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TMI Blog2015 (9) TMI 907X X X X Extracts X X X X X X X X Extracts X X X X ..... sue in these appeals is with regard to confirming the addition to the closing stock adopting cost of goods at the year end instead of adopting cost or realizable value followed by the assessee. 3. We consider the facts as narrated in the case of M/s. Aremkay in ITA No.1773/Mds/14 for the assessment year 2006-07. The brief facts of the case are that the assessee is one of the firms in M/s. RMKV Group. Consequent to search and seizure operations u/s.132 of the I. T. Act on 18.2.2009 in the business premises of M/s. RMKV & Sons, documents pertaining to assessee's case were seized and notice u/s.153A r.w.s. 143C of the Act dated 23.6.2010 was served on the assessee to file a return of income. In response to the notice, the assessee filed a return on 20.8.2010 admitting total income of Rs. 81,87,761/-. The AO completed the assessment after making disallowance of Rs. 3,60,638/- made towards valuation of closing stock by observing as under : "Provision at fixed percentage on the actual cost made while valuing the closing Stock: "7. The search revealed seizure of document in the form of financial statements as Annexures to the return filed and the details of closing stock as per books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the table as above, as the provision made varied from year to year, the assessee was asked-* to justify as to how the stocks were identified as either as 'slow moving' or 'non- moving'; * to justify that the provision made which is at a fixed percentage would reflect the realizable value of the goods unsold; * to justify that the provision made is not excessive; * to substantiate that -the assessee has not resorted to postponing the tax liability through the process of ad-hoc provision; 7.6 The provision made was justified on the ground that through the process of ageing, the stocks were identified to the year of purchase and they were classified as either slow moving or non-moving and the valuation was done by effecting reduction on the basis of fixed percentages as pointed above. On the basis of sample data, the provision made was sought to be justified by showing that the actual sale price realized when such goods were sold in the subsequent years was lower than the cost and resulting therefore in a loss. 7.7 The assessee's claim has been considered. The sample presented cannot be considered to be an acceptable random sample truly reflecting the universe. Besides the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,14,025 Nil -2,89,643 7.9. Taking into account the above set of data and the addition by way of adjustment to the closing stock on account of net provision made for the current year is Rs. 3,60,638." Aggrieved by this, the assessee went in appeal before the CIT(Appeals). 4. On appeal, after going through the assessment order, grounds of appeal, AO's remand report and assessee's rejoinder in this regard, the CIT(Appeals) observed that during the search action the closing stock has been valued with the assistance from the staff of the assessee firm and later the stock inventories have been verified by the Managing Partner of the assessee firm. The CIT(Appeals) further observed that the issue of closing stock valuation has been a subject matter during the search and post search proceedings. Therefore, the assessee should not have raised the issue in appeal, as it has agreed for the differences in closing stock valuation at the time of search/post search proceedings. Further, the CIT(Appeals) observed that the assessee has raised this issue at the time of scrutiny also. According to the CIT(Appeals), the AO has successfully countered the arguments of the assessee advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he method followed by the assessee for valuing the closing stock. The closing stock is to be valued at market price or cost whichever is less and that should be consistent from year to year. The assessee is not disputed that it has been followed the same method. However, consequent to search action, the assessee wanted to change the method of stock valuation for the first time, which is nothing but an after-thought so as to reduce the income which cannot be permitted at this point of time. Accordingly, this ground in all these appeals is rejected. 6. The next ground in ITA No.1776/Mds/14 is with regard to disallowance of lease commitment charges of Rs. 15 lakhs and donations of Rs. 40,024/-. 7. The facts of this issue are that the assessee claimed lease commitment charges for VPT parking lot at Rs. 15 lakhs in the revised return of income. According to the AO, the assessee has filed return as follows, in the original return of income though assessee admitted return of income at Rs. 91,47,663/- . Date of filing of return Total income admitted 18.3.2010 Rs. 76,47,663 27.3.2010 Rs. 77,22,663 19.4.2010 Rs. 77,20,348 The assessee admitted lower income in the revised r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... throng with crowd during the festival season. As there was no parking space many of our customers were persuading us to move into a larger space wherein they could shop without worrying about parking their vehicle. With this in mind we bought about 95 cents of land to construct our shop after allotting a portion for the parking lot. Thanks to the growth of population and customer base in the year 2006-07 we realized that we need a bigger area separately for the parking space. At this juncture a piece of land adjacent to the land we bought was offered to us on tenancy basis. The cultivator cum tenants of the property agreed to transfer the tenancy for a consideration. As it will be of immense use to our business we got the tenancy right transferred in our name. As these lands were originally dedicated to certain temples, with a charge on the income for performing certain pujas in a few temples 'HR&CE' intervened and contended that the transfer of tenancy in our favour are void as tenants have no right to transfer. Though the income from these lands will be approximately 4.5 kotas of paddy per year which rental was also not ceded to these temples, some more demands were raised from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it will be seen that the Lease Commitment Charges is a legitimate business expenditure incurred out of business expediency and deductible in computing the business income. Hence we submit that the same may be considered while computing the business income. We will be glad to provide any other clarifications in this regard, if necessary." The AO rejected the claim of the assessee. The assessee went in appeal before the CIT(Appeals). 8. Before the CIT(Appeals), the assessee contended that the AO should have held that any payment made for the smooth running of the business, being made out of business expediency, as a deductible expenditure. The assessee further contended before the CIT(Appeals) that the AO should have held that the very purpose of acquiring the tenancy rights in the land will exclusively serve the business interest of RMKV group of concerns and not the individual partners, the cost of acquisition of tenancy rights itself to be treated as an expense incurred out of business expediency. This being the position, the payment to various institutions as directed by the HR & CE, Government of Tamilnadu should be held as genuine business expenditure of the assessee. Afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts own to make a claim of expenditure during the relevant previous year. Therefore its claim of Rs. Ten lakhs as lease commitment charges is factually incorrect. The entries passed in the subsequent assessment year have to be treated as an attempt on the part of the assessee to straighten the claim and therefore dismissed as afterthought. * Sri Mahesh only obtained the demised premises for valuable consideration of Rs. 45,50,000 by getting the tenancy rights transferred in his name from the legal heirs of the original tenancy right holder. The funds required for payment of admitted consideration for transfer of tenancy rights was paid by the principal firm, RmKV & Sons which debited the current A/c. of Mahesh to the extent of Rs. 35,00,000 as an advance to Sri Mahesh and the balance consideration was paid by Sri Mahesh out of his own funds. Therefore Sri. Mahesh is the absolute owner of the property. * Tenancy rights are important rights attached to immovable property. It is by now recognised that tenancy right is a capital asset and surrender thereof amounts to transfer of capital asset. Both goodwill and tenancy rights have been brought within the ambit of charge by an amendmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenses were incurred for the purpose of business, absolutely nothing on record to indicate that the assessee did acquire any business advantage out of such expenditure. We do not find any expenses allowable under sec.37(1) of the Act and the assessee failed to explain that how it gained some business advantage by incurring that expenditure. Therefore, we are not inclined to uphold the argument of the ld. AR and we agree with the finding of the CIT(Appeals). 9.4 Regarding donations of Rs. 40,024/- is concerned, the assessee along with other partners paid Rs. 30 lakhs to two temples, viz., Mutharaman Temple, Palai and U & U Kattalai, Palai. The share of the assessee's donation out of these, is Rs. 40,024/- and it cannot be allowed, as the same is added and the CIT(Appeals) has confirmed the same. Since, the assessee has not paid lease commitment charges, we reject this ground. 10. The next ground is with regard to stock discrepancy at the time of search. This ground is discussed infra in ITA No. 1780/Mds/2014. 10.1 In the result, ITA Nos. 1173 to 1776/Mds/2014 are dismissed. 11. ITA Nos.1777 to 1780/Mds/2014 : The first common ground in all these appeals is with regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the search party and the book stock as confirmed by the assessee on the date of search, it is impossible to reconcile the book stock with inventory details provided by the search party. The assessee further contended before the CIT(Appeals) that the AO is not justified in rejecting the arguments advanced through stock reconciliation provided by the assessee which had established that the variation was less than 0.6% of the total inventory of the assessee, merely for the reason that it was not furnished immediately after the search. After considering the observations and the comments in the remand report, assessee's contentions and response to the AO's remand report, the CIT(Appeals) held that the AO has arrived at the conclusions in the assessment order after analysing the facts and materials available on record. The CIT(Appeals) has not accepted the contentions of the assessee on the ground that as the stock inventory was taken with the assistance of the staff of the assessee and subsequently the same was verified with the Managing Partner of the assessee firm. Further, the CIT(Appeals) observed that the assessee is, at this juncture, seeking for the complete details of data reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound in the stock for this assessment year at Chennai Branch and determined at Rs. 1,11,827/- at Tirunelveli Branch and the same was brought to tax as unrecorded sales. Being so, we do not find any infirmity in the orders of the lower authorities. We reject this ground of appeal in ITA No. 1780/Mds/2014. Similarly, we reject this ground in ITA No.1776/Mds/ 2014 also on the same reasoning. 19. Now, we take up Departmental Appeals in ITA Nos. 1875, 1876, 1877 & 1878/Mds/2014. The first common ground in these appeals is with regard to allowing the claim of repairs on hired building as revenue expenditure though it is capital expenditure. 20. The facts of the issue as narrated in ITA No.1875/Mds/2014 are that for the year ended 31.3.2008, under the head 'repairs and maintenance', the assessee debited Rs. 1,44,66,189/- with narration 'repairs and machinery'. During the course of assessment, it was submitted before the AO that out of the above expenditure, Rs. 1,40,04,343/- was incurred on account of the new commercial constructed at Vannarapettai, Tirunelveli during the relevant previous year and taken on lease by the assessee. While examining the books of accounts, the AO found that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he returned income. Against this, the Revenue is in appeal before us. 22. We have heard both the parties and perused the material on record. Similar issue was considered by the Tribunal in ITA No.1384/Mds/13 dated 29.5.2016, wherein the Tribunal has held as follows : 7. We have heard the parties and perused the record. In the present case, the assessee has taken the building on leasehold on which the assessee carried on interior work and claimed as revenue expenditure. The same was rejected by the CIT(A). The Ld. DR contended that the assessee made new addition the leased building and it is not the case of renovation of the leased building or improvement of the leased building as in the case of Joy Alukkas Pvt. Ltd., cited supra as held by the Kerala High Court. For settling the controversy, we have to go through the Explanation 1 to sec. 32(1) of the Act which was inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1.4.1988 which deals with the situation where the expenditure has been incurred by the assessee on construction of any structure on leasehold premises. The Explanation 1 is reproduced herewith below: "Explanation 1. Where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession of the assessee, but not in a case of construction of any structure or doing any work or relation to where such building is put up/constructed for the purpose of business or the profession of the assessee in a land taken on lease by the assessee." 10. Thus it is clear that the ratio laid down by the Madras High Court in the said judgment does not support the case of the assessee. 11. In the present case, the assessee has taken building on lease and made certain interior decoration. It is the case that the assesse has beautified the leased building. The High Court has further held in the aforesaid case that the language employed in a statute is the determinative factor of the legislative intent and even assuming there is a defect or any omission in the words used in the Legislature, the Court cannot correct or make up the deficiency, especially when a literal reading thereof produces an intelligible result an any departure from the literal rule would really be amending the law in the garb of interpretation, which is not permissible and which would be destructive of judicial discipline. 12. The Supreme Court of India in the case of Madras Auto Service (P) Ltd., 233 ITR 468 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leased premises should result in enduring benefit. That any expenditure incurred for civil work by a lessee in respect of the lease premises, without any further proof cannot be said to be capital expenditure or revenue expenditure. In order to find out the nature of expenditure, it is necessary to find out the nature of construction put up, the purpose of construction/renovation and the use to which the construction put up and also if it is a case of repair, replacement, addition or improvement has to be gone into. It is only on the aforesaid material, keeping in mind the principles enunciated in the judgments by the Supreme Court and keeping in mind section 37 and section 32 of the Act, that one has to determine whether the expenditure is revenue expenditure or capital expenditure. What would apply to civil work equally applies to electrical work or interior decoration. The assessee had not stated the nature of civil works constructed, the nature of interior decoration made to the leasehold premises and also the nature of electrical work undertaken. In the absence of that material and without proper application of mind, the assessing authority proceeded on the footing that the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of search. Being so, in our opinion, when the original assessment has been completed u/s.143(3), the addition can be made on the basis of incriminating material found during the course of search. Admittedly, in this case, there is no mention of any incriminating material discovered during the course of search warranting addition, placing reliance on the order of the Special Bench in the case of Cargo Global Logistics Ltd. vs. DCIT (137 ITD 287), we are inclined to uphold the argument of the ld. AR. Accordingly, this ground is allowed. Since, we have adjudicated the main issue, i.e. additional ground in favour of the assessee, we refrain from deciding the other issues raised by the assessee. Accordingly, ITA No.1769/Mds/2014 is partly allowed. 26. The common ground in ITA Nos.1770 to 1772/Mds/2014 is with regard to confirming the addition to the closing stock adopting cost of goods at the year end instead of adopting cost or realizable value followed by the assessee. Similar issue was considered in ITA Nos.1773 to 1776/Mds/2014 in the above paragraphs and for the reasons stated therein, we dismiss this ground of appeal in ITA Nos. 1770 to 1772/Mds/2014. 27. The next ground in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In such circumstances, it is not possible to sustain the addition made by the AO and confirmed by the CIT(Appeals). Accordingly, the addition is deleted and this ground is allowed. 31. The next ground in ITA No.1771/Mds/2014 is with regard to disallowance of expenditure towards repairs of Rs. 10,73,710/-. The lower authorities disallowed the claim of repairs at Rs. 10,73,710/- on the reason that the assessee has not produced supporting bills. The assessee's contention is that most of the payments were made by cheque or draft and the same was accepted by the AO during the course of remand proceedings. Therefore, the assessee contended that the addition to be deleted. 32. After going through the records and the orders of the lower authorities, we find that there is no discussion by the CIT(Appeals) regarding this aspect. Since main issue relating to treatment of repairs and renovation of leased building has been remitted back to the file of the AO for fresh consideration, this issue is also remitted to the file of the AO for fresh consideration. This ground is allowed for statistical purposes. 33. The next issue in ITA No.1772/Mds/2014 is with regard to non-adjudication of ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee on the ground that as the stock inventory was taken with the assistance of the staff of the assessee and subsequently the same was verified with the Managing Partner of the assessee firm. Further, he observed that the assessee is, at this juncture, seeking for the complete details of data regarding the physical stock which shows the assessee's delaying tactics in keeping the issue prolonged. Accordingly, he confirmed the addition of Rs. 38,22,956/- towards unrecorded sales. Against this, the assessee is in appeal before us. 40. Similar issue was considered in ITA No.1780/Mds/2014 in the above paragraphs. For the reasons given in that case, we reject this ground of appeal. 41. The next ground in ITA No.1772/Mds/2014 is with regard to confirming the addition of Rs. 12,47,295/- as unexplained money u/s.69A of the Act. 42. Regarding this issue is concerned, the AO observed as under: "14. During the course of search in their residence at No.29B, Water Tank, South Street, C-Colony, Perumalpuram, Tirunelveli , cash of Rs. 16,68,610 found was inventorised as per Annexure KS/Cash/F dated 18.2.2009. Out of the cash found, Rs. 12.25 lakhs was seized as per Ann KS/Cash/S. 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly brought to tax corresponding to the year in which the asset surfaced as a result of search." 43. On appeal, the CIT(Appeals) after considering the observations of the AO and the contentions of the assessee held that the assessee has failed to explain the sources for the cash found at the residence of the assessee with any cogent evidence before the AO during the scrutiny proceedings, even before him in the appellate proceedings. Therefore, he confirmed the addition of Rs. 12,47,295/- made by the AO and dismissed the ground of appeal. 44. We have heard both the sides and perused the material on record. The contention of the assessee that opening cash balance to be given credit and to be recomputed unexplained cash, accordingly. We find merit in the argument of the assessee's counsel. Therefore, we direct the AO to consider the opening balance of the assessee and then decide the excess cash. Accordingly, this ground is partly allowed. 45. The next ground in ITA No.1772/Mds/2014 is with regard to unexplained jewellery of Rs. 29,92,775/-. As seen from the grounds of appeal before CIT(Appeals) as reproduced by the CIT(Appeals) in page No.2 paragrahs 4 to 8, we find no place ..... X X X X Extracts X X X X X X X X Extracts X X X X
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