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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
O R D E R
PER PAVAN KUMAR GADALE JM:
The assessee has filed the appeal against the order of the Principle Commissioner of Income Tax (Pr.CIT) -2, Mumbai passed u/s 263 of the Act, 1961.
At the time of hearing, the Ld. Counsel for the assessee submitted that there is a delay of 12 days in filing the appeal before the Hon’ble Tribunal and filed
Simplex Mills Company Ltd, Mumbai. - 2 - the affidavit for condonation of delay. We find the facts mentioned in the affidavit are reasonable and accepted. Contra, Ld. DR has no specific objections. Accordingly the delay is condoned and admit the appeal.
The assessee has raised the following grounds of appeal:
General: 1. On the facts and in the circumstances of the case and in law, the order passed by the Learned Pr. Commissioner of Income Tax (Central) - 2, Mumbai (hereinafter referred to as "Pr. CIT") u/s 263 is bad in law and liable to be quashed.
2. The Ld. Pr. CIT erred in law and on facts in invoking provisions of section 263 in respect of the issue of allowability of cost of stores of Rs 10,54,575 ignoring the fact that it was already verified by the Assessing Officer (hereinafter referred to as "AO") during the course of assessment proceedings and applied his mind on the submissions made. The Ld. AO during the course of scrutiny assessment made specific inquiries in the matter and applied his mind on the submissions made and consciously allowed the same and hence, the order cannot be erroneous.
3. The Ld. Pr, CIT failed to appreciate that the treatment of cost of stores in the books of account during the year under reference is as per the accrual basis of accounting and hence, the same should be allowed as a deduction.
Simplex Mills Company Ltd, Mumbai. - 3 -
4. The Ld. Pr. CIT erred in law and on facts in invoking provisions of section 263 in respect of the issue of disallowance u/s 40(a)(ia). The Ld. Pr. CIT alleged that there is no TDS deducted on brokerage payable of Rs 90,23,146/- to Simplex Realty whereas there is no brokerage expense debited to Profit and Loss account and the amount of Rs 90,23,146/- is the loan amount outstanding in the books of Simplex Mills. It was explained to the Ld. Pr. CIT that the same is a misunderstanding due to the closing entry passed at the time of closure of branch books however, the same has been ignored by the Ld. Pr. CIT.
5. The above grounds are independent and without prejudice to one another.
6. Your appellant craves leave to add, alter, amend or delete any of the grounds of appeal.
The brief facts of the case are that, the assessee company is engaged in the manufacturing of cotton yarn and industrial fabrics and trading in textile products. The assessee has filed the return of income for the A.Y 2015-16 on 29.09.2015 with a total income of Rs. Nil. Subsequently the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act are issued. In compliance, the Ld. AR of the assessee appeared from time to time and submitted the details and the case was Simplex Mills Company Ltd, Mumbai. - 4 - discussed. The Assessing officer (A.O) has considered the information filed by the assessee and accepted the returned income and passed the order u/s 143(3) of the Act dated 16.10.2017.
3. Subsequently, the Pr.CIT on perusal of the records found that the A.O has passed the passed the assessment order without examining and making enquiry with respect to the claims (i) the cost of stores claimed/debited to profit and loss account of Rs.10,54,575/-as it pertains to earlier years and (ii) disallowance u/sec40(a)(ia) of the Act for non deduction of TDS on payments made to Simplex Reality Ltd towards Brokerage. The Pr.CIT has issued notice u/s 263 of the Act and incompliance to the notice, the Ld. AR submitted that at the time of purchase of stores, it is carried as inventory in the books of account and are debited to profit and loss account as and when the same are issued for production and consumed. The assessee fallow the mercantile method of accounting wherein the raw material, packing material, stores and spares, etc consumed during the year are debited to profit and loss account and all the stores consumed in the earlier years is debited to profit and loss account in Simplex Mills Company Ltd, Mumbai. - 5 - the year of consumption. In this financial year, all the stores items are carried in opening stock where sold upon closure of the manufacturing unit and therefore the items are consumable and packing stores pertaining to various divisions. The Ld.AR relied on the provisions of Sec. 37(1) of the Act to claim as a business expenditure and judicial decisions.
Whereas the on second disputed issue, the Pr.CIT observed that the assessee has paid brokerage to Simplex Reality and not deducted TDS and therefore provisions of Sec 40(a)(ia) of the Act are applicable. The Ld.AR of the assessee has made submissions as under; “As per the notice u/s 263, the account of M/s Simplex Reality Ltd is allegedly credited with brokerage payable of Rs. 90,23,146/- and no TDS is deducted thereon, thereby attracting disallowance u/s 40(a)(ia). We would like to clarify that no such brokerage was payable to Simplex REaly Ltd while closing the books of Mumbai division of the company, an entry was passed to transfer the balance to the Akola Division amounting Rs. 1,08,53,984/-. It may be seen that there was a loan balance of Rs. 90,23,146/- payable to simplex Realty Ltd which was already existing in the books of Mumbai division. It appears that since this closing entry started with a debit to brokerage payable account, this would have led to the current misunderstanding. We wish to emphasize again that this journal entry was passed with sole intention of closing the books of Akola division by transferring the balance of Mumbai division and no expenditure account was Simplex Mills Company Ltd, Mumbai. - 6 -
debited at all. This can be further verified by referring to the profit and loss account where no such expenditure can be found as debited.”
The Pr.CIT was not satisfied with the submissions and dealt on the provisions of Sec. 263 r.wexplanation 2 and passed the order with the directions read as under: 8. In view of the above discusstion it is clear that the AO has passed the assessment order in the case of assessee u/s 143(3) of the Act dated 16.10.2017 for the A.Y 2015-16 without making any inquiry or verification. Thus the order passed by the AO is deemed to be erroneous in so far as it is prejudicial to the interest of revenue within the meaning of clause (a) of explanation (2) below Sec. 263(1) of the Act. Since the order is erroneous as well as prejudicial to the interst of revenue, the order passed by the AO is set aside within the meaning of section 263(1) with the following direction.
1..the A.O is directed (i) to verify that Cost of stores of Rs. 10,54,575/- debited to Profit and Loss account is not debited to any books of account and (ii) to decide afresh on the admissibility of such earlier year expenses as per law.
2. In respect of TDS liability on brokerage, the AO is directed to make enquiries to ensure that the above claim of the assessee is tenable. In case of alternate findings, the AO directed to take thenecessary action under the relevant provisions of the IT Act.
Simplex Mills Company Ltd, Mumbai. - 7 -
The A.O is directed to pass a fresh assessment order after making necessary enquiry in the light of above discussion and after affording the assessee reasonable opportunity of being heard. The AO is further directed to properly investigate and verify the contention made in show cause notice, among other things.
Aggrieved by the order, the assessee has filed an appeal before the Honble Tribunal.
At the time of hearing, the Ld.AR submitted that the Pr.CIT has erred in set aside the order u/s 143(3) of the Act, which does not satisfy the twin conditions of erroneous and prejudicial to the interest of the revenue and direct the A.O to do afresh assesseement. The Ld.AR submitted that the explanation 2 to sec 263 of the Act ought to be considered only when the AO has not applied his mind, the facts are to be verified and no enquiry is conducted. Whereas, on the merits, the cost of stores debited to profit and loss account pertains to the earlier years and the claim is as per the accounting policies. And on the second disputed issue, the Ld.AR submitted that no brokerage was paid by the assessee and no such the claim was made in the books of account nor debited to profit and loss account and the provisions u/sec40(a)(ia) of the Act are inapplicable.
Simplex Mills Company Ltd, Mumbai. - 8 - The Ld.AR substantiated the submissions relying on the material evidence, provisions of the Act, judicial decisions and factual paper book and prayed for allowing the appeal.
Whereas the Ld.DR supported the order of the Pr. CIT and made submissions on the application of the provisions and explanation2 to section 263 of the Act.
We heard the rival submissions and perused the material available on record. Prima-facie the Pr.CIT has passed the revision order with a directions to the A.O. on two aspects (i) the cost of stores debited to profit and loss account and (ii) non deduction of TDS on brokerage payment. The Ld. AR submitted that it is a limited scrutiny and incompliance to notice, the assessee has filed letter dated 22-04-2017 before the A.O. placed at page 75 of paper book with the list of scrap(stores) at page 76 point.1 and the cost of stores sold as scrap were worth Rs.10,54,575/-.Further the Ld.AR referred to page 77 of the paper book, were a letter dated 29.09.2017 was filed before the A.O. explaining the Simplex Mills Company Ltd, Mumbai. - 9 - details of consumables and packing stores in various division sold and compliance of Accounting Standard 2 of ICAI and claim allowable u/sec37(1) of the Act. We find the assessee has filed the information incompliance to the notice issued and clarifications are filed over a period of time in the assesseement proceedings on the cost of stores debited to the profit and loss account. The Ld.AR has demonstrated the documents filed in the factual paper book which cannot be disputed.The assessee has diligently complied with the provisions of Act, and maintained the facts /details in the books of accounts and fallowed the Accounting standard -2 in valuation of inventories. Therefore we are of the opinion that the directions of the Pr.CIT order in respect of claim of stores in the profit and loss account cannot be sustained and allow the grounds of appeal pertaining to the disputed issue on claim of stores.
The second disputed issue on the payment of brokerage, the contentions of the Ld.AR that the no brokerage was paid to M/s Simplex Reality ltd. and referred to page 61 of the paper book journal voucher dated 31-03-2015. Further the assesee in response to Simplex Mills Company Ltd, Mumbai. - 10 - notice u/s 142(1) of the Act dated 28-02-2017 submitted the details before the A.O. on claim of expenses, deductions and justification of high interest expenses claimed. On perusal of the letter dated 22.04.2017 filed with the A.O. placed at page 75 of paper book, the assessee company has borrowed funds from M/s Simplex Reality Ltd along with M/s Simplex Papers Ltd and paid the interest. The above loans are availed for paying out of employees of Akola unit shutdown based on the court order. The Ld.AR demonstrated the audited financial statements, profit & loss account at page 89 in particular other expenses at Note 22 placed at page 102, were no brokerage expenses was paid or claimed. Further interest payment/accrued on barrowings from sister concerns/group are claimed and the fact of interest on accrual/paid was disclosed at note 32 –Related parties at page 104 of the paper book. We on perusal of the facts of financial statements in other expenses find that no brokerage was claimed by the assessee but the interest on loan funds from group concerns are debited under the head finance cost. Therefore the observations of the Pr.CIT cannot be acceptable as the order passed by the A.O. does not Simplex Mills Company Ltd, Mumbai. - 11 - satisfy the twin conditions of erroneous and prejudicial to the interest of the revenue. Accordingly, we set aside the order of the Pr.CIT and allow the grounds of appeal in favour of the assessee.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 25.04.2022.