ASTT. COMMISSIONER OF INCOME TAX, LUCKNOW vs. M/S PRAG INDUSTRIES (INDIA) PVT. LTD., LUCKNOW

(A) This appeal has been filed by the Revenue for assessment year 2013- 14 against impugned appellate order dated 13/10/2016 passed by learned Commissioner of Income Tax (Appeals) [“CIT(A)” for short]. In this appeal Revenue has raised the following grounds:

“1. The Commissioner of Income-tax (Appeal) has erred in law and on facts of the case in deleting the addition of Rs.42,683/- made on account of telephone expenses for personal use ignoring the fact that personal expenses could not be certified due to non-maintenance of telephone call register.

2. The Commissioner of Income-tax (Appeal) has erred in law and on facts of the case in deleting the addition of Rs.81,673/- made on account of Car running & Maintenance expanses for personal use ignoring the fact/ that personal use could not be certified due to non-maintenance of log] book.

3. The Commissioner of Income-tax (Appeals), Lucknow has erred in law and on facts of the case in deleting the addition of Rs.56,315/- made I on account of disallowance out of travelling and conveyance expenses ignoring the fact that the expenses claimed were mostly is cash and were not verifiable.

4. The Commissioner of Income Tax (Appeals), Lucknow has erred in law and on facts in deleting the addition to Rs.16,77,080/- made on account of repair and maintenance expenses without appreciating the fact that the expense incurred was of capital nature.

5. The CIT (A) has erred in law and on facts in deleting the addition of Rs.8,78,412/- made on account of disallowance of excessive payment to M/s Prag Precision Tools under the provision of Section 40A(2) ignoring the fact that the AO has made the addition in absence of any reason provided by the assessee for the excess payment.

6. The CIT (A) has erred in law and on facts in deleting the addition of Rs.3,90,698/- made on account of disallowance of bad debt written off without appreciating the fact that the assessee company was unable to prove the genuineness of receipt of short payment.

(B) The first and second ground of appeal are in respect of the disallowance amounting to Rs.42,683/- out of telephone expenses and Rs.81,673/- out of car running and maintenance expenses, made by the Assessing Officer. The Assessing Officer alleged that there was personal use involved in these expenses, and he disallowed the aforesaid amounts on ad hoc basis, at the rate of 10% of the total claim of the aforesaid expenses claimed by the assessee under these heads. These two issues have been dealt with by the learned CIT(A) in his aforesaid impugned appellate order dated 13/10/2016 in paragraphs 6(1) to 6(4) of the order. The learned CIT(A) took the view that if the Assessing Officer was not convinced with particular nature of expenses, he could have made necessary verification before making the disallowance. He disapproved the act of the Assessing Officer in making the aforesaid disallowance on ad hoc basis, and deleted the additions of the aforesaid amount of Rs.42,683/- out of telephone expenses and Rs.81,673/- out of car running and maintenance expenses respectively. At the time of hearing before us, the learned CIT, (D.R.) vehemently supported the order passed by the Assessing Officer on these issues. The learned A.R. for the assessee supported the order of learned CIT(A). We find, on perusal of records, that the Assessing Officer has failed to bring any material on record in support of his allegation that there was any element of personal use in the aforesaid expenses. Further, the Assessing Officer has not given any justification for applying the rate of 10% of the assessee’s claim, for computing the disallowance. In view of the foregoing, we are of the view that the order of learned CIT(A) is just and fair and in accordance with law having regard to facts and circumstances of the present case before us. Therefore, ground No. 1 & 2 of the appeal are dismissed.

(C) Ground No. 3 of the appeal is regarding the disallowance of Rs.56,315/- made by the Assessing Officer out of the assessee’s claim under the head travelling & conveyance expenses alleging that the expenses were not verifiable. He made the disallowance on an adhoc basis, at the rate of 10% of total claim of Rs.5,63,149/- under this head. The learned CIT(A) has decided this issue in paragraphs 7(1) to 7(4) of the impugned appellate order dated 13/10/2016. He deleted the aforesaid disallowance of Rs.56,315/- holding that the expenses were verifiable and were incurred for the purpose of business. At the time of hearing before us, learned CIT, (D.R.) for Revenue relied on the assessment order and strongly supported the additions; whereas learned A.R. for the assessee supported the order of learned CIT(A). After hearing both sides and on perusal of records, we find that nothing has been brought for our consideration by either side to interfere with the findings of fact recorded by the learned CIT(A) that the expenses were verifiable and that the same were incurred for the purpose of business. Further the Assessing Officer has not given any justification for applying the rate of 10% of the assessee’s claim, for computing the disallowance. In view of the foregoing the order of the learned CIT(A) on this issue is upheld.

(D) Ground No. 4 of the appeal is regarding the disallowance made by the Assessing Officer, amounting to Rs.16,77,080/- claimed by the assessee as repair & maintenance expenses. The Assessing Officer treated this amount as capital expenditure, stating ‘…factory building is too old and had to be replaced.’ For the purpose of computation of aforesaid disallowance, the Assessing Officer proceeded on ad hoc basis and disallowed a lump sum amount @10% out of the assessee’s total claim under the head repairs & maintenance. After adjusting for depreciation, the resultant quantum of disallowance out of assessee’s claim under the head ‘Repairs and Maintenance Expenses’ was computed by the Assessing Officer at Rs.16,77,080/-. At the time of hearing before us, learned CIT, (D.R.) vehemently supported the order of the Assessing Officer. She read out from the assessment order to claim that the disallowance of aforesaid amount of Rs.16,77,080/- was in the nature of capital expenditure. The learned A.R. for the assessee supported the order of learned CIT(A).

(D.1) This issue has been decided by the learned CIT(A) in paragraph 8(1) to 8(6) of the impugned appellate order. The learned CIT(A) deleted the aforesaid disallowance, treating the expenditure as current repairs because part of the structure became dilapidated and repairs/reinforcement of some parts of the said structure was required. The learned CIT(A) was of the view that the said expenditure has not brought any new asset into the books of account and the expenditure incurred is in respect of capital assets already part of the block of assets; and the expenditure incurred by the appellant was only for carrying on the business. The expenditure incurred by the appellant was for preserving and maintaining existing assets; and it was not correct to say that the appellant had obtained any enduring benefit because of this expenditure. The nature of expenditure incurred by the appellant was of repairing existing assets, and not meant for acquiring new assets. Furthermore, as already observed, no new capital asset or benefit of enduring nature came into existence. The assessee did not acquire any new asset/income earning apparatus. It is well settled principle of law that the expenditure incurred for acquisition of an asset is capital expenditure and expenditure incurred for repair & existing asset is revenue expenditure. Pecedents in the case of CIT vs. Delhi Press Samachar Patra (P.) Ltd. 322 ITR 590 (Delhi) and CIT vs. Saravana Spinning Mills P. Ltd. 293 ITR 201 (SC) support this view.

(D.2.) After hearing both sides and after perusal of records, we find that the disallowance out of repair & maintenance did not have sound basis, and was based on suspicion guess work and conjecture only. No material has been brought on record from the side of Revenue to show that new capital assets have come into existence or to show how the amount disallowed was not current repairs. The Assessing Officer made disallowance on suspicion, guess work and conjecture that it could not be ruled out that factory building was too old and had to be replaced. However, there is no material to support the claim that a new factory building was constructed by the assessee. Further the disallowance made by the Assessing Officer was on ad hoc basis by applying rate of 10% on the total claim of repair & maintenance. There is no material on record to justify on what basis this rate has been chosen by the Assessing Officer. In view of the foregoing, no case has been made from the side of Revenue to persuade us to interfere with the decision of learned CIT(A) on this issue in the impugned appellate order. Accordingly, ground No. 4 of the appeal is dismissed.

(E) Ground No. 5 of the appeal pertains to disallowance under section 40A(2) of the Act, amounting to Rs.8,78,412/- out of payments made to Prag Precision Tools. In the impugned appellate order, the learned CIT(A) deleted the aforesaid addition. The learned CIT(A) has dealt with this issue in paragraphs 9(1) to 9(vii) of his order. His conclusion is reproduced below for ease of reference:

(E.1) At the time of hearing before us, learned CIT (D.R.) for Revenue relied on the order of the Assessing Officer whereas the learned A.R. for the assessee supported the order of learned CIT(A).

(E.1.2) We have heard both sides and perused the materials on record. The disallowance u/s 40A(2) can be made by the Assessing Officer only if the expenditure represents payments made to persons specified u/s 40A(2)(b) of the I. T. Act and secondly; if the expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or the profession of the assessee or the benefit derived by or accruing to him therfrom. The aforesaid two conditions are to be fulfilled cumulatively. On perusal of records, we find that no material has been brought on record to establish that the payment made by the assessee to M/s Prag Precision Tools (P.) Ltd., a proprietary concern of Rakesh Jain (HUF) who being a specific person u/s 40A(2)(b) of the Act; is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or the profession of the assessee or the benefit derived by or accruing to him therfrom. We also find that the reliance placed by learned CIT(A) on various case laws is apt and contextual having regard to facts and circumstances of the present case before us. In view of the foregoing, we are of the view that no case has been made by Revenue to persuade us to interfere with the order of learned CIT(A) on this issue. Ground No. 5 of appeal is dismissed.

(F) Ground No. 6 of the appeal is regarding the disallowance of assessee’s claim amounting to Rs.3,90,698/- on account of bad debt written off. Vide impugned appellate order the learned CIT(A) deleted the aforesaid disallowance of Rs.3,90,698/-, after verifying himself that amounts were in the nature of bad debts. The learned CIT(A) further stated, after verification, that the amount was taken into profit & loss account and the amounts written off were in the nature of bad debts. Accordingly, he deleted the addition. At the time of hearing before us, learned CIT (D.R.) placed reliance on the order of the Assessing Officer whereas learned A.R. for the assessee supported the order of learned CIT(A). We have heard both sides and have also perused the materials on record. We find that there is nothing on record to show that the aforesaid finding of facts recorded by the learned CIT(A) in the impugned appellate order are erroneous. Moreover, in view of order of Hon'ble Supreme Court in T.R.F. Limited vs. CIT 323 ITR 397/ 190 taxmann 391 (SC) and order of Hon'ble Delhi High Court in CIT vs. Samara India (P) Ltd. 216 taxman 93, it is well settled that for an assessee to claim deduction in relation to bad debt, it is not necessary to establish that the debt had become irrecoverable and further that it is sufficient if assessee forms such an opinion and writes off debt as irrecoverable in its account. In view of the foregoing, we are of the view that the decision of learned CIT(A) deleting the aforesaid addition of Rs.3,90,698/- is a sound one having regard to facts and circumstances of the present case, applicable law and decided precedents. No case has been made from the side of the Revenue to persuade us to take a view different from the view taken by learned CIT(A) in is impugned appellate order. Accordingly, ground No. 6 is dismissed.

(G) Ground No. 7 of the appeal is regarding the addition made by the Assessing Officer on account of difference in net profit rate of the assessee’s Lucknow and Dehradun Units. Vide impugned appellate order dated 13/10/2016, the learned CIT(A) deleted this addition. The relevant portion of the order of the conclusion of learned CIT(A) is reproduced below:

(G.1) At the time of hearing before us, the learned CIT (D.R.) for Revenue placed reliance on the assessment order, and the learned A.R. for the assessee supported the order of the learned CIT(A). The learned CIT(D. R.) also supported the additions, claiming applicability of CUP (Comparable uncontrolled Price). The Learned Learned A. R. for the assessee placed reliance on CIT Vs Poonam Rani 5 Taxmann.com 76 (Del), CIT Vs. Mohd Umer 101 ITR 525 (Patna) for the contention that low profit is not by itself a valid criterion for not accepting profit shown in books of account. He supported this contention with the help of ITAT order also in the case of DCIT Vs Gajanan Traders 12 SOT 36 (Bang.) and orders of Delhi Bench of ITAT in the case of Bony Rubbers Co. Pvt. Ltd Vs. ACIT (I. T. Act. No.4980/Del/2004) and Sard Metal Engineers Vs Addl. CIT (I. T. Act. No.435/Del/2003) which have also been referred to and relied upon in the order of learned CIT(A). Perusal of the record shows that the learned CIT(A) has duly considered relevant facts and circumstances of the case, applicable law and decided precedents while directing the Assessing Officer to delete the aforesaid addition of Rs.3,03,72,121/-. He has noted that fixed assets qualifying for depreciation in Lucknow unit is higher than the depreciation in Dehradun unit. He has also noted that there is higher deployment of labour at Lucknow unit and has mentioned the comparative figures of corresponding expenditure and corresponding labour expenditure which is Rs.8,78,002/- for Dehradun unit and multiple times more in Lucknow unit amounting to Rs.43,46,452/-. He has also noted that the power and fuel expenses for Lucknow unit is substantially higher than that in Dehradun unit. Therefore, there is a reasonable explanation for lower net profit rate in Lucknow unit as compared to Dehradun unit. Moreover, perusal of record also shows that the Assessing Officer has not pointed out any discrepancy in the books of account, and has not rejected the books of account u/s 145 of the I. T. Act. Further, no specific instance of under reporting or over reporting of revenue, in Lucknow/Dehradun unit has been brought on record. Further, no instance of bogus or excessive claim of any expenses or under reporting of expenditure in Dehradun or Lucknow unit has been brought on record by the Assessing Officer. The contention of learned. CIT(D.R) for Revenue, advancing the argument of CUP is completely misplaced. On perusal of records, it is not the case of the Assessing Officer that the addition is based on CUP. Moreover, in any case CUP is a method of determining ALP (Arm’s Length Price) under Transfer Pricing and has no relevance to present case in which Transfer Pricing issue is not involved. Transfer pricing provisions for determination of ALP can be invoked only for specified transactions between Associate Enterprises (AEs), where the aggregate of specified transactions between AEs exceeds Rs.20 cr., but have no application for inter-se comparison between different units of the same enterprise. Therefore, Transfer Pricing provisions have no application in the present case for comparison of profits of Dehradun and Lucknow units of the assessee. Further, there is nothing on record to show that the assessee company had specified domestic transactions with its Associate Enterprises the aggregate of which exceeded Rs.20 cr. Further, we have already noted earlier that there was reasonable explanation for difference in net profit rate of the two units of the assessee leading to the inference that profit of one unit was not a good comparable for the other unit. Further, the Assessing Officer has not pointed out any defect or discrepancy in the books of account; and did not reject the books of accounts of the assessee. Also, as noted earlier not a single instance of under-reporting or over-reporting of either revenue or expenditure has been pointed out in either of the two units of the assessee. The Learned. CIT(A) has further observed at para 12(8) in his order that this issue was examined in earlier years also when no such addition was made. In view of the foregoing, we are of the view that the order of learned CIT(A) on this issue is just and fair in the light of specific facts and circumstances of the case, applicable law and decided precedents. No material has been brought for our consideration to persuade us to take a view different from the view taken by the learned CIT(A). No case has been made by Revenue for interfering with the order of learned CIT(A) on this issue. Therefore, ground 7 of the appeal is dismissed.

(H) All the grounds of appeal in Revenue’s appeal are treated as disposed of in accordance with the aforesaid direction, and the appeal is dismissed.

(I) Now, we come to the cross objection filed by the assessee, in which the following grounds have been taken:-

“1. BECAUSE the ld."CIT(A)" has grossly erred in law in holding that selection of case for scrutiny assessment under Computer Aided Selection Scheme (CASS) was valid in view of the judgment rendered by Hon'ble Andhra Pradesh High Court in the case of M/s Andhra Pradesh Beverages Corporation Ltd. and on that basis, in upholding the validity of assessment order dated 15.03.2016 passed under section 143(3) by the Asstt. CIF, Range-V, Lucknow.

2. BECAUSE, keeping in view the binding authority of Hon'ble Jurisdictional High Court in the case of Union of India vs. Sheo Shankar Sitaram reported in (1974) 95 ITR 523, the ld."CIT(A)" was under an obligation to hold that selection of case based on extraneous advice and material, was not valid and accordingly the Assessing Officer had lost jurisdiction to make assessment under section 143(3), in relation to the "return" filed by the assessee under section 139(1) of the Act.

4. BECAUSE the ld."CIT(A)" has erred in law and on facts in upholding the addition of Rs.27,55,343/- as had been made in the assessment on account of transfer of capital asset consisting of land and depreciable asset, forming part of Unit no.3 (2nd Unit at Dehradun).

5. BECAUSE the view taken by the ld."CIT(A)", while upholding the addition of Rs.27,55,343/- to the capital gain, suffers from non-consideration of factual matrix of the case as had been duly mentioned in paras 33, 34 and 35 of the Statement of Fact (accompanying the Memo of 1st appeal) as have been extracted in Enclosure - I(b) hereto and the same is not sustainable, and law applicable thereto.

(I.1) Further the assessee has also annexed enclosure to the grounds of appeal which are as under:

Enclosure-1(a) to Grounds of Cross Objection

It has not been disputed before us that assessment proceedings as well as proceedings for the imposition of penalty are judicial in nature. It is well-settled that an officer or authority upon whom jurisdiction has been conferred to make an order judicially has to act independently. He has to apply his own mind to the evidence on the record. He cannot act on the advice given by an outsider even though that stranger may be an authority higher in rank to him in the official hierarchy. The communications between the officer empowered to impose penalty and the higher authorities in regard to assessment or penalty proceedings could not be held to be communications made in official confidence because in law these authorities were not entitled to exchange opinions or give advice in regard to judicial proceedings. In our opinion, the Tribunal was justified in rejecting the claim of the petitioners under section 124 of the Evidence Act.

"The power conferred by section 25 is not administrative: it is quasi judicial. The expression "may make such inquiry and pass such order thereon" does not confer any absolute discretion on the Commissioner. In exercise of the power the Commissioner must bring to bear an unbiased mind, consider impartially the objections raised by the aggrieved party, and decide the dispute according to procedure consistent with the principles of natural justice: he cannot permit his judgment to be influenced by matters not disclosed to the assessee, nor by dictation of another authority....." xxxx xxxx xxxx xxxxx "......It enacts that no orders, instructions or directions shall be given by the Board so as to interfere with the discretion of the Appellate Assistant Commissioner of Wealth-tax in the exercise of his appellate functions. It does not, however, imply that the Board may give any direction or instructions to the Wealth-tax Officer or to the Commissioner in exercise of his quasi-judicial function. Such an interpretation would be plainly contrary to the scheme of the Act and the nature of the power conferred upon the authorities invested with quasi-judicial power." (7&8)

3. ITO Vs. Eastern Scales (Pvt.) Ltd reported in (1978) 115 ITR 323 (Cal).

The further ground of challenge of the respondent No.1 to the impugned orders relating to the assessment years 1970-71 and 1971- 72 was that the assessments for the said assessment years were sought to be rectified by the ITO under s.154 according to the direction of the Additional CIT, West Bengal-I, by charging tax on the rate applicable to the total income received by the non-resident from all the three sources. The ITO in his affidavit-in-opposition has admitted the said fact, namely, that he revised the assessment orders for the said years as per the direction of the Additional CIT, West Bengal-I. It has been held by the learned judge that the impugned orders were vitiated as the same were passed at the behest of the Additional CIT and not at the instance of the ITO concerned. It is, however, contended by Mr. Pal that in view of the provision of section 119(3) of the Act, the ITO did not commit any illegality by complying with the direction of the Additional CIT 8.119(3) provides that every ITO employed in the execution of the Act shall observe and follow such instructions as may be issued to him for his guidance by the Director of Inspection or by the Commissioner or by the IAC within whose jurisdiction he performs his functions. In our view, s.119 (3) does not permit the authorities mentioned therein to interfere with the exercise of judicial or quasi-judicial functions by the ITO in making the assessment. S.119 contemplates administrative directions or instructions that may be issued from time to time by the authorities as mentioned in sub-section (3) as also in other sub-sections. The ITO has to act judicially or quasi-judicially in the assessment proceedings and any direction by any higher authority as to the manner in which such proceedings are to be disposed of would be interference with the judicial or quasi-judicial functions of the ITO. If the ITO acts in accordance with such directions and disposes of assessment proceedings accordingly, his orders will be liable to be set aside on that ground. No other point has been argued on behalf of the appellants in this appeal.

Accordingly, the rule is made absolute in terms of prayer (a). It is unnecessary to consider prayer (b). Further, in view of the fact that the ITO concerned has been specifically directed under this order to ignore the communications of the Commissioner, the CBDT and the Govt. of India at the time of passing his order on the application for rectification, it becomes unnecessary to give any relief in terms of prayer (c) and no specific order need be made since these communications are to be ignored by the ITO." (498 & 499)

"Under the Act, it is provided that it is the duty of the Assessing Officer to make regular assessment. The circulars issued by the Central Board of Direct Taxes should not be of such nature which would curtail the power of the Assessing Officer or would mandate the Assessing Officer to assess in a particular manner only. For the purpose of explaining the section or the rules.

Circulars can be issued as mentioned in section 119 for the purpose of administration. For the purpose of just, proper and efficient management of the work of assessment and in public interest, circulars can be issued and the circulars cannot be adverse to the assessee. The Assessing Officer exercises quasi-judicial functions and a duty is cast upon him to Act in a judicial and independent manner. Other authorities cannot control or affect his judgment in the matter of assessment. If the circular is issued then, the subordinate officer is bound to act accordingly and he will be in a helpless situation and will not be in a position to exercise his own independent judgment. The courts have pointed out again and again that no authority howsoever high can control the administration of judicial or quasi-judicial authority, that being the essence of our judicial system. It appears that the authority cannot allow its discretion to be influenced by the dictation of others as it would amount to abdication. It would then not be the authority's discretion that is exercised but someone else. If an authority hands over its discretion to another body, it acts ultra vires and such interference by a person or a body extraneous to the power would be plainly contrary to the nature of the power conferred upon the authority."

In our view, from the assessment order itself, it becomes clear that though the Assessing Officer arrived at a conclusion that the taxable income when rounded off comes to Rs.2,11,81,620, however, in view of the circular held that the income shall not be less than the returned income, i.e. the income will be at Rs.5,13,86,320. Thus, no room is left for exercise of discretion by the circular. The authority invested with the power has to act on its own but when the concerned authority does not apply its mind and take action, it would amount to non-exercise of power by the authority and the action would be bad." (103)

6. Orient Paper Mills Ltd. Vs. Union of India reported in (1969) AIR 48.

8. If the power exercised by the Collector was a quasi judicial judicial power—as we hold it to be—that power cannot be controlled by the directions issued by the Board. No authority however high placed can control the decision of a judicial or a quasi judicial authority. That is the essence of our judicial system. There is no provision in the Act empowering the Board to issue directions to the assessing authorities or the appellate authorities in the matter of deciding disputes between the persons who are called upon to pay duty and the department. It is true that the assessing authorities as well as the appellate authorities are judges in their own cause; yet when they are called upon to decide disputes arising under the Act they must act independently and impartially. They cannot be said to act independently if their judgment is controlled by the directions given by others. Then it is a misnomer to call their orders as their judgments; they would essentially be the judgments of the authority that gave the directions and which authority had given those judgments without hearing the aggrieved party. The only provision under which the Board can issue directions is Rule233 of the Rules framed under the Act. That rule says that the Board and the Collectors may issue written instructions providing for any supplemental matters arising out of these Rules. Under this rule the only instruction that the Board can issue is that relating to administrative matters; otherwise that rule will have to be considered as ultra vires section 35 of the Act.

(51) (J) At the time of hearing before us, the Learned. A. R. for the assessee, submitted that the assessee did not want to press the cross objection and has sought permission to withdraw cross objection filed by the assessee. The learned CIT(D.R.) for Revenue expressed no objection to this. Accordingly, the cross objection filed by the assessee is dismissed, as not pressed and withdrawn.

In the result, appeal of Revenue and Cross Objection of assessee, both are dismissed.

(Order pronounced in the open court on 11/12/2024)