DCIT, NEW DELHI vs. M/S. PRASHA TECHNOLOGIES LTD., NEW DELHI

PER S.V. MEHROTRA, A.M..:

This appeal, preferred by the revenue, is directed against the order dated 30-09-2013, passed by the ld. CIT(A)-XVII, New Delhi in appeal no. 441/11-12, relating to A.Y. 2009-10.

2 ITA no. 6649/Del/2013 Prasha Technologies Ltd. its factory located at Manesar and Faridabad, Haryana. The assessee filed return of income declaring income at Rs. 6,61,79,559/-. The assessment was completed at a total income of Rs. 7,12,13,320/-, as under: Net profit as per computation of income submitted by the assessee Rs. 68179558/-

Add: i) Depreciation Rs. 1127512/- ii) Provisions Rs. 1500000/- iii) Capital expenditure Rs. 406250/- Assessed Income Rs. 71213320/-

revenue is in appeal before us and has taken following grounds of appeal:

3 ITA no. 6649/Del/2013 Prasha Technologies Ltd. 4. Brief facts of the case, apropos ground no. 1, are that during the year the assessee had claimed depreciation of Rs. 1,60,29,748/-, which, inter alia, included claim of depreciation of Rs. 11,27,512/- on the addition to fixed assets aggregating to Rs. 2,25,50,237/-, being 5% of the acquired value. The AO has observed that assessee did not file any details in respect of these additions to the building. He further noted that the addition had been made to the building on 31-3-2009 i.e. the last day of the financial year. The AO disputed the user of the building because assessee had not submitted the details and copies of the bills to the addition to the building. He, accordingly, disallowed the claim of depreciation of Rs. 11,27,512/-. 5. As regards the addition of Rs. 4,06,250/-, the AO has observed that the assessee had claimed legal and professional expenses amounting to Rs. 33,92,741/-. On verification of the details submitted by the assessee, he concluded that assessee had debited certain expenses, which were capital in nature, having long term ramifications for the business of the assessee. He has given details of such expenses as under: Date Amount Description 2.5.2008 40000 ISO certificate b 22.11.2008 70000 Certification audit ISO 24.11.2008 10000 ISO certificate 31.3.2009 68000 Consultancy for fire fighting system installation 19.1.2009 212000 Assistance rendered in search and selection 29.1.2009 6000 For property valuation in Gr. Noida 5.3.2009 64000 Installing EMS ISO14001 & QMS, ISO9001: 2008

4 ITA no. 6649/Del/2013 Prasha Technologies Ltd. 7. As regards disallowance of depreciation, before ld. CIT(A), the assessee, inter alia, submitted as under: “It is submitted that during the course of proceedings the A.O. asked the assessee to provide copies of the additions to the fixed assets. The assessee filed copies of all the fixed assets except building. In the course of the proceedings the assessee company filed a copy of the application made to HSIIDC, Manesar, Dist. Gurgaon for permission to occupy the building duly supported by the architect's certificate stating that the building was completed on 21.03.2009. Copy of the same is enclosed. The assessee also applied to the Central Excise Authority III, Range XIII, Gurgaon on 24.03.2009 which was acknowledged by the Excise Authorities on 25.03.2009. A copy of the acknowledgment of the letter is enclosed. The assessee had started use of the building and work was carried out in the building. The power connection, it was sanctioned for he earlier building was more than enough for both the buildings and even now no further power load has been asked for by the company.” 8. Ld. CIT(A), after considering these details and the Architect’s certificate, which stated that the building was completed on 21-3-2009, deleted the disallowance. 9. As regards Rs. 4,70,000/-, out of legal and professional expenses, treated as capital in nature, the assessee submitted before ld. CIT(A) as under: “a) The factories of the company are ISO compliance units. The assessee company has to pay to the authority annual fee for the renewal of these certificates. An audit is carried out before the certificate is renewed. This type of expenditure is a revenue expenditure and is not of any enduring benefit. These certificates are for a period of one year only and they are renewed every year.

5 ITA no. 6649/Del/2013 Prasha Technologies Ltd. In this respect we rely on the following case laws CIT vs. Infoys Technologies Ltd. 349ITR 582 & CIT vs. Perot Systems TSI (India) Ltd. 349ITR 563 Delhi. In the above cases it has been clearly held that this type of expenditure is allowable expenditure. The amounts spent on ISO certificate is Rs.50,000/- and for the audit Rs.70,000/-.

b) A sum of Rs. 68,000/- was spent for carrying out a drill on account of fire fighting training to the staff. The amount was paid to Fire Safety Services. This payment is actually on an account of training given to the staff for use of fire fighting. This amount has not been paid for consultancy for firefighting system installation but for training the staff from time to time for the use of firefighting equipment. c) The assessee engaged the services of Omam Consultants Pvt. Ltd. for the search and selection of the staff payment is not on account of any capital expenditure but the assistance rendered for the selection of the staff for the organization.

d) A sum of Rs.6000/- was paid to S.I. Dheer for preparing valuation report for the property situated at G-1, Industrial Area, Sonipat, Haryana. The company had planned to establish a factory at the said place but the plan did not materialize and the co. did not purchase the land. e) A sum of Rs 64,000/- was paid to Aastha Business Catalysts for 1SO-14001 & QMS-1SO-9001. This is yearly fee paid to the said organization. The above payments are duly supported by the vouchers which are enclosed and on which tax has, been deducted before payment of the amount.”

6 ITA no. 6649/Del/2013 Prasha Technologies Ltd. 11. The main grievance of the department is that ld. CIT(A) admitted the additional evidence in respect of both the disallowances discussed above, without giving opportunity to the AO for necessary comments, which is in contravention of Rule 46A(3). Ld. DR has relied on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Manish Build Well Pvt. Ltd. rendered in ITA no. 928/2011 dated 15-11-2011, wherein it has been, inter alia, held as under: “22. As we have with the consent of the learned counsel, heard them on merits, we proceed to decide the aforesaid substantial questions of law. Since the CIT (A) himself refers to Rule 46A and has also admitted that the confirmation letters adduced by the assessee before him were technically fresh evidence, it is not possible to accept the plea of the learned counsel for the assessee that the CIT (A), in examining the confirmation letters, was exercising his independent powers of enquiry under sub- Section (4) of Section 250 of the Income tax Act. It is true that the CIT (A) as first appellate authority has conterminous powers over the sources of income constituting the subject matter of the assessment, except the power to tackle new sources of income not considered by the Assessing Officer, and can do what the Assessing Officer can do and can direct the Assessing Officer to do what he has failed to do, as held by the Supreme Court in the case of Commissioner of Income-Tax, U.P. v. Kanpur Coal Syndicate, (1964) 53 ITR 225, but in this case, the CIT (A) did not exercise this right. This power, which is recognized in sub-Section (4) of section 250, has to be exercised by the CIT (A) and there should be material on record to show that he, while disposing of the appeal, had directed further enquiry and called for the confirmation letters from the assessee even in respect of receipt of monies from customers by way of cheques. Rule 46A is a provision in the Income Tax Rules, 1962 which is invoked, on the other hand, by the

7 ITA no. 6649/Del/2013 Prasha Technologies Ltd. assessee who is in an appeal before the CIT (A). Once the assessee invokes Rule 46A and prays for admission of additional evidence before the CIT (A), then the procedure prescribed in the said rule has to be scrupulously followed. The fact that sub-Section (4) of Section 250confers powers on the CIT (A) to conduct an enquiry as he thinks fit, while disposing of the appeal, cannot be relied upon to contend that the procedural requirements of Rule 46A need not be complied with. If such a plea of the assessee is accepted, it would reduce Rule 46A to a dead letter because it would then be open to every assessee to furnish additional evidence before the CIT (A) and thereafter contend that the evidence should be accepted and taken on record by the CIT (A) by virtue of his powers of enquiry under sub-Section (4) of Section 250. This would mean in turn that the requirement of recording reasons for admitting the additional evidence, the requirement of examining whether the conditions for admitting the additional evidence are satisfied, the requirement that the assessing officer should- be allowed a reasonable opportunity of examining the evidence etc. can be thrown to the winds, a position which is wholly unacceptable and may result in unacceptable and unjust consequences. The fundamental rule which is valid in all branches of law, including Income Tax Law, is that the assessee should adduce the entire evidence in his possession at the earliest point of time. This ensures full, fair and detailed enquiry and verification. A 7-Judge Bench of the Supreme Court in Keshav Mills Co. Ltd. v. Commissioner of Income- Tax, Bombay North, Ahmedabad (1965) 56 ITR SC 365 had observed as under:- "Proceedings taken for the recovery of tax under the provisions of the Act are naturally intended to be over without unnecessary delay, and so, it is the duty of the parties, both the department

8 ITA no. 6649/Del/2013 Prasha Technologies Ltd. and the assessee, to lead all their evidence at the stage when the matter is in charge of the Income-tax Officer." 23. It is for the aforesaid reason that Rule 46A starts in a negative manner by saying that an appellant before the CIT (A) shall not be entitled to produce before him any evidence, whether oral or documentary, other than the evidence adduced by him before the assessing officer. After making such a general statement, which is in consonance with the principle stated in the above judgment, exceptions have been carved out that in certain circumstances it would be open to the CIT (A) to admit additional evidence. Therefore, additional evidence can be produced at the first appellate stage when conditions stipulate in the Rule 46A are satisfied and a finding is recorded. Rule 46 A reads:- "Production of additional evidence before the [Deputy Commissioner (Appeals)] [and Commissioner (Appeals)]. 46A. (1) The appellant shall not be entitled to produce before the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)], any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the [Assessing Officer], except in the following circumstances, namely: (a) where the [Assessing Officer] has refused to admit evidence which ought to have been admitted; or (b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the [Assessing Officer] ; or (c) where the appellant was prevented by sufficient cause from producing before the [Assessing Officer] any evidence which is relevant to any ground of appeal; or

9 ITA no. 6649/Del/2013 Prasha Technologies Ltd. (d) where the [Assessing Officer] has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal. (2) No evidence shall be admitted under sub-rule (1) unless the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] records in writing the reasons for its admission. (3) The [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] shall 'not take into account any evidence produced under sub-rule (1) unless the [Assessing Officer] has been allowed a reasonable opportunity (a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or (b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant. (4) Nothing contained in this rule shall affect the power of the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the [Assessing Officer]) under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271.] We are highlighting these aspects only to press home the point that the conditions prescribed in Rule 46A must be shown to exist before additional evidence is admitted and every procedural requirement mentioned in the Rule has to be strictly complied with so that the Rule is meaningfully exercised and not exercised in a routine or cursory manner. A distinction should be recognized and maintained between a case where the

10 ITA no. 6649/Del/2013 Prasha Technologies Ltd. assessee invokes Rule 46A to adduce additional evidence before the CIT (A) and a case where the CIT (A), without being prompted by the assessee, while dealing with the appeal, considers it fit to cause or make a further enquiry by virtue of the powers vested in him under sub-Section (4) of Section 250. It is only when he exercises his statutory suo moto power under the above sub-section that the requirements of Rule 46A need not be followed. On the other hand, whenever the assessee who is in appeal before him invokes Rule 46A, it is incumbent upon the CIT (A) to comply with the requirements of the Rule strictly. 24. In the present case, the CIT (A) has observed that the additional evidence should be admitted because the assessee was prevented by adducing them before the assessing officer. This observation takes care of clause (c) of sub-rule (rj-of Rule 46A. The observation of the CIT (A) also takes care of sub-rule (2) under which he is required to record his reasons for admitting the additional evidence. Thus, the requirement of sub-rules (1) and (2) of Rule 46A have been complied with. However, sub-rule (3) which interdicts the CIT (A) from taking into account any evidence produced for the first time before him unless the Assessing Officer has had a reasonable opportunity of examining the evidence and rebut the same, has not been complied with. There is nothing in the order of the CIT (A) to show that the Assessing Officer was confronted with the confirmation letters received by the assessee from the customers who paid the amounts by cheques and asked for comments. Thus, the end result has been that additional evidence was admitted and accepted as genuine without the Assessing Officer furnishing his comments and without verification. Since this is an indispensable requirement, we are of the view that the Tribunal ought to have restored the matter to the CIT (A) with the direction to him to comply with sub-

11 ITA no. 6649/Del/2013 Prasha Technologies Ltd. rule (3) of Rule 46A. In our opinion and with respect, the error committed by the Tribunal is that it proceeded to mix up the powers of the CIT (A) under sub- section (4) of Section 250 with the powers vested in him under Rule 46A. The Tribunal seems to have overlooked sub-rulefa) of Rule 46A which itself takes note of the distinction between the powers conferred by the CIT (A) under the statute while disposing of the assessee's appeal and the powers conferred upon him under Rule 46A. The Tribunal erred in its interpretation of the provisions of Rule 46A vis-a-vis Section 250(4). Its view that since in any case the CIT (A), by virtue of his conterminous powers over the assessment order, was empowered to call for any document or make any further enquiry as he thinks fit, there was no violation of Rule 46A is erroneous. The Tribunal appears to have not appreciated the distinction between the two provisions. If the view of the Tribunal is accepted, it would make Rule 46A otiose and it would open up the possibility of the assessees' contending that any additional evidence sought to be introduced by them before the CIT (A) cannot be subjected to the conditions prescribed in Rule 46A because in any case the CIT (A) is vested with conterminous powers over the assessment orders or powers of independent enquiry under sub-section (4) of Section 250. That is a consequence which cannot at all be countenanced. 12. Ld. counsel for the assessee pointed out that as far as disallowance of Rs. 4,70,000/-, treating the same as capital expenditure by the AO is concerned, the AO does not dispute submission of details and, therefore, no fresh evidence was admitted by the ld. CIT(A).

13 Having heard both the parties, we find that as far as deletion of disallowance of depreciation by ld. CIT(A) is concerned, it is evident from

12 ITA no. 6649/Del/2013 Prasha Technologies Ltd. the submissions made before ld. CIT(A), reproduced earlier, that ld. CIT(A) did take into consideration the additional evidences and, therefore, in view of the decision of Hon’ble Delhi High Court in the case of CIT Vs. Manish Build Well Pvt. Ltd. (supra), the matter needs to be restored to the file of AO to examine the details afresh.

“The assessee company had applied to the Central Government for the Increase in Y remuneration of the Managing Director in October 2008. The increase in remuneration was applied for the period 01.04.2008 to 31.03.2010. A copy of the resolution

13 ITA no. 6649/Del/2013 Prasha Technologies Ltd. passed by the Extra Ordinary General meeting held on 16.10.2008 is enclosed. The Central Government on 31.07.2009 approved the remuneration of the managing director. Therefore, as on 31.03.2009 the company had provided for Rs.15,00,000/- i.e. increased remuneration from Rs.37,72,977/-. After taking into account a sum of Rs.15,00,000/- the total remuneration amounted to Rs.52, 72, 977/-. The Central Government sanctioned the increase in the remuneration to Rs. 59, 15,604/-. A copy of the sanction of Government of India is enclosed. In the subsequent year the provision of salary which was made on 31.03.2009 was paid and tax was deducted at source. The assessee is following mercantile system of accounting and, therefore, the provision had to make for the increase in remuneration passed by the shareholders but the amount was paid till the sanction of the Central Government was received. Attention is invited to the debate on the Finance Bill, 1968 wherein it was specifically laid down that where the scale of remuneration of directors is approved by Company Law Administration, there will be no question of disallowance of any part thereof in the Income Tax Assessments of the company on the ground that remuneration paid are unreasonable or excessive. In this connection attention was invited to Circular No. 6P dated 06-07-1968, where the Company Law Administration has stated" that the deputy Prime Minister and the minister of finance observed in the Lok sabha (during the debate on the finance bill, 1968) that, where the scale of remuneration of a director of a company had been approved by the company law administration, there was no question of the disallowance of any part thereof in the income tax assessment of the company on the ground that the remuneration was unreasonable or excessive".

14 ITA no. 6649/Del/2013 Prasha Technologies Ltd. For the guidelines issued under the Companies Act, 1956 in regard to managerial remuneration the following may be referred to "Notification No. GSR 36(E) dated 16.01.2002 amending certain provisions of Schedule XIII of the Companies Act, 1956". 16. The assessee also relied on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Shriram Piston Rings Ltd., wherein it was, inter alia, held that the company Law Board had jurisdiction and authority to fix the remuneration, whose approval was sought under the provisions of section 637 AA of the companies Act, 1956 and one of the factors which the Board had to consider, while granting approval, was the professional qualification and experience of the individual in respect of whom the remuneration was to be fixed.

15 ITA no. 6649/Del/2013 Prasha Technologies Ltd. remuneration over and above the remuneration drawn by the Managing Director. Accordingly, this ground is rejected.

Sd/- Sd/- ( SUCHITRA KAMBLE ) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 05/11/2015. *MP* Copy of order to: 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, New Delhi.

16 ITA no. 6649/Del/2013 Prasha Technologies Ltd.

-+ Date Initial 1. Draft dictated on 4 -11.2015 PS 2. Draft placed before author 5.11.2015 PS 3. Draft proposed & placed before the second JM/AM member 4. Draft discussed/approved by Second Member. JM/AM 5. Approved Draft comes to the Sr.PS/PS PS/PS 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.