ACIT, Varanasi V. Sri Yogesh Pd.Baranwal, Bhadohi

ITA 174/ALLD/2011

• Counselvise Citation: 17420714 RSA 2011
• Duration Of Justice: 1 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-12-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 06-11-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 02-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANDEEP CHAUHAN
• Assessee Lawyers: A K THUKRAL
• Keywords: Business expenditure; Search and seizure; Loose papers; Principle of natural justice; Commercial expediency; Capital expenditure
• Section: 44AD; 153A; 37(1); 145; 37; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ALLAHABAD BENCH, ALLAHABAD BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A.L. GEHLOT, ACCOUNTANT MEMBER ITA NOS.170 & 171/ALLD/2011 ASSESSMENT YEARS: 2007-08 & 2008-09 RESPECTIVELY ASSTT. COMMISSIONER OF INCOME TAX, VS. SMT. RITIKA BARANWAL, CENTRAL CIRCLE, VARANASI. W/O. SHRI NITIN BARANW AL, MAIN ROAD, BHADOHI. (PAN : AGQPB 4171 M). ITA NO.174/ALLD/2011 ASSESSMENT YEAR: 2008-09 ASSTT. COMMISSIONER OF INCOME TAX, VS. SHRI YOGESH PRASAD BARANWAL, CENTRAL CIRCLE, VARANASI. MAIN ROAD, BHADOHI. (PAN : ACGPB 0109 H). (APPELLANT) (RESPONDENTS) APPELLANT BY : SHRI SANDEEP CHAUHAN, CIT D.R. RESPONDENTS BY : SHRI BHUPENDRA SHAH, C.A. & SHRI A.K. THUKRAL, C.A. DATE OF HEARING : 06.11.2012 DATE OF PRONOUNCEMENT : 10.12.2012 ORDER PER A.L. GEHLOT, ACCOUNTANT MEMBER: THESE ARE APPEALS FILED BY THE REVENUE AGAINST THRE E SEPARATE ORDERS, ALL DATED 21.06.2011, PASSED BY THE LD. CIT(A), VARANAS I FOR THE ASSESSMENT YEARS 2007-08, 2008-09 & 2008-09 RESPECTIVELY. ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 2 2. SINCE THE FACTS OF ALL THESE THREE CASES ARE IDE NTICAL, THEREFORE, FOR THE SAKE OF CONVENIENCE, ALL THESE APPEALS ARE DECIDED TOGETHER . THE FACTS LEAD IN ITA NO.170/ALLD/2011 FOR A.Y. 2007-08 IN THE CASE OF SM T. RITIKA BARANWAL. WE, THEREFORE, CONSIDER THE FACTS OF THESE CASES ACCORD INGLY. TO KNOW THE GROUNDS OF APPEAL, WE REPRODUCE THE GROUNDS RAISED IN ITA NO.1 70/ALLD/2011 IN THE CASE OF SMT. RITIKA BARANWAL AS UNDER :- 1. THE LD. CIT(A) WAS NOT JUSTIFIED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.21,71,503/- MADE ON ACCOUNT OF D ISALLOWANCE OF EXPENSES UNDER THE HEAD, SALARY, WAGES, TRAVELLING AND OTHER EXPENSES, WITHOUT APPRECIATING THE FACT THAT THE A. O. HAS REJECTED THE ASSESSEES BOOKS OF ACCOUNT U/S 145(3) OF THE ACT, IN ABSENCE OF THESE EXPENSES NOT BEING SUPPORTED BY PROPER BILLS AND VO UCHERS. 2. THE LD. CIT(A) WAS NOT JUSTIFIED IN LAW AND ON F ACTS IN DELETING THE ADDITION OF RS.21,71,503/-, WITHOUT APPRECIATIN G THE FACT THAT THE BOOKS OF ACCOUNT WERE NOT FOUND DURING THE COURSE O F SEARCH WHICH ESTABLISHES THAT THE ASSESSEE DID NOT MAINTAIN BOOK S OF ACCOUNT IN REGULAR COURSE OF ITS BUSINESS. 3. THE LD. CIT(A) WAS NOT JUSTIFIED IN LAW AND ON F ACT IN DELETING THE ADDITION OF RS.21,71,503/-, WITHOUT APPRECIATIN G THE FACT THAT IN ABSENCE OF BILLS & VOUCHERS IN RESPECT OF EXPENSES, THE A.O. WAS JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNT U/S 145 (3) OF THE ACT. 4. THE LD. CIT(A) WAS NOT JUSTIFIED IN LAW AND ON F ACT IN DELETING THE ADDITION OF RS.21,71,503, WITHOUT APPRECIATING THE FACT THAT IN ABSENCE OF PROPER BILLS/VOUCHERS IN RESPECT OF EXPE NSES AND HAVING REJECTED BOOKS OF ACCOUNT, THE A.O. WAS JUSTIFIED I N ESTIMATING THE EXPENSES. 5. THE LD. CIT(A) HAD NO JUSTIFICATION FOR SUBSTITU TING HIS OWN ESTIMATION IN PLACE OF A.O.S ESTIMATION. ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 3 6. THAT THE ORDER OF THE LD. CIT(A) DESERVES TO BE VACATED AND THE ASSESSMENT ORDER PASSED BY THE A.O. BE RESTORED. 7. THAT THE APPELLANT CRAVES LEAVE TO AMEND ANY ONE OR MORE OF THE GROUNDS OF THE APPEAL AS STATED ABOVE AS AND WH EN NEED FOR DOING SO MAY ARISE. 3. THE BRIEF FACTS OF THE CASE ARE THAT A SEARCH AN D SEIZURE OPERATION UNDER SECTION 132 OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) WAS CONDUCTED IN THE RESIDENTIAL AND BUSINESS PREMISES OF M/S. CARPE T INTERNATIONAL, M/S. CARPET INTERNATIONAL PVT. LTD., BHADOHI, ITS DIRECTORS, IT S PARTNERS, ITS SISTER CONCERNS AND OTHER GROUP CASES ON 11.02.2009. THE WARRANT OF AU THORIZATION FOR SEARCH OF RESIDENTIAL AND BUSINESS PREMISES WAS ISSUED BY THE DIRECTOR OF INCOME TAX (INV.), KANPUR ON 03.02.2009 WHEREAS CONSEQUENTIAL WARRANT OF AUTHORIZATION FOR SEARCH OF LOCKERS WAS ISSUED BY THE DIRECTOR OF INCOME TAX (INV.), KANPUR ON 20.02.2009 & 25.02.2009. DURING THE COURSE OF SEARCH, VARIOUS LOOSE PAPERS, DOCUMENTS, FDRS. AND COMPUTERS ETC. AS PER ANNEXURES TO THE VA RIOUS PANCHANAMAS DRAWN WERE FOUND AND SEIZED. 4. THE A.O. STATED THAT SMT. RADHIKA BARANWAL, W/O. SHRI NITIN BARANWAL IS BEING PERSON OTHER THAN PERSONS REFERRED TO IN SECT ION 153A, SATISFACTION AS PER PROVISIONS OF SECTION 153C(1) OF THE ACT WAS RECORD ED. THEREAFTER, NOTICE UNDER SECTION 153A(A) READ WITH SECTION 153C(1) OF THE AC T DATED 07.07.2009 REQUIRING THE ASSESSEE TO FURNISH THE RETURN OF INCOME WAS IS SUED AND DULY SERVED. IN ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 4 RESPONSE TO THE NOTICE THE ASSESSEE FILED RETURN OF INCOME ON 26.08.2009 DECLARING TOTAL INCOME AT RS.9,71,580/-. 5. THE A.O. FURTHER STATED THE ASSESSEE HAS SHOWN I NCOME FROM WORK OF WEAVING CARPET AND FOR THE ENTIRE YEAR THE ASSESSEE HAS WORKED ONLY FOR ONE FIRM NAMELY M/S. CARPET INTERNATIONAL WHICH IS AN ENTITY OF THE SAME GROUP. AFTER PERUSAL OF PROFIT AND LOSS ACCOUNT FILED BY THE ASS ESSEE FOR THE YEAR ENDED 31.03.2007 IT WAS NOTED THAT FOLLOWING EXPENSES ARE DEBITED TO IT :- (I) WAGES AND SALARY RS.86,38,810/- (II) STAFF WELFARE RS.66,100/- (III) TRAVELLING EXPENSES RS.6,75,365/- (IV) TELEPHONE EXPENSES RS.65,377/- (V) AUDIT FEES RS.8,989/- (VI) OTHER EXPENSES RS.18.81,026/- 6. THE A.O. STATED THAT ON 16.12.2010, BOOKS OF ACC OUNTS WERE PRODUCED AND TEST CHECKED. THE ASSESSEE HAS FAILED TO PRODUCE A NY VOUCHERS FOR EXPENSES CLAIMED. THE AR EXPRESSED INABILITY TO PRODUCE THE SAME, BECAUSE THE SAME ARE NOT BEING MAINTAINED. WHEN ASKED ABOUT THE MODE OF PAYMENT, THE AR STATED THAT AS CARPET INDUSTRY IN THE AREA DEALS WITH POOR LABO URERS, SO CASH IS MORE CONVENIENT FOR JOB WORKERS. THEREFORE, ALL TRANSACTIONS WERE MADE IN CASH AND WITHIN THE PRESCRIBED LIMITS. ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 5 7. THE A.O. FURTHER STATED THAT IT IS PERTINENT TO MENTION THAT NO COMPLETE SET OF BOOKS OF ACCOUNT WERE FOUND AND SEIZED DURING THE C OURSE OF SEARCH AND SEIZURE OPERATION CONDUCTED ON THE ASSESSEE ON 11.02.2009. ALTHOUGH BOOKS OF ACCOUNT WERE PRODUCED BY THE ASSESSEE BUT THE SAME WERE NOT SUPPORTED BY THE BASIC DOCUMENTS I.E. BILLS AND VOUCHERS ON THE BASIS OF W HICH THESE BOOKS WERE PREPARED. THEREFORE, IT APPEARS THAT ASSESSEE DOES NOT MAINTA IN REGULAR BOOKS OF ACCOUNT AND THE BOOKS WHICH WERE PRODUCED BEFORE THE A.O. WERE PREPARED SUBSEQUENT TO THE SEARCH AND SEIZURE OPERATION. 8. IN THE CIRCUMSTANCES AS DISCUSSED ABOVE, THE A.O . STATED THAT THERE REMAINS, NO DOUBT, THAT THE ALLEGED PAYMENTS TO WEAVERS HAVE BEEN INFLATED. THE ASSESSEE HAS USED THE TOOL OF INFLATING THE EXPENSES AND THE REBY SUPPRESSING THE BOOK PROFIT. AS FAR AS THE ARGUMENT THAT THE ASSESSEE IS COVERED BY SECTION 44AD OF THE ACT IS CONCERNED, IT IS STATED THAT SECTION 44AD APPLIES T O THE ASSESSEES WHO ARE ENGAGED IN THE BUSINESS OF CIVIL CONSTRUCTION OR SUPPLY OF LABOUR OR CIVIL CONSTRUCTION. 9. THE A.O. MADE ADDITION OF RS.22,39,040/- FOR A.Y . 2007-08 IN CASE OF SMT. RITIKA BARNWAL AS UNDER :- (PAGE NO.3) THEREFORE, THE BOOK RESULT IS HEREBY REJECTED BY I NVOKING PROVISIONS OF SECTION 145(3) OF THE I.T. ACT, 1961. IT IS WELL SETTLED (VIDE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF KOCHWALA GEMS VS. JOINT COMMISSIONER OF INCOME TAX, JAIPUR R EPORTED IN 158 ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 6 TAXMAN 71) THAT THERE IS NO MATHEMATICAL FORMULA TO ESTIMATE THE ACTUAL AMOUNTS OF EXPENSES WHILE DOING BEST JUDGMEN T ASSESSMENT. IN EVERY CASE OF BEST JUDGEMENT, AN ELEMENT OF GUESS W ORK CANNOT BE ELIMINATED AND IT IS THE ASSESSEE HIMSELF WHO IS TO BLAME WHO DID NOT SUBMIT PROPER ACCOUNTS. IT IS A FACT THAT THE EXPE NSES AS MENTIONED BELOW ARE NOT AT ALL VERIFIABLE, BUT LOOKING AT THE VOLUME AND NATURE OF THE BUSINESS THESE EXPENSES CANNOT BE TOTALLY RULED OUT. THEREFORE, ON THE BASIS OF THE OTHER COMPARABLE CASES OF THE SAME TRADE IN THE SAME LOCALITY, 20% OF THE FOLLOWING CHARGES ARE DISALLOW ED AND ACCORDINGLY ADDED TO THE TOTAL INCOME :- EXPENSES HEAD EXPENSES CLAIMED % OF DISALLOWANCE DISALLOWED AMOUNT WAGES AND SALARY RS.86,38,810/- 20% 17,27,762/- TRAVELLING EXPENSES RS.6,75,365/- 20% 1,35,073/- OTHER EXPENSES RS.18,81,026/- 20% 3,76,205/- TOTAL 22,39,040/- 10. THE DETAILS OF ADDITION OF OTHER TWO APPEALS AR E AS UNDER :- 11. ITA NO.171/ALLD/2011 FOR A.Y. 2008-09 IN THE CA SE OF SMT. RITIKA BARANWAL (A.O. PAGE NO.3) EXPENSES HEAD EXPENSES CLAIMED % OF DISALLOWANCE DISALLOWED AMOUNT WAGES AND SALARY RS.1,58,15,451/- 20% 31,63,090/- TRAVELLING EXPENSES RS.7,09,690/- 20% 1,41,938/- TELEPHONE EXPS. RS.1,30,470/- 20% 26,094/- OTHER EXPENSES RS.32,27,043/- 20% 6,45,409/- TOTAL 39,76,531/- 12. ITA NO.174/ALLD/2011 FOR A.Y. 2008-09 IN THE CA SE OF SRI YOGESH PRASAD BARANWAL (A.O. PAGE NO.3) ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 7 EXPENSES HEAD EXPENSES CLAIMED % OF DISALLOWANCE DISALLOWED AMOUNT WAGES AND SALARY RS.96,14,108/- 20% 19,22,822/- TRAVELLING EXPENSES RS.5,14,068/-- 20% 1,02,814/- TELEPHONE EXPS. RS.1,25,687/- 20% 25,137/- OTHER EXPENSES RS.29,83,274/- 20% 5,96,655/- TOTAL 26,47,428/- 13. THE CIT(A) DID NOT AGREE WITH THE A.O. IN RESPE CT OF REJECTION OF BOOKS OF ACCOUNT. THE CIT(A) HELD AS UNDER :- (PAGE NOS.5 & 6) (ITA NO.170/A/2011) ON PERUSAL OF ASSESSMENT ORDER, IT IS NOWHERE MENT IONED THAT BEFORE COMPLETION OF ASSESSMENT PROCEEDINGS, ANY DE FICIENCY NOTICED IN THE BOOKS OF ACCOUNT WERE PROVIDED TO THE ASSESS EE FOR COMMENTS OR CLARIFICATION, HOWEVER, AT APPELLATE STAGE, THE ASS ESSEE HAS COMPLETELY DENIED TO HAVE ANY SUCH COMMUNICATION FROM THE A.O. DURING THE COURSE OF ASSESSMENT PROCEEDINGS. IN THE CASE OF G ARGI DIN JWALA PRASAD VS. CIT (1974) 96 ITR 97 (ALLD), THE HONBLE ALLAHABAD HIGH COURT HAS HELD THAT THE PRINCIPLE OF NATURAL JUSTI CE ARE APPLICABLE TO THE ASSESSMENT PROCEEDINGS. THE ELEMENTARY PRINCIP LE OF NATURAL JUSTICE IS THAT THE ASSESSEE SHOULD HAVE KNOWLEDGE OF THE MATERIAL WHICH IS GOING TO BE USED AGAINST HIM SO THAT HE MA Y BE ABLE TO MEET IT. THE LEARNED COUNSEL OF THE ASSESSEE HAS ALSO ARGUED THAT THE ASSESSEES BOOKS OF ACCOUNT HAVE BEEN VERIFIED BY A .O. AND WITHOUT DETECTING ANY SPECIFIC DEFECT OR DISCREPANCY IN THE BOOKS OF ACCOUNT, THE INVOCATION OF SECTION 145(3) IS QUITE ARBITRARY . IN THE LIGHT OF ABOVE DISCUSSION AND DECISION I HOLD THAT THE A.O. HAS WRONGLY INVOKED THE PROVISIONS OF SECTION 145(3) OF THE I.T . ACT, 1961. THE AOS OBSERVATION THAT THE BOOKS OF ACCOUNTS WERE WR ITTEN SUBSEQUENT TO SEARCH AND SEIZURE OPERATION IS WITHOUT ANY CORR OBORATIVE EVIDENCE AS NOWHERE IN ASSESSMENT ORDER, HE ESTABLISHED THAT THE BOOKS WERE WRITTEN IN ONE STROKE BY SAME PERSON AND SAME INK. 14. THE CIT(A) DELETED THE ADDITION AS UNDER :- (PA GE NO.6 ) ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 8 AS REGARDS THE ISSUES INVOLVING DISALLOWANCE OF RS .22,39,040/- HAS BEEN MADE ON THE ABOVE HEADS, IT IS FOUND THAT THE ADDITIONS OF RS.22,39,040/- MADE BY THE A.O. ON THE ABOVE MENTIO NED HEADS ARE COMPLETELY ON AD-HOC BASIS I.E., AT FLAT RATE OF 20 % WITH CLOSED MIND TO MAKE ADDITIONS THAT TO IN A SEARCH AND SEIZURE CASE S. THE LEARNED COUNSEL OF THE ASSESSEE HAS ARGUED THAT IN WEAVING AND FINISHING OF CARPETS, THERE IS INVOLVEMENT OF LABOURS AND THE PA YMENTS ARE MADE TO THEM AS PER PAYMENT REGISTER WHICH CANNOT BE SAID T O BE AGAINST TRADE PRACTICE AND METHOD OF ACCOUNTING. THE NAMES AND A DDRESSES OF THE LABOURS ARE AVAILABLE ON THE PAYMENT REGISTER AND A N OPEN VERIFICATION FROM THE LABOURS CAN BE MADE AND WITHO UT ESTABLISHING ANY SPECIFIC ITEM OF THE EXPENSES BEING FALSE OR UN VERIFIABLE EITHER THROUGH DIRECT ENQUIRIES AT HIS OWN OR GIVING AN OP PORTUNITY TO THE ASSESSEE TO GET IT DIRECTLY VERIFIED FROM THE LABOU RS/STAFF ON TEST CHECK BASIS, THE ADDITION IS QUITE ARBITRARY. I FIND THA T THIS CASE CLEARLY GETS HIT BY THE DECISION IN THE CASE OF M/S CHANDRA CONF ECTIONARY P. LTD., REPORTED IN 2003 (2) MTC 1022, WHEREIN IT HAS BEEN HELD BY THE HONBLE ITAT BENCH LUCKNOW THAT SUCH AD-HOC DISALLO WANCES, WITHOUT ASSIGNING ANY REASONS AND WITHOUT POINTING OUT ANY DEFECT ARE UNJUSTIFIED. 15. THE CIT(A) RESTRICTED 10% DISALLOWANCE ON ACCOU NT OF PERSONAL ELEMENT. THE CIT(A) HELD AS UNDER :- (PAGE NO.7) (ITA NO.170 /A/2011) THE ASSESSEES COUNSEL HAD TAKEN A PLEA IN THE APP EAL PROCEEDINGS FOR ASSESSMENT YEAR 2009-10 THAT ASSESS EES G.P. OF 47.92% WAS MUCH HIGHER AND THERE WAS NO SCOPE TO AN Y FURTHER ADDITION TO THE BOOK PROFIT. DURING THE YEAR UNDER CONSIDERATION, THE SITUATION IS DIFFERENT AND IN VIEW OF THE FACT THAT TRAVELLING EXPENSES OR PERSONAL PURPOSES CANNOT BE RULED OUT, CANNOT BE RU LED OUT, I RESTRICT THE TOTAL DISALLOWANCE TO 10% OF TRAVELLING EXPENSE S OF RS.6,75,365/- I.E., RS.67,537/- IN VIEW OF ABOVE FACTUAL POSITION, THE DISALLOWANCE MENTIONED IS SUSTAINED TO RS.67,537/- UNDER THE HEADS OF TRAVELI NG EXPENSES. IN THIS WAY, THE ASSESSEE GETS RELIEF OF RS.21,71,503/ - (RS.22,39,040.00 RS.67,537.00) ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 9 16. HOWEVER, THE CIT(A) DID NOT AGREE REGARDING PRO HIBITION OF REGULAR ASSESSMENT UNDER SECTION 153A/153C OF THE ACT. THE CIT(A) HELD AS UNDER : (PAGE NO.7) IN ADDITION TO THE GROUNDS OF APPEAL, THE ASSESSEE S COUNSEL HAS TAKEN A PLEA THAT THE SCOPE OF SECTION 153A OR 153C IS NARROW AND LIMITED TO THE SEIZED MATERIALS ONLY AND OTHER ADDI TION IS NOT ALLOWABLE UNDER THE NEW ASSESSMENT SCHEME OF THESE SECTIONS. I DO NOT AGREE WITH THE LEARNED COUNSEL AS THERE IS NO P ROHIBITION OF REGULAR ASSESSMENT OR RE-ASSESSMENT U/S 153A/153C L IKE SECTION 158BC/158B OF THE I.T. ACT, 1961. 17. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE P ARTIES AND RECORDS PERUSED. THE LD. REPRESENTATIVES OF PARTIES SUBMITTED THAT T HE FACTS OF THESE APPEALS ARE SIMILAR TO THE FACTS IN ITA NOS.187, 188 & 189/A/20 11 IN THE CASE OF M/S. CARPET PALACE DYEING DIVISION BHADOHI, HEARD ON 06.11.2012 ORDER EVEN DATED. WE FIND THAT THE FACTS OF THE CASES UNDER CONSIDERATION AND THE FACTS OF THOSE APPEALS CITED ARE SIMILAR. WE, THEREFORE, FOLLOW THE SAID ORDER OF EVEN DATE. THE RELEVANT FINDING FROM THE ORDER OF THE SAID ITA NOS.187, 188 & 189/A /2011 IN THE CASE OF M/S. CARPET PALACE DYEING DIVISION BHADOHI IS REPRODUCED AS UNDER :- 10. WE HAVE HEARD THE LD. REPRESENTATIVES OF PARTI ES AND RECORDS PERUSED. THE EFFECTIVE GROUNDS RAISED BY THE REVENUE IN ITS APPEALS ARE IN RESPECT OF DELETION OF ADDITIONS OF RS.11,23,867/- IN A.Y. 20 06-07, RS.23,12,152/- IN A.Y. 2007-08 & RS.12,95,998/-IN A.Y. 2009-10. OTHE R GROUNDS OF APPEALS ARE GENERAL IN NATURE OR GROUNDS OF APPEALS IN SUPP ORT OF MAIN GROUNDS OF APPEALS. IN GROUND NO.3 THE REVENUE OBJECTED THAT THE CIT(A) HAS WRONGLY GIVEN HIS FINDING THAT THE A.O. HAS INVOKED SECTION 145(3) OF THE ACT WITHOUT POINTING OUT ANY SPECIFIC DETAILS IN THE BOOKS OF A CCOUNT MAINTAINED BY THE ASSESSEE. THE CIT(A) FURTHER HELD THAT THERE IS NO CASE TO REJECT THE BOOKS OF ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 10 ACCOUNT IF THE INCOME IS NOT TO BE ESTIMATED BUT CE RTAIN UNVERIFIABLE EXPENSES ARE TO BE DISALLOWED. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) BECAUSE FINALLY ACTION OF THE A.O. WAS DISALLOWANCE OF EXPENSES AND NOT A CASE OF ESTIMATION OF PROFIT, THEREFORE BOOKS OF AC COUNT WERE ACCEPTED AND ADDITIONS WERE MADE BY DISALLOWANCE OF EXPENSES. I N PRINCIPLE, THE ORDER OF CIT(A) IS IN ACCORDANCE WITH FINDING OF A.O. ONLY. INTERFERENCE MADE BY THE CIT(A) IS IN RESPECT OF ONLY ESTIMATION OF AMOUNT O F DISALLOWANCES. WE, THEREFORE, DO NOT FIND ANY SUBSTANCE IN THESE GROUN DS OF APPEALS OF REVENUE. THUS, THE GROUNDS RAISED BY THE REVENUE FOR ALL THE THREE ASSESSMENT YEARS ARE REJECTED. 11. ONE OF THE REASONS GIVEN BY THE A.O. WAS THAT B OOKS OF ACCOUNT WERE NOT FOUND AT THE TIME OF SEARCH. BUT THE A.O. FAIL ED TO POINT OUT THAT HOW REVENUE HAS ADVERSELY EFFECTED BY THAT FACT PARTICU LARLY WHEN NO INCRIMINATING MATERIAL OR DOCUMENTS WERE FOUND AT T HE TIME OF SEARCH. SUBSEQUENT TO SEARCH, IF BOOKS OF ACCOUNT ARE PREPA RED ON THE BASIS OF ACCEPTED ACCOUNTING PRINCIPLES, ON THE BASIS OF MAT ERIAL AND ON THE BASIS OF DOCUMENTS AND NO DEFECTS ARE FOUND, SUCH BOOKS OF A CCOUNT IS ACCEPTABLE. THEREFORE, WE DO NOT FIND SUBSTANCE IN A.OS ORDER IN THIS REGARD. 12. AS REGARDS PRODUCING BOOKS OF ACCOUNT AND OTHER MATERIAL BEFORE THE A.O., THE A.O. HIMSELF REPRODUCED THE ORDER SHEET E NTRY DATED 10.12.2012 IN HIS ORDER AT PAGE NO.2 WHICH READS AS UNDER :- 10/12/2010 SHRI THUKRAL APPEARED AND FILLED HIS R EPLY WHICH IS KEPT ON RECORD. BOOKS OF ACCOUNTS WERE PRODUCED. HE WAS ASKED TO PRODUCE BILLS AND VOUCHERS FOR THE EXPENSES CLAIMED IN THE TRADING AND P&L ACCOUNT, PARTICULARLY, MANUFACTURING AND TRADING EXPENSES. THE AR FAILED TO PRODUCE THE SAME. IT WOULD BE PERTINENT TO MENTION THAT THIS HEAD INCLUDES FOLLOWING CHARGES: (I) WAGES (II) MISC. PRODUCTION EXPENSES (III) FUEL AND HUSK HOWEVER, THE CASH MEMOS/BILLS FOR DYES AND CHEMICALS, DIESEL & PETROL EXPENSES WERE PRODUCED A ND VERIFIED. OTHER EXPENSES OF P&L ACCOUNT WERE ALSO T EST CHECKED. ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 11 IN VIEW OF THIS THE AR IS ASKED TO SHOW CAUSE WHY THE BOOKS MAY NOT BE REJECTED IN VIEW OF SEC. 145(3 ) AND PROFIT MAY BE ESTIMATED. DATE OF COMPLIANCE IS 14/12/20. 13. ON PERUSAL OF ABOVE ENTRY OF ASSESSMENT PROCEED ING OF THE A.O. WE NOTICED THAT BOOKS OF ACCOUNT WERE PRODUCED BEFORE THE A.O. THE A.O. WANT TO ESTIMATE PROFIT AFTER REJECTING BOOKS OF ACCOUNT BUT ULTIMATELY AND FINALLY HE DISALLOWED 20% EXPENSES. THEREFORE, FINDING OF A.O. THAT BOOKS OF ACCOUNT NOT PRODUCED IS AN INCORRECT FINDING. 14. NOW WE ARE COMING TO MAIN EFFECTIVE GROUND WHIC H IS IN RESPECT OF 20% DISALLOWANCES OF EXPENDITURES OUT OF VARIOUS EX PENDITURES CLAIMED BY THE ASSESSEE. BUSINESS EXPENDITURES INCURRED FOR TH E PURPOSE OF BUSINESS ARE ALLOWABLE UNDER SECTION 37 OF THE ACT. THE SAID SE CTION 37 READS AS UNDER:- GENERAL 37. (1) ANY EXPENDITURE1 (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 [***] AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE15 OR PERSONAL EXPENSES OF TH E ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY15 FOR T HE PURPOSES OF THE BUSINESS15 OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND G AINS OF BUSINESS OR PROFESSION. [EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESS EE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANC E SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE.] (2) 17[* * *] (2B) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECTION ( 1), NO ALLOWANCE SHALL BE MADE IN RESPECT OF EXPENDITURE I NCURRED BY AN ASSESSEE ON ADVERTISEMENT IN ANY SOUVENIR, BROCH URE, TRACT, PAMPHLET OR THE LIKE PUBLISHED BY A POLITICAL PARTY .] ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 12 15. TO APPRECIATE THE SCHEME OF THE ACT IN RESP ECT OF ALLOWABILITY OF EXPENDITURES WE WOULD LIKE TO REFER TO CERTAIN JUDG MENTS WHEREIN CERTAIN PRINCIPLES HAVE BEEN DECIDED IN THIS REGARD. THESE JUDGMENTS ARE AS UNDER :- 15.1 CIT VS. TRANSPORT CORPORATION OF INDIA LIMITED , 256 ITR 701 (AP) -- (PAGE 705, 706 AND 707 ) 37. GENERAL.--(1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN S ECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITU RE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXP ENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION. EXPLANATION.--FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR AN Y PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW S HALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUS INESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE M ADE IN RESPECT OF SUCH EXPENDITURE.' IN ORDER TO CLAIM DEDUCTION OF EXPENDITURE UNDER SE CTION 37(1) OF THE ACT, AT THE RELEVANT POINT OF TIME AND IN TH E LIGHT OF THE JUDGMENTS IN INDIAN MOLASSES CO. P. LTD. V. CIT [19 59] 37 ITR 66 (SC); CIT V. INDIAN MOLASSES CO. (P) LTD. [1970] 78 ITR 474 (SC); SASSOON J. DAVID AND CO. P. LTD. V. CIT [ 1979] 118 ITR 261 (SC); MADHAV PRASAD JATIA V. CIT [1979] 118 ITR 200 (SC); CIT V. BALLARPUR INDUSTRIES LTD. [1976] 119 I TR 817 (BOM); CIT V. NAVSARI COTTON AND SILK MILLS LTD. [1 982] 135 ITR 546 (GUJ) AND CHENAB FOREST CO. V. CIT [1974] 9 6 ITR 568 (J&K), THE FOLLOWING CONDITIONS SHOULD BE SATIS FIED; (I)THE EXPENDITURE IN QUESTION SHOULD NOT BE OF THE NATURE DESCRIBED UNDER THE SPECIFIC PROVISIONS OF SECTIONS 30 TO 36 AND 80VV (SECTION 80VV WAS OMITTED WITH EFFECT FROM APRIL 1, 1986);(II)THE EXPENDITURE SHOULD NOT BE OF THE NATU RE OF CAPITAL EXPENDITURE ;(III)IT SHOULD NOT BE A PERSONAL EXPEN DITURE; AND (IV)THE EXPENDITURE SHOULD HAVE BEEN LAID OUT OR EX PENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSI NESS OR PROFESSION.IT IS THUS CLEAR THAT CONDITIONS AT (I), (II) AND (III) ABOVE ARE NEGATIVE CONDITIONS WHEREAS THE CONDITION AT (IV) ABOVE IS A POSITIVE CONDITION. IF THE EXPENDITURE S ATISFIES THE ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 13 NEGATIVE CONDITIONS, IT HAS TO SATISFY THE POSITIVE CONDITION IN ORDER TO BE ELIGIBLE FOR DEDUCTION UNDER SECTION 37 (1) OF THE ACT. THUS, SECTION 37(1) ALLOWS DEDUCTION OF ANY 'E XPENDITURE' SUBJECT TO CONDITIONS NOTICED ABOVE. IN INDIAN MOLA SSES CO.'S CASE [1959] 37 ITR 66, THE SUPREME COURT POINTED OU T THAT THE WORD 'EXPENDITURE' IS EQUAL TO 'EXPENSE' AND 'EXPEN SE' IS MONEY LAID OUT BY CALCULATION AND INTENTION. BUT TH E IDEA OF 'SPENDING' IN THE SENSE OF 'PAYING OUT OR AWAY' MON EY IS THE PRIMARY MEANING AND IT IS WITH THIS MEANING THAT ON E IS CONCERNED. 'EXPENDITURE' IS THUS WHAT IS 'PAID OUT OR AWAY' AND IS SOMETHING WHICH IS GONE IRRETRIEVABLY. THE A PEX COURT IN CIT V. NAINITAL BANK LTD. [1966] 62 ITR 638 HELD TH AT IN ITS NORMAL MEANING, THE EXPRESSION 'EXPENDITURE' DENOTE S 'SPENDING' OR 'PAYING OUT OR AWAY', I.E., SOMETHING THAT GOES OUT OF THE COFFERS OF THE ASSESSEE. A MERE LIABILIT Y TO SATISFY AN OBLIGATION BY AN ASSESSEE IS UNDOUBTEDLY NOT 'EXPEN DITURE'; IT IS ONLY WHEN HE SATISFIES THE OBLIGATION BY DELIVERY O F CASH OR PROPERTY OR BY THE SETTLEMENT OF ACCOUNTS, THAT THE RE IS EXPENDITURE. THE BURDEN OF PROVING THAT A PARTICULAR EXPENDITURE HAS BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS SO THAT THE ASSESSEE MAY BE ENTITLED TO CL AIM DEDUCTION IS ON THE ASSESSEE. THIS POSITION IS WELL SETTLED B Y THE JUDGMENTS OF THE APEX COURT IN CIT V. CALCUTTA AGENCY LTD. [1 951] 19 ITR 191 AND CIT V. IMPERIAL CHEMICAL INDUSTRIES (INDIA) (P.) LTD. [1969] 74 ITR 17. THE MERE OBJECT OF INCURRING EXPE NDITURE IS NOT DECISIVE WHETHER IT IS OF A CAPITAL NATURE OR R EVENUE NATURE. THEREFORE, THE ONUS IS ON THE ASSESSEE TO PROVE, IN TER ALIA, THAT THE ITEM OF EXPENDITURE IN QUESTION FOR ADMISSIBILI TY TO DEDUCTION IS NOT IN THE NATURE OF CAPITAL EXPENDITU RE. FURTHER, MERE PAYMENT BY ITSELF WOULD NOT ENTITLE THE ASSESS EE TO DEDUCTION OF THE SAID EXPENDITURE UNLESS THE SAME W AS PROVED TO BE PAID FOR COMMERCIAL CONSIDERATIONS. THE ONUS OF PROOF IS ALWAYS UPON THE ASSESSEE. IT CANNOT BE SAID THAT EV EN IF THE TAXPAYER DOES NOT PRODUCE ANY EVIDENCE IN SUPPORT O F THE CLAIM FOR DEDUCTION, THE ASSESSING OFFICER HIMSELF INDEPE NDENTLY IS TO COLLECT EVIDENCE AND DECIDE THAT THE DEDUCTION CLAI MED IS BASELESS HAVING REGARD TO THE LEGITIMATE BUSINESS N EEDS OF THE ASSESSEE, AS THE TRIBUNAL SEEMS TO THINK IN THE PRE SENT CASE. IT IS FOR THE TAXPAYER TO ESTABLISH BY EVIDENCE THAT A PA RTICULAR ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 14 ALLOWANCE IS JUSTIFIED. BUT, AS HELD BY THE SUPREME COURT IN CIT V. C. PARAKH AND CO. (INDIA) LTD. [1956] 29 ITR 661 WHETHER AN ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION O R NOT WILL DEPEND ON THE PROVISION OF LAW RELATING THERETO, AN D NOT ON THE VIEW WHICH HE MIGHT TAKE OF HIS RIGHTS. AT THE SAME TIME, THE ONUS IS ON THE ASSESSEE TO ESTABLISH THAT THERE ARE FACTS IN EXISTENCE WHICH ENTITLE IT TO A DEDUCTION AND IT IS FOR THE ASSESSEE TO ADDUCE NECESSARY EVIDENCE IN THIS REGAR D. THEREFORE, IF THE ASSESSEE FAILS TO PLACE SUFFICIEN T MATERIAL, HE IS NOT ENTITLED TO CLAIM THIS ALLOWANCE UNDER SECTION 37(1) OF THE ACT. IN CIT V. CHANDRAVILAS HOTEL [1987] 164 ITR 10 2 (GUJ), IT IS HELD THAT IF THE EXPENDITURE IS DOUBTED BY THE A SSESSING AUTHORITY, IT IS THE DUTY OF THE ASSESSEE TO PROVE BY LEADING EVIDENCE THAT THE EXPENDITURE WAS IN FACT, INCURRED . 16. NEWTONE STUDIOS LTD. VS. COMMISSIONER OF INCO ME-TAX [1955] 28 ITR 378 (MAD). THE FACTS OF THE CASE ARE THAT THE ASSE SSEE WAS A PRIVATE LIMITED COMPANY OWNING A STUDIO AND ENGAGED IN THE PRODUCTI ON OF MOTION PICTURES. THERE WERE SIX SHAREHOLDERS. THE MANAGING DIRECTOR AND THE THREE TECHNICIANS WERE REMUNERATED BY PAYMENTS OF WHAT WE RE CALLED HONORARIA, WHICH REALLY MEANT SALARIES AND ALSO BY PAYMENTS OF COMMISSION ON A FIXED PERCENTAGE BASIS. IN ADDITION EACH OF THEM GOT A C AR ALLOWANCE, AND WHEN THE PROFITS JUSTIFIED IT PAYMENT OF A MONTH'S SALAR Y AS BONUS. IN 1944 AND 1945 WHAT WAS PAID AS HONORARIA, THAT WAS, SALARY, TO THOSE FOUR AMOUNTED TO RS. 18,000 A YEAR. THEIR SCALE OF SALARIES WAS REVISED FOR 1946 BY A RESOLUTION PASSED BY THE SHAREHOLDERS ON 30-03-1946 , AND THE TOTAL CAME TO RS. 59,100 FOR 1946. THE GENUINENESS OF THE PAYMEN T OF THAT AMOUNT OF RS. 59,100 WAS NEVER IN DISPUTE. THE ASSESSEE CLAIMED THAT PAYMENT AS A DEDUCTION UNDER SECTION 10(2)(XV) OF THE 1922 ACT. THE I.T.O. LIMITED THE ADMISSIBLE DEDUCTION TO AN AMOUNT NOT EXCEEDING TWI CE THE AMOUNT ALLOWED IN EACH OF THE PRECEDING YEARS AND DISALLOWED THE B ALANCE. THE DISALLOWANCE WAS UPHELD BY THE AAC AS WELL AS THE T RIBUNAL. THE MADRAS HIGH COURT WHILE DECIDING THE MATTER 'WHETHER ON TH E FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DISALLOWANCE OF A SUM OF RS.23,100/- OUT OF THE EXPENSES INCURRED BY THE ASSESSEE FOR PAYMENT OF RE MUNERATION TO THE MANAGING DIRECTOR AND THE OTHER TECHNICIAN DIRECTOR S IS PERMISSIBLE UNDER THE PROVISIONS OF SECTION 10(2)(XV) OF THE INCOME-T AX ACT. THE COURT REFERRED CERTAIN EARLIER JUDGMENTS WHICH ARE AS UND ER :- ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 15 IN EASTERN INVESTMENTS LTD. V. COMMISSIONER OF INC OME-TAX, WEST BENGAL [1951] 20 ITR 1 , THE SUPREME COURT REF ERRED TO SECTION 12(2) OF THE ACT, WHICH PROVIDES FOR THE DE DUCTION OF AN EXPENDITURE INCURRED 'SOLELY FOR THE PURPOSE OF MAK ING OR EARNING SUCH INCOME, PROFITS OR GAINS' AND SUMMARIS ED THE PRINCIPLES TO BE KEPT IN VIEW : (1)THOUGH THE QUESTION MUST BE DECIDED ON THE FACTS OF EACH CASE, THE FINAL CONCLUSION IS ONE OF LAW. (2)IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PROFITABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNE D. (3)IT IS ENOUGH TO SHOW THAT THE MONEY WAS EXPENDED 'NOT OF NECESSITY AND WITH A VIEW TO DIRECT AND IMMEDIATE B ENEFIT TO THE TRADE, BUT VOLUNTARILY AND ON THE GROUND OF COMMERC IAL EXPEDIENCY, AND IN ORDER INDIRECTLY TO FACILITATE T HE CARRYING ON OF THE BUSINESS.' (4)BEYOND THAT, NO HARD AND FAST RULE CAN BE LAID D OWN TO EXPLAIN WHAT IS MEANT BY THE WORD 'SOLELY.' IN RAYALOO IYER AND SONS V. COMMISSIONER OF INCOME- TAX, MADRAS [1954] 26 ITR 265, A BENCH OF THIS COURT HELD THAT THE PRINCIPLES LAID DOWN BY THE SUPREME COURT WITH REFERENCE TO SECTION 12(2) OF THE ACT SHOULD ALSO BE APPLIED IN DECIDING UNDER SECTION 10 (2)(XV) WHETHER THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND THE COURT POINT ED OUT THAT THE TEST PRESCRIBED BY SECTION 10(2)(XV) OF THE ACT INCLUDED THAT OF COMMERCIAL EXPEDIENCY. AT PAGE 292 THE LEARNED JUDGES POINTED OUT: 'IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY TO D ETERMINE WHETHER THE EXPENDITURE IS WHOLLY AND EXCLUSIVELY L AID OUT FOR THE PURPOSE OF THE BUSINESS, THE REASONABLENESS OF THE EXPENDITURE SHOULD BE CONSIDERED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT FROM THE POINT OF VIEW OF OUTSI DERS INCLUDING THE INCOME-TAX OFFICER.' IT WAS THE SAME PRINCIPLE TO WHICH LORD WRIGHT REFE RRED IN CRADDOCK V. ZEVO FINANCE COMPANY LTD. [1946] 27 TC 267 AT 29 0: ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 16 'THE TRANSACTION HERE BEING A PERFECTLY STRAIGHTFOR WARD AND HONEST BARGAIN BETWEEN THE TWO COMPANIES, IT SEEMS TO ME THAT, IF THE PRESENT CLAIM WERE UPHELD, IT WOULD AMOUNT T O A PRECEDENT ENABLING THE REVENUE TO REVISE EVERY SUCH BARGAIN AND TO DEFEAT WHAT THE PARTIES HAD AGREED ON. THE R EVENUE IN A CASE UNDER SCHEDULE D HAS NO POWER TO EXAMINE WHAT THEY THINK WAS REASONABLE OR TO SAY WHAT EXPENDITURE WAS NECES SARY. 17. THE COURT HELD AS UNDER :- UNDER OUR TAXING SYSTEM, IT IS FOR THE ASSESSEE TO CONDUCT HIS BUSINESS, AND IN HIS WISDOM OR OTHERWIS E TO FIX THE REMUNERATION TO HIS STAFF. THE INCOME-TAX ACT DOES NOT CLOTHE THE TAXING AUTHORITY WITH ANY POWER OR JURISDICTION TO DETERMINE THE REASONABLENESS OF THE AMOUNT SO FIXED AND PAID BY THE ASSESSEE. THE ONLY TEST FOR THE DEDUCTIBILITY OF SU CH REMUNERATION IS WHETHER THE EXPENDITURE HAS BEEN IN CURRED SOLELY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSIN ESS. IF THE REALITY OF THE PAYMENT IS CHALLENGED OR IS IN DISPU TE DIFFERENT CONSIDERATIONS ARISE : SO ALSO IN CASES WHERE THE T AX AUTHORITIES ARE ABLE TO POINT TO SOME CONSIDERATION OTHER THAN THE PURPOSE OF THE BUSINESS AS ACCOUNTING FOR ANY PORTION OF TH E PAYMENT MADE. IN SUCH CASES, OF COURSE, SUCH PORTION OF THE AMOUNT CLAIMED, WHICH IS EITHER NOT HELD TO HAVE BEEN PAID OR IS HELD TO HAVE BEEN PAID FOR REASONS OTHER THAN BUSINESS EXPE DIENCY, COULD AND SHOULD BE DISALLOWED ; BUT THE REASON FOR THE DISALLOWANCE IS BECAUSE EITHER THE PORTION DISALLOW ED IS NOT PAID, OR BECAUSE THE EXPENDITURE IS NOT SOLELY AND EXCLUSIVELY FOR THE BUSINESS, AND NOT ON THE GROUND THAT IN THE OPINION OF THE INCOME-TAX OFFICER OR OTHER TAXING AUTHORITY TH E REMUNERATION IS 'UNREASONABLY' HIGHEITHER BECAUSE THE EMPLOYEE DOES NOT, IN THE AUTHORITY'S OPINION, DESE RVE SO MUCH, OR BECAUSE THE ASSESSEE COULD HAVE SECURED OTHER EM PLOYEES ON MORE FAVOURABLE TERMS. THE ASSESSEE CERTAINLY SATISFIED THE THIRD OF THE T ESTS POSTULATED BY THEIR LORDSHIPS IN THE EASTERN INVEST MENT'S CASE (SUPRA), THAT THE MONEY WAS EXPENDED 'NOT OF NECESS ITY AND WITH A VIEW TO DIRECT AND IMMEDIATE BENEFIT TO THE TRADE BUT VOLUNTARILY AND ON THE GROUND OF COMMERCIAL EXPEDIE NCY, AND ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 17 IN ORDER TO FACILITATE THE CARRYING ON OF THE BUSIN ESS.' EVEN NECESSITY FOR THE EXPENDITURE DOES NOT ENTER THIS T EST. THE QUESTION REFERRED TO US IS ANSWERED IN THE NEGA TIVE AND IN FAVOUR OF THE ASSESSEE. 18. IN THE LIGHT OF ABOVE DISCUSSIONS AND IN THE PREMISE OF THE ABOVE NOTICED WELL ESTABLISHED PRINCIPLES, LET US PROCEED TO EXAMINE THE FACTS OF THE CASE UNDER CONSIDERATION. WHETHER THESE NECESSARY CONDITIONS EXISTED TO CLAIM THIS ALLOWANCE UNDER SECTION 37(1) OF THE ACT AND WHETHER THE ASSESSEE DISCHARGED THE BURDEN CAST ON IT. THE ADMITTED FACT S OF THE CASE ARE THAT THE A.O. DISALLOWED 20% EXPENDITURES WHICH HAVE BEEN RE STRICTED BY THE CIT(A) TO THE EXTENT OF 5% OF WHICH CALCULATIONS COMES R S.47,247/-, RS.58,800/- & RS.92,969/- FOR ASSESSMENT YEARS 2006-07, 2007-08 & 2009-10. THE A.O. MADE 20% ADHOC DISALLOWANCE WITHOUT ANY BASIS WHERE AS THE ASSESSEE HAS FULLY DISCHARGED THE BURDEN THAT EXPENDITURES WERE INCURRED FOR THE PURPOSE OF BUSINESS. THE HONBLE MADRAS HIGH COURT IN THE CASE OF NEWTONE STUDIOS LTD. V. COMMISSIONER OF INCOME-TAX [1955] 2 8 ITR 378 (MAD) HELD THAT UNDER OUR TAXING SYSTEM, IT IS FOR THE ASSESSE E TO CONDUCT HIS BUSINESS, AND IN HIS WISDOM OR OTHERWISE TO INCUR BUSINESS E XPENDITURES. THE INCOME-TAX ACT DOES NOT CLOTH THE TAXING AUTHORITY WITH ANY POWER OR JURISDICTION TO DETERMINE THE REASONABLENESS OF THE AMOUNT SO FIXED AND PAID BY THE ASSESSEE. THE ONLY TEST FOR THE DEDUCTIBILI TY OF SUCH REMUNERATION IS WHETHER THE EXPENDITURE HAS BEEN INCURRED SOLELY AN D EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. IF THE REALITY OF THE PAY MENT IS CHALLENGED OR IS IN DISPUTE DIFFERENT CONSIDERATIONS ARISE: SO ALSO IN CASES WHERE THE TAX AUTHORITIES ARE ABLE TO POINT OUT TO SOME CONSIDERA TION OTHER THAN THE PURPOSE OF THE BUSINESS AS ACCOUNTING FOR ANY PORTI ON OF THE PAYMENT MADE. IN SUCH CASES, OF COURSE, SUCH PORTION OF THE AMOUN T CLAIMED, WHICH IS EITHER NOT HELD TO HAVE BEEN PAID OR IS HELD TO HAVE BEEN PAID FOR REASONS OTHER THAN BUSINESS EXPEDIENCY, COULD AND SHOULD BE DISAL LOWED; BUT THE REASON FOR THE DISALLOWANCE IS BECAUSE EITHER THE PORTION DISALLOWED IS NOT PAID, OR BECAUSE THE EXPENDITURE IS NOT SOLELY AND EXCLUSIVE LY FOR THE BUSINESS, AND NOT ON THE GROUND THAT IN THE OPINION OF THE INCOME -TAX OFFICER OR OTHER TAXING AUTHORITY THE REMUNERATION IS UNREASONABLY HIGH. IN THE CASE UNDER CONSIDERATION, THE ASSESSEE HAS ESTABLISHED B Y FILING EVIDENCES THAT EXPENDITURES WERE INCURRED FOR THE PURPOSE OF BUSIN ESS. THE CIT (A) HAS GIVEN HIS FINDING AFTER EXAMINING EACH HEAD OF EXPE NDITURES CLAIMED BY THE ASSESSEE. THE ASSESSEE IN SUPPORT OF JUSTIFICATION OF EXPENDITURES FURNISHED COMPARABLE CASE WHICH HAVE BEEN EXAMINED BY THE CIT (A) BEFORE REACHING ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 18 TO HIS CONCLUSIONS. THE CIT(A) FOUND THAT THE ASSE SSEE HAS CLAIMED COMPARATIVELY LESSER EXPENDITURE IN COMPARISON TO O THER COMPARABLE CASE. THE CIT(A) HAS ALSO FOUND THAT THE A.O. HIMSELF HAS ACCEPTED HIGHER CLAIM OF EXPENDITURES IN COMPARISON TO CLAIM OF ASSESSEE IN COMPARABLE CASE WHILE MAKING ASSESSMENT UNDER SECTION 153A/143(3) OF THE ACT. THE RELEVANT ABSTRACT OF ORDER OF CIT(A) IS REPRODUCED BELOW:- ( PAGE NOS.5 & 6) THERE IS AN EMBARRASSING SITUATION WHEN THE LEARNE D ASSESSING OFFICER HAS MENTIONED IN PARA NO.4.5 OF A SSESSMENT ORDER THAT THE BASIS OF 20% DISALLOWANCE OF EXPENSE S IS OTHER COMPARABLE CASES OF THE SAME TRADE IN THE SAME LOCA LITY WHEREAS HE HAS NOT CITED A SINGLE COMPARABLE CASE F OR HIS INFERENCE. ON THE OTHER HAND, HE HAS ACCEPTED THE HIGHER PERCENTAGE RATE OF EXPENSES WITH REFERENCE GROSS RE CEIPT IN CASE OF M/S CHAMPA DYEING (P) LTD. IN THEIR ASSESSMENTS U/S 153A/143(3). A COPY OF THE SAID ASSESSMENT ORDER I S ENCLOSED (PAGE 17 & 18 OF PAPER BOOK). THE COMPARATIVE FIGU RE OF RATE OF EXPENSES AS PER THE ASSESSMENT ORDER OF THE ASSE SSEE AND M/S CHAMPA DYEING PVT. LTD IS AS FOLLOWS :- A.Y. CARPET PALACE DYEING DIVISION (ASSESSEE) CHAMP A DYEING (P) LTD GROSS RECEIPT MANUFACTURING EXPENSES IN % SHOWN MANUFACTURING EXPENSES IN % ALLOWED BY A.O. GROSS RECEIPT MANUFACT URING EXPENSES IN % SHOWN MANUFACTU RING EXPENSES IN % ALLOWED BY A.O. 2006-07 188,93,663 76.61% 70.62% 339,64,828 84.98% 84.64% FROM THE ABOVE, IT IS CLEAR THAT THE DYEING EXPENSE S @ 84.64% HAVE BEEN ALLOWED IN THE ABOVE COMPARABLE CASE. ON THE CONTRARY, EXPENSES @ 76.61 CLAIMED BY THE ASSESSEE WHICH IS LOWER BY 8.03% IN COMPARISON TO THE ABOVE CASE HAS NOT BEEN ACCEPTED. THUS, THE DISALLOWANCES OF EXPENSES IN A SSESSEES CASE ARE DEVOID OF LOGIC. MOREOVER, THE LEARNED AS SESSING OFFICER HAS NOT CITED ANY COMPARABLE CASE ON THE BA SIS OF WHICH HE INFERRED THAT THE ASSESSEES EXPENSES WERE EXCES SIVE. AS SUCH, DISALLOWANCES DESERVE DELETION ON THIS GROUND ONLY. HOWEVER, THE ARBITRARINESS OF THE DISALLOWANCE IS A LSO ESTABLISHED AS IT HAS BEEN MADE ON WRONG FINDING AN D WITHOUT ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 19 POINTING OUT A SINGLE ITEM OF EXPENDITURE BEING FAL SE OR UNVERIFIABLE. 19. SO FAR OBJECTION OF THE A.O. THAT EXPENDITU RES WERE NOT VERIFIABLE, THE CIT(A) HAS GIVEN HIS FINDING AFTER EXAMINING THE RE CORDS THAT SOME EXPENDITURES WERE FULLY VERIFIABLE. HOWEVER, TO CO VER UP MINOR LAPSES AND NON-VERIFIABILITY OF CERTAIN EXPENDITURES, THE CIT( A) RESTRICTED THE DISALLOWANCE TO THE EXTENT OF 5% WHICH IS MOST REAS ONABLE AND FAIR ESTIMATION. THE REVENUE HAS FAILED TO POINT OUT AN Y MATERIAL AGAINST THE FINDING OF CIT(A) OR OTHER MATERIAL AND EVIDENCES B ASED ON WHICH A DIFFERENT ESTIMATION OF DISALLOWANCE OF EXPENDITURE CAN BE MA DE AT THIS STAGE. 20. IN THE LIGHT OF ABOVE DISCUSSION AND IN THE LIG HT OF THE FACTS, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A). THE ORD ERS OF CIT(A) ARE CONFIRMED ON THE ISSUE. 18. AS STATED THAT THE FACTS ARE IDENTICAL TO THE C ASES OF WHICH FINDING HAVE BEEN REPRODUCED ABOVE. EVEN OTHERWISE ALSO, THE CIT(A) FOLLOWED THE ORDER OF I.T.A.T., LUCKNOW BENCH IN THE CASE OF ACIT VS. M/S. CHANDRA CONFECTIONARY (P) LTD. (SUPRA). TO MAINTAIN CONSISTENCY, WE ARE ALSO TO F OLLOW THE ORDER OF CO-ORDINATE BENCH. THE CIT(A) FOLLOWED THE ORDER OF I.T.A.T. W HEREIN HE DID NOT FIND ANY INFIRMITY. SO FAR OBJECTION OF THE A.O. THAT VOUCH ERS OF SOME EXPENDITURES WERE NOT PRODUCED, THAT DEFICIENCY COVERS BY THE ADDITIO N TO THE EXTEND OF 10% SUSTAINED BY THE CIT(A). THE ASSESSEE DISCHARGED ITS BURDEN IN RESPECT OF ALLOWABILITY OF EXPENDITURES BY PRODUCING BOOKS OF ACCOUNT AND EXPL ANATION ETC. IN THE LIGHT OF THAT, ORDERS OF THE CIT(A) ARE CONFIRMED ON THE ISS UE. ITA NOS.170, 171 & 174/ALLD/2011 AYS. 2007-08 & 2008-09 20 19. IN THE RESULT, ALL THE THREE APPLES FILED BY TH E REVENUE ARE DISMISSED. (ORDER PRONOUNCED IN THE OPEN COURT) SD/- SD/- (BHAVNESH SAINI) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEMBER PBN/* COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT (APPEALS) CONCERNED 4. CIT CONCERNED 5. D.R., ITAT, ALLAHABAD BENCH, ALLAHABAD 6. GUARD FILE. BY ORDER ASSISTANT REGISTRAR INCOME-TAX APPELLATE T RIBUNAL, ALLAHABAD TRUE COPY