M/S. NRB BEARINGS LTD.,MUMBAI vs. ADDL. CIT 2(2), MUMBAI

5. The learned CIT (A) has erred in law and on facts in agreeing with the disallowance of a sum of Rs 8,78,599/- made by the Assessing Officer by treating repair expenditure as capital in nature for want of details. The learned CIT (A) ought to have directed the Assessing Officer to verify and allow the claim if relevant details were produced before him in the proceedings to be conducted to give effect to the appellate order.

6. The learned CIT (A) has erred in law and on facts in upholding the disallowance of expenditure of Rs. 1,63,048/- incurred on repairs to boundary wall by considering it as amount spent on 'construction of boundary wall'.

7. The learned CIT (A) has erred in law and on facts in invoking the provisions of S. 145A of the Act and in directing the Assessing Officer to work out addition on account of estimation of profit.

8. The learned CIT (A) has erred in law and on facts in approving the additions of Rs. 48,064/- and Rs. 1,41,776/- made by the Assessing Officer for belated payment of ESIC and PF respectively. The learned CIT (A) ought to have deleted the additions as there was no delay in payment of ESIC contributions were concerned; and the PF dues were paid within the grace period”.

3 M/s NRB Bearing Ltd

4 M/s NRB Bearing Ltd The AO in view of such information, issued show cause notice to the assessee that, why in respect of similar properties rented to the Centurion Bank and Johnson & Johnson, the rent received was Rs. 20,000/- and Rs. 1 Lakh per month, while the property earlier occupied by Johnson & Johnson was given to Futura Polyester Ltd., @ Rs. 5 lakh per month. This shows that the market rate of the rent was much higher than the rent received. Further, the assessee had received deposits of Rs. 3.50 crores and Rs. 2 crores and if such deposits were not there, then these property would have fetched much higher rent. In response, assessee submitted a reply vide letter dated 15.12.2009, where the assessee had submitted the copies of agreement in respect of all the three companies and stated as under :-

We are enclosing copies of agreement with M/s Johnson & Johnson, Centurion Bank and Futura Polyester Ltd, for premises rented to them at Shangrila (Residential Bldg.). Before the Centurion Bank, the said property was rented to Organon (India) Limited at monthly rent of Rs. 25,000/- and Rs. 2.5 Crore Security Deposit, the copy of agreement is enclosed. With regard to considering the market value for Flat No. 4 & 5, we would like to inform you that we have received a deposit of Rs. 5.50 Crores from two tenants. However, these deposits were credited in overdraft Account and thus, reducing the burden of interest cost. If, these deposits had not been received by us, the interest cost would have gone more by approx. Rs. 70-75 lakhs, which would have been admissible expenditure

“It has been held in large number of cases by various courts that, for determination of fair rent, the prevailing rent in the neighborhood can be a very important criteria. In this case, the rent fetched by Flat No. 4 when it was rented to Futura Polyester Ltd in January, 2007 is Rs. 5 lakh per month with a deposit of Rs. 15 lakh. If the 5 M/s NRB Bearing Ltd deposit was not taken by the assessee, the property would have fetched even a slightly higher rent than Rs. 5 lakh per month as the tenant would have saved interest corresponding to the deposit. The same flat was given to Johnson & Johnson at a monthly rent of only Rs. 20,000/- per month from 01.01.2002. Though, the flat was given to Johnson & Johnson at an earlier date and, therefore the market rate has to be slightly lower than the market rate at which flat was rented to future Polyester Ltd. However, the deposit of Rs. 3.5 crores was taken. The interest free deposit of Rs. 3.5 crore show that the flat would have fetched a much higher rent and the rent received is accordingly much less than the rent which it could have fetched by the same flat, rented to a subsequent tenant, I estimate the market value of rent of flat No. 4 at Rs. 4,50,000/- p.m.

Flat No. 5 with a slightly larger area (3587.45 sq. ft.) on 2nd Floor has been rented to Centurion Bank for rent of Rs. 1 lakh per month with a deposit of Rs. 2 crore. The market value of this flat is also estimated at Rs. 4,50,000/- per month. Considering the rent retched by flat rented to Futura Polyester and other factors.

Thus, the ALV of Flat No. 5, at 4.5 lakh per month comes to Rs. 54 lakh as compared to Rs. 12 lakh declared by the assessee while the proportionate ALV of Flat No.5 for the period up to November, 2006 (for 8 month) comes to Rs. 36 lakh as compared to Rs. 1,60,000/- declared by assessee. Accordingly, for these two properties, the total ALV is enhanced by Rs. 76,40,000/- it may not be out of place to mention here that as per assessee’s own submission, they have saved interest of Rs. 70-75 lakhs by using interest free deposits in the business clearly indicating that economic potential of the properties is certainly more than the rent received by assessee to the extent and thus, it indicates towards reasonableness of estimate of market value of rent of these two properties.

The income from house property has been computed at Rs.19,63,555/- in view of enhancement of ALV by Rs. 76,40,000/-, after allowing deduction @ 30% u/s 24 of the Income Tax Act. The addition to the income from house property declared by assessee would be Rs. 53,48,000/-”.

6 M/s NRB Bearing Ltd has been that the annual letting value shown by the assessee was as per the actual rent received, which was far more than municipal valuation rate, therefore actual rent received should be accepted.

7 M/s NRB Bearing Ltd Court and after giving due opportunity to the assessee to explain its case. Accordingly, ground no. 2 is treated as partly allowed for statistical purposes.

8 M/s NRB Bearing Ltd deciding this issue. Accordingly, ground no. 3 is treated as allowed for statistical purposes. 14. In ground no. 5 & 6, the assessee has challenged the disallowance of Rs. 8,78,599/- made by the AO for treating current repair as a ‘capital expenditure’.

9 M/s NRB Bearing Ltd for repairs as per the details and submission made before the CIT(A) as incorporated in para 5.2 of the appellate order. The expenditure which has been confirmed by the CIT(A) is on account of construction of a boundary wall however the construction cost of boundary wall was only Rs. 1,63,048/- and that also cannot be held to be capital expenditure but only repairs, because old wall was to be replaced.

10 M/s NRB Bearing Ltd ITA No. 1982/Mum/2011 a. ESIC Rs. 4,996/- on 18.05.2006 relating to Aurangabad Rs. 14,187/- on 18.05.2006 relating to Waluj Rs. 15,091/- on 18.08.2006 relating to Waluj Rs. 13,790/- on 18.10.2006 relating to Waluj Rs. 48,064/- ========== b. Contribution of Employees towards PF Rs. 1,41,716 on 18.02.2006 relating to Waluj

Further the AO has also not disputed that these payments were made within the grace period extended under the respective acts. Once that is so, then no such disallowance can be made.

“The order of the CIT(A) is opposed to law and facts of the case: 1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing R&D expenditure of Rs. 71.98 lakhs without appreciating that :- (i) The Department of Scientific & Industrial Research (DSIR) did not accept the claim of the assessee and approval was granted w.e.f. 03.02.2007 only although assessee

11 M/s NRB Bearing Ltd had applied for the approval from the beginning of the year. (ii) The activity prior to 03.02.2007 was not approved by DSIR hence only proportionate allowance was eligible.

(iii) The assessee failed to furnish copy of Form No. 3CL as required under rule 6(7A) of the I.T. Rule thereby contravened the conditions laid down under sub section 3 of section 35 of the I.T. Act.

2(i) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that provisions of section 145(3) is not attracted in the case of the assessee without appreciating that information in respect of excess / shortage in stock in physical verification of the goods, the scrap generated were not recorded in the books.

2(ii) On the facts and in the circumstances of the case and in law, the ld. CIT(A) failed to appreciate that the books of accounts of the assessee were incorrect, incomplete and not in consonance with the accounting standard as notified under sub section 2 of section 145 of the I.T. Act”.

12 M/s NRB Bearing Ltd Thus, he disallowed the claim for the expenditure incurred prior to 03.02.2007.

“… The legislative intent of the section was to encourage the development of the facility by providing deduction of weighted expenditure. Since the development facility was to be promoted, the intention of the Legislature was clear that the entire expenditure incurred by the assessee on development of facility. If approved, had to be allowed for the purpose of weighted deduction. The approval being granted during the previous year relevant to the assessment year, the assessee was entitled to claim weighted deduction in respect of the entire expenditure incurred under section 35AB of the Act”.

Moreover, it is also clear from Form 3CM, which does not give any cut off date for the approval. Accordingly, respectfully following the same, we uphold the order of the CIT(A) on this score. Accordingly, ground no. 1 as raised by the revenue is treated as dismissed.

15 M/s NRB Bearing Ltd Officer. Besides, as pointed out by the Appellant, item wise non- maintenance cannot be a defect in the books because the Appellant followed the exclusive method of accounting with regard to CANVAT and VAT credit. As I see, whereas this may attract provisions of section 145A, on its own, it will not attract rejection of books. The Assessing Office’s observation on the Auditors not providing adjustment figures is also misplaced in that the Appellant was maintaining exclusive method of accounting with regard to CENVAT and VAT and as claimed by the Appellant, the payment of the Excise and VAT have been continuously made. There is no specific adverse finding on this by the Assessing Officer. Further, similar method of accounting followed for the AY 2005-06 and 2006-07 has been accepted in scrutiny assessment. In similar vein, I do not find the extent of inadequacies on stock as brought to notice by the Assessing Officer substantial enough to call for rejection of the books. As I note, the basic flaw pointed out by the Assessing Officer is omission of the information on shortage/excess. This is, however, only partially correct as the figures are otherwise available in the Cost Audit Report, which have been given on physical verification. As mentioned by the Appellant, they are also reflected in the stock statement. The Assessing Officer has not brought anything specifically adverse on these details. Further, the net difference on this count being only Rs. 80,000/-, Rs. 76,000/- and Rs. 13,000/-, in absence of anything specific, rejection of books of account on account of this marginal difference would be highly disproportionate and against the principle of materiality, which is a key component of accounting principles. Besides regarding the scrap, I find that the Appellant is recording it upon sale and not upon generation of scrap. In this backdrop, I note that the Appellant was only following a different method of accounting of scrap, which in itself, without detection of anything specific, cannot make the accounts incorrect and incomplete so as to attract provisions of section 145. In this respect, the decision of the Hon’ble ITAT, Mumbai in the case of Protescap India Pvt Ltd vs Add. CIT in ITA No. 6385/Mum/2009 relied upon by the Appellant bears mention. This decision would indicate that accounting of scrap value on its realization has judicial sanction and accordingly, it cannot be taken as an inadequacy, which can call for rejection of books of account. The comparison of Appellant’s profit with SKF and FAG also cannot attract rejection of the books. In the first place, the profit shown by the Appellant is better than that shown by SKF. Further, the Appellant’s profile, status and volume of business is not comparable with that of FAG and accordingly, the comparison is incompatible. Although the Assessing Officer has brought out his own issues on this comparison, the fact remains that when seen against the totality of accounts such comparison thus, does not render the correctness and completeness of the books faulty. Books of account cannot be rejected on the basis of difference in perspective. Besides, the GP rate shown by the Appellant being 32.20% from the present year are higher than the earlier years. In line with the foregoing, in essence, I find that the discrepancies noted by the Appellant are procedural and marginal and when seen against the facts stated above do not make the correctness and completeness of accounts questionable as i) they stand explained

16 M/s NRB Bearing Ltd and ii) the requisite information as discussed above, otherwise stand disclosed, wherever found omitted in other relevant statement. Cost Audit Report, Audit Report, by way of opening and closing stock, rate, weight, etc. As held by the Hon’ble Calcultta High Court in the case of Ashok Refectories Pvt Ltd 279 ITR 457, where the accounts are otherwise verifiable, rejection of books would not be justified. Further, the issues raised by the Assessing Officer on the exclusive method of accounting, recognition of scrap on sales are debatable issues and vulnerable to contrary opinions and accordingly, they cannot be held as instrumental in holding the accounts incorrect and incomplete. They also do not affect the materiality of the accounts either in relation to the profit or in relation to expenditure. What they warrant is scrutiny of the individual issues and not wholesale rejection of the books of account. This being so, the provisions of section 145 are not attracted. Accordingly, I do not find justification in the action of the Assessing Officer. However, I find that in terms of section 145A of the ITA, CENVAT & VAT are to be added to the closing stock. This has not been done by the Appellant. Section 145A is very clear on this point and accordingly, the Assessing Officer is directed to work out the addition based on particulars to the submitted by the Appellant. In terms of the foregoing discussion, the ground of appeal is partly allowed”.

33. After considering rival submissions and finding given in impugned orders and material on record, we find that the AO has mainly rejected the books of accounts on three counts, as discussed above. So far as the AO’s observation on the exclusive method of CENVAT & VAT and that the assessee should provide each and every item of stock corresponding to CENVAT & VAT in proof thereof, the assessee’s contentions had been that the products manufactured by the assessee are very huge and numerous and accordingly, item to item correlation was not really feasible. Under such circumstance, when the details of opening stock, closing stock, quantity, value, rates are available, which are subjected to verification and cross check then it is suffice to hold that CIT(A) was correct in holding that there is no reason for rejecting the books of accounts. The entire reasoning of the CIT(A) appears to be factually and legally correct and accordingly, the same is affirmed. Regarding other issues also, we find that the Ld. CIT(A) has given a proper finding and reasoning. On the issue of accounting on scrap, it has been found that assessee has been recording the same at the time of sale and not at the time of 17 M/s NRB Bearing Ltd generation of scrap. The assessee was following a particular method of accounting of scrap, from last several years which cannot be rejected, unless such a method of accounting is not correct. Further, as pointed out by the Ld. Counsel, this method of accounting is followed and accepted by the department. Lastly, Ld. Counsel before us submitted that, right from AY 2001-02 to AY 2006-07, the assessments have been completed u/s 143(3), wherein the income has been assessed without rejection of books of accounts or estimation of gross profit on similar method of accounting and on similar facts. The Ld. AO has not pointed out any difference in this year. Thus, on these facts, we do not find any reason to deviate from the finding recorded by the Ld. CIT(A). Accordingly, ground no. 2 raised by the revenue is dismissed.

Sd/- Sd/- (िड. क�नाकर राव) (अिमत शु�ला) लेखा सद�य �याईक सद�य (D. KARUNAKARA RAO) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 30th October, 2015 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) -5, Mumbai. 4) The CIT -2, Mumbai. 5) िवभागीय �ितिनिध “जी”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “G” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File.