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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI G.D. AGRAWAL, HON’BLE & SHRI SUDHANSHU SRIVASTAVA
ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: The present appeal is preferred by the assessee against order dated 31.01.2013 passed by the Ld. CIT (Appeals) – XI, New Delhi for AY 2003-04.
(2)
The assessee is a Limited Company. The return of income was filed declaring a loss of Rs. 2,29,93,710/- However, the assessment was completed u/s 144 of the Income Tax Act, 1961 at an income of Rs. 60,000/- after disallowing all the expenses as the AO was of the opinion that since the assessee was not carrying out business activities, the expenses were not allowable. As per the records, the total expenses claimed were Rs. 14,59,16,812/-. However, the computation of income attached with the Return of Income shows that the net loss claimed during the year was only Rs. 2,29,93,710/- as under:
COMPUTATION OF INCOME/LOSSES:
Amount in Rs. Loss as per profit & loss account 187730664 Less: Depreciation as per Companies Act 41873852 145856812 Less: Statutory Dues not paid 39559 145817253 Add: Depreciation as per Income Tax Act 11428719 Less: Interest on secured loan provided 157245972 But not paid u/s 43B 134252262 Net loss during the year 22993710
(3)
Add: Loss for the Year C/F C/F Loss for the AY 1997-98 14578429 C/F Loss for the AY 1998-99 193862549 C/F Loss for the AY 1999-00 355820732 C/F Loss for the AY 2000-01 112508549 C/F Loss for the AY 2001-02 136948844 C/F Loss for the AY 2002-03 27054880 Total Losses Carried forward 863767693
In first appeal the Ld. CIT (A) deleted the entire disallowance made. Thereafter, on an appeal by the Department, the matter was remanded by the ITAT to the Ld. CIT (A) for fresh adjudication. The assessee expressed its inability to produce any vouchers/records/documents relating to the year under appeal. It was the assessee’s contention that the company was a sick industrial unit and the BIFR had sanctioned a scheme for rehabilitation with the cutoff date as 01.10.2004. However, in absence of the supporting documents, the Ld. CIT (A) upheld the disallowances after allowing the depreciation claimed. The loss on sale of investment of Rs. 81,75,000/- was also not allowed as a deduction. The details of disallowances upheld by the Ld. CIT (A) are as under:
(4) Salary & Wages Rs. 75,709/- Misc. & Administrative expenses Rs. 21,88,894/- Travelling & Conveyance Rs. 1,391/- Vehicle running & maintenance Rs. 7,330/- Auditors expenses Rs. 7,000/- Audit fees Rs. 52,500/- Bank charges & commission Rs. 6,174/- Preliminary exp. Written off Rs. 8,77,595/- Loss on sale of vehicle Rs. 2,90,132/- Total Rs. 35,06,725/-
Now the assessee is again before the Tribunal and has raised the following grounds of appeal -
That ld. CIT (A) has passed the order against the principles of natural justice, without any basis, suo moto, arbitrarily and in a mechanical way and hence the impugned order needs to be set aside.
2. That the ld. CIT (A) has erred by not appreciating the facts and circumstances of the case and disallowed all the expenses i.e. Salary and Wages Rs. 75,709/- and Rs. 34,31,016/- on account of administration, auditors expenses, vehicle running, bank charges, preliminary expenses etc. in an arbitrary manner and hence the impugned order being bad in law needs to be set aside. 3. The assessee craves leave to add, delete and amend any of the grounds of appeal at the time of hearing.
(5)
4. The Ld. AR submitted that pursuant to the issue being restored by the ITAT to the file of the Ld. CIT (A), no report was received from the AO and the order u/s 250 of the I.T. Act, 1961 was finalized by the Ld CIT (A) giving partial relief to the assessee in that the claim of depreciation amounting to Rs 1,14,28,119 was allowed and disallowances of expenses amounting to Rs 1,16,81,725 was upheld. It was submitted that it is a matter of record with the Income Tax Department that in Nov. 1996, the Hon’ble Supreme Court directed the Assessee Company to close down the operations on grounds of pollution and relocate the plant outside the National Capital Region of Delhi. As a result the main operations of the company came to a halt w.e.f. 31st March 1997. At the same time Water Transport Division also suffered due to cancellation of landing permit by Mumbai Port Trust resulting in complete closure of the Company in June 1998. The Ld.
(6)
AR further submitted that the court processes, non cooperation of labour, agitations, not allowing the managerial staff to function as well as denial of permission from banks and financial institutions to relocate the plant added to the problem and the net worth of the company got eroded leading the company to make a reference to Board of Industrial and Financial Reconstruction (BIFR) under the Sick Industrial.
Companies (Special Provisions) Act, 1985 (SICA). The Hon’ble BIFR sanctioned the Rehabilitation Scheme on 18th November 2004 and the assessee company restarted the melting division in Sept 2006 and the full unit became operational in March 2007. During the rehabilitation process most of the professional staff left the employment of the assessee company. It was submitted that during the re-adjudication proceedings before the Ld CIT(A), a summary of the expenses claimed was given and upon the (7) failure of the AO to submit the remand report, the Ld. CIT(A) ought to have given his independent finding on each expense claimed which has not been done. It was further submitted that considering the background of the assessee as afore said, as the records, vouchers and supporting documents relating to this assessment year could not be traced, the Ld CIT (A), should have take cognizance of the affidavit filed by the assessee that the records etc could not be traced due to the closure and shifting of the factory and given a finding on the expenses claimed which has not been done. The Ld. AR emphasized that the Ld CIT(A) has lost sight of the fact that the assessee is a widely held public limited company whose accounts have been audited and that the audit report of the auditors does not at any place mention that the same has been finalized with incomplete records which only shows that all the records, documents and vouchers were (8) available at the time of the audit and it was only at a later date, due to the shifting of the factory that the records got misplaced and could not be traced. The Ld. AR submitted that it can be perused from the details of expenses submitted that some of the expenses are mandatory like audit fees, printing of memorandum and articles of association and annual reports for the shareholders. It was submitted that the audit has been conducted is apparent as the audited financial statements for the said assessment year have been placed on record and there seems to be no justification in disallowance of these statutory and mandatory expenses. The Ld. AR submitted that the audit has been conducted on the basis of the books of account maintained by the assessee and there is no justification for disallowing the accounting charges of Rs. 20,000 incurred. It was further submitted that in terms of the audited financial statements relevant to the (9) assessment year 2003-04, the assessee has an asset base of Rs. 716.75 lacs and accumulated losses to the tune of Rs. 12,138.83 lacs and all the expenses during the year have been incurred to safeguard its assets, defend litigations against the assessee and to put forward the case of the assessee before the various government agencies for the rehabilitation package of the assessee.
The rehabilitation package was subsequently sanctioned and the assessee restarted its manufacturing activity during the financial year 2006-07. It was submitted that in the ledger accounts submitted relating to the legal and professional charges and the retainer ship fees, tax has been deducted at source wherever applicable from payments made to lawyers and other professionals i.e. S.K. Kochra, Joshi & Associates, O.P. Khaitan & Co., Ashish Aggarwal & Associates, Arjun H. Patil, Dhrure Liladhar & Co and S.K. Jhunjunwala. Similarly on (10) payments incurred towards security expenses, tax has been deducted at source, wherever applicable which only goes to show the genuineness of the expenditure. The Ld. AR further submitted that while finalizing the order, the Ld. CIT (A) has lost sight of the fact that the expenses subject to disallowance amounting in total to about Rs 37.06 lacs form a very small portion considering the total asset base of the assessee and also the accumulated losses of the assessee as shown in the audited financial statements relevant to the assessment year 2003-04. The Ld. AR also submitted a comparative chart of the various expenses for AY 2003-03, 2003-04 and 2004-05 which is being reproduced on the next page for a ready reference.
11 Comparison of Expenses F.Y. 2001 - 02 F.Y. 2002 - 03 F.Y. 2003 - 04 PARTICULARS (in Rs.) (in Rs.) (in Rs.) SALARY & WAGES (INCLUDING 7,06,412 36,000 75,709 ALLOWANCES) CONTRIBUTION TOWARDS ESI & EDLI 3,569 CONTRIBUTION TOWARDS EPF & FPF 6,436 STAFF WELFARE 14,341 TOTAL (Rs.) 7,30,758 36,000 75,709 OTHER EXPENSES REPAIR & MAINTENANCE 13,34,727 - RENT RATES AND TAXES 22,81,083 - MISCELLANEOUS & ADMINISTRATIVE. 37,43,448 7,85,468 21,88,894 EXPS. TRAVELLING & CONVEYANCE 1,94,152 - 1,391 VEHICLE RUNNING AND MAINTENANCE 3,61,223 - 7,330 AUDITOR'S EXPENSES 7,000 7,355 7,000 AUDIT FEES 52,500 52,500 52,500 BANK CHARGES & COMMISSION 18,947 5,880 6,174 PRELIMINARY EXPENSES WRITTEN OFF 8,77,595 2,69,709 8,77,595 - SETTLEMENT & RECONCILLATION 55,07,997 LOSS ON SALE OF VEHICLE 1,27,930 2,90,132 TOTAL (Rs.) 1,45,06,602 11,20,912 34,31,016 FINANCE CHARGES INTEREST FROM FINANCIAL INSTITUTIONS 4,46,13,877 5,66,07,590 WORKING CAPIAL LOAN 6,46,80,411 7,73,98,655 HDFC LOAN 2,05,317 2,46,017 TOTAL (Rs.) 10,94,99,605 - 13,42,52,262 Misc and Administrative Expenses include:
Legal and Professional Charges 3,87,729 TDS deducted on 2,72,729 Retainership Fees 1,29,100 TDS deducted on 95,000 Security Charges 6,54,052 TDS deducted on 6,54,052 ---------------- --------------- 11,70,921 10,21,821 ----------------- ---------------
(12) 5. The Ld. DR supported the AO’s order and that of the Ld.
CIT (A) and submitted that in view of the inability of the assessee to produce the relevant records/vouchers, the additions have been rightly made and the impugned order does not call for any interference.
We have heard the rival submissions and perused the material on record. It is undisputed that the assessee has been unable to produce the relevant vouchers for the purpose of verification even in the second round before
the Ld. CIT (A). It is also undisputed that the assessee company had become a sick industrial unit and has been able to obtain a rehabilitation package in terms of a scheme approved by the BIFR. It is also remains un- contradicted that the Ld. CIT (A) neither called for a remand report from the AO nor questioned the veracity of the affidavit regarding the assessee’s inability to produce the relevant records/vouchers before proceeding to re- adjudicate the issue of disallowance. It is true that under (13) normal business conditions, an assessee is reasonably expected to maintain proper records/vouchers of the expenses incurred and produce the same before the tax authorities when required to do so. However, when the assessee company has been forced to shut down its operations from the existing location and is forced to shift to a new location, the possibility of some records being lost/misplaced cannot be ruled out and for this very reason it is our considered opinion that the affidavit filed by the asseseee company before the Ld. CIT (A) cannot be completely disregarded. It is also an undisputed fact that the books of accounts were audited and the return of income has been filed on the basis of the audited books of accounts. A comparative chart of the expenses for AY 02-
03, 03-04 and 04-05 has also been placed on record which has not been agitated by the Department. A perusal of the comparative chart shows that in the year under consideration the salary/allowances were only Rs.
75,709/- as compared to Rs. 7,30,758/- in the (14) immediately preceding year. Even though the company might have stopped commercial operations and might have become a sick company, some minimal expenditure on salary of staff has to be incurred all the same and in our opinion, keeping in mind the general financial state of affairs of the assessee company during the year under consideration, the amount cannot be said to be excessive and we accordingly direct the AO to delete the same. As far as the Miscellaneous and Administrative Expenses to the tune of Rs. 21,88,894/- are concerned, we find that the assessee has deducted tax at source on Rs.
10,21,821/- only and it is our considered opinion that the interest of justice will be served if in the absence of details, the disallowance is restricted to the amount on which tax has not been deducted at source. We direct the AO to delete the addition of Rs. 10,21,821/- on this account. As far as the disallowance of travelling expenses of Rs. 1,391/- , vehicle running and maintenance expenses of Rs. 7,330/- and bank charges of Rs. 6,174/-
(15) are concerned, they also appear reasonably in tune with the figures of the preceding year as well as the financial position of the assessee for the year under consideration and we direct the AO to delete these three additions also.
The assessee has claimed a write off of preliminary expenses amounting to Rs. 8,77,595/- and it is seen that this amount is the same as that of the immediately preceding year being 1/10th of the total expenditure incurred. On the principle of consistency, we direct the AO to delete this addition also. The assessee has claimed loss on sale of vehicle amounting to Rs. 2,90,132/-. and this amount is duly appearing in Schedule M of the audited profit/loss account under the nomenclature ‘loss on sale of vehicle’ and it is our considered opinion that on facts no adverse inference can be drawn and therefore, we direct the AO to delete this addition also. The last disallowance is of Rs. 81,75,000/- on account of loss of sale of investment. It is seen that the assessee had sold its holding of 15 lac equity shares in SKS Ltd (face value
(16)
Rs. 10/- each) at Rs. 4.55 per share in view of severe liquidity crisis within the company. A perusal of Schedule
E of the audited Balance Sheet shows that the assessee’s value of investments has reduced from Rs. 30,500,000 in AY 02-03 to Rs. 15,500,000/- in AY 03-04. However, it is seen that the loss on the sale of investments has been debited to the profit/loss account although it is a capital loss as the shares were held as an investment and not as a stock in trade. Therefore, the disallowance has been rightly made on this issue and we confirm the same.
In the result, the appeal of the assessee is partly allowed.
Order is pronounced in the open court on 21.07.2016