Microflo Filters Private Limited, Hyderabad, Hyderabad V. ITO, Ward-16(1), Hyderabad, Hyderabad

ITA 1738/HYD/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2474 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 28-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMAN MALIK
• Assessee Lawyers: A V RAGHURAM
• Keywords: Reopening of assessment; Business expenditure; Difference of opinion; Change of opinion; Capital expenditure
• Section: 143(3); 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1738/HYD/2016 ASSESSMENT YEAR: 2005-06 MICROFLO FILTERS PVT. LTD., HYDERABAD. PAN AABCM 9589M VS. INCOME TAX OFFICER, WARD 16(1), HYDERABAD. APPELLANT RESPONDENT ASSESSEE BY: SHRI A.V. RAGHURAM REVENUE BY: SMT. SUMAN MALIK DATE OF HEARING: 22/12/2017 DATE OF PRONOUNCEMENT: 28/02/2018 O R D E R PER S. RIFAUR RAHMAN, AM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE O RDER OF CIT(A) - 4, HYDERABAD, DATED 09/09/2016 FOR THE AY 2005-06. 2. BRIEFLY THE FACTS OF THE CASE ARE, THE ASSESSEE COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF AUTOMOBIL E AND INDUSTRIAL FILTERS FILED ITS RETURN OF INCOME FOR T HE AY 2005-06 ON 25/10/2005 ADMITTING TOTAL INCOME OF RS. 8,39,93 0/-. THE CASE WAS SELECTED FOR SCRUTINY AND ASSESSMENT U/S 1 43(3) OF THE ACT WAS COMPLETED ON 13/12/2007 BY DISALLOWING COMMISSION PAYMENTS U/S 40(A)(IA) RAISING A DEMAND OF RS. 1,33,980/-. 2.1 THEREAFTER, THE AO ON THE BASIS OF INFORMATION RECEIVED FROM DIT(INV.) THAT THE ASSESSEE HAD BOOKED BOGUS B USINESS EXPENDITURE BY CREATING FALSE BILLS IN THE NAME OF M/S KALYANI I.T.A. NO. 1738/HYD/2016 MICROFLO FILTERS PVT. LTD., HYD. 2 PACKAGING AND M/S SRI SAI ANJANEYA PRINTING PRESS, REOPENED THE ASSESSMENT U/S 148 OF THE ACT ON 30/03/2012. IN RESPONSE TO THE SAID NOTICE, THE ASSESSEE REQUESTED TO TREAT THE ORIGINAL RETURN FILED ON 25/10/2005 AS THE RETURN FILED IN C OMPLIANCE TO THE NOTICE U/S 148. THE AO COMPLETED THE ASSESSMENT U/S 143(3) RWS 147 BY DISALLOWING AN AMOUNT OF RS. 9,32 ,118/- BEING BOGUS EXPENDITURE TO THE INCOME ASSESSED IN T HE ORDER U/S 143(3) OF THE ACT. 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A) AND CONTENDED THAT THE AO HAD FURNISHED CRYPTIC REASONS FOR HIS ACTION IN RESORTI NG TO REOPENING THE ASSESSMENT PROCEEDINGS ON THE BASIS O F INFORMATION RECEIVED BY HIM FROM DIT(INV.) WHICH WE RE NOT IN ACCORDANCE WITH THE DECISION OF THE APEX COURT IN T HE CASE OF GKN DRIVE SHAFT (INDIA) LTD. VS. ITO, 259 ITR 19. I T WAS FURTHER CONTENDED THAT THE REOPENING OF ASSESSMENT PROCEEDINGS ARE RESORTED TO BY THE AO ON THE BASIS OF EXTRANEOUS INFORMATION OBTAINED FROM THIRD PARTY IN RESPECT OF MATTERS ALREADY CONCLUDED WITH PROPER APPLICATION O F MIND FOR THE AY 2005-06. 4. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) CONFIRMED THE ACTION OF THE AO AND DISMISSED THE APPEAL OF THE ASSESSEE. 5. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE I S IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF A PPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEAL S)- 4, HYDERABAD, DISMISSING THE APPEAL OF THE APPELLAN T IS PERVERSE, ILLEGAL AND UNSUSTAINABLE ON FACTS AND IN LAW. 2. THE COMMISSIONER (APPEALS) FAILED TO APPRECIATE THAT THE NOTICE DATED 30.03.2012, REOPENING THE ASSESSME NT, I.T.A. NO. 1738/HYD/2016 MICROFLO FILTERS PVT. LTD., HYD. 3 IS SERVED ON THE APPELLANT BEYOND THE PERIOD OF 6 Y EARS OF LIMITATION PRESCRIBED UNDER SECTION 149 OF THE A CT, AND ALL CONSEQUENTIAL PROCEEDINGS ARE NON EST IN LAW AN D ARE LIABLE TO BE QUASHED. 3. WITHOUT PREJUDICE TO ABOVE GROUND, THE COMMISSIO NER (APPEALS) ERRED IN SUSTAINING THE ORDER OF REASSESS MENT UNDER SECTION 148 OF THE ACT WHICH IS PASSED ON A M ERE CHANGE OF OPINION. 4. THE COMMISSIONER (APPEALS) FAILED TO APPRECIATE THAT THIS BEING A CASE WHERE SCRUTINY ASSESSMENT WAS MAD E EARLIER, AND THE REOPENING WAS BEYOND FOUR YEARS FR OM THE END OF THE RELEVANT ASST. YEAR, THE REOPENING W AS BAD IN LAW IN THE ABSENCE OF ALLEGATION IN THE NOTI CE OR AT ANY TIME THEREAFTER, OR IN THE ASST. ORDER THAT THE ALLEGED ESCAPEMENT OF INCOME IS ON ACCOUNT OF THE REASONS ATTRIBUTABLE TO THE APPELLANT. 5. THE COMMISSIONER (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE ALLEGED BOGUS EXPENDITURE IS N OT ON ACCOUNT OF THE CONDUCT OF THE APPELLANT BUT IS RATH ER ON ACCOUNT OF MISAPPROPRIATION BY ONE OF THE EX-EMPLOY EES AGAINST WHOM CRIMINAL ACTION HAS BEEN LAUNCHED BY T HE APPELLANT AND THE SAME WERE PENDING. THE COMMISSIONER (APPEALS) OUGHT TO HAVE APPRECIATED T HAT THE APPELLANT HAS SUFFERED LOSS IN THE FORM OF BOGU S BILLS SUBMITTED BY THE EX-EMPLOYEE AND THE QUESTION OF ESCAPEMENT OF I INCOME DOES NOT ARISE AS APPELLANT IS NOT THE BENEFICIARY OF THE TRANSACTION. 6. THE AUTHORITIES BELOW FAILED TO APPRECIATE THAT IF IT IS NOT A GENUINE EXPENDITURE THEN IT IS A BUSINESS LO SS TO THE APPELLANT IN THE FORM OF THEFT BY ONE OF THE E X- EMPLOYEES AS THE APPELLANT IS THE VICTIM OF SUCH MISAPPROPRIATION THROUGH BOGUS BILLS. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, SINCE THERE IS NO ALLEGATION AGAINST THE APPELLANT IN RESPECT OF ALLEGED MISAPPROPRIATION THROUGH THE BOG US BILLS, THERE IS NO QUESTION OF ESCAPEMENT OF INCOME AS THE APPELLANT HAS SUFFERED THE LOSS TO SUCH EXTENT. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE COMMISSIONER (APPEALS) OUGHT TO HAVE APPRECIATED TH AT ASSESSING OFFICER COULD NOT HAVE BROUGHT TO TAX TH E AMOUNT OF RS. 9,32,118/- IN THE HANDS OF APPELLANT AS THE SAME IS EVEN OTHERWISE ALLOWABLE AS BUSINESS L OSS SUFFERED ON ACCOUNT OF MISAPPROPRIATION OF MONEY BY EMPLOYEE I.T.A. NO. 1738/HYD/2016 MICROFLO FILTERS PVT. LTD., HYD. 4 FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT TH E TIME OF HEARING, IT IS PRAYED THAT THE HON'BLE TRIB UNAL MAY BE PLEASED TO ALLOW THE APPEAL. 6. LD. AR SUBMITTED THAT GROUND NO. 2 RAISED BY THE ASSESSEE ON SERVING OF NOTICE BEYOND 6 YEARS IS AGA INST THE ASSESSEE OWING TO THE SPECIAL BENCH DECISION OF HON BLE GUJARAT HIGH COURT IN THE CASE OF RAJESH SUNDERDAS VASWANI VS. DCIT, [2017] 392 ITR 571. 6.1 WITH REGARD TO GROUND NOS. 3 & 4, LD. AR SUBMIT TED THAT THE REOPENING OF ASSESSMENT WAS BEYOND 4 YEARS AND AO HAS NOT BROUGHT ON RECORD THE FAILURES ON THE PART OF T HE ASSESSEE. FURTHER, HE SUBMITTED THAT THE ASSESSMENT WAS COMPL ETED U/S 143(3) AND HE RELIED ON INFORMATION OF OUTSIDE AGEN CIES, WHICH AMOUNTS TO CHANGE OF OPINION. HE FURTHER BROUGHT TO OUR NOTICE THAT ASSESSEE HAS DISCLOSED THE FACT OF FRAUD IN TH E ANNUAL REPORT, WHICH WAS PLACED BEFORE THE AO. 6.2 ON MERIT, HE SUBMITTED THAT LD. CIT(A) HAS NOT APPRECIATED THE FORMER EMPLOYEE HAS INVOLVED WITH M ISCREANTS TO INDULGE IN FRAUD BY RECORDING BOGUS BILLS AND MISAPPROPRIATED THE FUNDS BY RECORDING BOGUS EXPENS ES. THE MANAGEMENT HAS TAKEN CRIMINAL ACTION AGAINST THOSE PERSONS. ALL THE FACTS RELATING TO THIS CASE WERE SUBMITTED BEFORE THE AUTHORITIES. HE SUBMITTED THAT THE TAX AUTHORITIES FAILED TO APPRECIATE THE FACT THAT THE EXPENSES CLAIMED MAY N OT BE GENUINE BUT MISAPPROPRIATION OF FUNDS BY THE EX-EMP LOYEE ARE BUSINESS LOSS. ULTIMATELY, THE ASSESSEE HAS LOST TH E FUNDS AND THE CASE IS PENDING BEFORE THE COURT. UNTIL ANY FUN DS ARE RECOVERED, THE LOSS INCURRED ARE CLAIMABLE AS BUSIN ESS LOSS. I.T.A. NO. 1738/HYD/2016 MICROFLO FILTERS PVT. LTD., HYD. 5 7. LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORITI ES AND SUBMITTED THAT EXPENSES DUE TO FRAUD ARE NOT ADMISS IBLE EXPENSES U/S 37. 8. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. BASED ON THE INFORMATION SUBMIT TED BEFORE US, WE FIND THAT THE AO CAME TO KNOW ABOUT THE BOGU S BUSINESS EXPENDITURE RECORDED AND CLAIMED BY THE AS SESSEE. AT THAT POINT OF TIME, AO HAD THE OPINION THAT THER E IS A CHANCE OF ESCAPEMENT OF INCOME AND BASED ON THE INFORMATIO N FROM INVESTIGATION DEPARTMENT, HE HAD TO INITIATE THE RE ASSESSMENT PROCEEDINGS, FOR WHICH HE HAS FOLLOWED THE DUE PROC ESS. COMING TO GROUNDS OF APPEAL RAISED BY ASSESSEE, GRO UND NO. 2 IS AGAINST THE ASSESSEE, CONSIDERING THE HONBLE GUJARAT HIGH COURTS DECISION THAT THE ISSUE OF NOTICE WIT HIN THE TIME LIMIT ALLOWED UNDER LAW IS PROPER. WITH REGARD TO G ROUND NOS. 3 & 4, AS DISCUSSED ABOVE, AO HAS ENOUGH REASON TO BE LIEVE THAT THERE IS ESCAPEMENT OF INCOME AND IT DOES NOT AMOUNT TO CHANGE OF OPINION. THEREFORE, GROUND NOS. 2, 3 & 4 ARE DISMISSED. 8.1 COMING TO THE MERITS, THE ASSESSEE HAS BROUGHT ON RECORD TO DEMONSTRATE THAT THE EX-EMPLOYEE HAS MISAPPROPRIATED FUNDS AND MISUSED HIS OFFICE TO DEF RAUD THE COMPANY. THIS INCIDENT WAS DISCLOSED BY THE ASSESSE E IN ITS ANNUAL REPORT AND ALSO INITIATED CRIMINAL PROCEEDIN GS. THIS SHOWS THAT THE ASSESSEE HAS INCURRED LOSS DUE TO FR AUD. THE EXPENSES CLAIMED IN THE FINANCIAL STATEMENT MAY NOT BE ALLOWABLE EXPENDITURE, WHICH IS NOT RELATED TO THE BUSINESS BUT THE LOSS INCURRED BY THE ASSESSEE IS CERTAINLY A BU SINESS LOSS AND IT IS NOT RELATING TO CAPITAL EXPENDITURE. THIS TYPE OF EXPENSES ARE BUSINESS LOSS OR NOT, THERE ARE CATENA OF DECISIONS, WHICH CONFIRM THAT THESE ARE BUSINESS LO SS. ON THIS I.T.A. NO. 1738/HYD/2016 MICROFLO FILTERS PVT. LTD., HYD. 6 SPECIFIC ISSUE, A GENERAL PROVISION IN SECTION 28(1 ) R.W.S. 29, SPEAKS FOR DETERMINATION OF PROFITS OF ANY BUSINESS CARRIED ON BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS I N SECTION 30 TO 43D. IN ARRIVING AT THE PROFITS IN THE COMMER CIAL SENSE, BUSINESS EXPENDITURE OF ALL TYPES WHETHER SPECIFICA LLY PROVIDED FOR OR NOT, MAY BE DEDUCTED U/S 28(1) ITSELF (ACIT VS. RUSTAM JEHANGIR VAKIL MILLS LTD. [1976] 103 ITR 298, 310 ( GUJ.) ). AN AMOUNT WOULD BE DEDUCTIBLE U/S 28(1) ONLY WHERE IT IS AN EXPENDITURE CONNECTED WITH OR ARISING OUT OF TRADE OR IS A COMMERCIAL LOSS. (CIT VS. MIHIR TEXTILES LTD. [1976 ] 104 ITR 167 (GUJ.) ). THEREFORE, THE LOSS DUE TO DEFRAUD BY THE EMPLOYEES HAS TO BE CLAIMED U/S 28(1) OF THE ACT. I N OUR VIEW, THIS LOSS IS CLAIMABLE UNDER THE I.T. ACT AND IF TH ERE IS ANY RECOVERY THROUGH THE COURT, IT CAN BE CHARGED TO TA X U/S 41(1) OF THE ACT. THEREFORE, THIS LOSS IS ALLOWABLE IN TH E AY UNDER CONSIDERATION. THEREFORE, GROUND NOS. 5 TO 8 ARE AL LOWED. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 28 TH FEBRUARY, 2018. SD/- (P. MADHAVI DEVI) JUDICIAL MEMBER SD/- (S. RIFAUR RAHMAN) ACCOUNTANT MEMBER HYDERABAD, DATED 28 TH FEBRUARY, 2018 KV I.T.A. NO. 1738/HYD/2016 MICROFLO FILTERS PVT. LTD., HYD. 7 COPY FORWARDED TO: 1. MICROFLO FILTERS PVT. LTD., C/O S/SHRI AV RAGHURAM , P. VINOD & M. NEELIMA DEVI, ADVOCATES, 610 BABUKHA N ESTATE, BASHEERBAGH, HYDERABAD 500 001. 2. ITO, WARD 16(1), IT TOWERS, AC GUARDS, HYDERABAD - 4 3. CIT(A) - 4, HYDERABAD 4 PR. CIT - 4, HYDERABAD 5 THE DR, ITAT, HYDERABAD 6 GUARD FILE