2016 (6) TMI 1415 - AT - Income Tax

Assessment u/s 153A - as per assessee since no assessment proceedings was pending on the date of the search on 18.2.2009, the completed assessment on the date of search cannot be reopened for the purpose of making addition for the block period - HELD THAT - In the case before us, the assessee has filed the return of income in the regular course before the date of search and the Assessing Officer completed the assessment u/s 143(3) of the Act by determining the total income - on the date of search on 18.2.2009, no assessment proceeding was pending for the assessment year 2006-07. The question arises for consideration is when no assessment proceeding was pending on the date of search, can the Assessing Officer frame the assessment u/s 153A of the Act in the absence of any material found during the course of search operation? This Tribunal is of the considered opinion that in the absence of any search material, no assessment can be made for the block period in respect of the income disclosed before the date of search and the assessment was already completed. Therefore, in view of the language employed by the Parliament in sec. 153A of the Act, the Assessing Officer has to confine himself only to the material found during the course of search operation. Therefore, when the assessment proceeding was completed before the date of search, the Assessing Officer has no jurisdiction to frame block assessment u/s 153A of the Act in the absence of any material found during the course of search operation. Thus the orders of the lower authorities are set aside and the entire addition made by the Assessing Officer is deleted. Valuation of closing stock - method of valuation of closing stock - assessee is valuing the closing stock depending upon the stock which remains unsold - HELD THAT - The assessee is engaged in the business of readymade garments and other textile products. It is not in dispute that the fashion is changing very fast and the assessee has to stock the latest fashion textiles so as to meet the expectation of the customers. The only objection of the Revenue appears to be that the assessee is valuing the silk sarees at Rs. 100/-. The lower authorities have not classified the nature of the silk sarees. The silk product contains various varieties. Some of the silk sarees may contain pure zari and some of the silk sarees may contain artificial zari. Apart from pure silk, art silk also available in the market, hence, the valuation may differ from product to product. The silk sarees manufactured in one particular year may not be liked by the people after three or four years. Therefore, the assessee has to necessarily value the stock if it remains unsold for more than three years at the net realizable value or a value which could be estimated on adhoc basis. In this case, the assessee has estimated the same at Rs. 100/- or net realizable value in respect of the stocks which remains to be unsold for more than three years. The Assessing Officer has also found that it is not possible to identify the goods remained unsold in the showroom of the assessee. The fact remains that each and every product of the assessee was allotted by-number and it can be identified with reference to the by-number. Therefore, if the Revenue authorities wanted to identify the goods remained unsold for more than one year, two years or three years as the case may be, it can be verified and identified by referring to by-numbers. Hence, the Assessing Officer cannot doubt the valuation made by the assessee This Tribunal is of the considered opinion that in view of the nature of business undertaken by the assessee and the change of fashion year by year, the goods remain unsold needs to be valued either at cost or net realizable value whichever is lower. Since the assessee has taken the net realizable value for valuing the closing stock, the Assessing Officer is not justified in making the addition. It is also not in dispute that the assessee has offered for taxation the difference between the actual sale price and the net realizable value estimated by the assessee for valuation of closing stock. Therefore, the Revenue cannot have any grievance on the method of valuation adopted by the assessee. In view of the above, we are unable to uphold the orders of the lower authorities and accordingly, the same are set aside. The Assessing Officer is directed to delete the disallowance. Disallowance u/s 40A(2)(a) - assessee submitted that the assessee claimed payment of interest @ 18% to the specified persons provided u/s 40A(2)(b) assessee has also made advances to partners and collected interest only @ 13% - AO after considering the above facts, found that the payment of interest at 18% to the specified persons are excessive. Accordingly, he restricted the interest payment to 13% - HELD THAT - This claim of the assessee is not in dispute. The assessee admittedly paid interest only @ 18%. Therefore, this Tribunal is of the considered opinion that when the assessee has paid interest less than the market rate of interest for the unsecured loan, the Assessing Officer is not justified in restricting the interest to 13%. Assessing Officer is not justified in restricting the payment of interest to 13%. Therefore, this Tribunal is unable to uphold the orders of the lower authorities and accordingly the same are set aside. The Assessing Officer is directed to delete the disallowance of interest u/s 40A(2)(a). Disallowance of contribution to LIC Gratuity Fund - assessee has contributed towards LIC Gratuity Fund of the employees - Assessing Officer disallowed the claim of the assessee on the ground that the fund was not approved by the prescribed authority - HELD THAT - As the assessee has made contribution to LIC Gratuity Fund. It is also not in dispute that the assessee has already paid the money and the payment has gone out of the hands of the assessee. Therefore, this Tribunal is of the considered opinion that the judgment of the Apex Court in Textool Company Ltd.. 2009 (9) TMI 66 - SUPREME COURT is squarely applicable to the facts of the case. When the money has gone out of the hands of the assessee, this Tribunal is of the considered opinion that the same has to be allowed even though the LIC Gratuity Fund was not approved by the concerned CIT in view of the judgment of the Apex Court in Textool Company Ltd.(supra). In view of the above discussion, we set aside the orders of the lower authorities and the Assessing Officer is directed to delete the addition towards contribution to LIC Gratuity Funds. Disallowance of donation - HELD THAT - Admittedly, the assessee has not produced the original receipts before the Assessing Officer for scrutiny. When the assessee has not produced the original receipts for making claim u/s 80G of the Act, this Tribunal is of the considered opinion that the Assessing Officer has rightly disallowed part of the claim. This Tribunal do not find any reason to interfere with the order of the lower authority. Accordingly, the same is confirmed. Disallowance of pooja expenses - HELD THAT - The expenditure incurred by the assessee is not in dispute. It is the belief of each individual to garland God Almighty and start his business. If the assessee incurred expenditure for flowers, incense sticks, decorative items etc. for doing pooja, this Tribunal is of the considered opinion that the same is for business purpose. Hence, the Assessing Officer is not justified in disallowing the claim of the assessee. When the assessee starts its business by performing pooja, this Tribunal is of the considered opinion that the expenditure incurred for performing pooja is for business purpose, therefore, the same has to be allowed while computing the total income. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to delete the addition made. Disallowance towards repairs - HELD THAT - It appears from the assessment order that the assessee has not produced any material to support the claim of expenditure towards repair. However, the assessee filed certain bills and vouchers before the CIT(A) and the CIT(A) called for the remand report from the Assessing Officer - AO after verifying the material filed by the assessee, found that the claim made by the assessee is correct except to the extent of Rs. 64,54,309/-. When the Assessing Officer found that the claim made by the assessee is correct, this Tribunal is of the considered opinion that the CIT(A) has rightly confirmed the order of the Assessing Officer. In the absence of any other material available on record to prove the genuineness of the claim to the extent of Rs. 64,54,309/-, this Tribunal is of the considered opinion that the CIT(A) has rightly confirmed the order of the Assessing Officer. This Tribunal do not find any reason to interfere with the order of the CIT(A) Expenditure claimed by the assessee for renovation of the showroom - whether the assessee can claim the expenditure as revenue in nature? - HELD THAT - This issue was specifically considered by this Tribunal in the assessee s own case for assessment year 2002-03 when the assessee challenged the order of the Administrative Commissioner u/s 263 of the Act. This Tribunal found that the similar expenditure can be allowed as revenue in nature. Since the Co-ordinate Bench has already opined that the expenditure is revenue expenditure and merely because the Revenue s appeal against the order of this Tribunal is pending before the High Court, this Bench cannot take a different view. Moreover, the Kerala High Court in the case of Joy Alukkas India Pvt. Ltd 2014 (6) TMI 80 - KERALA HIGH COURT had an occasion to consider an identical issue. In the case before the Kerala High Court the assessee took a premises on lease and incurred expenditure for renovation. The object of the assessee was to establish a showroom in the course of its business activity. The Kerala High Court, after considering the relevant case laws on the subject, found that the similar expenditure is revenue in nature. Disallowance of lease commitment charges and donations - HELD THAT - donations were paid from the account of the assessee-firm and after receiving donation by the respective temples, the Executive Officer executed the lease deed in favour of Shri K. Mahesh. Therefore, it is obvious that the assessee-firm made the payments in the form of donation as per the direction of HR CE for obtaining the lease hold lands. Even though initially the lease deed was executed by Shri K. Mahesh and the legal heirs of the erstwhile tenants, the lease was subsequently taken from the temples directly consequent to the order of the HR CE Department. Therefore, this Tribunal is of the considered opinion that the lease commitment charges which was disclosed as donation in the books of account is for the purpose of obtaining lease holding interest of the land in question. Since the donation was made as per the direction of HR CE for the purpose of obtaining lease of the land for business purpose, this Tribunal is of the considered opinion that the payment is revenue in nature. Therefore, the orders of the lower authorities are set aside and the Assessing Officer is directed to delete the addition made towards lease commitment charges Addition towards stock discrepancy - HELD THAT - Assessing Officer himself admits that he could not identify the stock with reference to by-number provided by the assessee. If the Assessing Officer could not identify the stock with reference to by-number allotted by the assessee, this Tribunal is of the considered opinion that the method of taking inventory by the Revenue may not reflect the correct position of closing stock. When the assessee is maintaining stocks systematically by allocating by-number and also providing a system of tracking through the computer, this Tribunal is of the considered opinion that the authorities below ought to have examined the method adopted by the assessee in a detailed manner and an opportunity shall be given to the assessee to explain how the method works. However, without considering all these factors, the Assessing Officer simply came to the conclusion that there was a discrepancy. This Tribunal is of the considered opinion that the discrepancy was due to stocks remain unsold for more than one year and the assessee valued the same at the net realizable value or cost whichever is less, therefore, the CIT(A) is not justified in confirming the addition made by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to delete the addition.

Summary

Issues Involved:
1. Legality of assessment under Section 153A without incriminating material.
2. Valuation of closing stock.
3. Disallowance under Section 40A(2)(a) for excessive interest payments.
4. Disallowance of contribution to LIC Gratuity Fund.
5. Disallowance of donations.
6. Disallowance of pooja expenses.
7. Disallowance of repairs.
8. Classification of expenditure on showroom renovation.
9. Disallowance of lease commitment charges and donations.
10. Addition towards stock discrepancy.

Issue-wise Detailed Analysis:

1. Legality of Assessment under Section 153A without Incriminating Material:
The Tribunal noted that no incriminating material was found during the search operation. Section 153A mandates that all pending assessments on the date of the search would abate, and the Assessing Officer must pass a comprehensive assessment order including all disclosed incomes. Since no assessment was pending on the search date and no incriminating material was found, the Tribunal held that the Assessing Officer had no jurisdiction to frame the assessment under Section 153A. Consequently, the additions made were deleted, and the assessee’s appeal was allowed.

2. Valuation of Closing Stock:
The assessee valued the closing stock based on the method of cost or realizable market value, whichever is lower, and adjusted the value based on the stock's age. The Tribunal found this method reasonable, considering the nature of the textile business and changing fashion trends. It was noted that the stock could be identified by unique by-numbers. The Tribunal held that the Assessing Officer was not justified in doubting the valuation method, and the disallowance was directed to be deleted.

3. Disallowance under Section 40A(2)(a) for Excessive Interest Payments:
The assessee paid interest at 18% on unsecured loans, which was higher than the 13% paid on secured bank loans. The Tribunal observed that the market rate for unsecured loans was 20-24%, and the assessee paid less than this rate. It concluded that the Assessing Officer was not justified in restricting the interest to 13% and directed the deletion of the disallowance.

4. Disallowance of Contribution to LIC Gratuity Fund:
The assessee’s contribution to the LIC Gratuity Fund was disallowed as the fund was not approved by the prescribed authority. The Tribunal relied on the Supreme Court’s judgment in Textool Company Ltd., which allowed such payments if the money had gone out of the assessee’s hands. The Tribunal directed the deletion of the disallowance, treating the payment as business expenditure under Section 37.

5. Disallowance of Donations:
The assessee claimed a deduction for donations, but the Assessing Officer restricted it to 50% due to a lack of receipts. The Tribunal upheld the disallowance, noting that the assessee did not produce original receipts to substantiate the claim.

6. Disallowance of Pooja Expenses:
The assessee incurred expenses for pooja, which were disallowed by the Assessing Officer. The Tribunal found that such expenses were for business purposes, as the assessee believed in starting business activities with pooja. It directed the deletion of the disallowance.

7. Disallowance of Repairs:
For the repair expenses, the Tribunal noted that the assessee provided supporting material, and the Assessing Officer verified the claims during the remand proceedings. However, the Tribunal upheld the disallowance to the extent of Rs. 64,54,309/- due to a lack of supporting evidence.

8. Classification of Expenditure on Showroom Renovation:
The Revenue appealed against the classification of renovation expenses as revenue expenditure. The Tribunal referred to its previous decision and the Kerala High Court’s judgment, concluding that the expenditure for establishing a showroom in leased premises was revenue in nature. The Tribunal upheld the CIT(A)’s decision to allow the expenditure as revenue expenditure.

9. Disallowance of Lease Commitment Charges and Donations:
The assessee paid lease commitment charges to HR&CE, which were shown as donations. The Tribunal found that the payments were made as per HR&CE’s direction to obtain leasehold rights for business purposes. It concluded that the payment was revenue in nature and directed the deletion of the disallowance.

10. Addition towards Stock Discrepancy:
The Tribunal noted that the assessee’s stock could be tracked through a unique by-number system. The discrepancy in inventory was due to unsold stock not reflected in the physical inventory taken by the search party. The Tribunal held that the inventory method used by the Revenue did not reflect the correct position of closing stock and directed the deletion of the addition.

Conclusion:
The assessee’s appeals for certain assessment years were allowed, and others were partly allowed. The Revenue’s appeals were dismissed. The Tribunal’s decision emphasized the importance of proper valuation methods, justified interest rates, and the necessity of supporting evidence for deductions and disallowances.