Vildirect: IncomeTax-caselaws-2008-VIL-414-ITAT-CHD

2008-VIL-414-ITAT-CHD

Income Tax Appellate Tribunal CHANDIGARH

ITA No. 129/Chd/2007

Date: 31.07.2008

MICRO INSTRUMENTS CO.

INCOME TAX OFFICER

Sudhir Sehgal, for the Appellant.
Jitender Kumar, for the Respondent.

BENCH

M. A. BAKSHI Vice President and G. S. PANNU A.M.

JUDGMENT

G. S. Pannu, A.M. :

This is an appeal by the assessee against the order of the CIT(A) dt. 16th Nov., 2006 pertaining to the asst. yr. 2003-04. In this appeal the assessee has preferred multiple grounds of appeal which we shall deal in seriatim.

2. The appellant is a partnership firm which is engaged in the business of manufacturing electric motors, electric fans and sales thereof. For the assessment year under consideration it filed a return of income declaring an income of Rs. 86,21,400 which included a claim of deduction under s. 80-IB of the IT Act, 1961 (in short 'the Act' ) in respect of Unit II amounting to Rs. 16,22,661. The return of the assessee was subject to scrutiny assessment under s. 143(3) of the Act and the AO has passed an order thereof whereby the total income of the assessee has been assessed at Rs. 1,21,66,830. In the said assessment, the AO has inter alia denied the claim of deduction under s. 80-IB, rejected the trading results, made disallowances out of depreciation, expenses on foreign travel, interest, car running and telephone, etc. All the additions made were challenged in appeal before the CIT(A) unsuccessfully. The CIT(A) has dismissed the appeal of the assessee and the order of the AO has been sustained. Against such order of the CIT(A), the assessee is in appeal before us.

3. In the said background, we have heard the submissions of the rival counsel with respect to each of issues raised in appeal and perused the record to which our attention has been drawn in the course of the hearing.

4. The ground Nos. 1(a) to 1(d) in the memo of appeal relate to the action of the CIT(A) in sustaining the denial of deduction under s. 80-IB of the Act to the assessee. The factual position in this regard is discussed by the AO in paras 10 and 11 of the order. The AO observed that the assessee has two units. In Unit I it was manufacturing '2 pole electric motor' and electric fans while it manufactured '4 pole electric motor' inlet and outlet valves in Unit II. On being asked to justify the claim of deduction under s. 80-IB of the Act in relation to the profits and gains of Unit II, the assessee filed the relevant details and also submitted that the claim of the assessee under s. 80-IB was discussed in the assessment proceedings of the earlier years and allowed as such. From the discussion made in the assessment order it appears that the AO conducted a verification exercise in this regard. The AO noticed that no separate books of account were maintained for the Unit II; that the partners of the both the units are same; that no separate wage/salary register has been maintained for Unit II; that no separate power connection was obtained for Unit II; that the job work charges claimed in the two units were so manipulated to claim higher deduction under s. 80-IB; that the Unit II could not be said to be an independent unit but was only an extension of the business of the industrial undertaking in Unit 1. He therefore denied the claim of deduction under s. 80-IB of the Act. The CIT(A) has also sustained such denial on the reasoning similar to that adopted by the AO.

5. Before us the learned Representative for the appellant firm submitted that the lower authorities were not justified in denying the claim of deduction in this year for the reasons mentioned in the assessment order; for, in the earlier asst. yrs. of 2001-02 and 2002-03 the claim under s. 80-IB has been duly examined and allowed to the assessee with regard to the profits and gains of Unit II. It was submitted that for the asst. yr. 2001-02, the claim was examined in the course of assessment proceedings under s. 143(3) of the Act and allowed. It was submitted that once the relief under s. 80-IB has been allowed to the assessee in the initial year, then it is not open for the AO to examine such question again and decide to deny the relief, especially in a situation whereby the relief allowed in the initial year is not disturbed. It was explained that the initial assessment year for the claim of s. 80-IB relief in question was asst. yr. 2001-02 wherein such relief stood allowed. For the said proposition the assessee has relied upon the following decisions :

(i) Saurashtra Cement & Chemical Industries Ltd. vs. CIT (1979) 11 CTR (Guj) 139 : (1980) 123 ITR 669 (Guj);

(ii) CIT vs. Paul Brothers (1995) 216 ITR 548 (Bom);

(iii) CIT vs. P. Muncherji & Co. (1987) 63 CTR (Bom) 338 : (1987) 167 ITR 671 (Bom);

(iv) Russell Properties (P) Ltd. vs. A. Chowdhury, Addl. CIT (1977) 109 ITR 229 (Cal);

(v) K.N. Agarwal vs. CIT (1991) 100 CTR (All) 170: (1991) 189 ITR 769(All).

6. Apart from the aforesaid, the learned representative has relied upon the submissions made before the CIT(A) with regard to the claim of deduction under s. 80-IB to the effect that the same is otherwise also allowable to the assessee as it fulfils all the conditions prescribed in the said section.

7. On the other hand, the learned Departmental Representative has primarily relied upon the orders of the lower authorities in support of the case of the Revenue. The reasons to deny the claim have been reiterated before us on the same lines as noticed by us earlier in para 4 above.

8. We have carefully examined the rival stands with regard to the claim of the assessee firm for relief under s. 80-IB of the Act in relation to Unit II. Sec. 80-IB governs deduction in respect of profits and gains from certain industrial undertakings for such number of assessment years as specified in the section. Sub-s. (2) deals with the conditions which are required to be fulfilled by an industrial undertaking in order to be eligible for the relief. The assessee initially claimed deduction under s. 80-IB for the impugned unit in the asst. yr. 2001-02 and the same was allowed. In this assessment year the claim of the assessee was in continuation of the claims made in the earlier assessment years for the impugned assessment year falls within the number of assessment years as specified in the section in which the claim is eligible. The Revenue has sought to deny the claim in this year on the ground that the Unit II does not fulfil the conditions specified in the section. It is also a pertinent fact position that the claim allowed to the assessee in the initial assessment year of 2001-02 and thereafter in the asst. yr. 2002-03 has not been withdrawn. This aspect has been pleaded by the assessee before the AO as well as before the CIT(A). Before us, this aspect has been reiterated and we find no controvertion from the Revenue either at the stage of the proceedings before the lower authorities or even before us. Thus, factually speaking, the claim of the assessee for deduction under s. 80-IB stands admitted in the initial assessment year and also thereafter upto the assessment year prior to the year under consideration. On this factual matrix, we find no justification for the AO to deny the claim of the assessee for deduction under s. 80-IB. The implication of the earlier assessment made for the initial assessment year under s. 143(3) is that the assessee has fulfilled the conditions prescribed in the said section. Thereafter, it is not open for the AO to re-examine the issue all over again and come to a different conclusion in a subsequent year without justifying such departure. In the assessment order, we do not find any discussion by the AO on this aspect in spite of the fact that the appellant assessee had taken a specific position based on the relief allowed in the past. Further, the claim accepted by the AO in the asst. yr. 2001-02 and thereafter in 2002-03 has not been disturbed. Clearly, in a such a situation, the onus which was on the Revenue has not been discharged. We are conscious of the legal position that insofar as the justification for the claims of exemption/tax reliefs are concerned the onus is on the assessee to establish and justify the claims. So, however, in a situation like the present situation what we are trying to say is that the AO ought to have justified his departure from the earlier accepted position whereby similar claim has been accepted in the past. It is in this background that we are of the opinion that the onus was on the AO to justify the denial of deduction under s. 80-IB in view of the past history. In our considered opinion the erroneous approach of the lower authorities in this regard stands clearly manifested in view of the judgments of the Hon'ble High Courts of Gujarat and Bombay in Saurashtra Cement & Chemical Industries Ltd. (supra) and Paul Brothers (supra) respectively. Therefore, in this background we find no justification to uphold the stand of the IT authorities to deny the claim of the assessee for deduction under s. 80-IB in relation to the profits and gains of Unit II. Accordingly, on this ground the assessee succeeds.

9. The ground Nos. 2(a) to 2(d) in the memo of appeal relate to the action of the CIT(A) in sustaining an addition of Rs. 14,75,940 made by the AO on account of trading results. In brief, the dispute relates to the action of the AO in invoking the provisions of s. 145 of the Act to reject the trading results declared in the books of account maintained by the assessee. The reasons stated by the AO to reject the book results are as follows. The AO noticed that the GP rate in the present year had declined to 28.5 per cent as against 34.04 per cent and 33.28 per cent in the preceding asst. yrs. of 2002-03 and 2001-02 respectively. The explanation furnished by the assessee with regard to the decline in the GP rate has not been accepted by the AO. Secondly, the AO noticed that the assessee had made payments by way of job charges to M/s Micro Motion (P) Ltd., a sister concern and such payments have not been duly reported in the audit report annexed with the return of income. Further, the AO found no justification for incurring of such expenditure. Considering the above reasons, the AO inferred that the account books maintained by the assessee did not reflect the true and correct picture of the trading results and hence rejected the same by invoking the provisions of s. 145 of the Act. The AO computed the gross profit by applying a GP rate of 30 per cent on the sales as declared by the assessee and the difference amounting to Rs. 14,75,940 was added to the income returned by the assessee. In appeal before the CIT(A), the assessee made varied submissions. According to the assessee, its books of account are audited and all purchases/sales are fully vouched; that the decline in GP rate was on account of reduction in sale price due to supplies from China and increase in generator expenses, manufacturing expenses and job work charges; that the product of the assessee is subject to excise and complete record in this regard was maintained and inspected by the excise authorities. The aforesaid submissions of the assessee have not found favour with the CIT(A) and the addition made by the AO has since been sustained. Against such sustenance of addition the assessee is in appeal before us.

10. Before us, the learned representative for the appellant firm submitted that the lower authorities were not justified in rejecting the trading results declared in the books of account. The learned Representative pointed out that the decline in GP rate was fully explained in the course of assessment proceedings by way of written communications, copies of which have been placed in the paper book at pp. 43 to 49. It was explained that the sale prices of the products had declined due to competition from Chinese market. The assessee has also referred to the paper book wherein are placed copies of the invoices raised on few customers showing the decline in sale prices this year in comparison to the sales in the preceding years. Our reference has been invited to pp. 74 to 117 in this regard. Secondly, it is submitted that expenses have also risen in the year under consideration and this aspect has been admitted by the AO himself in para 3.2 of the order. The learned counsel explained the increase in generator expenses also. It was explained that the manufacturing process of the assessee required uninterrupted regulated electric power supply and therefore the assessee had not availed of any regular power connection but was entirely dependent on the power supplied by its own generator. The prices of diesel had increased in the year under consideration. The learned counsel further drew our attention to p. 118 of the paper book wherein is placed an analysis of all these factors on the GP rate, which shows that the aforesaid factors had affected the GP rate by as much as 7 per cent. Thus, the decline in the GP rate by mere 5.54 per cent in comparison to the immediate preceding year was quite justified. Even with regard to the job work charges paid to M/s Micro Motion (P) Ltd., it was submitted that the expenditure was incurred as in the past years for the work actually undertaken for the assessee. The learned counsel contended that the AO was wrong in observing that the job charges were unverifiable for the reason that the payee concern was also filing its return of income regularly. In this connection, the written submissions made to the AO have been referred to. In fact, the learned counsel pointed out that the payee concern was also being assessed with the same AO. It was pointed out that the said concern had duly accounted for the income earned from the assessee and there is no dispute on this aspect. The other arguments taken before the CIT(A) have been reiterated even before us. In nutshell, it is submitted that there was no justification with the AO to reject the trading results and resort to estimation of the gross profit.

11. On the other, hand learned Departmental Representative, apart from relying on the orders of the lower authorities pointed out that the assessee could not furnish the requisite quantitative stock details and therefore the AO was justified in rejecting the trading results declared by the assessee.

12. In reply, the learned representative for the assessee pointed out that the assessee was maintaining complete quantitative records as prescribed by the excise authorities and the stand of the Revenue on this aspect was untenable.

13. We have considered the rival submissions carefully. Sec. 145(3) of the Act empowers an AO to reject the trading results declared by an assessee. If the AO is not satisfied about the correctness of completeness of the accounts maintained by the assessee or where the method of accounting as notified is not followed by the assessee, the AO is empowered to reject the results so declared and make an assessment to the best of his judgment. In the present case, the AO noted that the GP rate declared was low in comparison to the two preceding assessment years. The second objection relates to the non-reporting of payments made to a sister concern covered within the meaning of s. 40A(2)(b) of the Act. Thirdly, the AO has also not found any justification for incurring payment of job work charges to the said sister concern. The point to be examined is as to whether there are any justified reasons for the AO to reject the books of account maintained by the assessee. In this connection, we find that none of the objections brought out by the AO is strong enough to negate the book results declared by the assessee. Firstly, with regard to the fall in GP rate, we find that the assessee had furnished a detailed explanation. The assessee had explained the decrease in sale price as also its reasons. The reasons were also substantiated on the basis of the sales bills of the respective years showing fall in prices of finished products of the assessee. In fact, in its written communication to the AO placed at pp. 43 to 45 of the paper book, the assessee also pointed out that the fall in sale price was also a subject-matter of examination by the excise authorities with no adverse findings, Further, the assessee explained the increase in expenses this year in comparison to the earlier years. In fact, we find that the AO himself has admitted that the purchase price of the raw materials has risen during the year under consideration. We, therefore, on the basis of the material on record are satisfied with the explanation rendered by the assessee with regard to the fall in GP rate (which) is plausible and could not be a ground to reject the books of account. Similarly, non-reporting of transactions with a concern covered under s. 40A(2)(b), at best, can be attributed to the auditors of the assessee and cannot be a ground to reject the reliability of the account books. Further, with regard to the incurring of job work payments to the sister concern, we find that the assessee had explained the reasons for making the payment. It has been explained that earlier the job work was being got done from outside parties and in view of the secrecy and confidentiality of the manufacturing process, the same was now being undertaken from the sister concern. it is submitted that no unreasonable expenditure has been incurred on job work payments to the sister concern inasmuch as it would have incurred such expenditure even if the job work was got done from other parties. We find that there is no negation to the fact position that the work has indeed been undertaken for the assessee by the sister concern M/s Micro Instruments (P) Ltd. The assessee has explained even before the lower authorities the circumstances in which the payments have been made. There is nothing unreasonable in this regard. In any case, even for applying the provisions of s. 40A(2)(b), it is for the AO to make out a case that the expenditure incurred is excessive or unreasonable having regard to the fair market value of such services. No effort in this regard has been made by the AO. Therefore, considering the aforesaid we do not find any justification for the AO to invoke the provisions of s. 145(3) of the Act and reject the reliability of the account books maintained by the assessee. Thus, the addition made by computing the gross profit on estimate basis is hereby set aside. Accordingly, the assessee succeeds on this ground.

14. The ground Nos. 3(a) to 3(b) in the memo of appeal relate to the action of the CIT(A) in sustaining the addition of Rs. 3,44,919 made by the AO by invoking s. 35D of the Act. The background of the impugned dispute is that the assessee had debited a sum of Rs. 3,44,919 on account of foreign travelling of its partners. On being asked to justify the expenditure, the assessee explained that the visit was undertaken to develop business prospects abroad and in fact trial orders were also procured. That the partners made enquiries and also contacted certain customers. The AO, however found that the export sales undertaken in this year were negligible and therefore, it could be said that there was no export business during the year under consideration and he, therefore, held that the impugned expenditure is liable to be considered as a preliminary expenditure covered within the meaning of s. 35D of the Act in five yearly instalments in subsequent years when the export business of the assessee would commence. He, therefore, disallowed the foreign travel expenditure of Rs. 3,44,919 and observed that deduction of such expenditure will be allowed under s. 35D in five instalments in subsequent years when there will be export turnover. This action of the AO has met with the approval of the CIT(A) also. Against the aforesaid, the assessee is in appeal before us.

15. Before us, learned representative for the assessee vehemently argued that the impugned expenditure was incurred in connection with the existing business of the assessee. In fact, it was pointed out that in the next year, there has been substantial export sales and the export sales have been rendered in relation to the countries which have been visited by the two partners during the year under consideration. Notwithstanding the factum of the export sales having matured in the succeeding year, the learned representative pointed out that the expenditure was allowable during the year under consideration itself for the purpose of expenditure has not been doubted by the AO. Sec. 35D is not at all attracted to the facts of the present case as according to the learned representative, there is no commencement or extension of existing business as is required for invoking s. 35D of the Act.

16. On the other hand, learned Departmental Representative has defended the orders of the lower authorities in support of the case of the Revenue.

17. We have considered the rival submissions carefully. From the aforesaid discussion, it is evident that the only case made out by the AO is that the provisions of s. 35D are attracted in the present case. In our considered opinion, s. 35D provides for amortisation of preliminary expenses incurred before the commencement of business or after the commencement of business in connection with the expenditure (sic-extension) or in connection with setting up of a new unit. The conditions prescribed in sub-s. (1) of s. 35D, in our considered opinion, do not come into play in the present case. In this case, there is no case made out that the expenditure in question has been incurred in connection with expenditure (sic-extension) of or in connection with setting up of a new unit. Merely because the export sales were not substantial during the year under consideration, the same would not lead to an inference that there was no export business. In any case, starting of export sales by itself does not denote start of a new business. Making of export sales, especially of the same product, which is being sold in domestic market, does not entail starting of new business. Therefore, the very basis weighing with the AO to invoke s. 35D is misplaced. Hence, we find no justification to sustain the impugned disallowance. So, however, we also notice that in para 4.1 of the assessment order, the AO has also doubted the business purpose of the expenditure in the absence of any specific evidence. However, because he invoked s. 35D of the Act, no disallowance was made on account of non-business purpose. The CIT(A) has also upheld the disallowance because of s. 35D of the Act. We, therefore, deem it fit and proper to remand this issue to the file of the AO to examine the business purpose and thereafter decide the issue afresh.

18. In the result, on this ground, the assessee succeeds for statistical purposes.

19. By way of ground No. 4 in the memo of appeal, the assessee has challenged an addition of Rs. 16,790. The AO noticed that in relation to four concerns, certain amounts were outstanding on which no interest was charged whereas the assessee was incurring interest expenditure on loans raised. On being asked to justify the interest-free advances, the AO was not satisfied with the reply filed by the assessee. He, therefore restricted the allowance of interest on loans by a sum of Rs. 16,790 representing interest @ 12 per cent on the amount of advances shown as free of interest.

20. The assessee contested this addition before the CIT(A). According to the assessee, all the amounts in question relate to routine trade advances and there was no element of loans or advances per se. The CIT(A) has, however dismissed the submissions of the assessee on the basis of the reasoning made out by the AO.

21. Before us, the learned counsel has reiterated the submissions as made before the lower authorities. It was submitted that the amounts in question were given in the earlier years and the same have also been received back and thus, there was no justification for making notional disallowance on account of interest.

22. On the other hand, the learned Departmental Representative has pointed out that the CIT(A) has sustained the disallowance on the ground that the assessee has not furnished details of business transactions with the parties in question. Therefore, the disallowance was justified.

23. Having considered the rival submissions, we find that the plea of the assessee that the advances have been made for business purpose is not established on facts. Further, the CIT(A) has also arrived at the factual finding at para 2(iii) of his order that there was a nexus between the borrowed funds and the amount of advances in question. For the aforesaid reasons, we find no justification in the plea of the assessee for setting aside the impugned disallowance. The same is hereby retained. On this ground, the assessee fails.

24. Ground Nos. 5(a) and 5(b) relate to the action of the CIT(A) in sustaining addition of 1/6th out of car expenses amounting to Rs. 28,242. The AO has made the disallowance on the ground that personal use of the vehicles cannot be ruled out. He therefore made a disallowance of 1/6th of the total expenses of Rs. 1,69,455 incurred for car running and maintenance. The CIT(A) has also sustained the addition.

25. In this regard, the learned representative for the assessee pointed out that the assessee itself has debited 1/6th of the expenses in the personal account of the partners. That, in any case, there was no car owned by the assessee firm. The assessee was merely reimbursing the expenses claimed by the partners on running of cars. Even with regard to the depreciation of Rs. 26,019 which has been made the subject-matter of disallowance, it was explained that the same related to a truck owned by the assessee and was not relating to the cars. In any case, it was pointed out that disallowance made by the AO was excessive.

26. On the other hand, the learned Departmental Representative has relied upon the orders of the lower authorities in support of the case of the Revenue.

27. Having considered the rival submissions, we find that the disallowance made by the AO is quite misdirected. Firstly, we find from a copy of the ledger account placed at p. 130 that the 1/6th of the total expenditure on running of the car has been transferred to the partners' personal accounts as 'drawings'. Therefore, the element relating to the personal use of the vehicle has already been excluded by the assessee suo motu. In fact, the quantum of exclusion is similar to the quantum of disallowance made by the AO. Considering this aspect, we find no justification for making the impugned disallowance. The same is hereby deleted.

28. Accordingly, the assessee succeeds on ground No.5.

29. By way of ground No. 6, the grievance of the assessee is on account of disallowance on telephone expenses @ 1/6th amounting to Rs. 47,948. The only plea taken before us is that the disallowance is on the higher side.

30. After considering the rival submissions, we find no justification to interfere with the disallowance made by the AO. The assessee fails on this ground.

31. By way of ground No. 7, the grievance is with regard to the allowing of depreciation of vehicle @ 20 per cent instead of 25 per cent. On this issue the claim of the assessee is that the depreciation claimed is on trucks on which rate of 25 per cent is in order whereas the AO erroneously has allowed depreciation @ 20 per cent. On this aspect, we set aside the order of the CIT(A) and restore the issue to the file of the AO who shall verify the claim of the assessee and thereafter allow depreciation at the prescribed rates in accordance with law. Thus, on this ground, assessee succeeds for statistical purpose.

32. In the result, appeal of the assessee is partly allowed.

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