2021 (3) TMI 475 - AT - Income Tax

Validity of the assessment framed by AO against the assessee u/s 153A - HELD THAT - As in view of the assessee no incriminating material or any undisclosed income was found during the course of search operations conducted by Revenue against the assessee on 27.08.2009 u/s 132(1) but however, before us no contention were raised by assessee challenging the validity and illegality of the assessment framed pursuant to search on the ground that no incriminating material or undisclosed income was found during the course of search operations. We have observed from assessment order passed by AO that several additions were made based on material /documents seized by Revenue during the course of search and seizure operations conducted by Revenue, u/s 132(1) of the 1961 Act on 27.08.2009. Thus, we dismiss Grounds No. 1 and 2 raised by assessee in memo of appeal filed with the tribunal. We order accordingly. Provision for expenses towards scheme for sale promotion carried on by the assessee - HELD THAT- It is for the businessman to arrange their affairs and not for tax authorities to decide the manner in which businesses are run, unless malice is at writ large on the part of the tax-payer to defraud revenue with an intent to evade taxes . Thus, the expenses which are genuine and bonafide expenses incurred wholly and exclusively in connection with the business of the tax-payer are to be allowed as business deduction while computing income chargeable to tax, keeping in view mandate of provision of Section 37(1) - The authorities below have not verified the claim of the assessee as to the genuineness and bonafide of the claim of sale promotion expenses as the AO disallowed the same on the grounds that these are bogus expenses while ld. CIT(A) held the same to be contingent and also that the provision is not properly made in terms of scheme of sales promotion of the assessee. The assessee has not brought on record working of sales promotion expenses payable to various buyers, meeting of targets by buyers and liability crystalized as per scheme run by assessee. The assessee has also not brought on record sales promotion scheme conducted by it before the AO, nor ld. CIT(A) remanded the matter to the file of the AO for seeking remand report from AO as the sale promotion scheme was filed for the first time before ld. CIT(A) as additional evidences. In our considered view keeping in view totality of facts and circumstances of the case and in the interest of justice and fair play, the matter needs to be restored back to the file of the Assessing Officer for fresh/denovo consideration of the issue on merit in accordance with law. The assessee has claimed these expenses in its book of accounts as business expenses, and deduction of these sales promotion expenses from the income is claimed and hence primary onus is on the assessee to prove that they are genuine and bonafide expenses which are incurred wholly and exclusively for the purpose of business of the assessee, thus satisfying the mandate of Section 37(1). Difference in the amounts reflected in the material seized during the course of search and seizure operation carried out by Revenue against the assessee u/s 132(1) of the 1961 Act on 27.08.2009, with that of the audited financial statements prepared by the assessee for the financial year ended 31.03.2009 - HELD THAT - Once the assessee has Head office, branches and units at different locations, the assessee s audited financial statements shall be prepared in consolidated form after taking into financials of all the units and offices, and it is not permissible for AO to solely depend upon Kanpur Branch account to ascertain income chargeable to tax, unless it is proven that either no expenses were incurred at other locations or no income were earned at other location, or they consisted bogus entries to defraud Revenue. The onus is on the assessee to prove that the expenses incurred at various locations were incurred wholly and exclusively for the purposes of the business of the assessee and that they satisfy the mandate of Section 37(1) of the 1961 Act and, on the other hand the onus is on the AO to prove that these expenses are incurred with malice to defraud the Revenue . Same is the case with income. However, we have observed that the assessee has not produced stock register before the authorities below. The assessee is claiming the expenses while computing income chargeable to tax and the onus is on the assessee to prove that these are genuine and bona fide expenses incurred wholly and exclusively for the purposes of the business of the assessee. We have also observed that the assessee is registered with Central Excise Department and is also covered under VAT. In our considered view keeping in view totality of facts and circumstances of the case and in the interest of justice and fair play, the matter needs to be restored back to the file of the Assessing Officer for fresh/denovo consideration of the issue on merit in accordance with law. The assessee has claimed these expenses towards raw material, consumables, packing material etc. in its book of accounts as business expenses, and deduction of these expenses from the income is claimed and hence primary onus is on the assessee to prove that they are genuine and bonafide expenses which are incurred wholly and exclusively for the purpose of business of the assessee, thus satisfying the mandate of Section 37(1) of the 1961 Act, and the closing stock truly reflected the stock actually held by assessee at the year end. The assessee is directed to submit all relevant details/documents including unit wise accounts and also consolidated accounts to reconcile the differentials, stock records, excise records, VAT records etc. before the AO during the course of denovo assessment proceedings for determination of this issue on merit in accordance with law and for computing income chargeable to tax in accordance with provisions of the 1961 Act. Thus, we are remitting this matter back to file of the Assessing Officer with a direction to assessee to produce all the relevant records including unit wise accounts reconciling with consolidated accounts, stock records, excise records, VAT records etc. before the Assessing Officer to prove that the expenses were incurred wholly and exclusively for the purpose of business of the assessee and they are bona fide and genuine expenses incurred for the business of the assessee and the stock truly reflected the stock held by assessee at a given point of time . The assessee is required to prove consumption of raw material, packing material, consumables etc. viz.-a-viz. production/manufacturing and also keeping in view its past track record in the earlier year of consumption of material viz.-a-viz. production/ manufacturing carried on by it in the earlier years. Appeal of the assessee on this issue is allowed for statistical purposes.

Issues Involved:
1. Jurisdiction and validity of assessment orders under Section 153A of the Income Tax Act.
2. Disallowance of expenses for the assessment year 2005-06.
3. Addition based on seized material for the assessment year 2009-10.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of Assessment Orders under Section 153A:
The assessee challenged the jurisdiction and validity of the assessment orders passed under Section 153A of the Income Tax Act for both assessment years 2005-06 and 2009-10. The contention was that no incriminating material or undisclosed income was found during the search operations conducted on 27.08.2009. However, the tribunal observed that several additions were made based on materials/documents seized during the search. Consequently, the tribunal dismissed Grounds No. 1 and 2 raised by the assessee, affirming the jurisdiction and validity of the assessment orders under Section 153A.

2. Disallowance of Expenses for the Assessment Year 2005-06:
The assessee contested the disallowance of ?14,77,400/- towards sales promotion expenses. The assessee argued that the provision for these expenses was made at 6% of total sales as per the sales promotion scheme, and the liability was incurred in the assessment year 2005-06, although payments were made in the subsequent year. The tribunal noted that the authorities below had disallowed these expenses, with the Assessing Officer (AO) treating them as bogus and the Commissioner of Income Tax (Appeals) [CIT(A)] considering them contingent and improperly estimated.

The tribunal found that the claim of sales promotion expenses was not adequately verified by the AO and that the assessee failed to provide sufficient evidence, such as the sales promotion scheme and detailed working of the expenses. Consequently, the tribunal remitted the matter back to the AO for fresh consideration, directing the assessee to submit all relevant details and documents. The AO was instructed to provide proper and adequate opportunity of being heard to the assessee and to admit evidences filed by the assessee in its defense.

3. Addition Based on Seized Material for the Assessment Year 2009-10:
The addition for the assessment year 2009-10 was based on the difference between amounts reflected in seized materials during the search and the audited financial statements. The AO adopted the profit reflected in the seized tally accounts, while the CIT(A) confirmed the addition for the differential in the closing stock amounting to ?1,79,15,749/-.

The tribunal observed that the assessee failed to substantiate its claim of reconciliation and did not produce stock registers to demonstrate the consumption of raw materials, consumables, and packing materials. The tribunal noted that year-end adjustments are common while finalizing audited financial statements and that the assessee's accounts should reflect the true and fair view of the business.

Given the complexity and the need for detailed verification, the tribunal remitted the matter back to the AO for fresh consideration. The assessee was directed to provide all relevant records, including unit-wise accounts, stock records, excise records, and VAT records, to reconcile the differences. The AO was instructed to ensure that the expenses were genuine and incurred wholly and exclusively for the business purposes of the assessee.

Conclusion:
Both appeals filed by the assessee for the assessment years 2005-06 and 2009-10 were allowed for statistical purposes, with directions for fresh consideration and verification by the AO. The tribunal emphasized the need for adequate opportunity of being heard and proper verification of all relevant details and documents in accordance with the principles of natural justice.

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