ACIT, CIRCLE-10, KOLKATA, KOLKATA vs. LUNA TYRES PVT. LTD., KOLKATA

This appeal by the Revenue is arising out of order of Commissioner of Income Tax (Appeals)-XII, Kolkata in appeal No.521/CIT(A)-XII/Cir-10/10-11 dated 13.12.2011. Assessment was framed by DCIT, Circle-10, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 31.12.2010 for assessment year 2008-09. Shri G. Mallikarjuna, Ld. Departmental Representative appeared on behalf of Revenue and Shri V.N.Purohit, Ld. Authorized Representative appeared on behalf of assessee.

First issue raised by Revenue is that Ld. CIT(A) erred in deleting the addition made by Assessing Officer for ₹ 80,02,750/- on account of incentive discount. A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 2 3. Facts in brief as culled out from the orders of Authorities Below and other records are as followed. A survey was conducted at business premises of assessee on 27.03.2008 and therefore the case was selected for compulsory scrutiny. Accordingly, notice u/s. 143(2) / 142(1) was issued to the assessee. The assessee, for the year under consideration filed its return of income declaring total income of ₹ 71,91,850/- under the head “business income”. The assessment was completed u/s 143(3) of the Act at a total income of ₹8,30,05,120/- after making certain disallowance / additions to the income of assessee. The assessee was engaged in the business of manufacturing of cycle and rickshaw tyres along with other products.

The assessee for the year under consideration has claimed expense under the head “incentive discount” for ₹80,02,750/- to its customers. Such discount was claimed in addition to commission and sales promotion expense. On question by the AO for the incentive discount, assessee failed to furnish sufficient details for the expense of incentive discount. Accordingly, AO disallowed the incentive discount and added to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee furnished the details of the parties in respect of expenses claimed as incentive discount. The assessee further submitted that sufficient opportunities to explain the incentive discount expense at the time of framing the assessment was not provided. After considering the submission of assessee, Ld. CIT(A) deleted the addition made by AO by observing as under:- “Regarding ground no. 1 relates to disallowance of Rs 80.02,750/- as incentive discount paid to various dealers who are responsible for collection of payment. It is noticed that the assessee had sales of cycle and rickshaw tyres amounting to Rs.10,45,65,066/-, the average discount is determined at 7.65% of sales made during the year. The assessee had produced the details of party-wise details of discount in Annexure-B along with a sample of the vouchers. The assessee had contended that such cash incentives motivates the dealer in remotes of area and the villages where expenditure on advertisement is to be considered as Tribunal-secondary. These incentives received by A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 3 dealers was passed on to the direct customers to dissuade them from other products. In its remand report dated 02.11.2011 A.O had also not rebutted the above submission of assessee. The incentive discount had been paid by the assessee to these dealers on principal to principal basis and this had been the normal practice in the business of assessee in past years also. Keeping in view the facts and circumstances, incentive discount is allowable as legitimate business expenditure. Therefore, ground no. 1 is allowed.”

Before us Ld. DR for the Revenue submitted that Ld. CIT(A) at the time of hearing has not called for any details from the party concern to whom the incentive discounts were given for the purpose of confirmation. He further submitted that Ld. CIT(A) erred in calling for remand report from AO. The assessee at the time of remand report has not co-operated.

We have gone through the submission made by both the sides and order of the lower authorities along with the materials available on record. From the foregoing discussion we find that the addition was made by the AO on the ground of non-submission of necessary details such as reasons for payment of such discount as well as names, addresses of the parties to whom such discount was paid. However the ld. CIT(A) after examining the facts of the case and considering the grounds urged before him by the assessee and evidenced relied on by the assessee called for the remand report. Accordingly the ld. CIT(A) allowed the appeal of the assessee by observing that payment of such discount is the normal practice of the assessee and the same was A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 4 allowed in the earlier years. The AO also not objected in the remand report on the submission of the assessee in respect of names and address of the recipient of such discount. Now the crux of the issue for our adjudication is whether the action of ld. CIT(A) deleting the addition of incentive discount is correct in the above stated facts & circumstances. On the perusal of the assessment records we find that the assessee at the time of remand report has submitted the details of the parties along with their addresses to whom the discount was provided. But the AO has not pointed out any defect in that list of the parties in remand report which is placed on pages 12 to 21 of the paper book. On the contrary the AO has stated in the remand report that no additional evidence has been submitted by the assessee. We also find that the AO did not point out any defect in the books of accounts. Therefore it can be inferred that the assessee has submitted the list of the parties at the time of assessment and the AO failed to exercise his power to verify the same by issuing notice under section 133(6) of the Act. From the order of the ld. CIT(A) we also find that the assessee has been claiming such expenses consistently and no such disallowance has been made in earlier years. In the light of above reasoning, we hold that the order of the Ld. CIT(A) is correct and in accordance with law and no interference is called for. Hence the ground raised by the Revenue is dismissed.

Next issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by AO for ₹ 4 lakh on account of miscellaneous expense.

The assessee, in the year under consideration has claimed an expense of ₹13,56,098/- under the head ‘miscellaneous expense’. During the course of assessment proceedings, AO found that such expenses are based on self- made vouchers, therefore, AO disallowed a sum of ₹ 4 lakh which was not supported with the documentary evidence and added to the total income of assessee. A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 5 10. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that no details of miscellaneous expense was called for by the AO at the time of assessment proceedings. The assessee further submitted that none of the expense was verified by AO while framing assessment. He further filed the list of miscellaneous expenses before the ld. CIT(A) and demonstrated that there was no scope on estimating the disallowance of Misc. Expenses. Considering the facts and circumstances, Ld. CIT(A) deleted the addition made by AO by observing as under:- “5. Regarding ground no. 2 relates to disallowance of Rs.4,00,000/- under the head miscellaneous expenses. The assessee had produced details of misc. expenses in Annexure-C of its written submission include bank charges, security guard charges, legal charges and expenditure under 16 heads. After careful consideration it is noticed that penalty debited to the extent of Rs.7,850/- is required to be disallowed. The balance adhoc addition of Rs.4,00,000/- out of total expenditure of rs.13,66,098/- is unwarranted. Therefore, ground no 2 is partly allowed.”

Before us Ld. DR vehemently relied on the order of AO whereas Ld. AR for the assessee relied on the order of Ld. CIT(A).

We have gone through the submission made by both the sides and order of the lower authorities along with the materials available on record. The facts of the case have already been discussed in the aforesaid paragraphs. Now the crux of the issue for our adjudication is whether the action of ld. CIT(A) deleting the addition of Misc. Expenses is correct in the above stated facts & circumstances. On the perusal of the assessment records we find that the AO has not verified the documents as well as pointed out any defect in the Misc. Expenses claimed by the assessee but he has disallowed the same on estimated basis. From the list of the documents we find that most of the expenses are verifiable from the documentary evidence as enclosed on page 22 of the paper book. Therefore in our considered view the AO should have verified the expenses at the time assessment rather disallowing the same on A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 6 the basis of estimation. The AO should have pointed out defects in respect to the specific head of expenses claimed under Misc. Expenses before making the disallowance. In our considered view the AO should not disallow the expenses based on some suspicion, doubt and should not draw unreasonable inferences based on some unreasonable apprehensions. The AO has not brought on record any cogent reasons as to why this expenditure was to be disallowed. It is not the case that the expense was considered to be bogus or short comings in the vouchers in this regard as observed by the Revenue. No material has been placed before us by the Revenue to controvert the findings of the impugned order of the CIT (A). In that view of the matter we find ourselves in full agreement with the reasoning and conclusion contained in the order of ld. CIT(A). With the result we uphold the impugned order of ld. CIT(A). Hence the ground raised by the Revenue is dismissed.

Next issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by Assessing Officer for ₹44,01,870/- on account of suppression of sales by taking fresh evidence in violation of Rule 46A of the IT Rules, 1962.

During the course of assessment proceedings, AO observed a difference of ₹44,01,870/- between the amount of sales shown by assessee in its profit and loss a/c and the computerized sales registers impounded at the time of survey vide page 30 marked as LTPL. Accordingly, AO treated the amount of difference for ₹44,01,870/- as undisclosed sales and added to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that difference between sales is arising mainly on account of VAT charges and discount charges. The assessee before ld. CIT(A) filed the reconciliation statement which stand as under:- “4. Statement of reconciliation of sales. Rs. A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 7 Grand total of sales register impounded and 10,89,66,936 considered by A.O. Add: Total of sales register between 27-03-2008 17,50,456 to 31-03-2008 (Annexure-D) Grand total of sales register from 01-04-2007 to 11,07,17,392 31-03-2008 Less; VAT included in the above (-)37,88,619.84 Add: Discount allowed not included in above (+) 27,37,074.94 Trade discount not included in above (+) 5,50,906.52 Total of sales A/c (Cr. Side posted from sales 11,02,16,753.62 register month wise) Less: value of goods sent to Guwahati Branch (-) 72,59,363.36 Value of discount (earlier added) (-) 5,50,906.52 Value of CST (included in total of sales register) (-)1,01,170.00 Value of credit notes (-)17,90,959.06 (-)1,24,38,155.26 Sales as per sales A/c (head office sale only) 9,77,78,598.36 (Annexure-E) Add: sales at Guwahati branch (as per branch 67,86,467.20 final a/c (Annexure-F) Sales as per profit & loss account 10,45,65,065.66 Considering the facts Ld. CIT(A) deleted the addition made by AO by observing as under:- “6. After careful consideration of the written submission, assessment order and the remand report of AO it is noticed that the survey u/s. 133A of the IT Act, 1961 was carried out n the factory and office premises of the assessee company where inventory of the stock was taken and LTPL-1 to LTPL-21 documents were impounded and statement of directors were also recorded. Regarding ground no. 3 which relates to addition of Rs.44,01,870/- under the head difference in sales. As per audited profit and loss account the total sale was Rs.10,45,65,066/- and as per page-30 of LTPL-8 the grand total of the sales was rs.1,89,66,936/-. No show cause was issued to the assessee company by the AO to reconcile the above difference. The assessee had submitted in his written submission a detailed reconciliation of the sales after including the figures from 01-04-2007 to 27-03-2008 (date of survey) and from 27-03-2008 to 31-03-2008 which includes VAT, discount allowed and trade discount separately. I have carefully examined the reconciliation statement along with Annexure-D,E & F it is noticed that the sales account stands reconciled. Therefore, the addition of Rs.44,01,870/- is deleted. Hence, ground no. 3 is allowed.” A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 8 Being aggrieved by this order of Ld CIT(A) Revenue is in appeal before us.

Before us both parties relied on the orders of Authorities Below as favorable to them.

We have heard the rival contentions of both the parties and perused the materials available on record. The facts of the case have already been discussed in the aforesaid paragraphs. Now the crux of the issue for our adjudication is whether the action of ld. CIT(A) deleting the addition on account of undisclosed sale is correct in the above stated facts & circumstances. At the outset we find that the necessary details were submitted by the assessee before the learned CIT(A) justifying the difference in the form of a reconciliation statement which is part of the ld. CIT(A) order. The learned CIT(A) also called for the remand report from the AO on the submissions made by the assessee before him. The AO has not reported any adverse comment in its remand report. No material has been placed before us by the Revenue to controvert the findings of the impugned order of the CIT (A) and in that view of the matter we find no infirmity in the order of ld. CIT(A). Hence the ground raised by the Revenue is dismissed.

Next issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by AO for ₹16,45,428/- on account of inflated purchase by taking fresh evidence in violation of Rule 46A of the IT Rules.

During the course of assessment proceedings, AO observed a difference of ₹16,45,428/- between the purchased amount shown in the profit and loss account and the amount of purchase found on the basis of documents impounded at the time of survey i.e. (page 21) of LTPL-8. The difference of ₹16,45,428/- was treated by AO as inflated purchase and added the same to the total income of assessee. A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 9 20. Aggrieved, assessee preferred an appeal before ld. CIT(A) whereas assessee submitted the reconciliation statement which stand as under:- Statement of reconciliation of purchase. Rs. grand total of purchase register impounded 6,60,44,183.30 and considered by ld. AO Add: Total of purchase reg. from 27-03-08 to 37,71,769.00 31-03-08 (Annexure-G) Grand total of purchase reg. from 01-04-07 to 6,98,15,952.30 31-03-08 Less: A debit note adjustment of M/s Aarti (-) 6,404.00 Steel Ltd. (due to price enhancement) 6,98,22,356.30 Less: Input VAT included in purchase register (-) 22,27,644.71 Total of debit side of purchase a/c in general 6,75,94,711.59 ledger (posted month wise) Less: purchase of finished (-) 14,84,457.00 goods (-) 3,10,392.00 Purchase of packing materials (-) 8,08,967.43 Purchase of stores (-) 26,03,816.43 Purchase of raw mat. As per P/L A/c and purchase 6,49,990,895.16 A/c [Annexure-H] Add: purchase of finished goods (as observed by (+) 14,84,457.00 ld. Assessing Officer) Purchase of finished stores (s observed by ld. (+) 12,14,259.04 Assessing Officer) Total observed by the ld. Assessing Officer as total 6,76,89,611.20 of purchase from P/L a/c After considering the same Ld. CIT(A) deleted the addition made by AO for ₹16,45,428/- by observing as under:- “7. Regarding ground no. 4 relates to addition of Rs.16,45,428/- as difference in purchases s debited in P & L a/c and the computerized purchase register LTPL-8 impounded during survey on 27-03-2008 vide written submissions dt. 08-07-2011 the AR of assessee company submitted a reconciliation of purchase for two period i..e 01-04-2007 to 26-03-2008 and 27-03-2008 to 31- 03-2008 along with Annexure-G and H. o sow cause was issued to the assessee company by the AO to reconcile the above difference I have carefully examined the reconciliation statement along with Annexure G & H it is noticed that the purchase account stands reconciled. Therefore, the addition of Rs.16,45,428/- is deleted. Hence, ground no. 4 is allowed.” A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 10 Aggrieved by this, Revenue has come up in appeal before us.

We have heard the rival contentions and perused the materials available on record. The facts of the case have already been discussed in the aforesaid paragraphs. Now the crux of the issue for our adjudication is whether the action of ld. CIT(A) deleting the addition on account of inflated purchases is correct in the above stated facts & circumstances. At the outset we find that the necessary details were submitted by the assessee before the learned CIT(A) justifying the difference in the form of a reconciliation statement which is part of the ld. CIT(A) order and in the annexure G & H which are placed on pages 38 to 40 of the paper book. The learned CIT(A) also called for the remand report from the AO on the submissions made by the assessee before him. The AO has not reported any adverse comment in its remand report. No material has been placed before us by the Revenue to controvert the findings of the impugned order of the CIT (A) and in that view of the matter we find no infirmity in the order of ld. CIT(A). Hence the ground raised by the Revenue is dismissed.

Last issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition for ₹6,12,08,595/- on account of difference in closing stock by taking fresh evidence in violation of Rule 46A of the IT Rules.

During the course of assessment proceedings, AO observed that the difference of ₹6,12,08,595/- between the amount of closing stock shown in the profit and loss a/c and as shown in documents impounded at the time of survey i.e (page 3) of LTPL-8 which was disallowed and added to the total income of assessee. A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 11 25. Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that the reconciliation which stand as under:- Total as per Annexure-K (total of purchase item-wise Rs.6,34,24,928.62 and suppliers-wise) Add: stock purchased (unticked items of Annexure-J) Rs.11,34,797.68 Total of computerized stock summary Rs.6,45,59,726.30 (Rs.6,45,59,895)-Annexure-J Accordingly, Ld. CIT(A) deleted the addition made by AO by observing as under:- “8. Regarding ground no. 5 relates to addition of Rs.6,12,08,595/- under the head difference in stock as per page-155 of impounded documents in LIPL-8. The assessee had contended that computerized stock summery was not the value of closing stock as on 31-03-2008. The assessee had produced a statement in form of Annexure-K and Annexure-J (extended sheet) for the period 01-04-2007 to 31-03-2008 which is nothing but item-wise, supplier- wise purchase of various items. These Annexure-K tallies with the impounded document as above. In Annexure-J (extended sheet) purchases made are shown as receipts and after subtracting the material issued net purchases are arrived at which tallies with the purchased debited in the audited accounts, in its counter comments dated 11-11-2011 the assessee had stated that AO had misconceived the stock summary impounded at the time of survey since this annexure was item-wise annual purchase value from the day to day purchase entries entered in the software i.e summarized in Annexure-K. it was never the value of closing stock as held by AO as per Annexure-I submitted before AO the total stock as on 31-03-2008 was Rs.95,78,622/-. Keeping in view the above facts and circumstances and the reconciliation submitted addition of Rs.6,12,08,595/- is deleted since the computerized stock summary is not the closing stock but it gets generated from purchase register.”

Before us both parties relied on the order of Authorities Below as favorable to them.

We have gone through the submission made by both the sides and order of lower authorities along with the materials available on record. The facts of the case have already been discussed in the aforesaid paragraphs. Now the crux of the issue for our adjudication is whether the action of ld. A.Y 2008-09 ACIT Cir-10, Kol vs. Luna Tyres Pvt. Ltd. Page 12 CIT(A) deleting the addition on account of undisclosed closing stock is correct in the above stated facts & circumstances. At the outset we find that the necessary details were submitted by the assessee before the learned CIT(A) justifying the difference in the form of annexure I & J which are placed on pages 42 to 60 of the paper book. The ld CIT(A) also called for the remand report from the AO on the submissions made by the assessee before him. The AO has not reported any adverse comment in its remand report. No material has been placed before us by the Revenue to controvert the findings of the impugned order of the CIT(A) and in that view of the matter we find no reason to interfere with the findings arrived by the Ld. CIT(A). Under the circumstances, this issue of Revenue’s appeal is dismissed. Hence the ground raised by the Revenue is dismissed.