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Income Tax Appellate Tribunal, “D” BENCH : KOLKATA
Before: Hon’ble Shri Aby. T. Varkey, JM & Shri M.Balaganesh, AM ]
ORDER Per M.Balaganesh, AM
This is an appeal of the assessee directed against the order passed by the Learned Commissioner of Income Tax (Appeals) –6, Kolkata (in short the ld CITA) in Appeal No. 18/CIT(A)-6/Kol/2013-14 dated 27.11.2015 against the order of assessment framed by the Learned Income Tax officer, Ward -55(3), Kolkata (in short the ld AO) u/s 143(3)/ 263 of the Act dated 03.03.2013 for the Asst Year 2007-08.
The only issue to be decided in this appeal is as to whether the ld CITA was justified in holding that the assessee is not entitled to agitate the issue before him , in the facts and circumstances of the case , thereby upholding the addition of Rs 6,33,344/- on account of freight and forwarding charges.
The brief facts of this issue is that the assessee is a partnership firm engaged in the business of Manufacturing and Sale of Homeopathic Medicines and had filed its return of income for the Asst Year 2007-08 on 31.10.2007 declaring total income of Rs
Hahneman Pharmacy and Laboratory A.Yr.2007-08 8,36,313/-. The entire books of accounts were produced and there is no allegation that they suffer from any defect liable to be rejected. The ld AO did not reject the books of accounts in the assessment proceedings. The assessment was completed u/s 143(3) of the Act on 29.12.2009 determining total income at Rs 11,09,145/-. Later the ld CIT sought to revise this assessment as erroneous and prejudicial to the interest of the revenue on the ground that the assessee had claimed double deduction on account of freight and forwarding charges in the sum of Rs 6,33,344/-. The assessee submitted before the ld CIT as under:- “The total freight and forwarding charges were paid for goods consigned through transporters to the various parties and these charges were paid by the parties on our behalf as consignment notes are on “to pay basis” and for which the assessee has credited the parties accordingly. Hence, the assessee has debited the freight and forwarding charges to the profit and loss account. The gross sales amounting to Rs. 1,25,34,107/- have been credited to the manufacturing account before deduction of freight and forwarding charges. The statement of sales and a sample sale invoice copy are enclosed herewith for corroboration of the assessee’s claim. The details so filed clearly reveal that freight and forwarding charges were not claimed by the assessee twice. The assessee has neither concealed any turnover nor has claimed any double deduction of the same expenditure with a view to reducing the net profit.”
The ld CIT passed an order u/s 263 of the Act on 19.3.2012 by observing as under:- “5. The arguments put forward by the Ld. AR have carefully been examined in the light of the assessee’s audited accounts, details of sale and consignment notes raised on its clients. It is pertinent to mention that freight and forwarding charge is an indirect expenditure in the hands of the assessee firm which is required to be claimed in the profit and loss account. Only the direct expenses attributable to the manufacturing process are debitable to the manufacturing account. In consonance with this usual practice the turnover credited to the profit and loss account should have only included the direct expenditure components. But surprisingly the assessee firm claims that the sale credited to the manufacturing account for the year included freight and forwarding charges which is quite anomalous and hence not reliable/tenable. The ld. AR has argued that this accounting system has been followed by the assessee in conformity with the procedure adopted for filing the sales tax returns. However, the accounting treatment followed by the assessee for the sales tax purpose is found to be not consistent with the practice ought to be adopted by the assessee for the income tax purpose. The gross turnover credited to the profit and loss account should not have in any way included the indirect freight and forwarding expenditure. Similar to central sales tax this indirect expenditure has been borne by the parties to whom the goods were sold by the assessee. It is worthwhile to note that 2
Hahneman Pharmacy and Laboratory A.Yr.2007-08 central sales tax has neither been included in the turnover nor has been claimed by the assessee as expenditure by way of debit to the profit and loss account. In the same manner the assessee should not have also debited the freight and forwarding charges to the profit and loss account. The reported inclusion of the freight and forwarding charges in the sale amount credited to the manufacturing account gives rise to an anomaly because the outward freight charge partakes the character of an indirect expenditure which has been borne by the consignees. The assessee’s contention on the impugned issue smacks of a thoroughly inconsistent accounting practice which defies common logic. This appellant fallacy/discrepancy embedded in the assessee’s accounting treatment could not at all be satisfactorily explained by the Ld. AR. On the contrary, he fairly conceded that the freight and forwarding charges should not have been included in the turnover and that this erroneous inclusion arose out of emanated from the method of raising the sale invoices as per the sales Tax Act. In other words, the ld. AR failed to refute the aforesaid discrepancy. There is no ambiguity as to the assessee’s claim of double deduction of the same expenditure i.e. freight and forwarding charges. Once the liability of the freight and forwarding expenditure has been borne by the consignee, the assessee firm is precluded from claiming the same expenditure in its profit and loss account. This glaring discrepancy in the assessee’s accounting treatment could not be detected by the AO while completing the assessment proceeding. The failure on his part to unearth this anomaly has rendered the assessment order erroneous as well as prejudicial to the interest of revenue because allowing the freight and forwarding charges has resulted in double deduction of the same expenditure and consequent under assessment income by a sum of Rs. 6,33,344/-. In this regard, I place reliance on the following judicial pronouncements: a) M/s Ashoke Leyland Ltd. vs. CIT reported in 260 ITR 599 (Mad) b) M/s Jai Bharath Tanners vs. CIT reported in 264 ITR 673(Mad.) c) M/s Malabar Industrial Co. Ltd. vs. CIT reported in 243 ITR 83(S C)
The Hon'ble Supreme Court and the Madras High Court have held in the above cases that the AO’s failure to conduct enquiry on the issues depicted in the assessee’s final accounts would render an assessment order erroneous and prejudicial to the interest of the revenue. Exactly, the same has happened in the instant case also. Therefore, I have no hesitation is setting aside the assessment order dated 29.12.2009 u/s 263 of the I.T. Act with a direction to the AO to frame the assessment order de novo in the light of the observations made above. Needless to mention that in the course of the reassessment proceeding the AO shall grant a reasonable opportunity of being heard to the assessee firm.”
The assessee did not prefer any appeal before this tribunal against the said order passed by the ld CIT u/s 263 of the Act.
Hahneman Pharmacy and Laboratory A.Yr.2007-08 6. The ld AO in the giving effect to section 263 proceedings, issued notice u/s 142(1) of the Act on 5.12.2012 to the assessee. The assessee produced the entire books of accounts before the ld AO again. The ld AO asked the assessee to explain why the freight & forwarding charges amounting to Rs 6,33,344/- was again debited to the profit and loss account , whereas in the invoices regarding outstation sales, submitted during the assessment proceedings, show that the freight and forwarding charges were deducted to arrive at the outstation sale amount. The assessee explained that outstation sales figure was arrived at without deduction of freight and forwarding charges and therefore there was no mistake in claim of the same in the profit and loss account by it. The assessee referred to the statement of sales submitted on 16.2.2012. The ld AO observed that this view of the assessee cannot be accepted as the copies of invoice of sale submitted during the course of assessment proceedings clearly show that the total outstation sale was arrived at after deduction of freight and forwarding charges amounting to Rs 6,33,344/- and again debited the same amount to profit and loss account leading to claim of double deduction . Accordingly, the ld AO disallowed the same in the re-assessment.
The ld CITA held that the ld CIT u/s 263 of the Act had directed the ld AO to make disallowance of Rs 6,33,344/- towards freight and forwarding charges and the ld AO had only followed the directions of the ld CIT which is binding on him. Once the ld AO follows the orders of his superior, by making an addition, the assessee cannot be aggrieved on the same. The assessee should have preferred an appeal before the Tribunal against the order passed by the ld CIT u/s 263 of the Act, which was admittedly not done by the assessee herein. Hence the assessee has to suffer in the instant scenario and accordingly the appeal filed by the assessee before him is not maintainable as per law. On these observations, the ld CITA dismissed the appeal of the assessee . Aggrieved, the assessee is in appeal before us on the following grounds:-
Hahneman Pharmacy and Laboratory A.Yr.2007-08 1. For that on the facts and circumstances of the case as well as in law, the Ld. CIT(A)-6, Kolkata erred in concluding that the appellant cannot be allowed to agitate the issue before him, even though the appeal was filed against the order of lower authority.
2. For that on the facts and circumstances of the case as well as in law to reject and dismiss the appeal when there is specific provisions in the Income Tax Act, 1961 empowering the Ld. CIT(A) to pass such order, even when the Ld. CIT(A) discussed in details the arguments of the appellant and not contradicted such adjustments in the appeal order.
3. For that on the facts and circumstances of the case, the appellant prays before the Hon’ble ITAT to delete the unjustified addition of Rs. 6,33,344/- on account of freight and forwarding charges.
4. The appellant craves leave to add to modify the grounds of appeal before or at the time of hearing of the appeal.
We have heard the rival submissions. At the outset, we find that the main observations of the ld CIT in his order u/s 263 of the Act are as under:- Therefore, I have no hesitation in setting aside the assessment order dated 29.12.2009 u/s 263 of the I.T.Act with a direction to the AO to frame the assessment order denovo in the light of the observations made above. Needless to mention that in the course of the reassessment proceeding the A.O. shall grant a reasonable opportunity of being heard to the assessee firm.
Hence it could be safely concluded that the ld CIT in his section 263 order had not directed the ld AO to make disallowance of freight and forwarding charges in the sum of Rs 6,33,344/- on account of double deduction. We find that the ld CIT had only directed the ld AO to make necessary enquiries with regard to the disputed double claim of deduction of freight and forwarding charges. We also find that the ld CIT had also directed the ld AO to grant sufficient opportunity to the assessee in this regard, which is very crucial for maintainability of the appeal before the ld CITA. In this regard , had the intention of the ld CIT u/s 263 of the Act is to merely give directions
Hahneman Pharmacy and Laboratory A.Yr.2007-08 to the ld AO to make disallowance of Rs 6,33,344/- , then there is no need for the ld CIT to mention in his order directing the ld AO to give opportunity of being heard to the assessee. We further find that the ld AO also had understood the language of section 263 order passed by the ld CIT as a denovo proceeding only. This is evident from the fact that the ld AO had issued fresh notice u/s 142(1) of the Act on 5.12.2012 and had called for the entire books of accounts of the assessee. The assessee had also appeared before the ld AO and produced the books of accounts before the ld AO in the giving effect proceedings to section 263 of the Act. Hence it is only a denovo assessment directed by the ld CIT u/s 263 of the Act. Hence the assessee had not lost its legal right to prefer an appeal before the ld CITA in case if he is aggrieved on a disallowance / addition made by the ld AO in the second round of proceedings. This is irrespective of the fact that the assessee had not preferred any appeal against the section 263 order before this tribunal. Hence we hold that the appeal filed by the assessee before the ld CITA is maintainable and the ld CITA ought not to have dismissed the appeal in the instant case. We find that the reliance placed by the ld AR on the decision of Hon’ble Kerala High Court in the case of CIT vs H.H.Sir Rama Varma & Ors reported in 203 ITR 398 (ker) directly supports our understanding of the language of section 263 of the Act . The operative portion of the said judgement is reproduced below:- “Held When the Commissioner has cancelled the order and has directed a fresh assessment to be made the entire assessment is before the officer. He is within his powers to consider all claims even the one not taken up earlier. The entire matter is afresh before the assessing authority and all relevant aspects should be considered by him while making the assessment afresh. The position will be different if the assessing authority has been directed to make only an assessment following some directions issued by the Commissioner. That the assessee was given an opportunity to place before the ITO all materials regarding the question relating to taxation of capital gains indicated in the order does not by itself restrict the power of the assessing authority while making a fresh assessment. The entire assessment had been cancelled and the direction was to make a fresh assessment. The CIT(A) was, therefore, right in observing that the assessee is legitimately entitled to claim the deduction. No error has, therefore, been committed by the Tribunal in upholding the order of the Commissioner (A).” 6
Hahneman Pharmacy and Laboratory A.Yr.2007-08 8.1. On merits, we find that the freight and forwarding charges of Rs 6,33,344/- is to be paid by the assessee which was paid by the customers on behalf of the assessee. Hence the assessee absorbed the freight and forwarding charges as its expenditure by debiting to profit and loss account by giving corresponding credit to the customers account as the assessee had to reimburse the freight and forwarding charges to the customers. This fact is also evident from the statement of sales furnished by the assessee before the lower authorities which is enclosed in page 46 of the paper book of the assessee. We also find from the profit and loss account of the assessee that a sum of Rs 1,25,34,106.76 is credited towards gross sales before deduction of freight and forwarding charges. We also find that the total freight and forwarding charges were paid for goods consigned through transporters to various parties and these charges were paid by the customers on behalf of the assessee as consignment notes are on ‘To pay basis’ and for which, the assessee had credited the customers account accordingly. Hence we do not find any infirmity in the accounting treatment given by the assessee and the claim of deduction of freight and forwarding charges in the sum of Rs 6,33,344/- is in order. We also hold that the assessee had not made any double deduction claim towards freight and forwarding charges as wrongly suspected by the ld CIT in his section 263 order and by the ld AO in the giving effect proceedings. The ld DR prayed for setting aside of this appeal to the file of ld CITA for adjudication of the issue on merits. In our considered opinion, we do not deem it fit and necessary as the facts and the treatment of gross sales before freight and forwarding charges credited in the manufacturing account and the statement of sales submitted before the lower authorities, are staring on us. Absolutely there is no scope for taking a different view in the impugned issue. We find that the assessee had pleaded the same before the ld CIT in section 263 proceedings ; before the ld AO and before the ld CITA by way of written submissions together with evidences in support of its submissions, which Hahneman Pharmacy and Laboratory A.Yr.2007-08 has not appreciated by the authorities below. Accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 07.03.2018
Sd/- Sd/- [A.T. Varkey] [ M.Balaganesh ] Judicial Member Accountant Member Dated : 07.03.2018 SB, Sr. PS Copy of the order forwarded to:
1. 1. Hahneman Pharmacy and Laboratory, 159B, Bipin Behari Ganguli Street, Kolkata- 700012 2. ITO, Ward-55(3), Kolkata, 54/1, Rafi Ahmed Kidwai Road, Kolkata-700016 3. C.I.T(A)- , Kolkata 4. C.I.T.- Kolkata.
5. CIT(DR), Kolkata Benches, Kolkata.