IN INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F NEW DELHI SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA No. 6573/Del/2018 Assessment Year:2014-15 Sri Raghunathji and Sons, Vs. Income Tax Officer, 2046 Katra Tobacco, Khari Ward-47(1), New Baoli, Delhi-110006 Delhi TAN/PAN: ABPFS2204Q (Appellant) (Respondent) Appellant by: Sh. K.R.Manjani, Adv Respondent by: Sh. B.S. Raj Purohit, Sr. DR Date of hearing: 20 08 2019 Date of pronouncement: 22 08 2019 ORDER PER PAVAN KUMAR GADALE, J.M.: assessee has filed appeal against order of CIT(A)-16, New Delhi passed under section 143(3) and 250 of Income Tax Act. assessee has raised following grounds of appeal. 1. Learned CIT(A) has erred on facts as well as in law in sustaining trading addition of Rs. 49,21,901/-, which is against history of case, no defects having been found by Learned A.O. in Books, Appellant has quantitative tally and reliance on CIT(A) s Orders for Asst. Year 2011-12 and 2012-13, which is no longer in existence, having been set aside by Hon ble Tribunal vide Orders approximately ten -' months before, and order is against law, Judgments of Hon ble Delhi High Court and Delhi Tribunals, have not been 2 deliberated and rather ignored. 2. Learned CIT(A) has erred on facts and in law in sustaining disallowance of salary to partners by relying on Partnership Deed of 12.06.2009 even though Partnership for year under consideration was dated 12.4.2010 in which in Clause 7, it is stated that salary will be given to all three partners, being working partners. 3. Learned CIT(A) has erred on facts as well as in law in sustaining addition of expenses of rebate, discount and sales promotion without pointing out any defect or any expenditure of disallowable nature inspite of fact that this is allowable as per judgment quoted in Written Arguments. 4. Ld. CIT(A) has erred on facts as well as in law in sustaining addition of sales tax even though it is legally allowable, expenditure being on additional sales tax paid due to non receipt of C form and not any penalty. 5. order of Ld. CCIT(A) is bad in law, being without application of mind, failing to follow legal position and is based merely on surmises. 2. Brief facts of case are that assessee firm is engaged in Business of import of Hing, dry fruits etc. and filed Return of income electronically disclosing total income of Rs. 43,810/- on 10.11.2014 and Return of income was processed under section 143(1) of Act. Subsequently under CASS, case was selected for limited scrutiny and notice under section 143(2) & under section 142(1) and alongwith questionnaire were issued. In compliance, Ld. AR of assessee appeared from time to time and furnished details. AO on perusal of financial statements called for certain clarifications in respect of purchase, sale and gross profit and AO considering turnover of three assessment years, found that net profit ratio for present assessment year is very 3 low compared to earlier years. Further AO found that assessee has claimed loss of Rs. 63,56,346/- being foreign exchange rate fluctuation. Finally Assessing Officer considered G.P. rate @ 15% as against 8.72% disclosed by assessee. Further clarifications were sought and assessee filed letter on 6.9.2016 referred at para 4.4 of assessment order. Whereas Assessing Officer considered all parameters and in absence of proper accounting, Books of accounts of assessee were Rejected under provisions of section 145 of Act. AO considering increase in volume of assessee s business and profit of similar organizations in same trade adopted 15% G.P. rate and made addition of difference in gross profit of Rs. 49,21,901/-. Further AO on perusal of profit and loss appropriation found that assessee firm has claimed salary of three partners aggregating to Rs. 2,90,709/- and assessee has filed copy partnership deed, whereas AO after verifying clause 7 of partnership deed found that assessee has not quantified salary allowable to partners and referred to CBDT Circular No. 739 dated 25.03.1996 for claim of remuneration under section 40(b)(v) of Act and made disallowance of Rs. 2,90,709/-. 3. Further on perusal of profit and loss account, AO found that assessee has claimed expenditure of Rs. 1,71,588/- on account of rebate and discounts and Rs. 1,42,268/- towards sale promotion. Whereas assessee has filed copy of ledger account but no documentary 4 evidence was filed in support of claim. Therefore, Assessing Officer disallowed 50% of Rebate and discounts and sale promotion and made addition of Rs. 1,56,928/-. Further assessee has claimed expenses of Rs. 27,639/- on account of additional sales tax. Since no documentary evidence was filed in respect payments, AO considered additional sales tax payment as penalty and made disallowance of Rs. 27,639/-and assessed total income of Rs. 54,90,987/- and passed order under section 143(3) of Act. 4. Aggrieved by order, assessee has filed appeal with CIT(A) whereas ld. CIT(A) considering grounds of appeal, submissions of assessee upheld action of AO and dismissed assessee s appeal. Aggrieved by order of CIT(A), assessee has filed appeal with Tribunal. 5. Before us, ld. AR argued that ld. CIT(A) erred in confirming additions without considering material facts and information. On first disputed issue of addition on account of gross profit, ld. AR submitted that assessee has been maintaining G.P. ratios from earlier assessment years and referred to chart at page 2 of assessment order. contention of ld. AR is that G.P. ratio at 15% cannot be benchmark as is not properly supported by Revenue and further G.P. rate has been affected due to claim of loss being difference in foreign exchange fluctuations. 5 6. On second disputed issue of disallowance of salary to partners, assessee has filed partnership deed and is required to pay salaries to partners as per provisions of section 40(b)(v) of Act and CBDT Circular. Whereas on disallowance of claim of rebate and discounts and sales promotion. contention of ld. AR is that these are expenses incurred wholly and exclusively for purpose of business and are to be allowed and finally on disallowance of additional sales tax, AR argued that sales tax liability is allowable expenditure and is not penal in nature and supported his arguments with paper book and prayed for allowing appeal. Contra ld. DR supported orders of CIT(A). 7. We have heard rival submissions and perused material on record. contention of ld. AR on first disputed issue of addition on account of difference in gross profit that assessee has been maintaining consistency in gross profit ratio and made submissions in Assessment proceedings. We find Assessing Officer has adopted gross profit rate 15% referred at para 4.7 of assessment order. But AO could not support with any comparable case or benchmark or industry average index. Further we find that assessee firm has been disclosing gross profit ratio for assessment year 2012-13 @ 4.39% and assessment year 2013- 14 @ 4.5% and in present assessment year 2014-15 @ 8.72%. AO has referred to loss of Rs. 63,53,346/- being difference in foreign exchange. ld. AR submitted that 6 said loss was allowed by AO. We, considering allowability of foreign exchange fluctuation loss are of opinion that AO having accepted foreign exchange loss cannot expect Higher G.P. ratio and adoption of G.P. rate @ 15% cannot be sustained. Accordingly, we considering material facts and foreign exchange fluctuation loss and consistency of G.P. ratio maintained by assessee from earlier assessment years, direct AO to delete addition and allow ground of appeal of assessee. 8. On second disputed issue of disallowance of partner s salaries. ld. AR submitted that assessee is entitled for deduction of salaries paid to partners as per provisions of section 40(b)(v) of Income Tax Act. ld. AR referred to partnership deed at page 22 to 24 of paper book and in particular clause 7 of partnership deed and submitted that assessee has incorporated clause required by CBDT for claim under section 40(b)(v) of Act. We on perusal of assessment order at para 5 clause 7 of partnership deed where assessee has submitted copy of partnership deed assessment proceedings. On comparison of clause 7 at para 5 of assessment order with clause 7 of partnership deed dated 12th August, 2010 name of incoming partner Mr. Kunal Bhatia was not reflected. When query was raised to ld. AR to explain discrepancy in partnership deed dated 12th April 2010 and partnership deed submitted before Assessing Officer on 30.06.2016, explanations of ld. AR are not satisfactory and prayed for opportunity to explain 7 discrepancy before assessing authorities. We find that partnership deed executed in April, 2010 is applicable from assessment year 2011-12. Therefore, considering facts and circumstances and to meet ends of justice, we restore disputed issue for limited purpose to file of Assessing Officer to verify correctness of partnership deed and assessee should be provided adequate opportunity of hearing and shall cooperate in submitting information and ground of appeal of assessee is allowed for statistical purposes. 9. third disputed issue argued by ld. AR in respect of restriction of claim of expenses on account of Rebate, discount and sales promotion. Assessing Officer has restricted claim to 50% as no evidence was filed in respect of claim. Even before ld. CIT(A) assessee could not substantiate with documentary evidence. When query was raised, ld. AR submitted that expenses are in nature of rebates discounts and said expenses are incurred for smooth running of business with customers. We considering facts of turnover nature of Business, going concern and income percentage of assessee over period referred in assessment order are of opinion that disallowance, expenditure @ 50% is slightly on High ride and accordingly we Restrict disallowance to 10% instead of 50% and modify order of ld. CIT(A) accordingly on this issue and partly allow ground of appeal of assessee. 10. last disputed issue envisaged by ld. AR in respect of disallowance of payment additional sales tax. ld. 8 AR vehemently argued that assessee has paid additional sales tax and which is allowable business expenditure and supported with copy of ledger account and challan copies for payment of additional sales tax at page 10 to 21 of paper book. contention of ld. AR is that assessee has paid additional sales tax levied by State sales tax authorities and are not penal in nature. We considering facts and nature of payment is compensatory are of view that claim has to be allowed subject to verification by Assessing Officer. ld. DR raised objections that AO was deprived to verify evidence filed. We are of substantive opinion that matter need to be verified accordingly remit this disputed issue to file of Assessing Officer for examination and allow ground of appeal of assessee for statistical purposes. 11. In result, assessee s appeal is partly allowed for statistical purposes. Order pronounced in open court on 22nd August, 2019. Sd/- Sd/- (N.K. BILLAIYA) (P.K.GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 22nd Aug, 2019 SH 9 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT 5. DR Assistant Registrar Date 1. Draft dictated on 20.08.2019 2. Draft placed before author 3. Draft proposed & placed before second member 4. Draft discussed/approved by Second Member. 5. Approved Draft comes to Sr.PS/PS 6. Kept for pronouncement on 7. File comes back to PS/Sr. PS 8. Uploaded on 23.08.2019 9. File sent to Bench Clerk 10. Date on which file goes to AR 11. Date on which file goes to Head Clerk. 12. Date of dispatch of Order. Sri Raghunathji and Sons v. Income-tax Officer, Ward-47(1), New Delhi