UNITECH PAPER MILL PVT. LTD.,KOLKATA vs. DCIT, CIR-4, KOLKATA, KOLKATA

There is a delay of about five days in filing the appeal by the assessee. In the application for condonation of delay in filing the appeal, the Assessee has explained that one of the Director of the Assessee Shri Dayanand Gupta was ill at the relevant point of time when the appeal was to be filed and hence could not sign the appeal memo and grounds to be filed before the Tribunal. The other director was Shri Sailesh Gupta. He was busy looking after the medical treatment of his father and his father ultimately died on 02.05.2016. We have considered the reasons given in the application for condonation of delay and are of the view that the delay in filing the appeal is not inordinate. The reasons given for condonation of delay in our view are constitutes reasonable and sufficient cause for the delay in filing the appeal by the assessee. The delay in filing the appeal is accordingly condoned. Unitech Paper Mill Pvt. Ltd. A.Y. 2010-11 2

The assessee has filed the following revised grounds of appeal. The revised grounds of appeal are nothing but a modified version of the original ground of appeal raised by the assessee in the grounds of appeal filed along with Form No.36. The revised grounds are taken up for adjudication with the consent of the parties. The revised grounds of appeal read thus:

As far as ground no.1 raised by the assessee is concerned the facts are that the assessee which is a company is engaged in the business of manufacturing of MG graph paper In Notes on Accounts point no. 1(d)(ii) of the Audited accounts it was mentioned as follows :- “ii The Company has not allocated salaries, wages, power and other incidental expenses used for construction of Unit-II as the Management feels that the amount cannot be worked out on a reasonable basis.”

It can be seen from the aforesaid notes on accounts that the assessee was in the process of construction of Unit-II and as one the last date of the previous year the constructions was not completed and Unit-II had not been set up or commenced business. Therefore the cost of construction of Unit-II had to be capitalised and even revenue expenses incurred in connection with Unit-II cannot be claimed as deduction while determining the total income of the existing unit (Unit-I) and had to be capitalized. Taking a cue from the notes on accounts, the AO was of the view that salaries, wages, bonus, power and fuel expenses which was debited in the profit and loss account and which were claimed as deduction while computing income from business cannot said to be wholly incurred for the existing Unit-I and part of it has to be considered as attributable to Unit-II and that portion of the revenue expense which Unitech Paper Mill Pvt. Ltd. A.Y. 2010-11 3 are attributable to Unit-II and should be disallowed and capitalised as capital works- in-progress of Unit-II. The AO found that a sum of Rs.4,56,48,806/- was the expenses debited in the profit and loss account on account of salary, wages, bonus, power and fuel expenses. The AO estimated 10% of the aforesaid expenses as attributable to Unit-II and a sum of Rs.45,64,880/- was added to the total income of the assessee as expenses attributable to Unit-II.

Aggrieved by the aforesaid addition, the assessee preferred appeal before CIT(A). Before CIT(A) the assessee firstly pointed out that the AO had not called upon the assessee for any explanation on this aspect and has made an adhoc disallowance of 10% of the expenses and the action of the AO in this regard is bad in law. The assessee pointed out that salary and wages for the past five years is almost identical with the salary and wages claimed during the previous year relevant to AY 2010-11, which means that no extra salary and wages was incurred for Unit-II which was under construction. As far as labour and bonus are concerned, the assesee pointed out that the construction of Unit-II was not done by the assessee and was done by an outside party and therefore labour charges of Unit-II could not and were not claimed in the profit and loss account of Unit-I. The assessee pointed out that there was a memorandum of settlement between the asessee and the workers union in which it was specifically agreed that the existing work force will not indulge in any work for Unit-II. As far as power and fuel charges are concerned, the assesee pointed out that attributing 10% of power and fuel expenses to Unit-II could be unreasonable. The assessee pointed out that the major component of fuel expenses is coal which is consumed only by Unit-I and coal is not required at the construction stage of unit-II. The assessee also pointed out that for construction of Unit-II the contractor was obliged to provide DG set. The assessee pointed out that notes on accounts cannot be the basis to make the impugned disallowance.

On the above submissions a remand report was called from the AO. The AO in his remand report agreed with the submissions of the assessee but pointed out that the Unitech Paper Mill Pvt. Ltd. A.Y. 2010-11 4 assessee has not quantified the expenses disallowable as attributable to Unit-II. In a reply to the remand report the assessee submitted that a sum of Rs.17,19,000/- being the part salary of directors and Head Office Accounts staff can be considered as attributable to Unit –II.

Despite the above facts which transpired in the course of the appellate proceedings before CIT(A), the CIT(A) confirmed the order of the AO without taking cognizance of the submissions of the assessee by concluding that expenses debited in the profit and loss account were partly attributable to Unit-II and since the assessee had not quantified the expenses the disallowance made by the AO was reasonable and had to be upheld.

Aggrieved by the order of CIT(A) the assessee has raised ground no.1 before the Tribunal. 10. We have heard the rival submissions. It is clear from the submissions made by the assessee before CIT(A), the remand report of the AO and reply of the assessee to the remand report that only a proportionate part of the expenses of Rs.17,19,000/- being salary of the directors and Head Office Accounts staff should be considered for disallowance as attributable to Unit-II. 10% of the aforesaid sum of Rs.1,71,900/- should be disallowed and capitalised as pre-operative cost of Unit-II. 10% of Rs.17,19,000/- so disallowed should be added to the total income of the assessee. We hold and direct accordingly. Ground No.1 raised by the assessee is partly allowed.

As far as ground No.2 raised by the assessee is concerned, the facts are that the assessee claimed as deduction while computing income from business a sum of Rs.2,00,000/- which was the expenses for conducting a conference by M/s Eastern India Corrogated Box Manufacturing Association which was formed to take care of the interest of paper manufacturers and traders. The assessee was also a member of the aforesaid association. The sum in question was paid by cheque in the subsequent financial year namely financial year 2010-11 relevant to A.Y.2011-12. It is not disputed that M/s Eastern India Corrugated Box Manufacturing Association sent their Unitech Paper Mill Pvt. Ltd. A.Y. 2010-11 5 bill on 30.12.2009 which was during the previous year relevant to A.Y.2010-11. The AO disallowed the claim of the assessee for deduction for the reason that there was no valid proof of incurring of the expenditure. The CIT(A) was satisfied with the evidence produced for incurring of the expenditure and the fact that it is a legitimate business expenditure. He however proceeded on the basis that since payment was made in the previous year relevant to A.Y.2011-12, the expenditure should be claimed only in A.Y.2011-12. We are of the view that the conclusion of CIT(A) are incorrect. The assessee follows mercantile system of accounting and has received bill raised by M/s Eastern India Corrogated Box Manufacturing Association on 30.12.2009. On that date the liability of the assessee crystallised and deduction was to be allowed legitimately in A.Y.2010-11. We therefore direct the AO to allow the deduction of a sum of Rs.2,00,000/- as claimed by the assessee. Ground No.2 raised by the assessee is accordingly allowed.

In the result the appeal by the assessee is partly allowed. Order pronounced in the Court on 29.11.2017. Sd/- Sd/- [M.Balaganesh] [ N.V.Vasudevan ] Accountant Member Judicial Member Dated : 29.11.2017.