M/S. TAJMAHAL AGRO INDUSTRIES (P) LTD.,CHENNAI vs. ITO, CHENNAI

आदेश / O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER :

The assessee filed these appeals against the orders of the Commissioner of Income Tax (Appeals)-III, Chennai in ITA No.817/06-07/A-III, 727/08-09/A-III both dated 17.08.2010 for the assessment years 2004-05 & 2006-07, respectively. The assessee as well as the Revenue filed appeal against the order of the Commissioner of Income Tax (Appeals)-III, Chennai in ITA No.458/09-10/A-III dated 20.08.2010 for the assessment year 2007- 08.

3 ITA Nos.1872 to 1874, 1940/Chny/2010 18.06.2003 i.e., during the assessment year 2004-05 and credited with Rs.95,61,762/- towards goodwill in its books without obtaining any money from him. Since the property was used by the assessee for its business and depreciation has been claimed by it in the earlier years, the AO held that the profit from the transfer would be short- term capital gains. The assessee was asked to furnish the guideline value for the purpose of assessing the market value of land u/s.50C and the break up of the capitalized amount including the cost of land. Since the assessee could not furnish any evidence to prove the purchase price of the land and in the absence of any details, the AO has treated it as short term capital gains. Aggrieved, the assessee filed an appeal against the treatment of profit on sale of land as short- term capital gain. It contended that the AO did not assign any value to the cost of land and adopted the entire market value of the land of Rs.7,62,500/- as on June, 2003 as short-term capital gain and adopting the cost of land at 70% of the market value fixed by the AO in 2004-05, argued that there would not be any short-term capital gain and the long-term capital gain would be Rs.2,28,750/-. The Ld. CIT(A) held that when no bifurcation of the asset is provided and depreciation has been claimed on the entire amount capitalized in the books of account, the AO was right in holding that the value of land

4 ITA Nos.1872 to 1874, 1940/Chny/2010 was "Nil". This is because no depreciation can be claimed on the cost of land as held by the Hon'ble Supreme Court in CIT v. Alps Theatre 65 ITR 377(SC). The Supreme Court in the subsequent decision in CIT v. Hoogly Mills Co. Ltd 287 ITR 333 has further held that where composite price is mentioned, the price has to be bifurcated between price of land and building and no depreciation can be given on land. As no bifurcation has been given but depreciation has been claimed, the AO has rightly taken the value of land at Nil and treated the profit as short term capital gain. Further, during the assessment proceedings, the assessee produced donation receipts for Rs.18,000/- & Rs.36,000/- paid to Amar Seva Sangam, which is eligible for deduction U/s.80G as per order dated 29.09.2003 of the CIT-II, Madurai which was valid upto 31.03.2006 and on such material claimed deduction U/s.80G. The AO refused to allow such claim as the assessee has not claimed this deduction in its return. Aggrieved, the assessee filed an appeal before the CIT(A) and on dismissal, filed the above appeal.

5 ITA Nos.1872 to 1874, 1940/Chny/2010 land does not loose its value under any circumstances and that the land appreciates in value only. He ought to have ascertained the value of land involved in the composite price at the time of purchase and considered such value as cost of purchase of land rather than assuming and presuming that the value of land was NIL. The courts have held that where a composite sale comprising of land and building was come across the value had to be split into value of land and value of other assets and appropriate treatment had to be given in accordance with law with respect to each asset. There is no depreciation rate for land in the depreciation schedule and the Supreme Court had held long time ago in the case of ALPS theatre that there is no deprecation for a land. The learned Assessing Officer erred in disallowing the deduction under section 80G for the sole reason that the receipts were produced in the course of the hearing and that the claim was not made in a revised return and the learned CIT(A) erred in confirming the disallowance.

6 ITA Nos.1872 to 1874, 1940/Chny/2010 Rs.1,19,05,102/- including the improvements and it had claimed depreciation in the earlier years on the entire amount capitalized which included cost of the land. The AO required the assessee to furnish the market value of the land as on the date of transfer in June 2003 by way of book entry. The assessee could not produce any evidence to indicate the cost of the land included in the total purchase cost. The total area of the land is 3 acres and 5 Guntas. From a print out taken from the internet as on 21.12.2006, as per which the value land at Mahajanahalli Municipal limits (being bagayat dry land) on that day was Rs.3,57,500 per acre. Based on this basis, the AO estimated the market value of the entire land as on June 2003 at Rs.7,62,500/- at the rate of Rs.2,50,000/- per acre. Since, no break up is available either with the assessee or with the Department to ascertain the value (i.e., the cost) of the land which was included in the total cost at the time of purchase, for arriving the cost of acquisition of land, the AO could not put any value towards the cost of the land. Further, since the assessee has been claiming depreciation on the entire value capitalized which included even the cost of land, it is to be taken that there is no element of cost involved in respect of acquisition of the land and therefore the Ld.DR supported the orders of lower authorities.

7 ITA Nos.1872 to 1874, 1940/Chny/2010 5. We heard the rival submissions and gone through relevant material. The assessee has purchased the rice mill such as land and building, machineries etc in 2000, the value of which as per its books was Rs.1,05,24,960/-. It capitalised in its books at Rs.1,19,05,102/- including the improvements and had claimed depreciation in the earlier years, say from ay 2001-02 onwards, on the entire capitalized amount which included the cost of the land. The assessee sold them as a composite sale in “as is where is” condition to one of its Directors Shri A.R. Subramanian on 18.06.2003 i.e., during the assessment year 2004-05, and credited with Rs.95,61,762/- towards goodwill in its books without obtaining any money from him. Since the property was used by the assessee for its business and depreciation has been claimed by it in the earlier years, the AO held that the profit from the transfer would be short-term capital gains. For the purpose of arriving out the market value of land u/s.50C, the AO asked the assessee to provide the break up of the capitalized amount including the cost of land and the assessee could not furnish any details. In the absence of such data from the revenue also, the AO could not arrive the cost of acquisition of the impugned land. Further, the AO found that the assessee has been claiming depreciation, all along, on the entire value of capitalization which included even the cost of land.

8 ITA Nos.1872 to 1874, 1940/Chny/2010 Therefore, the AO held that there is no element of cost involved in respect of acquisition of the land and hence held that the cost of acquisition of land as Nil. Since the assessee has not given the bifurcation of assets and its value which were capitalized and also has claimed depreciation all along even on the value of acquired, we do not find any infirmity in the findings of the Ld.CIT(A) that the AO has rightly taken the value of land at Nil and treated the profit as short term capital gain and hence we dismiss corresponding grounds of the appeal of the assessee.

5.1 On the claim of deduction u/s 80G, the fact remains that during the assessment proceedings itself, the assessee has produced donation receipts for Rs.18,000/- & Rs.36,000/- paid to Amar Seva Sangam, which was eligible for deduction U/s.80G as per order dated 29.09.2003 of the CIT-II, Madurai and was valid upto 31.03.2006 and on such material it claimed deduction U/s.80G. The AO refused to allow such claim as the assessee has not claimed this deduction in its return. Since the assessee has relied on the Hon’ble SC decision in the case of Goetze India Ltd v CIT (2006) 204 CTR (SC) 182, we direct the AO to reconsider this claim and allow the relief, if the claim is found meritorious on other respects, as if this

9 ITA Nos.1872 to 1874, 1940/Chny/2010 claim was made in the original return itself. The corresponding grounds of the assessee on this issue are treated as allowed.

Assessee’s Appeal in ITA No1873 /CHNY/2010, for the Assessment Year: 2006-07 : 7. The assessee was originally doing business in rice. While making the assessment for assessment year 2006-07, the AO found, inter alia, that in 2002, the assessee leased out the plant and rice mill machinery and a part of the immovable assets to M/s Peninsula Food Products (P) Ltd, a sister concern, under a lease agreement dt 3.10.2002 and admitted income from processing charges, sale of bran and sales of broken. Against such receipts, the assessee claimed various expenditures under the various heads viz cost of sales, employee cost, administrative exp, selling exp, finance cost and depreciation and admitted Rs.7,70,249/- as its total income. The AO examined the lease deed and found, inter alia, that the assessee was to be paid a rent of Rs.2/kg for processing the paddy/rice. The lessee purchased and processed the paddy/rice towards processing and paid processing charges of Rs. 90,88,000/- to the assessee. The

10 ITA Nos.1872 to 1874, 1940/Chny/2010 by-products like bran/ broken were sold by the assessee and the assessee admitted all such receipts. Against processing charges, it claimed various expenditures at Rs.1,02,98,162/-. The AO held that all the expenses should be met by the lessee company as agreed in the lease agreement and the rent received by the assessee as per the agreement should not be assessed under the head “Business” as claimed by the assessee but should be treated as “Income from other Sources” as per the case laws in New Savan Sugar & Gur Refining Co. Ltd Vs. CIT (74 ITR 7) and also CIT Vs. Kuya & Khas Kuya Colliery Co., (156 ITR 206). Further, the AO held that the lessee had processed 45,44,000 kgs of paddy / rice during the financial year and paid Rs.90,88,000/- at the rate of Rs.2 per kg for using the machinery and building shed. Therefore, he estimated the lease rental income at Rs.0.50 per Kg net of all, resultantly determined Rs.22,72,000/- (45,44,000 Kgs x 0.50 per Kg) as the income from the lease rental under the head “Income from other Sources”. With regard to the income from by products, on examination of the audit report, the AO found that there was no closing stock and opening stock particulars. The Authorised Representative was asked to explain about the quantitative details of the sale with corresponding purchase to sales. It was explained that the paddy/rice was purchased by the lessee,

11 ITA Nos.1872 to 1874, 1940/Chny/2010 M/s. Peninsula Food Products Ltd, a sister concern. Since the Processing of paddy/rice is not a onetime transaction but a continuous process, the AO held that the byproducts are also produced continuously. Therefore, there should be an opening and closing stock of byproducts such as broken rice/bran at the end of every year. Since the assessee failed to produce the quantitative details of the sale of broken rice / bran, also the quantitative details of closing stock of bran and broken rice, the AO rejected the books of account maintained by the assessee and estimated its income relying on Briz Byhushan Lal Parduman Kumar vs. CIT (115 ITR 524). Since the assesses sold away the by products of bran and broken rice, the AO held that there is no requirement for the expenses towards travel, carriage inwards etc, and treated the entire sale proceeds of Rs.68,09,001/- as income of the assessee and completed the assessment. On appeal, the Ld. CIT(A) dismissed the appeal. Against the order of the Ld. CIT(A), the assessee filed this appeal.

12 ITA Nos.1872 to 1874, 1940/Chny/2010 assessee. It has contended that its intention is to carry on business only. The leasing was resorted to only as temporary measure to tide over financial difficulties and therefore the lease rental earned cannot be taxed under income from other sources. It contended that only when the business is completely stopped and the assets are let out, the income can be taxed under other sources and in this regard, the Ld. AR relied on various decisions which were relied on before the Ld. CIT(A) also. Further, the Ld. AR pleaded that the AO erred in estimating the lease rental income @ 25% on the gross receipts ignoring both the direct and indirect expenses reasonably laid out or expended wholly and exclusively for the purpose of earning the lease rental income viz towards : insurance Rs.1,55,031/-,interest and finance charges Rs.10,85,532/-, depreciation on the plant and rice mill machinery Rs.40,79,967/- and part of the employee cost and administrative expenses which have been reasonably laid out or expended wholly and exclusively for the purpose of earning the lease rental income u/s 57(ii) and 57(iii).

13 ITA Nos.1872 to 1874, 1940/Chny/2010 received from its sister concern. Apparently, the assessee has not been carrying on any business activity during the year. In the next assessment year also no activity other than this activity has been carried on by the assessee. The lease deed with the sister concern was entered into in October, 2002 and since then the assessee had been letting out the assets and it is receiving income thereon without carrying on any manufacturing activities. All these facts clearly prove that the intention of the assessee is not to manufacture out of its assets but only to let them out and derive income therefrom. The assessee has derived income by exploiting the assets as its owner and not by using it as a business asset. The period of almost 6 years, during which time the assessee had not carried out any business activity, cannot be termed to be a temporary phase. The case laws relied upon by the Ld. AR are not directly on the issue. In the case of Universal Plastics Ltd. v. CIT 237 ITR 454, the Hon'ble Supreme Court has held that the lease as a temporary means of exploiting the commercial asset would constitute business income. However, in the case of the assessee there is no end in sight to the lease agreement. The lease started in October, 2002 and is still continuing. It is also seen that in the next assessment year also the lease was in force. By no stretch of imagination, this can be a temporary means of exploiting

14 ITA Nos.1872 to 1874, 1940/Chny/2010 the commercial assets. In view of these facts, the Ld. CIT(A) held that the AO has correctly taxed the income under other sources. With regard to the allowability of expenses incurred to earn the income, the Ld.DR submitted that the Ld.CIT(A) found that the AO had already allowed 75% and taxed only 25% of the lease rentals as its income. Even in computing the income from house property only a deduction of 30% of the income is allowed whereas in this case the AO has allowed deduction of 75%, which the Ld. CIT(A) has considered it as very fair and reasonable. Therefore, Ld. CIT(A) has rightly upheld the decision of the AO and hence the ld DR pleaded that the appeal may be dismissed.

15 ITA Nos.1872 to 1874, 1940/Chny/2010 In our view, such findings on the facts and circumstances are justified and hence we dismiss the corresponding grounds of the assessee’s appeal. With regard to the allowability of expenses incurred to earn the income, the AO found that as against the processing charges admitted at Rs.90,88,000/-, the assessee claimed Rs.1,02,98,162/- under various heads and all these expenses are to be borne by the lessee and hence he estimated the income. On appeal, the Ld. CIT(A) held that AO had already allowed 75% and taxed only 25% of the lease rentals as its income. Even in computing the income from house property, only a deduction of 30% of the income is allowed whereas in this case the AO has allowed deduction of 75%, which the Ld. CIT(A) has considered as very fair and reasonable. The Ld. AR pleaded that the AO erred in estimating the lease rental income @ 25% on the gross receipts ignoring both the direct and indirect expenses reasonably laid out or expended wholly and exclusively for the purpose of earning the lease rental income viz towards : insurance Rs.1,55,031/-, interest and finance charges Rs.10,85,532/-, depreciation on the plant and rice mill machinery Rs.40,79,967/- and part of the employee cost and administrative expenses which have been reasonably laid out or expended wholly and exclusively for the purpose of earning the lease rental income u/s 57(ii) & 57(iii) etc. The

16 ITA Nos.1872 to 1874, 1940/Chny/2010 AO has assessed the lease rental income at Rs.22,72,000/- as against the processing charges admitted at Rs.90,88,000/-. Thus, he has allowed Rs.68,16,000/- towards earning of income. We find that the total of insurance Rs.1,55,031/-, interest and finance charges Rs.10,85,532/-, depreciation on the plant and rice mill machinery Rs.40,79,967/- comes to Rs.53,20,470/- only. This leaves the balance of Rs.14,95,530/- (68,16,000 - 53,20,470 ) which was allowed towards the employee cost and administrative expenses for the purpose of earning the lease rental income u/s 57(iii). In the absence of any material from the assessee to assail the findings recorded by both the lower authorities towards the quantum of employee cost and the administrative expenses as unreasonable, we uphold the lease rental income determined at Rs.22,72,000/- and dismiss the corresponding grounds of the assessee.

17 ITA Nos.1872 to 1874, 1940/Chny/2010 Gauhati High Court in the case of Madanani Construction Corporation Ltd 295 ITR 45 and the Calcutta High Court in the case of Ashoka Refineries P Ltd 279 ITR 457 etc. With regard to the disallowance of expenses incurred for sale of by-products of bran and broken rice, the Ld. AR submitted that the AO assessed the entire receipt without allowing any deduction for the expenses incurred for earning the income. It was pleaded that the by products were the property of the lessee and to earn the income from such sources the assessee incurred cost of sales at Rs 24,63,645/, maintenance cost of Rs.6,87,720, selling and distribution expenses of Rs.15,55,529 and part of the employees cost Rs.43,98,132 and administrative cost Rs.11,43,126/- minus insurance of Rs 1,55,031/- and the lessee has not claimed such expenses etc. Therefore, the Ld. AR pleaded that at least a reasonable expenditure for earning the income should have been allowed.

18 ITA Nos.1872 to 1874, 1940/Chny/2010 Supreme Court in the case of S.N.Namachivayam Chettiar 38 ITR 579 (SC) where it was held that non maintenance of stock register can justify rejection of accounts. It was held that keeping of stock register is of great importance because that is a means of verifying the assessee's accounts by having "quantitative tally". If, after taking into account all materials including the want of stock register it is found that from the method of accounting the correct profits of business are not deductible, the operation of sec. 145(3) would be attracted. Further, the Ld.CIT(A) considered the decision of Calcutta High Court in Amiya Kumar Roy & Bros v. CIT, 1994 Tax LR 616 (Cal) which observed that where the assessee is a wholesale dealer, failure to maintain stock accounts would be a substantial defect in the accounts justifying an inference that the accounts were maintained in a manner from which the true and correct profits were not deductible. Applying the ratio of these decisions which are squarely applicable to this case, the Ld. CIT(A) has rightly held that the AO would be justified in rejecting book result and making necessary additions to the declared profit on estimate basis. With regard to the disallowance of expenses incurred for sale of by-products of bran and broken rice, the ld DR submitted that the CIT(A) found that the assessee wanted to claim a notional amount towards cost of bran & broken rice sold by

19 ITA Nos.1872 to 1874, 1940/Chny/2010 it which was never paid by it to its sister concern. The lease rent fixed by the assessee to its sister concern at Rs.2/· per kg. of rice would have been fixed after taking into consideration the expected realizations that the assessee would get by sale of bran & broken rice. Further, all the processing is done by the assessee's sister concern and the assessee does not carry out any activity, other than selling the by product and therefore no expenditure can be allowed towards the sale realization. Therefore, based on the facts on records, the Ld. CIT(A) held that no expenses can be allowed towards sale of bran & broken rice and the AO has rightly taxed the sale proceeds of bran & broken rice. Though, the assessee challenged these findings, yet it has not placed any material before this Hon’ble Tribunal in support of its contentions and hence the ld DR pleaded that the appeal may be dismissed.

20 ITA Nos.1872 to 1874, 1940/Chny/2010 various heads. The AO examined the lease deed and found that the assessee was not to incur various expenditures. On examination of the audit report, the AO found that there was no closing stock and, opening stock particulars. So he required the assessee to explain about the quantitative details of the sale with corresponding purchase to sales. It was explained that the purchases were made by the lessee, M/s. Peninsula Food Products Ltd, a sister concern. The Processing of paddy/ rice being a continuous process the byproducts are also produced continuously. Therefore, there should be an opening and closing stock of byproducts such as broken rice/bran at the end of every year. Since the assessee failed to produce the quantitative details of the sale of broken rice / bran, also the quantitative details of closing stock of bran and broken rice on the ground that the purchases were made by the lessee company, therefore, the AO rejected the books of account maintained by the assessee and estimated the income of the assessee. From this, it is clear that the assessee has not produced the core details which are sine qua non for determining the correct income, in such situation, the AO is bound to estimate the income and therefore AO is correct in rejecting the books of account. However, the AO held that since the assesses sold away the by products of bran and broken rice and

21 ITA Nos.1872 to 1874, 1940/Chny/2010 there is no requirement for the expenses towards travel, carriage inwards etc, he treated the entire sale proceeds of Rs.68,09,001/- as income of the assessee and completed the assessment. This is not correct. The reasonable expenditure required for earning the income has also to be estimated and has to be allowed. The assessee claims that it had incurred cost of sales at Rs.24,63,645/, maintenance cost of Rs 6,87,720/-, selling and distribution expenses of Rs.15,55,529/- and part of the employees cost Rs 43,98,132/- and administrative cost Rs.11,43,126/- minus insurance of Rs 1,55,031/- and the lessee has not claimed such expenses etc. Such a huge claim, on the line of business, on admitted income and in the absence any reliable material from the assessee, appears totally unrealistic. Neither the assessee nor the revenue could assist us in determining the fair and reasonable income from this source. Since there is no cost involved on the purchase and processing of broken and bran to the assessee, however, the cost of sale and distribution is required to be considered, therefore we consider that in this line of business an assessee may at best incur about at 30 % for these purposes and on such basis determine 30% of the admitted receipts would be the reasonable expenditure that could be required for earning the impugned receipts and therefore direct the AO to allow 30% of Rs

22 ITA Nos.1872 to 1874, 1940/Chny/2010 68,09,001 at Rs 20,42,700/- towards reasonable expenditure which could be required for earning the impugned income from sale of broken and bran and accordingly determine the income from this source at Rs.47,66,301/- as against Rs.68,09,001/-. Thus, we allow the assessee’s corresponding grounds of appeal to this extent.

Assessee’s Appeal in ITA No1874 /CHNY/2010, for the Assessment Year: 2007-08 : 15. While making the assessment for assessment year 2007-08, the AO found, inter alia, that the assessee did not admit processing charges towards the lease of the plant and rice mill machinery and a part of the immovable assets to M/s Peninsula Food Products (P) Ltd, a sister concern, as per the lease agreement dt 3.10.2002 but admitted income from sale of broken alone at Rs.72,00,380/-. Against such receipts, the assessee claimed various expenditures under various heads viz research expenses, consultancy charges, license fee for testing, ISO expenses, Medical expenses, Mess expenses, Salary and wages and admitted Nil income. On perusal of the details furnished by the assessee, the AO found that certain expenses which

23 ITA Nos.1872 to 1874, 1940/Chny/2010 were claimed under various heads do not wholly relate to the functioning of the business. The expenditure is not incurred wholly and exclusively for the purpose of earning the business income. Therefore, the AO required the assessee to furnish the details of those expenditures. The assessee could not furnish any such details. Further, the AO found that on the line of the assessee’s activities some of them are not required to be incurred also and hence disallowed all such expenses. However, in respect the expenditure incurred under the head salary and wages, the AO found that assessee has incurred Rs.42,22,437/- and such expenditure has increased over 50% and it is abnormally high, when compared to the expenditure incurred last year. The assessee has also not produced relevant details like attendance register, pay-roll etc in support of its claim. Further, the assessee company paid Rs.37321/- and 54637/- as ESI and PF remittances, respectively, which clearly revealed that the employees are not more as claimed by the assessee. Also loading and unloading are not part of the lessor company's (assessee) job. Therefore, out of such claim, the AO considered, that Rs.10,00,000/- is excessive and disallowed. Further, the AO disallowed medical expenses of Rs.67,069/-.

24 ITA Nos.1872 to 1874, 1940/Chny/2010 15.1 With regard to the assessee’s submissions that it has not collected the processing charges as there was a heavy loss in Peninsula Food Products P Ltd., as it exported polished rice on a fixed price and also due fluctuation in rice price, the sister concern could not pay the processing charges as agreed and further it was orally agreed between the two companies for the above transaction without payment of processing charges’ but it left over the broken rice and bran, the AO has not accepted this explanation as the broken rice and bran were regularly leased to the lessor company in the previous years. He held that when the lease agreement executed on 03-10-2002 between the assessee and the sister concern is in force, no oral agreement is enforceable in law. Further, the lease agreement was also not cancelled. So, he required the assessee to furnish the details of receipts from processing of paddy & rice as disclosed in the earlier year and found the following income from different sources:

Source March 2007 March 2006 Processing charges -- 90,88,000 Sale of Broken Rice 72,00,380 60,89,001 Sale of Bran -- 7,20,000 Rent 5,00,000 --

25 ITA Nos.1872 to 1874, 1940/Chny/2010 As the assessee company did not disclose the processing charges as an income, he estimated the fair and true income of the processing charges based on the prevailing market rates, that is, at the rates charged in the previous year. He held that the assessee has fairly done a better business than the last year as is evident from the sale of broken rice, the proceeds of which was at Rs.72,03,180/-as against Rs.60,89,000/- admitted in the immediate preceding year which is equivalent to an increase of 20% than the last year sale of broken rice. Since the assessee company has processed 45,44,000 kgs of paddy/ rice during the earlier year, the AO applying the 20% increase on the quantum of paddy / rice processed over the last year, arrived the quantum of rice / paddy processed at 9,08,000 kgs. Consequently, he arrived the total processing of quantum of rice / paddy processed during the year at 54,52,800 kgs (45,44,000 + 9,08,000). Since the processing charges as per the agreement is Rs. 2/- per Kg, he arrived the total processing charges at Rs.1,09,05,600/-(54,52,800 * 2). Since the proportionate expenditure has already been allowed by him, he assessed the income from the processing charges at Rs.1,09,05,600/-. Similarly for the income from the sale of bran,

26 ITA Nos.1872 to 1874, 1940/Chny/2010 the AO found that the assessee has not disclosed any proceeds from the sale of bran for the year ended 31-03-2007 whereas the assessee company has credited Rs.7,20,000/- from the sale proceeds from rice bran in the earlier year. Adopting the same pattern, he estimated the sale proceeds for the year ended 31-03- 2007 at Rs.8,51,750/- (Rs.720000 * Rs.7203180)/6089001) at Rs.8,51,750/- and added to the total income. Aggrieved, the assessee filed appeal before the CIT(A) and the Ld. CIT(A) deleted the additions made towards the processing charges, medical expenses and confirmed all other the disallowances / restrictions/ additions made by the AO. Aggrieved against the confirmation of the of various disallowances / restrictions/ additions made by the Ld.CIT(A), the assessee filed the appeal. Against the deletion of medical expense of Rs.67,069/- and the addition made towards the processing charges, the Revenue also filed the appeal .

27 ITA Nos.1872 to 1874, 1940/Chny/2010 expenses at Rs.21,814/-, medical expenses of Rs.67,069/-, mess expenses of Rs.16,59,455/-, restriction of Rs.10,00,000/- towards salaries and wages and sustaining the estimated income of Rs.8,51,750/- from the sale of broken rice and bran, without assigning proper reasons and justification, the expenses incurred were inextricably connected with the business of the assessee and therefore, they are allowable as deduction U/s.37.

28 ITA Nos.1872 to 1874, 1940/Chny/2010 Ld.CIT(A) also, the assessee could not furnish any material by which it could satisfy the Ld.CIT(A). Therefore, the Ld.CIT(A) held that the assessee has not processed any rice nor manufactured any product. The processing, if any, is done by its sister concern. The assessee has merely let out its assets and earned income therefrom. Therefore, these expenditures cannot, by any stretch of imagination, be termed as being related to business. With regard to the restriction of expenditure under the head ‘salaries, wages and bonus’, the Ld.CIT(A) held that the Ld.AR has not disputed any of the facts given by the AO and hence held that the disallowance made by the AO is fair and reasonable. With regard to the estimation of income from sale of bran, the assessee has been offering sale of broken rice and bran in all the years. The generation of bran and broken rice in the course of processing of rice is a material fact which cannot be denied. From the audited accounts of PFPPL, the Ld.CIT(A) find that no sales of broken rice or bran has been shown. Therefore, the sale of bran has to be reflected in the books of the appellant. In the absence of full details, the AO, based on the sale of bran for the previous year has added the amount of Rs.8,51,750/- which in his opinion, is fair and reasonable. After such findings, the assessee has not laid any

29 ITA Nos.1872 to 1874, 1940/Chny/2010 material to dislodge the findings recorded by the lower authorities and hence, the Ld.DR pleaded that the assessee’s appeal may be dismissed.

30 ITA Nos.1872 to 1874, 1940/Chny/2010 the years. The generation of bran and broken rice in the course of processing of rice is a material fact which cannot be denied. Further, the Ld.CIT(A) found from the audited accounts of PFPPL, that no sales of broken rice or bran has been shown. Therefore, the sale of bran has to be reflected in the books of the assessee. In the absence of full details, the Assessing Officer, based on the sale of bran for the previous year has added the amount of Rs.8,51,750/- which in our opinion, is fair and reasonable. Since the AO on due examination rejected major expenditure claim of the assessee / restricted, as the case may be, under various heads during this assessment year, which we have upheld, supra, in view of that we consider that the estimated from this source is a net income. In view of the facts and circumstances, we hold that the corresponding grounds of the assessee are dismissed on this issue.

Revenue’s Appeal in ITA 1940/Chny/2010, for the Assessment Year 2007-08

31 ITA Nos.1872 to 1874, 1940/Chny/2010 2.1 The CIT(A) ought to have appreciated that the above expenditure was disallowed on the ground that the assessee did not produce any evidence in support of the medical expenditure said to be incurred. It is submitted that the claim of the assessee deserves rejection on the ground of want of evidence for expenditure incurred.

19.1. The Ld.DR presented the case on the above lines and submitted that the Ld.CIT(A) erred in deleting the above additions. Per contra, the Ld.AR invited our attention to the relevant portions of the order of the Ld.CIT(A) and supported the order of the Ld.CIT(A).

19.2. The assessee incurred medical expenses of Rs.67,069/- against the admitted income of Rs.72.03 lakhs from sale of broken rice. The assessee claimed that these expenses relate to staff on account of dust, created in producing the broken rice and bran. The Ld.CIT(A) considered and allowed the appeal. Against which, the Revenue pleads that in the absence of production of any evidence, such claim should not be allowed. We heard the rival submissions and gone through relevant material. We do not find any reason to interfere with the order of Ld.CIT(A) and hence, the corresponding grounds of the Revenue is dismissed.

32 ITA Nos.1872 to 1874, 1940/Chny/2010 20. With regard to the addition towards processing charges, we extract the relevant portion of the order of the Ld.CIT(A) as under:-

“11. The next issue relates to estimation of processing charges at RS.1,09,05,600/· The AO, in the assessment order, has stated the following reasons for the above estimation: "the assessee company has not disclosed any income under the head processing charges for using machinery, building shed measuring 22,000 sft. It is evident that for producing broken rice the machinery was used for processing paddy / rice. The objective of the assessee company is to earn profits by way of doing business activity and not doing any charity or free to any other business concerns. As the assessee company did not disclosed the processing charges as income, the income i.e. the processing charges are fairly, truly and reasonable estimated based on the prevailing market rates, that is, the assessee's rates charged in the previous year. The assessee company fairly did better business than the last year. It is also evident from the sale of broken rice the proceeds amounting to Rs.72,03,180/· as against 60,89,000/· in the immediate preceding year which is equivalent to an increase of 20% than the last year sale of broken rice. The company has processed 45,44,000 cases of paddy I rice during the previous year 2005·06. Applying the 20% rate of paddy I rice processed last year, the same works out to 9,08,000/·. Thus, the total processing of cases is 54,52,800 (45,44,000 + 9,08,000). The processing charges as per the agreement is Rs.21· per kg and the total processing charges comes to Rs.1,09,05,600/-. As the proportionate expenditure has already been allowed, the processing charges amounting to Rs.1,09,05,600/- is treated as income. "

11.1 At the time of appellate proceedings, the ld. AR vehemently argued against the above estimation of income which was never received by it and filed the following submission: "The document which creates an obligation to pay Rs.2 per Kg by way of processing charges to the assessee by M/s. Peninsula Food

33 ITA Nos.1872 to 1874, 1940/Chny/2010 Products (P) Limited is the lease agreement dt 3/10/2002. This document is not a registered document. Being an unregistered document the same has no evidentiary value in any court of law. In case any of the parties to the lease agreement does not acquit himself in consonance with the terms of the lease agreement the party who has sustained a loss cannot enforce his claim for the payment agreed to in the lease agreement in any manner from the other party. The lease agreement is therefore on par with an oral agreement. So long as both parties honour the terms of the agreement it is good for both. If anyone commits a breach there is no remedy to recover the loss for the other party. Hence the terms of the lease agreement do not bind any party. No enforceable claim therefore arises for any party under this unregistered lease agreement. Secondly the lease agreement does not have a clause defining the period of the lease. In such a situation the period of the lease is only on an year to year basis. Unless the lease agreement is renewed on an year to year basis the lease agreement dt 3/10/2002 has no life in it. The lessor cannot take any action upon the lessee for recovery of any lease rents for violation of the terms of the lease agreement. Thirdly the lessor and the lessee had pursued a policy of give and take in many respects without strictly adhering to the terms of the lease agreement. The bran which had resulted in the polishing process had not been cleared by the lessor in any veer. When the lessor soLd. All the bran and credited the proceeds into his profit and loss account the lessee did not object to the same. When the lessee is the legal owner of the bran the sale proceeds of the bran also should go to the lessee only. The lessee had been magnanimous to forego his right in respect of the bran in 2006-07 in favour of the assessee. It has therefore been the turn of the lessor to forego his right to receive the lease rental of Rs.2 per Kg in 2007·08 when the lessee had incurred losses.

The assessee had already received Rs.72,03,180 by way of sale of bran. Though the assessee has no right to retain the sale of bran for him the lessee did not claim the same. The sale of bran had sufficiently compensated the assessee for the sacrifice of the lease rent.

34 ITA Nos.1872 to 1874, 1940/Chny/2010 In the light of the above submissions there is no case for estimation of income from lease rental of the plant and machinery and a part of the mill premises.

When there is no ground (or estimation of income at all from lease rental the question does not arise regarding the incremental growth of rental income at the rate of 20% when compared with the last year. Hence the entire addition of Rs.l,09,05,600 has no justification and hence deserve total deletion. "

I have carefully considered the facts of the case and the submission of the ld. AR. The Assessing Officer in this case has estimated the sales made by the sister concern and taxed the income that ought to have been received by the appellant. The income has been taxed on a notional basis. In my opinion, the AO cannot tax any income on a notional basis. The Id.AR was required to file the computation of income and audited accounts of the appellant and its sister concern M/s. Peninsula Food Products Pvt. Ltd (PFPP ). I have gone through the accounts of the appellant and the lessee sister concern. During the A.Y 2006·07, the lessee had paid to the appellant Rs.90.88 lacs as "processing charges" which was added to the cost of sales. However, during this assessment year viz. 2007·08, M/s. Peninsula Food Products Pvt.Ltd. (PFPPL) has not claimed any amount as having been paid as processing charge. It is therefore, apparent that PFPPL had not claimed any expenditure on this count. Since the appellant has not received any amount, it has also not shown the same in its profit and loss account. The AO is therefore, in my considered view, not correct in adding any notional income in the hands of the appellant. Accordingly, the AO is directed to delete the above addition made. This ground of appeal is allowed.”

20.1 Against the above decision, the Revenue filed appeal with following grounds:- 3. The learned CIT(A) has erred in deleting the addition made in respect of processing charges of Rs.1,09,05,600/-.

35 ITA Nos.1872 to 1874, 1940/Chny/2010 3.1 The learned CIT(A) has erred in holding that the income attributable to the processing charges is only notional. It is submitted that the income assessed in this regard is real and definite as can be seen from the lease agreement dated 3.10.2002 entered into and signed by both the parties. 3.2 The learned CIT(A) ought to have appreciated that as per Section 28 of the Act the profits and gains of any business/profession carried on by the assessee at any time during the previous year is chargeable to Income-tax. It is submitted that in the present case, the moment the lease agreement was entered into where by the assessee undertook the work relating to the processing of rice in lieu of payment receivable, the income started accruing to the assessee. 3.3 The learned CIT(A) has failed to notice that the assessee company had claimed expenditure in respect of the rice processing work carried out and the same was allowed in the assessment. In fact only the profits/gains which had not been offered was brought to tax and added to the total income. It is submitted here that the fact that the person making the payment to the assessee had not claimed the same as expenditure in his/its accounts or had not made the payment would not in any way absolve the assessee from the bounded duty to offer the income accrued during the P.Y. And that the assessing officer was rightly estimated the income from the processing activity relying on the previous year's rates charged by the assessee.

20.2 The Ld.DR presented the case on the above lines and supported the order of the AO. Per contra, the Ld.AR relied on the order of the Ld.CIT(A), which is extracted in para 20, supra.

20.3 We heard the rival submissions. The fact remains that that in 2002, the assessee leased out the plant, rice mill machinery and a part of the immovable assets to M/s Peninsula Food Products (P) Ltd, a sister concern, under a lease agreement dt 3.10.2002 and admitted income from processing charges, sale of bran and sales

36 ITA Nos.1872 to 1874, 1940/Chny/2010 of broken till assessment year 2006-07. However, this year, it has not admitted the processing charges on the plea that it has not collected the processing charges as there was a heavy loss in Peninsula Food Products P Ltd., as it exported polished rice order on a fixed price and also due fluctuation in rice price, the sister concern could not pay the processing charges as agreed and further it was orally agreed between the two companies for the above transaction without payment of processing charges’ and instead it left over the broken rice and bran. The AO has not accepted this explanation as the broken rice and bran were regularly leased to the lessor company in the previous years. He held that when the lease agreement executed on 03-10-2002 between the assessee and the sister concern is in force, no oral agreement is enforceable in law. Further, the lease agreement was also not cancelled and therefore, he estimated the income on relevant basis. The assessee disputed such addition. We find that the agreement is between the related parties and the assessee has not produced any material for establishing that there was an oral agreement for not paying the processing charges. We also find that the assessee has admitted sale of broken rice at Rs.72,03,180/- as against Rs.60,89,000/- admitted in the earlier assessment year.

37 ITA Nos.1872 to 1874, 1940/Chny/2010 This clearly evidences that the activities of the sister concern, during the assessment year, is much more than the earlier assessment year. On such undisputed facts and when the agreement between the related parties are in subsistence and the businesses of the lessee are going normal, it is not possible to hold that the processing charges did not accrue / arise to the assessee. Once the processing charges accrues or arise, it is chargeable to tax. Non-receipt or postponement or non-entry in the books are not relevant consideration. The processing charges or the rent as the case may be, accrues month after month, if not, on the end of the day of the assessment year, as the case may be. Therefore, the AO is right in charging the processing charges. We find that the basis adopted by the AO for charging the processing charges is one of the approved methods and it is reasonable. However, the AO has allowed 75% of such processing charges as reasonable expenditure for earning this income, in the assessment made for assessment year 2006-07, which has been approved by us, supra. During this assessment year, the AO has charged Rs.1,09,05,600/- towards processing charges, 75% of such receipts works out to Rs.81,79,200/-. Since, the AO has already allowed Rs.32,22,437/- under the head salaries, wages and bonus, adopting the same

38 ITA Nos.1872 to 1874, 1940/Chny/2010 basis, we direct the AO to allow Rs.49,56,763/- (81,79,200 – 32,22,437) towards reasonable expenditure for earning the income U/s.57. Subject to this relief to the assessee, the Revenue’s appeal is allowed.

Order pronounced in the court on the 9th September, 2019 at Chennai.

Sd/- Sd/- (धु�ु� आर एल रेड़्डी) ( एस जयरामन ) (Duvvuru R.L Reddy) (S. Jayaraman) �ाियक सद�/Judicial Member लेखा सद� /Accountant Member चे�ई/Chennai, िदनांक/Dated 9th September, 2019 RSR आदेश की �ितिलिप अ�ेिषत/Copy to: 1. िनधा�रती /Assessee 2. राज� /Revenue 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF