M/s Perfect Retreads Pvt Ltd, RAJKOT-GUJARAT V. The Deputy Commissioner Of Income Tax, Circle 1, RAJKOT-GUJARAT

CO 1/RJT/2011

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 9140 (ITAT-RAJKOT)
• Duration Of Justice: 2 year(s) 9 month(s) 21 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 25-10-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 23-08-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 04-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VILAS V SHINDE
• Assessee Lawyers: DM RINDANI
• Keywords: Unexplained investment; Business income; Cost of acquisition; Onus to prove
• Section: 133A; 131

Judgement Text

IN THE INCOME TAX APPELLATE TRIBULAL: RAJKOT BENCH: RAJKOT BEFORE SHRI T K SHARMA, JM AND SHRI D K SRIVASTAVA, AM ITA NO. 1309/RJT/2010 ASSESSMENT YEAR: 2007-08 DCIT, CIRCLE-1, RAJKOT V. PERFECT RETREADS PVT LTD., NR. RAJKAMAL PETROL PUMP, GONDAL ROAD, RAJKOT PAN: AABCP 2763 P C.O. NO. 01/RJT/2011 ASSESSMENT YEAR 2007-08 PERFECT RETREADS PVT LTD. V. DCIT, CIRCLE-1, RAJKOT DATE OF HEARING : 23.08.2013 DATE OF PRONOUNCEMENT : 25.10.2013 REVENUE BY : SHRI VILAS V SHINDE, CIT-DR ASSESSEE BY : SHRI D M RINDANI, FCA ORDER D. K. SRIVASTAVA: THE ASSESSEE IS A PRIVATE LIMITED COMPANY. IT IS EN GAGED IN THE BUSINESS AS AUTHORIZED DEALER FOR MARUTI, HERO HONDA AND TATA BRAND VEHICLES APART FROM CARRYING OUT BUSINESS OF RE-TREADING AND TRADING OF TYRES AND TUBES. SURVEY OPERATIONS U/S 133A WERE CARRIED OUT AT THE PREMISE S OF THE ASSESSEE ON 23.08.2006 DURING WHICH THE ASSESSEE OFFERED ADDITIONAL INCOME OF RS.1,05,00,000/- TO TAX, WHICH INTER-ALIA, INCLUDED A SUM OF RS.20,00,000/- BEING DIFFERENCE IN THE VALUE OF STOCK DETECTED AT THE TIME OF SURVEY. THE ASSESSEE FILED ITS RETURN OF INCOME ON 07.11.2007 RETURNING TOTAL INCOME AT RS.1,69,82,150 /- WITHOUT INCLUDING RS. 20,00,000/- BEING THE DIFFERENCE IN VALUE OF STOCK, WHICH WAS DECLARED AS ADDITIONAL INCOME, AT THE TIME OF SURVEY. ASSESSMENT U/S 143(3 ) OF THE INCOME-TAX ACT WAS COMPLETED ON 22.12.2009 ASSESSING TOTAL INCOME OF T HE ASSESSEE AT RS.2,10,94,950/- AFTER MAKING ADDITIONS OF (I) RS.20,00,000/- BEING THE DIFFERENCE IN VALUE OF STOCK DETECTED AT THE TIME OF SURVEY; (II) RS.9,50,302/- BEING THE AMOUNT OF COMMISSION DISALLOWED BY THE ASSESSING OFFICER AND (III) RS.11 ,62,500/- BEING DISALLOWANCE OF WARRANTY CLAIM EXPENSES. AGGRIEVED BY THE AFORESAI D ADDITIONS/DISALLOWANCES MADE BY THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A), BY HIS ORDER DATED 29.09.20 10, DELETED ALL THE AFORESAID 3 ADDITIONS/DISALLOWANCES MADE BY THE ASSESSING OFFIC ER AGAINST WHICH THE REVENUE IS NOW IN APPEAL BEFORE THIS TRIBUNAL. 2 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD 2. GROUND NO.1 TAKEN BY THE REVENUE READS AS UNDER: - THE LEARNED CIT(A)-I, RAJKOT, HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS.20,00,000/- MADE ON ACCOUNT OF STOCK VALUATION DIFFERENCE. 3. PERUSAL OF THE ORDER PASSED BY THE ASSESSING OFF ICER AND THE LD. CIT(A) SHOWS THAT THE ASSESSEE HAD OFFERED A SUM OF RS.20,00,000 /- BEING DIFFERENCE IN THE VALUE OF STOCK DETECTED AT THE TIME OF SURVEY. THE ASSESS EE DID NOT RETURN THE SAID SUM OF RS.20,00,000/- TO TAX. ON BEING CALLED UPON BY THE ASSESSING OFFICER TO EXPLAIN, THE ASSESSEE SUBMITTED THAT THE AFORESAID DIFFERENCE WA S ON ACCOUNT OF VALUATION AND NOT ON ACCOUNT OF QUANTITATIVE DIFFERENCE IN STOCK. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE. HE THEREFORE TREAT ED THE SAID SUM OF RS.20,00,000/- AS UNEXPLAINED INVESTMENT IN STOCK AND CONSEQUENTLY ADDED THE SAME TO THE INCOME RETURNED BY THE ASSESSEE. ON APPEAL, THE LD CIT(A) HAS DELETED THE IMPUGNED ADDITION WITH THE FOLLOWING OBSERVATIONS:- 8. I HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIO NS. THE MAIN QUESTION THAT FIRST NEEDS TO BE DETERMINED IS WHETHER THIS DIFFER ENCE OF RS.20,00,000/- IN THE INVENTORY VALUATION WAS ON ACCOUNT OF UNACCOUNTED P HYSICAL EXISTENCE OF INVENTORY OR WAS IT A VALUATION DIFFERENCE BETWEEN THE VALUE ARRIVED AT DURING THE COURSE OF THE SURVEY PROCEEDINGS AND THAT REFLE CTED IN THE BOOKS OF ACCOUNTS ON THE DATE OF THE SAID SURVEY. THE A.O. I N HER ORDER HAS NOT MADE OUT A CASE THAT THE SAID DIFFERENCE AROSE ON ACCOUN T OF PHYSICAL EXISTENCE OF EXCESS INVENTORY FOUND UNACCOUNTED ON THE DATE OF S URVEY. THE CONTENTIONS OF THE A.O. ALSO PROCEEDS ON THE BASIS THAT THE SAID D IFFERENCE IS A VALUATION DIFFERENCE. THE A.O. HAS CONTENDED THAT SUCH EXCESS VALUATION DONE IN THE MID-YEAR OF AN ACCOUNTING PERIOD WOULD ALSO CONSTIT UTE INCOME AND SHOULD BE BROUGHT TO TAX AS THE INCOME OF THE APPELLANT. THE A.O. HAS ALSO RELIED ON THE STATEMENT OF THE MANAGING DIRECTOR TO CONTEND THAT EVEN HE HAD AGREED THAT THE SAID RS.20,00,000/- REPRESENTED THE INCOME OF T HE APPELLANT COMPANY. THE AO AT PARA 5 OF THE HER ORDER HAS MADE A REFERE NCE TO THE PERTINENT QUESTIONS ASKED TO THE M.D. OF THE COMPANY IN THE S TATEMENT RECORDED U/S 131 DURING THE COURSE OF THE SURVEY PROCEEDINGS. IT IS NOBODYS CASE THAT 3 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD DURING COURSE OF THE SURVEY EXCESS STOCK IN QUANTIT Y TERMS WAS FOUND. THE SOLE ISSUE AT HAND CONCERNS ITSELF WITH THE VALUATI ON OF THE SAID PHYSICAL STOCK OF TOOLS & EQUIPMENTS FOUND. ACCORDING TO ACCOUNTIN G PRINCIPLES, STOCK IS VALUED AT THE CLOSURE OF THE ACCOUNTS EVERY YEAR AN D IT IS ONLY THIS VALUATION WHICH IS DONE AT THE CLOSE OF EVERY ACCOUNTING YEAR THAT HAS AN IMPACT ON PROFIT FOR LOSS FOR THE YEAR UNDER CONSIDERATION SI NCE THE CREDIT OF THE CLOSING STOCK AND THE CORRESPONDING DEBIT OF THE OPENING ST OCK FALL IN TWO DIFFERENT ACCOUNTING PERIODS. THE A.O. HAS NOT DEALT WITH THE ASPECT OF THE NEUTRALIZING IMPACT ON THE PROFIT & LOSS ACCOUNT WHEN THE CLOSIN G STOCK OF 24/08/2006 BECOMES THE OPENING STOCK OF 25/08/2006 WHICH IS BY OPERATION OF ACCOUNTING PRINCIPLES AND AS PER DECISION OF SUPREME COURT IN THE CASE OF V.K.J. BUILDERS AND CONSTRUCTIONS PVT. LTD. VS. CIT REPORTED IN 318 ITR PAGE 204. I AM IN AGREEMENT WITH THE FUNDAMENTAL ACCOUNTING CONTENTIO N OF THE ASSESSEE THAT ANY STOCK VALUATION EXERCISE DONE IN THE MIDST OF ANY ACCOUNTING PERIOD WOULD ESSENTIALLY BECOME REVENUE NEUTRAL SINCE THE CLOSIN G STOCK OF THE PREVIOUS DAY WOULD BECOME THE OPENING STOCK OF THE FOLLOWING DAY AND THE CREDIT AND DEBIT WOULD NEUTRALIZE EACH OTHER. IT IS NOT THE CASE OF THE DEPARTMENT THAT THE ASSESSEE HAS UNDERSTATED ITS PURCHASE COST OR ANY E XPENDITURE IN RELATION TO THE SAID STOCK. NOTHING HAS BEEN BROUGHT ON RECORD TO INDICATE THE SAME. THE QUESTION, PURE AND SIMPLE IS THE CORRECT VALUATION OF SUCH STOCK. AS FAR AS THE CLOSING STOCK VALUATION DONE BY THE ASSESSEE AS AT THE YEAR END IS CONCERNED, THE SAME HAS BEEN ACCEPTED BY THE DEPARTMENT AND NO ENHANCEMENT HAS BEEN DONE IN THE SAME. THE HONBLE SUPREME COURT IN THE CASE OF CHAINRUP SAMAPTRAM V/S CIT (24 ITR 481 SC) HAS HELD THAT IT IS A MISCONCEPTION TO THINK THAT ANY PROFIT ARISES OUT OF THE VALUATION O F THE CLOSING STOCK, I AM IN AGREEMENT WITH THE CONTENTION OF THE A.R. OF THE AS SESSEE THAT A MERE MIDYEAR VALUATION EXERCISE AS FAR AS STOCK IS CONCE RNED WOULD BE REVENUE NEUTRAL SINCE THE CLOSING AND THE OPENING STOCK WOU LD ESSENTIALLY FALL IN THE SAME ACCOUNTING PERIOD. I, THEREFORE, HOLD THAT A M ERE VALUATION DIFFERENCE IN THE MIDST OF THE ACCOUNTING YEAR WITHOUT BRINGING O N RECORD UNDISCLOSED PURCHASES PER SE CANNOT BE CONSIDERED AS UNDISCLOSE D INCOME AND I THEREFORE 4 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD DIRECT THAT THIS ADDITION OF RS.20,00,000/- SO MADE BY THE A.O. BE DELETED. THIS GROUND OF APPEAL IS ALLOWED IN FAVOUR OF THE ASSESS EE. 4. THE REVENUE IS NOW IN APPEAL BEFORE THIS TRIBUNA L AGAINST THE AFORESAID ORDER PASSED BY THE LD. CIT(A). IN SUPPORT OF APPEAL, THE ASSESSING OFFICER HAS FILED STATEMENT OF FACTS ALONG WITH THE APPEAL MEMO WHICH READS AS UNDER:- DURING THE ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE AO THAT THE ASSESSEE MADE DISCLOSURE OF RS.20,00,000/- DURING S URVEY U/S 133A OF THE IT ACT, ON ACCOUNT OF STOCK VALUATION, HOWEVER, THE SA ME WAS NOT DECLARED IN THE RETURN OF INCOME. THEREFORE, THE SAME WAS ADDED IN THE ASSESSMENT. DURING THE APPEAL PROCEEDINGS THE MAIN PLEA OF THE ASSESSEE WAS THAT ADDITION WAS NOT JUSTIFIED AS EXCESS STOCK WAS NOT FOUND. THE LD CIT(A) EXCEPTED THE PLEA OF THE ASSESSEE AND DELETED THE A DDITION INFERRING THAT NEAR VALUATION DIFFERENCE IN THE MIDST OF THE ACCOUNTING YEAR WITHOUT BRINGING ON RECORD UNDISCLOSED PURCHASES CANNOT BE CONSIDERED A S UNDISCLOSED INCOME. THE LD CIT(A) FAILED TO APPRECIATE THE FACT THAT DU RING THE COURSE OF THE SURVEY THE DIRECTOR OF THE ASSESSEE COMPANY, IN HIS STATEM ENT RECORDED U/S 131 OF THE IT ACT, SUO MOTO DECLARED AN AMOUNT OF RS.20,00 ,000/- AS UNDISCLOSED INCOME. THEREFORE, THE DECISION OF THE LD CIT(A) IS NOT ACCEPTABLE AND SECOND APPEAL IS RECOMMENDED ON THIS ISSUE. 5. IN REPLY, THE LD AUTHORIZED REPRESENTATIVE FOR T HE ASSESSEE SUPPORTED THE ORDER PASSED BY THE LD CIT(A). HE ALSO INVITED OUR ATTENTION TO THE MEMORANDUM OF CROSS-OBJECTIONS FILED BY THE ASSESSEE BEARING CO N O.01/RJT/2011, IN WHICH THE FOLLOWING GROUND OF CROSS-OBJECTION HAS BEEN TAKEN: - THAT THE LEARNED CIT(A)-1, RAJKOT HAS GRIEVOUSLY E RRED IN NOT ADJUDICATING ON THE GROUND NO.4 RAISED BY THE RESPONDENT THAT ALTER NATIVELY AND WITHOUT PREJUDICE TO OTHER GROUND OF APPEAL, THE LEARNED A. O. HAS GRIEVOUSLY ERRED IN NOT CONSIDERING THE ENHANCEMENT IN THE VALUATION OF STOCK OF TOOLS & EQUIPMENT OF RS.20,00,000/- AS OPENING STOCK OF THE SUBSEQUENT YEAR I.E. A.Y. 2008-09. 5 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD 6. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESS EE SUBMITTED THAT IF THE IMPUGNED ADDITION MADE BY THE ASSESSING OFFICER IS SUSTAINED, THE ASSESSEE SHOULD BE ALLOWED TO SHOW IT AS ITS CLOSING STOCK AND THER EAFTER AS OPENING STOCK OF THE NEXT YEAR. 7. WE HAVE HEARD BOTH THE PARTIES. PERUSAL OF THE A SSESSMENT ORDER PASSED BY THE ASSESSING OFFICER AS ALSO THE STATEMENT OF SHRI SURYAKANTBHAI H PATEL RECORDED AT THE TIME OF SURVEY SHOWS THAT THE ASSESSEE HAS A DMITTED DIFFERENCE OF RS. 20,00,000/- IN THE VALUE OF STOCK AND ALSO OFFERED THE SAME AS ITS ADDITIONAL INCOME TO TAX. IT IS FAIRLY WELL SETTLED THAT FACTS ADMITT ED BY THE ASSESSEE NEED NOT BE PROVED BY THE ASSESSING OFFICER. AFTER HAVING ACCEPTED THE DIFFERENCE IN VALUE OF STOCK, THE ASSESSEE DID NOT OFFER THE SAME TO TAX IN SPITE OF HIS STATEMENT TO THAT EFFECT AT THE TIME OF SURVEY. 8. SECTION 69/69B DEALS WITH AMOUNT OF INVESTMENTS NOT DISCLOSED OR NOT FULLY DISCLOSED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. IT PROVIDES THAT THE AMOUNT OF INVESTMENTS NOT FULLY DISCLOSED IN THE BOOKS OF ACC OUNTS IS LIABLE TO BE TREATED AS UNEXPLAINED IF THE ASSESSEE FAILS TO SATISFACTORILY EXPLAIN THE NATURE AND SOURCE THEREOF. FOCUS OF SECTION 69/69B IS ON THE INVESTME NTS. UNEXPLAINED INVESTMENTS IN STOCK CAN ARISE EITHER ON ACCOUNT OF NON-DISCLOSURE OF FULL AMOUNT OF INVESTMENT OR ON ACCOUNT OF NON-DISCLOSURE OF INVESTMENT IN CERTAIN GOODS. IN THE CASE BEFORE US, THE ASSESSEE HIMSELF HAS ADMITTED THAT THE IMPUGNED DIF FERENCE IN STOCK HAS NOT BEEN FULLY REFLECTED IN THE BOOKS OF ACCOUNTS AND THEREF ORE OFFERED THE SAME TO TAX AS ITS ADDITIONAL INCOME. THE IMPUGNED ADDITION MADE BY TH E ASSESSING OFFICER IS FULLY IN CONFORMITY WITH THE PROVISIONS OF SECTION 69/69B OF THE INCOME-TAX ACT. THE ASSESSEE HAS LED NO EVIDENCE TO PROVE THAT THE STATEMENT MAD E BY HIM AT THE TIME OF SURVEY WAS INCORRECT OR UNTRUE. THE VIEW OF THE LD. CIT(A) THAT THE ADDITION ON ACCOUNT OF UNEXPLAINED INVESTMENT CANNOT BE MADE UNLESS THERE IS QUANTITATIVE DIFFERENCE IN STOCK IS COMPLETELY UNSUSTAINABLE IN THE FACE OF LA NGUAGE USED IN SECTION 69/69B. FAILURE TO REFLECT FULL AMOUNT OF INVESTMENT WITHOU T THERE BEING ANY QUANTITATIVE DIFFERENCE IS ITSELF SUFFICIENT FOR MAKING ADDITION U/S 69/69B UNLESS THE ASSESSEE OFFERS SATISFACTORY EXPLANATION AS REGARDS THE NATU RE AND SOURCE THEREOF. IN THIS VIEW 6 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD OF THE MATTER, THE ORDER PASSED BY THE LD CIT(A) IN THIS BEHALF IS REVERSED AND THAT OF THE ASSESSING OFFICER IS RESTORED. GROUND NO.1 TAKE N BY THE REVENUE IS ALLOWED. 9. WE SHALL NOW EXAMINE THE PLEA OF THE ASSESSEE TH AT THE CLOSING STOCK OF THE YEAR SHOULD BE TREATED AS OPENING STOCK OF SUBSEQUE NT YEAR. THE DIFFERENCE IN STOCK, AS ADMITTED BY THE ASSESSEE, IS ONLY IN TERMS OF TH E VALUE OF STOCK. UNEXPLAINED INVESTMENTS REPRESENTED BY THE DIFFERENCE IN VALUE OF STOCK ARE TAXABLE U/S 69/69B. ONCE IT IS SO TAXED, THE ASSESSEE IS FREE TO RECORD THE CORRECT AMOUNT OF SALES IN WHICH CASE IT WOULD NOT BE AVAILABLE AS CLOSING STO CK AND THEREFORE THERE WOULD BE NO QUESTION OF SHOWING IT AS OPENING STOCK OF THE SUCC EEDING YEAR. IF SUCH ITEMS IN RESPECT OF WHICH UNEXPLAINED INVESTMENT HAS BEEN TA XED U/S 69/69B ARE NOT SOLD AND THEREBY RETAINED AS CLOSING STOCK, THEN THE VALUE O F CLOSING STOCK HAS TO BE FIRST SUITABLY ENHANCED BY THE CORRECT VALUE OF STOCK AND IT IS ONLY THEN THAT IT CAN BE SHOWN AS OPENING STOCK OF THE SUCCEEDING YEAR. THER E IS NO MATERIAL BEFORE US TO SHOW THAT THE ASSESSEE HAS NOT SOLD THE STOCK IN RE SPECT OF WHICH UNEXPLAINED INVESTMENT HAS BEEN TAXED AND THEREFORE IT IS NOT P OSSIBLE FOR US TO RECORD ANY FINDING IN THIS BEHALF. WE THEREFORE DIRECT THE ASSESSING O FFICER TO VERIFY THE CLAIM OF THE ASSESSEE. IF THE ASSESSEE IS FOUND NOT TO HAVE SOLD SUCH STOCK, HE WILL THEN VERIFY AS TO WHETHER SUCH STOCK HAS BEEN SHOWN AT ITS CORRECT VALUE AS ADMITTED AT THE TIME OF SURVEY AND, IF SO, ALLOW THE ASSESSEE TO SHOW IT AS OPENING STOCK OF THE SUCCEEDING YEAR. THIS WILL HOWEVER NOT AFFECT THE ACTION OF TH E ASSESSING OFFICER IN TAXING THE IMPUGNED INVESTMENTS AS UNEXPLAINED INVESTMENTS U/S 69/69B IN THE YEAR UNDER APPEAL. 10. GROUND NO.2 TAKEN BY THE REVENUE READS AS UNDER :- THE LEARNED CIT(A)-1, RAJKOT, HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS.9,50,302/- MADE ON ACCOUNT OF DISALL OWANCE OF COMMISSION EXPENSES. 11. THE ASSESSEE WAS FOUND TO HAVE CLAIMED A SUM OF RS.49,50,302/- AS COMMISSION EXPENSES OUT OF WHICH A SUM OF RS. 40,00 ,000/- WAS PAID TO TWO WHOLE- TIME DIRECTORS, NAMELY, SHRI SURYAKANTBHAI PATEL AN D SHRI KEVAL S PATEL WHILE THE REMAINING SUM OF RS.9,50,302/- WAS SHOWN AS MISCELL ANEOUS COMMISSION EXPENSES. 7 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD ON BEING CALLED UPON BY THE ASSESSING OFFICER TO EX PLAIN THE NATURE OF SERVICES PROVIDED BY THE COMMISSION PAYEE, THE ASSESSEE COUL D NOT ESTABLISH THE EXACT NATURE AND SERVICES PROVIDED BY THE PERSONS TO WHOM THE COMMISSION OF RS.9,50,302/- WAS PAID. THE ASSESSING OFFICER THERE FORE DISALLOWED THE SAME. ON APPEAL, THE LD CIT(A) HAS DELETED THE IMPUGNED DISA LLOWANCE WITH THE FOLLOWING OBSERVATIONS:- 12. I HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS. IT IS NOT UNDER DISPUTE THAT THE SAID COMMISSION OF RS.950302/- HAS BEEN TE RMED AS MISCELLANEOUS EXPENDITURE BY THE APPELLANT. IN ANY BUSINESS ORGAN IZATION, IT WOULD BE IMPOSSIBLE TO MAINTAIN EXHAUSTIVE DETAILS WITH REGA RD TO EVERY FARTHING EARNED OR SPENT. THE TEST OF MATERIALITY COUPLED WITH PREP ONDERANCE OF PROBABILITY MUST ALSO BE APPLIED TO DECIDE WHETHER A PARTICULAR ITEM CONSTITUTES INCOME / OR EXPENDITURE. IT IS NOT UNDER DISPUTE THAT THE AP PELLANT IS OPERATING IN AN INTENSELY COMPETITIVE ENVIRONMENT AND THERE ARE COM PETITIVE DEALERS APPOINTED BY THE AUTHORIZED PRINCIPLES MAINLY TO EN SURE THAT EVERY CUSTOMER GETS THE BEST DEAL IN ANY TRANSACTION. IT IS A COMM ERCIAL REALITY THAT THERE ARE INTERMEDIARIES WHO INTRODUCE CUSTOMERS FOR VEHICLE PURCHASES. THIS IS QUITE COMMON IN THE CASE OF ALL THE VEHICLES TODAY. LOOKI NG AT IT FROM A COMMERCIAL ANGLE ON TOTAL SALES OF RS.331.65 CRORES, SUCH COMM ISSION CONSTITUTES A MERE 0.028% AND IT WOULD BE IMPOSSIBLE ON A COMMERCIAL P LANE TO MAINTAIN EXHAUSTIVE DETAILS FOR SUCH IMMATERIAL EXPENDITURE. IN THE COURSE OF ACCOUNTING SMALL ITEMS OF IMMATERIAL EXPENSES ARE USUALLY RECO RDED ON SIMPLE VOUCHERS CONTAINING BASIC DETAILS. THIS PRACTICE IS NOT UNCO MMON IN THE COURSE OF BUSINESS. THE APPELLANT HAS NOT BEEN ABLE TO PROVID E EXHAUSTIVE DETAILS AS SO SOUGHT BY THE A.O. BUT HAS SUCH ENTRIES RECORDED ON VOUCHERS. THE A.O. HAS DISALLOWED THE SAID EXPENSES ON A SOLITARY CONTENTI ON THAT ONLY BASIC DETAILS RELATING TO THE SAID COMMISSION EXPENDITURE WERE PR OVIDED BY THE APPELLANT AND ITS ONUS WAS TO PROVIDE THE COMPLETE EXHAUSTIVE DETAILS. AS SO DISCUSSED ABOVE, THE IMMATERIALITY OF THE EXPENDITURE INVOLVE D COUPLED WITH THE PREPONDERANCE OF THE PROBABILITY AND THE COMMERCIAL REALITY IN WHICH THE APPELLANT OPERATES, I HOLD THAT THE CONTENTION OF T HE A.O. IN DISALLOWING THE 8 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD SAID COMMISSION EXPENDITURE RS.950302/- IS NOT CORR ECT AND THE SAME IS DELETED. 12. IN SUPPORT OF APPEAL, THE ASSESSING OFFICER HAS FILED STATEMENT OF FACTS ALONG WITH APPEAL MEMO WHICH READS AS UNDER:- DURING THE ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE AO THAT THE ASSESSEE COULD NOT CONCLUSIVELY PROVE THE GENUINENE SS OF COMMISSION PAYMENT, THEREFORE, THE AO MADE THE DISALLOWANCE OF COMMISSION EXPENSES AFTER GRANTING PROPER OPPORTUNITY TO THE ASSESSEE A ND AFTER ELABORATELY GIVING FINDING IN SUB PARA 12 OF THE ASSESSMENT ORDER. THE LD CIT(A) DELETED THE ADDITION INFERRING THAT THE ASSESSEE HAD EXPLAINED THE EXPENSES. THE LD CIT(A) FAIL TO APPRECIATE THE FACT THAT ONCE AN EXPENSE IS DEBITED IN BOOKS OF ACCOUNTS, THE EXCLUSIVE ONUS TO PROVE THE GENUINENE SS OF THE SAID EXPENSES LIES UPON THE ASSESSEE. IN THE INSTANT CASE, THE AS SESSEE FAILED TO CONCLUSIVELY PROVE AND FURNISHED DETAILS OF COMMISSION EXPENSES, THEREFORE, THE AO HAD RIGHTLY DISALLOWED COMMISSION EXPENSE OF RS.9,50,30 2/-. THEREFORE THE DECISION OF THE LD CIT(A) IS NOT ACCEPTABLE AND SEC OND APPEAL IS RECOMMENDED ON THIS ISSUE. 13. AT THE TIME OF HEARING, THE LD. DEPARTMENTAL RE PRESENTATIVE MERELY RELIED UPON THE ASSESSMENT ORDER AND THE AFORESAID STATEMENT OF FACTS FILED BY THE ASSESSING OFFICER WHILE THE LD AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE, IN REPLY, SUPPORTED THE ORDER PASSED BY THE LD CIT(A). 14. WE HAVE HEARD BOTH THE PARTIES. IT IS THE ASSES SEE-COMPANY WHICH HAS CLAIMED DEDUCTION FOR A SUM OFRS.9,50,302/- AS COMM ISSION PAYMENTS. THE BURDEN WAS OBVIOUSLY ON THE ASSESSEE TO SATISFACTORILY EXP LAIN THE EXACT NATURE OF SERVICES RECEIVED BY IT IN LIEU OF THE AFORESAID COMMISSION PAYMENTS. THE ASSESSEE COULD NOT DO SO BEFORE THE ASSESSING OFFICER. IT COULD NOT DO SO BEFORE THE LD. CIT(A) ALSO. THE LD CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT COMMISSION CONSTITUTES MERE 0.028% OF SALES AND THEREFORE IT WAS IMPOSSIBLE FOR THE ASSESSEE TO MAINTAIN THE COMPLETE DETAILS. THE REASON GIVEN BY THE LD CIT(A) IS NOT IN CONFORMITY WITH THE LAW. THE ASSESSEE HAS CLAIMED DEDUCTION FO R RS.9,50,302/- AS COMMISSION 9 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD PAYMENTS. THE ASSESSEE WAS THEREFORE REQUIRED TO BR ING THE RELEVANT DETAILS ON RECORD TO ESTABLISH THE NATURE AND SERVICES WHICH W ERE RENDERED BY THE COMMISSION PAYEES. THE ASSESSEE HAS FAILED TO DO SO. IN THIS V IEW OF THE MATTER, THE ORDER PASSED BY THE LD CIT(A) IN THIS BEHALF IS REVERSED AND THAT OF THE ASSESSING OFFICER IS RESTORED. GROUND NO.2 TAKEN BY THE REVENUE IS ALLOW ED. 15. GROUND NO.3 TAKEN BY THE REVENUE READS AS UNDER :- THE LEARNED CIT(A)-I, RAJKOT, HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS.11,62,500/- MADE ON ACCOUNT OF DISAL LOWANCE OF WARRANTY CLAIM EXPENSES. 16. A SUM OF RS. 11,62,500/- WAS CLAIMED BY THE ASS ESSEE AS WARRANTY EXPENSES. THE ASSESSEE-COMPANY ITSELF IS NOT A MANUFACTURER O F VEHICLES IN RESPECT OF WHICH IT HAS BEEN APPOINTED AS AUTHORIZED DEALER. NO SCIENTI FIC BASIS WAS GIVEN FOR CALCULATION OF THE IMPUGNED SUM AS WARRANTY EXPENSE S. THE ASSESSING OFFICER THEREFORE DISALLOWED THE IMPUGNED CLAIM. ON APPEAL, THE LD. CIT(A) HAS DELETED THE IMPUGNED DISALLOWANCE WITH THE FOLLOWING OBSERVATIO NS:- 16. I HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS. THE A.O. HAS PROCEEDED ON THE BASIC PREMISE THAT THE SAID WARRAN TY EXPENSE IN QUESTION WAS MERELY A PROVISION AND SINCE THE SAID EXPENDITU RE WAS NOT ACTUALLY INCURRED DURING THE COURSE OF THE ASSESSMENT YEAR U NDER CONSIDERATION, THE SAME CANNOT BE ALLOWED. I FIND THAT THE A.O. HAS FA ILED TO APPRECIATE THAT WHENEVER A PROVISION IS MADE IT IN ITSELF REFLECTS THAT THE EXPENDITURE IS ACTUALLY TO BE INCURRED IN A SUBSEQUENT TIME PERIOD, BUT THE LIABILITY OF THE SAID EXPENDITURE BEING ATTACHED TO TRANSACTIONS, THE SAI D PROVISION IS ALSO MADE IN THAT VERY ACCOUNTING YEAR. THE A.O. HAS REPRODUCED THE COMPLETE DETAILS ABOUT THE SAID PROVISION OF WARRANTY AT PARA-13.2 O F HER ORDER. THAT THE APPELLANT BEING A DEALER IN VEHICLE PRODUCTS IS EXP ECTED TO PROVIDE WARRANTIES ON CERTAIN PARTS RELATING TO THE SAID PRODUCTS TO T HE CUSTOMER WHO BUYS THE SAME IS NOT UNDER DISPUTE. THE HON. SUPREME COURT I N THE CASE OF CIT V/S HEWLETT PACKART INDIA (P) LTD (314 ITR 55 SC) HAS H ELD THAT PROVISION FOR WARRANTY MADE BY AN ASSESSEE FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING AND 10 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD CALCULATED ON A SCIENTIFIC BASIS CANNOT BE CONSIDER ED AS A CONTINGENT LIABILITY. THE HON. SUPREME COURT IN THE CASE ROTORK CONTROLS INDIA (P) LTD V/S CIT (314 ITR 62) HAS ALSO HELD THAT PROVISION FOR WARRA NTY MADE ON A SCIENTIFIC BASIS IS AN ALLOWABLE EXPENDITURE. RESPECTFULLY FOL LOWING THE ABOVE TWO DECISIONS OF THE HON. SUPREME COURT COUPLED WITH TH E FACT THAT A.O. HAS NOT POINTED OUT ANY DEFECT IN THE BASIS FOR THE SAID PR OVISIONS AS SO STATED IN PARA 13.1 OF HER ORDER, I DIRECT THAT THE SAID PROVISIO N OF WARRANTY OF RS.1162500/- BE ALLOWED AS AN EXPENDITURE. THIS GROUND OF APPEAL OF APPELLANT IS ALLOWED IN FAVOUR OF THE ASSESSEE. 17. IN SUPPORT OF APPEAL, THE ASSESSING OFFICER HAS FILED STATEMENT OF FACTS TOGETHER WITH APPEAL MEMO WHICH READS AS UNDER:- DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WA S NOTICED BY THE AO THAT THE ASSESSEE HAS DEBITED WARRANTY EXPENSES WHICH WA S NOT THERE IN THE PRECEDING YEAR. THEREFORE, AFTER PROPERLY ANALYZING THE FACT, THE AO DISALLOWED THE WARRANTY CLAIM EXPENSES. THE LD CIT(A) DELETED THE ADDITION INFERRING THAT THE AO HAS NOT POINTED OUT ANY DEFECT IN THE BASIS FOR THE SAID PROVISIONS AS STATED BY THE AO IN PARA NO.13.1 OF ASSESSMENT ORDE R. IN FACT, THE LD CIT(A) MISPLACED HIMSELF AS IN FACT PARA NO.13.1 OF THE AS SESSMENT ORDER CONTAINED REPRODUCTION OF THE REPLY OF THE ASSESSEE. IN FACT, THE AO HAS GIVEN DETAILED AND EXHAUSTIVE FINDINGS REGARDING THE DISALLOWANCE OF THE EXPENSES, FROM PARA 13.2 ONWARDS. IT MAY BE FURTHER MENTIONED THAT INSP ITE OF SUFFICIENT OPPORTUNITY, THE ASSESSEE COULD NOT PRODUCE THE DETAILS WHETHER ACTUALLY IT HAD INCURRED SUCH EXPENSES IN THE LATER YEARS AS ALMOST TWO YEAR S HAD EXPIRED FROM THE RELEVANT ASSESSMENT YEAR AND THIS FACT ALSO ENHANCE D THE FIND OF THE AO THAT THE DISALLOWANCE OF THE EXPENSE WAS JUSTIFIED. THER EFORE, THE DECISION OF THE LD CIT(A) IS NOT ACCEPTABLE AND SECOND APPEAL IS RECOM MENDED ON THIS ISSUE. 18. IN REPLY, LD AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUPPORTED THE ORDER PASSED BY THE LD. CIT(A). 19. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CO NSIDERED THE ORDER PASSED BY THE LD CIT(A). THE LD CIT(A) IS RIGHT IN HIS OBSERV ATION THAT THE HONBLE SUPREME 11 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD COURT HAS HELD IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD V. CIT, 314 ITR 62 THAT PROVISION FOR WARRANTY MADE ON A SCIENTIFIC BASIS I S AN ALLOWABLE EXPENDITURE. HOWEVER, THERE IS NO MATERIAL ON RECORD TO SHOW THA T THE IMPUGNED PROVISION FOR EXPENSES HAS BEEN MADE ON A SCIENTIFIC BASIS. IN TH IS VIEW OF THE MATTER, THE ORDER PASSED BY THE LD. CIT(A) IS SET ASIDE AND THE MATTE R IN THIS BEHALF IS RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR PASSING A FRESH O RDER IN THIS BEHALF AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. THE BURDEN WILL BE ON THE ASSESSEE TO ESTABLISH THAT THE PROVISIONS FOR WARRA NTY EXPENSES HAVE BEEN MADE ON SCIENTIFIC BASIS. IF THE ASSESSEE IS ABLE TO SHOW T HAT THE IMPUGNED PROVISION FOR WARRANTY EXPENSES HAS BEEN MADE ON THE SCIENTIFIC B ASIS, THE ASSESSING OFFICER SHALL ALLOW THE SAME IN ACCORDANCE WITH LAW. GROUND NO.3 TAKEN BY THE REVENUE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 20. GROUND NOS. 4 AND 5 TAKEN BY THE REVENUE READ A S UNDER:- 4. ON LEGAL AND FACTUAL STATUS OF THE CASE, THE LE ARNED CIT(A), OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. 5. IT IS, THEREFORE, PRAYED THAT THE FINDING GIVEN IN THE ORDER OF THE LD CIT(A) MAY BE DISMISSED/DELETED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 21. BOTH THE AFORESAID GROUNDS HAVE BEEN TAKEN INTO ACCOUNT WHILE DISPOSING GROUND NOS. 1, 2 AND 3. THEREFORE THEY DO NOT REQUI RE INDEPENDENT ADJUDICATION. 22. IN VIEW OF THE FOREGOING, THE APPEAL FILED BY T HE REVENUE IS PARTLY ALLOWED WHILE THE MEMORANDUM OF CROSS-OBJECTIONS FILED BY T HE ASSESSEE SHALL, FOR STATISTICAL PURPOSES, BE TREATED AS ALLOWED SUBJECT TO THE OBSE RVATIONS MADE EARLIER IN THE ORDER. ORDER PRONOUNCED ON 25.10.2013 SD/- SD/- (T. K. SHARMA) ( D. K. SRIVASTAVA) JUDICIAL MEMBER ACCOUNTANT MEMBER RAJKOT: 25.10.2013 *BT 12 1309-RJT-2010 & CO 01-RJT-2011 - PERFECT RETREADS PVT LTD COPY OF ORDER FORWARDED TO:- 1. APPELLANT DCIT, CIRCLE-1, RAJKOT 2. RESPONDENT- PERFECT RETREADS PVT LTD., GONDAL ROAD , RAJKOT 3. CONCERNED CIT-I, RAJKOT 4. CIT(A)-I, RAJKOT 5. DR, ITAT, RAJKOT 6. GUARD FILE. BY ORDER TRUE COPY PRIVATE SECRETARY, ITAT, RAJKOT