TMI Blog2014 (8) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... of stock, the assessee’s burden to justify the decrease, revaluation of the stock is not discharged - the claim of revaluation of stock was not subject to any accepted commercial accounting standard or practices but was left to the sole discretion of the management to claim it as and when it liked - a claim which is not substantiated by proper documentation cannot be allowed to the assessee – Decided against Assessee. Entitlement for deduction on previous year’s sale discount – Salary and rent disallowed u/s 40(a)(ia) - Held that:- The contention of the assessee is accepted that assessee has produced no evidence or convincing argument to come to a view that the liability for discount of earlier years sales crystallized in this year - In the absence of discharge of such a burden to prove crystallization of liability there was no infirmity in the order of CIT(A) - the law mandates the expenditure should be allowed in the year in which it is allowable in accordance with law subject to the prescribed payment – Decided against assessee. Imposition of penalty u/s 271(1)(c) – Held that:- The books of accounts which were rejected by the AO have been upheld to be proper by CIT(A), a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer and, hence, the reassessment proceeding is invalid and bad in law. 2. 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 loss of ₹ 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 ₹ 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 ₹ 12,26,420/- from salary paid by the appellant and ₹ 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 ₹ 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was sought to be explained. (iii) The total purchases as per P L A/c were ₹ 2,08,53,514/-. However as per annexure BA, the payments made to persons specified u/s 40A(2)(b) to the audit report, the following purchases were reflected: (a) Birla International Pvt. Ltd. ₹ 2,85,36,222/- (b) Birla Power Solution Ltd. ₹ 7,85,73,872/- 2.3. The details filed qua the purchases from Birla Power Solution Ltd. and Birla International Pvt. Ltd. were as under: Birla Power Solution Ltd. ₹ 34,41,784/- Birla International Pvt. Ltd. ₹ 30,93,130/- 2.4. The assessee was asked to explain the reflection of balance purchases amounting to ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 005. Due to damage caused flood the value of damaged stock becomes nil and even they had no resale value. Assessee filed working of the revaluation of stock supporting evidence of goods damaged in floods. The other reasons which decreased the GP was huge discount on the previous year sales and current year sales given to dealers. These were given as goods sold turned out to be of deteriorated quality. In these compelling circumstances, assessee had to give these discounts to the dealer to enable them to sell these defective goods in the market. The supporting proof of the discount given to the dealers was also filed. 2.9. Assessee furnished a reconciliation of Gross loss incurred by it along with reasons by following table: Reconciliation of gross loss for the F.Y. 2005-06 Particulars Amount (Rs) Gross loss as per Profit loss account 3,64,86,700 Less: Loss against Stock re-valuation 3,24,51,089 Balance of gross loss 40,35,611 Less: Discount/ scheme given against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bad debts (-) ₹ 1,57,64,349/- ₹ 2,55,56,356/- 2.12. Out of ₹ 2,55,56,356/-, assessee suo motu offered for disallowance ₹ 91.56 lacs. Assessing officer without giving any justifiable reason further disallowed an ad hoc amount of ₹ 10 lacs. It was pleaded that assessee having already suo motu disallowed a substantial amount at least cogent reason ought to have been given by the assessing officer for any further alleged inconsistency in the claim of indirect expenses with earlier years or turn over base and given a reasonable basis. Without such observation the ad hoc addition becomes patently based on pure guess work and conjectures. Reliance was placed on ITAT Jodhpur Bench order in the case of Lake Palace Hotel Motels (P) Ltd. Vs. DCIT 81 TTJ 657, holding that any ad hoc disallowance without a cogent finding cannot be sustained. III. Bad Debts: 2.13. The ground was withdrawn by the assessee before ld. CIT(A). Therefore, it was dismissed as withdrawn. 2.14. Ld. CIT(A) rejected the assessee s ground about reopening of assessment by following observations: 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e books of account cannot be rejected u/s 145(3). Consequently, CIT(A) firstly upheld the books of a/c and deleted the addition of ₹ 57,74,048/- on account of estimation of gross profit of 36%. It may be pertinent here to mention that revenue is not in appeal and has accepted this finding of ld CIT(A). 2.16. Qua the claim of gross loss of ₹ 3,64,86,700/- CIT(A) observed that it included following heads: Loss on account of revaluation of stock ₹ 3,24,51,089/- Discount given against current year sale ₹ 22,57,700/- Discount given against previous year sale ₹ 32,13,004/- 2.17. Loss of ₹ 3,24,51,089/- was incurred on account of revaluation of obsolete/non moving/damaged stock. Assessee had valued its obsolete stock at its realisable value, being lower of the actual cost and the resulted loss has been taken into consideration by the appellant to compute the profits chargeable to tax during the year under consideration. 2.18. CIT(A) observed that assessee s auditors in form no. 3CA of audit report u/s 44AB had report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the appellant has given discount of ₹ 32,13,004/- against the previous year sale. Since this expense does not pertain to the relevant assessment year, the same is liable to be disallowed. Hence the AO is directed to disallow this expenses while giving appeal effect to this order. Thus, the addition o of ₹ 4,22,60,757/- on account of rejection of books of accounts made by the AO is hereby confirmed to the extent of ₹ 3,56,71,457/- (Rs. 32,13,004/- + ₹ 3,24,58,453/-) and the appellant gets a relief of ₹ 65,89,300/- (Rs. 4,2,60,757/- - ₹ 3,56,671,457/-). 3. Aggrieved, assessee is before us qua these grounds : (i) Reopening of assessment u/s 147; (ii) Loss of ₹ 3,24,58,453/- on revaluation of closing stock; (iii) Disallowance of ₹ 32,13,004/- as previous years sale discount. (iv) Disallowance of ₹ 12,26,420/- of salary and ₹ 40,159/- of rent; (v) Disallowance of deduction of ₹ 1,57,64,349/-. As bad debts. 4. Ld. Counsel apropos reopening of assessment contends that the notice u/s 148 for reopening of assessment was issued on the basis of following reasons: During the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of accounts of the Appellant are duly audited under section 44AB of the Act as well as the Companies Act. The Auditors have 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 Auditor has certified that the inventories have been valued at lower of cost or net realizable value which is less and also certified that the comparison of cost and net realizable value is made item by item basis. There is no change in the method of valuation of stock and the obsolete stock has been valued on net realizable value. The A.O. erred in holding that no details of stock were produced as record demonstrates that all the relevant details and documents were filed. 4.4. The Appellant is consistently following well-recognized mercantile system of accounting and method for valuation of inventories i.e. cost or market value whichever is lower. The book results are in consonance with the principles of prudence and the method of accounting regularly followed. The A.O. has not pointed out any specific discrepancy in the books of account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in the case of Prashant S. Joshi Vs. ITO others (Writ petition no. 2287 of 2009 and others) dated 22-2-2010 observing as under: 18. For all these reasons, it is evident that there was absolutely no basis for the first respondent to form a belief that any income chargeable to tax has escaped assessment within the meaning of the substantive provisions of section 147. Explanation (2) to section 147 creates a deeming fiction of cases where income chargeable to tax has escaped assessment. Clause (b) deals with a situation were a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing officer that the has understated the income or has claimed excessive loss, deduction, allowance or relief in the return . For the purpose of clause (b) to explanation (2), the Assessing officer must notice that the assessee has understated his income or has claimed excessive loss, deduction, allowance or relief in the return. The taking of such notice must be consistent with the provisions of the applicable law. The act of taking notice cannot be at the arbitrary whim or caprice of the assessing officer and must be based on reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect that where assessee bank had written off impugned bad debt in its books by way of a debit to profit and loss account, simultaneously reducing corresponding amount from loans and advances to debtors depicted on assets side in balance sheet at close of year, assessee was entitled to deduction under section 36(1)(vii) and for that purpose, it was not necessary for it to close individual account of each of its debtors in its books. In the assessee s case it is the misconception on the part of lower authorites that a provision has been made and the bad debts have not been written off. The fact of the matter is that assessee has created a bad debt provision account in which bad debts have been clearly written off though not in individual debtor s account. Thus bad debts are actually written off in the manner mentioned by Hon ble Supreme in Vijay Bank (supra) for writing off of bad debts. Ld. Counsel, however, conceded that Vijay Bank judgment was rendered on 15-4-2010 i.e. prior to the making the concession before CIT(A) as it was not in the knowledge of the assessee at that time. It is vehemently pleaded that when an issue is clearly covered by Hon ble Supreme Court judgment whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntories have been considered as per book balances/ quantity/ value estimated by management. (c) Provision/ adjustment of obsolete, non moving shortages/ damaged, unserviceable inventories will be accounted for as and when determined (impact unascertainable). 5.1. These categorical findings of the auditors which have not been disputed by the assessee by any further explanation, speak a volume that the provision of devaluation of stock was not made on any physical verification, objective consideration or verification. The claim has been made on the wish and will of the management. In the absence of any verification, evidence, objective audit, inventories, the report of concerned officer about the extent of damage, reduction in value of the various quantities of the items, the assessee s claim becomes wholly uascertainable which has been rightly pointed out by the auditors. In the absence of the crucial evidence on record the assessee s claim has been rightly disallowed by ld. CIT(A). The judgments cited by the assessee to the effect that devaluation of closing stock inventory due to damage or slow moving goods was demonstrated unlike the case of the assessee where these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. 7.1. Coming to the issue about reopening of assessment we find merit in the argument of ld. DR that in the facts and circumstances of this case, the reassessment is neither by way of change of opinion nor on the basis of review of concluded issue. In the absence of any earlier assessment by assessing officer u/s 143(3) it cannot be held that assessing officer exercised any opinion on the facts of the case as the return of the assessee was simply processed u/s 143(1). 7.2. Similarly, the belief of the assessing officer for reopening of the assessment is on the basis of new and independent information i.e. return and record and scrutiny assessment verification for the next year i.e. A.Y. 2007-08. Therefore, we are unable to hold that the reassessment is by way of change of opinion or there was no new material. In the light of these observations reliance on Kelvinator India and Prashant S. Joshi (supra) does not help the assessee s case. Thus we uphold the validity of reassessment proceedings. 7.3. Coming to the first issue on merit i.e. revaluation of closing stock, ld. Counsel for the assessee in the rejoinder has relied on letter of intimation to the sales-tax departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowed in the year in which the same is allowable in accordance with law subject to the prescribed payment. This ground is dismissed subject to these observations. 7.7. Apropos ground no. 5 i.e. deduction on account of bad debts: This ground was voluntarily surrendered/ not pressed by the assessee before CIT(A), a fact which has not been disputed by the ld. Counsel. The only prayer in the nature of compensate plea is that assessee became subsequently wise finding that there already existed a Supreme Court judgment. We are unable to subscribe to this type of speculative approach of the assessee. The assessee voluntarily withdrew the ground with all the attended risk and consequences. In view thereof we see no infirmity in the order of CIT(A) in disallowing the claim of provision of bad debt. 8. In the result, assessee s appeal is dismissed. ITA no. 5680/Del/2013 [Penalty appeal u/s 271(1)(c)] 9. This is the appeal against the imposition of penalty u/s 271(1)(c). On the basis of findings in assessment order assessing officer imposed a penalty u/s 271(1)(c) at ₹ 1,45,61,571/-. Aggrieved assessee preferred first appeal. By that time the order of ld. CIT(A) which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis for imposition of penalty u/s 271(1)(c). Ld. counsel vehemently relied on this judgment. 10.1. It is further pleaded that the assessing officer by making various unfounded allegation rejected the books of account and held them to be unreliable. This finding has been categorically over ruled by the ld. CIT(A) which has been accepted by the department. Thus, what remains on record is upholding of assessee s books and mere no allowability of claims on the basis of inference drawn from material available on record. The allegations of furnishing inaccurate particulars or fabrication cannot be imputed to the assessee. The adverse inference drawn from the remarks of the auditors may be relevant for disallowing the claim but as far as concealment penalty proceedings are concerned, the bona fide of the assessee is demonstrated that it had voluntarily enclosed all the reports along with the return of income. On the basis thereof the assessment u/s 143(1) was made by assessing officer and thereafter no notice u/s 143(2) was issued. It is only while assessing A.Y. 2007-08 that assessing officer had a rethinking about the allowability of the claim. It was heavily biased because of AO' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be reasonably inferred that the appellant s conduct is purely bona fide. In such a situation, in the light of judgment of Apex Court in Dharmendra Textile Processors (supra), penalty u/s 271(1)(c) is held to be correctly levied by the AO since it is not necessary for tax authority to establish mens rea or deliberate or willful act of the appellant. 10.3. The findings of CIT(A) are assailed on the ground that assessee s books of account have been upheld by the CIT(A) himself. Therefore, the finding of lower authorities that assessee failed to furnish the true and correct particulars of income and no plausible explanation about non-production of books of a/cs and supporting vouchers were given, is contrary to record. It is demonstrated that assessee had furnished the communication to the sales tax department and director s affidavit to this effect has not been controverted by any of the lower authorities. Therefore, the allegation that assessee has failed to produce any evidence about flood and damage is unfounded. Non-consideration of this evidence and taking an adverse inference without verifying the evidence makes the inference misplaced and unfounded. Such erroneous observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Coming to the merits of the case, the fact that there was flood in July 2005 in Sion, Mumbai area has not been disputed. The assessee has demonstrated that this evidence about intimation to sales-tax authorities and the assessee s directors affidavit were filed. Thus, some material has been brought on record by the assessee, which has not been controverted. Thus, the inference drawn on imposition of penalty in this behalf carries with itself a deficiency of non-consideration of evidence furnished by the assessee. Therefore, a reasonable inference can be drawn to the effect that some damage was caused to the assessee s stock by floods which necessitated the movement of record from Sion to Goregaon Mumbai. Therefore, this plea of the assessee cannot be held bereft of evidence. For the purpose of quantum addition, non-discharge of burden may be a very crucial factor, however, while imposing penalty, one has to keep in mind the light thrown by Hon ble Supreme Court in the case of Reliance Petroproducts on these aspects. The importance thereof is whether assessee furnished these details along with the return of income and further during the course of assessment proceedings. From reco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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