2020 (3) TMI 210 - AT - Income Tax

Rejection of books of accounts u/s 145 (3) - assessee has failed to produce the books of accounts and supporting evidence - GP estimation - HELD THAT - Details of major expenses incurred by the assessee along with vouchers have been furnished before the AO and have been so examined by the AO; that record has been maintained by the assessee qua the expenditure incurred for each test conducted at various locations across the country; that payment details of all the expenditure incurred by the assessee have been duly produced before the CIT (A) who has verified the same; that expenses for hiring the invigilators and examiners for conducting the oral test for local conveyance hiring of police etc. along with vouchers have been duly brought on record and verified as such by the CIT (A); that AO without pointing out any specific/clear deficiency in bills/vouchers proceeded to reject the books of account on the basis of surmises for which assessee has not been provided any opportunity to rebut the same; that when there was no valid ground for AO to reject the books of account u/s 145 (3) the question of estimating the gross profit @ 5% of the gross receipts does not arise. AO has not recorded any categoric finding that the accounts produced by the assessee were defective or incomplete rather rejected the same eon the hyper-technical ground that certain details have not been brought on record. AO by recklessly rejecting the books of account proceeded to estimate the income by applying profit @ 5% of the gross receipt at 76, 94, 395/- whereas assessee company has already assessed its income from business at 1, 03, 37, 625/- (before depreciation). So AO for the reason best known to him has assessed the income of the assessee substantially less than the returned income. CIT (A) has rightly and validly accepted the books of account and set aside the estimation of gross profit @ 5% and proceeded to examine the sustainability of the various allowances claimed by the assessee independently. Allowable expenditure u/s 37(1) on its new project - HELD THAT - Bare perusal of the assessment order goes to prove that except for repeating the language of section 37(1) of the Act AO has not written a word as to how these expenditure claimed by the assessee are not business expenditure. Identical issue has already been decided by the Revenue in favour of the assessee in 2008-09 and such expenses have been accepted as revenue expenses in AY 2010-11 also the rule of consistency has to be followed by the Revenue particularly when there is no change in the business model and facts and circumstances of the case. So aforesaid expenditure incurred on salary hiring premises on rent business promotion expenses etc. have been rightly treated as revenue in nature by the CIT (A) with which no new assets have came into existence hence no ground is made out to interfere in the findings returned by the ld. CIT (A) consequently ground of revenue dismissed. Addition u/s 40A(2)(b) - Excessive rent paid by the assessee to its director - HELD THAT - Except for the facts that the premises at Greenwood Plaza had covered area of 1858 sq.ft. and open terrace of 462 sq.ft and the fact that new premises is in better location no new facts have been brought on record by the assessee. So we are of the considered view that ld. CIT (A) has determined the rent in the light of the facts and circumstances of the case by examining the lease deed of two premises taken on rent by the assessee company itself which is carrying out the same business in the two premises. So we find no scope to interfere into the findings returned by the ld. CIT (A). - Decided against assessee. Addition of gift of silver items - assessee has not furnished the details called for by the AO nor it is proved that such gifts are given for the purpose of business - Allowable expenses u/s 37(1) - HELD THAT - When the disallowance has already been made by the assessee company in FBT return which has been accepted by the AO no separate addition can be made which would amount to double disallowance. So we hereby delete this addition of 5, 47, 622/- sustained by the ld. CIT (A) for AY 2009-10 however subject to verification by the AO qua the facts brought on record by the assessee. Hence ground no.2 in assessee s appeal for AY 2009-10 is determined in favour of the assessee. Outstanding balance of sundry creditors namely Indoor Exteriors and Phone in Baroda - HELD THAT - When the Revenue has not disputed the fact that supplier has not supplied the goods which is apparent from the copy of account of supplier to whom payment had otherwise been made through banking channel no addition can be made on this account. So we are of the considered view that the addition is not sustainable and ordered to be deleted however subject to verification by the AO. Computation of carry forward losses and unabsorbed depreciation qua the year under assessments by the AO and confirmed by the ld. CIT (A) on the ground that the same has not been correctly computed - HELD THAT - Since it is a factual mistake pointed out by the ld. AR for the assessee AO is directed to correctly compute the carry forward losses and unabsorbed depreciation to arrive at the logical assessment. Depreciation on Innova car - HELD THAT - When the books of account have been accepted by the ld. CIT (A) and order of ld. CIT (A) has held to have been sustainable by the Bench as per findings in the preceding paras depreciation cannot be disallowed because vehicle running and its maintenance expenses have been duly charged to the accounts. Moreover when vehicle is proved to be purchased from the company s funds depreciation cannot be disallowed merely on the basis of surmises that it was not used for the business of the assessee. So car having been purchased from the company s fund though in the name of the Director and expenses as to its maintenance and running have been duly charged to the account which are audited one and have been duly accepted disallowance made by the AO and confirmed by the ld. CIT (A) is not sustainable hence ordered to be deleted.

Summary

Issues Involved:

1. Rejection of books of account under Section 145(3).
2. Disallowance of rent paid under Section 40A(2)(b).
3. Disallowance of expenditure on gifts.
4. Disallowance of outstanding balance of sundry creditors.
5. Computation of carried forward loss and unabsorbed depreciation.
6. Non-allowance of MAT credit.
7. Disallowance of depreciation on car.
8. Classification of expenditure on Project EDEXCEL.

Issue-wise Detailed Analysis:

1. Rejection of Books of Account under Section 145(3):

The AO rejected the books of account for AYs 2009-10 and 2010-11 under Section 145(3) due to incomplete records and unverifiable sundry creditors. The CIT(A) annulled this rejection, noting that the AO had inconsistently examined the books and vouchers. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO failed to provide specific deficiencies and did not offer the assessee an opportunity to rebut the findings. The Tribunal cited the Delhi High Court's ruling in CIT vs. Paradise Holidays, which states that regularly maintained and audited accounts should be considered correct unless proven otherwise by the Revenue.

2. Disallowance of Rent Paid under Section 40A(2)(b):

The AO disallowed rent payments for premises leased from a director, deeming them excessive. The CIT(A) adjusted the rent to ?85 per sq.ft. based on comparable leases, reducing the disallowance. The Tribunal found no basis to interfere with the CIT(A)'s findings, noting that the rent determination was based on lease deeds of similar premises.

3. Disallowance of Expenditure on Gifts:

The AO disallowed ?16,42,866 claimed for gifts, citing lack of supporting details. The CIT(A) partially upheld this, disallowing one-third of the expenses. The Tribunal, however, deleted the disallowance, noting that the expenses were already accounted for in the FBT return, thus avoiding double disallowance.

4. Disallowance of Outstanding Balance of Sundry Creditors:

The AO disallowed amounts related to sundry creditors. The CIT(A) upheld these disallowances. The Tribunal directed deletion of the disallowance for Phone.in Baroda, as the amount was added back in AY 2013-14. For Indoor & Exteriors, the Tribunal ordered deletion, subject to verification, as the supplier had moved abroad and the amount was not paid.

5. Computation of Carried Forward Loss and Unabsorbed Depreciation:

The assessee challenged the incorrect computation of carried forward losses and unabsorbed depreciation. The Tribunal directed the AO to correctly compute these amounts, acknowledging the factual errors pointed out by the assessee.

6. Non-allowance of MAT Credit:

The AO did not allow MAT credit for earlier years. The Tribunal directed the AO to allow the MAT credit after due verification, recognizing it as a factual mistake.

7. Disallowance of Depreciation on Car:

The AO disallowed depreciation on an Innova car registered in the director's name but purchased with company funds. The CIT(A) upheld this. The Tribunal reversed the disallowance, noting that the car was used for business purposes and its expenses were charged to the company's audited accounts.

8. Classification of Expenditure on Project EDEXCEL:

The AO disallowed ?2,26,14,880 claimed as revenue expenditure for Project EDEXCEL, treating it as capital expenditure. The CIT(A) deleted this disallowance. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure was for business purposes and similar expenses were treated as revenue in earlier years. The Tribunal emphasized the need for consistency in the Revenue's approach.

Conclusion:

The appeals filed by the assessee for AYs 2009-10 and 2010-11 were partly allowed, and the appeals filed by the Revenue for both years were dismissed. The Tribunal's comprehensive analysis upheld the CIT(A)'s decisions on key issues, ensuring proper treatment of business expenses and adherence to legal principles.