M/S GINNI FILAMENTS LTD.,MATHURA vs. A.C.I.T., RANGE-3, MATHURA

In the Income-Tax Appellate Tribunal, Agra Bench, Agra

Before : Shri Laliet Kumar, Judicial Member And Dr. Mitha Lal Meena, Accountant Member

ITA No. 173/Agr./2013 Assessment Year: 2008-09

M/s. Ginni Filaments Ltd., 110 K.M. vs. A.C.I.T., Range-3, Stone Delhi Mathura Road, Chhata, Mathura. Distt. Mathura. PAN-AABCG0942K (Appellant) (Respondent)

Appellant by Sh. R.S. Singhvi, C.A. Respondent by Sh. Waseem Arshad, Sr. DR

Date of Hearing 08.08.2019 Date of Pronouncement 02.09.2019

ORDER Per Laliet Kumar, J.M.: Present appeal is being filed by the assessee aggrieved from the order of the ld. CIT(A) dated 07.12.2012 on the following concise grounds : “1. BECAUSE, upon due consideration of facts and in the overall circumstances of the case 'CIT(A)' had fallen in error of fact and in law in proceeding to pass appellate in an ex-parte manner without due consideration of material facts available on records of the authorities below. 2. (a) BECAUSE, upon due consideration of facts and in the circumstances of the case the authorities below were not justified in making addition of Rs.7,31,07,000 after rejecting the Manufacturing/Trading results as were derived from the accounts, maintained on regular basis which were duly audited under section 44AB of the 'Act' and the Auditor has furnished unqualified Audit Report certifying the correctness in the accounts.

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(b)BECAUSE, the authorities below had taken the estimated rate of Gross Profit without considering the facts of the case, explanations furnished by the appellant and evidences as were brought on records during the course of hearing. (c) BECAUSE, in any view of the matter, rejection of accounts do not ispo facto gives rise to the jurisdiction to the 'AO' to make addition in the Gross Profit as fairly shown by the 'appellant' in the light of law laid down by the Hon'ble Rajasthan High Court in the case of CIT Vs Gotan Lime Khanij Udyog reported in (2002) 256 ITR 243(Raj.). 3. BECAUSE, the authorities below erred on facts in making and sustaining addition of Rs. 12,26,645/- on account of notional gain on foreign currency as income without considering the facts that the same is unrealizable and notional. 4. BECAUSE, the authorities below had fallen in error in disallowing prior period expenses amounting to Rs. 13,52,866/- and taxing prior period income without considering the normal prudence accounting system an erroneous interpretation of law and without appreciating that accruals event of the same has taken place in current year. 5.BECAUSE, the authorities below had fallen in error in making addition of Rs.29,11,000/- towards notional income on account of rent of machines without considering the facts that the same are not realized and is not realizable. 6. BECAUSE, the authorities below had fallen in error in disallowing deferred revenue expenses amounting to Rs.19,67,582/- without considering the facts that the same was never claimed in earlier years by the assessee and the same is being partly claimed on year to year basis in part and is being allowed accordingly consistently. 7. BECAUSE, on due consideration of facts and in the overall circumstances of the case the Id CIT(A) ought to have given clear cut finding in allowing the loss on merger of companies for the period 01.1 2.2007 to 31.03.2008. 8. BECAUSE, the 'AO' has erred in giving credit of TDS by Rs. 10,34,853/- instead of Rs. 13,81,255/- as claimed by the assessee in the revised computation of income.

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page 7 of the assessment order to the following effect : Perusal of above mentioned table reveals that - 1. Production loss as shown in table 'A' of the current year is 92.7 % higher than that of A.Y. 2007-08. It is 81.97% higher than that of A.Y. 09-10. 2. Consumption of processed fabric in production of garments varies from 1.578 Kg. per garment in A.Y. 2007-08 to 0.268 Kg. in A.Y. 2009-10 During the year under consideration it is 0.33 Kg. 3. Count wise details of production consumption, sales etc. of yarns has not been maintained by the assessee. 4. Valuation of stock is neither at cost or market price as can be seen from the above tables. 5. Perusal of the above chart reveals that average cost of yarns comes to Rs. 163.66 per kg, whereas the assessee is making sales @ 95.05. Cost of processed fabrics comes to Rs. 317.78 against the average sale prices of Rs.257.94 per kg.

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On the facts and in the circumstances of the case as discussed above, Manufacturing/trading results as shown by the assessee cannot be accepted. Books of account are liable to be rejected under section 145(3) of Income Tax Act and sales have to be estimated by adopting appropriate G.P. rate. There is huge fall in G.P. rate as compared to immediately preceding year. This is a fact that cotton prices have increased substantially. Other reasons as stated by the assessee cannot be totally ignored. But the fact remain that the assessee is selling goods at prices lower than its cost. The assessee has also made sales of some items at prices lower thanits purchase price. There is nothing on record to snow the assessee had entered in long term contract to make sales at prices lower than its cost. In these circumstances abnormally low sale price cannot be accepted. The account suffers from infirmities as discussed above. Keeping in view the reply filed by the assessee form time to time, it would be appropriate to allow some discount in G.P. rate while adopting G.P. rate of earlier year. In A.Y. 2007-08 the assessee has shown G.P. rate of 20.71 % and in the A.Y. 2009-10 G.P. rates is 15.80%. In the current year G.P. rate is 13.96%. If G.P. rate of the current year is taken at 16 % it will be fully justified on the facts and in the circumstances of the case.”

account and thereafter had computed the gross profit @ 16%. It was submitted that

on appeal before the ld. CIT(A), the ld. CIT(A) had also followed the decision of the

Assessing Officer and in paragraph No. 5.3 he had concluded as under : “5.3 I have considered all these objections taken by the appellant in the first ground, however, I find that neither in the statement of facts, nor in the grounds taken, no reason has been given for selling certain items at price less than its cost. The objections raised in the ground have also been found to be very brief and general in nature and no supporting documents, data or figures have been mentioned showing that the decision of the AO was wrong. In order to substantiate the objections taken in this ground, the appellant has also been provided opportunity to appear before me to show from the record and also produce the relevant documents to prove that data taken by the AO while drawing his conclusion in the assessment order about increase in the production cost and sale of certain items at a price less than the cost are contrary to the fact. But no such attempt has been made by the appellant company, even no written submission has been filed giving details and showing that the conclusion

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drawn by the AO was wrong. Therefore, I have accepted the conclusion drawn by the AO about non-maintenance of books of account by the assessee(appellant) property showing correct position of manufacturing and trading results and hence, I confirm the decision of the AO rejecting the books of account u/s.145(3) of the I.T. Act. Having confirmed the rejection of books of account by the AO, i have also found that the AO has reasonably estimated the gross profit rate at 16% after taking into account the GP rate disclosed by the assessee(appellant) in the previous assessment year as well as in the subsequent year and hence, I do not find any infirmity in estimation of profit by the AO and making the requisite addition of Rs.7,31,07,000/- on account of showing low GP rate and, therefore, the addition of Rs.7,31,07,000/- is confirmed and accordingly, ground no.1 is dismissed.”

It was submitted that during the assessment proceedings, the assessee had 5.

produced the books of account consisting of audited balance sheet and tax audit

report, cost audit report and other documents as called upon by the Assessing

Officer and there is no reason for the Assessing Officer to reject the books of

account.

5.1 Before the ld. CIT(A), the assessee had given point-wise rebuttal to the

objection raised by the Assessing Officer. Said objections are forming part of the

paper book. The ld. AR has summarized the same in the written submissions in para

6.10 to the following effect : 6.10 In fact, the observations of the assessing officer at Pg 7 are arbitrary, irrational and based on mis-appreciation of facts. The point was rebuttal of the same is hereunder: • It is submitted that figures indicating rise in production loss in Table A at Pg 5 of the assessment order are uncorroborated and it is not known from where the assessing officer has picked up these figures. Moreover, the assessing officer has totally ignored the quantity of work in progress while computing the purported production loss and as such the very basis of conclusion is incorrect

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and erroneous. Even otherwise, the mere fact of increase in production loss in the year under reference per se would not lead to any adverse inference as long as the production data is actual and correct. It may be appreciated that assessing officer has not disputed the correctness of opening stock, purchases, sales and closing stock and as such hypothetical allegation of production of loss is highly arbitrary and misconceived. • The AO has observed that there is reduction in consumption of fabric in Table B at Page 6 of the order. It is observed that consumption of fabric per garment has reduced from 1.578 Kg in AY 2007-08 to 0.33 Kg in current year. It is incomprehensible as to how reduction of consumption is an indicator of defect in books of account. In fact, the reduction in consumption is a favourable fact which shows improved efficiency and results in increase in profit. • The AO has observed that appellant has not maintained count-wise details of production which is factually incorrect as complete count-wise details are maintained which is corroborated from cost audit report. • The observation of AO regarding valuation of stock is also factually incorrect. It is clarified that stock has been consistently valued at cost or NRV whichever is lower. This position is corroborated from point no. 12(a) of tax audit report at PB Pg 38 as well as note no. 8 of audited Balance sheet at PB Pg 27. • The allegation of difference between cost and sale price of yarn as per Table C and Table D at Pg 6 of the assessment order is illogical as the AO has attempted to compare cost and sale price of different qualities of yarn and such the very basis of comparison is patently wrong. In any case/ in absence of any dispute with regard to correctness of data extracted from our own record, there could be no ground or basis for drawing adverse inference by making erroneous comparisons.

exercise of power u/s. 145(3) by the Assessing Officer and secondly, even if there

were alleged objections, those objections were duly answered by the Assessee the

assessment proceedings as well as in remand proceedings. The ld. AR has taken us

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to the order passed by the ld. CIT (A) where the contentions of the assessee were

duly noticed by the ld. CIT(A). Moreover, our attention was drawn to page 32 of the

paper book (Annual Report) where the quantities, cost and value of raw material

consumed for the assessment year 2007-08 werementioned to the following effect :

2007-08 Quantity Amount Rs. In Lacs (E)Sales (i).Yarn 225.42 @ 21426.93 (iii) Processed fabrics 14.68## 3786.56

2007-08 Kgs in lacs Rs. In Lacs (G) Raw Material consumed

Yarn 12.82 2098.16 Processed fabrics 0.37 117.58

6.1 It was further submitted that the assessee has been consistently following the

same accounting method and there was no reason for the Assessing Officer to reject

the books of account. Further, it was submitted that the conclusion of the Assessing

Officer is wholly unsustainable.

6.2 It was submitted that on account of fall in GP ratio, the Assessing Officer is not

empowered to invoke the provisions of section 145(3). It was submitted that no

additions could be made on account of alleged defects pointed out by the Assessing

Officer. The ld. AR has relied upon the following decisions :

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(i). CIT vs. UP State Food and Essential Commodities (2014) 221 Taxman 16 (Allahabad HC) (ii). CIT v. Poonam Rani (2010) 326 ITR 223 (Delhi HC) (iii). DCIT v. Subhash Chand Agrawal (2013) 58 SOT 122 (Alld. Tribunal)

the ld. CIT(A) in the identical facts, despite decline in GP, had accepted the GP rate of

8.41%. He has drawn our attention to the table reproduced in paragraph 6.7 of the

written submissions to the following effect :

A.Y. SALES Accretion/ Material & Payment & G.P. G.P. RATE Assessment (Decretion) of Manufacture Benefit to under Stock ngExp. Employee

2000-01 15,595.80 -105.82 11,080.18 578.97 3,830.83 24.56% U/S143(3)

2001-02 17,732.39 773.36 13,679.41 700.54 4,125.80 23.27% U/S143(3)

2002-03 17,130.92 -811.42 12,205.08 728.91 3,385.51 19.76% U/S 143 (1)

2003-04 17,433.03 -107.67 12,737.39 781.76 3,806.21 21.83% U/S143(3)

2004-05 19,821.31 258.01 15,169.17 822.22 4,087.93 20.62% U/S 143 (3)

2005-06 18,462.63 -93.30 13,839.95 951.29 3,578.09 19.38% U/S 143 (3)

2006-07 19,042.44 135.02 13,939.33 1,075.90 4,162.23 21.86% U/S 143 (3)

2007-08 22,445.75 752.87 17,185.56 1,357.64 4,655.42 20.74% U/S 143 (3)

2008-09 30,176.50 753.91 24,662.71 2,053.55 4,214.15 13.97% U/S 143 (3)

2009-10 40,805.38 -606.49 31,530.16 2,217.47 6,451.26 15.81% U/S 143 (3)

2010-11 50,720.84 327.04 38,320.82 2,404.81 10,322.25 20.35% U/S 143 (3)

2011-12 69,298.80 5170.08 57,959.74 2,865.75 13,643.39 19.69% U/S 143 (3)

2012-13 71,214.93 -3500.87 48,647.57 2,985.96 16,080.53 8.41% U/S 143 (3)/250

ITA No. 173/Agr/2013 9

The para 9 of the order of the ld. CIT(A) for assessment year 2012-13 accepting the

G.P. rate of 8.41% based on the remand report, was as under :

"9. G.P. Addition Rs. 82,68,05,337/- The AO has made an addition ofRs. 82,68,05,337/- by applying the average GP rate 20.02% which is increased by 11.61% of the relevant year GP rate. The assessee's co. had G.P. rate of 2035% in the A.Y. 2010-11 and G.P. rate of 19.69% in A.Y. 2011-12. The same has fallen to 8.41% in the relevant assessment year i.e. 2012-13. The assessee co. was asked to file the details regarding month wise sale and purchase vide notice u/s. 142(1) dated 30.01.2015. The assessee was failed to file any of these details. In absence of these details the genuineness of the trading result declared by the assessee co. could not be relied upon by the AO and this addition had been made. During the course of remand proceedings assessee co. furnished a detailed submission regarding addition on G.P. rate. It is worthwhile to mention here that AO has not indicated any discrepancy in the books of account, statutory audit report and also in tax audit report already placed on record. The AO has not rejected books of accounts u/s. 145(3) assumption basis applying G.P. Rate without finding any discrepancy in books of account. The assessee co. has maintained proper books of account and are audited under Companies Act and tax audit is also conducted as per the provisions of Income Tax Act. The company is also subject to cost audit and duly maintaining cost record in companies with Companies Act. The decision on this issue may be taken in the light of the above discussion."

Submissions of DR

was submitted that the books of account were not maintained by the assessee in

proper form, therefore, AO had rightly rejected. He drew our attention to page 7 of

the order passed by the Assessing Officer as well as the order of the ld. CIT(A) in

para 5.1 to 5.3.

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available on record. Before we deal with the facts of the case we would like to

mention that the Assessing Officer is empowered by virtue of section 145(3) to

reject the books of account and make assessment on estimate basis as per section

144 of the Act. But before invoking the provisions of section 145, it was incumbent

upon the Assessing Officer to record that the books of account were not correctly

maintained and were not complete and also to mention that the method of

accounting followed by the assessee was not in accordance with the norm laid down

by ICA or the Central Government. Further, it was the duty of the Assessing Officer

to show that the income was not computed by the AO in accordance with notified

accounting standard.

9.1 If we look into the orders of the authorities below, then we find that thelower

authorities have neither pointed out any defect in the books of account of the

assessee with respect to the correctness or completeness (in fact, the AO has relied

upon the books of account and used the transactions recorded in the books of

account to come to the conclusion that there was decrease in GP).

9.2 Further the AO has not mentioned that the method of accounting used by the

assessee was contrary to the notified accounting standards and also he had failed to

mention that the income computed was contrary to the standard notified by the

authorities.

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9.3 In our understanding, the gross profit/net profit are the end result reached on

the basis of books of account. In other words, the gross profit or net profit are the

resultant values arrived by the Assessee on the basis of the maintaining the books of

account. Merely because there is decrease in GP may be a reason to alarm and alert

the Assessing Officer, but the Assessing Officer has to do more homework to dig up

the reasons for decrease in GP/NP and for that purpose, it is the duty of the

Assessing Officer to point out the specific defects as to the correctness and

completeness of the books of account. Nothing has been done in the present case.

given following reasons for rejection of books of account as Fall in G.P. rate (page 3

of AO). The reasons for fall in GP rate were delineated on account of following

reasons:

(i). Increasing raw material price (ii). Decrease in sale price

The Assessing Officer in tables A,B,C,D&E at page 5 to 7 has mentioned that the

production of Gray Fabrics from yarn, production of garments from processed

fabrics, cost of different raw material used, average sale price of different items sold

by the assessee and average rate of opening and closing stock of different items are

shown. After recording all this, the AO has rejected the books of accounts of the

assessee.

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10.1 The assessing officer had mentioned the reason for coming to the conclusion

for increase in raw material by comparing the cost of purchase of raw material for

the previous years. No other independent material was brought on record to show

that the prices paid for the raw material was not prevalent in the market or there

was interrelated party transaction by virtue of which the assessee had paid the

higher price to the related party, thereby reduce the profit. Similarly for the

decrease in sale price the assessing officer had compared the sale price of yarn

which had resulted into loss. In fact while doing so the assessing officer had

compared the sale price of raw yarn with the processed fabric. In this case also the

assessing officer had not brought on record any independent evidence for

decreasing the sale price. The assessing officer has not brought on record that the

assessee has made a sale out of books or have made under invoicing. In view of the

above on facts also we do not find any reasons for rejecting the books of account by

the assessing officer.

10.2 In our considered opinion, the requirement of section 145(3) must be

complied by the Assessing Officer and he has to mention pointedly that in what

manner and on what basis, the conclusion was drawn by the Assessing Officer that

the books of account have not been correctly maintained.

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10.3 On the contrary, if we look into the figures provided in tables A to E then it is

clear that the said table work wereconstructed by the Assessing Officer based on the

books of accounts of the assessee, cost audit report and balance sheet of the

assessee. If the record is maintained by the assessee, then it is for the Assessing

Officer to point out how the maintained books of accounts were contrary to

accounting standard or how the same were defective. Once,the Assessing Officer is

taking the same figures as provided by the assessee in books of account and if the

said figures gave rise to decrease in GP rate, than the decline in GP cannot be made

basis of rejecting the books of account. In our view the whole exercise of rejection of

books of account is totally an excessive use of power by the Assessing Officer. We

are of the opinion that once the assessee is maintaining true and correct accounts in

respect to affairs of its industry then the same cannot form basis for rejection of

books of account. We may rely upon t. he decision of [2013] 40 taxmann.com 284

(Gujarat)Dhiraj R Rungta* wherein it was held that the rejected books of account

can not form basis of addition , similar view was taken in the matter of U. P State

Food and Essential Commodities. 221 Taxman 16 (All).

10.4 In the present case, basis of rejection of rejection of accounts by the Assessing

Officer was totally erroneous and uncalled for. The Assessing Officer has not given

any reason which would fall within the four corners of the ingredients as stipulated

u/s. 145 (3) of the Act.

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G.P. is also unsustainable, as making the GP addition on the basis of earlier year or

future year is not called for when the rejection of books of account was found to be

unsustainable. As in the present case, we do not agree with the finding of the lower

authorities with respect to the rejection of books of account and in consequence

thereof, we have no hesitation to hold that the GP rate of 16% is also erroneous and

liable to be set aside. We may further mention that in the similar circumstances, the

remand report was submitted by the Assessing Officer for the assessment year

2012-13 and the ld. CIT(A) had deleted the addition of Rs.82.68 crores based on the

remand report of the Assessing Officer.

rejected unless there are strong and sufficient reasons to indicate that they are

unreliable. Hon’ble Supreme Court in the case of Woodward Governor India Private

Limited [(2009) 312 ITR 254 SC] = [TS-40-SC-2009-O] held that “...Accounts

regularly maintained in the course of business are to be taken as correct unless

there are strong and sufficient reasons to indicate that they are unreliable...”

12.1 The primary condition for rejecting the book results as laid down under

section 145 of the Income-tax Act, 1961 is that the ld. AO should be satisfied that the

books of account maintained by the assessee are not complete and correct. As can be

seen from the findings of the lower authorities, there is no instance of falsity or

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incompleteness of the books of account. The books of account reflect the true state

of affairs of the assessee company. Under such circumstances merely because the

assessee company sold its products to its sister-concern, at a price lesser than the

prevalent market price on the date of sale, would not be a sufficient ground to come

to a conclusion that books of account of assessee company were not complete or

correct. This finding cannot, in any way, warrant rejection of books of accounts.

12.2 Similar ratio, under identical set of facts, has been laid down by the Hon’ble

ITAT Bangalore Bench in the case of Sphoorti Machine Tools (P.) Ltd [(2012) 19 ITR

0736 Bang] = [TS-744-ITAT-2012(Bangalore)-O] in which the Hon’ble Bench held

that “...The fact that the assessee has sold its products to its sister-concerns at a

price lesser downloaded from than the price at which the same product is sold to

the third parties, in our opinion, would not be a sufficient ground to come to a

conclusion that the books of account of the assessee are not complete and correct.

There is no evidence brought on record that over and above the price shown in the

books of account, the assessee received something more from M/s. Pragathi

Automation P. Ltd. As rightly contended on behalf of the assessee it is for the

businessman to decide the price at which he has to sell its products to its customers.

The law is well-settled that the Revenue cannot insist on the way in which

businessmen should conduct his business. The Revenue cannot compel a

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businessman to sell its products at a particular price, so that the assessee derives

maximum profit...”

12.3 Reliance is also placed on the order of Hon’ble Punjab & Haryana High Court

in the case of Saimbhi Cycles & Auto Industries, Ludhiana [(2015) 229 Taxman 552

P&H] = [TS5397-HC-2014(Punjab &haryana)-O] wherein the Hon’ble High Court has

upheld the following finding of Hon’ble ITAT contained in Para 7 of the order. The

same is reproduced for the sake of convenience:

“...The above findings were affirmed by the Tribunal vide order dated 29.4.2013,

Annexure A.III with the following observations:—

"8. We have considered the rival submissions carefully. We find that first of all the

assessee is a concern wherein assessee was entitled to deduction under section

80IB of the Act @ 25% which would mean that effective tax rate would be 22.50%

whereas the sister concern M/s Darshan Udyog is required to pay tax @ 30%,

therefore, there was no incentive to make sales at lower rate. In any case, in the

detailed submissions before the Assessing Officer and CIT(A) it demonstrated that

practically no sales have been made to outside parties and therefore, comparison is

not correct. In any case, the Hon'ble Supreme Court in the case of CIT v. Glaxo

Smithkine Asia (P) Limited has clearly held that since there was no provision to

make addition on account of receipts which are at less than the fair market value,

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therefore, such additions are not justified. In these circumstances, we find nothing

wrong with the order of learned CIT(A) and we confirm the same....”

12.4 In view of the above and also in view of the fact that there was no rejection of

books of accounts, ground Nos. 2(a) to (c) are allowed.

13.1 Ground No.4 pertains to disallowance of prior period expenses. The ld. AR has

drawn our attention to page 10 of the assessment order where the Assessing Officer

at Sl. (D) has disallowed the amount of Rs. 13,52,866/- on account of prior period

expenses. It was submitted that the assessee has not claimed this amount in the

computation of income and our attention was drawn to page 29 Sl. No. 11 of the

paper book to the following effect :

2007-08 2006-07 (Rs.in lacs) (Rs.in lacs) 11.a) Prior period Income(Expenses) represents: Debit relating to earlier years (15.14) (34.91) Credit relating to earlier years 14.75 11.13 Depreciation adjustment - 0.85 ----------- ----------- (0.39) 22.93) ----------- -----------

Further, it was submitted that the assessee has been consistently following this

policy in the earlier years also and has claimed as allowable expenses u/s. 37 of the

Act.

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CIT(A) order where the ld. CIT(A) has discussed in details the issue of prior period

income and expenditure.

on record. Para 8.2 of the ld. CIT(A)’s order is as under : 8.2 As I have held in the previous ground, due to following of mercantile system of accounting, if any, gain or loss is arising to the assessee(appellant) on the last day of accounting year, the same has to be taken into account while computing the income of the assessee(appellant), similarly, in case of claiming of any expense, if the same pertains to the previous year, these expenses cannot be allowed during the year under consideration and such expenses should have been quantified in the previous year itself and deduction for the same should have been taken. Therefore, I find that the AO is correct in disallowing the claim of prior period expenses of Rs.13,52,866/-. As regards to prior period income though the appellant has mentioned in ground no.4 that the AO has taxed the prior period income, no such details have been brought before me about amount of prior period income taxed by the AO during the year under consideration. However, the AO is directed to examine from the details of income furnished before him whether any prior period income has been taxed in this year and if any such income has been taxed for this year, the same should be excluded and the assessment proceeding of earlier year may be reopened for taxing the income of prior period in the relevant assessment year.”

Assessing Officer to verify from the record whether any prior period income has

been taxed in the year under consideration and if it was so then it should be

excluded and added to the relevant assessment year after reopening the case for

ITA No. 173/Agr/2013 19

taxing the income of the prior period. In our considered opinion, the income and

expenditure are required to be taxed in the year in which it was accrued and if the

income is considered to be accrued in the year under consideration, may be relating

to the prior period, then any expenditure laid out or expanded wholly and

exclusively for the purpose of business is also required to be allowed in this year. In

the present case, if we look into the computation of income, then it is clear that the

assessee has not taken into account the prior period expenses in computation of

income. As the assessee has not taken into account the prior period expenses for the

purpose of computation of income, then there was no reason for the Assessing

Officer to make disallowance of Rs. 13,52,866/-. In view of the above, the ground

raised by the assessee is allowed, as there is no occasion for the Assessing Officer to

disallow the same being not arising and forming part of the profit & loss account of

the assessee.

AR has drawn our attention to page 11 of the assessment order where the Assessing

Officer had added the amount of Rs.29,11,000/- as notional rent for the year under

consideration. The submissions of the AR are that the appellant had let out the

machinery to M/s. Ginni International Ltd. (GIL) and dispute arose between the

assessee and the tenant which led to filling of civil suit before the Delhi High court

ITA No. 173/Agr/2013 20

and the assessee in balance sheet at page 29 had disclosed the pendency of the suit

before the Delhi High Court. Note 7 reads as under : “7. The company had given certain machines valuing Rs.340.08 lacs (WDV as on 31.03.2008 Rs. 134.78 lacs) on loan against payment of rent to M/s. Ginni International Ltd. (GIL). GIL continued to pay the agreed rent up to August 2000, where after they stopped paying the said rent. The said machines formed part of the overall assets financed by various financial institutions and hypothecated to them. The machines lent to GIL were with the consent of the competent authorities. During the year 2002-03 GIL claimed that the said machines were given to them under hire purchase system. Since the claim of GIL is unfounded and not tenable in law, and in absence of rent forthcoming, the company was left with no alternative but to file a civil suit before Hon'ble Delhi High Court for recovery of the rent outstanding Rs.98.67 lacs upto August 2003 including interest of Rs.11.33 lacs and further rent @ Rs.2.43 lacs per month from September 2003 onwards. In view of the financial status of GIL and the legal advice the company is certain to recover the outstanding amount from GIL. As accounting prudence, the company has not recognised income of Rs.29.11 lacs in profit & loss A/c as rent on the said machines during the year.”

17.1 It was further submitted that M/s. GIL had refused to recognize its liability to

pay rent on account of non-realization of rent and that the AO had accepted this

position in the preceding as well as succeeding year and no additions were made on

account of notional rent.

17.2 Further, it was submitted that an amicable settlement entered between the

parties in the assessment year 2011 for the total consideration of Rs.2.60 crores

based on the cost of machine and rent of machines as placed at page 162 of the

paper book. It was submitted that the above said amount received by the assessee

ITA No. 173/Agr/2013 21

was used by the assessee for reducing the block of asset in the assessment year

2010-11.

17.3 The ld. AR relies on the decision of Hon’ble Supreme Court in the case of CIT

vs. Excel Industries Ltd., 358 ITR 295 (SC) and also in the matter of CIT vs. Goyal MG

Gases (P) Ltd. 303 ITR 159 (Delhi).

mercantile method of accounting and hence, the rent is required to be shown on

accrual basis in the books of account.

payable by GIL on account of machines let out by the assessee and the said machines

were given to GIL after taking consent from the Financial Institution to whom the

machines were hypothecated.

19.1 In our view, if GIL was not liable to pay the rent, and that position of GIL was

accepted by the assessee, then it was not required to be shown in the books of

account. However, once the assessee is claiming the rent on account of leasing out

the machines to GIL and GIL is subsequently settling the suit filed before the Delhi

High Court on the basis of mutual settlement whereby the GIL paid an amount of

Rs.2.60 crores towards payment against machinery cost, rent charges etc.

ITA No. 173/Agr/2013 22

19.2 In the opinion of Bench , mere assertion of the assessee that GIL was denying

the rent and hence it was not shown in the books and therefore addition of notional

rent was incorrect, is totally unacceptable. The assessee was following mercantile

system and the rent was required to be paid on accrual basis. Further the letter at

page 162 with subject “payment towards machinery cost, rent charges etc.”

clearly shows that the amount of Rs.2.60 lacs were not only towards block of assets,

but was also towards rent charges also. Therefore, the stand of the assessee is

belied by the letter of the GIL filed by the assessee itself . In view of the above, we do

not find any reason to interfere with the order passed by the lower authorities.

Further, we are of the opinion that merely because no notional rent was added

either in prior or subsequent year is no reason to deny the arguments of the ld. DR. Every year is a separate assessment year and the principle of res judicata does not

apply in the tax proceedings is an admitted position in law.

19.3 Reliance on the judgment of CIT vs. Excel Industries by the assessee is not applicable as in the said case, the Hon’ble Supreme Court mentioned that “there was no corresponding liability on the custom authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for

clearance” and in those facts, it was held as under : “Applying the three tests laid down by various decisions of this court, namely, whether the income accrued to the assessee is real or hypothetical ; whether

ITA No. 173/Agr/2013 23

there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made ; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic.”

However, when we look into the record, it is clear that the assessee has let out the

machines on lease to GIL and the GIL was under legal obligation to pay yearly rent of

Rs.29.11 lacs. In our considered opinion, there is an obligation of GIL to pay rent to

the assessee in terms of lease agreement and further it was under obligation to

return back the assets leased to it by the assessee. Further the GIL while entering

into amicable settlement had paid an amount of Rs.2.60 crores towards the value of

machines as well as for pending rent which clearly shows that the rental income

of the assessee was not a hypothetical or imaginary income, but had accrued on

account of use of industrial plant by GIL . Therefore, there was no error in the orders

of the authorities below.

to the extent of Rs. 19,67,582/- in respect of payment made to financial institution

on restructuring of loans. The AO considered the disallowance on the ground that

deferred revenue expenses are only allowable in terms of provisions of section

ITA No. 173/Agr/2013 24

35Dand the payment made to financial institution is covered u/s 43B of the Act. The

CIT(A) has also upheld the disallowance. The contention of the ld. AR is that the

identical claim of deferred revenue expenses are being allowed since AY 2003-04

without any reference to provisions of section 35D or 43B of the Act. It was

submitted that during the year under consideration there was no fresh expenses or

new claim and it is not understood on what basis, reference was made to provisions

of section 35D or 43B. the ld. AR further clarified that the claim of deferred revenue

expenses was in respect of advance payment of Management fee, restructuring fee

and other administrative expenses to financial institutions spread over the period of

respective loans. The details of deferred revenue expenses and supporting

documents are placed at paper book pages 165-170. The expenses have been spread

over the period of loan so as to reflect true and fair picture of profit and loss of the

company and there is absolutely no dispute with regard to genuineness of the

expenses and the Assessing Officer has merely disallowed the claim on technical

ground without appreciating the nature of the claim and past history and the fact

that payments of such expenses have already been made in AY 2002-03 and as such

provisions of section 43B are not applicable.

ITA No. 173/Agr/2013 25

appellant from AY 2002-03 onwards and as such the impugned disallowance, in

absence of any change in facts, is in totally wrong and in disregard to principle of

consistency. The factual position to this effect is supported from Schedule 19 of

Profit and Loss a/c placed at FB Pg 26 wherein the identical claim of deferred

revenue expenses in AY 2007-08 has been allowed by the assessing officer. It is

therefore, submitted that the claim of deferred revenue expenses is relatable to

expenses actually incurred and apportioned over the period of loan, the same is in

accordance with provisions of section 37 of the Income Tax Act, 1961 particularly

based on past accepted history.

an undisputed fact that the identical claim of assessee, in the similar facts and

circumstances of the case, has been accepted by the Revenue authorities since 2002-

03 onwards. There is no rebuttal of the fact stated by the assessee that the

impugned deferred revenue expenses are relatable to expenses actually incurred

and apportioned over the period of loan. In view of the above and following the rule

of consistency, we are of the opinion that the ld. authorities below were not justified

ITA No. 173/Agr/2013 26

in disallowing the claim of the assessee. Accordingly, the disallowance made on this

count is liable to be deleted.

Order pronounced in the open court on 2nd Sept., 2019.

Sd/- Sd/- (Dr. Mitha Lal Meena) (Laliet Kumar) Accountant Member Judicial member

Dated: 2nd Sept., 2019 *aks* Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant Registrar Income Tax Appellate Tribunal Agra Bench, Agra