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TMI Blog2015 (12) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... s of provisions of Section 144(1), we find that assessment was not completed u/s 144 and therefore, no notice was required to be issued u/s 144. The learned CIT(A) has very reasonably dealt with issue and has allowed appropriate relief to the assessee and therefore, we do not intend to interfere with his findings - Decided against assessee and revenue Disallowance of expenses - as per assessee where the profits are estimated, the revenue authorities cannot further make addition on account of disallowance of expense - Held that:- We find that such a scenario of not making any further additions arises only in those cases where the net profits are estimated whereas here is a case where addition has been made to the Gross Profits, therefore, the Revenue Authorities were justified in making various other additions on account of disallowance of expense - Decided in favour of assessee. Disallowance on account of foreign exchange expenditure - CIT(A) restricting the disallowance of foreign traveling expenses to the extent of 10% - Held that:- In Asst. Year 2005-06 in the case of assessee itself, had reduced the disallowance of foreign traveling expenses in the case of employees of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 25,40,000/- made on account of alleged improper and uncompleted maintenance of accounts. (iii) That after having upheld the rejections of book results as done by the learned A.O., the learned CIT(A) grossly erred in confirming further disallowance/additions as made by the learned A.O. (iv) The learned CIT(A), Jalandhar has erred in confirming the following disallowance out of expenses of ₹ 13,31,030/- under the head foreign traveling expenses made by Assessing Officer. Sr. No. Particulars Total expenses claimed Disallowance made by A.O Disallowanc e confirmed in appeal. 1 Ticker visa expenses of partner being for non business purpose Rs.4,96,808/- Rs.74,520/- i.e. 15% Nil 2 Foreign currency expenses being unvoched /without supportin g bills and also being for non business purposes. Rs.31,41,265/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the facts that the A.O had made the disallowance of ₹ 13,31,030/- on account of unverifiable Foreign Traveling Expenses after bringing on record the complete facts of the case. Reliance is placed on the decision of jurisdictional ITAT in the case of ACIT Vs. Archie International ITA No.458(ASR)/2004 for the Asst. Year 2001-02 wherein 40% of expenses on foreign travel were held to be not allowable. (iii) That, it is prayed that the order of the learned CIT(A) be set aside and that of the Assessing Officer restored. (iv) That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed off. 4. The brief facts as noted in assessment order are that assessee is a manufacturer and exporter of garden tools, hand tools etc. and is also trading in certain items like PVC resin etc. The case of the assessee was selected for scrutiny. During the assessment proceedings, the A.O required the assessee to produce stock register which the assessee stated that in view of the number of items involved as raw material in the manufacturing process, it was not possible to maintain the stock register. The assessee was then requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d supporting evidences regarding the duration of tour, purpose of the visit, and the details of expenditure incurred on tickets, boarding and lodging etc. On the basis of submissions made by assessee the Assessing Officer held that all of the expenses of ₹ 31,41,265/- spent in foreign exchange were in cash and were not supported by third party bills. The Assessing Officer after analyzing of expenses held that there was element of personal expenditure on these tours and therefore, he held the assessee had failed to prove that expenditure was wholly and exclusively for the purposes of business and therefore, he disallowed 40% of expenses of foreign currency, and 15% of ticket and visa expenses making in all additions of ₹ 13, 31,030/-. 6. The Assessing Officer also disallowed of claim of ₹ 17 lac which the assessee had claimed as Insurance Premium paid for Keyman Insurance Policy of Sh. Deepk Aggarwal, partner of the firm. The Assessing Officer further held that wages labour charges salary and labour welfare expenses were paid by assessee in cash and were supported by only self made vouchers and therefore the Assessing Officer made a disallowance of ₹ 1,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has conceded that even the list of these items could not be prepared and only an estimate was made. The admission by the appellant supports the AO s contention that the stock of the assessee was valued, at least to some extent, on estimate without physical measurement. As pointed out by the AO, the fact that such a system has been followed even in the past cannot take away from the A.O the right to determine the correct income of the assessee. It is also noteworthy that the assessee has been showing almost the same GP rate for the past three years. It has been contended that the valuation of universal bracket as on 31.03.2006 was inadvertently taken at higher figure, which had now been corrected to the correct figure. This supports the AO s conclusion that the value of closing stock adopted by the assessee is to ensure a constant GP rate in its annual income tax returns, which have no relation with actual income of the assessee. It is income tax returns, which have no relation with actual income of the assessee. It is difficult to believe that the assessee, while valuing each item of finish product at sale price less GP rate, would value Universal Brackets at high rate of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market price as on 31-03-2005, but has reduced the valuation of this item to the accepted method as on 31-03-2006. The net effect is that the income for the year ended 31-03-2005 has gone up by more than ₹ 10 lacks and has been depressed by the same amount in the financialyear 2005-06. Now, normally the value of both the opening and closing stock should be taken at the correct rates to arrive at correct income of the assessee. This would, however, in the present case, require revaluation of the opening stock as on 31-3-2005 which would, in turn, involve recomputing the income for assessment year 2005-06. In the case of V.K.J. Builders and Contractors (P) Ltd. Vs. CIT 228 CTR (SC) 143, the Hon ble Apex Court have held that the closing stock of one year had necessarily to be the opening stock of the assessee of the subsequent year. Since the value of closing stock as on 31-3-2005 has been accepted, the same has to be taken the value of opening stock as on 1-4- 2005. The rate of ₹ 4 per pc applied by the appellant for valuing the closing stock has not been shown by the AO to be incorrect as per the normal system of valuing the stock. Under the circumstances, I am of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ewed in the context of fact that no particulars and no bills/vouchers of actual utilization of foreign currency by the partners on foreign tours has been furnished. The contention that it was impractical to maintain all the bills/vouchers on foreign tour is too simple an explanation considering the amount of foreign currency spent by the assessee and the need, for purpose of income tax, to give supporting evidence in respect of claim of expenditure. The Hon ble Jurisdictional ITAT have upheld disallowance of varying percentages of foreign currency expenditure depending upon facts of the case. In the case of ACIT Vs. Archies International ITA No. 458 (ASR)/2004 relied upon by the AO, the Hon ble ITAT have upheld the disallowance of 40% of the foreign currency expenditure wherein some othe decisions relied upon by the appellant lower disallowance had been upheld. The decisions relied upon by the appellant are not of the Hon ble Jurisdictional ITAT. Disallowance of expenditure on estimate basis is essentially a matter of fact and no hard and fast rule can be laid down. I agree with the AO that, considering the quantum of the expenditure; the fact that the family members traveled with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant, in the case reported in 296 ITR 324 the AO had estimated the GP by adopting the GP rate of proceeding year. He also proposed to disallow u/s 40A(3) cash payments for purchase of goods since evidence had been found during the course of search that the assessee was making unaccounted purchases in cash. It was under these circumstances that the Hon ble Jurisdictional High Court held that once GP had been estimated, no further addition was required to be made u/s 40A(3). The disallowance in this case was proposed to be made in respect of purchase of goods which found part of trading account on which the GP rate was applied by the AO. In the case reported in 302 ITR 246, the Hon ble Jurisdictional High Court upheld the view of the ITAT that in the facts of the case no separate addition in respect of cash credits was warranted after the warranted after the book results had been rejected. The facts in these cases are thus different than in the case of the present appellant. The AO has rejected the book results in respect of trading account and has estimated the gross profit. She has not estimated the net profit of the assessee on the facts of this case. Hence, I am of the opinion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n inflated profits. He further submitted that assessee had to value its stock at cost or market price which ever is lower and therefore, there is no wrong in valuing such an item at cost price which by mistake in earlier year was valued at a higher rate. He submitted that evidence of cost price was filed with the authorities below. He further submitted that the results of the two parties relied upon by Assessing Officer in making addition on account of G.P rate were not confronted to the assessee. As regards addition on account of payment of labour and wages, the learned AR submitted that complete register of wages was produced and therefore, the additions sustained by leaner CIT(A) was not justified. 14. Arguing upon Ground No.4, the learned AR submitted that leaned CIT(A) had upheld the disallowance on foreign currency expenses to the extent of 25% as against the 40% made by Assessing Officer. The learned AR submitted that in the case of assessee itself in Asst. Year 2005-06, the Hon ble Tribunal in ITA No.83 was pleased to restrict similar disallowance to the extent of 10% and in this respect filed a copy of the said Tribunal Order. 15. Arguing upon Ground No. 5 regarding Key ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue s appeal are common and can be decided simultaneously. Ground No. 1 2 in Assessee s appeal are regarding confirmation of part addition on account of Gross Profit and Ground No.1 of Revenue s appeal is against part relief allowed to assessee, therefore, our adjudication on the issue of addition to Gross Profit will dispose off Ground No.1 2 of Assessee s appeal and Ground No.1 in Revenue s appeal. We find that assessee had not maintained complete books of account and vouchers. The Assessing Officer had pointed out various discrepancies in the books of account and calculation of opening and closing stocks. The argument of learned AR the mere absence of stock register cannot lead to rejection of books of accounts is though correct but here is a case where not only stock register was not maintained but there were various discrepancies in the valuation of opening and closing stock and moreover the Assessing Officer has clearly held that Gross Profit declared by assessee in the present year was lower as compared to earlier years. Moreover, the Assessing Officer has also compared Gross Profit ratio of two parties for the same year, who were also engaged in the similar type o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is partly allowed whereas Ground No.2 of Revenue s appeal is dismissed. 24. As regards Ground No.5 taken by assessee in respect of disallowance of Keyman Insurance Premium amounting to ₹ 17 lacs, we find that the learned CIT(A) had made disallowance by following his order in the case of Ambika Ovearses. We find that the case of Ambika Overseas has been dealt with vide consolidated Tribunal order dated 31.08.2015 in ITA No. 45 (Asr)/2010 and ITA No.700(Asr)/2013 for Asst. Years 2006-07 2007-08 respectively, where the Hon ble Tribunal had allowed the relief to the assessee on account of payment of Keyman Insurance Policy. The relevant findings as recorded by Hon ble Tribunal are contained in para 8 to 20 which are reproduced below. 8. Let us now come back to the core issue before us. The short question that we have to really adjudicate is as to whether the premium of ₹ 1,49,99,922 paid on the keyman insurance policies can be allowed on the facts of this case. As to what constitutes keyman insurance policy , we find guidance from the Explanation below Section 10(10D), as it stood at the relevant point of time, which defined the keyman insurance policy as follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not received the maturity sum but it has been assigned to the partners, therefore, the assessee cannot be given deduction for any premium paid. Insofar as the first objection of the learned Commissioner (Appeals) is concerned, we declined to agree with this conclusion, because once the assessee has bought a policy under a life insurance scheme, then whether the insurance company is making investment in mutual funds for capital appreciation or under any other investment scheme, will not make any material difference. (Emphasis, by underlining, supplied by us) 12. We are in considered agreement with the views so expressed by our distinguished colleagues. As long as a policy is an insurance policy, whether it involves a capital appreciation or is under any other investment scheme, it meets the tests laid down under section 10(10D). 13. The requirement of pure insurance policy is something which is not laid down by the statute. Yet, it is this which has been inferred by the authorities below. 14. Even if such an inference is desirable, as long as it does not emerge from the plain words of the statute, it cannot be open to supply the same. The concepts of term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lordships of Hon ble Supreme Court have referred to, with approval, Maxwell on Interpretation of Statutes observation that A case not provided for in a statute is not to be dealt with merely because there seems no good reason why it should have been omitted, and that the omission appears in consequence to have been unintentional . Their Lordships then observed that In other words, under the first principle, a casus omissus cannot be supplied by the Court except when reason for it is found to be in the four corners of the statute itself but at the same time a casus omissus should not be readily inferred and for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute . 15. It is also important to bear in mind the fact that the IRDA guidelines, no matter how relevant as these guidelines may be, have no role to play in the interpretation of the statutory provisions. IRDA is a body controlling the insurance companies and its guidance is relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y satisfied on the facts of the case before us. 16. A lot of emphasis has been placed by the authorities below on the circulars issued by the IRDA. It may, therefore, be appropriate to briefly deal with the IRDA and the impact of the circulars issued by the IRDA. IRDA, i.e. Insurance Regulatory and Development Authority, is set up under the Insurance Regulatory and Development Act 1999. Section 14 of the Insurance Regulatory and Development Act, 1999, describes the duties, powers and functions of the IRDA as follows: 14. DUTIES, POWERS AND FUNCTIONS OF AUTHORITY. (1) Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. (2) Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include, - (a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; (b) protection of the interests of the policy holders in matters concerning assigning of policy, nomin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Section 14(2)(b), if at all it has anything to do with the policyholders, it is protection of interest of the policyholders. It is in this background that we have to see the circulars issued by the IRDA. In the circular dated 27th April, 2005, the IRDA states as follows: The Authority is aware that some of the aberrations have taken place in the month of March 2005 in the matter of sale of keyman insurance. We shall conduct a detailed examination of the policies marketed in March 2005 and shall come up with detailed guidelines on the sale of keyman insurance at the appropriate time. In the meantime, it has been decided that only term insurance policy will henceforth be issued as keyman insurance cover . Your company is requested to ensure that your company follows this circular till fresh guidelines are issued. 18. A plain look at the above circular shows that it deals with aberrations in sale of keyman insurance policies and it is was a direction to the insurance companies that effect 27th April 2005 only term insurance policies should be issued as keyman insurance cover. That is between the regulatory authority and the insurance companies as to what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n expenditure cannot be, by any stretch of logic, relevant to determine its commercial expediency, and, in any case. Such a benefit of hindsight cannot be available at the point of time when business decisions are made; more often than not, these are the tools of post mortem of events, rather than inputs for the decision making. As for the other issues raised by the Assessing Officer as such, we may refer to the following observations made, in this context, by Hon ble Delhi High Court in the case of CIT Vs Rajan Nanda etc. [(2012) 349 ITR 8 (Del)]: 25. After giving our due and thoughtful consideration to the submissions of the parties of both sides, we feel that the assessee has been able to make out a case in its favour and order of the Tribunal does not call for any interference. We are persuaded by the following reasons in support of this view of ours: (i) The Department has itself allowed the expenditure incurred on the premium paid for keyman insurance policies in previous years as business expenditure under Section 37 of the Act. Right from 1991-92 upto 1993-94 and thereafter even in respect of Assessment Year 1997-98, the expenditure was allowed. Though thereaft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a Keyman insurance policy is allowable as business expenditure. In the present case, on the question whether the premium which was paid by the firm could have been allowed as business expenditure, there is a finding of fact by the Tribunal that the firm had not taken insurance for the personal benefit of the partner, but for the benefit of the firm, in order to protect itself against the set back that may be caused on account of the death of a partner. The object and purpose of a Keyman insurance policy is to protect the business against a financial set back which may occur, as a result of a premature death, to the business or professional organization. There is no rational basis to confine the allowability of the expenditure incurred on the premium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. A Keyman insurance policy is obtained on the life of a partner to safeguard the firm against a disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the respondents clearly get attracted to this Court. (Emphasis, by underlining, supplied by us) 21. Respectfully following the esteemed views of Hon ble Delhi High Court, we reject the stand of the authorities below on this aspect of the matter as well. As for the statement made by the employees of the insurance companies, nothing turns on these statements. What constitutes a keyman insurance policy under section 10(10D) is not dependent on what is it treated even by the insurer; as long as the assessee is allowed to take life insurance policy on its keymen, as have been undisputedly taken in this case, the same satisfies the requirement of Section 10(10D). In view of these detailed discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee and delete the impugned disallowance of ₹ 1,49,99,922. The assessee gets the relief accordingly. We find that facts circumstances of Ground No.5 in the present appeal are similar, therefore, respectfully following the above Tribunal Orders, we allow Ground No.5. 25. Now coming to Ground No.6 relating to confirmation of disallowance of ₹ 1,50,000 out of salary, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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