M/s Harley Instruments, Pune V. Addl CIT Rg- 3 Pune., Pune

ITA 1405/PUN/2012

• Counselvise Citation: 140524514 RSA 2012
• Duration Of Justice: 2 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 19-12-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 21-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MODISHRI S P WALIMBE
• Keywords: Business expenditure; Residential status; Rule of consistency; Corroborative evidences; Revised return
• Section: 234B; 131; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE: SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO. 1405 / P N/ 20 1 2 ASSESSMENT YEAR : 2008 - 09 M/S. HARLEY INSTRUMENTS, B/5, ABHI NAV APARTMENTS, NAVI PETH, PUNE VS. ADDL. C OMMISSIONER OF INCOME TAX, RANGE - 3, PUNE (APPELLANT) (RESPONDENT) PAN NO. AAAFH7023A APPELLANT BY: SHRI M.K. KULKARNI RESPONDENT BY: SHRI A.K. MODI/SHRI S.P. WALIMBE ORDER PER R.S . PADVEKAR , JM : - IN THIS APPEAL, THE ASSESSEE HAS CHALLENGED THE IMPUGNED ORDER OF THE LD. CIT(A) - I I, PUNE DATED 23 - 03 - 201 2 FOR THE A.Y. 2008 - 09 . THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS IN APPEAL: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) WAS JUSTIFIED IN CONFIRMING THE RECEIPT OF ADVANCE OF RS.1,14,53,353/ - SO RECEIVED FROM THE FOREIGN PRINCIPALS AS TAXABLE INCOME ACCRUED DURING THE YEAR AS IT WAS RECEIPT SIMPLICITOR AND THE COMMENSURATE SERVICES TO EARN THE INCOME WERE YET TO BE PERFORMED? 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) WAS CORRECT IN HIS APPROACH WHILE CONFIRMING THE DECISION OF THE A. O. THAT EVEN THOUGH THE INCOME WAS NOT ACCRUED UNDER S. 5 OF THE ACT THE SAME WAS TAXABLE AS INCOME DISTURBING THE CHAIN OF CONSISTENCY SO FOLLOWED BY THE APPELLANT AND ACCEPTED BY THE DEPARTMENT IN THE EARLIER ASSESSMENT? 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) WAS CORRECT IN HIS DECISION TO CONFIRM THE ADDITI ON MADE BY THE A. 0. OF RS.1,14,53,353/ - IN SPITE OF THE FACTS THAT PART OF 2 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE SUCH RECEIPT IS ALSO OFFERED AND TAXED IN THE SUBSEQUENT ASSESSMENT YEAR FOLLOWING THE CONSISTENT METHOD AND THEREFORE, AMOUNTS TO BE TAXATION OF THE SAME INCOME TWICE NO T PERMISSI BLE UNDER THE LAW? 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE AD - HOC ADDITION MADE BY THE A. 0 OF RS.19,72,383/ - OUT OF DIFFERENT CLAIMS OF EXPENSES? 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEVY OF INTEREST U/S . 234A, 234B AND 234C IS NOT JUSTIFIED AND IN THE CIRCUMSTANCES IT BE DELETED. 2. SO FAR AS THE GROUND NOS. 1, 2 AND 3 ARE CONCERNED THE ISSUE IS CONFINED TO THE AMOUNT OF RS.1,14,53,353/ - WHICH WAS RECEIVED BY THE ASSE SSEE F ROM ITS FOREIGN P RINCIPALS AND SHOWN AS A LIABILITY INSTEAD OF DECLARING THE SAME AS AN INCOME , AS PER THE OPINION OF THE ASSESSING OFFICER. THE FACTS WHICH ARE REVEALED FROM THE RECORD AS UNDER. THE ASSESSEE FIRM I S ENGAGED IN THE BUSINESS ACTIVI TY OF DEALERS AND REPRESENTATIVES OF INSTRUMENTS MANUFACTURED BY INDIAN AND OVERSEAS MANUFACTURERS. THE ASSESSEE WORKS FOR AND ON BEHALF OF MANUFACTURERS FOR OBTAINING ORDERS, INSTALLATION OF MACHINES AND WARRANTY SERVICES. DURING THE YEAR UNDER CONSIDER ATION, THE ASSESSEE FIRM HAS ENTERED INTO TRANSACTION OF SUPPLY OF MILLING EQUIPMENT/PLASMA CLEANING EQUIPMENT MANUFACTURED BY M/S. GATAN INC., U.S.A. AND TO SUPPLY THE SAME TO CENTRAL GLASS & CERAMIC RESEARCH INSTITUTE, KOLKATA. IT IS STATED THAT IN ADDI TION TO THE SAME THE ASSESSEE HAS ALSO RECEIVED SALE AND SERVICE CHARGES FROM COMPANIES LIKE GATAN UKWSCGS, ACCENT OPTICAL TECHNOLOGIES, UK ETC. THE ASSESSEE HAS FILED THE RETURN OF INCOME DECLARING INCOME OF RS.30,44,511/ - (AS PER REVISED RETURN) FOR THE A.Y. 2008 - 09. THE REVISED RETURN WAS FILED AS THERE WAS A TYPOGRAPHICAL ERROR IN MENTIONING THE FIGURES. THE RETURN FILED BY THE ASSESSEE WAS SELECTED FOR SCRUTINY BY THE ASSESSING OFFICER. 3 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE 3. THE ASSESSING OFFICER EXAMINED THE BALANCE SHEET OF THE ASS ESSEE AND IT WAS NOTICED BY HIM THAT THE ASSESSEE HAS SHOWN SUM OF RS.1,58,70,649/ - AS SUNDRY CREDITORS UNDER THE HEAD CURRENT LIABILITIES. THE ASSESSEE STATED BEFORE THE ASSESSING OFFICER THAT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS CASH SYS TEM OF ACCOUNTING AND THE ASSESSEE HAS NEVER CHANGED THE METHOD OF ACCOUNTING. THE ASSESSEE ALSO CLARIFIED TO THE ASSESSING OFFICER THAT IN RESPECT OF THE ITEMS IMPORTED THROUGH HIM FROM THE FOREIGN MANUFACTURERS , GENERAL WARRANTY IS REQUIRED TO BE GIVEN FOR 36 MONTHS AND FOR THE SAID WARRANTY THE ASSESSEE RECEIVED WARRANTY CHARGES WHICH ARE CONSIDERED IN THE RESPECTIVE YEARS WHEN THE WARRANTY IS ALIVE AND IF NO WORK IS DONE IN THE FINANCIAL YEAR. ACCORDINGLY, THE AMOUNT RECEIVED TOWARDS THE WARRANTY SUPP ORT CHARGES AS CLAIMED BY THE ASSESSEE ARE SPREAD OVER IN THE 3 YEARS WHICH ACCORDING TO THE ASSESSEE IS A PERIOD OF WARRANTY. THE ASSESSING OFFICER ASKED FOR THE COP Y OF THE A GREEMENT WITH MANUFACTURER/ P RINCIPAL AND OTHER RELATED INFORMATION. THE ASSESS EE INFORMED TO THE ASSESSING OFFICER THAT LAST FEW YEARS THERE IS NO AGREEMENT WITH THE PRINCIPAL AND EVERY CASE IS TACKLED INDEPENDENTLY DEPENDING UPON WHO IS QUOTING FOR THE MACHINE AND ITS TERMS AND CONDITIONS AND ACCORDINGLY INSTALLATION AND WARRANTY S UPPORT CHARGES ARE FIXED. THE ASSESSEE FILED ITS SAMPLE INVOICE BEFORE THE ASSESSING OFFICER AND EXPLAINED HOW THE ORDERS ARE PROCESSED AND WARRANTY SUPPORT CHARGES ARE RECEIVED BY THE ASSESSEE. 4. AS PER THE FACTS ON RECORD AND ALSO AS EXPLAINED BY TH E ASSESSEE BEFORE THE AUTHORITIES BELOW , THE ASSESSEE IS DEALING INTO SELLING INSTALLATION, WARRANTY OF SOME SPECIALIZED MACHINES USED BY THE LABORATORIES, EDUCATIONAL INSTITUTES ETC. AS PER THE BUSINESS M ODEL OF THE ASSESSEE , IT ASCERTAINS THE REQUIREMEN TS OF THE MACHINES WITH COMPANIES/INSTITUTES/LABORATORIES AND BASED ON THE REQUIREMENT OF SUCH LABORATORIES/INSTITUTES OR COMPANIES ENTER INTO CORRESPONDENCE WITH THE 4 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE PRINCIPAL/MANUFACTURERS ABOUT THE PRICE OF THE MACHINES AND OTHER TERMS AND CONDITIONS ET C. AND THE PRICE IS FIXED BETWEEN THE PRINCIPAL/MANUFACTURER AND THE ASSESSEE. MANY TIMES THERE IS A DIRECT COMMUNICATION BETWEEN THE BUYER AND THE MANUFACTURER. IF THE OFFER OF THE ASSESSEE/ MANUFACTURER IS ACCEPTED THEN THE ORDER IS PLACED BY THE CUSTOM ER DIRECTLY TO THE PRINCIPAL AND COPY OF SUCH ORDER IS MARKED TO THE ASSESSEE FOR FURTHER FACILITATION OF THE ORDER. IT IS STATED THAT THE INTERVENING FORMALITIES, FACILITATION AND CORRESPONDENCES ARE DONE EITHER DIRECTLY OR THROUGH THE ASSESSEE BY/TO THE CUSTOMER IN INDIA. THE MAIN ROLE OF THE ASSESSEE IS LIAISON ING WITH THE PRINCIPAL/MANUFACTURER FOR SUPPLY OF REQUIRED MACHINES TO THE CUSTOMERS IN INDIA AND IT IS HIS RESPONSIBILITY TO COMPLETE THE IMPORT FORMALITIES . T HE PAYMENT IN RESPECT OF THE MACHI NES IS DIRECTLY MADE BY THE CUSTOMER TO THE PRINCIPAL. IT IS STATED BY THE ASSESSEE THAT THE PRINCIPAL/MANUFACTURER RETAINS THE PORTION OF CONSIDERATION RECEIVED FROM THE CUSTOMER WHICH HAS BEEN AGREED BETWEEN THE PRINCIPAL AND THE ASSESSEE TOGETHER WITH ANY INCIDENTAL CHARGES THAT THE PRINCIPAL MAY HAVE INCURRED AND THE BALANCE IS REMITTED TO THE ASSESSEE IN INDIA AS ITS COMMISSION. THE ASSESSEE STATED THAT AS PER THE UNDERSTANDING BETWEEN THE PRINCIPAL AND THE ASSESSEE, THE ASSESSEE UNDERTAKES THE WORK OF INSTALLATION AND SUBSEQUENT WARRANTY SERVICES AS AND WHEN REQUIRED. IN CASE OF ANY WARRANTY WHICH REQUIRES THE REPLACEMENT OF CERTAIN ITEMS, PARTS OR PORTION OF EQUIPMENT O R THE MACHINE, THE SAME ARE SUPPLIED BY THE MANUFACTURER FREE OF COST AND IT IS ASSESSEES RESPONSIBILITY TO DO CORRESPONDENCE WITH THE MANUFACTURER FOR GETTING THE DEF ECTIVE PART S FOR REPLACEMENT AND REPLACEMENT OF SUCH DEFECTIVE PART S OF AN EQUIPMENT S /MACHINE S ARE DONE BY THE ASSESSEE DURING PERIOD OF WARRANTY . 5. ON THE BASIS OF THE ABOVE BUSINESS M ODEL O F THE ASSESSEE COMPANY , THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE MAINLY 5 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE OPERATING AS A FRONT/SALES OFFICE ON BEHALF OF THE MANUFACTURER. AS OBSERVED BY HIM , FOR THE PURPOSES OF RUNNING THE FRONT OFFICE OR THE SALES OFFIC E, THE ASSESSEE DOES NOT MAINTAIN ANY INVENTORY AND IT IS BASED ON THE REQUIREMENT OF ITS HIGH END MACHINES WHICH ARE USED BY THE LABORATORIES/EDUCATIONAL INSTITUTES, OTHER GOVT. AND PRIVATE BODIES. THE ASSESSING OFFICER HAS ANALYZED THE ASPECTS OF THE BU SINESS M ODEL OF THE ASSESSEE AS UNDER: 1. THAT ASSESSEE IS A FRONT/MARKETING OFFICE FOR ITS PRINCIPAL/MANUFACTURERS 2. THAT THE ASSESSEE DEALS INTO SPECIALIZED HIGH END MACHINES USED BY LABORATORIES, EDUCATIONAL INSTITUTES OR SUCH OTHER GOVERNMENT OR PRIVATE I NSTITUTES. 3. THAT ASSESSEE ACTS AS MARKETING ARM OF THE MANUFACTURERS TO CONVERT THE REQUIREMENTS OF SUCH MACHINES BY THE INSTITUTES, LABORATORIES INTO CONFIRMED ORDERS AND FURTHER PROCESSES SALE OF SUCH MACHINES TO THE CUSTOMERS. 4. THAT ASSESSEE IN RESPECT OF EACH INDIVIDUAL BUSINESS DEAL OF SUCH KIND REACHES TO AN UNDERSTANDING WITH THE PRINCIPAL ABOUT THE SELLING PRICE OF THE MACHINE AND THE OTHER INCIDENTAL EXPENSES THAT WOULD BE CHARGED BY THE PRINCIPAL 5. THAT BASED ON THE MARKET CONDITIONS AND OTHER ASPECTS , A SELLING PRICE TO THE END CUSTOMER IS ARRIVED AT, WHICH IS QUOTED TO THE CUSTOMER. AFTER FIANLISATION OF TENDERING PROCEDURE THE ASSESSEE FACILITATES SELLING OF SUCH MACHINE TO THE END CUSTOMERS. 6. THAT THE DIFFERENCE BETWEEN THE PRICE AGREED WITH THE PRI NCIPAL AND THE PRICE CHARGED TO THE CUSTOMER IS RECEIVED BY THE ASSESSEE AS ITS COMMISSION. 7. THAT ASSESSEE UNDERTAKES THE ACTIVITY OF INSTALLATION AND WARRANTY SERVICES AFTER THE SALES AS PER THE TERMS AND CONDITIONS OF THE MANUFACTURERS. HOWEVER THE WARRAN TY REPLACEMENT COST IS BORNE BY THE MANUFACTURER. 8. THAT THE ASSESSEE FOLLOWS CASH SYSTEM OF ACCOUNTING 6. TO THE EXTENT OF RS.1,14,53,353/ - THE AMOUNT WHICH WAS RECEIVED BY THE ASSESSEE DURING THE YEAR AND SHOWN AS SUNDRY CREDITORS , T HE ASSESSI NG OFFICER HELD THAT THE SAID AMOUNT IS RECEIVED BY THE ASSESSEE 6 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE AS COMMISSION IN RESPECT OF THE DEALS IN WHICH THE ASSESSEE HAS RENDERED SERVICES OF SALES AND SERVICES WHICH HAS NOT BEEN OFFERED TO TAX AS INCOME . AT THE SAME TIME , THE ASSESSING OFFICER H AS PARTLY ADMITTED THE CLAIM OF THE ASSESSEE IN RESPECT OF THE INSTALLATION AND THE WARRANTY BY OBSERVING THAT THERE MIGHT BE SOME WORK RELATING TO INSTALLATION AND THE WARRANTY SERVICES DURING THE WARRANTY PERIOD WHICH MAY BE REQUIRED TO BE PROVIDED BY TH E ASSESSEE . T HEN THE ASSESSING OFFICER HAS GONE ON THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE WHICH IS CASH SYSTEM OF ACCOUNTING. HE FINALLY HELD THAT THE AMOUNT TO THE EXTENT OF RS.1,14,53,353/ - IS TO BE BROUGHT TO TAX WHICH IS IN THE N ATURE OF THE COMMISSION RECEIVED BY THE ASSESSEE FROM ITS PRINCIPAL AND MERELY THE ASSESSEE HAS TO INCUR CERTAIN COST OF INSTALLATION AND THE WARRANTY IN FUTURE , TH E TAXABILITY OF THE SAID AMOUNT CANNOT BE DEFERRED. THE ASSESSING OFFICER HAS ALSO DISCUSSE D THE IMPACT OF THE DIFFERENT METHOD OF ACCOUNTING ON THE REVENUE RECOGNITION. THE ASSESSING OFFICER FINALLY ADDED RS.1,14,53,353/ - AS AN INCOME OF THE ASSESSEE. 7. THE ASSESSEE CHALLENGED THE SAID ADDITION BEFORE THE LD. CIT(A) BUT WITHOUT SUCCESS. T HE ASSESSEE TOOK THE FIRM STAND WITH THE LD. CIT(A) THAT THE AMOUNT RECEIVED BY THE ASSESSEE MAY BE IN THE FORM OF COMMISSION IS ONLY IN THE NATURE OF ADVANCE AS THE SAID AMOUNT WAS ATTACHED WITH THE OBLIGATION OF THE WARRANTY ON THE ASSESSEE. LD. CIT(A) HAS DISCUSSED THE THEORY OF THE REAL INCOME AND THE CONCEPT OF THE ACCRUAL OF INCOME IN PARA NOS. 3.8, 3.9, 3.10, 3.11, 3.11.1 ETC. THE LD. CIT(A) HAS PLACED HIS MORE EMPHASIS ON THE APPROACH OF THE ASSESSING OFFICER THAT THE ASSESSEE COULD NOT PRODUCE TH E AGREEMENT FROM THE MANUFACTURER/PRINCIPAL TO DEMONSTRATE THE CONTRACTUAL OBLIGATION OF WARRANTY ON THE ASSESSEE. THE REASONS GIVEN BY THE LD. CIT(A) FOR CONFIRMING THE STAND OF THE ASSESSING OFFICER FOR BEGINNING TO TAX THE SAID AMOUNT ARE AS UNDER: 7 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE 3. 12 THE APPELLANT HAS SHOWN THE RECEIPTS ON ACCOUNT OF WARRANT SUPPORT CHARGES AS SUNDRY CREDITORS UNDER CURRENT LIABILITIES IN THE BALANCE SHEET. THE TOTAL AMOUNT WHICH HAS BEEN CREDITED DURING THE YEAR IS OF RS.1,14,53,353/ - WHICH HAS BEEN STATED TO BE O N ACCOUNT OF WARRANTY SUPPORT CHARGES. THE METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT IS CASH SYSTEM. IT HAS BEEN CONTENDED BY THE APPELLANT THAT CREDITING AN AMOUNT AS CURRENT LIABILITY FOR WHICH SERVICES ARE YET TO BE RENDERED WOULD NOT MEAN THAT THE ASSESSEE IS FOLLOWING HYBRID SYSTEM OF ACCOUNTING BECAUSE INCOME IS TO BE TAXED AND NOT THE RECEIPT AND TO THE EXTENT OF THE AMOUNT PERTAINING TO THE SERVICES RENDERED ONLY GOT VESTED IN THE ASSESSEE AND THAT THE REST OF THE AMOUNT HAS BEEN RIGHTLY TAKEN AS A LIABILITY TO BE ADJUSTED IN THE SUBSEQUENT YEAR AS AND WHEN SERVICE WAS RENDERED. 3.13 THE APPELLANT'S STAND DOES NOT GET VINDICATED BECAUSE OF THE FACT THAT THE BASIS ON WHICH THE SAID AMOUNT HAS BEEN RECEIVED HAS NOT BEEN BROUGHT ON RECORD. IT IS NO TICED FROM THE ASSESSMENT ORDER THAT THE A.O., HAD SOUGHT THE EXPLANATION OF THE ASSESSEE WITH RESPECT TO THE AGREEMENT AND THE TERMS AND CONDITIONS ON WHICH THE AFORESAID AMOUNT HAD BEEN RECEIVED. THE REQUISITE INFORMATION AS EVIDENT FROM THE ORDER, WAS N OT FURNISHED BY THE APPELLANT ON THE APPOINTED DATE AND TIME AND, THEREFORE, THE A.O. HAD TO RESORT TO ISSUING SUMMONS U/S. 131 TO SOLICIT THE INFORMATION WITH RESPECT TO THE DETAILS AND JUSTIFICATION OF THE RECEIPT. IT WAS CLEARLY MENTIONED BY THE APPELLA NT IN ITS SUBMISSION FILED BEFORE THE A.O. ON 03.11.2010 THAT IN THE LAST FEW YEARS THERE WAS NO AGREEMENT WITH THE PRINCIPAL AND THAT EVERY CASE WAS TACKLED INDEPENDENTLY AND THE TERMS AND CONDITIONS AND OTHER RELATED ITEMS SUCH AS INSTALLATION AND WARRAN TY SUPPORT CHARGES WERE FIXED ONLY AFTER QUOTING FOR THE MACHINE. THE APPELLANT HAD ALSO STATED THAT THERE WERE MANY PRACTICAL ISSUES INVOLVED AND THE SAME WERE TACKLED BY WAY OF E - MAIL AND DIRECT TELEPHONE CALLS. THE APPELLANT INSTEAD OF FURNISHING THE TE RMS AND CONDITIONS ENTERED INTO BY IT WITH THE FOREIGN PRINCIPAL OR A COPY OF AGREEMENT, ONLY FURNISHED SAMPLE INVOICES AND EXPLAINED THE MANNER IN WHICH BUSINESS WAS CARRIED OUT. THE MANNER OF CONDUCTING THE BUSINESS WAS ALSO SUBSEQUENTLY EXPLAINED BY THE PARTNER OF THE APPELLANT FIRM ON 03.11.2010. THE A.O. HAS RECORDED THOSE FINDINGS IN PARAS 5.1.3 TO 5.1.5 OF THE ASSESSMENT ORDER. WHILE EXPLAINING THE REVENUE SHARING BETWEEN THE PRINCIPAL AND THE APPELLANT, IT WAS EXPLAINED BY THE PARTNER THAT THE PAYME NT FOR THE SALE MACHINE WAS MADE DIRECTLY TO THE PRINCIPAL BY THE 8 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE CUSTOMER. AFTER THE RECEIPT OF THE ENTIRE SALE AMOUNT, THE PRINCIPAL RETAINED THE PORTIONS OF CONSIDERATION WHICH HAD BEEN AGREED BETWEEN THE PRINCIPAL AND THE APPELLANT TOGETHER WITH INCID ENTAL CHARGES THAT THE PRINCIPAL HAD INCURRED AND THE BALANCE AMOUNT WAS REMITTED TO THE APPELLANT FIRM IN INDIA AS ITS COMMISSION. REGARDING THE WARRANTY SERVICES IT HAS BEEN STATED BY THE PARTNER THAT AS PER THE UNDERSTANDING BETWEEN THEM, THE APPELLANT UNDERTOOK THE WORK OF INSTALLATION AND SUBSEQUENT WARRANTY SERVICES AS AND WHEN REQUIRED, IN CASE, IF ANY WARRANTY WHICH REQUIRED A REPLACEMENT OF CERTAIN ITEM, PARTS OR PORTION OF EQUIPMENT OF THE MACHINE, THE SAME WAS SUPPLIED BY THE MANUFACTURER FREE OF COST AND ONLY THE FORMALITY AND CORRESPONDENCE WHICH WAS REQUIRED TO RECEIVE SUCH WARRANTY REPLACEMENT TOGETHER WITH SERVICING THE WARRANTY OF REPLACEMENT OF THE DEFECTIVE PART OF THE EQUIPMENT WAS DONE BY ASSESSEE. THE APPELLANT HAS NOT PRODUCED ANY DOCU MENTARY EVIDENCE OR PROOF IN SUPPORT OF THE CLAIM MADE AND NATURE OF RECEIPT AND SUBSEQUENT WORKS UNDERTAKEN REMAINS TO BE UNDERSTOOD ONLY FROM THE EXPLANATION FURNISHED BY THE PARTNER WHICH HAS BEEN QUOTED EARLIER. THE APPELLANT HAS ALSO NOT BROUGHT ON RE CORD ANY MATERIAL TO INDICATE THAT SEPARATE AGREEMENTS FOR THE WARRANTY WAS ENTERED INTO WITH PRINCIPAL. AT NO POINT OF TIME EITHER DURING THE ASSESSMENT PROCEEDINGS OR AT APPELLATE STAGE THE APPELLANT HAS BEEN ABLE TO BRING ON RECORD ANY MATERIAL WHATSOEV ER TO INDICATE THAT SEPARATE AGREEMENT OR TERMS AND CONDITIONS WERE ENTERED INTO FOR THE WARRANTY SUPPORT CHARGES WHICH COULD DISTINGUISH IT FROM THE REGULAR RECEIPT OF COMMISSION RECEIVED ON ACCOUNT OF SALE OF MACHINES IN INDIA. AS EVIDENT FROM THE EXPLAN ATION FURNISHED BY THE PARTNER, THE PAYMENT FOR A SALE OF MACHINE AND THE SUBSEQUENT DISBURSAL MADE BY THE PRINCIPAL TO THE APPELLANT OCCURS ONLY ONCE AND THIS INCLUDES THE RECEIPT ON ACCOUNT OF WARRANTY SUPPORT CHARGES ALSO. IF ANY OTHER AGREEMENT OR TERM S AND CONDITIONS HAVE BEEN ENTERED INTO BY THE APPELLANT, THE SAME IS NOT REVEALED FROM THE FACTS BROUGHT ON RECORD. THE APPELLANT RECEIVED THE ENTIRE RECEIPTS AS COMMISSION AND PART OF WHICH IS CREDITED TO THE PROFIT AND LOSS ACCOUNT AND PART TAKEN TO THE BALANCE SHEET WHICH APPEARS AS SUNDRY CREDITORS UNDER CURRENT LIABILITIES. THE APPELLANT HAS ALSO NOT SPECIFIED THE AFTER SALES SERVICES WHICH ARE BEING CARRIED OUT DURING THE COURSE OF ASSESSMENT PROCEEDINGS AS EVIDENT FROM THE ASSESSMENT ORDER, THE WARR ANTY REPLACEMENT COST IS BORNE BY THE MANUFACTURER OR THE PRINCIPAL. THE 9 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE APPELLANT'S BASIS OF BIFURCATING THE RECEIPT OF COMMISSION IS NOT UNDERSTANDABLE IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. 3.14 IT IS AN UNDISPUTED FACT THAT THE APPELLANT IS FOLLOWING CASH SYSTEM OF ACCOUNTING FOR RECOGNIZING THE REVENUE BUT KEEPING ASIDE PART OF THE RECEIPT AND SHOWN IT AS A LIABILITY ON THE PLEA OF FUTURE EXPENSES DOES NOT APPEAL TO REASON. THUS IN A WAY, THE APPELLANT THOUGH CLAIMING TO RECOGNIZE THE PROFIT AS PER CASH SYSTEM OF ACCOUNTING, HOWEVER, IS NOT OFFERING THE ENTIRE RECEIPT FOR TAX ON THE GROUND THAT THE SAME HAS NOT ACCRUED, BRINGS IN THE MERCANTILE SYSTEM OF ACCOUNTING IN PICTURE FOR RECOGNIZING THAT PART OF REVENUE. THE A.O. HAS RIGHTLY POINTED OUT THAT THE MIXTURE OF CASH AND MERCANTILE ACCOUNTING I.E. HYBRID SYSTEM IS NOT PERMISSIBLE U/S 145 OF THE ACT, FROM ASSESSMENT YEAR 1997 - 98. THE APPELLANT IS THUS LEFT WITH ONLY TWO OPTIONS TO FOLLOW I.E. THE CASH SYSTEM OR THE MERCANTILE SYSTEM. THE PLE A TAKEN BY THE APPELLANT OF THE INCOME HAVING NOT ACCRUED IS THUS MISPLACED AND UNJUSTIFIED AND NOT BACKED BY PROPER EVIDENCE AND EXPLANATION. 3.15 THE APPELLANT HAS ALSO TAKEN A STAND DURING THE APPELLATE PROCEEDINGS THAT THE SAID AMOUNT RECEIVED FROM THE PRINCIPAL IS AN ADVANCE. DURING THE ASSESSMENT PROCEEDINGS IN THE SUBMISSIONS MADE BY THE APPELLANT BEFORE THE A.O. AND ALSO THE EXPLANATION AS GIVEN BY THE PARTNER OF THE FIRM DO NOT SPEAK OF THE RECEIPT AS ADVANCE. THE APPELLANT'S PLEA THAT PART OF THE COMMISSION RECEIPT IS ADVANCE IS NOT BACKED BY ANY DOCUMENTARY PROOF OR EVIDENCE. THE A.O. HAS ALSO RIGHTLY NOTED IN PARA 5.1.10 THAT NEITHER THE APPELLANT HAD CONSIDERED SUCH RECEIPT OF COMMISSION AS ADVANCE IN ITS BOOKS OF ACCOUNT NOR DURING THE COURSE OF PROCEEDINGS THE APPELLANT HAD MADE ANY SUCH CONTENTION. THE APPELLANT'S TREATING OF THE RECEIPTS AS ADVANCE APPEARS TO BE IMAGINARY AND NOT BACKED BY ANY PROOF OR EVIDENCE WHATSOEVER. THE CASE LAWS RELIED UPON BY THE APPELLANT ALL RELATE TO THE RECEIPT OF ADVANCE BY THE ASSESSEE AND ITS SUBSEQUENT TREATMENT AND HENCE ON FACTS THE SAME ARE DISTINGUISHABLE AND NOT APPLICABLE. THOUGH THE APPELLANT ITSELF SPEAK OF MUTUAL CONTRACTUAL OBLIGATIONS BUT THE SAID CONTRACTUAL OBLIGATIONS HAVE NOT BEEN BROUGHT ON RE CORD BY THE APPELLANT SO AS TP JUSTIFY THE CLAIM MADE. THE KARNATAKA HIGH, COURT IN THE CASE OF CIT VS SYNDICATE BANK (2003) 261 ITR 528 (KAR) ALSO HELD THAT THE CONDUCT OF THE PARTIES IN TREATING THE INCOME IN A PARTICULAR MANNER IS MATERIAL EVIDENCE OF T HE FACT WHETHER INCOME HAS ACCRUED OR NOT AND THAT THE CONCEPT OF REAL 10 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE INCOME IS CERTAINLY APPLICABLE IN JUDGING WHETHER THERE HAS BEEN INCOME OR NOT. 3.15.1 IT WILL BE SEEN FROM THE ABOVE THAT THE CONDUCT OF THE PARTY IN TREATING AN INCOME IN A PARTICULAR MANNER IS MATERIAL EVIDENCE OF THE FACT WHETHER INCOME HAS ACCRUED OR NOT. THE QUESTION WHETHER REAL INCOME HAS MATERIALIZED TO THE ASSESSEE HAS TO BE CONSIDERED WITH REFERENCE TO COMMERCIAL AND BUSINESS REALITIES OF THE SITUATIONS IN WHICH THE ASSESSEE H AS BEEN PLACED AND NOT WITH REFERENCE TO THE SYSTEM OF ACCOUNTING. 3.16 ALTHOUGH THE CONDUCT OF THE ASSESSEE IS RELEVANT OR MATERIAL IN DECIDING WHETHER INCOME HAD ACCRUED OR NOT, YET THE IPSE DIXIT OF THE ASSESSEE CANNOT BE THE LAST WORD. WHERE THE CONDUC T OF THE ASSESSEE IS UNEQUIVOCAL, MERE IMPROBABILITY OF RECOVERY CANNOT BE A POINTER TO THE QUESTION WHETHER INCOME HAD RESULTED OR ACCRUED TO THE ASSESSEE. WHAT HAD ACCRUED MUST BE CONSIDERED FROM THE POINT OF VIEW OF THE PROBABILITY AND IMPROBABILITY OF REALIZATION IN A REALISTIC MANNER. IN THE CASE OF STATE BANK OF TRAVANCORE VS CIT (1986) 158 ITR 102 (SC) THE APEX COURT RELYING ON THE DECISION IN CALCUTTA CO. LTD. VS CIT (1959) 37 ITR 1 (SC) THAT THE CONCEPT OF REALITY OF INCOME AND THE ACTUALITY OF THE SITUATION ARE RELEVANT FACTORS WHICH GO TO THE MAKING UP OF THE ACCRUAL OF INCOME BUT ONCE ACCRUAL HAS TAKEN PLACE AND INCOME ACCRUES, THE SAME CANNOT BE DEFEATED BY ANY THEORY OF REAL INCOME. 3.17 IT HAS, HOWEVER, TO BE BORNE IN MIND THAT IF BY THE TERMS OF CONTRACT OR AGREEMENT THE INCOME ACCRUES IN THE YEAR IN WHICH, BY THE TERMS OF THE CONTRACT, THE INCOME BECOMES DUE AND PAYABLE THEN SUCH INCOME WHICH HAS ACCRUED BY THE TERMS OF CONTRACT IN SUCH CASES WOULD BE ENTITLED TO BE INCLUDED IN THE INCOME OF THE ASSESSEE. BUT NEITHER PROPOSITION THAT THE I.T. ACT IS EXHAUSTIVE BY ITSELF NOT THAT IN THE SCHEME OF THE IT. ACT, THERE IS A PROVISION AS TO WHEN INCOME IS DEEMED TO ARISE OR ACCRUE, TAKES AWAY THE APPLICATION OF THE ORDINARY PRINCIPLES OF LAW. ACCORD ING TO THE PRINCIPLES, INCOME MUST ACCRUE IN ACCORDANCE WITH THE LAW. 3.18 UNDER THE CASH SYSTEM OF ACCOUNTING, A RECORD AS KEPT OF ACTUAL CASH RECEIPT AND ACTUAL CASH PAYMENTS ENTRIES BEING MADE WHEN MONEY IS ACTUALLY COLLECTED OR DISBURSED, INCOME NOT RE CEIVED IS NOT LIABLE TO BE SHOWN IN THE BALANCE SHEET MAINTAINED ON CASH BASIS, IT WAS SO HELD IN KESHAV MILLS LTD. VS CIT (1953) 23 ITR 230 11 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE (SC). SECTION 5 IS INTENDED TO EXPLAIN THE SCOPE OF TOTAL INCOME. THIS SECTION ELABORATES THE MEANING OF THE EXPRES SION 'INCOME OF THE PREVIOUS YEAR' REFERRED TO IN SECTION 4 OF THE ACT. THE AMBIT OF CHARGE UNDER THE ACT IS DEPENDENT ON TWO FACTORS: (I) THE RESIDENTIAL STATUS OF THE ASSESSEE (II) THE BASIS OF CHARGE VIZ. WHETHER THE COMPUTATION IS TO BE MADE ON RECEIPT BASIS OR ACCRUAL BASIS. THE EXPRESSION 'ACCRUED' OR 'ARISEN' OR 'RECEIVED' MUST BE GIVEN THEIR PLAIN GENERAL MEANING IN THE ABSENCE OF ANY PARTICULAR DEFINITION. THEREFORE, IF A PERSON IS RESIDENT HE WILL BE ASSESSED AS PER SECTION 5(1)(A)(B) ON ALL INCOM E RECEIVED OR DEEMED TO RECEIVE BY HIM IN INDIA IN THE PREVIOUS YEAR AND ALL INCOME ACCRUING AND ARISING TO HIM IN INDIA OR DEEMED TO ACCRUE AND ARISE IN INDIA. THEREFORE, IN THE ABSENCE OF ANY CONTRACTUAL OBLIGATION AND THE METHOD OF ACCOUNTING THE RECEIP T OF COMMISSION WHICH HAS BEEN SHOWN AS A LIABILITY IS INCOME WHICH NEEDS TO BE TAXED. IN THE CASE OF RAJA MOHAN BAHADUR VS CIT (1967) 66 ITR 378 (SC) IT WAS HELD, WHEREAS UNDER THE CASH SYSTEM NO ACCOUNT OF WHAT ARE CALLED THE OUTSTANDINGS OF THE BUSINESS EITHER AT THE COMMENCEMENT OR AT THE CLOSE OF THE YEAR IS TAKEN ACCORDING TO MERCANTILE METHOD ACTUAL CASH RECEIPTS DURING THE YEAR AND THE ACTUAL CASH OUTLAYS DURING THE YEAR ARE TREATED IN THE SAME WAY AS UNDER THE CASH SYSTEM, BUT TO THE BALANCE THUS A RISING THERE IS ADDED THE AMOUNT OF THE OUTSTANDINGS NOT COLLECTED AT THE END OF THE YEAR AND FROM THIS IS DEDUCTED THE LIABILITIES INCURRED OR ACCRUED BUT NOT DISCHARGED AT THE END OF THE YEAR. IT IS EQUALLY TRUE THAT THE ASSESSEE IS ENTITLED TO ADOPT ITS OWN SYSTEM OF ACCOUNTING. NONETHELESS, IF IN THE CIRCUMSTANCES OF A GIVEN CASE THAT SYSTEM FAILS TO DISCLOSE THE TRUE INCOME OF THE ASSESSEE IN THE RELEVANT ACCOUNTING PERIOD, IT IS OPEN TO THE DEPARTMENT TO IGNORE THE RESULTS OF THAT SYSTEM OF ACCOUNTING AND TO DEDUCE THE TRUE INCOME OF THE ASSESSEE. 3.18.1 THUS ON THE GIVEN FACTS AND THE MATERIAL ON RECORD AND ALSO THE RATIO OF THE JUDICIAL DECISIONS THE CONTENTION RAISED BY THE APPELLANT IS NOT TENABLE IN LAW. THE CONTENTION RAISED BY THE APPELLANT HAS NOT DEMONSTRATED BY BRINGING ON RECORD COGENT MATERIAL AND PROPER EVIDENCE WHICH COULD JUSTIFY THE CLAIM MADE THAT THE RECEIPT IS NOT TAXABLE DURING THE YEAR . NOW, THE ASSESSEE IS IN APPEAL BEFORE US. 8 . WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PART IES AND PERUSED THE RECORD. THE LD. COUNSEL ARGUES THAT AS PER THE BUSINESS MODEL OF 12 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE THE ASSESSEE IT IS IMPORTING THE MACHINES FROM THE FOREIGN MANUFACTURERS WHICH ARE SPECIALIZED MACHINES AND EQUIPMENTS . THE ASSESSEE FINDS OF THE CUSTOMERS IN THE MARKET AND ACCORDINGLY DOES THE LIAISONING WITH THE FOREIGN MANUFACTURERS. MOST OF THE MACHINES WHICH ARE IMPORTED BY THE ASSESSEE FOR ITS CUSTOMERS IN INDIA ARE SPECIALIZED MACHINES USED BY THE LABORATORIES, EDUCATIONAL INSTITUTES ETC. THE BUYERS ARE IMPORTIN G THE MACHINES AS THE ASSESSEE IS ASSURING THE QUALITY AND SERVICE SUPPORT IN CASE OF ANY DEFECT OR MALL FUNCTIONING OF THE MACHINES. HE SUBMITS THAT FOR FINALIZING THE PRICE OF THE MACHINE WHICH IS TO BE IMPORTED, THE FINAL PRICE IS FIXED BY THE MANUFAC TURER AND THE ASSESSEE EVEN IF THERE IS DIRECT NEGOTIATION MANY TIMES BETWEEN THE BUYER AND THE FOREIGN MANUFACTURERS. THE ASSESSEE IS GIVING ADVICE TO THE FOREIGN MANUFACTURER AFTER CONSIDERING THE LOCAL MARKET CONDITIONS TO QUOTE THE PRICE OF THE MACHIN ES TO THE CUSTOMERS DIRECTLY. HE SUBMITS THAT THE ROLE OF THE ASSESSEE BETWEEN THE FOREIGN MANUFACTURERS/PRINCIPAL AND THE BUYERS IN INDIA IS A VERY IMPORTANT KE Y ROLE. THE PAYMENT OF THE MACHINES IMPORTED IN INDIA ARE DIRECTLY MADE BY THE BUYERS TO THE MANUFACTURERS/PRINCIPAL AND OUT OF THE AMOUNT RECEIVED FROM THE BUYERS IN INDIA THE PRINCIPAL/MANUFACTURERS REMIT THE AMOUNT TOWARDS THE COMMISSION AND WARRANTY SERVICE BACK UP TO THE ASSESSEE. HE ARGUES THAT THOUGH THERE ARE NO AGREEMENT S BETWEEN THE ASS ESSEE AND THE MANUFACTURER S BUT AS PER THE BUSINESS MODEL OF THE ASSESSEE WHICH HAS BEEN ACCEPTED IN PAST BY THE DEPARTMENT , T HE ASSESSEE IS SHOWING THE AMOUNT RECEIVED FROM THE FOREIGN MANUFACTURERS AS ADVANCE/LIABILITIES AND WHEN THE PERIOD OF WARRANTY I S OVER THEN ONLY THE SAID AMOUNT IS DECLARED AS INCOME. HE SUBMITS THAT EVEN IF THE ASSESSEE IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING BUT ON THE BASIS OF REAL INCOME THEORY UNLESS THE WARRANTY PERIOD IS OVER THE AMOUNT IN THE HANDS OF THE ASSESSEE IS ON LY IN THE NATURE OF THE ADVANCE OR LIABILITY. HE SUBMITS THAT THE BUSINESS MODEL OF THE ASSESSEE HAS BEEN EXPLAINED TO 13 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE BOTH THE AUTHORITIES BELOW BUT THE SAME WAS NOT AT ALL CONSIDERED. THE ASSESSEE HAS PRODUCED THE INVOICE ON WHICH THE TERMS AND CONDITI ONS ARE MENTIONED BUT THOSE ARE ALSO DISCARDED. HE ARGUES THAT THE AMOUNT OF RS.1,14,53,353/ - HAS BEEN SUBSEQUENTLY DECLARED BY THE ASSESSEE PHASE WISE ON COMPLETION THE PERIOD OF WARRANTY AND IF THE SAME AMOUNT IS TAXED AGAIN IN THE A.Y. 2008 - 09 THEN THE RE WILL BE DOUBLE TAXATION WHICH IS AGAINST THE BASIC PRINCIPLES OF INCOME T AX LAW. HE ARGUES THAT AS PER THE BUSINESS MODEL OF THE ASSESSEE , IT IS REGULARLY FOLLOWING THE METHOD OF RECOGNIZING THE INCOME IN RESPECT OF THE COMMISSION AND WARRANTY SUPPORT CHARGES WHEN WARRANTY PERIOD HAS EXPIRED WHICH IS NEVER QUESTIONED BY THE ASSESSING OFFICER IN PAST . HE SUBMITS THAT IN GENERAL WARRANTY NEEDS TO BE GIVEN FOR 36 MONTHS AND ACCORDINGLY WARRANTY SUPPORT CHARGES WHICH ARE RECEIVED ARE CONSIDERED IN THIS RES PECTIVE YEAR WHEN THE WARRANTY IS ALIVE. HE SUBMITS THAT IF NO WORK IS DONE IN ANY FINANCIAL YEAR THEN THE ENTIRE RECEIPT IS SHOWN AS AN INCOME IN NEXT 3 YEARS AS PER THE CONTRACT /UNDERSTANDING BETWEEN THE ASSESSEE AND THE BUYERS OF EQUIPMENTS/ MACHINES, S ERVICES WILL BE RENDERED IN THOSE YEARS ONLY. HE PLEADED FOR ALLOWING THE GRAND OF THE ASSESSEE AND DELETING THE ADDITION. THE LD. DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 9 . IN THIS CASE, WE FIND THAT THE ASSESSEE IS CONSISTENTLY FOLLOWING T HE METHOD OF RECOGNIZING THE INCOME IN RESPECT OF THE COMMISSION INSTALLATION CHARGES AND WARRANTY SUPPORT SERVICES ON THE BASIS OF THE PERIOD OF WARRANTY. W E ALSO FIND THAT THE ASSESSEE DID NOT PRODUCE ANY SPECIFIC AGREEMENT WITH THE PRINCIPAL/MANUFACTUR ER S OF THE MACHINES AND EQUIPMENT BUT HAS PRODUCED SOME INVOICE AND OTHER DETAILS BEFORE THE ASSESSING OFFICER. WE ALSO FIND THAT IN CASE OF ANY WARRANTY WHICH REQUIRES THE REPLACEMENT OF CERTAIN ITEMS, PARTS OR PORTION OF EQUIPMENT OF MACHINES DURING THE PERIOD OF WARRANTY THE SAME IS SUPPLIED BY MANUFACTURER FREE OF COST. THE MAIN PLANK OF THE ARGUMENT OF THE LD. 14 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE COUNSEL IS THAT ALTERNATIVELY THE ASSESSEE PLA YS KEY ROLE BETWEEN THE BUYERS OF THE MACHINES AND THE MANUFACTURER/PRINCIPAL. UNDER THE CONTRA CTUAL OBLIGATION THE ASSESSEE IS DOING THE INSTALLATION OF MACHINES AND ALSO THE SERVICE SUPPORT DURING THE WARRANTY PERIOD ON BEHALF OF MANUFACTURERS . ON PERUSAL OF THE ASSESSMENT ORDER, WE FIND THAT THE ASSESSING OFFICER HAS ACCEPTED IN PARA NO. 5.1.13 THAT THERE ARE CERTAIN COSTS OF INSTALLATIONS OR WARRANTY ON THE ASSESSEE WHICH MAY HAVE TO INCUR IN FUTURE BUT ON RECOGNIZING THE INCOME , H E HAS NOT ACCEPTED THE PLEA OF THE ASSESSEE. THE ASSESSEE FAIRLY ADMITTED BEFORE THE AUTHORITIES BELOW THAT THERE W AS NO SPECIFIC AGREEMENT WITH THE MANUFACTURER AND EACH CASE IS TACKLED INDEPENDENTLY DEPENDING UPON WHO IS QUOTING FOR THE MACHINE AND ITS TERMS AND CONDITIONS AND ACCORDINGLY INSTALLATION AND WARRANTY SUPPORT CHARGES ARE FIXED. THE ASSESSEE ALSO SUBMITT ED BEFORE THE ASSESSING OFFICER THAT SAMPLE INVOICE AND OTHER DETAILS UNDERTAKING HOW THE ORDERS ARE PROCESSED AND WARRANTY SUPPORT CHARGES ARE RECEIVED. IT IS NOT DISPUTED BEFORE US THAT EVEN IF THE SAME ARE IN THE AMOUNT RECEIVED TOWARDS COMMISSION, INS TALLATION AND WARRANTY CHARGES ARE NOT FULLY SHOWN AS AN INCOME CLAIMING THE SAME AS NOT ACCRUAL BUT THE ASSESSEE HAS OFFERED THE SAID AMOUNT IN SUBSEQUENT YEARS. 10. WHEN THE ASSESSEE HAS SPECIFIC BUSINESS MODEL OF DOING HIS BUSINESS WHICH HAS NOT BEEN QUESTIONED IN PAST AND HENCE, THIS YEAR THE ASSESSING OFFICER IS QUESTIONING THE ASSESSEE WHICH IS AGAINST THE RULE OF CONSISTENCY. EVEN IF THE ASSESSEE IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING AND THE AMOUNT RECEIVED IS NOT AN INCOME UNDER THE CHARGIN G PROVISIONS OF THE ACT , THEN IT DOES NOT MEAN THAT THE ASSESSEE HAS TO OFFER THE SAME AS HIS INCOME IRRESPECTIVE OF THE FACT WHETHER THE SAME IS HIT BY THE CHARGING PROVISIONS OR NOT. WE, THEREFORE, HOLD THAT THE AMOUNT SHOWN BY THE ASSESSEE AS A LIABILI TY OR IN THE NATURE OF THE ADVANCE TO THE EXTENT OF RS.1,14,53,353/ - CANNOT BE BROUGHT TO TAX FOR THE A.Y. 2008 - 09. AT THE MOST ASSESSING OFFICER CAN VERIFY WHETHER THE 15 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE ASSESSEE HAS SHOWN THE SAID AMOUNT IN SUBSEQUENT YEARS ON THE BASIS OF THE PERIOD OF W ARRANTY. WE, ACCORDINGLY, ALLOW GROUND NOS. 1, 2 AND 3 AND DELETE THE ADDITION. 1 1 . THE NEXT ISSUE IS THE AD HOC ADDITION OF RS.19,72,383/ - OUT OF DIFFERENT CLAIMS OF EXPENSES AND THIS ISSUE ARISES FROM GROUND NO. 4. AS NOTED BY THE ASSESSING OFFICER THE ASSESSEE HAS DEBITED THE FOLLOWING AMOUNTS TO THE PROFIT AND LOSS ACCOUNT: I. PROFESSIONAL FEES RS.9,64,100/ - II. SPONSORSHIP E XPENSES RS.5,19,111/ - III. TRAVELLING E XPENSES RS.13,79,880/ - THE ASSESSING OFFICER ASKED THE ASSESSEE TO GIVE THE DET AILS WITH SUPPORTING EVIDENCES AND ALSO EXPLAINED BUSINESS PURPOSES FOR INCURRING THE SAID EXPENSES. THE ASSESSEE FILED THE DETAILS AND ALSO EXPLAINED THE NEXUS WITH ITS BUSINESS. THE DETAILS FILED BY THE ASSESSEE ARE REPRODUCED ON PAGE NOS. 13, 14 AND 1 5 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER ALSO ISSUED SUMMONS U/S. 131 TO THE ASSESSEE TO PRODUCE THE SUPPORTING DOCUMENTS AND THE BUSINESS PURPOSES OF THE SAID EXPENSES. THE ASSESSING OFFICER MADE THE DISALLOWANCE OF RS.19,72,383/ - OUT OF PROFESS IONAL FEES, SPONSORSHIP EXPENSES AND TRAVELLING EXPENSES. THE ASSESSING OFFICER HAS GIVEN THE FOLLOWING REASONS FOR MAKING THE DISALLOWANCE: 5.2.3 APART FROM THE LISTS AS ABOVE NO SUPPORTING DOCUMENTS WERE PRODUCED AND NO BUSINESS PURPOSE HAS BEEN EXPLAIN ED IN RESPECT OF THE AFORESAID EXPENSES. FROM THE LIST SUBMITTED, IT IS NOT PROVED THAT THE EXPENSES CLAIMED BY THE ASSESSEE ARE FOR BUSINESS PURPOSES. IT CAN BE SEEN FROM THE DETAILS SO SUBMITTED THAT FOR PROFESSIONAL CHARGES/FEES PAID THERE ARE NOT EVEN THE THIRD PARTY BILL/VOUCHER. ACCORDINGLY IT EVEN CANNOT BE ASCERTAINED THAT SUCH EXPENSES ARE IN ANY WAY BUSINESS EXPENSES OF THE ASSESSEE. IT IS ALSO SEEN THAT ONE OF PROFESSIONAL FEES OF RS.1,20,000/ - IS TOWARDS ONE MR. MAHESH HARDIKAR, SANE HOSE USA. FROM THE SURNAME IT APPEARS THAT THIS PERSON COULD BE SOME RELATIVE OF THE PARTNERS OF THE FIRM. IN RESPECT OF SPONSORSHIP EXPENSES IT MAY BE SEEN THAT THE AMOUNT HAS - BEEN 16 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE DRAWN IN THE NAME OF INDIVIDUALS ALSO AND THERE ARE SPONSORSHIP FOR HIGH TEA, LUNCH , CULTURAL PROGRAM ETC. HOW ARE THEY RELATED TO THE BUSINESS OF THE ASSESSEE IS NO WHERE EXPLAINED. UNDER THE SPONSORSHIP EXPENSES THERE ARE EXPENSES TOWARDS AIR TICKET FOR DELHI VARANASI, US EXPENSES FOR 15 DAYS AND ANOTHER AIR TICKET FOR ONE AVINASH PAND E, WHICH TOTALS TO RS.1,83,163/ - . HOW THESE EXPENSES ARE FIRSTLY AS SPONSORSHIP EXPENSES AND SECONDLY HOW THEY ARE BUSINESS EXPENSES OF THE ASSESSEE HAS NOWHERE BEEN EXPLAINED/SUPPORTED. UNDER THE EXPENSES FOR TRAVELLING, IT MAY BE SEEN IN BOTH THE ANNEXUR ES SUBMITTED, NO DETAILS WHAT SO EVER HAVE BEEN GIVEN IN RESPECT OF FOREIGN TRAVEL EXPENSES OF RS.489171.75. THEREFORE THE AMOUNTS OF EXPENSES UNDER THE HEAD PROFESSIONAL FEES OF RS.9,64,100/ - , UNDER THE HEAD SPONSORSHIP EXPENSES OF RS.5,19,111/ - AND TRAV ELLING EXPENSES OF RS.489171.75 OUT OF TOTAL OF RS.13,79,880.75, ARE CONSIDERED NOT PROVED FOR BUSINESS PURPOSES AND ARE ACCORDINGLY DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE. ACCORDINGLY A TOTAL DISALLOWANCE OF RS.19,72,383/ - . 1 2 . THE SAID DI SALLOWANCE WAS CONFIRMED BY THE LD. CIT(A). THE REASONS GIVEN BY THE LD. CIT(A) ARE AS UNDER: 4. IN GROUND NO. 3 THE APPELLANT HAS CONTESTED THE ADDITION OF RS.19,72,383/ - MADE BY THE A.O. UNDER THE HEAD PROFESSIONAL FEES, SPONSORSHIP EXPENSES ETC. OUT O F VARIOUS EXPENSES COMPRISED OF THE FOLLOWING: (1) PROFESSIONAL FEES RS.9,64,100/ - (2) SPONSORSHIP EXPENSES RS.5,19,111/ - (3) TRAVELLING EXPENSES RS.4,89,171/ - 19,72,386/ - DURING THE ASSESSMENT PROCEEDINGS THE A.O. NOTICED THAT THE APPELLANT HAD DEBITED RS.9,64,100/ - UNDER PROFESSIONAL FEES, RS.5,19,111/ - AS SPONSORSHIP EXPENSES AND RS.13,79,880/ - ON TRAVELLING EXPENSES. THE A.O. SOUGHT THE DETAILS ALONG WITH SUPPORTING EVIDENCES AND ALSO THE EXPLANATION REGARDING THE BUSINESS PURP OSES OF THE EXPENSES. THE APPELLANT SUBMITTED THE LIST OF SPONSORSHIP FEES PAID ALONG WITH NARRATION AND A LIST OF THE PROFESSIONAL FEES PAID WAS ALSO FURNISHED. SIMILARLY IN RESPECT OF TRAVELLING EXPENSES HEAD - WISE DETAILS WERE SUBMITTED. HOWEVER, THE A.O. FOUND THAT NO SUPPORTING DOCUMENTS WERE SUBMITTED AND THE BUSINESS PURPOSE FOR WHICH THE EXPENSES HAD BEEN INCURRED 17 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE WERE NOT EXPLAINED. THE A.O. AGAIN SOUGHT THE DETAILS AND EVIDENCES FOR EXPENSES AND EXPLANATION FOR THE BUSINESS PURPOSES FOR INCURRIN G THE EXPENSES, HOWEVER, NO ONE ATTENDED ON THE APPOINTED DAY AND, THEREFORE, THE A.O. ISSUED SUMMONS U/S 131 TO THE PARTNERS SEEKING THE DETAILS. THE PARTNER OF THE FIRM ATTENDED ON 03.11.2010 AND AGAIN SUBMITTED A LIST OF PAYMENTS MADE TO THE PARTIES WIT H REGARD TO THE AFORESAID EXPENSES. THE A.O. HAS ENCLOSED THE AFORESAID DETAILS IN PARA 5 OF THE ASSESSMENT ORDER. 4.1 IN THE GIVEN CIRCUMSTANCES, THE A.O. FOUND THAT NO SUPPORTING DOCUMENTS WERE FURNISHED NOR THE BUSINESS PURPOSE WAS EXPLAINED AND THUS T HE A.O. INFERRED FROM THE DETAILS THAT THE EXPENSES COULD NOT BE ASCERTAINED AS TO WHETHER THE SAME RELATED IN ANY WAY TO THE BUSINESS OF THE APPELLANT. THE A.O. ALSO FOUND THAT THE NATURE OF EXPENSES UNDER PROFESSIONAL FEES AND SPONSORSHIP FEES WERE NOT R ELATED TO THE BUSINESS OF THE ASSESSEE AND NO EXPLANATION IN THIS REGARD HAD BEEN PUT FORTH BY THE APPELLANT. EVEN UNDER THE TRAVELLING EXPENSES NO DETAILS IN RESPECT OF FOREIGN TRAVEL EXPENSES OF RS.4,89,171.75 WAS FURNISHED NOR ANY EXPLANATION GIVEN WITH RESPECT TO ITS NATURE AND PURPOSE. THUS THE A.O. HELD THE AFORESAID EXPENSES AMOUNTING TO RS.19,72,383/ - TO BE EXPENSES NOT PROVED FOR BUSINESS PURPOSE AND ACCORDINGLY THE SAME WERE DISALLOWED AND ADDED TO THE TOTAL INCOME. 4.2 DURING THE APPELLATE PROCE EDINGS IT HAS BEEN CONTENDED BY THE APPELLANT THAT THE DISALLOWANCE HAS BEEN MADE BY THE A.O. WITHOUT ASSIGNING ANY REASONS AND ON AN ADHOC BASIS. IT HAS BEEN ONLY STATED THAT THE SPONSORSHIP FEES EXPENSES WERE TOWARDS BUSINESS EXPENSES AND WHOLLY AND EXCL USIVELY FOR BUSINESS PURPOSE AND THAT THE PAYMENTS HAVE BEEN MADE BY ACCOUNT PAYEE CHEQUES THROUGH BANKING CHANNELS. REGARDING THE PROFESSIONAL FEES IT HAS BEEN CONTENDED THAT THE SAME WERE PAID TO TECHNICAL EXPERTS AND THAT THE DETAILS WERE PROVIDED TO AO , WHO WITHOUT APPLYING THE MIND HAS MADE THE ADDITION. SO FAR AS THE DISALLOWANCE UNDER TRAVELLING EXPENSES IS CONCERNED, IT HAS BEEN ONLY STATED THAT THEY ARE TRAVELLING ALL OVER INDIA WHENEVER THE MACHINERY IS SUPPLIED BY THE FOREIGN PRINCIPAL AND THAT U NLESS THE ASSESSEE UNDERTAKES EXTENSIVE TRAVELLING IT WOULD NOT BE ABLE TO EXTENTED THE SERVICES AND, THEREFORE, THERE WAS NOTHING LIKE PERSONAL ELEMENT. 4.3 THE SUBMISSION MADE BY THE APPELLANT HAS BEEN CAREFULLY CONSIDERED AND ALSO THE MATERIAL ON RECOR D. THE CONTENTION RAISED 18 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE BY THE APPELLANT THAT THE DISALLOWANCE OF THE EXPENSES HAS BEEN MADE ON AN ADHOC BASIS AND WITHOUT ASSIGNING ANY REASONS BY THE A.O. IS FACTUALLY NOT CORRECT. THE A.O, HAS TRIED TO DEEPLY EXAMINE THE NATURE OF THE EXPENSES INCURRED AND IN THE ABSENCE OF PROPER EVIDENCE AND EXPLANATION HAS INFERRED THE SAME TO BE NOT RELATED TO THE BUSINESS PURPOSES OF THE APPELLANT. THE APPELLANT HAS NEVER PRODUCED ANY SUCH DETAILS OR ANY EXPLANATION EITHER AT THE STAGE OF ASSESSMENT OR APPELLATE PR OCEEDINGS WHICH COULD JUSTIFY THE CLAIM OF EXPENSES INCURRED BY THE APPELLANT. THE MANNER IN WHICH THE APPELLANT CONDUCTED THE BUSINESS HAS BEEN EXPLAINED BY THE APPELLANT BEFORE THE A.O. AND IN THE GIVEN SET OF FACTS, THE INCURRING OF THE EXPENSES AS CLAI MED PRIMA FACIE DO NOT APPEAR TO BE JUSTIFIED MORE SO BECAUSE OF LACK OF EVIDENCE AND EXPLANATION WITH RESPECT TO THE NEED FOR SUCH EXPENSES IN VIEW OF THE NATURE OF CONTRACTUAL OBLIGATION BETWEEN THE APPELLANT AND THE FOREIGN PRINCIPAL. THE APPELLANT HAS NEVER REVEALED THE NATURE; OF THE CONTRACT OR AGREEMENT WITH THE PRINCIPAL AND, THEREFORE, IN THE LIGHT OF THE ABOVE THE EXPENSES INCURRED WHICH HAVE BEEN DISALLOWED COULD NOT BE CONSIDERED TO HAVE BEEN INCURRED FOR THE PURPOSES OF BUSINESS. THE APPELLANT' S CONTENTION THAT TRAVEL EXPENSES ENTAIL TRAVELLING ALL OVER INDIA, WHENEVER THE MACHINERY SUPPLIED BY THE FOREIGN PRINCIPAL HAS TO BE INSTALLED. HOWEVER, THE DISALLOWANCE MADE BY THE A.O. IS WITH RESPECT TO THE FOREIGN TRAVEL EXPENSES CLAIMED OF RS.4,89,1 75/ - . SIMILARLY THE SPONSORSHIP FEES AND PROFESSIONAL FEES HAVE ALSO NOT BEEN EXPLAINED BY THE APPELLANT TO BE HAVING NEXUS WITH THE BUSINESS ACTIVITY CARRIED OUT. THE APPELLANT IS CARRYING ON THE BUSINESS ACTIVITY AS AN AGENT OF THE FOREIGN PRINCIPAL, HOW EVER, THE TERMS AND CONDITIONS AND ALSO EXISTENCE OF ANY AGREEMENT OR CONTRACTUAL OBLIGATION HAVE NOT BEEN REVEALED BY THE APPELLANT AT ANY STAGE OF THE PROCEEDINGS NOR PROVIDED ANY DOCUMENTARY EVIDENCE IN SUPPORT OF SAID EXPENSES CLAIMED. THE MERE EXISTEN CE OF AN ORAL AGREEMENT BETWEEN THE APPELLANT AND THE FOREIGN PRINCIPAL WHO PROVIDES COMMISSION DOES NOT BIND THE A.O. TO HOLD THE PAYMENT WAS MADE EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF BUSINESS. THE ONUS LAY ON THE APPELLANT TO PROVE THE EXPENSES FOR THE PURPOSE OF BUSINESS BY PRODUCING COGENT AND CONVINCING EVIDENCE AND THE SAME HAS NOT BEEN DISCHARGED AND, THEREFORE, THE CONTENTION OF THE APPELLANT WITH RESPECT TO ITS ALLOWABILITY IS MISPLACED AND NOT TENABLE. 19 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE 4.4 IN VIEW OF THE ABOVE FACTS, THE ADD ITION OF RS.19,72,383/ - IS UPHELD. THE GROUND OF APPEAL NO. 3 RAISED BY THE APPELLANT IS LIABLE TO BE DISMISSED. NOW, THE ASSESSEE IS IN APPEAL BEFORE US. 1 3 . WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. THE LD. COUNSEL ARGUES THAT THE ASSESSEE IS ENGAGED IN THE IMPORTING OF AND DEALER S IN INSTRUMENTS/MACHINES AND THIS FACT HAS NOT BEEN DISPUTED. HE SUBMITS THAT ALL THE EVIDENCES WERE FILED FROM TIME TO TIME AS DESIRED BY THE ASSESSING OFFICER. HE SUBMITS THAT IN PARA NO. 5.2.2 , THE ASSESSING OFF ICER HIMSELF HAS ADMITTED THAT THE PARTNER OF THE ASSESSEE FIRM ATTENDED BEFORE THE ASSESSING OFFICER AND FILED ALL THE DETAILS IN RESPECT OF THE PAYMENTS MADE TO DIFFERENT PARTIES. THE ASSESSEE ALSO G AVE THE BREAKUP OF THE ENTIRE EXPENDITURE . HE SUBMITS THAT THERE IS NO END TO DOUBT S RAISED BY THE ASSESSING OFFICER. THE ASSESSEE HAS EXPLAINED WHAT FOR THE EXPENDITURE IS INCURRED. HE SUBMITS THAT AFTER GIVING THE ENTIRE DETAILS BY THE ASSESSEE BOTH THE AUTHORITIES BELOW WERE NOT SATISFIED. HE PLEADED F OR DELETING THE ADDITION. PER CONTRA, THE LD. DR SUPPORTED THE ORDER OF THE LD. CIT(A) . 14. THE ASSESSING OFFICER MADE THE ADDITION IN RESPECT OF : I. PROFESSIONAL FEES RS.9,64,100/ - II. SPONSORSHIP EXPENSES RS.5,19,111/ - III. TRAVELLING EXPEN SES RS.4,89,171/ - THE ASSESSEE HAS FILED THE PAPER BOOK IN WHICH THE DETAILS OF THE EXPENDITURE ARE GIVEN. THE ASSESSING OFFICER WAS NOT SATISFIED IN RESPECT OF THE DETAILS AND EXPLANATION FURNISHED BY THE ASSESSEE AND THE ASSESSING OFFICER MADE AD HOC DISALLOWANCE STATING THAT THE SAID EXPENDITURE IS NOT FOR THE PURPOSE OF BUSINESS. 1 5 . WE FIND THAT THE ASSESSING OFFICER ISSUED THE SUMMONS TO THE ASSESSEE U/S. 131 WHICH WAS ALSO ATTENDED BY THE PARTNER OF THE 20 ITA NO. 1405/PN/2012, M/S. HARLEY INSTRUMENTS, PUNE ASSESSEE AND THE ASSESSEE FIRM FILED ALL THE REQUIRED DETAILS. IN OUR OPINION TO THE BEST OF THE ASSESSEE WHATEVER THE EVIDENCES AND DETAILS C OULD BE FILED BEFORE THE ASSESSING OFFICER THOSE EVIDENCES HAVE BEEN FILED. A S RIGHTLY ARGUED BY THE LD. COUNSEL , THERE IS NO END TO THE DOUBTS AND THE S ATISFACTION OF THE ASSESSING OFFICER FOR PROVING A PARTICULAR EXPENDITURE THAT IT HAS GOT NEXUS WITH THE BUSINESS OF THE ASSESSEE. WE ALSO FIND THAT THE ASSESSEE HAS CLAIMED IDENTICAL EXPENDITURE IN THE PAST ALSO WHICH WAS NEVER DEBATED . IN OUR OPINION T HERE IS NO JUSTIFICATION TO DISALLOW THE LEGITIMATE EXPENDITURE TO THE ASSESSEE MERELY ON THE BASIS OF DOUBTS WHEN ADMITTEDLY THE ASSESSEE HAS FILED ALL THE REQUIRED DETAILS IN SUPPORT OF THE SAID EXPENDITURE. WE, ACCORDINGLY, ALLOW THE GROUND NO. 4 AND D ELETE THE ADDITION. GROUND NO. 5 IS CONSEQUENTIAL. GROUND NO. 6 IS GENERAL IN NATURE. 1 6 . IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 25 - 0 8 - 20 1 4 SD/ - SD/ - ( G.S. PANNU ) ( R.S. PADVEKAR ) ACCOUNTANT M EMBER JUDICIAL MEMBER RK /PS PUNE , DATED : 25 TH AUGUST, 2014 COPY TO 1 ASSESSEE 2 DEPARTMENT 3 4 THE CIT(A) - I I, PUNE THE CIT - II, PUNE 5 THE DR, ITAT, B BENCH, PUNE. 6 GUARD FILE. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL PUNE