DCIT CIR 6(3) vs. M/S MODERN TERRY TOWELS,

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the orders of CIT(A) XXVI, Mumbai,dtd. 30.7.2003 and 31.7.2003,the AO has filed the appeals for the above mentioned two years.As the grounds raised in both the appeals are almost identical so,we are passing a single order to dispose them.The assessee company is engaged in the business of manufacture and export of textile goods.The details of filing of return etc. for both the AY.s can be summarised as under :- A.Y. ROI filed Returned Assessment dt. Assessed on Income(Rs.) Income(Rs.) 1998-1999 27.11.1998 (-)29.84 crores 30.03.2001 (-)21.38 crores 1999-2000 29.12.1999 25.70 crores 28.03.2002 19.55 crores 7279/Mum/2003-AY.1998-99: 2.First Ground of appeal is about allowing depreciation of Rs.2.69 Crores on fixed assets. During the assessment proceedings,the AO found that the assessee had claimed addition to block of fixed assets namely land(Rs.18.44 lakhs),building(Rs.661.71 lakhs), plant and machinery(P&M)(Rs.2,511.01 lakhs),furniture (Rs.4.93 lakhs) and vehicle (Rs.7.04 lakhs). He directed the assessee to furnish proof in support of addition made to fixed assets. As per the AO,the assessee furnished details of additions made to fixed assets,it did not produce bills and vouchers to the tune of Rs.75.14 lakhs in support of the addition to P&M, that P&M of Rs.25.11 crores were purchased after Sept.1997.After examining the details of addition to P&M,he held that most of the machinery, on which depreciation had been claimed,were shown under installation/under construction.Considering the fact that about 33

7279-80/M/03-Modern Terry Towel Ltd. items of P&M were described as under installation,the AO issued a further letter calling for further information in relation to addition made to the fixed assets.As per the AO the assessee submitted a self certificate,dt.7.2.2001,stating that it had made addition of Rs.25 Crores under the head P&M during the year.He asked the assessee as to why depreciation claimed on assets shown as under installation should not be disallowed.Assessee filed the details of capital work in progress.Finally,the AO held that the assessee had not produced any proof in support of its claim for addition to P&M, that it could not establish that the addition to P&M represented the capitalisation of work in progress,that it had failed to substantiate the claim made by it,that it had failed to prove that all assets were acquired, installed and utilised during the year.As a result,he made a disallowance of Rs.2.69 Crores(Rs.2.37 crores for P&M+ Rs.31.24 lakhs in respect of factory building).

3.Aggrieved by the order of the AO, the assessee filed an appeal before the First Appellate Authority(FAA).The assessee contended that the P&M and factory building were capitalised for the year under appeal,that same were not under installation, that when the expenses were incurred on P&M during construction period such expenses were debited in the books of account under the head P&M under installation, that when the P&M was ready and put to use it was transferred to the account of respective P&M from the under installation a/c.,that it had produced all the necessary bills,that the AO had disallowed depreciation on fixed assets on account of capitalisation out of opening WIP,on capitalization of pre-operative expenses and on account of assets purchased during the year,that the opening WIP had been accepted as such in the earlier AY.s,that depreciation could not be disallowed on same,that entire pre- operative expenses for the earlier year had been taken as the opening balance for the year under appeal,that the pre-operative expenses included interest on borrowed capital, that the pre-operative expenses incurred during the previous-years included interest on borrowed capital of Rs.713.41 lakhs,that out of total pre-operative expenses of Rs.828.38 lakhs the assessee had capitalised an amount of Rs.610.48 lakhs during the year under consideration, that the assessee was following the mandate of AS-10 and AS-16. After considering the available material,the FAA held that during the assessment proceedings the assessee had filed the details of addition to fixed assets,that bills,vouchers etc.thereof were furnished,that the AO had specifically asked certain bill to be produced before him,that vide its letter dtd.12.12.2000,that the assessee had filed those bills also,that the AO’s allegation that the assessee had not filed bills etc. was factually incorrect,that the assessee had 7279-80/M/03-Modern Terry Towel Ltd. capitalised the fixed asset from opening WIP which was accepted by AO in earlier year, that AO disallowed depreciation in earlier year on the amount of pre-operative expenses that were capitalized,that the sum capitalized was of Rs.610.48 lakhs, that the assessee had incurred pre-operatie expenses to the extent of Rs. 303.95 lakhs including interest on borrowed capital of Rs.2.28 crores,that the entire pre-operative expenses for the earlier year had been taken as opening balance for the year under appeal, that total pre-operative expenses for the AY.under consideration was of Rs.5.18 Crores,that it included interest on borrowed capital of Rs.4.85 Crores,that the total pre-operative expenses for the AY.s 1997-98 & 1998-99 was at Rs.822. 38Crores inclusive of interest on borrowed capital loss of Rs.7.13Crores, that out of the total pre-operative expenses of Rs.8.28 crores,the assessee had capitalised an amount of Rs.6.10 crores in AY 1998-99 and balance amount of Rs.2.11 crores was capitalised in subsequent year,that the assessee had not claimed interest on borrowed capital for the year under appeal, that while computing income for the respective year it had captalised interest on borrowed capital,that the AO was not justified in disallowing depreciation of Rs.2.69 Crores on fixed assets capitalised during previous year.

5.During the course of hearing before us,the Departmental Representative (DR) supported the order of AO and stated that the assessee had not produced bill/vouchers, that the AO had given sufficient opportunity in that regard.The Authorised Representative (AR) stated that assessee had furnished all necessary details during the course of assessment proceeding.

6.We have heard the rival submissions and perused the material before us, we find that the AO had disallowed an amount of Rs.8.10 crores under the head depreciation,that the FAA had upheld the disallowance of Rs.4.92 crores and Rs.3.80 lakhs under the heads P&M and building respectively,that the AO had made disallowance of Rs.2.69 crores in respect of fixed assets including P&M capitalised during the year under consideration, that vide its letters dt.12.12.2000 and 22.3.2001,the assessee had filed bills and vouchers of the P&M purchased,that the assessee had capitalised the fixed assets out of WIP that was accepted by AO in earlier year,that pre-operative expenses included expenditure incurred on account of interest on borrowed capital, that the assessee had not claimed interest on capital as per the provisions of section 36(iii) of the Act,that it had followed Accounting Standard issued by Institute of Chartered Accountants.In our opinion,once the AO had acceptes a particular figure for earlier years for an item then he should not make any addition in that regard in the 7279-80/M/03-Modern Terry Towel Ltd. subsequent year.We have perused the balance sheet as on 31.3.1998((pg-14 of the PB) and the figures of capital work in progress for the earlier year and the year under consideration. After considering the figures appearing in the balance sheet,we are opinion that order of FAA does not suffer from any legal or factual infirmity.From the books of accounts it is clear that WIP for the earlier year was given a particular treatment during the year under appeal as per the mandate of AS-10 and AS-16.Therefore,confirming the order of the FAA,we decide the first Ground of appeal against the AO.

7.The next Ground of appeal is about deleting addition of Rs.23.87 lakhs on account of making up charges (stitching charges) in contravention of Rule 46A of the Income tax Rules, 1962 (the Rules).During the assessment proceedings the AO made addition of Rs.23,87,927/- to the income of the assessee on the ground that the notices issued to 9 parties u/s. 133(6) of the Act remained unserved.

8.During the appellate proceeding before FAA,the assessee submitted that it had furnished details of making charges to AO along with confirmation from respective contractors, that with regard to non-service of notices it was mentioned that because of the earthquake in Gujarat the contractors had left their place of business and had gone to their native places, that it was brought to the notice of the AO that most of the payment above Rs.15,000/- were made by cheques and tax was deducted, that copies of TDS certificates were submitted to the AO. After considering the submission of the assessee and the assessment order, the FAA held that the assessee had discharged the onus cast upon it,that it had filed confirmation from all contractors including the 9 contractors for which the AO had made the addition, that the payment exceeding Rs15,000/- had been made by cheques.Finally, she deleted the addition made by the AO.

9.During the course of hearing before us, the DR left the issue to the discretion of the Bench. The AR supported the order of the FAA and stated that identical issue for the earlier year stands decided in favour of the assessee by the Tribunal, that the Hon'ble Bombay High Court had upheld the order of the Tribunal.

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10.We have heard the rival submissions.We find that the assessee had filed confirmations of all the contractors who had job-work for it,that payments were made by cheques where the amount was more than Rs.15,000,that Tax was deducted at source as per provisions of the Act,that the assessee had not produced any new evidence during the course of appellate proceedings.Therefore,the issue of producing of fresh evidence is not arising out of the order of the FAA.Only on that account the ground raised by the AO deserves to be dismissed. However,we have considered the merits of the issue also.We find that in the earlier year the Hon'ble Bombay High Court(357ITR750)had dealt with the similar issue.Facts of the case were narrated by the Hon’ble Court as under: “During the assessment year 1997-98,the assessee had claimed an amount of Rs. 1.16 crores as expenses under the head making up charges.During the assessment proceedings,the assessee was asked to furnish confirmation letters from the persons to whom the payment was made for making up charges. The assessee could not furnish confirmatory letters to the extent of Rs. 88.97 lakhs. Consequently, the Assessing Officer disallowed the expenditure to the extent of Rs. 88.97 lakhs and added it to the income of the assessee.The Tribunal held that the expenditure on account of making up charges had to be allowed. This was on the basis of a finding that payments were made by account payee cheques on bills raised by the contractor/job workers. Further, tax at source had also been deducted in respect of the payments for making up charges to the contractor/job workers. The Tribunal held that it was not necessary that in every case expenses were to be allowed only upon confirmation letters being filed from the recipients of the amounts especially, when the expenditure was backed by considerable evidence,including the registers maintained as per the requirement of the central excise authorities.” The Hon’ble Court decided the issue as under: “…..the finding of the Tribunal with regard to the making up charges was a pure finding of fact. The Tribunal on the basis of the evidence before it had rightly come to the conclusion that the amounts paid towards making up charges were genuine and allowed the expenses.” Respectfully following the above judgment of Hon'ble Bombay High Court,we dismiss Ground No.2 raised by the AO. ITA7280/Mum/2003-A.Y.1999-2000: 12.Ground Nos. 1-2,raised by the AO for the year under appeal,deal with allowing of depreciation of Rs.59.52 lakhs on fixed assets capitalized by the assessee.Following our order 5

7279-80/M/03-Modern Terry Towel Ltd. for earlier year(paragraph 6 of the order),we decide first two grounds against the AO,wherein we have adjudicated an identical issue.

13.Second effective ground of appeal

(GOA3-6)is about deleting disallowance of Rs.19.

57. Crores on account of bogus purchases from Ramnath Trading Pvt. Ltd. (RTPL) and Rutika Trading Pvt. Ltd.(Rutika).During the assessment proceedings the AO found that the assessee had purchased goods worth Rs.9.93 crores from RTPL and Rs.9.63 crores from Rutika. He directed the assessee to prove the genuineness of the transaction and to produce the parties. The AO directed the ward-inspector to gather information about both the parties.The Inspector opined that the transactions with RTPL and Rutika appeared to be bogus,that they were not capable of supplying the goods in such large volumes.After considering the report of the Inspector,the AO made an addition of Rs.19,57,29,000/- to the total income of the assessee,holding that the purchases made from RTPL and Rutika were not genuine.

14.During the appellate proceedings,before the FAA the assessee argued that all purchases were fully vouched and duly entered in stock register,that corresponding sales were appearing in stock register,that statutory auditors had audited the records maintained by the assessee,that quantative information was given in tax audit report,that the AO had not pointed out any defect or difference in the audit report,that both the suppliers were registered dealer under sales tax,that they had shown in the sales in their respective sales tax returns,that the confirmations from both parties was made available to AO and it included their permanent account numbers,that the assessee had purchased goods from both the parties in the AY.s.1995-96 and 2000-01,that the order for the AY.2000-01 was completed u/s. 143(3) of the Act, that the assessee had furnished the details of purchase of Rs.12.79 crores made from them,that the AO had accepted the entire purchase for that year,that the assessment for AY.1994-95 was reopened and purchases from RTPL and Rutika was treated genuine by the AO.Considering the available material the FAA held that the assessee had purchased goods from both the parties during the AY.s.1995-96 and 2000-01,that the AO did not doubt genuineness of purchases for those years that he was not justified in making the addition,that he should have brought evidence on record that goods were never received.Finally,she deleted the addition.

14.Before us the DR supported the order of AO and AR relied upon order of AO.We have heard the rival submission and perused the material before us.We find that in earlier and 6

7279-80/M/03-Modern Terry Towel Ltd. subsequent AY.s the assessee had purchased goods from same parties,that the AO had accepted the purchases from those parties as genuine in those assessment years while completing scrutiny assessments,that he has not brought anything on record that facts for the year under appeal were distinguishable from the facts of those years,that he had not doubted the sales made by assessee or rejected the books of accounts. In our opinion,if the AO accepts sales then purchases cannot doubted-because no sales can be made without purchases.It is found that assessee had filed the confirmation letters from the parties citing their PA No.s.Thus, the assessee had discharged the onus cast upon it with regard to genuineness of the purchases.It was the duty of the AO to prove details filed by the assessee were bogus.In the case under consideration,the AO had not proved that purchases made from RTPL and Rutika were not genuine.Therefore, we do not want to interfere with the order of the FAA. Second effective ground of appeal is decided against the AO.