Thirumala Pharmachem Pvt. Ltd., CHENNAI V. ITO, CHENNAI

ITA 573/CHNY/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4910 (ITAT-CHENNAI)
• Duration Of Justice: 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 22-03-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 07-03-2017
• Court: TRIBUNAL
• Department Lawyers: SUPRIYO PAL
• Assessee Lawyers: B RAMAKRISHNAN
• Section: 40A(3)

Judgement Text

, .. , IN THE INCOME TAX APPELLATE TRIBUNAL , SMC B BENCH, CHENNAI . , ! BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.573/MDS/2017 ( / ASSESSMENT YEAR: 2009-10) M/S. THIRUMALA PHARMACHEM PVT. LTD., C/O. SETHURAMASUBBU, FLAT NO.1, 3 RD FLOOR, A BLOCK, INDIRA GRANDEUR EB ROAD, JJ NAGAR, CHENNAI 600 037. VS THE INCOME TAX OFFICER, CORPORATE WARD 3(2), CHENNAI PAN: AAACT2302H ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRI B. RAMAKRISHNAN, CA /RESPONDENT BY : SHRI SUPRIYO PAL, JCIT /DATE OF HEARING : 29.03.2017 ! /DATE OF PRONOUNCEMENT : 05.04.2017 / O R D E R THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEA LS)-13, CHENNAI DATED 27.01.2017 IN IT NO.214/CIT(A)-11/201 5-16 FOR THE ASSESSMENT YEAR 2009-10 PASSED U/S.143(3) R.W.S.147 OF THE ACT. 2. THE ASSESSEE HAS RAISED SIX GROUNDS IN ITS APPEA L. HOWEVER AT THE TIME OF HEARING THE LD. AR DID NOT PRESS WITH R ESPECT TO GROUND NOS.4 & 5 AND THEREFORE BOTH THOSE GROUNDS ARE DISM ISSED AS NOT PRESSED. GROUND NO.1 IS GENERAL IN NATURE AND THER EFORE DO NOT 2 ITA NO.573/MDS/2017 SURVIVE FOR ADJUDICATION. THE OTHER THREE GROUNDS ARE REPRODUCED HEREIN BELOW FOR ADJUDICATION: 1) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ADDITION OF RS.19,19,548/- MADE ON A CCOUNT OF SUPPRESSION OF SALES. 2) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF AUDIT FEE U/S.40(A)( IA) OF THE ACT AMOUNTING TO RS.28,090/-. 3) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN PARTIALLY CONFIRMING THE DISALLOWANCE U/S.40A(3) OF THE ACT FOR RS.5,40,000/- BEING SETTLEMENT MADE TO EMPLOYEES ON WINDING UP. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACT URING AND SALE OF CHEMICALS, FILED ITS RETURN OF INCOME ON 13.03.2 015 FOR THE ASSESSMENT YEAR 2009-10 SUBSEQUENT TO THE ISSUANCE OF NOTICE U/S.148 OF THE ACT ON 26.04.2013, BASED ON THE AIR / CIB INFORMATION. THEREAFTER THE ASSESSMENT WAS COMPLET ED U/S.143(3) R.W.S.147 OF THE ACT ON 20.03.2015 WHEREIN THE LD.A O MADE VARIOUS 3 ITA NO.573/MDS/2017 ADDITIONS, WHICH WAS SUBSEQUENTLY, CONFIRMED / PART IALLY CONFIRMED, BY THE LD.CIT(A). 4. GROUND NO.1: ADDITION OF RS.19,19,548/- TOWARDS SUPPRESSION OF SALES:- DURING THE COURSE OF SCRUTINY ASSESSMENT, IT WAS OBSERVED BY THE LD.AO THAT FOR THE RELEVANT ASSESSMENT YEAR PERCENTAGE OF SALE ON COST OF MATERIAL CONSUMED WAS ONLY 62% WHIL E AS FOR THE FINANCIAL YEAR 2007-08 IT WAS 153.72% AND FOR THE F INANCIAL YEAR 2006-07, 171.91%. WHEN THE LD.AO QUERIED, THE ASSE SSEE MADE THE FOLLOWING SUBMISSION: WE WERE IN TO THIS BUSINESS UNTIL 2009 AND THE UNI T WAS CLOSED DUE TO HEAVY LOSSES. THE BUILDING THAT BELO NGS TO THE COMPANY WAS SOLD TO MEET OUT THE DEBTS AND SETTLEME NT. WE MADE A LOSS OF AROUND RS.6 LAKHS IN THE YEAR 2007-2008 AND BUSINESS SCENARIO BECOME WORST IN 2008-2009(F.Y). AS A RESU LT WE ENDED UP WITH GROSS LOSS. WE MADE THE PAYMENTS TO VENDORS A ND EMPLOYEES ONLY OUT TO THE SOURCE OF BUILDING SALE PROCEEDS. THE BUILDING SALE PROCEEDS WERE USED TO MEET THE EXPENSES IN THE YEAR 2008-2009. AS THE COMPANY FINANCIAL POSITION BECOME WORSE WE LOST THE COOPERATION FROM EMPLOYEES AND THERE WERE A HUGE BA TCH PROCESS LOSS, CONSEQUENTLY ENDED UP WITH GROSS LOSS IN THE YEAR 2008-2009. IN ADDITION TO THIS WE ALSO HAD SETTLEMENT AND CLOS ING DOWN EXPENSES. WITH BATCH PROCESS LOSS AND FAULTY CHEMI CAL REACTIONS WE 4 ITA NO.573/MDS/2017 ENDED UP IN HUGE LOSS. THE APPLICABILITY OF GENERAL MARGIN AS DISCLOSED IN THE EARLIER YEAR IS NOT APPLICABLE DUR ING THIS YEAR OF 2008-2009. ALL THE PURCHASES AND SALES WERE MAD E THROUGH BANK TRANSACTIONS ONLY. WE MADE GOOD THE LOSS ONLY WITH THE SALE PROCEEDS REALIZATION. HOWEVER, THE LD.AO ARRIVED AT THE CONCLUSION T HAT THE ASSESSEE HAS SUPPRESSED SALES IN ORDER TO AVOID TAX ON CAPIT AL GAINS RELATING TO SALE OF PROPERTY. THEREAFTER THE LD.AO REWORKED THE SALE OF THE ASSESSEE ADOPTING THE PERCENTAGE OF SALE ON COST OF MATERIAL CONSUMED AT 153.72% FOR THE RELEVANT ASSESSMENT YEA R AND THEREBY WORKED OUT THE SUPPRESSION OF SALE AT RS.19,19,548/ - AND ADDED TO THE INCOME OF THE ASSESSEE. 4.1 ON APPEAL THE LD.CIT(A) CONFIRMED THE ORDER OF THE LD.AO BY AGREEING WITH HIS VIEW. 4.2 BEFORE US, THE LD.AR SUBMITTED THAT THE ASSESS EE HAD DISCONTINUED THE BUSINESS DURING THE RELEVANT ASSES SMENT YEAR AS IT WAS INCURRING HEAVY LOSSES. FURTHER, THE ASSESSEE COULD NEITHER SELL ITS CLOSING FINISHED STOCK NOR THE RAW MATERIALS AS THEY HAVE BECOME REDUNDANT. IN THIS SITUATION, IT WAS ARGUED THAT P RESUMPTIONS CANNOT 5 ITA NO.573/MDS/2017 BE MADE THAT THE ASSESSEE WOULD HAVE SOLD THE FINIS HED STOCK AND RAW MATERIALS AND THEREBY REALIZED PROFIT. THE LD. AR FURTHER SUBMITTED THAT THE ASSESSEE HAS INCURRED LOSS DURIN G THE YEAR AND THEREFORE THE ADDITION MADE BY THE LD.AO MAY BE DEL ETED. THE LD.DR ON THE OTHER HAND VEHEMENTLY ARGUED IN SUPPOR T OF THE ORDERS OF THE REVENUE AUTHORITIES. 4.3. I HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE MATERIALS AVAILABLE ON RECORD. FROM THE FACTS OF THE CASE, IT IS APPARENT THAT THE ASSESSEE HAS SUFFERED LOSS FROM I TS BUSINESS AND FINANCIALLY DRAINED. THE FINANCIAL CONDITION OF THE ASSESSEE COMPANY WAS GOING WORST DAY BY DAY WHICH ULTIMATELY LED TO THE CLOSURE OF ITS BUSINESS. FURTHER, THERE IS NOTHING ON RECORD TO SU GGEST THAT THE ASSESSEE COMPANY WOULD HAVE SOLD ITS ENTIRE FINISHE D STOCK OR RAW MATERIALS AND THEREBY REALIZED PROFITS. THE REVENU E HAS ALSO NOT BROUGHT OUT ANYTHING ON RECORD TO SHOW THAT THE ASS ESSEE HAS SUPPRESSED SALES OTHER THAN MERE ARITHMETIC COMPUTA TION ON CERTAIN RATIOS. THOUGH RATIO ANALYSIS RELIED BY THE LD.AO M AY BE AN INDICATOR, ONE CANNOT COME TO A CONCLUSIVE CONCLUSI ON ONLY BASED ON SUCH RATIOS CONSIDERING THE FACTS AND CIRCUMSTAN CES OF THE ASSESSEES CASE. CONSIDERING THE ENTIRE FACTS OF T HE CASE I AM OF 6 ITA NO.573/MDS/2017 THE VIEW THAT THERE ARE NO CONSTRUCTIVE MATERIALS C OMING OUT TO SUGGEST THAT THE ASSESSEE HAS SUPPRESSED ITS SALES. THEREFORE, I DO NOT FIND ANY MERIT IN THE ORDER OF BOTH THE REVENUE AUTHORITIES ON THIS ISSUE. HENCE, I HEREBY DIRECT THE LD.AO TO DE LETE THE ADDITION OF RS.19,19,548/- MADE IN THE HANDS OF THE ASSESSEE TO WARDS SUPPRESSION OF SALES. 5. GROUND NO.2: DISALLOWANCE OF AUDIT FEE RS.28,090 /- :- THE LD.AO DISALLOWED THE EXPENDITURE INCURRED TOW ARDS PAYMENT OF AUDIT FEES OF RS.28,090/- INVOKING THE P ROVISIONS OF SECTION 40(A)(IA) OF THE ACT, SINCE THE ASSESSEE HA D NOT COMPLIED WITH THE PROVISIONS OF SECTION 194J OF THE ACT. ON APPEAL, IT APPEARS THAT THE LD. CIT(A) HAS NOT ADDRESSED THE ISSUE. H OWEVER, ON EXAMINING THE FACTS I DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD.AO, BECAUSE AS PER PROVISO (B)(III) OF SECTION 1 94J OF THE ACT, THE ASSESSEE IS BOUND TO DEDUCT TAX FOR PAYMENT MADE TO WARDS PROFESSIONAL FEES OF RS.20,000/- OR ABOVE. IN THE CASE OF THE ASSESSEE, THE ASSESSEE HAD MADE AGGREGATE PAYMENT O F RS.28,090/- AND THEREFORE THE PROVISIONS OF SECTION 194J AND 40(A)(IA) OF THE ACT WOULD BE ATTRACTED. THEREFORE THIS GROUND RAISED BY THE ASSESSEE IS DISMISSED. 7 ITA NO.573/MDS/2017 6. GROUND NO.3: DISALLOWANCE OF RS.5,40,000/- U/S.40A( 3) OF THE ACT:- IT WAS OBSERVED BY THE LD.AO THAT THE ASSESSEE HA D MADE CASH PAYMENTS AGGREGATING TO RS.7,05,000/- TO ITS E MPLOYEES TOWARDS SETTLEMENT. SINCE THE ASSESSEE HAD VIOLATE D THE PROVISIONS OF SECTION 40A(3) OF THE ACT, AS IT HAD EXCEEDED TH E AGGREGATE CASH PAYMENT OF RS.20,000/- TO A SINGLE PERSON IN A DAY OTHERWISE THAN BY ACCOUNT PAYEE CHEQUE / DEMAND DRAFT AMOUNTING TO RS.6,85,000/-, THE LD.AO DISALLOWED THE SAME AND AD DED TO THE INCOME OF THE ASSESSEE. ON APPEAL, THE LD.CIT(A) H ELD THAT IN THE CASE OF THE ASSESSEE RULE 6DD(H) WOULD BE APPLICABL E AND THEREFORE DIRECTED THE LD.AO TO RECOMPUTED THE DISA LLOWANCE U/S.40A(3) OF THE ACT BY OBSERVING AS UNDER: ALL THESE EXPENSES ARE TO BE CONSIDERED TERMINAL B ENEFIT TO THE EMPLOYEES AND SUCH PAYMENTS CAN BE MADE UPTO RS.50, 000/- UNDER RULE 6DD(H) OF THE ACT. THE AO HAS ALSO ACCEPTED THE FACT THAT THE ASSESSE E HAS CLOSED DOWN BUSINESS IN THE MONTH OF NOVEMBER 2008. THERE FORE, IT IS ABUNDANTLY CLEAR THAT THE PAYMENTS MADE TO THE EMPL OYEES ARE NOTHING BUT SETTLEMENT PAYMENT. ALL THESE EXPENSES ARE TO BE CONSIDERED TERMINAL BENEFIT TO THE EMPLOYEES AND SU CH PAYMENTS CAN BE MADE UPTO RS.50,000 UNDER RULE 6DD(H) OF THE ACT . ACCORDINGLY 8 ITA NO.573/MDS/2017 THE CONTENTION OF THE APPELLANT IS FOUND TO BE ACCE PTABLE AND THE AO TO RECOMPUTED DISALLOWANCE U/S 40A(3) OF THE ACT BA SED ON THE ABOVE FINDING. IN THE RESULT, THE GROUND OF APPEAL IS PA RTLY ALLOWED. I DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD .CIT(A), BECAUSE THE LD.CIT(A) HAS ONLY FOLLOWED THE PROVISIONS OF T HE RULE 6DD(H) OF THE RULES WHILE DECIDING THE ISSUE. THEREFORE, I D O NOT FIND IT NECESSARY TO INTERFERE WITH HIS ORDER ON THIS ISSUE . 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON THE 5 TH APRIL, 2017. SD/- ( . ) (A. MOHAN ALANKAMONY) / ACCOUNTANT MEMBER '# /CHENNAI, $% /DATED 5 TH APRIL, 2017 JR % '( )( /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. , ( )/CIT(A) 4. , /CIT 5. (-. / /DR 6. .0 /GF