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TMI Blog2019 (10) TMI 1193X X X X Extracts X X X X X X X X Extracts X X X X ..... at the disallowance of the expenses cannot exceed the exempt income i.e. CIT Vs. Vision Finstock Ltd. [ 2017 (7) TMI 1277 - GUJARAT HIGH COURT] or only those investments should only be considered for the purpose of the disallowance which have resulted the dividend income. We are also conscious to the fact that the above judgments were rendered in connection with the income determined under normal computation of income but to our mind the same principles can also be applied to the case on hand. It is because, the provisions of section 115JB of the Act require to make the disallowance of the expenditure related to any income to which section 10 applies other than section 10(38) - we hold that the expenses incurred in connection with the exempted income cannot exceed the amount of such exempted income under the provisions of section 115JB of the Act. Accordingly, we limit the disallowance of the expenses to the extent of exempt income which is NIL in the case on hand. Thus no disallowance of the expense is warranted under section 115BJB of the Act. Hence the ground of appeal of the Revenue is dismissed. Suppression of production/sales after rejecting the books of accounts under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egister. Accordingly, we note that the reasons which were based by the AO for rejecting the books of accounts are not sufficient enough and cogent to reject the books of accounts. Accordingly, we conclude that once the books of accounts of the assessee are not liable to be rejected then its book profit should be accepted in the given facts and circumstances. Depreciation on car - HELD THAT:- From the preceding discussion we note that the payment for the purchase of the car was made by the assessee though the same was registered in the name of the director. This fact can be verified from the assessment order as well as CIT (A) order. Thus it is clear that, the assessee was the beneficial owner of the car and accordingly it was eligible for claiming the deduction for the depreciation on such car. We hold that the assessee is eligible for depreciation on the car purchased by it but registered in the name of the director as the assessee is the beneficial owner of such car. Hence the ground of appeal of the Revenue is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. interest expenditure 540723 iii. administrative expenditure 75000 total 615723 4.3 Accordingly, the AO disallowed the sum of ₹ 6,15,723/- under the provisions of section 14A read with rule 8D of income tax rule under the normal computation of income as well as under MAT computation of income. Aggrieved assessee preferred an appeal to the learned CIT (A). 5. The assessee before the learned CIT (A) submitted that there was no exempt income earned by it in the year under consideration. Therefore there cannot be any disallowance of any expenses warranted under the provisions of section 14A read with rule 8D. 5.1 The learned CIT (A) after considering the submission of the assessee deleted the addition made by the AO under normal as well as MAT computation of income. Being aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us. 6. The learned DR before us vehemently supported the order of the AO whereas the learned AR for the assessee before us submitted that there cannot be disallowance of any expense under section 14A of the Act as there is no exempt income in view of the Gujarat High Court decision in the case of Corrtech Energy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case." 7.5 We also note that in the identical facts and circumstances the Hon'ble jurisdictional High Court has decided that the amount of disallowance of the expenditure cannot exceed the amount of exempted income in the case of CIT vs. Vision Finstock Stock Ltd in tax appeal No. 486 of 2017 vide order dated 31 July 2017. The relevant extract of the order is reproduced below: "1. The Revenue has challenged the judgement of the Income Tax Appellate Tribunal dated 07.07.2016 raising following questions for our consideration: "A. Whether on the facts and circumstances of the case and in low, the YTAT was justified in restricting the disallowance made of Rs. l,02,82,049/- u/s. 14A to the extent of exempt income of ₹ 55,6047- only? B. Whether on the facts and circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be the subject matter of disallowances while determining the net profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below: "In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962." 7.9 The ratio laid down by the Hon'ble Tribunal is squarely applicable to the facts of the case on hand. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act. 7.10 However, it is also pertinent to note that the disallowance needs to be made with respect to the exempted income in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw support from the judgment of Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance regarding the exempted income needs t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of exempt income which is NIL in the case on hand. Thus no disallowance of the expense is warranted under section 115BJB of the Act. Hence the ground of appeal of the Revenue is dismissed. 8. The 2nd issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for ₹ 14,06,42,330/- on account of suppression of production/sales after rejecting the books of accounts under section 145(3) of the Act. 9. The assessee in the year under consideration has produced different types of tiles and marbles besides the trading in these items. The tax auditor of the assessee in its report in form 3CD has reported the details of the items in which the assessee has traded during the year. Such trading items include tiles, marbles, Agro products, chemical products, raw materials, spares and the scraps. The quantity wise details such as opening stock, purchases, sales and the closing stock were furnished in the annexure K attached to form 3 CD of tax audit report. 9.1 Similarly, the tax auditor of the assessee has reported the quantitative details of raw materials consumed in the production of tiles and the marbles along with the scraps in the annexure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted u/s.145 of the Act and income should not be estimated. 11. The assessee in response to such show cause notice vide letter dated 17-03-2015 expounded the details of annexure L demonstrating the items consumed in the production of the tiles, the marbles and the scrap. In such details, the descriptions of 1028 items were furnished which were utilized for the production of the tiles and the marbles. The items mentioned in the list (first part beginning from serial No. 1 to 938) aggregating to 30,31,18,075 kgs were utilized for the production of the tiles. Similarly, the items mentioned in the 2nd part of the list beginning from serial No. 1 to 90 aggregating to 3,75,37,319.77 kgs were utilized for the production of the marbles. The assessee at the same time also claimed that it has generated scrap of 32,22,245 kgs in the production of tiles. 11.1 Accordingly, the assessee in the revised detailed annexure L dated 17- 03-2015 claimed that it has consumed raw material of 30,31,18,075 kgs in the production of tiles of 1,25,19,851 square meters including the scrap generated for 32,22,245 kgs and there was the output of 5,99,953 square meters marbles against the consumption of raw mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s set out as under: 5.24 As discussed above, the suppression of production of tiles is worked out as under considering the submission of the assessee dated 17/03/2015 and also considering the submission of the assessee regarding the quantity in Kg. consumed for manufacturing of tiles at 45.40 Kg. Particulars As per assessee Consumption of raw material Less: Marble material consumed as per sheet scrap (New Annexure-L) 343877640 (-)37537319 (-)3222243 Net Material Consumer for tiles 303118075 Ratio of production 1.92 sq.Mtr. Per 45.40 Kg. By applying thumb-rule the quantity of production during the year 303118076/45.40 X 1.92 12819090 Less: Production shown 12519851 Suppression of sale in Sq.Mtr. 12819090 - 12519851 299239 Suppression of sale in vlue 299239 x 470 140642330 5.25 From the above working, it can be seen that the assessee under stated the production of tiles by 299239 Sq.Mtr. the value thereof of ₹ 470/- works out as above, comes to ₹ 14,06,42,330/- is treated as undisclosed income of the assessee by suppressing the production of tiles weighing 299239 Sq. Mtr. and the same is added to the total income. The aggrieved assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the books, was not provided for the rebuttal. Thus any information used against the assessee without confronting the same cannot be the basis of drawing any adverse inference. 13.4 There cannot be any thumb rule that the assessee has to consume 45 to 48 kgs of raw materials to produce 1.92 square meter of tiles. As such, the opinion of the AO was based on the information of the website of the companies where such details of consumption of raw materials viz a viz production of tiles was displayed which was actually in relation to the packing detail of the tile boxes. In fact, the AO has never called for any internal production data from such companies. 13.5 The assessee also submitted that it has furnished the details of the raw material used in the production of tiles/marbles vide letter dated 17 March 2015 and 27th of March 2015. These details were supported with the invoices, lorry receipt, goods receipt. Moreover, the entire production was subject to the excise duty and there was also independent audit conducted by the excise department but there was no allegation for such suppression and sale of the goods outside the books. Accordingly, the assessee claimed that there cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee vide letter dated 27th of March 2015 was not considered by the AO without adducing any reason thereon. As such, these details were reconciled with the quantities used in the manufacture of tiles and the marbles and the same was supported on the basis of invoices, lorry receipt and goods receipts etc. 14.4 The learned CIT (A) also observed that the assessee requested the AO in the latter dated 27th of March 2015 that if he requires, the senior vice president sales and marketing would remain present on the next date of hearing. Similarly the assessee also offered the AO to visit the factory to understand the exact production process involving different kinds of raw materials. But the AO has not considered the request of the assessee. 14.5 The AO has not disputed the total consumption of the raw materials of 343877640 kgs but rejected the information furnished by the assessee in the letter dated 27th March 2015 detailing the raw materials used in the production of the tiles/marbles on the ground that the assessee has been changing its stands about the materials consumed in the production of tiles and the marbles. As such, there was no specific reason assigned by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of tiles is on lower side in comparison to the consumption of raw material shown by various concerns who are into manufacturing of vitrified tiles. The ld. AO made huge addition of ₹ 14,06,42,330/- on account of 4. suppression of production / sales merely on the basis of weird thumb rule (public domain information), presumption, conjecture and surmises only. 5. The ld. AO held that in order to produce 1.92 Sq. Mtr. of tiles, 45.40 Kg. of Raw Material is required and since the Appellant has consumed Net Material of 303118075 Kg., the Appellant should have produced 12819090 Sq. Mtrs. of tiles, however, since the Appellant has actually produced 12519851 Sq. Mtrs. of tiles, there was suppression of sales of 299239 Sq. Mtr. of tiles resulting into value of suppression of sales at ₹ 14,06,42,330/-. Accordingly, the ld. AO arbitrarily made an addition of ₹ 14,06,42,330/- on account of alleged suppression of sales to the total income of the Appellant. 6. The ld. CIT(A) has deleted the addition made by the ld. AO on the ground (a) there is not a single evidence of suppression of production / sale of goods, (b) the Assessing Officer, on the basis of catalog wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. CIT(A) has rightly held that the Public Domain Information as relied upon by the ld. AO do not indicate as to what should be the consumption of raw material into the production of 1.92 sq. mtr. Of tiles but it only indicates the packing details of box of tiles, which has nothing to do with the thumb rule of consumption of raw material to the production of tiles. (Pls. see para 6.3.1 to 6.3.2 on pg. nos.39-41 of the CIT(A) order) B. No arithmetic formula can be applied to allege suppressed production / sale of tiles without brining on record any cogent, tangible and incriminating material 1. Apart from relying upon so called packing details of boxes, the ld. AO has not brought on record any cogent and incriminating material so as to establish alleged suppression of production / sales of tiles. 2. The ld. AO further failed to appreciate that every company has their own process of manufacturing. There are so many factors which are required to be considered while comparing one company with other companies. There will be different process of manufacturing, research and development units, know-how, different sizes, weight and pattern of products, different combination of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elying on the consumption of electricity by the excise authorities and addition in the hands of the assessee on account thereto by the assessing officer. 5. At this juncture, the Appellant would like to draw Your Honour's attention to the decision, of another statute i.e Excise Act, in the case of R.A. Casting Pvt. Ltd. vs. CCE, Meerut - I, 2009 (237) ELT 674, copy of which is enclosed herewith marked as Annexure - A. In the case of R.A.Casting, the clandestine removal of goods was presumed on the basis of consumption of electricity to the production of MS Ingots and demand was raised. The allegations leveled in R. A. Casting (supra) were mainly,- (a) Inordinately high electricity consumption without any explanation, (b) Sale of Ingots at a huge loss over last 4-5 years,which was economically and commercially not possible, generation of fictitious profits in the balance sheets by depositing huge amount of cash with the stock brokers and receiving (c) cheques of profits against the cash so deposited, and (d) Claim of High Auxiliary load of about 35%. 6. However, the Delhi Tribunal in R.A.Casting (supra) in categorical terms held that no demand can be raised / upheld ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o installed capacity, consumption of electricity, labour employed and payment made to them, packing material used, records of security officers, discrepancy in the stock of raw materials and final products; Suppressed sales of goods with reference to entry of vehicle/truck in the factory premises, loading of goods therein, security gate records, transporters' documents, such as L.Rs, statements of lorry drivers, entries at different check posts, forms of the Commercial Tax Department and the (d) receipt by the purchaser of such goods; (e) Sale proceeds of such suppressed sale of goods. 9.Reliance is further placed on the Ahmedabad bench of Tribunal in the case of Century Tiles Ltd. vs. JCIT in 51 taxmann.com 515, wherein under similar facts of the case, the Hon'ble Tribunal has held that We find that absolutely no material was brought on record by the Revenue to show that the assessee actually produced quantity more than what has been disclosed in the books of account or made any sale which was not recorded in the books of account. In the circumstances, in our considered view, variation in the amount of consumption of fuel could have been a ground for careful scrutinisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished details of consumption of raw materials to the production of tiles and marbles. However, the ld. AO vide order sheet 4. dated 26/03/2015 once again asked the Appellant to reconcile the figures and furnish details of raw materials used for production of Composite / Agglomerated / Quartz marbles and in connection thereto the Appellant vide letter dated 27/03/2015 furnished not only reconciliation but also the supporting thereto. Pls. refer pg. nos.95 to 254 of P/B. However, the ld. AO was of the view that the Appellant was changing its facts and figures every time in order to support the production of tiles shown by it and when the increased raw material consumption in production of marble is shown the production of tiles is found to be very low. In other words, for the alleged low yield of production of tiles and on the basis of unauthenticated, unreliable, illogical and irrational public domain data, the ld. AO rejected books of accounts of the Appellant. In this connection, it is most respectfully submitted that it is an admitted and undisputed fact that the Appellant has consumed total 343877640 Kgs of raw materials for the production of tiles and marbles. It is fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s used therein. However, the ld. AO without appreciating such facts of the case, discarded the submission furnished on 27/03/2015. The ld. AO has even not given any cogent reasons for not accepting the details as furnished by the Appellant vide letter dated 27/03/2015. The ld. AO has rejected books of accounts merely on the ground of alleged low yield of 6. production of tiles on the basis of unauthenticated, unreliable, illogical and irrational public domain data. 7. The Appellant relies on following authorities, wherein the Hon'ble authorities has gone to the extent that even if the stock register is not maintained, books of accounts cannot be rejected, whereas in the present case before Your Honours, it is undisputed facts that the Appellant has maintained stock register as well as followed prescribed valuation guideline * Pandit Brothers vs. CIT 26 ITR 159 (Punj.) * Ashoke Refactories (P) Ltd. vs. CIT 279 ITR 457 (Cal.) There is no mistake or error in the books of accounts maintained by it and therefore the same are not required to be rejected. The learned AO has not found any material defect in the books of account and the incident of so called mistake/error as rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was pleased to delete the addition made by the AO as elaborated in the preceding paragraph. 18.1 From the preceding discussion, we note that the AO has compared the production of the tiles shown by the assessee with the companies available in the public domain. Accordingly the AO held that there was suppression in the production shown by the assessee which was further sold outside the books of accounts. In this regard, we note that there was no material available with the AO evidencing that there was less production of the tiles except the input output ratio of the raw material consumed and the final outcome on the basis of the data collected from the public domain. In our considered view, the assessee cannot be alleged that it has suppressed the production merely on comparison with outside companies until and unless it is based on some concrete materials in the form of documentary evidences. In this regard we find support and guidance from the judgment of RA Casting Pvt Ltd (supra) where it was held as under: 22. The clandestine manufacture and removal of excisable is to be proved by tangible, direct, affirmative and incontrovertible evidences relating to (i) Receipt of raw m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not genuine. There were many surmises and conjectures, and the conclusion was the result of suspicion which could not take the place of proof in these matters 18.3 Similarly, there was no information available with the AO suggesting that the income generated by the assessee outside the books of accounts by suppressing the production and the sales whether it was invested or utilized by itself directly or indirectly through the involvement of the directors and other parties associated with the company. As such, there was no information signifying that the assessee has generated the income outside the books of accounts. Therefore in our considered view there cannot be any addition on account of the allegation made by the AO that the assessee has made sales outside the books of accounts. In this regard we find support and guidance from the judgment as detailed below along-with their relevant portion of the judgment: (a) CIT v A. Raman & Company, 67 ITR 11 (SC) "the inference raised by the ITO that the HUFs of the assessees had made profit by sale of articles purchased from the assessees larger than the profit which the assessees had made, was not justified, since there was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch opportunity goes to root of the matter and strikes at the very foundation of the assessment and, therefore, renders the orders passed by the Commissioner (Appeals) and the Tribunal vulnerable. The assessee was bound to be provided with the material used against him apart from being permitting him to cross examine the deponents whose statements were relied upon by him. Despite the request seeking an opportunity to cross examine the deponents and furnish the assessee with copies of statements and disclose material, these were denied to him. Therefore, the addition made to the income of the assessee was not justified and liable to be deleted. 18.5 On perusal of the information collected by the AO from the public domain we also note that it relates to the packing of the tiles and as such it does not deal with the production of those companies. Therefore, in our considered view such packing details cannot be compared with the production of the assessee. Moreover, the AO has never collected any information from the companies available in the public domain about their internal production process system. Thus we are of the view that, such information available in the public domain cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting the books of accounts. Such satisfaction has to be established and substantiated based on facts and figures, which further depends on the circumstances of each case. Mere minor mistakes/typological errors/absence of stock registers/lower GP may not ipso facto amount to incorrectness/incompleteness of accounts in terms of section 145(3) of the Act. But the case would be different where the above-mentioned mistakes are coupled with other findings. 18.9 In the given case, AO has rejected the book results of the assessee based on the finding that there was less production of tiles in comparison to the companies available in the public domain and non-maintenance of production registers properly. In the light of the above facts, the AO invoked the provisions of section 145(3) of the Act and thereby he has made certain upward additions on account of suppressed production which was sold outside the books. 18.10 In our humble understanding, the consumption ratio of raw material having bearing on the production shown by the other concern engaged in a similar activity cannot be a criterion to reject the books. It is because the consumption/production of a concern depends upon various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e books of accounts. But in the instant case, we note that there was no such conclusive finding by the AO. We also find support and guidance from the order of ITAT Bench in the case of Haridas Parikh Vs. ITO reported in 113 TTJ 274 wherein it was held as under: Unless the Assessing Officer is able to point out certain transactions which have been left to be entered in the books of account or that the assessee has sold some of the items at a price higher than what is disclosed in the books of account or if proper particulars, bills, vouchers are not forthcoming, etc., the books of account cannot be rejected without assigning specific reasons. In the instant case merely because different range and nature of items were being dealt with by the assessee and the maintenance of quantitative stock of each and every item was not practically possible, the books of account maintained by the assessee which were free from any defect could not be rejected merely because the average GP rate was slightly lower than the average GP rate of the earlier year. In the instant case, the sales of the assessee during the year under consideration had increased substantially from ₹ 1.24 crores to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd circumstances. In view of the above and after considering the facts in totality, we do not find any reason to interfere in the order of the learned CIT (A). Hence, the ground of appeal of the revenue is dismissed. In the result, the appeal of the revenue is dismissed. Coming to the ITA No. 2451/Ahd/2016 for A.Y. 2013-14 19. The 1st issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for ₹ 50,00,000/- on account of suppression of production. 20. At the outset we note that, the identical issue has been decided by us in favour of the assessee in the ITA No 1517/Ahd/2016 vide paragraph number 18 of this order. Respectfully following the same we do not find any reason to interfere in the finding of the learned CIT (A). Hence, the ground of appeal of the Revenue is dismissed. 21. The 2nd issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for ₹ 43,76,530/- under the provisions of section 14A read with rule 8D of income tax rule under normal computation of income. 22. At the outset we note that, the identical issue has been decided by us in favour of the assessee in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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