M/S Prestige Foods Ltd. vs. Commissioner Of Income Tax

1 HIGH COURT OF MADHYA PRADESH; INDORE BENCH (DIVISION BENCH : HON'BLE SHRI SHANTANU KEMKAR AND HON'BLE SHRI S.C.SHARMA, JJ.) I.T.R. No.01 of 2000 Prestige Foods Limited, Indore (M.P.) APPLICANT

VERSUS Commissioner of Income Tax, Bhopal (M.P.)

RESPONDENT ********************************************************* For Applicant : Shri P.M.Choudhary, learned counsel. For Respondent : Shri R.L.Jain, learned Senior counsel with Ms. Veena Mandlik, learned counsel. ********************************************************* O R D E R (Passed on 11

th day of April, 2012)

PER SHANTANU KEMKAR, J : Pursuant to the order dated 19.07.1999 passed by the Supreme Court in Civil Appeal No.3975/1999 the Income Tax Appellate Tribunal, Indore Bench (for short the Tribunal) has drawn up the statement of the case and has referred the following questions of law to this Court, for giving opinion :- “(i) Whether in the facts and circumstances of the case, the Tribunal was justified in holding that the sum of Rs.16,47,766/- was not allowable as expenditure on repairs? (ii) Whether in the facts and 2 circumstances of the case, the finding of the tribunal that the expenditure of Rs.16,47,766/- is capital in nature is inter-alia based on material not disclosed to the assessee and is hereby vitiated ? (iii) Whether in the facts and circumstances of the case, the mode of apportionment

expenditure determining the profits exempt under section 80HH & 80-I adopted by the Tribunal is tenable in law ?” 2. Brief facts necessary for deciding the aforesaid questions No.1 and 2 may be stated as follows. In the year 1988-89 the applicant Assessee set up a Seed Handling Plant (for short the Plant) in its second unit namely Prestige Soya Industries in order to store the seeds purchased by it for being used in its manufacturing process. The plant was operational for almost 15 months till it was severely damaged due to an accident which occurred on 26.05.1991. As the plant was insured with the New India Assurance Company Limited, on a claim for damages being made by the Assessee the survey of the plant was conducted by the Surveyor of the Insurance Company in order to assess the damage caused and the loss suffered by the Assessee. In the meantime in the assessment proceedings the Assessee claimed expenses of Rs.16,47,766/- incurred by it for the repairs of the damaged plant and charged the same in the profit and loss account. The Assessing Officer was not satisfied with the explanation offered by the Assessee about the charging of the repair expenses in the profit and loss account. The Assessing Officer arrived at a conclusion that the plant was totally destroyed in the said accident and it was reconstructed by the assessee. He, therefore, treated the expenses as capital expenditure and declined to allow the claim of the Assessee made under Sections 30, 31 or 37 of the Act vide order 3 dated 27.03.1995. 3. Dissatisfied with the order dated 27.03.1995 passed by the Assessing Officer the Assessee filed an appeal No.IT-122-95/96 before the Commissioner of Income Tax (Appeals). While deciding the appeal vide order dated 23.11.1995 the CIT (A) took into consideration the aforesaid survey report of the Insurance Surveyor and on the basis of the findings recorded in the survey report dismissed the assessee's appeal. Aggrieved, the Assessee filed a further appeal before the Tribunal. The Tribunal also considered and relied the said survey report and dismissed the Assessee's appeal No.1/IND/1996 vide order dated 27.11.1996. The Tribunal held that since the plant was reconstructed with the changed design, the expenses incurred on it can only be treated as expenditure incurred on reconstruction of the plant which are to be treated as capital expenditure and the same are not allowable as revenue expenditure for repairs. 4. The facts necessary for deciding question No.3 in brief are that during the course of assessment the Assessing Officer had noticed that the Assessee has debited major expenses towards the Directors' remuneration, books, periodicals, Diwali expenses, professional charges, vehicle expenses, telephone and trunk call expenses, Director's travelling expenses in the assessee Prestige Food Industries. The nominal expenses were debited in the account of its second unit viz Prestige Soya Industries. The Assessing Officer asked the assessee to submit explanation of the aforesaid disproportionate allocation of miscellaneous expenses. The Assessee submitted its explanation but the Assessing Officer was not satisfied with the same and vide order dated 27.03.1995 bifurcated the expenses by dividing it in the ratio of turnover of both the units of the Assessee. Feeling aggrieved the Assessee filed an appeal before the CIT (A). The CIT (A) dismissed the 4 appeal vide order dated 23.11.1995. The order of the CIT (A) was upheld by the Tribunal in the further appeal filed by the Assessee. 5. Having heard learned counsel for the parties on the aforesaid questions our opinion on the questions referred is as under. 6. Re questions No.1 and 2 :- On going through the order passed by the CIT (A) and the Tribunal, we find that the CIT (A) has recorded the finding against the Assessee on the basis of the survey report of the Insurance Company. The said survey report was received by the Assessing Officer behind the back of the Assessee. No opportunity was ever given by the CIT (A) to the Assessee to dispute the correctness of the said survey report which formed the basis of recording of findings against the Assessee. We find that even copy of the same was not supplied to the Assessee. The CIT (A) and the Tribunal have considered the said survey report without showing it to the Assessee and without giving opportunity to the Assessee to furnish its explanation about it by observing that the same is confidential in nature. They held that the report was available on record of the Assessing Officer which can be looked by any judicial authority in confidence, if need so arise. Having regard to this undisputedly the findings have been recorded by the CIT (A) and the Tribunal on the basis of the survey report which was never supplied to the Assessee. It has now been well settled that the Income Tax Officer though not bound to rely on evidence produced by the Assessee as he considers to be false, yet if he proposes to make an estimate in disregard of that evidence he should in fairness disclose to the Assessee the material on which he is going to found that estimate; and that in case he proposes to use against the Assessee the result of any private inquiries made by him, he must communicate to the Assessee the substance of the information so proposed to be 5 utilized to such an extent as to put the Assessee in possession of full particulars of the case he is expected to meet and that he should further give him an ample opportunity to meet it. The Income Tax Officer is not bound by any technical rules of the law of evidence. It is open to him to collect materials to facilitate assessment even by private enquiry. But if he desires to use the material so collected, the Assessee must be informed of the material and must be given an adequate opportunity to explain it and controvert the contents of it. (emphasis supplied) [See Dhakeshwari Cotton Mills Ltd. Vs. Commissioner of Income Tax (1954) 26 ITR 775 SC, C. Vasantlal and Co. Vs. Commissioner of Income Tax, Bombay City (1962) 45 ITR 206 SC and Kishinchand Chellaram Vs. Commissioner of Income Tax, Bombay City (1980) 125 ITR 713 SC]. In view of this legal position, in our considered view the orders of the CIT (A) and the Tribunal are in violation of principles of the natural justice. The Assessee has been deprived of fair opportunity to object and challenge the correctness of the survey report on the basis of which opinion has been formed by the CIT (A) and the Tribunal against the Assessee. In all fairness the said survey report should have been disclosed to the Assessee and the Assessee should have been provided opportunity to explain and object the findings recorded in it before forming any opinion adverse to it. In this view of the matter the question No.2 is decided in favour of the Assessee by holding that the finding that the expenditure of Rs.16,47,766/- is capital in nature is vitiated as it is based upon the material not disclosed to the Assessee. Having regard to this opinion about question No.2, we do not feel it necessary to answer question No.1. 7. Re Question No.3 :- On going through the orders of the Assessing Authority we 6 find that in the assessment proceedings no details of expenses were furnished by the assessee in order to establish that the particular expenses were incurred in its particular unit out of its two units. In the circumstances, in our considered view in the absence of any details being made available by the Assessee to establish that the particular expenses were incurred for its particular unit out of its two units, the expenses incurred in the various heads are required to be treated for both the units and thereafter in order to arrive at a just figure of expenses of each unit the expenses have to be bifurcated and divided in the ratio of turnover of both the units. This exactly has been done by the Tribunal. Thus, in our opinion the mode and method of apportionment of expenditure adopted by the Tribunal is fully justified. Accordingly, the question No.3 is answered in favour of the Revenue. 8. The reference stands disposed of. The Tribunal to proceed in the matter in accordance with law. (Shantanu Kemkar)

(S.C.Sharma) Judge

Judge AM.