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Income Tax Appellate Tribunal, DELHI BENCH “F” NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI L.P. SAHU
Assessee by: Shri P.C. Yadav, Adv. Department by: Shri Manoj K. Chopra, Sr. DR Date of hearing : 29 .09.2015 Date of pronouncement: 22 :12.2015 ORDER PER I.C. SUDHIR: JUDICIAL MEMBER These are the cross-appeals preferred by the parties against the common First Appellate Order. The assessee has impugned First Appellate Order on the following grounds: 1. On the facts and in the circumstances of the case, the Learned CIT(Appeals) has erred in confirming the order of A.O. wherein the A.O. has disallowed the sum of Rs.22,47,306 claimed by the assessee as Revenue expenses under various heads.
2 2. Learned CIT(Appeals) has failed to appreciate that similar nature of expenses were claimed by the assessee in the various years and no disallowance has ever been made from these expenses.
3. Learned CIT(Appeals) had erred in ignoring that under the new provision of sec. 36(1)(vii) of a bona fide write off of bad debt is sufficient to claim write off of bed debt and there is no need to prove the same.
Learned CIT(Appeals) had erred in ignoring that expenses under the head communication, house-keeping, festival, charity * donation and trade fair expenses were paid by a/c payee cheques and the assessee has also deducted TDS, where ever the provisions of TDS are applicable.
5. Learned CIT(Appeals) while affirming the disallowance completely overlooked that the A.O. has not provided sufficient opportunity to assessee for proving the genuineness of these expenses and has framed the assessment in an arbitrary manner.
6. Learned CIT(Appeals) has passed the appellate order in a hurried manner and erred in not remanding the matter to the A.O. for verification of the claim of the appellant vis-à-vis these expenses.
Learned CIT(Appeals) has also overlooked the ledger a/c. and has not asked any further explanation from the assessee during the appellate proceedings before passing the appellate order.”
We have heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
Ground Nos. 1 and 2: Out of the several expenses claimed by the assessee, the Assessing Officer disallowed following expenses basically on the basis that assessee had not tried evidence in support: a) Communication expenses: Rs.3,56,633 b) House-keeping expenses. Rs.3,03,232 c) Festival expenses Rs.2,16,855 d) Charity and donation exp. Rs.15,000
4. The assessee argued that the Assessing Officer did not provide sufficient opportunity on the basis that the assessment was going to be time barred. Regarding donation of Rs.15,000, the assessee claimed that such an expenditure was allowable under sec. 37. It was submitted that no such disallowances were made in previous years and subsequent years. The Assessing Officer thus did not satisfy with the submissions of the assessee disallowed all these expenses in total at Rs.12,36,096. The Assessing Officer also disallowed Rs.5,32,390 towards bad debts, Rs.4,34,380 and Rs.44,440 towards repair and maintenance of building and towards repair and maintenance of computers respectively. The Learned CIT(Appeals) has also confirmed the disallowances. Thus, the confirmed disallowances are as under: Confirmed: Communication exp. Rs.3,56,633 House-keeping Exp. Rs,3,03,232 Festival Exp. Rs.2,16,855 Charity & Donation Exp. Rs. 15,000 Trade fair expenses Rs.3,44,376 4 Bed debts written off Exp. Rs.5,32,390 Repair and maintenance Exp. on Rs.4,34,380 Building.
Repair & maintenance exp. Rs. 44,440 on computed.
In support of the grounds, the Learned AR submitted that before the Assessing Officer, sufficient time was not provided to present the case of the assessee with the evidence in support. He submitted that similar nature of expenses were claimed by the assessee in previous year and no disallowance has ever been made from these expenses.
The Learned CIT(Appeals) has also ignored that under the new provisions of sec. 36(1)(vii), a bona fide right off of bad debts is sufficient to claim right of and there is no need to prove the same. The Learned CIT(Appeals) has also erred in ignoring the expenses under the head “communication, house-keeping, festival, charity and donation and trade fair expenses which were paid by account payee cheques and the assessee had also deducted TDS, wherever the provisions of TDS were applicable. The Learned CIT(Appeals) has also affirmed the disallowances made by the Assessing Officer in hurried manner and without calling for remand report from the Assessing Officer for verification of the claim of the assessee vis-à-vis these expenses. The Learned CIT(Appeals) also overlooked the ledger account and has not asked any further explanation from the assessee during the appellate proceedings. The Learned AR submitted that 5 sufficient evidences were there to support the claimed expenses regarding the disallowance of bad debts written off, the Learned AR cited the decision of Hon'ble Supreme Court in the case of T.R.F. Ltd., 323 ITR 297 (S.C) holding that a bona fide right off of the bad debt is enough to treat the amount as dead. Under the new provisions of law, the only aspect is as to whether the amount of bad debts was offered for taxation in earlier years is crucial but unfortunately the lower authorities below did not bother themselves to look into this aspect. He submitted that books of account of the assessee are audited which have been accepted by the Assessing Officer as correct. Merely because some vouchers were not produced by the assessee that ipso facto could not prove that the expenses were bogus or not incurred for the purpose of business. He submitted further that assessee had paid FBT on communication and festival expenses as it was evident from the FBT return and other documents. In support, he referred page Nos. 51 item No. 12, page No. 65 item No. 14 of the paper book which are in relation to FBT return on communication and festival expenses. In this regard, he also placed reliance on the decision of Delhi Bench of the ITAT in the case of Hansraj Mathura Dass vs. ITO in holding that once FBT is deduction on some expenses then purpose test is not necessary for the allowance of an expense regarding trade fair expenses he referred page No. 67 of the paper book showing that substantial payments were made by cheques to Indian Trade Promotion Organization, A Govt. of India organization.
6 Regarding expenses incurred on house-keeping, the Learned AR referred pave No. 63 and 64 of the paper book with the submission that substantial amount of payments have been made by cheque after deduction of TDS on these amounts. He submitted further that Assessing Officer has not doubted the genuineness of the expenses claimed on repair and maintenance as he has allowed depreciation on these expenses. Regarding the nature of thee expenses, the Learned AR submitted that no new assets has come into existence and the expenses are incurred for repairing the old assets for the smooth running of business. In support, he cited the decision of Hon'ble Supreme Court in the case of Alemic Chemical Works Co. Ltd. vs. CIT (1989) – 177 ITR 377 (S.C) and of Hon'ble Delhi High Court in the case of Delhi Press Samachar Patra Pvt. Ltd. – 322 ITR 590 (Del.).
The Learned AR submitted further that assessee was in possession of huge losses, therefore, it can be safely assumed that no prudent person will claim expenses on higher side to enhance the accumulated losses.
Consumption of law material of worth Rs.85.67 lacs has been accepted by the Department and hence it is not permissible to disallow certain expenses merely because certain vouchers were not produced.
The Learned Senior DR on the other hand placed reliance on the orders of the authorities below. He submitted that every assessment year is an independent unit, hence, it would be of no help to the assessee in saying that similar expenses were allowed in other 7 assessment years. He submitted that the bills were not produced in support of the claimed expenses and so far as the claim of bad debts is concerned, the assessee failed to establish that it was part of Revenue expenses. He submitted that the decisions relied upon by the Learned AR are having different facts and are thus not relevant.
7. Considering the above submission, we find that the Learned CIT(Appeals) has simply upheld the disallowances made by the Assessing Officer, the assessee has filed copies of those documents filed before the Assessing Officer made available at page No.51 to 201 of the paper book besides audited accounts for the financial years ended 31.3.2007, 31.3.2006 and 31.3.2005. These were also filed before the Learned CIT(Appeals). We prima facie find substance in the above contentions of the Learned AR that submissions of the assessee made in support of the claimed expenses have not been properly considered in view of the documents filed in support of these claims. For instances, the assessee had paid FBT on communication and festival expenses, trade fair expenses have been made by cheque to a Government of India organization i.e. Indian Trade Promotion organization, expenses incurred on house-keeping have been paid by cheque after deduction of TDS, the Assessing Officer has not doubted the genuineness repair and maintenance expenses as he himself has allowed depreciation on these expenses, and the claimed bad debt has been written off in the books of account. We thus in the interest of 8 justice set aside the matter to the file of the Assessing Officer to verify the above claim in view of the submissions of the assessee supported with evidence and decide the issue afresh after affording opportunity of being heard to the assessee. These grounds are thus allowed for statistical purposes.
In result, the appeal is allowed for statistical purposes.
Appellate Order on the sole ground that the Learned CIT(Appeals) has erred in not upholding the action of the Assessing Officer in determining long term capital gains earned from slum sales at Rs.2,94,29,272 as against Rs.1,58,72,901 admitted to by the assessee, by ignoring and not adjudicating entirely on merits the contentions of the Assessing Officer in the assessment order.
Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
The facts in brief are that the Assessing Officer determined long term capital gain at Rs.2,94,29,272 against Rs.1,58,72,901 (revised) declared by the assessee towards long term capital gains in respect of slump sales under sec. 50B of the Act. The Assessing Officer observed that as per report under sec. 50B(3) and computation of income filed by the assessee along with letter dated 28,.9.2009, the amount of sales consideration receipts from slump sales was shown at Rs.3 crores only, whereas the actual amount as per copy of slump sales agreement 9 submitted by the assessee should have been Rs.3 crores + value of net current assets (excluding cash in hands) and bank balance and advance recoverable from government) as per closing balances. The Assessing Officer observed further that computation of income filed by the assessee reveals that the total value of net current assets and WDV of fixed assets transferred are taken as Rs.1.85 crores and Rs.72,70,728 respectively for the purpose of determining the long term capital gains and after deducting them amounts from Rs.3 crores, the long term capital gain of Rs.41,50,800 has been determined. Vide letter dated 29.12.2009 in response to letter dated 15.12.2009 issued by the Assessing Officer, the assessee while accepting the mistake requested the Assessing Officer to frame the assessment taking into account long term capital gain at Rs.1,58,72,901 in place of Rs.41,50,800 as claimed earlier in the computation of income.
The Assessing Officer noted from the details filed by the assessee vide its letter dated 29.12.2009 that long term capital gain recomputed by the assessee at Rs.1,58,72,901 was after taking the value of sales consideration at Rs.4,18,07,661 which included, Sales consideration as mentioned in Rs. 3,00,00,000 the agreement + Value of financial assets on cost basis Rs.1,18,07,661 Total sales consideration
Rs.4,18,07,661
The Assessing Officer noted that assessee had calculated the value of financial assets of Rs.1,18,07,661 after reducing the value of raw material of stock amounting to Rs.68,56,371 from the value of net current assets. However, as per copy of slump sales agreement, only cash in hand and bank balance and advances recoverable from government were to be excluded. The Assessing Officer noted that it is no where written in sale agreement and addendum filed by the assessee that stock is to be excluded while determining the value of sales consideration. He noted further that in the addendum slump sale agreement, the effective date of transaction was taken as 31.1.2007 in place of 31.12.2006 as per original slump sales agreement. The Assessing Officer noted that the date of execution of the said addendum was not written in the copy of the addendum slump sales agreement filed by the assessee vide letter dated 29.12.2009. The Assessing Officer asked the assessee to furnish the original addendum slump sale agreement to which the assessee showed its inability to produce. The Assessing Officer noted that the said addendum was filed by the assessee only after query raised vide order sheet entry dated 15.12.2009 regarding submissions of balance sheet and profit and loss account as on 31.12.2006 and 01.01.2007, which were the effective date of transaction as per the original slump sale agreement.
Under these circumstances, the Assessing Officer concluded that the value of net current assets was Rs.1,85,78,472 which the assessee itself 11 had taken while computing long term capital gain in a statement showing computation of total income and after taking the same, the total sales consideration comes to Rs.4,85,78,472 which was Rs.3 crores plus value of net current assets (excluding cash in hand and bank balance and advances recoverable from government) as per closing balance sheet, in place of Rs.3 crores as taken by the assessee.
The Assessing Officer accordingly recomputed long term capital gain as under:
Total sales consideration Rs.4,85,78,472 (Minus) WDV fixed assets Rs.72,70,728 (Minus) net current assets Rs.1,18,78,472 Rs.1,91,49,200 Rs.2,94,29,272
The Assessing Officer thus has determined long term capital gain at Rs.2,94,29,272 on account of slump sales. The Learned CIT(Appeals) has, however, not approved the action of the Assessing Officer, which has been questioned by the Revenue before us.
In support of the grounds, the learned Senior DR has placed reliance on the assessment order. He submitted that the Learned CIT(Appeals) has failed to appreciate that money paid on account of inventory as per slump sales agreement was also to be taken in consideration. The Learned CIT(Appeals) has, however, reduced this amount from consideration.
The Learned AR on the other hand tried to justify the First Appellate Order. He has summarized the position of capital gains on slump sales as under:
As per original return As revised As per & taken by the A.O. by the assessment for arriving at the assessee order (taken figure of Sale during asst. for Consideration. (Actual computing figures as per Net current balance sheet assets) as on 31.01.2007) Sales 3,00,000 4,18,07,661 4,85,78,472 consideration Less: 72,70,728 72,70,728 72,70,728 WDV of Fixed assets Current Assets- Inventories 68,56,371 68,56,371 - Debtors 97,82,975 97,82,975 97,82,975 Advances 48,91,052 50,34,867 50,47,424 recoverable 2,15,30,398 2,16,74,213 1,48,30,399 Current liabilities Sundry 19,69,677 20,27,932 19,69,677 Creditors Provision for 9,82,249 9,82,249 9,82,249 Gratuity 29,51,926 30,10,181 29,51,926 Net Current 1,85,78,472 1,86,64,032 1,18,78,473 Assets Capital 41,50,800 1,58,72,901 2.94,29,271 Gains 13 17. Considering the above submission, we find that the Learned CIT(Appeals) has dealt with the issue in detail meeting out the cases of the parties and has come to the following conclusions: “6. I have gone through the assessment order and the detailed written submissions in this regard.
7.1 The appellant company was engaged in the business of manufacturing and sale of shoe lasts. During the year the appellant company has transferred its shoe lasts manufacturing business as a going concern 'as is where is' by way of slump sale.
7.2 For the aforesaid 'purpose the appellant had entered into a slump sale agreement dated 23.01.2007 and an addendum slump sale agreement dated 20.02.2007 with Mls Toscana Footwear components Limited.
7.3 As per the aforesaid agreements and the addendum thereto, the purchaser acquired the entire business undertaking of the seller situated at E-6,7,8, sector 59, District Gautam Budh Nagar (Noida) UP pertaining to manufacturing, sale and distribution of shoe lasts with all assets (excluding land &Buildings) & Liabilities and past arrears of taxes (excluding property taxes), charges, levies, outstanding dues or claims, benefits and Zor liabilities under pending cases.
7.4 Thus, the purchaser acquired the "business" by way of slump sale along with all assets and liabilities (excluding land, Buildings, Investments and past arrears of taxes) with continuity of the services of all the employees as a going concern at the closing date i.e 31.01.2007.
7.5 In consideration thereof, the purchaser was required to pay Rs.3 crores towards the cost of business. In addition to the above, the purchaser was also required to pay a sum equivalent to value of net current assets excluding cash in hand and bank balance and advance recoverable from Govt. as per the closing balance sheet as on 31.01.2007.
7.6 The purchaser i.e. Mls Toscana Footwear components Limited recorded the transaction of the purchase of business at Rs.4, 18,07,6611-.
7.7 The appellant company had also recorded the sale of the business at Rs.4,lS,07,661j-. The breakup of the sale consideration is as under.-
Amounts (Rs.) Particulars Fixed Assets 2,37,92,6701- Inventory 62,07,3301- 3,00,00,0001- Other Current Assets as on 31.03.07 Advances to employees 21,00,353/- Advances to Suppliers 7,03,0221- Debtors 97,82,975/- Advance to Mzs Toscana Footwear 22,31,4921- 1,48,17,842/- components Ltd Other Current Liabilities as on 31.03.07 Sundry Creditors 4,42,815/- Advances from customers 2,73,198/- Provision for Gratuity 9,82,249/- Liability for expenses 13,11,919/- (30,10,1811-) Net Sales Consideration 4,18,07,6611- 7.8 However at the time of filing the Return of Income the appellant company on the basis of the Form 3CEA i.e Report of an accountant under Section SOB (3) relating to computation of Capital Gains in case of Slump Sale returned Capital gains ujs SOB at Rs.41,50,SOOj-. In the course of Assessment proceedings the appellant company revised the computation of Capital Gain which is as under:
Particulars Amount (Rs.) Sale Consideration 4,18,07,6611- Less:- Net worth of the undertaking WDV of Fixed assets 72,70,728/- Value of net current assets 1,86,64,032/- 2,59,34,7601- Net Long Term Capital Gains 1,58,72,9011- 7.9 Value of the net current assets has been worked out as under:-
Book value as on 31.01.07(Rs.) Inventories 68,56,371 Debtors 97,82,975 Advances recoverable 50,34,867 (A) 2,16,74,213 Sundry Creditors 20,27,932 Provision for Gratuity 9,82,249 Total Current Liabilities (B) 30,10,181
Net Current assets transferred (A-B) 1,86,64,032 7.10 The AO computed the LTCG is] s 50B as under:- Particulars Amount (Rs.) Sale Consideration 4,85,78,472/- Less:- Net worth of the undertaking WDV of Fixed assets 72,70,728/- Value of net current assets 1,18,78,472/- 1,91,49,200/- Net Long Term Capital Gains 2,94,29,272/-
7.11 The assessee has taken Rs. 4,18,07,661/- as sale consideration, the breakup of which is as under: 3,00,00,000/- Sale consideration as mentioned in the agreement Plus Value of Financial assets on the cost basis 1,18,07,661/- Total Sale consideration 4,18,07,661/- ·7.12 However, the AO has taken sale consideration at Rs. 4,85,78,472/- the break up which is as under: Total Sale Consideration 4,85,78,472/- (Minus) WDV of fixed assets transferred 72,70,728 (Minus) Net current assets 1,18,78,4 72/- l,91,49,200/- 2,94,29,272/ 7.13 The main contention of the AR is that the consideration received was only Rs.4,18,07,661/-. Nothing more than what was recorded in the books of account was received. The AR has drawn my attention to the ’Notes to accounts' in the Auditors Report as on 31.03.2007 in the case of appellant which reads as under: . "( c) The Company has sold its entire business operations except Land and Building to Toscana Footwear Components Limited with effect from 1st February 2007 at value of Rs. 4,18,07,6611- as per the Slump Sale Agreement. "
7.14 The same is reflected in the Books of account of the buyer i.e. M/s Toscana Footwear Components Limited. My attention has been dr-awn to 'Notes to account' of the Auditors Report as on 31.03.07 - in the C3 se of M/ s Toscana Footwear Components Limited - which reads as under: "(b) The company has purchased entire business from Toscana Lasts Limited for Rs. 41,807,661/- with effect from 1st February 2007 under Slump Sale Agreement."
7.15) The AO cannot tax an amount of Rs. 67,70,811/-(4,85,78,472- 4,18,107,661) on notional basis. There is no evidence to suggest that the assessee was in receipt of more than what was declared. In thecase M.P. Ramachandran vs. DCIT 32 SOT 592 (Mum), it was held that no hypothetical exercise is permissible to declare an income as accrued. Accordingly, the AO is hereby directed to accept the Sale consideration returned by the assessee. ! ' r : 7.16 The AO has not given any basis for determining the cost of net current assets at Rs. 1,18,78,472/- in place of 1,86,64,032/- adopted by the asseesee. It is not clear as to why the value of net current assets of Rs. 1,85,78,472/- (which was taken into account while determining the sale consideration) was not given due credit while reducing the value of net current assets. It has led to taxing the amount of Rs. 67,00,000/- (1,85,78,472 - 1,18,78,472) twice. Hence, the action of the AO is not approved.”
Hereinabove, we have already discussed the facts of the case. The only issue involved in the ground is as to whether the value of long term capital is Rs.2,94,29,272 as computed by the Assessing Officer or Rs.1,58,72,901 as computed by the assessee. The assessee had furnished document in support of its claim. The Assessing Officer has included cost of acquisition (inventories under current assets at Rs.68,56,371) in the sales consideration ignoring that the amount is cost of acquisition of the inventories and not the sale value of inventories. It is very much evident from the slump sales agreement made available at page Nos. 55 and 58 of the paper book. The Assessing Officer while arriving at the figure of sales consideration has also adopted the figure of advances as reflected originally.
He has taken lesser amount of advances (Rs.1,43,851). The assessee had also furnished the reasons for difference in net current assets. The Assessing Officer on one hand has enhanced the figures of sales consideration from Rs.4,18,07,661 to Rs.4.85 crores by including the book value of inventory in sales consideration and on the other hand while computing long term capital gain, he has not reduced the cost of acquisition of inventories from value of considerations received attributable to inventories, which is apparently a wrong approach on the part of the Assessing Officer. The Assessing Officer was of the view that the assessee has separately received extra amount of inventory along with sales consideration and the assessee was not entitled for the credit of cost of acquisition of inventory while computing long term capital gain. The Assessing Officer has completely overlooked that the sales consideration of Rs.3 crores consisted the amount of inventory which fact was evident from the slump sales agreement. Besides, the audited results of the assessee and the buyer both were showing the amounts of Rs.4,18,07,661 as sales consideration received and paid. The Learned CIT(Appeals) after discussing the respective cases of the parties has thus come to the conclusion that the value of sales consideration at Rs.4,86,64,032 adopted by the Assessing Officer was without any material. Under the facts and circumstances of the case as discussed in detail hereinabove, we fully concur with this finding of the Learned CIT(Appeals). The same is upheld. The ground is accordingly rejected.
In result, the appeal is dismissed.
In summary, appeal preferred by the assessee is allowed for statistical purposes and that of the Revenue is dismissed.
Order pronounced in the open court on 22.12.2015