2015 (7) TMI 50 - AT - Income Tax

Rejection of books of accounts - addition being estimated profit @ ₹ 4000/- per motor cycle sold - CIT(A) held the rejection of the books of account of the assessee to be not correct and deleted the addition - Held that - Alleged difference in the quantity shown in Form No.3CEB and the quantitative details furnished by the assessee, as per the Assessing Officer, during the quarter April-June, 2005, as per the 3 CEB report, the figure was of 3138 motorcycles, whereas the quantitative details of 07.12.2009 showed a figure of ₹ 1025 motorcycles, giving a discrepancy of 2113 motorcycles and there was a similar discrepancy for July-December, 2005 and January-March, 2006. The assessee, in its letter dated 17.12.2009, had stated that the details contained in Form 3 CEB were with reference to the royalty paid/payable by the assessee company and they were not the details of production, i.e., not the number of motorcycles produced by the assessee company. A reconciliation had been filed by the assessee regarding the sale on which royalty had been paid and the sales during the year. The Assessing Officer did not meet this explanation of the assessee and rather concluded, without any basis, that the assessee was maintaining different sets of books of account. Before the Ld. CIT (A), Annexure V to the Form 3CEB was pointed out to show that in the Form 3CEB, the number of motorcycles produced had nowhere been stated. In its written submissions filed before the Ld. CIT (A), the assessee requested for calling for a specific comment by the Assessing Officer in this regard. The CIT (A) called for a remand report from the Assessing Officer. The Assessing Officer submitted not one, but two remand reports. However, the contention of the assessee was nowhere rebutted in either of these remand reports. In the first remand report the assessee's contention was not even dealt with and even in the second one, it was not rebutted. In response thereof, the Ld. CIT (A) found the stand taken by the assessee to be correct. The Form 3CEB filed before the Assessing Officer was found to be not about the number of motorcycles produced by the assessee during the period, rather, it was found to be concerning the royalty paid by the assessee company during the relevant quarter. The Ld. CIT (A) noted that besides, the assessee had furnished a complete reconciliation before the Assessing Officer, as also incorporated in the assessment order. This reconciliation had, however, been arbitrarily rejected by the Assessing Officer. It was in these circumstances, that the Ld. CIT (A) held and, in our considered opinion, for the aforegoing discussion, correctly so, that the Assessing Officer had erred in concluding that there had been a difference in the sales and quantitative details of the assessee. AO observed that the average sales of motorcycles by the assessee during the year was low, as compared to the preceding assessment year - Held that - Assessee had maintained that there had been a change in the product mix during the year; that in the preceding year, the motorcycle 'Enticer' had been sold, which was not so in the year under consideration; that there had been a decrease in the sale price to meet the competition in the market; that the figures were based on the books of account, in which, no discrepancy had been found; that the assessee had not been shown to have charged from its dealers any price more than that stated in the sale invoice and the books of account; and that the Assessing Officer had not pointed out any error in respect of any sale. It was on the basis of this, that the Ld. CIT (A) observed that there was no justification for the Assessing Officer to make an assumption that the sale price charged by the assessee during the year was lower than that in the preceding year. Now, When the Assessing Officer has, neither in the assessment order, nor in either of the remand reports, been able to rebut the categorical assertions of the assessee in this regard, as to how the Ld. CIT (A) has erred in accepting the assessee's contention, has not been made out before us. Obviously, 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 Assessing Officer to assume that the sale price charged by the assessee company was under-stated and the Assessing Officer evidently erred in making such assumption. As correctly noted by the Ld. CIT (A), unless there is material evidence to disprove the contention of the assessee, the sale stated in the books of account needs must be accepted. Therefore, the Ld. CIT (A) has rightly held that on this score, the books were rejected by the Assessing Officer merely by indulging in surmises. Assessee's explanation regarding the losses incurred by it as compared to the profits earned by other competitors was not acceptable - Held that - Before us, nothing has been brought to support this action of the Assessing Officer. Obviously, 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. Therefore, in the presence of the said factors, without doubt, the losses suffered by the assessee cannot be said to be either bogus, or inflated. The Assessing Officer 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 as sale price higher than that noted in the books of account. Rather, the Assessing Officer arbitrarily compared the case of the assessee with other successful companies, which can never lead to appropriate estimation of profit of a loss bearing company like the assessee.In view of the above, on this issue also, the Ld. CIT (A) has correctly held the rejection of the books of the assessee by the Assessing Officer to be incorrect. Assessee had been selling motorcycles at a lower price to its holding and subsidiary companies as compared to its domestic sales - Held that - The assessee had stated that it was entitled to DEPB benefits in respect of its export sales and if the total DEPB benefits were added to the export sale price, the effective export price would be substantially higher in comparison to the domestic sale price. The TPO's order dated 13.11.2009 was also brought forth, wherein, on considering the export sales made by the assessee company to its holding company and subsidiary companies, the TPO had accepted the price of export shown by the assessee as being at arm's length. These contentions of the assessee as well as the TPO's order were found by the Ld. CIT (A) to have been ignored by the Assessing Officer. The comparative chart submitted by the assessee had also not been found by the Assessing Officer to contain any discrepancy. In the remand report dated 22.09.2010 also, the Assessing Officer was not found to have entered any rebuttal to the assessee's contentions. After rejoinder to the remand report even in the second remand report, the Assessing Officer was found to have passed only peripheral orders of estimation of profit without answering the assessee's submission. It was on this that the Ld. CIT (A) correctly held that in absence of material, the Assessing Officer could not tinker with the price determined by the TPO. - Decided against revenue. Estimation of the average profit per bike sold - whether the Assessing Officer has given due allowance for the change in product mix, competition and the assessee's smaller scale of operation? - Held that - As regards the estimation of profit at ₹ 4000 per motor bike, we are of the view that estimation of profit can be resorted to only when there is a discrepancy in the books of account which makes the determination of the profit or loss difficult. Since there is no discrepancy in the books of account and the books of account having been accepted, the profit or loss has to be determined as per the books of account and not on estimation basis. We further notice that the assessee has given reasons for the losses being incurred by it. The assessee's explanation about the losses being low market share, low capacity utilization, higher inventory ratio, high personnel cost, etc. had been rejected by the AO arbitrarily. In this regard the CIT(A) correctly appreciated the facts - - Decided against revenue. Disallowance of royalty payments by the assessee company to its 100% holding company - CIT(A) deleted the disalowance - Held that - It cannot be gainsaid that any expenditure incurred wholly and exclusively for the purposes of business is an allowable expenditure, even though, as in the present case, the payment is made to a 100% shareholding company of the payer. That apart, u/s 40A (2) of the Act, it is only the fair value of such expenditure, which is allowable. Besides, the arm's length price provisions take care of the payment in such transactions being at arm's length, as has been done in the present case by the TPO. The Assessing Officer 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, as observed. Therefore, finding no merit therein - Decided against revenue. Carry forward and set off of brought forward business losses and unabsorbed depreciation - CIT(A) deleted the disalowance - Held that - in accordance with the provisions of Section 79 of the IT Act, if on the last day of the previous year, the shares of the company carrying not less than 51% of the voting power were not beneficially held by persons beneficially holding shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred, any loss incurred in any year prior to the previous year shall not be carried forward and set off against the income of the previous year. There is no dispute to the requirement of Section 79, as above, of the Act. Now, herein, the previous year relevant to Assessment 2001-02 ended on 31.03.2001. On that date, Yamaha Japan was having a shareholding of 74%, which is obviously more than the requisite 51% voting power, as envisaged under Section 79 of the Act. This position undisputedly continued upto the last date of the previous year relevant to the year, under consideration (Assessment Year 2006-07). In other words, Yamaha Motor Company Japan, continued to hold 74% share as on 31.03.2006. This being the position, it has not been shown as to how the assessee company was not eligible to set off its losses from Assessment Year 2001-02 onwards, as correctly noted by the Ld. CIT (A). Apropos the unabsorbed depreciation, however, the Ld. CIT (A) correctly notes the provisions of Section 79 of the Act to be inapplicable. The correct position, as observed, is that the unabsorbed depreciation becomes the depreciation of the subsequent year and in case of change in shareholding pattern also, there is no bar on the unabsorbed depreciation, as laid down by the provisions of Section 32 (2) of the Act. Thus, it is seen that the Ld. CIT (A) has correctly held the assessee company to be entitled to carry forward its losses only from Assessment Year 2001-02, while the losses for earlier years are not entitled. The unabsorbed depreciation has also been correctly allowed to be carried forward by the Ld. CIT (A) holding the provisions of Section 32 (2) of the Act, rather than those of Section 79, to be applicable on this score. Nothing has been brought before us by the department so as to persuade us to differ from the perfectly legal and justified reasoning adopted by the Ld. CIT (A) - Decided against revenue. Disallowance of expenses incurred by the Appellant under Voluntary Retirement Scheme - Held that - Consequential impact of the VRS expenditure incurred by the assessee in the earlier years That such incurrence of expenditure is not in accordance with the mandate of the provisions of Section 35BDA of the Act, has not been shown before us by the department. The Assessing Officer did not accord any reason for the disallowance, even in the remand report. Too, even though the difference, as pointed out by the Assessing Officer in the assessment order, was only of ₹ 4.84 crores, the CIT (A) sustained a disallowance of ₹ 10 crores and that too, without any basis. The CIT (A), we find, was not correct in holding that the VRS expenditure shown in the computation had not been properly explained by the assessee. The Ld. CIT (A) confirmed the disallowance oblivious of the aforediscussed provisions of Section 35BDA of the Act, as squarely applicable to the case of the assessee. Therefore, we are not at one with the Ld. CIT (A) on this aspect and the grievance of the assessee is found to be justified and is accepted. The Assessing Officer is, thus, directed to delete the addition. - Decided in favour of assessee. Disallowance of spares, stores and tools consumed by the assessee - Held that - There exists nothing on record to show that the expenditure under spares, stores and tools is the same as that debited under the head of purchases. To reiterate, no discrepancy whatsoever has been shown or pointed out in the books of account of the assessee, particularly on this account, even though the assessee's books of account, undisputedly, were subjected to audit and the auditors had certified the Profit Loss Account of the assessee to be giving a true and fair view of the profit/loss earned by the assessee during the year under consideration. It is only by way of a bald assumption that the claim of the assessee has been dubbed to be a double claim, without proving it to be so. It has not been disputed before us that there were two different accounts of expenditure, both being allowable under the Act and both having been incurred by the assessee wholly and exclusively for its business purposes.- Decided in favour of assessee. Computation of capital gain - difference in the computation arose for the reason that the Assessing Officer had disallowed indexation of the land, holding that land is a depreciable asset, had zero rate of depreciation - Held that - The basic observation made concurrently by the taxing authorities, to the effect that land is a depreciable asset, is ipso facto erroneous. The position is quite to the contrary. Land, it is trite law, is not a depreciable asset. This position stands duly supported, as rightly contended on behalf of the assessee, by the provisions of Section 32 (1) of the Act, wherein, depreciation is allowed, inter alia, in respect of building, machinery, plant or furniture. It is to be stressed that in this connection there is no mention of 'land'. Were the situation otherwise, that is to say, land was a depreciable asset, it would definitely have found mention in Section 32 (1). Then, in Appendix I to the Income-tax Rules, depreciation rates have been provided. These rates, again, are with reference to building, furniture, machinery and plant only. Again, 'land' does not find mention therein. It cannot be gainsaid that Rules are to supplement and make workable the provisions of the Act and, therefore, the absence of 'land' in the said Appendix to the Rules is also indicated of the fact that it was never the intention of the legislature to bring and within the definition of depreciable assets. Otherwise two, in today's worlds it would be difficult to imagine land to be a depreciable asset. Rather, quite to the countrary. Nothing opposed to this has been brought before us. Thus the assessee is entiled to indexation in respect of the value of its land and the Assessing Officer erred in making disallowance in this regard. - Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of books of accounts and deletion of estimated profit addition.
2. Discrepancies in sales and quantitative details.
3. Comparison with competitors and profit estimation.
4. Royalty payments and their disallowance.
5. Carry forward and set off of brought forward business losses and unabsorbed depreciation.
6. Disallowance of expenses under Voluntary Retirement Scheme (VRS).
7. Disallowance of expenses on spares, stores, and tools.
8. Computation of capital gains and indexation of land.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts and Deletion of Estimated Profit Addition:
The Assessing Officer (AO) rejected the books of accounts of the assessee, citing discrepancies in sales and quantitative details, and made an addition of Rs. 106,08,48,000/- by estimating profit at Rs. 4000/- per motorcycle sold. The CIT(A) held the rejection of books to be incorrect and deleted the addition. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not provide sufficient evidence to support the rejection and that the assessee's explanations were reasonable and substantiated.

2. Discrepancies in Sales and Quantitative Details:
The AO observed discrepancies in the quantity of motorcycles shown in Form 3CEB and the monthly production chart. The assessee clarified that Form 3CEB details were related to royalty payments, not production. The CIT(A) accepted this explanation, and the Tribunal found no reason to interfere, as the AO failed to rebut the assessee's clarification.

3. Comparison with Competitors and Profit Estimation:
The AO compared the assessee's profit with that of Hero Honda Motors Ltd. and Bajaj Auto Ltd., estimating an average profit of Rs. 4000/- per bike. The CIT(A) rejected this comparison, noting that the AO ignored the assessee's specific reasons for losses, such as low market share and high costs. The Tribunal agreed, emphasizing that profit estimation should be based on the assessee's actual receipts and expenditures, not arbitrary comparisons.

4. Royalty Payments and Their Disallowance:
The AO disallowed Rs. 71,65,41,721/- paid as royalty to the holding company, treating it as siphoning off profits. The CIT(A) deleted the disallowance, noting that the Transfer Pricing Officer (TPO) had accepted the royalty payments at arm's length price. The Tribunal upheld this decision, stating that the AO failed to provide evidence of any services not rendered and that the royalty payments were justified and properly documented.

5. Carry Forward and Set Off of Brought Forward Business Losses and Unabsorbed Depreciation:
The AO disallowed the carry forward of losses and unabsorbed depreciation, citing a change in shareholding. The CIT(A) allowed the carry forward from AY 2001-02 onwards, noting that Yamaha Motor Company Ltd. held more than 51% shares since May 26, 2000. The Tribunal agreed, emphasizing that the shareholding pattern met the requirements of Section 79 of the Income Tax Act.

6. Disallowance of Expenses under Voluntary Retirement Scheme (VRS):
The AO disallowed Rs. 10 crore out of VRS expenses, questioning the quantum claimed. The CIT(A) upheld the disallowance, but the Tribunal deleted it, noting that the assessee's claim was in accordance with Section 35DDA of the Act and that the AO failed to provide a valid basis for the disallowance.

7. Disallowance of Expenses on Spares, Stores, and Tools:
The AO disallowed Rs. 8.77 crore, treating it as a double deduction. The CIT(A) upheld the disallowance, but the Tribunal deleted it, noting that the expenses on spares, stores, and tools were separate from raw material purchases and were properly accounted for in the books.

8. Computation of Capital Gains and Indexation of Land:
The AO computed capital gains at Rs. 114,52,66,153/- without allowing indexation of land, treating it as a depreciable asset with a 0% depreciation rate. The CIT(A) upheld this computation, but the Tribunal disagreed, stating that land is not a depreciable asset and that the assessee is entitled to indexation benefits.

Conclusion:
The Tribunal dismissed the department's appeal and allowed the assessee's appeal, confirming the CIT(A)'s decisions on all issues except for the disallowance of VRS expenses and spares, stores, and tools, which were deleted by the Tribunal. The Tribunal emphasized the need for proper evidence and substantiation in making disallowances and rejections of claims.