THE INCOME TAX OFFICER,,WARD-2(1)(2), AHMEDABAD vs. M/S. KANAK CASTOR PRODUCTS PVT. LTD.,, AHMEDABAD

The Ld.CIT(A) has erred in law and on facts in deleting the following disallowances made by the Assessing Officer without considering the factual observations made by the Assessing Officer in the remand report:

(i) Disallowance of 30% of labour expenses of Rs.25,68,128/-.

(ii) Disallowance of 25% of freight inward expenses of Rs.48,62,129/-. 1.(iii) Disallowance of 25% of freight outward expenses of Rs.20,69,876/- 1.(iv) Disallowance of 25% of loading and unloading expenses of Rs.8,77,735/-. 1.(v) Disallowance of 25% of stores and spares expenses of Rs.25,67,185/-. 1.(vi) Disallowance of testing charges of Rs.12,74,532/-. 1.(vii) Disallowance of bank commission and bank guarantee expenses of Rs.2,00,000/- 1.(viii) Disallowance of 25% of packing expenses of Rs.2,67,092/-. 1.(ix) Disallowance of Rs.3,58,636/- out of brokerage expenses. 1.(x) Disallowance of depreciation of Rs.47,70,928/-.

The Ld.CIT(A) has erred in law and on facts in admitting the additional evidences in violation of conditions specified in Rule 46A without appreciating the fact that during the course of assessment proceeding ample opportunities were given the Assessing Officer to produce the evidences and even during remand proceedings, the A.O. did not find the additional evidences submitted by the assessee as convincing and conclusive.

The appellant craves leave to amend alter any ground or add a new ground which may be necessary.

The only interconnected issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition of Rs. 1,98,16,281/- made by the AO on the reasoning that the expenses were not incurred wholly and exclusively for the purpose of the business.

The facts in brief are that the assessee in the present case is a private limited company and engaged in the business of manufacturing, processing and trading of castor oil and other related products. The assessee for the year under consideration filed its return of income declaring loss of Rs. 6,17,50,097/- only. The assessee revised its return of income time to time and finally declared the loss of Rs. 5,86,29,312/- in the return revised dated 09th May 2010. AY 2008-09 3

The AO during the assessment proceedings required the assessee to furnish the necessary details by issuing show cause notice time and again but the assessee failed to furnish the same. However, the assessee in response to the final show cause notice issued by the AO submitted certain details, vide letter 22nd December 2011 which was filed on 27-12-2011 at the fag end of the assessment. The details furnished by the assessee are given as under:

1 However, the AO was not satisfied with the submission of the assessee on the reasoning that the assessee has not furnished adequate details for the necessary verification. As such, the details furnished by the assessee were containing the copies of the ledgers along with the name of parties. But there was no detail about the amount which were paid to the different parties.

2 The AO, likewise, further noted that the assessee has filed the copies of the invoices/bills in support of brokerage expenses of the earlier year. Accordingly, the AO disregarded the contention of the assessee and made the disallowance of different expenses claimed by the assessee on ad hoc basis/estimated basis in the manner as detailed below:

3 The AO found that the assessee has not filed complete details and associated evidences in support of genuineness of expenses to justify that these were incurred wholly and exclusively for the purpose of the business. As such, the assessee only submitted the list of names of persons to whom amount was paid against alleged expenses. But no detail was given that of how much amount was paid to the specific person. Likewise, no PAN or other detail was submitted of the person to whom amount was paid. Accordingly, the AO in the absence of adequate supporting documents held that the genuineness of the expenses have not been proven completely. Thus, the AO disallowed part expenses in the following manner:

4 The AO found that the assessee during the year has claimed testing charges of 12,74,532/- but there was no such expense claimed in the immediate previous year though export sales were made in both the years. Further, the assessee failed to furnish any supporting document despite being asked specific question. Thus, the AO in absence of supporting documents disallowed the claim and added to the total income of the assessee.

5 The assessee during the year under consideration claimed bank commission & guarantee charges of Rs. 5,59,909/- and Rs. 8,99,262/- respectively. The AO found that the assessee has not furnished bank book or bank statement or any other supporting documents. Therefore, the AO held that the impugned expenses cannot be accepted in totality without cross verification. Thus, the AO disallowed part expenses of Rs. 2,00,000/- and added the same to total income of the assessee. AY 2008-09 6

6 The assessee in the year under consideration claimed the brokerage expense of Rs. 4,48,168/- only. The AO from the note to accounts attached with the financial statement found that an amount of Rs. 3,28,797/- is prior period expenses, thus he disallowed the same. Similarly, the AO found that the genuineness of remaining expense of Rs. 1,19,376/- was also not proven as the assessee failed to furnished necessary document and evidences. Thus the AO disallowed 25% of the remaining amount i.e. 29,844/- only aggregating to Rs. 3,58,636/- and added the same to the total income of the assessee.

7 The AO found that the assessee during the year has made an addition of Rs. 2,53,35,712/- to the fixed assets and claimed depreciation and additional depreciation of Rs. 24,04,744/- and Rs. 23,66,184/- respectively. However, the assessee failed to submit necessary document to prove the genuineness of the addition of fixed assets. Thus, the AO disallowed the depreciation as well as additional depreciation aggregating to Rs. 47,70,928/- and added to the total income of the assessee.

8 In view of the above, the AO made the addition of various expenses as discussed above aggregating to Rs. 1,98,16,281/- to the total income of the assessee vide order dated 29th December 2010. 6. The assessee being aggrieved preferred an appeal to the learned CIT (A) and filed certain additional documents which were forwarded to the AO for the remand report.

1 The AO vide remand report dated 24th August 2018 submitted that the assessee deliberately has not submitted required document/ evidences till fag end of assessment proceeding despite issuing several notices. Thus the same were not verified due non availability of time. The AO further submitted that the additional document is nothing but same set of documents which were submitted during AY 2008-09 7

2 The assessee in rejoinder submitted that all the payments were made through banking channel. The assessee also claimed that the ledger copies of the parties along their name, addresses and cheque detail were already submitted. Therefore, the finding of the AO to this extent is incorrect. The assessee also claimed that detail of TDS returns were also furnished before the AO during assessment proceedings. The assessee further claimed that it has submitted bank book and bank statement vide letter dated 19th June 2012 during appellate proceeding and also during assessment proceeding vide submission dated 12th October 2010. Similarly, the assessee contended that it has also filed the copies of the invoices/bills for the purchase of fixed assets for more than 80% of assets during assessment proceeding as well appellate proceeding. With respect to cash book, the assessee submitted that the AO never asked for cash book. Hence, the same was not submitted.

The learned CIT(A) after considering submission of the assessee and remand report of the AO admitted the additional evidences and proceeded to decide individual additions made by the AO of various expenses. The finding of the learned CIT(A) is given in the following paragraph.

1 The CIT(A) observed that the assessee has furnished the necessary bills and genuineness of the payments and duly recorded the expenses in the books of accounts. Thus, the learned CIT(A) held that in such circumstances, the ad-hoc disallowances of the expenses are not tenable and directed the AO to delete the same.

2 The learned CIT(A) observed that the AO has disallowed testing charges on account non availability of supporting document. However, during appellate proceeding, the assessee has furnished relevant ledger and supporting document establishing correctness of the expenses. Hence, the ld. CIT-A directed the AO to delete the addition made by him.

3 The learned CIT (A) held that the assessee has submitted bank details during assessment proceeding as well as during appellate proceeding. Thus adhoc disallowances of Rs. 2 lakh out of expenditure paid to bank is not sustainable. Accordingly, the ld. CIT-A directed the AO to delete the addition made by him.

4 The learned CIT (A) found that addition of the brokerage expenses of Rs. 3,28,792/- was made on account of prior period expenses and 25% of remaining expense on account of non-availability of the supporting evidence. However, the assessee in suo- moto has disallowed the same in the revised return of income for Rs. 4,48,168/- only. Therefore, further disallowance is not required.

5 The learned CIT(A) held that the majority of the bills with respect to the addition of assets were duly submitted by the assessee. Hence, the disallowance of depreciation is not justified and accordingly the ld. CIT-A directed the AO to delete the addition made by him.

Being aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us.

1 The learned DR before us contended that the necessary supporting documents were not furnished by the assessee even during the remand proceedings.

2 On the contrary the learned AR before us filed paper book running from the pages 1 to 732 and submitted that all the details in support of the expenses were AY 2008-09 9

3 The learned AR also drew our attention on the details of freight inward expenses, freight outward expenses, loading and unloading expenses, stores and spares expenses and packing expenses which are placed on record in the paper book.

4 The learned AR with respect to bank guarantee expenses and bank commission expenses filed the copy of the ledger along with the bank statements which are placed on pages 250 to 478 of the paper book.

5 The learned AR with respect to the brokerage expenses contended that the same was disallowed in the revised computation of income therefore there cannot be any further disallowance of such expenses. The learned AR for this purpose drew our attention on the revised return of income which is placed on record.

6 The learned AR with respect to the addition of fixed assets submitted that the majority of bills for the purchase of the fixed assets were filed which are placed on pages 536 to 651 and 673 to 674 of the paper book.

7 Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them.

We have heard the contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that it was alleged by the AO that the assessee has not furnished the requisite details in support of various expenses. Thus, the AO, in the absence of such details, has made the disallowance of various expenses on ad hoc basis. The list of such expenses reads as under:

1 However, the learned CIT (A) was pleased to delete the addition made by the AO on the reasoning that the assessee has furnished all the requisite details in support of the expenses.

2 Admittedly, the necessary details in support of the expenses were filed by the assessee at the fag end of the assessment proceedings. Accordingly the AO in his remand report dated 24th April 2018 has categorically admitted the fact that such details filed by the assessee were not verified due to shortage of time. The AO in his remand report has made reference to the details filed by the assessee on 27th December 2010 vide letter dated 22nd December 2010. 9.3 However, we find that the assessee has also filed additional submissions before the AO vide letter dated 29th of December 2010 which has not been referred by the AO in the remand report. Indeed, the assessment order was passed by the AO dated 29th December 2010. Hence, it was not possible for the AO to consider the details furnished by the assessee at the fag and of the assessment proceedings.

4 Be that as may be, all the above details filed by the assessee vide letter dated 22 December 2010 and 29th of December 2010 were also submitted before learned CIT (A) vide submission dated 19th June 2012 which were duly forwarded by the learned CIT (A) for the remand report. But the details filed by the assessee dated 29th December 2010 has not been referred by the AO in the remand report.

5 On perusal of the remand report of the AO dated 24th April 2018, we note that the AO has made the disallowance of the expenses for various reasons. One of the reason was that the details were not furnished by the assessee whether the expenses were paid through the banking channel or in cash. We disagree with the finding of the AO for the reason that the assessee has duly furnished the copies of the expenses ledgers and the ledger of all the parties to whom the payments of such expenses were made which are placed on paper book as detailed below: AY 2008-09 11

6 The party wise ledgers contains the details of the mode of payment which is through banking channel. Similarly, the assessee has also filed the copy of the bank statement which is placed on pages 251 to 438 of the paper book. Likewise there were addresses furnished by the assessee of all the parties to whom the payment was made against the expenses. However, the AO has not verified from any of the party despite having the power under the statute under the provisions of section 131(1)/133(6) of the Act.

7 The 2nd allegation of the AO was that the assessee has not furnished the details of the TDS. However on perusal of the paper book filed by the assessee, particularly pages 693 to 724, we note that the assessee has furnished details of TDS deducted and the copies of the TDS return acknowledgment.

8 The 3rd and the 4th allegation of the AO was that the assessee has not furnished the bills of the parties as well as the copies of the vouchers for payment. Indeed, it was the onus of the assessee to furnish the requisite details as desired by the AO. On perusal of the paper book, we also note that such details were not furnished by the assessee. However, in our considered view in the absence of such details, there cannot be any disallowance of the expenses. It is for the reason that the AO was provided the addresses of the parties to whom the payment was made, their ledger accounts showing the amount was paid through the banking channel AY 2008-09 12

9 The next allegation ( No. 5 and 6) was that the assessee failed to furnish the copy of the bank book and the bank statement. In this regard we find that, the assessee was maintaining 7 bank accounts and has filed the copies of all the bank statement which are available on pages 251 to 438 of the paper book. Likewise, the assessee before learned CIT(A) in rejoinder to remand report claimed that it has furnished bank book during assessment proceeding vide letter dated 12th October 2010, but the same not controverted by DR. Thus to this extent, we disagree with the comments of the AO in the remand report.

10 With respect to the cash book, the learned AR before us contended that the copy of the cash book was never demanded by the AO during the assessment proceedings. Accordingly, the assessee has not furnished the same. This contention of the learned AR was not controverted by the learned DR at the time of hearing. Accordingly, we note that the assessee cannot be penalized on account of non- furnishing the cash book in the given facts and circumstances.

11 Besides, the above we also note that the assessee has also made rectification application under section 154 of the Act vide letter Ref: Kanak/154/2008- 09/3012/01-11 dated 19th January 2011 requesting the AO to consider the necessary details filed in the application dated 29th of December 2010. The copy of the rectification application is placed on pages 110 to 115 of the paper book. Therefore, we can safely assume that the necessary details were available with the AO during the remand proceedings. But the AO has not taken the same into consideration while filing the remand report to the learned CIT (A). AY 2008-09 13

12 Coming to the disallowance of testing charges of ₹ 12,74,532.00, in this connection we note that the assessee has filed the necessary details of such expenses. The details include the ledger copies of the parties and the major bills issued by the parties which are placed on pages 207 to 249 of the paper book. The AO has not pointed out any defect in the details furnished by the assessee. In the event, the AO had any doubt on the genuineness of such expenses, he was empowered under section 133 (6)/131 of the Act to carry out the necessary verification. But he has not done so.

13 Coming to the ad hoc disallowance of Rs. 2 lacs towards bank commission/bank guarantee expenses, in this regard we note that the assessee has furnished the copies of the ledger of such expenses which is placed on pages 439 to 478 of the paper book. The assessee in support of its expenses has also filed the bank statements which are placed on pages 251 to 438 of the paper book. The details of such expenses were very much available during the remand proceedings before the AO. Therefore the same cannot be disallowed on adhoc basis.

14 Coming to the disallowance of brokerage expenses of ₹ 3,58,636/-, in this connection we note that the assessee in the revised return of income has already made the disallowance of brokerage expenses on account of non-deduction of taxes. In other words the assessee has claimed brokerage expenses of ₹ 4,48,167/- which were disallowed by the assessee suo-moto in its revised return of income. Therefore, any further disallowance will lead to the double addition to the total income of the assessee. The assessee has filed the necessary details showing the amount of disallowance of the impugned expenses which is placed on pages 6 of the paper book. However, the question arises that the assessee in the subsequent year can claim the deduction of such expenses after complying the provisions of TDS whereas the disallowance has been made by the AO for the impugned expenses on account of 2 reasons namely prior period expenses and secondly non-availability of supporting evidence. As regards the prior period expenses, we note that the courts have taken the view that prior period expense cannot be disallowed as there is no effect on the tax liability of the assessee. In holding so we draw support and AY 2008-09 14