Commissioner Of Income Tax, Faridabad v. M/S. Faridabad Entertainment (P) Ltd.faridabad

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 530 of 2010Date of decision: 31.1.2011 Commissioner of Income Tax, Faridabad --- Appellant Versus M/s. Faridabad Entertainment (P) Ltd.Faridabad --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present:Ms. Urvashi Dhugga, Standing Counselfor the appellant-Revenue. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-Tax Act,1961 (for short “the Act”) has been filed by the Revenue against theorder dated 31.12.2009, passed by the Income Tax Appellate TribunalDelhi Bench ‘B’, New Delhi (in short “the Tribunal”) in ITA No.313/Del/2009, relating to the assessment year 2004-2005. The following substantial questions of law have beenclaimed for determination by this Court: 1-Whether on the facts and in the circumstances of the case,the Ld. ITAT was right in deleting the addition of Rs.13,88,866/- made on account of operations/ expenses bythe Assessing Officer after invoking Section145 of theIncome Tax Act, 1961 and bringing on record the defectthat the assessee is not maintaining mercantile systemregarding the receipts of management charges and,thereafter, estimating the income on the basis of previousrecord of the assessee and whether the ITAT was right inholding that no defect has been brought on record by theAssessing Officer?the Ld. ITAT was right in deleting the addition of Rs.13,88,866/- made on account of operations/ expenses bythe Assessing Officer after invoking Section145 of theIncome Tax Act, 1961 and bringing on record the defectthat the assessee is not maintaining mercantile systemregarding the receipts of management charges and,thereafter, estimating the income on the basis of previousrecord of the assessee and whether the ITAT was right inholding that no defect has been brought on record by theAssessing Officer? 2-Whether on the facts and in the circumstances of the case,the learned ITAT was right in law in upholding the order ofthe learned CIT(A) in deleting the addition of Rs.2,73,680/- made by the Assessing Officer on account ofrebate and discount even though the genuineness of theseexpenses were not established?”the learned ITAT was right in law in upholding the order ofthe learned CIT(A) in deleting the addition of Rs.2,73,680/- made by the Assessing Officer on account ofrebate and discount even though the genuineness of theseexpenses were not established?” 2.The facts, in brief, necessary for adjudication, as narratedin the appeal, are that the respondent-assessee filed its return ofincome for the assessment year 2004-2005, on 1.11.2004 declaringloss of Rs. 29,81,221/-. The assessment was completed underSection 143(3) of the Act, vide order dated 22.12.2006 at a loss of Rs.12,75,130/- in which many additions were made and certaindeductions were disallowed. As regards the operational receipts andexpenses, the assessing officer held that genuineness of the claim ofthe operational expenses was not established and the correct profit or loss from business could not be ascertained from the receipts andexpenses shown during the year. The assessing officer, therefore,rejected the book result shown by the assessee, under Section 145 ofthe Act. In so far as the rebate and discount expenses are concerned,the assessing officer held that since the genuineness of thoseexpenses was not established, the expenses claimed by the assesseeamounting to Rs. 2,73,680/- were not allowable. 3. The assessee feeling aggrieved against the order of theassessing officer, preferred an appeal before the Commissioner ofIncome-tax (Appeals) {in short “the CIT(A)”}. The CIT(A) allowed theappeal and granted a relief of Rs. 17,06,069/- to the assessee. Thefindings of CIT(A) have been affirmed by the Tribunal, vide order dated31.12.2009, in the appeal carried by the assessee. This is how, theRevenue is in appeal before this Court. 3. The assessee feeling aggrieved against the order of theassessing officer, preferred an appeal before the Commissioner ofIncome-tax (Appeals) {in short “the CIT(A)”}. The CIT(A) allowed theappeal and granted a relief of Rs. 17,06,069/- to the assessee. Thefindings of CIT(A) have been affirmed by the Tribunal, vide order dated31.12.2009, in the appeal carried by the assessee. This is how, theRevenue is in appeal before this Court. 4.We have heard learned counsel for the Revenue and haveperused the record. 5.The point for consideration in this appeal relates to thegenuineness of the claim of the assessee under the heads,‘operational expenses’ and ‘rebate and discount’. 6. The CIT(A) while allowing the appeal of the assessee withregard to its claim for ‘operational expenses’ held as under: “9. I have carefully considered the submissions of the Ld.A.R. a and perused the order of assessment. The plainreading of the assessment order makes it quite evidentthat the A.O. has resorted to the provisions of Section 145of the Income Tax Act only on presumption / or suspicion without bringing any material on record to justify his action.The A.O. himself admitted that the receipts shown hadbeen more than the preceding year i.e. Rs. 24,75,215/- asagainst the last year’s Rs. 6,13,645/-. Last year, the GPwas 66%. The loss during the year had been largely dueto the operational expenses which have increased fromRs. 2,05,578/- of the last year to this year’s Rs.26,26,474/-, the details of which had been furnished inschedule ‘K’ of the P & L account. Also, marginallyresponsible for the loss have been the personal expensesas per Schedule-L increased from Rs. 12,68,633/- of thelast year to this year’s Rs. 16,36,648.95, which fact hasnot been considered by the A.O. while he has referred toadministrative expenses, selling expenses (which havebeen less than year rather from Rs.4,05,339.55 to Rs.3,98,636.50 etc. Thus, the AO has focussed his enquirieson the increase into the operational expenses, and whilehe was even so satisfied with the other expenses in theSchedule ‘K’ he was not convinced with the justificationgiven by the appellant company during the course ofregular proceedings regarding the increase in the paychannel expenses. 10. The appellant had explained the entire issue vide itsletter dated 28.11.2006 enclosed in the paper book whichhas been duly studied by me. By this letter, the appellanthad explained the increase in the operational expenses as per clause No.2.4-2.2(ii) of the agreement with the SitiCable Net Work Ltd. and income as per clause No. 2.4-2.2(i). While the A.O. seems to have accepted theexplanations of the appellant regarding the managementcharges of Rs. 23,68,503/- arrived on the basis of totalbilling raised to the cable operators for Rs. 1,57,90,022/-,the detailed annexure of billing raised at managementcharges of which has been examined by me. The A.O,.has not accepted the appellant’s explanations regardingthe takeover of pay channel as per clause No. 2.4 -2.2(ii),wherein the details of 50% Pay Channels transferred toSiti Cable Network Ltd. on the basis of the total billing ofRs. 1,57,90,022/- i.e. Rs. 78,95,011/- were also attachedand which have been also examined by me. I have againexamined all these documents as well as the month-wisedetails of operational expenses in respect of theagreement between Siti Cable Net work Limited and theappellant company filed during the course of assessmentproceedings vide letter dated 23.11.2006 and which hasalso now been submitted during the course of appellantproceedings i.e. distribution-cum-management agreementbetween Siti Cable Network and the appellant companydated 27.5.2002 and the addendum to DCM agreementdated 3.4.2003 which have also been perused by me. Ifind that all the operational expenses have been genuinelyand accurately arrived at as per these agreement deeds, especially clause 2.4 of the DCM agreement. The A.O. hasnot pointed out any discrepancy or contradiction in theoperational charges arrived at by the appellant companyas per the above agreements. Neither he has pointed outany defect or deficiency in the regular books of accountmaintained by the appellant company nor any defect in thebills and vouchers for such expenses maintained by itduring the course of normal business. As to the method ofaccounting, the receipts of management charges asadmitted by the A.O. are on the basis of realisation i.e.they are crystallised in this year and thus they are to beaccounted for only during the year under considerationand hence the mercantile method of accounting adoptedby the appellant company as per note of Schedule-P of theaudit report dated 24.8.2004 is in no way in variation orcontradiction with the facts and the circumstances of thecase. The appellant company has got its accounts dulyaudited by the C.A. M/s. Subhash C. Gupta and Co. andvide their report dated 24.8.2004, it is declared by themthat the proper books of account as required by law hadbeen kept by the company and the P & L account and itsbalance sheet are in consonance with the books ofaccount which give a true and fair view of the company’saffairs. The A.O. has not found out or pointed out anyadverse finding regarding the audited version of the booksof account nor in the mercantile system of account followed by the company generally, debiting expenses onaccrual basis. Thus, the completeness and correctness ofthe books of accounts maintained by the appellantcompany are in no way in dispute or doubt by the A.O. andhence the provisions of Section 145 have been incorrectlyand indiscreetly applied by the A.O. on the facts andcircumstances of this case. Therefore, in view of the ratiolaid down by the jurisdictional High Court in the case ofCIT vs. Om Overseas Shivsagar (supra) and that ofGauhati High Court in the case of M/s. MadnaniConstruction Corporation Pvt. Ltd. the A.O. was notjustified in invoking the provisions of Section 145 when theduly audited book version was not challenged by the A.O.or any Court, and the audited particulars/ details were notat all disputed as to there being defects whatsoever inthem. 11. As to the books of accounts and vouchers maintained,they, therefore, reflect a true picture of the accounts of theappellant company. Hence, the business results declaredby the appellant company need not have been interferedby the A.O. in estimating its profits by applying an arbitraryrate of G.P. at 50%. Merely because the profits are lowcompared to the earlier year is not a circumstance ormaterial to justify an estimate in the circumstances andfacts of the case, as held by the jurisdictional High Court inthe case of Pandit Bros. Vs. CIT, 26 ITR 156 (P&H). Similarly, the books of account can be rejected underSection 145 only where either no method of account wasemployed or the method employed was such that it did notdisclose the true profits, in view of the decision of thejurisdictional High Court in the case of CIT vs. K.S. Bhatia,269 ITR 257 (P&H). In the instant case, neither of the twoabove premises are applicable. Thus, the addition of Rs.13,88,866/- both on facts and law is meritless and hencestands deleted.” The issue regarding discount and rebate has been discussed by theCIT(A) in para 20 of its order, which reads thus: Similarly, the books of account can be rejected underSection 145 only where either no method of account wasemployed or the method employed was such that it did notdisclose the true profits, in view of the decision of thejurisdictional High Court in the case of CIT vs. K.S. Bhatia,269 ITR 257 (P&H). In the instant case, neither of the twoabove premises are applicable. Thus, the addition of Rs.13,88,866/- both on facts and law is meritless and hencestands deleted.” The issue regarding discount and rebate has been discussed by theCIT(A) in para 20 of its order, which reads thus: “20. I have carefully considered the submissions of thelearned A.R. and perused the order of assessment. Fromthe assessment order, it is quite evident that the A.O. hasproceeded on some misunderstanding of the nature ofsubscription charges as per the agreement entered by theappellant company with M/s. Siti Cable Network Limited.These expenses as detailed as per schedule-N of theaudited accounts have been duly examined by me vis-à-visthe method embedded in clause No. 2.4 of the addendumto DCM agreement dated 3.4.2003. It has been found that50% distribution charges are paid to the distributors fromthe realisation of the service charges from the bills raisedwhich amount to Rs. 1,57,90,022/- on behalf of Siti CableNetwork Limited. However, during the year underconsideration, certain credit notes were issued by the Siti Cable to the clients/customers against whom the billingwas raised by the appellant company and these creditnotes are exactly the rebate and discount expenditurebeing incurred for the appellant company which amount toRs. 2,73,680/-. As everything is transparent in the accountmaintained in a separate heads of rebate and discount, asagainst that of the subscription charges, and since theA.O. has not pointed out any defect or deficiency in therebate and discount account, no adverse inference can bedrawn as to the genuineness of these expenses claimed atRs. 2,73,680/- under the head “rebate and Discount”.Therefore, the disallowance of Rs. 2,73,680/- too, isdeleted.” 7. The Tribunal held that the ‘operational expenses’ had beengenuinely and accurately shown which were as per various clauses ofthe agreement and further that no defect in the regular books ofaccount was pointed out by the assessing officer nor any discrepancyin the operational charges shown by the assessee-company in termsof those agreements were pointed out and, thus, the CIT(A) hadrightly deleted the disallowance of Rs. 13,88,866/- made by theassessing officer. The Tribunal further held in plain words that noinfirmity could be found in the order of the CIT(A), allowing the claim ofthe assessee relating to ‘rebate and discount’. The Tribunal hadconcluded that the genuineness of ‘rebate and discount’ could not bedoubted. 8.Learned counsel for the appellant-Revenue has not beenable to pin-point any perversity or illegality in the findings of the CIT(A)and the Tribunal on both the counts, which may warrant interferenceby this Court. In view of this, no substantial question of law arises forconsideration of this Court and the appeal is accordingly dismissed. (AJAY KUMAR MITTAL) JUDGE January 31, 2011*rkmalik* (ADARSH KUMAR GOEL) JUDGE