IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D, MUMBAI Before Shri Sanjay Garg, Judicial Member, and Shri Ashwani Taneja, Accountant Member ITA NO.7471/Mum/2014 Assessment Year: 2010-11 Dinesh V. Bahirwani, DCIT 20(2), Unit No.605, Business Suites Mumbai- 9 Ploot No.83, Vs. S.V. Rd, Santacruz(W) Mumbai-400054 (Appellant) (Revenue) P.A. No. ABRPB3559K ITA NO.7497/Mum/2014 Assessment Year: 2010-11 ACIT 24(2) Dinesh V. Bahirwani, 612, Piramal Chambers, Unit No.605, Business Lalbaug, Suites 9 Ploot No.83, Vs. Mumbai-400012 S.V. Rd, Santacruz(W) Mumbai-400054 (Revenue) (Respondent) P.A. No. ABRPB3559K Appellant by Shri Vipul Shah (AR) Revenue by Shri B.S. Bist (Sr. DR) /Date of Hearing : 18/10/2016 Date of Order: 18/10/2016 ORDER 2 Dinesh V. Bahirwani Per Ashwani Taneja (Accountant Member): These Cross Appeals are filed by Revenue and assessee against separate orders of Ld. CIT(A) passed in each of aforesaid assessment years. 2. During course of hearing, arguments were made by Shri Vipul Shah, Authorised Representative (AR) on behalf of Assessee and by Shri B.S. Bist, Departmental Representative (Sr. DR) on behalf of Revenue. We shall take up Revenue s appeal in ITA No. 7497/Mum/2014 for Assessment Year 2010-11 3. revenue has filed appeal against order of Ld. CIT(A) dated 27.10.2014 passed against assessment order u/s 143(3) of Act, dated 28.03.2013 on following grounds: 1. On facts and circumstances of case and in law, Ld. CIT(A) has erred in deleting addition of Rs. 88,15,024/- on account of undervaluation of closing stock on basis of additional evidences submitted during appeal proceedings without granting opportunity to AO for verifying same and thus violating Rule 46A. 2. On facts and circumstances of case and in law, Ld. CIT(A) has erred in granting relief of Rs. 8,93,558/- on account of disallowance of commission expenses only on basis that TDS was deducted and transactions were through bank whereas assessee could not prove genuineness of commission transactions nor could he produce any contract for same. 3. appellant prays that order of CIT (Appeals) on above grounds be set aside and that of AO be restored. 3 Dinesh V. Bahirwani 4. Ground No.1: In this ground, revenue has agitated action of Ld. CIT(A) in deleting addition of Rs.88,15,024/- made by AO on account of undervaluation of closing stock. During course of hearing, it was stated by Ld. DR that since assessee was not able to prove that correct method of accounting was followed, therefore, AO had applied average cost of valuation of stock and valuation of closing stock was done accordingly. He submitted that additional evidences were considered by Ld. CIT(A). But, Ld. DR was not able to pin point exactly what additional evidences were considered by Ld. CIT(A). 4.1. Per contra, Ld. Counsel of assessee submitted that assessee has been consistently following FIFO method of accounting for valuation of stock in earlier years as well as subsequent years and same has been accepted by department and no addition has been ever made in this regard. 4.2. We have gone through orders of lower authorities and considered by both sides. It is noted by us that Ld. CIT(A) analysed facts of case before deleting addition with following observations: In appeal, it has been submitted that appellant is proprietor of two concerns by name of M/s Trinity Trading and M/s Satya Tex, both of which are engaged in trading in fabric. It has been further submitted that quantitative details of opening stock (with value), details of purchase during year (with quantity and purchase cost) and quantitative details of closing stock (with value) were duly furnished during scrutiny proceedings along with copies of purchase bills etc. It is also submitted that appellant had clarified to A.O. 4 Dinesh V. Bahirwani that it had been consistently following FIFO method of valuation of stock for past many years and that said method of valuation had been accepted by Department in preceding years. appellant has argued that overheads considered by A.O. are applicable in hands of manufacturer whereas he is only trader. It is pointed out that since he is following FIFO method, average cost method is not applicable in his case. In light of these facts, it is stated that addition of Rs. 88,15,024/- is unwarranted and should be deleted. 5.1.2 I have caref ully considered f ac ts related to this issue. One of fundamental canons of taxation is that method of accounting regularly followed by assessee, cannot be disturbed unless it can be demonstrated that profits for year cannot be derived from method adopted. In particular in case where method has been found acceptable in earlier years, reason for rejection of same should be clearly brought out. It is open to assessee to choose method but same should be consistently adopted as held in CIT v. McMillan & Co. [19581 reported at 33 ITR 182 (SC). In decision rendered in case of CIT v. Advance Construction Co. (P.) Ltd. [2005] reported at 275 ITR 30 (Guj . ) h e l d s f o llo ws: 14........., it is necessary to note that under section 145 of Act income chargeable under head 'profits and gains of business or profession' shall be computed in accord method of accounting regularly employed by theassessee. only exception is: where method employed is such that in opinion of Assessing Officer income cannot be properly deduced therefrom Assessing Officer shall then compute income upon such basis and in such manner as he may determine. provision, therefore, specifically provides that choice of method of accounting lies with assessee, only caveat being that it has to show that chosen method has been regularly followed. section is couched in mandatory terms and department is bound to accept assessee's choice of method 5 Dinesh V. Bahirwani regularly employed, except for situation, wherein Assessing Officer is permitted to intervene, in case it is found that true income, profits and gains cannot be arrived at by method employed by assessee. position of law is further well-settled that regular method adopted by assessee cannot be rejected merely because it gives benefit to assessee in certain years." 5.1.3 It has also been held th at A.O. mus t demonstrate that me thod of accounting has resulted in under-estimation of profits as held by Apex Court in decision rendered in case of CIT v. Realest Builders & Services Ltd. reported at 170 Taxman 218 (SC). "In cases where Department wants to tax assessee on ground of liability arising in particular year, it should always ascertain method of accounting followed by assessee in past and whether change in method of accounting was warranted on ground that profit is being tinder estimated tinder impugned method of accounting. If AO comes to conclusion that there is tinder-estimation of profits, he must give facts and figures in that regard and demonstrate to Court that impugned method of accounting adopted by assessee results in underestimation of profits and is therefore rejected. Otherwise, presumption would be that entire exercise is revenue neutral." 5.1.4 In decision rendered in case of CIT v. Margadarsi Chit Funds (P.) Ltd. [1985] 155 IT R 442 (AP), it was he ld th at th e A.O. mus t ref er to th e inheren t def ec t in sys te m and record cle ar f inding th at th e sys te m of accoun ting followed by assessee is such that correct profits cannot be deduced from books of account maintained by assessee. It is not open to ITO to intervene and substitute different system of accounting from one that is followed by assessee, on ground that system which commends to ITO, is better. 5.1.5 It is seen that appellant has consistently followed FIFO method of stock valuation as is evident from Audit Reports for M Is Trinity Trading and M/s Satya Tex f or A.Y. 2009-10, 2010-11 and 6 Dinesh V. Bahirwani 2011-12 f iled by appellant during these proceedings. From order passed u/s 143(3) for A.Y. 2009-10 passed in case of appellant himself, on 27/12/2011 it is seen that A.O. has not made any addition on account of stock valuation. Similar is position in case of A.Y. 2011-12 wherein assessment in case of appellant is made vide order dated 27.02.2014 without taking exception to method of valuation of stock. From submissions made by appellant during scrutiny proceedings, dated 04/03/2013, it is seen that appellant had enclosed copies of bills etc. in support of valuation. Accordingly, in view of above facts and settled position of law in this regard, addition of Rs.88,15,024/- cannot be sustained and is deleted. Accordingly, Grounds No. 1 to 3 raised by appellant are allowed. 4.3. We have carefully gone through facts of case and well reasoned findings recorded by Ld. CIT(A). It is noted that assessee has been following FIFO method for valuation of its stocks in all earlier and subsequent years and no addition has ever been made. assessment order was passed u/s 143(3) for A.Y. 2009-10 accepting FIFO method of stock valuation. It is further noted that assessee had submitted copies of bills and other evidences to justify valuation based upon FIFO method. Further, nothing wrong could be pointed out by Ld. DR in detailed and well reasoned findings of Ld. CIT(A). Further, it is noted by us that closing stock of impugned year had become opening stock of next year. Thus, viewed from this angle also, overall tax effect taking both years into account will be tax-neutral. Under these circumstances, we do not find any necessity to make interference in order of Ld. CIT(A), therefore, this ground is rejected. 5. Ground No.2: In this ground, revenue has challenged 7 Dinesh V. Bahirwani action of Ld. CIT(A) in deleting commission expenses of Rs.8,93,558/-. 5.1. It was argued by Ld. DR that said disallowance has been deleted merely on ground that payment was made by cheque and evidence of rendering of services has not been proved. It was further argued similar issue had arisen in A.Y. 2009-10 wherein issue has been sent back to file of AO by Tribunal. 5.2. Per contra, Ld. Counsel relied upon order of Ld. CIT(A). 5.3. We have gone through facts of case as well as order of Tribunal of A.Y. 2009-10 dated 08.05.2015. It is noted that commission paid in identical facts and circumstances was disallowed by AO in A.Y. 2009-10. matter reached before Tribunal and Tribunal has sent this issue back to file of AO with following observations: 7. We have heard parties, and perused material on record. case of both parties before us was along with same lines. We firstly observe that primary reason of A.O. in disallowing expenditure, which he does in toto, is non-furnishing of any evidence toward rendering of services for which commission on sales has been paid. In other words, assessee s case was found deficient by him insofar as satisfactorily proving its claim was concerned. A.O. nowhere doubted genuineness of expenditure, except, as it appears, in case of Parul Bahirwani, relative, whose place of residence; assessee contending payees to be out station parties, had not been specified. In fact, doubt apparently arose in mind of A.O., as we infer from his calling for confirmations and supporting documents in all cases, as against from selected few initially, on account of assessee furnishing xerox copies of 8 Dinesh V. Bahirwani confirmations, and which are definitely not admissible. How could, then, A.O. be said to have faulted in holding assessee to have not satisfactorily proved its claim for relevant year. ld. CIT(A) reversed his findings without in any manner showing same as infirm. It is not question of A.O. bringing contrary material on record, as stated by him. law does not enjoin upon assessing authority to, in order to disallow claim for expenditure, disprove same, but assessee to prove same; payment through banking channel, which would only be proved by submission of bank statement/s (or bank certificate, or like), and which was not furnished despite being called for, would though positive attribute, is not sacrosanct, nor is fact of same being subject to TDS. primary charge of A.O. as afore-stated, is toward non-evidencing rendering of service, and which has not been rebutted in any manner. assessee has no-where explained modus operandi or even manner in which services were rendered, which is sine qua non for claim of commission, being only service charges in relation thereto. Some of classical cases in respect of expenditure in general (refer: Ram Bahadur Thakur Ltd. vs. CIT [2003] 261 ITR 390 (Ker); CIT vs. Navsari Cotton & Silk Mills [1982] 135 ITR 546 (Guj)), and commission expenditure in particular (refer: Lachminarayan Madan Lal vs. CIT [1972] 86 ITR 439 (SC); Lakshmiratan Cotton Mills Co. Ltd. vs. CIT [1969] 73 ITR 634 (SC)) are referred to draw home point. findings by ld. CIT(A) are based on bald claims, de hors any material on record. Merely making general statements, without basis in any material on record, which has moved ld. CIT(A), would not prove claim. His taking cognizance of copies of confirmations, i.e., which are inadmissible in evidence, cannot also to be regarded as valid. Even no finding qua commission to Parul Bahirwani, relative, stands issued. We, accordingly, vacating his findings, restore matter back to file of A.O. to allow assessee opportunity to present its case before him. A.O. shall, on his part, proceed reasonably; that being hallmark of any good assessment, sustainable in law. backdrop under 9 Dinesh V. Bahirwani which expenditure stands incurred, is, as overly emphasized by ld. CIT(A), nevertheless, relevant, and to be accorded due regard. Commercial expediency is important ingredient, and which gets no doubt supported by fact of regular expenditure, which we observe to vary over wide range, and which may itself not be determinative, being rather in some circumstances pointer to genuineness. Again, are persons to whom commission is paid same from year to year, which would, where so, also establish them as regular commission agents, and toward which A.O. had in fact called for their returns, etc. We leave it at that; same being purview of assessing authority, only adding that his adjudication should satisfy test of reasonableness and in accordance with law in facts and circumstances of case, as validated by material on record. We decide accordingly. 5.4. No distinction has been made on facts by either party before us. Thus, we send issue back to file of AO along with same directions as were given by Tribunal in earlier years. assessee shall bring on record requisite evidences to substantiate rendering of services by agents. This ground may be treated as allowed for statistical purposes. Now, we shall take assessee s appeal in ITA No.7471/Mum/2014 6. assessee has filed on following grounds: 1.On facts and circumstances of case and law Ld. Commissioner of Income Tax; - Appeal (CIT-A) erred in disallowing commission of Rs. 7,00,000/-. 2. On facts and circumstances of case and law id. CIT-A has not considered fact and evidences submitted in relation to commission. 3. On facts and circumstances of case Id. CIT-A erred in disallowing above additions and thus upheld 10 Dinesh V. Bahirwani penalty proceedings u/s 271(1) (c) of Income Tax Act 1961. Appellant craves leave to add, amend, alter, modify, substitute or delete any or all above ground(s) of appeal. 6.1. It is noted that issue involved with regard to disallowance of commissions is identical to ground no.2 of Revenue s appeal. Since we have sent this issue back to file of AO, this ground is also sent back to file of AO with our directions as given above. AO is directed to follow our order. These grounds may be treated as allowed for statistical purposes. 8. As result, both appeals may be treated as partly allowed. Order was pronounced in open court at conclusion of hearing. Sd/- Sd/- (Sanjay Garg ) (Ashwani Taneja) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 18/10/2016 .Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. CIT, Mumbai. 4. CIT(A)- , Mumbai 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Dy. Asstt. Registrar) ITAT, Mumbai Dinesh V. Bahirwani v. DCIT-20(2), Mumbai