Income Tax Appellate Tribunal - Mumbai
Teletronics Dealing Systems Pvt.Ltd., ... vs Department Of Income Tax on 6 March, 2012
ITA Nos 2588 & 3440 of 2011
Teletronics Dealing System Pvt Ltd Mumbai
IN THE INCOME TAX APPELLATE TRIBUNAL
"E" Bench, Mumbai
Before Shri B. Ramakotaiah, Accountant Member
and Shri Vivek Verma, Judicial Member
ITA No. 2588/Mum/2011
(Assessment Year: 2007-08)
Teletronics Dealing Systems (P) Ltd Add.C.I.T. Circle-9(3)
71, Ranwar, Waroda Road 2nd Floor, Room No.229
Bandra (West) Aayakar Bhavan,
Mumbai 400050 Vs MK Road, Mumbai 400020
PAN - AAACT 2603 H
Appellant Respondent
ITA No. 3440/Mum/2011
(Assessment Year: 2007-08)
Add.C.I.T. Circle-9(3) Teletronics Dealing Systems
2nd Floor, Room No.229 (P) Ltd
Vs
Aayakar Bhavan, 71, Ranwar, Waroda Road
MK Road, Mumbai 400020 Bandra (West)
Mumbai 400050
PAN: AAACT 2603 H
Appellant Respondent
Revenue by: Mr. B. Jaya Kumar, DR
Assessee by: Mr. Vijay C.Kothari/Ajit Shetty
Date of Hearing: 06/03/2012
Date of Pronouncement: 21/03/2012
ORDER
Per B. Ramakotaiah, A.M.
These are cross appeals by assessee and Revenue against the orders of the CIT (A)-20 Mumbai dated 28.02.2011. There are various issues raised in the appeals and these are dealt with issue- wise.
2. We have heard the learned Counsel and the learned Departmental Representative in detail and their arguments are considered at the relevant place.
Page 1 of 13ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai
3. Issue of rejection of books of account and G.P. Addition :
The first issue is raised as ground number 1 in the assessee's appeal and GP addition as ground number 1 in Revenue appeal. Briefly stated, the Assessing Officer in the course of assessment proceedings asked the assessee to furnish various details. However, he was of the opinion that the assessee has not produced the books of account, bills and vouchers fully and therefore, the correctness and completeness of the account cannot be accepted and invoking the provisions of section 145(3) of the Income Tax Act, proceeded to estimate the GP. Vide Para 6 of the assessment order he noticed that the assessee's GP in earlier year was at 47.51%, whereas in this year it was at 38.11%. Therefore, he adopted the same ratio. However, while doing so he grossed up the turnover and arrived at undisclosed sales of `.2,84,89,101/- and took that figure as addition to gross profit. The issue was contested before the CIT (A). The assessee also filed additional evidence before CIT(A), which was sent to the Assessing Officer on remand. The CIT (A) after admitting the additional evidence and considering the submissions of the assessee, upheld the rejection of books of account, but deleted the GP addition. His reasoning for upholding the rejection of books of account in Para 6 of the order, is as under:
"6.I find no merit in the contention of the appellant. The Assessing Officer rightly exercised the powers given under section 145(3). Section 145(3) provides that where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section 91) or accounting standards as notified in sub-section 92), have not regularly been followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section.144. It is true that the accounts regularly maintained by an assessee in the course of business are normally taken as correct, unless there are cogent reasons to indicate that they are not reliable. It is basically a question of fact to be decided on the facts and circumstances of each case. In the instant case, the appellant did not furnish the quantitative details of the stock, purchases and sales apart from not producing the books of account in order to Page 2 of 13 ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai verify them. Even though the Form 3CD report showed that the quantitative details were given in Annexure 'E' to the report, no such annexure was filed before the Assessing Officer nor has it been filed even in the additional evidences. However, the ledger accounts of various items showing stock and other details have been furnished only through the additional evidence before me. In the absence of stock details both quantitative and qualitative with their movement and further without producing the supporting books of account it was not possible for the Assessing Officer to satisfy himself with the correctness of the profit shown in the return. It was not possible for him to know whether the appellant had maintained and kept day to day quantitative details/stock register for the goods manufactured and traded by it. There was also no way to verify the basis of the valuation of the closing stock shown by the assessee. In my opinion, no assessment would be complete if the books of account are not physically seen, examined and verified with reference to reports, documents, evidences relied upon to support the income returned. The income returned cannot be accepted unless it is shown that it is in conformity with the books of account maintained. In this view of the matter, it was not possible for the Assessing Officer to accept the profits shown by the appellant. Provisions of section 145(3) are clearly attracted to this case and the Assessing Officer rightly rejected to books of account and resorted to the assessment in the manner provided under section 144 of the Act. I, therefore, uphold the assessment".
The deletion of GP addition was considered as under:
"10. I find merit in the contention of the appellant. The relevant data given above are not in dispute. In my opinion, the GP rate of last year is no match when the turnover of the current year has gone up five times by `.12.8 crores as compared to last year. I agree with the appellant that the GP reduces when turnover increases. Not only this, there is fivefold increase in quantum of net profit as well from `.1.19 crores last year to `.5.48 crores this year. It would, therefore, be not reasonable to disturb the gross profit ratio of the current year. I, therefore, delete the addition made on this account of `.2,84,89,101/-".
Since these issues are inter-related, the arguments of the learned Counsel and the learned Departmental Representative were considered. We find that there is no reason to reject the books of Page 3 of 13 ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai account as was done by the Assessing Officer and confirmed by the CIT (A). There is no discussion at all why the books of account are not complete and correct. The assessee has furnished lot of details before Assessing Officer and as additional evidence furnished further details asked by AO before the CIT (A) which were sent on remand to the Assessing Officer. There is no whisper about accounting method or why incomes can not be computed on the basis of books or any perceptible reasons for rejecting the books of account. Just because quantitative details are not enclosed with the reports and a stock register in the required sense was not maintained, the books of account cannot be rejected. As seen from the orders of the CIT (A), the assessee has furnished ledger accounts of various items and it was submitted that the assessee purchases and sells them by lots and ledger account do indicate both the quantity and the value of the items traded by the assessee and therefore, no separate quantitative details or stock register was necessary to be maintained. The aspects on which the CIT (A) confirmed the rejection of books of account are not material in the sense that the assessee had complete control over the stock inventory and did maintain ledger account with quantitative details. The Assessing Officer has not even attempted to examine or co- relate the closing stock with the stocks available in the register and its valuation. On examination of the data furnished before the authorities and on the submissions, we are of the opinion that there is no necessity to reject the books of account when the assessee had maintained books of account according to the prescribed procedure and the books of account were also duly audited. Even though the Assessing Officer submits that the information was not furnished before him as mentioned under section 142(1) and the notice dated 6.11.2009, assessee's Counsel argued that most of the data was furnished and whatever balance was left, was furnished by way of additional evidence before the CIT (A). It was further seen that various Assessing Officers have issued Page 4 of 13 ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai notices to the assessee. The Dy. CIT, 9(3) issued notice under section 143(2) on 15.9.2008 which was the statutory notice for scrutiny, issued within one year of filing the return. Afterwards no proceedings were initiated till 17.7.2009 wherein the ACIT, 9(3) has issued notice under section 142(1). Subsequently, Add.CIT Range-3 has issued notice on 4.8.2009. There was response to various postings subsequently and on hearing on 8.12.2009, the Authorized Representative was called upon to furnish further details by 9.12.2009. Since the proceedings concluded late in the evening on 8.12.2009, the assessee could compile various details tried to furnish the same on 10.12.2009, which according to the affidavit on record, was rejected by the Assessing Officer. Even though the Assessing Officer stated to have rejected such information, the order was passed on 16.12.2009 rejecting the books of account on the reason that information called for was not furnished. The assessee had no other option than to file them as additional evidence before the CIT (A) with an affidavit of what transpired before the Assessing Officer on 8.12.2009 and 10.12.2009 and the CIT did admit the additional evidence and sent information on remand. Keeping these facts in mind and also noticing that the assessee was able to furnish all the information whatever was required by the Assessing Officer, we are of the opinion that there is no need to reject the books of account.
4. The provisions of 145(3) can only be invoked in the following conditions.
"Section.145(3): (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.]"
As can be seen from the audited accounts and the report of the audit in Form 3CD and further noticing the voluminous papers Page 5 of 13 ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai enclosed in the paper book from Page Nos.1 to 453, we are of the opinion that assessee's books of account were rejected for extraneous consideration by the Assessing Officer, but not based on the provisions of law. The reasoning given by the CIT (A) while upholding the rejection of books of account cannot also be upheld. He, after rejecting the books of account, the only addition made by the Assessing Officer is the GP addition, which is the material for the issue under consideration, the addition of which was deleted by the CIT (A). Acceptance or rejection of the books of account does not really matter as far as the GP addition is concerned. Since both the assessee is contesting the rejection of books of account and the Revenue contesting deletion of GP addition, our considered opinion is that the Revenue authorities have erred in rejecting the books of account. Therefore, the assessee ground is allowed.
5. As far as the GP addition is concerned, we are of the opinion that the CIT (A) has correctly rejected GP addition. Even though the order was brief, the entire details filed before the CIT (A) do indicate that he has considered submissions and deleted the addition on proper grounds. The learned Departmental Representative made efforts to support the action of the Assessing Officer but after considering the order of the Assessing Officer, we are of the opinion that the Assessing Officer had not considered the facts while making the addition. First of all, rejection of books of account itself was not correct and was done by not giving proper opportunity to assessee and by rejecting highhandedly, filing of information on 10- 12-2009. The contents/ averments of affidavit filed before CIT(A) were not controverted. Therefore making addition of GP itself was not warranted. Moreover, the comparison of GP itself was wrong. The Assessing Officer arrived at the gross profit ratio for assessment year 2006-07 at 47.51%. The assessee vide letter dated 10.12.2009 addressed to the Add. CIT (which was not accepted by him) but filed as additional evidence before the CIT (A) submitted that the operational income excluding the other income will yield only Page 6 of 13 ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai 40.15% GP ratio is compared to 38.62% in the current year. However, the turnover was 5 times more than the earlier year thereby there is some fall in the GP. So the Assessing Officer comparison of GP itself was wrong as he took in to account gross income but not the operational profits of the assessee. The other incomes which also were there in the Profit & Loss A/c were not excluded by the Assessing Officer. Therefore, the amounts taken for comparison itself was basically wrong. As seen, the fall in GP marginally was due to increase in turnover.
6. After considering that comparison for gross profit, the Assessing Officer went on a different method. On a turnover of `100/- if the GP is considered at 47.51%, and in another year, if the GP was at 38.11%, the GP addition would be 47.5% minus 38.11% on `.100/-turnover. However, the Assessing Officer as per his own working arrived at the GP as 'undisclosed sales' by grossing up the turnover which is not correct. Therefore, even while working the addition under GP, instead of adding the difference of 9.4%, in GP on the turnover which comes to `.1,49,53,929/-, Assessing Officer made an addition of `.2,84,89,101/-. This itself is very arbitrary, excessively high and cannot be sustained. It is unfortunate that the Revenue without examining the basic parameters for rejection of the books of account and amount of GP addition made, comes in appeal contesting deletion by the CIT (A). The order of the Assessing Officer, rejecting the books of account and making the addition under GP is very arbitrary and capricious. This action of the Assessing Officer cannot be justified on any parameters. Therefore, we have no hesitation in rejecting the ground of the Revenue. The order of Ld. CIT(A) is confirmed. Accordingly Ground No.1 of the Revenue is rejected.
7. Issue of deletion of expenditure `.17,45,404/-: The Assessing Officer while computing the assessment, compared the expenditure under various heads in previous year relevant for assessment year 2006-07 with the previous year relevant for the Page 7 of 13 ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai impugned assessment year and noticed that there was an additional expenditure of `.17,45,404/- between respective claims in both years and accordingly in the absence of books, excess expenditure determined by him was disallowed. Before the CIT (A), the assessee, as stated earlier filed additional evidence which was sent on remand, justified the expenditure, the CIT (A) deleted the addition after considering the assessee's arguments as under:
"14. Being aggrieved, the appellant submits that all the expenses are fully supported by bills, vouchers etc. The Assessing Officer failed to appreciate that the books of account were audited. He did not appreciate that the total turnover for the current year increased five times over the last year. Further, the quantum of gross profit as also the net profit grew fivefold. It is submitted that there was no disproportionate increase in expenses necessitating the impugned disallowance.
15. I find merit in the contention of the appellant. There is no dispute that the appellant's turnover went up from `.3.10 crores last year to `.15.90 crores in the current year. The increase in expenses this year as taken by the Assessing Officer is commensurate with almost fivefold increase in turnover. The Assessing Officer has acted unreasonably in making the impugned disallowance. I delete the addition made on that account of `.17,45,404/-".
8. After considering the rival arguments and examining the order of the Assessing Officer and the CIT (A), we do not find any reason to differ from the findings of the CIT (A). In fact, as rightly pointed out by the CIT (A), the Assessing Officer has acted unreasonably in making the impugned disallowance without considering the increase in turnover and extent of the activity of the assessee. Therefore, Revenue ground is accordingly rejected.
9. Issue No.3: Depreciation on intangible assets: The assessee raised this as Ground No.2 in its appeal. Briefly stated, the assessee claimed depreciation of `.27,90,958/- on addition to fixed assets amounting to `.1,39,54,792/- under the head 'Intangible assets'. The Assessing Officer observed that Appendix-1 to Rule 5 under the Income Tax Rules shows that depreciation for intangible assets is Page 8 of 13 ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai allowable only in respect of 'know-how, patents, copyrights, trade- marks, licenses, franchises or any other business or commercial rights of similar nature'. He observed that the assessee was unable to show, how 'Network' was included within the meaning of intangible assets and that the claim was also not verifiable in the absence of books of account, he disallowed the deduction claimed of `.27,90,958/- and added the said sum to the income returned.
10. Being aggrieved, the assessee submitted before the CIT (A) that it did not claim depreciation on 'Networks' as stated by the Assessing Officer. It purchased during the year, the business of the firm Pioneer Telephones on lump sum basis, valued at `.1,51,00,000/- vide agreement dated 17.05.2006. The networth of the undertaking was `.11,45,208/- as per the Audit Report in Form No.3CEA prescribed under section 50B(3) relating to computation of capital gains in case of slump sale. The business of the firm was more than 20 years old. The firm was a service provider for Dealer Board Equipments and was in the same line of business. As per clauses (a) to (c) on Page 3 of the agreement, the running business included, all network, technical knowhow, software, tangible and other assets. Clause 7 on page 19 of the agreement also included non-compete clause. The assessee submits that it debited `.1,39,54,792/- being the difference between the lump sum price of `.1,51,00,000/- and net worth of `.11,45,208/- of the going concern as cost of the intangible assets which it added to the Fixed Assets and claimed depreciation @25% of `.27,90,958/. It relied on the decisions of the Tribunal in Skyline Caterers (P) Ltd vs. Income Tax Officer, Ward-8(3)(2), Mumbai (2008) 20 SOT (Mum.) (SMC), Kotak Forex Brokerage Ltd vs. ACIT, Range 3(2), Mumbai (2009) 33 SOT 237 (Mum) and Hindustan Coca Cola Beverages (P) Ltd vs. DCIT, Circle 12(1) New Delhi (2009) 34 SOT 171 (Delhi) wherein it was held that goodwill is covered under 'Intangible Assets' referred to in section 32(1)(ii) and consequently depreciation would be allowable on the same. The assessee contended that the cost to it of Page 9 of 13 ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai `.1,39,54,792/- on acquiring the business of Pioneer Telephones was only towards intangible assets of the said concern covered under section 32(1)(ii) and is entitled to claim deduction of the impugned sum. The assessee's plea is that the addition made of `.27,90,958/- should be deleted.
11. The CIT (A) after considering the submissions dismissed the claims by stating as under:
"24. I find no merit in the contentions of the appellant. It has acquired entire undertaking of the partnership firm, Pioneer Telephones, engaged in the service business as a going concern vide slump sale agreement dated 17-05- 2006. The business was acquired for a lump sum sale consideration of `.1,51,00,000/-. The appellant has attributed `.1,39,54,792/- to intangible assets. The agreement does not specify any intangible assets nor does assign any value to that. I fail to understand as to how the appellant has acquired intangible assets worth `.1,39,54,792/-. The nature of the intangible asset has not been explained or described. The facts above show that the appellant acquired a business as a going concern for lump sum consideration. Since there was transfer of entire business, the acquired business constituted the capital asset. The assets transferred constituted running business. The parties did not intend to make a sale of itemized assets. The appellant also never intended to purchase individual items. The slump sale agreement merely mentions all tangible and intangible assets and properties of Pioneer Telephones without even identifying or describing them. A slump sale contemplates sale of a going concern lock, stock and barrel plus transfer of all assets and liabilities plus absence of an itemized sale. In the case of a slump sale it is not possible to assign the sale value to individual items of assets. There was no sale of itemized assets. The slump sale agreement was a contract. The slump sale agreement was for a lump sum price. No goodwill or know how or any commercial right embedded in the business was identified in the agreement nor was there any payment made towards them. The appellant has merely invented intangible assets out of nowhere and attributed cost to it being the difference between the sale value and the net worth as aforesaid. The appellant has created a fictitious assets in its fixed assets schedule. The sale consideration of `.1,51,00,000/- was capital expenditure in the hands of the appellant and it rightly Page 10 of 13 ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai did not claim that as business deduction. No depreciation also was claimed on that amount as it did not give rise to any depreciable fixed assets eligible to depreciation under section 32 of the Act. What is not admissible as deduction directly cannot be claimed indirectly giving a different colour to the transaction of slump sale. I, therefore, hold that there was no acquisition of intangible assets as such and no question arises for considering the claim of depreciation thereon. In this view of the matter, I do not consider it necessary to examine the relevance of various case laws relied upon by the appellant as they were rendered under different facts and circumstances. The Assessing Officer has rightly disallowed the depreciation brought for different reasons. I confirm the addition made of `.27,90,958/-".
12. Before us the learned Counsel took us to the facts of the case and also relied on various case law on the issue. During the course of the arguments it was submitted that the slump sale was from 3rd party, but on examination of the paper book filed it was noticed and admitted that the concern which was acquired by the assessee company is a group concern in which the Director of the Company was Managing Partner of the firm. The Assessing Officer in his anxiety to refuse the books of account and make the GP addition did not examine this aspect of slump sale agreement and acquisition of various assets by the assessee. Even though the CIT (A) sent the matter on remand, the main contention of the Assessing Officer was that the additional evidence should not be allowed to be filed. He did not go into the merits of the examination of the slump sale agreement and acquisition of the other concern. Since these aspects were not examined by the Assessing Officer and the CIT (A), we are of the opinion that the matter requires re-examination at the level of Assessing Officer. Keeping in mind the fact that the concern acquired was a sister concern of the assessee company and the Assessing Officer has to examine the price paid for acquiring the company, the assets acquired and other aspects so as to verify the cost of assets both tangible and intangible and whether the claim of the assessee for depreciation is allowable both legally and factually.
Page 11 of 13ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai Since this issue was not examined in its perspective with reference to the record of the concern which was acquired and the entries made in the books of account of the assessee which were also not before us, we without going into the merits of the claim and various case law relied, restore the issue to the file of the Assessing Officer for fresh examination on facts and decide according to the facts and law on the issue. Therefore, the issue in Ground No.2 raised by assessee on the issue of depreciation on the intangible assets is restored to the file of the Assessing Officer. The Assessing Officer is directed to give due opportunity to the assessee while examining the issue and deciding the matter afresh. This ground is allowed for statistical purposes.
13. Issue of Disallowance under section 14A: This is the third ground raised by the assessee on disallowance under section 14A in relation to the expenditure incurred in earning dividend income. Briefly stated, the assessee earned dividend of `.11,68,431/- and claimed exemption under section 10(34) of the Act. The Assessing Officer worked out the disallowance of `.1,05,610/- applying Rule 8D of the Income Tax Rules. It was the contention before the CIT (A) that the assessee has not incurred any expenditure in earning exempt income. The learned Cit (A) following the principles laid down by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co, Ltd vs. DCIT (2010) 234 CTR (Bom.) held that the disallowance made by the Assessing Officer is a reasonable estimation of such expenditure. Accordingly he confirmed the addition.
14. After considering the rival arguments on the issue and various orders of the ITAT on the issue of disallowance under section 14A in other cases relied upon, we are of the opinion that the disallowance under section 14A can be restricted to 5% of the dividend received during the year. As the Assessing Officer already noticed that there was no interest applicable on the dividend earned and only administrative expenditure and as the ITAT consistently Page 12 of 13 ITA Nos 2588 & 3440 of 2011 Teletronics Dealing System Pvt Ltd Mumbai allowing the administrative expenditure upto 5% of the dividend earned as 'reasonable amount' we hold that 5% of the dividend income is reasonable amount which can be considered u/s14A. Assessing Officer is directed to restrict the disallowance to 5% of the amount of dividend. Accordingly the ground is considered partly allowed.
15. In the result, assessee's appeal is partly allowed and the Revenue appeal is dismissed.
Order pronounced in the open court on 21st March, 2012.
Sd/- Sd/-
(Vivek Verma) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 21st March, 2012.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "E " Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
Page 13 of 13