TMI Blog2015 (9) TMI 907X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, 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. - Decided against assessee. Disallowance of lease commitment charges - Held that:- tThough the assessee pleaded 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).- Decided against assessee. Regarding donations the assessee along with other partners paid ₹ 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 ₹ 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority proceeded on the footing that the expenditure constituted capital expenditure. We remit the issue in dispute to AO to consider whether the expenditure is revenue or capital in nature and decide afresh - Decided in favour of assessee for statsitical purposes. Addition on account of expenditure by way of sundry supply to staff found to have been vouched by self-made vouchers - assessment u/s 153A - Held that:- While making the above additions, the AO has not established that there is incriminating material discovered during the course 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 (2012 (7) TMI 222 - ITAT MUMBAI(SB)), we are inclined to uphold the argument of the ld. AR. - Decided in favour of assessee. Unexplained expenditure u/s.69C - Held that:- This is a search assessment. The AO made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d seizure of document in the form of financial statements as Annexures to the return filed and the details of closing stock as per books of accounts relevant for the assessment year 2008-09. It was noticed that the closing stock reported in the return of income is less as compared to the details of closing stock as per books of accounts. 7.1 It is seen from the returns filed that the method of closing stock valuation is reported to be at cost or realizable value whichever is lower and as certified by the Management. This is confirmed by the observation of the tax auditor as per Form 3CD. Serial No.12 of Form 3CD of Tax Audit Report calls for information as under: (a) Method of valuation of closing stock employed in the previous year; (b) Details of deviation, if any from the method of valuation prescribed u/s.145A and the effect thereof on the profit or loss. 7.2. Tax Audit report filed for none of the assessment years reported any change in the method of valuation of closing stock. Therefore, the assessee was asked to reconcile the variance between the closing stock as per financial account and the closing stock as disclosed in the return of income. 7.3 The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 said sample data was not substantiated with reference to purchase invoice and sale invoice to prove the claim. It is found that the assessee started making provision for stock out of purchases even one year before the relevant previous year. It is seen that major portion of the stocks in respect of which provision is made were found sold in the subsequent year. Therefore the claim such stocks are slow moving or non-moving is not correct. In fact, the percentage of stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 50%. There is no consistency in the 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 ₹ 15 lakhs and donations of ₹ 40,024/-. 7. The facts of this issue are that the assessee claimed lease commitment charges for VPT parking lot at ₹ 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 ₹ 91,47,663/- . Date of filing of return Total income admitted 18.3.2010 &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of trading in textile goods at Tirunelveli Town since 1926. The firm which was started on a small scale which grew up well thanks to the goodwill and patronage enjoyed from the public in and around Tirunelveli. Our shop s neighbourhood used to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by these concerns which also enjoy the fruits of this payment, it was claimed as a deduction in the Adjustment account and revised returns were filed accordingly. Please find enclosed various documents connected with the above expenditure. From the foregoing facts, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny litigation. Thereafter, separate lease deeds were entered into. The lease deed is for a period of 3 years and the demised premises were permitted to be used for commercial purposes. The lease was subject to renewal, if the lessor at the time of expiry of the lease period is of the opinion that it is beneficial to do so on enhancement of the lease rentals agreed upon by 15%. The lease shall be extended for a period of every 3 years thereafter. 9.2 Following facts are relevant for consideration: At the outset it is made clear that the assessee did not incur any expenditure on its 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 ₹ 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 considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giving rise to charge of capital gains as enunciated by the Supreme Court in Durga Das Khanna reported in 72 ITR 796. The sum of Rs. One crore paid together by Sri Mahesh and the firm, RMKV Sons has to be treated as a premium paid in lump sum for transfer of lease, which is apart from the subsequent lease rentals and ten months rentals as advance ( which is a common feature) Therefore the sum of Rs. one crore paid can at best be treated only as Expenditure incurred to cure a title to a capital asset Premium paid for acquiring lease rights Donation simpliciter 9.3 Further, though the assessee pleaded 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 ₹ 40,024/- is concerned, the assessee along with other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the uniform stand taken with respect to the discrepancy of stock found on the day of search with regard to all the concerns treating the subsequent claims as not verifiable. Therefore, the excess stock found at Chennai of ₹ 1,05,531/- and quantified on the date of search is treated as the unexplained investment of the assessee u/s.69B and brought to tax by the AO. Aggrieved, the assessee went in appeal before the CIT(Appeals). 17. Before the CIT(Appeals), the assessee contended that the AO failed to appreciate the fact that in view of the serious deficiencies in the stock taking exercise by the search party, which had resulted variations between physical inventory as per 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 fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntries or change in the dates as stated above, he accepted the value of excess stock found during the course of search to be out of their unrecorded income and agreed to pay the income-tax due on such income for the year. During the course of investigation vide letter dated 10.8.2009 submitted to the ADIT (Investigation) by Sri Shiva Kumar, no specific arguments relating to the figures of stock were raised except pointing out that the physical stock at Tirunelveli was mentioned in the tabulation reflecting the physical stock for the group as a whole. The said mistake was rectified by the AO while passing the order. The AO after considering the entire facts of the case, added ₹ 9,43,980/- as discrepancy found in the stock for this assessment year at Chennai Branch and determined at ₹ 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/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exchange Ltd. v. CIT (Punjab) 55 ITR 550, where it is held that construction of temporary structure in a leased (2 years) property capital expenditure since the structure is an enduring asset . However, the CIT(Appeals) observed that on identical issue for the assessment year 2003-04, Chennai Bench of the Tribunal has held against the order u/s.263 passed by the CIT that the said expenditure is revenue in nature. Further, the CIT(Appeals) observed that in this regard, the Tribunal has followed the decision rendered by the Jurisdictional High Court in the case of Hari Vignesh Motors Pvt. Ltd. (282 ITR 338). Accordingly, following the decision of the Tribunal, the CIT(Appeals) deleted the addition of ₹ 1,33,04,126/- made to the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S Lean Logistics Ltd. (supra). In the said case, the assessee had constructed a building on the leased land for the business advantage. The Court held that the entire cost of construction is admissible as revenue expenditure. Explanation 1 categorically states that the business or profession is carried on in a leased building and not on land. The High Court in para 4.4 of the judgment further held as under:- 4.4 What constitutes a capital expenditure and what does not, to attract Expln. 1 to section 32(1) of the Act depends upon the construction of any structure or doing any work or in relation to and by way of renovation, extension or improvement to the building which is put up in a building taken on lease by him for carrying on his business and profession 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the high Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure. 14. From the above judgment, we can conclude that it is essential that the expenditure incurred on the construction of any structure on the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower authorities, this ground is admitted. 26. In this case, there was a search u/s.132 of the Act on 18.2.2009 and notice u/s.153A was issued to the assessee on 23.2.2010. On earlier occasion, regular assessment was made u/s.143(3) of the Act on 30.12.2008, wherein ad-hoc addition of ₹ 40,000/- was made on account of expenditure by way of sundry supply to staff found to have been vouched by self-made vouchers. While completing the assessment, the following additions have been made by the AO: 1. Unexplained expenditure ₹ 1,84,000/- 2. Depreciation on computer software ₹ 4,608/ 3. Provision for slow moving non-moving stocks ₹ 6,23,727/- However, while making the above additions, the AO has not established that there is incriminating material discovered during the course 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance of ₹ 4,80,000/- on 1/4/2002, if he has taken a reasonable notice of the social standing of the assessee. It was also contended by the assessee before the CIT(Appeals) that the AO should have given due allowance for cash gifts received by the family members from friends and relatives on various occasions all through these seven assessment years, especially in view of the social standing of the family. However, the CIT(Appeals) held that the AO is justified in making the said addition of ₹ 2,31,500/- as the expenditure per month shown by the assessee does not realistically reflect the actual state of affairs. Accordingly, he dismissed this ground of appeal. Against this, the assessee is in appeal before us. 30. We have heard both the sides and perused the material on record. This is a search assessment. The AO made an estimation of drawings. Without any incriminating material found during the search, the AO cannot make addition on account of poor cash drawings of the assessee. 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-. However, it was found that the closing stock as per books of account as on 17.2.2009 for the group as a whole was ₹ 20,15,05,458/-. Thus, the physical inventory of stock was found to be less as compared to the stock as per books of account to the aggregate extent of ₹ 1,27,64,281/-. Therefore, Managing Partner was examined and sworn statement was recorded. The aggregate deficit stock as arrived at on the date of search and as confirmed by the letter dated 10.8.2009 is treated as unrecorded sales in the books of account and brought to tax by the AO. Accordingly, the addition called for on this core is ₹ 38,22,956/-. Aggrieved by this, the assessee went in appeal before the CIT(Appeals). 39. 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port the cash available on that date. 14.2 The explanation has been considered. The claim of cash belonging to other persons (wife and daughter from USA) is considered as the said explanation has been offered on the date of search. The claim of cash gifts is also conceded in view of the proximity of the event with the date of search. The balance of rs12,47,295 is sought to be explained with reference to the estimate of family expenditure for the AY 2003-04 to 2009-10 and the assumption of idle cash in hand of ₹ 4,80,OOO. The claim of initial cash in hand has been rejected for the detailed reasons mentioned while examining the claim of pure cash drawings to meet out family expenditure. Therefore the explanation once again which rests on the same has to be rejected squarely. In fact, the entire explanation based on a table has been an exercise by a process of backward working to account for the valuables found in the form of cash, jewellery and silver and to account for the day to day expenditure for family. Therefore, the balance cash of ₹ 12,47,295 is treated as unexplained money u/s 69A of the Act and accordingly brought to tax corresponding to the year in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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