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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH
Before: Shri P.M. Jagtap & Shri Siddhartha Nautiyal
आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-
This is an appeal filed by the assessee against the order of the ld. Principal Commissioner of Income Tax (Appeals)-2, Ahmedabad vide order dated 26/02/2015 passed for the assessment year 2010-11.
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The assessee has taken the following grounds of appeal:-
“1. The order passed by learned C.I.T. is illegal, bad in law, and therefore, requires to be quashed. It is submitted that it be so held now. 2. The learned C.I.T. has erred in passing revision order on the ground that the learned Assessing Officer has not examined the issue whether accounts are for 13 months or 12 months. It is submitted that it was crystal clear from record, and therefore, revision on this ground be cancelled. 3. The learned C.I.T. has erred in passing revision order on the ground that claim of depreciation on windmill while computing book profit u/s.H5JB was not examined by learned Assessing Officer. Revision on this ground is mere change of opinion, and therefore, illegal, and therefore, requires to be quashed. 4. The learned C.I.T. has erred in passing revision order on the ground that details of valuation of closing stock was not furnished before learned Assessing Officer. Revision on this is mere change of opinion, and therefore, illegal, and therefore, requires to be cancelled. 5. The learned C.I.T. has erred in passing revision order on the ground of non-furnishing of details of stock hypothecated to bank. Your appellant submits that in view of clear legal position, the revision order on this ground is illegal, and therefore, requires to be cancelled. 6. The learned C.I.T. has erred in passing revision order on the ground of six times increase in sale of scrap at Rs. 174,46,006/- as against Rs.32,57,079/- of immediately preceding previous year. Revision on this ground is mere change of opinion, and therefore, illegal and therefore, requires to be cancelled. 7. The learned C.I.T. has erred in passing revision order on the ground that no break-up of SS sheet cost W.I.P. and SS FG (in
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quantity term) filed nor examined by learned Assessing Officer during the course of original assessment. Revision on this ground is mere change of opinion, and therefore, illegal, and therefore, requires to be quashed. 8. The learned C.I.T. has erred in passing revision order on the ground that valuation of closing stock of raw material does not include transportation cost, and finance cost. Your appellant submits that revision on this ground is illegal, and therefore, requires to be cancelled. 9. The learned C.I.T. has erred in passing revision order on the ground that all related party payments on account of job work payments were not verified by learned Assessing Officer 'at fair market value' as per provision of section 40A(2)(b) of the Income Tax Act, 1961. Your appellant submits that revision on this ground is mere change of opinion, which is illegal, and therefore, order passed u/s.263 on this ground is required to be cancelled. The appellant reserves its right to add, amend, alter or modify any of the grounds stated hereinabove either before or at the time of hearing.”
The brief facts of the case are that the original assessment order was passed on 22-03-2013 under section 143(3) of the Act determining the total income at � 18,51,661/- which was the same income as filed by the assessee in the return of income. The Principal Commissioner of Income Tax-2, Ahmedabad initiated proceedings under section 263 of the Income Tax Act, and after taking on record the submissions of the assessee, held that the order passed by the AO is erroneous and prejudicial to the interests of the Revenue. The assessee is in appeal before us against the aforesaid order passed by the PCIT. Before us, the counsel for the assessee has submitted
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that he shall be only pressing ground numbers 3 and 9 of his appeal. Accordingly, we shall be discussing and adjudicating upon only the above grounds contested before us.
Ground No 3: Claim of depreciation on Windmill:
The brief facts related to this ground of appeal are that during the impugned assessment year, the assessee had purchased windmill for an amount of � 4,20,25,000/- and claimed depreciation @ 80% on the same under the Income Tax Act. The PCIT was of the view that depreciation claimed @ 80% by the assessee while computing books profits under section 115JB of the Income Tax Act is not permissible and instead, the assessee should have claimed depreciation @ 15.33% as per the Companies Act for the purpose of calculation of book profits under section 115JB of the Act. Accordingly, the assessee has been allowed excess depreciation of Rs. 2,75,00,917/- on the windmill, while computing the book profits for the relevant period. In the 263 proceedings, the assessee submitted that on the very said issue, the AO had raised query by letter dated 19-02-2012 at serial number 8 of the said query, which was replied by the assessee vide letter dated 12-12-2012. However, the PCIT rejected the assessee’s arguments with the following observations:
“xxxxxxxxxxxxxxxxxxxxxxx On verification of records, it is gathered that the AO, vide his letter dated 19-02-2012 at sr. no.8 has asked assessee to submit details of bills/invoice/receipt/Delivery Challan for installation of windmill along with date of put to use with supporting document, whereas the assessee had submitted only copy of invoice for the purchase of the windmill vide its reply by letter dated 12-12-
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2012. The assessee has not submitted the supporting document for installation of windmill along with date of put to use to the AO. The AO has not verified the claim of depreciation of assessee while calculating the book profit u/s. 115JB of the IT Act and accordingly not charged the MAT liability payable by assessee.”
Before us, the counsel for the assessee drew our attention to page 129 and 130 the paper book, in which the assessee had submitted that the Companies Act, 1956 prescribed minimum rates of depreciation which is 15.33% while as per Income Tax Rules, the rate of depreciation on windmill is 80% and, therefore the assessee is eligible to claim rate of depreciation at a higher rate. The learned counsel for the assessee further submitted that the depreciation is being claimed by the assessee from year-to-year consistently and there is no change in the method/rate of claiming depreciation in the assessment year and for all previous assessment years. Further, the Department has accepted the depreciation as charged and as claimed in the accounts on similar basis. Further, counsel for the assessee submitted that it is not open for the Department to change the depreciation as claimed in the accounts, if the accounts are in accordance with Part II and Part III of the Schedule 6 of the Companies Act, 1956. The counsel for the assessee placed the case of Apollo Tyres v CIT 255 ITR 273 (Supreme Court) and Malayala Mandrama v CIT 300 ITR 251 (Supreme Court) in support of his contention. In response, the ld. Dr placed reliance on the observations made by PCIT in the 263 order.
We have heard the rival contentions and perused the material on record on this ground. In the case of Malayala Manorama Co. Ltd v. CIT [2008] 169 Taxman 471 (SC), the facts were that in the profit and loss
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account for the relevant assessment year, the assessee had debited depreciation at the rates prescribed by the Income-tax Rules, 1962. However, the Assessing Officer was of the view that for purposes of section 115J, depreciation should have been calculated in terms of the Companies Act, 1956 and Schedule XIV thereof. Accordingly, he disallowed the assessee's claim of depreciation charged at the rates prescribed by the Income-tax Rules. The Commissioner (Appeals) as well as the Tribunal allowed the assessee's claim and directed the Assessing Officer to allow the claim of depreciation as per the Income-tax Rules for the purposes of computing the book profit under section 115J. On reference, the High Court reworked the profits of the assessee under section 115J by substituting the rates of depreciation prescribed in Schedule XIV of the Companies act, 1956. In appeal, the Supreme Court held that where assessee was consistently charging depreciation in its books of account at rates prescribed in Income-tax Rules and accounts of assessee had been prepared and certified as per provisions of 1956 Act, Assessing Officer would not have any jurisdiction under section 115J to rework net profits of assessee by substituting rates of depreciation prescribed in Schedule XIV to 1956 Act. We further note that the jurisdictional Gujarat High Court in the case of DCIT v. Vardhman Fabrics (P.) Ltd. [2002] 122 Taxman 375 (Gujarat) has also adjudicated on this issue in favour of the assessee. The brief facts of the case were that assessee calculated depreciation on plant and machinery at 33.33 per cent as permissible under the Income-tax Rules, 1962 as against 30 per cent depreciation required to be calculated under Schedule XIV of the Companies Act. The Commissioner, acting under section 263, held that rate of depreciation claimed was in excess of the rate under the Companies Act
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and that excess was to be disallowed. The Tribunal held that Circular of Company Law Board lays down minimum rate of depreciation for purpose of distribution of dividend and company may decide to claim higher depreciation on basis of a bona fide technological evaluation and proper disclosure is to be made by way of a note forming part of annual accounts. The Tribunal further held that, in instant case, proper disclosure was made by way of a note to annual statement of accounts and rates claimed on basis of income-tax records were based on bona fide information of Board of Directors as contained in aforesaid minutes of meeting of Board of Directors. In appeal, the High Court held that the Tribunal was right in holding that depreciation worked out by assessee on basis of income- tax records and debited to profit and loss account was not violative of provisions of Companies Act and ITAT has not erred in cancelling order passed by Commissioner under section 263 of the Act. Again, in the case of CIT Ludhiana v. Sona Woollen Mills (P.) Ltd. 2007] 160 Taxman 22 (Punjab & Haryana), assessee claimed depreciation as per provisions of income tax Act for computing quantum of income under section 115J. The Assessing Officer rejected claim of assessee on ground that depreciation for purposes of section 115J was permissible as per Schedule XIV of Companies Act. The Commissioner (Appeals) allowed claim of assessee holding that depreciation provided under Companies Act was minimum but there was no bar to higher depreciation being claimed by assessee and, thus, for purposes of section 115J, depreciation actually debited could be allowed. The High Court held that in view of Supreme Court decision in Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562, Commissioner (Appeals) was justified in holding that the assessee is eligible to claim higher rate of depreciation and Income Tax Act.
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The Delhi ITAT in the case of HAL Offshore Ltd [2019] 108 taxmann.com 390 (Delhi - Trib.) held that where depreciation provided in profit and loss account is at same rate as provided for purpose of profit and loss account being laid before Annual General Meeting (AGM), no addition could be made to assessee's income on ground that while calculating total income as per section 115JB, assessee had adopted rate of depreciation as per Income-tax Act instead of Companies Act in profit and loss account. The Andhra Pradesh High Court in the case of Deccan Tools Industries (P.) Ltd.[2014] 52 taxmann.com 55 (Andhra Pradesh) held that where for purpose of section 115J, assessee claimed depreciation at rates provided under Income-tax Rules, action of Assessing Officer in redrawing profit and loss account and adopting rates prescribed under Companies Act, was totally unauthorized.
6.1 In view of the various decisions cited above, we are of the considered view that in the instant facts, PCIT erred in facts and law in holding that the assessment order was erroneous and prejudicial to the interests of the revenue so far as ground number 3 of the assessee’s appeal is concerned.
In the result, ground number 3 of the assessee’s appeal is allowed.
Ground number 9: payments for job work not verified by AO at “fair market value” under section 40A(2)(b): 8. The brief facts in relation to this ground of appeal are that in the 263 proceedings, the PCIT observed that the assessee made certain payments to MC Metal Private Limited on account of job work payments of �
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48,49,883/-, on account sales of � 1,86,14,467/- and job work receipt of � 9,22,254/- in respect of which the AO did not carry out the necessary verification of market value as per the provisions of section 40A(2)(b) of the Income Tax Act. In the 263 proceedings, the assessee submitted that the AO raised query vide letter dated 04-01-2013 (at serial number 14) and the said the said details were furnished by the assessee vide letter dated 12-12- 2012. Accordingly, the order passed by the AO is not erroneous and prejudicial to the interests of the revenue. The PCIT, however, dismissed the submissions of the assessee with the following observations:
“On verification of records, it is gathered that the AO, vide his letter dated 19-02-2012 at sr. no.14 and vide his letter dated 04.01 2013 at sr. no.(ii) has asked assessee to furnish complete name and address of the business concerns specified in sec. 40A(2)(b) of the IT Act with nature of payment along with copy of account and comparable evidence of outside parties. The assessee had submitted only the details of parties along with amount of payment and the ledger account of the respective parties as per sr. No. 13 of its reply by letter dated l2-2012. The assessee has not submitted any supporting document as comparable evidence of outside party to justify its payment to the by Sec. 40A(2)(b) of the IT Act. The assessee has not submitted any other details though asked for by the AO during the assessment proceeding. Accordingly the issue of payment made to related party verification of fair market value as per the provisions of Sec. 40A(2)(b) of the IT Act- was not examined by the AO at the time of assessment.”
Before us, the counsel for the assessee submitted that the PCIT in the 263 order has shifted the entire onus of proving that provisions of section 40A(2)(b) of the Act have not been satisfied by the assessee stating that the assessee has not given comparable evidence of outside parties to justify that
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it’s payment to the parties are covered within the provisions of section 40A(2)(b) of the Act. According to the assessee, the assessee cannot be required to prove that the payment is on arms-length basis and assessee cannot be asked to provide comparable cases to prove that the provisions of section 40A(2)(b) of the Act have been satisfied in the instant set of facts. Hence, the order passed by the AO after carrying out during verification cannot be held to be erroneous and prejudicial to the interests of the revenue. In response, ld. DR relied upon the observations made by the PCIT in 263 order.
We have heard the rival contentions and perused the material on record. We note that vide letter dated 4 January 2013, the AO had called for details of business concerns specified in section 40A(2)(b) of the Act. The PCIT has also agreed in his order that the vide letter dated 12-12-2012, the assessee submitted details of parties along with amount of payment and the ledger accounts of the respective parties as per serial number 13 in the said reply. Accordingly, in our view, it is not a case that this issue was not examined by the AO in the assessment proceedings. Specific query in this regard was raised by the AO, to which the assessee replied. We note that the jurisdictional Gujarat High Court in the case of CIT v. Ashok J. Patel (2014) 43 Taxman.com 227 (Gujarat) held that for making the disallowance under section 40A(2)(b) of the Act, onus to prove unreasonableness is on the assessing officer. While passing the order, the High Court made the following observations:
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There is, however, one more reason for doing so. As evident from a plain reading of the assessment order, the Assessing Officer, had called upon the assessee to demonstrate that the payment made by the assessee to the specified persons is not unreasonable or excessive, and it is thus failure of the assessee which has resulted in disallowance under section 40A(2). However, proving a negative, as the assessee has been called upon to do in this case, is an impossible onus to perform. In any event, this onus is on the Assessing Officer and the Assessing Officer has failed to discharge the said onus. For this reason also, the disallowance is unsustainable in law. As regards the discrepancy in the figures of the tax audit report and the assessee, neither such a situation can be a reason enough to make a disallowance under section 40A(2) nor the onus of explaining such a variation is on the assessee. A tax auditor is an independent professional and any errors in his report cannot be put to assessee's disadvantage.
10.1 The Gujarat High Court in the case of Gujarat Gas Financial Services Ltd [2015] 60 taxmann.com 483 (Gujarat) held that where assessee company as well as assessee's parent company, both were assessed to tax at maximum marginal rate, it could not be said that service charge was paid by assessee-company to parent company at unreasonable rate with the object to evade tax. The Gujarat High Court held that since revenue could not point out that assessee evaded payment of tax, invocation of section 40A(2) was not valid. In the case of IKEA Trading (India) (P.) Ltd. [2021] 123 taxmann.com 129 (Delhi - Trib.), the Delhi ITAT held that as
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per section 40A(2)(b), onus had been cast upon Assessing Officer to bring on record comparable cases to demonstrate that transactions made by assessee with related parties were unreasonable and excessive. The Tribunal held that since Assessing Officer had not brought any comparable case to demonstrate that payments made by assessee were excessive/unreasonable and the fact that payees were also assessed to tax at same rate of tax, Commissioner (Appeals) had rightly deleted addition. In the case of CIT v. Indo Saudi Services (Travel) (P.) Ltd 310 ITR 306 (Bombay)[2008], the Bombay High Court held that where revenue was not in a position to point out how assessee evaded payment of tax by alleged payment of higher commission to its sister concern, since sister concern was also paying tax at higher rate, disallowance of alleged excess commission paid to sister concern was not justified. In view of the above decisions, as applied to the assessee set of facts, Ld. PCIT in the 263 proceedings has held that the assessment order is erroneous and prejudicial for the reason that the assessee has not been able to bring on record comparable cases in order be able to substantiate that the payment is not unreasonable or excessive as per provisions of section 40A(2) (b) of the Act. In our considered view, such onus cannot be cast upon the assessee to prove that payment made is not excessive/unreasonable by bringing on record instances of comparable cases. As held by various Courts/Tribunals, the onus is on the revenue to record reasons why payment by the assessee is excessive/unreasonable so as to invoke provisions of section 40A(2)(b) of the Act. For the foregoing reasons, in our view, PCIT has erred in facts and law in holding that the order is erroneous and prejudicial to the interests of the revenue, so far as ground number 9 of the assessee’s appeal is concerned.
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In the result, ground number 9 of the assessee’s appeal is allowed.
12 Since the assessee has not pressed the other grounds of appeal, the matter is being restored to the file of AO to examine the other issues on which the order under section 263 of the Act was set aside for fresh/de-novo adjudication, after giving due opportunity of hearing to the assessee to present his case.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 22-07-2022
Sd/- Sd/- (P.M. JAGTAP) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 22/07/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद