M/S. ARMEE INFOTECH,,AHMEDABAD vs. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-3(3),, AHMEDABAD

First we take appeal of the Revenue in the Asstt.Year 2012-13 i.e. ITA No.1778/Ahd/2016. However, if any ground is found to be inter- connected with any other issues agitated in rest of two appeals, then same will be taken up together.

Ground No.1 raised by the Revenue reads as under:

In response to the show cause notice of the AO, it was contended that the assessee has a total turnover of more than Rs.102 crores. It has shown GP margin at 13.35%. It has made sales mostly to schools, colleges and different computerization projects. The assessee pointed out that purchase orders were received by it from IL&FS Education. As per the technical configuration of UPS, stabilizer and site net working it was required to replace batteries. The assessee has placed on record details of battery replacement as per annexure-2 before the AO. It has also submitted copies of agreement exhibiting as to why batteries were required to be replaced.

The ld.AO has gone through all these details. He has disallowed claim of the assessee for two reasons, viz. it is a contingent liability which is to be materialized after five years, and secondly, he has verified purchases of batteries, and out of total purchases, he found

Dissatisfied with finding of the AO, the assessee carried the matter in appeal before the ld.first appellate authority. The assessee had raised two fold of submissions. In the first fold of submissions, it was contended that provision made by it was in consonance with Accounting Standard 29 issued by the Institute of Chartered Accountants of India. It has made this provision on the basis of contractual liabilities, and this provision has been made in a scientific manner. The assessee relied upon the latest judgment of Hon’ble Supreme Court in the case of Rotork Control India P.Ltd. Vs. CIT,314 ITR 62 (SC). In its next fold of submissions, it was contended that in the Asstt.Year 2010-11, similar provision was made. The ld.AO has disallowed claim of the assessee. The assessee took the matter before the ld.CIT(A) who partially allowed the claim. Assessee and Revenue approached the Tribunal, who set aside issue to the file of the AO for verification.

The ld.AO on re-verification has allowed claim of the assessee vide assessment order dated 31.3.2016 passed under section 143(3) r.w.s. section 254 of the Act. The ld.CIT(A) has considered these three fold of submissions, and was satisfied with the explanation of the assessee. The ld.CIT(A) has reproduced clause of agreement under which the assessee was required to replace batteries. The ld.CIT(A) thereafter made reference to the proposition laid down by the Hon’ble Supreme Court in the case of Rotork Control India P.Ltd. Vs. CIT (supra). The ld.CIT(A) also took cognizance of the assessment passed in the Asstt.year 2010-11 in set aside proceedings and after perusing the impugned assessment order, the ld.CIT(A) has reproduced the ITA No.1778/Ahd/2016 & 2 Others ACIT Vs. Armee Infotech 5 finding of the order on page no.12 of the impugned order. However, thereafter, the ld.CIT(A) observed that certain purchases were not found to be genuine and he confirmed the disallowance at 17% of the alleged bogus purchases. This exercise worked out to disallowance of Rs.59,16,000/- out of the total disallowance made by the AO. In this way, the ld.CIT(A) has partly deleted disallowance and partly confirmed.

Before us, the ld.DR relied upon the finding of AO. He contended that the liability was contingent in nature. The assessee failed to prove genuineness of the expenditure incurred for replacement of batteries, and therefore the AO has rightly disallowed.

On the other hand, the ld.counsel for the assessee relied upon the order of the ld.CIT(A) as well as stand of the AO in the Asstt.Year 2010- 11. He took us through assessment order passed on 30.3.2016 in the Asstt.Year 2010-11 which is available on page no.83 to 89 of the paper book.

We have duly considered rival submissions and gone through the record carefully. The assessee has turnover of more than Rs.102 crores. It has made provision for replacement of batteries qua the computers sold by it. The clause of the agreement on which it was required to replace has been taken note by the ld.CIT(A), and such clauses read as under:

Before adverting to the proposition laid down by the Hon’ble Supreme Court in the case of Rotork Control India P.Ltd. Vs. CIT (supra), we would make reference to the stand of AO in the case of the assessee in the Asstt.Year 2010-11. In this assessment year, the assessee made provision for battery replacement. The addition of Rs.1,43,99,000/- was made. The assessee took this issue to the ld.CIT(A) who confirmed addition to the extent of Rs.1,03,61,067/-. Dissatisfied with order of the ld.CIT(A), the assessee carried the matter in appeal before the Tribunal in and 2714/Ahd/2013. In other words, cross appeals were filed before the Tribunal. These appeals have been decided vide order dated 28.2.2014. The Tribunal has remitted the issue back to the file of the AO for fresh examination. The AO re-verified all these aspects, and found, as a matter of fact, that the provision made by the assessee in F.Y.2009-10 i.e. the Asstt.Year 2010-11 was utilized by Asstt.Year 2014-15 i.e. in the F.Y.2013-14. The total amount was used by the assessee except a sum of Rs.2,24,717/-. In other words, a provision of Rs.1,43,99,000/- was made. Out of which only Rs.2,24,717/- remained unutilized. This amount was written back in the accounts and offered as income. This verification was made subsequent to the assessment order passed in the Asstt.Yeaer 2012-13, that is impugned before us. Meaning thereby, the AO himself as accepted that provision made by the assessee is a contractual liability and has duly been discharged in the earlier years. This finding has been reproduced by the ld.CIT(A) in the impugned order at page no.12 which reads as under:

Hon’ble Supreme Court has explained the position of law on admissibility of a provision regarding warranty and relevant discussion is worth to note, which reads as under: UA provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation, and 9c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. The word 'liability' is defined as “a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or ITA No.1778/Ahd/2016 & 2 Others ACIT Vs. Armee Infotech 8 similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under Section 37 of the said Act. However, when there is manufacture and of an army of items running into thousands of units of sophisticated , the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to setting that obligation.”

In the light of the above, if we examine facts of the present case, then it would reveal that under contractual agreement, the assessee has been making provision consistently. It has demonstrated as to how the provision has been utilized by it qua which parties, on whose premises it has installed the computers. Therefore, we do not find any error in the finding of ld.CIT(a) that the assessee is entitled to claim deduction of provision for warranty for replacement of batteries in toto. However, the ld.CIT(A) has restricted the allowance of provision on the second reasoning assigned by the AO. The AO found that the assessee failed to prove its purchases; because out of total purchases, suppliers to the extent of Rs.1,56,78,802/- could not confirm the sales made to the assessee. The ld.CIT(A) was satisfied to the extent that batteries have been replaced, and the assessee must have earned extra profit by procuring batteries from sources “A”, and probably bill from sources “B”. There is no dispute with regard to the quantitative details of batteries. Dispute relates to source of procurements. The assessee placed on record documentation with regard to five parties who denied the sales to the assessee. According to the ld.CIT(A) profit element to the extent of 17% must have been earned by the assessee in this modus operandi. For harboring this plea, the ld.CIT(A) has made reference to order of the ITAT in the case of Vijay Proteins Ltd., 58 ITD 428 (ITAT-Ahd) wherein profit estimated at 25% of the purchase made where details were found to be bogus. On the other hand, stand of the assessee is that its turnover is of Rs.102 crores. The alleged extra

We have looked into all these details. Before the ld.CIT(A), assessee has produced decision of Hon’ble Gujarat High Court in the case of CIT Vs. Gujarat Ambuja Exports Ltd., Tax Appeal No.840 of 2013, and also relied upon in the case of Mayank Diamonds P.Ltd., Tax Appeal No.200 of 2003. It further relied upon decision of ITAT, Ahmedabad Bench in the case of ACIT Vs. Lulubi Steel in ITA No.1568/Ahd/2008. In the case of Gujarat Ambuja (supra), the AO disallowed 25% of the bogus purchase, which has been reduced to 5% at the level of ITAT. This decision of the ITAT was challenged before the Hon’ble Gujarat High Court, the Hon’ble Court did not interfere in the finding of the Tribunal. Similarly, in the case of Mayank Diamonds P.Ltd. (supra), GP rate of 5% was taken by the Tribunal, which has been upheld by the Hon’ble High Court. In the case of Lulubi Steel (supra), the Tribunal has again restricted the addition at 12.5%. In all these cases, Vijay Proteins (supra) has been considered. A perusal of the decisions would reveal that major factor which weighed with the ITAT as well as Hon’ble High Court was estimation of profit in a particular transaction after considering particular line of business. Here, in this case, the assessee has purchased batteries and replaced. Quantity was not in dispute. In the past, whatever provisions remained unutilized was offered as income by the assessee. Therefore, we are of the view that there is nothing with the ld.CIT(A) to estimate the profit

Ground No.2 in the Revenue’s appeal for the Asstt.Year 2012-13, and ground no.2 in the assessee’s appeal for the Asstt.Year 2012-13, and ground no.3 in the appeal of the assessee for the Asstt.Year 2014- 15. All these grounds are inter-connected with each other. The dispue in these grounds of appeals relate to determination of the amounts require to be disallowed out of sale promotion expenses.

We take facts first from the Asstt.Year 2012-13. In this assessment year, the assessee has debited a sum of Rs.1,29,93,438/- towards sales promotion expenses, and claimed the same in the profit & loss account. The ld.AO found that it has given costly gifts to certain

In the Asstt.Year 2014-15, the assessee has debited a sum of Rs.1,15,86,601/- as sales promotion expenses. The ld.AO found that Rs.30,52,101/- were debited by the assessee against trading business and Rs.85,34,500/- against commission income. The AO has disallowed a sum of Rs.85,34,500/- and this disallowance has been confirmed by the ld.CIT(A).

With the assistance of the ld.representatives, we have gone through the record carefully. The ld.CIT(A) while partly confirming the disallowance made by the AO has recorded the following finding (Asstt.Year 2012-13):

Stand of the assessee is that it was in the business of trading in computer spares and peripheral. It was also providing maintenance services. There are many suppliers in the area of business, in which the assessee was engaged. In order to remain in the market, and also to maintain assessee’s hold in the market, it is essential to incur expenditure on sale promotion. The assessee further contended that it has achieved a turnover of Rs.102.32 crores, and against which it has incurred expenditure of Rs.1,29,93,438/-, which is just 1.14% of the total turnover. The expenditure cannot be said to be excessive or unreasonable. Only reason assigned by the AO is that it failed to give list of recipients of the gifts.

After going through well reasoned finding of the ld.CIT(A), we are of the view that there is no justification to interfere in it. The ld.CIT(A) found as a matter of fact that similar expenditure incurred by the assessee in the Asstt.Year 2010-11 and 2011-12, and those

However, we are of the view that there is no reason to disallow expenditure to the extent of Rs.9.50 lakhs on an adhoc basis. We delete this disallowance also. Thus, we allow the grounds of appeal raised by the assessee, and reject ground of appeal raised by the Revenue.

As far as Asstt.Year 2014-15 is concerned, in this year, the assessee has declared total income at Rs.6,15,58,474/-. The reasons for making disallowance of Rs.85,34,500/- out of sales promotion

On the other hand, the stand of the assessee is that it has purchased the gold. Thereafter, it was converted into 5-10 grams of coins which were distributed on festivities viz. Diwali and other occasions to its customers. Considering nature of the assessee’s business, and expenses incurred in earlier years, it, but natural that this must have been recurring expenditure in this year also – there may be some irregularities crept in on the source of purchase of gifts items, but that is not sufficient to ignore claim of the assessee. The sales promotion expenses are one of necessary components for doing business smoothly and the returned income in this year has been enhanced. It has shown total income of Rs.6.15 crores against Rs.4.13 crores in the Asstt.Year 2012-13. In Asstt.Year 2012-13, we have accepted the sales promotion expenses to the extent of Rs.1.29 crores, wherein this year it has also incurred Rs.85 lakhs. Considering nature

Ground No.2: In ITA No.1778/Ahd/2016 as well as ground no.1 in ITA No.2324/Ahd/2018. 27. The grievance of the Revenue in its appeal for the Asstt.Year 2012-13 is that the ld.CIT(A) has erred in deleting disallowance of Rs.55 lakhs in respect of donation to political parties under section 80GGC of the Act. The grievance of the assessee in its appeal for the Asstt.Year 2014-15 is that the ld.CIT(A) has erred in confirming the disallowance of Rs.5,86,32,892/- which was claimed as deduction under Chapter VIA in respect of donation given to political party and charitable institutions.

Brief facts of the case are that in the Asstt.Year 2012-13, the assessee has given donation of Rs.55 lakhs to Rashtriya Komi Ekta Party (“RKE” party for short) which is duly registered with Election Commission of India. Similarly, for the Asstt.Year 2014-15, the assessee has given donation to the following parties.

With assistance of the ld.representatives, we have gone through the record. In the Asstt.Year 2012-13, the assessee has given donation to only one party i.e. “RKE” whereas in the Asstt.Year 2014-15, it has given donation to three political parties viz. “RKE”, Akhil Bhartiya Hindu Mahasabha, Lok Janshakti Parity. Apart from these three political parties, it has further given donation to three charitable institutions vis. Shri Sadvichar Parivar Jankalyan Pashuraksha Charitable Trust, Mahavir Shubha Sandesh Jivdaya Panjrapole Charitable Trust, Shri Vardhaman Jjivdaya Panjrapole Charitable Trust. Let us take note of section 80GGC:

A perusal of the above section would reveal that it provides deduction of any amount of contribution made by an assessee in the previous year to a political party. Only exception provided in this section is that the assessee should not be by a local authority i.e. Municipal authority etc. or any artificial juridical person wholly or partly funded by the Government. In other words, donation should not be given by a local authority or by a corporation funded by the Government. Except these two categories of the assessee, if any other assessees made a contribution to a political party, then such contribution would be allowed as deduction. Explanation appended to this section further provides the meaning of a political party and it contemplates a “political party” means a political party registered under section 29A of the Representation of the People Act, 1951. The assessee has produced details of payment made through account payee cheques as well as registration certificate of these political parties before the AO. Only exclusion made with effect from 1.4.2014 is that donation should not be made in cash and this clause is not applicable on the facts of the assessee’s case, because it has made through account payee cheques. Next category of donee is charitable institution. These institutions got registered under section 12A of the Income Tax Act. Their incomes are to be assessed under sections 11, 12 and 13 of the Act. Their characters/activities have been categorized as charitable by the department itself. They have been granted registration under section 80GGC of the Act for soliciting donation from the assessee,

The case of the Revenue in the Asstt.Year 2014-15 is that the assessee failed to prove, whether ultimately, the donees have used these monies ? The AO has devoted a lot of energy in conducting such inquiry as to how these monies have been incurred by the recipients. To our mind, the authorities below have misdirected themselves. The donees are taxable entities in themselves. If they misused their position and failed to conduct themselves in regard with requirement of law, then this amount could be taxable in his hands. Act nowhere put obligation upon the donor to ensure how the funds are utilized by the donee towards their objects. Due to this reason, we are of the view that whole angle of inquiry at the end of the AO is misdirected. It is for the AO to verify whether these charitable institutions have utilized funds for charitable objects or not, in their own cases, and if they failed to utilize funds for their objects, then their charitable status could be cancelled. Registration under section 12AA could be cancelled as per the procedure contemplated in section 12AA(3) of the Act. The funds which were not used for objects of the Trust, that can be brought to tax under section 13(3) of the Act. A perusal of the scheme of Income Tax Act, it would reveal that once the donation has been made, the donee is not under obligation to keep a track of the donation, and nothing left in his hand which can ask for return of these amounts. There is no such provision provided in the Act. If a duly recognized institution, for the purpose of receiving donation, somebody makes donation and then how the donation would be bogus, if the donee failed to use it for the object which has been made eligible to receive the donation. How the donor could dictate terms after donations are made ? No donee will be under influence of the donor for arranging its affairs. Therefore, there is ITA No.1778/Ahd/2016 & 2 Others ACIT Vs. Armee Infotech 19 fallacy in the approach of the ld.AO as well as the ld.CIT(A) for disallowing the donations made by the assessee. We do not find merit in the grounds of Revenue raised in the Asstt.Year 2012-13. The ld.CIT(A) has rightly deleted the disallowance of Rs.55.00 lakhs. This ground of appeal is rejected. On the same analogy, the grounds appeal raised by the assessee in the Asstt.Year 2014-15 for disallowance of Rs.5,86,32,892/- is allowed.

In the result, ITA No.1778/Ahd/2016 (by Revenue) is dismissed, and ITA No.1900/Ahd/2016 (by assessee) is partly allowed.

Now we take remaining grounds of appeal in the Asstt.Year 2014- 15. 35. Ground no.1 and 3, we have already adjudicated along with appeal for the Asstt.Year 2012-13. In Ground No.2, the grievance of the assessee is that the ld.CIT(A) has erred in confirming the disallowance of Rs.17,74,045/- which was disallowed by the AO out of travelling expenditure.

Brief facts of the case are that the assessee has debited total expenses of Rs.73,38,974/- towards travelling expenses. The ld.AO has gone through the record and also recorded statement of partner Shri Kirit Patel. He found that out of total expenses a sum of Rs.14,29,324/- were incurred for personal trip of Shri Kirit Patel to South Africa. He also discussed that expenditure incurred for the visit of Smt.Ami Patel, partner to Ooty was also of personal nature. In this way, he worked out a disallowance of Rs.17,74,045/-. Appeal to the CIT(A) did not bring any relief to the assessee.

With the assistance of the ld.representatives, we have gone through the record. We find that during the course of assessment

After considering complete details, as discussed in the assessment order, we delete a sum of Rs.1,30,224/- out of total disallowance made by the AO at Rs.17,74,045/- which has been confirmed by the ld.CIT(A) also. We find that the assessee failed to demonstrate that rest of the expenditure disallowed by the AO was also incurred for the purpose of business. No doubt the total expenditure claimed by the assessee is only 0.85% of the total revenue earned by it. It has demonstrated a turnover of Rs.91.40 crores, and it has claimed travelling expenses of only Rs.77.33 lakhs; but still if it is unearthed by the AO that in certain expenditure element of personal nature is involved, then such expenditure cannot be allowed to the assessee. Therefore, this ground of appeal is partly allowed.

Ground No.4: In this ground, grievance of the assessee is that the ld.CIT(A) has erred in confirming addition of Rs.27,60,687/- which was added by the AO on account of understatement of closing stock.

During the assessment proceedings, in respect of value of closing stock, the assessee has filed complete details and inventory of the closing stock showing value of closing stock at Rs.6,72,93,163/- item- wise. The ld.AO noticed that in the chart, value of some of the items of closing stock was taken below the purchase rate or at opening balance, with specific reference to the computer table/chair. Taking clue from ITA No.1778/Ahd/2016 & 2 Others ACIT Vs. Armee Infotech 21 the value of closing stock in respect of table/chair and server, the ld.AO assumed that the assessee has valued entire closing stock at a price lower than the cost or purchase price. Thus, as per the AO, assessee has made understatement of closing stock to the extent of Rs.12,03,408/- and made addition of Rs.27,60,687/- in the total income of the assessee. Action of the AO was challenged before the first appellate authority. Before the ld.CIT(A), the assessee has submitted that item-wise details of inventory was submitted before the AO during the assessment, and the AO arbitrarily adopted average value of the computer table/chair without considering the fact that there were different types of computer tables and chairs having different purchase price, and therefore, they could not be averaged. The assessee further submitted that the similar method of valuation followed by the assessee year and year and has been accepted by the department. It further submitted that adjustment on account of valuation of closing was tax neutral, and would not fasten any tax liability, because value of closing stock of the year would become opening stock in the next year, and therefore, there is no logic for the assessee to underestimate the value of closing stock. However, the ld.CIT(A) based on the specific observations of the AO dismissed submissions of the assessee in the absence of evidence, and accordingly confirmed the addition. Thus, the assessee is now before the Tribunal.

Before us the ld.counsel for the assessee reiterated submissions as were made before the Revenue authorities. He further submitted that the Revenue authorities while valuing the closing stock by taking a specific instance of stock item, generalized the entire value of closing stock. It is submitted that this method of valuing closing stock is followed by the assessee year after year, and the same was accepted by the department. The instance pointed out by the ld.AO in respect of stock of computer table/chair for calculation of understatement of closing stock is misleading, because, the said items have different sizes,

We have heard both the parties, considered submissions made and also perused the orders of Revenue authorities. While going through the items of closing stock furnished before the Revenue authorities indicated that there were about 22 closing stock items in the list. The assessee has in fact valued the stock on the basis of estimated realizable value. No doubt estimation of net realizable value should be based on some evidence. It has claimed by the assessee that it is following consistently valuation of inventory at cost or net realizable value whichever is less. Out of total stock, the ld.AO has chosen computer table/chair and serve as indicative of how the assessee has undervalued the closing stock. On that basis he averaged entire stock and determined undervaluation of closing stock, which according to the assessee was faulty, because, these items were in different sizes and having different purchase price. This claim of the assessee cannot be simply bruised aside, because computer table are different in sizes and purchased at different prices, and therefore, it cannot be taken in one lot. Therefore, we are not convinced with the method adopted by the AO in determining the value of understated closing stock in respect of computer chair/tables, because firstly the same has to be segregated in respective size, types and price, and thereafter arrive at more reasonable value of closing stock at cost or net realizable value. The ld.AO failed to take note of this aspect. He did not refer to any evidence collected by him rejecting the valuation made by the assessee towards realization of value of the assets disclosed in the closing stock. In other words, if a particular computer table/chair has been valued in the closing stock on net realizable basis, then its value should be disturbed by the AO by pointing out specific defects in determination of such value, and how he will determine the value which could be realized

In the result, ITA No.1778/Ahd/2016 (by Revenue) is dismissed, and ITA No.1900/Ahd/2016 and 2324/Ahd/2018 (by assessee) are partly allowed. Order pronounced in the Court on 11th January, 2022 at Ahmedabad. (WASEEM AHMED) VICE-PRESIDENT