Income Tax Appellate Tribunal - Ahmedabad
Stuio-3 Architect Pvt.Ltd.,, ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C"
Before SHRI BHAVNESH S AINI,JM & SHRI A N P AHUJ A, AM
ITA No.1841/Ahd/2009
(Assessment Year:-2006-07)
Income-tax Officer, W ard- V/s
Studio-3 Architect Pvt. Ltd.,
8(2), Ahmedabad "Madhu Malti", Near Old
High Court, Navrangpura,
Ahmedabad
PAN: AABCS 5517 L
[Appellant] [Respondent]
Revenue by :- Shri Anurag Sharma, DR
Assessee by:- Shri Gaurav Nahta, AR
O R D E R
A N Pahuja: This appeal by the Revenue against an order dated 27- 03-2009 of the ld. CIT(Appeals)-XIV, Ahmedabad, raises the following grounds:-
1. "The Ld. CIT(A) has erred in law and on facts in directing to delete the disallowance of depreciation on car of Rs.1,94,948/-.
2. The Ld. CIT(A) has erred in law and on facts in directing to delete the disallowance of Rs.10,97,994/- on interest expenses.
3. The Ld. CIT(A) has erred in Saw and on facts in directing to allow loss incurred on account of business activity of Rs.9,49,176/-.
4. The Ld. CIT(A) has erred in law and on facts in directing to delete the disallowance of bad debts of Rs.1,01,081/-.
5. On the facts and in the circumstances of the case, the Id.
Commissioner of Income-tax (A)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer.
6. It is therefore, prayed that the order of the Id. Commissioner of Income-tax(A)-XIV, Ahmedabad may be set-aside and that of the Assessing Officer be restored."
2 Adverting first to ground no.1 in the appeal , facts, in brief, as per relevant orders are that return declaring loss of Rs.3,42,071/- filed on 27-12-2006 by the assessee, engaged in the business of interior and architectural work, after being processed u/s 143(1) of ITA no.1841/Ahd/2009 the Income-tax Act, 1961 [hereinafter referred to as the "Act"] was selected for scrutiny with the issue of a notice u/s 143(2) of the Act on 19.10.2007. During the course of assessment proceedings, the Assessing officer noticed that though the assessee had an innova car registered in the name of a director and not in the name of assessee company, it claimed depreciation of Rs.1,94,948/- on the said car. W hile referring to provisions of sec. 32 of the Act and decisions in the case of M.M. Fisheries ,227 ITR 204( Delhi) and Addl. CIT Vs. United Motor Transport Service Association (1991) 190 ITR 13(All.), the AO concluded that depreciation is allowable only on assets owned by the assessee. Since car was not registered in the name of the company, the AO disallowed the claim for depreciation on car.
3. On appeal, the ld. CIT(A) deleted the disallowance on the ground that the car having been purchased out of funds of the company as its asset, even though registered in the name of the director, was wholly and exclusively used for their business of the appellant. Inter alia, the ld. CIT(A) relied upon a number of decisions cited on behalf of the assessee.
4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned DR supported the order of the AO while the learned AR on behalf of the assessee supported the findings of the learned CIT(A).
5. We have heard both the parties and gone through the facts of the case. The relevant provisions of section 32 of the Act stipulate depreciation in respect of building, machinery, plant or furniture "owned by the assessee" and "used" for the purposes of the business or profession. Indisputably, the innova car was purchased with the funds of the company and used by the assessee for the purposes of its business. The controversy is in regard to ownership of the car. The contention of the assessee is that car being not registered under the Motor Vehicles Act in the name of the company, by itself is not sufficient to hold the contrary. The factual position as stated by the assessee is not disputed by the 2 ITA no.1841/Ahd/2009 Revenue. The contention of the Revenue is that unless the car is registered in the name of the assessee under the Motor Vehicles Act, the assessee would not be entitled to deduction of depreciation allowance in respect thereof. We are of the opinion that the assessee, who had purchased the car for valuable consideration and used the same for its business, cannot be denied the benefit of depreciation on the ground that the transfer was not recorded under the Motor Vehicles Act or that the vehicle stood in the name of a director of the assessee company in the records of the authorities under the Motor Vehicles Act.
5.1 The aforesaid view is supported by the decision in the case of CIT Vs. Navdurga Transport Co.,235 ITR 150(All), wherein the issue was as to whether firm was entitled to depreciation on cars, brought in to the firm for use of business of the firm, even though cars continued to be registered in the name partners. Hon'ble Allahabad High Court held that the Tribunal rightly reached the conclusion that the assessee owned and used the three vehicles within the meaning of s. 32 of the Act. Similar view was taken in the case of CIT Vs, Mohd. Bux Shokat Ali(No.2), 256 ITR357(Raj), CIT Vs Fazilka Dabwali TPT Co. Ltd. (2004) 270 ITR 398 (P&H), CIT v. Salkia Transport Associates [1983] 143 ITR 39/13 Taxman 191 (Cal.), CIT v. Nidish Transport Corpn. [1910] 185 ITR 669/[1989] 44 Taxman 351(Ker.), CIT v. Dilip Singh Bagga [1993] 201ITR 995/[1994] 77 Taxman 66(Bom.), CIT v. Navdurga Transport Co. [1999] 235 ITR 158 (All.) and CIT v. Basti Sugar Mills Co. Ltd. [2002] 257 ITR 88/123 Taxman 693 (Delhi)as also by the ITAT in their decision in the case of The Curious House (P) Ltd. v ITO (1980) 9 TTJ 348(Indore) and ITO Vs. Modi Agency, ITA no. 198/Gau/1977-78(Gauhati).
5.2 In the light of view taken in the aforesaid decisions, mere non- registration of a vehicle in the name of the company under the Motor Vehicles Act, cannot disentitle it in regard to its claim of depreciation, when the facts on record are undisputed that the assessee company has, in fact, made the investment in purchase of the vehicle and such vehicle is being used for its business. The requirement of section 32 is that the vehicle must be owned by the assessee and not that the assessee must be a 'registered owner' of the same 3 ITA no.1841/Ahd/2009 under the Motor Vehicles Act. Therefore, we have no hesitation in upholding the findings of the ld. CIT(A).Consequently, ground no. 1 relating to disallowance of depreciation on motor car is dismissed.
6. Ground no.2 relates to the disallowance of Rs.10,97,994/- on account of interest. During the course of assessment proceedings, the AO noticed that the assessee had advanced loans of Rs.1,04,70,526/- to Asopalav Estate and Leasing Pvt. Ltd. and Rs,23,76,805/- to M/s. Mistry Associates, without charging any interest . Since the assessee failed to establish that the funds were advanced to the aforesaid associates concern M/s Asopalav Estate and Leasing Pvt. Ltd for the purpose of business while the tax audit report as on 01/04/2005 reflected that funds of Rs.1,73,36,061/- were advanced to sister / associate concerns and as on 31.3.2005, these stood at Rs.2,47,75,240/- , the AO concluded that the assessee diverted funds to their sister concerns without charging any interest . Regarding assessee's contention that directors and staff of Mistry Associates were providing designs, the assessee did not furnish any documentary evidence Likewise, the assessee advanced Rs.23.62 lacs to Amarkunj Plantation Pvt. Ltd. without charging any interest. The AO also noticed that that assessee had received interest free advance form its customers. As on 31/03/2005. the advance from customers was of Rs.54,59,829/- and as on 31/03/2006, the same increased to Rs.2,30,52,502/-. Since the assessee had huge interest free funds at its disposal and still borrowed funds, the AO disallowed interest of Rs. 10,97,994/- on the ground that funds nave been transferred for non business purposes.
7. On appeal, the learned CIT(A) deleted the disallowance on the ground that the advance given to Asopalav Estate and Leasing Pvt. Ltd., was for purchase of office at Mumbai and thus, for the business of the assessee while the advances given to Mistry Associates and its director Shri Jitendra Mistry as well as Smt. Mamtaben Mistry were for the purpose of interior decoration and for providing technical support. Since the assessee was having sufficient interest free funds, the ld. CIT(A) concluded that the question of diverting the interest 4 ITA no.1841/Ahd/2009 bearing funds for loans to associate concerns did not arise nor the AO established the nexus between the interest bearing funds and the interest free advances given to associate concern. Inter alia, the ld. CIT(A) relied on various decisions including the decision in the case of Torrent Financiers vs. ACIT, 73 TTJ 624 (Ahd ).
8. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned DR supported the order of the AO while the learned AR on behalf of the assessee supported the findings of the learned CIT(A).
9.. We have heard both the parties and gone through the facts of the case. Indisputably and as pointed out by the ld. CIT(A), the aforesaid advance of Rs.1,04,70,526/- to M/s Asopalav Estate and Leasing Pvt. Ltd. and Rs,23,76,805/- to M/s. Mistry Associates was given for the purpose of business of the assessee . There is nothing on record to suggest that the said amount was for non-business purposes. Before the ld. CIT(A), the assessee contended that majority of loans had been advanced in the preceding years out of available surplus with the company and that the assessee had not utilized borrowed funds for the purpose. Hon'ble Karnataka High Court in Bit Tul (P.) Ltd. v. CIT (ITRC 141 of 1977 dated 29-7-1980) held that there should be material to justify the conclusion that any borrowed money by the assessee in a year in which interest had been paid had been diverted for non-business purpose before making any disallowance. Since the Revenue have not placed any material before us that borrowed funds had indeed been utilized for advancing interest free loans and advances for non-business purposes in the year under consideration or even in the earlier years nor any such disallowance in relation to funds advanced in the preceding years is stated to have been made, apparently, there was no ground for making any disallowance of interest in the year under consideration.
9.1 Even otherwise, Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.) held that if there were funds available 5 ITA no.1841/Ahd/2009 both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments.
9.2. In the light of view taken in the aforesaid decisions, especially when in the instant case the Revenue have not placed before us any material that the borrowed funds had indeed been utilized towards the aforesaid advances while the advances were found by the ld. CIT(A) for business purposes, we are not inclined to interfere with the findings of the ld. CIT(A). Therefore, ground no.2 in the appeal is dismissed.
10. Ground no.3 in the appeal of the Revenue relates to claim for loss of Rs.9,49,176/- in the business. The AO noticed that the assessee incurred losses in its professional activity continuously. To a query by the AO, the assessee replied that the assessee carried on the business of architect, designing & manufacturing of furniture etc. and for this purpose, labour work on material of the customers was also carried out. It was submitted that proper accounts were maintained and these were audited. Even though the sales reduced, certain expenses increased and the G.P. was 21.10%. However, the A.O. did not accept the explanation of the assessee on the ground that the assessee engaged in the profession of interior designing and architectural business, had two directors, who were highly qualified and experienced and still no income from interior designing was offered to tax while the project wise details of material and other expenses were not maintained and the assessee did not furnish bifurcation of the expenses on each of the project nor the assessee furnished any evidence as to whether or not work had been carried out with labour or with material. Inter alia, since the assessee did not maintain any stock register nor furnished project wise details of commencement and their completion while the 6 ITA no.1841/Ahd/2009 expenses on labour and raw material increased in February and March,2006 without any basis and the assessee failed to establish the genuineness of the said expenses and the no basis was shown for valuing W IP, the AO rejected book results having recourse to provisions of sec. 145(3) of the Act and consequently, estimated gross profit @ 8% of total receipts, resulting in addition of an amount of Rs.9,49,176/-.
11. On appeal , the learned CIT(A) deleted the addition in the following terms:-
"4.3 I have considered the facts of the case and the submissions as advanced by the A.O. From the details furnished by the A.R., it is seen that its accounts are duly audited by the Chartered Accountants and they have not pointed out any mistakes, Further, the A.O. has also not been able to find out any defect in the books maintained by the appellant and hence, there is no justification for rejecting the books of account u/s 145(3) of the Act. Further, by following several decisions as relied upon, I hold that rejection of book result is not justified and so also the estimate of profit is not justified. Accordingly, the disallowance of loss and addition of Rs.9,49,176/- are deleted."
12 The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned DR supported the order of the AO while the learned AR on behalf of the assessee supported the findings of the learned CIT(A).
13. We have heard both the parties and gone through the facts of the case. As is apparent from the aforesaid facts, indisputably and as pointed out by the ld. CIT(A), no other defects in the books of accounts except perhaps that the assessee did not maintain any stock or quantity records or that the increase in expenses in Feburary and March ,2006 was not justified and that no basis for valuation of W IP was shown while project wise details of expenses were not furnished . Before the ld. CIT(A), the assessee explained the basis of valuation of stock depending upon 7 ITA no.1841/Ahd/2009 the stage of completion in the project and pointed out that the assessee had consistently followed method of accounting of receipts and valuation of stock while the AO did not point out any specific defects in the books of accounts. We are of the opinion that it is difficult to catalogue various types of defects in the account books of an assessee which may render rejection of accounts on the ground that accounts are not complete from which the correct profit cannot be deduced. Merely because quantity records were not kept or projectwise details were not maintained, book results can not be discarded altogether, especially when the AO did not point out any specific defects in the books. Indisputably, records were being maintained in the same manner as in the preceding years, when book results have been accepted by the AO. The ld. DR appearing before us did not refer us to any material controverting the aforesaid findings of facts recorded by the ld. CIT(A). In the absence of any defects whatsoever , we are of the opinion that there was no ground for rejecting the book results and making any trading addition. Hon'ble Gauhati High Court in Aluminium Industries (P) Ltd. v. CIT (I.T.R. No. 12 of 1990) observed that a lower rate of gross profit declared by the assessee as compared to the previous year, would not in itself be sufficient to justify any addition. The mere fact that the percentage of loss or gross profit is high or low in a particular year does not necessarily lead to inference that there has been suppression. Low profit is neither a circumstance nor material to justify addition of profits. The ratio of the judgments in Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC); Raghubir Mandal Harihar Mandal v. State of Bihar [1957] 8 STC 770 (SC); State of Kerala v. C. Velukutty [1966] 60 ITR 239 (SC); State of Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC); Brij Bhusan Lal Parduman Kumar v. CIT [1978] 115 ITR 524 (SC); Chouthmal Agarwalla v. CIT [1962] 46 ITR 262 (Assam); R.V.S. and Sons Dairy Farm v. CIT [2002] 257 ITR 764 (Mad); International Forest Co. v. CIT [1975] 101 ITR 721 (J & K) ; M. Durai Raj v. CIT [1972] 83 ITR 484 (Ker); Ramchandra Ramnivas v. State of Orissa [1970] 25 STC 501 (Orissa); Action Electricals v. Deputy CIT [2002] 258 ITR 188 (Delhi) and Kamal Kumar Saharia v. CIT [1995] 216 ITR 217 (Gauhati) indicate that the AO is not fettered by any technical rules of evidence and pleadings, and he is entitled to act on material which are not acceptable in 8 ITA no.1841/Ahd/2009 evidence in a court of law, but while making the assessment under the principles of best judgment, the Income-tax Officer is not entitled to make a pure guess without reference to any evidence or material. There must be something more than a mere suspicion to support the assessment. Low profit in a particular year in itself cannot be a ground for invoking the powers of best judgment assessment without support of any material on record. The Hon'ble Gujarat High Court in the case of CIT Vs. Amitbhai Gunwantbhai, 129 ITR 573 held that if there was no challenge to the transactions represented in the books then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. Secondly, even if for some reason, the books are rejected it is not open to the AO to make any addition on estimate basis or on pure guess work. Indisputably, no specific discrepancies or defects in the books of account of the assessee have been pointed out before us nor was any material brought to our notice to establish that purchases were inflated or receipts suppressed. In these circumstances , we are opinion that that there was no justification in invoking the provisions of section 145 of the Act [ Vikram Plastics,239 ITR 161(Guj)]. The burden of showing that the apparent state of affairs is not the real one is very heavy on the Department [Bedi & Co. Pvt. Ltd. Vs. CIT,144 ITR 352(Karn) affirmed by Hon'ble Supreme Court in 230 ITR 580 while no other material has been placed before us to doubt the nature of the transactions recorded in the books. If there was no challenge to the transactions represented in the books, then it is not open to Revenue to contend that what is shown by the entries is not the real state of affairs. In the light of these observations of the Hon'ble jurisdictional High Court, we have no hesitation in upholding the findings of the ld. CIT(A). Therefore, ground no.3 in the appeal is dismissed.
14. Ground no.4 relates to deletion of disallowance of bad debts of Rs.1,01,081/-. The AO noticed that the assessee debited bad debts of Rs.1.01,081/- in the P&L Account. To a query by the AO , the assessee explained that only the sundry balances were written off, income in relation to which was duly accounted for . However, the AO did not accept the submissions of the assessee on the ground in the audited accounts, the above amount had been shown as bad debts and no 9 ITA no.1841/Ahd/2009 action had been taken to recover the amount. Since no action for recovery had been taken, the AO disallowed the claim for deduction of the said amount of Rs.1,01,081/- .
15. On appeal, the learned deleted the disallowance in the following terms:
"5.3 I have considered the facts and the circumstances and the submissions of the appellant. I find that the AR has filed account copies of parties and has claimed the same as sundry balances written off and that the amounts were not receivable due to claims made by the parties and the claims made by the parties were accepted by the appellant. Considering these facts and submissions, I hold that the claim of the appellant that the amounts written off are kasar vatav is genuine, hence I delete the disallowance."
16. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned DR supported the order of the AO while the learned AR on behalf of the assessee supported the findings of the learned CIT(A).
17. We have heard both the parties and gone through the facts of the case. As is apparent from the aforesaid facts, the ld. CIT(A) on perusal of account copies of parties concluded that the assessee had accepted the claims made by the parties and the amounts written off were kasar vatav and genuine. The Revenue have not placed before any material, controverting these findings of facts recorded by the ld. CIT(A). In these circumstances, especially when there is no material before us to take a different view in the matter, we are not inclined to interfere. Therefore, ground no.4 is dismissed.
18. Ground nos. 5 & 6 being mere prayer, do not require any separate adjudication and are, therefore, dismissed.
10ITA no.1841/Ahd/2009
19. In the result, appeal is dismissed.
Order pronounced in the court today on 21 -01-2011
Sd/- Sd/-
(BHAVNESH S AINI) (A N P AHUJ A)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Dated : 21 -01-2011
Copy of the order forwarded to:
1. Studio-3 Architect Pvt. Ltd., "Madhu Malti", Near Old High Court, Navrangpura, Ahmedabad
2. ITO, W ard-8(2), Ahmedabad
3. CIT concerned
4. CIT(A)-XIV, Ahmedabad
5. DR, ITAT, Ahmedabad Bench-C, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD 11