Purchase from grey market

 

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "F", MUMBAI
BEFORE SHRI D.K. AGARWAL (J.M.) AND SHRI J. SUDHAKAR REDDY (A.M.)
ITA No. 3541 to 3144/Mum/2007
Assessment Years : 2001-02 to 2004-05
M/s Free India Assurance
Services Ltd.,
2nd
Floor, Prima Plaza,
J.V. Patel Compound,
B.M. Road, Elphinstone (W),
Mumbai 400 013.
PAN : AAACF 3879 K
Vs.
Dy. Commissioner of IncomeTax, Central Circle -7,
Old CGO Annexe,
M.K. Road,
Mumbai – 400 020.
(Appellant) (Respondent)
ITA No. 3661 & 3662/Mum/2007
Assessment Years : 2002-03 & 2003-04
Dy. Commissioner of IncomeTax, Central Circle -7,
8th
floor, Old CGO Annexe,
M.K. Road,
Mumbai – 400 020.
Vs.
M/s Free India Assurance
Services Ltd.,
2nd
Floor, Prima Plaza,
J.V. Patel Compound,
B.M. Road, Elphinstone (W),
Mumbai 400 013.
PAN : AAACF 3879 K
(Appellant) (Respondent)

O R D E R
PER D.K. AGARWAL, J.M.
These appeals by the assessee and Revenue are directed against
separate orders all dated 28.2.2007 passed by the ld. CIT(A) for A.Ys.
2001-02, 2002-03, 2003-04 and 2004-05. Since the facts are identical
and the issues involved are common, all these appeals were heard ITA No.3541 to 3244/M/07 & 2661 to
3662/M/07, M/s Free India Assurance Services Ltd.

together and are disposed of by this common order for the sake of

convenience.

ITA No. 3541/Mum/2007 for A.Y. 2001-02(Assessee's appeal)

2. Briefly stated facts of the case are that the assessee company is engaged in the business of multi level marketing under the name and style of Free India Concepts. A search and seizure action u/s 132 of the Income Tax Act, 1961 (the Act) was carried out on 25.6.2003. In response to notice u/s 153A, the assessee filed return declaring total income of ` 9,55,310/- for the A.Y. 2001-02. During the course of assessment proceeding, the A.O. observed that in the search, blank/written or unused vouchers for Diwali bonus, conveyance and unused bills of various restaurants were found and seized. The assessee was asked to explain as to why the expenses under these heads should not be disallowed on estimate basis. In reply, it was, inter alia, stated by the assessee that vouchers found were blank or unused which clearly shows that these vouchers were not used for booking of any expenses in the books of account. All these expenses were debited in the books of account and claimed in the P&L A/c are the genuine business expenses, hence, no disallowance on estimate basis can be made. However, the A.O. was of the view that the onus of proving that these vouchers had not been used for claiming bogus expenses was on the assessee which the assessee has clearly failed, therefore, he disallowed 20% of the expenses which have been debited under the head conveyance and staff welfare to P&L account by way of inflation by making use of the blank signed bills kept in the premises as and when it required. Thus he has estimated the disallowance at 20% of the each year as under (Page 3 of the assessment order) :-

3              Details A.Y. 01-02 A.Y. 02-03 A.Y. 03-04 A.Y. 04-05

Conveyance 7,21,955 12,25,457 14,48,312 11,25,033

Staff welfare 3,31,084 6,29,415 5,76,599 6,67,805

Total 10,53,039 18,54,872 20,24,911 17,92,838

¼ for A.Y.2004-05

from Apr to Jun 2005 4,48,210

20% of the above 2,10,608 3,70,974 4,04,982 1,12,052

Thus, for this A.Y. the A.O. disallowed ` 2,10,608/- being 20% of `10,53,039/-. On appeal, the ld. CIT(A) while agreeing with the views of the A.O., upheld the disallowance made by the A.O.

3. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us challenging in both the grounds the sustenance of disallowance of 20% out of conveyance and staff welfare expenses disallowed ` 2,10,608/-.

4. At the time of hearing, the learned counsel or the assessee while referring to the comparative chart of staff welfare and conveyance expenses in proportion to gross income and net income for the A.Ys. 2001-02, 2002-03, 2003-04 and 2004-05 appearing at page No. 107 of the assessee's paper book submits that in view of the percentage of the expenses to the gross income, the disallowance made by the A.O. and sustained by the ld. CIT(A) is highly excessive and therefore due relief may be allowed to the assessee.

5. On the other hand, the ld. D.R. supports the order of the A.O. and ld. CIT(A).

6. We have carefully considered the submissions of the rival parties and perused the relevant material available on record. We find that there is no dispute that the assessee has filed month-wise details of staff welfare and conveyance expenses. It is also not in dispute that the said expenses claimed by the assessee are for business purposes. However, in the absence of any material to show that the vouchers which were found at the time of search were not used by the assessee for booking of expenses under the head conveyance and staff welfare, we are of the view that some disallowance is called for. Considering the totality of the facts and circumstances of the case and the percentage of expenses, we are of the view that it would be reasonable to sustain the disallowance at 10% as against 20% made by the A.O. and confirmed by the ld. CIT(A). We hold and order accordingly. The assessee gets a relief of ` 1,05,304/- out of total addition of ` 2,10,608/-. The grounds taken by the assessee aretherefore partly allowed.

ITA NO. 3542/Mum/2007 for A.Y. 2002-03 (Assessee's appeal)

7. Ground No. 1 is against the sustenance of disallowance of expenditure ` 174829/-.

8. At the time of hearing, the ld. counsel for the assessee submits that he does not want to press the above ground which was not objected to by the ld. D.R.

9. That being so and in the absence of any supporting material placed on record by the ld. Counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed.ITA

No.3541 to 3244/M/07 & 2661 to  3662/M/07, M/s Free India Assurance Services Ltd.

10. Ground Nos. 2 & 3 are against sustenance of disallowance of 20% expenses of ` 3,70,974/- out of conveyance and staff welfare expenses.

11. At the time of hearing, both the parties have agreed that the facts of the above issue are similar to the facts of the case for the A.Y. 2001-02, therefore, the plea taken by them in the appeal for the A.Y. 2001-02 may be considered while deciding the above ground of appeal.

12. After carefully hearing the rival submissions and perusing the material available on record and keeping in view of our findings recorded in assessee's appeal for the A.Y. 2001-02 in paragraph No. 6 of this order, we direct the A.O. to restrict the disallowance to 10% as against 20% made by him. In other words, the assessee gets relief of `1,85,487/- out of total disallowance of ` 3,70,974/-. The ground taken by the assessee is, therefore, partly allowed.

13. Ground No. 4 is against the sustenance of disallowance of 20% `6,16,346/- out of cash purchases of ` 30,80,730/- u/s 40A(3) and ground No. 1(ii) in Revenue's appeal in ITA No. 3661/Mum/07 for A.Y. 2002-03 is against the relief allowed by the ld. CIT(A) of ` 24,65,384/- out of total disallowance of bogus purchases ` 30,80,730/-.

14. The facts of the above issue are that the A.O. found from page No. 140 of the seized documents of Annexure A-6 seized from Prime Plaza that the assessee had made purchases amounting to ` 30,80,730/- from Shri Deepak for which the assessee had issued a cheque of `30,80,730/- and in lieu thereof he received cash from Shri Deepak. Therefore, the A.O. issued show cause notice as to why the purchases of ` 30,80,730/- should not be disallowed. The assessee replied vide letter dated 8.3.2000 as under (Para 8 at page 12 of the assessment order) :- "In para 10, reference is made for page No. 140 of Annexure A-6 seized from Prime Plaza. The amount mentioned is ` 30,80,730/-. In the show cause notice, your honour have mentioned that these entries pertains to Deepak but these entries pertain to M/s Hira Cloth Agency and M/s Shreeram Sales & Synthetics which is already explained in the explanation to seized materials. Purchase bills were taken from these parties to cover up the purchase actually made in the grey markets. The cheques were issued to them against which cash was received and this very cash was in turn utilised for the payment of purchases made of fabrics from grey market. This fabric was purchased in the year 2001-02 (AY 2002-03) and was lying in stock as on 31.3.2002. the closing stock as on 31.3.2002 includes this fabric purchased and the amount of closing stock was shown in the trading account on the credit side and against which the expenses under the head purchases were shown on the debit side of the trading account. By showing the closing stock on the credit side and the expense i.e. purchases on the debit side of the trading there remains no effect on the profit of the year under consideration. It goes without saying that there cannot be a closing stock without its corresponding purchases. The effect of both these items considered collectively results into no effect on the taxable income. As such no disallowance is warranted on this count." However, the A.O. did not accept the assessee's explanation. According to the A.O. Shri Ashish Mehta himself accepted in the statement recorded u/s 132(4) on 26.06.2003 that the assessee made certain cheque payments and received the cash back and since assessee had clarified that the purchases were not made from Deepak Enterprises but from the Grey market it was established that the assessee did not purchase material from M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics. Hence the A.O. concluded that assessee admitted bogus purchases amounting to ` 30,80,730/- from M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics and accordingly added the same to the income of the assessee.

15. On appeal, the ld. CIT(A) while observing that as long as the stock is reflected in the books of account, to that extent of fabrics purchased by this firm, credit has to be given to the purchases made by the assessee and since it is an admitted fact that the assessee had made the purchases by way of cash from the Grey market held that the provisions of section 40A(3) are attracted and hence he disallowed ` 6,16,346/- being 20% of purchase of ` 30,80,730/- and thus allowed relief of `24,65,384/-.

16. At the time of hearing, the ld. Counsel for the assessee while reiterating the same submissions as submitted before the A.O. and ld. CIT(A) refers to page No. 145 to 152 of the assessee's paper book to show that cheques amounting to ` 15,50,730/- and ` 15,30,000/- aggregating to ` 30,80,730/- were issued to two parties M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics respectively against the purchases of fabrics. He further submits that against the said cheques payments, the assessee received back the amount in cash from the said two parties and purchased the cloth of the same amount from Grey market. He further submits that the said cloth amounting to ` 30,80,730/- is lying in the closing stock as on 31.3.2002 onwards which may be verified from the details of closing stock as on 31.3.2003 appearing at page No. 147 of the assessee's paper book. In the light of the above, he submits that the A.O. was not justified in treating the above purchases as bogus purchases without verifying the fact that the assessee has shown the above purchases in the regular books of account and also shown the same in the closing stock in the regular return filed by the assessee. With regard to the disallowance made by the ld. CIT(A) u/s 40A(3), the ld. Counsel for the assessee submits that during the course of search, no such material was found to show that the assessee has made cash payments more than ` 20,000/- or the assessee has violated the provisions of section 40A(3).

8         therefore, the ld. CIT(A) was not justified in invoking the provisions of section 40A(3) and in making the disallowance of ` 6,16,346/- being 20% of the above purchases of ` 30,80,730/-. In support the reliance was also placed on the following decisions:-

1) Rajmal Lakhichand v. ACIT [2001] 79 ITD 84 (Pune)

2) Western India Bakers (P) Ltd. V. DCIT [2003] 87 ITD 607 (Mum)

3) Sharma Associates v. ACIT (1996) 217 ITR (AT) page 1

He, therefore, submits that the addition made by the A.O. and sustained by the ld. CIT(A) be deleted.

17. On the other hand, the ld. D.R. while relying on the order of the A.O. submits that the assessee has placed no material on record to show that the assessee has not made bogus purchases of ` 30,80,730/- and has made cash payments against the said purchases less than `20,000/-. He, therefore, submits that the A.O. was justified in treating the said purchases of ` 30,80,730/- as bogus purchases and the ld. CIT(A) was not justified in applying the provisions of section 40A(3) in sustaining the addition of ` 6,16,346/-. He, therefore, submits that the addition made by the A.O. be restored.

18. Having carefully heard the submissions of the rival parties and perusing the material available on record, we find that there is no dispute that the assessee has made payments of ` 30,80,730/- by cheques to M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics. During the course of search, the statement was also recorded of Shri Ashish Mehta on 20.6.2003 wherein he has stated that against the cheque transactions, cash has been received which is found recorded at page No. 152 of the assessee's paper book. During the course of assessment proceeding, it was stated by the assessee that the said cash, against cheque payments was utilised to purchase cloth from the Grey market and in support, the assessee has also filed details of closing stock as on 31.3.03 appearing at page 143 of the assessee's paper book wherein fabric cloth totalling to ` 30,80,730/- is appearing as closing stock. In the absence of any material to show that no such cheque payments were made by the assessee or cash amount received by the assessee against the cheque payments was utilised by the assessee other than purchases or the entry recorded in the closing stock amounting to `30,80,730/- is found to be fictitious or false or no such closing stock was found during the course of search, we are of the view that the assessee has made cash purchases of ` 30,80,730/- which undisputedly found recorded in the inventory of closing stock, therefore, the A.O. was not justified in treating the said purchases of ` 30,80,730/- as bogus purchases.

19. As regards the application of provisions of section 40A(3) of the Act, we find that during the course of search, no such material was found to show that the assessee has made cash payments in violation of provisions of section 40A(3) of the Act. Disallowance cannot be made merely on presumption basis that the assessee had made the purchases by way of cash from the Grey market in violation of the provisions of section 40A(3) of the Act.

20. In the case of Rajmal Lakhichand v. ACIT [2001] 79 ITD 84 (Pune), it has been held ( Head note – page 86) :- "The provision of section 40A(3) is to be invoked when the department has evidence with itself that the assessee has made payments in cash exceeding the prescribed limits. Disallowance cannot be made merely on a presumption that the assessee must have made payments in cash and that too exceeding the prescribed limits. Hence, the impugned addition made by the Assessing Officer and sustained by the Commissioner (Appeals) was to be deleted."

21. In the case of Western India Bakers (P.) Ltd. V. DCIT [2003] 87 ITD 607 (Mum) it has been held (Head note page No. 609) :-

" When a provision of law is to be applied, it is to be seen that all the circumstances alliunde to the application of such provision did exist. If it is not possible to find out how the violation of the provision was done, addition cannot be made on the basis of inference and surmises. In the instant case, it was not known at what point of time and how assessee violated the provisions of section 40A(3). As such, no addition on that count was warranted. [para 29]."

22. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the aforesaid decisions and for the reasons as discussed above hold that the ld. CIT(A) was not justified in sustaining the addition of ` 6,16,346/- being 20% of total purchase of `30,80,730/- and accordingly we delete the entire addition of `30,80,730/-. The ground taken by the assessee is therefore allowed and the ground taken by the Revenue is dismissed. 23. Ground No. 5 is against the sustenance of addition of ` 19,29,711/- incurred on renovation of office premises.

24. Briefly stated facts of the above issue are that the A.O. found that the assessee had debited ` 19,29,711/- under the head `office renovation expenses' which according to the A.O. to be capital in nature and hence he issued a show cause to the assessee as to why the same should not be disallowed as capital expenditure. The assessee vide its reply dated 8.3.2006 submitted that the assessee's office at Prima Plaza is a rented one. It was taken on leave and license in the financial year 2001-02 and after taking the possession, the company incurred expenses on furnishing the said rented office. Expenses for wooden partitions, cabins, cubicles & desks for staff persons were made and debited under the head office renovation. No additions/alterations to the basic structure of the unit were made nor any new capital assets was created and debited under this head. The assessee also filed details of the said expenses. It was further submitted that the expenses resulted in creation of no fixed assets and the partitions etc. have no realizable value and also are not in the nature of shifting to other places, therefore, the expenses incurred cannot be said to be in the capital nature and needs to be allowed as revenue expenditure. However, the A.O. did not accept the contention of the assessee for the following reasons:-

"(1) The expenditure had been incurred before the assessee started business in its office and these expenses were not of routine nature but of one time expenditure.

(2) The wooden partitions, cabins, cubicles, desks are in the nature of permanent furniture and fixtures for starting the business. The said premises was owned by the Directors of company Shri Gnan Chand Mehta and Shri Ashish Mehta and Shraddha Mehta, who had more than 50% of the shares of the company. Therefore, this premises was going to be with the assessee permanently for all practical purposes, thus it has resulted in enduring benefit of the Company. Hence, it is capital in nature.

(3) Once, they are capital in nature, only depreciation is allowable as per provisions of Explanation to Sec. 32(1). Hence, he disallowed the renovation expenditure of ` 19,29,711/- as capital expenditure, but allowed depreciation of ` 96,485/- on the said disallowed amount."

25. On appeal, the ld. CIT(A) while applying Explanation 1 to section 32 of the Act held that the value addition of ` 19,29,711/- to the value of the building taken on lease from the Directors of the company by way of making wooden partitions, creation of office cabins etc. are in the nature of `doing of any work' as improvement to the building as stated in the said Explanation and accordingly he confirmed the disallowance made by the A.O.

26. At the time of hearing, the ld. counsel for the assessee while reiterating the same submissions as submitted before the A.O. and ld. CIT(A) further submits that the assessee had taken office premises on leave and license agreement basis. The description of office premises taken on lease is as under:-

Sr,

No.

Description of premises Monthly

Rent

Area of

Gala

1 Gala No. 105, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

40,000 700 sq.ft.

2 Gala No. 106, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

40,000 700 sq.ft.

3 Gala No. 107, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

15,000 570 sq.ft.

4 Gala No. 108, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

25,000 560 sq.ft.

He further submits that the assessee has also filed details of the expenses incurred on office renovation appearing at page No. 164 to 166 of the assesse's paper book. The nature of expenses incurred by the assessee in this regard was wooden partitions, cabins, cubicles, desks etc. and no additions/alterations to the basic structure of the unit was  made. He, therefore, submits that all the expenses incurred by the assessee on renovation on leased premises cannot be treated as capital expenditure. Reliance was also placed on the decision in the case of DCIT vs. Smt. Geeta V. Mehta (2008) 26 SOT 455 (Mum). He, therefore, submits that the addition made by the A.O. and sustained by the ld. CIT(A) be deleted.

27. On the other hand, the ld. D.R. while relying on the order of A.O. and ld. CIT(A) distinguished the decision relied on by the ld. counsel for the assessee and further submits that the expenses incurred by the assessee are capital in nature and therefore the A.O. was fully justified in treating the same as capital expenditure.

28. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that there is no dispute that the assessee has taken the premises on lease owned by the Directors of the company Shri Gnan Chand Mehta and Shri Ashish Mehta and Shraddha Mehta who held more than 50% shares of the company. We further find that the period of lease was commenced from 16.10.2001 in respect of three properties and in respect of fourth property the lease period was commenced from 1.4.2002, relevant to the A.Y. 2003-04. We further find that the premises were taken on lease for three years subject to the condition that the rent shall be increased by 15% of the rent at the end of 11 months. We further find the assessee has incurred renovation expenses of ` 19,29,711/- on the renovation of office by providing wooden partitions, cabins, cubicles, desks etc. We further find that the assessee has started the above expenditure on repairs from 1.4.2001 i.e. prior to the property taken on lease. We further find that there is no material on record to show that the said expenses had been incurred by the assessee on the repairs of already existing wooden partitions, cabins, cubicles, desks etc. We further find that the A.O. has invoked Explanation 1 to section 32 of the Act which was inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1-4-1988 which reads as under:- "Explanation1. Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee".

On going through the above Explanation, it became explicitly clear that where the assessee carries out repairs on certain premises taken on lease or other right of occupancy and any capital expenditure is incurred by way of renovation or extension and improvement to the building, then section 32 shall apply as if the said structure or the building is owned by the assessee. The effect of this insertion is that any capital expenditure incurred by the assessee on any premises acquired otherwise than on ownership basis, has to be treated as a building owned by such person and depreciation is allowable on it under section 32 as if it is building owned by him.

29. In Ballimal Naval Kishore vs. CIT [1997] 224 ITR 414 (SC), the Hon'ble Supreme Court approved the test in the case of New Shorrock Spinning and Manufacturing Co. Ltd. V. CIT [1956] 30 ITR 338 (Bom) as to when the expenditure can be said to have been incurred on current repairs. In that case it was observed as follows (page 417) : "The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of `repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure." 30. Applying to the Explanation 1 to section 32 of the Act in the light of the test laid down to the facts of the present case, we are of the view that since the assessee has incurred huge expenditure on purchase of plywood/furniture etc. for making wooden partitions, cabins, cubicles desks etc., the assessee has built an altogether new office premises, therefore, there is no doubt that these expenditure incurred by the assessee are for fixed capital asset and therefore capital in nature not allowable as revenue expenditure. This view also finds support from the judgment of Hon'ble Delhi High Court in the case of Bigjo's India Ltd. Vs. CIT [2007] 293 ITR 170 (Delhi) wherein expenditure incurred for acquiring new assets such as lift shaft and wooden counters etc. on the licensed premises was held to be capital in nature, not deductible as revenue expenses.

31. In DCIT vs. Smt. Geeta V. Mehta [2008] 26 SOT 455 (Mum) relied on by the learned counsel for the assessee, the facts of that case are that as per the assessee, the property to which the repairs were incurred was held by the assessee through a Franchise Agreement dated 1.1.2002. The assessee used the said property for running Mehta Institute of Technology and she was a Franshisee of Mehta Classes and Mehta College. The assessee was under obligation to incur expenditure on repairs of the premises as per the said Franchise Agreement which was ITA valid for one year at one time and it was not a case of a perpetual lease. The assessee undertook renovation of the leased licensed premises and during the year relevant to A.Y. 2003-04 the assessee incurred an expenditure of ` 8,27,276/-. The A.O. invoked the Explanation 1 to section 32(1) of the Act and held that assessee holds the `right of occupancy' in the property within the meaning of Explanation 1 to section 32(1) and accordingly disallowed the repair expenses. On appeal, the ld. CIT(A) deleted the addition made by the A.O. on the ground that the expenditure has been incurred by the assessee for the purpose of business allowable u/s 37(1) of the Act. On further appeal before the Tribunal, the Tribunal while observing that it is a settled law that every case has to be seen independently whether a particular expenditure is revenue or capital depending on the facts of each case held that expenditure incurred by the assessee by way of purchase of tiles, grills, electrical fittings, ply, plywood, granite and related labour charges incurred in this connection with keeping the classrooms fit for use is revenue in nature allowable u/s 37 of the Act.

32. Whereas in the case before us, the property was taken on lease for three years commencing from 16.10.2001 in respect of three properties and the fourth property was taken on lease from 1.4.2002 not relevant for the year under consideration. The assessee has starts repairs expenses from 1.4.2001 i.e. prior to the property taken on lease. The assessee has placed no material on record to show that there was any obligation to the assessee to incur expenditure on repairs of the premises taken on lease. Therefore, the decision relied on by the ld. Counsel for the assessee is distinguishable and not applicable to the facts of the present case.

33. In this view of the matter, we are of the view that the expenditure incurred by the assessee are capital in nature not allowable as revenue expenditure as claimed by the assessee. Accordingly, we are inclined to uphold the finding of the ld. CIT(A) in confirming the disallowance of expenditure of ` 19,29,711/- subject to allowance of depreciation. The ground taken by the assessee is, therefore, rejected. ITA NO. 3661/Mum/2007 A.Y.2002-03 (Revenue's Appeal)34. Ground No. 1(i) is against the deletion of addition of commission payment of ` 38,70,055/- to Shri Vinod Jaiswal. 35. Brief facts of the above issue are that during the course of search several documents were seized from which it was found by the Assessing Officer that the assessee had made payments to Shri Vinod Jaiswal and this expenditure was not accounted for in the regular books of accounts maintained by the assessee. This expenditure was claimed by the assessee only in the return filed in response to notice u/s.153A. Since this expenditure were not accounted in the regular books of accounts the A.O. required the assessee to show cause why it should not be disallowed and added to returned income. The assessee filed the written reply vide its letter dated 08.03.2006 in which it was submitted that the notings of these pages denote working of amount of incentive paid to Mr. Vinod Jaiswal and this income was included in the income of Shri Vinod Jaiswal in the return filed by him u/s. 153A for the A.Y. 2002-03 and 2003-04 and the assessee filed detailed explanation for this objection in the said assessment proceedings which was finalized by the same Assessing Officer. The assessee contented that these payments were made wholly and exclusively for the purpose of business and since neither it was in the nature of capital expenditure nor personal expenditure and since it was wholly and exclusively incurred for the purpose of business, it should be allowed. The Assessing Officer did not accept this contentions of the assessee. He has stated that (pages 17 to 19 of the order of the ld. CIT(A) :- 1. "Most of the payments have been made not by the assessee company but by the other parties. The assessee has claimed expenditure on the payments which was not made by it. 2. For Example: The payment were made by Asha Pura International, Bench Mark International, Jinneswar Trading, Himalaya Impex etc. These were the parties to whom the assessee had booked bogus printing and stationery and labour charges. The bogus expenses of these parties have already been admitted by the and therefore same Modus-Operandi is employed by the asssessee for making unaccounted payments to bogus parties. Assessing Officer observed that when these parties had been utilized by the assessee for claiming expenses under the head Printing & Stationery, how the same parties, which did not exist would make payments to Shri Vinod Jaiswal. The Assessing Officer also cited other examples in the books in the assessment order.

3. One such example was the entry of Sghri Santosh Jaiswal amounting to ` 2,50,000/- which was claimed to have paid to Shri Vinod Jaiswal. Since the amount was paid to Shri Santosh Jaiswal, it cannot be claimed to have been paid to Shri Vinod Jaiswal. In respect of another expenditure of a Cheque No.629581, the Assessing Officer had noted the entries which are as under :- ` 23,67,700-00

Vinod Jaiswal Cheque No.629581 ` 5,00,000-00` 28,67,700-00

(-) Cash to be received M.D. ` 5,00,000-00` 23,67,700-00

From the above entry Assessing Officer concluded that the assessee had paid ` 5,00,000.00 by way of Cheque and the same amount was received back by cash from the MD, who is none other than Shri Vinod Jaiswal and there are also other entries noted by the Assessing Officer, which were related to either for Mobile or for TV, each had no link that the services rendered by the said Shri Vinod Jaiswal to the company. Assessing Officer has also concluded that the services also were not established to have been rendered by Shri Vindo Jaiswal for the following reasons:_

a) There should be a written agreement for any incentive to be paid or any payment to be made, which is based on services rendered by the persons. In this case, the assessee has failed to produce any agreement or documentary evidence on the basis of which payment has been made to Shri Vindo Jaiswal on account of so called service rendered to the Company. b) If the services are rendered by Shri Vinod Jaiswal to the Company, then it is the duty of the Company to make the payment to him. However, the facts are contrary to this as the payments have been made by other parties and not by the assessee Company.

c) If the payments were made for services rendered by him, then the amount received in cheque should be retained by him. However, the department has seized the documentary evidence, which proves that cash has been received back from him against the cheque issued as discussed above.

d) Had the expenses been genuine, than, the assessee would have made these payments and booked the expenses in its regular books of accounts.

Therefore the assessing Officer concluded that the assessee had claimed these expenditure by shifting bogus expenses from head of Printing & Stationery to another head of incentive paid to Shri Vinod Jaiswal and since this expenditure was also not debited in the regular books of accounts, this could not be allowed as expenditure at all. The assessee's theory of commission by way of incentive payable to Managing Director, Shri Vinod Jaiswal was also not accepted by Assessing Officer who held that assessee had not proved the rendering of service by Shri Vinod Jaiswal to the Company but the assessee had tried to shift this expenditure of Printing & Stationery to incentive. Thus, in view of the above, the Assessing Officer has disallowed the entire expenditure of :-

- ` 38,70,055/- for A.Y. 2002-03

- ` 70,74,272/- for A.Y. 2003-04

Hence, he disallowed this ` 38,70,055/- and added back the same to the income returned."

36. During the course of appellate proceedings, Assessee's Representative submitted written submissions as follows (para 3.2 at page 19 of the order of the ld. CIT(A) :- "It is submitted that during the course of search the authorized officer seized diary maintained by Shri Ashish G. Mehta as per Annexure A-6. On page no.122-124 of this seized diary there were entries of incentive at the rate of ` 12.50 per member payable to Shri Vinod Jaiswal, the director of the company, which are as under :- Period No. of members Seized page no. of Annexure A-6

Page no. of

Paper book

Amount

payable to

Vinod

Jaiswal

April to 29.07.01 58739 122 126 7,34,238

30.07.01 to

02.09.01

22872 122 126

2,85,900

03.09.01 to

30.09.01

33370 122 126

4,17,130

01.10.01 to

29.10.01

42528 122 126

5,31,600

29.10.01 to

31.12.01

53635 123 127

6,70,438

01.01.02 to

03.03.02

52208 123 127

6,52,600

04.03.02 to

31.03.02

46252 124 128

5,78,150

Total 38,70,055

"On page no.122 of seized material there is evidence of payment of ` 13,60,000/- made to Vindo Jaiswal upto 27.09.01. On page No.122 & 123 there are evidences of further payment made to Vinod Jaiswal on account of incentives. It is submitted that during the course of assessment proceedings the appellant had filed before A.O. the details of incentive due to Vinod Jaiswal on the basis of seized material, which is placed page No. 135 of the paper book. It was contended before the A.O. that out of incentive amounting to ` 38,70,055/- payable to Vinod Jaiswal an aggregate amount of ` 12,00,000/ were paid by cheque toVinod Jaiswal and his wife and was claimed as expenditure in the Profit & Loss Account. Out of the balance amount an aggregate amount of ` 19,90,600/- was paid to Vinod Jaiswal by taking bogus bills for printing & stationery mainly through Ashapura International. The details of the payments made to Vinod Jaiswal are also placed at page No. 131 of the paper book. The appellant in its revised computation of total income for A.Y. 2002-03 has offered the entire purchases made from Ashapura International including G.P. at 4.22% amounting to ` 30,86,275/- as the undisclosed income, which has been accepted by the A.O. in the impugned order. The appellant also claimed the balance incentive paid/payable to Vinod Jaiswal, which either accounted by way of bogus printing & stationery bills of Ashapura International or paid in cash / remained outstanding in its return of income filed u/s. 153A. The copy of return of income filed u/s. 153A, computation thereof and the revised computation are placed at page No. 6-11 of the paper book. The A.O. having accepted the additional income of ` 30,88,275/- in respect of purchases made from Ashapura International was not justified in disallowing the appellant's claim of deduction amounting to ` 26,70,055/- being incentive paid / payable to Vinod Jaiswal, which are duly recorded in the seized material discussed above..........." It was further submitted that the A.O. while computing the total income in the impugned order has taken the starting point as the total income as per return filed on 31.10.2002 u/s. 139(1) amounting to ` 56,30,790/-. Therefore it was submitted that the AO's addition of ` 38,70,055/- in respect of payments to Vinod Jaiswal is totally unwarranted and incorrect and the same be deleted. 37. The learned CIT(A) after examining the matter found that the assessee's objection is correct, deleted the addition made by the learned AO. 38. At the time of hearing, the ld. D.R. while relying on the order of the A.O. submits that in view of the entries recorded in the seized material appearing at page No. 245 to 250 of the assesee's paper book, it is clear that the assessee has claimed bogus expenses of ` 38,70,055/- in the name of Shri Vinod Jaiswal. He further submits that since the assessee has failed to prove that the said payment was made for business purchases, the ld. CIT(A) was not justified in deleting the addition made by the A.O. He further submits that even otherwise the said expenditure is not allowable u/s 69 of the Act. Reliance was also placed on the decision of CIT vs. J.K. Panthaki & Co. [2009] 316 ITR 452 (Kar). He, therefore, submits that the addition made by the A.O. be restored. 39. On the other hand, the ld. Counsel for the assessee while reiterating the same submissions as submitted before the A.O. and ld. CIT(A) further submits that it is not a case of the A.O. that the expenditure is not allowable u/s 69 of the Act, therefore, the new plea taken by the ld. D.R. is devoid of any merit. He, therefore, submits that the assessee has explained through a chart appearing at page No. 20 of the order of the ld. CIT(A) that the above payment of ` 38,70,055/- was made by the assessee to Shri Vinod Jaiswal on the basis of entries of incentive @ ` 12.50 per member payable to Shri Vinod Jaiswal, the Director of the company. He further submits that since the A.O. has himself allowed the payment by cheques, therefore, the disallowance of cash payment for the same purpose is not justified. He further submits that in the Income Tax Return filed by Shri Vinod Jaiswal, he has disclosed the same amount as his income and the A.O. after considering in detail has also taxed the same. He, therefore, submits that the order passed by the ld. CIT(A) in deleting the disallowance be upheld. 40. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that before the ld. CIT(A), the assessee has filed a complete chart appearing at page No. 20 of the order of the ld. CIT(A) showing the period, No. of members made/introduced by Shri Vinod Jaiswal, page No. of seized documents, page No. of assessee's paper book and amount paid to Shri Vinod Jaiswal ITA No.3541 to 3244/M/07 & 2661 to 3662/M/07, M/s Free India Assurance Services Ltd. l 23etc. We further find that the ld. CIT(A) after considering the assessee's submission has deleted the addition vide paras 3.3.0 and 3.3.01 of his order which are reproduced as under:-

"3.3.0: I have considered the submissions of the appellant. During the course of appellate proceedings the Assessee's Representative submitted that the Assessing Officer had proceeded ahead with the computation based upon the income returned in the Original return filed u/s.139 at ` 56,30,790/- instead of the income returned by the assessee as per the return filed u/s.153A, which was subsequently revised at ` 94,30,793/-. [In the original return filed u/s.153A on 23.02.2004 at ` 83,54,659/- (page 6 to 10 of Paper Book) which was subsequently revised to `94,30,793/-(page 7 of the paper book]. It is only in the return riled u/s.153A on 23.02.2004 the assessee had made this claim for the deduction of this expenditure at ` 26,70,055/-. Therefore, it was submitted that since the Assessing Officer has started the computation with the total income declared by the assessee as per the return filed u/s.139 on 31.10.2002 at ` 56,30,790/-, in which the assessee has not made any claim of ` 26,70,055/-, there was no need for disallowing thesaid expenditure. To put it in other words, the assessing Officer has disallowed the entire expenditure of :_

- ` 38,70,055/ – for A.Y. 2002-03

- ` 70,74,272/- for A.Y. 2003-04

Hence, he disallowed this ` 38,70,055 and added back the same to the income returned.

3.3.1: On verification of the return of income on the statement of total income filed along with the said return, I find that the assessee's objection is correct and therefore the disallowance made by the Assessing Officer to the extent of ` 38,70,055/- is deleted."

41. In the case of CIT vs. J.K. Panthaki And Co. [2009] 316 ITR 452 (Kar) Their Lordships have remanded the matter for reconsideration by the Tribunal on the ground that the Tribunal has failed to consider the case in the light of the Explanation to sub-section (1) of section 37 of the Act. Whereas in the present case, before us, it is not the case of the Revenue that the payment made by the assessee are not allowable in view of the Explanation to section 37(1) of the Act, therefore, the decision relied on by the ld. D.R. is distinguishable and not applicable to the present case.

42. In the absence of any contrary material placed on record by the Revenue to show that the chart prepared by the assessee appearing at page No. 20 of the order of the ld. CIT(A) is not correct or the entries recorded therein are not matching with the relevant seized material or the part of the amount was not paid by cheque or the same was not allowed as deduction or the payment has not been made to Shri Vinod Jaiswal to introduce the new members to carry on the business. This being so and in the absence of any finding recorded in respect of the application of the provisions of section 69 of the Act and TDS, we are of the view that the payment made by the assessee are allowable under Act as business expenditure and accordingly we decline to interfere with the order of the ld. CIT(A) on this account. The ground taken by the Revenue is, therefore, rejected.

43. Ground No. 1(ii) is against the deletion of addition of ` 24,65,384/- out of purchases of ` 30,80,730/-.

44. In view of our finding recorded in paras No 18 to 22 of this order, the ground taken by the Revenue is therefore rejected.

ITA No. 3543/Mum/2007 for A.Y. 2003-04 (Assessee's appeal).

45. Ground Nos. 1 & 2 are against sustenance of addition of ` 4,04,982/- being 20% disallowance out of conveyance and staff welfare expenses.

46. In the absence of any distinguishing feature brought on record by the parties and keeping in view of our finding recorded in para No. 6 of this order, the disallowance of ` 404982/- is reduced to ` 202491/-. The ground taken by the assessee is therefore partly allowed.

47. Ground No. 3 is against the sustenance of disallowance u/s 40A(3) ` 2,88,000/- being 20% of expenditure out of cash purchases of `14,40,000/-.

48. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in paras No. 18 to 22 of this order, the addition made by the A.O. and sustained by the ld. CIT(A) is deleted. The ground taken by the assessee is, therefore, allowed. ITA No. 3662/Mum/2007 for A.Y. 2003-04(Revenue's appeal).

49. Ground No. 1(i) is against the deletion of addition of ` 70,74,272/- being payments to Shri Vinod Jaiswal.

50. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in paras No. 40 to 42 of this order, we decline to interfere with the order passed by the ld. CIT(A) on this account. The ground taken by the Revenue is, therefore, rejected.

51. Ground No. 1(ii) is against the deletion of addition of ` 11,52,000/- out of purchases of ` 14,40,000/-.

52. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in para No. 18 to 22 of this order, the ground taken by the Revenue is therefore rejected.

ITA No. 3544/Mum/2007 for A.Y. 2004-05 (Assessee's appeal).

53. Ground Nos. 1 & 2 are against sustenance of addition of `4,48,210/- being 20% disallowance out of conveyance and staff welfare expenses.

54. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in para No. 6 of this order, the disallowance of ` 4,48,210/- is reduced to ` 2,24,105/-. The ground taken by the assessee is therefore partly allowed. 55. In the result, assessee's appeals stand partly allowed and the Revenue's appeals are dismissed.

Order pronounced on this 30thday of March, 2011.

Sd/-

(J. SUDHAKAR REDDY)

ACCOUNTANT MEMBER

Sd/-

(D.K. AGARWAL)

JUDICIAL MEMBER

Mumbai, Dated 30th

March, 2011.

RK ITA No.3541 to 3244/M/07 & 2661 to

3662/M/07, M/s Free India Assurance Services Ltd.

l

27

Copy to:

1. The Appellant

2. The Respondent

3. Commissioner of Income Tax (Appeals)- Concerned, Mumbai

4. DIT (International Taxation), Concerned, Mumbai

5. Departmental Representative, Bench `F', Mumbai

//TRUE COPY// BY ORDER

ASSTT. REGISTRAR, ITAT, MUMBAI ITA No.3541 to 3244/M/07 & 2661 to

3662/M/07, M/s Free India Assurance Services Ltd.

l

28

1 Draft dictated on 2.3.11 Sr PS

2 Draft placed before Author on 3.3.11 Sr PS

3 Draft proposed & Place before the

2nd

member

JM/AM

4 Draft discussed/approved by 2nd

Member

JM/AM

5 Approved draft comes to the Sr PS Sr.PS

6 Kept for pronouncement on Sr PS

7 File sent to the Bench Clerk Sr PS

8 Date on which file goes to the Head

Clerk

9 Date on which file goes to the AR

10 Date of despatch Sr PS 

DEPRECIATION – ALLOWABLE AMOUNT AND ACTUAL ALLOWANCE AGAINST CHARGEABLE PROFITS

 

DEPRECIATION – ALLOWABLE AMOUNT AND ACTUAL ALLOWANCE AGAINST CHARGEABLE PROFITS OR GAINS two important concepts in section 32 on the Income-tax Act, 1961.

References and links:

Section 32 of Income-tax act, 1961.

Article by author titled "Chargeable profits and gains in the context of depreciation allowance" published in (1996) 86 Taxman 184 (Mag.).

Depreciation:

Readers are well aware about concept of depreciation of assets in commercial world and also about depreciation allowable under the provisions of the income-tax act, 1961.Therefore, a detailed discussion is not considered necessary.

Scope of this write-up:

Scope of this write-up is limited to two aspects:

Amount of depreciation allowable, and amount which can be allowed in any year and balance un-allowed deprecation which is carried forward under the provisions of Income-tax Act to form part of current depreciation of subsequent year.

Depreciation allowable:

On reading of section 32(1) along with the relevant rules and the appendix to the income Tax Rules which prescribes rate of depreciation we find that the allowance for depreciation of various eligible assets is to be worked out at prescribed rates on SLM or WDV basis as may be applicable in case of an assessee. The allowance for deprecation of assets is calculated from year to year and it can be called a regular and continuing allowance. Whereas, some other allowances like initial allowance or additional allowance are allowed in the initial year as an incentive. Terminal deprecation may be allowed in the year when asset ceases to be in use or when block of asset ceases to be block of asset etc. Those deductions cannot properly be called as allowance for depreciation of assets because initial or additional allowance is allowed as an incentive and terminal allowance is in nature of obsolescence allowance.

What is allowable, and what can be allowed?:

We find that what is allowable as allowance for deprecation is to be computed in terms of sub-section (1) of the section 32.

We also find that what can be allowed in a given year is to be computed in accordance with sub-section (2) of section 32 and what remains un-allowed due to inadequate chargeable income is to be carried forward.

Relevant portion of these sub-sections are reproduced below with highlights in context of the scope of this write-up:

Depreciation.

32. (1) [In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—]

[(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;]

(ii) 3[in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:]

xxxx

(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.]

Quantification is in sub-section (1):

We find that the quantification of depreciation allowable is to be made in accordance with sub-section (1) whereas actual allowance will be made under sub-section (2).

As per sub-section (2) deprecation is to be actually allowed in the assessment of assessee. And that deprecation is to be allowed to the extent of chargeable profits or gains.

The amount which can be allowed is thus restricted to the amount of profit or gains which are chargeable to tax.

Chargeable profit or gain or income:

In a detailed article the author has expressed his views that Chargeable income in the context of Section 32 of the Income-tax Act, 1961 means `total income', computed after allowing deductions under chapter VIA in an article published at (1996) 86 Taxman 184 (Mag.) entitled "Chargeable profits and gains in the context of depreciation allowance". In that article, detailed discussions have been made on related provisions. It is also pointed out that under the provisions of the Income-tax act, 1922 the scheme was different. Under old provisions it was mandatory to deduct depreciation while computing business income. Whereas in the 1961 Act the scheme is different, and amount of allowable deprecation is to be deducted from `chargeable income'.

In context of computation provisions allowable amount of depreciation can be computed when section 32 or section 57 is applicable that is when a business or profession is carried or when certain types of income are earned which may fall under the head `income from other sources'.

However, depreciation can actually be allowed only against chargeable profits or gains that means against `total income' which is worked out after deductions under chapter VIA are deducted from the gross total income. Deprecation is therefore, allowable against `total income', irrespective of heads of income under which different computations are made.

The amount of allowable deprecation or any part of it which cannot be allowed due to absence or inadequacy of chargeable profit or gains becomes part of deprecation of subsequent year.

Depreciation which is carried forward is considered as actually allowed for the purpose of computing written down value (WDV). However, in view of author the concept of year wise `unabsorbed deprecation' was applicable only during assessment years 1997-98 to 2001-02 when a limit of eight years was applicable for carry forward and set off of deprecation also.

For a detailed discussions readers are advised to read the earlier article published as (1996) 86 Taxman 184 (Mag.) entitled "Chargeable profits and gains in the context of depreciation allowance".

Readers are also requested to send their views on the subject matter.

DEPRECIATION – ALLOWABLE AMOUNT AND ACTUAL ALLOWANCE AGAINST CHARGEABLE PROFITS OR GAINS two important concepts in section 32 on the Income-tax Act, 1961.
By: C.A. DEV KUMAR KOTHARI : View Profile

References and links:

Section 32 of Income-tax act, 1961.

Article by author titled "Chargeable profits and gains in the context of depreciation allowance" published in (1996) 86 Taxman 184 (Mag.).

Depreciation:

Readers are well aware about concept of depreciation of assets in commercial world and also about depreciation allowable under the provisions of the income-tax act, 1961.Therefore, a detailed discussion is not considered necessary.

Scope of this write-up:

Scope of this write-up is limited to two aspects:

Amount of depreciation allowable, and amount which can be allowed in any year and balance un-allowed deprecation which is carried forward under the provisions of Income-tax Act to form part of current depreciation of subsequent year.

Depreciation allowable:

On reading of section 32(1) along with the relevant rules and the appendix to the income Tax Rules which prescribes rate of depreciation we find that the allowance for depreciation of various eligible assets is to be worked out at prescribed rates on SLM or WDV basis as may be applicable in case of an assessee. The allowance for deprecation of assets is calculated from year to year and it can be called a regular and continuing allowance. Whereas, some other allowances like initial allowance or additional allowance are allowed in the initial year as an incentive. Terminal deprecation may be allowed in the year when asset ceases to be in use or when block of asset ceases to be block of asset etc. Those deductions cannot properly be called as allowance for depreciation of assets because initial or additional allowance is allowed as an incentive and terminal allowance is in nature of obsolescence allowance.

What is allowable, and what can be allowed?:

We find that what is allowable as allowance for deprecation is to be computed in terms of sub-section (1) of the section 32.

We also find that what can be allowed in a given year is to be computed in accordance with sub-section (2) of section 32 and what remains un-allowed due to inadequate chargeable income is to be carried forward.

Relevant portion of these sub-sections are reproduced below with highlights in context of the scope of this write-up:

Depreciation.

32. (1) [In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—]

[(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;]

(ii) 3[in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:]

xxxx

(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.]

Quantification is in sub-section (1):

We find that the quantification of depreciation allowable is to be made in accordance with sub-section (1) whereas actual allowance will be made under sub-section (2).

As per sub-section (2) deprecation is to be actually allowed in the assessment of assessee. And that deprecation is to be allowed to the extent of chargeable profits or gains.

The amount which can be allowed is thus restricted to the amount of profit or gains which are chargeable to tax.

Chargeable profit or gain or income:

In a detailed article the author has expressed his views that Chargeable income in the context of Section 32 of the Income-tax Act, 1961 means `total income', computed after allowing deductions under chapter VIA in an article published at (1996) 86 Taxman 184 (Mag.) entitled "Chargeable profits and gains in the context of depreciation allowance". In that article, detailed discussions have been made on related provisions. It is also pointed out that under the provisions of the Income-tax act, 1922 the scheme was different. Under old provisions it was mandatory to deduct depreciation while computing business income. Whereas in the 1961 Act the scheme is different, and amount of allowable deprecation is to be deducted from `chargeable income'.

In context of computation provisions allowable amount of depreciation can be computed when section 32 or section 57 is applicable that is when a business or profession is carried or when certain types of income are earned which may fall under the head `income from other sources'.

However, depreciation can actually be allowed only against chargeable profits or gains that means against `total income' which is worked out after deductions under chapter VIA are deducted from the gross total income. Deprecation is therefore, allowable against `total income', irrespective of heads of income under which different computations are made.

The amount of allowable deprecation or any part of it which cannot be allowed due to absence or inadequacy of chargeable profit or gains becomes part of deprecation of subsequent year.

Depreciation which is carried forward is considered as actually allowed for the purpose of computing written down value (WDV). However, in view of author the concept of year wise `unabsorbed deprecation' was applicable only during assessment years 1997-98 to 2001-02 when a limit of eight years was applicable for carry forward and set off of deprecation also.

For a detailed discussions readers are advised to read the earlier article published as (1996) 86 Taxman 184 (Mag.) entitled "Chargeable profits and gains in the context of depreciation allowance".

Readers are also requested to send their views on the subject matter.

Dated: - January 7, 2012

S. 147: Full & true disclosure of material facts means “specific” disclosure o

 

The Indian Hume Pipe Co Ltd vs. ACIT (Bombay High Court)
S. 147: "Full & true disclosure of material facts" means "specific" disclosure of "each" fact
The assessee entered into an agreement in July 2001 for sale of development rights for Rs.39 crores. The transfer was in December 2003. The assessee computed LTCG of Rs. 23.19 crores. The assessee invested in eligible bonds between Feb & June 2002 (after the agreement to sell but before the transfer) and claimed exemption u/s 54EC. During the assessment proceedings, the AO asked for a copy of the agreements with the purchaser and other details which the assessee furnished. A copy each of the s. 54EC bonds (which gave the dates of investments) was also furnished. The AO allowed the deduction as claimed. After the expiry of 4 years from the end of the assessment year, the AO issued a notice u/s 148 claiming that as the investments were made prior to the date of transfer (Dec 2003), s. 54EC deduction was not admissible. The assessee filed a Writ Petition to challenge the reopening on the ground that there was no failure on its part to make a full and true disclosure of material facts. HELD dismissing the Petition:

(i) "Full and true disclosure of material facts" means that the disclosure should not be garbled or hidden in the crevices of the documentary material which has been filed by the assessee with the AO. The assessee must act with candor. A full disclosure is a disclosure of all material facts which does not contain any hidden material or suppression of fact. It must be truthful in all respects;

(ii) On facts, though the AO enquired into the matter and the assessee furnished a copy of the s. 54EC bonds (from which the dates of allotment/ investment were evident), there was no (specific) reference by the assessee to the dates on which the amounts were invested in the s. 54EC bonds. Also, it was it was evident that the AO had not applied his mind to the issue of s. 54EC exemption. Accordingly, the AO was justified in reopening the assessment.

Note: The ground that s. 54EC exemption is allowable even to investments made pre-transfer as per Circular No. 359 dated 10.5.1983 and so there can be no "reason to believe" was not argued. Contrast with Kelvinator 256 ITR 1 (Del)(FB) (affirmed in 320 ITR 561 (SC)) where it was held that a s. 143(3) assessment meant that the AO was "deemed to have applied his mind to all aspects" and that a reopening based on "reappraisal of existing material" was not permissible.

Related Judgements
Titanor Components Limited vs. ACIT (Bombay High Court At Goa) There is a well known difference between a wrong claim made by an assessee after disclosing all the true and material facts and a wrong claim made by the assessee by withholding the material facts. It is only in the latter case that the AO is entitled to proceed…
Atma Ram Properties Pvt Ltd vs. DCIT (Delhi High Court) S. 147: AO must specify what facts are failed to be disclosed. Lapse by AO no ground for reopening if primary facts disclosed In AY 2001-02, the AO assessed advances of Rs. 1.56 crores received from a group concern as "deemed dividend" u/s 2(22)(e). In appeal, the CIT…
Hasan Ali Khan vs. ITSC (Bombay High Court) (i) The Chairman of the Settlement Commission has the power to constitute a Special Bench and he is not required to give reasons or produce the material in support thereof. (ii) It is not as if the moment an application is made and there is compliance of the…

Whether when Revenue searches several persons, a combined satisfaction rec

 

Whether when Revenue searches several persons, a combined satisfaction recorded can be said to be legally valid for initiating action under Sec 158BD - YES, rules ITAT

NEW DELHI, JAN 06, 2012: THE issues before the Bench are - Whether ground relating to assumption of jurisdiction under section 158BD can, for the first time, be taken in the second round of litigation; whether completion of assessment proceedings in the case of searched person is sine qua non for initiating action under section 158BD; Whether for judging the correct date of notice of 158BD typographical errors should be ignored; Whether combined satisfaction, when the searched persons are more than one, can be recorded for initiating action under section 158BD and Whether undisclosed income unearthed during search can only be added under chapter- XIV-B. And the verdict partly goes in favour the assessee.

Facts of the case

Assessee, a partnership firm, is engaged in the business of civil construction assessed under section 158BD of the Act. Since certain incriminating material was found against it in a Search and seizure action under section 132 of the Act, conducted at the residence of the partners. During the course of search, several incriminating materials, along with some books of accounts pertaining to M/s. Jeet Construction Company, were seized from all the business premises. On the basis of these documents the AO made additions. Assessee challenged these additions before the CIT(A) and ITAT - ITAT restored the matter to the AO for considering afresh - In the second round of appellate proceedings before CIT(A) assessee challenged the jurisdiction of the AO under section 158BD on the ground that no satisfaction was recorded by the AO of the searched person and the alleged satisfaction was a consolidated satisfaction vis-a-vis material seized from different persons, which was not permissible. Besides assessee also challenged that action under section 158BD ought to have been taken after the culmination of assessment of searched person. Assessee also challenged the addition on merits. CIT(A) dismissed the legal contentions of the assessee and also sustains the addition on merits. Before ITAT the AR of the assessee pointed out that expenses shown by the assessee in the books and assessed under section 143(3) were more than the expenses estimated by the AO and hence no addition on estimated basis was permissible.

After hearing the parties the ITAT held that,

++ in view of decision of Gujarat High Court in the case of P V Doshi Vs CIT, it is clear that jurisdiction point being a pure question of law can be agitated in the remand proceedings as it goes to the root of the matter. In the case before us the assessing officer had not provided the copy of satisfaction note recorded by the assessing officer while initiating proceedings under section 158BD of the Act. The satisfaction note was provided on interference of the CIT (Appeals) in the second round of appellate proceedings. At this stage only the assessee came to know the reasons as to why proceedings against it were initiated under section 158BD as no search under section 132 of the Act was conducted in the case of the assessee. Therefore, in our considered opinion, the assessee is justified in taking the ground agitating the jurisdiction under section 158BD in the second round of assessment proceedings;

++ nowhere in the section it is provided that proceedings under section 158BD will be initiated only in a case where assessment under section 158BC is made. Initiation of 158BD proceedings is independent of the action taken in the case of searched person. It is the satisfaction of the assessing officer having jurisdiction over searched person to convey the books of accounts or assets to the assessing officer having jurisdiction on the person in respect of whom the books of account, other documents or assets seized or requisitioned are found in the possession of searched person. The books of accounts or documents or assets can be conveyed at any stage i.e. during the course of assessment proceedings in case of searched person or before initiation of proceedings under section 158BC of searched person or after completion of assessment in the case of searched person. Therefore, completion of assessment under section 158BC in the case of searched person is not condition precedent for recording of the satisfaction under section 158BD of the Act;

++ as per original assessment order the notice was served on the assessee on 20/09/2004. Therefore, the date written on hand at the bottom as 20/09/2004 represents the date of service. The date of issue of notice on 16/11/2003, in our considered opinion, appears to be typing mistake as the assessing officer in the assessment order has stated the date of notice under section 158BD as 16/09/2004. The date of notice mentioned in the assessment order 16/09/2004 was not challenged in the first assessment proceedings. Therefore, the date mentioned on the notice under section 158BC 16/11/2003 is a typographic mistake. The assessee had not filed any other evidence to prove that notice dated 16/11/2003 was served on the assessee in November, 2003. In the absence of any such material, we are unable to hold that the notice under section 158BD read with s. 158BC was issued on 16/11/2003. Therefore, this contention of the assessee is rejected;

++ the contention of the assessee that the combined satisfaction note recorded in respect of three different searched persons is bad in law. The assessing officer should have recorded separate satisfaction notes in the case of each searched party. As already mentioned that the assessing officer is same for all the searched persons, because of this reason, a combined satisfaction note has been prepared. When the assessing officer is the same for all the searched persons, making a satisfaction note based on material found from the premises of different persons, which was conveyed by the authorized officer to the assessing officer, preparation of combined satisfaction note will not be detrimental to the interest of the Revenue. At the best it could be treated as an irregularity and not illegality. What is to be seen is whether before issue of notice u/s 158BD satisfaction should be recorded by the assessing officer which has been done in the case of the assessee. Therefore, assessment cannot be annulled on the basis of combined satisfaction note, recorded by the same assessing officer, having jurisdiction on all the searched persons including the assessee under appeal;

++ Section 158B(b) defines term `undisclosed income' and means to include any money, bullion, jewellery or other valuable article or things or any income based on any entry in the books of accounts and other documents or transaction, where such money, bullion, jewellery, valuable article, things, entry in the books of accounts or other document or transaction represent wholly or partly income or property, which has not been or would have been disclosed for the purpose of this Act or any expense, deduction or allowance claimed under this Act, which is found to be false. From the definition of expression `undisclosed income' it is clear that income which has not been disclosed or would not have been disclosed would be undisclosed income. Section 158BB(1) provides the mode of computation of undisclosed income. The undisclosed income for the block period shall be the aggregate of total income of the previous years falling within the block period computed, in accordance with provisions of this Act, on the basis of evidence found as a result of search or requisition of books of accounts or other documents and such other material or information as are available with the assessing officer and relatable to such evidence, as reduced by the aggregate of total income or as the case may be, as increased by aggregate of losses of such previous years determined, - as specified in clause (a) to (f). Therefore, where income has been already assessed or return of income has been filed that income cannot be taken as undisclosed income;

++ no evidence during the course of search was found that the assessee had earned any undisclosed income. Similarly, there is nothing on record to suggest that the assessee had booked bogus expenditure in various assessment years. The assessing officer had also not determined the undisclosed income assessment year-wise. In fact on the basis of entries found recorded in the seized material, income cannot be determined on year to year basis. Had it been so, the earlier assessing officer would have not recorded a finding of fact that there was no clinching evidence of concealment of income. Merely because the ITAT had set aside the issue to the file of the assessing officer, the totals of all the entries whether recorded in the regular books of accounts or without any date would constitute income of the assessee that too undisclosed income. Moreover, it is a settled law that the assessee cannot be put to a more adverse situation than what he was in.

Adjustment of short-term capital loss post 1-10-2004 against short-term capital

 

Adjustment of short-term capital loss post 1-10-2004 against short-term capital gain pre 1-10-2004
There is no bar in section 70 that short-term capital loss post 1-10-2004 cannot be set-off against short-term capital gain earned prior to that date. – Vide ITO v. Sonia Pankaj Razdan (2011) 42(II) ITCL 412(Mum-Trib)

WHAT is Res Judicata

 

By Vinayak Y Thakur

WHAT is Res Judicata

A matter adjudged, a thing judicially acted upon or decided, a thing or matter settled by judgment, a thing definitely settled by judicial decision, the thing adjudged – Law Lexicon

As per Black's law Dictionary – 7th Edition, there are three elements in the above principle.

They are -

(1) an earlier decision on the issue,

(2) a final judgment on the merits, and

(3) the involvement of the same parties, or parties in privity with the original parties.

The above principle operates as a bar to try the same issue once over. The Apex Court in the case of Sulochana Amma vs. Narayanan Nair - (2002-TIOL-292-SC-MISC) held that this principle aims to prevent multiplicity of proceedings and accords finality to an issue, which directly and substantially had arisen in the former suit between the same parties or their privies, decided and became final, so that parties are not vexed twice over; vexatious litigation would be put to an end and the valuable time of the Court is saved. It is based on public policy as well as private justice. The principle would apply, therefore, to all judicial proceedings of the tribunals other than the civil courts.

Basis and Scope of

The principles of Res Judicata are of universal application as it is based on two age old principles, namely , interest reipublicae ut sit fins litium which means that it is in the interest ofthe State that there should be an end to litigation and the other principle is nemo debet his veari, si constet curiae quod sit pro un aet eademn cause meaning thereby that no one oughtto be vexed twice in a litigation if it appears to the Court that it is for one and the same cause. This doctrine is common to all civilized system of jurisprudence to the extent that a judgment after a proper trial by a Court of competent jurisdiction should be regarded as final and conclusive determination of the questions litigated and should forever set the controversy at rest.

That principle of finality of litigation is based on high principle of public policy . In the absence of such a principle great oppression might result under the colour and pretence of law in as much as there will be no end of litigation and a rich and malicious litigant will succeed in infinitely vexing his opponent by repetitive suits and actions. This may compel the weaker party to relinquish his right. The doctrine of Res Judicata has been evolved to prevent such an anarchy.

Recently, Hon. Supreme Court in the case of M. Nagabhushana vs. State of Karnataka 2011 (271) ELT 481 dealt with this doctrine. It held that the application of this doctrine should not be hampered by any technical rules of interpretation. Plea of res judicata is not mere technicality, but a fundamental principle sustaining rule of law, ensuring finality in litigation.

Constructive res judicata

`Constructive' means `implied', "that which has not the character assigned to it in its own essential nature, but acquires such character in consequence of the way in which it is regarded by a rule or policy of law (Black)

Whether doctrine is applicable in taxation matters

The principle of res judicata or estoppel is not applicable to tax matters , thus the view taken by the assesse or appellate, revisional authority or even the High Court in respect of any one assessment period will not be final and conclusive for subsequent assessment period but such earlier decisions should be a cogent factor in the determination of the same point in subsequent assessment period.

In the case of Bramec Surie (P) Ltd . 1986 (25) ELT 79, the Tribunal had held that issues already concluded in earlier proceedings could be reopened in subsequent proceedings for another period of time if emerging fresh materials give a new dimension to the matter.

While dealing with the issue whether Appellate Tribunal is bound by its earlier decision, the Hon. Supreme Court in the case of Swaraj Mazda Ltd 1995 (77) ELT 505 held that the Tribunal is not precluded from deciding the question on merits because of earlier decision of the Tribunal regarding an earlier period.

The non-application of the doctrine of res judicata in tax matters is based on the fact that assessment for each year is distinct and separate since the Finance Act which alone supports the assessment is sanctioned only for a particular year by the legislature. When happening of some subsequent event was not existent at the time of passing the first order, one cannot plead res judicata.

Case laws relied on for the above discussion

++ J.K. Synthetics Ltd. 1981 (8) ELT 328 Tribunal

++ Birla Jute Mfg. Co. Ltd. 1985 (21) ELT 930 Tribunal

++ Jain Exports - (2003-TIOL-164-HC-DEL-EXIM-LB)

++ Peico Electronics & Electricals Ltd. 1994(71) ELT 1053 (Tribunal) upheld in 2000 (116) ELT A72 SC.

++ Swaraj Mazda Ltd. 1995 (77) ELT 505 SC

++ Sulochana Amma vs. Narayanan Nair - (2002-TIOL-292-SC-MISC)

++ UOI vs. R.C.Fabrics (P) Ltd. - (2002-TIOL-533-SC-CUS-LB)

++ M. Nagabhushana 2011 (271) ELT 481 SC.

Avoiding litigation under Section 11 of the Arbitration Act

 

January 4, 2012
Avoiding litigation under Section 11 of the Arbitration Act

There is much litigation in courts under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter, "A&C Act"), on appointment of arbitrators. Often, the party resisting the arbitration exploits all its might to stall the appointment of arbitrator, which can easily last a few years. A real threat of rising litigation costs is used to politely arm-twist a weaker party into a settlement, even if the latter has a genuine claim.

This post is aimed at attempting to propose a solution, in order to expedite the actual arbitration proceedings. The solution is Section 11 of the A&C Act, which is the cause of the entire problem as well.

Section 11(2) of the A&C Act provides that the parties are free to agree to the procedure for appointment of arbitrators. It is only in the absence of an agreement between the parties over a procedure, or failure to act according to the agreed procedure, that one of the parties can approach the court for appointment of the arbitrator.

Therefore, the parties are free to agree that if upon expiry of a definite time period, from receiving a request for appointment of an arbitrator, the other party does not appoint its own arbitrator, the former's arbitrator shall act as a sole arbitrator. This procedure obviates a situation where one party will have to approach the court for appointment of arbitrator. It is a very practical provision, which seems to have been completely ignored in India.

A similar provision, although more clear and elaborate, exists in Section 17 of the English Arbitration Act, 1996.

Relevant portion of the model arbitration clause under London Maritime Arbitrators Association Terms, incorporating the essence of this provision, reads as follows:

"The reference shall be to three arbitrators. A party wishing to refer a dispute to arbitration shall appoint its arbitrator and send notice of such appointment in writing to the other party requiring the other party to appoint its own arbitrator within 14 calendar days of that notice and stating that it will appoint its arbitrator as sole arbitrator unless the other party appoints its own arbitrator and gives notice that ithas done so within the 14 days specified. If the other party does not appoint its own arbitrator and give notice that it has done so within the 14 days specified, the party referring a dispute to arbitration may, without the requirement of any further prior notice to the other party, appoint its arbitrator as sole arbitrator and shall advise the other party accordingly. The award of a sole arbitrator shall be binding on both parties as if he had been appointed by agreement."

This is a useful provision, which could be used while drafting an arbitration clause, in order to avoid a situation where a genuine arbitration claim is stalled under Section 11 of A&C Act.

I am uncertain whether this provision for default appointment of arbitrator has ever been tested in courts in India (I would be grateful if someone could bring to my attention a decision where it has been tested). It would be interesting to see whether our courts adopt a non-interventionist approach or indulge in some ingenuous attempts to exercise jurisdiction.

143[2]

 

[2012] 17 taxmann.com 37 (JP. - ITAT)
IT : Where Assessing Officer has not issued notice under section 143(2) within time available, he cannot issue notice under section 142(1)(ii) and (iii) after time limit of issuance of notice under section 143(2) has expired 

Business of real estate

 

[2012] 17 taxmann.com 36 (DELHI - ITAT)
IT : Participation by assessee in tender for sale of land demonstrats that its business of real estate development is set up during relevant year.

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Income Tax Arrear Letter from CPC Bangalore just a communication of demand not a

 

Income Tax Arrear Letter from CPC Bangalore just a communication of demand not a demand notice, No need to respond to tax notices for below Rs 100

It has been reported in some sections of the press that the Central Processing Centre , Bangalore is sending notices for payment of taxes which are as small as Rs. 1/- , 4/- , 6/-, causing unnecessary hardship to assesses .

It has been stated that when the refunds for amounts less than Rs. 100/- are not issued by the Income Tax Department, then the demand for less than Rs. 100/- should also not be collected .

Clarification in this regard is as follows:

Arrear Demand Communication

The Income Tax Department has created a central repository of all demands for better demand management as required by Standing Committee of Parliament and C&AG. To achieve this, all officers were asked to collate demand lying at various places viz. IRLA, TMS and manual registers and upload onto CPC portal. This was also part of the annual action plan. Consequently AOs have uploaded the same. During a meeting with Bangalore Chartered Accountants association, it was suggested that taxpayers should also be informed about the same so as to enable them to take necessary action if the outstanding demands were incorrect. This measure was aimed at providing greater transparency. Therefore, a communication has been sent to taxpayers informing them about existing arrears. It may be clarified that this communication is not a demand notice. This measure is, in fact, an assessee -friendly exercise. The Department has also written to all chief commissioners to amend such entries, if found incorrect, when approached by taxpayers. This would correct the database if a taxpayer has proof of payment etc. As per extant procedure, demand of less than Rs. 100 is not enforced but is liable for adjustment against future refunds.