Gumho NT India Auto Parts Pvt. Ltd., Thiruvallur V. ACIT, CHENNAI

CO 167/CHNY/2016

• Counselvise Citation: [2017] 123 COUNSELVISE.COM (IT) 2784 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 8 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 31-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 20-02-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 22-11-2016
• Court: TRIBUNAL
• Department Lawyers: DAR
• Assessee Lawyers: SUPRIYO PAL
• Keywords: Business income; Depreciation; Business expenditure; Revised return
• Section: 145

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: CHENNAI . . . , ! '#.. $ %!& , ( )* BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ! ./ ITA NO.1671/MDS/2016 + ,+ /ASSESSMENT YEAR: 2010-11 & CO NO.167/MDS/2016 + ,+ /ASSESSMENT YEAR: 2010-11 THE ASST. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-2(1), CHENNAI-600 034. VS. M/S.GUMHO NT INDIA AUTO PARTS PVT. LTD., NO.12, OTHAPPAL VILLAGE, UTHUKOTTAI TALUK, THIRUVALLUR DISTRICT 602 023. [PAN: AADCG 4670 N] ( -. /APPELLANT) ( /0-. /RESPONDENT) -. 1 2 / APPELLANT BY : MR.SUPRIYO PAL, JCIT / 0-. 1 2 /RESPONDENT BY : MR.DARPAN ANCHALIA, CA $ 1 3( /DATE OF HEARING : 20.02.2017 45, 1 3( /DATE OF PRONOUNCEMENT : 31.03.2017 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER DATED 17.03.2016 OF COMMISSIONER OF INCOME TAX (APPEALS)- 6, CHENNAI, IN ITA NO.11/CIT(A)-6/2012-13 FOR THE AY 2010-11 AND RAISE D THE FOLLOWING GROUNDS: ITA NO.1671 & CO NO.167/MDS/2016 :- 2 -: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS CONTRARY TO THE LAW AND FACTS OF THE CASE. 2.1 THE CIT(A) OUGHT NOT TO HAVE DELETED THE DISALLOWAN CE OF BUSINESS LOSS IN THE ABSENCE OF THE ASSESSEE OFFERING ANY INCOME DURING THE PREVIOUS YEAR. 2.2 THE CIT(A) OUGHT TO HAVE APPRECIATED THAT AS PER SE CTION 3 OF THE ACT WHEREIN THE PREVIOUS YEAR HAS BEEN DEFINED THAT, PREVIOUS YEAR MEANS THE FINANCIAL YEAR IMMEDIATEL Y PRECEDING THE ASSESSMENT YEAR: PROVIDED THAT, IN THE CASE OF A BUSINESS OR PROFESS ION NEWLY SET UP, OR A SOURCE OF INCOME NEWLY COMING INTO EXISTENCE, IN THE SAID FINANCIAL YEAR, THE PREVIOUS YEAR SHALL BE THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINESS OR PROFESSION OR, AS THE CASE MAY BE, THE DATE ON WHIC H THE SOURCE OF INCOME NEWLY COMES INTO EXISTENCE AND ENDING WITH THE SAID FINANCIAL YEAR. 2.3 THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE DEPRE CIATION WHICH WAS DISALLOWED BY THE AO IN THE ABSENCE OF ANY EVIDENCE TO SUBSTANTIATE THE INSTALLATION OF THE PLANT AND MACHINERY HAS NOT BEE N PRESSED BY THE ASSESSEE BEFORE THE CIT(A), WHICH DOUBTS THE COMMENCEMENT OF ANY BUSINESS ACTIVITY. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 2.0 ALL THE GROUNDS OF THE APPEAL ARE RELATED TO THE D ISALLOWANCE OF RS.53,64,653/- IN RESPECT OF THE EXPENSES DEBITED T O THE PROFIT & LOSS A/C. THE ASSESSING OFFICER (IN SHORT AO) DISALLOWED TH E ABOVE EXPENSES AS PER THE DISCUSSION MADE IN THE ASSESSMENT ORDER IN PARA NO.1.1 & 1.2 WHICH ARE EXTRACTED AS UNDER: 1.1 DURING THE COURSE OF HEARING, THE AUTHORIZED RE PRESENTATIVE OF THE ASSESSEE COMPANY FURNISHED THE FINANCIAL STATEMENTS OF THE ASSESSEE COMPANY. ON A PERUSAL OF THE PROFIT AND LOSS ACCOUNT FORMING PART OF THE FINANCIAL STATEMEN TS, IT IS SEEN THAT THE ASSESSEE COMPANY HAD SHOWN SALES AND OTHER INCOME AS NIL. HOWEVE R, IT HAS CLAIMED EXPENDITURE TOWARDS PURCHASES, EMPLOYEE PAYMENTS, ADMINISTRATIVE EXPENS ES, FINANCIAL EXPENSES AND DEPRECIATION TO THE EXTENT OF RS.75,01,127.50. 1.2 THE ASSESSEE COMPANY HAS BEEN INCORPORATED ON 0 8.06.2009 AND IS IN ITS INITIAL YEARS OF OPERATION. THE ASSESSEE COMPANY HAS COMMEN CED ITS BUSINESS OPERATION DURING THE YEAR AS IS EVIDENT FROM THE FACT THE ASSESSEE C OMPANY HAS CLAIMED DEPRECIATION OF RS.1,86,400.89 DURING THE YEAR. AS PER SECTION 145 OF THE INCOME TAX ACT, 1961 THE ASSESSEE COMPANY IS REQUIRED TO FOLLOW A METHOD OF ACCOUNTING AS PER WHICH INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION OR INCOME FROM OTHER SOURCES SHALL BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IT I S SEEN THAT THE ASSESSEE COMPANY HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. IN VIEW OF THIS, WHEN THE ASSESSEE HAS INCURRED ANY EXPENDITURE, THE RELEVANT INCOME HAS T O BE OFFERED FOR TAXATION. THE ASSESSEE COMPANY IS REQUIRED TO FOLLOW MATCHING CONCEPT IN R ECOGNITION OF REVENUE. SINCE THE ASSESSEE COMPANY HAS NOT OFFERED TO TAX THE INCOME EARNED DURING THE YEAR, THE EXPENDITURE CLAIMED BY THE ASSESSEE HAS TO BE DISAL LOWED. THE EXPENDITURE OF RS.3,30,000/- RELATED TO ROC FEES HAS BEEN DISALLOW ED SEPARATELY. HENCE, THE AMOUNT OF ITA NO.1671 & CO NO.167/MDS/2016 :- 3 -: EXPENDITURE TO THE EXTENT OF RS.53,64,653/- [EXCLUD ING THE VALUE OF CLOSING STOCK OF RS.18,06,474/- AND ROC FEES OF RS.3,30,000/-] IS DI SALLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. 3.0 AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) (IN SHORT LD.CIT(A))S, THE ASSESSEE WE NT ON APPEAL BEFORE THE LD.CIT(A) AND THE LD.CIT(A) ALLOWED THE ASSESSEES APPEAL. THE LD.CIT(A) IN HIS ORDER OBSERVED THAT THE AO HIMSELF HAS REC ORDED THAT THE ASSESSE HAS COMMENCED THE BUSINESS OPERATIONS DURING THE YE AR. FURTHER, LD.CIT(A) ALSO OBSERVED THAT THE AO HAS NOT GIVEN A NY FINDING THAT ANY EXPENDITURE CLAIMED IS NOT GENUINE OR INFLATED. TH E LD.CIT(A) RELIED ON DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F CIT V. SARABHAI MANAGEMENT CORPORATION LTD. MANU/SC/0667/1991 REPOR TED IN 192 ITR 151 (SC) AND ALLOWED THE ASSESSEES APPEAL. 4.0 AGGRIEVED BY THE ORDER OF THE LD.CIT(A)S, THE REV ENUE FILED APPEAL BEFORE THIS TRIBUNAL. DURING THE YEAR, LEARNED DEPARTMENTAL REPRESENTATI VE (IN SHORT LD.DR) ARGUED THAT THE ASSESSE HAS NOT COMMENCED THE BUSINESS AND ADMITTED ONLY OTHER INCOME. THERE WERE NO SALES DU RING THE YEAR. THE ASSESSEE IS A MANUFACTURER OF AUTO PARTS AND THERE WERE NO SALES DURING THE YEAR WHICH INDICATES THAT THE ASSESSEE HAS NOT COMMENCED THE PRODUCTION ACTIVITY. THIS ARGUMENT IS SUBSTANTIATE D BY DISALLOWANCE OF DEPRECIATION RELATING TO THE PLANT AND MACHINERY WH ICH WAS ACCEPTED BY THE ASSESSE. IN THE ABSENCE OF BUSINESS INCOME, TH E DISALLOWANCE OF DEPRECIATION AND NO MATCHING REVENUE SHOWS THAT THE ASSESSEE HAS NOT ITA NO.1671 & CO NO.167/MDS/2016 :- 4 -: COMMENCED THE BUSINESS AND THE AO HAS RIGHTLY DISAL LOWED THE EXPENDITURE OF RS.53,64,653/- DEBITED TO THE PROFIT & LOSS A/C. 5.0 ON THE OTHER HAND, THE LD.AR ARGUED THAT THE ASS ESSE HAS COMMENCED HIS BUSINESS AND COMPLETED THE TRIAL RUN OF PRODUCTION. THE FACT THAT THE ASSESSE HAS COMMENCED BUSINESS OPERAT IONS WAS ADMITTED BY THE AO IN THE ASSESSMENT ORDER. THE ASSESSE FIL ED REVISED RETURN OF INCOME CLAIMING DEPRECIATION ON PLANT AND MACHINERY BUT NOT PRESSED ON THE GROUNDS BEFORE THE LD.CIT(A), SINCE THE ASSESSE E IS ENTITLED FOR DEPRECIATION FROM THE NEXT AY AND THERE WAS NO LOSS TO THE ASSESSE. ACCORDING TO THE LD.AR, THE AO HAS COMMITTED AN ERR OR IN DISALLOWING THE BUSINESS EXPENDITURE. 6.0 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. WE HAVE GONE THROUGH THE PROFIT & LOSS A/C AND AS PER THE PROFIT & LOSS A/C, THOUGH THERE WAS NO SALES, THE ASSESSE HA S ADMITTED THE CLOSING STOCK PURCHASED DURING THE YEAR. THE AO DISALLOWE D EMPLOYEE PAYMENTS, ADMINISTRATIVE EXPENSES AND FINANCIAL EXPENSES AMOU NTING TO RS.53,64,653/- BUT ACCEPTED THE PURCHASES MADE BY T HE ASSESSE. ONCE, THE PURCHASES ARE MADE WHICH GOES TO STOCK IN TRADE , THE BUSINESS OPERATIONS DEEMED TO HAVE BEEN COMMENCED. THE AO DI D NOT FURNISH THE REASON FOR DISALLOWANCE OF EMPLOYEE PAYMENTS, ADMIN ISTRATIVE EXPENSES AND FINANCIAL EXPENSES AND THE DEPRECIATION. THE A SSESSEE EXPLAINED THAT ITA NO.1671 & CO NO.167/MDS/2016 :- 5 -: THE TRIAL RUN HAS ALREADY COMPLETED IN THIS CASE AN D THE TRADING AND PROFIT & LOSS A/C SHOWS THAT THE BUSINESS OPERATIONS HAVE BEEN COMMENCED. THE AO ACCEPTED IN THE ASSESSMENT ORDER THAT THE BU SINESS OPERATIONS HAVE BEEN COMMENCED. WHETHER THERE IS A TRADING RE CEIPT OR NOT, ONCE THE BUSINESS OPERATIONS HAVE BEEN COMMENCED, ALL TH E EXPENSES RELATING TO THE BUSINESS DEBITED TO THE PROFIT & LOSS A/C RE QUIRED TO BE ALLOWED IN THE ASSESSMENT. AT THE COST OF REPETITION, IT WAS HELD BY THE HONBLE GUJRAT HIGH COURT IN THE CASE OF SARABHAI MANAGEMEN T CORPORATION LTD., THE FIRST STAGE OF BUSINESS ACTIVITY IS ACQUIRING T HE RAW MATERIAL AND ESTABLISHMENT OF PLANT AND MACHINERY. IN THE ASSES SEES CASE, THE ASSESSEE HAS ALREADY ACQUIRED RAW MATERIAL AND ESTA BLISHED THE PLANT AND MACHINERY WHICH WAS NOT DISPUTED BY THE AO. THE AS SESSEE HAS ALREADY COMMENCED THE BUSINESS OPERATIONS WHICH WAS ALSO AC CEPTED BY THE AO. THEREFORE, THE DECISION OF THE HONBLE GUJRAT HIGH COURT IN THE CASE OF SARABHAI MANAGEMENT CORPORATION LTD. VS. CIT IS SQ UARELY APPLICABLE. WE HOLD THAT BY PURCHASE OF RAW MATERIALS AND ESTAB LISHMENT OF THE PLANT AND MACHINERY AND COMPLETION OF TRIAL PRODUCTION, T HE ASSESSEE HAS COMMENCED THE BUSINESS OPERATIONS AND THE ENTIRE EX PENDITURE DEBITED TO THE PROFIT & LOSS A/C RELATING TO REVENUE IS ALLOWA BLE EXPENDITURE. ACCORDINGLY, WE UPHOLD THE ORDER OF THE LD.CIT(A) A ND DISMISS THE REVENUES APPEAL. 7.0 CO NO.167/MDS/2016 FOR THE AY 2010-11: CROSS OBJECTIONS ARE SUPPORTIVE TO THE ORDER OF TH E LD.CIT(A). SINCE THE ISSUE RELATING TO THE DISALLOWANCE OF EXPENDITU RE AMOUNTING TO ITA NO.1671 & CO NO.167/MDS/2016 :- 6 -: RS.56,94,653/- WAS ALLOWED IN FAVOUR OF THE ASSESSE E, NO SEPARATE ADJUDICATION OF THE CROSS OBJECTIONS ARE REQUIRED A ND GROUND NOS.1 TO 4 ARE OF CROSS OBJECTIONS ARE DISPOSED OFF ACCORDINGL Y. 8.0 GROUND NO.5 OF CROSS OBJECTIONS IS RELATED TO DEPR ECIATION OF CLAIM OF RS.96,86,425/- WHICH WAS NOT PRESSED BY THE LD.A R BEFORE THE LD.CIT(A). DURING THE APPEAL HEARING, LD.AR FAIRLY ACCEPTED THE ABOVE FACTS AND NOT PRESSED THE GROUND NO.5. THEREFORE, GROUND NO.5 IS DISMISSED AS NOT PRESSED. 9.0 GROUND NO.6 IS GENERAL IN NATURE WHICH DOES NOT RE QUIRE SPECIFIC ADJUDICATION. 10.0 IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED AND CROSS OBJECTIONS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MARCH, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( '# . . $ %!& ) (D.S.SUNDER SINGH) ( /ACCOUNTANT MEMBER /CHENNAI, 6! /DATED: 31 ST MARCH, 2017. TLN 1 /3%7 87,3 /COPY TO: 1. -. /APPELLANT 4. $ 93 /CIT 2. /0-. /RESPONDENT 5. 7 : /3 /DR 3. $ 93 ( ) /CIT(A) 6. #+ = /GF