The Commissioner Of Income Tax, Karnal v. M/S Om Overseas, Shiv Nagar, Panipat

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. ITA No.699 of 2010 Date of decision: 31.1.2011 The Commissioner of Income Tax, Karnal -----Appellant Vs. M/s Om Overseas, Shiv Nagar, Panipat ----Respondent CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:-Mr. Yogesh Putney, Sr.Standing Counsel for the revenue. Adarsh Kumar Goel,J. 1.This order will dispose of ITA Nos.687, 699, 719 and 720of 2010 as it has been stated by learned counsel for the revenue that allthe four appeals involve common questions. 2.ITA No.699 of 2010 has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 (for short, ‘the Act’) against theorder of the Income Tax Appellate Tribunal, Delhi bench ‘B’ New Delhipassed in ITA No.2885/Del/2009 dated 29.1.2010 for the assessmentyear 2005-06, claiming following substantial questions of law:- “i) Whether on the facts and circumstances of thecase and in law, the learned ITAT was right inholding that the CIT(A) had duly put all theobjections and documents to all the parties for theircomments, it cannot be said that there was violationof provisions contained in Rule 46A of the IncomeTax Rules, 1962, despite the fact that opportunitywas given by the AO under section 142A(3) of the Income Tax Act, 1961 to the assessee during thecourse of assessment proceedings and any evidenceif any or objections to the DVO’s report was to besubmitted before the AO which was not done andthat the assessee was not eligible to produce newevidence for the first time before the CIT(A) andalso not appreciating the fact that there is noprovision for a revised report under section 142Aof the Income Tax Act, 1961? ii) Whether on the facts and circumstances of thecase and in law, the learned ITAT was right in lawin observing that there was no violation of Rule46A of the Income Tax Rules, 1962, despite thefact that none of the conditions prescribed underrule 46A were satisfied by the assessee foradmission of additional evidence in as much asthere was no occasion where (a) the AO refused toadmit the evidence, (b) or the assessee wasprevented by sufficient cause from producing theevidence which was called upon to be produced bythe AO, (c) or the assessee was prevented bysufficient cause for producing before the AO anyevidence which is relevant to the ground of appeal,(d) or the AO passed the assessment order withoutgiving the assessee sufficient opportunity to adduceevidence relevant to any ground of appeal? iii) Without prejudice to the above, whether on thefacts and in the circumstances of the case, thelearned ITAT is right in arriving at the conclusionthat a sum of Rs.91,30,355/- on ‘Humidification Plant’ and Rs.1,20,01,718/- under the head‘Trenches’ considered by the DVO’s subsequentinvalid report, be treated as investment and holdingthat the investment made in the building accountunder the head ‘Humidification Plant’ and‘Trenches’ considered for allowing relief to theassessee is completely ignoring the provision ofsection 142A of the Income Tax Act? iv) Whether on the facts and in the circumstancesof the case, the learned ITAT was right in deletingthe addition of Rs.46,23,127/- made by the AO onaccount of disproportionate expenses in the P&Laccount in view of the fact that the books ofaccounts were rejected by applying the provisionsof section 145(3) of the Income Tax Act, 1961 asthe assessee failed to produce the stock registerbefore the AO especially when the auditors in theiraudit report in column 22 had stated that theassessee has maintained stock register in respect ofbroad product only?” iv) Whether on the facts and in the circumstancesof the case, the learned ITAT was right in deletingthe addition of Rs.46,23,127/- made by the AO onaccount of disproportionate expenses in the P&Laccount in view of the fact that the books ofaccounts were rejected by applying the provisionsof section 145(3) of the Income Tax Act, 1961 asthe assessee failed to produce the stock registerbefore the AO especially when the auditors in theiraudit report in column 22 had stated that theassessee has maintained stock register in respect ofbroad product only?” 3.The assessee is an exporter deriving income frommanufacture and export of handloom goods. During assessment,dispute arose regarding correctness of the cost of construction of thefactory as also claim for expenses as per trading and P&L account. TheAssessing Officer appointed District Valuation Officer (DVO) andobtained report as to valuation which was higher than the valuationdeclared by the assessee. On that basis, addition was made to thedeclared income. The CIT(A) accepted the plea of the assessee for calling revised report by admitting additional evidence under Rule 46Aof the Income Tax Rules, 1962 (for short, ‘the Rules’). As per revisedreport, the assessee was given the benefit but objections of theassessee to the revised report seeking reduction of cost under the heads‘Humidification Plant’ and ‘Trenches’ were rejected. The Tribunalupheld the said objections and allowed the appeal of the assessee whiledismissing the appeal of the revenue against admission of additionalevidence and acceptance of revised report. Questions (i) to (iii) relate tothis aspect and it has been fairly stated that the same are coveredagainst the revenue by our order passed today in ITA No.721 of 2010.Accordingly, the said questions cannot be held to be substantialquestions of law. 4.As regards Question (iv), the Assessing Officer disallowedexpenses claimed on the ground that the assessee failed to producestock register and quantitative details of the raw material of furnishedgoods. It was observed that new machinery was installed by theassessee which resulted in higher production and quality in whichcase, rates of its products should have increased resulting in grossprofit. Turnover had also come down which created doubt regardinggenuineness of the books of account. On appeal, the CIT(A) set asidethe addition holding that all the details were available and there was noreason to doubt the genuineness of books of account which had beenaccepted in the preceding as well as succeeding years. It was held thatdisallowance of expenses to the extent of 20% of the increasedexpenditure was not justified. As regards increase of expenses, it was observed that the assessee had given due explanation and increase inexpenses was justified on account of cost of diesel and electricity,salary, PF, bonus and other items. Though the turnover had decreased,the production was higher as shown by the higher closing stock. GPrate had also increased. Relevant observations are:- observed that the assessee had given due explanation and increase inexpenses was justified on account of cost of diesel and electricity,salary, PF, bonus and other items. Though the turnover had decreased,the production was higher as shown by the higher closing stock. GPrate had also increased. Relevant observations are:- “After rejection of books of accounts the AO proceeded todisallow 20% of the increased expenditure as increased incomparison to the preceding year. As discussed anddecided above, assessee has been maintaining completebooks of accounts and the same were produced before theAO and the AO could not find any patent defect in thebooks of accounts or vouchers/bills relating to anyexpenditure. The AO has not disputed the genuinity ofexpenses claimed by the assessee and therefore, he has notpointed out any specific expenditure or any specific item ofexpenditure which is not an allowable expenditure. Thedisallowance has merely been made because there is anincrease in the expenditure as compared to the precedingyear and because the books of accounts have been rejected.Whereas, rejection of books of accounts was not justifiedand the decision of the AO has already been set aside asabove. The assessee has explained and justified the reasonfor increase in expenses and AO has not disputed the claimof the assessee on merit or on facts. Assessee has explainedthat in the preceding year he was mainly in trading andtherefore, buying the goods from market and thenexporting them, whereas, in the year under considerationthe assessee ahs installed various textile machineries likeimported shuttle less weaving looms, warting machines,sizing plant etc. and therefore, it is claimed that certainexpenditure have been increased but in long run the incomeand turnover of the assessee will increase and it is in the interest of business to have its own manufacturing unit. Theassessee has also given item wise explanation for increasein expenditure before the AO and during appellateproceedings and the same has been reproduced in thesubmissions of the assessee. Assessee has claimed thatdiesel and electricity expenses, salary, PF and bonus, dyesand chemicals consumable stores, fees and taxes andinsurances etc. which have been compared by the AO haveparticularly increased due to establishment of its own plantand machinery and AO has not denied the claim of theassessee and no discrepancy was found either on merit oron facts. The AO has also claimed that turnover has notincreased but asessee has explained that goods worth overRs.9 crore were lying in the closing stock and if the sameare added to the total turnover then closing stock andturnover in the preceding year are same as in this year. Theassessee has also claimed that its GP rate has increased dueto its own manufacturing and same has also not beendenied by the AO, therefore, merely because expenses haveincreased cannot be the reason for any disallowance,particularly when all the expenses during the year havebeen incurred for the purpose of business only and AO hasnot found any defect or deficiency in the claim forexpenses. The AO has disallowed 20% of the increasedexpenses as compared to the preceding year but he has notgiven any basis for doing so. If the AO held that 20% of theincreased expenses are not the business expenses thenautomatically he has accepted the remaining 80% of theincreased expenses allowable business expenses but formaking any disallowance AO has to find out as to whichare the expenses which are not business expenses.Generally if an expenditure is the business expenditure thenonly a part of it cannot be held as non business expenditurewithout any finding of the fact. There can be only four reasons for which the expenditure may be held as notallowable, (1) the expenditure is of personal nature, or (2)the expenditure is a capital expenditure, or (3) theexpenditure is not related to the business of the assesseeand lastly (4) the expenditure does not relate to the periodunder consideration and therefore, AO has to find out as towhich are the expenses or items of expenses which aredisallowable because of any of the above reasons. AOcannot merely held that 20% of the expenses are disallowedwhereas, he is unable to find any expenditure which iscovered by any of the above reasons or which is to abusiness expenditure, therefore, making disallowance 20%of the increased expenses by the AO is not only withoutany basis but it is illogical also. Therefore, the disallowancemade by the AO is deleted and the ground of appeal isallowed.” 5.The above view has been affirmed by the Tribunal. 6.We have heard learned counsel for the revenue. 7.Learned counsel for the revenue submitted that theAssessing Officer had given valid reasons for disallowing expensesclaimed by rejecting books of accounts. The CIT(A) and the Tribunalwere not justified in upholding the plea of the assessee. 8.We are unable to accept the submission. The CIT(A) hasgiven valid reasons for setting aside the additions and for accepting thebooks of account. The reasons given by the Assessing Officer havebeen duly met. It has been held that inspite of new machinery, theexpenses increased due to increase in price of diesel and also cost ofestablishment. Even though turnover did not increase, the closing stockhad increased and the GP rate had not decreased. In these circumstances, there was no reason to reject the books of account. Thefinding recorded by the CIT(A) and the Tribunal is not shown, in anymanner, to be perverse. The books of account could be rejected only ifit could be shown that they did not truly reflect the income of theassessee. Reasons given by the Assessing Officer for rejecting thebooks of account having not been found to be correct, view taken bythe CIT(A) and the Tribunal being not perverse, the question raisedcannot be held to be substantial question of law. 9.Accordingly, these appeals are dismissed. (Adarsh Kumar Goel) Judge January 31, 2011‘gs’ (Ajay Kumar Mittal) Judge