2023 (2) TMI 1312 - AT - Income Tax

Disallowance of Unverified Expenses - Nature of expenses - In the statement recorded u/s 132(4) assessee had admitted that it has claimed bogus commission expenses in Ay 2009-10 - assessee took a contention that it has retracted from the statement by not disallowing these expenses while computing total income at the time of filing return of income - HELD THAT - There is no dispute that the amount is not in the nature of commission expenses i.e. the assessee has admitted that it has booked bogus expenses by way of commission payments only. Secondly it has furnished the details of materials purchased through these bills delivery challans etc. to prove receipt of materials. The assessee has also explained the reason as to why these expenses were not added to the total income while computing total income - tax authorities have ignored all these aspects on merits but placed their reliance on the statement made u/s 132(4) of the Act. The provisions of sec.132(4) enables the assessing officer to presume that the admission made in the statement may be used in the assessment proceedings. It is well settled proposition of law that it is a rebuttable presumption meaning thereby the deponent could show that the admission made by him in the statement was wrong. In the instant case in our view the assessee has rebutted the admission by furnishing evidences in support of the expenses. The very same fact that a sum of Rs.9, 86, 470/- out of the above said expenditure amount of Rs.48, 89, 052/- represents Capital expenditure (which fact has also been accepted by the AO) would show that there is merit in the submission of the assessee. For booking bogus expenses it is unlikely that anyone will account for bogus capital expenses. Accordingly we are of the view that the explanation given by the assessee on this aspect merits acceptance. Accordingly direct the AO to delete the addition - Accordingly we hold that the consequential disallowance of depreciation on the capital expenditure amount is also not warranted Bogus Purchases - AO has entirely placed his reliance on the statement given by the employees and directors of the assessee u/s 132(4) - HELD THAT - The question of suspicious dealers came to fore only on the reason that these dealers did not deposit VAT tax after issuing accommodation bills. If the assessee could get VAT credit against these bills then it may be possible to presume that the suppliers are genuine. Under these set of facts it is claimed by the assessee that the surrender towards bogus purchases was made on the technical reason that the said suppliers have not paid VAT amount which would disentitle the assessee to claim VAT credit and hence the assessee cannot effectively prove the genuineness of purchases. If the rerevised VAT returns have been accepted by the VAT authorities and the assessee got the credit of VAT amount it is submitted that the entire foundation on which the surrender was made got demolished. It is also submitted that these suppliers are not included in the list of suspicious dealers by MVAT authorities. Under these set of facts we are of the view that the assessee may be provided with one more opportunity to prove the genuineness of purchases. Accordingly this issue requires fresh examination at the end of the AO since the AO has not examined these factual aspects. Deduction expenses classified as Prior Period Expenses - assessee did not claim the above said expenses while computing return of income but claimed the same before the AO - HELD THAT - As under the mercantile system of accounting the assessee should have created provision for the expenses as at the yearend for all known expenses even if the relevant bills have not been received by that point of time. The principle that the liability accrued and crystallized during the year would apply only to those cases where the liability itself is in dispute and got finally settled in the subsequent years. Best example would be the dispute relating to Wage increment i.e. in the case of increase in wages the liability to pay increment could be known only after settlement of dispute and hence it could be claimed only in the year in which the dispute is settled i.e. an uncertainty should surround the liability itself in order to apply this principle. In the instant case there is no uncertainty with regard to all the three items of expenses listed above. Hence in our view this principle will not apply. Accordingly we are of the view that these expenses do not relate to the year under consideration and hence the claim of the assessee is liable to be rejected. Assessee s alternative claim that the Tribunal may direct the AO to allow these expenses in the year to which it pertains to - In our view the Tribunal does not have power to issue direction to the AO for a year which is not before it. However the assessee may move appropriate petition before the AO for making the additional claim in the year to which these expenses pertain to in accordance with law and the said petition may be considered in a liberal manner by the AO. Addition u/s 14A r.w.r. 8D - contention of the Ld A.R is that the dividends were received directly into its bank account and hence no expense has been incurred in earning dividend income - HELD THAT - We notice that the value of investments held by the assessee has increased by about 180 crores during the year under consideration. Besides the above the assessee has purchased and sold mutual funds to the tune of Rs.133 crores. Hence it cannot be said that it did not use various resources of its business for the purpose of carrying above said activities. It is the submission of the assessee that the increase in investments is due to increase in shares of foreign subsidiaries whose dividend income is taxable meaning thereby the exempt income has been earned mainly from units of mutual fund. Considering the investments in mutual funds and earning dividend income from them we are of the view that the provisions of Rule 8D(2)(iii) should not be applied. Accordingly we are of the view that the disallowance to be made u/s 14A may be estimated. Accordingly we direct the AO to disallow 15% of the exempt income and in our view the same would meet the requirements of sec. 14A of the Act MAT computation u/s 115JB for provision for bad and doubtful debts - HELD THAT - As the total income is computed in accordance with the provision of Income tax Act and Book profit is computed on the basis of financial statements prepared in accordance with the accounting principles and accounting standards. Even though the decision in the case of Vijaya Bank 2010 (4) TMI 46 - SUPREME COURT was rendered by Hon ble Supreme Court in the context of sec. 36(1)(vii) of the Act relating to computation of income the Hon ble High Courts have chosen to extend the said principle laid down by Hon ble Supreme Court to computation of book profit u/s 115JB of the Act wherein the accounting principles and accounting standards acquire prime importance. Thus we hold that the amount of Provision for bad and doubtful debts if reduced from the amount of Sundry debtors balance in the assets side of Balance Sheet the same would not be hit by clause (i) of Explanation 1 to sec.115JB of the Act. Accordingly we set aside the order passed by CIT(A) on this issue and direct the AO not to add the amount of Provision for bad and doubtful debts to net profit while computing book profit u/s 115JB. Disallowance of commission expenses - no dispute that the amount of disallowance cannot exceed the amount debited to the Profit and Loss account - HELD THAT - It is settled principle that each year is different and the income of one year cannot be taxed in another year. Since the commission amount of Rs.143.50 lakhs has been claimed in AY 2009-10 and since the assessee itself has accepted the same to be bogus the disallowance of above said expense has been righly made in AY 2009-10 only. It cannot be shifted to any other year. However if the very same amount has been offered voluntarily by the assessee as its income in the succeeding AY 2010-11 the assessee may move appropriate petition before tax authorities in accordance with law seeking exclusion of Rs.143.50 lakhs in that year. Deduction u/s 10B - Assessee contended that the deduction u/s 10B of the Act should be computed with reference to Profits and gains derived by 100% Export Oriented Units (Pril Oral and Goa) from exports without deducting allowances under the Income tax Act i.e. the claim of the assessee is that the deduction should be allowed on commercial profits - HELD THAT - Since the assessee is raising an altogether new issue which has not been examined by the tax authorities the ld D.R submitted that this claim of the assessee requires examination at the end of AO. We agree with the submission made by Ld D.R. Accordingly we restore this issue to the file of AO for examining this claim of the assessee. Disallowance of Mark to Market loss - assessee had revalued the derivative contracts outstanding as at the yearend in respect of foreign exchange receivable - HELD THAT - M to M loss on forward contracts was Rs.42.53 lakhs. The other two items relate to ineffective Option Contracts and Derivative asset w/off relating to option contracts . The nature of these items is not clear and we notice that no tax authority has examined these items. If these transactions have been entered in the course of carrying on of regular business activities and the underlying assets are trading items the loss arising on their revaluation at the year end is allowable as deduction. It is to be seen that the underlying assets having foreign currency exposure is also revalued as at the year end. Accordingly for the limited purpose of verifying these factual aspects we restore this issue to the file of the AO for examining this issue in the light of principles laid down .in the case of D Chetan Co 2016 (10) TMI 629 - BOMBAY HIGH COURT . Deduction u/s 35(2AB) - weighted deduction on expenses incurred outside the in-house facility - expenditure incurred prior to the date of approval - HELD THAT - As prior to 1-7-2016 Form 3CL had no legal sanctity and it is only w.e.f 1-7-2016 with the amendment to Rule 6(7A)(b) of the Rules that the quantification of the weighted deduction u/s.35(2AB) of the Act has significance. Further the date of approval shall not be cut off date for allowing scientific research expenditure u/s 35(2AB) of the Act. Whether the deduction u/s 35(2AB) could be allowed in the absence of approval of scientific research in-house facility by DSIR? - Under the provisions of sec.35(2AB) approval of in-house research facility is a mandatory condition for allowing deduction under that section. Accordingly if no approval of scientific research facility is available then the deduction u/s 35(2AB) is not allowable. In the instant case the Ld D.R took us to the copy of approvals placed in the paper book and submitted that approval of some of the research facilities are not available. Further the assessee has not furnished the break-up details of scientific research expenses incurred in each of the research facility centre. Accordingly we are of the view that these factual aspects require verification at the end of AO. Accordingly we are restoring this issue to the file of AO for the limited purpose of obtaining the details of scientific research expenses incurred in each of the approved in-house facility and then examine the issue in the light of discussions made supra. Deduction of ESOP expenses - assessee is entitled for deduction of ESOP expenses when the rights are vested in the hands of the assessee - assessee has stated before the AO that it has not debited above said amount in its books of account. However before CIT(A) it has been claimed that the discount was amortised over the vesting period - HELD THAT - In the instant case it is not clear as to whether the year under consideration i.e. FY 2008-09 is the vesting period for the amount of Rs.5, 74, 85, 066/- claimed by the assessee. In the written submission it is stated by the assessee that the above said amount represents value of fringe benefit of ESOP exercised by the employees during the year under consideration. Hence it is required to be examined in the instant case as to whether the period of vesting and period of exercising of option is one and the same by examining two ESOP schemes referred. Even though under the Income tax Act entries whether made or not in the books of account are not relevant in our view it is required to be examined as to whether there is mandatory statutory requirement to account for discount or not and further its impact on computation of income. In our view all these factual aspects require verification at the end of AO. Accordingly we set aside the order passed by the Ld CIT(A) on this issue and restore the same to the file of AO to examine the above said factual aspects and decide the issue in the light of discussions made supra.

Summary

Issues Involved:
1. Disallowance of unverified expenses.
2. Disallowance of bogus purchases.
3. Deduction of prior period expenses.
4. Disallowance u/s 14A of the Act.
5. Deduction of provision for bad and doubtful debts u/s 115JB.
6. Disallowance of commission expenses.
7. Deduction u/s 10B of the Act.
8. Disallowance of mark to market loss.
9. Deduction u/s 35(2AB) of the Act.
10. Deduction of ESOP expenses.

Summary:

1. Disallowance of Unverified Expenses:
The assessee admitted to booking bogus commission expenses of Rs. 4,76,34,543/- in AY 2009-10. However, only Rs. 4,27,45,491/- was admitted in the return filed u/s 153A. The AO added Rs. 39,02,582/- to the total income, which was confirmed by the CIT(A). The Tribunal held that the explanation by the assessee regarding the nature of expenses was valid and directed the AO to delete the addition of Rs. 39,02,582/-.

2. Disallowance of Bogus Purchases:
The assessee admitted to accounting for bogus purchases of Rs. 10,00,88,095/-. The AO disallowed Rs. 7,90,83,655/-, which was confirmed by the CIT(A). The Tribunal noted that the assessee had revised VAT returns and provided additional evidence. The issue was remanded to the AO for fresh examination.

3. Deduction of Prior Period Expenses:
The assessee claimed Rs. 4,91,608/- as prior period expenses. The AO rejected the claim, citing the decision in Goetze (India) Ltd. The Tribunal upheld the rejection, stating that the expenses did not relate to the year under consideration.

4. Disallowance u/s 14A of the Act:
The assessee disallowed Rs. 89.79 lakhs u/s 14A but later claimed no expenditure was incurred. The CIT(A) restricted the disallowance to the amount of exempt income. The Tribunal directed the AO to disallow 15% of the exempt income.

5. Deduction of Provision for Bad and Doubtful Debts u/s 115JB:
The assessee added Rs. 23.50 million to the net profit while computing book profit u/s 115JB. The Tribunal held that if the provision is reduced from the sundry debtors balance, it would not be hit by clause (i) of Explanation 1 to sec. 115JB and directed the AO not to add the provision to the net profit.

6. Disallowance of Commission Expenses:
The AO disallowed Rs. 152.26 lakhs paid to M/s Tuticorin Trexim P Ltd. The CIT(A) restricted the disallowance to Rs. 143.50 lakhs. The Tribunal held that the disallowance should be restricted to Rs. 143.50 lakhs and allowed the assessee to seek exclusion of the amount in AY 2010-11.

7. Deduction u/s 10B of the Act:
The assessee claimed that the deduction u/s 10B should be computed on commercial profits. The Tribunal restored the issue to the AO for examination.

8. Disallowance of Mark to Market Loss:
The AO disallowed Rs. 3.39 crores as notional loss. The CIT(A) deleted the disallowance, following the decision of the Bombay High Court. The Tribunal remanded the issue to the AO for verification of the nature of transactions.

9. Deduction u/s 35(2AB) of the Act:
The AO rejected the claim for weighted deduction on expenses incurred outside the in-house facility. The CIT(A) allowed the deduction. The Tribunal held that expenses on clinical trials outside the facility are eligible for deduction and remanded the issue to the AO for verification.

10. Deduction of ESOP Expenses:
The AO rejected the claim for ESOP expenses. The CIT(A) allowed the claim, following the decision in Biocon Ltd. The Tribunal remanded the issue to the AO to verify the factual aspects.

Conclusion:
The Tribunal provided detailed directions for each issue, remanding several issues back to the AO for fresh examination and verification. The appeals were partly allowed, and the cross-objection by the assessee was allowed.