Income Tax Appellate Tribunal - Hyderabad
M/S. Endeavour Industries Ltd.,, ... vs Department Of Income Tax on 13 March, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B" : HYDERABAD
BEFORE SHRI P. M. JAGTAP, ACCOUNTANT MEMBER
AND
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA.No.404/Hyd/2014
Assessment Year 2009-2010
M/s. Infiniti Metal products
India Ltd., (Formerly known vs. DCIT, Circle 2(2)
as M/s. Endeavour Hyderabad.
Industries Ltd.,)
Hyderabad.
PAN AAACE8007E
(Appellant) (Respondent)
ITA.No.548/Hyd/2014
Assessment Year 2009-2010
vs. M/s. Infiniti Metal products
DCIT, Circle 2(2) India Ltd., (Formerly known
Hyderabad. as M/s. Endeavour
Industries Ltd.,) Hyderabad.
PAN AAACE8007E
(Appellant) (Respondent)
For Assessee : Mr. P. Muralimohan
For Revenue : Mr. Rajat Mitra
Date of Hearing : 10.03.2015
Date of Pronouncement : 13.03.2015
ORDER
PER P.M. JAGTAP, A.M.
These two appeals, one filed by the assessee being ITA.No.404/Hyd/2014 and the other filed by the revenue being ITA.No.508/Hyd/2014, are cross-appeals which are directed 2 ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
against the Order of Ld. CIT(A)-III, Hyderabad dated 15.01.2014.
2. The assessee in the present case is a company which is engaged in the business of trading in steel products. The return of income for the year under consideration was filed by it on 16.11.2009 declaring total income of Rs.43,80,004. During the course of assessment proceedings, the assessee company was called upon by the A.O. to produce the books of account along with supporting bills/vouchers for verification. The assessee company was also required by the A.O. to produce the VAT returns of its Hyderabad branch as well as Chennai branch. Although, the assessee produced the relevant details pertaining to Hyderabad branch, it could not produce either the VAT returns or the purchase invoices pertaining to Chennai branch. On verification of the relevant ledger extract pertaining to Chennai branch, it was also observed by the A.O. that the same did not contain the details of purchases made. He, therefore, held that the claim of the assessee for purchases of Chennai branch was not fully verifiable and disallowance of Rs.1,86,09,868 was made by him on account of unverifiable purchases being 8% of the total purchases of Chennai branch. It was also noted by the A.O. that expenditure of Rs.27,21,566 claimed by the assessee on account of salaries, wages and bonus was apparently on the higher side when compared to the turnover of the last year vis-à-vis turnover of the year under consideration which was drastically lower at about 50% of the earlier year. Since the assessee could not offer any explanation to the satisfaction of the A.O. for such higher claim on account of salaries, wages and bonus, adhoc disallowance of Rs.4,80,000 was made by the A.O. out of the 3 ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
expenditure claimed by the assessee on account of salaries, wages and bonus.
3. During the course of assessment proceedings, it was also noticed by the A.O. that assessee had closing stock of Rs.88,5,541 as on 31.03.2008 which was not brought forward and shown in the P & L account of the year under consideration as opening stock. Although, the value of stock of Rs.88,5,541 was shown by the assessee in the P & L account as decrease in stock as noted by the A.O. himself, he presumed that in the absence of the closing stock of the earlier year having been brought forward in the P & L account as opening stock, the said stock was sold by the assessee outside the books of accounts. Taking into consideration the net profit of 0.20% on sales shown by the assessee, the value of sale of opening stock made outside the books of accounts was worked out by the A.O. at Rs.88,73,252 and the same was added by him to the total income of the assessee.
4. During the year under consideration, the assessee company had paid finance charges of Rs.3,51,000 and Rs.7,32,239 to M/s. Sujana Metal products Ltd., amounting to Rs.3,51,000 and Rs.7,32,239 respectively. Since no tax at source was deducted by the assessee from the said payments, financial charges amounting to Rs.10,83,239 were disallowed by the A.O. under section 40a(ia) of the Act. Accordingly, the total income of the assessee for the year under consideration was computed by the A.O. of Rs.3,34,26,614 vide order dated 23.12.2011 passed under section 143(3) of the Act.
5. Against the order passed by the A.O. under section 143(3), an appeal was preferred by the assessee before the Ld. 4 ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
CIT(A) challenging all the four additions made by the A.O. and after considering the submissions made on behalf of the assessee and the material available on record, the Ld. CIT(A) restored the issue relating to addition made by the A.O. on account of non-disclosure of opening stock to the file of the A.O. with a direction to verify the claim of the assessee that the opening stock was very much grouped with the purchases.
6. As regards the disallowances made by the A.O. on account of unverifiable purchases of Chennai branch and expenditure claimed on account of salary, wages and bonus, the Ld. CIT(A) held that keeping in view the unverifiable claim of the assessee on account of purchases, salary etc., the books of account of the assessee were liable to be rejected. Accordingly, he directed that the books of account of the assessee be rejected and the net profit be estimated at 0.7% of sales being the net profit rate applied in the case of sister concern of the assessee engaged in the same line of business. This method adopted by the Ld. CIT(A) resulted in enhancement of income of the assessee as computed by the Assessing Officer. The Ld. CIT(A) also confirmed the disallowance of Rs.10,83,239 made by the A.O. on account of finance charges by invoking the provisions of section 40a(ia).
7. Aggrieved by the order of the Ld. CIT(A), assessee and revenue both are in appeal before the Tribunal on the following grounds :
ITA.No.404/Hyd/2014 : A.Y. 2009-2010 (Assessee's Appeal) :
"1. The Ld. CIT(A)-III, Hyderabad erred both in law and on facts in upholding order of the A.O. partly.5
ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
2. The Ld. CIT(A), Hyderabad erred in confirming the addition towards disallowance of financial charges u/s.40(a)(ia) of Rs.10,83,239/-.
3. The Ld. CIT(A), Hyderabad erred in not considering the fact that the provisions of section 40(a)(ia) are applicable only to expenditure which is payable as on 31st March of every year and not for the amounts which are already paid.
4. The Ld. CIT(A), Hyderabad ought to have given an opportunity of being heard before enhancing the income of appellant company.
5. The Ld. CIT(A), Hyderabad erred in directing the A.O. to reject the books of account and estimating the income of the appellant company.
6. Without prejudice to above grounds, the Ld. CIT(A) erred in directly to estimate the income of the appellant company at 0.7% which is very high in the line of business of appellant company.
7. The Ld. CIT(A), Hyderabad ought to have appreciated the fact that the appellant's average net profit in the preceding three assessment year is very less and it would be unreasonable to estimate the income for the year under consideration @ 0.7% which is very high.
8. The CIT(A), Hyderabad ought to have appreciated that the purchase of the appellant company, which was disallowed by the A.O. of Rs.1,86,09,868 which is calculated at the rate of 8% of purchases of Chennai branch of Rs.23,26,23,254 are genuine and no disallowance can be made in this regard.
9. The CIT(A), Hyderabad ought to have appreciated that the salaries of an amount of Rs.4,80,000 which had been disallowed by the A.O. on the basis of previous year turnover are genuine and no disallowance can be made in this regard.
10. The appellant may, add or alter or amend or modify or substitute or delete and/or rescind all or any of 6 ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
the grounds of appeal at any time before or at the time of hearing of the appeal."
ITA.No.548/Hyd/2014 - A.Y. 2009-2010 (Revenue Appeal) :
"1. The CIT(A) erred in law in setting aside the matter though he has no such power and also it is accepted by him that the assessee could not produce any evidence with reference to addition on opening stock.
2. The CIT(A) erred on facts and in law in directing verification of the accounts though the assessee failed to discharge the onus even at the appellate stage.
3. The CIT(A) erred on facts and in law in altering the disallowance made by the A.O. on purchases of Chennai Branch and also on salary without citing any cogent reasons for such relief.
4. The CIT(A) erred on facts and in law in granting relief to the assessee with reference to bogus purchases and bogus salary expenses.
5. Any other that may be taken at the time of hearing."
8. We have heard the arguments of both the sides and also perused the relevant material on record. Ground Nos.1 and 10 raised in the appeal of the assessee and ground No.5 raised in the appeal of the revenue are general in nature requiring no specific adjudication.
9. The common issue raised in ground Nos. 2 and 3of the assessee's appeal relates to the disallowance of Rs.10,83,239 made by the A.O. and confirmed by the Ld. CIT(A) on account of finance charges under section 40a(ia) for its failure to deduct tax at source.
7ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
10. At the time of hearing before us, both sides have agreed that this issue is squarely covered in favour of the assessee by the decision of Coordinate Bench of this Tribunal in the case of S.S. Net Works vs. ITO rendered vide order dated 28.01.2015 passed in ITA.No.478/Hyd/2013 wherein it was held, following the decision of Hon'ble A.P. High Court in the case of CIT vs. Janapriya Engineers Syndicate (ITA.No.352 of 2014 dated 24.06.2014) as well as the decision of Special Bench of the Tribunal at Visakhapatnam in the case of Merylin Shipping and Transport vs. Addl. CIT (ITA.No.477/Vizag/2008 dated 29.03.2012), that if the relevant expenditure is found to have been paid within the relevant previous year, no disallowance under section 40a(ia) can be made on the ground that tax at source has not been deducted by the assessee from the payment of the said expenditure. In the present case, the expenditure in question on account of finance charges was fully paid by the assessee in the year under consideration as clearly noted by the A.O. in his order and we, therefore, hold following the decision of Coordinate Bench of this Tribunal in the case of S.S. Net Works (supra), that no disallowance under section 40a(ia) can be made, on account of such finance charges as the same were fully paid. We, therefore, delete the disallowance made by the A.O. and confirmed by the Ld. CIT(A) on this issue and allow ground No.2 and 3 of assessee's appeal.
11. The common issue involved in ground Nos. 4 to 9 of assessee's appeal and ground Nos. 3 and 4 of the Revenue's appeal relates to the disallowance made by the A.O. on account of unverifiable purchases of Chennai branch of the assessee company and expenditure claimed on account of 8 ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
salary, wages and bonus which has been substituted by the Ld. CIT(A) by estimating the income of the assessee from the business of trading in sale of products by applying the net profit rate of 0.7% of sales.
12. After considering rival submissions and perusing the relevant material on record, it is observed that 8% of the purchases of Chennai branch of the assessee company were disallowed by the A.O. on the ground that the assessee failed to produce the relevant purchase invoices as well as other details to support and substantiate the same. He held that the purchase of Chennai branch claimed by the assessee thus were not fully verifiable and disallowance to the extent of 8% of such purchase was made by him. He also made adhoc disallowance of Rs.4,80,000 out of the total expenditure of Rs.27,21,566 claimed by the assessee on account of salaries, wages and bonus on the ground that the expenses so claimed were not commensurate with the turnover of the year under consideration which had drastically come down as compared to the immediately preceding year.
13. On appeal, the Ld. CIT(A) held that in view of unverifiable purchases of Chennai branch as well as unverifiable expenses claimed by the assessee towards salary, wages and bonus, it would be proper to reject the books of account. Accordingly, he rejected the books of account and estimated the net profit of the assessee company from the business of trading in steel products by applying the net profit rate of 0.7% which resulted in enhancement of income. Although, we agree with the contention of the Ld. Counsel for the assessee that the action of the Ld. CIT(A) rejecting the books of account and estimating the income of the assessee by 9 ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
applying net profit rate of 0.7%, which resulted into the enhancement, is not justified in the facts and circumstances of the case especially when no notice of enhancement was given by the Ld. CIT(A) to the assessee, we find it difficult to accept his contention that the addition made by the A.O. by way of disallowance of 8% made out of purchases of Chennai branch is not sustainable in the absence of rejection of books of account made by him. In our opinion, it is not the case where the income of the assessee was estimated by the A.O. but it is the case where disallowance was made by the A.O. for unverifiable purchases due to the failure of the assessee to produce the relevant invoices and furnish the relevant details to support and substantiate its claim of purchase made by Chennai branch. It is a settled position that if any expenditure such as purchase is claimed by the assessee, the onus is on the assessee to support and substantiate its claim for such expenditure by producing the relevant documentary evidence as well as by furnishing relevant details whenever called for by the Assessing Officer. In the present case, this onus was not discharged by the assessee during the course of assessment proceedings and this position has not been disputed even by the Ld. Counsel for the assessee. He however has contended that the relevant invoices and other details could not be furnished by the assessee during the course of assessment proceedings as proper and sufficient time was not allowed by the A.O. to do so. He has also contended that all these details and documentary evidence in the form of invoices are duly maintained by the assessee. Keeping in view of this submission made by the Ld. Counsel for the assessee, we are of the view that it would be fair and proper and in the interest of justice, to restore this matter to the file of the A.O. for giving one more 10 ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
opportunity to the assessee to produce the relevant invoices and other details in order to support its claim of purchases made by Chennai branch and even the learned D.R. has not raised any objection in this regard. We, therefore, set aside the impugned order of the Ld. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the issue relating to the assessee's claim of purchases made by Chennai branch afresh, after giving the assessee a proper and sufficient opportunity to support and substantiate the said claim.
14. As regards the disallowance made on account of expenditure claimed by assessee towards salary, wages and bonus, we find that the said disallowance made by the A.O. on adhoc basis is not sustainable. The nature of this expenditure claimed by the assessee is such that the same is not likely to vary with the turnover and merely because there was drastic reduction in the turnover of the assessee in the year under consideration, it cannot follow that there has to be a proportionate reduction in the expenditure claimed on account of salary, wages and bonus. This expenditure is substantially in the nature of fixed expenditure and the disallowance made by the A.O. on adhoc basis without pointing out any other specific instance of unverifiable element involved in the expenditure claimed by the assessee, in our opinion, is not well founded. We, therefore, direct the A.O. to delete the same. Ground Nos. 4, 5, 6, 7 and 9 of the assessee's appeal are accordingly allowed, Ground No.8 of the assessee's appeal is treated as allowed for statistical purposes and Ground No. 3 and 4 of the Revenue's appeal are treated as partly allowed for statistical purposes.
11ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
15. In ground No. 1 and 2 of its appeal, the Revenue has challenged the action of the Ld. CIT(A) in remitting the issue relating to the addition made on account of non- disclosure of opening stock to the A.O. with a direction to verify the claim of the assessee that the value of opening stock was duly grouped with purchases.
16. After considering the rival contentions and perusing the relevant material on record, it is observed that the addition made by the A.O. on account of non-disclosure of opening stock was assailed by the assessee before the Ld. CIT(A) by making the following submissions in writing :
1. "As seen from the P & L account drawn in the annual report 2008-09 there appears the following position.
Because of grouping up of the accounts the position as on Financial Year ending for 2007-08 is also noticed as follows :
I. Income Rs. Rs. Sales 333,39,63,789 631,18,67,632 Other Income 86,977 15,86,36,952 Total 333,40,50,766 647,05,04,584 II Expenditure Rs. Purchase of stock 327,82,96,381 641,23,74,645 Selling & Administration 2,17,10,083 1,70,48,161 Expenses (Sch.(k)) Financial Expense (Sch.(L)) 1,32,22,676 2,73,98,565 Depreciation 52,54,657 33,41,003 Preliminary expenses 1,185 1,185 Increase or decrease in stock 88,55,541 18,64,009 (Sch.(M)) Total 332,73,40,523 646,20,27,588 Net Profit Before Tax 67,10,243 84,76,996
The following are the schedules append to the P & L account as drawn above (Schedule-N Profit & Loss a/c. for F.Y. 2007-08).
12ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
Particulars Amount Closing balance as on 31.03.07/opening 1,07,19,550 balance as on 1.4.07.
Closing balance as on 31.3.08 88,55,541 Decrease in stock written off to profit and 18,64,009 loss account F.Y. 2007-08/A.Y. 2008-09 Schedule 'M' profit and loss account for the year 2008-09.
Particulars Amount
Closing balance as on 31.03.08/opening 88,55,541
balance as on 1.4.08.
Closing balance as on 31.3.09 0
Decrease in stock written off to profit and 88,55,541 loss account F.Y. 2007-08/A.Y. 2008-09
2. As could be seen from the P & L a/CIT(A) as above that the system of Accounting followed is arriving at the net profit in such that no separate Trading Account is constructed. And thus, no opening stock as on first day of financial year 2008-09 is taken to the debit of trading account and no closing stock as on last day of financial year 2008-09 was credited to trading account. However, some stock adjustment was made to P & L account as per item No.6; This represents the decrease in stock, as shown in schedule (N). The decrease in stock has been reduced from the profit. This is done by way of accounting entry by inclusion into expenditure". In fact, this represents addition to the purchases, being the 'costs of the goods sold".
3. It is noticed from the Trading and Profit and Loss account for the A.Y. 2008-09, 2009-10 and 2010-11 that the assessee has been continuously adopting a system of accounting for adjusting the increase or decrease of the stock and showing the closing stock to current assets under "incentives". This is in confirmative with part I and Part II of Schedule VI of the Companies Act, 1956."
17. A perusal of the above submissions made by the assessee clearly shows that the decrease in stock was duly shown by the assessee in the expenditure side of the P & L account. It appears that this method of presentation adopted 13 ITA.No.404 & 548/Hyd/2014 M/s. Infiniti Metal Products India Ltd., Hyderabad.
by the assessee was not appreciated by the A.O. in proper perspective. When the difference in opening and closing stock was duly reflected in the P & L account of the assessee as increase or decrease in stock, the value of opening and closing stock was duly taken into account while determining the profit and loss of the relevant period and this aspect was very much clarified by the assessee in the written submissions filed before the Ld. CIT(A). The value of closing stock as on 31st March, 2008 thus was duly brought forward by the assessee as opening stock for the year under consideration and there was no case of making any addition on this issue as done by the A.O. presuming that the opening stock was sold by the assessee outside the books of accounts. The Ld. CIT(A), in our opinion, properly appreciated this position and remitted the matter back to the A.O. for the limited purpose of verifying the claim of the assessee as made in the written submissions. In our opinion, there is thus no infirmity in the impugned order of the Ld. CIT(A) on this issue and upholding the same, we dismiss ground Nos. 1 and 2 of the Revenue's appeal.
18. In the result, appeal of the assessee is treated as allowed as indicated above and appeal of the Revenue is treated as partly allowed for statistical purposes.
Order pronounced in the open Court on 13.03.2015.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (P.M. JAGTAP)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 13th March, 2015
VBP/-
14
ITA.No.404 & 548/Hyd/2014
M/s. Infiniti Metal Products India Ltd., Hyderabad.
Copy to
1. M/s. Infiniti Metal products India Ltd., (Formerly known as M/s. Endeavour Industries Ltd.,) Hyderabad. C/o. Mr. P. Murali & Co., Chartered Accountants, 6-3- 655/2/3, 1st Floor, Somajiguda, Hyderabad - 82.
2. Dy. Commissioner of Income Tax, Circle 2(2), Hyderabad.
3. CIT(A)-III, Hyderabad.
4. CIT-II, Hyderabad.
5. D.R. I.T.A.T. "A" Bench, Hyderabad.
6. Guard File