Kailash dairy Ltd, V. ACIT Circle One, Meerut

ITA 2492/DEL/2008

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9727 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 18-08-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 11-07-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BK GUPTA
• Assessee Lawyers: CHANDER MEHRA
• Keywords: Business income; Business expenditure; Capital Gains
• Section: 40A(3); 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D: NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI DEEPAK R. SHAH, ACCOUNTANT MEMBER I.T.A.NO.2492/DEL/2008 ASSESSMENT YEAR : 2004-05 KAILASH DAIRY LIMITED, ASSTT. COMMISSIONER OF INCOME-TAX, C/O MEHRA & CO., VS. CIRCLE ONE, MEERUT. CHARTERED ACCOUNTANTS, 7, RAJESHWARI PALACE, NEAR COMMISSIONER RESIDENCE, CIVIL LINES, MEERUT. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI CHANDER MEH RA, FCA RESPONDENT BY : SHRI B.K. GUPTA, S R. DR. O R D E R PER DEEPAK R. SHAH, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS), MEERUT, DATED 5 TH MAY, 2008 IN AN APPEAL AGAINST THE ASSESSMENT FRAMED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (THE ACT). 2. THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGE D IN THE BUSINESS OF PROCESSING AND TRADING OF MILK PRODUCTS. 2 3. THE FIRST GROUND OF APPEAL IS AGAINST DISALLOWAN CE OF RS.85,630/- ON ACCOUNT OF ELECTRICITY EXPENSES. FROM THE DETAILS OF ELECTRICITY BILLS, THE ASSESSIN G OFFICER OBSERVED THAT THE EXPENSES CONTAINED BILLS RELATABLE TO TWO RESIDENTIAL PREMISES OCCUPIED BY THE DIRECTOR. THE SAME WERE THEREFORE, HELD AS NOT RELATED TO BUSINESS AND HENCE WERE DISALLOWED. BEFORE THE LEARNED CIT(A) IT WAS CONTENDED THAT SIM ILAR PAYMENTS WERE MADE IN EARLIER YEAR. THE ELECTRICITY EXPENSE S ARE INCLUDED IN THE REMUNERATION OF DIRECTORS. THE DIRECTORS ARE WORKI NG FROM RESIDENCE AND HENCE THE EXPENSES ON ELECTRICITY SHOULD HAVE BEEN ALLOWED. THE LEARNED CIT(A) HELD THAT THE ELECTRICITY EXPENSES AT THE RE SIDENCE OF THE CHAIRMAN AND MANAGING DIRECTOR CANNOT BE ALLOWED IN FULL AS BUSINESS EXPENSES. THE RESIDENCE OF ONE OF THE DIRECTORS IS ALSO REGISTERE D OFFICE AND HENCE SOME PORTION OF IT CAN BE TREATED AS USED FOR BUSINESS P URPOSES. ACCORDINGLY, 1/8 TH OF ELECTRICITY EXPENSES AT THE REGISTERED OFFICE WE RE HELD ALLOWABLE AND BALANCE EXPENSES WERE DISALLOWED. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI CHANDE R MEHRA SUBMITTED THAT IN EARLIER YEAR THERE WERE NO DISALLOWANCES. IN THE SUBSEQUENT YEAR THE CIT(A) HAD TREATED 75% OF THE EXPENSES AT REGISTERE D OFFICE AS RELATABLE TO BUSINESS AND HENCE THE SAME SHOULD HAVE BEEN ALLOWE D. 3 THE LEARNED DR SHRI B.K. GUPTA ON THE OTHER HAND, S UBMITTED THAT THE DIRECTORS ARE NOT SHOWING ELECTRICITY EXPENSES AS R EMUNERATION OR PERQUISITE. THE RESOLUTION OF THE COMPANY WAS NOT FILED IN THIS REGARD. THEREFORE, THE DISALLOWANCE IS TO BE UPHELD. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE A SSESSEE HAS NOT FILED ANY DETAILS AS TO WHETHER THE ELECTRICITY AT THE RE SIDENCE OF TWO DIRECTORS WERE TREATED AS PERQUISITE IN THEIR HANDS AND OFFERED FO R TAX. IF THE ELECTRICITY EXPENSES AT THE RESIDENCE OF THE DIRECTORS ARE CONS IDERED AS PERQUISITE IN THE HANDS OF RESPECTIVE DIRECTORS, THE SAME CAN BE CONS IDERED AS EXPENSES INCURRED IN THE COURSE OF BUSINESS AND HENCE ALLOWA NCE AS SUCH. TO VERIFY THE SAME, THE MATTER IS RESTORED BACK TO THE FILE O F THE ASSESSING OFFICER. HOWEVER, IF IT IS FOUND THAT SUCH AMOUNT IS NOT INC LUDED AS PERQUISITE IN THE HANDS OF THE DIRECTORS, THE DISALLOWANCE CAN BE UPH ELD IN RESPECT OF RESIDENCE NOT USED AS REGISTERED OFFICE. IN RESPECT OF RESID ENCE ALSO USED AS REGISTERED OFFICE, SINCE THE REGISTERED OFFICE IS NOT USED MAI NLY FOR THE PURPOSE OF BUSINESS BUT ONLY FOR LIMITED STATUTORY REQUIREMENT , IT WILL BE APPROPRIATE TO ALLOW 25% OF THE ELECTRICITY EXPENSES OF THE RESIDE NCE USED AS REGISTERED OFFICE. 4 6. NEXT GROUND OF APPEAL IS AGAINST DISALLOWANCE OF RS.21,887/- BEING 20% OF RS.1,09,434/- ON ACCOUNT OF DIESEL PURCHASED BY INVOKING SECTION 40A(3) OF THE ACT. 7. THE ASSESSEE PURCHASED DIESEL IN RESPECT OF WHIC H PAYMENT WAS MADE OTHERWISE THAN BY ACCOUNT PAYEE CHEQUE OR DRAFT IN RESPECT OF PAYMENT EXCEEDING RS.20,000/-. THE PAYMENTS WERE MADE AS U NDER:- 1. 06.03.04 RS.57,096/- HOLI (BREAK-UP BEING RS.38064 + RS.19,032) 2. 07.03.04 RS.28,548/- DHULENDI 3. 08.03.04 RS.23,790/- MIDNIGHT ----------------- TOTAL RS.1,09,434/- ----------------- THE SAME WERE DISALLOWED BY THE ASSESSING OFFICER B Y INVOKING SECTION 40A(3). BEFORE THE LEARNED CIT(A) IT WAS CONTENDED THAT THE APPLICABILITY OF SECTION 40A(3) IS SUBJECT TO THE EXCEPTION PROVIDED IN RULE 6DD. AS PER RULE 6DD(K) WHERE THE PAYMENTS WERE REQUIRED TO BE MADE ON A DAY ON WHICH BANK WAS CLOSED EITHER ON ACCOUNT OF HOLIDAY OR STRIKE, THE SAME IS EXCEPTION AND HENCE, NO DISALLOWANCE CAN BE MADE BY INVOKING SECTION 40A(3). IT WAS SUBMITTED THAT HOLI AND DULHENDI AR E BANK HOLIDAYS. THE PURCHASES WERE REQUIRED TO BE MADE FOR PURPOSE OF G ENERATOR MAINTENANCE. THE LEARNED CIT(A) HELD THAT AS PER CLAUSE (K) OF R ULE 6DD, THE SAME CAN BE ACCEPTED ONLY WHEN THE PAYMENT WAS REQUIRED TO BE MADE. THE ASSESSEE IS 5 REGULARLY PURCHASING DIESEL FROM M/S. KISAN FILLING CENTRE WHICH WHOM THE ASSESSEE HAS RUNNING ACCOUNT. THOUGH THE BANKS WER E NOT OPEN ON THESE DATES BUT NO EMERGENCY SITUATION WAS EXPLAINED. TH E PAYMENT COULD HAVE BEEN MADE TO THE REGULAR CLIENT AFTER 2 OR 3 DAYS. THERE WAS NO NECESSITY OF MAKING CASH PURCHASES ON THESE DAYS. HE ACCORDINGL Y UPHELD THE DISALLOWANCE TO THE ABOVE EXTENT. 8. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT WHEN THE PURCHASES ARE MADE IN CASH, THE PAYMENT IS ALSO REQ UIRED TO BE MADE IMMEDIATELY. THE DAY BEING BANK HOLIDAY, THE AMOUN T COULD NOT BE PAID BY ACCOUNT PAYEE CHEQUE OR DRAFT AND HENCE IN TERMS OF RULE 6DD(K), THE AMOUNT COULD NOT BE DISALLOWED UNDER SECTION 40A(3) . THE LEARNED DR ON THE OTHER HAND, ADOPTED THE CONCLUSION OF LEARNED C IT(A). 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS BY NOW SETTLED LAW THAT HOW AND ON WHAT TERMS THE BUSINESS SHOULD BE C ONDUCTED IS THE PREROGATIVE OF THE ASSESSEE AND THE ASSESSING OFFIC ER CANNOT SIT IN THE ARM- CHAIR OF THE ASSESSEE TO DECIDE AS TO HOW THE BUSIN ESS SHOULD BE CONDUCTED OR WHEN THE PAYMENT SHOULD BE MADE. WHETHER THE PAYME NT WAS REQUIRED TO BE MADE IS A FACT BETWEEN THE PARTIES AND THE ASSESSIN G OFFICER CANNOT QUESTION AS TO WHY THE PAYMENT WAS MADE ON A BANK HOLIDAY OR THAT WHY THE ASSESSEE COULD NOT WAIT FOR 2-3 DAYS. THE URGENCY OF THE SI TUATION IS WELL UNDERSTOOD 6 BY THE ASSESSEE ALONE AND NOT SUBJECT TO THE APPROV AL FROM THE ASSESSING OFFICER. THE FACT IS TO BE EXAMINED IS WHETHER THE PAYMENT WAS MADE ON A BANK HOLIDAY OR NOT. IF AS PER THE ASSESSEE THE PA YMENT WAS REQUIRED TO BE MADE ON A BANK HOLIDAY, THE SAME IS AN EXCEPTION CO VERED IN CLAUSE (K) OF RULE 6DD AND HENCE DISALLOWANCE CANNOT BE MADE UNDE R SECTION 40A(3) OF THE ACT. THE BUSINESS OF THE ASSESSEE REQUIRES THAT THE GENERATOR SHOULD FUNCTION AND FOR GENERATOR TO RUN AVAILABILITY OF D IESEL IS A PRE-CONDITION. THUS THE PAYMENT WAS MADE DUE TO BUSINESS EXPEDIENC Y AND HENCE SINCE THE PAYMENT WAS MADE ON BANK HOLIDAY OR AT A TIME WHEN THE BANKS WERE NOT FUNCTIONING, THE AMOUNT CANNOT BE DISALLOWED UNDER SECTION 40A(3) OF THE ACT. WE, THEREFORE, DELETE THE DISALLOWANCE OF RS. 21,887/-. 10. NEXT GROUND OF APPEAL IS AGAINST DISALLOWANCE O F A SUM OF RS.3,03,530/- BEING PURCHASE OF LAND BY INVOKING PR OVISION OF SECTION 40A(3) OF THE ACT. 11. THE ASSESSEE FOR ITS EXPANSION HAD PURCHASED LA ND AT DIFFERENT PLACES BUT COULD NOT COMMENCE THE PROJECT AT SUCH LAND. S INCE IN THE OPINION OF THE ASSESSEE THE PROJECT WAS NOT VIABLE AT SUCH PLACES, THE LAND WAS SOLD FROM WHICH A SHORT TERM CAPITAL GAIN OF RS.20,500/- WAS OFFERED FOR TAX. THE ASSESSING OFFICER HELD THE PURCHASE OF LAND FOR RS. 15,17,650/- WAS BY WAY OF CASH AND HENCE THE SAME IS DISALLOWABLE UNDER SE CTION 40A(3) OF THE ACT. 7 THE ASSESSING OFFICER HELD THAT THERE WERE 10 DIFFE RENT TRANSACTIONS FOR PURCHASE OF LAND BETWEEN 21 ST APRIL 2003 TO 5 TH MARCH, 2006. THEREFORE, PURCHASE AND SALE OF LAND IS TO BE TREATED AS BUSIN ESS TRANSACTION AND HENCE SUCH PURCHASE PRICE CANNOT BE ALLOWED UNDER SECTION 40A(3) OF THE ACT. ACCORDINGLY 20% OF SUCH SUM WAS DISALLOWED. THIS R ESULTED INTO DISALLOWANCE OF RS.3,03,530/-. 12. BEFORE THE LEARNED CIT(A) IT WAS CONTENDED THAT EVEN AS PER OBJECT CLAUSE THE ASSESSEE WAS NEVER SET UP FOR CONDUCTING BUSINESS IN LANDS. THE LANDS WERE ACQUIRED ONLY FOR EXPANSION PURPOSES BUT WHEN IT WAS FOUND THAT THE SAME IS NOT VIABLE, SUCH LAND WAS SOLD AND CAPI TAL GAIN WAS OFFERED FOR TAX. IN THE COMPUTATION STATEMENT THE INCOME IS SH OWN UNDER THE HEAD CAPITAL GAIN WHICH HAD BEEN ACCEPTED BY THE ASSES SING OFFICER AS SUCH. THEREFORE, PROVISION OF SECTION 40A(3) CANNOT BE AP PLIED. THE LEARNED CIT(A) HELD THAT SINCE THE PAYMENT IS BY WAY OF MON EY LAID OUT OR SPENT WHICH HAS GONE IRRETRIEVABLY, WOULD BE COVERED BY S ECTION 40A(3). SECTION 40A(3) IS INVOKED TO COUNTER THE EVASION OF TAX THR OUGH CLAIM OF EXPENDITURE SHOWN TO HAVE BEEN INCURRED IN CASH WITH A VIEW TO FRUSTRATING PROPER INVESTIGATION. THE EXPENDITURE WILL INCLUDE ANY PA YMENT. THEREFORE, THE DISALLOWANCE IS TO BE UPHELD. EVEN THE ASSESSING O FFICER HAS HELD THAT THE ASSESSEE WAS INDULGED IN PURCHASE AND SALE OF LAND AS ADVENTURE IN THE NATURE 8 OF TRADE AND THEREFORE, THE PAYMENTS ARE TO BE TREA TED AS IN RESPECT OF STOCK- IN-TRADE. ACCORDINGLY DISALLOWANCE WAS UPHELD. 13. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LEARNED CIT(A). IT WAS CONTENDED THAT S ECTION 40A(3) APPLIES ONLY IN RESPECT OF EXPENDITURE REFERRED TO IN SECTI ONS 30 TO 37 OF THE ACT. SINCE THE PURCHASE PRICE OF LAND WAS NEVER CLAIMED DEDUCTIBLE IN COMPUTATION OF BUSINESS INCOME, SECTION 40A(3) HAS NO APPLICATION. THE INCOME IS ASSESSED AS CAPITAL GAIN ONLY IN SPITE OF RECORDING THAT THE ASSESSEE IS INDULGED IN PURCHASE AND SALE OF LAND. THUS, SE CTION 40A(3) CANNOT BE APPLIED. THE LEARNED DR ON THE OTHER HAND, RELIED UPON THE F INDING OF THE LEARNED CIT(A). 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SECT ION 40A IS A NON OBSTANTE CLAUSE AND THE SAME IS IN RELATION TO COMP UTATION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSI ON. THUS SECTION 40A(3) CAN BE APPLIED ONLY WHERE THE INCOME IS COMPUTED UN DER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. UNDISPUTEDLY THE INCOME IS ASSESSED UNDER SECTION 45 UNDER THE HEAD CAPITAL GAINS AND HENCE SECTION 40A(3) HAS NO APPLICATION FOR DISALLOWANCE OF 20% O F THE PURCHASE PRICE OF 9 THE LAND. WHILE COMPUTING INCOME UNDER THE SPECIF IC HEAD THE PROVISION CONTAINED FOR COMPUTING SUCH INCOME UNDER CHAPTER I V CAN BE APPLIED. THUS WHILE COMPUTING INCOME UNDER THE HEAD CAPITAL GAIN ONLY PROVISION CONTAINED IN SECTIONS 45 TO 55 AS CONTAINED IN CHAP TER IV-E WILL BE APPLIED AND NOT THOSE CONTAINED IN CHAPTER IV-D IN RELATION TO COMPUTATION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINES S OR PROFESSION. THE SCHEDULER SYSTEM OF COMPUTATION OF INCOME UNDER RES PECTIVE HEADS ALSO PRESCRIBE THAT INCOME UNDER THE RESPECTIVE HEAD CAN BE COMPUTED ONLY UNDER SPECIFIC CHAPTER IN RELATION TO COMPUTATION OF INCO ME. THEREFORE, SECTION 40A(3) CANNOT BE INVOKED WHICH IS PART OF CHAPTER I V-D WHILE COMPUTING CAPITAL GAINS UNDER SECTION 45 WHICH IS PART OF CHA PTER IV-E OF THE ACT. ACCORDINGLY DISALLOWANCE OF RS.3,03,530/- IS DELETE D. 15. NEXT GROUND OF APPEAL IS AGAINST DISALLOWANCE O F RS.76,479/- ON ACCOUNT OF CHARITY. 16. FROM THE COMPUTATION OF TOTAL INCOME AS FILED B EFORE THE ASSESSING OFFICER, WE FIND THAT THE ASSESSEE ITSELF HAS DISAL LOWED THE AMOUNT OF RS.76,479/- AS DISALLOWABLE WHILE COMPUTING PROFITS OF BUSINESS. THE ASSESSING OFFICER HAS COMPUTED INCOME STARTING WITH THE INCOME OFFERED BY THE ASSESSEE. THEREFORE, SEPARATE DISALLOWANCE IN RESPECT OF CHARITY OF 10 RS.76,479/- IS NOT WARRANTED. ACCORDINGLY, ADDITIO N OF RS.76,479/- IS DELETED. 17. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 11 TH SEPTEMBER, 2009. SD/- SD/- (A.D. JAIN) (DEEPAK R. SHAH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 11 TH SEPTEMBER, 2009. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.