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Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
Before: SHRI H.S.SIDHU & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the ld AO against the order of the ld CIT (A)-XIX, New Delhi dated 05.03.2012 for the Assessment Year 2004-05. 2. The ld AO has raised the following grounds of appeal:- “1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting an addition of Rs. 1992000/- out of depreciation without appreciating the fact that the assets transferred to Gurgaon Unit was not entitled to depreciation as that unit was not functioning during that year. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting an addition of Rs. 277343/- made out of disallowance of depreciation on electrical fittings which was claimed at 25% instead of 15% as per Rule 5 of the Income Tax Rules, 1961.” 3. “On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting an addition of Rs. 450567/- made as disallowance of electrical expenses without appreciating that these were for a building not used by the assessee for its business and hence was not allowance u/s 37(1) of Income Tax Act, 1961.” 4. “On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting addition of Rs. 897391/- made on account of suppression of stock since two items of dies and moulds shown as opening stock as on 1.4.2003 have neither been sold nor shown in closing stock as on 31.3.2004.” 5. “On the facts and in the circumstances of the case and in law the Ld. C1T(A) erred in deleting an addition of Rs. 1,00,97,203/- on account of estimation of gross profit which was declared by the assessee company at a very low rate.” Page |
1. ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)
“On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting an addition of Rs. 9332/- without appreciation the fact that this payment to ESIC was for infringement of law and hence not allowance u/s 37 of the Income tax Act, 1961.” 7. “On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting an addition of Rs. 1,06,127/- made on account of disallowance of bad debts.” 8. “On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting an addition of Rs. 5,00,000/- without appreciating the fact that the expenses on freight and cartage was extremely high as compared to last year and no explanation whatsoever was offered by the assessee to support its claim of enhanced expenditure.” 9. “On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting an addition of Rs. 11405/- claimed as payment as subscription for clubs without appreciating that the assessee had not been able to prove a nexus of this expense with its business expediency. 10. The appellant craves leave for reserving the right to amend, modify, alter add or forgo any grounds of appeal at any time before or during the hearing of appeal.”
The brief facts of the case is that the assessee is engaged in the business of manufacturing Auto components for the automobile companies like Maruti Udyog, Ford India, Tata Motors, General Motors and others in the country. The assessee filed return of income on 31.10.2004 , which was processed u/s 143(1) on 24.02.2005. The assessee declared total income of Rs. 4728500/- after claiming set off of the BF unabsorbed deprecation allowance of Rs. 10935807/- but tax was paid u/s 115JB of the Book profit shown at Rs. 24401141/-.
The ld AO passed assessment u/s 143(3) of the act on 15.12.2006 where in nine additions and disallowances were made and total income was determined at Rs. 1,97,30,008/- against the returned income of Rs nil. 5. Aggrieved, the assessee preferred appeal before the ld CIT(A), who partly allowed the appeal of the assessee. The revenue aggrieved with the order of the ld CIT(A), preferred appeal before us. 6. Ground no 1 of the appeal is against the disallowance of depreciation of Rs 19,92,000/-. 7. The ld DR relied up on the order of the ld AO and ld AR relied up on the order of ld CIT (A). 8. We have carefully considered the rival contentions and also perused the order of the ld CIT(A). The ld CIT(A) has discussed these ground covering all the facts as under:- “4. Ground Nos. 1.1 and 1.2 are directed against the action of the AO in disallowing depreciation of Rs. 19,92,000. The reasons given by the AO are as under: “I have considered the assessee‟s reply. It is beyond comprehensive that various assets would have remained idle, for such a long time, as the machinery with the Page | 2 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)
passage of time are likely to be ineffective/defective/junk, and the explanation that some machinery have been shifted to other units in the next year(s) is not plausible. It is apparent and evident that the assessee is not reporting the correct facts and is hiding the truth of the matter. Section 32 of the Act prescribe that depreciation is admissible if an asset is owned by the assessee and used for the purposes of the business. It is an admitted position that unit at Gurgaon was not functioning during the year under consideration; it can thus be safely presumed that the assets installed and the factory building were not put to use for business purposes. The assessee has not furnished any reliable evidence as to what asset has been transferred, what was its use, when transferred, the mode of transfer, etc. And to which unit it was transferred and from when it was used in the other unit. The assessee in letter dated 14.12.2006 has stated that machinery at Gurgaon unit was transferred to other unit at Plot No. 262, sector 24, Faridabad in January, 2004 and photo-copies of the Loading and unloading of 6+2 Cranes have been filed. However, on the other hand, the assessee in letter dated 23.11.2006 had stated that some machinery was transferred in the next financial year. Copy of account of the Plant and machinery was furnished, wherein credit entries of Rs. 33,62,515/-(seven items) were made, but bill Numbers are not mentioned and the basis of the amount credited have not been supplied. The balance amount in Plant and Machinery A/c is debit stood at Rs.22,99,993/- on 31.3.2004. It is thus evident that the assessee is playing hide and seek game and giving contradictory statements and not coming up with the true facts of the case. Since the assessee has furnished a vague and general reply and it is not supported with any evidence, depreciation on all the assets of Unit No.III is not allowed. Its working is being done on the basis of the information of book value furnished by the assessee, and discussed as under:
Building O.B. Rs.46,14,498/- Dep. @ 10% ........ Rs.4,61,4507- Plant & Machinery O.B. Rs.56,62,508/- Dep. @ 25% Rs. 14,15,627/- Electric Installation O.B. Rs.6,49,958/- Dep. @ 15% Rs. 97,4947- Furniture & Fixture O.B. Rs. 18,086/- Dep. @ 15% Rs. 2,713/- Misc. Equipment O.B. Rs. 1,02,418/- Dep. @ 15% Rs. 15,363/- .............. Total Rs. 19.92,647/-” 5.1 The AR filed detailed written submissions in this regard which are as under: “Submissions :- The LD AO has disallowed Rs. 19,92,647 on account of depreciation on all the assets of the unit at Gurgaon on the premise that section 32 of the act requires that assets should be owned by the assessee and should also be used for the purpose of the business. As he found that the this unit had suspended working during the year therefore, he addressed himself wrongly to conclude that the assessee is not entitled to depreciation under the law. These machineries were transferred to other units where they were used for manufacturing to support this, vide letter dated 14.12.2006 (which he mentions in para 5.7), the assessee brought on record the evidences for transferring the machineries to the other unit at Plot No. 262, Sector-24, Faridabad.
ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)
While appraising the evidences, in a unjustifiable manner he did not bother to note the bill nos. and notes in his order :- “But bill nos. is not mentioned and the basis of the amount credited have not been supplied”. The bill nos. have been given as per page no. 16-22 attached. Therefore, his this observation is proven to be nonfactual. Regarding basis, the assessee was never confronted. It is now explained that the basis of the amount calculation of the individual machinery is cost as reduced by the depreciation earlier claimed. The bills were raised for the purposes of transporting from Gurgaon to Faridabad. It is argued here that as per the block systems of assets as introduced in 1989, the entire small or big machines lying in one unit or any other unit, they continue to be part of the block assets and when it is being transferred from one unit to another the cost at which is being transferred does not remain relevant for the purposes of allowing depreciation of Gurgaon unit. The procedure laid down in the Act is that in the opening balance in block of assets new purchases are added and sales if any are reduced. The balance left is then considered for the purpose of calculating depreciation for the year. Under the law claim of the depreciation on the entire block of assets has been rightly made by the assessee and should have been allowed. The AO‟s contention that Gurgoan assets were not used therefore, depreciation should not be allowed is against law. Section 32 of the Act laid down mainly two conditions for allowing the depreciation that the asset should be owned by the assessee and should be used for the business of the assessee. The ownership of the assets is no where disputed. The closure of the Gurgaon unit has been wrongly handled by the Ld AO to disallow the depreciation even not considering the fact supported by evidence that machineries having shifted to the other units continue to be entitled for the claim of the depreciation.” 5.2 The AR relied on the following case laws: • CIT vs. India Tea and Timber Trading Company (221 ITR 857) • Capital Bus Service Pvt. Ltd. vs. CIT (123 ITR 405) (Delhi) • JCIT vs. United Phosphorous Ltd. (299 ITR 7) (SC) • Mysore Minerals Ltd. vs. CIT (239 ITR 775) (SC) 6.1 I have gone through the assessment order and the detailed written submissions filed by the AR. 6.2 The AO has disallowed Rs. 19,92,647 on account of depreciation on all the assets of the unit at Gurgaon on the premise that section 32 of the act requires that assets should be owned by the assessee and should also be used for the purpose of the business. As he found Page | 4 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05) that this unit had suspended working during the year therefore, he concluded that the assessee is not entitled to depreciation under the law. These machineries were transferred to other units where they were used for manufacturing to support this, vide letter dated 14.12.2006 (which he mentions in para 5.7), the assessee brought on record the evidences for transferring the machineries to the other unit at Plot No. 262, Sector-24, Faridabad. It is argued by the AR that as per the block systems of assets as introduced in 1989, the entire small or big machines lying in one unit or any other unit, they continue to be part of the block assets and when it is being transferred from one unit to another the cost at which is being transferred does not remain relevant for the purposes of allowing depreciation of Gurgaon unit. The procedure laid down in the Act is that in the opening balance in block of assets new purchases are added and sales if any are reduced. The balance left is then considered for the purpose of calculating depreciation for the year. Under the law claim of the depreciation on the entire block of assets has been rightly made by the assessee and should have been allowed. The AO‟s contention that Gurgoan assets were not used therefore, depreciation should not be allowed is not in accordance with the provisions of the Act. I am in agreement with the contentions of the AR. Relief: Rs. 19,92,000/- Accordingly, Ground Nos. 1.1 and 1.2 are allowed.”
9. The ld DR could not point out any infirmity in the order of the ld CIT(A). We also do not find and justification to nopt to agree with the order of the ld CIT (A). In view of this we confirm the finding of the ld CIT(A) and dismiss the ground No. 1 of the appeal of the Revenue.
Ground No. 2 of the appeal was with respect to disallowance of deprecation on electric fittings of Rs. 277343/- considering the rate of 15% instead of 25% claimed by the assessee.
The ld DR relied up on the order of the ld AO and ld AR relied up on the order of ld CIT (A).
12. The ld CIT(A) decided this issue vide para No. 7 to 9 as under:- “7. Ground No. 2.1 is directed against the action of the AO in disallowing depreciation amounting to Rs.2,77,343 on electrical installation. The reasons given by the AO are as under: “In addition to the above, it is found that depreciation on Electric installations has been claimed @ 25% whereas, as per S.No. II of the Schedule of the I.T. Rules depreciation on Furniture and Fitting including Electrical fittings is admissible at 15%. This has also been clarified in Note 5 below the Table i.e. “Electrical fittings” include electrical wiring, switches, sockets, other fittings and fans etc. Such clarification is inclusive and not exhaustive. The assessee in its letter dated 26.08.2006 (para 11) has stated that generally all the installations are relating to the manufacturing activities and connected with the Plant and machinery, as such depreciation @ 25% is Page | 5 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05) admissible. The explanation is quite contrary to the specific Rule under the l.T. Rules and particularly when the assessee has calimed depreciation under the head „Electric Installation and not under the head Plant and Machinery‟, depreciation can be allowed only at the rate of 15% and not at 25%. It is worked out at under:
W.D.V. Addition April to Sep. Oct. to March 24,51,111 124071 3,96,472 @15% @15% @7.5% = Rs.4,16,012/- Claimed at Rs.6,93,3 5 57- Excess claimed and the same is disallowed . Rs.2,77,343/-‟' 7. The AR filed detailed written submissions in this regard which are as under: “Facts relating to this ground of appeal are that the assessee company is engaged in manufacturing of Auto Component. The entire Plant and Machinery situated in all the four units are operated with the help of Electricity. For its working the machineries are supplied with Electricity through Electrical installations which include fixtures, wires, switch boards, starters and panel boards etc. These all are connected with the machinery and thus form integral part of the Plant and machinery. It can be said that a machine cannot run without installing these fittings. In this backdrop of the facts the treatment of Electric Installations has to be considered at par with plant and machinery. In reply to question by the AO the assessee made submissions in its reply dated 26.08.2006 as under:-
“Regarding depreciation on Electrical Installations:- It is submitted that generally all the installations are relating to the manufacturing activity and connected with the Plant and Machinery. This being so the Electrical installations also form part of Machinery and therefore, in entitled to 25% depreciation”. In para 6.2 the Ld AO has confined himself to the Rules which gives 15% rate for the Electric Installations. Here he has grossly committed an error in not understanding that rules are made for implementing the Act. Their lordship in the case of CIT vs. Tajmahal Hotel (1971), 82 ITR 44 (SC), have very categorically laid down as under “The Indian Income-tax Rules, 1922, are meant only for the purpose of carrying out the provisions of the Act and they cannot take away what is conferred by the Act or whittle down its effect”. In this case, the Hon‟ble court held that Sanitary and pipeline fittings which Page | 6 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05) though fell under the category of furniture and fittings yet they were treated and accepted as plant and machinery for the purposes of allowing development rebate. The law laid down by the Hon‟ble Supreme Court in the aforementioned case has been again reiterated in another case by the Apex court in Scientific Engineering House Pvt. Ltd. Vs. CIT (1986) 157 ITR 86. In this case the lordship observed:- “That “plant” was not necessarily confined to an apparatus which was used for mechanical operations or was employed in mechanical or industrial business. But in order to quality as “plant”, the particular article had to have some degree of durability. The test to be applied was : Did the article fulfil the function of a plant in the assessee‟s trading activity ? Was it a tool of his trade with which he carried on his business ? If the answer was in the affirmative, it would be a “plant”. Following the above landmark decisions, further the followings have been held to be plant and was entitle to depreciation accordingly Internal telephone systems constituted plant and the assessee was 1. entitled to investment allowance in respect of it-192 ITR 20 (Karnataka). The cost of crane attached with a truck was held to be integral part of 2. the truck and therefore, the depreciation was allowed as applicable on the truck-256 ITR 50 (Gujarat) Sanitary Pipeline fittings in a cinema theatre for in the category of 3. plant-268 ITR 432 (Rajasthan). In view of the above landmark judgments of the Supreme Court and followed by the various high court, the Ld AO has erred in not allowing depreciation on the Electrical Installations at par with plant and machinery. It is, therefore, prayed that the disallowance of depreciation should be deleted as it deserves to be deleted.”
I have gone through the assessment order and the detailed written submissions filed by the AR in this regard. Facts relating to this ground of appeal are that the assessee company is engaged in manufacturing of Auto Component. The entire Plant and Machinery situated in all the four units are operated with the help of Electricity. For its working the machineries are supplied with Electricity through Electrical installations which include fixtures, wires, switch boards, starters and panel boards etc. These all are connected with the machinery and thus form integral part of the Plant and machinery. It can be said that a machine can not run without installing these fittings. In this backdrop of the facts the treatment of Electric Installations has to be considered at par with plant and machinery. However the AO allowed depreciation rate of 15% applicable to Furniture and Fitting on the ground that Electrical fitting include electrical wiring switches, sockets, other fittings and fans etc. On the other hand the AR contended that all the installations which include fixtures, wires, switch boards, starters and panel boards etc. These all are connected with the machinery and thus form integral part of the Plant and machinery.
ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)
After careful consideration of the facts of the case, these fittings cannot be equated with normal electrical fittings. The items in question are related to plant and machinery and as such eligible for higher rate of depreciation i.e. 25%. The action of the AO is not upheld. Relief Rs. 2,77,343/-“ 13. We have carefully considered the rival contentions and also perused the order of the ld CIT(A) which do not suffer from any infirmities. The ld DR could not show us any error in the order of the ld CIT(A). in the result we confirm the order of the ld CIT(A) ground No. 2 of the appeal of the Revenue.
Ground No. 3 was with respect to the addition of Rs. 450567/-.
The ld DR relied up on the order of the ld AO and ld AR relied up on the order of ld CIT (A).
The ld CIT(A) has dealt with this issue vide para No. 10 to 12 as under:- “10. Ground No. 3 is directed against the action of the AO in disallowing expenses of Rs. 4,50,567.40. The reasons given by the AO are as under: “The above mentioned data would show that electricity bills were almost at the minimum charges, even when units consumed, each month, were within the range of about 1000 units. It is noticed that the amount of Rs. 38,147/- paid in April, 2003 related to the earlier period. Since the assessee has maintained books on mercantile basis, this amount is not allowable on payment basis. Accordingly, the amount of Rs.38147/- is not admissible in this year. During discussion, it was informed that building was sold in the subsequent period(s). It is thus apparent that Building with or without machinery was not used at all and the same was intended to be sold. On these facts, expenses incurred on electricity bills cannot be said for the purposes of the business of the assessee, but the same were incurred so as to facilitate the building etc to be sold later on. Accordingly, the whole of expenses at Rs.4,50,567/- are not allowed.”
10. The AR filed detailed written submissions in this regard which are as under: “The Ld AO has made disallowance of Rs. 4,50,567.40 on the pretext that Land and Building has been sold in the next year and thus the building was not used at all and the same was intended to be sold therefore, the Electricity bills cannot be said for the purpose of the business. The facts are that during this year part of the machinery was transferred to the other units and balance remained in the building itself which is confirmed by the AO in para 5.7. The electricity expenses were incurred for guarding the Business Assets in factory premises against any kind of theft etc. of the machinery and other valuable attachments of the building itself. The security guards remained throughout the year. It is the decision/option of the management that how to keep the assets intact and safe and it did best for protecting the business assets of the company. The Ld AO has exceeded his scope by interfering with the business prudence of the assessee. He has opined that as the building was to be sold later on therefore, Page | 8 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05) this expenditure was not required for the business. His such thinking is nothing but surmises and conjectures and is devoid of merits of the expenditure and also outside his scope of working as an Assessing Officer. Reliance is placed on S.A. Builders vs CIT 158 Taxmann 74 (SC). Which has laid down in para 34 as under:- “The revenue cannot put itself in the arm chair of the businessman or in a position of Board of Directors and assume the role to decide how much is a reasonable expenditure having regards to the circumstances of the case”. Further the Hon‟ble Delhi High Court has also decided in favour of assessee in the case of CIT vs. Dalmia Cement (B) Ltd. 254 ITR 377 as under “The reasonableness of the expenditure could be gone into only for the purpose of determining whether, in fact, the amount was spent. Once it is established that there was nexus between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits”. In the present case it cannot be denied that the expenditure was incurred on electricity and it was to protect and save the business assets of the assessee and it was not in capital nature also, therefore, the disallowance of electricity bills made by the AO should be deleted.”
I have gone through the assessment order and the detailed written submissions filed by the AR in this regard. The expenditure was incurred in the course of the business of the appellant. Whether there is any consumption of electricity or not, the appellant is required to pay minimum electricity charges. If the electricity charges are not paid, the electricity connection will be disconnected or cancelled. The payment of minimum amount is as per the rules and regulation of supplier of the electricity. After careful consideration of the facts, the action of the AO is not approved.”
The ld CIT(A) has deleted holding that these expenditure was incurred for the purposes of the business and they are minimum amounts as per the rules. In view of this we do not find any infirmity in the order of the ld CIT(A) in deleting the above addition. accordingly, ground No. 3 of the appeal of the revenue is dismissed.
Ground No. 4 of the appeal is against the deletion of Rs. 897391/- made by AO alleging suppression of stocks with respect to dyes and moulds which was shown at opening stock but not in closing stock.
The ld DR relied up on the order of the ld AO and ld AR relied up on the order of ld CIT (A). Page | 9 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)
The ld CIT(A) has dealt with this issue vide para No. 13 to 15 as under:- “13 Ground No. 4 is directed against the action of the AO in making an addition of Rs.8,97,391. The reasons given by the AO are as under: “It is thus apparent that tools and dies shown in closing stock on 31.3.2003 have not been reflected in the stock of goods as on 31.3.2004 and the self manufactured Dies and Tools shown as on 31.3.2004 do not pertain to the items shown as opening stock. The assessee was thus asked in my notice/letter dated 01.12.2006 to explain as to how the stock of Dies and Tools shown as C. Stock on 31.03.2003 i.e. O. Stock as on 1.4.2003 has been accounted for in the books of account. The assessee in its letter dated 05.12.2006 and 14.12.2006 has stated that “dies and tools” were sold during the year at Rs. 1.32 crore and some parts had become scrap. On verification, it is found that out of “Tools and Dies” shown in the opening stock at Rs.34,34,719/-, the following items have not been sold:- Description amount Checker Comp R. FR DR Rs.4,67,257/- CheckerComp R. LR. RDR Rs.4,30,134/- Total ........... Rs.8,97,391/- The assessee‟s explanation that Dies and Tools worth Rs.8,97,391/- have become scrap, which are admittedly not accounted for as sales in the books, is devoid of merit, as the explanation is not supported with evidence. Accordingly, an addition of Rs.8,97,391/- is being made i.e. to the extent profit is understated. Accordingly, an addition of Rs.8,97,391/- is being made to the income declared.” 14. The AR filed detailed written submissions in this regard which are as under: “The assessee manufacturers „Dies and Tools‟ as per requirements of the customers and on completion the sales invoices are raised. Such kind of the work was shown in progress on 31.03.2003 amounting to Rs. 34,34,718 for 27 items. Kindly refer paper book page no 23. During the previous year i.e. 2003-04 after completing, 25 of 27 items were sold for Rs. 78,76,080. Tool Code Description G.Total Sl.No. Amount 1. SOI V02500/2600 CHECKER COMP R FR DR 467257 2. S01V02700/2800 CHECKER COMP R FD RDR 430134 TOTAL 897391 To the specific query of the AO that why these two items were not appearing in the Page | 10 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)
closing stock as on 31.03.2004, a detailed submission supported with evidences was made as under :- “Regarding matching of „Dies and Tools‟ shown as work in progress as on :- On page-2 of our letter 5.12.06 we have made the detailed submission and have also shown that the assessee has sold „Dies and Tools‟ worth Rs. 1.32 Crore during F.Y. 2003-04. The copy of the Invoices are being produced where the stock shown on 31.3.2003 has been disposed off. Here your kind attention is drawn to the two items shown in work in progress, which were intended for Honda namely:- (i) Checker Comp R LR RDR (ii) Checker Comp R FR DR The work of these tools were started after obtaining “Maker Layout” letter dated 10.1.2003. As per this letter the company was allowed to plan its process for development only. In anticipation of the confirmed order the co. started actual manufacturing of the tools. This was in progress and was declared in the closing stock on 31.03.2003. Subsequently in F.Y. 2003-04 the customer i.e M/s Honda Siel Car India Ltd. did not find the manufacturing of tools to their satisfaction and asked the assessee to stop the working on Tools. At this stage the tool was all dismantled and certain usable parts/material were used/consumed in making other tools. The parts which could not be consumed were of scrap value for the company. This extra ordinary loss also contributed towards the fall in G.P. Ratio for the year. For your information it is stated here that subsequently M/s Honda made the arrangements for the assessee company with Rikenkaiki Co. Ltd. Japan for the Technical Guidance to the assessee company vide agreement dated 28th day of April 2004. The copy of the said agreement is enclosed. The name of the parts i.e Checker Components appears in Schedule-1 on page- 18 of the agreement enclosed. This name can also be matched with the Maker Layout letter dated 10.1.2003 from M/s Honda on the basis of which the manufacturing was started. This loss occurred may kindly be accepted in view of the documentary evidences enclosed”. In support of the contention that Honda Siel made arrangements with Rikenkaiki Company Ltd., Japan the copy of the agreement dated 28.04.2004 was also enclosed. In support of the contention that Honda Siel made arrangements with Rikenkaiki Company Ltd., Japan the copy of the agreement dated 28.04.2004 was also enclosed. Further to support the contention that the manufacturing of these two tools were stopped by Honda Siel copy of mail sent on 21.12.2006 at 5.18 p.m. is enclosed. This is a confirmation of the mail sent by the assessee at mail dated 21.12.06 at Page | 11 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)
4.35 p.m. on 21.12.2006 which describes the whole set of events and the reasons also why Honda Siel rejected the tools made by the assessee. It has been shown that the tools which the assessee started in F.Y. 2002-03 and on which some expenditure were incurred during F.Y.2003-04 were scraped due to its non-acceptance by the customer. Since this was a customized tools only for Honda Siel therefore, the major cost incurred could not be saved and the components what-so-ever could be salvaged were saved and used in other tools. The AO has not shown that the plea of the Assessee was incorrect or false and no evidence has been led. After careful consideration of the facts and circumstances of the case, I am in agreement with the contentions of the AR.”
The ld CIT(A) has deleted the addition holding that the stocks not shown in the closing stock were in fact sold during the year and same were also supported by copy of the invoice as well as the correspondence. In view of this we do not find any infirmity in the order of the ld CIT(A) in deleting the above addition. Consequently, ground No. 4 of the appeal of revenue is dismissed.
Ground No. 5 of the appeal contests the addition of Rs. 100973203/- on account of lower gross profit. The ld DR referred to para No. 24 of the order of the ld AO. The ld AR relied on the submission made before the ld CIT(A). 23. We have carefully considered the rival contentions. The ld CIT(A) has deleted the above addition holding that the books of accounts are maintained by the assessee wherein, there is no defect. He decided the issue vide para No. 16 to 21 as under:- “16. Ground Nos. 5.1 to 5.11 are directed against the action of the AO in making an addition of Rs. 1,00,97,203 towards lower G.P. 17. The AR filed detailed written submissions in this regard. 18. I have gone through the assessment order and the detailed written submissions filed by the AR in this regard. 19. The AO had observed broadly as under: • No proper valuation of stock of various items of in various units as mentioned in the assessment order. Higher/excessive generation of scrap • Defects in RGI registers • • Rejected books of account and applied G.P.rate of 28.66 (worked out at the average G.P.rate of last three preceding years) 20. The main submissions of the AR are summarized as under: • All the required data were provided and books of account were kept in his custody Page | 12 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05) for some time • Scrap generation is adequately explained • Some clerical errors have taken place while either preparing the data or furnishing details • G.P. rate decreased in the year under consideration because of decrease in selling rates and increase in purchase price of inputs/raw material • Trading results and G.P rates which have fallen in the F.Ys 05-06 and 07-8 relevant for A.Y 06-07 and 08-09 were accepted by the AO in the scrutiny assessment orders u/s 143(3) dated 28.11.2008 and 30.12.10 respectively • The AO has not properly appreciated the evidence brought on record and the submissions of AR are not taken in full while addressing the issue. 21. I have examined the issue in great detail. The following are G.P. rates declared for various years: Assessment Year. GP 21.24% 2006-07 23.18% 2005-06 25.68% 2004-05 30.00% 2003-04 28.08% 2002-03 27.30% 2000-01 In paras 16.1 to 16.20 the AO has observed in the assessment order about the valuation of closing stock. The AO had also given figures relating stock which were filed at two different times, first on 30.07.2006 and second on 18.10.2006. It is found from the order that in both the details quantity of different items as well as the final figure of stock is same. In the details furnished on first occasion the value applied was individually and whereas in the in the latter details, average value was taken. The AR clarified that the difference in representation has arisen since the accountant who had been handling expired and the details furnished later were prepared by junior accountant who has been recruited in the place of old accountant. In paras 18.1,18.2 and 18.3 the AO has made out a case where the value of the finished goods in opening stock should have been taken after reducing the selling rate by 26% and not 20% as shown by the appellant. Since this does not effect the income computation of the year under consideration, in my opinion it is irrelevant to discuss further. The appellant has valued finished goods in the closing stock after reducing 26% from the selling price. This is found to be reasonable when the declared G.P. for the year under consideration is 25.68%. The income of the year has been rightly computed on this issue. For the fall in G.P. rate this year the appellant has given elaborate explanation duly supported by various documents but the AO has not dealt fairly the submissions advanced by the appellant. There is force in the contention of the AR that in manufacturing company G.P. does not remain constant. During the under consideration the selling prices were reduced and purchase prices of raw materials had gone up. A detailed chart on page No. 48 has been prepared which shows selling rate of 10 components in two different years and Page | 13 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)
the figures are supported by the copies of sales invoices of these two years. There is no doubt left during the year under consideration selling rates had decreased. On page No. 49 of the paper book the final adverse effect on G.P. rate has been calculated which is 6.67%. These submissions were made before the AO vide letter dated 13.09.2006 in para No.5 (pages 210 to 212). With this reply page No.862 to 937 were attached to support the fall of G.P. rate by 6.67%. In paras 19.8 and 19.9 the AO has pointed out difference stock submitted on 03.06.2006 and 18.10.2006. It has been explained in the submission that this difference occurred due to clerical mistake. It is seen from para 19.10 of the impugned order that the whole premise of invoking S. 145(3) is based upon discrepancies as pointed out in para 19.8. As the appellant has explained fully now, the rejection of books account cannot be upheld. The details of scrap has been placed on page no 123. The Excise records were audited and certificate of audit had been placed on page no. 124 to 126. The AO in his letter dated 27.09.2006 has stated that in para no 4 that as per thumb rule the scrap in such industries is not less than 10%. On the other hand the appellant has shown scrap in Excise records more than 10% and which has been sold from time to time. The scrap account in the Excise records has been accepted by the Excise Department. The appellant has also placed on page no. 217 which is the reply to the AO where scrap has been fully explained. Therefore it is held that the scrap accounted for by the assessee cannot be doubted as no material has been brought on record to prove it otherwise. On page no. 160 to 162 the appellant has placed copy of assessment order passed by the same AO in the case of M/s Royal Tools (India), Faridabad, which is also a automobile ancillary like the appellant, where the AO accepted the G.P rate of 13.5%. As per page No. 127 the G.P. in different years has been given and it is found that in A.Y 2005-06 and 2006-07, it has fallen further by 2.50% and 1.94% respectively. For these two assessment years trading results have been accepted. The appellant has furnished the details called for. The books of account as prescribed are maintained and also the books of account are audited as seen from the 3 CA and 3 CD reports. Lower G.P. compared to earlier years may be one of the factors to be taken into account while resorting to rejection of trading results but it should not be the sole basis. The AO made some theoretical calculations and proceeded to estimate income. The action of the AO is not in accordance with the legal position as on date on the issue. In view of the above discussion, the AO is hereby directed to accept the G.P. declared by the appellant.”
The ld DR could point out any infirmity in the order of the ld CIT(A). Apparently ld AO has made the addition based on hypothetical calculations. In view of this we do not find any infirmity in his order. Accordingly, ground No. 5 of the appeal is dismissed.
Ground No. 6 of the appeal relates to disallowance of Rs. 9332/-. The ld CIT(A) has deleted the above addition vide para No. 27 to 30 as under holding that it is neither penalty but for the purpose of payment to temporary staff:-
“27. Ground No. 7.1 reads as under: Page | 14 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)
The Ld. AO has erred in law and on facts in disallowing Rs. 9332 on account of payment of ESI.
Vide this ground the appellant has contested the action of the AO in disallowing Rs. 9,332 on account of payment of ESI. The reasons given by the AO are as under: “In Schedule 19 of the audited statement, a sum of Rs. 15,245 has been debited as additional demand. Scrutiny of this account revealed that it consisted of Rs. 5913/- as Income tax paid and Rs. 9,332/- on account of Inspection done u/s 45 of the ESI Act on 21.10.2003 and the wages found to be omitted at Rs. 1,40,484/- by the Inspector ESIC. Apparently, this expense is for the infringement of the ESI laws and the same is not admissible. Hence an addition of Rs. 15,245/- is being made.” The AR filed detailed written submissions in this regard which are as under: 29. “During the year inspection of the records of assessee took place by the staff from ESI Office. They found that on certain payments to the temporary staff ESI was not deducted. On calculating the non-deduction they found that Rs. 9332 were payable by the assessee on this account. Your attention is invited to P.B. Page no. 150-153. The above payment is on additional payment of ESI and not at all in any way can be said that it is penalty or infringement. Therefore, disallowance of this payment is totally devoid of merits and should be deleted.”
I have gone through the assessment order and the detailed written submissions filed by the AR. After careful consideration of the facts of the case, I am in agreement with the contentions of the AR and the disallowance is hereby deleted.”
Therefore, we dismiss ground No. 6 of the appeal.
Ground No. 7 of the appeal is with respect of disallowance of bad debts of Rs. 106127/- with respect to two parties who are the customers of the assessee and whose accounts have been written off. The ld CIT(A) allowed the claimed of the assessee as it satisfied necessary conditions. The ld AO disallowed it as the assessee could not file copies of the account of the assessee from the books of those parties. We do not find any justification for making this addition and hence, ld CIT(A) has rightly deleted the above disallowance. In the result ground No. 7 of the appeal is dismissed. 28. Ground No. 8 of the appeal is against addition of Rs. 5 lacs made by the ld Assessing Officer holding that it is extremely high as compared to previous year. The above disallowance was deleted by the ld CIT(A) holding that AO has not pointed out any mistake in the details furnished but has made disallowance on ad hoc basis. We do not find any infirmity in the order of the ld CIT(A) in deleting the above addition. in the result ground No. 8 of the appeal is dismissed. Page | 15 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)
Ground No. 9 of the appeal is with respect to addition of Rs. 11405/- made by the Assessing Officer holding that club subscription did not have any nexus with the business of the assessee. The ld CIT(A) deleted the above disallowance holding that AO has not given any reason for the disallowance. Therefore, we confirm the order of the ld CIT(A) in deleting for which we also could not find any reason in the assessment order. In the result ground No. 9 of the appeal is dismissed.
30. Ground No. 10 of the appeal is general in nature and therefore same is dismissed. 31. Before parting we are really at pain to say that firstly the order passed by the ld Assessing Officer was mostly on conjectures and surmises. In fact the order was passed by the officer of the rank of Dy. Commissioner of Income Tax. On reading of the assessment order we noted that that most of the additions/ disallowance do not have any basis. The ld Assessing Officer has made almost 10 disallowance to the total income of the assessee. Most of the disallowance are deleted by the ld CIT(A) by giving reasons and in many grounds holding that addition has been made on hypothetical basis. Despite this appeal is approved by the Officer of the Rank of Commissioner of Income Tax to be preferred before the coordinate bench. It is apparent that in this case approval of the appeal by the officer of such a high rank does not have proper appreciation of the fact. Certain times these kinds of appeals also become indefensible and ld DR despite their notable performance are not able to defend the issues in appeal and cut a sorry figure. According to us, on most of the grounds, this appeal should not have been filed before us. It is a sheer waste of money of exchequer , which could have found its way for betterment of public at large. 32. In the result, appeal of the revenue is dismissed. Order pronounced in the open court on 21/11/2017. -Sd/- -Sd/- (H.S.SIDHU) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:21/11/2017 A K Keot Copy forwarded to
Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT Page | 16 ACIT,Vs Venus Industrial Corporation Pvt Ltd, (Assessment Year: 2004-05)