THE ITO 9(1)4, MUMBAI V. M/S. G-TECH SYSTEMS PVT. LTD, MUMBAI

ITA 1579/MUM/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4530 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 29-07-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 04-03-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Assessee Lawyers: ASHWIN S CHHAG
• Keywords: Business income; Bonafide belief; Question of law; Difference of opinion; Change of opinion
• Section: 143(3); 147; 148

Judgement Text

1 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES G BEFORE SHRI P.M. JAGTAP, A.M. AND SHRI VIJAY PAL RA O, JM ITA NO. 1579/MUM/08 ASSESSMENT YEAR 2003-04 INCOME TAX OFFICER -9(1)(4), ROOM NO. 224, 2 ND FLOOR, AAYAKAR BHAWAN, M.K.ROAD, MUMBAI -20. VS. M/S G. TECH SYSTEMS PVT. LTD., B-5, DWARKAMAT BLDG. NO. 2, PANNALAL GHOSH MARG, SOMWAR BAZAR, MALAD (E), MUMBAI 64. PAN AAACG 9382 J. APPELLANT RESPONDENT C.O. NO. 121/MUM/09 ARISING OUT OF ITA NO. 1579/M/08 ASSESSMENT YEAR 2003-04 M/S G. TECH SYSTEMS PVT. LTD., B-5, DWARKAMAT BLDG. NO. 2, PANNALAL GHOSH MARG, SOMWAR BAZAR, MALAD (E), MUMBAI 64. PAN AAACG 9382 J. VS. INCOME TAX OFFICER -9(1)(4), ROOM NO. 224, 2 ND FLOOR, AAYAKAR BHAWAN, M.K.ROAD, MUMBAI -20. CROSS OBJECTOR RESPONDENT ASSESSEE BY SHRI ASHWIN S. CHHAG DEPARTMENT BY SHRI A.K. NAYAK ORDER PER P.M. JAGTAP, A.M. THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST TH E ORDER OF LD. CIT(A) 9 MUMBAI DATED 6.12.07 AND THE SAME IS BEING DISPOSED OF ALO NG WITH THE C.O. FILED BY THE ASSESSEE BEING C.O. NO. 121/MUM/09. 2 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. 2. AT THE OUTSET, WE MAY NOTE THAT THERE IS A DELAY OF 320 DAYS IN FILING ITS C.O. BY THE ASSESSEE. IN THIS REGARD, THE ASSESSEE COMPANY HAS MOVED AN APPLICATION SEEKING CONDONATION OF THE SAID DELAY. AS STATED IN THE SAI D APPLICATION, THE PRELIMINARY ISSUE RELATING TO THE JURISDICTION OF THE A.O. TO VALIDLY INITIATE THE RE-ASSESSMENT PROCEEDINGS WAS NOT RAISED BY THE ASSESSEE IN THE APPEAL FILED BEFORE THE LD. CIT(A) UNDER THE BONAFIDE BELIEF THAT THE SAID INITIATION WAS AS PER LAW. SUBSEQUENTLY, AS A RESULT OF CONFIRMATION OF SOME OF THE ADDITIONS BY THE LD. CI T(A), THE A.O. IMPOSED PENALTY U/S 271(1)(C) AND ALSO TOOK SOME COERCIVE MEASURES FOR RECOVERY OF OUTSTANDING DUES. THE ASSESSEE COMPANY, THEREFORE, SOUGHT AN EXPERT OPINI ON ON THE MATTER FROM ONE SHRI ASHWIN S. CHHAG, A QUALIFIED CHARTERED ACCOUNTANT, WHO ADVISED IT TO RAISE THE ISSUE OF JURISDICTION BY FILING A C.O. AS THE REVENUE HAD AL READY FILED AN APPEAL AGAINST THE ORDER OF THE LD. CIT(A). ACCORDING TO THE ASSESSEE, THIS SEQUENCE OF EVENTS CULMINATED IN THE DELAY OF ABOUT 320 DAYS IN FILING THE C.O. AND THER E IS THUS SUFFICIENT CAUSE FOR THE SAID DELAY. IN SUPPORT OF THIS CONTENTION, RELIANCE HAS BEEN PLACED ON BEHALF OF THE ASSESSEE COMPANY ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MST. KATIJI REPORTED IN 167 ITR 471(SC) WHEREIN IT WAS HELD THAT WHEN SUBST ANTIAL JUSTICE AND TECHNICAL CONSIDERATIONS ARE PITTED AGAINST EACH OTHER, THE C AUSE OF SUBSTANTIAL JUSTICE DESERVES TO BE PREFERRED FOR THE OTHER SIDE CANNOT CLAIM TO HAVE V ESTED RIGHT IN INJUSTICE BEING DONE BECAUSE OF A NON-DELIBERATE DELAY. KEEPING IN VIEW THIS LEGISLATIVE SPIRIT OF THE PROPOSITION PROPOUNDED BY THE HONBLE SUPREME COURT AND HAVING REGARD TO ALL THE FACTS OF THE CASE, WE ARE OF THE VIEW THAT THERE WAS SUFF ICIENT CAUSE FOR THE DELAY ON THE PART OF THE ASSESSEE COMPANY IN FILING ITS CROSS OBJECTION. WE, THEREFORE, CONDONE THE SAID DELAY AND PROCEED TO DISPOSE OF THE C.O. FILED BY THE ASS ESSEE ON MERITS ALONG WITH THE APPEAL FILED BY THE REVENUE. 3. IN THE PRELIMINARY ISSUE RAISED IN THE C.O., TH E ASSESSEE COMPANY HAS CHALLENGED THE VALIDITY OF RE-ASSESSMENT PROCEEDINGS INITIATED BY THE A.O. 3 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. 4. AT THE TIME OF HEARING BEFORE US, THE LD. D.R. H AS RAISED A STRONG OBJECTION BY SUBMITTING THAT THIS ISSUE CHALLENGING THE VALIDITY OF THE RE-ASSESSMENT PROCEEDINGS HAVING NOT BEEN RAISED BY THE ASSESSEE EITHER BEFOR E THE A.O. OR BEFORE THE LD. CIT(A), THE SAME CANNOT BE RAISED AT THIS STAGE AND THAT TOO BY WAY OF C.O. HOWEVER, AS RIGHTLY CONTENDED BY THE LD. COUNSEL FOR THE ASSESSEE IN TH IS REGARD, THERE IS NO DIFFERENCE BETWEEN AN APPEAL AND C.O. AND WHAT CAN BE RAISED I N APPEAL CAN ALSO BE RAISED IN THE C.O. THE DECISION OF HONBLE GAUHATI HIGH COURT IN THE CASE OF CIT VS. PURBANCHAL PARIBHAN GOSTHI REPORTED IN 234 ITR 663 SUPPORTS TH IS CONTENTION. MOREOVER, AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF NATIONAL T HERMAL POWER COMPANY LTD. V. CIT 229 ITR 383 (SC), WHERE THE TRIBUNAL IS ONLY REQUIR ED TO CONSIDER A QUESTION OF LAW ARISING FROM THE FACTS WHICH ARE ON RECORD IN THE A SSESSMENT PROCEEDINGS, THERE IS NO REASON WHY SUCH A QUESTION SHOULD NOT BE ALLOWED TO BE RAISED. KEEPING IN VIEW THE SAID DECISION OF HONBLE SUPREME COURT IN THE CASE OF NA TIONAL THERMAL POWER COMPANY LTD. (SUPRA) AND TAKING INTO CONSIDERATION THAT THE PREL IMINARY ISSUE SOUGHT TO BE RAISED BY THE ASSESSEE COMPANY IN ITS C.O. INVOLVES PURELY A QUES TION OF LAW, THE ADJUDICATION OF WHICH DOES NOT REQUIRE INVESTIGATION INTO ANY NEW FACTS, WE OVERRULE THE OBJECTION RAISED BY THE LD. D.R. AND PROCEED FURTHER TO DECIDE THE SAID PRE LIMINARY ISSUE ON MERITS. 5. THE ASSESSEE HAS CHALLENGED THE VALIDITY OF RE-A SSESSMENT PROCEEDINGS ON THE GROUND THAT THE SAME WERE INITIATED BY THE A.O. TO CIRCUMVENT THE PROCEEDINGS U/S 143(2) WHICH IS NOT PERMISSIBLE. IT HAS ALSO BEEN CONTEND ED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THERE WAS NO FRESH MATERIAL BROUGHT ON RECORD BY THE A.O. TO SHOW THAT THE INCOME OF THE ASSESSEE HAD ESCAPED ASSESSMENT AND IN THE ABSE NCE OF SUCH MATERIAL, THE INITIATION OF RE-ASSESSMENT PROCEEDINGS WAS BAD IN LAW BEING BASE D ON A MERE CHANGE OF OPINION. IN SUPPORT OF THIS CONTENTION, RELIANCE HAS BEEN PLACE D BY THE LD. COUNSEL FOR THE ASSESSEE ON THE DECISIONS OF HONBLE DELHI HIGH COURT IN THE CA SE OF KLM ROYAL DUTCH AIRLINES VS. ADIT 159 TAXMAN 191 (DELHI) AND IN THE CASE OF CIT VS. KELVINATOR OF INDIA LTD. (FULL BENCH) 256 ITR 1 (DELHI)[F.B.] 4 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. 6. WE HAVE CAREFULLY GONE THROUGH THE JUDGMENTS OF THE HONBLE DELHI HIGH COURT RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE . IT IS OBSERVED THAT IN THE CASE OF KLM ROYAL DUTCH AIRLINES (SUPRA), THE NOTICE ISSUED BY THE A.O. U/S 148 INITIATING THE RE-ASSESSMENT PROCEEDINGS WAS CHALLENGED BY THE ASS ESSEE BY WAY OF WRIT PETITION AND THE QUESTION THAT WAS RAISED IN THE SAID WRIT PETITION WAS WHETHER ON THE COMMENCEMENT OF ASSESSMENT PROCEEDINGS MUST THEY FIRST BE BROUGHT T O THEIR LOGICAL CONCLUSION BY FRAMING AN ASSESSMENT BEFORE EMBARKING ON THE PROCEEDINGS A S ENVISAGED IN SECTION 147/148 OR CAN RESORT TO SECTION 147 BE MADE EVEN WHILST THE N ORMAL ASSESSMENT PROCEEDINGS ARE PENDING CONCLUSION. IN THE SAID CASE, THE REGULAR A SSESSMENT PROCEEDINGS FOR THE RELEVANT YEAR THUS WERE INITIATED BY THE A.O. BY ISSUING NOT ICE U/S 143(2) AND IT WAS HELD BY THE HONBLE DELHI HIGH COURT THAT THE SCRUTINY ASSESSME NT PROCEEDINGS HAVING BEEN INITIATED BY THE A.O., IT COULD NOT, BUT RESULT IN EITHER RET URN BEING ACCEPTED OR AN ASSESSMENT BEING CONDUCTED AND CONCLUDED THEREON BY THE A.O. IT WAS HELD THAT THE PROVISIONS OF SECTION 147 WOULD HAVE NO ROLE TO PLAY AT THIS STAGE OF THE PROCEEDINGS. AS HELD BY THE HONBLE DELHI HIGH COURT IN THE SAID CASE, IT WAS EVIDENT T HAT FACED WITH SEVERE PAUCITY OF TIME, THE A.O. HAD ATTEMPTED TO TRAVEL THE PATH OF SECTIO N 147 IN THE VAIN ATTEMPT TO ENLARGE THE TIME AVAILABLE FOR FRAMING THE ASSESSMENT WHICH WAS NOT PERMISSIBLE IN LAW. ACCORDINGLY, THE PENDING PROCEEDINGS U/S 147 WERE QUASHED BY THE HONBLE DELHI HIGH COURT HOLDING THAT THE INITIATION THEREOF WAS IRREGULAR AND ILLEG AL. THE FACTS INVOLVED IN THE PRESENT CASE, HOWEVER, ARE MATERIALLY DIFFERENT IN AS MUCH AS THE RE WAS NO INITIATION OF REGULAR ASSESSMENT PROCEEDINGS BY THE A.O. BY ISSUANCE OF N OTICE U/S 143(2). ON THE OTHER HAND, THE RETURN OF INCOME FILED BY THE ASSESSEE ON 1.12. 03 WAS PROCESSED BY THE A.O. U/S 143(1) ON 19.3.04 AND THE NOTICE U/S 148 WAS ISSUED ONLY ON 14.10.05 I.E. AFTER THE PERIOD AVAILABLE FOR ISSUE OF NOTICE U/S 143(2) WHICH HAD EXPIRED ON 31.12.04. THIS SITUATION, IN FACT, WAS CONTEMPLATED BY THE HONBLE DELHI HIGH CO URT IN THE CASE OF KLM ROYAL DUTCH AIRWAYS (SUPRA) AND IT WAS HELD IN THIS CONTE XT THAT WHERE A RETURN OF INCOME HAS BEEN FILED BUT HAS BEEN TAKEN AT ITS FACE VALUE WIT HOUT ANY PROCEEDINGS U/S 143(2) AND 143 HAVING BEEN CONDUCTED, NO ASSESSMENT EXERCISE W OULD OBVIOUSLY HAVE BEEN 5 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. UNDERTAKEN AND AFTER THE EXPIRY OF THE TIME PERIOD SET DOWN IN SECTION 153, THIS SITUATION CAN BE REMEDIED BY THE A.O. BY INVOKING THE PROVISI ONS OF SECTION 147. 7. IN THE CASE OF KELVINATOR INDIA LTD. (SUPRA) CI TED BY THE LD. COUNSEL FOR THE ASSESSEE, A QUESTION RAISED BEFORE THE HONBLE DELH I HIGH COURT WAS WHETHER EVEN FOR A MERE CHANGE OF OPINION BY THE ITO, ACTION U/S 147 C AN BE BROUGHT INTO OPERATION AND SINCE THE ASSESSMENT IN THE SAID CASE WAS ORIGINALL Y MADE BY THE A.O. U/S 143(3) AND THE SAME WAS REOPENED ON THE BASIS OF SAME MATERIAL AVA ILABLE ON RECORD AND IN THE SAME SET OF FACTS WITHOUT THERE BEING ANY NEW INFORMATION CO MING TO THE POSSESSION OF THE A.O., THE RE-OPENING OF ASSESSMENT WAS HELD TO BE BAD IN LAW AS THE SAME WAS BASED MERELY ON THE CHANGE OF OPINION BY THE ITO. IN THE PRESENT C ASE, THE RETURN FILED BY THE ASSESSEE WAS PROCESSED BY THE A.O. U/S 143(1) AND THERE BEI NG NO ASSESSMENT COMPLETED U/S 143(3), THE DECISION OF THE HONBLE DELHI HIGH COUR T IN THE CASE OF KELVINATOR OF INDIA LTD. (SUPRA) HOLDING THE INITIATION OF RE-ASSESSME NT OF PROCEEDINGS AS BAD IN LAW BEING BASED ON A MERE CHANGE OF OPINION HAS NO APPLICATIO N. ON THE OTHER HAND, THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ACIT VS. RAJES H JHAVERI STOCK BROKERS 291 ITR 500 (SC) IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE WHEREIN IT WAS HELD THAT INTIMATION U/S 143(1)(A) CANNOT BE TREATED TO BE AN ORDER OF ASSESSMENT AND THERE BEING NO ASSESSMENT U/S 143(1)(A), THE QUESTION OF RE-OPENIN G OF ASSESSMENT ON THE BASIS OF CHANGE OF OPINION DOES NOT ARISE. IT WAS HELD THAT IN SUC H CASE, IF THE A.O., FOR WHATEVER REASON HAS REASON TO BELIEF THAT INCOME HAS ESCAPED ASSESS MENT, IT CONFERS JURISDICTION TO RE-OPEN THE ASSESSMENT WHERE THE CASE IS NOT COVERED BY PRO VISO TO SECTION 147. IT WAS ALSO HELD THAT FAILURE TO TAKE STEPS U/S 143(3) WILL NOT REND ER THE A.O. POWERLESS TO INITIATE RE- ASSESSMENT PROCEEDINGS EVEN WHEN INTIMATION U/S 143 (1) HAD BEEN ISSUED. IN THE PRESENT CASE, THE RETURN FILED BY THE ASSESSEE WAS ORIGINAL LY PROCESSED BY THE A.O. U/S 143(1)(A) AND THE RE-ASSESSMENT PROCEEDINGS WERE INITIATED BY ISSUE OF NOTICE U/S 148 AFTER RECORDING THE REASONS ON THE BASIS OF WHICH BELIEF WAS ENTERTAINED BY THE A.O. ABOUT THE ESCAPEMENT OF ASSESSEES INCOME. HAVING REGARD TO ALL THESE FACTS OF THE CASE AND 6 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. KEEPING IN VIEW THE DECISION OF HONBLE SUPREME COU RT IN THE CASE OF RAJESH JHAVERI STOCK BROKERS (SUPRA), WE HOLD THAT THE INITIATION OF RE-ASSESSMENT PROCEEDINGS BY THE A.O. WAS IN ACCORDANCE WITH LAW AND THERE WAS NO IN FIRMITY MUCH LESS LEGAL INFIRMITY IN THE SAID INITIATION AS ALLEGED BY THE ASSESSEE. WE , THEREFORE, FIND NO MERIT IN THIS ISSUE RAISED BY THE ASSESSEE IN ITS C.O. AND DISMISS THE SAME. 8. IN GROUND NO. 1 OF ITS APPEAL, THE REVENUE HAS C HALLENGED THE ACTION OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE OF ` 32,000/- MADE BY THE A.O. U/S 40A(3). 9. ON SCRUTINY OF THE COPY OF ASSESSEES LEDGER ACC OUNT IN THE BOOKS OF M/S G. TECH SOLUTION, IT WAS NOTED BY THE A.O. THAT PAYMENT OF ` . 1,60,000/- WAS MADE BY THE ASSESSEE COMPANY IN CASH ON 24.1.03. SINCE THE SAID PAYMENT MADE IN CASH WAS IN CONTRAVENTION OF SECTION 40A(3), HE MADE A DISALLOWANCE OF ` 32,000/- BEING 20% OF THE CASH PAYMENT BY INVOKING THE SAID PROVISION. THE LD. CIT(A), HO WEVER, DELETED THE SAID DISALLOWANCE MADE BY THE A.O. OBSERVING THAT THE ASSESSEE HAD PA ID THE AMOUNT OF ` 1,60,000/- IN NINE INSTALLMENTS OF LESS THAN ` 20,000/- OVER A PERIOD FROM 28.1.03 TO 01.02.2003 AND THERE WAS THUS NO PAYMENT MADE BY THE ASSESSEE IN CASH IN CONTRAVENTION OF SECTION 40A(3). 10. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. ALTHOUGH THE ASSESSEE HAS FILE D A COPY OF LEDGER ACCOUNT OF M/S G. TECH SOLUTION SHOWING THAT THE RELEVANT PAYMENTS IN CASH WERE MADE ON DIFFERENT DATES NOT EXCEEDING ` 20,000/- AT A TIME, IT IS OBSERVED THAT A CATEGORI CAL FINDING HAS BEEN RECORDED BY THE A.O. IN THE ASSESSMENT ORDER THAT T HE PAYMENT OF ` 1,60,000/- WAS MADE IN CASH BY THE ASSESSEE ON 24.1.03. IN VIEW OF THI S FINDING RECORDED BY THE A.O., WE ARE OF THE VIEW THAT THE CLAIM OF THE ASSESSEE OF HAVIN G MADE THE CASH PAYMENT OF ` 1,60,000/- IN NINE INSTALLMENTS ON DIFFERENT DATES REQUIRES VERIFICATION BY THE A.O. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF A.O. FOR DECIDING THE SAME AF RESH AFTER VERIFYING THE CLAIM OF THE 7 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. ASSESSEE OF HAVING MADE THE PAYMENT IN CASH IN NINE DIFFERENT INSTALLMENTS NOT EXCEEDING ` 20,000/- AT A TIME. GROUND NO. 1 OF THE REVENUES APPEAL IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 11. IN GROUND NO. 2, THE REVENUE HAS CHALLENGED THE ACTION OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE OF ` 78,966/- BEING 20% OF THE EXPENSES CLAIMED TO BE I NCURRED BY THE ASSESSEE ON TRAVELING, CONVEYANCE AS WELL AS SALES PROMOTION, SUNDRY EXPENSES & VEHICLE EXPENSES. 12. THE EXPENSES CLAIMED BY THE ASSESSEE UNDER VARI OUS HEADS AGGREGATING TO ` 3,94,830/- COULD NOT BE SUBSTANTIATED BY THE ASSESS EE BY PRODUCING THE RELEVANT DOCUMENTARY EVIDENCE AS REQUIRED BY THE A.O. IN TH E ABSENCE OF THE RELEVANT DETAILS AND SUPPORTING DOCUMENTARY EVIDENCE PRODUCED BY THE ASS ESSEE, THE A.O. HELD THAT THE SAID EXPENSES WERE NOT FULLY VERIFIABLE AND THE DISALLOW ANCE OF 20% OF THAT EXPENSES AMOUNTING TO ` 78,966/- WAS MADE BY HIM. THE LD. CIT(A), HOWEVER , DELETED THE SAID DISALLOWANCE MADE BY THE A.O. ON THE GROUND THAT TH ERE WAS FAILURE ON THE PART OF THE A.O. TO BRING ANY EVIDENCE ON RECORD WHICH COULD PR OVE THAT THE RELEVANT EXPENSES HAD NOT BEEN INCURRED BY THE ASSESSEE FOR THE PURPOSE O F ITS BUSINESS. 13. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS RIGHTLY CONTENDED BY THE LD . D.R., THE ONUS TO SUPPORT AND SUBSTANTIATE ITS CLAIM FOR THE DEDUCTION OF EXPENSE S BY PRODUCING THE SUPPORTING DOCUMENTARY EVIDENCE WAS ON THE ASSESSEE AND SINCE THE ASSESSEE HAD FAILED TO DISCHARGE THE SAME, THE DISALLOWANCE MADE BY THE A.O. TO THE EXTENT OF 20 OF SUCH EXPENSES FOR INVOLVEMENT OF UNVERIFIABLE ELEMENT WAS FULLY JUSTI FIED BEING FAIR AND REASONABLE. THE LD. CIT(A), ON THE OTHER HAND, WAS NOT CORRECT IN DELET ING THE SAID DISALLOWANCE BY PUTTING THE ONUS ON THE A.O. WHICH ACTUALLY WAS ON THE ASSE SSEE. WE, THEREFORE, SET ASIDE THE 8 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND RESTORE THAT OF THE A.O. GROUND NO. 2 OF THE REVENUES APPEAL IS ACCORDINGLY ALLOWED. 14. A COMMON ISSUE RAISED IN GROUND NO. 3 OF THE RE VENUES APPEAL AS WELL AS ASSESSEES C.O. RELATES TO THE ADDITION OF ` 15,81,471/- MADE BY THE A.O. ON ACCOUNT OF SALE VALUE OF THE CLOSING STOCK WHICH STANDS SUSTAI NED BY THE LD. CIT(A) TO THE EXTENT OF ` 7,90,736/-. 15. ON PERUSAL OF THE P&L ACCOUNT FILED BY THE ASSE SSEE ALONG WITH ITS RETURN OF INCOME, IT WAS NOTED BY THE A.O. THAT COST OF SALES WAS SHOWN AT ` 19,06,622/-. ON FURTHER EXAMINATION, HE FOUND THAT PURCHASES CLAIME D TO BE MADE BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION WHICH WERE INCLUDED IN THE COST OF SALES WERE TO THE EXTENT OF ` 21,43,598/-. AS THE GROSS MARGIN GENERALLY EARNED IN THE LINE OF ASSESSEES BUSINESS WAS 10%, THE A.O. WORKED OUT THE COST OF GOODS SOLD AT ` 6,21,498/- BEING 90% OF SALES OF ` 6,90,554/-. THE DIFFERENCE IS THE PURCHASE OF ` 21,43,598/- AS SHOWN BY THE ASSESSEE AND THE COST OF GOODS SOLD AS WORKED OUT AT ` 6,21,498/-WAS TREATED BY THE A.O. AS CLOSING STOCK WHICH SHOULD HAVE BEEN AVAILABLE WITH THE ASS ESSEE AS ON 31.3.03. SINCE THE CLOSING STOCK WAS SHOWN BY THE ASSESSEE AT ` 98,776/-, THE DIFFERENCE OF ` 14,23,324/- BEING SHORTAGE IN STOCK WAS TREATED BY THE A.O. AS SOLD BY THE ASSESSEE OUTSIDE THE BOOKS OF ACCOUNT AND THE SALES VALUE THEREOF TAKING INTO CONSIDERATION A G.P. RATE OF 10% WORKED OUT AT ` 15,81,471/- WAS ADDED BY HIM TO THE TOTAL INCOME O F THE ASSESSEE. BEFORE THE LD. CIT(A), IT WAS SUBMITTED THAT THE ASSESSEE COMPANY IS IN THE BUSINESS OF COMPUTER HIRE AND ANNUAL MAINTENANCE CONTRACT OF COMPUTERS. IT WAS SUBMITTED THAT THESE CONTRACTS WERE COMPREHENSIVE IN NATURE AND COVERED THE SERVIC ING AND REPAIRS OF THE COMPUTERS INCLUDING SPARES AND VARIOUS PARTS. COPIES OF THE RELEVANT CONTRACTS WITH THE CLIENTS WERE ALSO FILED BY THE ASSESSEE BEFORE THE LD. CIT(A) TO SUPPORT AND SUBSTANTIATE ITS CONTENTION. IT WAS BROUGHT TO THE NOTICE OF THE LD. CIT(A) THAT MAJOR BUSINESS OF THE ASSESSEE COMPANY WAS OF ANNUAL MAINTENANCE CONTRACT AND COMP UTER HIRE WHEREAS TRADING ACTIVITY 9 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. CONSTITUTED A VERY SMALL PART OF THE BUSINESS. IT WAS CONTENDED THAT THE A.O., HOWEVER, FAILED TO APPRECIATE THAT ALL THE PURCHASES SHOWN I N THE BOOKS WERE NOT FOR RE-SALE AND THEY WERE ALSO USED AS SPARES WHILE PROVIDING SERVI CES TO THE CLIENTS. IT WAS CONTENDED THAT THE SPARES AND PARTS SO CONSUMED COULD NOT HAV E REMAINED IN THE CLOSING STOCK AT THE END OF THE YEAR AS ALLEGED BY THE A.O. AND THERE WA S NO JUSTIFICATION IN MAKING THE ADDITION BY ASSUMING THAT THE SAME WERE SOLD BY THE ASSESSEE OUTSIDE THE BOOKS OF ACCOUNT. KEEPING IN VIEW THESE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE COMPANY BEFORE HIM, THE LD. CIT(A) ACCEPTED THE STAND OF TH E ASSESSEE THAT THE ASSUMPTION OF THE A.O. ABOUT THE ASSESSEE HAVING SOLD THE SPARES AND PARTS OUTSIDE THE BOOKS OF ACCOUNT WAS FACTUALLY IN-CORRECT. HE ALSO FOUND MERIT IN THE A SSESSEES CONTENTION THAT SUCH ASSUMPTION WAS NOT WELL FOUNDED IN VIEW OF THE FACT THAT THE ACCOUNTS OF THE ASSESSEE WERE DULY AUDITED. HE, HOWEVER, HELD THAT THERE WA S FAILURE ON THE PART OF THE ASSESSEE TO SATISFACTORILY EXPLAIN THE CONSUMPTION OF COMPUTER SPARES AND PARTS AND THEREFORE THE ADDITION MADE BY THE A.O. ON THIS ISSUE WAS SUSTAIN ED BY HIM TO THE EXTENT OF 50%. 16. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE COST O F SALES SHOWN BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WAS ` 19,06,622/-AS AGAINST SALES OF ` 6,90,554/- AND SERVICE CHARGES OF ` . 37,71,714/- RECEIVED IN THAT YEAR. THE MAJOR AMO UNT OF BUSINESS INCOME THUS WAS GENERATED BY THE ASSESSEE FROM SERVICE CHARGES WHIC H WERE IN CONNECTION WITH THE CONTRACTS FOR ANNUAL MAINTENANCE OF COMPUTERS UNDER TAKEN BY THE ASSESSEE COMPANY FOR ITS CLIENTS. THE SAID CONTRACTS WERE OF COMPREHENS IVE NATURE AND THE ASSESSEE THUS WAS REQUIRED TO PURCHASE THE SPARES AND PARTS OF THE CO MPUTERS FOR PROVIDING REPLACEMENTS IN TERMS OF THE ANNUAL MAINTENANCE CONTRACT. THE PURC HASES SO MADE, HOWEVER, WERE INCLUDED BY THE ASSESSEE COMPANY IN THE COST OF SAL ES WHICH CREATED CONFUSION AND MISUNDERSTANDING IN THE MIND OF THE A.O. WHO FOUND COST OF SALES AT ` 19,06,622/- TO BE DISPROPORTIONATELY HIGHER AS COMPARED TO SALES OF ` 6,90,544/-. HE, HOWEVER, IGNORED THE SERVICE CHARGES OF ` 37,71,714/- RECEIVED BY THE ASSESSEE AND REFLECTED IN THE P&L 10 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. ACCOUNT FOR THE EARNING OF WHICH MAJOR PURCHASES OF COMPUTERS PARTS AND SPARES WERE MADE BY THE ASSESSEE AND THE SAME WERE INCLUDED IN THE COST OF SALES. WHEN THESE ASPECTS WERE BROUGHT TO THE NOTICE OF THE LD. CIT(A ) AND EVEN THE COPIES OF THE COMPREHENSIVE ANNUAL MAINTENANCE CONTRACTS WERE ALS O FILED BEFORE HIM, THE LD. CIT(A) ACCEPTED THAT THE ASSUMPTION OF THE A.O. ABOUT SALE OF COMPUTER SPARES AND PARTS OUTSIDE THE BOOKS OF ACCOUNT BY THE ASSESSEE WAS FACTUALLY IN-CORRECT. HE, HOWEVER, STILL SUSTAINED THE ADDITION MADE BY THE A.O. ON ACCOUNT OF SUCH ALLEGED SALE TO THE EXTENT OF 50% ON THE GROUND THAT THE ASSESSEE COULD NOT SATIS FACTORILY EXPLAIN THE CONSUMPTION OF COMPUTER PARTS. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS FILED PROFIT & LOSS ACCOUNT OF THE IMMEDIATELY PRECEDING YEAR I.E. 2002 -03 WHICH SHOWS THAT COST OF SALES WAS SHOWN BY THE ASSESSEE AT ` 10,96,964/- AS AGAINST SALES OF ` 7,20,943/- AND SERVICE CHARGES OF ` 22,71,641/-. IN THE YEAR UNDER CONSIDERATION, THE INCOME FROM SERVICE CHARGES THUS HAD GONE UP BY ` 15 LACS WHEREAS THE COST OF SALES WHICH INCLUDED PURCHASES OF COMPUTER SPARES AND PARTS HAD GONE UP BY ABOUT ` 8 LACS. IN OUR OPINION, IT THEREFORE, CANNOT BE SAID THAT THE PURCHASE OF COMP UTER PARTS AND SPARES SHOWN BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION WAS UNREAS ONABLE OR EXCESSIVE AS COMPARED TO THE IMMEDIATELY PRECEDING YEAR SO AS TO WARRANT ANY ADDITION ON THIS ISSUE. WE, THEREFORE, DELETE THE ADDITION MADE BY THE A.O. AND SUSTAINED BY THE LD. CIT(A) ON THIS ISSUE. GROUND NO. 3 OF REVENUES APPEAL IS ACCORDI NGLY DISMISSED WHEREAS GROUND NO. 3 OF ASSESSEES C.O. IS ALLOWED. 17. IN THE REMAINING GROUND RAISED BY THE ASSESSEE IN ITS C.O., THE ADDITION MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF DIFFERENCE IN PURCHASES AMOUNTING TO ` 1,38,200/- HAS BEEN DISPUTED. 18. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES O N THIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS SUBMITTED BY THE LD . COUNSEL FOR THE ASSESSEE FROM THE LEDGER ACCOUNT EXTRACT OF M/S G. TECH SYSTEMS P. LT D., THE DIFFERENCE IN PURCHASES WAS 11 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. MAINLY DUE TO PURCHASE OF LAPTOP BY THE ASSESSE FRO M THE SAID PARTY WHICH WAS DEBITED IN THE BOOKS OF THE ASSESSEE TO THE RELEVANT ASSET ACC OUNT WHEREAS THE SAME WAS SHOWN BY OTHER PARTY IN THE SALE ACCOUNT. AS RIGHTLY CONTEND ED BY THE LD. D.R.IN THIS REGARD, THIS EXPLANATION OFFERED BY THE ASSESSEE REQUIRES VERIFI CATION BY THE A.O. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE A.O. WITH A DIRECTION TO DECIDE THE SAME AFR ESH AFTER VERIFYING THE EXPLANATION OF THE ASSESSEE AS REGARDS DIFFERENCE IN PURCHASES. T HE RELEVANT GROUND OF THE ASSESSEES C.O. IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTI CAL PURPOSE. 19 IN THE RESULT, APPEAL OF THE REVENUE AS WELL AS C.O. OF THE ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED ON 30 TH SEPTEMBER, 2010. SD/- SD/- (VIJAY PAL RAO) (P.M. JAGTAP) JUDICIAL MEMBER ACCO UNTANT MEMBER MUMBAI, DATED 30 TH SEPTEMBER , 2010. RK COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) IX - MUMBAI 4. THE CIT- IX MUMBAI 5. THE DR BENCH, D 6. MASTER FILE // TUE COPY// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI 12 ITA 1579/M/08 & CO 121/M/09 M/S G.TECH SYSTEMS LTD. DATE INITIALS 1. DRAFT DICTATED 29.9.10 SR.P.S./P.S. 2. DRAFT PLACED BEFORE AUTHOR 29.9.10 SR.P.S./P.S. 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER. - J.M./A.M. 4.DRAFT DISCUSSED/ APPROVED BY SECOND MEMBER. J.M./A.M. 5. APPROVED DRAFT COMES TO THE SR.P.S./P.S. SR.P.S./P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S. 8. DATE OF WHICH FILE GOES TO THE HEAD CLERK. 9. DATE OF DISPATCH OF ORDER.