9911796707
TMI Blog2010 (6) TMI 655X X X X Extracts X X X X X X X X Extracts X X X X ..... eting the addition of Rs. 8,65,314 on account of disallowance under section 40A(2)( b ) of the Income-tax Act. The Assessing Officer stated that the assessee had made huge payment of Rs. 86,53,144 to Ashoka Textools, Avnhesh Industries, Setu Engineers Pvt. Ltd. and Alidhara Techotex Industries which is a person specified under section 40A(2)( b ) of the Income-tax Act. The Assessing Officer asked the assessee to give justification of the expenditure. The assessee replied that labour work was done through the parties covered by the above provisions. All these parties are assessed to tax at maximum marginal rate. The explanation of the assessee was, however, not accepted on the reason that the assessee has not followed due diligence has not invited tenders to obtain minimum price. The Assessing Officer accordingly, disallowed 10 per cent of the entire expenditure and made the addition. The addition was challenged before the learned CIT(A) and same facts were explained. It is also stated that the disallowance is ad hoc in nature and based on surmises and conjectures. The Assessing Officer cannot disallow 10 per cent of the expenditure without bringing on record as to how the expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed on record. He has also relied upon the decision of the Hon ble Bombay High Court in 301 ITR 306 but no relevant case law was found on that page. 5. We have considered the rival submissions and the material available on record and do not find any justification to interfere with the order of the learned CIT(A). ITAT Ahmedabad Bench in the case of Mahavir Dyeing Print Mills (P.) Ltd. ( supra ) considering the provisions of section 40A(2)( b ) of the Income-tax Act held as under : "4. We have heard both the sides and also carefully perused the orders of the authorities below as far as applicability of provision of section 40A(2)( b ) is concerned, the Act prescribed that where an assessee incur any expenditure in respect of which payment has been made to any of a person referred therein then in the opinion of the Assessing Officer such expenditure is excessive or unreasonable, having regard to the fair market value of the goods or services or facilities for which the payment is made, then so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable shall not be allowed as a deduction. On careful readings of this section 4, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on record against the assessee that unreasonable or excessive payment was made to the sister concern as compared with the fair market value. The Assessing Officer has not pointed out in the assessment order as to what is the unreasonable or excessive payment made to the sister concern. All the parties are assessed to tax. Therefore, ad hoc addition disallowing the expenditure by 10 per cent is not justified in the matter. Considering the facts of the case as noted above, we do not find it to be a fit case for interference. We accordingly, dismiss this ground of appeal of the revenue. 7. On ground No. 2 of the appeal, the revenue challenged the deletion of addition of Rs. 10 lakhs in respect of income on account of low net profit. In the assessment order, the Assessing Officer has stated that the assessee has not shown correct value of semi-finished goods/work-in-progress. No day-to-day quantitative consumption has been maintained. Record of consumption was also not maintained. The stock register is also not maintained. The assessee is a manufacturer of textile machinery and machinery parts. The assessee has failed to show the correct value of work-in-progress and also the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has pointed out that it has been maintaining RG-1, RG-23A and various other registers prescribed by the Excise authorities. However, as per the settled position of law even if the books of account are rejected, addition has to be made by giving some specific basis and it cannot be ad hoc. In the present case although some defects have been pointed and gross profit has fallen substantially but except for pointing out an inadequate method of semi-finished goods/work-in-progress, the Assessing Officer has not been able to point out any major defect. He undervaluation of semi-finished goods and goods in transit has already been taken care of by the addition made by the Assessing Officer and confirmed in this order. Besides this, no specific defect has been pointed out and no basis for addition of Rs. 10,00,000 cannot therefore be sustained. Hence, the addition is deleted and these grounds of appeal are allowed." 8. The learned DR relied upon the order of the Assessing Officer and submitted that there is a fall in the gross profit rate in the assessment year under appeal. The Assessing Officer has verified the books of account in which work-in-progress was not found verifiable. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 999] 239 ITR 161 . He has further submitted that in the assessment year under appeal the assessee has shown total sales of Rs. 31.25 crores on which gross profit rate of 24.35 per cent has been shown. He has submitted that in the assessment year 1998-99 the Assessing Officer under section 143(3)/147 of the Income-tax Act vide order dated 10-3-2006 accepted the gross profit rate of 24.94 per cent on the total sales of Rs. 3.78 crores. He has submitted that the order for assessment year 1998-99 was passed on 10-3-2006 and the assessment order in the present appeal is passed at the same time on 16-3-2006. There was no reason to make ad hoc addition. He has submitted that the total gross profit of the assessee in the assessment year under appeal is much higher as compared to the assessment year 1998-99. Copy of the assessment order for assessment year 1998-99 is filed in the paper book at page 63. 9. We have considered the rival submissions and the material available on record and we do not find it to be a fit case for interference in the matter. The assessee explained before the Assessing Officer that the assessee developed a new machine and the production was also not enough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT(A) it is clear that the Assessing Officer has not pointed out any specific defects in any of the sales or purchases or expenses. The Assessing Officer merely pointed out that there is some discrepancies in the work-in-progress of which the assessee has declared Rs. 1,51,855 on account of closing stock of material. The Assessing Officer therefore, could have made separate addition to that extent for which the Assessing Officer also made estimated addition of Rs. 5 lakhs. However, there was no reason to reject the entire book results of the assessee or to make the huge addition. The learned Counsel for the assessee also submitted that the assessee maintained books of account in the same pattern and same method of accounting has been adopted by the assessee in the earlier years in which also no defect has been pointed out. In the assessment year 1998-99 even the gross profit of 24.94 per cent has been accepted in the order under section 143(3) of the Income-tax Act. In the case of Samir Diamond Exports Ltd. ( supra ) relied upon by the Assessing Officer the assessee admitted before the Assessing Officer that it did not maintain details of polished diamonds on the basis of weig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer observed that the assessee had not shown closing stock of either the work-in-progress or the semi-finished goods. Even the closing stock of finished goods was not shown. The assessee explained that work-in-progress was shown with labour expenses but the overhead expenses were not included in the work-in-progress. The assessee further stated that since the addition of closing stock would be opening stock in the next year and since the rate of taxation is same for both the years no disturbance to the closing stock should be made. But the Assessing Officer did not accept the contention of the assessee. The Assessing Officer relied upon the decision of the Hon ble Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 . The Assessing Officer has reproduced the inventory of the closing stock enclosed with the return of income in table C in Para 5.8 of the assessment order. From this table it was noted that the assessee has not shown either the work-in-progress or the finished goods closing stock. Only the closing stock shown was with all the raw materials. Therefore, according to the Assessing Officer, the contention of the assessee that work-in-progres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee reiterated the same submissions made before the authorities below and submitted that the assessee maintained proper records and excise duty is also paid. The quantitative details in respect of excisable materials are entered in excise record RG-23A. It was stated that the raw materials used for the production are also recorded in the register. The production and sales of finished goods are recorded in RG-1 register; complete quantitative details were given by the assessee and verified by the auditor. The auditor has not mentioned anything against the assessee and mentioned in the audit report PB-24 that stock of finished goods and spare etc. have been physically verified by the management and the verification is reasonable. Similarly, procedure of physical verification of stock followed by the management was found reasonable and adequate in relation to the size of the company in which no discrepancy has been noticed on verification. He has submitted that no under valuation of stock was found. The raw materials issued and sent to the machine are verifiable. Work-in-progress is included in the raw material. Total is 419.24 as noted by the Assessing Officer at page 4 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the rival submissions and the materials available on record. According to the assessee details of closing stock were filed before the authorities below which are mentioned at PB-13 to PB-18. The learned Counsel for the assessee demonstrated on the basis of the above papers that complete details were filed before the authorities below showing quantitative details of the closing stock. The details of raw materials are filed at page 39 of the paper book which at Sr. Nos. 25 and 26 the addition on account of work-in-progress is also made. It would, therefore, show that in the raw material items, the items of work-in-progress have been added. The same tally with the details mentioned at page 4 of the assessment order. The learned CIT(A) noted that the closing stock is to be valued by including overheads like freights inwards etc. The learned Counsel for the assessee pointed from Table D recorded at page 4 of the assessment order that freights and tempo expenses have been added in the details furnished by the assessee. The assessee after explaining everything on this issue and explaining the quantitative details admitted and quantified the overheads at Rs. 1,51,855 which were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore calculating deduction under section 80-IB of the IT Act. It was submitted before the learned CIT(A) that up to the assessment year 2001-02, the claim of depreciation was not mandatory. The learned CIT(A) however, did not accept the contention of the assessee and confirmed the order of the Assessing Officer for giving deduction under section 80-IB of the Income-tax Act after allowing depreciation as per order of the Special Bench and also following the decision of the Hon ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 in which the Hon ble Supreme Court has stated that for the purpose of deduction under Chapter VI-A, the depreciation has to be mandatorily allowed. This ground of appeal of the assessee was accordingly dismissed. 19. The learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that in the assessment year under appeal the assessee has claimed depreciation but in the preceding assessment year up to 2001-02 claim of depreciation was not mandatory. He has submitted that the Assessing Officer has correctly worked out the WDV of the earlier years. He has sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i ) that if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect of the legislative intention. The key word in sub-clause ( b ) of section 43(6) is "actually". It is the antithesis of that which is merely speculative, theoretical or imaginary. The connotation of the phrase "actually allowed" is thus limited to depreciation actually taken into account or granted and given effect to, i.e., debited by the Assessing Officer against the income of the business while computing the taxable income of the assessee. It could not mean "notionally allowed" or merely allowable on a notional basis or provided in the books of account by an accounting entry. Thus, mere passing of accounting entry made for depreciation in the books of account was not depreciation actually allowed, as there was no liability to tax and as there was no assessment till the assessment year 2002-03. Thus, the written down value as on 1-4-2002, would be the original cost less nil, i.e., original cost". We may further note that the assessment year under appeal is 2003-04 and Explanation ( 5 ) to section 32 of the Income-tax Act was inserted by the Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 22. As a result, the appeal of the assessee is partly allowed. ITA No. 3591/Ahd./2007 (assessee s appeal) 23. On ground Nos. 1 and 2, the assessee challenged the orders of the authorities below in rejecting the book results under section 145(3) of the Income-tax Act and addition of Rs. 24,20,000. The revenue is in appeal on the same issue on ground No. 1 of its appeal challenging the relief granted to the assessee in a sum of Rs. 43,33,842 as against addition of Rs. 67,53,842. During the year the assessee has shown sales of Rs. 20.63 crores and gross profit rate of 23.83 per cent as against sales of Rs. 31.25 crores and gross profit rate of 24.35 per cent in the preceding assessment year. The Assessing Officer recorded similarly in this assessment year also that work-in-progress details are not valued properly and overhead expenses are not fully disclosed. The assessee has valued the semi-finished goods on estimate basis without actual calculation, no stock register is maintained and no quantitative details are maintained. The Assessing Officer similarly followed the decision in the case of Samir Diamond Exports Ltd. ( supra ) as well as the decision of Allahabad Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, stands that the book results of the assessee are acceptable. The similar reasons for rejection of the book results by the Assessing Officer have not been considered proper for the purpose of rejection of the book results. In the assessment year 2003-04 also, it was noticed that in the preceding assessment years also the assessee has employed same method of accounting which have not been doubted by the authorities below and the book results of the assessee have been accepted. In the assessment year 1998-99 even in the re-assessment proceedings the Assessing Officer accepted the book results declared by the assessee by applying gross profit rate of 24.94 per cent despite sale was very small as compared to the sales declared in the assessment year under consideration. No new fact has been brought against the assessee. Therefore, there is no reason to deviate from the findings given in the earlier years especially when the departmental appeal has been dismissed in the assessment year 2003-04. Considering the totality of the facts and circum- stances and earlier history of the assessee, we do not find any justification in sustaining the findings of the authorities below in reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any remission or cessation of liabilities during the year under consideration. The assessee relied upon the decision of the Hon ble Gujarat High Court in the case of Ambika Mills Ltd. v. CIT [1964] 54 ITR 167 to say that even if unclaimed liabilities are shown as subsisting debit in the balance sheet then section 41(1) of the Income-tax Act cannot be invoked. The learned CIT(A) considering the submissions of the assessee deleted the entire addition. The learned CIT(A) noted that the Assessing Officer himself has stated that these are old creditors. Therefore, addition on account of unexplained credits can be made in the year in which the credits arose and not in the current year. The learned CIT(A) accordingly deleted the addition. The learned DR relied upon the order of the Assessing Officer and submitted that since the balances of sundry creditors were appearing for more than 3 years as the same amount, therefore, Assessing Officer was justified in making addition with the aid of section 41(1) of the Income-tax Act. The learned DR however, submitted that similar balances have been shown in the assessment year under appeal which was shown in the earlier 3 years. On the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion has been made is in existence in that year or not; or" 8.1 Hon ble Madras High Court in the case of Tamilnadu Warehousing Corporation ( supra ) held as under : "The assessee filed its return for the assessment year 1989-90 and assessment years completed under section 143(3) of the Income-tax Act, 1961. The assessee had surrendered the Group Gratuity Scheme with LIC and received a sum of Rs. 8,22,925 during the year relevant to the assessment year 1989-90. As there was no proper enquiry made by the Assessing Officer in the assessment completed on 21-1-1992, the Commissioner passed order under section 263 of the Act and set aside the assessment with a direction to the Assessing Officer to assess the said amount under section 41(1) of the Act for the assessment year 1989-90. The Tribunal set aide the order of the Commissioner. On appeal to the High Court: Held, that the assessee had continued to show the admitted amount of Rs. 8,22,925 as liability in the balance-sheet. The undisputed fact was that it was a liability reflected in the balance-sheet. Once it was shown as liability by the assessee, the Commissioner was wrong in holding that it was assessable under section 41( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t not under section 41(1) or under section 68. It can be considered only under section 28, i.e., it can be considered for disallowance while examining the claim of expenses or outgoings against revenue receipts. Current year s genuine trading liabilities, waved/remitted or ceased to exist in the current year itself will not form part of trading/manufacturing or P/L account except a note appended to them as disclosure of information. 21.10 Even in a case where a liability ceased to exist due to limitation i.e., the claim of the creditor is barred by limitation under Limitation Act of 1963 but if the liability subsist or has not been written off by the assessee, or the assessee does not absolve himself from the liability, though not legally enforceable, it cannot be taxed under section 41(1)." 8.5 The Hon ble Rajasthan High Court in the case of CIT v. Prameshwar Bohra ( supra ) has held as under : "The assessee on the first day of the previous year relevant to the assessment year 1993-94 i.e., on 1-4-1992, credited an amount of investment/cash credit of Rs. 1,55,316 in his books of account. The Assessing Officer added this amount in the income of the assessee as unexp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2000-01 were in a sum of Rs. 1,29,83,564. The particulars of those parties against whom the liabilities were shown is mentioned at PB-3, 4 and 5. The same parties continued in the assessment year 2001-02 under appeal but the balances of some of the parties have reduced which would show that part payments have been made to them. The above facts would show that the liabilities shown in the balance sheet in the assessment year under appeal i.e., 2001-02 which are opening balances which are carried forward from the preceding assessment year. The liabilities have been shown in the balance sheet of the assessee which would show that the assessee acknowledged the liabilities of the outstanding amounts. The balances were thus carried forward from earlier years. In assessment year 2002-03, the Assessing Officer made addition of Rs. 1,60,590 in respect of Royal Engineering Work whose balance was also outstanding in the assessment years 2000-01 and 2001-02. It would, therefore, show that similar addition is made in the assessment year 2002-03 which would amount to double addition in respect of the same party. In assessment year 2003-04 the Assessing Officer made addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, we are of the view that provisions of section 41(1)( a ) of the IT Act have been wrongly applied in the matter. We may also note here that the learned Counsel for the assessee has filed details of particulars of payments of liabilities in subsequent years which are in the nature of adjustment through journal entry, cash payment and some payments by banking channel. The learned DR objected to the filing of such details at this stage and further submitted that the payment by cash and journal entry would not prove genuineness of the payments. We do not agree with the submission of the learned DR because those details were called for by the Bench during the course of hearing and even payment by cheques and/or journal entry would not absolve the Assessing Officer for making out a case under section 41(1)( a ) of the Income-tax Act. The last contention of the learned Counsel for the assessee was that since income of the assessee is computed under section 44AE of the Income-tax Act, therefore, provisions of section 41(1) of the Income-tax Act would not apply. However, considering the finding given above that provisions of section 41(1) would not apply to the facts and circums ..... X X X X Extracts X X X X X X X X Extracts X X X X
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