-1- IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD Before S/Shri Mukul Kumar Shrawar, JM and D.C.Agrawal, AM ITA No.783/Ahd/2008 Asst. Year :2004-05 Asstt. CIT, Circle-5, Surat. Vs. Shri Chhanabhai K. Patel, Kathor, P.O. Kamrej, Surat. (Appellant) (Respondent) .. AND ITA No.863/Ahd/2008 Asst. Year :2004-05 Shri Chhanabhai K. Patel, Vs. Asstt. C.I.T., Circle-5, At & PO Kathor, B/H Surat. Galara High School, Tal. Kamrej, Surat. (Appellant) (Respondent) .. Revenue by :- Shri Abhijeet Kumar N. DR Assessee by:- Shri Rasesh B. Shah, A.R. ORDER Per D.C. Agrawal, Accountant Member. These are two cross appeals one filed by Revenue and other by assessee arising out of order of ld. CIT(A) dated 10.12.2007. ITA No.783/Ahd/2008 Asst. Year 2004-05 (Revenue s appeal) 2. Revenue has raised following grounds in its appeal :- ITA Nos.783 & 863/Ahd/2008 Asst. Year 2004-05 (1) On facts and in circumstances of case and in law, ld. CIT(A) has erred in deleting addition of Rs.4,00,000/- being disallowance out of crude oil expenses made by AO. (2) On facts and in circumstances of case and in law, ld. CIT(A) has erred in deleting addition of Rs.73,258/- being disallowance of expenses claimed for purpose of spare parts made by AO. (3) On facts and in circumstances of case and in law, ld. CIT(A) has erred in deleting addition of Rs.2,81,218/- being labour expenditure made by AO. (4) On facts and in circumstances of case and in law, ld. CIT(A) has erred in restricting addition on account of diesel expenses to Rs.20,000/- instead of addition of Rs.1,59,548/- made by AO. (5) On facts and in circumstances of case and in law, ld. CIT(A) has erred in deleting addition of Rs.25,000/- made by AO on account of unaccounted purchases made from M/s Shiv Shakti Petroleum. ITA No.863/Ahd/2008 Asst. Year 2004-05 (Assessee s appeal) Whereas assessee has raised following grounds in its appeal :- (1) On facts and in circumstances of case as well as law on subject, ld. CIT(A) has erred in confirming action of AO in making disallowance of Rs.32,014/- being 20% out of telephone, miscellaneous & postage expenses. (2) On facts and in circumstances of case as well as law on subject, ld. CIT(A) has erred in confirming action of AO in making disallowance of Rs.41,112/- being 20% out of vehicle maintenance & motorcar depreciation expenses. (3) On facts and in circumstances of case as well as law on subject, ld. CIT(A) has erred in confirming action of AO in making addition of Rs.4,00,000/- on account of carting expenses u/s 69 of IT Act. 2 ITA Nos.783 & 863/Ahd/2008 Asst. Year 2004-05 (4) On facts and in circumstances of case as well as law on subject, ld. CIT(A) has erred in partly confirming disallowance of Rs.20,000/- out of total disallowance of Rs.1,59,548/- made by AO out of diesel expenses. 3. facts of case are that assessee is government contractor engaged in business of quarry. assessee filed return of income on income of Rs.24,62,060/- and assessment was completed under section 143(3) at Rs.38,74,210/-on 28.12.2006. Revenue s appeal 4. first issue relates to deleting addition of Rs.4 lacs being disallowance made out of crude oil expenses. During course of assessment proceedings AO noticed that there was debit entry in books for purchase of crude oil from Jalaram Oil Centre, Surat. From copy of accounts AO noticed payment of Rs.4 lacs at end of year. AO then called for copy of account of assessee from broker Shri Kanaiyalal Khichi u/s 133(6). Shri Kanaiyalal Khichi in his letter dated 4.12.2006 did not confirm transaction as claimed by assessee. He clarified that he did not know assessee nor his firm. He also informed his assessment particulars. On this basis AO required assessee to prove genuineness of payment made to and transactions with Jalaram Oil Centre. Till date of assessment nothing was heard from assessee and accordingly AO made addition. ld. CIT(A) allowed assessee to produce evidence in form of bank statement wherein payment was found received by Shri Jalaram Oil Centre. 5. ld. DR submitted that ld. CIT(A) ought to have directed AO to verify above bank statement and whether payment was actually 3 ITA Nos.783 & 863/Ahd/2008 Asst. Year 2004-05 made to Jalaram Oil Centre and goods in question were received by assessee. 6. On other hand, ld. AR submitted that vide letter dated 13.12.2006 AO was informed about details of Jalaram Oil Centre and payment made to it. 7. ld. DR in response to this said that such letter was never received by AO. 8. second addition is of Rs.73,258/- being disallowance out of expenses claimed for purchase of spare parts. During course of assessment proceedings AO noticed that assessee has debited sum of Rs.3,91,258/- for purchase of spare parts from M/s Umiya Automobiles. AO carried out enquiries and found that account of two parties did not tally and assessee has shown excess liability of Rs.73,258/-. assessee did not furnish any explanation to reconcile difference. AO accordingly made addition. 9. ld. CIT(A) deleted addition on ground that difference is in opening balance which related to earlier year and, therefore, no addition could be made in year under consideration. 10. ld. DR submitted that ld. CIT(A) has admitted evidence without giving opportunity to AO. assessee failed to furnish any reconciliation statement before AO and failed to point out how difference pertained to earlier year. In this process AO has lost valuable time for taking remedial action for relevant Asst. Year. 4 ITA Nos.783 & 863/Ahd/2008 Asst. Year 2004-05 11. ld. AR on other hand submitted that vide letter dated 13.12.2006 assessee had explained difference. receipt of this letter is denied by ld. DR. 12. third addition is of Rs.2,81,218/- being labour expenditure disallowed by AO. During course of assessment proceedings AO found that assessee had debited total labour expenses of Rs.28,12,181/-. He found that payment made to labourers are not verifiable. They are either unvouched or voucher did not carry any signature of persons receiving money. address of labourers were also not furnished. Considering nature of evidence AO disallowed 10% of total claim resulting in addition of Rs.2,81,218/-. 13. ld. CIT(A) deleted addition by holding that during course of survey under section 133A assessee has made disclosure of Rs.10 lacs and such disallowance should be deemed to be covered within such disclosure. 14. ld. DR pointed out that ld. CIT(A) has not examined what would be effect of disclosure and how such additions could be covered in disclosure. 15. ld. AR on other hand supported order of ld. CIT(A). 16. Next addition is of Rs.20,000/- retained by ld. CIT(A) out of total addition of Rs.1,59,548/- disallowed by AO out of diesel expenses. During course of assessment proceedings AO found that assessee has debited sum of Rs.15,95,480/- in profit and loss account on account of diesel expenses. assessee failed to submit 5 ITA Nos.783 & 863/Ahd/2008 Asst. Year 2004-05 bills in support of claim, therefore, AO disallowed 10% of claim resulting in addition of Rs.1,59,548/-. 17. ld. CIT(A) retained only addition of 10% and deleted rest. 18. ld. DR submitted that ld. CIT(A) has not given any specific reason for deleting addition. 19. On other hand, ld. AR relied on order of ld. CIT(A). 20. next addition is of Rs.25,000/- made by AO on account of unaccounted purchases made from Shiv Shakti Petroleum. AO during course of assessment proceedings found that assessee has claimed to have made purchases of diesel and made payment of Rs.12,500/- each in cash on 15.10.2003 and on 16.10.2003 which was not included in payments as per books of account. AO had called for copy of account from Shiv Shakti Petroleum and found no evidence of such payment received from assessee. No explanation came forward to AO and accordingly he made addition of Rs.25,000/-. 21. ld. CIT(A) deleted addition on ground that books of third party cannot be relied upon unless opportunity of rebuttal is given by AO. 22. ld. DR submitted that AO had made addition on basis of copy of account received from Shiv Shakti Petroleum. If all other transactions recorded by Shiv Shakti Petroleum in respect of assessee 6 ITA Nos.783 & 863/Ahd/2008 Asst. Year 2004-05 are correct then there is no reason why this transaction should be treated as wrong. 23. ld. AR on other hand, submitted that reply has been submitted on 13.12.2006 which was denied by ld. DR. Assessee s appeal 24. ld. AR did not press ground Nos.1,2 & 4. and therefore, they are treated as rejected. 25. Ground No.3 relates to confirmation of addition of Rs. 4 lacs on account of carting expenses. During course of assessment proceedings AO found that assessee has debited sum of Rs.45,15,069/- as carting expenditure to transporter namely Shri Vijay C. Patel. This party confirmed transportation and services given to assessee but did not provide copy of account of assessee as according to him he is assessed only under section 44AE being transporter and he is not maintaining books of accounts. However, from copy of account of Shri Vijay C. Patel in books of assessee AO noticed that transportation work totaling to Rs.12,14,800/- has been carried out. opening balance in account of that party was Rs.3,93,357/- meaning thereby that this much sum was payable to Shri Vijay C. Patel as on 1.4.2003. Further work to extent of Rs.12,14,800/- was done resulting in total payable amount of Rs.16,08,157/-. During whole year payment of Rs.3,68,700/- was made. Thus total work carried out during year remained unpaid with some amount payable pertaining to earlier years. In order to examine as to how transporter will work without getting payment, AO recorded his statement under section 131. It was found 7 ITA Nos.783 & 863/Ahd/2008 Asst. Year 2004-05 that Shri Vijay C. Patel has borrowed sum of Rs.1,50,000/- from assessee seven years ago which was repaid in two subsequent years. He had incurred Rs.7,50,000/- in Asst. Year 2003-04 on transportation work for assessee. Asking him to explain source of this expenditure, Shri Vijay C. Patel replied that shortage of cash was met by assessee by paying cash to him and further that some expenditure was directly paid by assessee on his behalf. He confessed that sum of Rs.4 lacs was paid by assessee to him but he has not recorded same in books. AO required assessee to explain but finding no explanation he made addition of Rs.4 lacs. 26. ld. AR submitted that assessee has not been given opportunity to examine Shri Vijay C. Patel and his statement has been relied upon without confronting assessee. 27. ld. DR submitted that explanation of assessee was called for but no reply was submitted. 28. We have heard parties in respect of both appeals and carefully perused material on record. In our considered view ld. CIT(A) has admitted evidence without giving opportunity to AO to examine same. Thus there is clear violation of Rule 46A. Further AO has also not confronted assessee in respect of statement of Shri Vijat C. Patel. Thus there is clear violation of natural justice both by ld. CIT(A) in respect of all issues on which department is aggrieved and by AO in respect of addition of Rs.4 lacs. We also notice that assessee claims to have furnished detailed reply on 13.12.2006 and ld. AR shows that this letter was acknowledge in Ward of AO. But surprisingly no reference of this letter is found in 8 ITA Nos.783 & 863/Ahd/2008 Asst. Year 2004-05 order of AO. It was expected that explanation to important matters raised by AO should be furnished personally by assessee during course of assessment proceedings and entry to that effect should have been made in order sheet. AO is required to consider such explanation before finally making addition. We accordingly set aside issues on grounds raised by Department and issue in ground No.3 raised by assessee, to file of AO who will decide them afresh by observing principles of natural justice. He will also consider to give telescoping effect to disclosure of Rs.10 lacs made by assessee during course of survey. AO will otherwise give cogent reasons for not considering addition as covered in disclosure of Rs.10 lacs. With above observations, we restore two appeals on issues discussed above to file of AO. Appeal filed by Revenue is allowed for statistical purposes and appeal of assessee is partly allowed for statistical purposes. 29. In result, appeal filed by Revenue is allowed for statistical purposes and appeal of assessee is partly allowed for statistical purposes. Order was pronounced in open Court on 30.11.10. Sd/- Sd/- (Mukul Kr. Shrawat) (D.C. Agrawal) Judicial Member Accountant Member Ahmedabad, Dated : 30.11.10. Mahata/- 9 ITA Nos.783 & 863/Ahd/2008 Asst. Year 2004-05 Copy of Order forwarded to:- 1. Assessee. 2. Revenue. 3. CIT(Appeals)- 4. CIT concerns. 5. DR, ITAT, Ahmedabad 6. Guard File. BY ORDER, Deputy/Asstt.Registrar ITAT, Ahmedabad 1.Date of dictation 11/11/2010. 2.Date on which typed draft is placed before Dictating 23/11/2010 Member .Other Member . 3.Date on which approved draft comes to Sr.P.S./P.S . 4.Date on which fair order is placed before Dictating Member for pronouncement .. 5.Date on which fair order comes back to Sr.P.S./P.S 6.Date on which file goes to Bench Clerk .. 7.Date on which file goes to Head Clerk . 8.The date on which file goes to Asstt. Registrar for signature on order 9.Date of Despatch of Order .. 10 ACIT.- Circle-5 v. Shri Chhanabhai K.Patel