Pr. Commissioner Of Income-Tax, Faridabad v. M/S. K.k. Kohli & Brothers Pvt. Ltd., Faridabad

ITA No. 554 of 2017 (O&M) 211 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH I.T.A. No. 554 of 2017 (O&M) Decided on : 06.08.2018 * * * Pr. Commissioner of Income-Tax, Faridabad Appellant Versus M/s. K.K. Kohli & Brothers Pvt. Ltd., Faridabad Respondent CORAM : HON'BLE MR. JUSTICE AJAY KUMAR MITTALHON'BLE MR. JUSTICE AVNEESH JHINGAN Present :Mr. Tajender K. Joshi, Standing Counsel for the Revenue. Mr. Rajiv Agnihotri, Advocatefor the assessee. * * * AVNEESH JHINGAN, J. The present appeal has been filed under Section 260A ofthe Income Tax Act, 1961 (for short 'the Act') against the order dated05.04.2017 passed by the Income Tax Appellate Tribunal, New Delhi(for short 'the I.T.A.T.'), dismissing the appeal of the Revenue andallowing the cross-objections of the assessee. The assessment yearinvolved is 2007-08. 2.The assessee company was engaged in the business ofprocessing of fabric at Faridabad. During the relevant year, returnwas filed showing an income of �3,42,590/-. The case was selectedfor scrutiny and notice was issued under Section 143(2) of the Act.The Assessing Officer, vide order dated 29.12.2009, finalized the assessment under Section 144 of the Act. An addition of� 1,56,86,870/- was made as gross profit rate had fallen in comparisonto earlier years. An addition of �1,43,72,485/- was made disallowingthe bad debts. An amount of �1,41,83,879/- was added by disallowingthe additional depreciation claimed on Plant & Machinery. 3.Aggrieved of the assessment order, an appeal was filedbefore the Commissioner of Income Tax (Appeals) {for shortC.I.T.(A)}. The appeal was partly allowed, vide order dated26.04.2012. C.I.T.(A) deleted the addition of �1,26,86,871/- onaccount of fall in gross profit rate and addition of �30 lakhs was onlyupheld. Out of addition made of �1,43,72,485/- on account ofdisallowance of bad debts, only disallowance sustained was�18,18,058/-. The Appellate Authority deleted additions of �53,860/-made under Section 43B and �2,71,431/- made under Section40(a)(ia) of the Act. The addition made on account of �1,41,83,879/-by disallowing the short term capital gain was also deleted.4.Aggrieved of the order of the C.I.T.(A), Revenue preferredan appeal before the Tribunal and the assessee filed cross-objections.The Tribunal vide order dated 05.04.2017, dismissed the appeal filedby the Revenue and allowed the cross-objections of the assessee. 5.As per the appellant-revenue, following substantialquestions of law arise for consideration:- (i)Whether on the facts and in the circumstances of thecase, the Ld. ITAT, New Delhi was right in law in deletingthe addition of Rs. 1,56,86,871/- made by the AssessingOfficer on account of fall in GP rate as the assessee hadintentionally not produced the bills and voucherscase, the Ld. ITAT, New Delhi was right in law in deletingthe addition of Rs. 1,56,86,871/- made by the AssessingOfficer on account of fall in GP rate as the assessee hadintentionally not produced the bills and vouchers with books of account in order to verify book results? (ii)Whether on the facts and in the circumstances of thecase the Ld. ITAT was right in law in deleting thedisallowance of Rs.1,43,72,485/- made by theAssessing Officer on account of bad debts written off asthe assessee has failed to discharge the onus to provethat the debts had actually become bad?case the Ld. ITAT was right in law in deleting thedisallowance of Rs.1,43,72,485/- made by theAssessing Officer on account of bad debts written off asthe assessee has failed to discharge the onus to provethat the debts had actually become bad? with books of account in order to verify book results? (ii)Whether on the facts and in the circumstances of thecase the Ld. ITAT was right in law in deleting thedisallowance of Rs.1,43,72,485/- made by theAssessing Officer on account of bad debts written off asthe assessee has failed to discharge the onus to provethat the debts had actually become bad?case the Ld. ITAT was right in law in deleting thedisallowance of Rs.1,43,72,485/- made by theAssessing Officer on account of bad debts written off asthe assessee has failed to discharge the onus to provethat the debts had actually become bad? (iii)Whether on the facts and in the circumstances of thecase the Ld. ITAT was right in law in deleting thedepreciation allowed at Rs.72,69,675/- @ 80% insteadof Rs. 22,71,774/- by the Assessing Officer as theassessee itself had claimed depreciation at different ratein the past and also failed to substantiate its claim bynot supplying the necessary evidence that themachinery fulfill all the conditions laid down in Rule 5item (ix) of the depreciation?case the Ld. ITAT was right in law in deleting thedepreciation allowed at Rs.72,69,675/- @ 80% insteadof Rs. 22,71,774/- by the Assessing Officer as theassessee itself had claimed depreciation at different ratein the past and also failed to substantiate its claim bynot supplying the necessary evidence that themachinery fulfill all the conditions laid down in Rule 5item (ix) of the depreciation? (iv)Whether on the facts and in the circumstances of thecase, the Ld. ITAT was right in law in deleting thedisallowance of Rs. 1,48,76,639/- made by theAssessing Officer on account of short term capital lossclaimed on block of assets(having 15% rate ofdepreciation) which did not cease to exist?case, the Ld. ITAT was right in law in deleting thedisallowance of Rs. 1,48,76,639/- made by theAssessing Officer on account of short term capital lossclaimed on block of assets(having 15% rate ofdepreciation) which did not cease to exist? 6. Learned counsel for the appellant-Revenue argued that the Tribunal had erred in dismissing the appeal. His grievance is that onlyhand-written books were produced before the Assessing Officer andthe veracity of the same was not verifiable as the supportingdocuments were not produced. He further argued that bad debts wereclaimed but without making any efforts to recover the amounts. Hedefended the order of Assessing Authority for disallowing short termcapital loss on sale of Plant & Machinery as the block asset had notceased to exist. He challenged the allowance of additional depreciation of 80% on Boiler. 7.The Tribunal dismissed the appeal of the Revenue mainlyrelying on the findings recorded by the C.I.T.(A). It would beappropriate to quote the relevant portion of the order of the Tribunalby which the contention of the Revenue has been rejected on the firstissue :- depreciation of 80% on Boiler. 7.The Tribunal dismissed the appeal of the Revenue mainlyrelying on the findings recorded by the C.I.T.(A). It would beappropriate to quote the relevant portion of the order of the Tribunalby which the contention of the Revenue has been rejected on the firstissue :- “6.We have heard the rival submissions andcarefully perused the relevant material placed on record.As far as the department's ground challenging thedeletion of addition of Rs. 1,26,86,871/- made onaccount of fall in GP rate and the related ground ofinvoking the provisions of Section 144 are concerned, itis seen that the Ld. CIT(A) has given a categoricalfinding that the action of the Assessing Officer ininvoking the provisions of Section 144 was not justifiedwhen the books of accounts were produced andcompliances were made during the course ofassessment proceedings. Ld. CIT(A) has held that evenwhen the Assessing Officer had chosen to proceed onpassing a best judgment assessment order, the additionwas required to be made on the basis of materialavailable on record. The Ld. CIT(A) has also noted thatthe Assessing Officer had not cited any reason for notaccepting the gross loss @ 31.71% as declared by theassessee, but adopting the rate of 20% instead. He hasalso noted that during the course of assessmentproceedings, the assessee was specifically asked aboutthe valuation of closing stock. The Ld. CIT(A) hasfurther observed that on the basis of the sales bills filed,the average sale price of fabric worked out to Rs.14 permetre whereas the average rate of fabric for which nosale bills had been filed worked out to Rs.9.20 per metre. Ld. CIT(A) has further observed that the items inclosing stock inventory were mentioned as “cottonfabrics” without any mention of specific quality or brandidentification and as such, the valuation of stock was notamenable for verification.Thereafter, the Ld. CIT(A)proceeded to estimate the difference in valuation at Rs.5per metre and restricted the estimation of under-valuation of closing stock to Rs.30 lakh. A perusal ofthe assessment order also shows that although theAssessing Officer has proceeded on best judgmentassessment u/s 144 of the Act on the ground that booksof accounts were not produced, the Ld. CIT(A) hasgiven a finding that in view of the books of accountshaving been produced, the Assessing Officer was notjustified in invoking the provisions of section 144 of theAct. However, the Ld. CIT(A) has not specificallyaddressed the issue of rejection of books of accounts. Aperusal of the assessment order also shows thatalthough the Assessing Officer has not accepted the GPloss rate at 31.71%, he has not given any reasoning foradopting the loss rate at 20%. The entire case of theAssessing Officer seems to be based on the allegationthat the books of accounts were not produced beforehim. Ld. AR has filed copy of the entire order sheet andhas submitted that the order sheet does not mentionthat the books of accounts were not produced. It hasbeen submitted by the Ld. AR that in view of notmentioning the specific non-production of books ofaccounts, it goes out in assessee's favour to prove thatthe books of accounts were duly produced. The Ld. ARhas also contended that the details of valuation ofclosing stock were filed which had not been contradictedby the Assessing Officer. 6.1On due consideration of the entire factual 6.1On due consideration of the entire factual matrix on this issue, we do feel that irrespective of thefact as to whether the books of accounts were dulyproduced or not produced before the Assessing Officer,the fact remains that the valuation of closing stock hasbeen made without categorising it in terms of specificquality or brand.The Ld. CIT(A) has also noted thatalthough manufacture, purchases and sales details werefiled before the Assessing Officer in respect of trading offabric, the assessee had not filed quantitative detailsand as such, the stock of trading goods, included in theclosing stock was not ascertainable. The Ld. CIT(A) hasalso noted that the assessee had not been able toestablish that the valuation of stock as on 31.03.2007was based on sale rate prevailing on that day. Ld.CIT(A) has also noted that the average rate of fabricwas Rs.52.51 per metre at a stock of 623830 metres on31.03.2006 whereas the average rate of valuation as on31.03.2007 worked out to Rs.11.96 per metre stock of557971 metres and thus, there was a drastic fall in therate of valuation even when the major portion of thestock was out of opening stock. Given thecircumstances, we feel that the Ld. CIT(A) had no optionbut to make a reasonable estimate, specially whenindividual details in terms of quality as well as quantitywere not available. During the course of hearing beforeus, the department could not suggest any otheralternate method of valuation which could havereasonably been adopted by the Ld. CIT(A) exceptarguing that there was no basis for such estimation. (emphasis supplied) 8. 8.From the perusal of impugned order, it is evident thatcertain aspects mentioned hereinafter were not considered by CIT(A)while allowing the appeal of assessee. The Tribunal has also not adverted to the following issues which were required to be examined.The average sale price, on the basis of the bills filed, of the fabric wasRs.14 per meter, whereas, the average rate of fabric for which nosales bills were produced, worked out as �9.20 per meter; theinventory of the closing stock did not mention quality or brand foridentification, hence, valuation could not be verified; the issue ofrejection of books of accounts was not considered; the assesseefailed to establish that the valuation of stock as on 31.03.2007, wasmade on rates prevailing on the said date. The average rate of fabricwas �52.51 per meter whereas evaluation worked out at �11.96 permeter and there was a drastic fall. The Tribunal while dismissing theappeal of the Revenue took note of these issues but has not dealtwith the above referred issues. 9.In such circumstances, without expressing any opinion onthe merits of the case, it would be appropriate that the matter beremitted back to the Tribunal to decide the same afresh in accordancewith law after providing opportunity to both the parties. 10.The appeal is disposed of, accordingly. (AJAY KUMAR MITTAL) JUDGE 06.08.2018pankaj baweja (AVNEESH JHINGAN) JUDGE Whether speaking/reasoned: Yes / NoWhether reportable :Yes / No