Tilak Nagpal, Panipat V. ITO, Panipat

ITA 3930/DEL/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6401 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 28-07-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 26-08-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SAMEER SHARMA
• Assessee Lawyers: V MOHAN C AS
• Keywords: Gross profit estimation; Depreciation; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : H : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI JOGINDER SINGH, JM ITA NO.3930/DEL/2011 ASSESSMENT YEAR : 2007-08 TILAK NAGPAL, 223-R, MODEL TOWN, PANIPAT. PAN : AAUPN6025G VS. ITO, WARD-4, PANIPAT. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI VED JAIN & SHRI V. MOHAN, CAS DEPARTMENT BY : S HRI SAMEER SHARMA, SR. DR ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDE R PASSED BY THE CIT (A) ON 27.5.2011 IN RELATION TO THE ASSE SSMENT YEAR 2007-08. 2. GROUND NO.1 IS GENERAL, WHICH DOES NOT REQUIRE A NY ADJUDICATION. GROUND NOS.2 AND 3, DEALING WITH PRO VIDING ITA NO.3930/DEL/2011 2 INADEQUATE HEARING OPPORTUNITY BY THE AUTHORITIES B ELOW WERE NOT PRESSED BY THE LD. AR. THE SAME, THEREFORE, STAND D ISMISSED. 3. GROUND NO.4 IS AGAINST CONFIRMATION OF ADDITION TO THE EXTENT OF 0.5% OF THE GROSS PROFIT RATE. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE DECLARED TOTAL TURNOVER OF ` 2,47,62,462/- WITH GROSS PROFIT OF ` 40,47,142/-, GIVING GP RATE OF 16.34%. THE AO NOTICED THE CORRESPONDING FIGURES F OR THE PRECEDING YEAR AT ` 1,13,42,669/-, ` 27,77,244/- AND 25.72%. THE ASSESSEE WAS CALLED UPON TO EXPLAIN THE REASONS FOR DECLINE IN THE GROSS PROFIT RATE. IN THIS REGARD, THE ASSES SEE WAS ALSO REQUIRED TO FURNISH QUANTITATIVE DETAILS OF OPENING STOCK, PURCHASES, SALES AND CLOSING STOCK. THE ASSESSEE S UBMITTED THAT DURING THE YEAR UNDER CONSIDERATION A NEW PRODUCT L INE OF COTTON TERRY TOWEL TRADING WAS STARTED. TOTAL TURNOVER OF THIS ITEM WAS ` 87.62 LAC WITH GROSS LOSS OF ` 1.62 LAC. IT WAS EXPLAINED THAT REST OF THE TURNOVER RELATED TO THE ASSESSEES MANUFACTU RING OPERATIONS AS WERE CARRIED OUT IN THE EARLIER YEARS . AS AGAINST THE TURNOVER UNDER THE MANUFACTURING SEGMENT AT ` 160.01 LAC, THE ASSESSEE SHOWED TO HAVE EARNED GROSS PROFIT OF ` 42.09 LAC GIVING GP RATE OF 26.30%. THAT IS HOW IT WAS DEMONSTRATED THAT THE ITA NO.3930/DEL/2011 3 GROSS PROFIT RATE IN THIS YEAR AT 26.30% WAS BETTER THAN 25.72% OF THE IMMEDIATELY PRECEDING YEAR. THE AO OBSERVED TH AT SINCE THE ASSESSEE FAILED TO FURNISH QUANTITATIVE DETAILS, TH E BOOKS OF ACCOUNT WERE LIABLE TO BE REJECTED U/S 145(3). IN DOING SO, HE RELIED ON CERTAIN DECISIONS NOTED ON PAGE 2 OF THE ASSESSMENT ORDER. AFTER REJECTING THE BOOKS OF ACCOUNT, HE EN HANCED THE GP RATE BY 1% OF THE GROSS TURNOVER, WHICH RESULTED I NTO AN ADDITION OF ` 2 LAC. THE LD. CIT(A) UPHELD THE REJECTION OF BOO KS OF ACCOUNT. HE, HOWEVER, REDUCED THE ESTIMATE OF GP ADDITION TO 0.5% INSTEAD OF 1% MADE BY THE AO. THE LD. DR HAS NOT SHOWN THE REVENUE TO HAVE FILED ANY CROSS APPEAL. 4. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT THE ASSESSE E WAS ADMITTEDLY ENGAGED IN TWO DISTINCT BUSINESS ACTIVIT IES DURING THE YEAR UNDER CONSIDERATION. IT IS IN CONTRAST TO ONLY MANUFACTURING ACTIVITY DONE IN THE PRECEDING YEARS. IN THE MANUFA CTURING SEGMENT, THE ASSESSEE DECLARED A GP RATE OF 26.30% AS AGAINST 25.72% FOR THE PRECEDING YEAR. THE AO HAS REJECTED THE BOOKS OF ACCOUNT ON THE GROUND THAT THERE WERE NO QUANTITATI VE DETAILS OF OPENING STOCK, PURCHASES, RAW MATERIAL CONSUMED, SA LES AND ITA NO.3930/DEL/2011 4 CLOSING STOCK. EVEN IF WE ACCEPT THE VIEW POINT OF THE AO THAT THE BOOKS OF ACCOUNT IN RESPECT OF THE MANUFACTURING SE GMENT WERE RIGHTLY REJECTED, THEN ALSO, THE AO CANNOT ESTIMATE THE INCOME AT HIS WHIMS AND FANCIES AFTER REJECTING THE BOOKS OF ACCOUNT. A REASONABLE ESTIMATE OF INCOME IS REQUIRED TO BE MAD E EVEN AFTER THE REJECTION OF BOOKS OF ACCOUNT EITHER ON THE BAS IS OF THE PAST RESULTS OR SOME OTHER LOGICAL BASIS. AS THE AO HAS COMPARED THE GP RATE OF THE PRECEDING YEAR FOR MAKING ADDITION, WE ALSO GO BY THE SAME. AS THE GP RATE OF THE ASSESSEE IN THE MAN UFACTURING SEGMENT IS ADMITTEDLY HIGHER THAN THAT OF THE PRECE DING YEAR, DESPITE THE REJECTION OF BOOKS OF ACCOUNT, THERE CA N BE NO QUESTION OF MAKING ANY TRADING ADDITION. 5. NOW, WE TURN TO THE TRADING SEGMENT. IT IS SEEN THAT THE ASSESSEE HAS DRAWN SEPARATE TRADING ACCOUNT FOR TH E TADING SEGMENT AND MANUFACTURING ACCOUNT FOR THE MANUFACTU RING SEGMENT. A COPY OF THE AUDITED TRADING ACCOUNT OF T HE TERRY TOWEL SEGMENT IS PLACED ON PAGE 8 OF THE PAPER BOOK, WHER EAS A COPY OF THE MANUFACTURING ACCOUNT FOR THE MANUFACTURING SEGMENT IS AVAILABLE ON PAGE 7 OF THE PAPER BOOK. PAGE 9 IS A COPY OF PROFIT & LOSS ACCOUNT WHICH BEGINS WITH GROSS PROFIT FROM MANUFACTURING ITA NO.3930/DEL/2011 5 SEGMENT AT ` 42.08 LAC AND GROSS LOSS FROM THE TRADING SEGMENT AT ` 1.61 LAC. IN SO FAR AS THE QUANTITATIVE DETAILS U NDER THE TRADING SEGMENT ARE CONCERNED, WE FIND FROM THE ASS ESSEES REPLY DATED 21.12.2009 FILED BEFORE THE AO, A COPY OF WHICH IS AVAILABLE ON PAGE 89 OF THE PAPER BOOK, THAT THE AS SESSEE FURNISHED COMPLETE QUANTITATIVE DETAILS OF STOCK OF COTTON TERRY TOWEL ALONG WITH THE PURCHASES AND SALES AS WELL. SUCH DETAILS WERE ALSO FILED BEFORE THE LD.CIT(A) AS IS APPARENT FROM THE WRITTEN SUBMISSIONS FILED BEFORE THE LD. FIRST APPELLATE AU THORITY, A COPY OF WHICH IS AVAILABLE AT PAGES 91 ONWARDS OF THE PAPER BOOK. THE FACTUM OF THE ASSESSEE HAVING FURNISHED QUANTITATIV E DETAILS OF TRADING ACCOUNT OF COTTON TERRY TOWEL, CAN BE VERIF IED FROM PAGE 93 OF THE PAPER BOOK. A COPY OF SUCH DETAILS IS AV AILABLE ON PAGES 39 AND 41 OF THE PAPER BOOK FROM WHERE IT CAN BE SE EN THAT THE ASSESSEE PURCHASED 62,544 PIECES OF COTTON TERRY TO WEL DURING THE YEAR THROUGH FIVE PURCHASE BILLS AND SOLD THE E QUAL QUANTITY IN FULL, AGAIN, THROUGH FIVE SEPARATE INVOICES. BILL- WISE QUANTITY OF BOTH THE PURCHASES AND SALES CAN BE VERIFIED FROM T HESE PAGES. THUS, IT IS APPARENT THAT THE ASSESSEE GAVE FULL DE TAILS OF QUANTITY PURCHASED AND SOLD OF COTTON TERRY TOWEL FROM WHICH HE SUFFERED ITA NO.3930/DEL/2011 6 LOSS OF ` 1.61 LAC WHICH WAS SHOWN DISTINCTLY IN THE TRADING ACCOUNT FOR COTTON TERRY TOWEL SEGMENT. ONCE THE Q UANTITATIVE DETAILS ARE AVAILABLE AND THERE IS NO INFIRMITY IN SUCH DETAILS INCLUDING THE FIGURES OF PURCHASE AND SALE, THERE C AN BE NO QUESTION OF MAKING ANY TRADING ADDITION ON THIS SCO RE. 6. WHEN WE VIEW THE THINGS IN ENTIRETY, BEING HI GHER GROSS PROFIT RATE UNDER THE MANUFACTURING SEGMENT VIS-A-VIS THE PRECEDING YEAR AND GROSS LOSS UNDER COTTON TERRY TOWEL SEGMEN T WHICH WAS STARTED IN THIS YEAR, WE CANNOT RESIST OUR CONCLUSI ON IN HOLDING THAT NO ADDITION ON ACCOUNT OF LOW GROSS PROFIT RAT E CAN BE MADE. AS SUCH, THE SUSTENANCE OF ADDITION AT 0.5% ON ACCO UNT OF GROSS PROFIT RATE IS DIRECTED TO BE DELETED. THIS GROUND IS ALLOWED. 7. GROUND NO.5 IS AGAINST THE CONFIRMATION OF ADDIT ION OF ` 1,25,789/- MADE U/S 14A BY APPLYING THE PROVISIONS OF RULE 8D. 8. BRIEFLY STATED, THE FACTS APROPOS THIS GROUND AR E THAT THE ASSESSEE MADE INVESTMENTS OF ` 28,87,100/- FOR PURCHASE OF SHARES OF THREE COMPANIES. RELYING ON THE JUDGMENT IN THE CASE OF ABHISHEK INDUSTRIES LTD. VS. CIT 286 ITR 1 , THE AO HELD THAT THE INTEREST COMPONENT IN RESPECT OF SUCH INVESTMEN TS WAS ITA NO.3930/DEL/2011 7 REQUIRED TO BE DISALLOWED. APPLYING THE PROVISIONS OF RULE 8D, THE AO WORKED OUT A TOTAL ADDITION OF ` 1,25,789/- U/S 14A INCLUSIVE OF ` 14,436/- TOWARDS OTHER ADMINISTRATIVE EXPENSES APA RT FROM INTEREST IN CONNECTION WITH MANAGING SUCH ACTIVITIE S. THE LD. CIT(A) UPHELD THE ADDITION. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE ASSES SMENT YEAR INVOLVED BEFORE US IS 2007-2008. THE HONBLE JURISD ICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT (2012) 347 ITR 272 (DEL) AND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE LTD. MFG. CO. V. DCIT [(2010) 328 IT R 81 (BOM)] HAVE HELD THAT THE PROVISIONS OF RULE 8D CANNOT BE APPLIED TO ANY ASSESSMENT YEAR PRIOR TO 2008-2009. SINCE THE ASSES SMENT YEAR UNDER CONSIDERATION IS PRIOR TO ASSESSMENT YEAR 200 8-2009, AS SUCH WE ARE DISINCLINED TO UPHOLD THE APPLICABILITY OF RULE 8D FOR THE PURPOSES OF COMPUTING DISALLOWANCE U/S 14A. 10. HOWEVER, THE FACT REMAINS THAT DISALLOWANCE IS DEFINITELY CALLED FOR IN THE EARLIER YEARS ON SOME REASONABLE BASIS. ORDINARILY, THE DISALLOWANCE OF EXPENSES U/S 14A WO ULD INVOLVE ITA NO.3930/DEL/2011 8 INTEREST EXPENDITURE INCURRED FOR MAKING INVESTMENT S IN SECURITIES YIELDING EXEMPT INCOME AND OTHER DIRECT AND INDIREC T EXPENSES INCURRED ON MANAGEMENT OF INVESTMENT AND INCOME. 11. FIRSTLY, WE ESPOUSE THE DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE. IT IS OBSERVED THAT THE ASSESSEE MADE INVESTMENTS IN SHARES YIELDING EXEMPT INCOME AMOUNTING TO ` 28. 87 LAC. FROM THE AUDITED BALANCE SHEET OF THE ASSESSEE, WHICH I S AVAILABLE ON PAGE 2 OF THE PAPER BOOK, IT CAN BE SEEN THAT THE A SSESSEES CAPITAL STANDS AT ` 47,69,543/-. THIS SHOWS THAT TH E ASSESSEES CAPITAL IS FAR IN EXCESS OF INVESTMENT MADE IN SHAR ES YIELDING EXEMPT INCOME. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 31 3 ITR 340 (BOM), HAS HELD THAT IF INTEREST FREE FUNDS ARE AVAILABLE WITH THE ASSESSEE, SUFFICIENT TO MEET ITS INVESTMENT, AND, A T THE SAME TIME, LOAN HAS BEEN RAISED, IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM INTEREST FREE FUNDS AND, AS S UCH, NO DISALLOWANCE OF INTEREST IS CALLED FOR. IN REACHIN G THIS CONCLUSION, THE HONBLE BOMBAY HIGH COURT RELIED ON THE JUDGMEN T OF THE HONBLE SUPREME COURT IN THE CASE OF EAST INDIA PHARMACEUTICAL WORKS VS. CIT (1997) 224 ITR 627 (SC). THIRD MEMBER IN VISION ITA NO.3930/DEL/2011 9 INDUSTRIES LTD. VS. ADDL. CIT (2012) 136 ITD 309 (M UM) (TM) HAS ALSO TAKEN A SIMILAR VIEW. RECENTLY THE HONBLE BO MBAY HIGH COURT IN CIT VS. HDFC BANK LTD ., VIDE ITS JUDGMENT DATED 23.07.2014 HAS HELD THAT NO SECTION 14A DISALLOWANC E OF INTEREST PAID ON BORROWINGS CAN BE MADE IF THE ASSESSEES OW N FUNDS AND NON-INTEREST BEARING FUNDS EXCEEDS INVESTMENT IN TA X-FREE SECURITIES. THE HONBLE GUJARAT HIGH COURT IN CIT VS. SUZLON ENERGY LTD. (2013) 354 ITR 630 (GUJ) HAS ALSO HELD THAT WHERE OWN CAPITAL IS MORE THAN INVESTMENT IN SECURITIES M AKING EXEMPT INCOME, THERE CAN BE NO DISALLOWANCE U/S 14A ON ACC OUNT OF INTEREST. IN VIEW OF THE FOREGOING DISCUSSION AND CONSIDERING THE FACT THAT THE ASSESSEES OWN CAPITAL IS MORE THAN I NVESTMENT IN SHARES YIELDING EXEMPT INCOME, WE HOLD THAT THERE C AN BE NO QUESTION OF DISALLOWANCE OF INTEREST U/S 14A. 12. HAVING SEEN THAT THE ASSESSEE DID NOT INCUR ANY INTEREST EXPENDITURE FOR MAKING INVESTMENT IN SHARES, WE FIN D THAT THE NEXT COMPONENT OF DISALLOWANCE IS OTHER DIRECT AND INDIRECT EXPENSES INCURRED ON MANAGEMENT OF INVESTMENT AND I NCOME. CONSIDERING THE MAGNITUDE OF THE INVESTMENT AND OTH ER ATTENDING CIRCUMSTANCES CONNECTED WITH THE ADMINISTRATION AND ITA NO.3930/DEL/2011 10 MANAGEMENT OF INVESTMENT AND EXEMPT INCOME, IF ANY, WE ARE OF THE CONSIDERED OPINION THAT IT WOULD BE FAIR AND RE ASONABLE TO ESTIMATE SUCH EXPENSES AT ` 14,000/-. WE, THEREFOR E, SUSTAIN DISALLOWANCE U/S 14A AT THIS LEVEL OF ` 14,000/-. T HIS GROUND IS PARTLY ALLOWED. 13. THE LAST GROUND OF THE ASSESSEES APPEAL IS AGA INST THE CONFIRMATION OF DISALLOWANCE OF ` 60,345/- BEING 1/ 10TH OF CAR AND OTHER EXPENSES ON ACCOUNT OF PERSONAL USE. 14. THE ASSESSEE CLAIMED DEDUCTION OF ` 6,03,450/- ON ACCOUNT OF VARIOUS EXPENSES SUCH AS CAR RUNNING AND MAINTEN ANCE, CAR DEPRECIATION, CAR INSURANCE, INTEREST ON CAR LOAN, MOTORCYCLE DEPRECIATION AND MAINTENANCE EXPENSES, TRAVELLING A ND TELEPHONE EXPENSES, ETC. ON A PERUSAL OF THE DETAILS OF SUCH EXPENSES FILED BY THE ASSESSEE, THE AO OBSERVED THAT SOME OF THE E XPENSES WERE UNVOUCHED AND SOME WERE OF PERSONAL NATURE. C ONSIDERING THE ENTIRETY OF THE FACTS, THE AO MADE DISALLOWANCE OF 20% OF SUCH EXPENSES WHICH RESULTED INTO AN ADDITION OF ` 1,20,690/-. THE LD. CIT(A) REDUCED SUCH ESTIMATE TO 10%, THEREB Y RESTRICTING ITA NO.3930/DEL/2011 11 THE ADDITION TO ` 60,345/-. THE ASSESSEE IS AGGRIEVED AGAINST THE SUSTENANCE OF ADDITION AT THIS LEVEL. 15. HAVING HEARD BOTH THE SIDES AND PERUSED THE REL EVANT MATERIAL ON RECORD, IT IS OBSERVED THAT SOME OF THE EXPENSES CLAIMED BY THE ASSESSEE WERE OBVIOUSLY UNVOUCHED AN D ALSO WERE PERSONAL IN NATURE. CONSIDERING THE ENTIRETY OF TH E FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, WE ARE OF THE CO NSIDERED OPINION THAT THE LD.CIT(A) WAS JUSTIFIED IN RESTRIC TING THE ADDITION TO THIS EXTENT. WE, THEREFORE, UPHOLD THE VIEW TAK EN BY THE LD. CIT(A) ON THIS SCORE. THIS GROUND IS NOT ALLOWED. 16. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 31.07.201 4. SD/- SD/- [ JOGINDER SINGH] [ R.S. SYAL ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 31 ST JULY, 2014. DK ITA NO.3930/DEL/2011 12 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.