DY.COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), AHMEDABAD vs. M/S. PRIMA AUTOMATION (INDIA) P.LTD., GANDHINAGAR

ITA Nos. 805/Ahd/2015 & 478/Ahd/2015 are cross appeals by the Revenue and the Assessee preferred against the order of the Ld. CIT(A)-9, Ahmedabad dated 08.01.2015 pertaining to A.Y. 2011-12.

Both these appeals were heard together and are disposed of by this common order for the sake of convenience.

We will first take up Revenue’s appeal in ITA No. 805/Ahd/2015

The only grievance of the revenue is that the ld. CIT(A) erred in deleting the addition of Rs. 34,15,182/- made u/s. 145A of the act on account of adjustment to the value of closing stock.

On perusal of the details submitted by the assessee, the A.O. noticed that the assessee has not included the value of CENVAT of Rs. 34,15,182/- paid on raw material lying in the closing stock. The A.O. was of the opinion that the assessee has violated the provisions of Section 145A of the Act. Assessee was asked to justify why addition should not be made. Assessee strongly objected to the proposed addition and pointed out that since it is following exclusive method of accounting, any addition on account of unutilized CENVAT is unwarranted and uncalled for. The contention of the assessee did not find any favour with the A.O. who proceeded by making the addition of Rs. 34,15,182/- .

After considering the facts and the submissions, the ld. CIT(A) was convinced that since the assessee is following exclusive method of accounting, therefore amount of Rs. 34,15,182/- being CENVAT paid on raw material is revenue neutral. The ld. CIT(A) directed the A.O. to delete the addition of Rs. 34,15,182/-.

Before us, the ld. D.R. strongly supported the findings of the A.O. Per contra, the ld. counsel for the assessee reiterated what has been stated before the lower authorities.

We have carefully perused the orders of the authorities below. There is no dispute that the assessee is making accounting entries following exclusive method of accounting. We also find that the assessee has been following this method since past many years. Even, if the accounting entries are made according to inclusive method of accounting, the net effect would be revenue neutral. Therefore, we do not find any merit in the additions made u/s. 145A of the Act and therefore we do not find any error or infirmity in the findings of the ld. CIT(A). Appeal filed by the Revenue is dismissed.

Coming to the appeal of the assessee in ITA No. 478/Ahd/2015.

For this proposition, we draw support from the decision of the Hon’ble Jurisdictional High Court of Gujarat in the case of Corrtech Energy Pvt. Ltd. 372 ITR 97.

Respectfully following the same, we direct the A.O. to delete the addition of Rs. 68,652/-. This ground is allowed.

The next ground relates to the addition of Rs. 18,28,850/-.

During the course of the scrutiny assessment proceedings, the A.O. noticed that the assessee has debited an amount of Rs. 18,81,970/-. As training expenses. The A.O. further noticed that in the immediately preceding assessment year, the same expenditure was Rs. 1,93,452/-. The assessee was asked to justify its claim of expenditure. In its reply, the assessee stated that the assessee has agreed to pay for the technical education of its two employees namely Sh. Harshvardhan M Patel and Sh. Kartik V. Patel and in return, these two employees have agreed to receive 55% lesser salary after the completion of their technical education to reimburse the company for the cost borne thereof.

The submissions of the assessee did not find any favour with the A.O. who observed that the said employees are sons of the directors of the company and secondly, the MOU relied upon by the assessee is not a legally binding document. The A.O. further observed that the assessee has not furnished any documentary evidence to explain that the said expenditure have been incurred for business purpose of the assessee. The A.O. accordingly disallowed Rs. 18,28,850/-.

Assessee carried the matter before the ld. CIT(A) but without any success.

Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. The ld. counsel once again placed reliance on the Memorandum of Understanding signed by the assessee and the two employees. It is the say of the ld. counsel that these two employees are now engaged in the business of the assessee at 55% lesser salary as agreed upon by them as per the MOU. The ld. counsel concluded by saying that the assessee has successfully explained the business need of the said expenditure and the same should be allowed. Per contra, the ld. D.R. strongly supported the findings of the revenue authorities.

We have carefully perused the orders of the authorities below. It is true that the assessee company has entered into a Memorandum of Understanding with these two employees by which it is agreed that after completion of their technical education, the assessee would be paying 55% lesser salary when they will re-join the company. It is equally true that the said MOU is not a legally binding agreement since it is not a registered document. Further, there is no

Considering the facts in totality, in our considered opinion, the assessee could not justify the business expediency of this expenditure and failing which the disallowance is justified. This ground is accordingly dismissed.