M/s. SH- Haryana Wires Ltd., New Delhi V. JCIT, New Delhi

ITA 2388/DEL/2010

• Counselvise Citation: 238820114 RSA 2010
• Duration Of Justice: 1 year(s) 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 15-09-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 20-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NIRANJAN KOULI
• Assessee Lawyers: DR RAKESH GUPTA
• Keywords: Gross profit estimation; Corroborative evidences; Onus to prove
• Section: 234B; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G DELHI BEFORE SHRI R.P. TOLANI AND SHRI K.G. BANSAL ITA NO. 2388(DEL)/2010 ASSESSMENT YEAR: 2007-08 M/S SH HARYANA WIRES LTD., JOINT COMMISSIONER OF INCOME B-9, KALINDI COLONY, VS. T AX, RANGE-8, NEW DELHI. NEW DELHI-65. PAN: AAGCS9530C ITA NO. 3023(DEL)/2010 ASSESSMENT YEAR: 2007-08 JOINT COMMISSIONER OF INCOME M/S S H HARYANA WIRES LTD., TAX, RANGE-8, NEW DELHI. VS. B-9, KALINDI COLONY, NEW DELHI. (APPELLANT) (RESPON DENT) ASSESSEE BY : DR. RAKESH GUPTA, ADVOCATE DEPARTMENT BY: SHR I NIRANJAN KOULI, CIT, DR DATE OF HEARING : 15.09.2011 DATE OF PRONOUNCEMENT: 30.09.2011. ORDER PER K.G. BANSAL : AM THESE CROSS APPEALS OF THE ASSESSEE AND THE R EVENUE HAVE BEEN ARGUED IN A CONSOLIDATED MANNER BY THE LD. COUNSE L FOR THE ASSESSEE AND THE LD. DR AS THEY INVOLVE COMMON GROUNDS. THEREFO RE, A CONSOLIDATED ORDER IS PASSED. ITA NO. 2388&3023(DEL)/2010 2 2. THE BACKGROUND FACTS ARE THAT THE ASSESSEE H AS BEEN ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF ENAMELED COPP ER WIRES, USED IN MOTORS AND TRANSFORMERS. THE RETURN WAS FILED ON 31.10.2009 DECLARING TOTAL INCOME OF RS. 2,22,32,320/-. THE RETURN WAS PROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 1961 (THE ACT FOR SHORT). T HEREAFTER, THE CASE WAS SELECTED FOR SCRUTINY BY ISSUING STATUTORY NOTIC E. 3. GROUND NOS. 1 AND 2 IN THE APPEAL OF THE ASSE SSEE ARE AGAINST REJECTION OF BOOKS OF ACCOUNT U/S 145 AND CONFI RMING THE ADDITION OF RS. 77,69,000/- BY ESTIMATING GROSS PROFIT RATIO AT 6.5%. ON THE OTHER HAND, GROUND NO. 1 IN THE APPEAL OF THE REVENUE IS AGAIN ST REDUCTION OF THE ADDITION TO THE GROSS PROFIT FROM RS. 2,53,18,658 /- TO RS. 77,69,000/-. 3.1 BRIEFLY, THE FACTS ARE THAT IN THE COURSE OF EXAMINATION, THE AO FOUND THAT THE GROSS PROFIT RATIO IN THIS YEAR HAS COME DOWN TO 5.65% AS AGAINST 8.42% LAST YEAR. SIMILARLY, THE NET PROFIT RATIO HAS COME DOWN TO 1.97% AGAINST 4.62% LAST YEAR. THE ASSESS EE WAS REQUIRED TO PRODUCE BOOKS OF ACCOUNT, SUPPORTING VOUCHERS ETC. OR ANY OTHER MATERIAL TO SUBSTANTIATE THE RETURN AND TO EXPLAIN FALL IN GROSS PROFIT AND NET PROFIT RATIOS. IT WAS SUBMITTED THAT THE FALL IN TH ESE RATIOS IS ON ACCOUNT OF ITA NO. 2388&3023(DEL)/2010 3 FLUCTUATION IN INTERNATIONAL PRICE OF COPPER. TH E AO MADE A MENTION THAT THE ASSESSEE-COMPANY DID NOT PRODUCE BOOKS OF AC COUNT IN PHYSICAL FORM IN ORDER TO SUBSTANTIATE THE CLAIM MADE IN THE R ETURN AND ACCOMPANYING DOCUMENTS. IT HAS BEEN HELD THAT THE FALL IN T HE RATIO HAS NOT BEEN JUSTIFIED AND THE BOOKS HAVE NOT BEEN PRODUCE D, THEREFORE, BOOK RESULTS CANNOT BE ACCEPTED. ACCORDINGLY, THE PROVISION C ONTAINED IN SECTION 145 HAS BEEN INVOKED. CONSEQUENTLY, THE ASSESSMENT IS MADE BY ENHANCING THE GROSS PROFIT RATIO BY 2.77% SO AS TO BRING IT IN LINE WITH THE GROSS PROFIT RATIO OF LAST YEAR. THIS HAS LED TO AN ADDITION OF RS. 2,53,18,658/-. 3.2 BEFORE THE FIRST APPELLATE AUTHORITY, IT HAS INTER-ALIA BEEN SUBMITTED THAT THE FALL IN THE GROSS PROFIT RATIO IS ON ACCOUNT OF INCREASE IN INTERNATIONAL PRICE OF COPPER, WHICH IS THE RAW-MAT ERIAL CONSUMED BY THE ASSESSEE. THE PRICE HAS INCREASED BY 70% BUT THE SALE PRICE HAS INCREASED BY 60% ONLY. IT HAS ALSO BEEN ASSERTED THAT THE BOOKS OF THE ASSESSEE HAVE BEEN ACCEPTED WHILE FRAMING THE ORDER UNDER FRI NGE BENEFIT TAX ACT. THE LD. CIT(APPEALS) CONSIDERED THE FACTS OF T HE CASE AND SUBMISSIONS MADE BEFORE HIM. IT IS MENTIONED THAT THE BOOKS WERE NOT PRODUCED BEFORE THE AO IN SPITE OF REPEATED OPPORTUNITIES GRANT ED TO THE ASSESSEE. THE COMPLETION OF ASSESSMENT FOR LEVY OF FRINGE BEN EFIT TAX DOES NOT BY ITSELF ITA NO. 2388&3023(DEL)/2010 4 LEAD TO THE CONCLUSION THAT THE BOOKS OF ACCOUNT ARE COMPLETE IN ALL RESPECTS. THE CLAIM THAT THE BOOK RESULTS SHOULD BE ACCEPTED AS THEY HAVE BEEN MAINTAINED IN THE REGULAR COURSE OF BUSINES S AND AUDITED, HAS ALSO BEEN REJECTED ON THE GROUND THAT MERE AUDIT DOES NOT EXCLUDE THE JURISDICTION OF THE AO TO EXAMINE THE BOOKS. THERE FORE, THE FINDING THAT BOOK RESULTS HAVE TO BE REJECTED HAS BEEN UPHELD BY THE LD. CIT(APPEALS). COMING TO THE ESTIMATION OF INCOME, IT IS MENTION ED THAT THE COURTS ARE PRECLUDED FROM GOING INTO THIS MATTER IF THE ORDER OF THE AO IS BASED ON RELEVANT FACTS AVAILABLE ON RECORD. THE AO HAS MADE ASSESSMENT ON THE BASIS OF GROSS PROFIT RATIO SHOWN IN THE IMMED IATELY PRECEDING YEAR. HOWEVER, TAKING INTO CONSIDERATION THE SUBMISSI ON THAT FULL IMPACT OF INCREASE IN RAW-MATERIAL COST COULD NOT BE PASSED ON TO THE CUSTOMER, THE LD. CIT(APPEALS) HAS FIXED THE GP RATIO AT 6.5%. THIS RESULTS IN A RELIEF OF RS. 1,75,49,658/- TO THE ASSESSEE. 3.3 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE S UBMITTED FACTS IN BRIEF THAT THE ASSESSEE HAS BEEN MANUFACTURING AND SELL ING ENAMELED COPPER WIRES. THUS, COPPER IS THE MAIN RAW-MATERIAL U SED IN THE MANUFACTURING ACTIVITY. THE PRICE OF COPPER REMAINED VOLATILE . THE ASSESSEE HAS BEEN IMPORTING THIS RAW-MATERIAL ALSO. THE PRICE WENT UP AND, THEREFORE, THERE A ITA NO. 2388&3023(DEL)/2010 5 FALL IN THE GROSS PROFIT RATIO. LOOKING TO TH E TRADING RESULTS OF LAST YEAR, THE AO MADE ADDITION OF ABOUT RS. 2.53 CRORE ON ACCOUNT OF LOW GROSS PROFIT RATIO. THE LD. CIT(APPEALS) HAS REDUCED THIS ADDITION TO ABOUT RS. 77 LAKH. THE AO HAD PASSED THE ORDER ON 22.1 2.2009 ON THE RETURNED FILED BY THE ASSESSEE QUANTIFYING FRINGE BENEFI TS AT RS. 9,59,204/-. THIS ORDER HAS BEEN PLACED IN THE PAPER BOOK ON PAGE NO . 644. IT IS MENTIONED THEREIN THAT THE BOOKS OF ACCOUNT WERE CALLED FOR AND EXAMINED ON A TEST CHECK BASIS. THIS ORDER HAS BEEN PASSED ON THE SAME DAY ON WHICH THE ASSESSMENT ORDER HAS BEEN FRAMED. THEREFORE, THE FINDING THAT BOOKS WERE NOT PRODUCED IS NOT SUPPORTED BY EVIDENCE ON RE CORD. FURTHER, HE DREW OUR ATTENTION TOWARDS PAGE NO. 324 OF THE PAPER B OOK, WHICH CONTAINS THE DETAILS OF AVERAGE PURCHASE PRICE AND SALE PRIC E OF THE TWO YEARS. IT IS SEEN THAT AVERAGE PURCHASE PRICE OF COPPER IN THE IMMEDIATELY PRECEDING YEAR WAS RS. 204 PER KILOGRAM, WHILE IT HAS BEE N RS. 347/- PER KILOGRAM. THE SALE PRICE IN THESE YEARS HAS BEEN RS. 279/- PER KILOGRAM AND RS. 447/- PER KILOGRAM. IT IS ARGUED THAT THE FULL IMPA CT OF INCREASE IN COPPER PRICE COULD NOT BE PASSED ON TO THE CUSTOMER, LE ADING TO LOWER GROSS PROFIT RATIO. THE GOODS MANUFACTURED BY THE ASSESSEE ARE LIABLE TO EXCISE DUTY AND, THEREFORE, IT CANNOT BE CONCLUDED THAT THE BOOKS OF ACCOUNT COULD BE MANIPULATED IN ANY MANNER. OUR ATTENTION HAS AL SO BEEN DRAWN TOWARDS ITA NO. 2388&3023(DEL)/2010 6 PAGE NO. 325 ONWARDS, WHICH CONTAIN THE DETAILS OF PURCHASES, ASSESSABLE VALUE AND THE BILLS OF PURCHASE. IT IS SEEN THA T PURCHASES HAVE BEEN MAINLY MADE FROM HINDALCO INDUSTRIES LTD., GE MOTOR IN DIA LTD. AND STERLITE INDUSTRIES INDIA LTD. IT IS SEEN THAT NONE OF TH ESE IS A FOREIGN COMPANY. THE CASE OF THE LD. COUNSEL IS THAT THE BOOKS HAV E BEEN MAINTAINED IN THE REGULAR COURSE OF BUSINESS, WHICH HAVE BEEN AUDITE D. THE REASON FOR FALL IN GROSS PROFIT RATIO HAS BEEN FURNISHED. THEREFORE, THE BOOKS COULD NOT HAVE BEEN REJECTED AND BOOK RESULTS COULD NOT HAVE BEEN ESTIMATED. IN ORDER TO SUPPORT THESE CONTENTIONS, RELIANCE HAS BEEN PL ACED IN THE CASE OF CIT VS. PANDIT BROS., 261 ITR 159(P&H), CIT VS. JHAN DU MAL TARA CHAND RICE MILLS, 73 ITR 192 (P&H), AND CIT VS. M. DURA I RAJA, 83 ITR 484 (KER.). 3.4 IN REPLY, THE LD. DR SUBMITTED THAT BOTH THE LOWER AUTHORITIES HAVE GIVEN CONCURRENT FINDING THAT THE BOOKS IN PHYSICA L FORM HAVE NOT BEEN PRODUCED FOR EXAMINATION TO SUBSTANTIATE THE RE TURN OF INCOME. THIS FINDING ITSELF IS SUFFICIENT TO REJECT THE BOO K RESULTS. THE LD. CIT(APPEALS) HAS ALSO RECORDED AN ADDITIONAL FIND ING THAT PRODUCTION OF BOOKS FOR THE PURPOSE OF DETERMINING FRINGE BENE FIT TAX DOES NOT AMOUNT TO PRODUCTION OF BOOKS FOR INCOME-TAX ASSESSMENT . THEREFORE, IT IS A ITA NO. 2388&3023(DEL)/2010 7 MATTER OF RECORD THAT THE BOOKS AND SUPPORTING DOC UMENTS HAVE NOT BEEN PRODUCED. COMING TO ESTIMATION OF INCOME, THE ON LY REASON FURNISHED IS THAT THERE HAS BEEN INCREASE IN PURCHASE PRICE OF COPPER, THE MAIN RAW- MATERIAL USED BY THE ASSESSEE. HOWEVER, THERE HAS BEEN AN INCREASE IN SALE PRICE ALSO. THEREFORE, IF PRICES GO UP, THE PROF IT SHOULD ALSO INCREASE IN PERCENTAGE TERM. ACCORDINGLY, IT CAN BE SAID THAT NO JUSTIFICATION HAS BEEN PROVIDED BY THE ASSESSEE FOR FALL IN GP RATIO. THE ESTIMATION OF BOOK PROFIT DOES INVOLVE SOME GUESS WORK. HOWEVER, APART FROM MENTIONING THE FACTS ABOUT INCREASE IN RAW-MATERIAL COST, THE LD. CIT(APPEALS) HAS ALSO NOT MADE ANY OBJECTIVE CALCULATION TO FIX THE RATIO AT 6.5%. THIS IS STATEDLY DONE BY CONSIDERING THE FACTS OF THE C ASE IN TOTALITY AND THE SUBMISSIONS MADE BY THE ASSESSEE. ON THE OTHER H AND, THE AO ESTIMATED PROFIT ON THE BASIS OF FIGURES SUPPLIED BY THE A SSESSEE IN THE RETURN OF IMMEDIATELY PRECEDING YEAR. ACCORDINGLY, IT IS A RGUED THAT THE ORDER OF THE LD. CIT(APPEALS) MAY BE SET ASIDE AND THAT OF TH E AO MAY BE RESTORED. IN ORDER TO SUPPORT THESE CONTENTIONS, RELIANCE HAS B EEN PLACED ON THE FOLLOWING CASES:- (I) JAIMAL RAM & PARTY, (2008) 172 TAXMAN 228 (RAJ.); (II) ZORA SINGH VS. CIT, (2008) 173 TAXMAN 76 (P&H); (III) SHREE GANPATI EMBROIDERY (P) LTD. VS. CIT, (2009) 1 78 TAXMAN 176 (P&H); ITA NO. 2388&3023(DEL)/2010 8 (IV) SHRIRAM & CO. VS. ACIT, (2009) 176 TAXMAN 426 (RA J.), IN WHICH IT HAS BEEN HELD THAT BOOKS CAN BE REJECTE D WHEN ONLY COMPUTERIZED BOOKS, CASH BOOK, LEDGER, JOURNAL AND FEW VOUCHERS ARE PRODUCED BUT STOCK REGISTER, LONG BOOK ETC. HAVE NOT BEEN PRODUCED; (V) MRS. KRISHNA GUPTA VS. ACIT, (2008) 173 TAXMAN 29 (DEL); AND (VI) CIT VS. CHANDRAVILAS HOTEL, (1987) 164 ITR 102 (GU J.) 3.5 WE HAVE CONSIDERED THE FACTS OF THE CASE A ND SUBMISSIONS MADE BEFORE US. AT THE OUTSET, IT HAS TO BE DECIDED W HETHER THE BOOKS WERE PRODUCED IN THE COURSE OF ASSESSMENT PROCEEDINGS . THE AO HAS RECORDED A CATEGORICAL FINDING THAT BOOKS IN PHYSICAL FORM HAVE NOT BEEN PRODUCED TO SUBSTANTIATE THE ACCOUNTS FILED WITH THE RETUR N OF INCOME. THE CASE OF THE LD. COUNSEL IS THAT THE BOOKS HAVE BEEN PRODUC ED FOR THE PURPOSE OF QUANTIFYING FRINGE BENEFIT TAX. BOTH THE ASSESSM ENTS WERE COMPLETED TOGETHER. THE LD. CIT(APPEALS) HAS RECORDED A FINDING THAT THE BOOKS WERE NOT PRODUCED BEFORE THE AO. HAVING CONSI DERED THESE FINDINGS, THE FACT IS THAT THE DETERMINATION OF FRINGE BENEFIT TAX INVOLVES A VERY LIMITED SCRUTINY OF THE AMOUNT EXPENDED ON PROVIDING COMM ON BENEFITS TO THE EMPLOYEES. THE ASSESSMENT DOES NOT TAKE INTO ACCOUNT AUTHENTICITY OF PURCHASE, SALE AND THE BOOK RESULTS. THEREFORE , PRODUCTION OF BOOKS OF ACCOUNT UNDER THOSE PROCEEDINGS HAS ONLY A LIMI TED SCOPE OF LOOKING INTO ITA NO. 2388&3023(DEL)/2010 9 SALARY, PERQUISITES AND OTHER COMMON BENEFITS ET C. PROVIDED TO THE EMPLOYEES. PRODUCTION OF SUCH LIMITED EVIDENCE CANNOT LEAD TO THE INFERENCE THAT THE BOOKS HAVE BEEN PRODUCED IN TOT ALITY FOR DETERMINING THE TOTAL INCOME. IT IS ALSO THE CLAIM THAT COMPUTER IZED BOOKS WERE PRODUCED. BUT SUPPORTING EVIDENCE CAN ONLY BE IN PHYSICAL F ORM AS VOUCHERS AND BILLS, WHICH HAVE NOT BEEN PRODUCED. THEREFORE, WE DO NOT FIND ANY REASON TO DISPLACE THE CONCURRENT FINDINGS OF LOWER AU THORITIES THAT THE BOOKS AND SUPPORTING DOCUMENTS HAVE NOT BEEN PRODUCED. IN SUCH A SITUATION, IT IS EXPECTED THAT THE AO SHALL ESTIMATE THE BO OK PROFIT BY RESORTING TO FACTS ON RECORD, INCLUDING RESULT OF LAST YEAR ALSO. HOWEVER, HE HAS NOT TAKEN INTO ACCOUNT THE IMPACT OF INCREASE IN COS T OF RAW-MATERIAL ALTHOUGH SUBMISSION TO THIS EFFECT WAS MADE BEFORE HIM. THE LD. CIT(APPEALS) HAS FIXED THIS RATIO AT 6.5%. WHILE DOING SO, IT IS MENTIONED THAT TOTALITY OF FACTS HAVE BEEN TAKEN INTO ACCOUNT WHICH INTER -ALIA INCLUDE THE SUBMISSIONS MADE BY THE ASSESSEE AND THE INCREASE IN PRICE OF COPPER. HOWEVER, EVEN A ROUGH AND READY CALCULATION I N THIS RESPECT IS NOT MADE. IT CANNOT BE ASCERTAINED AS TO HOW TH E RATIO HAS BEEN FIXED AT 6.5%. IN THESE CIRCUMSTANCES, WE THINK IT FIT TO RESTORE THE MATTER TO THE FILE OF THE LD. CIT(APPEALS) TO CONSIDER FACTS ON R ECORD AND ESTIMATE THE GROSS PROFIT RATIO AFTER TAKING INTO ACCOUNT IN TER-ALIA THE INCREASE IN ITA NO. 2388&3023(DEL)/2010 10 PRICE OF COPPER AND INCREASE IN SALE PRICE OF THE FINISHED GOODS. THE LD. DR HAD RELIED ON A NUMBER OF CASES IN RESPECT O F ESTIMATION OF INCOME AFTER REJECTION OF BOOKS. WE HAVE CONSIDERED T HE CASES RELIED UPON BY BOTH THE PARTIES. HOWEVER, SINCE WE ARE RESTO RING THIS MATTER TO THE FILE OF THE LD. CIT(APPEALS), IT IS NOT NECESSARY FOR U S TO DESCRIBE THE DETAILS OF EACH OF THESE CASES AND THE APPLICABILITY TO TH E FACTS OF THIS CASE. IN THE LIGHT OF OUR FINDINGS SET OUT EARLIER, THE GROUN DS TAKEN BY THE RIVAL PARTIES ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSE . 4. GROUND NO. 3 IN THE APPEAL OF THE ASSESSEE IS T HAT THE LD. CIT(APPEALS) ERRED IN CONFIRMING THE DISALLOWANC E OF RS. 4,73,000/- MADE BY THE AO IN RESPECT OF PRIOR PERIOD EXPENSES. IN THIS CONNECTION, IT IS MENTIONED IN THE ASSESSMENT ORDER THAT THE EXPEND ITURE PERTAINS TO THE EARLIER YEAR BUT HAS BEEN DEBITED TO THE ACCOUNT S OF THIS YEAR. THE ASSESSEE HAS NOT DISCHARGED THE BURDEN TO SHOW THAT THE AMOUNT IS DEDUCTIBLE IN COMPUTING THE TOTAL INCOME OF T HIS YEAR. THEREFORE, THE CLAIM HAS BEEN DENIED. BEFORE THE LD. CIT(APPEAL S), IT HAS BEEN SUBMITTED THAT THE IMPUGNED AMOUNT INCLUDES A SUM OF RS. 4, 19,544/-, BEING ELECTRICITY EXPENDITURE FOR THE MONTH OF MARCH, 2006. THE BILL FOR THIS MONTH WAS RAISED ON 19.04.2006. IN REGARD TO TH E BALANCE AMOUNT OF RS. ITA NO. 2388&3023(DEL)/2010 11 59,456/-, IT HAS BEEN SUBMITTED THAT THE COMMISSI ON PAYABLE TO THE AGENT WAS SETTLED AFTER THE CLOSE OF THE PREVIOUS YEAR ON FINALIZATION OF THE BALANCE-SHEET. SINCE THESE LIABILITIES HAVE CRYST ALLIZED AFTER THE CLOSE OF THE PREVIOUS YEAR AND BECAME PAYABLE THEREAFTER, THE SAME HAVE TO BE EXCLUDED FROM THE TOTAL INCOME OF THIS YEAR. THE LD. CIT( APPEALS) CONCURRED WITH THE FINDING OF THE AO THAT THE ASSESSEE HAS FAILE D TO DISCHARGE THE BURDEN THAT THE LIABILITY CRYSTALLIZED IN THIS YEAR AND N OT IN THE EARLIER YEAR. THE EXPENDITURE UNDOUBTEDLY BELONGS TO AN EARLIER Y EAR. THUS, THE ASSESSMENT ORDER HAS BEEN UPHELD IN THIS MATTER. 4.1 BEFORE US, THE LD. COUNSEL REFERRED TO PAGE NO. 47 OF THE PAPER BOOK, WHICH IS THE ELECTRICITY BILL FOR MARCH, 2006 RAIS ED IN APRIL, 2006 OF A SUM OF RS. 8,99,024/-. FURTHER, HE REFERRED TO PAGE NO. 52 OF THE PAPER BOOK, WHICH IS A PART OF SUBMISSIONS MADE BEFORE TH E AO IN THIS MATTER. IT HAD BEEN SUBMITTED THAT THE BILL FOR MARCH, 2006 WAS RECEIVED LATE AND NO PROVISION FOR THIS EXPENDITURE WAS MADE IN FINAN CIAL YEAR 2005-06. THE EXPENDITURE IS REVENUE IN NATURE AND THE EXPENDI TURE REMAINS UN-ALLOWED. IN REGARD TO COMMISSION, IT HAS BEEN SUBMITTE D THAT THE EXPENDITURE PERTAINS TO FINANCIAL YEAR 2005-06, HOWEVER, TH E SETTLEMENT WAS MADE IN THIS YEAR ON FINALIZATION OF THE ACCOUNTS. THE A SSESSEE COULD HAVE ITA NO. 2388&3023(DEL)/2010 12 CLAIMED BOTH THESE EXPENSES IN THE EARLIER YEA R LEADING TO CORRESPONDING REDUCTION IN LIABILITY. THEREFORE, IT HAS BEEN RE QUESTED THAT THE EXPENDITURE MAY BE ALLOWED IN THIS YEAR. RELIANCE HAS BEEN PLACED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. VISHNU INDUSTRIAL GASES (P) LTD. DATED 6.5.2008 IN ITR NO. 229 OF 1988, A COPY OF WHICH HAS BEEN PLACED ON RECORD. THE HONBLE COURT REFER RED TO THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. N AGRI MILLS CO. LTD. , (1958) 33 ITR 681, IN WHICH IT IS MENTIONED THAT IN A MATTER SUCH AS THIS WHERE THE DEDUCTION IS OBVIOUSLY A PERMISSIBLE DEDUCTION WHY SHOULD THE INCOME-TAX AUTHORITY RAISE DISPUTE AS TO THE YEA R IN WHICH THE DEDUCTION SHOULD BE ALLOWED? IN VIEW OF THE AFORESAID OB SERVATION, THE HONBLE DELHI HIGH COURT HELD THAT THIS IS HARDLY A QUES TION THAT SHOULD REQUIRE US TO EXERCISE OUR MINDS PARTICULARLY SINCE THERE IS NO DOUBT THAT THE TAX HAS BEEN PAID AND THE RATE OF TAX REMAINS THE SA ME FOR BOTH YEARS. IN REPLY, THE LD. DR SUBMITTED THAT THE ASSESSEE HA S BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THE EXPENDITURE DOES NOT PERTAIN TO THIS YEAR. NO SUBMISSION WAS MADE BEFORE THE AO WHO H AS MENTIONED THAT THE CLAIM HAS NOT BEEN SUBSTANTIATED AS TO THE ACCOUN T ON WHICH THE EXPENDITURE WAS MADE IN THE EARLIER YEAR BUT IS BEING DEBITED IN THIS YEAR. ITA NO. 2388&3023(DEL)/2010 13 4.2 WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. WE FIND THAT THE ASSESSEE HAS CLAIME D DEDUCTION OF EXPENDITURE AMOUNTING TO RS. 4,19,544/- AS ELECTR ICITY EXPENDITURE OF MARCH, 2006, FOR WHICH THE BILL WAS RECEIVED IN APRIL, 2006. THIS FACT HAS NOT BEEN PROVED BY THE ASSESSEE BEFORE US. THE ELECTRICITY BILL, PLACED ON PAGE NO. 47, IS OF AN AMOUNT OF RS. 8 ,99,024/-. IT SEEMS TO HAVE BEEN PAID ON 27.04.2006. HOWEVER, THE EXP ENDITURE ON THIS ACCOUNT IS STATED TO BE RS. 4,19,544/-. THEREF ORE, BILL ON PAGE NO. 47 IS NOT THE EXPENDITURE IN QUESTION. AS THE FACTUAL FOU NDATION THAT THE EXPENDITURE PERTAINS TO EARLIER YEAR AND WAS AL LOWABLE IN THAT YEAR BUT WAS NOT ALLOWED, HAS NOT BEEN PROVED, THE CLAIM IN THIS YEAR CANNOT BE ALLOWED FOR LACK OF ASCERTAINMENT OF THE NATUR E AND ALLOWABILITY OF THE EXPENDITURE. AS REGARDS THE ALLEGED SALES COMMI SSION, THERE IS NO EVIDENCE ON RECORD THAT THE COMMISSION WAS FINALI ZED IN THIS YEAR ALTHOUGH PERTAINING TO AN EARLIER YEAR AND IT WAS ADMISSIBL E DEDUCTION EITHER IN THE EARLIER YEAR OR IN THIS YEAR. IN VIEW OF THE LAC K OF FOUNDATION ABOUT NATURE AND ALLOWABILITY OF EXPENDITURE, NONE OF THE AFO RESAID AMOUNT CAN BE HELD TO BE DEDUCTIBLE. THUS, THIS GROUND IS DISMISS ED. ITA NO. 2388&3023(DEL)/2010 14 5. GROUND NO. 4 IN THE APPEAL OF THE ASSESSEE IS A GAINST SUSTAINING THE DISALLOWANCE OF RS. 4,80,000/- IN RESPECT OF SALA RY EXPENSES. ON THE OTHER HAND, GROUND NO. 2 IN THE APPEAL OF THE REVENUE I S AGAINST REDUCTION OF DISALLOWANCE FROM RS. 8,40,000/- TO RS. 4,80,000/- . 5.1 THE EXPENDITURE RELATES TO PAYMENT OF SALA RY TO MRS. RIDHI MANGLA AND MR. KARAN MANGLA OF RS. 1,20,000/- AND RS. 7, 20,000/- RESPECTIVELY. IT IS HELD THAT THE ASSESSEE HAS FAILED TO PROVE THAT THE EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURP OSE OF BUSINESS. THEREFORE, THE EXPENDITURE WAS DISALLOWED. 5.2 BEFORE THE FIRST APPELLATE AUTHORITY, IT WA S SUBMITTED THAT THE SALARIES WERE PAID TO THE DAUGHTER AND THE SON OF THE MANAGING DIRECTOR OF THE ASSESSEE-COMPANY. THE DAUGHTER, SMT. RIDHI MA NGLA, HOLDING THE MASTER DEGREE IN MANAGEMENT FROM LONDON SCHOOL OF ECONOMICS, WAS RESPONSIBLE FOR COST ANALYSIS. SHE WAS PAID SA LARY FOR THREE MONTHS @ RS. 40,000/- PER MONTH, TOTALING TO RS. 1,20,000/- . THEREAFTER, SHE GOT MARRIED AND NO SALARY WAS PAID TO HER. THE SON , KARAN MANGLA, IS A COMPUTER SCIENCE GRADUATE FROM IIT, DELHI. HE HE LPED THE COMPANY TO DEVELOP ERP PROGRAMME AND SOFTWARE FOR PRODUCTI ON AND QUALITY ITA NO. 2388&3023(DEL)/2010 15 DEPARTMENT OF THE COMPANY. HE WAS PAID TOTAL SA LARY OF RS. 7,20,000/-. ACCORDINGLY, IT HAS BEEN CLAIMED THAT THE EXPEN DITURE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE LD. CIT(APPEALS) CONSIDERED THE FACTS OF THE CASE AND THE SUBM ISSIONS MADE BEFORE HIM. HE DID NOT FIND ANY JUSTIFICATION FOR DISALLOWANCE OF SALARY PAID TO THE DAUGHTER AS SHE ACTUALLY WORKED AS COST ANALYST FOR THE COMPANY. IN RESPECT OF THE SON, IT IS MENTIONED THAT HE OSTEN SIBLY WORKED FOR THE COMPANY RIGHT FROM APRIL, 2006. AT THIS POINT OF TIME HE WAS STUDYING IN IIT AND HE WAS ALSO WORKING FOR THE COMPANY OF H IS FATHER. THE COMPANY HAS NOT PAID ANY SALARY TO THE DAUGHTER AFTER HER MARRIAGE. IN SUCH CIRCUMSTANCES, IT WILL BE DIFFICULT TO UNDERSTA ND HOW A FINAL YEAR STUDENT OF IIT WILL NEGLECT HIS STUDIES AND GIVE TIME TO THE COMPANY FOR DEVELOPING ERP PROGRAMME AND SOFTWARE. THE DAU GHTER OF THE ASSESSEE HELD MASTER DEGREE IN MANAGEMENT FROM LONDON SCHO OL OF ECONOMICS AND SHE WAS PAID SALARY @ RS. 40,000/- PER MONT H. AS AGAINST THIS, THE SON WAS STUDYING FOR A PART OF THE PERIOD AND THEREAFTER OBTAINED GRADUATION DEGREE, YET HE WAS PAID SALARY @ RS. 60,000/- PER MONTH. IN VIEW OF THESE IRRECONCILABLE FACTS, HE ALLOWED SALARY IN RESPECT OF THE SON FOR A PERIOD OF NINE MONTHS @ RS. 40,000/- PER MONTH. BOTH THE PARTIES ARE AGGRIEVED BY THIS ORDER. ITA NO. 2388&3023(DEL)/2010 16 5.3 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE RE FERRED TO PAGE NOS. 90 TO 93, BEING THE RETURNS OF THE SON FOR ASSESSMENT YE ARS 2005-06 AND 2006-07. THESE RETURNS SHOW RECEIPT OF SALARY OF RS. 1,7 5,000/- AND RS. 3.00 LAKH IN THE RESPECTIVE YEARS. THE CASE OF THE LD. C OUNSEL IS THAT HE WAS WORKING FOR THE COMPANY EVEN IN THE PREVIOUS YEAR RELEVAN T TO THE ASSESSMENT YEAR 2005-06. HIS EMPLOYMENT CONTINUED IN THIS YEAR ALSO. FURTHER, HE DREW OUR ATTENTION TO PAGE NOS. 58.A TO 66 OF THE PA PER BOOK, WHICH CONTAIN COST SHEETS PREPARED BY THE DAUGHTER. ACCORDING LY, IT IS ARGUED THAT SHE RENDERED SERVICES FOR WHICH SHE WAS PAID SALARY . 5.4 IN REPLY, THE LD. DR SUBMITTED THAT THE SAL ARY PAID TO THE SON WAS EXCESSIVE HAVING REGARD TO HIS QUALIFICATION AND THE QUALIFICATION OF THE DAUGHTER, WHO WAS PAID SALARY ONLY @ RS. 40,000/- PER MONTH. 5.5 WE HAVE CONSIDERED THE FACTS OF THE CASE A ND SUBMISSIONS MADE BEFORE US. FROM THE DETAILS PLACED ON RECORD R EGARDING COST SHEET PREPARED BY MRS. RIDHI MANGLA, IT IS CLEAR THAT S HE HAS RENDERED SERVICES TO THE COMPANY. THEREFORE, IT CANNOT BE SAID THA T THE ASSESSEE DID NOT DISCHARGE THE BURDEN THAT THE EXPENDITURE WAS INCURRED WHOLLY AND ITA NO. 2388&3023(DEL)/2010 17 EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. COMING TO KARAN MANGLA, IT IS SEEN FROM PAGE NOS. 67 TO 89 THAT HE PREPARED P RODUCTION AND SALES MANAGEMENT SYSTEM (USERS MANUAL) WHILE EVEN STU DYING AT INDIAN INSTITUTE OF TECHNOLOGY. HE HAS BEEN PAID SALARY IN THE EARLIER YEAR ALSO. THEREFORE, THERE IS NO REASON TO RESTRICT HIS SALARY TO NINE MONTHS. IN SO FAR AS QUANTUM OF SALARY IS CONCERNED, IT CAN BEST BE DECIDED BY THE ASSESSEE DEPENDING UPON THE BENEFIT TO BE DERIV ED FROM THE SERVICES. IN THIS CASE, THE PROVISION CONTAINED IN SECTION 4 0A(2) IS APPLICABLE. HOWEVER, NONE OF THE AUTHORITIES BELOW HAS RECOR DED THE FINDING THAT ANY OF THE CONDITIONS MENTIONED IN THE PROVISION IS APPLICABLE. THE BURDEN TO PROVE WITH SUFFICIENT EVIDENCE THAT THE SALARY WAS EXCESSIVE ETC. IS ON THE REVENUE, WHICH REMAINS UN-DISCHARGED. THEREFORE, WE ARE OF THE VIEW THAT NO PART OF THE EXPENDITURE COULD HAVE BEEN DISA LLOWED. THE RESULT IS THAT GROUND OF THE ASSESSEE IS ALLOWED AND THE GROUND O F THE REVENUE IS DISMISSED. 6. GROUND NO. 3 IN THE APPEAL OF THE REVENUE IS AGA INST ALLOWANCE OF BAD DEBT OF RS. 18,32,000/-. IN THIS CONNECTION, IT WA S SUBMITTED BEFORE THE AO THAT MATERIAL WAS SUPPLIED TO BPL ENGINEERING LTD . IN THE EARLIER YEARS, BUT DUE TO ITS BAD FINANCIAL POSITION , THE A SSESSEE COULD NOT RECEIVE THE ITA NO. 2388&3023(DEL)/2010 18 WHOLE OF THE SALE PROCEEDS. THEREFORE, THE BALANC E AMOUNT WAS WRITTEN OFF IN FINANCIAL YEAR 2006-07. THE AO HELD THAT SIN CE NO EFFORT WAS MADE TO RECOVER THE AMOUNT, THE DEBT IS NOT DEDUCTIBLE IN COMPUTING THE INCOME. THE LD. CIT(APPEALS) HELD THAT SINCE THE ASSESS EE HAS WRITTEN OFF THE AMOUNT AS BAD DEBT, THE SAME HAS TO BE ALLOWED. 6.1 BEFORE US, THE LD. COUNSEL SUBMITTED THAT THE CUSTOMER HAD ISSUED THE CHEQUE WHICH BOUNCED. THE LD. DR DID NOT F URNISH ANY PARTICULAR ARGUMENT IN THIS CONNECTION. HE MERELY RELIED ON THE ORDER OF THE AO. 6.2 WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. AFTER AMENDMENT IN SECTION 36, THE O NLY CONDITION FOR CLAIMING THE DEDUCTION OF A DEBT IS THAT IT HAS BEEN BON AFIDELY WRITTEN OFF IN THE ACCOUNTS AS BAD DEBT. NO OTHER CONDITION IS NO W REQUIRED TO BE SATISFIED. THIS FOLLOWS CLEARLY FROM THE STATUTORY LANGUAGE AS INTERPRETED IN DECISION OF HONBLE SUPREME COURT IN THE CASE OF TRS LTD . VS. CIT, (2010) 230 CTR 14. IN PARAGRAPH NO. 4, IT HAS BEEN HELD THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE DEBT HAS BEEN WRITTEN OFF AS IRREC OVERABLE IN THE ACCOUNT. NO DISPUTE HAS BEEN RAISED BY THE REVENUE BEFORE US TH AT THE DEBT HAS NOT BEEN ITA NO. 2388&3023(DEL)/2010 19 WRITTEN OFF IN THE ACCOUNT. THEREFORE, RESPECTFU LLY FOLLOWING THE AFORESAID DECISION, IT IS HELD THAT THE ASSESSEE IS ENTITL ED TO DEDUCT THIS AMOUNT IN COMPUTING THE INCOME. ACCORDINGLY, THIS GROUND IS DISMISSED. 7. GROUND NO. 4 IN THE APPEAL OF THE REVENUE IS AGA INST ALLOWANCE OF THE DEDUCTION OF RS. 24,378/- ON ACCOUNT OF CONTRIBUTI ON TO THE PROVIDENT FUND. IN THIS CONNECTION, IT IS MENTIONED IN THE ASSES SMENT ORDER THAT THE DUE DATE OF PAYMENT WAS 20.05.2006 AND ACTUAL DATE OF PAYMENT WAS 27.05.2006. SINCE THE PAYMENT WAS MADE SUBSEQU ENT TO THE DUE DATE, THE DEDUCTION WAS DENIED. THE LD. CIT(APPEALS) ALLO WED THE DEDUCTION BECAUSE THE PAYMENT HAS BEEN MADE PRIOR TO THE DUE DATE OF THE FILING OF THE RETURN. HAVING HEARD BOTH THE PARTIES, WE FI ND THAT THE FINDING OF THE LD. CIT(APPEALS) IS RIGHT IN VIEW OF THE DECISION IN THE CASE OF CIT VS. ALOM EXTRUSIONS LTD., (2009) 319 ITR 306 (SC) AN D CIT VS. AIMIL LTD. & OTHERS, (2010) 229 CTR (DEL) 418. RESPECTFULLY FOLLOWING THESE DECISIONS, THIS GROUND OF THE REVENUE IS ALSO DIS MISSED. 8. GROUND NO. 5 IN THE APPEAL OF THE REVENUE IS AGA INST ALLOWING DEDUCTION OF RS. 4,19,751/- IN RESPECT OF GRATUI TY. IN THE ASSESSMENT ORDER THIS AMOUNT HAS BEEN DISALLOWED IN COMPUTATI ON OF INCOME BY ITA NO. 2388&3023(DEL)/2010 20 REFERRING TO THE TAX AUDIT REPORT. IT WAS SUBM ITTED BEFORE THE LD. CIT(A) THAT EXPENDITURE OF RS. 2,48,428/- HAD BEEN CLAIME D IN RESPECT OF GRATUITY ON PAYMENT BASIS. THE FACTUAL DISCREPANCY WAS EX PLAINED BY STATING THAT THE PROVISION OF RS. 4,19,751/- WAS ADDED BACK I N THE COMPUTATION OF INCOME. THE LD. CIT(APPEALS) CONSIDERED THE FA CTS AND DELETED THE ADDITION OF RS. 4,19,751/- MADE BY THE AO. THIS F INDING AS PER HIS ORDER MEANS THAT THE DEDUCTION OF RS. 2,48,428/- STAND S ALLOWED ON PAYMENT BASIS. 8.1 BEFORE US, THE AFORESAID FACTS WERE REPEAT ED. OUR ATTENTION HAS BEEN DRAWN TOWARDS PAGE NO. 42 OF THE PAPER BOO K, WHICH IS GRATUITY PAYABLE ACCOUNT, WHICH SHOWS OPENING BALANCE OF R S. 8,90,594/-. THERE ARE FOUR DEBITS IN THE ACCOUNT AGGREGATING TO RS. 2,48,428/-. THE BALANCE OF RS. 6,42,156/- HAS BEEN CARRIED FORWARD. THE ACCO UNTS SHOW THAT THE ASSESSEE CLAIMED DEDUCTION ONLY IN RESPECT OF THE AMOUNT PAID IN THIS YEAR OUT OF THE OPENING BALANCE. THUS, NO EXPENDITUR E WAS IN FACT DEBITED IN THE ACCOUNTS OF THIS YEAR. WHILE COMPUTING THE IN COME, THE ASSESSEE DISALLOWED PROVISION OF GRATUITY AMOUNTING TO RS. 4,19,751/- AND CLAIMED THE EXPENDITURE OF RS. 2,48,428/-. TO US, THE BAS IS OF DISALLOWANCE OF RS. ITA NO. 2388&3023(DEL)/2010 21 4,19,751/- IS NOT CLEAR. HOWEVER, IT IS CLEAR T HAT THE ASSESSEE CLAIMED THE EXPENDITURE ON PAYMENT BASIS AT RS. 2,48,428/-. T HIS AMOUNT HAS BEEN ALLOWED BY THE LD. CIT(APPEALS). THE EXPENDITUR E IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AS PAYME NT OF GRATUITY TO THE EMPLOYEES. THEREFORE, WE DO NOT FIND ANY INFIRM ITY IN HIS ORDER. ACCORDINGLY, THIS GROUND IS ALSO DISMISSED. 9. GROUND NOS. 5, 6 AND 7 IN THE APPEAL OF THE A SSESSEE HAVE NOT BEEN ARGUED BY THE LD. COUNSEL. HOWEVER, THE AO IS DIR ECTED TO RE-COMPUTE INTEREST CHARGEABLE UNDER SECTIONS 234B AND 234C WHILE GIVING EFFECT TO THIS ORDER. 10. GROUND NO. 6 IN THE APPEAL OF THE REVENUE IS A RESIDUARY GROUND, WHICH HAS NOT BEEN ARGUED. THE SAME IS DISMISSED . 11. IN THE RESULT, BOTH THE APPEALS ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. SD/- SD/- (R.P. TOLANI) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER SP SATIA ITA NO. 2388&3023(DEL)/2010 22 COPY OF THE ORDER FORWARDED TO:- M/S SH HARYANA WAIRES LTD., NEW DELHI. JCIT, RANGE-8, NEW DELHI. CIT(A) CIT THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.