THE PRINCIPAL COMMISSIONER OF INCOME TAX, FARIDABAD vs. M/S K.K. KOHLI & BROTHERS PVT. LTD

ITA No. 554 of 2017 (O&M) -1- 211 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH I.T.A. No. 554 of 2017 (O&M) Decided on : 06.08.2018 * * * Pr. Commissioner of Income-Tax, Faridabad Appellant Versus M/s. K.K. Kohli & Brothers Pvt. Ltd., Faridabad Respondent CORAM : HON'BLE MR. JUSTICE AJAY KUMAR MITTAL HON'BLE MR. JUSTICE AVNEESH JHINGAN Present : Mr. Tajender K. Joshi, Standing Counsel for the Revenue. Mr. Rajiv Agnihotri, Advocate for the assessee. * * * AVNEESH JHINGAN, J. The present appeal has been filed under Section 260A of the Income Tax Act, 1961 (for short 'the Act') against the order dated 05.04.2017 passed by the Income Tax Appellate Tribunal, New Delhi (for short 'the I.T.A.T.'), dismissing the appeal of the Revenue and allowing the cross-objections of the assessee. The assessment year involved is 2007-08. 2. The assessee company was engaged in the business of processing of fabric at Faridabad. During the relevant year, return was filed showing an income of `3,42,590/-. The case was selected for scrutiny and notice was issued under Section 143(2) of the Act. The Assessing Officer, vide order dated 29.12.2009, finalized the PANKAJ BAWEJA 2018.09.17 10:58 I attest to the accuracy and authenticity of this document [HIGH COURT, CHANDIGARH] ITA No. 554 of 2017 (O&M) -2- assessment under Section 144 of the Act. An addition of ` 1,56,86,870/- was made as gross profit rate had fallen in comparison to earlier years. An addition of `1,43,72,485/- was made disallowing the bad debts. An amount of `1,41,83,879/- was added by disallowing the additional depreciation claimed on Plant & Machinery. 3. Aggrieved of the assessment order, an appeal was filed before the Commissioner of Income Tax (Appeals) {for short C.I.T.(A)}. The appeal was partly allowed, vide order dated 26.04.2012. C.I.T.(A) deleted the addition of `1,26,86,871/- on account of fall in gross profit rate and addition of `30 lakhs was only upheld. Out of addition made of `1,43,72,485/- on account of disallowance of bad debts, only disallowance sustained was `18,18,058/-. The Appellate Authority deleted additions of `53,860/- made under Section 43B and `2,71,431/- made under Section 40(a)(ia) of the Act. The addition made on account of `1,41,83,879/- by disallowing the short term capital gain was also deleted. 4. Aggrieved of the order of the C.I.T.(A), Revenue preferred an appeal before the Tribunal and the assessee filed cross-objections. The Tribunal vide order dated 05.04.2017, dismissed the appeal filed by the Revenue and allowed the cross-objections of the assessee. 5. As per the appellant-revenue, following substantial questions of law arise for consideration:- (i)Whether on the facts and in the circumstances of the case, the Ld. ITAT, New Delhi was right in law in deleting the addition of Rs. 1,56,86,871/- made by the Assessing Officer on account of fall in GP rate as the assessee had intentionally not produced the bills and vouchers PANKAJ BAWEJA 2018.09.17 10:58 I attest to the accuracy and authenticity of this document [HIGH COURT, CHANDIGARH] ITA No. 554 of 2017 (O&M) -3- with books of account in order to verify book results? (ii)Whether on the facts and in the circumstances of the case the Ld. ITAT was right in law in deleting the disallowance of Rs.1,43,72,485/- made by the Assessing Officer on account of bad debts written off as the assessee has failed to discharge the onus to prove that the debts had actually become bad? (iii)Whether on the facts and in the circumstances of the case the Ld. ITAT was right in law in deleting the depreciation allowed at Rs.72,69,675/- @ 80% instead of Rs. 22,71,774/- by the Assessing Officer as the assessee itself had claimed depreciation at different rate in the past and also failed to substantiate its claim by not supplying the necessary evidence that the machinery fulfill all the conditions laid down in Rule 5 item (ix) of the depreciation? (iv)Whether on the facts and in the circumstances of the case, the Ld. ITAT was right in law in deleting the disallowance of Rs. 1,48,76,639/- made by the Assessing Officer on account of short term capital loss claimed on block of assets(having 15% rate of depreciation) which did not cease to exist? 6. Learned counsel for the appellant-Revenue argued that the Tribunal had erred in dismissing the appeal. His grievance is that only hand-written books were produced before the Assessing Officer and the veracity of the same was not verifiable as the supporting documents were not produced. He further argued that bad debts were claimed but without making any efforts to recover the amounts. He defended the order of Assessing Authority for disallowing short term capital loss on sale of Plant & Machinery as the block asset had not ceased to exist. He challenged the allowance of additional PANKAJ BAWEJA 2018.09.17 10:58 I attest to the accuracy and authenticity of this document [HIGH COURT, CHANDIGARH] ITA No. 554 of 2017 (O&M) -4- depreciation of 80% on Boiler. 7. The Tribunal dismissed the appeal of the Revenue mainly relying on the findings recorded by the C.I.T.(A). It would be appropriate to quote the relevant portion of the order of the Tribunal by which the contention of the Revenue has been rejected on the first issue :- “6. We have heard the rival submissions and carefully perused the relevant material placed on record. As far as the department's ground challenging the deletion of addition of Rs. 1,26,86,871/- made on account of fall in GP rate and the related ground of invoking the provisions of Section 144 are concerned, it is seen that the Ld. CIT(A) has given a categorical finding that the action of the Assessing Officer in invoking the provisions of Section 144 was not justified when the books of accounts were produced and compliances were made during the course of assessment proceedings. Ld. CIT(A) has held that even when the Assessing Officer had chosen to proceed on passing a best judgment assessment order, the addition was required to be made on the basis of material available on record. The Ld. CIT(A) has also noted that the Assessing Officer had not cited any reason for not accepting the gross loss @ 31.71% as declared by the assessee, but adopting the rate of 20% instead. He has also noted that during the course of assessment proceedings, the assessee was specifically asked about the valuation of closing stock. The Ld. CIT(A) has further observed that on the basis of the sales bills filed, the average sale price of fabric worked out to Rs.14 per metre whereas the average rate of fabric for which no sale bills had been filed worked out to Rs.9.20 per PANKAJ BAWEJA 2018.09.17 10:58 I attest to the accuracy and authenticity of this document [HIGH COURT, CHANDIGARH] ITA No. 554 of 2017 (O&M) -5- metre. Ld. CIT(A) has further observed that the items in closing stock inventory were mentioned as “cotton fabrics” without any mention of specific quality or brand identification and as such, the valuation of stock was not amenable for verification. Thereafter, the Ld. CIT(A) proceeded to estimate the difference in valuation at Rs.5 per metre and restricted the estimation of under- valuation of closing stock to Rs.30 lakh. A perusal of the assessment order also shows that although the