TMI Blog1994 (4) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer considered the payment as excessive freight paid to sister concerns of the assessee-company. After considering the facts stated in letter dated 22-2-1993 of the assessee-company, the Assessing Officer arrived at the conclusion that 2.5 per cent of the total payment aggregating to Rs. 4,10,135 paid to these two sister concerns is disallowable under section 40A(2). Accordingly disallowance of Rs. 10,253 was made. 2.1 The learned CIT (Appeals) has discussed this point in paras 3 to 3.7 of his order. He has confirmed the action of the Assessing Officer. 2.2 The learned counsel for the assessee submitted before us that M/s Geetanjali Road Lines is a sole proprietorship concern of Mr. B.S. Goyal, one of the Directors of the company. However, M/s Vishal Hind Roadways is a partnership firm constituted by three partners S/Shri Shersingh Madan, Harishsingh Madan and Vinod Madan who are not in any manner related to the Directors of the appellant-company and payments made to that party is not covered within the ambit of section 40A(2). It was further pointed out that freight payments made to these two parties were reasonable and were based on commercial considerations. In or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsiderations. No basis has been indicated in the assessment order as to why and how the Assessing Officer considered only 2.5 per cent as unreasonable and excessive out of the aggregate freight payments of more than Rs. 4 lakhs. In view of the facts stated in the letters submitted before the Assessing Officer and in view of the relevant details shown to us from the documents submitted in the compilation, we are of the considered opinion that payment of freight charges made to these two parties by no stretch of imagination be regarded as excessive or unreasonable. The disallowance is, therefore, cancelled. 3. The second ground relates to addition of Rs. 21,98,898 made on account of low yield. This point has been discussed by the Assessing Officer in para 5(iv) at pp. 6 to 9 of the assessment order. The assessee-company imports/purchases mutilated woollen rags etc. from foreign countries and through the various processes or production manufactures yarn which are sold in Amritsar and Panipat markets. The accounts of the appellant-company have been audited as required under the provisions of the Companies Act as well as under section 44AB of the IT Act, 1961. As per the tax audit rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... astes etc. Finally yarn is produced of desired count and quality which is sold in Amritsar and Panipat market." It was pointed out by him that the percentage of yield shown in the Tax Audit Report has been arrived at by taking the total quantity of opening stock and closing stock without bifurcating the same separately into opening and closing stock of raw material and semi-finished goods (SFM). If the excess of closing stock of SFM over the opening stock of SFM is converted into raw material or vice-versa and then the percentage of yield of finished material is calculated with reference to raw material consumed, the percentage of yield in the year under consideration will come to 79.42 per cent as per the details submitted in the compilation at page 4. According to the Assessing Officer the normal percentage of yield in this line of business ranges between 75 to 78 per cent. If this is compared with the yield computed as per the correct method as per details given at page 4 of the compilation, the yield shown by the assessee will be found to be better and does not warrant any suspicion or disbelief about the correctness of the declared yield. One of the reasons explained by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not produce the stock register before the Assessing Officer which was specifically required to be produced by a letter dated 14-12-1992. He also submitted that in spite of repeated opportunities granted to the assessee it did not furnish any evidence to corroborate the correctness of loss at Ropar in respect of 25433 kgs. alleged to have been sent in earlier years to M/s Jai Gurudev Spinning Mills Pvt. Ltd., Ropar for carrying out the job work of spinning. No material or evidence has been produced by the assessee to prove the reality of the loss of the said 25433 kgs. The assessee did not furnish any such evidence even before the CIT (Appeals). A copy of the plaint submitted in the court against M/s Jai Gurudev Spg. Mills has also not been made available to the departmental authorities. He vehemently supported the order of the CIT (Appeals) and relied upon the elaborate reasons mentioned in the assessment order as well as in the order of the CIT (Appeals) and submitted that the addition has rightly been confirmed. 3.4 At this stage the Bench required the learned counsel for the assessee to submit a copy of the plaint filed in the suit against M/s Jai Gurudev Spg. Mills and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the dates subsequent to 14-12-1992 in brief indicates that the assessee complied with all the requirements by producing the required details. Such details were verified and placed on records. Similar observations have been made by the learned assessing authority in para 3 of the assessment order as rightly pointed out by the learned counsel for the assessee. The accounts maintained by the appellant company have been audited by the auditors in accordance with the provisions of section 44AB. The entire purchases and sales are supported by proper vouchers, entries in the financial books of account and are also supported by complete quantitative details. The assessee submitted letter dated 20-1-1993 in which justification relating to correctness of the yield of 72.2 per cent shown in the tax audit report was given. It was, inter alia, pointed out that the company is maintaining complete record of the material received, processed, production, despatches and account of all the losses which the company incurred during the various processes of production. The contention relating to writing off of 25433 kgs. of material sent to Jai Gurudev Spg. Mills was also brought to the notice of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said quantity of material by applying the rate of Rs. 11.50 per kg. and thereby claimed a decree for a sum of Rs. 1,63,945 in addition to Interest and cost etc. The said suit was valued at Rs. 2,21,325 inclusive of the value of goods and interest thereon. The learned counsel for the assessee was not able to reconcile the vast difference between the quantity mentioned in the said suit and the quantity written off in the stock records and claimed as loss in the quantitative details furnished before the departmental authorities. From the quantitative details furnished before the Assessing Officer it is obviously an admitted fact that the assessee claimed loss to the extent of 25433 kgs. while the stock left with that party as per copy of the plaint is only 14256.1 kgs. There is no explanation whatsoever to support the claim for loss made in the year under consideration in respect of the balance quantity of almost 11,178 kgs. As regards the value of such raw material claimed by way of loss at Ropar it is not known from the details furnished in the compilation as to whether the partly processed raw material was sent to the said party for carrying out the process of spinning or the raw m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Investment allowance Rs. 27,56,000 ------------------------- Rs. 28,69,554 ------------------------- Less: Deficiency as per statement in last year Rs. 19,02,623 ------------------------ Book profit Rs. 9,66,931 ------------------------ 30% thereof Rs. 2,90,079 ------------------------ Accordingly, the company has paid tax under section 115J of Rs. 2,90,079." The Assessing Officer sent an intimation under section 143(1)(a) on 26-3-1991 revising the book profit under section 115J as under: "Net profit as per P L A/c Rs. 1,13,554 Add: Investment allowance reserve Rs. 27,56,000 Income-tax provision Rs. 2,10,000 ----------------------- Rs. 30,79,554 ----------------------- Less: Deficiency of earlier year as per book Rs. 3,93,898 ----------------------- Book profit Rs. 26,85,656 ----------------------- 30 percent thereof Rs. 8,05,696" Tax payable including additional tax, interest under sections 234B and 234C was determined at Rs. 6,52,641 under section 115J. The assessee submitted application for rectification to revise the said demand which was rejected by the Assessing Officer. In the regular assessment completed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e losses suffered by the company in any of the years since the year 1960 will be eligible to be set off against the profit of the relevant previous year regardless of the fact that there was a profit in one or more of the intervening year or years from the year in which the loss or depreciation remained unabsorbed and the year in which the set off against the profits of the relevant year in which the assessee chooses to set off the past loss. On that basis he submitted that the losses of the years 1983, 1986 and 1987 will be eligible to be set off against the income of assessment year 1990-91 for the purpose of computation of the book profits under section 115J regardless of the fact that there was positive income of a substantial amount in the intervening years 1984 and 1985. He submitted that provisions of sub-clause (iv) are materially different as compared to the provisions contained in section 205(1)(b) of the Companies Act which have been incorporated in clause (iv) of the Explanation to section 115J. Section 205(1)(b) of the Companies Act permits set off in respect of past losses either against the profits of the relevant year or of any previous financial year or years or ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghly profitable companies deserves attention. It was, therefore, proposed to introduce a provision whereby every company will have to pay a minimum corporate tax on the profits declared by it in its own accounts. In the Finance Bill as introduced, the provisions of item (iv) of the Explanation to section 115J did not exist. In other words, for computation of book profits for the purpose of section 115J there was no provision for deducting past losses or unabsorbed depreciation. The trade and industry made representations. After considering several representations made in this regard, the Finance Minister while moving the Finance Bill proposed certain amendments in the proposed section 115J and agreed with the suggestions and thereby the provisions of section 205 of the Companies Act, 1956 were incorporated in the form of introducing the present clause (iv) of the Explanation to section 115J providing that past losses or unabsorbed depreciation, whichever is less, should be allowed to be set off against the book profit of the current year for purpose of computing book profits in accordance with section 115J. 4.6 The provisions of section 115J requires the assessing authority to fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view to ensure that 'zero tax' prosperous companies pay minimum corporate tax as per the provisions of section 115J. Such an interpretation as suggested by the learned counsel is also not validly possible even on the basis of a plain reading of the relevant clause (iv). It will be worthwhile repeating that the said clause (iv) clearly provides that the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of section 205 of the Companies Act, 1956 are applicable. The use of words "which would be required to be set off" in the said clause clearly means that only that amount of loss or depreciation which has not already been set off against the past profits, can be regarded as the eligible amount which would be required to be set off against the profits of the relevant previous year. The said expression "which would be required to be set off", therefore, clearly excludes the amount which has already been set off in prior years and did not remain unabsorbed loss or unabsorbed depreciation in the relevant previous year for which the book profits is to be computed as per the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be regarded as expenditure in the nature of advertisement. Such expenses are customary business expenditure and the limits prescribed in rule 6B cannot be applied in relation to such business expenditure. The disallowance has been confirmed merely on the basis of suspicion that such an expenditure may be for non-business purposes. Such a suspicion is not based on any material existing on records. The Assessing Officer has not recorded the statements of any person nor has brought any material to corroborate such a vague suspicion. Looking to the volume of business carried out by the assessee, whose turnover was about Rs. 4 crores, such quantum of expenditure incurred for presentation of gift on Diwali etc. do not warrant any suspicion or disbelief. The contention of the assessee is also supported by the decision of the ITAT relied upon by him. Considering all the facts and circumstances of the case, we are of the opinion that the disallowance should be cancelled. We direct the ITO to delete the said addition. 5.5 The next ground relates to disallowance of Rs. 10,000 out of motor car expenses on the ground of personal user. The Assessing Officer made an ad hoc disallowance of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, direct the AO to delete the disallowance of Rs. 10,000. 6. The next ground relates to disallowance of Rs. 5000 out of the staff and workmen welfare expenses. After considering the submissions made by the learned representatives and after going through the orders of the departmental authorities, we find that the Assessing Officer has not given any specific instance of a disallowable expenditure debited in this head of account. Such an ad hoc or lump sum disallowance of Rs. 5000 out of total expenses for staff welfare of Rs. 2,01,645 cannot be justified. The disallowance of Rs. 5000 is, therefore, cancelled. 7. The next ground relates to disallowance of Rs. 10,000 out of telephone expenses. It was pointed out by the learned counsel for the assessee that no such disallowance was ever made in the past. The expenses have been incurred wholly for business purposes and ought to have been allowed in full. The learned D.R. supported the disallowance made by the ITO and confirmed by the CIT(A). 8. We have gone through the orders of the depttl. authorities. Out of total expenditure of Rs. 2,87,044 an ad hoc disallowance of Rs. 10,000 has been made without any basis, which has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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