2023 (5) TMI 1000 - AT - Income Tax

Disallowance of Design and Development expenses - principal of res-judicata or consistency - contention of the assessee that similar expenses were incurred by the assessee in earlier and in subsequent years and amount was also paid to the same parties in those years but no disallowance of the expenses have been made by the AO while framing the assessment u/s 143(3) - HELD THAT - DR Submission that the principal of res-judicata is not applicable to the assessment proceedings and each assessment year has to be considered on standalone basis. We do not dispute the aforesaid preposition of DR but at the same time the Hon ble Supreme Court in the case of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through different assessment years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, then it would not be appropriate to allow the position to be changed in the subsequent year. No justification in AO for disallowing the expenses on adhoc basis and which was upheld by CIT(A). We, therefore, set aside the addition made by AO. Thus the ground of assessee is allowed. Addition on account of suppressed income from sale of Katran/Scrap material - waste generated known as Katran - HELD THAT - We find that the basis of working out the alleged sale value of Scrap that assessee ought to have earned is only on the basis of the search conducted by the AO on the internet. AO has not brought any material on record to demonstrate that the Scrap Sales found by him on the internet by various other entities were engaged in dealing with similar business as of the assessee. AO has also not stated the basis of the selection of parties, the name of the parties on the basis of which he has concluded the sale of scrap to be understated. Assessee has also demonstrated the percentage of sale of Scrap in various preceding and succeeding assessment years and percentage of waste to the sale in the year under consideration are in the same range as that of earlier and subsequent years. AO has not brought on record any concrete material to demonstrate that the sale of Scrap recorded by the assessee is understated. On the contrary he has presumed it on the basis of the working made by him on the basis of research undertaken on the internet. AO was not justified in making the estimation of Scrap Sales. Set aside the addition made by AO and upheld by CIT(A). Thus the ground of assessee is allowed.

Issues Involved:
1. Disallowance of Rs. 5,33,592/- on account of design & development expenditure.
2. Addition of Rs. 25,49,235/- on account of suppressed income from sale of Katran/Scrap Material.
3. Conversion of assessment proceedings from Limited Scrutiny to Complete Scrutiny.
4. Validity of assessment due to service of assessment order after the expiry of limitation period.
5. General grounds challenging the assessment and CIT(A) order.

Summary:

Issue 1: Disallowance of Rs. 5,33,592/- on account of design & development expenditure
The assessee, a partnership firm engaged in manufacturing ladies garments, filed its return for A.Y. 2015-16 declaring an income of Rs. 5,56,10,440/-. The AO disallowed 50% of the design & development expenses amounting to Rs. 5,33,592/- due to lack of supporting bills and invoices, particularly for payments made to a related party, Aarti Uppal. The CIT(A) upheld this disallowance. The Tribunal found that similar expenses were incurred in previous and subsequent years without disallowance, and no evidence was provided by the AO to prove the expenses were unreasonable or excessive. Relying on the principle of consistency and the Supreme Court's decision in Radhasoami Satsang vs. CIT, the Tribunal set aside the disallowance.

Issue 2: Addition of Rs. 25,49,235/- on account of suppressed income from sale of Katran/Scrap Material
The AO added Rs. 25,49,235/- to the assessee's income, alleging suppressed income from the sale of scrap material based on internet search results indicating higher market rates for such scrap. The CIT(A) upheld this addition. The Tribunal noted that the AO's addition was based solely on internet searches without concrete evidence or material on record to demonstrate that the assessee's recorded scrap sales were understated. The Tribunal found that the percentage of scrap sales to total sales was consistent with other years, and thus, set aside the addition.

Issue 3: Conversion of assessment proceedings from Limited Scrutiny to Complete Scrutiny
The assessee challenged the conversion of assessment proceedings from Limited Scrutiny to Complete Scrutiny, arguing that the AO did not follow CBDT's binding instructions. The Tribunal did not adjudicate this issue as it decided the primary issues on merits.

Issue 4: Validity of assessment due to service of assessment order after the expiry of limitation period
The assessee argued that the assessment order was served after the expiry of the limitation period. The Tribunal did not adjudicate this issue as it decided the primary issues on merits.

Issue 5: General grounds challenging the assessment and CIT(A) order
The Tribunal found these grounds academic and did not require adjudication as the primary issues were decided on merits.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal setting aside the disallowance of design & development expenses and the addition for suppressed income from scrap sales. The other grounds were rendered academic and not adjudicated.

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