Income Tax Appellate Tribunal - Delhi
Parkash Industries Ltd., Hisar vs Department Of Income Tax on 12 April, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'D' : NEW DELHI)
BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER
and
SHRI C.M. GARG, JUDICIAL MEMBER
ITA No.3036/Del./2010
(Assessment Year : 1996-97)
Dy. Commissioner of Income-tax, vs. M/s. Prakash Industries Ltd.,
Karnal. Delhi Road.
Hisar.
CO No.357/Del./2010
(in ITA No.3036/Del./2010)
(Assessment Year : 1996-97)
M/s. Prakash Industries Ltd., vs. JCIT, Special Range,
Delhi Road. Karnal.
Hisar.
(Appellant) (Respondent)
Assessee by : Shri Ajay Wadhwa, Advocate
Revenue by : Shri D.K. Mishra, DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This appeal filed by the revenue and cross objection filed by the assessee emanates from the order of CIT (Appeals), Rohtak dated 12.04.2010.
2. The assessee is a limited company engaged in the business of manufacturing and sale of PVC Pipes, Picture Tubes, Video Tape, Power Generation, Sponge Iron, Induction Furnace, Heavy Structural Rolling 2 ITA No.3036/Del/2010 CO No.357/Del/2010 Mill & Mining, and Crushing activities. The return of income was filed on 29.11.1996 declaring taxable income at Nil. The assessee has claimed carry forward depreciation allowance of Rs.57,68,88,192/- pertaining to Assessment Year 1994-95 and 1995-96 of Rs.29,62,98,768/- and Rs.28,05,89,429/-. The total turnover of the assessee during the year was more than Rs.670 crores and gross profit rate was 10.45% in comparison to 9.47% in the earlier years.
3. The grounds of appeal filed by the revenue read as under :-
"1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.1,22,73,504/- on account of preceding years expenses as the assessee was maintaining its accounts on mercantile system of accounting and the prior period expenses claimed were not allowable in the year under consideration.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.50 lacs out of repair expenses without appreciating that the assessee could not establish the genuineness of these expenses and the department was already in appeal on this issue in the A.Y. 2001-02 which was pending before the ITAT.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.1 lac out of MD's commission without appreciating properly that the steep hike in expenses was not justified by the genuine needs of business and the departmental appeal filed on the issue is pending before the Ld. ITAT.
4. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.1 lac made out of professional expenses claimed at Rs.14.33 lacs without appreciating that the assessee could not furnish complete details of such expenses and the appeal filed by the 3 ITA No.3036/Del/2010 CO No.357/Del/2010 department on the issue is pending before the ITAT in the assessments years 2001-02 to 2005-06.
5. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.5 lacs out of Misc. expenses claimed at Rs.2.37 Crores without appreciating that the assessee could not furnish complete details/ necessary explanation in respect of these expenses as well as justification for increase.
6. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.50 lacs out of commission expenses claimed at Rs.l,47,34,764/- without appreciating that the claim of commission was not proportionate to the legitimate needs of business and further the assessee also failed to discharge the onus of proving the genuineness of huge commission expenses claimed by furnishing copies of agreements/confirmation from the concerned parties.
7. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of depreciation of Rs.4.23 Crores and Rs.42.50 lacs claimed respectively on machinery and Wind Generators on admission of additional evidence in the shape of a certificate from Tamilnadu without affording any opportunity in this regard.
8. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of depreciation of Rs.l Crore on the so-called purchase of machinery from M/s Ashish Engineering Works without appreciating properly that the genuineness of purchase of machinery could not be established conclusively by the assessee.
9. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.7,05,28,805/- out of expenses claimed on lease rent/lease management fees etc. following his order dated 22.09.2007 in assessee's case for the asstt. year 2001-02 which has not been accepted and the appeal filed by the department on the 4 ITA No.3036/Del/2010 CO No.357/Del/2010 issue is pending before the ITA T for the asstt. year referred to above.
10. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.8,55,60,070/-, Rs.18,05,500/- and Rs.8,64,400/- on account of lease rent, lease Management fee and lease rent of building respectively without appreciating that every year is independent and expenditure of each year is admissible on the facts and circumstances which did not warrant the allowance of above expenditure in the year under consideration.
11. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of interest out of interest claimed on account of utilisation of borrowed funds for non-business purposes by following his order passed in the assessee's case for the assessment year 2001-02 & 2002-03 which has not been accepted and the departmental appeal on the issue is pending before the Ld. ITAT.
12. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the lump-sum addition of Rs.20 Crores without proper appraisal of findings of the AO that the transaction with M/s Ashish Engg. Works, M/s A.S. Mechanical Works and A.S. Forgings, Pioneer Engg. Works, R.K. Video & Other concerns as recorded in para No.21 of the assessment order were not properly recorded and the method of accounting followed was such that the profits cannot be deducted therefrom.
13. The Appellant craves leave to add or amend the grounds of appeal before the appeal is heard and disposed off."
4. The grounds of cross objection filed by the assessee read as under:-
"1. That in the facts & circumstances of the case and in law, the Commissioner of I Income Tax. (Appeals), Rohtak [briefly "the CIT(A)"] erred in confirming 5 ITA No.3036/Del/2010 CO No.357/Del/2010 adhoc disallowance of Rs.704957/- out of staff welfare and sales promotion expenses.
2. That in the facts and circumstances of the case and in law the CIT(A) erred in confirming the disallowance of Rs.150000/- on account of foreign travelling expenses.
3. That in the facts and circumstances of the case and paid in cash more than Rs.20,000/- should be allowed Rs.57117/- due to situation of the payment.
4. That in the facts and circumstances of the case and in law the CIT(A) erred in not allowing the addition ground regarding payment of P.F. & F.P.F. of Rs.28672/- disallowed u/s 438
5. That in the facts and circumstances of the case and in law the CIT(A) erred in I not allowing the additional ground disallowed u/s 438 as per Tax Audit Report Rs.25103/-."
We have heard both sides on the grounds raised in appeal as well as in cross objection.
5. In the ground no.1 of the revenue's appeal, the issue involved is deleting the disallowance of Rs.1,22,73,504/- made on account of preceding year expenses debited in the books of account.
6. While pleading on behalf of the revenue the ld. DR submitted that the assessee was maintaining books of account on mercantile system and prior period expenses should not be allowed in the year under consideration. Ld. DR submitted that in mercantile system of accounting, the expenses are allowed on accrual. He submitted that basically the mercantile system of accounting is a double entry system of accounting 6 ITA No.3036/Del/2010 CO No.357/Del/2010 and profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. The profits earned and credited in the books of account constitute the basis of computation of income. This system postulates the existence of tax in so far as monies are due and payable by the parties to whom they are debited. For this proposition, the ld. DR relied on the decision of Hon'ble Supreme Court in the case of Keshav Mills Ltd. vs. CIT reported in 23 ITR 230 (SC). Ld. DR submitted that in the mercantile system of accounting, in order to determine the net income of an accounting period, the revenue and other income are matched with the cost of resources consumed (expenses). In this system, this matching is required to be done on accrual basis. He further submitted that under this matching system, revenue and income earned during an accounting period, irrespective of actual cash in flow is required to be compared with the expenses incurred during the same period, irrespective of actual outflow of cash. Ld. DR also relied on the decision of Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT reported in 225 ITR 802 (SC) wherein the Hon'ble Supreme Court has held that the determination of true profits or losses in a particular year cannot be determined correctly if expenditure rightfully belonging to a particular year on accrual basis is claimed in a subsequent year based on payment method as it would distort the profit or 7 ITA No.3036/Del/2010 CO No.357/Del/2010 loss figure in both the years, particularly when the amount is substantial. In the mercantile system of accounting, only ascertained liability justifies an entry in the books of account maintained on mercantile basis. Ld. DR also submitted that the liability claimed in the books of account is not eligible for deduction unless it is shown that the liability was determined and crystallized in the year of account, although pertains to an earlier year. Ld. DR submitted that in Income-tax, each year is a self-contained period with regard to which profit or loss to be computed. The true profits and gains of a previous year is required to be computed for the purpose of determining tax liability. In each case where the accounts are maintained on the mercantile system basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year is to be required to be adjusted in the books of account of that particular previous year. For this proposition, the ld. DR relied on the decision of Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. v. CIT, 213 ITR 523(Gujarat) whether the accounts are kept on mercantile system basis, allowance must be granted in the year in which the liability is incurred, irrespective of the question whether the disbursement has been made or not. For this, ld. DR relied on the decision of Hon'ble Madras High Court in the case of Madras Fertilizers Ltd. vs. CIT - 209 ITR 174. Ld. DR submitted that as per Accounting Standard No.II notified under section 145(2) though 8 ITA No.3036/Del/2010 CO No.357/Del/2010 applicable from Assessment Year 1997-98 where it is prescribed that when there is mandatory accounting standard prescribed for the purpose, assessee can no longer resort to an argument following Nagri Mills case 33 ITR 684 (Mum) that since tax rates are same, revenue need not unnecessarily do the exercise. Ld. DR submitted that assessee has no choice in this regard. Ld. DR submitted that in view of the decision of Hon'ble Gujarat High Court in the case of Saurashtra Cement, 213 ITR 523, the expenditure relating to prior period can only be allowed if the liability had accrued during the year. He further relied on the following judgments of ITAT :-
(i) ITA NO.5708/Mum/2009 - Assessment Year-2004-05 M/s.
Tipco Industries Ltd. Vs. The ACIT
(ii) Haworth (India) P. Ltd. v. DCIT - 11 ITR (Trib) 757 (Del) Ld. DR also submitted that assessee has claimed net of the prior period income and expenses to the profit & loss account. The assessee has not furnished the details of the following expenses claimed :-
(a) Rs.7,52,000/- PTD Pithampura division - no evidence (ref :
para 1 pg5-AO)
(b) Sales tax:- could be penalties and not allowable (ref: para2 pg5-AO)
(c) PTC Division Kashipur - Incomplete details for Rs.4310296 (ref: para 2 pg5-AO)
(d) Most of the expenditure details not furnished - (ref: para 4 pg5-AO) 9 ITA No.3036/Del/2010 CO No.357/Del/2010
(e) Even the claims detailed at pg3-4 of the asst order are general in nature - like that the statutory dues got settled, why no provision was made for bonus etc. No agreement/order copy to show that the claims were finally settled during the year also furnished.
Ld. DR further submitted that thus, the Assessing Officer has made disallowance of the claim made on the grounds of no evidence of payment filed, no explanation furnished and evidence of dispute to whom payment made not given. Therefore, the CIT (A) has completely not applied his mind while deleting the addition. The CIT (A) has also failed to consider that each previous year is a self-contained period in regard to which profit or loss to be computed as held by Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. vs. CIT, 213 ITR 523(Gujarat). Ld. DR also submitted that assessee has relied on the case of TOYO Engineering 5 SOT 616 (Mum). He submitted that assessee company can and always make a correct computation, as in his case of audit and in the computation post-audit he can always incorporate the correct position. The very auditing of expenditure will suffice, in view of the decision of Hon'ble Delhi High Court in the case of Good Year India 246 ITR 116 ( Del). In the case of applicability of decision of ITAT, Ahmedabad Bench in the case of Atul Limited - 26 taxmann.com 300 (Ahd), ld. DR submitted that such a case can apply when facts are more or less akin to each other. The basic 10 ITA No.3036/Del/2010 CO No.357/Del/2010 requirement for AO is to examine the exact nature of liability, the crystallization of such liability and if any income is also of prior period, the nature of such income and the assessee's case is more similar to Atul Ltd than Toyo Engineering. Ld. DR also submitted that in the assessee's own case for Assessment Year 1994-95, the ITAT while deciding the ITA 4344/Del/2000 had set aside the issue to the file of the Assessing Officer.
7. On the other hand, while pleading on behalf of the assessee, the ld. AR relied on the order of the CIT (A) and further submitted that this addition has been made without applying any mind by the Assessing Officer. The total prior period expenses as per audit reports were of Rs.96,57,170/-. There was prior period income of Rs.26,16,334/-. The assessee claimed the net of prior period expenses after reducing the prior period income in the profit and loss account of Rs.70,40,836/-. The Assessing Officer did not apply his mind and he disallowed both the total prior period expenses by adding the prior period income also. This fact itself shows that Assessing Officer has completely not applied his mind to the correct facts of the case. The assessee has already offered the prior period of income for taxation in the earlier year. Therefore, by reducing the prior period expenses by that amount the assessee had done the right thing. With no imagination such prior period income can be added to prior period expenses disallowance. The Assessing Officer failed to understand how the income even though relating to earlier year offered to 11 ITA No.3036/Del/2010 CO No.357/Del/2010 tax in the impugned Assessment Year can form the part of the total disallowance, income cannot be disallowed. Thus, the Assessing Officer's act was completely against the basis principles of accountancy. As per the Assessing Officer, the prior period expenses cannot be allowed in the said Assessment Year since the same is related to transactions entered into the earlier year. Following the matching concept in order to determine the net income of an accounting year, the revenue and other income are matched with the cost to find the correct income. The ld. AR further pleaded that the ld. DR relied on the judgment of Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd v. CIT, cited supra, wherein the Hon'ble Apex Court has held that there could be no computation of profits and gains until the expenditure which is necessary for the purpose of earning the receipt is deducted therefrom whether the expenditure is actually incurred or the liability in respect of thereof has accrued. Other decisions were also cited by ld. DR for the proposition that only ascertained liabilities justify an entry in the books of account maintained on mercantile system. The allowance must be granted in the year in which the liability is incurred or accrued was also a stand taken by the ld. DR. Ld. AR submitted that the judgement of Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. V. CIT, cited supra, rather supports the assessee's contention that merely because the expenses relate to a transaction of 12 ITA No.3036/Del/2010 CO No.357/Del/2010 earlier year, it does not become the liability payable in the earlier year unless it can be said that the liability is determined and crystallized in the year in question. The ld. AR further submitted that assessee has put a Note No.3 which accompanied the computation of income. The relevant Note read as under:-
"As per the Tax Audit Report a net sum of Rs.70,39,842/- has been debited to the Profit & Loss A/c as relating to earlier years/ full details are enclosed herewith as Annexure-II A sum of Rs.25,84,131/- has been surrender as income on account of credit items. A sum of Rs.96,23,973/- has been claimed towards the debit item. As it is apparent from the remarks given by the Tax Auditor, the debits have been made during the year for the reason either that the bills/demand were received/raised during the year or that the claims were settled during the year or that the amounts were debited by the Bank during the year or provision was less made/ although/ the expenditure may be relating to some earlier periods. These expenses could not be booked in the respective year to which they relate since the assessee company did not have any basis as the bills were received during the year. These expenses have neither been claimed nor allowed in the assessments of earlier years. Keeping in view that the above amount is a small percentage of total expenses involved the same should be allowed in the present year. In the alternative I these expenses may be allowed in the respective years in which case the company will reduce this years claim accordingly.
As per the note, the expenses could not be booked in the earlier years as the bills in respect of these expenses were received during the year under consideration. In the note, it was explained that these amount of expenses were very small percentage of total expenses incurred by the assessee and 13 ITA No.3036/Del/2010 CO No.357/Del/2010 if such expenses cannot be allowed in this year, then it shall be allowed in the respective years. The assessee filed details of these prior period expenses and the tax auditors also reported in his tax audit report in Form No. 3CD by giving the details of the nature of these expenses. A bare perusal of the details, it can be found that expenses are business in nature and are allowable. It is also submitted by ld. AR that out of these expenses, Rs.96,57,170/-, prior period expenses debited in the books amounting to Rs.75,51,613/- were covered by section 43B of the Act where allowability is only on the basis of payment as these were statutory liabilities. With regard to setting aside the issue in Assessment Year 1994-95, the ld. AR submitted that the Assessing Officer has decided the issue in favour of the assessee by relying on various judgements of Hon'ble High Courts. Ld. AR also placed a copy of order of Assessment Year 1994-95 in the paper book. Ld. AR also submitted that in Assessment Year 1995-96, the CIT (A) has allowed the prior period expenses and the Department has not filed further appeal. Ld. AR submitted that in Assessment Year 1990-91, while dealing with setting aside the proceedings, the Assessing Officer has allowed the prior period expenses vide its order dated 28.03.2001. The assessee submitted complete details of expenses. These liabilities to pay these expenses arose and crystallized when the same was acknowledged for payment or the bills were raised. Ld. AR relied for this proposition on the decision of 14 ITA No.3036/Del/2010 CO No.357/Del/2010 Hon'ble Delhi High Court in the case of CIT vs. Exxon Mobil Lubricants Pvt. Ltd. reported in 328 ITR 17 (Del). He also submitted that various Courts had held that merely because expenses relate to transactions of earlier year, it does not become a liability payable in the earlier year unless it is proved that the liability was determined and the same crystallized in an earlier year. Ld. AR also brought to our notice the decision of Hon'ble Bombay High Court in the case of CIT v. Nagri Mills Co. Ltd., 33 ITR 681 for the proposition that the Department should not fritter away its energy in deciding the allowability of expenses based on the year to which it relates. As per Hon'ble High Court, the ultimate tax effect is negligible and, therefore, the issue of expenses relating to earlier year or current year should not be gone into with clock like precision unless the expenses do not relate to business.
8. We have heard both the sides. We have also perused the orders of the authorities below. We have also considered the case laws relied upon by both the sides. The Assessing Officer has made a patent mistake while adding the prior period expenses to the income of the assessee. The total prior period expenses were of Rs.96,57,170/- and there was prior period income of Rs.26,16,334/-. The Assessing Officer added both these amounts which is patently wrong. Therefore, the CIT (A) has rightly appreciated this fact and considered this mistake in his order. The assessee's contention for consistency wherein it was contended that in 15 ITA No.3036/Del/2010 CO No.357/Del/2010 respect of earlier years also, this issue relating to prior period expenses has been decided in favour of the assessee by the Assessing Officer or by the CIT (A). The Department has also not filed further appeal. The assessee company is having many divisions all across the country and there can be instances and cases, where bills for expenses are received at much later dated or beyond the financial year and expenses could not be booked when they are incurred. For such a situation, the decision of Hon'ble Bombay High Court in the case of Nagri Mills Co. Ltd. (supra) is also a guiding force while deciding this issue of prior period expenses. The expenses were incurred wholly and exclusively for the purpose of business. The bonafide and genuineness of expenses is not doubted. However, the Assessing Officer observed that the bills of the expenses were not furnished during the Assessment Year proceedings. We have perused the audit report and the letter dated 15.03.1999 which give the details of expenses. The expenses are of varying nature. These pertain to freight, repair, electricity, water, telephone, entry tax, sales tax, interest, discount, exgratia, bonus, advertisement, sale commission etc. Assessee claims that expenses to the tune of Rs.75,51,613/- were to be disallowed u/s 43B of the Act for the reason that these were not paid during the relevant period and these expenses can be allowed only on actual payments. Thus, these expenses in any case are to be disallowed in those particular years and to be allowed in the year of actual payments. Further, 16 ITA No.3036/Del/2010 CO No.357/Del/2010 this appeal relates to Assessment Year 1996-97 where a considerable time has been lapsed. In comparison to total turnover, these expenses are not of significant volume. The assessee has suo-motto made a disclosure of the prior period expenses both by way of mentioning in the audit report and by filing the report along with return of income. However, for want of further furnishing of details if the issue is restored back to the Assessing Officer, no useful purpose will be served. Further, substantial amount of expenses are in the nature of the expenses which are allowable only on the payment basis also prompt us not to restore the issue to the file of the Assessing Officer. Considering all these facts, we find it appropriate to sustain addition of Rs.21,05,557/- being difference between prior period expenses debited in Profit & Loss account and expenses which can be allowed only on actual payments. It will be sufficient to meet the end of justice. We order accordingly. Therefore, we partly allow this ground of revenue's appeal.
9. In the ground no.2, he issue involved is against deleting the disallowance of Rs.50 lacs out of repair expenses.
10. While pleading on behalf of the revenue, ld. DR submitted that the assessee has claimed total expenses of Rs.6.16 crores on account of repairs to the building in comparison to Rs.4.10 crores in the immediate preceding year. The Assessing Officer disallowed Rs.50 lacs. The details given by the assessee is a break up of expenses division wise without any 17 ITA No.3036/Del/2010 CO No.357/Del/2010 corroborating details or even the nature of expenses. When the nature of expenditure was not ascertainable the AO has harboured a doubt that it can even include capital expenditure and he has rightly disallowed of Rs.50 lacs when the nature of expenditure is not acceptable. The Assessing Officer asked the assessee to produce the vouchers in excess of Rs.25000/-, when the same was not produced. The Assessing Officer also show caused for such disallowances and assessee has not satisfactorily explained the same. Thus, the assessee failed to discharge the onus casted on it. The ld. DR also drew our attention to the nature of narration of such expenses, which are placed at pg 370-451 of PB.
11. On the other hand, the ld. AR submitted that the assessee submitted a reply dated 15.03.1999. The division-wise expenditure was submitted on 29.1.1999 and further detailed break-up of repairs and maintenance of plant and machinery and others was submitted. The assessee has also informed the Assessing Officer that entire details were filed as required by him, therefore, no such disallowance was called for. The ld. AR submitted that these expenditure were at various cites, branches and division of the company all across the country. During the year under consideration, there was a substantial enhancement in the production capacity of various divisions. The details of repairs and maintenance running into 80 pages were filed during the course of assessment proceedings. The Assessing Officer did not pinpoint any defect or 18 ITA No.3036/Del/2010 CO No.357/Del/2010 discrepancies in these details. The Assessing Officer has also not doubted the genuineness of expenditure. The ad hoc disallowance by making a guess work is not as per law. Ld. AR relied on the following decisions :-
(a) Glorious Hospitality (P.) Ltd. v. Dept. of ACIT, ITA No.2124/De1/2012
(b) ITO v. Ethno Financial Research (P) Ltd (2010) 36 SOT 207 (Del)
(c) Dy. CIT v. Mrs. Irene D'Souza (2006) 6 SOT 86 (Bang)
(d) Sunita Mine Chem Ind v. ITO (2008) 23 SOT 39 (Jodh-URO)
(e) Midland International Ltd. v. Dy. CIT (2007) 109 ITD 198 (Del)
(f) Silicon Graphics Systems (I) (P) Ltd. v. Dy. CIT (2007) 17 SOT 29 (Del) (URO)
(g) Hughes Escorts Communications Ltd. v. JCIT - 157 Taxman 46 (Del) (Mag).
He further submitted that the only requirement of section 37 of the Act is that expenditure should be incurred wholly and exclusively for the business purpose and the expenditure should not be in capital nature. Once the expenses are held to be incurred during the course of business, partial disallowance is not permissible as these expenses were incurred wholly and exclusively for the purpose of business. Without identifying disallowable expenditure or pinpointing any defect, adhoc disallowance cannot be resorted to. No addition can be made on the basis of presumption. The ld. AR also relied on the following decisions
(a) Dy. CIT v. Mrs. Irene D'Souza (2006) 6 SOT 86 (Bang),
(b) Midland International Ltd. v. Dy. CIT (2007) 109 ITD 198 (Del), 19 ITA No.3036/Del/2010 CO No.357/Del/2010
(c) Silicon Graphics System (I) (P.) Ltd. v. Dy. CIT (2007) 17 SOT 29 (Del) (URO)
(d) Hughes Escorts Communications Ltd. Jt. CIT (2006) 157 Taxman 46 (Del) (Mag).
12. We have heard both the sides on the issue. We have also gone through the details of the repairs and maintenance in the paper book at pages 370 to 451. We have also perused the show cause issued by the Assessing Officer. The Assessing Officer has asked only general details and no specific bills were called for. The Assessing Officer should have gone through the details and indicate which expenditure he want to verify further. The Assessing Officer must have applied his mind with the details submitted by the assessee and must have pinpointed the discrepancies and omissions. Ad hoc disallowance cannot be resorted to in the absence of any specific discrepancy noted in the details submitted by the assessee. The Assessing Officer has failed to identify the expenses and amounts where there was any discrepancy and he proposed to disallow the same. In view of these facts, we find no merits in the appeal of the revenue on this ground. We also get the support from the decision of Hon'ble Delhi High Court in the case of National Industrial Corporation reported in 177 CTR 194 (Del.). Keeping these facts in view, we sustain the order of the CIT (A) on this issue.
13. In the ground no.3, the issue involved is deleting the addition of Rs.1 lac out of MD's commission.
20 ITA No.3036/Del/2010CO No.357/Del/2010
14. While pleading on behalf of the revenue, the ld. DR submitted that the CIT (A) deleted the addition merely by a non-speaking order showing a complete non-application of mind and must, therefore, be set aside and he relied on the order of the Assessing Officer.
15. On the other hand, ld. DR submitted that assessment has paid Rs.2.5 lacs as remuneration to the whole time Managing Director of the company. The Assessing Officer made ad hoc disallowance of Rs.1 lac therefrom. The total turnover of the company was more than Rs.617 crores in comparison to Rs.466 crores in the earlier year. The profit before tax was increased from Rs.44.16 crores to Rs.64.52 crores. The remuneration paid to the Managing Director was in accordance with the Schedule-XIII of the Companies Act, 1956. This payment of remuneration has been approved by the Board of Directors and shareholders of the company, therefore, ad hoc disallowance was not justified which the CIT (A) has rightly deleted. The ld. AR also relied on the judgment of Hon'ble Delhi High Court in the case of CIT v. Dalmia Cement (P.) Ltd. reported in 254 ITR 377.
16. We have heard both the sides. We have also gone through the submission made by both sides. We find that the Assessing Officer has made an ad hoc disallowance without appreciating the facts of the case that the turnover and profit of the company has been increased during the year. The payment has been made in accordance with Schedule-XIII of 21 ITA No.3036/Del/2010 CO No.357/Del/2010 the Companies Act, 1956 and this payment has also been approved by the Board of Directors and shareholders of the company. In view of these facts, it was unjustified to make an ad hoc disallowance of Rs. 1 lac from the total payment of Rs.2.5 lacs to the whole time Managing Director of the company. In view of these facts, we find no merits in this ground of revenue's appeal and we sustain the order of the CIT (A) on this issue. This ground of revenue's appeal stands dismissed.
17. In the ground no.4, the issue involved is deleting the disallowance of Rs.1 lac made out of professional expenses claimed at Rs.14.33 lacs.
18. While pleading on behalf of the revenue the ld. DR submitted that the details available at pages 497-540 of the paper book show that legal and professional charges are debited to such head site-wise without any narration whatsoever and throwing no light on the purpose of such expenses and he relied on the order of the Assessing Officer and also his pleadings in the other ground of similar disallowances.
19. On the other hand, ld. AR submitted that the assessee has debited professional expenses of Rs.14.33 lacs and the details have been submitted running into more than 40 pages placed at pages 497-540 of the paper book. The Assessing Officer has not perused the details or asked for any further specification information in this regard. Ld. AR pleaded to sustain the order of CIT (A).
22 ITA No.3036/Del/2010CO No.357/Del/2010
20. We have heard both the sides on the issue. We have also perused the details available on record. The assessee submitted the details. The Assessing Officer has not asked any further specific information. He has also not doubted the genuineness of the expenses. We find no substance in making the ad hoc disallowance without giving any specific finding in respect of any expenditure. Therefore, we find no merits in this ground of revenue's appeal and the same is accordingly dismissed.
21. Ground no.5 is against deleting the addition of Rs.5 lacs made out of misc. expenses claimed at Rs.2.37 crores debited by the assessee.
22. While pleading on behalf of the revenue, the ld. DR submitted that the ad hoc disallowance of Rs.5 lacs was made when item-wise details of expenses and relevant bills of major expenses were not furnished. The assessee has tried to justify the increase in the net profit and misc. expenses and some disallowances made suo-moto by the assessee. The assessee's pleadings are mis-placed and untenable. The Assessing Officer is under an obligation to examine the details and nature of any expenses before allowing it u/s 37 of the Act. He submitted that as held by the Hon'ble Allahabad High Court in the case of Rotomac Globals (P.) Ltd. reported in 320 ITR 66 (All.), the disallowance is warranted the moment the expenditure is not proved to be for business purpose; it may be for personal purpose or otherwise; sometimes where everything is produced before AO, ad hoc disallowance has been deleted; but the principle that 23 ITA No.3036/Del/2010 CO No.357/Del/2010 personal or more appropriately non business expenditure are to be disallowed even in case of a corporate assessee. He also relied on the followings case laws where the ad hoc disallowance has been upheld :-
(i) Niko Resources Limited - (2009) 123 TTJ 310 (Ahd.);
(ii) ITC Classic Finance Ltd. - (2000) 112 Taxman 155 (ITAT
Cal.-A Bench)(Mag.)
(iii) RotomacGlobal (P.) Ltd. - 320 ITR 616 (All.)
(iv) Addi Industries Ltd. - (2010) 2 ITR (TRIB.) 236 (Delhi)
(v) Columbia Tri Star Films - 10 Taxman.com (Mum.)
(vi) V.K. Dewan & Co. vs. ITO - ITA No.1817/Del/2012
The ld. DR also submitted as under :-
"Coming to facts of the case at PB 541, the following expenditures are included under the head Misc expenses :
(a) General expenses: 13,61,397(b) office maintenance 10,23,355 (c) Telephone 51,02,219 (d) filing fee and listing fee 21.55 lakh apart from the amount disallowed suo-motu of charity 4.04 lakh and entertainment of 3 lakh.
As has correctly been held in the case of M/s VRC Construction India Pvt. Ltd., ITA No.5310/Del/2011 where the tribunal held that "We are making it clear as each year is independent, therefore, our view is based upon the peculiar facts of this case only." res judicata or consistency principle does not apply to such disallowances and therefore the preceding year's decision as cited by assessee is of no avail. The CIT(A) decision at para 10 of his order deleting the addition merely following earlier orders is absolutely non speaking and on that ground alone deserves to be set aside apart from the logic or propriety of such a decision. Without 24 ITA No.3036/Del/2010 CO No.357/Del/2010 doubt} such high volume of expenses without proper corroboration could not have been allowed in toto by AO and the amount of disallowance ought to have been higher. Therefore considering the reasonable amount of disallowance the same deserves to be upheld."
23. On the other hand, ld. AR submitted the details of the miscellaneous expenses before the Assessing Officer. These expenses include filing fee, crane higher charges, freight, coolie, telephone expenses, electricity and water, books and periodicals, inspection and testing etc. The details were submitted and the Assessing Officer has not asked any further specific details nor pointed out any defects or instances in these expenditure. The turnover of the assessee has gone up substantially and similarly the profits for the year under consideration, therefore, the increase in miscellaneous expenses is justifiable. The Assessing Officer relied upon the decision of ITAT for the Assessment Year 1995-96 in ITA No.2978/Del/2000 dated 13.12.2005. The ld. AR has submitted that assessee has himself disallowed Rs. 4,04,777/- as charity and donation and Rs. 3,70,968/- as entertainment expenses in the computation of income. Finally, ld. AR relied on the order of the CIT (A).
24. We have heard both the sides on the issue. We find that assessee has himself disallowed some expenditure which is not allowable. The Assessing Officer relied on the disallowance made in Assessment Year 1995-96 which has been finally deleted by the ITAT while deciding the 25 ITA No.3036/Del/2010 CO No.357/Del/2010 ITA No.2978/Del/2000 dated 13.12.2005. The Assessing Officer has not pinpointed any specific defects in the details nor has he further asked any details in this regard, therefore, we find no defects in the order of CIT (A). Accordingly, we sustain the same. This ground of revenue's appeal is dismissed.
25. Ground No.6 is against deleting the addition of Rs.50 lacs out of commission expenses debited of Rs.1,47,34,764/-.
26. While pleading on behalf of the revenue, the ld. DR relied on the order of the Assessing Officer and also on the case laws which are being discussed below.
The ld. DR submitted that expenditure should not be in the nature of capital expenditure or personal expenses of the assessee and it should be laid out or expanded wholly and exclusively for the purposes of the business or profession and it should be incurred in the previous year, then that such expenses are allowable u/s 37 of the Act. Ld. DR relied on the decision of Eimco K.C.P. Ltd. vs. CIT - 242 ITR 659 (SC) for various conditions to be fulfilled for allowability of any expenses u/s 37 of the Income-tax Act, 1961. He also relied on the decision of J.K. Woollen Manufacturers vs. CIT - 72 ITR 612 (SC)(3 Judge Bench) and Swadeshi Mills Co. Ltd. vs. CIT - 63 ITR 57 (SC). Ld. DR also submitted that the burden of proving that the expenditure was incurred wholly and exclusively for the purpose of the business lay upon the assessee and 26 ITA No.3036/Del/2010 CO No.357/Del/2010 when no evidence was led to that effect, expenditure may not be allowed. For this proposition, he relied on the decision of Lakshmiratan Cotton Mills Co. Ltd. v. CIT - 73 ITR 634 (SC)(3 Judge Bench). Ld. DR also relied on various other decisions of Hon'ble Supreme Court including Aspra Limited - (1936) 4 ITR 264 (SC). He also submitted that Assessing Officer and ITAT can examine the genuineness (if not whole amount can be disallowed), whether the expenditure is borne out in the character of a trader (if not the whole amount can be disallowed) or is laid out wholly and exclusively for the purpose of the business (if not, whole or part can be disallowed). For this, he relied on the decision of J.K. Woollen Manufacturers vs. CIT - 72 ITR 612 (SC)(3 Judge Bench, cited supra. He also submitted that it is, of course, open to the Appellate Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is also held that they cannot of course fix the expenditure by their own standard which is the exclusive domain of the businessman. For this also, he relied on the decision of J.K. Woollen Manufacturers vs. CIT, cited supra. In the case of partial disallowance, how to determine and how much disallowance is to be made, he relied on the judgment of Hon'ble Supreme Court in the case of CIT vs. Walchand & Co. Pvt. Ltd. - 65 ITR 381 (SC). He pleaded that 27 ITA No.3036/Del/2010 CO No.357/Del/2010 the same is upheld in J.K. Woollen Manufacturers vs. CIT, cited supra. In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the income-tax department. He also submitted that mere agreement is not enough and could not be a substitute for the evidence whether real services have been rendered to earn commission. He also submitted that when expenditure is legal then only it can be allowed. He also submitted that burden of proof is on the taxpayer that a particular allowance is justifiable and in absence of any such evidence the finding of the Assessing Officer must be accepted. The burden of proof is on the assessee to claim a deduction and to bring all material facts on record to substantiate its claim. He submitted that mere payment cannot be entitled for deduction of an expenditure unless it is proved to be claimed for commercial considerations and the onus lies on the assessee as held by Hon'ble Gauhati High Court in the case of Assam Pesticides & Agro Chemicals vs. CIT - 227 ITR 846 (Gau.). He also relied on the broad principles as elaborated by the Hon'ble Kerala High Court in the case of Ram Bahadur Thakur Ltd. vs. CIT - 1 KLT 687 (Ker.)(FB). He also relied on the decision of Sasson J. David and Co. (P.) Ltd. vs. CIT - 118 ITR 261 (SC). For the proposition that merely because an audit report is available there is no fetter on the power of the 28 ITA No.3036/Del/2010 CO No.357/Del/2010 Income-tax Officer to require the assessee to justify its claim with reference to the records, materials and evidence, such a power is inherent in an Assessing Officer in the scheme of the Act, he relied on the decision of Goodyear India Ltd. vs. CIT - 246 ITR 116 (Del.). He also submitted that based on the above principles, the following judgments can be verily relied upon as binding decisions laid down in terms of principles set by Hon'ble Apex Court :-
(i) Nund & Sammont Co. (P.) Ltd. - 78 ITR 268 (SC)(3 Judge Bench);
(ii) Swadeshi Cotton Mills - 63 ITR 57 (SC);
(iii) Lachminarayan Madan Lal - 86 ITR 439 (SC);
(iv) Precision Electronics Ltd. - [2007] 164 Taxman 67 (Delhi);
(v) Assam Pesticides & Agro Chemicals - 227 ITR 846 (Gau.);
(vi) EssEss Kay Engineering Co. (P.) Ltd. - 151 ITR 636 (P&H);
(vii) Vishnu Agencies (P.) Ltd. - 117 ITR 754 (Cal.) He relied on the decision of ITAT in the case of M/s. Precision Electronics Ltd. vs. DCIT, Delhi (dated 31.01.2006) - 2006-TIOL-38-
ITAT-DEL wherein ld. DR submitted that business expenditure, payment of commission, proof is necessary regarding nature of services rendered and payment through cheques under a written agreement not a conclusive proof of services rendered. He also relied on the decision of ITAT in the case of Bisquare Technologies Pvt. Ltd. vs. ITO (dated 31.03.2008) - 29 ITA No.3036/Del/2010 CO No.357/Del/2010 2008-TIOL-197-ITAT-DEL. Finally, he relied on the decision of ITAT, Bangalore Bench in the case of M/s. Rajesh Exports Ltd. vs. ACIT, Bangalore (Dated 14.08.2008) - 2008-TIOL-457-ITAT-Bang and submitted that in the case of commission paid to an agent, additional evidence in the form of certificates amongst others only self serving and not admissible. Credible evidence not produced as to the nature of services provided to the assessee. A commission payment for services rendered can be allowed as a deduction only when the assessee proves to the satisfaction of the Income-tax authorities that the agent has rendered some services justifying the payment of commission and deduction claimed by the assessee was not allowed.
27. On the other hand, the ld. AR submitted that the CIT DR has cited a large number of decisions for the proposition that even though there may be an agreement for making a payment yet the Assessing Officer can go beyond the agreement and take into consideration all relevant factors to enquire whether the amount is paid fulfills the conditions as per the requirement of section 37(1) of the Act. It is open to the Tribunal to come to the conclusion that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or it is not made out wholly and exclusively for the purpose of business. He submitted that the summary of the CIT DR's contention is that a mere agreement is not enough and not be a substitute for the evidence and the burden of proof to 30 ITA No.3036/Del/2010 CO No.357/Del/2010 establish the claim of expenditure lies on the assessee. Ld. AR submitted that the assessee submitted partywise details of commission, copy of agreement with commission agents, PAN etc. vide its letter dated 15.03.1999. The commission to the agents was paid for services taken for booking of sale orders of sponge iron, steel ingot or heavy structure. The commission agents also help in collection of payments and also insure smooth working of production cycle. The commission agents facilitate the effective running of the business and also provide necessary liquidity to the assessee. The Assessing Officer has not demonstrated how these expenses are excessive or unreasonable. The Assessing Officer has no power to himself to decide what is unreasonable or excessive. Similar commission has been allowed in the past years. If any doubt was there then the Assessing Officer could have called the agents and enquired about. He pleaded to sustain the order of CIT (A) on this issue.
28. We have heard both the sides on the issue. We have also gone through the contentions raised by the ld. DR. We have no doubt regarding the legal issues raised by the Ld. CIT (DR). The expenses are allowed only if it is incurred wholly and exclusively for the purpose of business. The burden lies on the assessee to establish that the expenditure relates to the business. Thus, there is no quarrel regarding the legal issue raised by the ld. CIT DR. But we have to see how these legal issues are applicable in assessee's case. When the assessee has furnished complete details of 31 ITA No.3036/Del/2010 CO No.357/Del/2010 expenses as asked for by the Assessing Officer along with evidences, then it is incumbent upon the Assessing Officer to seek specific information out of the details furnished. Without making such efforts, ad hoc disallowance out of commission expenses is unjustified. The Assessing Officer was free to examine further the commission agents to whom the payments were made by the assessee. Therefore, the legal proposition relied upon by the CIT DR are not applicable to the facts of assessee's case. Ad hoc disallowances can be made only when there are no details furnished. When details have been given before the Assessing Officer and Assessing Officer did not specify any expenditure and identify those items of expenditure which has not been made for wholly and exclusively for the purpose of the assessee then only the Assessing Officer can proceed for making the disallowances but no such exercise has been carried out by the Assessing Officer in this case. The assessee has submitted explanation for making the payments which the Assessing Officer has not found false. The assessee is having large number branches and the commission agents procure orders, facilitate in collection of payment from the customers and, therefore, the payments were made for the work carried out by the agents for the smooth running of the business of the assessee. In view of these facts, we find no fault in the order of the CIT (A) and we sustain the same. This ground of revenue's appeal is dismissed.
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29. In the ground no.7, the issue raised is against deleting the disallowance of depreciation of Rs.4.23 crores and Rs.42.5 lacs claimed respectively on machinery and wind electric generators by admitting additional evidence in the shape of a certificate from Tamil Nadu Electricity Board. Assessee claimed 100% depreciation on 5 wind generators show as purchased prior to 30.09.1995 from M/s. Airo Energy Ltd. of Rs.83,00,000/- each and cost of foundation and erection of Rs.8,55,788/- the same was disallowed treating purchase of these wind generators as non-genuine. Further, 50% depreciation disallowed on the six wind generators claimed by assessee which was purchased after 30.09.1995 from the same company. Assessing Officer treated the purchase of these as non-genuine. CIT (A) granted relief to assessee.
30. While pleading on behalf of revenue ld. DR submitted that admitting of additional evidence by the ld. CIT (A) in the shape of certificate from Tamilnadu Electricity Board without affording an opportunity to the Assessing Officer was not proper and as per law. During the year, addition of Rs.54.18 crores was made under the head "plant and machinery" and Rs.5.49 crores under the head "electrical installation" as per Schedule 4 to the balance sheet. Out of this addition of Rs.54.18 crores to the "plant and machinery", Rs.49.68 crores were claimed to be 100% depreciable assets and wind electric generators of Rs.44,49,31,239/- were installed in the Wind Farm Division at Tamil 33 ITA No.3036/Del/2010 CO No.357/Del/2010 Nadu Electricity Board. The total numbers of wind electric generators purchased were 45. The Assessing Officer disallowed depreciation of Rs.4,23,55,785/- treating the claim of purchase of five wind electric generators @ Rs.83 lacs each from M/s. Airo Energy Ltd. and the cost of foundation and erection of Rs.8,55,785/- as not genuine. Thus, the total cost pertaining to these five wind electric generators purchased from M/s. Airo Energy Ltd. was Rs.4,23,55,785/-. Assessee has claimed that these were installed prior to 30.09.1995. The Assessing Officer disallowed entire amount of depreciation on the basis that M/s. Airo Energy Ltd. is a non-genuine party as the Inspector visited the address and did not find the firm at the address. While pleading on behalf of the revenue the ld. DR submitted that on the spot enquiry and in the survey, the transaction was found non-genuine. The Assessing Officer asked the assessee to produce the supplier and furnish the detailed address and the assessee has not complied with a result the Assessing Officer made the disallowances. Ld. DR submitted that the amount is huge and the supplier was not produced and also spot enquiry indicated non-genuineness and in such a situation whether a certificate from third party can be relied on the assessee. The depreciation is actually allowed on the purchase cost, genuineness of transaction and time of use. Since all these have not been verified, therefore, the CIT (A) was not justified in deleting the addition and he finally pleaded to remit back the issue to the authorities below. 34 ITA No.3036/Del/2010 CO No.357/Del/2010
31. On the other hand, the ld. AR submitted that assessee has purchased five wind power generating machines from M/s Airo Energy Ltd before 30.09.1995. The ld. AR submitted that total number of wind electric generators purchased were 45 in numbers and there were purchased for a sum of Rs. 44,49,31,239/-. Out of these, five were purchased from M/s Airo Energy Ltd and installed prior to 30.09.1995. The total cost including installation was Rs.4,23,55,785/-. One wind electric generator was purchased from M/s Airo Energy Ltd. for a sum of Rs.85 lacs and was installed after 30.09.1995 at the site which has been certified by Tamil Nadu Electricity Board (TNEC) and the power generated has been sold to TNEC. The TNEC has confirmed the installation and functioning of each of the 45 generators and the installation certificates were also filed before the Assessing Officer vide letter dated 19.03.1999 which is placed at page 718 of the paper book. The department's claim that confirmation/certificate of TNEC constitutes additional evidence since it was filed for the first time before CIT(A) is not correct. The confirmations were made available to the Assessing Officer itself which is confirmed by letter dated 19.03.1999, therefore, the CIT (A) was justified in deleting the addition.
32. We have heard both the sides on the issue. This issue has been discussed by the Assessing Officer in para 17.1 and 17.2 at pages 15 & 16 of Assessing Officer's order. The CIT (A) has dealt the issue in para 15.2 35 ITA No.3036/Del/2010 CO No.357/Del/2010 to 15.10 at pages 28 to 33 of his order. We have also perused the details submitted. At the outset, we would like to state that confirmation was made available to the Assessing Officer on 19.03.1999. This fact has been accepted by the ld. DR when it was pointed out to him during the hearing. In view of these facts, we hold that the confirmation filed from TNEC did not constitute additional evidence and the same was filed before the Assessing Officer. On the perusal of the confirmations, we find that TNEC has confirmed that 45 wind electric generators were installed by the assessee. Thus, the existence of the wind electric generators was confirmed by the user himself i.e. TNEC. These facts establish the factum of existence of the assessee is beyond any doubt. TNEC has also confirmed that electric generation was started during the year under consideration and the power generation in terms of units has been also quantified. It ahs increased from 54512790 in Assessment Year 1995-96 to 129741589 in the year under consideration. The increase in the power generation was attributed to the addition of wind electric generators installed during the year. The sale of the power through wind electric generators was also sold for a sum of Rs.26,66,65,859/- which is reflected in the audited Profit & Loss Account and Balance Sheet of the assessee company. The details of the power sold, copies of bills of purchase of wind electric generators were submitted to the Assessing Officer. The Assessing Officer's observation that the supplier was not found at the 36 ITA No.3036/Del/2010 CO No.357/Del/2010 given address but he has not issued any summons u/s 131 of the Income- tax Act, 1961 to M/s Airo Energy Ltd. The assessee requested the Assessing Officer to issue the summons which has not been accepted. We would also like to mention that the issue has been already settled in favour of the assessee by the ITAT in Assessment Years 1993-94 and 1995-96 wherein while examining the allowability of lease rent the existence of the asset had been accepted and established. The reliance on the following decisions of ITAT also make us to sustain the order of CIT (A) on this issue wherein it is decided that lease rental allowable even when manufacturer of machinery was not traceable but assets are in existence :-
(i) DCIT v. Adinath Industries (2001) 252 ITR 476 (Guj)
(ii) J.R. Solvent Industries Pvt. Ltd v. ACIT (1999) 63 TIJ 165 (Chd) (TM)
(iii) Balaji Textiles Industries (P) Ltd. v, ITO (1994) 49 ITD 177 (Bom)
(iv) Upper India Trading Ltd in I.T.A. No. 694/BOM/89 dated 04.08.1993 We also hold that the revenue's allegation that the firm from whom the machines were purchased were non-existent but the facts show that the wind electric generators were installed at the premises of TNEB which has been confirmed by the TNEB which is a Government Undertaking.
The certificate submitted by the assessee from TNEB remains uncontroverted. The Assessing Officer could have verified the veracity of the certificate issued by TNEB if he was having any doubt regarding the 37 ITA No.3036/Del/2010 CO No.357/Del/2010 supplier M/s. Airo Energy Ltd.. Merely not finding M/s. Airo Energy Ltd. that too without summoning the same at the premises cannot be made a basis to draw the conclusion that firm was non-existent. As it is not possible to ensure that the company will continue at the same premises in the coming time. Assessee requested for issuing summons to supply M/s Airo Energy Ltd which was not accepted by the Assessing Officer. Therefore, the evidence in the form of certificate from TNEB assumes a credence and deserves to be considered for allowing the depreciation on the assets. In the assessee's own case for Assessment Year 1995-96, the ITAT has held as under :-
"We have examined in detail the spot verification report carried out by the Dr. Director of Income-tax (Inv)-I, Raipu0 MP on the instructions of the Addl. Commissioner of Income-tax Hissar Range, Hissar. We find that the annexure of the report contains the name of each of the lessor to whom lease rent is being paid along with the items supplied by him and existing at the site of the assessee company at Champa. There is also a column wherein the items verified at the site by the Chartered Engineer have been mentioned and these items tally with the items leased by the assessee company on which, lease rent is being paid. The chart enclosed elsewhere in this order has been verified by us and we find that the directions of the CIT(A), Patiala vide his order dated 16.03.2000 have in fact been carried out by the Department though both the Assessing Officer and the CIT(A), Rohtak chose to ignore the same despite specific reference being made by the assessee to the report of the Departmental Engineer being available with them. The sole reason for disallowance of lease rent is that the so called suppliers have no capacity to manufacture and hence they could not have sold the machinery said to be leased. As against this presumption, the physical examination shows that machinery do exist in the premises of assessee as a 38 ITA No.3036/Del/2010 CO No.357/Del/2010 result of which production is also undertaken. If a person has to look to his hands he need not see it in the mirror. The facts speak for itself. The existence of machinery having been proved by the physical examination itself, it can not be said that no machinery is taken on lease for which lease rent is paid. The other corroborative evidence like lease agreement passing of money by banking channels, declaring lease income of recipients etc. are overwhelming evidence against the presumption that manufacturers do not have capacity to produce machineries. We therefore hold the lease transaction as genuine."
This decision of the ITAT was upheld by the Hon'ble Punjab & Haryana High Court. The decision of ITAT for the Assessment Year 1993-94 in ITA No.2298/D/2004 has also been upheld by the Hon'ble Punjab & Haryana High Court. We would also like to state that the decision of Hon'ble Punjab & Haryana High Court in the case of DCIT vs. Adinath Industries (supra) is very relevant and where the Hon'ble High Court has held as under :-
"Details about purchase were furnished. Transactions were through a broker whose bill was produced. All details from the stage of receipt to production were produced. For further verification assessee produced gate pass. Avak Chithi (receipt note) and weight note. Assessee produced laboratory report and sample report. It pointed out the difference paid or recovered in view of reports. Assessee produced RG 4 Form to show that details entered as per Excise Rules. Assessee pointed out the production and purchase of raw materials. Assessee submitted that details about the transaction, truck number, etc. Thus, assessee produced relevant materials to show purchase of materials and its use in production. AD has accepted the existence of G in case of A for asst. yr. 1985-86. The Tribunal appreciated all these facts in arriving at a conclusion. It clearly appears that matter has been disposed of on appreciation of evidence and when the matter has been 39 ITA No.3036/Del/2010 CO No.357/Del/2010 decided by the Tribunal on appreciation of evidence, it cannot be said that, that raises a question of law. The Tribunal pointed out that at best it could be inferred that these parties were set up by somebody else and the reasons could be manifold for that. It is very much surprising that in the instant case the AD has drawn a presumption that the amount has come back in the assessee' hands, without any evidence whatsoever merely on the basis of withdrawal of amounts from the account of G. It goes without saying that it was within the knowledge of the banker as to who was the account holder and who withdrew the amount from the same bank. The AD by due diligence could have unearthed the fact that G is a bogus party by recording statement of the bank manager, accountant or cashier or the party who introduced G to the bank. The matter is in the realm of appreciation of evidence and no interference is called for in the matter. In the circumstances, the appeals are dismissed".
Keeping all these facts in view, we hold that the existence of the machinery and its use has been established by assessee beyond ANY doubt. The two decisions of ITAT in assessee's own case in earlier years which have been also confirmed by Hon'ble jurisdictional High Court on the issue also goes in favour of assessee. Therefore, respectfully following these aforesaid decisions, we uphold the order of the CIT (A) and dismiss this ground of revenue's appeal.
33. In the ground no.8, the issue involved is against deleting the disallowance of depreciation of Rs.1 crore on the purchase of machinery from M/s. Ashish Engineering Works.
34. The ld. DR submitted that the genuineness of the purchase of machinery from Ashish Engineering Works Rasmada Durg (M.P.) could 40 ITA No.3036/Del/2010 CO No.357/Del/2010 not be established conclusively by the assessee. The Assessing Officer made an addition to the cover up the possible loopholes/leakages for bogus machinery carrying 100% depreciation. The Assessing Officer made a presumption that wind electric generators purchased from M/s. Ashish Engineering Works was not genuine and disallowance was made to cover up the possible leakage towards the bogus purchase on which assessee was entitled 100% depreciation other than the wind electric generators division. This issue has been dealt by the Assessing Officer in para 7.3 at pages 16 & 17 of his order and CIT(A) has dealt this issue at para 15.10 at page 13 of his order.
35. While pleading on behalf of the revenue, the ld. DR submitted that it is true that there is no concept of ad hoc disallowance of depreciation in the Act except that of section 34. But it is nonetheless imperative to note that depreciation is calculated on the WDV which is related to cost and when Assessing Officer doubts the genuineness of purchase and thus the expenses in this regard, the depreciation has to be disallowed for that reason. The disallowance of depreciation in Assessment Year 1995-96 by Assessing Officer was as per direction of CIT(A) to take a decision on the basis of submission of bills etc. The issue there was limited to absence of details and not genuineness of the transaction as such. He pleaded that the matter can be given a fresh look in the above context and for substantial justice in the matter.
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36. On the other hand, the ld. AR submitted that the assessee furnished complete details of purchases made of Rs.49.68 crores. Out of this amount, wind electric generators comprised of Rs.44,49,31,239/-, the assessee purchased continue pusher type furnace at Stainless Steel Division at Bharuch, Gujarat and complete details were filed before the Assessing Officer vide letter dated 19.03.1999. In such a situation, the Assessing Officer was not justified merely going on suspicions and making ad hoc disallowances without there being any specific finding. Ld. AR also submitted that under which section this disallowance has been made is not clear. How can the disallowance be made from the purchases of capital gains of plant and machinery by account payee cheques and shown in the books of account? The Director's report and the annual accounts of the assessee company clearly establishes that machinery was installed at Bharuch project at Gujarat. Therefore, the CIT (A) was justified in deleting the addition.
37. We have heard both the sides on the issue. We are not able to understand why this ad hoc disallowance was made without any basis or substance. The disallowance cannot be made merely to cover possible loopholes or leakages of bogus purchase of capital goods. The AO has to establish that no assets have been purchased or installed and in that circumstances, he can resort to disallow the depreciation. No efforts have been made to establish that the details submitted by the assessee were not 42 ITA No.3036/Del/2010 CO No.357/Del/2010 correct. Therefore, we sustain the order of CIT (A) for deleting such ad hoc addition and this ground of revenue's appeal is dismissed.
38. In the ground nos.9 & 10, the issue involved is deleting the disallowance of Rs.7,05,28,805/- out of expenses claimed on lease rent/lease management fees etc. and also deleting the addition of Rs.8,55,60,070/- on account of lease rent, Rs.18,05,500/- on account of lease management fee and Rs.8,64,400/- on account of lease rent of building respectively. The CIT (A) has deleted the addition by holding as under :
" The Issue involved and the submissions made by the appellant have been considered. The lease rent of Rs.70528805.00 pertaining to the supplies of 5 parties is allowed on the same lines as in the appeal order dated 22.9.2007 for the A.Y. 2001-02 and vide order dated 23.9.2009 for the A.Y. 2002-03.
As regards the disallowance of lease rent of Rs.85560070.00 pertaining to the supplies of other than five parties, since the AO has allowed the same in the subsequent assessment years, the same is allowed this year also as there is no issue involved for the disallowance of lease rent. Lease management fees of Rs.18,05,500/- and lease rent of Rs.8,64,400/- was also disallowed by the Assessing Officer, the same are allowed because the same has not been disallowed by the AO in any other assessment years.
The ground of appeal no. 17 is allowed."
This issue has been dealt by the Assessing Officer in para 18 at pages 17 to 19 of his order and CIT (A) has dealt this issue at paras 15 & 16 at pages 33 to 36 of his order.
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39. While dealing with the grounds no.9 & 10, the ld. DR made common pleadings as the Assessing Officer as were as CIT (A) had also dealt these issues in the same paras. The ld. DR submitted that disputes relate to lease rent, lease management fee and least rent relating to various machineries taken by the assessee. Ld. DR relied on the order of Assessing Officer and submitted that assessee has not filed details of lease rents and Assessing Officer disallowed the same as per para 18 of his order. He further submitted that one such transaction is buying of machinery from a non existent concern, M/s. Sahib Engg Works, which has allegedly sold the machinery to the assessee which in turn has sold it to M/s Reliance Capital Ltd which in turn has leased it to assessee. The investigation established that M/s Sahib Engg Works is a bogus concern. M/s. Reliance Capital who is the owner has surrendered the depreciation under VDIS. In such a situation, the mere existence of the machinery shall not prove that lease is genuine. The existence of machinery is one thing and leasing it out is another. The existence of machinery in assessee's premises proves that at least the assessee could be the owner. The lease transaction is not proved thereby particularly as the circumstantial evidences pertained to the contrary. The AO is not bound by normal rules of evidence and may rely on factors and indirect evidences normally not admissible as evidences in a court of law. Ld. DR pleaded that it is not for fun that Reliance Capital offered the amount as 44 ITA No.3036/Del/2010 CO No.357/Del/2010 bogus claim of depreciation. AO can always go beyond the agreements to examine and unravel the substance behind the transactions. Same is the case with other similar machineries as detailed in page 18 of the assessment order. The Assessing Officer called for the suppliers of machineries to be produced, but the assessee has not done so. Since 90% of such assets are claimed installed at Champa, a survey was undertaken and initially the machineries could not be identified neither the structural design or bills, challans and transporter details produced before the AO. As regards the rolling mills rolls purchased from TISCO, these were not identified. There were difference in sizes and there were variance in purchase rates. Such is the story with other machineries. The assessee has stated that the rent pertaining to 5 such bogus parties comes to Rs.7.05 cr and balance to other parties. The CIT (A) allowed the appeal for Assessment Year 2001-02 and 2002-03. He allowed the balance pertaining to other parties as the Assessing Officer has allowed the rent in subsequent years. Ld. DR submitted that claim of lease rental falling u/s 37 is a mixed question of law and facts and as is well known that there could be no res judicata or consistency in such matters and can be examined afresh every year. Mere following of the earlier orders or subsequent orders without independent examination as plenary authority makes the order unsustainable on this point. The ld. DR submitted that the assessee has taken the argument that payment was made through 45 ITA No.3036/Del/2010 CO No.357/Del/2010 bank, lessors were in existence and machineries were physically found. In the remand report dated 08.01.2004, the Assessing Officer stated that some of the documentary evidences were produced before him although the transport details of such machineries were not given. He stated that apparently the transaction appears genuine while a decision to be taken by CIT (A) on merits. But the crucial finding on which this observation of the Assessing Officer is based that the parties were not involved in the lease transactions for the Assessment Year 1993-94 and the addition was made for want of information in this regard. That itself shows that the finding for this year could not be applied mechanically. The ld. DR also submitted that as per para 8.5 of ITAT order for Assessment Year 1993- 94, the CIT (A) completely relied on such comments of Assessing Officer. Further there was an observation by ITAT that none of the concerns proved bogus has nothing to do with lease rent. Hon'ble Punjab & Haryana High Court in its order held that since these are questions of fact, no substantial question of law arises. Even if two views were possible, the Hon'ble High Court would not disturb the findings. He submitted that the order of the Hon'ble High Court related to penalty proceedings as such and not quantum proceedings and hence not strictly applicable to assessee's case in this year. Ld. DR submitted that apparently as can be seen, the Assessing Officer has fallen into error in law in making his conclusion based on wrong presumption that the five 46 ITA No.3036/Del/2010 CO No.357/Del/2010 concerns have nothing to do with the lease transactions. This is misplaced argument that the steel was supplied to these parties which in turn supplied the machinery to the so called lessors. These lessors in turn leased the machinery to the assessee. Thus the very existence of the concerns is one link in the chain of events and if proved bogus would make the entire chain of events appear suspicious. Though the conclusion is one of the facts, this is one mixed question of law and facts and hence no res judicata or consistency would apply to merely base the conclusion on the basis of finding for another year without independent examination. Ld. DR also submitted that the ITAT was also seen to be swayed by the argument that if assets exist, no addition can be made because the seller is not found. He further submitted that this is directly in conflict to the well laid proposition in La Medical - 17 Taxman 628 (Del). He has submitted a copy of the order for the proposition that once it was accepted that suppliers were bogus then tribunal could not have come to a conclusion that purchase could have been made from some other source. This is more true when the transaction is fictitious. Further when ITAT lays down a decision on the basis of part relevant and part irrelevant consideration, it is not possible to say as to what extent its decision was influenced by the latter and hence becomes unsustainable. Thus it follows that part of a transaction (out of a chain closely linked to one another) cannot be justified without thorough verification when other part seems to 47 ITA No.3036/Del/2010 CO No.357/Del/2010 be bogus or sham or non-genuine. It is held in the case of Beena Metals - 240 ITR 222( Ker) that failures to prove details of brokers through whom purchases were made who are found to be non- existent will render the purchase bogus. Ld. Dr also submitted that courts have in fact held that fraud vitiates judgment. In the case of Smt. Shrisht Dhawan vs. M/s. Shaw Brothers - AIR 1992 SC 1555, it has been held that fraud and collusion vitiate even the most solemn proceedings in any civilised system of jurisprudence. It is a concept descriptive of human conduct. He also relied on the decision of Hon'ble Supreme Court in the case of Meghmala & Ors. vs. G. Narasimha Reddy & Ors. in Civil Appeal Nos. 6656 - 6657 of 2010 order dated 16th August, 2010 wherein the Hon'ble Apex court held that dishonesty should not be permitted to bear the fruit and benefit to the persons who played fraud or made misrepresentation and in such circumstances the Courts should not perpetuate the fraud. He also submitted that an act of fraud on court should also be viewed seriously. A collusion or conspiracy with a view to deprive the rights of the others in relation to a property would render the transaction void ab initio. Fraud and deception are synonymous. Although in a given case a deception may not amount to fraud, fraud is anathema to all equitable principles and any affair tainted with fraud cannot be perpetuated or saved by the application of any equitable doctrine including res judicata. The fraud is proved when it is shown that a false representation has been 48 ITA No.3036/Del/2010 CO No.357/Del/2010 made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly and carelessly whether it be true or false. Suppression of a material document would also amount to a fraud. He further submitted that avoidance of tax by ingenuine methods have to be dealt in strictly and to see further that such attempts are destroyed by bringing that amount to tax in terms of the statute as held by Hon'ble Kerala High Court in the case of BPL Ltd vs. DCIT - 293 ITR 321( Ker). He also submitted that the genuineness of transaction would be decided from primary material available from records and it is not required to have clinching material to prove that a transaction is bogus as held in the case of Golecha Properties
- 227 ITR 391( Raj). He further submitted that Hon'ble Supreme Court in the case of Raghubir Mandal Harihar Mandal vs. State of Bihar - 85 STC 770 (SC) held that addition can still be made even if there is no direct evidence and the material available should be more than a mere suspicion to do the same. He finally pleaded that CIT (A) should not have mechanically followed other years orders, particularly when the Assessing Officer has called upon the assessee to submit the details of transaction and admittedly not everything required was furnished. It is well known that if best evidences available with a person are not produced before the court, the court may draw a presumption against that person as held by Hon'ble Delhi High Court in the case of O.P. Kapurvs Padma Kaw - 1972 RLR 32 (Delhi HC) and Hon'ble Madras High Court 49 ITA No.3036/Del/2010 CO No.357/Del/2010 in the case of CIT vs. Krishnaveni Ammal - 158 ITR 826 (Madras). The onus is on the assessee to bring all material facts to substantiate the claim as held in the case of L.H. Sugar factory & Oil Mills - 125 ITR 293( SC) and he should do it at the earliest point of time. Reliance is placed on Manish Buildwell - 204 Taxman 106 (Delhi). Ld. DR also submitted that it is also settled law that the party (here revenue) which alleges a document to be non-genuine has to prove nothing till the party relying on the document proves its genuineness as held by Hon'ble Supreme Court in the case of Rangmal vs. Kuppuswamy - 2011 (2) (OJR) (9)(SC). He finally pleaded that in the light of the above propositions, the heavier onus was on the assessee in terms of the attendant circumstances of the case makes it mandatory on the CIT(A) as a correctional authority to make a proper appreciation of the whole of the material and not merely rely on the statement of Assessing Officer, particularly during remand which is more a proceeding before the CIT(A) and a decision has to be taken by CIT (A) as a higher and plenary authority on the issue before him, although he may take into account the opinion of the Assessing Officer, it could not be a mechanical basis for a decision. Thus the whole thing needs a relook at the level of CIT (A) and hence the matter be set aside for this purpose.
40. While pleading on behalf of the assessee the ld. AR submitted that the revenue has disallowed the claim of the assessee of lease rent/ 50 ITA No.3036/Del/2010 CO No.357/Del/2010 management fee of Rs.7,05,28,805/- on the basis that five parties, namely, M/s. Sahib Engineering Works, M/s. Ashish Engg. Works, M/s A.S. Mechanical Works, M/s A.S. Forgings and M/s Pioneer Engg Works, Gobindgarh, were non existent and the assessee has not been able to produce these parties despite numerous requests. The other allegation of the revenue was that all the machineries purchased by the lessers from these parties were installed at Champa, Chattisgarh and a survey u/s 133A was carried out at the business premises of the assessee at Champa for Assessment Year 1995-96 and the chartered engineer could not identify the machinery claimed to have been installed there. The lease rent claimed on the machinery purchased in the earlier years also disallowed. A few items were purchased during the period relevant to Assessment Year under consideration. A detailed chart showing date of purchase and installation was submitted. Ld. AR also submitted that the issue is no more res-integra and has been finally settled in the favour of the assessee. Ld. AR submitted that a spot verification was carried out by the Department on 26.02.2001 in respect of the proceedings for the Assessment Year 1995-96 on the direction of the CIT (A) Patiala, the machinery purchased from these five parties in the earlier years as well as in the year under consideration was verified along with other machinery purchased during the course of spot verification conducted on 26.02.2001. The Government appointed engineer found all the 51 ITA No.3036/Del/2010 CO No.357/Del/2010 machineries as claimed to be in existent and working and even names of the lessors on the machinery along with detailed description of the machinery was also found on the spot. As regards to the rolls, the names of the lessors could not be found because the rolls get used up with time due to continuous wear and tear and the names of the lesser get defaced. Therefore, total number of rolls were counted and tallied with the books of account by the chartered engineer and found to be in order. The lease rent chart filed by the assessee giving all the particulars of purchases made by the lessors from the said five parties and also carried the page numbers of the verification report consequent to survey conducted on 26.02.2001 by the engineers where the assets were found to be in existent. Thus, the assessee has proved beyond any doubt that the machineries were purchased from these five parties and were also being used. Ld. AR also submitted that in assessee's own case for Assessment Years 1993-94 and 1995-96, the ITAT has held that supply of these equipments are genuine suppliers and M/s Sahib Engineering Works was held to be existent. The Assessing Officer in the Assessment Year 1993- 94 himself has admitted in the remand report that the machinery has been purchased from these five parties, therefore, the depreciation was allowable. The remand report submitted by the Assessing Officer as appearing in ITAT decision for Assessment Year 1993-94 read as under:- 52 ITA No.3036/Del/2010 CO No.357/Del/2010
"The then AO disallowed the above lease rental after giving the details reasons. As per inquiries made by the DI (Inv), Ludhiana, the assessee company had taken asset on lease, which were supplied to the leasing company by certain concerns namely (i) Sahib Engineering Works, Ludhiana (ii) A.S. Fordging Mandi Gobindgarh (iii) A. S. Mechanical Works (iv) Ashish Engineering Works and Pioneer Engineering Works, who were either no existence or concern having" no expertise and means to manufacture sophisticated machinery sold to leasing company. The assessee id not file the complete information as required by the A, O. during the course of assessment proceedings particularly the full name address and identity of the suppliers of the machinery invoice No. and date of sale etc. It was, however, been claimed that no such supplier as mentioned above in respect of which inquiries were made by the DIT(Inv), Ludhiana and have been round to be non-existence or have no expense or means to manufacture such sophisticated machinery is involved in the transaction of tease rental paid during the period relevant to asstt. year 1993-94. But in the absence of complete information, it was not possible for the A.O, to see as to whether the assessee company has entered or not into any transaction with the above five bogus/non existent concerns or not. So, keeping in view of the above facts and also the non cooperative attitude of the assessee in filing the complete information to the Department as required, the AX), disallowed all the lease rentals paid by the assessee on a/c of Plant and Machinery, to all the above mentioned lessors, during the period relevant to assessment year 1993-94.
Now as the assessee company has filed all the necessary details, along with sufficient documentary evidence, it can be inferred that the transaction made by the assessee company in respect of lease rentals claimed to have been paid to the aforesaid lessor Coys is beyond doubt. There seems no involvement of any, out of the five concerns proved bogus/non existence, in the transactions. Though, the assessee has not furnished the name i.e. transporter, make and number of vehicles, through which machinery was transported in respect of-the machinery on lease from seven lessor as mentioned in para -'d', yet the evidences furnished 53 ITA No.3036/Del/2010 CO No.357/Del/2010 by the assessee now appears to be sufficient to prove the genuineness of the claim."
In the Assessment Year 1995-96, the ITAT in its order dated 15.5.2009 while deciding ITA No.427/Del/2006 has deleted the disallowance of lease rent holding the lease transactions to be genuine. Ld. AR has also placed a copy of the order of ITAT at pages 838 to 857 of the paper book. It was also contended by ld. AR that the lease rent paid to these five parties were suo-motto allowed by the Assessing Officer in the Assessment Year 2003-04 onwards. Ld. AR further submitted that Hon'ble Punjab & Haryana High Court has upheld the deletion made in the earlier years. The ld. AR also placed heavy reliance on the spot verification report dated 02.03.2001 which is placed at pages 740 - 780 of the paper book where the proposition regarding the existence of assets has been proved in favour of the assessee. With regard to CIT DR's contention that the existence of the five parties is an important link in the chain of events and if proved bogus, would make the entire chain of event suspicious and it was a mixed issue of law and facts, therefore, no res judicata or principle of consistency would apply and independent examination is required to be done. On this issue, ld. AR submitted that it had not purchased the machinery but it was the lessors who had purchased the machinery and it was not a case of booking expenses on account of purchase but payment of lease rent for use of machinery. 54 ITA No.3036/Del/2010 CO No.357/Del/2010 Therefore, the ratio of the decisions relied upon by the ld. DR is not applicable as the existence of the machinery is proved beyond doubt and the lease rent is paid by account payee cheques. He submitted that ld. CIT DR's contention that transaction was a fraud has no basis. When the machinery is in existence then how it can be said to be a fraud. Ld. AR submitted to sustain the order of CIT (A).
41. We have considered the rival contentions and the case laws relied up in view of the facts on record. The lease rent is being paid largely in respect of assets which have been in existence for the last 2-3 years. The lease rent has been allowed by the ITAT, Delhi in respect of Assessment Years 1993-94 and 1995-96 by holding that the assets were in existence as per the spot verification report dated 08.03.2001 of the chartered engineer appointed by the Income-tax Department. These decisions of the Tribunal have been approved by the Hon'ble jurisdictional Punjab & Haryana High Court. Therefore, the lease rent paid is in respect of the assets purchased in the earlier years also deserve to be allowed in this year also. Besides this, we find that on the spot verification report, the Department found all the assets which have been acquired / purchased by lessors from the five parties mentioned above. During the hearing, ld. AR has also taken us to items reflected in the spot verification report and tallied it with the description of the items of plant & machinery on which lease rent is being paid. Hence, the existence of the machinery used and 55 ITA No.3036/Del/2010 CO No.357/Del/2010 purchased from the five parties is established. Therefore, respectfully following the decision of the ITAT in Assessment Years 1993-94 and 1995-96 which has been confirmed by Hon'ble Punjab & Haryana High Court, we uphold the decision of CIT (A) for allowing the lease rent amounting to Rs.7,05,28,805/-.
42. As regards to ground no.10 wherein the revenue has challenged the deletion of addition made on account of lease rent of Rs.8,55,60,070/-, lease management fee of Rs.18,05,500/- and lease rent of building of Rs.8,64,400/- and where the pleadings of the revenue are the same as pleaded in ground no.9, ld. AR submitted that during the year, total lease rent debited in the books of account was of Rs.15,87,58,775/- out of which Rs.7,05,28,805/- was disallowed which has been deleted by the CIT (A) on the basis of ITAT's decision in Assessment Year 1993-94 and 1995-96 and on the basis of spot verification report dated 08.03.2001 given by the Chartered Engineer appointed by Income-tax Department. This order of ITAT has been confirmed by Hon'ble Punjab & Haryana High Court. The Assessing Officer further disallowed the remaining amount of the lease rent on the basis that adequate details were not furnished and lease rent as in other cases must be bogus. The ld. AR relied on the order of CIT (A) and further submitted that the lessors were well known suppliers/NBFCs/manufactures of equipments of heavy machineries. These lease rents have been paid through banking channels 56 ITA No.3036/Del/2010 CO No.357/Del/2010 only. The department got verification done through the Chartered Engineer and the assets have been found on the spot verification which is evident form the report dated 08.03.2001. Therefore, there was no justification in disallowing the lease rent, lease management fee and lease rent of building. The rent for the building has been paid which does not require any other evidence to prove it. The ld. AR further submitted that the Assessing Officer, in the Assessment Year 1997-98 and thereafter, have never disallowed lease rent on the same equipments paid to the same parties. On this account also, the approach of the Assessing Officer was inconsistent. He further submitted that assessee submitted that complete details of the lease rent along with lease agreement. These machines were purchased from well-known supplier like M/s Tata Iron & Steel Co. Ltd, Flact India Ltd, Vestas RRB (I) Ltd, Daslagarway Wind Turbine Ltd, Ganon Dunkerley & Co. Ltd., Bharat Heavy Electricals Ltd, Control & Switch Gear Ltd, Crompton Greaves Ltd, Flender Mach. Gear Ltd, Inductotherm India Ltd, Sayaji Iron & Steel Co. Ltd., Atlas Copco India Ltd., Electrotherm India Ltd etc. Therefore, the CIT (A) is completely justified in deleting such baseless disallowance and he pleaded to sustain the order of the CIT (A).
43. We have heard both the sides on this issue. We have also perused the details submitted. The total lease rent debited by the assessee for the year was Rs.15,87,58,775, out of which Rs.7,05,28,805/- was separately 57 ITA No.3036/Del/2010 CO No.357/Del/2010 disallowed which we have considered while deciding ground no.9 of revenue's appeal in the preceding paras and we have upheld the order of CIT (A) for deleting the same. In this ground, the disallowance is of remaining lease rent on machinery of Rs.8,55,60,070/-, lease management fee of Rs.18,05,500/- and lease rent of building of Rs.8,64,400/-. This disallowance was made only on the basis that no adequate details were furnished, hence these payments must also be bogus. The lease rent has been paid by banking channels. The assets had been found by the Chartered Engineer on the spot verification and the same was reported by him in his report dated 08.03.2001. The suppliers of the machinery/equipments were well know like Tata Iron & Steel Co. etc. including Government organization BHEL. The lease rent paid on the assets in the subsequent years has never been disallowed by the revenue authorities nor the genuineness has been doubted. The lessors have confirmed having given the machinery on lease, the machinery was existed on the spot and being used. Considering all these facts, we find no fault in the order of CIT (A) and we sustain the same. This ground of revenue's appeal is dismissed.
44. In the ground no.11, the revenue has challenged the deletion of the addition of Rs.2 crores on account of disallowance of interest out of the interest claimed on account of utilization of borrowed funds for non- business purposes.
58 ITA No.3036/Del/2010CO No.357/Del/2010
45. While pleading on behalf of the revenue ld. DR submitted that this disallowance is intimately related to the issued raised in ground no.9 and if the lease rent has been held not genuine then the interest paid for borrowed funds to pay such lease rent would be for non-business purposes and needs to be disallowed. Hence, he pleaded that the decision of Ground No.9 would decide the fate of this ground.
46. On the other hand, ld. AR submitted that the issue raised in ground no.9 regarding the non-genuineness of five parties who have supplied the machinery and equipments to the assessee on lease is no more res integra. The assets have been found on the spot verification conducted on 26.02.2011 at Champa, Chhatisgarh which is placed at pages 735 to 780 of the paper book. In the Assessment Year 1995-96, the ITAT has treated the payment of lease rent as genuine. Since there were assets in existence and being used by the assessee, the lease rent was genuine and there cannot be any interest on the loan taken for the non-business purposes.
47. We have heard both the sides on the issue. We have also perused the record. We have upheld the order of CIT (A) regarding the genuineness of the payment of lease rent raised in ground no.9, therefore, we find that there is no justification in disallowing the ad hoc amount of interest of Rs.2 crores from the interest debited in the books of account. Therefore, we sustain the order of CIT (A) for deleting this addition. This ground of revenue's appeal is dismissed.
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48. In the ground no.12, the issue raised is against the deletion of lump sum addition of Rs.20 crores made by the Assessing Officer. The Assessing Officer made this ad hoc addition of R.20 crores by holding that transactions with five parties, namely, M/s. Sahib Engineering Works, M/s. Ashish Engg. Works, M/s A.S. Mechanical Works, M/s A.S. Forgings and M/s Pioneer Engg Works, Gobindgarh were not properly recorded and the method of accounting adopted by the assessee was not correct. The Assessing Officer observed in his order that huge amounts were paid by account payee cheques to M/s Pioneer Engg. Works, one of the five bogus parties and sales were also made to them. Assessing Officer also observed similar transactions were entered into with M/s Ashish Engg. Works as well. The Assessing Officer also observed that no particulars of sales made to these parties and the amount paid to them were furnished. The Assessing Officer has also observed that the amount paid to these parties was mostly returned during the year under consideration. It is also observed that there was a peak debit balance of Rs.11,30,67,240/- on account of sales outstanding against these parties. The Assessing Officer held that these parties were not genuine and the receipts in their accounts have not been explained. On this basis, the Assessing Officer concluded that these accounts belonged to the assessee and since they have not been recorded, the books are not reliable and therefore he proceeded to make the addition of Rs.20 crores. Similar 60 ITA No.3036/Del/2010 CO No.357/Del/2010 allegations were also made by the Assessing Officer in respect of other concerns, i.e. M/s A.S. Mechanical Works and M/s A.S. Forgings to whom cheques were issued and received back. The Assessing Officer stated that separate addition on account of GP is called for since there were defects in the books of account as the auditors report showed that percentage of yield, wastage, consumption of raw material etc has not been worked out. He held that true results cannot be ascertained and, therefore, overall addition of Rs.20 crores is justified.
49. The ld. DR relied on the order of the Assessing Officer and also submitted that the addition was made on overall consideration of several grounds. The sale bills for 4 concerns were not produced. The percentage of production and wastage was not given in audit report as not ascertainable. There was no stock register. He further pleaded that sales bills were not produced nor the introducers of account was produced. The Assessing Officer reached at dead end when the assessee intentionally withheld the information to stall the enquiries. Regarding the nature of the transaction in the bank accounts of these parties, no details were filed and the status and capacity of these parties as commented upon through field enquiries are not given the weightage and examination, they deserved. There are heavy unaccounted deposits in these accounts which should have been verified by CIT(A) as a plenary authority and being the subject matter of the appeal. He further submitted that as to the nature of 61 ITA No.3036/Del/2010 CO No.357/Del/2010 the accounts involved, it is no sheer coincidence that all these parties opened the accounts at Shivaji Marg Branch, the address of assessee under same circumstances and in the same manner and the very introducers in all cases lack credibility who were never produced either. He also relied on the notings of Assessing Officer with regard to the 3 parties whose method and manner of opening of accounts, manner of purchase from assessee and manner of opening accounts at Shivaji Marg Branch to make payments, non-production of introducers and transport details etc have not been commented upon by the assessee in any manner nor given the consideration these deserve by CIT(A). Such relevant materials could not have been dismissed as of no import rendering the decision of CIT(A) unsustainable, relying on Omar SalayMdSait - 37 ITR 151 (SC), Dhirajlal Giridharilal - 26 ITR 736{ SC), Daulatmal Rawatmull - 87 ITR 349( SC) etc. He pleaded that the arguments now adduced in synopsis page 31 point 5 are misplaced. No addition has been made for such addition. The AO on page 22 refers to a different concern and different account and held also that this account belongs to assessee. The debit transaction referred to is for the purpose of showing the transactions other than pure and simple business transactions. He pleaded that similarly at point 4 page 30 of synopsis what the Assessing Officer discussed is receipt of the sale considerations and not the opposite of payment to the 5 bogus parties. The technical objections in rejection of 62 ITA No.3036/Del/2010 CO No.357/Del/2010 books at point 2 page 30 of synopsis etc are equally misplaced and misdirected. The Assessing Officer has not adopted estimation of GP although he has held that books are not reliable and quite naturally so. There have been unsubstantiated sales, accounts held to belong to assessee and credit entries therein are matters material to assessment. Even copy of accounts of a party worth Rs.5 crores not submitted to Assessing Officer. Funds have been made to parties with fake address. Production details and stock register are not maintained. When the Assessing Officer held that correct profit cannot be deduced from such accounts, incomplete and insufficiently evidenced and produced, he can reject the books or he can make additions as deemed fit and there is no bar in the statute to do so. Unsubstantiated sales may lead to additions and cannot be explained by mere book entries as held in the case of G.R. Compressors - 116 ITD 131 (TM)(Del.). The addition u/s 68/69 overall to estimation has also been judicially upheld - 123 ITR 457(SC)/ 50 ITR l (SC). He pleaded that in that view of the matter, addition may be sustained or be reasonably determined. The matter may also be sent back for detailed quantification on these grounds.
50. On the other hand, the ld. AR submitted that the gross profit ratio as well as the net profit ratio were far better than the preceding two years. A comparable chart was filed as below :-
A.Y. Turnover Gross Net GP NP 63 ITA No.3036/Del/2010 CO No.357/Del/2010 Profit Profit Ratio Ratio (%) (%) 1994-95 235.32 51.46 19.76 23.34 8.35 1995-96 466.33 107.89 44.16 25.28 9.47 1996-97 617.40 147.63 64.52 25.79 10.45
The gross profit ratio chart was also submitted before the Assessing Officer vide letter dated 15.01.1999 place at page no.822 to 824 of the paper book. For the year under consideration, the gross profit as well as the net profit ratio has increased. If the ad hoc addition of Rs.20 crores is added then the gross profit raised comes to 29.29% which has been never achieved by the assessee company in its history. The books of account were never rejected and no show cause was issued prior to such rejection. The ld. AR relied on this proposition that no estimation is permissible without rejection of the books of account. For this proposition, ld. AR relied on the following decisions :-
(a) DCIT vs. Mewar Textiles Mills Ltd - (1999) 105 Taxman 199 (JP) (Mag)
(b) CIT vs. Padamchand Ramgopal (1970) 76 ITR 719 (SC)
(c) CIT vs. Maharaja Shree Umed Mills Ltd (1991) 192 ITR 565 (Raj)
(d) Chiranji Lal Steel Rolling Mills vs. CIT (1972) 84 ITR 222 (P & H)
(e) Central Provinces Manganese Ore Co. Ltd vs. ITO - 191 ITR 662 Ld. AR further submitted that the Assessing Officer is not clear under what sections such ad hoc addition was made. The Assessing Officer has 64 ITA No.3036/Del/2010 CO No.357/Del/2010 already disallowed lease rent in respect of the assets purchased by the lessors from the five parties then how this further addition can be made.
There is no evidence of unexplained investment out of books and therefore there is no question of any addition under section 69 of the Act. Payments to all these five parties were made by account payee cheques. Similarly no addition can be made under section 68 of the Act as assessee has paid by cheque and assessee has not received any amount. Hence there is a peak debit and not peak credit. This issue is covered by the decision of ITAT for the Assessment Year 1993-94. Ld. AR also submitted that on two different occasions, once a survey u/s 133A conducted on 16.12.1997 and spot verification conducted on 26.02.2001, on both these occasions, the machinery installed at the business premises of the assessee at Champa plant was found. These machineries were taken on lease from renowned NBFC lessors. With regard to the transactions of alleged five parties, the ITAT while deciding ITA No.2298 & 2720/Del/2004 for the Assessment Year 1993-94 dated 24.10.2008 has found that all the five parties were genuine. These facts have been accepted by Hon'ble Punjab & Haryana High Court. Further ITAT while deciding ITA No.4610 & 846/el/2005 & 2006 for Assessment Year 1994- 95 dated 18.06.2009 has held that Sahib Engineering Works was a genuine party. This ad hoc addition of Rs.20 crores cannot be said for any escaped income but it is the nature of a punishment/penalty. With regard 65 ITA No.3036/Del/2010 CO No.357/Del/2010 to the reference to payments and receipts of certain amount from Pioneer Engineering Company, the assessee submitted that vide letter dated 12.12.1998 and 08.03.1999, the assessee explained that assessee has supplied heavy structural steel to Pioneer Engineering Company which was supplier of machinery to the lessors of the assessee. The Assessing Officer accepted the genuineness of Pioneering Engineering as per ITAT order for Assessment Year 1993-94. All machinery sold by Pioneer Engineering to lessors was found on the spot verification by the department. The Assessing Officer has not found any faulty or specific defect in the books of account of the assessee. All the transactions with alleged parties were through banking channels and were duly recorded in the books.
51. We have heard both the sides. We have considered the relevant material available on record. After considering all the relevant material, we find that the addition of Rs.20 crores is primarily made on the ground that five parties were bogus and that the payments by cheques have been made to them beside the sale of raw material. Most of the payments made to these parties have been received back during the year, under consideration. We find that the transactions relating to four parties shows there is a peak debit in the books of the assessee rather than the peak credit. In our considered view, there can be no addition on account of peak debit because it represents amount advanced through books of 66 ITA No.3036/Del/2010 CO No.357/Del/2010 account to a particular party. How the advance made to the parties through account payee cheques from the books of account of the assessee can be added as income of the assessee. The addition u/s 68 of the Act deals with the peak credit. The credit in the accounts represents the advance during the year under consideration. The ITAT also dealt such issue in assessee's own case for the Assessment Year 1993-94 wherein the ITAT has held as under :-
"On perusal of the copy of the account of M/s Sahib Engineering Works in the books of the assessee at page-102, we find that the AO has added total debit on account of sales up to 24th September 1992 totaling to Rs.1,48,74,249/-; These are debits in the books of the assessee and the AO has not made any addition on account of the amounts purportedly received from Bank Account NO.448 of M/s. Sahib Engineering Works. What is added as income is the amount of peak debit being value of goods sold by the assessee to M/s Sahib Engineering Works rather than the peak credit addition u/s 68 is not to be made In respect of peak of debit entries. The money trail leads to the said three leasing companies M/s Kotak Mahindra Finance Ltd., SRF Finance Ltd and Times Guarantee Finance Ltd and there is no evidence to establish that the said moneys remitted by M/s Kotak Mahindra Finance Ltd., SRF Finance Ltd and Times Guarantee Finance Ltd were the assessees funds. Under these circumstances, the addition of Rs.1,48,74,249/- is deleted".
Once the advance made to a party and the same amount was received back then there cannot be any addition for escapement of income, At the most, the interest may be disallowed if the advances were made for non- business purposes. This has not been done by the Assessing Officer and we have no power to do it. Without going deep into the accounts merely 67 ITA No.3036/Del/2010 CO No.357/Del/2010 stating that accounts were benami of the assessee is not justified. Moreover, the ITAT in assessee's own case had held that five parties are genuine and the Assessing Officer in remand report has already treated these five parties as genuine. Thus, allegations howsoever strong but these cannot take place of evidence. The Assessing Officer has failed to discharge the onus with regard to establishing the fact regarding the benami of these sources of the assessee. The Assessing Officer could have enquired regarding the person who has introduced the accounts from the account opening form and the necessary enquiries could have been made from the banks but nothing of such type has been done by the Assessing Officer. Merely stating that the cheques have been issued to the parties and received back during the year under consideration cannot be a basis for making such huge addition of Rs.20 crores. Addition can be made only if there is an escapement or evasion of income. The addition made for lease rent paid to these parties has been deleted in various years. The existence of the assets has been established. Lease rent paid on the lease assets has been found allowable. In these circumstances, we find no fault in the order of the CIT (A) and we sustain the same on this issue. This ground of revenue's appeal is dismissed.
52. Ground No.13 is general in nature and does not require any adjudication, hence dismissed.
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53. In the cross objection filed by the assessee, in ground no.1, the issue is against the sustaining of addition of Rs.7,04,957/- made out of the staff welfare and sales promotion expenses.
54. This issue has been dealt by the Assessing Officer in para 5 at page 6 of his order. In computation of the income, the assessee himself has disallowed Rs.1,80,484/- u/s 37(2)(a) of the Income-tax Act, 1961 out of Rs.3,70,967/- shown towards the entertainment expenditure. The Assessing Officer found that assessee has debited Rs.67,83,464/- under the head staff welfare expenses and Rs.2,66,113/- under the head sales promotion expenses in the books of account for the year under consideration. Assessing Officer noticed that expenditure debited in the books under these heads was on account of the cost of foods, sweets and also entertainment expenses of the guests of the company and auditors. Some expenditure was also towards the donations given for the marriage. The Assessing Officer reached at a conclusion that it is not established that entire expenditure has been incurred on the welfare of the staff. Following the past history of the assessments of assessee, the Assessing Officer disallowed 10% of the total expenditure treating towards entertainment not admissible u/s 37(2) of the Act. This disallowance was also for want of details to substantiate the claim of assessee. The CIT (A) has sustained the addition.
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55. We have heard both the sides on this issue. We have also considered the various case laws relied upon by the assessee as well as the revenue. The Assessing Officer has restricted the disallowance to 10% on account of staff welfare and sales promotion expenses debited in the books of account of Rs.67,83,464/- and Rs.2,66,113/- respectively. Some of the expenses were suo moto disallowed by the assessee himself. Full details were not filed before Assessing Officer. Keeping in view of the nature of expenses debited under these heads, we find hat CIT (A) was justified in sustaining the addition being 10% of these expenses being treated as not allowable in view of the provisions of section 37(2) of the Act.
56. In the ground no.2, the issue is raised against the sustaining of disallowance of Rs.1,50,000/- on account of foreign traveling expenses. This issue has been dealt by the Assessing Officer in para 7 at pages 6 & 7 of his order and the CIT (A) confirmed the same. The Assessing Officer observed that during the year the expenditure on account of foreign traveling debited in the books of account of Rs.13,49,453/- as against Rs.10,63,018/- in the immediately preceding year. The auditor of the assessee worked out the disallowance under Rule 6D in respect of Inland traveling but nothing was done in respect of the foreign traveling. The Assessing Officer treated Rs.1,50,000/- as not made for business purposes out of the foreign traveling expenses of Directors and employees. Such 70 ITA No.3036/Del/2010 CO No.357/Del/2010 disallowance was also made in the earlier year also. The CIT (A) has sustained this addition by relying on the decision for Assessment Year 2001-02.
57. We have heard both the sides on this issue. We have considered the details submitted in this regard. Assessing Officer had disallowed this amount out of foreign traveling expenses as details submitted were not sufficient to explain the expenditure to justify to that extend. Such disallowances are being made in past years. Ld. AR has failed to show anything adverse regarding fate of addition in past years. Hence, we sustain the addition.
58. In the ground no.3 of the cross objection, the issue raised is against sustaining the disallowance of Rs.57,115/- being 20% of the amount paid in cash in excess of Rs.10,000/-. This issue has been dealt by the Assessing Officer in para 9 at page 7 of his order and the CIT (A) confirmed the same while dealing ground no.8 at page 10 of his order. This disallowance of Rs.57,115/- being 20% of Rs.2,85,584/- paid in cash otherwise then by account payee cheques/drafts. The ld. AR submitted that this expenditure was covered by the exemptions in Rule 6DD(h) of Income-tax Rules, 1962. The details of this expenditure is as under :-
Head of account Particulars Amount
Staff recruiting Paid to SWAIN - Notice Pay 15990
Medical Paid to H.P. Singh 11110
reimbursement
LTA Paid to D.P. Singh 23250
Medical Paid to N.K. Bhomia 10500
71 ITA No.3036/Del/2010
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Reimbursement
Gilcon Nirman Co. Cash paid at. R.A. Bill 19540
P. Ltd.
- do - Cash paid against bill as advance 19540
- do - - do - 14665
- do - - do - 18160
- do - - do - 18850
Q.N. Construction - do - 20000
- do - - do - 19600
Total 210735
59. After going through the nature of the expenditure, we find that this expenditure incurred in cash is covered by Rule 6DD(h), therefore, we set aside the orders of the authorities below and allow this ground of assessee's cross objection.
60. Ground Nos.4 & 5 in the cross objection relating to sustaining the addition regarding payment of provident fund and EPF OF Rs.28,672/- and sustaining the disallowance of Rs.25,103/- as per tax audit report under Section 43B were not pressed at the time of hearing. Thus, the same stand dismissed.
61. In the result, the appeal of the revenue as well as cross objection of the assessee is partly allowed.
Order pronounced in open court on this 24th day of September, 2013.
Sd/- sd/-
(C.M. GARG) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 24th day of September, 2013
TS
72 ITA No.3036/Del/2010
CO No.357/Del/2010
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A), Rohtak.
5.CIT(ITAT), New Delhi.
AR/ITAT
New Delhi
Date of Dictation................................................................. Date on which the typed draft is placed before the Dictating Member....................................... Date on which the approved draft come to Sr.PS/PS......................................................... Date on which fair order sent to Member for signature...................................................... Date on which the fair order comes back after pronouncement to the Sr.PS/PS.............................. Date on which the file goes to the Bench Clerk.................................................................. Date on which the file goes to the Head Clerk.................................................................. The date on which the file goes to the AR for signature on the order.......................................... Date of Despatch of the Order....................................................................................