Income Tax Appellate Tribunal - Delhi
Superior Crafts , New Delhi vs Department Of Income Tax on 28 March, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'E' : NEW DELHI
BEFORE SHRI R.P.TOLANI AND SHRI K.D.RANJAN
ITA Nos. 4011, 4012 & 4013/Del/2009
Assessment Years : 2000-01, 2001-02 & 2005-06
A.C.I.T. Circle 25(1) Vs. Superior Crafts
New Delhi. D-13, Udyog Nagar
Peera Garhi
New Delhi.
PAN AADFS3061L
(Appellant) (Respondent)
Appellant by : Smt. Sangeeta Gupta, CIT DR
Respondent by : Shri S.M.Mathur, C.A.
ORDER
PER K.D.RANJAN, AM:
These appeals by the Revenue for assessment years 2000-01, 2001-02 and 2005-06 arise out of separate orders of ld. CIT(A)-XXIV, New Delhi. These appeals were heard together and for the sake of convenience are disposed of by this common order.
2. The first common issue for consideration relates to deleting the addition on account of gross profits after taking into consideration of the order of I.T.A.T. Except difference in figure the facts are identical in all the years under appeal. For the sake of convenience, the ground raised in assessment year 2000-01 is reproduced as under:
On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition of Rs.3,73,99,056/- on account of gross profit after taking into consideration of the order of the Hon'ble ITAT in the case of the assessee for A.Y. 2002-03. The Ld.CIT(A) has ignored the facts that the accounting ratio of the assessee are 2 inconsistent and unreliable due to the absence of day to day accounts of stock which the assessee himself was not able to substantiate.
3. The Assessing Officer rejected the books of accounts after pointing out certain defects. The Assessing Officer thereafter estimated the gross profit @32% as against gross profit rate admitted by the assessee at 23.87%.
4. On appeal, the ld. CIT(A) deleted the addition following the decision of I.T.A.T. for assessment year 2002-03.
5. We have heard both the parties and gone through the material available on record. We find that this issue is covered by the decision of I.T.A.T. The ld. CIT(A) deleted the addition following the decision of I.T.A.T. by observing as under:
"3.7 The Hon'ble ITAT, Delhi vide its order dt. 28th March, 2008 in ITA No.203/Del/2007 in the appellant's own case for the A.Y.2002-03 has elaborately dealt with the issue. The observations of the Hon'ble ITAT are reproduced as under:
"4.9 On careful consideration of all the aspects of the matter, we find that the approach adopted and the finding given by the lower authorities in relation to closing stock valuation is not correct. It is an admitted fact that the assessee had not been maintaining day- today account of the stock. The assessee has been determining the closing stock items on physical verification at the end of the year. For valuing the inventory appearing in the closing stock, the assessee has to follow a particular method. The assessee has either to compute the cost of each item separately or he can derive the cost after deducting certain margin from the sale price. Considering the volume of business and numerous 3 items involved, the assessee has been valuing the finished goods, semi finished goods and goods in progress on the basis of sale price of these items sold in the subsequent year after deducting a particular margin, which has been uniformly followed by the assessee in the earlier and the subsequent years. For computing the sale values of items of closing stock in different categories, the assessee has been approaching the first sales towards the finished goods, the next sales towards the semi finished goods and the balance against the goods under progress. This is a systematic and reasonable basis adopted by the assessee, which has been uniformly followed. As the quantity of items appearing in closing stock will vary from year to year, the period of sales adopted for valuation of closing stock in different year will also differ. This has been demonstrated by the assessee by producing a chart regarding the valuation for different years which show that period of sales adopted for different years is different.
4.10 We find that the A.O. has accepted the basis of valuation of closing stock items adopted by the assessee i.e. as a specified percentage of sales of the closing stock items. He has rejected the inventory of closing stock and has taken the period of sales of the closing stock items as the same period as taken for the sale of closing stock of last year in order to determine the closing stock inventory and its value. One of the reasons given for rejecting the closing stock is that the value of closing stock shown was only 80% of shipping loan whereas as per terms and conditions of loan its should have been 125%. But there is no material collected by the A.O. to show that the closing stock was actually more than one declared by the assessee. Violation of terms and conditions of loan or the fact that the assessee did not produce the stock inspection report of the bank, cannot be the ground for rejecting the closing stock declared by the assessee. Similarly, the ensured value of stock being higher or insuring of some premises other than the factory premises for the purpose of stock are also not conclusive factors in determining the stock on the last day of the year. It is an undisputed fact that there was no stock 4 found at the insured premises. Further, the insured value i.e. the sum insured is the maximum value the assessee can get as per insurance rules and it has no relevance to availability of stock on a particular day which may vary from time to time. No efforts have been made to obtain the stock inspection report from the bank or to gather any other material to establish that the closing stock on the last day of the accounting period was higher than the declared value. Even if the A.O. rejects the closing inventory on the ground that no day to day stock register is maintained, he had to determine the gross profit only on estimate either on the basis of assessee's own past record or on the basis of a comparable case. No comparable case has been brought on record and the OP rate declared by the assessee this year at 28.93% is substantially higher than the OP rate 19.16% accepted in the assessee's own case in the immediate preceding year. In view of better results, no addition is possible on account of trading account of which closing stock value is an integral part. The assessee has followed a reasonable basis of valuation of closing stock, which has been regularly followed and accepted by the department in the earlier yeas and in the subsequent year. In view of this position and the OP rate declared being higher this year compared to accepted OP rate in the immediate preceding year, any addition on account of closing stock valuation is not justified. We, therefore, set aside the order of CIT(A) and delete the addition made by the A.O."
3.8 Adverting back to the facts of the case, it is a fact that books of accounts of the assessee are audited and no discrepancy has been pointed out by the A.O. The production results have not been found to be acceptable to the A.O. in absence of day to day stock register. The A.O. has completely ignored the substantial increase in the gross profit of the assessee which itself indicates that the A.O. has acted in a very arbitrary and illogical manner by applying g.p. ratio of a proceeding assessment year which is well in absolute terms against normal practice of drawing conclusions on the basis of comparisons and common sense. The A.O. made other observations also with regard to the reliability for the book 5 results of the assessee which is evident from the text of the assessment order.
The observations of the A.O. indicate that the A.O. is inclined to believe that the assessee has indulged in suppression of production, stock and its profit but the A.O. has not unearthed the suppression. The crucial fact of a substantial increase in gross ratio as compared to earlier years has been brushed aside.
3.9. In the light of the judicial authorities cited in preceding paragraphs, and particularly the decision of the Hon'ble ITAT, Delhi in its order in appellant's own case for A.Y. 2002-03 on the similar issue with identical facts and circumstances, as reproduced above; the estimation of gross profit on the basis of a future year in view of absolute facts is liable to be rejected being arbitrary, illogical and not in conformity with a logical practice of drawing conclusions on the basis of precedence of previous trading-results. Therefore, the trading addition of Rs.3,73,99,056/- made by the A.O. is deleted."
Since the issue is squarely covered by the decision of I.T.A.T., respectfully following the precedent we do not find any infirmity in the order passed by the ld. CIT(A) deleting the addition in all the years.
6. The next common issue for consideration relates to deletion of addition on account of bogus payments to contractors. During the course of assessment proceedings the Assessing Officer noted that assessee had made certain payments to contractors such as M/s RA Exports, Sensational Exports and Prakash Fabrication Unit but the assessee had failed to prove the genuineness of these payments. The Assessing Officer was of the view that payments made to these parties were to be treated as bogus as RA Exports and Sensational Exports were the firms in which partners were substantially interested. During the course of assessment proceedings 6 assessee had neither been able to substantiate its claim that the work was actually executed in the premises of the assessee nor it had actually incurred this expenditure. The assessee did not produce any attendance records, PF/ESI records etc. of the employees, inward and outward challans for the movement of goods/stock with these contractors. The Assessing Officer, therefore, was of the view that the assessee had debited these expenses in order to inflate the expenses. The Assessing Officer added the amount of Rs.1,41,33,784/- in assessment year 2000-01, Rs.60,13,637/- for assessment year 2002-03 and Rs.11,11,140/- in assessment year 2005-06. We may like to mention that similar addition was made by the Assessing Officer in assessment year 2002-03.
7. On appeal, it was submitted that assessee had been obtaining services of these fabricators for last seven years and the payments to them had been allowed in all the years except in assessment years 2000-01, 2001-02 and 2005-06. During the course of assessment proceedings all the evidences were placed on record. The fabricators were assessed to tax separately. The Permanent Account had been allotted. There was no requirement on the part of the assessee to deduct ESI and PF as the work force never belonged to the assessee but to fabricators. Any infringement, if any, on their part could not be treated as bogus payment to them. The ld. CIT(A) on consideration of various arguments advanced by the assessee, deleted the addition following the decision of I.T.A.T. for assessment year 2002-03.
8. Before us, the ld. CIT DR supported the order of Assessing Officer. On the other hand, ld. A.R. of the assessee relying on the order of I.T.A.T. supported the order of ld. CIT(A).
79. We have heard both the parties and gone through the material available on record. We find that this issue is covered by the decision of I.T.A.T. Delhi Bench 'D' for assessment year 2002-03 in ITA No.203/Del/2007 dated 28/3/2008. the I.T.A.T. deleted the addition by observing as under:
"24.9 We have carefully considered the mater. We find that the disallowance had been made mainly on the basis of some technical defaults noted by the A.O. The assessee has satisfactorily explained the absence of GRN or challans, which were not required as the work was being done at the factory premises of the assessee. Similarly, there was no requirement of any attendance record or deduction of PF ESI as the work was being on contract and the workers were not employees of the assessee. We find sufficient force in the plea taken by the ld. counsel that the A.O. had not doubted the genuineness of expenditure as query letter issued by the A.O. a copy of which is available at page 279-280 of paper book-I, makes it clear that the A.O. had asked the assessee to give justification with respect to section 40A(2) and 40A(3) only. Section 40A(2) relates to reasonableness of payments in case the expenditure had been incurred in relation to connected person and Section 40A(3) is regarding cash payments. The assessee therefore explained the matter only with respect to these provisions vide letter dated 2.11.2005 a copy of which has been placed at page 434 of paper book -II. It has also been claimed that there was no cash payment exceeding Rs.20,000/- and the ld. DR has produced no material to controvert this claim. Nor there is any material to show that the payments made to the associate concerns were excessive compared to market value. All these concerns are assessed to tax and the payments had been made by cheques. Similar payments for job work had been made in the earlier years also as well as in the succeeding year when no disallowance had bee made. Under these circumstances, any disallowance this year is not justified. We, therefore, set aside the order of CIT(A) on this point and delete the additions made."
Since the issue in the assessment years before us is squarely covered by the decision of I.T.A.T. Delhi Bench in assessee's own case and since no material distinguishing the facts has been placed on record, we do not find 8 any reason to differ with the decision of I.T.A.T. Respectfully following the decision of coordinate Bench, we uphold the order of ld. CIT(A) deleting the addition made by the Assessing Officer in all the three years.
10. The next issue for consideration which is common in all the appeals relates to deleting the disallowance on account of tour and travel expenses. The facts of the case are that the Assessing Officer disallowed an amount of Rs. 5 lacs each out of tour and travel expenses in all the three years.
11. On appeal, the ld. CIT(A) following the decision of I.T.A.T. for assessment year 2002-03, restricted the disallowance of 20% of Rs.5 lacs and deleted the addition of Rs. 4 lacs each in all the years.
12. We have heard both the parties and gone through the material available on record. the I.T.A.T. while dealing with the issue for assessment year 2002-03 has held that expenditure on traveling might vary substantially from year to year as the business requirement may not be the same. Considering the entirety of facts and circumstances including the past record, the Tribunal came to the conclusion that estimated disallowance of 20% of the expenditure claimed should be treated as not incurred wholly and exclusively for the purposes of business. In the case before us, the ld. CIT(A) has restricted the disallowance of 20% of the disallowance made by the Assessing Officer. However, from the order of I.T.A.T. we find that disallowance has to be restricted to 20% of the expenditure incurred on tour and traveling. However, the disallowance cannot exceed the amount of Rs.5 lacs as it is settled law that assessee cannot be put to an adverse situation worse than what has been done in assessment. The Assessing Officer is, therefore, directed to disallow 20% of the tour and travel expenditure in all 9 the years subject to the maximum disallowance made by Assessing Officer i.e. Rs. 5 lacs. The order of ld. CIT(A) is, therefore, modified to this extent.
13. The next issue for consideration which is common in all the three years relates to deleting the disallowance of interest on funds advanced to sister concerns.
14. We have heard both the parties and gone through the material available on record. The Assessing Officer disallowed the interest in all the three years on the ground that assessee had not charged any interest on the loans and advances paid to sister concerns. During the course of hearing, it was pointed out by the ld. A.R. of the assessee that for assessment year 2002-03, similar issue came up in appeal before this Tribunal. The Tribunal set aside the matter to the file of the Assessing Officer with the directions to examine the nexus between the funds raised and loans advanced to sister concerns. It has further been submitted that the Assessing Officer as directed by I.T.A.T. in assessment year 2002-03 has examined the matter in detail and had come to the conclusion that the interest free loans were advanced because of business expediency out of its own funds. Therefore, the Assessing Officer had not made any addition in assessment year 2002-03. The ld. CIT(A) has deleted the addition by observing as under:
"10.3 I have carefully considered the facts of this issue and the submissions of the counsel of the appellant. It is seen that the advances made by the appellant to its sister concerns were quite lesser than the interest free funds available with the firm. The appellant firm had interest free funds of Rs.397.00 lacs at the beginning of relevant financial year and Rs.752.00 lacs at the end of it i.e. as on 31.3.2000. Merely payment through cheque issued from OD account of the firm does not mean that the firm has lent the amounts out of borrowed funds when otherwise the firm had adequate interest free funds which has clearly been demonstrated by the counsel of the 10 appellant through the above chart. Therefore, the A.O. had no case to add the amount of Rs.1,06,696/- us/s 37(1) of the Act. Otherwise also, the A.O. erred in invoking s.37(1) instead of s.36(1)(iii) of the Act which deals with allowability of interest expenses. The addition of Rs.1,06,696/- is, therefore, deleted."
15. On careful consideration of the facts and in view of the fact recorded by ld. CIT(A) we do not find any infirmity in the order of ld. CIT(A) deleting the addition particularly when on identical facts the Assessing Officer had not made any addition in assessment year 2002-03 when the matter was remitted back to him for making necessary enquiries and deciding the issue on merits. Accordingly we do not find any infirmity in the order of ld. CIT(A) deleting the addition in all the three years.
16. The next issue for consideration which is common in assessment years 2000-01 and 2001-02 relates to prior period expenses.
17. The facts of the case relating to this ground of appeal are that the Assessing Officer in assessment year 2000-01 disallowed an amount of Rs.50,200/- on the ground that these expenses did not pertain to the year under consideration. In assessment year 2001-02, the addition of Rs.48,890/- was made on identical grounds.
18. On appeal, the ld. CIT(A) deleted the addition for assessment year 2000-01, by observing as under:
"11.3 I have carefully considered the facts of this issue and the submissions of the counsel of the appellant. From the perusal of the relevant details regarding these expenses, it is seen that the expenditure represents the payment of credit card, an expenditure which was though received on 26th March 1999 but it was paid during the month of April 1999. It is seen that the appellant accounts for the 11 payment of credit cards in its books of account only on payments basis after verifying its correctness and the billed amount in context of the details of the bill which is received later on. And the payment is released after verification of the bills with copies of invoices. Therefore, it is seen that business precaution to verify billing details before releasing the payment has been followed by the appellant and due to this fact the appellant has booked the expenditure only when the funds are released. There is no infirmity in the procedure followed by the appellant. The addition, made by the A.O. owing to a venial technical aspect, is arbitrary and uncalled for particularly in the light of decision of Hon'ble Bombay High Court in the case of CIT vs. Nagri Mills Company Limited reported in 33 ITR 681 quoted above. Therefore, the addition of Rs.50,200/- is hereby deleted."
19. In assessment year 2001-02, the ld.CIT(A) deleted the addition on identical grounds.
20. We have heard both the parties and gone through the material available on record. We find that this issue is covered against the assessee by the decision of I.T.A.T. for assessment year 2002-03 wherein it has been held that prior period expenses could not be allowed in the absence of any evidence in the form of correspondence etc. before the bills were issued. In the absence of any such material, liability has to be taken as incurred in the year in which the bills were raised because the assessee was following mercantile system of accounting. The Tribunal rejected the contention of assessee that the bills were raised in earlier years and paid in the year under consideration itself indicated that there was dispute pending. Since the issue is squarely covered by the decision of I.T.A.T. and assessee has not been able to produce any evidence in support of the contention that the expenditure was crystalized during the year under consideration, the Assessing Officer was justified in disallowing the claim for prior period 12 expenditure. We, therefore, set aside the order of ld. CIT(A) and restore the order of Assessing Officer.
21. The last issue for consideration for assessment year 2005-06 relates to deleting the unverified credit balance of Rs.71,949/-. The Assessing Officer during the course of assessment proceedings found that assessee during the year under consideration did not have any business transaction with some of the creditors having same opening and closing balances. Out of these, in some of the cases, the amounts were not added back or settled in later year. The amount involved in respect of these creditors was Rs.71,949/-. The Assessing Officer added the amount of Rs.71,949/- as income of the assessee.
22. On appeal, the ld. CIT(A) deleted the addition by observing as under:
"8.3 I have carefully considered the facts of this issue and the submissions of the counsel of the appellant. It is seen that the A.O. has summarily added the above amount merely on the basis of the fact that the assessee had no transactions with certain creditors and their opening and closing balances remained the same. The A.O. further noted that out of some of them the amounts were never added back or settled in later years. This means the A.O. was convinced that certain amounts were indeed added back or settled in proceedings years. However, the A.O. has neither differentiated between such cases nor quantified such amounts. Moreover, the A.O. has not demonstrated that there was any remission or cessation of these liabilities during the year under consideration. Looking at these facts, it seems the A.O. has made this addition in a very causal and arbitrary manner; and the addition was not at all warranted under any of the provisions of the Act. Therefore, the addition of Rs.71,949/- is hereby deleted."
23. We have heard both the parties and gone through the material available on record. From the order of ld. CIT(A) we find that the Assessing Officer had not demonstrated that there was any remission or cessation of 13 liability during the year under consideration. The ld. CIT(A) has recorded a finding that addition has been made by the Assessing Officer in a very casual and arbitrary manner. Before us, nothing has been brought on record contrary to the finding of ld. CIT(A). In view of above, we do not find any infirmity in the order passed by the ld. CIT(A) deleting the addition.
24. In the result, appeals filed by the Revenue for all the three years are partly allowed.
Order pronounced in the open Court on 27th August, 2010.
Sd/- Sd/-
(R.P.TOLANI ) (K.D.RANJAN )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 27.08.2010.
PSP
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Deputy Registrar