2016 (5) TMI 1309 - AT - Income Tax

Suppressed production and suppressed turnover - Several incriminating documents, loose sheets etc were seized during the course of search proceedings from the premises of Shri Sohanraj Mehta - Held that - No evidence was found with the figures mentioned by the assessee in his letters to Shri Sohanraj Mehta are in coded figures. No evidence was found that the assessee has checked and okayed the notings of Shri Sohanraj Mehta. We therefore find some force in the arguments of the Ld. Counsel for the assessee that Shri Sohanraj Mehta has not maintained these accounts/details for the purpose of reporting to the assessee or for the purpose of giving account of unaccounted transactions to the assessee. Merely because Shri Sohanraj Mehta filed his return disclosing some commission as his additional undisclosed income and the department accepted the same without even making protective addition in his hands the same in our opinion cannot be the basis to compute huge suppressed turnover to the tune of about ₹ 340 crores as assessee s unaccounted turnover especially when not a single piece of unaccounted purchase or sales voucher or transport receipt or unaccounted purchase receipt was found. This in our opinion is also an indicator that no such unaccounted business was carried out by the assessee as alleged by the AO and upheld by the CIT(A). Even under the theory of probability also no such unaccounted business is possible under the facts and circumstances discussed above. In view of the above, it has to be held that the huge suppressed production and suppressed turnover and thereby generation of huge unaccounted income as determined by the AO, in our opinion, is incorrect. Therefore, the addition made by the AO and partly sustained by the CIT(A) on account of unaccounted profit on suppressed production and sale thereof is directed to be deleted. It is also an admitted fact that certain chits duly signed by the assessee were found from the possession of Shri Sohranraj Mehta during the course of search on 10-10-2009. Those chits were in the hand writing of the assessee for different years. It is not known as to why and for what purpose the assessee used to give such chits in his hand writing. Further, the amount of such chits according to the assessee is about ₹ 61 lakhs whereas the Revenue has considered the same at about ₹ 61 crores by adding two zeros to the figures. We have already held at Para No.133 of this order that in absence of any cogent evidence in the hands of the revenue, it is not proper to decode the same by adding two zeros. The argument of the Ld. Counsel for the assessee that certain sales tax refunds were due to be received by Shri Sohanraj Mehta for which he has issued chits to be handed over to them is not borne out of records. Considering the totality of the facts of the case, in our opinion, addition of an amount of ₹ 20 crores for the A.Yrs. 2004-05 to 2008-09 will meet the ends of justice under the facts and circumstances of the case. We therefore direct addition of ₹ 20 crores for the period from A.Yrs. 2004-05 to 2008-09 to be spread over equally. - Decided partly n favour of assessee Treatment of sales tax subsidy received - revenue receipt OR capital receipt - Held that - Tribunal in assessee s own case for A.Yrs. 2003-04 to 2005-06 has decided the issue and held that the sales tax subsidy received by the assessee in the instant case was in the course of carrying of its trade more profitably for which it cannot be held as capital receipt and the order of the CIT(A) treating the same as revenue receipt has been upheld. The Ld. Authorised Representative also conceded that the issue has been decided against the assessee by the order of the Tribunal in assessee s own case. In view of the decision of the Tribunal in assessee s own case this ground by the assessee is dismissed. Addition under Explanation to section 37(1) - payments in the nature of bribe - Held that - CIT(A) correctly deleted the addition made by the AO on the ground that the AO in the instant case has made the addition of the unaccounted income by applying the GP ratio and considered as added the entire GP and taxed, therefore, nothing further remains to be considered for disallowance as the entire expenses are deemed to have been disallowed and held to be part of the addition of unaccounted income, therefore, it cannot be added once again. Disallowance u/s.36(1)(va) on account of delayed payment of employees contribution to PF and ESI - Held that - Admittedly, the assessee has deposited the employees contribution to PF and ESI before the due date of filing of the return. The Coordinate Benches of the Tribunal are taking the consistent view that if the assessee has deposited the employees contribution to PF and ESI before the due date of filing of the return then no disallowance is called for. Since the assessee in the instant case has admittedly deposited the amounts before the due date of filing of the return, a finding given by the CIT(A) and not controverted by the revenue, therefore, we do not find any infirmity in his order. Claim of depreciation on assets of Hyderabad Division - block of assets installed in Hyderabad Division, were not used in previous year, current year and subsequent years - Held that - We find the issue has been decided in faovur of the assessee by the decision in the case of G.R. Shipping Ltd.(2009 (7) TMI 1169 - BOMBAY HIGH COURT ). In that case the assessee was engaged in shipping business and owned a barge which was included in the block of assets. The barge met with an accident and sunk on 06-03-2000, i.e. relevant to A.Y. 2000-01. As the efforts to retrieve the barge was uneconomical the barge was sold on as is where is basis for ₹ 55 lakhs in the month of May 2001 relevant to A.Y. 2002-03. As the barge was non operational and not used for business at a later date in A.Y. 2001-02 the AO denied depreciation. The Tribunal held that after the concept of Block of Asset w.e.f. 01-04-1988, individual assets had lost their identity once it entered with the Block of Assets and only the Block of Assets had to be considered. It was held that the test of user had to be applied upon the block of assets as a whole and not on individual assets. On appeal by the Revenue, the Hon ble High Court dismissed the appeal filed by the Revenue. Therefore, since the Ld.CIT(A) in the instant case has allowed the claim of depreciation on the block of assets installed at Hyderabad Division which were not used during the impugned assessment year by following the decision of Hon ble Bombay High Court, therefore, in absence of any contrary material brought to our notice we do not find any infirmity in the order of the CIT(A). Disallowance u/s 14A - Held that - AO disallowed ₹ 8,64,152/- being administrative expenses incurred for earning the exempt income. We find the Ld.CIT(A) considering the totality of the facts of the case has restricted such disallowance to ₹ 3,50,000/- which in our opinion is a reasoned one. We uphold the order of the CIT(A) on this issue and the grounds raised by the assessee as well as the revenue on this issue are dismissed. Depreciation on windmill - whether power generation from windmill is manufacturing activity of article or things? - Held that - Since the Ld.CIT(A) while allowing the claim of additional depreciation has relied on various decisions including the decisions of Hon ble Madras High Court in the case of VTM Ltd. (2009 (9) TMI 35 - MADRAS HIGH COURT ) and M/s. Hitech Arai Ltd. (2009 (9) TMI 60 - MADRAS HIGH COURT) and since nothing contrary was brought to our notice against the above decisions, therefore, we do not find any infirmity in the order of the Ld.CIT(A) allowing the claim of additional depreciation on windmills installed by the assessee during the year. Addition made on the documents pertained to Dhariwal and Doshi Pvt. Ltd. - Held that - The findings given by the CIT(A) that the notings made on page no.4 seized from the premises of the assessee at Baroda records the details of the pet jars which is actually utilized by DDIPL which is engaged in the Tea business could not be controverted by the Ld. Departmental Representative. We find the AO in the instant case made the addition based mainly on the statement of Shri Ajit Jain without any verification and his finding is also not supported by any independent evidence. The assessee has already explained during the course of assessment proceedings itself that since the said page itself is titled DDIPL, addition if any, can be made in the hands of DDIPL and cannot be made in the hands of the assessee. In absence of any independent evidence that the said page belongs to the assessee company, we are of the considered opinion that addition cannot be made merely on the basis of the statement of Shri Ajit Jain. The Ld.CIT(A) in the instant case has given justifiable reasons for deleting the addition. Addition on difference in stock of packing material - Held that - From the order of the AO as well as the submission of the assessee it is not verifiable as to what method of accounting for valuation of stock was being adopted by the assessee. If the valuation is being made as per actual invoice price, then taking average price will give a distorted figure. In view of the above discussion and keeping in mind the interest of justice, we deem it proper to restore the issue to the file of the AO with a direction to give one more opportunity to the assessee to substantiate with evidence to his satisfaction regarding the difference between physical stock and the stock as per books. Ground raised by the assessee is accordingly allowed for statistical purposes. Addition considering the statement of one the employee of the appellant company - Held that - Since the paper was found from the Baroda office of the assessee company and the Chief Executive managing the affairs of the assessee company had explained the nature of each and every item, therefore, merely because the name of the assessee company was not mentioned in the seized paper, it cannot be said that it does not belong to the assessee company. Further, the figures mentioned in the said seized document are not round figures. Out of the 5 entries 4 entries are in odd figures. Therefore, it also cannot be said that these are baseless or some estimates etc. Since the assessee company is engaged in the business of Gutkha and one of the item of the seized document show free pouches , therefore, there is a strong indication that the same relates to the business of the assessee. Since the statement of the Chief Executive of the assessee company Shri Ajith Jain was recorded on oath u/s.132(4) of the I.T. Act wherein he has stated that these expenses relate to the Delhi office of the assessee company which are not recorded in the regular books of account, therefore, the presumption will be against the assessee especially when the paper is seized from the office premises of the assessee.

Summary

Issues Involved:
1. Addition of undisclosed income based on papers found with a third party.
2. Adoption of profit percentage on estimated unaccounted turnover.
3. Treatment of sales tax subsidy as revenue receipt.
4. Allowability of additional depreciation on windmills.
5. Disallowance of employee contributions to PF and ESI.
6. Disallowance under section 14A for earning exempt income.
7. Addition based on unaccounted stock and expenses.

Issue-wise Analysis:

1. Addition of Undisclosed Income Based on Papers Found with a Third Party:
The AO made additions based on documents found with a third party, Shri Sohanraj Mehta, during a search. The documents indicated unaccounted sales and payments. The AO concluded that these transactions belonged to the assessee company, M/s. Dhariwal Industries Ltd. (DIL), and made additions accordingly. The CIT(A) upheld part of the addition but reduced the profit percentage applied. The Tribunal found that no incriminating documents were found during the search at the assessee's premises and that the Excise Department had not found any unaccounted production. The Tribunal also noted that various third-party statements had been retracted and that there was no corroborative evidence linking the documents to the assessee. The Tribunal held that the huge suppressed turnover determined by the AO was not justified and directed the deletion of the addition, except for a token addition of ?20 crores spread over the relevant assessment years.

2. Adoption of Profit Percentage on Estimated Unaccounted Turnover:
The AO adopted a 60% profit percentage on the estimated unaccounted turnover, while the CIT(A) reduced it to 30%. The Tribunal found that the AO's method was not justified, especially since the Excise Department had not found any unaccounted production. The Tribunal directed the deletion of the addition based on the estimated unaccounted turnover, except for a token addition of ?20 crores.

3. Treatment of Sales Tax Subsidy as Revenue Receipt:
The AO treated the sales tax subsidy received by the assessee as a revenue receipt, which was upheld by the CIT(A). The Tribunal noted that this issue had been decided against the assessee in its own case for earlier years and upheld the CIT(A)'s decision to treat the sales tax subsidy as a revenue receipt.

4. Allowability of Additional Depreciation on Windmills:
The AO disallowed the claim of additional depreciation on windmills, arguing that power generation does not amount to the manufacture of an article or thing. The CIT(A) allowed the claim, relying on various judicial decisions that held electricity to be an article or thing. The Tribunal upheld the CIT(A)'s decision, allowing the claim of additional depreciation on windmills.

5. Disallowance of Employee Contributions to PF and ESI:
The AO disallowed the employee contributions to PF and ESI on the ground that they were not paid within the due date. The CIT(A) allowed the claim, noting that the contributions were paid before the due date of filing the return. The Tribunal upheld the CIT(A)'s decision, allowing the claim of the assessee.

6. Disallowance under Section 14A for Earning Exempt Income:
The AO made disallowances under section 14A for earning exempt income. The CIT(A) reduced the disallowance. The Tribunal upheld the CIT(A)'s decision but directed the AO to verify the assessee's claim that its own capital and interest-free funds were more than the investments in shares/mutual funds. The Tribunal also restricted the disallowance of administrative expenses to ?2 lakhs for each relevant assessment year.

7. Addition Based on Unaccounted Stock and Expenses:
The AO made additions based on the difference between the physical stock found during the search and the stock as per books. The CIT(A) upheld the addition. The Tribunal restored the issue to the AO for fresh consideration, directing the AO to give the assessee an opportunity to reconcile the difference. The Tribunal also upheld the addition of ?1,04,84,609 based on a seized document, noting that the document was not a dumb document and was supported by the statement of the Chief Executive of the assessee company.

Conclusion:
The Tribunal provided relief to the assessee by deleting most of the additions made by the AO and partly upheld by the CIT(A), except for a token addition of ?20 crores spread over the relevant assessment years. The Tribunal also upheld the CIT(A)'s decisions on other issues, including the treatment of sales tax subsidy, additional depreciation on windmills, and disallowance of employee contributions to PF and ESI. The Tribunal directed the AO to verify certain claims of the assessee and give it an opportunity to reconcile differences in stock valuation.