ACIT - 8(3), MUMBAI V. M/s. SUBASH SILK MILLS LTD., MUMBAI

ITA 2907/MUM/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1146 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 11-12-2009
• Assessment Year: 1998-1999
• Appeal Filed On: 13-04-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HEMANT J LAL
• Keywords: Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, E BENCH, MUMBAI. BEFORE SHRI S.V.MEHROTRA, AM & SMT. ASHA VIJAYRAGH AVAN,JM I.T.A NO.2907/MUM/2007 ASSESSMENT YEAR: 1998-99 THE ACIT 6(3), V. SUBASH SILK MILLS LTD., AAYAKAR BHAVAN, M.K. ROAD, 9, MARINE CHAMBERS, N EW MARINE MUMBAI. LINES, MUMBAI-20. PA NO.AAACS 9966 J (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI HEMANT J LAL RESPONDENT BY : SHRI SHEKHAR GUPTA O R D E R PER S.V.MEHROTRA, AM THE APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 25.1.2007 OF LD CIT (A)-XXIX, MUMBAI FOR THE ASSESSMENT YEAR 1998-99. GROUNDS RAISED BY THE REVENUE READ AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD CIT (A) ERRED IN NOT UP-HOLDING THE ACTION OF THE A O IN REJECTING BOOKS RESULTS AND APPLYING THE PROVISIONS OF SECTION 145( 3) OF THE I.T.ACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD CIT (A) ERRED IN NOT UPHOLDING THE ACTION OF THE AO IN ESTIMATING THE SALES AT RS.35 CRORES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD CIT (A) ERRED IN NOT UPHOLDING THE ACTION OF THE AO IN APPLYING GROSS PROFIT OF 10% ON THE TURNOVER OF RS.35 CRORES. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD CIT (A) ERRED IN NOT UPHOLDING THE ACTION OF THE AO IN MAKING ADDITION OF RS.40 LAKHS IN RESPECT OF TRANSACTIONS NOT RECORDED IN BOOKS OF ACCOUNTS.. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD CIT (A) ERRED IN DELETING THE DISALLOWANCE OF RS.8,08,699/- PAID UNDER THE ITA NO.2907/M/07 M/S. SUBASH SILK MILLS LTD. 2 VOLUNTARY RETIREMENT SCHEME WITHOUT GIVING ANY FIND ING AS TO WHETHER SECTION 35DDA IS APPLICABLE EARLIER TO 1.4.2001 AND WITHOUT EXAMINING THE FACTS OF THE CASE AS TO WHETHER THERE WAS ENDURING BENEFIT. 2. FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY, IN THE RELEVANT ASSESSMENT YEAR, CARRIED ON THE BUSINESS OF MANUFACTURING OF CLOTH. IT HAD FILED ITS RETURN OF INCOME SHOWING LOSS OF RS.3,13,23,890/-, WHICH WAS SUBSEQU ENTLY REVISED TO RS.3,07,82,667/-. THE AO HAS OBSERVED IN THE ASSESSMENT ORDER THAT DU RING THE COURSE OF ASSESSMENT PROCEEDINGS OF SHRI NARAYAN U MATHAAI, PROPRIETOR O F M/S. GRACE INTERNATIONAL FOR A.Y. 1997-98, IT TRANSPIRED THAT GRACE INTERNATIONAL H AD DONE HAWALA TRANSACTION AS THE EXPENSES HAD NOT BEEN INCURRED TO CARRY OUT THE TRA DING OF RS.2.65 CRORES. HE FURTHER OBSERVED THAT THE AO OF M/S. GRACE INTERNATIONAL GA THERED INFORMATION U/S.133(6) AND NOTICED THAT 17 PARTIES FROM WHOM M/S. GRACE INTER NATIONAL ALLEGEDLY PURCHASED TEXTILE GOODS AND SOLD TO M/S. SUBHASH SILK MILLS LTD., I.E . THE ASSESSEE COMPANY HAD ADMITTED THAT THEY HAD NEITHER PURCHASED THE GOODS NOR THEY HAD SOLD THE GOODS. FROM THE STATEMENTS OF SHRI MUKESH ARORA, SHRI JITENDRA JHON SA, SHRI DEEPAK KHANNA, SHRI NITIN KUMAR JAIN, IT WAS FOUND THAT THE BILLS WERE ISSUED BY THEM AT THE INSTANCE OF SHRI DEEPAK KHANNA, FINANCE MANAGER OF M/S. SUBHASH SILK MILLS LTD, SHRI MUKESH ARORA, SHRI JITENDRA JHONSA ALSO ADMITTED THAT THEY HAD NO T TAKEN THE DELIVERY OF GOODS AND THE GOODS WERE LYING IN THE POSSESSION OF M/S. SUBH ASH SILK MILLS LTD. THEY REQUIRED THE ASSESSEE TO PRODUCE THE PARTIES ALONGWITH THEIR BOO KS OF ACCOUNT BUT THE ASSESSEE EXPRESSED ITS INABILITY TO DO THE SAME, FOR WHICH, A DETAILED REPLY WAS SUBMITTED AS REPRODUCED AT PAGE 3 OF THE ASSESSMENT ORDER. THE AO FURTHER OBSERVED THAT THE ONUS WAS ON THE ASSESSEE TO ESTABLISH THE GENUINENESS OF THE TRANSACTIONS RECORDED IN ITS BOOKS OF ACCOUNT, WHICH HE FAILED TO DISCHARGE. TH E AO HAD PROVIDED THE EVIDENCE GATHERED BY THE AO OF M/S. GRACE INTERNATIONAL IN THE FORM OF STATEMENTS OF SHRI MUKESH AROA, SHRI JTENDRA JHONSA, SHRI DEEPAK KHANN A AND SHRI NITIN KUMAR JAIN. THE AO FINALLY CONCLUDED THAT THE ALLEGED TRANSACTIONS WITH THESE PARTIES WERE MAINLY FOR GETTING REQUISITE FINANCES AND THEY HAD ONLY ISSUE D BILLS. THUS, THE ASSESSEE SUBMITTED A DETAILED REPLY, WHICH HAS BEEN REPRODUCED AT PAGE S 4 TO 9 OF THE ASSESSMENT ORDER AFTER CONSIDERING WHICH, THE AO REJECTED THE ASSESS EES BOOKS OF ACCOUNT AND ESTIMATED THE TURNOVER AT RS.35 CRORES AS AGAINST RS.22.10 CR ORES DECLARED BY THE ASSESSEE. HE ALSO MADE THE ADDITION IN REGARD TO FALL IN G.P. RA TE. HE ADOPTED THE G.P. RATE AT 10% ITA NO.2907/M/07 M/S. SUBASH SILK MILLS LTD. 3 AND THUS MADE AN ADDITION OF RS.269.46 LAKHS BEING THE DIFFERENCE BETWEEN (RS.350 LAKHS RS.80.54 LAKHS). HE FURTHER OBSERVED THAT SINCE THE ASSESSEE HAD NOT RECORDED ALL THE TRANSACTIONS IN ITS BOOKS OF ACCOUNT, THERE FORE, IT MUST HAVE INVESTED SOME FUNDS IN THESE TRANSACTIONS. HE, ACCORDINGLY, MADE AN AD DITION OF RS.40 LAKHS ON THIS COUNT. THE AO FURTHER NOTICED THAT THE ASSESSEE HAD PAID V RS COMPENSATION OF RS.8,08,699/- WHICH HE DISALLOWED TREATING THE SAME AS CAPITAL IN NATURE. 3. THE LD CIT (A) OBSERVED THAT THOUGH TECHNICALLY, THE AO WAS CORRECT IN REJECTING THE BOOKS OF ACCOUNT BECAUSE THE PURCHASES IN RESPE CT OF FOUR PARTIES AND SALES IN RESPECT OF NINE PARTIES RECORDED IN THE BOOKS WERE NOT GENUINE BUT THE CONSEQUENCE OF THIS HAD TO BE TAKEN INTO CONSIDERATION AND UNLESS IT WAS TO REDUCE THE TAX LIABILITY OR SUPPRESSION OF INCOME, NO FRUITFUL PURPOSE WOULD BE SERVED BY REJECTING THE BOOKS OF ACCOUNT. HE OBSERVED THAT THE OBJECT WAS TO FACILI TATE THE LOAN FROM BANK. HE FURTHER OBSERVED THAT SIMILAR ISSUE HAD COME UP IN EARLIER YEARS, WHEREIN, LD CIT (A) HAD ALLOWED THE ASSESSEES APPEAL AND HAD ACCEPTED THAT SUCH FINANCIAL TRANSACTION OF BADLA FINANCE WERE ADMITTED WAY OF DOING BUSINESS. HE FU RTHER OBSERVED THAT SIMILAR ISSUE HAD COME UP IN THE CASE OF SUBHASH KNITTING INDUSTR IES FOR THE ASSESSMENT YEAR 1987- 88 AND THE TRIBUNAL VIDE ITS ORDER DATED 3.2.1997 I N ITA NO.7703/BOM/90 HAD ACCEPTED THE ASSESSEES CONTENTION. HE FURTHER OBSERVED THA T NO EVIDENCE HAD BEEN BROUGHT ON RECORD TO SHOW THAT BY ARTIFICIALLY INCREASING SALE S AND PURCHASE IN RESPECT OF THESE 13 PARTIES, INCOME HAD BEEN REDUCED IN ANY WAY. ON TH E CONTRARY, HE POINTED OUT THAT THOUGH THE AO STATED THAT THE ASSESSEE HAD INFLATED THE ARTIFICIALLY ITS SALES FIGURE BUT AFTER REJECTING BOOKS OF ACCOUNT, HE HAD NOT ONLY A LLOWED THESE SALES FIGURE TO CONTINUE BUT HAD ADDED FURTHER TO THE TURNOVER ON ESTIMATE B ASIS. POINTING OUT ALL THESE ASPECTS, LD CIT (A) HELD THAT NO PURPOSE WOULD BE SERVED BY REJECTING THE BOOKS OF ACCOUNT FOR THE SAKE OF REJECTING IT UNLESS FINDINGS WAS GIVEN, SIMULTANEOUSLY, THAT CERTAIN TRANSACTION NOTED IN BOOKS OF ACCOUNT WERE INTENDED TO REDUCE THE TAX LIABILITY. HE ALSO POINTED OUT THAT THOUGH THE ASSESSEE WAS CLAIMING T HESE TRANSACTIONS AS GENUINE BUT AT THE SAME TIME, HE WAS CLAIMING ACCOMMODATION CHARGE S ALSO, THEREFORE, THIS STAND OF THE ASSESSEE WAS NOT ACCEPTABLE. HE HELD THAT THE ACCOMMODATION CHARGES AMOUNTING TO RS.5,93,597/- WERE NOT ALLOWABLE. HE, ACCORDING LY, DELETED THE ADDITION MADE ON ACCOUNT OF ESTIMATE IN TURNOVER AND ALSO IN REGARD TO G.P. ADDITION. HE ALSO DELETED THE ITA NO.2907/M/07 M/S. SUBASH SILK MILLS LTD. 4 ADDITION OF RS.40 LAKHS MADE ON ACCOUNT OF ASSUMED INVESTMENTS IN THE TRANSACTIONS NOT RECORDED IN THE BOOKS OF ACCOUNT ON SAME COUNT. AS REGARDS THE DISALLOWANCE ON ACCOUNT OF VOLUNTARY RETIREMENT SCHEME, HE ALLOWED THE ASSESSEES APPEAL FOLLOWING THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF MADURA COATS V DCIT, 273 ITR 32 (MAD) AND THE DECISION OF THE HONBLE BOMBAY HIG H COURT IN THE CASE OF CIT V. BHOR INDUSTRIES, 264 ITR 180 (BOM). 4. LD D.R. SUBMITTED THAT THOUGH THE LD CIT (A) UPH ELD THE FINDINGS OF THE AO REGARDING THE REJECTION OF BOOKS OF ACCOUNT BUT STI LL ACCEPTED THE BOOK RESULTS. HE RELIED ON THE ORDER OF THE AO. 5. LD COUNSEL FOR THE ASSESSEE REFERRED TO THE DECI SION OF THE ITAT MUMBAI BENCHES IN ASSESSEES OWN CASE FOR AYS 1997-98 AND 1998-99, WHEREIN, THE TRIBUNAL HAD ACCEPTED THE ASSESSEES MODUS OPERANDI. THEREFORE, THERE WAS NO BASIS FOR REJECTION OF BOOKS OF ACCOUNT. HE RELIED ON THE ORDER OF THE LD CIT (A). 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE RECORD OF THE CASE. THE MAIN CONTENTION OF THE DEPARTMENT IS THAT SINCE THE BOOKS OF ACCOUNT WERE REJECTED, THEREFORE, THE AO HAD TO RESORT TO MAKE THE ESTIMAT E AND, THEREFORE, THE ADDITION WAS REQUIRED TO BE MADE. WE FIND IT DIFFICULT TO ACCEP T THIS PROPOSITION BECAUSE MERE REJECTION OF BOOKS OF ACCOUNT DOES NOT LEAD TO CONC LUSION THAT THE ADDITION IS CALLED FOR. THE AO HAS TO TAKE INTO CONSIDERATION THE ENTIRE MA TERIAL ON RECORD TO COME TO THE CONCLUSION WHETHER THE BOOK RESULTS ARE TO BE COMPL ETELY IGNORED OR NOT. IN THE PRESENT CASE, THE BOOKS OF ACCOUNT WERE REJECTED FOR TECHN ICAL REASONS BUT AT THE SAME TIME, THERE IS NO AVERMENT OF THE AO IN THE ASSESSMENT OR DER REGARDING SUPPRESSION OF TURNOVER OR REDUCTION OF TAX LIABILITY. WE ARE IN AGREEMENT WITH LD CIT (A) THAT UNLESS SUCH FINDINGS ARE RECORDED BY THE AO, NO FRUITFUL P URPOSE WOULD BE SERVED BY REJECTING THE BOOKS OF ACCOUNT. THE ASSESSEES CONTENTION TH AT MAINLY THE BOOK ENTRIES WERE MADE FOR OBTAINING BANK FINANCE, HAS NOT BEEN FAULT ED WITH AND IF A REGULAR SYSTEM IS PREVALENT IN THE COMMERCIAL FIELD, THEN THE SAME CA NNOT BE A BASIS FOR MAKING THE ADDITION ON ESTIMATE BASIS. WE FIND THAT IN A.Y. 1 997-98, THIS MODUS OPERANDI WAS ACCEPTED BY THE TRIBUNAL IN ITA NO.2803/M/2003, OBS ERVING AS UNDER: ITA NO.2907/M/07 M/S. SUBASH SILK MILLS LTD. 5 5. THE ABOVE EXPLANATIONS OF THE ASSESSEE FOUND FA VOUR WITH THE CIT (A). HE FOUND THAT SIMILAR ISSUE WAS ALREADY ADJUDICATED BY THE CIT (A) IN THE CASE OF SUBHASH KNITTING INDUSTRIES, A GROUP COMPANY AND TH E CIT(A) HELD THAT THESE TRANSACTIONS HAVE BEEN DONE WITH A VIEW TO OBTAIN B ANK FINANCE AND THE PROFIT OF ABOUT 20 PAISE PER METRE GIVEN TO THESE PARTIES WAS REASONABLE AND THE ITAT MUMBAI BENCH B VIDE ITS ORDER DATED 03 RD FEBRUARY, 1997 IN ITA NO.7703 IN THAT CASE UPHELD THAT DECISION OF THE CIT (A). THE LD C IT (A) FURTHER HELD THAT IT IS IMPOSSIBLE TO ACHIEVE HIGHER TURNOVER UNLESS BADLA FINANCE IS ARRANGED AND IN THE COURSE OF MANUFACTURE OF FABRICS THE FUNDS AVAILABL E ARE INSUFFICIENT UNLESS THE BADLA FINANCE IS ARRANGED FOR EACH STAGE OF MANUFAC TURE. IT IS A NORMAL PRACTICE BEING FOLLOWED IN THE INDUSTRY AND THE SAME CANNOT BE TERMED AS UNLAWFUL TRANSACTIONS. 6. RIVAL CONTENTIONS HEARD. BEFORE US NOTHING NEW H AS BEEN ADDUCED BY THE REVENUE. IT IS ALSO NOT CONTROVERTED THAT THE FACT S AND CIRCUMSTANCES OF THE IMPUGNED ISSUE IS IDENTICAL TO THE DECISION OF THE TRIBUNAL IN THE CASE OF SUBHASH KNITTING INDUSTRIES (SUPRA). IN THE CIRCUMSTANCES, FOLLOWING THE CO-ORDINATE BENCH ORDER, WE DO NOT HAVE A REASON TO ARRIVE AT A DIFFERENT CONCLUSION THAN THE ONE ARRIVED AT BY THE LD CIT (A). THEREFORE, WE END ORSE THE FINDINGS OF THE CIT (A) ON THIS ISSUE. THE GROUND OF THE REVENUE FAILS . 7. IN A.Y. 1998-99 ALSO, THIS MODUS OPERANDI WAS AC CEPTED BY THE TRIBUNAL, OBSERVING AS UNDER: WE FIND THAT IN A.Y. 1997-98, THE ASSESSEE IN SIMI LAR MANNER OBTAINED ACCOMMODATION BILLS AND PAID ACCOMMODATION CHARGES WHICH WERE DISALLOWED BY THE AO AND THE LD CIT (A) HAD DELETED SUCH DISALLOW ANCE. THIS ISSUE WAS ALSO THERE IN THE CASE OF SUBHASH KNITTING INDUSTRIES (S UPRA), THE SISTER GROUP CONCERN, WHEREIN, THE TRIBUNAL ALSO DELETED THE IDE NTICAL ADDITION. THUS, IN VIEW OF CONSISTENCY, WE DELETE THIS ADDITION. ACCORDING LY, THIS GROUND OF THE ASSESSEE IS ACCEPTED. CONSISTENT WITH THE PRECEDENT, WE CONFIRM THE FINDI NGS OF THE LD CIT (A) IN ACCEPTING THE BOOK RESULTS. THEREFORE, ADDITION MADE ON ACCOUNT OF TURNOVER, GROSS PROFIT AND FUNDS AMOUNTING TO RS.40 LAKHS ALLEGEDLY BEING INVESTED FOR ADDITIONAL TRANSACTIONS ARE DELETED. GROUND NOS.1 TO 4 ARE REJECTED. 8. AS FAR AS GROUND NO.5 REGARDING DISALLOWANCE OF RS.8,08,699/- PAID UNDER THE VRS, IS CONCERNED, WE FIND THAT THIS ISSUE IS NOW S ETTLED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BHOR INDUSTRIES (S UPRA), WHEREIN, IT WAS, INTER ALIA, HELD AS UNDER:- ITA NO.2907/M/07 M/S. SUBASH SILK MILLS LTD. 6 . THE SAID EXPENSES WEE INCURRED BY THE ASSESSEE TO SAVE EXPENSE. THIS WAS NOT REFERABLE TO ANY INCOME YIELDING ASSET. IT MUS T BE ALLOWED IN ITS ENTIRETY IN THE YEAR IN WHICH IT WAS INCURRED AND IT COULD NOT BE SPREAD OVER A NUMBER OF YEARS EVEN THOUGH THE ASSESSEE HAD WRITTEN IF OFF I N ITS BOOKS OVER A PERIOD OF YEARS THEREFORE, THE EXPENSES RELATING TO VOLUNT ARY RETIREMENT SCHEME WERE A REVENUE EXPENDITURE AND WERE AN ALLOWABLE DE DUCTION. FOLLOWING THE DECISION OF THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF BHOR INDUSTRIES (SUPRA), THIS GROUND IS REJECTED. 9. IN THE RESULT, APPEAL FILED BY THE REVENUE STAND S DISMISSED. PRONOUNCED ON 9 TH JULY, 2010 SD/- (ASHA VIJAYRAGHAVAN) (JUDICIAL MEMBER) SD/- (S.V. MEHROTRA) (ACCOUNTANT MEMBER) MUMBAI, DATED 9 TH JULY, 2010 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)-XXIX, MUMB AI 4. COMMISSIONER OF INCOME TAX, 8, MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH E, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI ITA NO.2907/M/07 M/S. SUBASH SILK MILLS LTD. 7 DATE INITIALS 1. DRAFT DICTATED ON 24.6.2010 PS 2. DRAFT PLACED BEFORE AUTHOR 28.6.2010 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM/JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/J M 5. APPROVED DRAFT COMES TO THE SR. PS PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER ITA NO.2907/M/07 M/S. SUBASH SILK MILLS LTD. 8