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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
ORDER Per Shri A.T.Varkey, JM Both these cross appeals filed by the assessee and revenue are against the order of Ld. CIT(A)-XII, Kolkata dated 27.11.2009 for AY 2005-06. Since both the appeals have been heard together and issues are interrelated, we dispose of both these appeals by this consolidated order.
Ground no. 1 assessee’s appeal and ground no. 4 of revenue’s appeal is regarding claim of assessee in respect of tooling purchased. We note that the AO following the decision of Tribunal in assessee’s own case for AYs 1995-96 to 1997-98 rejected the assessee’s claim for Rs.2,48,80,000/- and allowed deduction of Rs.1,76,28,000/- as per assessee’s account. The Ld. CIT(A) allowed the deduction equivalent to tooling consumed during the year. Both assessee and revenue are in appeal. The Ld. AR for assessee did not press this ground citing the reason that claim of tooling either on consumption basis or amortization basis only makes difference as of timing and does not, therefore, makes any impact as such, therefore, the assessee does not want to contest this ground. Consequently, we reverse the order of Ld. CIT(A) and uphold the order of AO on this issue. Revenue’s appeal on this issue is allowed.
Ground no. 2 of assessee’s appeal and ground no. 2 of revenue’s appeal are against the order of disallowance/restriction of raw material consumed to 1% of the value of raw material consumed on estimate basis respectively. Briefly stated facts are that the assessee company is a manufacturer and trader of Refractory’s. On examination of details filed by the assessee it was noticed by the AO that considering the decrease of Rs.226.55 lakhs in closing stock, the consumption of raw materials have shown an upward trend of 25% whereas the production of finished products shown an upward trend of 10% only. At the same time he also noted that considering the purchase and opening stock, the closing stock valuation of slide gate items was found less than the opening stock as also in respect of cement. The AO in the assessment order passed u/s. 143(3) of the Act made a disallowance @ 2% of raw material consumed, as the consumption of raw material has shown an upward trend of 25%, whereas the production of finished goods has increased by 10% only. On appeal, the Ld. CIT(A) considering the AO’s disallowance on higher side restricted the same to 1% of the raw material consumed. Aggrieved against the restriction of disallowance @ 1% both the assessee as well as the revenue is in appeal before us.
3.1. We have heard rival submissions and gone through the facts and circumstances of the case. We note that that according to AO, in the assessment year under consideration there is abnormal increase in the consumption of raw material by 25% than compared with the increase in production of finished goods by 10%, which we note is not factually correct. From a perusal of page no. 26, note no. 5 of schedule 17 (Notes on Account of the audited accounts) quantitative details of finished goods manufactured the same is tabulated below:
Actual Production Unit Financial year 2004-05 Qty. 2003-04 Qty. Refractory’s (Shaped) Pcs 3,83,834 3,37,552 Refractory’s (Unshaped) Tons 11,789 9,064 From a perusal of the above, it can be seen that in the year under consideration vis-à-vis the earlier assessment year (AY 2004-05) production of refractory’s (shaped) has increased by 13.7% and production of refractory’s (unshaped) has increased by 30%. The simple average of increase in production of both the refractory’s is 22%, which according to AO is 10%, is per se erroneous. Further, on perusal of Schedule 14 (Materials) of the audited accounts (page no. 20) reveals that closing stock of work-in-progress (WIP) as on 31.03.2004 is Rs.38,192/- and on 31.03.2005 is Rs.52,907/-. Thus, there is an increase of 39% in the closing stock of WIP. We also note that the value of closing stock of finished goods and WIP has also increased by 29%, therefore, in the light of the aforesaid facts emerging from the audited accounts of the assessee, the factual inference of the AO is incorrect and the basis for estimation itself fails. We also note that the books of account of the assessee has not been rejected by the AO, therefore, the estimation was not warranted. In the light of the aforesaid facts and circumstances the fact that the Ld. CIT(A) erred in restricting the disallowance to 1% of raw material consumed. Therefore, in the interest of justice and fair play for both the parties, we set aside the order of Ld. CIT(A) and remand the matter back to the file of AO for de novo adjudication and the direct the AO to take into consideration all the factors and not to be swayed away by clause 28(a) annexure 19 to the audited accounts wherein the quantitative details of principal items of good traded was stated to be not readily ascertainable (page 34 of paper book), when the quantity manufactured during the year and the closing stock of the year are discernible from annexure 20 clause 28(b) (page 35 of paper book). With the aforesaid observation, we remand the matter back to the file of the AO to decide this issue afresh after giving adequate opportunity to the assessee.
Ground no. 3 of both the assessee’s appeal and revenue’s appeal are against the order of Ld. CIT(A) on account of disallowance of site expenses-Maintenance and site expenses- others u/s. 40(a)(ia) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) to the extent of labour charges and office rent. Briefly stated facts are that the AO disallowed the site expenses – maintenance of Rs.43,44,654/- and site expenses – others of Rs.84,81,271/- u/s. 40(a)(ia) of the Act on the ground that the assessee had not furnished the details relating to TDS in respect of the said site expenses – maintenance and others. On appeal, the Ld. CIT(A) deleted the disallowance u/s. 40(a)(ia) of the Act in respect of other expenses and restricted the disallowance only on two items of expenses by observing as under:
“The AO made disallowance u/s. 40(a)(ia) on the ground that the appellant failed to produce tax deduction details in respect of site expenses – maintenance/others. On the other hand the appellant referring to questionnaire issued by AO submitted that the AO had not called for the details in respect of the above mentioned expenses. The appellant while submitting the details of the above expenses stated that it’s employee’s incurred expenses at the customer site and the same are charged to site expenses and hence there is no requirement to deduct tax. I have considered the submissions of the appellant. The AO appears to be not justified to make disallowance u/s. 40(a)(ia) without calling for the details and examining the nature of such expenses debited. However, the perusal of details of nature of expenses submitted shows that in respect of ‘labour charges’ (through contractors) and ‘office rent’, the appellant should have made tax deductions. As such, I direct the AO to restrict the disallowance u/s. 40(a)(ia) only to these two items of expenses and delete the disallowances/additions made in respect of other expenses. The appellant gets a partial relief on this ground.” Aggrieved, assessee as well as revenue both is in appeal before us.
4.1. We have heard rival submissions and gone through the facts and circumstances of the case. We note that out of the details of site expenses of Rs.4,04,51,275/- the AO asked only the details of TDS of site expenses of Rs.1,50,22,618/- pursuant to which assessee gave the details of this information sought. However, the AO disallowed site expenses and maintenance of Rs.43,44,654/- and site expenses and others of Rs.84,81,271/- which aggregates to Rs.1,28,25, 925/- u/s. 40(a)(ia) and (ib) of the Act without providing proper opportunity to the assessee. The Ld. CIT(A) gave partial relief after taking note of the details submitted before him. The AO ought to have done the assessment by providing sufficient opportunity to the assessee and since no opportunity was given to the assessee at the time of assessment proceedings on the addition/disallowance made, the proper course to be taken is that the matter needs to be remanded back to the AO. In support of this, we rely on the decision of Hon’ble Supreme Court (three judges Bench) in Tin Box Company Vs. CIT (2001) 249 ITR 216 (SC) wherein the Hon’ble Supreme Court has held as under:
“It is unnecessary to go into great detail in these matters for there is a statement in the order of the Tribunal, the fact-finding authority, that reads thus : “We will straightaway agree with the assessee’s submission that the Income-tax Officer had not given to the assessee proper opportunity of being heard.” That the assessee could have placed evidence before the first appellate authority or before the Tribunal is really of no consequence for it is the assessment order that counts. That order must be made after the assessee has been given a reasonable opportunity of setting out his case. We, therefore, do not agree with the Tribunal and the High Court that it was not necessary to set aside the order of assessment and remand the matter to the assessing authority for fresh assessment after giving to the assessee a proper opportunity of being heard. Two questions were placed before the High Court, of which the second question is not pressed. The first question reads thus : “1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not setting aside the assessment order in spite of a finding arrived at by it that the Income- tax Officer had not given a proper opportunity of hearing to the assessee ?” In our opinion, there can only be one answer to this question which is inherent in the question itself : in the negative and in favour of the assessee. The appeals are allowed. The order under challenge is set aside. The assessment order, that of the Commissioner (Appeals) and of the Tribunal are also set aside. The matter shall now be remanded to the assessing authority for fresh consideration, as aforestated.” In the light of the aforesaid decision of the Hon’ble Supreme Court, cited supra, we are inclined to remand the matter back to the file of the AO for de novo assessment. Needless to say, assessee should be given reasonable opportunity of being heard by the AO and we give liberty to assessee to adduce evidence in support of its claim for expenses claimed by it which has not been admittedly asked by AO during assessment proceeding. The assessee is also directed to cooperate in the de novo assessment proceedings before the AO on the issue. This ground of appeal of assessee and revenue is allowed for statistical purposes.
5. Ground no. 4 of assessee’s and revenue’s appeal are against the order of Ld. CIT(A) in allowing advertising expenses of Rs.2,17,760/-. Facts of the issue are that in the assessment order the AO observed that in annexure 5 regarding details of advertising expenses of Rs.41,40,940/- TDS is evident in all eligible cases except Rs.2,17,760/- for which narration being payment of bill Rs.20,000/- made to various parties. According to AO, the assessee neither submitted the name and address of the respective parties nor the confirmation of bills and hence, the said amount is liable for disallowance u/s. 40(a)(ia) read with sec. 194C of the Act. On appeal, the Ld. CIT(A) gave partial relief to the assessee by holding as under: “The AO made disallowance u/s. 40(a)(ia) on the ground that the appellant failed to produce tax deduction details in respect of site expenses - maintenance/others. On the other hand the appellant referring to questionnaire issued by AO submitted that the AO had not called for the details in respect of the above mentioned expenses. The appellant while submitting the details of the above expenses stated that it's employee's incurred expenses at the customer site and the same are charged to site expenses and hence there is no requirement to deduct tax. I have considered the submissions of the appellant. The AO appears to be not justified to make disallowance u/s. 40(a) (ia) without calling for the details and examining the nature of such expenses debited. However, the perusal of details of nature of expenses submitted shows that in respect of 'labour charges" (through contractors) and 'office rent', the appellant should have made tax deductions. As such, I direct the AO to restrict the disallowance u/s 40(a)(ia) only to these two items of expenses and delete the disallowances/additions made in respect of other expenses. The appellant gets a partial relief on this ground.”
Aggrieved, revenue and assessee both are in appeal before us.
5.1. We have heard rival submissions and gone through facts and circumstances of the case. The assessee has not pressed this ground of appeal it preferred on this issue. We note that out of Rs.41,40,940/- AO disallowed Rs.2,17,760/- on the plea that details of the disbursal was not provided to him, so he made disallowance. The Ld. CIT(A) has given partial relief by holding as supra. However, we do not understand in what context the Ld. CIT(A) has given relief to the assessee. The main grievance of the revenue is that details in respect to this issue for amount disallowed by AO were not provided before the AO. In such a scenario, we, therefore, direct the AO to verify the claim of the assessee afresh. So, we set aside the order of CIT(A) on this issue and restore the matter back to the file of AO for fresh consideration. This ground of appeal of revenue/assessee is allowed for statistical purposes.
Now coming to the remaining ground of appeal of assessee i.e. ground no. 5 of assessee’s appeal is against the order of Ld. CIT(A) in confirming the disallowance on account of prior period expenses of Rs.27,532/-. Briefly stated facts are that the AO disallowed a sum of Rs.40,659/- on account of prior period expenses in spite of the submission of the assessee that in the assessment year under consideration the auditor has reported prior period expenses of only Rs.13,127/- in clause 22(b) of the Tax Audit Report which was duly offered to tax in the computation of total income. On appeal, the Ld. CIT(A) confirmed the addition of Rs.27,532/- (Rs.40,659-Rs.13,127). Aggrieved, assessee is in appeal before us on the addition of Rs.27,532/-.
6.1. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the AO has simply made disallowance of prior period expenses of Rs.40,659/- (Rs.53,786 – Rs.13,127) without assigning any reason in the computation of total income. In appeal the Ld. CIT(A) has confirmed the addition of Rs.27,532/- (Rs.40,659 – Rs.13,127). It was submitted by the assessee that in the assessment year under consideration, the auditor has reported prior period expenses of Rs.13,127/- in clause 22(b) of the tax audit report which according to the assessee was duly offered to tax in the computation of total income. However, without assigning any reason the authorities below have made the addition which renders the order bad in law for non-application of mind, therefore, in the interest of justice relying on the order of Hon’ble Supreme Court in the case of Tin Box Company (cited supra), we remand this issue to the file of AO for de nove adjudication. This ground of appeal of assessee is allowed for statistical purposes.
7. Ground no. 5 of revenue’s appeal is against the order of Ld. CIT(A) in allowing gifts of Rs.5 lacs. Brief facts of the issue are that the AO made the disallowance of Rs.5 lacs out of Rs.16,89,072/- incurred on gifts and presents on the contention that the assessee neither categorized the persons to whom gifts were presented nor their correlation with business activity. On appeal, the Ld. CIT(A) while deleting the ad hoc disallowance made by the AO has observed as under: “I have carefully examined the submissions of the appellant including case laws relied upon. I find there is force in appellant’s arguments. The AO has made on ad hoc addition without segregating such items. As such there is no basis for such ad hoc disallowance. The appellant furnished details of gifts and presents categorizing the persons to whom gifts were presented. As seen from the facts of the case I am satisfied that the gifts and presents are given to customers in the course of the business and incurred for the purpose of promoting business activities and maintaining the relationship with the customers. In view of the facts and case laws cited, I am of the view that ad hoc disallowance made by the AO is not correct and liable to be deleted. The appellant’s ground is allowed.”
Aggrieved, revenue is in appeal before us.
7.1 We have heard rival submissions and gone through facts and circumstances of the case. We note that assessee has given calendar, diary, bags etc. which are regularly presented to customers, dealers, employees during festival occasion to carry the business smoothly and needs to be considered as business expenditure u/s. 37(1) of the Act. We note that identical issue has cropped up before the Tribunal in assessee’s own case in AYs 2000- 01 and 2001-02 in & 650/Kol/2008 dated 08.10.2009 wherein the claim made by the assessee for allowance of expenditure incurred on gifts and presentations were accepted, therefore, we do not find any infirmity in the order of the Ld. CIT(A) and the ground of appeal of revenue is dismissed.
8. Ground nos. 6 and 7 of revenue’s appeal are against the order of Ld. CIT(A) in allowing foreign travel expenses of Rs.20 lacs and Rs.5,49,995/- respectively. Brief facts of the issue are that the AO made an ad hoc disallowance on foreign travel expenses of Rs.20,00,000/- out of Rs.75,85,265/- and further disallowance of Rs.5,49,995/- being foreign travelling expenditure on the auditors and the finance director for discussing the proposal of acquisition of refractory business of ACC was made on the ground that the assessee has not furnished the details of persons travelling, purpose of visit and its correlation with the business activity. On appeal, the Ld. CIT(A) deleted both the additions by observing as under: “The A.O made disallowance on two counts in respect of foreign travel expenditure. The first disallowance was made on ad-hoc basis on the ground that the appellant failed to produce relevant details. The appellant however submitted that the A.O cannot make an ad-hoc disallowance in view of the ratios laid down by the judicial forums. The appellant also submitted details of such foreign travel expenses. I have carefully considered the submissions and case laws relied on by the appellant. I am of the view that the A.O could have categorisd such expenditure and accordingly made disallowance. The ad-hoc disallowance of Rs. 20,00,000/- made is not justifiable as there is no basis for such ad-hoc disallowance. Hence I direct the A.O to delete the addition. As far as the second addition is concerned, the A.O made this addition on the ground that the expenditure incurred is not exclusively laid out for the purpose of business. On the other hand the appellant submitted that the expenditure incurred for the purpose of acquisition of refractory business and hence for the purpose of business. The appellant relied on certain case laws in support of its arguments. I have perused the assessment order. I find myself not in agreement with the reasoning given by the A.O for making such disallowance. As argued, the appellant is placed in a better position to decide about incurring particular expenditure in a particular way. It is to be seen whether the expenditure incurred is genuine and incurred in the course and/or for the purpose of business. In view of the facts and keeping in view the judicial decisions on this subject, I direct the AO to delete the addition of Rs.5,49,995/-. ”
Aggrieved, revenue is in appeal before us.
8.1. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee is a subsidiary of Vesuvius group Ltd. situate in UK. The Vesuvius Group Ltd. has various subsidiaries all over the world and the assessee undertakes various transactions with its fellow subsidiaries and also has to attend various international conferences organized by its group companies. In this respect the employees of the assessee company frequently travelled out of India and this year the assessee has incurred foreign travel expenses of Rs.75,85,265/- which was clubbed and grouped under the head “Travelling & Conveyance”. However, the AO did not allow Rs.20 lacs on the reason that the persons named who travelled had any relation with the business activity were furnished before him. The Ld. CIT(A) allowed the same. We note that in earlier assessment years there has been no disallowance on foreign travel and taking into consideration the rule of consistency and since the AO has made ad hoc disallowance which is an arbitrary exercise of power, we do not subscribe this action of the AO and, therefore, we uphold the order of Ld. CIT(A) and dismiss this ground of appeal of revenue.
9. Ground no. 8 of revenue’s appeal is against the order of Ld. CIT(A) in allowing hotel expenses of Rs. 20,00,000/-. Briefly stated facts are that the assessee claimed Rs.73,47,894/- which was clubbed under the head “Travelling & Conveyance” in schedule 15 to the audited accounts, however the AO disallowed Rs.20,00,000/- towards hotel expenses on the contention that the same is not incurred wholly and exclusively for business purpose and also since the assessee had not produced a single voucher though asked for. On appeal, the Ld. CIT(A) deleted the addition by observing as under: “The A.O made ad-hoc disallowance of Rs. 20,00,000/- towards hotel expenses. The A.O pointed out certain discrepancies including non-production of vouchers. The appellant on the other hand contended that the expenditure was incurred for the purpose of business and that the A.O never requisitioned for bills and vouchers. The appellant submitted details of hotel expenses including bills/vouchers. I have carefully considered the submissions of the appellant. I have also examined the facts of the case and the reasoning given by the AO. As I held earlier in respect of other ad-hoc additions, I am not in agreement with the A.O for making an ad-hoc addition in respect of hotel expenses also. The AO should have made specific additions after categorizing such expenses where discrepancies noticed." In view of the facts of the case and also keeping in view the case laws cited, I direct the A.O to delete the addition made on this count.”
Aggrieved, revenue is in appeal before us.
9.1. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the employees of the group companies, auditors, directors were travelling to different units of the company for holding various conferences and seminars. We have already upheld the travelling expenses allowed by the Ld. CIT(A). The assessee had claimed an amount of Rs.73,47,894/- for hotel expenses. However, the AO disallowed Rs. 20 lacs on the specious plea that the assessee has not produced a single voucher of hotel expenses, so, the AO made an ad hoc disallowance of Rs. 20 lacs. The Ld. CIT(A), however, allowed the claim of the assessee. We note that the assessee has produced bills/vouchers of hotel expenses, samples of which have been placed at page nos. 204 to 256 of the paper book. From a perusal of the same, we note that the Director and foreign employees as well as other employees/auditors of the assessee company have been staying in hotels and bills have been annexed with the paper book. So, the contention of the AO cannot be accepted. We have already upheld the order of the Ld. CIT(A) in respect to travelling expenses because it is for the purpose of business. When they travelled they have to stay in various places/countries for which expenses are for the purpose of business of the assessee, therefore, we uphold the order of the Ld. CIT(A) who was pleased to delete the ad hoc disallowance made by the AO. This ground of appeal of revenue is dismissed.
10. Ground no. 9 of revenue’s appeal is against the order of Ld. CIT(A) in allowing professional fees paid to M/s. Advent Processing amounting to Rs.67,08,440/-. Briefly stated facts of the issue are that the AO disallowed professional fees of Rs.67,08,440/- paid to Advent Processing by holding that the description designs and drawings as mentioned in the bills is a vague description without identification of the actual professional services rendered. On appeal, the Ld. CIT(A) deleted the addition by observing that the AO made the disallowance of Rs.67,08,440/- towards professional fees paid to assessee’s group company situated at Canada on the ground that there was no mention in the bills about details of actual professional services rendered. According to Ld. CIT(A) the AO ought to have called for the details of services rendered and examined the same before making the disallowance. According to him, the assessee submitted details of services rendered by the Canada based group company and TDS was also duly deducted such payments. So, he did not agree with the AO for making such a disallowance and, therefore, he deleted the addition. Aggrieved, revenue is in appeal before us.
10.1. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee paid professional fees to M/s. Advent Processing of Rs.67,08,440/- which was included under the ‘Professional Fees’, which in turn was clubbed under the head ‘Misc. expenses’ in schedule 15 of the audited accounts. Taking note of the expenses claimed by the assessee the AO asked the assessee to explain the nature of services rendered by M/s. Advent Processing and to furnish a break up of payments made along with the copies of the bills. Pursuant to the query raised by the AO, the assessee replied by letter dated 29.12.2008 which is kept at page nos. 85 to 90 of the paper book. The AO was not satisfied with the reply of the assessee and according to the AO, the invoice only shown that the term drawing and design. So, he was not able to understand the nature of the drawing and design and the relevant of it to the business of the assessee. Therefore, he was pleased to disallow the aforesaid amount. On appeal, the Ld. CIT(A) noted that the assessee had submitted the details of services rendered by Advent Processing and also the assessee had deducted the TDS on such payments. It was brought to our notice that the professional fees paid to Advent processing in the earlier years and subsequent assessment years has not been disallowed and for the first time the AO has resorted to disallow the same. We take note that the TDS of the payment has been deducted and the assessee has submitted the detailed break up of payment along with the copies of the bills before the AO. However, on a specious plea that the nature of drawing and design and its relevance to the business carried out by the assessee could not be understood from the invoice prompted the AO to make the disallowance, which the Ld. CIT(A) taking note of the evidence furnished and the TDS deducted and also taking into consideration that the professional fees for Advent Processing has never been disallowed in the earlier years as well as the subsequent assessment years allowed the claim which does not call for any interference on our part and, therefore, we dismiss this ground of appeal of revenue.
In the result, both the appeals of the revenue and the assessee are partly allowed for statistical purposes.
Order is pronounced in the open court on 07.03.2018