DCIT 3 (1), BHOPAL vs. M/S NARMADA SWITCHGEAR P LTD , BHOPAL

आदेश/O R D E R

Per B.M. Biyani, A.M.:

“1. Whether in the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting addition of Rs. 2,81,93,202/- on account of various

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 expenses whereas the AO has clearly pointed out the discrepancies w.r.t. expenses in the assessment order.

2. Whether in the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting addition of Rs. 80,29,776/- on account of bad debt written off, without examining facts and findings of AO and relied upon various judgement.

3. Whether in the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting addition of Rs. 55,45,006/- on account of bogus creditor without examining the facts and findings of AO mentioned in the assessment order.”

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 notices u/s 143(2)/142(1) were issued from time to time which were duly complied with. Finally, the Ld. AO completed assessment u/s 143(3) at a total income of Rs. 8,15,86,820/- after making certain additions. Aggrieved, the assessee went in first-appeal and got part-relief. Now the revenue, being aggrieved by the order of first-appeal, has come in this appeal before us.

Ground No. 1:

5. This ground relates to the disallowance of Rs. 2,81,93,202/- out of various expenses.

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14

“Ground No.2: "That the Ld. A.O. was not justified in making an addition of Rs. 2,81,93,202/- on the ground "having regard to possible leakage of revenue on this count disallowance out of the above hea.ds of expenditure is tabulated hereunder ………", in view of the books of account produced and all the supporting documents therewith and the Ld. A.O. having made filedenquiries he ought to have passed a speaking order stating the reason for each disallowance and M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 examining it in the light of the evidence and explanation offered by the Assessee."

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14

Accordingly, the Ld. A.O.considering the possible leakage of revenue added amount of Rs. 2,81,93,202/- to the total income of the appellant. 5.1 The appellant submitted that the Ld. A.O. has compared the percentage increase in expenses with the previous year. This is not correct method. It should be compared in relation to sales. It was explained to the Ld. A.O. that the appellant had been passing through a lean phase in past few years and owing to the development of specialized product, the business has been revived and business was increased. In this regard, the appellant submitted comparative statement of income for the current year and the earlier year. The chart is reproduced here under: Items 2012-13 2011-12 2010-11 2009-10 Transformer tanks 2310.37 320.45 0.00 -1.40 Valve tanks 55.44 13.47 13.97 7.80 Cubicles 0.00 27.25 7.50

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 Shunt Assy./Misc 0.00 0.00 16.80 5.24 Oil Tanks 2.89 0.00 0.00 Busduct & Spares 23.45 158.99 70.64 101.11 2392.15 520.16 108.91 112.75 Services Installation/commissioning 12.16 0.00 0.00 5.00 of Busducts Job work 10.12. 22.23 35.73 46.92 22.28 22.23 35.73 51.92 Others Packing/forwarding/freight 2.11 9.57 5.29 3.44 2416.54 551.96 149.93 168.11 Taxes 135.12 35.32 11.97 21.47 2551.66 587.28 161.90 189.58

The appellant submitted that there is phenomenal increase in business. That is why the expenses have been increased. The Ld. A.O. has only considered the expenditure side and ignored the revenue side. In earlier year the income comprised mostly of income from job work and sale of busducts. The two periods are therefore, un-comparable. The complete details of expenses and reason were furnished during the assessment proceedings particularly in respect of sister concerns. The product manufactured by the appellant required highly technical skills and specialized machine. All the sister concerns are specialized in manufacturing of engineering goods for the use of large PSUs in power generation and distribution activities. Narmada Vehicles Pvt. Ltd., earlier dealing with sale of Hyundai Cars has specialization in painting of machine and skilled labour. All the facts have been explained to the Ld. A.O. the appellant got the job work done through sub-contracting which was in the interest of the business. No provision under the Act prohibits the conduct of business through sister concerns. It is outside the scope of the A.O. to judge the necessity or otherwise of an expense incurred in relation to the business. In relation to the comments of the Ld. A.O. that the vouchers were self-made, pre-printed quarter sheet etc., the appellant submitted that when the number of attachments i.e. supporting bills in a single transaction is large, a docket being a summery sheet of all expenses is used. Complete details had been submitted during assessment proceedings. There is only one accountant, all the vouchers has been made in his handwriting. Therefore, on the basis of handwriting genuineness of expenses cannot be doubted. All the expenses are verifiable and thus, the Ld. A.O. is not correct in his findings. The Ld. A.O. has not pointed out any single instance as to which voucher was not available or non-genuine. Nature of all expenses has been explained during the assessment proceedings. The appellant also furnished the detailed reply

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 furnished before the Ld. A.O. Regarding electricity bill the appellant submitted that it was in the name of M/s. Narmada Transmission Pvt. Ltd. and the Ld. A.O. has mentioned that the appellant and the said company both have claimed this expense. The appellant and M/s. Narmada Transmission Pvt. Ltd. are located on adjoining plot of land. MPEB has allotted electricity connection through a single transformer. An agreement had been executed with MPEB. The same was also given during assessment proceedings. The name of the appellant is mentioned in the said agreement. Thus, there is no doubt left that the electricity connection is not in the name of the appellant. The bills have been made by the MPEB only in the name of the person first mentioned in the agreement which is a technical matter. The appellant has bifurcated the bill amount to be paid by each unit as per power usage. On perusal of attached charge it will be clear that there is not double claim of electricity expense. The Ld. A.O. ignored these facts. In past assessment years there is no adverse finding on this issue. The Ld. A.O. has not made any enquiry in respect of any of the expenditure claimed. Similarly, entire details alongwith explanation was furnished during the assessment proceedings in respect of travelling and conveyance expenses. All expenses have been incurred in relation to business of the appellant. The foreign visits have been supported by proper communication with the foreign supplier of aluminum. Regarding packing expenses the appellant submitted that the product of the appellant is a highly technically product and hence, requires special packing skills and material. The increasing these expenses were due to abnormal increase in turnover. Regarding business promotion expenses a general remark has been given by the Ld. A.O. and no specific defect has been pointed out. This was the first year of appellant's new business, therefore, commission has been paid under an agreement with an agency. Appointment of agent for securing business is very much permitted. The Ld. A.O. has not made any enquiry to examine the genuineness of the expenditure. All payments have been made through banking channels and due consideration of TDS and Service Tax has been given. No enquiry in this regard has been conducted during the assessment proceedings. The appellant has large number of employees. The staff welfare expense includes canteen expenses, ESI expenses, Uniform to staff, ICICI Prudential Policy for the workers (premium paid was Rs. 1,00,00,000/-). The prudential policy was introduced for the first time. Therefore, there is no justifiable reasons to disallow such expenses. Similarly, no defect pointed out in relation to salaries and wages expenses and other expenses also. Regarding prior period expenses of Rs. 4,00,037/- the appellant submitted that it was explained with documentary evidence that these are incurred for the business purpose and have now been written off. There were some credit balances and the same are written off. The major amount pertained to Commercial Tax Department. Such expenses has wrongly referred to as prior period expense in the Profit & Loss account. The TDS returns have been revised because due to some practical reason. The returns were filed on time to avoid ~ena1ty even if some details were not available at the time of filing of TDS return. It is submitted that all the expenditure has been incurred in commercial expediency. The appellant has placed reliance upon the decision of Hon'ble Apex Courts in the case of Hero Cycle Pvt. Ltd. 63 Taxmann.com 308 and S.A. Builders 288 ITR 1. In view of the above submissions the appellant submitted that the addition made may be deleted.

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 5.2 I have considered the facts of the case, findings of the Ld. AO. and submission of the appellant. The Ld. AO has disallowed 20% of Rs. 4,11,11,257/- being sub-contract expense. The Ld. A.O. has observed that this expenditure has been increased by 2564% in comparison to previous year. I find that while making this observation the Ld. A.O. ignored the facts that the turnover of the appellant company had been increased to Rs. 2551.66 lakhs from Rs. 587.28 lakhs. Percentage increase is 334.49% which is very substantial. During the assessment proceedings, the Ld. A.O. has made some observations which are not based upon specific defects in the books of account of the appellant but these are general in nature. The appellant has submitted detail submissions in the assessment proceedings as well as in the appellate proceedings. I find that the Ld. AO. has not proved that expenses in question are not incurred in connection with any commercial expediency and the expenses claimed are not allowable as per the provisions of section 37 of the Act. The payments to sister concerns have been made due to their specialized business activities of manufacturing. The appellant has given some work as sub-contract to them. Without making any enquiry, the Ld. A.O. concluded that the part of expenses are not genuine and disallowed 20% of such expenses to prevent some leakage of revenue. The findings in the assessment order are not based upon actual facts but these are based upon general observations. I agree with the material facts brought on record before me through written/ submissions by the appellant which has been summarized in para 5.1 above. Further, before disallowing part of sales commission etc. enquiry should have been made to prove it non-genuine or otherwise. The staff welfare expenses include ESI payment, ICICI Prudential Policy (Rs. 1,00,00,000/-) etc. it is not understandable that how can be 20% of the same disallowed. I have found that the disallowance of 20% has been made on account of electricity expenses which is not based upon correct facts. Electricity connection is in the name of M/s Narmada Transmission Pvt. Ltd. The appellant and Mis. Narmada Transmission Pvt. Ltd. are located on adjoining plot of land. MPEB has allotted electricity connection through a single transformer. An agreement had been executed with MPEB. The same had also been given during assessment proceedings. The name of the appellant is mentioned in the said agreement. Thus, there is no doubt left that the electricity connection is not in the name of the appellant. The bills have been made by the MPEB only in the name of the person first mentioned in the agreement which is a technical matter. The appellant has bifurcated the bill amount to be paid by each unit as per power usage. I have found that there is not double claim of electricity expense. The Ld. A.O. ignored these facts. In past assessment years there is no adverse finding on this issue. Further, the appellant has also made TDS and paid service tax where-ever it was necessary. The genuineness of expenditure incurred under the head sub-contracting cannot be doubted on the basis of some observation. There has to be some cogent evidences in this regard. In view of the above and decision of Hon'ble Apex Court in the case of Hero Cycles Pvt. Ltd. (supra) and S. A. Builders (supra), the appellant has succeeded in proving the expenses are allowable as per the provisions of section 37 of the Act. Therefore, the addition made by the Ld. AO cannot be sustained and the same is hereby deleted. This ground of appeal is allowed.”

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 8. Before us, the Ld. DR vehemently supported the assessment-order. He also pleaded that the Ld. CIT(A) has reversed the action of Ld. AO by holding that the increase in expenditure was on account of increase in turnover achieved by assessee, but that was not the sole reason, there were several other reasons mentioned by Ld. AO justifying the disallowance. Drawing our attention to assessment-order, Ld. DR submitted that the Ld. AO has discussed each item of disallowance and given reasoning too; therefore the disallowance made by Ld. AO is well-reasoned. Arguing this strongly, the Ld. DR lastly submitted that some disallowance was certainly justified in the present case.

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 10. We have considered rival contentions of both sides and perused the material held on record including the orders of lower authorities. We note that the assessee is a company and its accounts are duly audited in terms of statutory provisions. Going forward to the assessment-order, we observe that the first sentence of Para No. 5 of the assessment-order, which deals this issue,clearly reveals that the Ld. AO observed“On perusal of audited final accounts, it was found that the assessee has debited following expenses in Profit & Loss Account. The assessee has shown expenses on very higher side as compared to previous year.” Then, the Ld. AO made a mathematical comparison of various items of expenses in the current year and immediately preceding year and ascertained mathematical-increase in % terms. Similarly, in the concluding para too, the Ld. AO has mentioned “Further, the assessee has shown expenses on very higher side as compared to previous year.”. Thus, it is clearly visible that the Ld. AR was prompted to make disallowance based on mathematical-increase in the quantum of expenses. In fact, the Ld. DR also accepted this but dutifully attempted to contradict by submitting that there are other reasons noted by Ld. AO as well. Taking into account such submission of Ld. DR, we analysed the assessment-order and observed that Ld. AO has made general observations like “most of the vouchers”, “some of the bills and vouchers”, “massive increase”. Regarding payments made to sister concerns, namely M/s Narmada Transmission Pvt. Ltd., Narmada Vehicles Pvt. Ltd. and Narmada Equipment Pvt. Ltd, the Ld. AO has nowhere applied section 40A(2) which is a statutory provision and which requires comparison of “actual payment” with “fair market value” of the goods/services supplied by sister concern; rather the Ld. AO has just made a lump sum disallowance of 20% which is totally baseless and against the statutory mandate of section 40A(2). At some places, the Ld. AO has made lump-sum % disallowance on the premise of “cash-payment” but not applied the statutory provision of section 40A(3) which, if applicable, would have attracted 100% disallowance and if not applicable, then no disallowance ought to have been made. Thus, the M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 disallowance made by Ld. AO on the footing of “cash payment” is also not legal. Then the observation made by Ld. AO that most of the vouchers are self-made vouchers, is also far from truth. Ld. AO has scanned such a self- made voucher on Page No. 14 of the assessment-order (which is reproduced in our earlier paragraph too). A perusal of voucher indicates that there is a clear mention of “Inv. No. 28” in the narration part. Thus, the voucher scanned in the assessment-order is simply a covering-voucher of the assessee but there is “Invoice No. 28” too for which the payment has been made. Thus, there is a “invoice” for the “cover-voucher” but the Ld. AO has overlooked this and made a general observation that the payments have been made on self-made vouchers. It is true that the Ld. AO has discussed each item of disallowance, but the discussion is general and there is no mention as to which voucher was not available or ingenuine. We observe that the Ld. AO has made 100% disallowance out of prior-period expenses; 50% disallowance out of electricity/power and staff welfare; and 20% disallowance out of several other expenses, which is lump-sum / adhoc and not concrete. On the other hand, the Ld. CIT(A) has (i) considered the findings made by Ld. AO at length; (ii) noted that there was a phenomenal increase in sale/revenue as also change in business-model of assessee, therefore the preceding year was un-comparable; (iii) elaborately analysed each item of disallowance one by one. Thereafter, the Ld. CIT(A) has deleted the disallowances made by Ld. AO. Regarding 100% disallowance of “prior- period expenses”, the Ld. CIT(A) has given a categorical finding on Page No. 8 of the appeal-order “Regarding prior period expenses of Rs. 4,00,037/- the appellant submitted that it was explained with documentary evidence that these are incurred for the business purpose and have now been written off. There were some credit balances and the same are written off. The major amount pertained to Commercial Tax Department. Such expenses has wrongly referred to as prior period expense in the Profit & Loss account.” Since the Ld. CIT(A) has already discussed all items one by one, any discussion by us would only result in repetition of the same. Hence, for the sake of brevity, we

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 refrain from repetitive discussion. Suffice only to say that the Ld. CIT(A) has passed a well-reasoned order and we do not find any infirmity therein. Therefore, we are inclined to countenance the action of Ld. CIT(A). This ground of revenue is, therefore, dismissed.

Ground No. 2:

“Ground no.4 That the Ld. AO is wrong in holding that the old debtors written off amounting to Rs.94,37,583/- were bogus, through it was proved before the AO that these were the result of Bills raised by the assessee by crediting the same to the income account in the past, and thereupon making an addition of Rs.80,29,776/- the Ld. AO ought to have considered the documentary evidence produced by the appellant, the Ld. AO has applied the judgment of Hon’ble Allahabad High Court in the case of Kohli Bros Colour Lab P. Ltd. When the facts and circumstances obtaining the instant case are different.”

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 7. During the assessment proceedings, the Ld. AO found that a sum of Rs.94,37,583/- was debited to profit & Loss account under the Bad debts. The Ld. AO has mentioned that the appellant could not established the fact that revenue corresponding to the claim has been taken into consideration in determining taxable income for the relevant year or any earlier year. No documentary evidences furnished to prove the efforts made for recovery of debts. After considering amount of Rs. 14,07,807/-, the Ld. A.O. disallowed amount of Rs. 80,29,776/- and added to the total income. 7.1 The appellant submitted that the ledger account of various debtors were provided to the Ld. A.O. The debts have arisen on account of genuine trading transactions which meant that the corresponding revenue had already been recorded in the books of account. The detailed reply in this regard was furnished during the assessment proceedings. The debts arose in the ordinary course of business and the same had been credited to revenue account. The appellant has placed reliance upon the decision of Hon’ble Apex court in the case of TRF Ltd.323 ITR 397. 7.2 I have gone through the assessment order as well as the written submission of the appellant. The Ld. A.O. has made addition of Rs. 80,29,726/- on account of bad debts written off as the appellant failed to produce adequate information and evidence of efforts for recovery of bad debts. During the assessment proceedings as well as appellate proceedings the appellant furnished complete ledger account in respect of the issue involved. Considering the facts of the case, it has been found that debts have been arisen on account of genuine trading transactions of various years which have also been incorporated in the books of account. I am in agreement with the Ld. AR that the only condition for allowability of the bad debts u/s 36(1)(vii) of the Act is it must have been written off in the books of account by the assessee as bad. Hon’ble Apex court in the case of TRF Ltd. CA No. 5293/2003 has decided this issue as under: “In these appeals, we are concerned with assessment year 1990-1991 and assessment year 1993-1994 Prior to 1st April, 1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had, in fact, become irrecoverable. That position got altered by deletion of the word "established", which earlier existed in Section 36(1)(vii) of the Income Tax Act, 1961 ['Act', for short]. For the sake of clarity, we re-produce herein below provisions of Section 36(1)(vii) of the Act, both prior to 1st April, 1989 and post-1st April, 1989: "Pre- 1st April, 1989: Other deductions. 36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 2B--

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 (i) to (vi) xxxx xxxx xxxx (vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year. Post- 1st April, 1989: Other deductions. 36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (i) to (vi) xxxx xxxx xxxx (vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the Previous Year'" Thispositioninlawiswell-settled 'After" 1sth april,1989'it is not necessary for the assessee to establish that thedebt,infact,hasbecomeirrecoverable'Itisenoughif thebaddebtiswrittenoffasirrecoverableintheaccounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account tothecustomer'InthecaseofCompanies,theprovisionisdeductedfromsundr yDebtors.Asstatedabove,theAssessingOfficerhasnotexaminedwhether,in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matteris remitted to the Assessing Officer for de novo consideration of the above-mentioned aspect only and that too only to the extent of the write off' Subject to above, the civil appeals filed by the assessee are disposed of with no order as to costs'" Thus, the Hon’ble Apex Court has heard that the law in this regard is well- settled. After 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecover able. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Following the above decision of the Hon’ble Apex Court, I allow the expenses claimed under the head bad debts written off to the appellant as the same was arisen in the ordinary course of business and same has been written off as a matter of business commercial expediency. Hence, the addition of Rs. 80,29,776/- is hereby deleted. This ground of appeal is allowed.”

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 14. Before us, Ld. DR supported the assessment-order, as against which the Ld. AR placed heavy reliance on the order of first-appeal. Ld. AR also placed reliance on Page No. 17 to 19 of his Written-Submission as also Page No. 201 to 224 of the Paper-Book where the copies of ledger accounts of various debtors, as filed during assessment-proceeding, are placed. Our attention is also drawn to Page 64 to 72 of the Paper-Book where the copies of letters dated 28.12.2015 and 18.01.2016 filed to Ld. AO during the course of assessment are filed in which the assessee had given a detailed submission on the bad-debt claim.

Ground No. 3:

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 the Ld. AO framed an inference that the liability of Rs. 53,45,006/- declared by assessee to NPVL stood unproved from the Balance-Sheet of NPVL, hence made addition. During first-appeal, Ld. CIT(A) reversed the action of Ld. AO.

M/s Narmada Switchgear Pvt. ltd Assessment year 2013-14 20. Resultantly, this appeal of revenue is dismissed.

Order pronounced as per Rule 34 of I.T.A.T. Rules, 1963 on 03/02/2023.

Order pronounced in the open court on ….../……/2023.