Income Tax Appellate Tribunal - Chandigarh
Assistant Commissioner Of Income Tax vs Axia Engineering Co. (Also Axia Engg. ... on 13 May, 1994
Equivalent citations: (1996)54TTJ(CHD)335
ORDER
N. K. AGRAWAL, J. M. :
These are appeals by the Revenue relating to the asst. yrs. 1986-87 and 1987-88. The assessee has filed cross-objection for the asst. yr. 1987-88.
2. We shall first take up the Revenues appeal relating to asst. yr. 1986-87. Grounds Nos. 1 and 2 relate to the deletion of addition of Rs. 50,000 made in the trading account invoking the proviso to s. 145(1) of the IT Act. The Assessing Officer (AO) noticed during assessment proceedings the assessee had shown the value of the stock at Rs. 30,42,881 in the stock statement filed before the bank. The number of M. S. sheets had been shown at 10720. However, during assessment proceedings, it was noticed that the assessee had shown in its record 1444 sheets, 4215 flats and 8466 plates. The assessee was required to explain as to how 10720 M. S. sheets had been shown in the stock statement filed before the bank. The assessees explanation was that M. S. sheets, flats and plates could be described under any of the three categories and it was for that reason that the figure 10720 had been shown in the bank statement declaring it as relating to M. S. sheets only. It was only a variation in the description of the stock which was reflected in the stock statement and there was nothing objectionable to reject the stock position shown in the books of account. The AO further noticed that the value of the parts manufactured by the assessee had been shown at Rs. 3,57,462 but it was difficult to ascertain the correctness of this valuation. Similarly, the value of raw-material had been shown at Rs. 3,22,077 but in the absence of the weight of the materials, its valuation also could not be verified. The closing stock had thus not been properly valued. It was further noticed that the assessee had shown excessive wastage and scrap. No stock register had been maintained nor the manufacturing details were available. Since the scrap should not be available exceeding 10% the result shown by the assessee was held to be totally unreliable. Therefore, the books of account were rejected. The AO thereafter proceeded to make an addition of Rs. 50,000 in the trading account.
3. The assessee went in appeal with the plea that sales had been shown in this year at Rs. 41,34,305 and the GP had been disclosed at Rs. 15,33,057. The ad hoc addition of Rs. 50,000 was said to be based on simple estimate and without any basis. The assessee had wide items spread over 8 categories in the stock. Whatever stock had been declared in the stock statement before the bank, that was based on a rough classification. Sheets, flats and plates had been collectively described as sheets in the stock statement. The total value of the sheets had been shown in that statement at Rs. 1,02,294 whereas in the return stock had been declared at Rs. 1,11,199. It was, therefore, contended that higher valuation had been shown in the books and it provided no ground to hold that the assessee had suppressed the stock. The value of pipes and steel tubes had been shown in the stock statement at Rs. 8,942 whereas in the valuation of stock shown in the return, these items had been valued at Rs. 83,336. Since the GP rate in this year was very high as compared to the earlier years, the book results were said to be reliable. It was contended that regular books of account had been maintained and there was no reason to reject the books of account unless certain defects were noticed. Reliance was placed before the CIT(A) on a decision of the Punjab High Court in the case of Pandit Bros. vs. CIT (1954) 26 ITR 159 (Punj) for the proposition that the method of accounting was the same as in earlier years and simply because the stock register had not been maintained the book results could not be rejected. Reliance has also been placed on a decision of the Kerala High Court in the case of M. Durai Raj vs. CIT (1972) 83 ITR 484 (Ker) in support of the plea that where the books of account had been regularly maintained, the trading results could not be rejected unless it was established that there was any suppressed turnover. In the case of International Forest Co. vs. CIT (1975) 101 ITR 721 (J&K), the Jammu & Kashmir High Court had an occasion to examine a case wherein it was held that mere low yield shown by the assessee in the accounting year in question as compared to previous years was not to be treated as a valid ground for rejecting the book results. The Gujarat High Court in the case of Balapur Vibhag Jungle Kamdar Mandali Ltd. vs. CIT (1982) 135 ITR 91 (Guj) observed that where the same method of accounting had been followed for a number of years and had been accepted by the Revenue, that method could not be rejected without valid reason in a particular year. The learned counsel for the assessee has, on the strength of these decisions, submitted that no ad hoc addition could be made unless specific defect was found in the books of account. The learned first appellate authority accepted the plea and deleted the addition.
4. The learned Departmental Representative has submitted that various defects had been found by the ITO and, therefore, the book results were rightly rejected. The assessee did not maintain any stock register giving details of different items nor manufacturing details had been furnished. There was no evidence on record to show that different items, namely, sheets, plates and flats were items of similar nature. It is, therefore, contended that the addition had been rightly made in the trading account.
5. The learned counsel for the assessee has, in reply, submitted that there were as many as 8 different items of stock and in the stock statement, the stock of sheets, plates and flats had been combined and categorised in one category called M. S. sheets. Since the classification was made on a rough basis, no objection could be taken for that reason. It is also pointed out that the assessee had shown the gross profit rate in this year at 37.08% as against 20.22% in the asst. yr. 1984-85 and 26.71% in the next assessment year.
6. We have considered the rival contentions and we are in agreement with the learned counsel that the ad hoc addition made in the trading account could not be sustained. The method of accounting was the same as in the earlier years. Mere absence of the stock register could not be treated to be sufficient to reject the books of account, unless some specific defects were noticed. As regards stock statement filed before the bank, it was to be seen that the assessee had shown the stock under the head "M. S. sheets" and on that basis an adverse inference was drawn that the assessee did possess sheets of higher valuation in stock. There is no basis to shown as to shown in this year. There is no basis to show as to how addition was made at Rs. 50,000. This appears to be a simple ad hoc estimate. All the purchases and sales are said to be vouched. No specific defect has been shown in the books of account. Therefore, we find no force in grounds Nos. 1 and 2 and these are rejected.
7. Grounds Nos. 3 and 4 relate to the deletion of addition of Rs. 75,000 made on account of income from combine harvester. The assessee had shown hire income at Rs. 75,000 in the preceding assessment year but no such income was shown in this year. The assessee had explained that the harvester in question had been actually sold to M/s Baldev Singh & Bros. for Rs. 5,50,000 on 11th Jan., 1986. The deal had actually been settled on 15th May, 1985 when a sum of Rs. 20,000 had been received from the prospective buyers as advance money. Thereafter, a further sum of Rs. 40,000 was received and another sum of Rs. 15,000 on 25th Sept., 1986. It was for this reason that the combine harvester was not given on hire to anyone. The AO did not agree and made an addition of Rs. 75,000 on the ground that the assessee must have given the harvester on hire during the season April to May, 1985.
8. The assessee went in appeal with the plea that there was no evidence on record to show that the harvester had been given on hire in this year. The advance money had been received in May, 1985 after the deal had been finally settled for the sale of the harvester and, therefore, there was no occasion for the assessee to give it on hire to anyone else. The learned CIT(A) accepted the plea of the assessee and deleted the addition.
9. The learned Departmental Representative submitted that the buyer was not produced and it was not probable to presume that the harvester was kept idle during the harvesting season.
10. The learned counsel for the assessee has, in reply, submitted that there was no evidence to indicate any receipt of income in this year. Since the assessee was under an obligation to retain the harvester in good condition after the sale transaction had been finalised on 15th May, 1985, the assessee could not give it on hire at all. It is said to be pure assumption on the basis of which hiring income had been adopted at Rs. 75,000. Affidavit of Shri Baldev Singh was also filed in support.
11. We have considered the rival contentions and we are in agreement with the learned counsel that the harvester had been agreed to be sold in May, 1985 and certain advance money had also been received in that month. Therefore, under the agreement, the assessee was not free to give that harvester on hire. The delivery of the harvester was indeed given in January, 1986 but that would not make out a case against the assessee so far as hiring income was concerned. Simply because the assessee had earned hiring charges in the preceding year, that alone will not make out a case against the assessee for this year. The assessees accounting year ended on 31st March, 1986. Advance money had been received in May, 1985. In these circumstances, we find no force in the Revenues plea. Grounds Nos. 3 and 4 are also, therefore, rejected.
12. Ground Nos. 5 and 6 relate to the deletion of disallowance of Rs. 92,870 made under s. 40A(2)(b) of the Act. The assessee had shown payment of interest at Rs. 3,72,226. The AO noticed that interest had been paid @ 24% to the creditors who were close relatives and dependents of the partners. Except for Smt. Manorama Khanna, who had been paid interest @ 20%, others were paid at the rate of 24%. The AO took the view that it was excessive and unreasonable and therefore, allowed the same @ 18%.
13. The assessee went in appeal with the plea that the higher interest had been paid to the creditors keeping in view the higher market rate. Moreover, the actual interest paid to the bank also rose to 23% if the compound interest as well as the guarantee fee and amount of insurance were taken into account. Moreover, the bank also required certain money to be kept in the FD account. In the case of private creditors, these charges were not to be paid nor any security was to be furnished. Therefore, the higher rate of interest was said to be justified. In the case of a bank also, the actual interest rate came to 23%. The assessee had also relied upon a decision of the Punjab & Haryana High Court in the case of CIT vs. Dalmia Dadri Cement Ltd. (1970) 77 ITR 410 (P&H) in support of the plea that when certain payment had been allowed in the earlier years, the same view must be taken in the other years even though the principle of res judicata was not applicable to the decisions of the IT authorities. It was contended that in the earlier year, rate of interest had been allowed at 24% in respect of the same borrowings from the same creditors. Reliance was also placed on a decision of the Calcutta High Court in the case of CIT vs. Edward Keventer (P) Ltd. (1972) 86 ITR 370 (Cal). That was a case where certain payments to directors were disallowed treating them as excessive. It was observed that the matter should be examined from the point of view of a prudent businessman. In the case of Voltamp Transformers (P) Ltd. vs. CIT (1981) 129 ITR 105 (Guj), the Gujarat High Court had also an occasion to examine a disallowance of commission paid to sole selling agent. It was noticed in that case that sales had increased due to the effort of the agent and it was in that context held that the payment of commission was reasonable. The first appellate authority accepted the plea and deleted the addition.
14. The learned Departmental Representative has relied on the order of the AO.
15. The learned counsel for the assessee has, in reply, submitted that mostly these were the old balances on which interest had been paid @ 24% as in the preceding assessment year. Copies of accounts of the creditors have been placed on record to show that except in a few cases, in the cases of all the creditors, there were old opening balances on which interest had been paid @ 24%. Since the assessee had shown increased profit in this year, higher borrowings on higher interest were necessary in the interest of business. Loans from private parties were to the convenience of the assessees business because such loans were received without any security or hypothecation of stock. In these cases, no extra charges were required to be paid regarding guarantee money or insurance premium. The learned counsel has, therefore, submitted that the disallowance was rightly made keeping in view the past history of the case.
16. We have considered the rival contentions and we find no force in the Revenues plea that interest could be disallowed treating it to be excessive or unreasonable. Since in the preceding assessment year, interest had been allowed at 24% on the same amounts from the same borrowers, there was no reason to take a different view in this year. It is also to be noted that the assessee had shown GP at 37.08% in this year as against 20.22% in the asst. yr. 1984-85 and 26.71% in the asst. yr. 1985-86. In these circumstances, the addition was rightly deleted. Therefore, ground Nos. 5 and 6 also fail and are rejected.
17. In the asst. yr. 1987-88, the only ground in Revenues appeal relates to the deletion of addition of Rs. 83,617 under s. 40A(2)(b). We have already seen while examining the Revenues grounds Nos. 5 and 6 in the preceding assessment year that the payment @ 24% were not unjustified in the circumstances of the case. Since the facts and circumstances are similar in the asst. yr. 1987-88 also, we find no force in the Revenues ground for the reasons given above. Therefore, Revenues ground stands rejected.
18. In the assessees cross-objection, addition of Rs. 5,000 out of staff welfare expenditure and another addition of Rs. 32,657 out of car-running expenditure have been challenged. The assessee had shown total expenditure relating to staff welfare at Rs. 15,929. The AO took the view that most of the expenditures were entertainment expenditures. The assessees plea, however, was that expenditure had been incurred in providing tea and snacks to the employees during working hours and, therefore, was not in the nature of entertainment expenditure. Ad hoc disallowance of Rs. 5,000 was said to be not justified. In the case of expenditure on cars totalling Rs. 10,627, it was contended that there was no reason to make a disallowance because the assessee had also incurred expenditure on jeeps, mini trucks and motor-cycles at Rs. 43,145. The AO had made the disallowance on both the expenditures to the extent of 1/4th (at Rs. 13,443). In appeal, the CIT(A) restricted the disallowance to 1/4th of the expenditure on cars only.
19. The learned counsel for the assessee has submitted that there was no justification to make any disallowance in respect of staff welfare expenditure unless it was found that these expenditures were in the nature of entertainment expenditure. In the absence of any evidence on record, ad hoc disallowance of Rs. 5,000 is said to be not justified. The learned Departmental Representative has relied upon the order of the CIT(A).
20. We have considered the rival contentions and we are in agreement with the learned counsel for the assessee that disallowance of Rs. 5,000 was not based on any definite material on record. Expenditure incurred in connection with tea and snacks provided to the employees during working hours was an allowable expenditure and was not to be treated as entertainment expenses in view of the Expln. 2 below s. 37(2A). Therefore, disallowance of Rs. 5,000 on an ad-hoc basis is found to be not justified. It is, therefore, deleted. As regards disallowance sustained by the CIT(A), we are of the view that reasonable relief has already been given by excluding the expenditure on jeeps, mini trucks etc. and confining the disallowance to the extent of 1/4th on cars. In our view, personal use of the cars by the partners was the primary factor on the basis of which disallowance has been restricted to 1/4th of Rs. 10,627. Therefore, disallowance in respect of expenditure on car made by the learned CIT(A) is upheld.
21. In the result, Revenues appeals for both the years stand rejected and the cross-objection of the assessees stands partly allowed.