9911796707
TMI Blog2014 (8) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 3,24,58,453/- on the revaluation of the closing stock at the end of the year. 3. On the facts and the circumstances of the case and in law the CIT(A) erred in holding that the appellant is not entitled to deduction of Rs. 32,13,004/- as discount on sales on the ground that the said discount has been given on previous year's sales. 4. On the facts and the circumstances of the case and in law the CIT(A) erred in disallowing Rs. 12,26,420/- from salary paid by the appellant and Rs. 40,159/- from rent paid by the appellant as per section 40(1)(ia) of the Act. 5. On the facts and the circumstances of the case and in law the CIT(A) ought to have allowed the deduction of Rs. 1,57,64,349/- as bad debts under section 36(1)(vii) or as business loss under section 28 of the Act. 2. Brief fats are: The original assessment was completed u/s 143(1) on 17-8-2007, processing the return filed on 29-11-2006 declaring total income at Nil and carried forward of loss and unabsorbed depreciation amounting to Rs. 6,73,54,090/-. Thereafter 148 notice was issued by recording the reasons that income had escaped assessment and asking the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 34,41,784/- Birla International Pvt. Ltd. Rs. 30,93,130/- 2.4. The assessee was asked to explain the reflection of balance purchases amounting to Rs. 10,05,75,180/- in the books of a/c and in case of failure to explain, to show cause why such purchases should not be treated as unaccounted purchases. 2.5. Assessee replied that due to floods in the area which were in public knowledge, the goods were damaged and stock of the assessee was damaged in the floods and that was the reason for negative G.P. Besides, in the shifting of the record from Sion Mumbai to Goregaon (Mumbai), part of the books of a/c and record was misplaced, therefore, it could not be produced. The assessing officer rejected the books of account and further observed that average g.p. rate disclosed by the assessee for A.Y. 2004-05, 2005-06 & 2007-08 came to 36%, which was applied to the sales turn over of (-) Rs. 1,60,65,800/-. By this working the assessee's declared negative G.P. of Rs. 3,64,86,709/- stood converted into a (+) G.P. of Rs. 57,74,048/- which resulted into an addition of Rs. 4,22,60,757/-. A.O. further observed that assessee had claimed an amount of Rs. 1,57,64,349/- as provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss 40,35,611 Less: Discount/ scheme given against current year sales 22,57,700 Discount/ scheme given against previous year's 32,13,004 Add: profit during the year 14,35,093 As per Annexure (including Sales of old stock) Difference balance of gross loss/ profit - 2.10. Books of accounts of the appellant are duly audited by a Chartered Accountant under section 44AB of the Act as well as the Companies Act: The Auditor has thoroughly verified the details in respect of the inventories and has not reported any adversity or wrong claim The details of opening stock, consumption and closing stock are reflected in such audited financial statements, the inventories have been valued at lower of cost or net realizable value and also certified that the comparison of cost and net realizable value is made item by item basis. There has been no change in the method of valuation of stock and the obsolete stock has been valued on the basis of net realizable value of tile inventories. A.O. erred in holding that no details of stock were produced before him as all the relevant details and documents were in his possession. A.O. further erred in not taking cognizance of the Audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn of income for the relevant A.Y. 2006-07 on 29.11.2006 declaring its total income at RS.Nil. This return of income was processed on 17.08.2007 u/s 143(1) of the I.T. Act. No scrutiny took place in respect of original return of income filed by the appellant. Subsequently, the AO noted that the appellant had debited its P&L A/c by an amount of Rs. 1,57,64,349/- on account of provision for bad and doubtful debts. However, while computing the income the appellant had not added back this amount in its computation of income. As per the I.T. Act any provisional expenditure is not an allowable expenses. Hence in my opinion the case of the appellant clearly falls u/s 147 under clause b of explanation 2 section 147 of the I.T. Act. The AO has duly recorded the reason for reopening of the case and the same was also found to be communicated to the appellant. Therefore, the objection of the appellant regarding the reopening of the case is hereby rejected and it is held that the AO has rightly reopened the case u/s 147 of the I.T. Act. The case of GKN Drive Shift (I) Ltd. Vs. CIT (259 ITR 19 SC) is not applicable in the case of appellant as evident from the record that the reasons for reopen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erviceable inventories and fixed assets have not been made. As explained provision/adjustment for the sale will be accounted for as and when determined(impact uncertainable).'" (ii) Further, in para 12 of significant accounting policies appended to the balance sheet in scheduled 18, the auditors have stated as follows: "12. a. Inventories have been considered as per book balance/quantity/value estimated by the management. As per the programme, only certain quantities of inventories have been physically verified during the year Provision/ adjustment for obsolete, non moving shortage/ damaged, unserviceable inventories will be accounted for as and when determined (impact uncertainable)." 2.19. CIT(A) qua these remarks by auditors observed that: i. A simple reading of this report made it clear that no physical verification was actually done by the management and merely a certificate to this effect was issued. Consequently item-wise loss was not verifiable or determinable merely on the basis of details filed by the assessee. ii. No pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,57,64,349/- as provision for bad and doubtful debts in its return for the A.Y. 2006-07. Since this is only a provision and not actual expenditure, the same is not allowable as per sec. 36(1)(vii) of Income Tax Act, 1961. Therefore, I have reason to believe that income chargeable to tax amounting Rs. 1,57,64,349/- has escaped assessment." 4.1. These reasons make it clear that no new information came in the possession of the assessing officer and only on the basis of return filed by the assessee and during the course of assessment for A.Y. 2007-08 the assessing officer changed his opinion that bad debt provision was not allowable to assessee. Thus the reason is neither based on new knowledge or information but on the basis of assessee's own figures provided in the return, therefore, change in AO's opinion that the bad debts were not allowable. Therefore, the reassessment in question is bad in law in view of Hon'ble Supreme Court judgment in the case of Kelvinator India and GKN Driveshift (I) Ltd. Vs. CIT 259 ITR 19. It has been held by Hon'ble Supreme Court that even assessment u/s 143(1) cannot be reopened due to change of opinion. Therefore, the reassessment being only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et realizable values of the inventories from the market sources has been made. Therefore the action of the A.O. is unjustified and arbitrary. 4.5. The fact that there were floods in Sion Mumbai in July 2005 have not been disputed by any of the lower authorities. Due to these floods the assessee's some stock was fully damages and some partially damaged. In these circumstances as per mercantile method of accounting and prudent business policy assessee had to revalue the stock and bring the inventory to a realistic value as per settled mercantile system principles i.e. valuation of closing stock on the basis of cost or market value which ever is low. Ld. CIT(A) has upheld the books of a/c of the assessee holding them to be duly maintained on the basis of mercantile system which are duly audited and contain no defects. The order of ld. CIT(A) upholding the books has not been challenged by the revenue in as much as no appeal has been filed. Thus, veracity and completeness of assessee's books of account stands accepted by the revenue. The addition has been made only on an inference that assessee did not sufficiently prove the inventories to the satisfaction of assessing officer about th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a valid exercise of power. In the present case, having regard to the law laid down by the Supreme Court it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons which have been recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of section 147. In these circumstances, the petition shall have to be allowed by setting aside the notice under section 148." 4.6. Apropos the second issue, it is vehemently pleaded that in the zeal of rejecting the book results AO did not care to look into the facts about discount on sales of current year and previous years sales. Ld. CIT(A) upheld the book results of the assessee and also allowed the discount on current sales. However, without any rhyme or reason ld. CIT(A) upheld the disallowance of the discount on sales of earlier years holding that expenses did not pertain to relevant assessment year. It is pleaded that the sales of the earlier years have not been denied, genuineness of payment of discount in this year also is not denied. Discount has been disallowed merely on the finding that it pertains to earlier ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticia" i.e. the supremacy of the justice has to prevail. 5. Ld. DR on the other hand contends that - (i) There is no original assessment u/s 143(3) in the case of the assessee and its return has been processed u/s 143(1) which does not amount to a regular assessment and in the same way it does not amount to forming of any opinion by the assessing officer on the issues. It is not the return of A.Y. 2006-07 based on which the assessing officer came to belief that income had escaped assessment, rather it was a new information in the form of assessee's return of income and record for next year i.e. 2007-08. The verification of this new record revealed the information to the assessing officer that income had escaped assessment in A.Y. 2006-07. Thus, it is a case where no earlier opinion was formed and new information came in possession of the assessing officer. Therefore, this being neither a case of change of opinion nor a case of review and the reopening being based on new material and information on record in possession of assessing officer, the reopening has been rightly upheld by ld. CIT(A). (ii) Apropos the next issue i.e. revaluation of cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relied on. 5.2. Apropos disallowance of salary and rent u/s 40(a)(ia) for want of deduction during the current year, ld. DR has no objection to allow it in accordance with law when-ever the TDS amount is actually paid. 5.3. Apropos disallowance of bad debt, the ld. DR contends that it is a matter of record that the assessee had not pressed this ground before CIT(A) hence it was dismissed. It has not been disputed that Hon'ble Supreme Court judgment in the case of Vijay Bank (supra) existed on books prior to the assessee's not pressing the ground. Under these circumstances, assessee cannot be allowed to take a somer sault and agitate the issue whenever assessee likes. The Vijay Bank judgment does not come to assessee's help in as much as the ground was not pressed before CIT(A) despite the judgment being available in public domain. 6. Ld. Counsel for the assessee in rejoinder contends that as far as the fact about destruction of record in the floods is concerned, relevant information in the form of communication to the Sales-tax department and the affidavit of the director to this effect was filed before the assessing officer and CIT(A) which is placed on paper book 41 & 42. Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006, which is after more than a year of the incident. Similarly, the affidavit in question has been sworn on 30th July 2007 i.e. about 2 years after the incident. Be that as it may, in any case there is nothing more on record to suggest as to ultimately what view has been taken by the sales-tax department on this issue. 7.4. Besides, this information also did not give any details about the mode, extent and the nature of damage of stock. We also note that assessee has used only the generalized words like obsolete, non moving shortages/ damaged, unserviceable inventories. In our considered view as per the proper method of accounting the assessee will always prepare separate list of items in respect of obsolete, non moving shortages, damaged goods, unserviceable inventories and thereafter a consolidation will be prepared. This is minimum, which could have been done by the assessee to justify its claim, in the absence of even minimum details of of reduction in the value of stock, the assessee's burden to justify the decrease, revaluation of the stock is not discharged. The assessee's stand is further adversely affected by the observation of its own auditors remarks that no physical v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's appeal of penalty was considered by CIT(A) on the basis of relief granted. The relevant observation is as under: "Therefore, the order u/s 271(1)(c) dated 28-06-2012 is hereby confirmed in terms of quantification of penal amount of 100% of the amount of tax sought to be evaded to the extent of the additions confirmed by the CIT(Appeals) i.e. rejection of books of account Rs. 3,56,71,477/- (Rs. 3,24,58,453/- loss on account of revaluation of stock. Rs. 32,13,004/- discount given against previous years sale) but also modified to the extent of relief given by CIT(A)-VI, New Delhi in the appeal no. 47/12-13 dated 09-05-2013 i.e. Rs. 65,89,300/- (s. 4,22,60,757 - Rs. 3,56,71,457) plus deletion of ad hoc addition of Rs. 10,00,000/-. On addition of Rs. 12,26,420/- and Rs. 40,159/- u/s 40(a)(ia) on account of disallowance of salary and rent, however, no penalty u/s 271(1)(c) is however held to be imposable." 9.1. This order clearly mentions that the CIT(A) upheld minimum penalty qua following items: Loss on account of revaluation of stock Rs. 3,24,58,453 Discount on previous years sales Rs. 32,13,004 Rs. 3,56,71,477 9.2. Revenue has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only from the parameters laid down by Hon'ble Supreme Court in the case of Reliance Petroproducts (supra). 10.2. Ld. CIT(A) has confirmed the penalty by following observations: "5.10. In this case, considering the totality of circumstances and material on record, it is clear that the appellant had failed to discharge its strict liability to furnish true and the correct particulars of income, while filing its return of income. Even reassessment proceedings have been held to be legally and validly initiated by the AO as held by the CIT(Appeals) in quantum appeal. In this case, no plausible explanation has been given by the appellant regarding the non production of books of accounts, supporting vouchers and stock register before the AO. In fact, the CIT(Appeals) has also confirmed the addition of Rs. 3,56,71,457/- on account of rejection of books of account after holding that loss on account of net realizable value of the closing stock shown at Rs. 3,24,58,453/- as claimed by the appellant company is not sustainable, after finding fault in submission of the appellant vis-à-vis the Audit Report and which is held also not in accordance with Accounting Stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e discount of previous years sales claim in this year also is not justified in as much as the sales of previous year are not disputed and genuineness of payment of discount is not disputed. The objection raised is purely a technical plea that the discount pertains to the sales of earlier years. Thus the issue at best amounts to postponement of expenditure to subsequent year. Hon'ble Supreme Court in the case of CIT Vs. Excel Industries Ltd. 358 ITR 295 has held that such issues are revenue neutral and should not be agitated by department. In these circumstances penalty cannot be imposed for change in year of claim. 10.5. Ld. Counsel contends that a claim which under the bona fide impression of the assessee has crystallized in this year cannot be held to be furnishing of inaccurate particulars merely because AO thinks it belongs to earlier year. More so, when the sales and payments are accepted. Assessing officer has neither enquired from these parties by issuing summons u/s 131 or called information under sec. 133(6) in penalty proceedings to bring home the charge that assessee furnished inaccurate particulars. In the entire length and breath of the order imposing penalty by AO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement about the devaluation of stock with a qualification that the claim will be made as and when desired by the management. This observation may have an adverse impact while evaluating quantum addition but qua the penalty proceedings u/s 271(1)(c), facts remain that damage and revaluation of goods is not denied or disputed by the C.A. Due to non-discharge of burden the quantum addition has been confirmed. It is trite law that every confirmation of quantum addition cannot result in imposition of concealment penalty. In the consideration of entirety of facts and circumstances i.e. upholding of books of a/cs of the assessee C.A having certified the damage of the goods by flood though with a rider that the claim will be made depending on the management decision. The fact remains that the damage in the flood cannot be rejected out rightly or held to be a false claim. The assessee having disclosed all the relevant facts, particulars and statement along with the return of income, we are of the view that Hon'ble Supreme Court judgment in the case of Reliance Petro Products is applicable to the assessee's case. 12.2. Coming to the second issue of penalty i.e. disallowance of claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
