2014 (7) TMI 168 - AT - Income Tax

Rejection of books of accounts on account of estimated profits Held that - As it has also been decided in assessee s own case for the earlier assessment year, the Form 3CEB filed before the AO was found to be not about the number of motorcycles produced by the assessee during the period - it was found to be concerning the royalty paid by the assessee company during the relevant quarter - the assessee had furnished a complete reconciliation before the AO, as also incorporated in the assessment order - This reconciliation had been arbitrarily rejected by the AO. Average sales of motorcycles Held that - The AO had not pointed out any error in respect of any sale - It was on the basis of this, that the CIT(A) observed that there was no justification for the AO to make an assumption that the sale price charged by the assessee during the year was lower than that in the preceding year - merely since the realization per motor cycle for the year under consideration was low as compared to that in the preceding year, this by itself cannot lead the AO to assume that the sale price charged by the assessee company was under-stated and the AO evidently erred in making such assumption - unless there is material evidence to disprove the contention of the assessee, the sale stated in the books of account needs must be accepted. Losses incurred by it as compared to the profits earned by other competitors Held that - Nothing has been brought to support this action of the AO - profit can only be made when there is ability to do so - The factors pointed out by the assessee for not being able to make sales, have not been refuted - in the presence of the factors, without a doubt, the losses suffered by the assessee cannot be said to be either bogus, or inflated - The AO did not prove otherwise - No discrepancy was pointed out in the books of account of the assessee company concerning the expenditure incurred and claimed by the assessee - Nothing was brought to establish that the assessee had been charging a sale price higher than that noted in the books of account Decided against Revenue. Royalty payment to 100% subsidiary Held that - It cannot be said that any expenditure incurred wholly and exclusively for the purposes of business is an allowable expenditure - the payment is made to a 100% shareholding company of the payer - u/s 40A(2) of the Act, it is only the fair value of such expenditure, which is allowable AO proceeded merely on assumptions, surmises and conjectures which, undeniably, can never substitute hard evidence, which is entirely absent here - Neither Section 40(a)(i) nor Section 2(22)(e) of the Act are applicable the order of the CIT(A) is upheld - Decided against Revenue. Set off of brought forward business losses and unabsorbed depreciation Held that - When an assessee furnishes an explanation on a specific query, the same is treated as accepted unless some inconsistencies are found by the AO on its vetting or the assessee fails to substantiate the same on being called upon to do so - If the Officer does not dispute the correctness of the specific explanation tendered by the assessee, the same is considered as correct and binding of the AO - It is totally impermissible to dub the explanation given by the assessee as a cooked up story without any evidence to the contrary - even if it is presumed without agreeing that the AO was under some misconception qua the assessee s explanation during the assessment proceedings, he could have verified the same when remand reports were called for - revenue has brought no material on record to demonstrate any fallacy in the explanation tendered on behalf of the assessee Decided against Revenue.

Summary

Issues Involved:
1. Rejection of books of account and deletion of addition on estimated profits.
2. Deletion of disallowance of royalty payments.
3. Allowing the claim of carry forward and set off of brought forward business losses and unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Rejection of Books of Account and Deletion of Addition on Estimated Profits:
The Revenue challenged the CIT(A)'s decision to reject the Assessing Officer's (AO) rejection of the books of account and the deletion of the addition of Rs. 1,36,51,37,400/- made on estimated profits. The AO had relied on the assessment order for AY 2006-07, estimating the average profit per motorcycle by comparing it with Hero Honda Motors Ltd. The CIT(A) allowed the relief by following his own order for AY 2006-07, which was upheld by the ITAT. The ITAT found that the AO's reasons for rejecting the books, such as discrepancies in Form 3CEB, lower average sales, and comparison with competitors, were not justified. The AO had not provided hard evidence to support his claims, and the CIT(A)'s decision to accept the assessee's explanations was upheld. The ITAT concluded that the facts of the year under consideration were identical to AY 2006-07, and there was no justification to take a different view. Thus, the order of the CIT(A) was upheld, and the Revenue's grounds were rejected.

2. Deletion of Disallowance of Royalty Payments:
The Revenue also contested the CIT(A)'s deletion of the disallowance of Rs. 19,06,59,918/- made on account of royalty payments by the assessee to its 100% holding company, Yamaha Motor Co. Ltd., Japan. The AO had disallowed the royalty payment, considering it a colorable device to reduce profits. However, the CIT(A) allowed the relief, following the appellate order for AY 2006-07, which was upheld by the ITAT. The ITAT noted that the expenditure was incurred wholly and exclusively for business purposes and was at arm's length, as determined by the TPO. The AO's assumptions were found to be baseless, and the CIT(A)'s decision was upheld. The ITAT found no justification to take a different view from AY 2006-07 and rejected the Revenue's ground.

3. Allowing the Claim of Carry Forward and Set Off of Brought Forward Business Losses and Unabsorbed Depreciation:
The Revenue challenged the CIT(A)'s decision to allow the claim of carry forward and set off of brought forward business losses from AY 2001-02 onwards and unabsorbed depreciation from AY 1997-98 onwards. The AO had relied on the assessment order for AY 2006-07, while the CIT(A) allowed the relief following his own order. The ITAT's Third Member agreed with the learned Judicial Member, who found that the assessee's explanation regarding the shareholding of Yamaha Motor Co., Japan was correct. The AO had multiple opportunities to verify the assessee's claim but failed to do so. The CIT(A)'s acceptance of the assessee's explanation was upheld, and the ITAT found no merit in the Revenue's ground. Therefore, the order of the CIT(A) was upheld, and the Revenue's ground was rejected.

Conclusion:
The ITAT upheld the CIT(A)'s decisions on all grounds, finding that the AO's actions were not justified and the CIT(A)'s acceptance of the assessee's explanations was correct. The appeals of the Revenue for both AY 2003-04 and AY 2004-05 were dismissed.