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TMI Blog2012 (12) TMI 1230X X X X Extracts X X X X X X X X Extracts X X X X ..... d not produce any bills and vouchers as mentioned in assessment order/order sheet and noted by the Authorised Representative of the assessee. 2. Whether on the facts and circumstances of the case Ld. CIT( A) is justified in deleting the addition of Rs.54,77,084/- being part disallowance of expenses of material consumed, labour charges and power and fuel etc. ignoring the fact that no vouchers of these expenses were produced before the A.O. 3. Whether on the facts and circumstances of the case Ld. CIT(A) is justified in deleting the addition of Rs.6,28,883/- being part disallowance of various expenses of profit and loss account ignoring the fact admittedly no bills/vouchers of these expenses were produced before the A.O. 4. Whether on the facts and circumstances of the case Ld. CIT(A) is justified in deleting the addition of Rs.19,35,849/- being addition of interest income of FDR not shown by the assessee during the year under consideration and or in any other year. 5. Whether in the facts and circumstances of the case Ld. CIT(A) is justified in accepting the version of the assessee and allowing appeal of the assessee without making any discussion in appellate order called f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsumed 155244128/- 2% 1633003/- 3. Labour charges 81650150/- 2% 1633003/- 4. Power & Fuel 17674338/- 2% 353486/- 5. Repair & Maintenance 9246259/- 2.5% 231156/- 6. Water exp. 1545570/- 10% 154557/- Total 5477084/- 7. Conveyance Exps 521986/- 10% 52199/- 8. Medical Exps 445740/- 20% 89148/- 9. Mess Exps 1339570/- 10% 133957/- 10. Misc. Exps 128597/- 10% 12860/- 11. Site Office Exps 2123475/- 5% 106174/- 12. Staff & Labour welfare Exps 289288/- 10% 28893/- 13. Traveling Eps 145440/- 10% 14544/- 14. Vehicle Running & Maint. 1911081/- 10% 191108/- 7. During the assessment proceedings, the A.O. noticed that the assessee did not show any interest of income whereas there is AIR information about the interest payment and TDS. The A.O. made addition of Rs.19,35,849/- as under :- (Paragraph No.5, page no.2) "5. I have verified the trading and profit & loss account for F.Y. 2007- 08 and it is seen that no interest amount have been shown to have received and no amount of interest declared by the assessee as income of the assessment year 2008-09. Interest received as shown in AIR information which is given above is on the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has mentioned in his order that the assessee has produced books of account, cash book, Ledger, journal and bank book also but not produced bills and vouchers. In my opinion without any specific point which has gathered by the Assessing Officer during the course of investigation of the case, "no disallowance can be made merely on making vague observation that expenses were not verifiable". It is noticed that the assessing Officer has made vague disallowances @ 2% for material consumed, labours, power and fuels, 2.5% for repair & maintenance and 10% of water expenses. The Assessing Officer has not pointed out the specific terms which were inadmissible in nature. This working of the Assessing Officer only shows that the disallowances have been made capriciously without properly measuring actual extent of unverifiability The case clearly gets hit by the decision in the case of M/s Chandra Confectionary P. Ltd. reported in 2003(2) MTC 1022, wherein it has been held by the Hon'ble ITAT Bench, Lucknow that such ad-hoc disallowances, without assigning any reasons and without pointing out any defect, are unjustifiable. In view of above factual position, the disallowances mentioned in above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleted." 11. The CIT(A) has also deleted the addition of Rs.19,35,849/- as under :- (Paragraph No.7, page nos.16 & 17) "7. First issue is relating to the addition of Rs.19,35,849/- on the account of interest received from Bank with Punjab Nation Bank as per AIR information. It is seen that during the course of assessment proceedings the appellant has submitted the details along with TDS certificate and certificate received from Punjab National Bank, Pandeypur reference to Joint Commissioner of Income Tax, Varanasi interest on FDR for the F.Y. 2008-09 has credited Rs.7,50,242/- and TDS thereon Rs.77,275/-. A copy of which is enclosed by appellant vide paper book page no.24 to 28. On the other hand the appellant has submitted the details of interest and TDS thereon an amount of Rs.3,13,391/- vide paper book page no. 21 and 32 to 34. This fact has already brought on record before the Assessing Officer. Again the appellant has submitted Annual Tax Statement u/s 203AA in form 26AS for A.Y. 2008-09 and copy of the account of interest shown during the financial year in the books amount of Rs.23,74,091/-. Looking to the record of the assessee vide paper book page no.267. I find that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.]" 13. It is to note that under section 145(1), the income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" has to be computed in accordance with the method of accounting regularly employed by the assessee, unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom or the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee. Under the sub-section (3) of section 145 in any case where the accounts are correct and complete to the satisfaction of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under consideration. The facts of that case were that the assessee was engaged in the business of manufacturing copper wires. For the relevant assessment year, she filed a return declaring gross profit at the rate of 1.4 per cent against gross profit rate of 5.91 per cent for the preceding year. On being asked, the assessee attributed the fall in gross profit rate to the increase in the purchase price. The Assessing Officer rejected the explanation given by the assessee on the ground that no supporting evidence was produced to show increase in the purchase price and decrease in sales. He also noticed that the weight of finished products declared by the assessee was more than the weight of raw materials. When asked to explain, the assessee submitted that after drawing wire, the process went on to put the wire for enamelling, as a result of which the weight of the wire increased by 2-3 per cent. The Assessing Officer felt that in the absence of adequate supporting evidence, the explanation given by the assessee could not be accepted. He, therefore, rejected the account books of the assessee under section 145(3) and estimated income by applying the gross profit rate of the preceding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finished products (i.e., opening stock of raw material, raw material issued to production department, raw material consumed and closing stock of raw material, opening stock of finished goods, finished goods produced during the year, finished goods sold and closing stock of finished goods) were prepared and audited by certified accountant and were enclosed with Form No. 3CD which had been placed on record, but the Assessing Officer had ignored the factual figures, both in qualitative and quantitative terms, enclosed with the return and filed during the course of assessment proceedings. It was for that reason that the Commissioner (Appeals) was satisfied that the assessee had furnished complete details, including quantitative details in respect of purchase of raw material, manufacture of copper wire and sale of the finished products. In those circumstances, the accounts maintained by the assessee could not have been said to be incomplete or inaccurate. In fact, the Assessing Officer had no material before him to treat the accounts of the assessee as defective or incomplete. [Para 6]…… As regards the marginal increase in the weight of the finished product, the explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as the finished goods and duly audited by the certified accountant had been placed on record, but the Assessing Officer ignored those actual figures enclosed with the return. In any case, there is no statutory provision under the income-tax regime requiring the assessee to maintain the daily stock register. Hence, even if no such register was being maintained by the assessee, that, by itself, would not lead to the inference that it was not possible to deduce the true income of the assessee from the accounts maintained by her, nor the accounts could be said to be defective or incomplete for that reason alone. If the stock register is not maintained by the assessee, that may put the Assessing Officer on guard against the falsity of the return made by the assessee and persuade him to carefully scrutinize the account books of the assessee, but the absence of one register alone does not amount to such a material leading to the conclusion that the account books were incomplete or inaccurate. Similarly, if the rate of gross profit declared by the assessee in a particular period is lower as compared to the gross profit declared by him in the preceding year, that may alert the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses. Business expenditures incurred for the purpose of business are allowable under section 37 of the Act. The said section 37 reads as under:- "General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". [Explanation.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] (2) [* * *] (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.]" 18. To appreciate the scheme of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of any "expenditure" subject to conditions noticed above. In Indian Molasses Co.'s case [1959] 37 ITR 66, the Supreme Court pointed out that the word "expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention. But the idea of "spending" in the sense of "paying out or away" money is the primary meaning and it is with this meaning that one is concerned. "Expenditure" is thus what is "paid out or away" and is something which is gone irretrievably. The apex court in CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 held that in its normal meaning, the expression "expenditure" denotes "spending" or "paying out or away", i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not "expenditure"; it is only when he satisfies the obligation by delivery of cash or property or by the settlement of accounts, that there is expenditure. The burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alled honoraria, which really meant salaries and also by payments of commission on a fixed percentage basis. In addition, each of them got a car allowance, and when the profits justified it payment of a month's salary as bonus. In 1944 and 1945 what was paid as honoraria, that was, salary, to those four amounted to Rs. 18,000 a year. Their scales of salaries were revised for 1946 by a resolution passed by the shareholders on 30-03-1946, and the total came to Rs. 59,100 for 1946. The genuineness of the payment of that amount of Rs.59,100 was never in dispute. The assessee claimed that payment as a deduction under section 10(2)(xv) of the 1922 Act. The ITO limited the admissible deduction to an amount not exceeding twice the amount allowed in each of the preceding years and disallowed the balance. The disallowance was upheld by the AAC as well as the Tribunal. The Hon'ble Madras High Court while deciding the matter observed "whether on the facts and in the circumstances of the case, the disallowance of a sum of Rs.23,100/- out of the expenses incurred by the assessee for payment of remuneration to the Managing Director and the other technician directors is permissible under the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edule D has no power to examine what they think was reasonable or to say what expenditure was necessary." 20. The Court held as under:- "Under our taxing system, it is for the assessee to conduct his business, and in his wisdom or otherwise to fix the remuneration to his staff. The Income-tax Act does not clothe the taxing authority with any power or jurisdiction to determine the reasonableness of the amount so fixed and paid by the assessee. The only test for the deductibility of such remuneration is whether the expenditure has been incurred solely and exclusively for the purpose of the business. If the reality of the payment is challenged or is in dispute different considerations arise : so also in cases where the tax authorities are able to point to some consideration other than the purpose of the business as accounting for any portion of the payment made. In such cases, of course, such portion of the amount claimed, which is either not held to have been paid or is held to have been paid for reasons other than business expediency, could and should be disallowed ; but the reason for the disallowance is because either the portion disallowed is not paid, or because the expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to conduct his business, and in his wisdom or otherwise to incur business expenditures. The Income-tax Act does not clothe the taxing authority with any power or jurisdiction to determine the reasonableness of the amount so fixed and paid by the assessee. The only test for the deductibility of such remuneration is whether the expenditure has been incurred solely and exclusively for the purpose of the business. If the reality of the payment is challenged or is in dispute different considerations arise: so also in cases where the tax authorities are able to point to some consideration other than the purpose of the business as accounting for any portion of the payment made. In such cases, of course, such portion of the amount claimed, which is either not held to have been paid or is held to have been paid for reasons other than business expediency, could and should be disallowed ; but the reason for the disallowance is because either the portion disallowed is not paid, or because the expenditure is not solely and exclusively for the business, and not on the ground that in the opinion of the Income-tax Officer or other taxing authority the remuneration is "unreasonably" high. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A). In the light of the facts of the case, we confirm the order of the CIT(A) on this issue. 24. As regards deletion of addition of Rs.19,35,849/- by the CIT(A), we notice that the A.O. has made addition simply on the basis of AIR information on the basis of form no.26AS in which the assessee has satisfactorily explained the details of interest and TDS. As per the assessee, the CIT(A) noted that the amounts of interest and TDS have wrongly submitted by the Bank in is Annual Tax Return for the year 2009-10. Against the explanation of the assessee, the CIT(A) called for the remand report. In the Remand Report the A.O. has failed to substantiate how the addition of Rs.19,35,849/- is to be made for the year under consideration. For the purpose of ready reference the necessary explanations submitted by the assessee and considered by the CIT(A) is reproduced from paragraph no.7, page nos.16 & 17 :- "7. First issue is relating to the addition of Rs.19,35,849/- on the account of interest received from Bank with Punjab Nation Bank as per AIR information. It is seen that during the course of assessment proceedings the appellant has submitted the details along with TDS certificate and cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition on said account is hereby deleted." 25. In the light of the above discussion and reply of the assessee, we are of the view that merely on the basis of wrong submission of annual return by Bank or wrong information in form no.26AS, addition is not warranted automatically. The issue is required to be examined in the light of books of account of the assessee. The correct facts were already brought on record before the Assessing Officer. The CIT(A) found that the amount has already been taken in the computation of Income along with TDS and also the appellant has submitted the reconciliation chart of receipts for the A.Y. 2008-09 vide Paper Book page no.39A filed before CIT(A) which shows that the assessee has disclosed total gross receipt of Rs.13,54,19,130/- including the bank interest with TDS Rs.23,74,091/- and bank interest without TDS Rs.40,861/- but in the 26AS pertaining to A.Y. 2008-09. it was observed by the CIT(A) that the bank has not filed any details in the TDS return and no interest and TDS amount of bank received by assessee has been reflected in Annual Tax statement under section 203AA filed by the bank. It means the bank has not filed its Annual Tax State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee firm is engaged in the business of civil contract and derives income from civil construction. The A.O. on the basis of AIR information noticed about the contract receipts, interest receipts and TDS. The A.O. asked the assessee to reconcile the figures as per AIR information and as per books of account. After considering the assessee's submission, the A.O. made addition of Rs.53,019/- being the difference of turnover as per AIR information and as per books of account of the assessee. The A.O. has also noted a comparative position of G.P. which is reproduced from page no.5 of the A.O.'s order as under :- (paragraph no.5) A.Y. Turnover Gross Profit G.P. Rate 2007-08 35548265 3487616 9.81% 2008-09 41566724 4262191 10.25% 2009-10 100898025 10594292 10.50% 31. The A.O. noticed that the assessee has produced books of accounts such as cash book, ledger account, journal, bank book. The assessee did not produce voucher register in respect of labour etc. The A.O. invoked section 145(3) of the Act. After invoking section 145(3), the A.O. made addition of Rs.21,05,142/- out of various trading expenses of Rs.4,80,304/- out of various expenses. 32. The details of disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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