DCIT, New Delhi V. M/s. Micromax Informatics Ltd., New Delhi

ITA 5829/DEL/2014

• Counselvise Citation: 582920114 RSA 2014
• Duration Of Justice: 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 15-01-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 30-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V MOHAN; VED JAIN CA SMT RANO JAIN
• Assessee Lawyers: PEEYUSH JAIN
• Keywords: Rejection of books of accounts; Gift; Transfer pricing; Business expenditure; Income from undisclosed sources; Search and seizure; Loose papers; Document seized; Principle of natural justice; International transaction; Period of limitation; Cost of acquisition; Non-deduction of tax; Corroborative evidences; Assessment record; Time period of passing order; Documents seized
• Section: 43B; 143(3); 92B; 92E; 153A; 14A; 133(6); 194C; 201(1); 6; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I NEW DELHI BEFORE SHRI I.C.SUDHIR, JM AND SHRI J.SUDHAKAR REDDY , A.M . ITA NO. 6135/DEL/20 1 4 ASSESSMENT YEAR : 2011 - 12 MICROMAX INFORMATICS LTD. VS. DCIT, CENTRAL CIRCLE 16 21/14, BLOCK A, PHASE II NEW DELHI NARAINA INDUSTRIAL AREA NEW DELHI PAN: AABCR 8863 N & ITA NO.5829/DEL/2014 ASSESSMENT YEAR : 2011 - 12 DCIT, CC 16, N.DELHI VS. MICROMAX INFORMATICS LTD., N.DEL (APPELLANT) (RESPONDENT ) APPELLANT BY : - SHRI VED JAIN, C.A. SMT. RANO JAIN, C.A. & SH. V.MOHAN, A.R. RESPONDENT BY : - SH. PEEYUSH JAIN, CIT, D.R. O R D E R PER J.SUDHAKAR REDDY, AM TH ESE APPEALS ARE FILED BY THE ASSESSEE DIRECTED AGAINST AN ORDER PASSED BY THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS THE AO ) U/S 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) DATED 21 ST OCTOBER,2014 FOR THE ASSESSMENT YEAR (HERE INAFTER REFERRED TO AS THE AY ) 2011 - 12. 2 . FACTS IN BRIEF : - MICRO MAX INFORMATICS LTD. (HEREINAFTER REFERRED TO AS MICROMAX ) THE ASSESSEE COMPANY IS THE 12 TH LARGEST HANDSET MANUFACTURER IN THE WORLD (ACCORDING TO GLOBAL HANDSET VENDOR MARKET SHARE REPORT FROM STRATEGY ANALYTICS) WITH A GLOBAL MARKET SHARE OF 1% AND CLOSE TO 8% MARKET ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 2 SHARE IN INDIA. MICROMAX HAS PRESENCE ACROSS INDIA AND GLOBALLY IN HONG KONG, BANGLADESH, NEPAL, SRI LANKA, MALDIVES, UAE, KINGDOM OF SAUDI ARABIA, KUWAIT, QATAR, OMAN , AFGHANISTAN AND BRAZIL. MICROMAX PRODUCTS PORTFOLIO INCLUDES OVER 60 MODELS, RANGING FROM DUAL SIM PHONES TO QWERTY, TOUCH - ENABLED SMART FEATURE PHONES AND 3G ANDROID SMART PHONES. 2.1 . THE ASSESSEE COMPANY MMX INDIA WAS INCORPORATED ON 29 TH MARCH, 2000 . THE COMPANY WAS INITIALLY IN THE BUSINESS OF MANUFACTURING FIXED WIRELESS TERMINALS AND PHONES. DURING THE YEAR ENDED 31 ST MARCH,2009 THE COMPANY BEGAN THE BUSINESS OF TRADING OF THIRD PARTY MANUFACTURED MOBILE PHONES UNDER ITS BRANDS NAMELY MICROMAX AND MICROMAX MOBILE . MMX INDIA HAS 3 TIER DISTRIBUTION NET WORK IN INDIA, WHICH EXTENDS ACROSS 65 SUPER DISTRIBUTERS, 1500 MICRO DISTRIBUTORS AND OVER 100,000 RETAILERS. THE PRODUCT INCLUDES MOBILE PHONES, DATA CARDS, ACCESSORIES AND SPARES AND TERMI NALS. 2.2. A SEARCH AND SEIZURE OPERATION U/S 132 OF THE ACT WAS CONDUCTED IN THE MICROMAX GROUP OF CASES ON 10.2.2011. THE ASSESSEE M/S MICROMAX INDIA LTD., IS A MEMBER OF THIS GROUP. THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.09.2011 DECLARING TOTAL INCOME OF RS.299,42,85,775/ - . A NOTICE U/S 143(2) OF THE ACT WAS ISSUED TO THE ASSESSEE ON 02.03.2012. 2.3 . DURING THE COURSE OF SCRUTINY PROCEEDINGS THE ASSESSEE FILED A LETTER DT. 9 TH MAY,2012 AND REQUESTED TO REVIEW THE VALIDITY AND SCOPE OF ASSESSM ENT PROCEEDINGS U/S 153A OF THE ACT AND ALSO ASKED FOR A COPY OF AN ORDER PASSED U/S 127 OF THE ACT, TRANSFERRING THE JURISDICTION OF THE ASSESSEE COMPANY. THE OBJECTIONS ARE SUMMARISED BY THE AO AT PARA 3 OF HIS DRAFT ASSESSMENT ORDER WHICH IS EXTRACTED FOR READY REFERENCE. THE ASSESSEE S OBJECTION IS SUMMARISED BELOW: ( I ) PROCEEDINGS U/S 153A CANNOT BE INITIATED AGAINST A PERSON AGAINST WHOM SEARCH & SEIZURE ACTION U/S 132(1) HAS NOT BEE INITIATED. ( II ) AO CANNOT BE LAWFULLY PERSUADED TO ISSUE NOTICE U/S 153A O F THE ACT IN RESPECT OF CLOSED ASSESSMENT IN THE ABSENCE OF SEIZURE OF UNDISCLOSED INCOME OR ANY DOCUMENTS, BOOKS OF ACCOUNTS, ETC. OF INCRIMINATING NATURE. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 3 ( III ) THE ASSESSEE NARRATED DETAILED SUBMISSION ON SCOPE OF ASSESSMENT PROCEEDINGS U/S 153A OF THE ACT. 2.4. THE OBJECTIONS OF THE ASSESSEE WERE REJECTED BY THE AO ON THE FOLLOWING GROUNDS. ( A ) A VALID SEARCH WARRANT WAS ISSUED AND EXECUTED IN ASSESSEE S CASE AND A PANCHNAMA WAS DRAWN IN RESPECT OF PROCEEDINGS OF SEARCH; ( B ) S.153A OF THE ACT REQUIRES TOTAL INCOM E FOR THE PRECEDING 06 YEARS TO BE ASSESSED OR REASSESSED; ( C ) IN CASE NO INCRIMINATING MATERIAL IS FOUND DURING THE COURSE OF SEARCH, IT CANNOT BE CONCLUDED THAT A PERSON HAS NOT ACCUMULATED ANY UNDISCLOSED INCOME OR UNDISCLOSED ASSETS. 2.5 . DURING THE COURS E OF ASSESSMENT PROCEEDINGS, SPECIAL AUDIT WAS ORDERED VIDE APPROVAL OF CIT, C ENTRAL - II, NEW DELHI VIDE ORDER NO. CIT(C ) - II/2012 - 13/3919 DT. 20.03.2013 . TIME LIMIT FOR SUBMISSION OF THE SPECIAL AUDIT REPORT WAS EXTENDED FROM TIME TO TIME AFTER PRIOR APPRO VAL OF THE CIT, CENTRAL - II, NEW DELHI. THE SPECIAL AUDIT REPORT WAS SUBMITTED ON 16.9.2013 . 2.6. DURING THE COURSE OF SPECIAL AUDIT THE ASSESSEE FILED REPORT ON INTERNATIONAL TRANSACTIONS U/S 92E OF THE ACT IN FORM 3 CEB ON 18.7.2013. REFERENCE WAS M ADE TO THE TRANSFER PRICING OFFICER (HEREINAFTER REFERRED TO AS THE TPO ) TO DETERMINE THE ARM S LENGTH PRICE (HEREINAFTER REFERRED TO AS THE ALP ). THE REPORT OF THE TPO WAS RECEIVED ON 1.11.2013. AS MENTIONED IN THE TPO S REPORT, ALP OF THE INTERNATI ONAL TRANSACTIONS RELATING TO RECEIPT OF INTEREST ON LOAN EXTENDED TO ASSOCIATE ENTERPRISES (HEREINAFTER REFERRED TO AS THE AE ), WAS COMPUTED AT RS.2,47,59,085/ - , AS AGAINST THE DECLARED VALUE OF RS.1,41,92,634/ - AND AN ADDITION OF RS.1,05,66,541/ - WAS MADE. IT WAS ALSO OBSERVED THAT THE ASSESSEE HAS EXTENDED THE FACILITY AND BENEFIT OF STANDBY LETTER OF CREDIT IN FAVOUR OF ITS DUBAI AE. THE ALP OF THE SAME WAS WORKED OUT AT RS.1,22,39,100/ - . THUS THE TOTAL ADJUSTMENT IN RESPECT OF INTERNATIONAL TRAN SACTION OF RS.2,28,05,551/ - WAS MADE . A NUMBER OF ISSUES WERE RAISED DURING THE COURSE OF ASSESSMENT , AND IN THE DRAFT ASSESSMENT ORDER DT. 14.11.2013 THE AO PROPOSED THE FOLLOWING ADJUSTMENTS. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 4 (A) INCOME AS DECLARED - RS.2,99,42,85,775/ - ADD: AS P ER TPO - RS. 2,28,05,551/ - ( I ) SALE OF SCRAP - RS. 2,74,00,000/ - ( II ) SHORTAGE OF DOA MOBILES - RS. 3,82,03,224/ - ( III ) ACCESSORIES OF DOA MOBILES - RS. 4,62,00,000/ - ( IV ) CREDIT NOTES OF M/S BRIGHT POINT - RS. 10,97,61,523/ - ( V ) OTHER CREDIT NO TES - RS.3,37,09,95,646/ - ( VI ) SWAP - RS. 33,82,50,816/ - ( VII ) SEIZED DOCUMENTS - RS. 13,81,25,000/ - ( VIII ) (A) TDS DEFAULT - RS. 3,22,40,175/ - (B) TDS DEFAULT - RS. 53,17,42,328/ - ( IX ) BONUS - RS. 51,59,380/ - ( X ) PRIOR PERIOD EXPENSES - RS. 16,06,037/ - ( XI ) ADVERTISEMENT - RS. 2,00,00,000/ - ( XII ) SUNDRY CREDITORS - RS. 2,37,11,754/ - ( XIII ) U/S 14A - RS. 5,31,225/ - ( XIV ) SHORTAGE OF MOBILES - RS. 1,18,63,125/ - ( XV ) HSBC ACCOUNT - RS. 7,44,24,668/ - ( XVI ) U/S 35D - RS. 2,19,70,208/ - ( XVII ) ADD ITION ON ACCOUNT OF G.P. RATE RS. 33,61,06,480/ - TOTAL INCOME - RS. 8,14,53,82,915/ - OR RS.8,14,53,82,920/ - 2.7. THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL - III (HEREINAFTER REFERRED TO AS THE DRP ), NEW DELHI. THE DRP VIDE ITS ORDER DT. 20.9.2014 ISSUED DIRECTIONS U/S 144C( 5 ) OF THE ACT. THE AO PASSED THE FINAL ASSESSMENT ORDER ON 21.10.2014 MAKING THE FOLLOWING ADJUSTMENTS. (A) INCOME AS DECLARED - RS.2,99,42,85,775/ - ADD: (I) AS PER TPO (PARA - 8) - RS . 62,10,949/ - ( II ) SALE OF SCRAP (PARA - 10) RS. 84,20,360 / - ( III ) SHORTAGE OF DOA MOBILES (PARA - 11(A)) - RS. 3,82,03,224/ - ( IV ) ACCESSORIES OF DOA MOBILES (PARA - 11(B)) - RS. 4,62,00,000/ - ( V ) CREDIT NOTES OF M/S BRIGHT POINT - RS. 10,97,61,523/ - (PAR A - 12(A)) ( VI ) OTHER CREDIT NOTES (PARA - 12(B)) - RS.346,57,17,077/ - ( VII ) SWAP (PARA - 13(A) & 13(B)) - RS. 40,35,48,739/ - ( VIII ) SEIZED DOCUMENTS (PARA - 14) - RS. 13,81,25,000/ - (A) TDS DEFAULT (PARA - 15(2) - RS. 3,22,40,175/ - (B) TDS DEFAULT (PARA - 15(3) - RS. 25,65,386/ - ( IX ) BONUS (PARA - 16) - RS. 51,59,380/ - ( X ) SUNDRY CREDITORS (PARA - 19) - RS. 2,37,11,754/ - ( XI ) U/S 14A (PARA - 20) - RS. 5,21,025/ - ( XII ) SHORTAGE OF MOBILES (PARA - 21) - RS. 1,18,63,125/ - ( XIII ) HSBC ACCOUNT (PARA - 22) - RS. 7,44,24,668/ - ADDITION ON ACCOUNT OF G.P. RATE (PARA - 24) RS. 33,61,06,480/ - TOTAL INCOME - RS.769,70,64,640/ - OR RS.769,70,64,640/ - ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 5 3. AGGRIEVED THE ASSESSEE FILED THIS APPEAL BEFORE US TAKING 29 GROUNDS. THE REVENUE HAS ALSO FILED AN APPEAL TAKING 12 GROUNDS. 4. WE HAVE HEARD SHRI VED JAIN, THE LD.COUNSEL FOR THE ASSESSEE AND SHRI PEEYUSH JAIN, THE LD.CIT, D.R. ON BEHALF OF THE REVENUE AT LENGTH. THERE ARE A NUMBER OF ISSUES THAT ARISE IN THESE CROSS APPEALS. WE WOULD TAKE UP EACH OF THESE ISSU ES IN SERIAT U M . 5. THE FACTS RE LATING TO THE ISSUE, THE FINDING OF THE AO, THE FINDING OF THE DRP, THE ARGUMENTS OF THE ASSESSEE AND THE ARGUMENTS OF THE REVENUE ARE FIRST LISTED OUT AND THEN OUR FINDINGS WOULD BE GIVEN GROUND WISE. 6. WE FIRST TAKE UP THE ASSESSEE S APPEAL 6.1. GROUND NO.1 READS AS FOLLOWS. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ORDER PASSED BY THE LEARNED ASSESSING OFFICER (AO) IS BAD BOTH IN THE EYE OF LAW AND ON FACTS. GROUND NO.1 IS GENERAL IN NATURE. 6.2. GROUND N OS. 2 AND 3 READ AS FOLLOWS. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DIRECTIONS ISSUED BY THE HON BLE DRP ARE BAD AND LIABLE TO BE QUASHED HAVING BEEN PASSED BEYOND THE PERIOD OF LIMITATION PRESCRIBED UNDER THE STATUTE. 3. WITHOUT PREJUDICE TO THE ABOVE AND IN THE ALTERNATIVE, THE ASSESSMENT ORDER PASSED BY THE AO IS BARRED BY LIMITATION HAVING BEEN PASSED BEYOND THE STATUTORY PERIOD PRESCRIBED IN THE ACT. 6.2.1 . THE ABOVE GROUND NOS. 2 AND 3 ARE ON THE ISSUE OF LIMITATION. AS PER THE FACTS, THE DRAFT ASSESSMENT ORDER IN THIS CASE WAS PASSED ON 14 TH NOVEMBER, 2013. THE ASSESSEE THEREAFTER FILED OBJECTION BEFORE THE DRP ON 13 TH DECEMBER, 2013. THE DRP THEREAFTER HAS PASSED THE ORDER ON 29 TH AUGUST, 2014. THE AO HAS PASSED THE FINAL AS SESSMENT ORDER ON 21 ST OCTOBER, 2014. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 6 AS PER SECTION 144(2) OF THE ACT, THE ASSESSEE CAN FILE OBJECTION BEFORE THE DRP WITHIN 30 DAYS OF THE RECEIPT OF THE DRAFT ASSESSMENT ORDER. AS PER SECTION 144C(12), THE DRP IS SUPPOSED TO GIVE ITS DIRECTION WITH IN 9 MONTHS FROM THE END OF THE MONTH IN WHICH THE DRAFT ORDER IS FORWARDED BY THE AO. FURTHER AS PER SECTION 144(13), THE AO HAS TO PASS THE FINAL ASSESSMENT ORDER WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH SUCH DIRECTION IS RECEIVED. IN THE P RESENT CASE, THE DRP HAS PASSED THE ORDER ON 29 TH AUGUST, 2014 AS IS EVIDENT FROM THE FIRST PAGE OF THE ORDER WHERE UNDER COLUMN 8, THE DATE OF DIRECTION HAS BEEN STATED TO BE 29 TH AUGUST, 2014. THE AO IN THE FINAL ASSESSMENT ORDER ON PAGE 2 HAS STATED TH AT THE ORDER WAS RECEIVED IN OFFICE OF CIT(C) - II, NEW DELHI AND IN HIS OFFICE ON 2 ND SEPTEMBER, 2014. THE AO HAS PASSED THE ORDER TAKING THIS DATE AS DATE OF RECEIPT OF ORDER ON 21 ST OCTOBER, 2014. THE ISSUE IN THIS GROUND IS THAT DRP HAVING PASSED THE ORDER ON 29 TH AUGUST, 2014 THE SAME WOULD HAVE BEEN SERVED ON THE AO ON THE SAME DATE AS THE ORDER HAS BEEN SERVED BY HAND AND NOT BY POST. IN CASE THE ORDER HAS NOT BEEN ISSUED BY THE DRP ON 29 TH AUGUST, 2014 SO AS TO BE OUT OF ITS CONTROL THEN THE DIRE CTION OF THE DRP WILL BE BARRED BY LIMITATION AS THE SAME WILL BE BEYOND NINE MONTHS FROM THE END OF THE MONTH IN WHICH THE DRAFT ASSESSMENT ORDER WAS RECEIVED BY THE ASSESSEE. IN THE ALTERNATIVE, IN CASE THE DRP ORDER WAS ISSUED AND RECEIVED BY THE AO O N 29 TH AUGUST, 2014, THEN THE FINAL ASSESSMENT ORDER PASSED BY THE AO ON 21 ST OCTOBER, 2014 WILL BE BEYOND ONE MONTH FROM THE END OF THE MONTH IN WHICH THE DIRECTIONS HAVE BEEN ISSUED AND BARRED BY LIMITATION. 6.2.2. ASSESSEE S CONTENTIONS ARE AS UNDER. THE AO PASSED THE DRAFT ASSESSMENT ORDER ON 14.11.2013. ASSESSEE FILED OBJECTION BEFORE THE DRP ON 13.12.2013. THE DRP PASSED ITS ORDER GIVING DIRECTIONS TO AO ON 29.8.2014. THIS ORDER WAS APPARENTLY HAND DELIVERED TO THE AO. AO HAS PASSED FINAL ASSE SSMENT ORDER ON 21.10.2014. ON PAGE 2 OF THIS ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 7 ORDER IT HAS BEEN STATED THAT THE DIRECTIONS OF THE DRP WERE RECEIVED ON 2.9.2014. THUS THERE IS ISSUE WHETHER DRP HAS PASSED THE ORDER AND ISSUED THE SAME ON 29 TH AUGUST, 2014 AND IF SO WHETHER THESE DIRECTI ONS WERE RECEIVED BY AO ON 29 TH AUGUST, 2014 OR ON 2 ND SEPTEMBER, 2014. IN VIEW OF THE ABOVE FACTS, THE ORDER PASSED BY THE DRP IS BARRED BY LIMITATION OR THE ASSESSMENT ORDER PASSED BY THE AO DATED 21 ST OCTOBER, 2014 IS BARRED BY LIMITATION. AS PER SECTION 144(2) OF THE ACT, THE ASSESSEE CAN FILE OBJECTION WITHIN 30 DAYS OF THE RECEIPT OF THE DRAFT ASSESSMENT ORDER. AS PER SECTION 144C(12), NO DIRECTION CAN BE ISSUED BY THE DRP AFTER 9 MONTHS FROM THE END OF THE MONTH IN WHICH THE DRAFT ORDER IS FO RWARDED TO THE ASSESSEE. AS PER SECTION 144(13), UPON RECEIPT OF THE DIRECTION FROM THE DRP, THE AO HAS TO PASS THE ASSESSMENT ORDER WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH SUCH DIRECTION IS RECEIVED. IN THE PRESENT CASE, THE DRP HAS STAT ED THAT IT HAS PASSED THE ORDER ON 29 TH AUGUST, 2014 AND THE AO HAS STATED THAT IT HAS RECEIVED THE ORDER ON 2 ND SEPTEMBER, 2014. THIS ORDER HAS BEEN SENT BY DRP BY HAND AND NOT BY POST. IN THIS BACKGROUND, THE ISSUE FOR CONSIDERATION IS WHETHER THE DR P HAS PASSED THE ORDER WITHIN THE TIME PRESCRIBED UNDER SECTION 144(12) OR THE AO HAS PASSED THE ORDER WITHIN THE TIME PRESCRIBED UNDER SECTION 144C(13). FOR COMPUTING LIMITATION THE INSTRUCTIONS HAVE TO BE ISSUED BY DRP SO AS TO BE BEYOND THE CONTROL OF THE AUTHORITY CONCERNED I.E. DRP. IN CASE THE DRP HAS ISSUED THE ORDER ON 29 TH AUGUST, 2014, THEN IT SHOULD HAVE REACHED AND SERVED ON THE AO ON 29 TH AUGUST, 2014 ITSELF. IN CASE THE AO HAS RECEIVED THE ORDER BY HAND ON 2 ND SEPTEMBER, 2014, (SINCE THE DE LIVER Y IS BY HAND) THEN THE ORDER HAS BEEN ISSUED BY THE DRP SO AS TO BE BEYOND ITS CONTROL ON 2 ND SEPTEMBER, 20 - 14. IN THIS REGARD RELIANCE IS BEING PLACED ON THE JUDGMENT OF THE KERALA HIGH COURT IN THE CASE OF GOVERNMENT WOOD WORKS VS STATE OF KERALA (1988)69 ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 8 STC 62 (KER). THE ABOVE JUDGMENT HAS BEEN APPLIED BY THE KERALA HIGH COURT IN THE CASE OF COMMISSIONER, AGRICULTURE TAX VS KAPPUMALAI ESTATE, (1 998) 234 ITR 187 (KER) 6 . 3. REVENUE S SUBMI SSIONS : IT WAS SUBMITTED BY THE DR THAT THE CONTENT ION OF THE ASSESSEE IS NOT CORRECT. THE DRP HAD ISSUED THE DIRECTION ON 29 TH AUGUST, 2014 WHICH IN THE ORDINARY COURSE HAS BEEN RECEIVED BY THE AO ON 2 ND SEPTEMBER, 2014. THE TIME GAP BETWEEN 29 TH AUGUST, 2014 AND 2 ND SEPTEMBER, 2014 IS NOT TOO WIDE. TH E DRP HAVING ISSUED THE ORDER AND EVEN DELIVERED BY HAND ON 2 ND SEPTEMBER, 2014 I.E. WITHIN 3 DAYS FROM THE DATE OF THE ORDER CANNOT BE SAID TO BE AN ABNORMAL DELAY SO AS TO DOUBT THE DATE OF THE DIRECTIONS STATED BY THE DRP. HE FURTHER CONTENDED THAT IT IS NOT NECESSARY THAT THE DIRECTION BE COMMUNICATED ON THE SAME DAY ON WHICH THE DIRECTION HAS BEEN PASSED BY THE DRP. THE DRP HAS SIGNED THE ORDER ON 29 TH AUGUST, 2014 AND HAS GOT THE SAME SERVED ON THE AO ON 2 ND SEPTEMBER, 2014 AND THUS DRP ORDER IS WIT HIN NINE MONTHS FROM THE END OF THE MONTH IN WHICH THE ASSESSEE FILED THE OBJECTION AND THE FINAL ASSESSMENT ORDER IS ALSO WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH THE AO RECEIVED THE DIRECTION. THUS THE CONTENTION OF THE ASSESSEE THAT DIRECTIO N/ ORDER IS BARRED BY LIMITATION IS NOT CORRECT. 6.4. OUR FINDINGS: - AFTER HEARING RIVAL CONTENTIONS WE FIND THAT THE ENTIRE BASIS ON WHICH THE ASSESSEE CLAIMS THAT THE IMPUGNED ORDER IS HIT BY LIMITATION IS AN ASSUMPTION THAT THE DRP ORDER DT. 29 TH AUGUST,2014, WAS HANDED OVER ON THE VERY SAME DAY TO THE AO. THIS IS NOT A VALID ASSUMPTION. THE REVENUE CLAIMS THAT THE DRP ORDER IN QUESTION WAS SERVED ON THE AO ON 2 ND SEPTEMBER,2014. THE DRP HAVING PASSED THE ORDER ON 29 TH AUGUST, 2014 AND HAVING S ERVED THE SAME BY HAND ON 2 ND SEPTEMBER, 2014 WILL NOT MEAN ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 9 THAT DRP HAS NOT PASSED THE ORDER WITHIN THE TIME PRESCRIBED. IN OUR VIEW IT IS NOT CORRECT THAT DATE OF THE ORDER TO BE CONSIDERED FOR LIMITATION WILL BE THE DATE ON WHICH THE ORDER GOES OUT OF THE HANDS OF THE DRP. FURTHER THE FINAL ASSESSMENT ORDER PASSED BY THE AO ON 21 ST OCTOBER,2014, IS WITHIN ONE MONTH FROM THE END OF THE MONTH IN WHICH THE AO RECEIVED THE DRP ORDER AND HENCE IS WITHIN THE LIMITATION PERIOD. IN THE RESULT THESE GROUND NO S. 2 AND 3 OF THE ASSESSEE ARE DISMISSED. 7 . GROUND NO.4 READS AS FOLLOWS. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE REFERENCE MADE FOR SPECIAL AUDIT UNDER SECTION 142(2A) IS BAD IN LAW. 7 .1. THE FACTS RELATING TO GROUND NO.4 ARE THAT : IN THIS CASE A SEARCH AND SEIZURE OPERATION WAS CARRIED OUT ON THE ASSESSEE ON 10 TH FEBRUARY, 2011. THE ASSESSEE FILED THE RETURN OF INCOME ON 30 TH SEPTEMBER, 2011. THEREAFTER THE AO ISSUED A NOTICE UNDER SECTION 143(2) ALONG WITH QUESTIONNAIRE. IN RESPON SE THERETO, THE ASSESSEE SUBMITTED VARIOUS DETAILS AS IS EVIDENT FROM THE ASSESSMENT ORDER. THE ASSESSEE ALSO PRODUCED THE BOOKS OF ACCOUNTS BEFORE THE AO. ON 26 TH FEBRUARY, 2013 ASKING THE ASSESSEE TO FURNISH EXPLANATION WHY NOT THE ACCOUNTS BE AUDITED U NDER SECTION 142(2A) OF THE INCOME TAX ACT. IN RESPONSE THERETO, THE ASSESSEE FILED ITS OBJECTION DATED 8 TH MARCH, 2013 WHERE IT WAS SUBMITTED THAT ASSESSEE HAS PRODUCED THE BOOKS OF ACCOUNTS AND ALL THE DETAILS AS CALLED FOR. ASSESSEE ALSO SUBMITTED PAR AWISE REPLY TO EACH OF THE ISSUES RAISED IN THE SHOW CAUSE NOTICE. THEREAFTER THE ASSESSEE RECEIVED A SHOW CAUSE NOTICE ON 11 TH MARCH, 2013 FROM THE CIT, CENTRAL - II, NEW DELHI TO FURNISH EXPLANATION WHY SPECIAL AUDIT SHOULD NOT BE CARRIED OUT IN THE CASE OF THE ASSESSEE. THE ASSESSEE FILED A DETAILED OBJECTION TO THIS LETTER VIDE LETTER DATED 15 TH MARCH, 2013 AND 18 TH MARCH, 2013. THE SAID OBJECTIONS, HOWEVER, WERE REJECTED AND A SPECIAL AUDIT WAS ORDERED VIDE LETTER DATED 20 TH MARCH, 2013. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 10 7.2. DRP FIN DINGS: DRP REJECTED THE CONTENTIONS OF THE APPELLANT COMPANY THAT THE ORDER OF THE SPECIAL AUDIT U/S 142(2A) WAS NOT JUSTIFIED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE FINDINGS OF THE DRP IN THIS REGARD ARE AS UNDER: THE OBJECTION OF THE APPELLAN T WAS CONSIDERED IN THE LIGHT OF THE ORDER PASSED BY THE AO. THE ORDER ALONG WITH THE SUBMISSIONS MADE BY THE APPELLANT DURING THE DRP PROCEEDINGS REVEALED THAT DURING THE SEARCH ACTION A LARGE NUMBER OF DOCUMENTS WERE RECOVERED SUGGESTING CONFIRMED CONCE ALMENT OF INCOME. THE APPELLANT WAS GIVEN OPPORTUNITIES DURING THE SEARCH AS WELL AS THE POST SEARCH PROCEEDINGS TO THROW AMPLE LIGHT ON THE INCRIMINATING DOCUMENTS RECOVERED IN THE COURSE OF SEARCH. HOWEVER THE APPELLANT INSTEAD OF AVAILING OF THOSE OPP ORTUNITIES CHOSE TO RESORT TO CAT AND MOUSE GAME RESULTING IN NON - COMPLIANCE WITH ALMOST ALL THE QUERIES RAISED TO HIM BY THE AUTHORITIES. ACCORDINGLY THE COMPLEXITY OF THE ACCOUNTS REMAINED UNRESOLVED. THEREFORE THE SPECIAL AUDIT CONDUCTED UNDER THE SEC TION 142(2A) OF THE ACT WAS VERY MUCH WARRANTED IN THE GIVEN SITUATION. HENCE THE SAID OBJECTION OF THE APPELLANT IS OVERRULED. 7.3 . FINAL ORDER BY AO THE ASSESSEE CHALLENGED THE DRAFT ASSESSMENT ORDER BEING MADE IN PRINCIPLE OF NATURAL JUSTICE AND W ITHOUT GIVING ADEQUATE OPPORTUNITY WHICH WAS REJECTED BY THE HON BLE DRP IN PARA 3 OF THEIR ORDER. 7 . 4 . A SSESSEE S SUBMISSIONS: - THE ASSESSEE FILED THE RETURN OF INCOME ON 30 TH SEPTEMBER, 2011. THEREAFTER THE AO ISSUED NOTICE UNDER SECTION 143(2) ON 2 ND MARCH, 2012. A DETAILED QUESTIONNAIRE WAS ALSO ISSUED BY THE AO ON 2 ND MARCH, 2012. IN COMPLIANCE THERETO THE ASSESSEE SUBMITTED ALL NECESSARY DETAILS. THE ASSESSEE ALSO PRODUCED THE BOOKS OF ACCOUNTS. AT THE FAG END WHEN THE ASSESSMENT WAS GETTIN G TIME BARRED, THE AO ISSUED A SHOW CAUSE NOTICE FOR A SPECIAL AUDIT. THE ASSESSEE SUBMITTED A DETAILED OBJECTION VIDE LETTER DATED 8.3.2013 PLACED AT PAPER BOOK PAGES 832 - 858. THE AO IGNORING THE CONTENTION OF THE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 11 ASSESSEE ORDERED THE SPECIAL AUDIT ON 20 TH MARCH, 2013. FURTHER OBJECTIONS WERE FILED VIDE LETTER DATED 11.3.2013 PLACED AT PAPER BOOK PAGES 860 - 879 AND ANOTHER LETTER DATED 15.3.2013 AND 18.3.2013 PLACED AT PAPER BOOK PAGES 880 - 894. THE INTENTION OF GETTING THE SPECIAL AUDIT DONE WAS TO GET E XTENSION OF THE PERIOD FOR COMPLETING THE ASSESSMENT. AS PER THE PROVISIONS OF SECTION 142(2A), A SPECIAL AUDIT CAN BE CARRIED OUT WHEN THERE IS COMPLEXITY IN THE ACCOUNTS. IN THE PRESENT CASE THERE WAS NO COMPLEXITY IN THE ACCOUNTS. THE ACCOUNTS HAVE BEEN DULY AUDITED BY THE AUDITOR APPOINTED UNDER SECTION 44AB OF THE INCOME TAX ACT. THERE WAS NO COMPLEXITY IN THE ACCOUNTS. THE AO AFTER RECEIVING ASSESSEE S DETAILED CLARIFICATION, IN A MECHANICAL WAY, ORDERED FOR THE SPECIAL AUDIT IGNORING THE LEGAL POSITION THAT THE AO NEEDS TO EXAMINE THE ACCOUNTS AND OTHER MATERIAL OBJECTIVELY. SINCE THE AO HAS FAILED TO EXAMINE THE ACCOUNTS AND OTHER MATERIAL OBJECTIVELY, THE REFERENCE MADE BY HIM FOR SPECIAL AUDIT IS BAD IN LAW. 7.5. REVENUE S SUBMISSIONS: - TH E SUBMISSIONS OF THE L D.D.R. ON GROUND NO.4 ARE THAT AS PER THE PROVISIONS OF SECTION 142(2A) IT IS THE JUDGMENT OF THE AO HAVING REGARD TO THE NATURE AND COMPLEXITY OF THE ACCOUNTS, VOLUME OF THE ACCOUNTS, DOUBT ABOUT CORRECTNESS OF THE ACCOUNT, MULTIPL ICITY OF THE TRANSACTIONS IN THE ACCOUNT OR SPECIALIZED NATURE OF THE BUSINESS ACTIVITIES OF THE ASSESSEE AND THE INTEREST OF THE REVENUE. IN THE PRESENT CASE CONSIDERING THE VOLUME OF THE ACCOUNTS AND THE MULTIPLICITY OF THE TRANSACTIONS, THE AO WAS JUST IFIED IN ORDERING SPECIAL AUDIT UNDER SECTION 142(2A) OF THE ACT. 7.6. OUR FINDINGS: - THE AO AS WELL AS THE DRP HAVE, KEEPING IN VIEW THE COMPLEXITIES IN THE ACCOUNTS AND THE VOLUME CAME TO A CONCLUSION THAT THIS IS A FIT CASE FOR APPLICATION OF PROVISI ONS OF S.142(2A) OF THE ACT. WE DO NOT FIND ANY PERVERSITY IN THIS VIEW OF THE AO AS APPROVED BY THE DRP. SUFFICIENT OPPORTUNITY HAS BEEN GRANTED TO THE ASSESSEE AND IT WAS ONLY AFTER CONSIDERING THE OBJECTIONS, SPECIAL AUDIT WAS ORDERED. WE SEE NO REAS ON TO ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 12 INTERFERE WITH THESE FINDINGS OF THE REVENUE AUTHORITIES. IN THE RESULT GROUND NO.4 IS DISMISSED AS DEVOID OF MERIT. 8 . GROUND NO.5 READS AS FOLLOWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN ASSESSING THE INCOME OF THE APPELLANT AT RS.7,69,70,64,640/ - AS AGAINST THE INCOME OF RS.2,99,42,85,775/ - DECLARED BY THE ASSESSEE. 8 .1 . GROUND NO.5 IS GENERAL IN NATURE WHICH DO NOT REQUIRE OUR ADJUDICATION. 9 . GROUND NO.6 , 7 AND 13 READ AS FOLLOWS. 6 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING THE ADDITION OF AN AMOUNT OF RS. 3,37,09,95,646/ - ON ACCOUNT OF CREDIT NOTES ISSUED. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED IN NOT DELETING THE ABOVE ADDITION PROPOSED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER DESPITE THE FACT THAT EACH AND EVERY ISSUE RAISED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER AND THE SPECIAL AUDIT REPORT HAS BEEN REBUTTED WITH EXP LANATION AND EVIDENCES BEYOND DOUBT. 7(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING ADDITION OF AN AMOUNT OF RS. 9,47,21,431/ - ON ACCOUNT OF CREDIT NOTES ISSUED TO M/S. SUPER DISTRIBUTORS. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED IN NOT DELETING THE ABOVE ADDITION PROPOSED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER DESPITE THE FACT THAT EACH AND EVERY ISSUE RAISED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER AND THE SPECIAL AUDIT REPORT HAS BEEN REBUTTED WITH EXPLANATION AND EVIDENCES BEYOND DOUBT. 13 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING ADDITION OF AN AMOUNT OF RS. 10,97,61,523/ - ON AC COUNT OF CREDIT NOTES ISSUED TO M/S. BRIGHT POINT INDIA. (II) THAT THE ABOVE AMOUNT HAS BEEN ADDED BY ARBITRARILY REJECTING THE DETAILED EXPLANATION AND RECONCILIATION FILED BY THE ASSESSEE. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ER RED IN NOT DELETING THE ABOVE ADDITION PROPOSED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER DESPITE THE FACT THAT EACH AND EVERY ISSUE RAISED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER AND THE SPECIAL AUDIT REPORT HAS BEEN REBUTTED WITH EXPLANATIO N AND EVIDENCES BEYOND DOUBT. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 13 9 .1. THE FACTS RELATING TO TH ESE GROUND S ARE THAT: THE ASSESSEE COMPANY SELLS MOBILE PHONES AND ACCESSORIES TO ITS SUPER DISTRIBUTORS. THE SUPER DISTRIBUTORS IN TURN SELL THE SAME TO ITS DOWN THE LINE CHANNEL. D URING THE COURSE OF THE SEARCH THERE WAS AN ALLEGATION LEVIED AGAINST THE ASSESSEE COMPANY THAT IT GIVES INSTRUCTION TO ITS SUPER DISTRIBUTORS FOR DECREASING THE SELLING PRICE OF THE MOBILE PHONES. IN THE CASE ONE OF ITS MAJOR SUPER DISTRIBUTORS I.E. BRIG HT POINT INDIA PVT. LTD. IT WAS OBSERVED THAT IT HAS ISSUED CREDIT NOTES WITH DISCOUNT NOTE DURING THE PERIOD FROM OCTOBER, 2009 TO 31 ST MARCH, 2011. DURING THE COURSE OF THE POST SEARCH ENQUIRY, THE ASSESSEE FILED THE RECONCILIATION STATEMENT. HOWEVER, THE AO WAS NOT SATISFIED WITH THE RECONCILIATION GIVEN BY THE ASSESSEE. ACCORDINGLY THIS ISSUE WAS REFERRED TO THE SPECIAL AUDITOR. THE SPECIAL AUDITOR CARRIED OUT THE VERIFICATION IN RESPECT OF THE BRIGHT POINT INDIA PVT. LTD. ON THE DIRECTION OF THE AO HE ALSO CARRIED OUT THE VERIFICATION IN RESPECT OF THE OTHER SUPER DISTRIBUTORS. AFTER VERIFICATION, THE SPECIAL AUDITOR REPORTED THAT IT HAS BEEN ABLE TO RECONCILE THE ACCOUNTS. IT WAS FURTHER REPORTED THAT FOR THE FINANCIAL YEAR 2009 - 10 THE DIFFEREN CE IN THE BALANCE BETWEEN THE ASSESSEE COMPANY AND THE BRIGHT POINT INDIA PVT. LTD. HAS BEEN RECONCILED WITH THE LEDGER ACCOUNT OF THE FINANCIAL YEAR 2010 - 11. IN RESPECT OF THE FINANCIAL YEAR 2010 - 11, THE SPECIAL AUDITOR REPORTED THAT IN THE ABSENCE OF TH E LEDGER ACCOUNT FOR THE NEXT YEAR NOT BEING AVAILABLE THEY ARE NOT IN A POSITION TO RECONCILE THE SAME. IN RESPECT OF THE OTHER SUPER DISTRIBUTORS IT WAS REPORT BY THE SPECIAL AUDITOR THAT THEY HAVE BEEN PROVIDED WITH LEDGER ACCOUNT IN THE BOOKS OF TH E SUPER DISTRIBUTORS IN RESPECT OF 30 SUPER DISTRIBUTORS OUT OF THE TOTAL 95 SUPER DISTRIBUTORS AND HENCE THEY ARE UNABLE TO COMMENT IN RESPECT OF OTHER SUPER DISTRIBUTORS. THE AO, THEREAFTER, ISSUED A SHOW CAUSE NOTICE IN RESPONSE TO WHICH THE ASSESSE E SUBMITTED THE LEDGER ACCOUNT OF THE VARIOUS SUPER DISTRIBUTORS IN ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 14 THEIR BOOKS OF ACCOUNTS. NOT BEING SATISFIED THE AO DREW ADVERSE INFERENCE AGAINST THE ASSESSEE AND MADE THE FOLLOWING ADDITIONS: - I) RS.337,09,95,646/ - IN RESPECT OF 65 SUPER DISTRIBUTOR S AGAINST WHICH THE ALLEGATION WAS THAT THE LEDGER ACCOUNT IN THEIR BOOKS HAVE NOT BEEN SUBMITTED; II) RS.9,47,21,431/ - BEING THE DIFFERENCE IN THE LEDGER ACCOUNTS OF THE 30 SUPER DISTRIBUTORS WHOSE ACCOUNTS WERE SUBMITTED ON THE GROUND THAT THE LEDGER ACC OUNT IN THE BOOKS OF THESE 30 SUPER DISTRIBUTORS FOR SUBSEQUENT YEAR HAVE NOT BEEN SUBMITTED; III) AN ADDITION OF RS.10,97,61,5213/ - IN RESPECT OF BRIGHT POINT INDIA PVT. LTD. ON THE GROUND THAT THE ASSESSEE HAS FILED TO GIVE SATISFACTORY EXPLANATION ABOUT THIS ACCOUNT. 9.2 . DRP FINDINGS THE DRP HELD THAT THE ASSESSEE COMPANY DID NOT PROVIDE THE DESIRED INFORMATION AND NECESSARY EVIDENCES AND DISMISSED THE OBJECTION OF THE ASSESSEE AND HAS UPHELD THE CONTENTION OF THE AO. THE FINDING OF THE DRP IN THIS R EGARD ARE AS UNDER: THE DRP NOTED THAT THE OBSERVATIONS OF THE SPECIAL AUDITORS THAT THE ASSESSEE COMPANY DID NOT PROVIDE THE DESIRED INFORMATION AND NECESSARY EVIDENCE DESPITE HAVING BEEN GIVEN SUFFICIENT OPPORTUNITIES A NUMBERS OF TIMES. IT WAS SEEN TH AT THE TOTAL NUMBER OF PARTIES FOR WHICH CLAIM WAS MADE ON ACCOUNT OF CREDIT NOTES WAS 95. THE APPELLANT COMPANY AS PER ITS CONVENIENCE PROVIDED LEDGER ACCOUNT (ACCOUNTS OF THE ASSESSEE IN THE BOOKS OF THESE PARTIES) OF 30 PARTIES OUT OF TOTAL 95 PARTIES. IT WAS SEEN THAT CREDIT, NOTES AGGREGATED TO RS. 9,47,21,431/ - WHICH WAS NOT ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS. WHEN APPELLANT WAS CLAIMING EXPENSE ON ACCOUNT OF SUCH CREDIT NOTES WITHOUT EVIDENCE AND IS RECOGNIZED BY THE PARTIES, SUCH CLAIM WAS NOT T ENABLE. THE ASSESSEE COMPANY DID NOT GIVE ANY EXPLANATION IN THIS REGARD. THUS, THE DRP IS OF THE VIEW THAT THE CLAIM WAS RIGHTLY DISALLOWED. 9.3. FINAL ORDER BY AO : - ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 15 SINCE DRP REJECTED THE OBJECTION OF THE ASSESSEE THE AO IN THE FINAL ASSESSMENT ORDER HAS STATED AS UNDER: - THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS DISMISSED THE OBJECTION OF THE ASSESSEE ON THIS ISSUE . IN VIEW OF THIS, ADDITION OF RS.346, 57,17,077/ - IS MADE TO THE INCOME OF THE ASSESSEE. THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO.35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DT. 29.8.2014 HAS DISMISSED THE OBJECTION OF THE ASSESSEE ON THIS ISSUE OBSERVING T HAT THE CLAIM OF THE ASSESSEE IN RESPECT OF CREDIT NOTES TO THIS EXTENT WAS RIGHTLY TO BE DISALLOWED. IN VIEW OF THIS, ADDITION OF RS.10,97,61,523/ - IS MADE TO THE INCOME OF THE ASSESSEE. 9.4. ASSESSEE S SUBMISSIONS: I. . THIS ISSUE REGARDING CREDIT NOTES HAS ARISEN ON ACCOUNT OF THE CREDIT NOTES ISSUED TO BRIGHT POINT INDIA PVT. LTD. DURING THE COURSE OF THE POST - SEARCH INVESTIGATION. II . DURING THE COURSE OF THE POST - SEARCH INVESTIGATION THE ASSESSEE SUBMITTED DETAILS OF THE DISCOUNT AND COPY OF ACCOUNT W ITH RESPECT TO BRIGHT POINT INDIA PVT. LTD. A RECONCILIATION STATEMENT WAS ALSO FILED. III . THE AO THEREAFTER REFERRED THIS ISSUE TO THE SPECIAL AUDITOR UNDER SECTION 142(2A). THE TERMS OF REFERENCE (PAPER BOOK PAGE 4971) WAS THAT THERE WAS A DIFFERENCE OF RS.10,97,61,523/ - IN THE AMOUNT OF THE CREDIT NOTES SHOWN BY THE ASSESSEE ISSUED TO M/S BRIGHT POINT INDIA PVT. LTD. THIS DIFFERENCE COULD NOT BE RECONCILED DURING THE ASSESSMENT PROCEEDINGS AND THE SPECIAL AUDITOR IS DIRECTED TO OBTAIN COPIES OF ACCO UNT OF THE SUPER DISTRIBUTORS INCLUDING M/S BRIGHT POINT INDIA PVT. LTD. AND EXAMINE WHETHER CREDIT NOTES AND DEBIT NOTES ISSUED BY THE ASSESSEE ARE PROPERLY ACCOUNTED FOR AND TALLY WITH THOSE ACCOUNT OF THE DISTRIBUTORS. IV . THE SPECIAL AUDITOR THEREAFT ER EXAMINED THE ACCOUNT OF THE BRIGHT POINT INDIA PVT. LTD. AND HIS OBSERVATIONS ON THIS ACCOUNT WITH THE RECONCILIATION FOR THE FINANCIAL YEAR 2009 - 10 ARE AT PAPER BOOK PAGE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 16 4980 AND FOR FINANCIAL YEAR 2010 - 11 AT PAGE 4982. THE SPECIAL AUDITOR HAS FULLY RECONCILED THIS ACCOUNT AND THE IMPORTANT FACTOR TO BE NOTED IN THE RECONCILIATION IS THAT THE PAYMENTS RECEIVED/ MADE ARE EXACTLY MATCHING WITH THE ACCOUNT OF BRIGHT POINT INDIA PVT. LTD. ALL DIFFERENCES POINTED OUT HAVE BEEN CLARIFIED TO HAVE BEEN ACCO UNTED FOR IN THE SUBSEQUENT YEAR. V . THE ONLY OBSERVATION OF THE AUDITOR IS THAT IN THE ABSENCE OF LEDGER ACCOUNT IN THE BOOKS OF BRIGHT POINT INDIA PVT. LTD. FOR THE SUBSEQUENT FINANCIAL YEAR I.E. 2011 - 12 THEY ARE UNABLE TO COMMENT ABOUT THE INVOICES ISSU ED BY THE ASSESSEE HAVE BEEN ACCOUNTED FOR BY BRIGHT POINT INDIA PVT. LTD. OR NOT (PAPER BOOK PAGE 4983). VI . SIMILARLY THE SPECIAL AUDITOR VERIFIED THE ACCOUNT OF OTHER SUPER DISTRIBUTORS FOR THE FINANCIAL YEAR 2009 - 10 AND 2010 - 11 AND RECONCILIATION OF THE VARIOUS SUPER DISTRIBUTORS HAVE BEEN STATED IN THE SPECIAL AUDIT REPORT STARTING FROM PAPER BOOK PAGE 4985 TO 5121. VII . IN RESPECT OF RECONCILIATION OF 13 PARTIES CARRIED OUT FOR THE FINANCIAL YEAR 2009 - 10, THE SPECIAL AUDITOR POINTED OUT THAT THERE I S A DIFFERENCE OF RS.1,41,96,478/ - . THE SPECIAL AUDITOR FURTHER POINTED OUT THAT THIS DIFFERENCE STAND RECONCILED SINCE ALL THESE SUPER DISTRIBUTORS HAVE ACCOUNTED FOR THESE CREDIT NOTES OF RS.1,41,96,478/ - IN THE SUBSEQUENT FINANCIAL YEAR I.E. 2010 - 11 (PA PER BOOK PAGE 5126). VIII . IN RESPECT OF THE 30 SUPER DISTRIBUTORS OUT OF THE 95 SUPER DISTRIBUTORS IN THE F.Y. 2010 - 11, THE SPECIAL AUDITOR CARRIED OUT THE RECONCILIATION AND POINTED OUT THAT THERE IS A DIFFERENCE OF RS.9,47,21,431/ - BUT IN THE ABSENCE OF LEDGER ACCOUNT FOR THE FINANCIAL YEAR 2011 - 12, THEY ARE UNABLE TO COMMENT UPON THE SAME. IX . THE SPECIAL AUDITOR FURTHER POINTED OUT THAT IN THE ABSENCE OF LEDGER ACCOUNT OF THE ASSESSEE COMPANY IN THE BOOKS OF SUPER DISTRIBUTORS IN RESPECT OF THE REMAI NING 65 PARTIES FOR THE F.Y. 2011 - 12 I.E. THE NEXT YEAR, THEY ARE UNABLE TO COMMENT UPON WHETHER THESE SUPER DISTRIBUTORS HAVE ACCOUNTED FOR THE CREDIT NOTES(PAPER BOOK PAGE 5128). X . THE AO THEREAFTER ISSUED A SHOW CAUSE NOTICE AND IN RESPONSE THERETO THE ASSESSEE SUBMITTED THE REPLY DATED 07.11.2013 (PAPER BOOK PAGE 1655). IN THIS LETTER, CONFIRMATION OF ACCOUNT OF SUPER DISTRIBUTORS WHICH SPECIAL AUDITORS HAVE POINTED OUT NOT PROVIDED IN THEIR REPORT WAS SUBMITTED ALONG WITH COPY OF ACCOUNT (PAPER BOOK PAGE 1656 - 2033). IT MAY BE RELEVANT TO MENTION THAT THE DETAILS ABOUT THESE SUPER DISTRIBUTORS WERE OTHERWISE ALSO WERE AVAILABLE WITH THE AO. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 17 THESE DETAILS WERE SUBMITTED VIDE LETTER DATED15.03.2011 PLACED AT PAPER BOOK PAGE 434, PARA 6 WITH NAME, ADDRESS, ETC. LEDGER ACCOUNT OF SOME OF THESE PARTIES WERE SUBMITTED TO THE AO VIDE LETTER DATED 11.01.2013 (PAPER BOOK PAGE 460 - 462). XI . FURTHER DETAILS WERE SUBMITTED VIDE LETTER DATED 11.01.2013 (PAPER BOOK PAGE 539) WITH CONFIRMATION COPY OF ACCOU NT. VIDE LETTER DATED 20.12.2013 (PAPER BOOK PAGE 732, RELEVANT PAGE 734, PARA 5 AND 6) IT WAS POINTED OUT THAT THE CONFIRMATION IN RESPECT OF BRIGHT POINT INDIA PVT. LTD. HAS ALREADY BEEN SUBMITTED AND IN THIS LETTER IT WAS ALSO POINTED OUT THAT THE CRED IT NOTE IS ACCOUNTED FOR ON THE DATE OF ISSUE AND COPY OF THE SAME IS SENT TO THE PARTY AND IT IS UP TO THE DISTRIBUTOR AS TO WHEN THEY RECORD THE CREDIT NOTE IN ITS BOOKS OF ACCOUNT. VIDE THIS LETTER ITS COMPLETE BOOKS OF ACCOUNTS WERE ALSO PRODUCED FOR V ERIFICATION. VIDE THIS LETTER COMPLETE DETAILS OF THE REBATE AND DISCOUNT WERE ALSO SUBMITTED. THUS ALL THE DETAILS AND CONFIRMATION WITH COMPLETE COPY OF ACCOUNTS WERE AVAILABLE ON RECORD OF THE AO. XII . IT MAY BE IMPORTANT TO NOTE THAT VIDE LETTER DA TED 15.01.2013 (PAPER BOOK PAGE 740) THE ASSESSEE HAD SUBMITTED COPY OF LEDGER ACCOUNT ALONG WITH CONFIRMATION AND RECONCILIATION OF M/S BRIGHT POINT INDIA PVT. LTD. XIII . IN VIEW OF THE ABOVE FACTS, THE OBSERVATIONS MADE BY THE AO ARE FACTUALLY INCORRECT . THE ASSESSEE COMPANY VIDE LETTER DATED 11.01.2013 HAS SUBMITTED COMPLETE COPY OF LEDGER ACCOUNT FOR EACH OF THE PARTY. COMPLETE BOOKS OF ACCOUNTS WHICH INCLUDED LEDGER ACCOUNT OF THESE PARTIES WERE PRODUCED BEFORE THE SPECIAL AUDITOR. XIV . THE SPECI AL AUDITOR IN FACT HAS VERIFIED THESE ACCOUNTS AND HAS EVEN OBSERVED THAT ON THE BASIS OF THE ANALYSIS OF THE SUBSEQUENT YEAR THAT WHEREVER THERE IS A DIFFERENCE THE SAME HAS BEEN ACCOUNTED FOR BY THESE SUPER DISTRIBUTORS IN THE NEXT YEAR. THE REPORT OF T HE SPECIAL AUDITOR CLEARLY SHOWS THAT THERE IS NO DIFFERENCE IN THE PAYMENTS SHOWN BY THE SUPER DISTRIBUTORS AND THE PAYMENTS ACCOUNTED FOR BY THE ASSESSEE COMPANY (PB PG. 4980, 4982). FURTHER THE SPECIAL AUDITOR REPORT CLEARLY ACKNOWLEDGES THAT ASSESSEE HAS PROVIDED ALL THE LEDGER ACCOUNTS, COPY OF CREDIT NOTES AND COMPLETE DETAILS WITH ADDRESSES OF THE SUPER DISTRIBUTORS. XV . IT WAS ALSO POINTED OUT THAT IN RESPONSE TO THE SHOW CAUSE NOTICE ISSUED BY THE AO POST - SPECIAL AUDITOR REPORT VIDE LETTER DATED 07.11.2013 (PB PG. 1655) THE ASSESSEE COMPANY PROVIDED COMPLETE COPY OF ACCOUNT ALONG WITH BALANCE CONFIRMATION LETTER FROM EACH OF THESE 65 PARTIES. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 18 XVI . IT WAS ALSO POINTED OUT THAT THE AO CARRIED OUT INDEPENDENT VERIFICATION BY ISSUE OF NOTICE UNDER SEC TION 133(6), AS IS EVIDENT FROM PAGE 61 OF THE DRAFT ASSESSMENT ORDER, AND NOTHING ADVERSE HAS COME OUT ABOUT SUCH SUPER DISTRIBUTORS IN SUCH ENQUIRY. XVII . FURTHER THE COPY OF ACCOUNT OF THESE SUPER DISTRIBUTORS WERE COLLECTED POST - DRAFT ASSESSMENT ORDER AND ON THE BASIS, IT WAS SUBMITTED BEFORE THE DRP THAT ALL THE CREDIT NOTES ISSUED BY THE ASSESSEE COMPANY HAVE BEEN DULY ACCOUNTED FOR BY EACH OF THESE SUPER DISTRIBUTORS AND STAND RECONCILED, AS IS EVIDENT FROM THESE COPIES OF ACCOUNT (PAPER BOOK PAGES 3 134 - 4353, VOL. X AND XI). XVIII . THUS ALL THE INFORMATION HAS BEEN PROVIDED AND WAS AVAILABLE WITH THE AO. STILL THE AO HAS MADE ADDITION ARBITRARILY IGNORING THE MATERIAL AND EVIDENCE ON RECORD ON ACCOUNT OF THE CREDIT NOTES ISSUED TO THE SUPER DISTRIBUTO RS. THE ADDITION MADE IN THE FINAL ASSESSMENT ORDER IS NOT TENABLE. XIX . THE ASSESSEE HAS SUBMITTED COMPLETE DETAILS AND NO INCONSISTENCY, CONTRADICTIONS OR ERRORS HAVE BEEN POINTED OUT IN THE DETAILS SUBMITTED. XX . ASSESSEE HAS BEEN MAINTAINING REGULAR BOOKS OF ACCOUNT AND ALL SALES AND CREDIT NOTES ISSUED THERETO HAVE BEEN DULY ACCOUNTED FOR. XXI . PAYMENTS RECEIVED FROM THE SUPER DISTRIBUTORS HAVE BEEN DULY ACCOUNTED FOR. THE AO AND SPECIAL AUDITOR AFTER THOROUGH VERIFICATION HAVE NOT BEEN AB LE TO POINT OUT ANY SINGLE INSTANCE OF ANY PAYMENT BEING RECEIVED BUT NOT ACCOUNTED FOR BY THE ASSESSEE COMPANY. XXII . THERE IS NOT A SINGLE INSTANCE WHERE A SUPER DISTRIBUTOR HAS REFUSED OR CONTRADICTED THAT IT HAS NOT RECEIVED THE CREDIT NOTE. XXIII . THE ADDITION HAS BEEN MADE MERELY ON THE BASIS OF A DOUBT. XXIV . EVEN THESE DOUBTS HAVE ALSO BEEN ADDRESSEDBY THE ASSESSEE BY SUBMITTING COMPLETE COPY OF ACCOUNT OF THE ASSESSEE COMPANY IN THE BOOKS OF THESE SUPER DISTRIBUTORS FOR WHICH THE ALLEGATI ON WAS THAT THE ACCOUNT HAS NOT BEEN PROVIDED FOR. XXV . THE ASSESSEE HAS ALSO SUBMITTED CONFIRMATION FROM EACH OF THE PARTIES. XXVI . IN THE CASE OF BRIGHT POINT INDIA PVT. LTD. THE ASSESSEE HAS SUBMITTED COMPLETE RECONCILIATION AND THIS FACT HAS BEE N EXAMINED AND CONFIRMED BY THE SPECIAL AUDITOR AS IS EVIDENT FROM PAPER BOOK PAGE 4980 - 4982 WHEREBY NO DIFFERENCE REMAINS UNEXPLAINED. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 19 XXVII . THE DETAILED EXPLANATION SUBMITTED BEFORE THE DRP (PAPER BOOK PAGE 6449 - 6467) HAS BEEN REJECTED ARBITRARILY B Y THE DRP. XXIX . THE AO & DRP HAVE IGNORED THE FACT THAT THESE ARE RUNNING ACCOUNT OF THE SUPER DISTRIBUTORS AND MERELY BECAUSE SOME OF THE SUPER DISTRIBUTORS HAVE ACCOUNTED FOR THE CREDIT NOTES IN THE SUBSEQUENT YEAR CANNOT BE A GROUND FOR MAKING ADDIT ION IN THE HANDS OF THE ASSESSEE. 9.5 . REVENUE S SUBMISSIONS : - IT WAS SUBMITTED BY THE LEARNED DR THAT THIS ADDITION HAS BEEN MADE ON THE BASIS OF THE FACTUAL FINDING RECORDED BY THE AO AND AS CONFIRMED BY THE DRP. IT WAS CONTENDED THAT THIS ISSUE IS F ACT BASED. THE ASSESSEE COMPANY IN THE PAPER BOOK HAS PLACED PAPERS WHEREBY IT HAS BEEN CONTENDED THAT THE ACCOUNTS STAND RECONCILED AND ADVERSE INFERENCE CANNOT BE DRAWN MERELY ON THE GROUND THAT THE COPY OF ACCOUNTS IN THE BOOKS OF THE SUPER DISTRIBUTOR S HAVING BEEN SUBMITTED. THE LEARNED DR RELIED UPON THE ORDER OF THE AO AS CONFIRMED BY THE DRP. 9.6. OUR FINDINGS: - AFTER CONSIDERING THE RIVAL SUBMISSIONS AND THE DETAILS OF THE DISCOUNTS AND COPY OF ACCOUNTS SUBMITTED BY THE ASSESSEE TO THE REVENUE AU THORITIES, WHICH IS FILED BEFORE US BY WAY OF PAPER BOOK, WE OBSERVE THAT THE ENTIRE ADDITION IS BASED ON THE FACT THAT THE ASSESSEE HAS FAILED TO SUBMIT THE COPY OF ACCOUNTS IN THE BOOKS OF SUPER DISTRIBUTORS AND IN SOME CASES IT HAS FAILED TO RECONCILE THE DIFFERENCES IN THE ACCOUNTS DURING THE ASSESSMENT PROCEEDINGS. BEFORE US THE ASSESSEE HAS DEMONSTRATED THAT IT HAS SUBMITTED THE NECESSARY INFORMATION AND EACH AND EVERY ACCOUNT HAS BEEN RECONCILED. THIS IS A PURE CASE OF RECONCILIATION OF ACCOUNTS AN D WE DO NOT UNDERSTAND HOW AN ELEMENT OF INCOME CAN BE INFERRED AND AN ADDITION MADE. THE AO HAS REFERRED THIS ISSUE TO THE SPECIAL AUDITOR AS HE WAS NOT ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 20 SATISFIED ABOUT THE RECONCILIATION OF ACCOUNT OF BRIGHT POINT INDIA PVT.LTD. THE SPECIAL AUDITOR TH EREAFTER EXAMINED THIS ISSUE AND HAS AS K ED T HE APPELLANT COMPANY TO SUBMIT THE LEDGER ACCOUN T OF M/S BRIGHT POIN T IND I A PVT LTD IN ITS BOOKS OF ACCOUNTS AS WELL AS IN THE BOOKS OF M/S BRIGHT PO I N T INDIA PVT LTD. FOR THE FINANCIAL YEAR 2009 - 10 AND 2010 - 11 . AFTER VER I FICATION , THE SPEC I AL AUDITOR HAS REPORTED THE RECONCILIATION FOR THE FINANC I AL YE AR 2009 - 10 IN ITS REPORT AT PAPERBOOK PAGE 4980. AS PER THIS RECONC IL IATION , THE CREDIT NOTES ISSUED B Y THE APPELLANT IN THE NAME OF M/ S BR I GHT POINT INDIA PVT LTD DURING THE FINANCIAL YEAR 2009 - 10 WERE RS . 125 , 92 , 827 / - WHEREAS THE DEBIT NOTE RAISED BY M/ S BRIGHT POINT INDIA PVT LTD ON THE APPELLANT COMPANY WAS RS. 125,94 , 969. THUS THERE WAS A SMALL EXCESS DEBIT BY M/S BRIGHT POINT IND I A PVT LTD OF RS . 2142.02 . THU S , IT CANNOT B E SAID THAT CREDIT NOTE ISSUED BY THE ASSESSEE HAS NOT BEEN ACCOUNTED FOR B Y BRIGHT POINT INDIA PVT LTD . EVEN THIS D I FFERENCE HAS ALSO BEEN EXPLA I NED B Y THE SPECIAL AUDITOR IN ITS REPORT . SIMILAR RECONCILIATION HAS BEEN GIVEN B Y THE SPECIAL A UDITOR FOR THE FINANCIAL Y EAR 2010 - 11 WHEREBY IT HAS BEEN S T ATED THAT THE APPELLANT COMPAN Y HAS ISSUED CREDIT NOTE OF RS. 30 , 13 , 25 , 910 AND THE CORRESPONDING DEBIT NOTE RAISED BY M/ S BRIGHT POINT INDIA PVT LTD ON THE APPELLANT COMPANY WERE OF RS. 30 , 67 , 54 , 495. THUS , THE CREDIT NOT E ISSU E D BY THE APPELLANT COMPANY WERE NOT EXCESSIVE. ON THE CONTRAR Y , CLAIM MAD E BY BRIGHT POINT INDIA PVT LTD ON THE ASSESSEE WAS MORE . WE FURTH E R NOT E FROM PAPER BOOK PAGE 4982 THAT THE PAYMENTS RECEIVED BY ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 21 THE APPELLANT COMPANY AND THE PAYMENTS STATED TO HAVE BEEN MADE B Y M/S BRIGH T POIN T INDIA PVT LTD AS PER ITS ACCOUNTS DURING THE YEAR ARE EXACTL Y THE SAME , I . E ., RS. 161,81,58 , 957. ALL THESE FACTS ARE BORNE ON RECORD AND THE SAME W ERE BROUGHT TO THE NOTICE OF THE DRP BY THE AS SESSEE . THE OBSERVATIONS MADE B Y THE D~P IN THIS REGARD ARE IN TOTAL DISREGARD TO THE FACTS AND EVIDENCES ON RECORD. ACCORDINGLY, DRP WAS NOT CORRECT IN NOT DELETING THE ADDITION ON THIS ACCOUNT . UNDER THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE ADDITIONS IN QUESTION ARE BAD IN LAW AND WITHOUT ANY ADVERSE EVIDENCE AGAINST THE ASSESSEE. IN THE RESULT THIS ADDITION ON ACCOUNT OF CREDIT NOTES ARE DELETED. AS REGARDS THE ADDITION ON ACCOUNT OF REMAIN ING SUPER DISTRIBUTORS OF RS. 346,57,17,1 07, WE NOTE THAT THIS ADDITION HAS BEEN MADE NOT ON THE BASIS OF ANY ADVERSE MATERIAL OR INFORMATION COLLECTED AGAINST THE ASSESSEE. THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER HAS DRAWN ADVERSE INFERENCE ON THE GROUND THAT THE APPELLANT COMPANY HA S NOT PROVIDED ITS LEDGER ACCOUNT IN THE BOOKS OF THE 65 SUPER DISTRIBUTORS. IT IS NOT A CASE WHERE ASSESSEE HAS FAILED TO PROVIDE WHAT WAS AVAILABLE WITH IT . AS PER THE FACTS ON RECORD , THE APPELLANT COMPANY HAS PROVIDED ITS LEDGER ACCOUNT IN RESPECT OF ALL THE 95 DISTRIBUTORS. IN RESPONSE TO THE LETTER RECEIVED FROM THE SPECIAL AUDITOR, THE APPELLANT COMPANY VIDE LETTER DATED 29 TH AUGUST, 2013 PROVIDED THE REBATE & DISCOUNT LEDGER. IT PROVIDED THE CONTACT DETAILS OF THE 65 DISTRIBUTORS FOR THE FINANCIAL YEAR 2010 - 11 WHOSE LEDGER ACCOUNT IN THEIR BOOKS OF ACCOUNT WERE NOT PROVIDED. THE APPELLANT COMPANY ALSO PROVIDED BALANCE CONFIRMATIONS OF THE SUPER DISTRIBUTORS . THE OBSERVATION OF THE SPECIAL AUDITOR WAS LIMITED TO THE POINT THAT IN THE ABSENCE OF LEDG ER ACCOUNT IN THE BOOKS OF SUPER DISTRIBUTORS, THEY ARE UNABLE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 22 TO COMMENT . THE ASSESSING OFFICER THEREAFTER SOUGHT CLARIFICATION B Y WAY OF SHOW CAUSE NOTICE AND IN RESPONSE THERETO THE APPELLANT COMPAN Y SUBMITTED THE CONFIRMATION FROM EACH OF THE SUPER DIS TRIBUTOR IN WHOSE CASE THE SPECIAL AUDITOR HAS POINTED THAT LEDGER ACCOUNTS WERE NOT PROVIDED. THE AO STILL DREW ADVERSE INFERENCE DESPITE ALL THE ABOVE INFORMATION BEING AVAILABLE ON RECORD. AS REGARDS THE ADDITION OF RS. 947,21,431 ON ACCOUNT OF DIFFERE NCE AS PER THE ACCOUNTS OF THE DISTRIBUTORS, WE HAVE EXAMINED THE COPY OF LEDGER ACCOUNTS AND RECONCILIATION FILED BY THE ASSESSEE. THESE ACCOUNTS HAVE BEEN DULY RECONCILED BY THE ASSESSEE AND THERE WAS NO REASON TO DRAW ADVERSE INFERENCE ON THIS ACCOUNT. WE FURTHER NOTE THAT AT THE TIME OF THE HEARING BEFORE THE DRP, THE ASSESSEE COLLECTED COPY OF ACCOUNTS IN THE BOOK OF THE SUPER DISTRIBUTOR AND ALSO FILED THE RECONCILIATION IN RESPECT THEREOF . AS PER THESE COPY OF ACCOUNTS AND THE RECONCILIATION, EACH AN D EVERY ACCOUNT STOOD RECONCILED INCLUDING THE ACCOUNTS WHEREBY DIFFERENCE OF RS. 947,21,431 WAS POINTED OUT. THE DRP IGNORING ALL THESE EVIDENCES AND THE MATERIAL HAVE CONFIRMED THE ACTION OF THE ASSESSING OFFICER. DURING THE COURSE OF HEARING WITH THE AS SISTANCE OF THE LEARNED AR, WE HAVE VERIFIED THESE ACCOUNTS . AT THE TIME OF THE HEARING BEFORE US, THE LEARNED DR COULD NOT CONTROVERT THE ABOVE FACTS. THE CONCLUSION OF THE AO AS UPHELD BY THE DRP, IN OUR VIEW IS CONTRARY TO FACTS ON RECORD AND BASED PURE LY ON SURMISES AND CONJECTURES. SUCH CONJECTURES PRESUMPTIONS AND SURMISES CANNOT BE THE BASIS OF ADDITION. TH E FINDING AS RECORDED BY THE DRP AND STATED HEREINABOVE ON THESE ISSUES OF CREDIT NOTES IS INCORRECT AND CONTRARY TO FACTS ON RECORD. UNDER THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE ADDITIONS I N QUESTION ARE BAD I N LAW AND WITHOUT ANY ADVERSE EVIDENCE AGAINST THE ASSESSEE. IN THE RESULT WE DELETE THESE ADDITIONS BEING DEVOID OF MERIT AND THESE GROUND NOS. 6, 7 AND 13 OF THE A SSESSEE ARE ALLOWED. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 23 1 0 . GROUND NOS. 8, 9 AND 10 READ AS FOLLOWS. 8 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING THE ADDITION OF AN AMOUNT OF RS.26,73,07,426/ - ON ACCOUNT OF SWAP UNITS/WARR ANTY REIMBURSEMENT. (II) THAT THE ABOVE ADDITION HAS BEEN MADE BY ARBITRARILY REJECTING THE EXPLANATION AND EVIDENCES BROUGHT ON RECORD BY THE ASSESSEE. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED IN NOT DELETING THE ABOVE ADDITION PROPOSED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER DESPITE THE FACT THAT EACH AND EVERY ISSUE RAISED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER AND THE SPECIAL AUDIT REPORT HAS BEEN REBUTTED WITH EXPLANATION AND EVIDENCES BEYOND DOUBT. 9 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING AN ADDITION OF RS.7,09,43,390/ - ON ACCOUNT OF GROSS PROFIT EARNED ON THE ABOEVESTATED AMOUNT OF RS. 26,73,07,426/ - OF SCRAP UNITS. (II) THAT THE ABOVE ADDITION HAS BEEN MADE MOST ARBITRARILY WITHOUT THERE BEING ANY BASIS FOR THE SAME. 10(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING ADDITION OF RS. 6,52,97,923/ - ON ACCOUNT OF SWAP UNITS/WAR RANTY REIMBURSEMENT. (II) THAT THE ABOVE SAID ADDITION HAS BEEN MADE WITHOUT THERE BEING ANY SUCH ADDITION IN THE DRAFT ASSESSMENT ORDER AS WELL AS WITHOUT THERE BEING ANY DIRECTION BY THE DRP. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ABOVE SAID ADDITION IN ANY CASE IS UNJUSTIFIED IN VIEW OF THE EXPLANATION AND EVIDENCES SUBMITTED BY THE APPELLANT COMPANY. 1 0 .1. FACTS RELATING TO THE ABOVE GROUNDS ARE THAT THE ASSESSEE COMPANY IS A TRADER OF MOBILE PHONES UNDER THE BRAND NAME MICROMAX WHICH IT IS IMPORTING FROM VARIOUS CHINESE PARTIES. DURING THE COURSE OF THE SEARCH IT WAS OBSERVED THAT THERE ARE AGREEMENTS WITH THE SUPPLIERS WHEREBY THE ASSESSEE IS ENTITLED TO RECEIVE 2% EXTRA MOBILE PHONES ALONG WITH ITS PURCHASED QUANTITY FROM THE CHINESE PARTIES. ON THIS BASIS THE AO RAISED AN APPREHENSION THAT THE ASSESSEE IS NOT ACCOUNTING FOR THESE 2% EXTRA MOBILE PHONES IN ITS BOOKS OF ACCOUNTS. ACCORDINGLY THIS ISSUE WAS REFERRED TO THE SPECIAL AUDITOR FOR VERIFICATION WHETHER SUCH SWAP UNI TS BEING RECEIVED BY THE ASSESSEE ARE BEING ACCOUNTED FOR OR NOT. THE ASSESSEE, ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 24 BEFORE THE SPECIAL AUDITOR, EXPLAINED THAT THE SWAP UNITS ARE BEING ISSUED IN RESPECT OF CERTAIN SUPPLIERS. THESE ARE NOT BEING RECEIVED FROM ALL THE SUPPLIERS. THE ASSESSE E ALSO SUBMITTED THAT ALL THE SWAP UNITS HAVE BEEN DULY ACCOUNTED FOR. IT WAS CONTENDED THAT THE ASSESSEE IS IMPORTING THESE MOBILE PHONES AND DURING THE COURSE OF THE IMPORTS EACH AND EVERY QUANTITY IMPORTED HAS TO BE DECLARED IN THE INVOICES AS WELL AS IN THE BILL OF ENTRY. THE ASSESSEE ALSO EXPLAINED THE MODUS OPERANDI OF ACCOUNTING TREATMENT OF THESE SWAP UNITS AS UNDER: - 4.4 BASIS OF RECORDING SWAP UNITS RECEIVED THE ASSESSEE COMPANY HAS 2 PROCEDURE FOR RECORDING SWAP UNITS IN THE BOOKS OF ACCOUNT, THE DETAILS OF WHICH ARE AS FOLLOWS: - PROCEDURE 1 (CASE STUDY) THE ASSESSEE COMPANY SENT A PURCHASE ORDER (PO), ORDER NO. MIL/10/PO/00266 DATED 25 - 05 - 2010 TO M/S WEALTHY LINK (ASIA) LTD. OF 4,000 UNITS OF MOBILE PHONE AT $90/ - PER MOBILE HANDSET . THE ASS ESSEE COMPANY IS ELIGIBLE TO RECEIVE 2% SWAP UNITS ON THE PURCHASE AND 80 UNITS HAVE BEEN MENTIONED IN PO AT ZERO VALUE . THE FOREIGN VENDOR SENDS A PORFORMA INVOICE TO THE ASSESS COMPANY IN WHICH IT HAS MENTIONED THAT THE ASSESSEE COMPANY IS ELIGIBLE TO RECEIVE 2% FREE OF COST (FOC) MOBILE PHONES I.E. 80 UNITS. P RO FORMA INVOICE PARTICULARS UNITS RATE AMOUNT 100 UNITS OF MOBILE PHONES MODEL NO.W900, AGAINST PO NO. MIL/10/PO/00266 4000 $90 $3,60,000/ - FOC UNITS 80 - - TOTAL 4,080 $3,60,000 THE AS SESSEE COMPANY PAID CUSTOM DUTY ON ALL UNITS I.E. 4,080 UNITS. THE EXCHANGE RATE BEING RS. 49.11/$ ON THE DATE OF RECEIPT, THE ASSESSEE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 25 COMPANY CREDITED THE FOREIGN SUPPLIER WITH RS 1,76,79,612/ - ($3,60,000/ - *RS 49.11$). THE ASSESSEE COMPANY DOES NOT DIFFE RENTIATE BETWEEN ITS BASIC UNIT AND SWAP UNITS, HENCE ENTIRE 4,080 UNITS ARE RECORDED IN STOCK REGISTER AT RS.4,333/ - (APPROX.) THE WORKING IS AS FOLLOWS: - PARTICULARS AMOUNT(RS/UNITS) TOTAL PURCHASES (INCLUDING SWAP) 4,080 UNITS TOTAL AMOUNT PAYABLE R S.1,76,79,612/ - AVERAGE PRICE OF EACH MOBILE PHONE (RS.1,76,79,612/4,080 UNITS) RS. 4,333/ - AVERAGE PRICE IN $ TERMS (RS. 4,333/RS.49.11$) $88.23/UNIT THEREFORE THE AVERAGE PRICE PER UNIT IN TERMS OF DOLLARS FALLS FROM $90/UNIT TO $88.23/UNIT . NOW THE ASSESSEE COMPANY SHALL ENTER 4,080 UNITS IN STOCK REGISTER @ RS. 4,333/ - PER UNIT. ON SALE OF THESE UNITS IN THE MARKET, COST OF GOODS SOLD IS BOOKED @ RS. 4,333/ - PER UNIT. IN CASE MOBILE PHONE IS TO BE REPLACED IN WARRANTY, THEN SUCH COST IS DEBITED TO THE PROFIT & LOSS ACCOUNT UNDER WARRANTY EXPENSE. KINDLY REFER TO ANNEXURE - 4(3) FOR SUPPORTING DOCUMENTS. PROCEDURE 2(CASE STUDY) THE ASSESSEE COMPANY SENT A PURCHASE ORDER (PO), ORDER NO. MIL/10/PO/00535 DATED 31 - 08 - 2010 TO M/S VERYKOOL WIRELESS TECHNO LOGY LTD. OF 10,000 UNITS OF MOBILE PHONES AT $75/ - PER MOBILE HANDSET. THE ASSESSEE COMPANY IS ELIGIBLE TO RECEIVE 2 % SWAP UNITS ON THE PURCHASE AND 200 UNITS HAVE BEEN MENTIONED IN PO AT ZERO VALUE. THE FOREIGN VENDOR SENDS A PORFORMA INVOICE TO THE ASS ESSEE COMPANY IN WHICH IT MENTIONED THAT THE ASSESSEE IS ELIGIBLE TO RECEIVE 2% FREE OF COST (FOC) MOBILE PHONES I.E. 200 UNITS. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 26 P ROFORMA INVOICE PARTICULARS UNITS RATE AMOUNT 10000 UNITS OF MOBILE PHONES (MODEL NO. X50, AGAINST PO NO. MIL \ 10 \ PO \ 00535) 10000 $75/ - $7,50,000/ - FOC UNITS 200 - - TOTAL 10,200 $7,50,000 THE FOREIGN VENDOR HAS ACKNOWLEDGED THE ELIGIBILITY OF THE ASSESSEE COMPANY TO RECEIVE 2% SWAP UNITS IN THIS REGARD. HOWEVER, INSTEAD OF PROVIDING 2% SWAP UNITS, THE FOREIGN VEN DOR GAVE 2% DISCOUNT TO THE ASSESSEE COMPANY ON ITS PURCHASE OF 10,000 UNITS. THE ASSESSEE COMPANY RECEIVES EQUIVALENT BENEFIT IN BOTH THE CASES. IN SUCH CASE, THE FOREIGN VENDOR SHALL SEND THE COMMERCIAL INVOICE AT DISCOUNTED PRICE, THEREBY GIVING THE BEN EFIT OF 2% SWAP IN TERMS OF DISCOUNT. THE COMMERCIAL INVOICE IS AS FOLLOWS: - COMMERCIAL INVOICE PARTICULARS UNITS RATE AMOUNT 10000 UNITS OF MOBILE PHONES (MODEL NO. X50, AGAINST PO NO. MIL \ 10 \ PO \ 00535) 10,000 $73.53/ - $7,35,294/ - TOTAL 10,000 $7,3 5,294/ - THE RATE OF $73.53/ - PER UNIT IS CALCULATED AS FOLLOWS: - PARTICULARS AMOUNT (RS./UNITS) BASIC UNITS ORDERED 10,000 SWAP UNITS ELIGIBLE TO RECEIVE @ 2% 200 TOTAL UNITS TO BE RECEIVED 10,200 TOTAL PURCHASE VALUE (10,000*$75 PER UNIT) $7,50,000/ - PRICE PER UNIT ($7,50,000/10,200 UNITS) $73.53 ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 27 NOW THE ASSESSEE COMPANY RECEIVES ONLY 10,000 UNITS ON WHICH CUSTOM DUTY IS DULY PAID. THE EXCHANGE RATE BEING RS. 47.87/$ ON THE DATE OF RECEIPT, THE ASSESSEE COMPANY SHALL CREDIT THE FOREIGN SUPPLIER WI TH RS. 3,51,97,055/ - ( $7,35,294/ - * RS. 47.87/$ ). THE ASSESSEE COMPANY DOES NOT RECEIVE ANY SWAP UNITS IN THIS CASE, INSTEAD RECEIVES A CORRESPONDING PURCHASE DISCOUNT. HENCE 10,000 UNITS ARE RECORDED IN STOCK REGISTER AT RS. 3,520/ UNIT THE WORKING IS A S FOLLOWS: - PARTICULARS AMOUNT (RS./UNIT) TOTAL PURCHASES 10,000 TOTAL AMOUNT PAYABLE RS. 3,51,97,055/ - AVERAGE PRICE OF EACH MOBILE PHONE (3,51,97,055/10,000 UNITS) RS. 3,520/ - IN THIS PROCEDURE, PURCHASE DISCOUNT WAS RECEIVED INSTEAD OF 2% SWAP UNI TS WHICH IS DULY RECORDED IN BOOKS OF ACCOUNTS. KINDLY REFER TO ANNEXURE - 4(4) FOR SUPPORTING DOCUMENTS. (I) IN SUPPORT THEREOF THE ASSESSEE COMPANY SUBMITTED ALL THE DOCUMENTS INCLUDING THE PURCHASE ORDERS, PURCHASE INVOICES, BILL OF ENTRY, CUSTOMS CLEAR ANCE, STOCK ACCOUNTS, ETC. (II) THE SPECIAL AUDITOR, HOWEVER, ASKED FOR THE CONFIRMATION FROM THE FOREIGN SUPPLIERS AND IN THE ABSENCE OF CONFIRMATIONS FROM THE FOREIGN SUPPLIERS THEY WORKED OUT THE VALUE OF THE SWAP UNITS WHICH ASSESSEE WOULD HAVE RECEIVE D FROM THE VENDORS IN RESPECT OF WHICH ASSESSEE COMPANY HAS ENTERED INTO AGREEMENTS AT RS.6,52,97,923/ - . THE SPECIAL AUDITOR ALSO WORKED OUT THE VALUE OF THE SWAP UNITS IN RESPECT OF THE TENDERS WITH WHOM THE ASSESSEE HAS NO AGREEMENT TO RECEIVE SWAP UNIT S ASSUMING THAT ASSESSEE WOULD HAVE RECEIVED THE SAME AT RS.26,73,07,426/ - . (III) THE AO THEREAFTER ISSUED A SHOW CAUSE NOTICE. IN RESPONSE THERETO, ASSESSEE SUBMITTED THE CONFIRMATIONS FROM VARIOUS SUPPLIERS/VENDORS. THE AO, HOWEVER, REJECTED THE SAME ON THE GROUND THAT THE SAME CANNOT BE RELIED UPON AS THESE CONFIRMATIONS ARE ON PLAIN PAPER AND NOT ON THE LETTERHEAD OF THE PARTY, ETC. THE AO ACCORDINGLY MADE AN ADDITION OF RS.33,26,05,349/ - AS VALUE OF THE SWAP UNITS RECEIVED BY THE ASSESSEE BUT NOT ACCOUNTED FOR. (IV) THE AO FURTHER MADE AN ADDITION OF RS.7,09,43,390/ - BEING THE GROSS PROFIT EARNED BY THE ASSESSEE ON THE SALE OF THE ABOVE SWAP UNITS BY ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 28 APPLYING GROSS PROFIT DECLARED BY THE ASSESSEE FOR THIS ASSESSMENT YEAR OF 26.54%. 10.2 . DRP FI NDINGS: THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO.35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS DISMISSED THE OBJECTION WHICH READS AS UNDER: - HAVING CONSIDERED THE FACTS OF THE CASE THE DRP IS OF THE C ONSIDERED VIEW THAT THE SUBMISSIONS OF THE APPELLANT WERE WITHOUT ANY MERITS. AS A MATTER OF FACT THERE WAS NO SATISFACTORY COMPLIANCE WITH THE REQUIREMENTS POSED BY THE AO AND SPECIAL AUDITORS DURING THE RELEVANT PROCEEDINGS. AGREEING WITH THE REASONS GIV EN BY THE AO IN FULL THE GROUND OF THE APPEAL IS DISMISSED AS THE APPELLANT FAILED TO ACCOUNT FOR THE EXTRA 2% MOBILE PHONES RECEIVED FROM CERTAIN PARTIES AS WELL AS FROM THOSE IN RESPECT OF WHICH IT WAS ARGUED THAT NO EXTRA MOBILES (2%) WERE PROVIDED. HOW EVER THE GP ON SUCH 'SWAP UNITS WAS REASONABLY TAKEN BY THE APPELLANT. 10.3. FINAL ORDER BY AO: THE AO IN THE FINAL ASSESSMENT ORDER HAS STATED AS UNDER: - THUS IN VIEW OF THE AFORESAID DISCUSSION, I FIND THAT ASSESSEE HAS FAILED TO JUSTIFY AND EXPLAIN WITH EVIDENCES THE ISSUE RAISED BY THE SPECIAL AUDITORS AND BY ME AND THEREFORE ADDITION OF RS.26,73,07,426/ - WAS PROPOSED UNDER THIS HEAD VIDE DRAFT ORDER U/S 144C OF THE ACT R.W.S 143(3) OF THE ACT AS FORWARDED ON 16.11.2013 TO THE ASSESSEE IN RELATING T O THE ASSESSMENT ORDER PROPOSED TO BE PASSED BY THE A.O. U/S 144C/143(3) OF THE ACT . FURTHER, THIS AMOUNT WILL BE INCREASED BY THE G.P. PERCENTAGE FOR A.Y. 2011 - 12 WHICH IS 26.54%. AT THE TIME OF SEARCH, THERE WAS A SHORTAGE OF STOCK WHICH FURTHER SHOWS TH AT THESE EXTRA MOBILE PHONES ARE SOLD OUT WITH THE SAME PROFIT MARGIN AT WHICH THE OTHER STOCK MOBILE PHONES WERE SOLD. ACCORDINGLY, FURTHER ADDITION OF RS.7,09,43,390/ - WAS ALSO PROPOSED ON ACCOUNT OF G.P. ACCORDINGLY, THE TOTAL ADDITION PROPOSED IN THIS REGARD WORKS OUT TO RS.33,82,50,816/ - VIDE DRAFT ORDER U/S 144C OF THE ACT R.W.S 143(3) OF THE ACT AS FORWARDED ON 16.11.2013 TO THE ASSESSEE IN RELATING TO THE ASSESSMENT ORDER PROPOSED TO BE PASSED BY THE A.O. U/S 144C/143(3) OF THE ACT. 10.4. ASSESSE E S SUBMISSIONS: ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 29 (I) . THE ADDITION CONFIRMED BY THE DRP IS IN TOTAL DISREGARD TO THE EXPLANATION GIVEN BY THE ASSESSEE REGARDING THE ACCOUNT OF THE SWAP UNITS AND EVIDENCES AS WELL AS CONFIRMATIONS FILED IN SUPPORT THEREOF. (II) . THE ASSESSEE COMPANY HAS S UBMITTED A DETAILED EXPLANATION THAT IN RESPECT OF THE SWAP UNITS WHEREVER THERE IS AN AGREEMENT, THE SUPPLIER INCLUDES THESE AS PART OF THE QUANTITY PURCHASED AND CORRESPONDING BENEFIT IS GIVEN BY REDUCING THE COST PER PIECE TO THE EXTENT OF THE SWAP UNIT S. THIS FACT WAS SUPPORTED WITH THE RELEVANT INVOICES AND OTHER DOCUMENTS AND ALSO NOTED IN THE SPECIAL AUDIT REPORT AT PAPER BOOK PAGES 5133 - 5137. (III) . FURTHER VIDE LETTER DATED 04.01.2013 (PAPER BOOK PAGE 401) ASSESSEE SUBMITTED ALL THE DOCUMENTS IN S UPPORT OF THE ABOVE EXPLANATION WHICH INCLUDES COPY OF THE SUPPLIER S PROFORMA INVOICES, BILL OF ENTRY, BOOKS OF ACCOUNT, STOCK REGISTER, PURCHASE INVOICES, CUSTOM DUTY DOCUMENTS AND OTHER SHIPPING DOCUMENTS. (IV) . IT WAS FURTHER STATED IN THIS LETTER THA T THESE DOCUMENTS SHOULD BE SUFFICIENT ENOUGH. HOWEVER, IN CASE ANY FURTHER INFORMATION/ EXPLANATION ARE REQUIRED THE SAME WILL BE SUBMITTED. (V) . THE ASSESSEE VIDE LETTER DATED 31.10.2013 (PAPER BOOK PAGE 1235 - 1241, RELEVANT PAGE 1239) SUBMITTED THE CONFIRMATION FROM THE 4 PARTIES. (VI) . THE ASSESSEE VIDE LETTER DATED 01.11.2013 (PAPER BOOK PAGE 1250) SUBMITTED FURTHER CONFIRMATIONS FROM 4 MORE PARTIES. (VII) . VIDE LETTER DATED 11.11.2013 (PAPER BOOK PAGE 2088) THE ASSESSEE COMPANY SUBMITTED CONFIRMATIONS OF TWO MORE PARTIES AND VIDE LETTER DATED 11.11.2013 (PAPER BOOK PAGE 2094) SUBMITTED CONFIRMATION OF ONE MORE PARTY. (VIII) . THUS THE ASSESSEE HAS SUBMITTED ALL EVIDENCES WHICH INCLUDED THIRD PARTY/ GOVERNMENT EVIDENCE IN THE FORM OF BILL OF ENTRY, CUSTOM ATTESTED PURCHASE INVOICES. ALL THESE TRANSACTIONS ARE OF IMPORT AND LIABLE FOR CUSTOM DUTY. EACH AND EVERY PIECE OF THE UNITS BEING RECEIVED HAS TO BE AS PER THE DOCUMENTS WHICH INCLUDE INVOICES, BILL OF ENTRY AND THERE IS NO MECHANIS M UNDER THE IMPORT - EXPORT TO SEND EXTRA PIECES WITHOUT ANY COMMERCIAL INVOICES/PACKING LIST. (IX) . THE ASSESSEE HAVING PROVIDED ALL THESE AUTHENTIC DOCUMENTS AND THERE BEING NO MATERIAL FOUND DURING THE COURSE OF THE SEARCH OF ANY PURCHASE OR SALE OUTS IDE THE BOOKS OF ACCOUNT THERE WAS NO REASON FOR THE AO TO MAKE THESE ADDITIONS. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 30 (X) . AS REGARDS THE CONFIRMATIONS FROM SUPPLIERS, AS STATED HEREINABOVE, THE ASSESSEE HAS FILED CONFIRMATIONS AND THE SAME HAVE BEEN REJECTED BY THE AO ON THE FLIMSY GROUND TH AT THESE ARE NOT ON THE LETTERHEADS. THE AO WAS HAVING COMPLETE DETAILS OF THE PARTIES WHICH INCLUDED ADDRESS, TELEPHONE NUMBER, EMAIL, ETC. MENTIONED ON THE PURCHASE INVOICES. IN CASE OF DOUBT HE COULD HAVE VERIFIED THE AUTHENTICITY OF THESE CONFIRMATIO NS OR CO - RELATED THESE CONFIRMATIONS WITH THE PURCHASE INVOICES, PROFORMA INVOICES AND OTHER DOCUMENTS. (XI) . NOT ONLY THAT POST - RECEIPT OF THE DRAFT ASSESSMENT ORDER THE ASSESSEE OBTAINED THE CONFIRMATIONS FROM THESE SUPPLIERS ON THE LETTERHEADS OF THESE PARTIES (PAPER BOOK PAGE 2320 - 2328). (XII) . THUS BOTH THE POINTS ON THE BASIS OF WHICH THESE ADDITIONS HAVE BEEN MADE WERE DULY REBUTTED (WRITTEN SUBMISSION BEFORE DRP PG. 6426 - 6449). (XIII) . THE DRP HAS REJECTED THE EXPLANATION AND EVIDENCES ARBITRARILY O N THE GROUND THAT THERE WAS NO SATISFACTORY COMPLIANCE WITH THE REQUIREMENTS OF THE AO. THESE FINDINGS OF THE DRP ARE FACTUALLY INCORRECT IN VIEW OF THE ABOVE FACTS AND THE DOCUMENTS. 10.5. REVENUE S SUBMISSIONS : IT WAS SUBMITTED BY THE DR THAT THE AO HAS MADE THE ABOVE ADDITION SINCE THE ASSESSEE HAS FAILED TO FILE NECESSARY EVIDENCES IN SUPPORT OF ITS CONTENTION. IT WAS SUBMITTED THAT THE CONFIRMATION WAS FILED BY THE ASSESSEE AT THE TIME OF THE PROCEEDING BEFORE THE AO WERE NOT RELIABLE SINCE TH ESE WERE ON THE PLAIN PAPER AND NOT ON THE LETTERHEAD OF THE COMPANIES. HE FURTHER SUBMITTED THAT THE ASSESSEE AS AN AGREEMENT WITH THE VENDORS WHEREBY IT IS ENTITLED TO RECEIVE SWAP UNITS. THE PROCEDURE ADOPTED BY THE ASSESSEE FOR ACCOUNTING THESE SWAP UNITS IS NOT THE CORRECT PROCEDURE AND THE AO WAS JUSTIFIED IN REJECTING THE SAME AND MAKING THE ADDITION. IT WAS FURTHER SUBMITTED THAT SINCE THESE SWAP UNITS HAVE NOT BEEN ACCOUNTED FOR THE AO WAS JUSTIFIED IN MAKING THE ADDITION OF THE GROSS PROFIT W HICH THE ASSESSEE WOULD HAVE EARNED FROM SALE OF SUCH SWAP UNITS. 10.6. OUR FINDINGS: ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 31 THE ENTIRE ADDITION IN THIS CASE IS MADE BY THE AO ON THE SOLE GROUND THAT THE CONFIRMATIONS GIVEN BY VARIOUS PARTIES, WERE ON PLAIN PAPER AND NOT ON LETTERHEADS. THESE ARE ALL CONFIRMATIONS FILED BY FOREIGN SUPPLIERS. THE ASSESSEE HAD SUBMITTED ARGUMENTS INCLUDING PURCHASE INVOICES, BILL OF ENTRY, CUSTOM CLEARANCE, STOCK ENTRIES ETC. THE CONFIRMATION IN QUESTION FROM THESE FOREIGN PARTIES ARE ON ADDITIONAL DOCU MENTARY EVIDENCES. IN OUR VIEW THESE CONFIRMATIONS CANNOT BE SUMMARILY REJECTED BY THE AO. THE AO, IN OUR VIEW, SHOULD NOT HAVE REJECTED THESE CONFIRMATIONS WITHOUT ENQUIRY. THE AO HAD THE ADDRESS OF THESE PARTIES, THE TELEPHONE NUMBERS, E - MAIL ADDRESSE S. THE FORMAT IN WHICH THE CONFIRMATIONS WERE GIVEN BY FOREIGN PARTIES, IS NOT WITHIN THE CONTROL OF THE ASSESSEE. WE FURTHER NOTE THAT THE ASSESSEE HAS SUBMITTED ALL EVIDENCES WHICH INCLUDED THIRD PARTY/GOVERNMENT EVIDENCES IN THE FORM OF BILL OF ENTRY, CUSTOM - ATTESTED PURCHASE INVOICES. ALL THESE PURCHASES ARE FROM FOREIGN SUPPLIERS AND ARE LIABLE FOR CUSTOM DUTY. ALL UNITS RECEIVED BY WAY OF IMPORT HAVE TO BE DECLARED IN THE BILL OF ENTRY. THE ASSESSEE HAS PROVIDED BOOKS OF ACCOUNTS AND ALSO THE SUPP ORTING EVIDENCES. THE PROCEDURE EXPLAINED BY THE ASSESSEE OF ACCOUNTING THESE UNITS IN RESPECT OF THESE VENDORS WITH WHOM THERE IS AN AGREEMENT OF SWAP UNITS IS CORRECT PROCEDURE AND SUPPORTED BY CUSTOM ATTESTED INVOICES, BILL OF ENTRY, ETC. THE DR DURIN G THE COURSE OF HEARING COULD NOT CONTROVERT THE CONTENTION OF THE ASSESSEE. AS REGARDS THE VENDORS WITH WHOM THERE IS NO SUCH ARRANGEMENT, WE NOTE THAT THERE IS NO EVIDENCE OR MATERIAL TO EVEN SUGGEST THAT ASSESSEE WOULD HAVE RECEIVED SWAP UNITS. NO MAT ERIAL WAS FOUND DURING SEARCH TO THIS EFFECT. WE FURTHER NOTE THAT BEFORE THE DRP THE ASSESSEE HAS ALSO FILED CONFIRMATION ON THE LETTERHEAD OF THESE VENDORS. IN VIEW OF THE FACTS, THE FINDINGS OF THE DRP ARE INCORRECT AND AGAINST THE FACTS ON RECORD. U NDER THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE ADDITION IN QUESTION IS BAD IN LAW AS IT IS MADE WITHOUT ANY EVIDENCE. IN THE RESULT THIS ADDITION IS DELETED AND THESE GROUND NOS. 8, 9 AND 10 OF THE ASSESSEE ARE ALLOWED. 1 1 . GROUND NO.11 READS AS FOLLOWS. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 32 11 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING ADDITION OF AN AMOUNT OF RS. 3,82,03,224/ - ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK OF DOA MOBILE ON NO3 LOCATIO N. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED IN ARBITRARILY IGNORING THE EXPLANATION AND EVIDENCES SUBMITTED BY THE APPELLANT COMPANY IN SUPPORT OF ITS CONTENTION THAT THERE IS NO UNDER - VALUATION OF THE CLOSING STOCK AS ALLEGED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER. 1 1 .1. THE FACTS RELATING TO THIS GROUND ARE THAT DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS IT WAS OBSERVED THAT THE ASSESSEE HAS A CLOSING STOCK OF DEAD ON ARRIVAL MOBILE PHONES OF 31,081 UNITS AT ITS T WO LOCATIONS. THE 5000 UNITS AT OTHER THAN NO3 LOCATION HAS BEEN VALUED AT RS.1677/ - AND WHEREAS 26,081 UNITS AT N03 LOCATION HAVE BEEN VALUED AT RS.212/ - ACCORDINGLY ON THIS BASIS THE AO VALUED THE CLOSING STOCK OF 26,081 UNITS BY APPLYING THE RATE OF R S.1677/ - COMPUTING THE DIFFERENCE IN THE STOCK OF RS.3,82,03M,224/ - AND ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE. IN RESPONSE THERETO ASSESSEE SUBMITTED A REPLY DATED 7 TH NOVEMBER, 2013 WHEREBY THIS ISSUE WAS CLARIFIED. THE AO, HOWEVER, NOT BEING SATIS FIED WITH THE REPLY OF THE ASSESSEE HELD THAT THE STOCK HAS BEEN UNDERVALUED IN RESPECT OF THE 26,081 DEAD ON ARRIVAL MOBILE PHONES AND MADE AN ADDITION OF RS.3,82,03,224/ - . 11.2. DRP FINDINGS : THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORD ER IN FORM NO.35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS DISMISSED THE OBJECTION WHICH READS AS UNDER: - THE ABOVE SUBMISSION OF THE APPELLANT WAS CONSIDERED. THE DRP IS OF THE VIEW THAT THE REASONS GIVEN BY THE AO THAT WHERE AS VALUATION OF OPENING STOCK, RECEIPTS OF DOA MOBILES WAS DONE IN THE RANGE OF RS. 1500/ - TO 1800/ - PER MOBILE IN RESPECT OF OTHER PLACES THE CLOSING STOCK MAINTAINED AT NARAINA LOCATION (N03), WHICH WAS CALLED N03 LOCATION, ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 33 WAS VALUED AT RS. 212/ - PER MOBI LE PHONE. SUCH VALUATION OF CLOSING STOCK WAS HIGHLY UNDER VALUED WHEN SEEN AGAINST THE VALUATION AT OTHER LOCATIONS WHICH WAS RS. 1,677/ - PER MOBILE PHONE. A DETAILED WORKING WAS GIVEN BY SPECIAL AUDITORS AT PAGE NO. 383 OF THE SPECIAL AUDITORS REPORT A LSO. THE APPELLANT COULD NOT EXPLAIN THE REASON FOR THE DIFFERENTIAL APPROACH IN VALUING THE DEAD MOBILES OF NO.3 - NARAINA LOCATIONS. ACCORDINGLY THE DRP HAS NO HESITATION IN DISMISSING THIS GROUND. 11.3. FINAL ORDER BY AO : SINCE DRP REJECTED THE O BJECTION OF THE ASSESSEE, THE AO IN THE FINAL ASSESSMENT ORDER HAS STATED AS UNDER: - THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 (PARA - 8) HAS DISMISSED THE OBJEC TION OF THE ASSESSEE ON THIS ISSUE. IN VIEW OF THE ABOVE, ADDITION OF RS. 3,82,03,224/ - IS MADE TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK OF DOA MOBILE ON NO3 LOCATION AS HELD ABOVE . 11. 4. ASSESSEE S SUBMISSIO NS: I . THE AO AND THE DRP HAS NOT APPRECIATED THE FACTS IN THE RIGHT PERSPECTIVE. NARAINA IS THE LOCATION WHERE DEAD ON ARRIVAL MOBILE PHONES ARE SENT FINALLY AND CANNIBALIZED. THE VALUATION DONE AT THE OTHER LOCATIONS OF DEAD ON ARRIVAL MOBILE PHO NES IS AT THE COST OF THE MOBILE PHONES. ONCE THE DEAD ON ARRIVAL MOBILE PHONES REACHES AT NARAINA LOCATION AND IT IS CONFIRMED THAT THIS IS A DEAD ON ARRIVAL PHONE, THE SAME IS CANNIBALIZED AND THAT IS WHY THE VALUATION AT NARAINA UNIT HAS BEEN DONE AT R S.212. II . THE INTERPRETATION OF THE SPECIAL AUDITOR REPORT BY THE AO IS ALSO NOT CORRECT. THE SPECIAL AUDITOR HAS NOT STATED THAT THIS IS UNDERVALUED. HE HAS SIMPLY STATED THAT IT IS INCIDENTAL THAT THE COMPANY HAS VALUED DEAD ON ARRIVAL MOBILE PHONE S IN THE CLOSING STOCK AT RS.212 PER UNIT AT NARAINA LOCATION (PAPER BOOK PAGE 4969). III . DURING THE ASSESSMENT PROCEEDINGS ASSESSEE HAS SUBMITTED A DETAILED NOTE (PAPER BOOK PAGE 922) POINTING OUT THE RECOVERY WHICH ARE MADE FROM THE DEAD ON ARRIVAL MO BILE PHONES WHICH IS CHARGER, HAND FREE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 34 AND BATTERY. THE VALUATION OF THE N - 3 LOCATION HAS ACCORDINGLY BEEN DONE ON THE BASIS OF THE SALVAGE VALUE OF THE DEAD ON ARRIVAL MOBILE PHONES COMPUTED AT RS.212. THUS THERE WAS NO REASON FOR THE AO TO IGNORE THIS VALUATION AND VALUE THE DEAD ON ARRIVAL MOBILE PHONES AT ACQUISITION COST OF A PERFECT LIVE MOBILE PHONE. THE AO HAS IGNORED THE FACT THAT THESE ARE NOT LIVE MOBILE PHONES BUT ARE DEAD MOBILE PHONES HAVING ONLY SCRAP VALUE. IV . THE AO HAS TOTALLY IGNORED THE DETAILED REPLY DATED 07.11.2013 (PAPER BOOK PAGES 1637 - 1638) WHEREBY THIS ISSUE WAS CLARIFIED. V . THE COST OF THE LIVE MOBILE PHONE IS RS.1677 AND THE SCRAP VALUE OF SUCH MOBILE PHONE IS RS.212. VI . THE AO HAS NOT DISPUTED THE FACT THAT THESE PHONES ARE DEAD ON ARRIVAL AND THE ONLY DISPUTE IS REGARDING THE VALUE. VII . THE AO HAS ALSO NOT DISPUTED THAT THE SALVAGE VALUE IS RS.212. THE ONLY ISSUE WHICH HE HAS RAISED IS WHY THE SAME HAS NOT BEEN VALUED AT RS.1677 BEING THE RATE ADOP TED AT OTHER LOCATION. FOR THIS THE AO HAS IGNORED THE FACT THAT SALVAGE VALUE IS TAKEN ONLY WHEN IT IS CONFIRMED THAT IT IS A DEAD PHONE. THIS PROCESS OF CONFIRMATION OF DEAD ON ARRIVAL MOBILE PHONE IS DONE AT NARAINA LOCATION AND HENCE ASSESSEE COMPANY IS CORRECT IN VALUING THE SAME AT SALVAGE VALUE ONLY AFTER BEING CONFIRMED THAT THE PHONE IS DEAD. VIII . THE VALUATION DONE BY THE ASSESSEE IS IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY FOLLOWED AND THE ACCOUNTING STANDARD AS - 2 WHICH ARE STA TUTORILY APPLICABLE IN VIEW OF THE PROVISIONS OF SECTION 211(3C) OF THE COMPANIES ACT, 1956 WHEREBY THE CLOSING STOCK IS TO BE VALUED AT COST OR NET REALIZABLE VALUE WHICHEVER IS LOWER. IX . THE ASSESSEE COMPANY HAVING VALUED THE SAME AT NET REALIZA BLE VALUE BEING LOWER THAN THE COST, THE VALUATION WAS IN ACCORDANCE WITH THE ACCOUNTING STANDARD AND THE AO WAS NOT JUSTIFIED IN SUBSTITUTING THE SAME WITH THE COST. X . THE DETAILED EXPLANATION WITH EVIDENCES SUBMITTED BEFORE DRP (PAPER BOOK PG. 642 4 - 6426) HAS BEEN REJECTED ARBITRARILY. 11.5. REVENUE S SUBMISSIONS : - THE LEARNED DR SUPPORTED THE ORDER OF THE AO AS CONFIRMED BY THE DRP. IT WAS SUBMITTED THAT THERE IS NO REASON TO VALUE THE CLOSING STOCK AT TWO RATES. THE ASSESSEE HIMSELF VALUED 5 000 UNITS AT RS.1677/ - AND REMAINING ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 35 26081 UNITS AT RS.212/ - . THE ASSESSEE S EXPLANATION THAT 26,081 UNITS ARE DEAD ON ARRIVAL MOBILE PHONES AND AS SUCH THE SAME HAS TO BE VALUED AS SCRAP REALIZABLE VALUE CANNOT BE ACCEPTED. ACCORDINGLY THE DRP RELIED UP ON THE ORDER OF THE AO AND THE DRP. 11.6. OUR FINDINGS FROM THE FACTS ON RECORD WE NOTE THAT THE ASSESSEE HAS SUBMITTED A DETAILED NOTE POINTING OUT THE RECOVERY WHICH ARE MADE FROM THE DEAD - ON - ARRIVAL MOBILE PHONES IN THE FORM OF CHARGER, HANDS FREE A ND BATTERY. THE ASSESSEE HAS DONE THE VALUATION OF THE DEAD - ON - ARRIVAL MOBILE PHONES AT ITS N - 3 LOCATION ON THE BASIS OF THIS SALVAGE VALUE COMPUTED AT RS. 212 . THIS VALUATION DONE IS IN ACCORDANCE WITH THE ACCOUNTING STANDARD AS - 2 WHEREB Y CLOSING STOCK IS TO BE VALUED AT LOWER OF COST OR NET REALISABLE VALUE. THE FACT THAT THESE ARE MOBILE PHONES, WHICH ARE DEAD ON ARRIVAL AND THE FACT THAT THESE ARE CANNIBALISED AND CERTAIN PARTS ARE GATHERED AND VALUED IS NOT DISPUTED BY THE REVENUE. THE COST OF A LIVE MOBILE PHONE, CANNOT, IN OUR VIEW, BE ADOPTED AS THE COST OF A DEAD ON ARRIVAL MOBILE PHONE. UNDER THESE CIRCUMSTANCES WE HAVE NO OTHER ALTERNATIVE BUT TO DELETE THIS ADDITION . WHEN THE FACTS STATED BY THE ASSESSEE ARE NOT CONTRADICTED BY GATHERING OF EVID ENCE, THEN THE ADDITION BASED ON PRESUMPTIONS CANNOT BE MADE . THE OBSERVATIONS MADE BY THE DRP THAT SUCH VALUATION OF CLOSING STOCK WAS HIGHLY UNDER VALUED SHOWS THAT DRP HAS NOT BEEN ABLE T O APPRECIATE THE FACTS IN RIGHT PERSPECTIVE. IT HAS FAILED TO DIS TINGUISH BETWEEN A WORKING MOBILE PHONE AND A DEAD - ON - ARRIVAL MOBILE PHONE. THE DEAD - ON - ARRIVAL MOBILE PHONE CANNOT BE VALUED AT COST. IT HAS TO BE VALUED AT SALVAGE VALUE. THE VALUATION OF RS. 1,677 IS AT COST OF MOBILE PHONE WHICH IS WORKING. IF THE MOBI LE PHONE IS DEAD, ITS VALUE HAS TO BE SALVAGE VALUE WHICH HAS BEEN WORKED OUT AT RS. 212. THE DETAILED WORKING OF THIS HAS BEEN SUBMITTED BY THE ASSESSEE WITH WHICH HAS NOT BEEN DISPUTED. IN THE RESULT THE ADDITION IN QUESTION IS DELETED AND THIS GROUND OF ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 36 THE ASSESSEE IS ALLOWED. 12. GROUND NO.12 READS AS FOLLOWS. 12 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING AN ADDITION OF RS.4,62,00,000/ - ON ACCOUNT OF SALE OF DOA MOBILES AND ACCESSOR IES. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED IN ARBITRARILY IGNORING THE EXPLANATION AND EVIDENCES SUBMITTED BY THE APPELLANT COMPANY. 1 2 .1. THE FACTS RELATING TO THIS GROUND ARE THAT: DURING THE COURSE OF THE ASSESSMENT THE AO RAISED THE ISSUE THAT THE ASSESSEE HAS INCURRED AN EXPENDITURE OF RS.33 CRORES TOWARDS REPLACEMENT OF DEAD ON ARRIVAL MOBILE PHONES WITH FRESH PHONES. IT WAS FURTHER ALLEGED THAT SUCH DEAD ON ARRIVAL UNITS, THE ASSESSEE WOULD HAVE RECOVERED ACCESSORIE S WHICH NORMALLY HAVE 14% VALUE. ON THIS BASIS THE AO COMPUTED THAT ON RS.33 CRORES WORTH UNITS THE ASSESSEE WOULD HAVE RECOVERED RS.4.62 CRORES OF ACCESSORIES. SINCE THE SAME HAVE NOT BEEN ACCOUNTED FOR IT WAS PRESUMED THAT IT WOULD HAVE BEEN SOLD OUT O F THE BOOKS OF ACCOUNTS AND ACCORDINGLY ADDITION OF RS.4.62 CRORES HAS BEEN MADE BY THE AO. 12.2. DRP FINDINGS: THE CONTENTIONS OF THE APPELLANT AS WELL AS THOSE OF THE AO WERE DULY CONSIDERED THE DRP FEELS INCLINED TO SIDE WITH THE VIEW OF THE AO F OR THE REASON THAT THE ARGUMENTS AND THE EVIDENCE BROUGHT ON RECORD BY AO ARE OF FORCEFUL AND CONVINCING NATURE. THE CLAIM OF THE APPELLANT IS CONTRARY TO RECORDS ALSO. IT IS NOTEWORTHY THAT DURING THE SPECIAL AUDIT AND ASSESSMENT PROCEEDINGS THE SUBMISSIO N - MADE BY THE APPELLANT WAS THAT THE ACCESSORIES WERE GIVEN FREE OF COST TO THE DISTRIBUTORS WHICH WAS FOUND TO BE INCORRECT BY THE AO. ACCORDINGLY THE OBJECTION OF THE APPELLANT ON THE BASIS OF SOME FACT WHICH REMAINED UNCORROBORATED DURING THE ASSESSMENT PROCEEDINGS IS ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 37 HELD TO BE WITHOUT ANY MERIT BEING AN AFTERTHOUGHT. HENCE THE SAID GROUND IS DISMISSED. 12.3. FINAL ORDER BY AO THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECT IONS DATED 29.08.2014 (PARA - 8) HAS DISMISSED THE OBJECTION OF THE ASSESSEE ON THIS ISSUE OBSERVING THAT THE OBJECTION OF THE APPELLANT ON THE BASIS OF SOME FACT WHICH REMAINED UNCORROBORATED DURING THE ASSESSMENT PROCEEDINGS IS HELD TO BE WITHOUT ANY MERIT BEING AN AFTERTHOUGHT. 12.4. ASSESSEE S SUBMISSIONS: I . THE ADDITION MADE BY THE AO IS BASED ON SURMISES AND CONJECTURE. THE AO HAS ASSUMED THAT THE ASSESSEE WOULD HAVE SOLD THE ACCESSORIES RECOVERED FROM THE DEAD ON ARRIVAL PHONES AND BY APPLYING 14% RECOVERY HAS MADE AN ADDITION OF RS.4,62,00,000/ - . II . THE ASSESSEE DURING THE COURSE OF THE ASSESSMENT HAS SUBMITTED COMPLETE QUANTITATIVE DETAILS. IT WAS POINTED OUT THAT THE TOTAL QUANTITY OF SUCH ACCESSORIES WAS 2,42,426 VALUED AT RS.3,66,45,443 AND THE SAME HAVE BEEN UTILIZED AND GIVEN TO THE SUPER DISTRIBUTORS. THE DETAILS OF THE SAME HAVE ALSO BEEN FILED (PAPER BOOK PAGE 2369 - 2370) ALONG WITH CONFIRMATIONS FROM THE SUPER DISTRIBUTORS (PB PG. 2371 TO 2409) WERE ALSO FILED. THUS THE ALLEGATION OF THE AO THAT THE ASSESSEE HAS NOT SUBMITTED REPLY IN RESPONSE TO THE SHOW CAUSE NOTICE IS FACTUALLY INCORRECT. THE ASSESSEE IN RESPONSE TO SHOW CAUSE NOTICE ISSUED BY THE AO SUBMITTED REPLY VIDE REPLY DATED 7.11.2013 WHERE IT WAS POINTED OUT THAT IT HA S SUBMITTED DETAILED EXPLANATION ALONG WITH SUPPORTING DOCUMENTS. COPIES OF THE SAME WERE AGAIN SUBMITTED TO THE AO. IT WAS ALSO POINTED OUT THAT IN CASE THERE IS ANY SORT OF DISAGREEMENT WITH THE SUBMISSION MADE BY THE ASSESSEE THE SPECIFIC DISAGREEMENT MAY KINDLY BE KNOWN TO THE ASSESSEE SO THAT FURTHER EXPLANATION MAY BE FILED. III . THE ASSESSEE IS MAINTAINING COMPLETE BOOKS OF ACCOUNTS WITH QUANTITATIVE DETAILS AND EACH AND EVERY PIECE IS DULY ACCOUNTED FOR. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 38 IV THIS IS A CASE OF SEARCH AND DUR ING THE COURSE OF SEARCH NOT A SINGLE PIECE UNACCOUNTED WAS FOUND. THERE WAS NO EVIDENCE THAT ASSESSEE HAS MADE ANY SALE OUTSIDE THE BOOKS OF ACCOUNT. V . NO INCRIMINATING MATERIAL FOUND OF ANY ACCESSORY BEING SOLD OUTSIDE THE BOOKS OF ACCOUNT. VI . THE ADDITION HAS BEEN MADE BY INDULGING INTO SURMISES AND CONJECTURE IGNORING THE EXPLANATION AND EVIDENCES AS IS EVIDENT FROM THE FACT THAT THE AO HAS MERELY ESTIMATED THE AMOUNT BY APPLYING A FLAT RATE OF 14% ON RS.33 CRORES IGNORING THE CORRECT FIG URES AS PER BOOKS OF ACCOUNTS OF RS.3,66,45,443 DULY ACCOUNTED FOR WITH EVIDENCES. VII . THE DRP HAS CONFIRMED THE ADDITION MADE BY THE AO IGNORING THE DETAILED EXPLANATION (PB PG. 6422 - 6424). 12.5. REVENUE S SUBMISSIONS : THE LD.D.R. SUBMITTED THAT THERE IS NO DISPUTE ABOUT THE FACT THAT THE ASSESSEE COMPANY HAS REPLACED THE DEAD ON ARRIVAL MOBILE PHONES TO THE EXTENT OF RS.33 CRORES. ACCORDINGLY IT HAS RECOVERED ACCESSORIES TO THE EXTENT OF RS.4.62 CRORES. THE AO HAS CORRECTLY TAKEN THIS VALUE SIN CE THE ASSESSEE HAS NOT BEEN ABLE TO SUPPORT ITS EXPLANATION. IT IS FURTHER SUBMITTED THAT THE EVIDENCE SUBMITTED BY THE ASSESSEE COMPANY IN THIS REGARD IS NOT RELIABLE AND ACCORDINGLY THE AO AND THE DRP WAS JUSTIFIED IN IGNORING THE SAME AND MAKING THE A BOVE SAID ADDITION. 12.6. OUR FINDINGS: THIS ADDITION IS MADE ON THE PRESUMPTION OF THE AO THAT THE ASSESSEE WOULD HAVE RECOVERED 14% OF THE VALUE OF PHONES WHICH ARE DEAD ON ARRIVAL. IN THIS PROCESS THE AO ACCEPTS THAT THE RESIDUAL VALUE OF A DEAD ON ARRIVAL PHONE IS AROUND APPROXIMATELY RS.235/ - , WHICH IS APPROXIMATELY THE VALUE AT WHICH THE ASSESSEE HAS VALUED ITS CLOSING STOCK OF DEAD ON ARRIVAL PHONES. WE HAVE DEALT WITH THIS ISSUE AT PARA AT 11.5 OF THE ORDER. THERE IS NO IOTA OF EVIDENC E WITH THE AO TO COME TO A CONCLUSION THAT THE ASSESSEE WOULD HAVE SOLD THE ACCESSORIES RECOVERED FROM DEAD ON ARRIVAL PHONES, OUT OF THE BOOKS. THE ASSESSEE HAS SUBMITTED COMPLETE QUANTITATIVE DETAILS DURING THE COURSE OF ASSESSMENT PROCEEDINGS. AS PE R THESE DETAILS THE TOTAL VALUE OF ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 39 SUCH ACCESSORIES WAS RS.3,66,45,443. THESE HAVE BEEN DULY ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS. THE TOTAL QUANTITY OF SUCH ACCESSORIES WERE VALUED AND UTILISED BY GIVING THE SAME TO SUPER DISTRIBUTORS. CONFIRMATIO NS WERE FILED FROM THE SUPER DISTRIBUTORS. THE AO IS FACTUALLY INCORRECT IN STATING THAT THE ASSESSEE HAS NOT FILED A REPLY TO THE SHOW CAUSE NOTICE ISSUED BY THE AO AS IS EVIDENT FROM THE REPLY ON RECORD. IN FACT THE ASSESSEE HAS FILED DETAILED EXPLANAT ION WITH SUPPORTING EVIDENCES. EVEN DURING THE COURSE OF SEARCH NO INCRIMINATING MATERIAL WAS FOUND TO SHOW THAT THE ASSESSEE HAS NOT MADE SALES, OUTSIDE THE BOOKS OF ACCOUNTS. THE CONCLUSION OF THE AO HAS UPHELD BY THE DRP, IN OUR VIEW IS BASED PURELY ON SURMISES AND CONJECTURES. SUCH CONJECTURES, PRESUMPTIONS AND SURMISES CANNOT BE THE BASIS OF ADDITION. IN THE RESULT WE DELETE THIS ADDITION ON THE GROUND THAT IT IS DEVOID OF MERIT. IN THE RESULT THIS GROUND OF THE ASSESSEE IS ALLOWED. 13. GRO UND NO.14 READS AS FOLLOWS: 14(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING ADDITION OF AN AMOUNT OF RS. 84,20,360/ - ON ACCOUNT OF SALE OF SCRAP. (II) ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE DRP HAS ERRED IN IGNORING THE CONTENTION OF THE APPELLANT COMPANY THAT INCOME ON ACCOUNT OF SALE OF SCRAP FOUND DURING THE SEARCH HAVING BEEN INCLUDED IN THE PROFIT AND LOSS ACCOUNT FILED BY THE ASSESSEE NO FURTHER ADJUSTMENT ON ACCOUNT OF INCOME ON SALE OF SCRAP IS REQUIRED TO BE MADE. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED IN ARBITRARILY IGNORING THE EXPLANATION AND EVIDENCES SUBMITTED BY THE APPELLANT COMPANY. 1 3 .1. THE FACTS RELATING TO THIS GR OUND ARE THAT: DURING THE COURSE OF THE SEARCH A SCRAP REGISTER WAS FOUND ON WHICH ITEMS OF THE SCRAP SOLD TO THE EXTENT OF RS.29,96,676/ - WERE RECORDED. ON THIS BASIS THE MATTER WAS REFERRED TO THE SPECIAL AUDITOR FOR VERIFICATION OF THE SCRAP GENERATED AND ACCOUNTED FOR BY THE ASSESSEE COMPANY. THE SPECIAL AUDITOR AFTER CARRYING OUT THE VERIFICATION FOR ALL THE SEVEN YEARS BEFORE HIM HAS WORKED OUT THE VALUE OF THE SCRAP FOR EACH OF THE YEAR AS UNDER: - FINANCIAL YEAR AMOUNT (RS.) FY. 2004 - 05 NA ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 40 FY. 2005 - 06 13,983 FY. 2006 - 07 46,494 FY. 2007 - 08 NIL FY. 2008 - 09 9,82,512/ - FY. 2009 - 10 40,66,949/ - FY. 2010 - 11 84,20,360/ - TOTAL 1,35,30,298/ - THE AO, HOWEVER, MADE HIS OWN CALCULATION. HE WAS OF THE VIEW THAT SCRAP SOLD BY THE ASSESSEE DURING THE 70 DAYS PERIOD WAS RS.29,96,676/ - . ON THIS BASIS HE ASSUMED THAT ASSESSEE IS GENERATING SCRAP AS A PERCENTAGE OF THE PURCHASES AND COMPUTED THE VALUE OF THE SCRAP FOR EACH OF THE YEARS AS UNDER: - S. NO . FINANCIAL YEAR INVOLVED AMOUNT OF IMPORT PURCHASE RELATED TO MOBILE PHONES ETC. PROPORTIONATE SCRAP GENERATED 1. 2010 - 11 1750 CRORES 2.74 CRORE 2. 2009 - 10 1150 CRORES 1.80 CRORE 3. 2008 - 09 264 CRORES 41.34 LACS 4. 2007 - 08 76 CRORES 11.90 LACS 5. 200 6 - 07 59 CRORES` 9.24 LACS TOTAL 5.16 CRORES THE SCRAP VALUE COMPUTED BY THE AO FOR THE YEAR UNDER CONSIDERATION WAS ACCORDINGLY RS.2.74 CRORES AS AGAINST RS.84,20,360/ - COMPUTED BY THE SPECIAL AUDITOR. THE AO IN THE DRAFT ASSESSMENT ORDER MADE THE AD DITION OF RS.2.74 CRORES BEING THE SCRAP VALUE COMPUTED BY HIM. 13.2. DRP FINDINGS THE DRP, HOWEVER, REDUCED THE SAME AND RESTRICTED THE ADDITION TO RS.84,20,360/ - BEING THE VALUE WORKED OUT BY THE SPECIAL AUDITOR. THE FINDINGS OF THE DRP READ AS UND ER: THE DRP HAVING CONSIDERED THE ENTIRE FACTS OF THE CASE - IS OF THE VIEW THAT THE LEARNED AO DID NOT PROVIDE ANY SCIENTIFIC BASIS FOR COMPUTING THE FIGURES O CONCEALED SALES OF SCRAP TO THE TUNE OF RS. 2.74 CRORES. THE FIGURE OF CONCEALED SALES OF RS. 8 4,20,360/ IS CONSIDERED TO BE RATIONAL AND LOGICAL BEING BASED OR THE WORKING OF ACCOUNTING EXPERTS. ACCORDINGLY THE OBJECTION OF THE APPELLANT I SUSTAINED PARTIALLY. IN THE ALTERNATIVE AND WITHOUT PREJUDICE TO THE ABOVE, THE AC WAS NOT JUSTIFIED IN SUBSTI TUTING THE FIGURE OF RS. 84,20,360 / - WORKED OUT BY THE SPECIAL ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 41 AUDITOR WITH THAT OF RS.2.74CRORE. THE ADDITION MADE ON THIS ACCOUNT NEEDS TO DELETED. 13.3. FINAL ORDER BY AO: THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 DIRECTED TO SUBSTITUTE THE FIGURE OF RS.84,20,360/ - WORKED OUT BY THE SPECIAL AUDITOR IS THAT OF PROPOSED ADDITION OF RS.2.74 CR. BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL AGAIN ST THE ORDER OF THE DRP. IN REVENUE S APPEAL GROUND NOS.2 AND 3, THE CONTENTION IS THAT THE DRP WAS NOT JUSTIFIED IN REDUCING THE ADDITION TO RS.84,20,360/ - AND IN THE ASSESSEE S APPEAL IN GROUND NO.14 IS THAT THE ADDITION AS CONFIRMED BY THE DRP OF RS. 84,20,360/ - IS NOT JUSTIFIED PARTICULARLY KEEPING IN VIEW THE FACT THAT AN AMOUNT OF RS.37.47 LACS HAS ALREADY BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS. 13.4. ASSESSEE S SUBMISSIONS: I . THE ASSESSEE HAS SUBMITTED THE DETAILED EXPLANATION TO ASST. DI RECTOR OF INVESTIGATION IN REGARD TO THE SCRAP VIDE LETTER DATED 30.10.2012 (PAPER BOOK PAGE 224, RELEVANT PARA 7 ON PAGE 225). II . FURTHER VIDE LETTER DATED 07.01.2013 (PAPER BOOK PAGE 430) EXPLANATION REGARDING SCRAP SALE WAS GIVEN TO THE AO. III . DETAILS O F THE SCRAP SALE ACCOUNTED FOR DURING THE YEAR ARE AT PAGES 399 - 400. IV . IT WAS EXPLAINED THAT ASSESSEE HAS BEEN ACCOUNTING FOR COMPLETE QUANTITY FOR YEAR TO YEAR AS IS EVIDENT FROM THE QUANTITATIVE CHART FOR EACH OF THE YEAR QUOTED BY THE AO IN THE DRAFT ASSESSMENT ORDER WHICH IS AT PAGE 10 TO 14 OF THE DRAFT ASSESSMENT ORDER. V . THAT THE ESTIMATION MADE BY THE AO IS IN TOTAL DISREGARD TO THE FACTS OF THE CASE AS IS EVIDENT FROM ITS EXPLANATION WHICH WAS FILED BEFORE THE AO AS WELL AS THE SPECIAL AUDITOR. EVEN THE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 42 SPECIAL AUDITOR HAS EXTRAPOLATED THE SALE OF SCRAP FOR THE YEAR UNDER CONSIDERATION AND THE VALUE WORKED OUT BY THEM IS RS.84,20,360/ - ONLY. THE ASSESSEE HAVING ACCOUNTED FOR SCRAP TO THE TUNE OF RS.37.47 LACS (PB PG.21), THERE WAS NO JUSTIFICAT ION FOR IGNORING THE SAME. VI . THE DRP HAS IGNORED THE WRITTEN SUBMISSIONS FILED BEFORE IT (PB PG. 6467 - 6479) WHEREBY THIS FACT OF INCOME ON ACCOUNT OF SALE OF SCRAP OF RS.37.47 LACS WAS BROUGHT TO ITS NOTICE (RELEVANT PAGE 6476). 13.5. REVENUE S SUBMISSIO NS : THE LD. DR SUBMITTED THAT ADMITTEDLY A REGISTER WAS FOUND DURING THE COURSE OF THE SEARCH SHOWING SALE OF SCRAP. THE MATTER WAS REFERRED TO THE SPECIAL AUDITOR WHO EXAMINED THE ISSUE AND HAS COMPUTED THE VALUE OF THE SCRAP FOR EACH OF THE YEAR. HOWEV ER, THE AO HAS GONE WITH THE LOGIC THAT WHEN SCRAP SOLD TO THE EXTENT OF RS.29,96,676/ - WAS FOUND FOR THE PERIOD OF 70 DAYS THE SCRAP FOR THE YEAR WOULD HAVE BEEN DEFINITELY BEEN HIGHER. ACCORDINGLY HE HAS WORKED OUT A FORMULA AS PERCENTAGE OF THE PURCHAS ES MADE BY THE ASSESSEE IN EACH OF THE YEAR AND HAS RIGHTLY COMPUTED THE VALUE OF THE SCRAP AT RS.2.74 CRORES ON TOTAL IMPORT OF MOBILE PHONES OF RS.1750 CRORES. ACCORDINGLY HE SUPPORTED THE ORDER OF THE AO. 13.6. OUR FINDINGS: THE SPECIAL AUDITOR BY EXTRAPOLATION OF SALE OF THE SCRAP UNDER THE YEAR OF CONSIDERATION WORKED OUT THE SAME AT RS.84,25,360/ - . THE SPECIAL AUDITORS IN ITS REPORT HAS GIVEN A BASIS FOR COMPUTING SCRAP VALUE FOR EACH YEAR. THE AO HAS NO BASIS WHATSOEVER TO COME TO A CONCLUS ION THAT THE SALE OF SCRAP AMOUNTED TO RS. 2.74 CRORES. TAKING THE TOTAL IMPORTS OF THE ASSESSEE AND APPLYING OF A PERCENTAGE CANNOT BE CONSIDERED AS A SCIENTIFIC BASIS FOR ARRIVING AT THE TRANSACTION. THE SPECIAL AUDITOR IN ITS REPORT WHICH HAS BEEN QUO TED BY THE AO IN THE ASSESSMENT ORDER HAS GIVEN THE BASIS FOR WORKING OUT THE VALUE OF THE SCRAP. THUS, THE DRP WAS CORRECT IN HOLDING THAT THE VALUE OF THE SCRAP AS COMPUTED BY THE SPECIAL AUDITOR BE ADOPTED WHICH COMES TO RS.84,20,360. NEVERTHELESS, WE NOTE THAT THE ASSESSEE HAS ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 43 ALREADY ACCOUNTED FOR SCRAP TO THE TUNE OF RS.37.47 LAKHS AS IS EVIDENT FROM ITS PROFIT AND LOSS ACCOUNT. THIS FIGURE HAS TO BE REDUCED FROM THE FIGURE OF RS.84,20,360 WORKED OUT BY THE SPECIAL AUDITOR AS VALUE OF SCRAP GENER ATED DURING THE YEAR AND IT IS ONLY THE BALANCE AMOUNT WHICH CAN BE BROUGHT TO TAX. IN THE RESULT THE ASSESSEE GETS PART RELIEF AND THIS GROUND IS PARTLY ALLOWED. 14. GROUND NO.15 READS AS FOLLOWS. 15 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING THE ADDITION OF AN AMOUNT OF RS.13,81,25,000/ - ON ACCOUNT OF NOTINGS IN SEIZED DOCUMENTS. (II) THAT THE ABOVE ADDITION HAS BEEN MADE DESPITE THE ASSESSEE BRINGING ALL MATERIAL AND EVIDENCES ON RECO RD TO PROVE THAT THE AMOUNTS ARE DULY EXPLAINED. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED IN ARBITRARILY IGNORING THE EXPLANATION FOR EACH OF THE SEIZED DOCUMENT ALONG WITH EVIDENCES SUBMITTED BY THE APPELLANT COMPANY IN SUPPO RT OF ITS CONTENTION THAT EACH OF THE SEIZED DOCUMENTS DOES NOT REPRESENT INCOME EARNED BY THE APPELLANT COMPANY OUTSIDE THE BOOKS OF ACCOUNTS 14.1. THE FACTS RELATING TO THIS GROUND ARE THAT: AS PER THE AO DURING THE COURSE OF THE SEARCH OPERATION CE RTAIN INCRIMINATING MATERIALS WERE SEIZED. THE ASSESSEE WAS ASKED TO GIVE EXPLANATION IN RESPECT OF THESE DOCUMENTS. THE AO, HOWEVER, WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE IN RESPECT OF CERTAIN DOCUMENTS AND ACCORDINGLY MADE AN ADD ITION OF RS.13,81,25,000/ - AS UNDER: - (I) A - 2 (PAGE - 6) - RS.25 LACS (II) A - 3 VARIOUS PAGES - RS.5 LACS (III) A - 3 (ESTIMATED) - RS.2 LACS (IV) A - 4 (ESTIMATED) - RS.3 LACS (V) A - 5 - RS.16.25 LACS (VI) A - 6 - RS.20 LACS (VII) A - 5 (PAGE - 1) - RS.10 CRORES (VIII) A - 5 (PAGE - 2) - RS.3 CRORES TOTAL - RS.13,81,25,000/ - ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 44 14.2. DRP FINDINGS: THE APPELLANT FAILED TO EXPLAIN THE ENTRIES AS ABOVE. THE DRP ON A FAIR AND JUST CONSIDERATION OF THE MATERIAL FACTS RECORDED HEREINABOV E IS OF THE FIRM VIEW THAT THE JOTTINGS AND DOTTING AS INTERPRETED BY THE AO WERE NOT IN THE NATURE OF DUMB ENTRIES. THEY OF COURSE CONTAINED MEANINGS AND SUCH MEANINGS COULD BE DECIPHERED ONLY BY THE AUTHORS OF THE LOOSE PAPERS. UPON EXAMINATION OF THE AU THORS AND THE CROSS VERIFICATION OF THEIR STATEMENTS WITH THE REALITIES ON THE GROUND THE INFERENCES WERE DRAWN. THEREFORE THE OBJECTION OF THE APPELLANT IS 'OVER - RULED'. 14.3. FINAL ORDER BY AO : HENCE, TOTAL ADDITION OF RS.13,81,25,000/ - WAS PROPO SED TO THE ASESSEE S TOTAL INCOME VIDE DRAFT ORDER U/S 144C OF THE ACT R.W.S 143(3) OF THE ACT AS FORWARDED ON 16.11.2013 TO THE ASSESSEE IN RELATING TO THE ASSESSMENT ORDER PROPOSED TO BE PASSED BY THE A.O. U/S 144C/143(3) OF THE ACT. THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS OVER - RULED THE OBJECTION OF THE ASSESSEE. 14.4. ASSESSEE S SUBMISSIONS : I . THE ADDITION MADE BY THE AO AND AS CONFIRMED BY THE DRP IS IN TOTAL DISREGARD TO THE DOCUMENTS FOUND WHICH ARE SELF - SPEAKING AND THE EXPLANATION GIVEN BY THE ASSESSEE COMPANY IN RESPECT OF EACH DOCUMENT WHICH HAS BEEN QUOTED BY THE DRP IN ITS ORDER AT PAGES 58 TO 60. THE ADDITIONS ARE UNTENABLE IN VIEW OF THE EXPLANATION ON EACH OF THE PAGES AS UNDER: - II . THE FIRST SEIZED DOCUMENT IS PAGE NO.6 OF ANNEXURE A - 2 AT PB PG. 814. THE ASSESSING OFFICER HAS MADE AN ADDITION OF RS.25 LAKH. IN THIS REGARD THE ASSESSEE HAS SUBMITTED AN EXPLANATION VIDE LETTER DA TED 11.01.2012, PAPER BOOK PAGE 2119 - 2122, RELEVANT PARA 2 ON PAGE 2120. IN THIS REPLY IT WAS CLEARLY STATED THAT THERE IS NO MENTION OF ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 45 ANY SUM OF RS.25 LAKH GIVEN AS ADVANCE FOR PURCHASE OF LAND AND ACCORDINGLY THERE CANNOT BE ANY ADDITION ON THIS ACCOU NT AS IS BEING ASSUMED BY THE ASSESSING OFFICER. THE ADDITION HAS BEEN MADE BY INDULGING INTO SURMISES. III . REGARDING PAGE NO. B - 2 OF ANNEXURE A - 3 AT PB PG. 816 THE ASSESSING OFFICER HAS MADE AN ADDITION OF RS.5 LAKH ON THIS ACCOUNT. THE ASSESSING OFFIC ER HAS MADE AN ALLEGATION THAT THERE IS A CASH EXPENDITURE OF RS.2 LAKH ON ACCOUNT OF IPO. IN ITS REPLY DATED 11.11.2013 AT PB PG. 2119 - 2122, RELEVANT PARA 3 ON PAGE 2120 ASSESSEE HAS CATEGORICALLY STATED THAT THERE IS NO EXPENDITURE MENTION ON IT. SINCE THERE IS NO FINANCIAL TRANSACTION RECORDED AT THIS PAGE, THEREFORE, THERE IS NO ISSUE OF RECORDING SUCH TRANSACTION. AS REGARDS THE IPO EXPENDITURE THE SAME WAS OF RS.2,19,70,208 WHICH HAS BEEN FULLY ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS AS IS EVIDENT F ROM COMPUTATION OF INCOME WHERE THIS AMOUNT HAS BEEN ADDED BACK (PB PG.5 READ WITH PG.2). SO THE QUESTION OF FURTHER DISALLOWANCE IN ANY CASE DOES NOT ARISE. IV . THE ASSESSING OFFICER HAS MADE AN ADDITION OF RS.2 LAKH ON ACCOUNT OF PAGE 15 OF ANNEXURE A - 3 (PB PG. 815). THIS SEIZED DOCUMENT IS PLACED AT PAPER BOOK PAGE 815. IN ITS REPLY DATED 11.11.2013 AT PB PG. 2119 - 2122, RELEVANT PARA 4 ON PAGE 2121 THE ASSESSEE HAS CLARIFIED THAT THERE IS NO FINANCIAL TRANSACTION. ON GOING THROUGH THE SAME IT MAY BE NOTICED THAT THIS IS A ROUGH WORKING PAD AND NOTES RECORDED ARE PERSONAL IN NATURE OF MR. RAHUL SHARMA, CHIEF OPERATING OFFICER AND NOT RELATED TO THE COMPANY. THERE IS NO FINANCIAL TRANSACTION RECORDED ON THIS PAGE. THERE IS NO MATERIAL WHATSOEVER THAT ANYTHING IS RECORDED HERE TO THE BUSINESS OF THE COMPANY. V . PAGE 83 OF ANNEXURE A - 4 ON THE BASIS OF WHICH THE ASSESSING OFFICER HAS MADE ADDITION OF RS.3 LAKH. THIS PAGE IS PLACED AT PAPER BOOK PAGE 817. IN ITS REPLY DATED 11.11.2013 AT PB PG. 2119 - 21 22, RELEVANT PARA 5 ON PAGE 2121 IT WAS CLARIFIED THAT THIS DOCUMENT IS RELATED TO COMPANY S POLICY REGARDING INCENTIVE TO ITS DISTRIBUTORS WHO MEET THE SALES TARGET. ON GOING THROUGH THIS PAPER IT MAY BE NOTICED THAT THERE IS NO FINANCIAL TRANSACTION WHAT SOEVER RECORDED BUT STILL THE ASSESSING OFFICER HAS DRAWN ADVERSE INFERENCE AND HAS MADE ARBITRARY ADDITION. THE ASSESSEE COMPANY HAS SUBMITTED A DETAILED REPLY VIDE LETTER DATED 11.01.2013 RELEVANT OBSERVATIONS AT PAGE 2121. VI . THIS PAGE NO. B - 9 OF ANN EXURE A - 5 OF WHICH THE ASSESSING OFFICER GAS MADE AN ADDITION OF RS.16,25,000. THIS PAGE IS PLACED AT PAPER BOOK PAGE 819. THE EXPLANATION FOR THE SAME WAS SUBMITTED VIDE LETTER ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 46 DATED 11.1.2013 PLACED AT PAPER BOOK PAGE 2119 - 2122, RELEVANT PARA 6 ON PAGE 2122. IN THIS EXPLANATION IT WAS CLEARLY STATED THAT MR. VIKAS JAIN, DIRECTOR WHO WAS INCHARGE OF THE BUSINESS HAS MADE ROUGH CALCULATION OF THE PROPOSED TENDER FOR WHICH COMPANY WISH TO APPLY. AS PER THIS PROPOSAL COMPANY WILL HAVE TO SUPPLY 8 LAKH UNI TS IN TWO YEARS FOR TOTAL 16 LAKH UNITS IN TWO YEARS AND SHALL HAVE TO DO APPROXIMATELY RS.8 CRORE OF TURNOVER PER ANNUM AND WHILE HIRING 17+5 = 22 SALES STAFF. THERE WAS NO FINANCIAL TRANSACTION INVOLVED. ACCORDINGLY THE INFERENCE DRAWN BY THE ASSESSING OFFICER THAT THIS REPRESENTS SOME CASH OUTSIDE THE BOOKS OF ACCOUNT IS ABSOLUTELY INCORRECT. THESE FACTS BECOME EVIDENT FROM THE WAY THIS PAPER HAS BEEN WRITTEN. FURTHER A MENTION OF RS.25,000 CASH HAS BEEN MENTIONED WHICH IS CASH IN HAND AND AS SUCH TH ERE WAS NO REASON FOR THE ASSESSING OFFICER TO DRAW ANY ADVERSE INFERENCE. VII . IN RESPECT OF PAGE B - 31 OF ANNEXURE A - 6, THE ASSESSING OFFICER HAS MADE AN ADDITION OF RS.20 LAKH. THIS PAPER IS PLACED IN THE PAPER BOOK PAGE 818. IN ITS REPLY DATED 11.11.20 13 AT PB PG. 2119 - 2122, RELEVANT PARA 7 ON PAGE 2122 THE ASSESSEE HAS CLARIFIED THAT THIS IS A WRITING PAD MAINTAINED BY THE ACCOUNTING CLERK OF THE COMPANY. IT WAS FURTHER CLARIFIED THAT THE ENTRIES ARE VERIFIABLE FROM THE BOOKS OF ACOCUNTS. IN THIS RE GARD IT WAS EXPLAINED THAT THIS IS NOTING MADE BY MR. PRASANNA KUMAR JHA, ACCOUNTING CLERK OF THE COMPANY. THIS IS A NOTING MADE BY HIM REGARDING THE ENTRY WHICH HAVE BEEN REVERSED IN THE BOOKS OF ACCOUNT. THE ASSESSING OFFICER HAS INDULGED INTO SURMISES BY ASSUMING THAT THESE REPRESENT UNACCOUNTED RECEIPTS IGNORING THE FACT THAT THE WORD WRITTEN IS REV REVERSED. THUS TO ASSUME THAT THIS IS A RECEIPT IS ALSO NOT CORRECT. ALSO TO ASSUME THAT THIS IS RETURN WILL ALSO NOT BE CORRECT. REV REVERSE D WAS STILL MADE WITH THE ENTRY HAS BEEN REVERSED IN THE BOOKS OF ACCOUNT AND ACCORDINGLY THE INFERENCE DRAWN BY THE ASSESSING OFFICER ON THIS ACCOUNT IS NOT CORRECT. THE RELEVANT EVIDENCES SUBMITTED IN SUPPORT THEREOF HAVE ALSO BEEN IGNORED BY THE DRP. V III . IN RESPECT OF PAGE 1 OF ANNEXURE A - 5, THE ASSESSING OFFICER HAS MADE AN ADDITION OF RS.10 CRORE. THIS DOCUMENT IS PLACED AT PAPER BOOK PAGE 820. IN THE DRAFT ASSESSMENT ORDER AT PAGE 53 OF THE DRAFT ASSESSMENT ORDER THE AO HAS STATED THAT THE ASSESS EE HAS FAILED TO EXPLAIN THESE TRANSACTIONS. THIS IS FACTUALLY INCORRECT. THE AO HAS IGNORED THE REPLY DATED 11.11.2013 PB PG. 2119 - 2122 RELEVANT PARA 1 ON PAGE 2119 WHERE IT HAS BEEN CLARIFIED THAT THIS IS RELATED TO PLANNING FOR ESTABLISHMENT OF MODULE FACTORY. THE AO AND DRP BOTH HAVE IGNORED THE REPLY. IT IS SURPRISING TO SEE THAT THIS DOCUMENT BEING ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 47 SO CLEAR THE ASSESSING OFFICER HAS STILL MADE ADDITION BY MAKING AN OBSERVATION HENCE ADDITION/DISALLOWANCE OF RS.10 CRORE AS . ON GOING THROUGH THIS P AGE IT IS VERY CRYSTAL CLEAR THAT THIS IS PROPOSAL WHEREBY COST OF MODULE FACTORY HAS BEEN STATED. THIS DOCUMENT CLEARLY SHOWS THAT PROVIDED SALE IS AVAILABLE , IT ALSO SHOWS WHERE TO BE ESTABLISHED , IT ALSO GIVES OPTION HIMACHAL PRADESH KALA AMB, SECOND OPTION HARYANA BAHADURGARH. THUS THE INCOME ADDED BY THE ASSESSING OFFICER BY ASSUMING IT IS SOMETHING OUTSIDE THE BOOKS OF ACCOUNTS SHOWS THE NEED OF APPLICATION OF THE MIND. IX . THIS PAGE 2 OF ANNEXURE A - 5 IS IN CONTINUATION OF THE ABOVE PAGE 1 OF WHICH THE ASSESSING OFFICER HAS MADE AN ADDITION OF RS.3 CRORE. THIS DOCUMENT IS PLACED AT PAPER BOOK PAGE 821. IN THE DRAFT ASSESSMENT ORDER AT PAGE 53 OF THE DRAFT ASSESSMENT ORDER THE AO HAS STATED THAT THE ASSESSEE HAS FAILED TO EXPLAIN THESE TRAN SACTIONS. THIS IS FACTUALLY INCORRECT. THE AO HAS IGNORED THE REPLY DATED 11.11.2013 PB PG. 2119 - 2122 RELEVANT PARA 1 ON PAGE 2119 WHERE IT HAS BEEN CLARIFIED THAT THIS IS RELATED TO PLANNING MENTIONED ON EARLIER PAGE REGARDING ESTABLISHMENT OF MODULE FA CTORY. THIS PAGE IS THE CONTINUATION OF ABOVE STATED PAGE WHEREBY THE COST OF MODULE FACTORY HAS BEEN ESTIMATED AND IN THIS PAGE THE SOURCE OF INVESTMENT HAVE BEEN IDENTIFIED THAT WHO WILL INVEST HOW MUCH. THIS NOWHERE SHOWS THE ASSUMPTION MADE BY THE ASS ESSING OFFICER THAT ANY INVESTMENT HAS BEEN MADE BY THE ASSESSEE. THERE IS NO LINKAGE WHATSOEVER OF THIS PAGE WITH THE BUSINESS OF THE ASSESSEE. THERE IS NO CORROBORATION WHATSOEVER. X . IN VIEW OF THE ABOVE, THE ADDITION MADE BY THE ASSESSING OFFICER AN D CONFIRMED BY THE DRP ARE IN DISREGARD TO THE CONTENTS OF THE DOCUMENT AND EXPLANATION GIVEN BY THE ASSESSEE IN RESPECT OF THESE VARIOUS DOCUMENTS AND HENCE THE SAME NEED TO BE DELETED. 14.5. REVENUE S SUBMISSIONS : THE LD.D.R. SUBMITTED THAT THE AO W AS JUSTIFIED IN DRAWING ADVERSE INFERENCE IN RESPECT OF THESE DOCUMENTS AS THE EXPLANATION GIVEN BY THE ASSESSEE WAS NOT FOUND SATISFACTORY BY THE AO. ( I ) IN RESPECT OF DOCUMENT A - 2/PG.6, IT WAS ARGUED BY THE LEARNED DR THAT THE ASSESSEE HAS FAILED TO RELATE THIS DOCUMENT WITH THE BOOKS OF ACCOUNTS AND NO SUPPORTING DOCUMENTS HAVE BEEN PRODUCED AND THE AO WAS JUSTIFIED IN DRAWING ADVERSE INFERENCE. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 48 ( II ) IN RESPECT OF DOCUMENT A - 3/PG.3, THE ASSESSEE HAS FAILED TO IDENTIFY THE IPO EXPENSES OF RS.2 LAC STATED THEREIN . ( III ) IN RESPECT OF DOCUMENT A - 3/PG. 15 THERE IS A CLEAR MENTION OF THE WORDS GIFT FOR MAYOR WHICH THE ASSESSEE HAS NOT EXPLAINED. NO EXPLANATION HAS BEEN GIVEN FOR THIS EXPENSE INCURRED. ( IV ) IN RESPECT OF DOCUMENT A - 4/PG.83, IT WAS ARGUED BY THE LEARNED DR THA T THIS PAGE CONTAINS REMARKS OF STRATEGY OF HOW THE EXPENSES OF FOREIGN TRIP WILL BE CONVERTED INTO OTHER HEAD LIKE GIFT AND CLAIM AS BUSINESS EXPENSES. IT WAS ARGUED THAT THE EXPLANATION GIVEN BY THE ASSESS THAT THIS IS REGARDING A BUSINESS STRATEGY AND THE INCENTIVE TO THE SUPER DISTRIBUTORS IS NOT ACCEPTABLE AND THE AO WAS JUSTIFIED IN DRAWING ADVERSE INFERENCE. ( V ) IN RESPECT OF DOCUMENT A - 5 IT WAS CONTENDED THAT ON THIS DOCUMENT CLEARLY THE AMOUNT OF RS.16 LAC IS STATED AND THE EXPLANATION OF THE ASSESSEE THAT NO FINANCIAL TRANSACTION IS INVOLVED IS ACCEPTABLE. ( VI ) AS REGARDS DOCUMENT A - 6 IT WAS ARGUED BY THE LEARNED DR THAT THE AMOUNT OF RS.10 LAC WHICH HAS BEEN STATED IN THIS DOCUMENT THE ASSESSEE HAS FAILED TO IDENTIFY AND RECONCILE THESE ENTRIES WITH THE BOOKS OF ACCOUNT AND ACCORDINGLY THE AO IS JUSTIFIED IN DRAWING ADVERSE INFERENCE ON THIS DOCUMENT. ( VII ) IN RESPECT OF DOCUMENT A - 5/1, IT WAS ARGUED BY THE LEARNED DR THAT THIS DOCUMENT CLEARLY SHOWS THE EXPENDITURE INCURRED BY THE ASSESSEE IN RESPECT OF THE FA CTORY TO BE ESTABLISHED IN HARYANA AND HIMACHAL. THE ASSESSEE HAS FAILED TO EXPLAIN THESE TRANSACTIONS AND IDENTIFY THE SOURCE AND OUTCOME OF THESE INVESTMENTS. THE ADDITION HAS BEEN RIGHTLY MADE BY THE AO. ( VIII ) IN RESPECT OF DOCUMENT A - 5/PG.2, IT WAS ARGUED BY THE LEARNED DR THAT A TOTAL INVESTMENT OF RS.3 LAC HAS BEEN MADE BY THE ASSESSEE AND ASSESSEE HAS FAILED TO EXPLAIN THE SOURCE OF THESE INVESTMENTS. ON THE BASIS OF THE ABOVE SUBMISSIONS THE LEARNED DR SUBMITTED THAT THE ADDITION HAS BEEN RIGHTLY MAD E BY THE AO AND CONFIRMED BY THE DRP. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 49 14.6. OUR FINDINGS: THIS GROUND IS BASED ON THE SEIZED DOCUMENTS. HENCE WE EXAMINE EACH OF THESE SEIZED DOCUMENTS. (I) FIRST WE SHALL TAKE UP DOCUMENT A - 2 AT PAGE 6 OF THE ASSESSEE S PAPER BOOK. A PERUSAL OF THI S DOCUMENT DEMONSTRATES THAT THERE IS NO MENTION OF ANY SUM OF RS.25 LAKHS. HENCE THE ADDITION BASED ON THIS BASIS THAT AN ADVANCE HAS BEEN MADE FOR THE PURCHASE OF LAND IS PURELY ON SURMISES. AS THERE IS NO ENTRY OR WRITING IN THE DOCUMENT IN QUESTION AS ALLEGED BY THE AO, WE DELETE THE ADDITION IN QUESTION. (II) DOCUMENT A - 3 CONSISTS OF VARIOUS PAGES TOTALLING TO A SUM OF RS.5 LAKHS. THE FIRST ITEM ALLEGED IS CASH EXPENDITURE OF RS.2 LAKHS ON ACCOUNT OF IPO. THE ASSESSEE CONTENDS THAT NO SUCH EXPENDITU RE HAS BEEN INCURRED BY IT. WE HAVE EXAMINED THE DOCUMENT IN QUESTION WHICH IS AT PAGES 2119 AND 2122 OF THE PAPER BOOK. THE RELEVANT PAGE IS 2120 OF THE PAPER BOOK. NO FINANCIAL TRANSACTION HAS BEEN RECORDED IN THIS PAGE. THE ASSESSEE HAS ACCOUNTED TH AT RS.2,19,17,208/ - AS IPO EXPENDITURE. IN VIEW OF THE ABOVE DISCUSSION WE DELETE THIS ADDITION. (III) THE NEXT ITEM IS AN AMOUNT OF RS.2 LAKHS AT PAGE 15 OF ANNEXURE A - 3. THE ASSESSEE CONTENDS THAT THESE ARE ROUGH WORKING PADS AND NOTES RECORDED BY MR. RAHUL SHARMA, CHIEF OPERATING OFFICER AND THAT THESE ARE PERSONAL IN NATURE AND NOT RELATED TO THE COMPANY. THE REVENUE S CONTENTION IS THAT THERE IS A CLEAR MENTION OF THE WORD GIFT FOR MAJOR AND THAT THE ASSESSEE HAS NOT EXPLAINED THE SAME. WE HAVE E XAMINED THIS DOCUMENT. AS THERE IS A SPECIFIC MENTION, WE ARE OF THE CONSIDERED OPINION THAT THE ONUS SHIFTED TO THE ASSESSEE, TO PROVE THAT THIS ENTRY IS NOT A GIFT GIVEN BY THE MAYOR, WHICH IS NOT RECORDED IN THE BOOKS OF ACCOUNTS. HENCE WE SUSTAIN THI S ADDITION. (IV) THE NEXT ADDITION IS OF AN AMOUNT OF RS.3 LAKHS AT PAGE 83 OF ANNEXURE A - 4. THE ASSESSEE EXPLAINED THAT THIS DOCUMENT RELATES TO COMPANY S POLICY REGARDING INCENTIVE TO ITS DISTRIBUTORS TO MEET ITS SALES TARGET. IT IS ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 50 SUBMITTED THAT ON G OING THROUGH THIS PAPER, IT MAY BE NOTICED THAT THERE IS NO FINANCIAL TRANSACTION WHATSOEVER RECORDED. THE D.R. SUBMITS THAT THE CONTENTS OF THIS DOCUMENT DEMONSTRATES THE STRATEGY OF THE ASSESSEE COMPANY AS TO HOW EXPENSES OF A FOREIGN TRIP, WOULD BE CO NVERTED INTO EXPENSES UNDER THE HEAD GIFTS ETC. AND IT CLAIMED AS BUSINESS EXPENSES. ON CONSIDERING THESE SUBMISSIONS AND EXAMINING THE DOCUMENTS IN QUESTION, WE ARE OF THE CONSIDERED OPINION THAT NO ADDITION CAN BE MADE BASED ON THESE NOTINGS ON LOOSE PAPERS, WITHOUT ANY CORROBORATING EVIDENCE. THE ADDITION IS MADE PURELY ON SURMISES AND CONJECTURES. IT IS WELL SETTLED THAT EACH AND EVERY NOTING ON A LOOSE PAPER, CANNOT BE TREATED AS UNACCOUNTED INCOME WITHOUT ANY CORROBORATIVE EVIDENCE. SCRIBBLING ON ROUGH SHEETS OF PAPER HAS BEEN CONSIDERED AS INCOME WITHOUT ANY CORROBORATIVE EVIDENCE. THIS ADDITION IS DELETED. (V) THE NEXT ADDITION IS BASED ON PAGE NO. B9 OF ANNEXURE A - 5. THIS DOCUMENT IS AT PAGE 819 OF THE ASSESSEE S PAPER BOOK. THE ASSESSEE E XPLAINED THAT THIS PAPER CONSISTS OF ROUGH CALCULATIONS MADE BY MR.VIKAS JAIN, THE DIRECTOR IN - CHARGE, FOR THE PROPOSED TENDER. IT WAS SUBMITTED THAT THE TENDER WAS FOR THE SUPPLY OF 8 LAKH UNITS PER YEAR FOR TWO YEARS. THE VALUE WAS APPROXIMATELY PUT A T RS.18 CRORES AND IT IS STATED THAT THE HIRING WOULD BE OF 22 SALES STAFF. ON PERUSAL OF THE DOCUMENTS AND CONSIDERING THE SUBMISSIONS OF THE LD.DR, WE ARE OF THE CONSIDERED OPINION THAT THIS ROUGH CALCULATIONS CANNOT LEAD TO A CONCLUSION THAT THE ASSESSE E HAS EARNED UNACCOUNTED INCOME. AS HELD EARLIER SCRIBBLING AND FIGURES ON LOOSE PAPERS, WITHOUT ANY CORROBORATORY EVIDENCE CANNOT LEAD TO A CONCLUSION THAT THE ASSESSEE HAS RECEIVED UNACCOUNTED MONEY. HENCE THIS ADDITION IS HEREBY DELETED. (VI) THE N EXT PIECE OF PAPER BASED ON WHICH THE ADDITION OF RS.25 LAKHS IS MADE, PAGE NO.B - 31 OF ANNEXURE A - 6. THE ASSESSEE EXPLAINS THAT THESE ARE NOTINGS MADE BY MR.JHA, THE ACCOUNTS CLERK OF THE COMPANY AND THAT THESE NOTINGS WERE RECORDING ENTRIES, WHICH WERE REVERSED IN THE BOOKS OF ACCOUNTS. THE AO ASSUMED THAT THESE REVERSAL OF ENTRIES ARE UNACCOUNTED ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 51 INCOME. SUCH A VIEW CANNOT BE SUSTAINED. WHEN ENTRIES ARE FOUND IN THE BOOKS OF ACCOUNTS AND WHEN THE SAME CORROBORATES TO ROUGH WORKINGS MADE BY THE ACCOU NTS CLERK OF THE ASSESSEE, TO ARGUE THAT THESE ROUGH NOTINGS ON A PIECE OF PAPER ARE UNACCOUNTED INCOME OF THE ASSESSEE IS INCORRECT AND AGAINST THE FACTS OF THE CASE. THE ADDITION IN QUESTION IS PURELY MADE ON THE BASIS OF CONJECTURES AND SURMISES, HENCE WE DELETE THE SAME. (VII) THE NEXT ADDITION IS RS.10 CRORES BASED ON PAGE NO.1 ANNEXURE A - V. THE DOCUMENT IN QUESTION IS PLACED AT PAGE 820 OF THE PAPER BOOK. THE ASSESSEE HAS EXPLAINED THAT THIS SHEET OF PAPER CONSISTS NOTINGS ON A PROPOSAL FOR A MODUL E FACTORY. IT IS SUBMITTED THAT THE COST OF THE MODULE FACTORY HAS BEEN STATED THEREIN, INCLUDING THE PROPOSED LOCATIONS. HERE ALSO THE ADDITION IS BASED ON THE IMAGINATION OF THE AO, RATHER THAN ON GATHERING OF EVIDENCES. A PLAIN LOOK AT THE DOCUMENT DOES NOT BY ANY STRETCH OF IMAGINATION LEADS US TO A CONCLUSION THAT UNACCOUNTED INCOME/ASSETS HAVE BEEN RECORDED THEREIN. THE LD.DR WHILE AGREEING WITH THE PAPERS POINTS OUT TO THE ESTABLISHMENT OF A FACTORY AT HARYANA, HIMACHAL PRADESH, SUBMITS THAT THE ASSESSEE HAS FAILED TO EXPLAIN THE TRANSACTION. IN OUR VIEW SUCH ADDITION BASED ON SURMISES AND CONJECTURES, WITHOUT ENQUIRY OR GATHERING OF EVIDENCE CANNOT BE SUSTAINED. IN THE RESULT WE DELETE THIS ADDITION. (VIII) THE NEXT ADDITION IS BASED ON A PAPE R WHICH IS A CONTINUATION OF THE SHEET OF PAPER DISCUSSED ABOVE. THE DOCUMENTS IN QUESTION AT PAGE 2 OF ANNEXURE A 5. THE ASSESSEE CLARIFIED THAT THIS SHEET OF PAPER IS A CONTINUATION OF PAPER WHERE CERTAIN FIGURES ARE MENTIONED WHILE PLANNING ESTABLISH MENT OF A MODULE FACTORY. THE EXPLANATION GIVEN BY THE ASSESSEE HAS BEEN IGNORED BOTH BY THE AO AS WELL AS BY THE DRP. FOR THE REASONS GIVEN WHILE DELETING THIS AMOUNT OF RS.10 CRORES IN ABOVE PARAS, WE DELETE THIS ADDITION OF RS.3 CRORES AND ALLOW THIS GROUND OF THE ASSESSEE. 15. GROUND NO.16 READS AS FOLLOWS. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 52 16 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN DISALLOWING AN AMOUNT OF RS. 25,65,386/ - INVOKING THE PROVISIONS OF SECTION 40(A)(IA) O F THE ACT ON THE EXPENSES IN RELATION TO PROVIDING TRANSPORTATION TO EMPLOYEES. (II) THAT THE ABOVE SAID ADDITION HAS BEEN MADE BY THE AO DESPITE THE FACT THAT THE DRP DIRECTION TO RESTRICT THE ADDITION TO THE EXTENT OF AMOUNT DUE AND PAYABLE I.E. RS. 5,41 ,301/ - ONLY. ( I ) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ABOVE SAID ADDITION IS NOT OTHERWISE TENABLE IN THE EYE OF THE LAW IN VIEW OF THE SUBSEQUENT AMENDMENT MADE TO THE PROVISIONS OF SECTION 40(A)(IA) WHICH HAVE BEEN HELD TO BE RETROSPECTIVE IN NATU RE. 1 5 .1 . FACTS RELATING TO THIS GROUND ARE THAT: GROUND NO.16 IS REGARDING ADDITION OF RS.25,65,386/ - MADE BY THE AO ON THE GROUND THAT ASSESSEE HAS FAILED TO DEDUCT TAX AT SOURCE IN RESPECT OF THE PAYMENTS MADE TO THE FOLLOWING THREE PARTIES: - I ) M/S C YBER GREEN RENT CAR PVT. LTD. RS.23,49,036/ - II ) M/S GOOD TIMES TOURS & TRAVEL RS.1,45,330/ - III ) M/S CHAUHAN TOURS & TRAVELS RS. 71,000/ - TOTAL RS.25,65, 386/ - 11.1 A SHOW CAUSE NOTICE WAS ISSUED BY THE AO ON ACCOUNT OF THE FAILURE TO DEDUCT TAX AT SOURCE IN RESPECT OF ABOVE PAYMENTS. IT WAS CONTENDED BY THE ASSESSEE COMPANY THAT THESE PARTIES ARE PROVIDING TRANSPORTATION SERVICES OF PICK AND DROP FACILITY TO ITS EMPLOYEES AND AS SUCH THE SAME IS NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE IN VIEW OF THE SPECIFIC EXEMPTION PROVIDED UNDER SECTION 1904C(6). THE AO NOT BEING SATISFIED WITH THE EXPLANATION OF THE ASSESSEE MADE THE ADDITION OF RS.25,65,386/ - . 1 5.2. DRP FINDINGS SINCE THE APPELLANT CONCEDED THAT IT FAILED TO DEDUCT TAX IN RESPECT OF RS.5,41,301/ - ONLY THE AO IS DIRECTED TO APPLY HIS MIND INDEPENDENTLY AND VERIFY THE CLAIM OF THE APPELLANT. ACCORDINGLY THE OBJECTION IS PARTLY ALLOWED. 15 .3 . FINAL ORDER BY AO THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS PARTLY ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 53 ALLOWED THE OBJECTION OF THE ASSESSEE ON THIS ISSUE OBSERVING THAT, SINCE TH E APPELLANT CONCEDED THAT IT FAILED TO DEDUCT TAX IN RESPECT OF RS.5,41,301/ - ONLY THE A.O. IS DIRECTED TO APPLY HIS MIND INDEPENDENTLY AND VERIFY THE CLAIM OF THE APPELLANT. IN VIEW OF THE ABOVE, ADDITION OF RS.25,65,386 IS MADE TO THE INCOME OF THE ASSE SSEE AFTER VERIFICATION FROM ASSESSMENT RECORD. 15.4. ASSESSEE S SUBMISSIONS : I . THE OBSERVATION MADE BY THE AO IN THE FINAL ASSESSMENT ORDER IS CONTRARY TO THE DIRECTION OF THE DRP. THE DRP HAS HELD AS PER THE PROVISIONS OF SECTION 40(A)(IA) ADDITION CAN BE MADE ONLY OF THE AMOUNT DUE AND PAYABLE AS ON THE LAST DATE OF THE ACCOUNTING YEAR. SINCE THE AMOUNT DUE AND PAYABLE AS ON 31 ST MARCH, 2011 WAS RS.5,41,301/ - ONLY, THE ADDITION WAS RESTRICTED TO THAT AMOUNT ONLY. THE AO WAS DIRECTED TO M AKE VERIFICATION OF THE AMOUNT OUTSTANDING AS ON 31 ST MARCH, 2011. THE AO IGNORING THE DIRECTION AND WITHOUT ANY BASIS DISALLOWED THE ENTIRE AMOUNT I.E. RS.25,65,386/ - . THE CONTENTION OF THE AO IN THE FINAL ASSESSMENT ORDER AT PAGE 60 THAT ADDITION IS BE ING MADE AFTER VERIFICATION IS FACTUALLY INCORRECT AS IS EVIDENT FROM THE SUBMISSION BEFORE DRP AT PG PG. 6491 WHERE AMOUNT OF EACH PARTY IS STATED AS UNDER WITH COPY OF ACCOUNT: - I ) M/S CYBER GREEN RENT CAR PVT. LTD. RS.5,09,743/ - (PB PG. 2058 - 205 9) II ) M/S GOOD TIMES TOURS & TRAVEL RS. 27,558/ - (PB PG. 2039) III ) M/S CHAUHAN TOURS & TRAVELS RS. 47,000/ - (PB PG. 2051) TOTAL RS.5,41,301/ - AS PER COPY OF ACCOUNT OF EACH OF THESE THREE PARTIES THE AMOUNT DUE AND PAYABLE AS ON 31 ST MARCH, 2011 WAS RS.5,41,301 ONLY AND HENCE THE OBSERVATION OF THE AO IS CONTRARY TO FACTS ON RECORD. II . THE ENTIRE ADDITION OF RS.25,65,386/ - IS OTHERWISE UNTENABLE IN VIEW OF THE AME NDMENT MADE BY THE FINANCE ACT, 2012 BY INSERTING A PROVISO BELOW SECTION 201(1) THAT AN ASSESSEE SHALL NOT BE TREATED IN DEFAULT FOR FAILURE TO DEDUCT TAX IN CASE THE DEDUCTEE HAS FURNISHED THE RETURN OF INCOME UNDER SECTION 139 AND HAS TAKEN INTO ACCOUNT SUCH SOME FOR COMPUTING INCOME IN ITS RETURN OF INCOME AND PAID THE TAXES THEREON. IN THE CASE OF THE APPELLANT COMPANY ALL THE THREE DEDUCTEES ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 54 ARE TAX PAYER AS IS EVIDENT FROM THE DETAILS SUBMITTED BEFORE THE AO DURING THE COURSE OF THE ASSESSMENT PROCE EDINGS VIDE LETTER DATED 08.11.2013 (PAPER BOOK PAGES 2037 - 2038) ALONG WITH DETAILS (PAPER BOOK PAGES 2039 - 2075). THIS AMENDMENT HAS BEEN HELD TO BE RETROSPECTIVE AND IT HAS BEEN FURTHER HELD THAT WHERE ADDITIONS HAVE BEEN MADE UNDER SECTION 40(A)(IA), AN OPPORTUNITY HAS TO BE GIVEN TO THE ASSESSEE FOR COMPLYING THE REQUIREMENTS OF THIS PROVISO OF SUBMITTING THE PRESCRIBED CERTIFICATE AS REQUIRED UNDER PROVISO TO SECTION 201(1). III . FOR THIS RELIANCE IS BEING PLACED ON THE FOLLOWING JUDGMENTS: - I) ITO VS GAURIMAL MAHAJAN & SONS ITA NO. 1852/PN/2012 DATED 6 - 1 - 2014 (ITAT, PUNE BENCHES) II) SEA FOOD PARK INDIA LTD VS DCIT ITA NO. 762/COCH/2013 DATED 31 - 3 - 2014 (ITAT, COCHIN BENCH) III) DCIT VS ENTRACO POWERS SYSTEMS PVT LTD ITA NO. 1039/PN/2012 DATED 30 - 4 - 2014 (ITAT, PUNE BENCHES) IV) SATISH CHAND AGARWAL VS JCIT ITA NO. 339/AGRA/2013 DATED 29 - 5 - 2014 (ITAT, AGRA BENCH) V) DCIT VS ANSAL LANDMARK TOWNSHIPS PVT LTD ITA NOS 2859, 2972 & 877/DEL/2013 DATED 22 - 7 - 2014 (ITAT DELHI BENCHES) VI) ITO VS DR JAIDEEP KUM AR SHARMA ITA NOS. 3893, 5696/DEL/2011 DATED 25 - 7 - 2014 (ITAT DELHI BENCHES) VII) SHRI G SHANKAR VS ACIT ITA NO. 1832/BANG/2013 DATED 10 - 10 - 2014 (ITAT BANGALORE BENCHES) VIII) DCIT VS JAIPUR VIDYUT VITRAN NIGAM LTD ITA NO. 224/JP/2014 DATED 21 - 11 - 2014 DATED 21 - 11 - 2014 (ITAT JAIPUR BENCH) 15.5. REVENUE S SUBMISSIONS : ( I ) LD.D.R. SUBMITTED THAT THERE IS A FAILURE TO DEDUCT TAX AT SOURCE IN RESPECT OF THESE THREE PARTIES TO THE EXTENT OF RS.25,65,386/ - . THE DRP HAS DIRECTED THAT ADDITION BE RESTRICTED TO RS.5, 41,301/ - SINCE THE AMOUNT OUTSTANDING AS ON THE CLOSING OF THE ACCOUNTING YEAR WAS THIS MUCH ONLY. IT IS SUBMITTED THAT THE DRP DIRECTION THOUGH ARE CLEARLY ON THIS ISSUE THE AO HAS STILL MADE THE ADDITION OF THE ENTIRE AMOUNT OF RS.25,65,386/ - . THE REVE NUE IS ALSO IN APPEAL ON THIS GROUND BEING GROUND NO.10 AGAINST THE DIRECTION OF THE DRP ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 55 RESTRICTING THE ADDITION TO RS.5,41,301/ - . IT IS FURTHER SUBMITTED THAT IN THIS REGARD TWO ISSUES ARISE, ONE IS ADDITION TO BE RESTRICTED TO THE AMOUNT DUE AND PAYABL E AS ON THE LAST DATE OF THE ACCOUNTING YEAR ON THE BASIS OF WHICH DRP HAS RESTRICTED THE ADDITION TO RS.5,41`,301/ - . THE CONTENTION OF THE ASSESSEE APPARENTLY IN THIS REGARD SO FAR FACTUAL ASPECT IS CONCERNED THAT THE AMOUNT OUTSTANDING WAS RS.5,41,301/ - AS ON THE LAST DATE OF THE ACCOUNTING YEAR APPEARS TO BE CORRECT IN VIEW OF THE STATEMENT OF ACCOUNT FILED BEFORE THE AO AS WELL AS DRP. HOWEVER, IT WAS CONTENDED THAT THE RELIANCE PLACED BY THE DRP ON THE JUDGMENT OF THE ITAT IN THE CASE OF MERLIN SHIPP ING AND THE JUDGMENT OF THE ALLAHABAD HIGH COURT IN THE CASE OF VECTOR SHIPPING PVT. LTD. IS NOT JUSTIFIED. ( II ) AS REGARDS THE ALTERNATIVE CONTENTION OF THE ASSESSEE COMPANY THAT ALL THE THREE DEDUCTEES ARE BEING ASSESSED TO TAX AND IN VIEW OF THE PROVISO AD DED TO SECTION 201(1) THE ASSESSEE COMPANY CANNOT BE CONSIDERED TO BE AN ASSESSEE IN DEFAULT IN CASE IF HE SUBMITS THE PRESCRIBED CERTIFICATE AS REQUIRED BY THIS PROVISO TO SECTION 201(1) HE HAS NO OBJECTION IF THE MATTER IS REMITTED TO THE AO FOR MAKING N ECESSARY COMPLIANCE AS REQUIRED BY THE PROVISO TO SECTION 201(1) AND THEREAFTER THE ADDITION GETS DELETED. 15.6. OUR FINDINGS: THE DISALLOWANCE IN QUESTION IS MADE U/S 40A(IA) ON THE GROUND THAT THE ASSESSEE HAS FAILED TO DEDUCT TAX AT SOURCE FROM TH REE PARTIES. THE DRP HAS RESTRICTED THE ADDITION TO RS.54,30,030/ - . THE AO SHOULD HAVE FOLLOWED THESE DIRECTIONS OF THE DRP. THE AO CANNOT IGNORE THESE DIRECTIONS OF THE DRP. BE IT AS IT MAY, SUBSEQUENT TO THE AMENDMENT MADE BY THE FINANCE ACT, 2012 TO S.201(1), WHEREIN A PROVISO WAS INSERTED, THE ASSESSEE CANNOT BE TREATED AS AN ASSESSEE IN DEFAULT, IF THE DEDUCTEE HAS FURNISHED RETURN OF INCOME U/S 139 OF THE ACT. THE ASSESSEE HAS SUBMITTED THE DETAILS WHEREBY ALL THE 3 DEDUCTEES ARE INCOME TAX PAY EES. HOWEVER, THE ASSESSS IS REQUIRED TO SUBMIT THE CERTIFICATE AS PRESCRIBED IN THE PROVISO TO S.201(1). THE DR HAS SUBMITTED THAT IT HAS NO OBJECTION IF THIS ISSUE IS REMITTED TO AO TO MAKE NECESSARY COMPLIANCE BY FILING THE PRESCRIBED CERTIFICATE ABO UT THE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 56 DEDUCTEE HAVING FILED THE RETURN OF INCOME, PAID TAXES THEREON AND THE ABOVE SAID AMOUNT ON WHICH TDS WAS LIABLE TO BE DEDUCTED HAS BEEN INCLUDED IN THEIR INCOME. UNDER THESE CIRCUMSTANCES, THE ISSUE IS REMITTED TO THE FILE OF THE AO TO DO THE NECE SSARY COMPLIANCE AS REQUIRED U/S 201(1) OF THE ACT. IN THE RESULT THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 16 . GROUND NO.17 READS AS FOLLOWS. 17 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN DISALLOWING AN AMOUNT OF RS. 3,22,40,175/ - INVOKING THE PROVISIONS OF THE SECTION 40(A)(IA) OF THE ACT (II) THAT THE DISALLOWANCE HAS BEEN MADE DESPITE THE FACT THAT THE DRP HAS DIRECTED NOT TO MAKE DISALLOWANCE IN RESPECT OF ITEMS WH ICH DO NOT ATTRACT SECTION 40(A)(IA) OF THE ACT. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED IN IGNORING THE CONTENTION OF THE APPELLANT COMPANY THAT THE AMOUNT OF RS.3,22,40,175/ - HAS BEEN COMPUTED ON THE BASIS OF AGGREGATE CREDIT IN THE ACCOUNT IGNORING THE FACT THAT CREDIT IN THE ACCOUNTS ARE APPEARING ON ACCOUNT OF THE CHEQUES AND OTHER TRANSACTIONS WHICH INCLUDED PURCHASE OF FIXED ASSETS, PURCHASES WHICH ARE NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE. (IV) ON THE FACTS AN D CIRCUMSTANCES OF THE CASE, THE ABOVE SAID ADDITION IS OTHERWISE UNTENABLE IN VIEW OF THE AMENDMENT MADE TO SECTION 40(A)(IA) OF THE ACT SUBSEQUENTLY WHICH HAVE BEEN HELD TO BE RETROSPECTIVE IN NATURE. 16.1. FACTS RELATING TO THIS GROUND ARE THAT: GROUND NO.17 IS REGARDING DISALLOWANCE OF RS.3.22.40,175/ - MADE BY THE AO BY INVOKING THE PROVISIONS OF SECTION 40 (A)(IA). AS PER THE AO, ASSESSEE HAS FILED TO DEDUCT TAX AT SOURCE IN RESPECT OF THE EXPENDITURE INCURRED AGGREGATING TO RS.3,22,40,175/ - . AS PER THE AO THE TOTAL AMOUNT ON WHICH TAX WAS DEDUCTIBLE UNDER SECTION 194C WAS RS.19,89,14,292/ - , UNDER SECTION 194 - I RS.13,55,835/ - AND UNDER SECTION 194J RS.1,30,87,597/ - . THUS THE TOTAL AMOUNT CREDITED WAS RS.24,42,30,809/ - TO THE ACCOUNT OF THE VA RIOUS PARTIES AND OUT OF THE ABOVE PAYMENTS TAX HAS NOT BEEN DEDUCTED ON THE ABOVE STATED AMOUNT OF RS.3,22,40,175/ - .. SINCE THE ASSESSEE COMPANY ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 57 FAILED TO SUBMIT SATISFACTORY EXPLANATION THE AO DISALLOWED THE ABOVE BY INVOKING THE PROVISIONS OF SECTION 4 0(A)(IA). 16.2 . DRP FINDINGS THE DRP TOOK NOTE OF THE ABOVE FACTS. HAVING REGARD TO THE EVIDENCE ON RECORD THE AO IS DIRECTED TO IDENTIFY THE NATURE OF THE TRANSACTIONS AS GIVEN IN THE CHART AFTER VERIFYING THAT THE CHART IS BASED ON SEIZED MATERIAL S AND THE SPECIAL AUDITOR S REPORT. ITEMS WHICH DO NOT ATTRACT 40(A)(IA) SHALL BE EXCLUDED UPON THE VERIFICATION. SUBJECT TO THE ABOVE CONDITION, THE OBJECTION IS SUSTAINED. 16.3. FINAL ORDER BY AO: THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESS MENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS SUSTAINED THE OBJECTION OF THE ASSESSEE ON THIS ISSUE OBSERVING THAT, HAVING REGARD TO THE EVIDENCE ON RECORD THE A.O. IS DIRECTED TO IDENTIFY THE NATURE OF THE TRANSACTIONS AS GIVEN IN THE CHART AFTER VERIFYING THAT THE CHART IS BASED ON SEIZED MATERIALS AND THE SPECIAL AUDITOR S REPORT. ITEMS WHICH DO NOT ATTRACT 40(A)(IA) SHALL BE EXCLUDED UPON THE VERIFICATION. IN VIEW OF THE ABOVE, ADDITION OF RS.3,22,40,175/ - IS MADE TO THE INCOME OF THE ASSESSEE AFTER VERIFICATION OF RECORDS. 16.4. ASSESSEE S SUBMISSIONS : THE FINAL ASSESSMENT ORDER PASSED BY THE AO IS CONTRARY TO THE DIRECTION GIVEN BY THE DRP. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS ITSELF THE A SSESSEE HAS CLARIFIED THIS ISSUE VIDE LETTER DATED 2.11.2013 (PB PG. 1285 - 1286 ALONG WITH EVIDENCES AT PGS. 1287 - 1621) THAT THERE IS NO FAILURE TO DEDUCT TAX ON THIS AMOUNT. THE ASSESSEE HAS FURTHER SUBMITTED A DETAILED EXPLANATION PLACED AT PAPER BOOK PAG E 2732 - 2733 POINTING OUT THAT THESE AMOUNTS ARE NOT LIABLE FOR TDS. THIS ISSUE HASARISEN BECAUSE THE AGGREGATE AMOUNT OF CREDIT HAS BEEN PICKED UP FROM EACH OF THE LEDGER ACCOUNT WITHOUT LOOKING INTO THE NARRATION AND THE NATURE OF THE TRANSACTION WHILE V ERIFYING DEDUCTION OF TAX AT SOURCE. IN FACT OUT OF THIS AMOUNT TAX HAS BEEN DEDUCTED ON RS.1,59,65,555 AND TAX IS NOT DEDUCTIBLE ON BALANCE AMOUNT BECAUSE OF VARIOUS REASONS EXPLAINED HEREINAFTER . ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 58 (II) THE DETAILS OF EACH OF THESE ENTRIES WERE CLASS IFIED (PAPER BOOK PAGE 2732) AND WERE AS UNDER: - REASONS AMOUNT(RS) SUPPORTINGS CONSUMABLES/FIXED ASSETS 19,50,577 INVOICES TDS ALREADY DEDUCTED 1,59,65,555 FORM 16A, CHALLAN & 26Q DETAILS PAYMENT REVERSAL/ TRANSFER TO ADVANCE 97,46,420 VOUCHER(S) & D ETAILS REVERSAL OF INVOICE 62,45,233 VOUCHER(S) & DETAILS DEBIT NOTE REVERSAL 15,94,202 VOUCHER(S) & DETAILS NO TDS TO BE DEDUCTED (REIMBURSEMENTS) 6,56,320 VOUCHER(S) & DETAILS GROSS AMOUNT TAKEN BY AO FOR CORRECT TDS BUT NET AMOUNT IN CREDIT BALANCE OF PARTY SO DIFF - 39,18,3123 TOTAL 3,22,39,995 (III) COPIES OF THE SAME WERE ALSO FILED (PAPER BOOK PAGE 2733) AND COMPLETE DETAILS WITH LEDGER ACCOUNT WERE ALSO FILED AND PLACED AT PAPER BOOK PAGES 2734 - 3133. (IV) FIRSTLY THE ACTION OF THE AO IS CONTRARY TO THE DIRECTION OF THE DRP. (V) . SECONDLY THERE IS NO DEFAULT IN DEDUCTION OF TAX AT SOURCE ON THESE AMOUNTS TOTALING RS.3,22,39,995/ - . THE ASSESSEE HAS SUBMITTED COMPLETE DETAILS WITH EVIDENCES IN SUPPORT THEREOF BEFORE THE AO AS WE L L AS DRP . (VI) THE AO HAS NOT BEEN ABLE TO BRING ANY MATERIAL TO CONTRADICT THE EXPLANATION AND THE EVIDENCES ON RECORD. THERE ARE EVIDENCES ON RECORD THAT OUT OF THE ABOVE AMOUNT OF RS.3,22,39,935/ - TAX HAS BEEN DEDUCTED ON RS.1M59,65,555/ - FOR WHICH NECESSARY T DS CERTIFICATES AND CHALLANS ARE ALSO ON RECORD AND TDS IS NOT REQUIRED TO BE DEDUCTED ON THE REMAINING AMOUNT AS THE SAME REPRESENTS REVERSAL OF ENTRIES, DEBIT NOTES, ETC. THUS THE ENTIRE ADDITION ON THIS ACCOUNT HAS BEEN MADE ARBITRARILY IGNORING THE AB OVE FACTS AND EVIDENCES. THE DETAILED REPLY SUBMITTED BEFORE DRP (PB PG. 6492) ON THE BASIS OF WHICH DRP HAS GIVEN DIRECTION TO AO, HAS BEEN TOTALLY IGNORED BY THE AO WHILE FRAMING FINAL ASSESSMENT ORDER AT PAGE 61. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 59 16.5. REVENUE S SUBMISSIONS: LD. DR THAT CONSIDERING THE EXPLANATION GIVEN BY THE ASSESSEE BEFORE THE DRP AS WELL AS BEFORE THE ITAT THIS ASPECT LOOKS TO BE A FACTUAL ISSUE AND IN VIEW OF THE ANALYSIS GIVEN BY THE ASSESSEE AND THE SUPPORTING DOCUMENTS ATTACHED THERETO. THE LEARNED DR FURTHE R SUBMITTED THAT CONSIDERING THIS ANALYSIS AND THE EVIDENCE THE DRP HAS DIRECTED THE AO TO VERIFY THE SAME AND ALLOW THE CLAIM OF THE ASSESSEE. IT APPEARS THAT THE AO AT THE TIME OF PASSING THE FINAL ASSESSMENT ORDER HAS NOT TAKEN INTO CONSIDERATION THESE DIRECTIONS OF THE DRP. 16.6. OUR FINDINGS : HERE ALSO THE DIRECTIONS GIVEN BY THE DRP HAVE NOT BEEN FOLLOWED BY THE AO. THE FINAL ASSESSMENT ORDER PASSED BY THE AO CANNOT BE IN VIOLATION OF THE DIRECTIONS GIVEN BY THE DRP. THE ASSESSEE HAS EXPLAINED TH AT THERE IS NO DEFAULT ON ITS PART IN DEDUCTING TAX AT SOURCE AND HAS ALSO FILED DETAILS BEFORE THE AO AND THE DRP. WITH THE ASSISTANCE OF THE AR, WE HAVE VERIFIED THE DETAILS WITH THE SUPPORTING EVIDENCES. AS PER THE DETAILS ON RECORD AND EJVIDENCES IN SUPPORT THEREOF, THERE IS NO DEFAULT IN RESPECT OF THE AMOUNT ADDED BY THE AO. THE ASSESSEE HAS SUBMITTED COMPELTE RECONCILIATION AND THE REASON THEREOF. FURTHER, THE ASSESSEE S CONTENTIONS THAT TAX HAS BEEN DEDUCTED ON AN AMOUNT OF RS.1,59,65,555/ - AND ITS CONTENTION THAT TAX IS NOT DEDUCTIBLE ON THE BALANCE DUE TO VARIOUS REASONS, HAS NOT BEEN CONTRADICTED BY THE DR. UNDER THESE CIRCUMSTANCES WE DELETE THIS ADDITION OF RS.3,22,39,995 AND ALLOW THIS GROUND OF THE ASSESSEE. 17. GROUND NO.18 READ S AS FOLLOWS. 18(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN DISALLOWING AN AMOUNT OF RS. 51,59,380/ - ON ACCOUNT OF BONUS, INVOKING THE PROVISIONS OF THE SECTION 43B OF THE ACT. (II) THAT THE ABOVE SAID ADDITION HAS BEEN MADE BY THE AO DESPITE THE CLEAR DIRECTION BY THE DRP THAT THE ADDITION BE MADE ONLY TO THE EXTENT ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 60 OF RS.24,40,854/ - AS COMPUTED BY THE APPELLANT COMPANY AFTER VERIFICATION. (III) THAT THE LEARNED AO HAS ERRED IN MAKING THE ADDITIO N OF RS.51,59,380/ - IGNORING ALL THE DETAILS AVAILABLE ON RECORD ABOUT THE CORRECT AMOUNT OF RS.24,40,854/ - . 17.1. FACTS RELATING TO GROUND NO.18 ARE: - GROUND NO.18 IS REGARDING DISALLOWANCE OF RS.51,59,380/ - MADE BY THE AO IN RESPECT OF THE BONUS PAY ABLE BY INVOKING THE PROVISIONS OF SECTION 43B. AS PER THE AO A SUM OF RS.51,59,380/ - WAS NOT PAID BEFORE THE DUE DATE OF FILING THE RETURN AND ACCORDINGLY THE SAME WAS HIT BY THE PROVISIONS OF SECTION 43B WHEREBY DEDUCTION IN RESPECT OF THE BONUS IS TO B E ALLOWED ONLY ON PAYMENT BASIS AND IN CASE THE AMOUNT REMAINS OUTSTANDING, FURTHER DEDUCTION CAN BE ALLOWED IF SUCH BONUS IS PAID BEFORE THE DUE DATE OF FILING THE RETURN. 17.2. DRP FINDINGS THE DRP HAS CONSIDERED THE ABOVE SUBMISSION OF THE ASS ESSEE. THE DRP DIRECTS THE AO TO ALLOW THE CLAIM OF THE ASSESSEE U/S 43B AFTER PROPER VERIFICATION . 17.3. FINAL ORDER BY AO THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO.35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTI ONS DATED 29.08.2014 HAS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE U/S 43B OF THE ACT AFTER PROPER VERIFICATION. IN VIEW OF THIS, ADDITION OF RS.51,59,380 IS MADE TO THE INCOME OF THE ASSESSEE AFTER VERIFICATION FROM ASSESSMENT RECORD. 17.4 . ASS ESSEE S SUBMISSIONS ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 61 I . THE AO WITHOUT CARRYING OUT ANY VERIFICATION AS DIRECTED BY THE DRP AND WITHOUT LOOKING AT THE EXPLANATION OF THE ASSESSEE HAS CONFIRMED THE ENTIRE ADDITION OF RS.51,59,380. II . THE ABOVE ADDITION OF THE ENTIRE AMOUNT OF RS.51,59 ,380 IS NOT CORRECT. BEFORE THE DRP FOLLOWING EXPLANATION WAS GIVEN: - III . AS PER PROVISIONS OF SECTION 43B PAYMENT IN RESPECT OF BONUS IS ALLOWED ON PAYMENT BASIS. FURTHER IN CASE ANY PAYMENT IS MADE BEFORE THE DATE OF FILING THE RETURN THE BENEFIT OF T HE SAME IS ALLOWED. IN THIS CASE THERE WAS AN OPENING BALANCE OF RS.23,38,177 AS ON 1 ST APRIL, 2010. THE ABOVE SAID AMOUNT WAS ADDED BACK IN THE PRECEDING ASSESSMENT YEAR AS IS EVIDENT FROM THE ASSESSMENT ORDER FOR THAT YEAR. DURING THE YEAR THE ASSESSE E HAS MADE A PROVISION OF RS.64,02,422 ON ACCOUNT OF BONUS AND HAS MADE A TOTAL PAYMENT OF RS.39,57,707 BY 31 ST MARCH, 2011 WHICH INCLUDED PAYMENT IN RESPECT OF THE BONUS OF PRECEDING YEAR AND ADDED BACK. A FURTHER PAYMENT OF RS.4081 BEFORE THE DUE DATE OF FILING THE RETURN WAS MADE. DETAILS ARE PLACED AT PB PG. 2334 WITH LEDGER ACCOUNT OF BONUS PAYABLE AT PB PG. 2336 - 2350. ACCORDINGLY THE ASSESSEE COMPANY WILL BE ENTITLED TO THE DEDUCTION OF RS.39,61,768 (RS.39,57,707 + RS.4,081 BEING THE AMOUNT PAID BEFOR E THE DUE DATE OF FILING THE RETURN) AND HENCE DISALLOWANCE UNDER SECTION 43B IS TO BE RESTRICTED TO RS.24,40,854/ - AND NOT RS.51,59,380 MADE BY THE ASSESSING OFFICER. IV . IT WAS ON THIS BASIS THAT DRP HAS DIRECTED THE AO TO RESTRICT THE ADDITION TO RS.24, 40,850. ACCORDINGLY THE ACTION OF THE AO IN MAKING THE DISALLOWANCE OF RS.51,59,380 AS AGAINST CORRECT AMOUNT OF RS.24,40,854 IS NOT JUSTIFIED. ALL THE DETAILS IN THIS REGARD WERE BEFORE THE AO AS IS EVIDENT FROM PAPER BOOK PAGE 2334 WHEREBY THE AMOUNT P AID DURING THE YEAR WAS RS.39,57,707 AND A FURTHER PAYMENT OF RS.4081/ - HAS BEEN MADE BEFORE THE DUE DATE OF FILING THE RETURN. THUS THE TOTAL PAYMENT ELIGIBLE FOR DEDUCTION WERE RS.39,61,768 AND HENCE THE DISALLOWANCE HAS TO BE RESTRICTED TO RS.24,40,854 . 17.5. REVENUE S SUBMISSIONS : THE LEARNED DR IN THIS REGARD HAS SUBMITTED THAT ADMITTEDLY THE PROVISIONS OF SECTION 43B ARE APPLICABLE IN THE PRESENT CASE. HOWEVER, HE AGREED WITH THE CONTENTION OF THE ASSESSEE AS DIRECTED BY THE DRP THAT THE DISALLO WANCE UNDER SECTION 43B HAS TO BE WORKED OUT TAKING INTO CONSIDERATION THE PENDING AMOUNT OF THE BONUS PAYABLE ALSO. HE FURTHER SUBMITTED THAT THE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 62 EXPLANATION GIVEN BY THE ASSESSEE BEFORE THE DRP AS WELL AS THIS ITAT THAT IN VIEW OF THIS POSITION OF THE L AW THE ADDITION HAS TO BE RESTRICTED TO RS.24,40,854/ - . THIS IS FACTUAL ASPECT AND THAT IS WHY THE DRP HAS DIRECTED THE AO TO VERIFY THE SAME AND ALLOW THE DEDUCTION. 17.6 . OUR FINDINGS : THE AO HAS NOT BOTHERED TO CARRY OUT THE DIRECTIONS OF THE DRP. T HE CLAIM MADE BY THE ASSESSEE IS AS PER LAW. IT ONLY REQUIRED VERIFICATION OF THE FACTS AS SUBMITTED BY THE ASSESSEE. THIS IS NOT DONE BY THE AO. UNDER THESE CIRCUMSTANCES WE DELETE THE ADDITION AND SET ASIDE THE MATTER TO THE FILE OF THE AO . THE AO WI LL VERIFY THE CLAIM OF THE ASSESSEE AND WHETHER THE DISALLOWANCE HAS TO BE RESTRICTED TO RS.24,40,854/ - IS CORRECT OR NOT. IN THE RESULT THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 18. GROUND NO.19 READS AS FOLLOWS. 19(I) ON THE FACTS AND CIRCUMS TANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING AN ADDITION OF RS.2,37,11,754/ - ON ACCOUNT OF SUNDRY CREDITORS. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED IN IGNORING THE DIRECTION OF THE DRP THAT THERE APPEARS TO BE A MERIT ON THE FACTS IN THE CLAIM PRESSED BY THE APPELLANT COMPANY AND THE AO WAS DIRECTED TO CARRY OUT NECESSARY VERIFICATION AND RECONCILIATION ON THE LINES SUGGESTED BY THE APPELLANT COMPANY. (III) THAT IN ANY CASE THE ADDITION MADE BY THE LEARNED AO WITHOUT GIVING ANY REASONS AND JUSTIFICATION FOR REJECTING THE EXPLANATION AND EVIDENCES SUBMITTED BY THE APPELLANT COMPANY WHICH SUPPORT THE CONTENTION OF THE APPELLANT COMPANY BEYOND DOUBT IS UNTENABLE. 1 8 .1 . FACTS RELATING TO TH IS GROUND ARE THAT: GROUND NO. 19 IS REGARDING ADDITION OF RS.2,37,11,754/ - MADE BY THE AO ON ACCOUNT OF THE DIFFERENCE AS PER THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND THE BALANCE AS PER THE BOOKS OF ACCOUNTS OF THE CREDITORS. DURING THE COURSE OF THE A SSESSMENT THE AO ISSUED NOTICE UNDER SECTION 133(6) TO THE VARIOUS PARTIES WITH WHOM THE ASSESSEE WAS HAVING DEALING. IN RESPECT OF THE FOLLOWING THREE CREDITORS THE AO NOTICED DIFFERENCE IN THE BALANCE AS PER THE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 63 BOOKS OF ACCOUNTS OF THE ASSESSEE AND THE BALANCE AS PER THE BOOKS OF ACCOUNTS OF THESE CREDITORS: - S.NO. NAME BALANCE AS PER PARTY BALANCE AS PER YOUR BOOKS DIFFERENCE 1. M/S. CARGO PLANNERS 2283232 20095752 17812520 2. M/S. DESIGN HORIZON, NARAINA - 1135398 1135398 3. M/S. SHYAM TELECOM LTD. 1993845 6757681 4763836 TOTAL 2,37,11,754 14.1 THE AO THEREAFTER ISSUED A SHOW CAUSE NOTICE TO FILE CONFIRMATION S FROM THESE CREDITORS. THE CONFIRMATIONS FILED BY THE ASSESSEE WERE REJECTED BY THE AO ON THE GROUND THAT THE SAME DID NOT BEAR THE PAN O R ANY OTHER PROOF WHICH CAN CERTIFY THE GENUINENESS AND IDENTITY OF THE PARTIES AND ACCORDINGLY THE AO MADE THE ABOVE ADDITION OF RS.2,37,11,754/ - . 18.2 . DRP FINDINGS THE FACTS PRESENTED BY THE APPELLANT WERE CONSIDERED BY US. THERE APPEARS TO BE MER IT ON FACTS IN THE CLAIM PRESSED BY THE APPELLANT. THE VERIFICATION AND RECONCILIATION WERE NOT PROPERLY DONE BY THE AO GIVING SCOPE FOR RECONSIDERATION OF THE CLAIM. ACCORDINGLY THE DRP IS OF THE CONSIDERED VIEW THAT THE ISSUE OF DISCREPANCY IN THE THREE ACCOUNTS MENTIONED ABOVE NEED TO BE GIVEN A RELOOK BY THE AO BY CARRYING OUT THE NECESSARY VERIFICATION AND RECONCILIATION ON THE LINES SUGGESTED HEREINABOVE BY THE APPELLANT. THE OBJECTION STANDS ALLOWED FOR STATISTICAL PURPOSES . 18.3. FINAL ORDER B Y AO THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS ALLOWED THE OBJECTION OF THE ASSESSEE ON THIS ISSUE FOR STATISTICAL PURPOSES OBSERVING THAT, THE DRP IS OF THE CONSIDERED VIEW THAT THE ISSUE OF DISCREPANCY IN THE THREE ACCOUNTS MENTIONED ABOVE NEED TO BE GIVEN A RELOOK BY THE A.O. BY CARRYING OUT THE NECESSARY VERIFICATION AND RECONCILIATION ON THE LINES SUGGESTED HEREINABOVE BY THE APPELLANT . ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 64 THE OBJECTIO NS OF ASSESSEE FILED BEFORE THE DRP WERE DULY CONSIDERED AND WAS FOUND THAT TOTAL DISALLOWANCE WAS RIGHTLY PROPOSED VIDE THE DRAFT ASSESSMENT ORDER. IN VIEW OF THIS, ADDITION OF RS.237,11,754 IS MADE TO THE INCOME OF THE ASSESSEE. 18.4 . ASSESSEE S S UBMISSIONS: I . THE AO HAS TOTALLY IGNORED THE FACTS AND THE EVIDENCES. NO REASONING HAS BEEN GIVEN BY THE AO FOR REJECTION THE EXPLANATION. THE DRP HAS CATEGORICALLY DIRECTED THE AO FOR CARRYING OUT A RECONCILIATION AND VERIFICATION. II . THE ASSESSEE HAS SUBMITTED THE EXPLANATION BEFORE THE AO VIDE LETTER DATED 8.11.2013 PLACED AT PAPER BOOK PAGE 2034 AS WELL AS VIDE LETTER DATED 11.11.2013 PLACED AT PAPER BOOK PAGE 2096 AND ANOTHER LETTER DATED 11.11.2013 PLACED AT PAPER BOOK PAGE 2123 GIVING CLARIFIC ATIONS FOR EACH OF THE ACCOUNTS. COPY OF NOTE ON RECONCILIATION OF EACH OF THESE PARTIES IS PLACED AT PAPER BOOK PAGE 2410 AND THE NECESSARY DETAILS WITH COPY OF ACCOUNT ARE AT PAPER BOOK PAGES 2411 - 2731. ALL THESE DOCUMENTS WERE BEFORE THE AO. THUS THE ADDITION MADE BY THE AO ARE ARBITRARY AND AGAINST THE FACTS AND EVIDENCES ON RECORD. III . IN THIS REGARD IT IS SUBMITTED THAT THERE ARE FACTUAL ERRORS IN THE CASE OF M/S CARGO PLANNERS. THE CORRECT AMOUNT IN THE CASE OF CARGO PLANNERS AS PER PARTY S ACCO UNT IS RS.2,28,30,232/ - (PB PG. 2505) AND NOT RS.22,83,232/ - AS STATED IN THE ASSESSMENT ORDER. THE BALANCE AS PER ASSESSEE S BOOKS OF ACCOUNT IS RS.2,00,95,752/ - . THE DIFFERENCE IS ON ACCOUNT OF THE BILLS RAISED BY M/S CARGO PLANNERS WHICH HAVE BEEN ACC OUNTED FOR BY THE ASSESSEE IN THE NEXT YEAR. THE RECONCILIATION STATEMENT IS AT PB PG. 2415. COPY OF ACCOUNT OF THE CARGO PLANNERS AS WELL COPIES OF ACCOUNT IN THE BOOKS OF THE ASSESSEE FOR BOTH THESE YEARS ARE AT PB PGS. 2506 - 2690. THUS, THE ACCOUNT W ITH THE CREDITOR STANDS FULLY RECONCILED AND THE AO WAS NOT JUSTIFIED IN IGNORING THE SAME DESPITE DRP DIRECTION AND HENCE THE ADDITION MADE BY THE AO ON THIS ACCOUNT IS UNTENABLE. IV . AS REGARDS M/S DESIGN HORIZON THERE IS A DIFFERENCE OF RS.11,35,395/ - THIS DIFFERENCE WAS BECAUSE ASSESSEE HAS ISSUED TWO CHEQUES AS UNDER: - ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 65 I ) CHEQUE NO. 953508 RS. 6,23,118/ - II) CHEQUE NO. 428951 RS. 5,12,279/ - __________ TOTAL RS.11,35,397/ - THESE CHEQUES WERE NOT PRESENTED BY THE PARTY A ND BECAME STALE AND ACCORDINGLY THE AMOUNT WAS REVERSED IN THE BOOKS OF ACCOUNT AS ON 31 ST MARCH AS IS EVIDENT FROM COPY OF ACCOUNT. M/S DESIGN HORIZON HAS NOT REVERSED THESE CHEQUES IN THEIR BOOKS. THESE CHEQUES WERE AGAIN ISSUED BY THE ASSESSEE IN THE SUBSEQUENT YEAR AS IS EVIDENT FROM THE STATEMENT OF ACCOUNT FOR THE FINANCIAL YEAR 2011 - 12. THUS THERE IS NO DIFFERENCE WHICH NEEDS ANY ADDITION ON THIS ACCOUNT. CONFIRMATION FROM DESIGN HORIZON, REGARDING THIS TRANSACTION IS AT PB PG.NO. 2692. THUS, THE ACCOUNT WITH THE CREDITOR STANDS FULLY RECONCILED AND THE AO WAS NOT JUSTIFIED IN IGNORING THE SAME DESPITE DRP DIRECTION AND HENCE THE ADDITION MADE BY THE AO ON THIS ACCOUNT IS UNTENABLE. V . IN THE CASE OF THE THIRD PARTY, M/S SHYAM TELECOM LTD. THERE I S NO DIFFERENCE IN THE BALANCE IN THE LEDGER A/C. THE LD. AO HAS WRONGLY TAKEN THE BALANCE AS PER THE BOOKS OF ASSESSEE AS RS.67,57,681/ - AS AGAINST THE CORRECT BALANCE OF RS. 19,93,845/ - . COPY OF CONFIRMED LEDGER A/C OF THE ASSESSEE IN THE BOOKS OF PARTY IS AT PB PG. NO.2412 - 2414 . THUS, THE ACCOUNT WITH THE CREDITOR STANDS FULLY RECONCILED AND THE AO WAS NOT JUSTIFIED IN IGNORING THE SAME DESPITE DRP DIRECTION AND HENCE THE ADDITION MADE BY THE AO ON THIS ACCOUNT IS UNTENABLE. VI . THE AO HAS TOTALLY IGNORED THE EXPLANATION GIVEN BEFORE THE DRP AT PB PG. 6420 - 6422. 18.5. REVENUE S SUBMISSIONS : IT WAS CONTENDED BY THE LEARNED DR THAT DURING THE COURSE OF THE ASSESSMENT, THE AO HAS ISSUED NOTICE UNDER SECTION 133(6) AND HE HAS NOTICED THE DIFFERE NCE IN THE BALANCES AS PER THE BOOKS OF ACCOUNT OF THE ASSESSEE AND THE BALANCES AS PER THE ACCOUNT OF THESE CREDITORS. THE ASSESSEE DURING ASSESSMENT HAS CLAIMED TO HAVE EXPLAINED THESE DIFFERENCES AND THAT IS WHY AN ADDITION WAS MADE IN THE DRAFT ASSESS MENT ORDER. IT WAS FURTHER SUBMITTED BY THE LEARNED DR THAT IT APPEARS FROM THE PAPER BOOK ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 66 AND THE ORDER OF THE DRP THAT ASSESSEE HAS SUBMITTED AN EXPLANATION ALONG WITH LEDGER ACCOUNT OF THE RESPECTIVE PARTIES POINTING OUT THE ERROR IN THE NOTING MADE BY THE AO. FURTHER ASSESSEE HAS ALSO FILED RECONCILIATION ALONG WITH SUPPORTING DOCUMENTS. CONSIDERING THESE THE DRP HAS OBSERVED THAT THERE APPEARS TO BE MERIT IN THE FACTS OF THE CLAIM PRESSED BY THE APPELLANT AND DIRECTED THE AO TO CONSIDER THE DISCREPA NCY IN THE THREE ACCOUNTS AS POINTED OUT BY THE ASSESSEE. THE AO IT APPEARS FROM THE FINAL ASSESSMENT ORDER HAS NOT CARRIED OUT THE VERIFICATION AS DIRECTED BY THE DRP AND THAT IS WHY HE HAS MADE THE ADDITION IN THE FINAL ASSESSMENT ORDER. 18.6 . O UR FINDINGS: THIS ADDITION HAS BEEN MADE BY THE AO ON MERE SURMISES WITHOUT VERIFYING THE EXPLANATIONS AND EVIDENCES FILED BY THE ASSESSEE. MERELY BECAUSE THERE ARE CERTAIN VARIATIONS IN RECONCILIATION ON ACCOUNTS WITH THREE PARTIES, VARIATIONS ARE TREATE D AS INCOME. THE ASSESSEE HAS PLACED A COPY OF A NOTE GIVING RECONCILIATIONS ON ACCOUNTS WITH THESE PARTIES AT APGE 2410 OF THE PAPER BOOK. IT IS ALSO CLAIMED THAT THERE ARE FACTUAL ERRORS IN THE CASE OF CARGO PLANNERS AND AS PER PARTY ACCOUNT IT IS RS.2 ,28,30,232/ - AND NOT RS.22,83,232/ - AS MENTIONED IN THE ASSESSMENT ORDER. SUCH SILLY TYPE OF MISTAKES HAVE BEEN MADE A BASIS FOR THE ADDITION, WITHOUT CONSIDERING THE SUBMISSIONS OF THE ASSESSEE. AS THE ACCOUNTS STAND FULLY RECONCILED, WE ARE OF THE CONS IDERED OPINION THAT NO ADDITION CAN BE SUSTAINED ON THIS GROUND. THUS WE DELETE THE ADDITION AND ALLOW THIS GROUND OF THE ASSESSEE. 19 . GROUND NO.20 READS AS FOLLOWS. 20. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FAC TS AND IN LAW, IN MAKING ADDITION OF AN AMOUNT OF RS.5,21,025/ - INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. 20 . FACTS RELATING TO THIS GROUND ARE THAT: IN GROUND NO.20 ASSESSEE IS CHALLENGING THE ADDITION OF RS.5,21,025/ - MADE BY THE AO BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. AS PER THE AO, ASSESSEE HAS AN AVERAGE INVESTMENT OF RS.10,62,45,000/ - AND BY INVOKING THE PROVISIONS OF SECTION 14A READ ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 67 WITH RULE 8D, THE AO COMPUTED DISALLOWANCE OF RS.5,31,225/ - IGNORING THE CON TENTION OF THE ASSESSEE THAT NO DISALLOWANCE UNDER SECTION 14A IS REQUIRED AS THERE WAS NO ACTIVITY DURING THE YEAR AND THESE INVESTMENTS ARE MAINLY IN THE SUBSIDIARY COMPANY. THE AO, HOWEVER, WAS NOT SATISFIED WITH THE ABOVE EXPLANATION AND MADE A DISALL OWANCE OF RS.5,31,225/ - BY INVOKING RULE 8D. 15.1 AGGRIEVED BY THE ORDER OF THE AO ASSESSEE FILED OBJECTION IN THE DRP WHEREBY IT WAS CONTENDED THAT FIRSTLY THE CALCULATION DONE BY THE AO OF AVERAGE INVESTMENT IS NOT CORRECT AS IT HAS INCLUDED TAXABLE IN VESTMENT ALSO. FURTHER IT WAS SUBMITTED THAT NO DISALLOWANCE IS CALLED FOR IN VIEW OF THE FACT THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO SUCH INVESTMENT WHICH BY AND LARGE ARE IN THE SUBSIDIARY COMPANY. THE DRP, HOWEVER, DID NOT AGREE WITH THE CONTENTION OF THE ASSESSEE COMPANY THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO SUCH INVESTMENTS. HOWEVER, DRP AGREED TO THE CONTENTION OF THE ASSESSEE COMPANY REGARDING ERROR IN THE AVERAGE INVESTMENT AND CONSEQUENTLY DIRECTED THE AO TO RECTIFY THE CALCULATION ERROR. 20. 1 . DRP FINDINGS THE DRP CONSIDERED THE CLAIM OF THE ASSESS :E IN THE LIGHT OF THE PROVISIONS U/S 14A OF THE ACT. UPON MERITORIOUS CONSIDERATION THE DRP IS OF THE FIRM VIEW THAT THE AO NEEDS TO RECTIFY THE CALCULATION ERROR I N THE COMPUTATION OF THE DISALLOWANCE U/S 14A OF ACT. THE AMOUNT OF DISALLOWANCE OF RS. 5,21,025/ - IS SUSTAINED. ACCORDINGLY THE OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED. 20.2 . FINAL ORDER BY AO THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMEN T ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS SUSTAINED THE DISALLOWANCE TO EXTENT OF RS.5,21,025/ - AND HAS DIRECTED TO RECTIFY THE CALCULATION ERROR IN THE COMPUTATION OF THE DISALLOWANCE U/S 14A OF THE ACT. 20.3. ASSESSEE S SUBMISSIONS : THE ASSESSEE HAS MADE INVESTMENT IN THE PRECEDING YEAR IN ITS SUBSIDIARY COMPANY. THERE HAS BEEN NO TRANSACTION DURING THE YEAR AND HENCE THE DISALLOWANCE COMPUTED ON THE BASIS OF 0.5% OF THE INVESTMENT IS NOT JUSTIFIED AND AGAINST THE FACTS. THE ASSESSEE COMPANY IN FACT HAS INCURRED NO EXPENDITURE DURING THE YEAR AS THERE WAS NO ACTIVITY ON ACCOUNT OF ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 68 INVESTMENT. HOWEVER, CONSIDERING THE SMALL AMOUNT INVOLVED, THIS GROUND IS NOT BEING PRESSED WITH A REQUEST THAT THE IS SUE OF DISALLOWANCE ON THIS ACCOUNT UNDER SECTION 14A BE KEPT OPEN IN OTHER YEARS 20.4. REVENUE S SUBMISSIONS : LD.D.R. SUBMITTED THAT IN VIEW OF THE SUBMISSION MADE BY THE COUNSEL OF THE ASSESSEE COMPANY WHEREBY THIS GROUND HAS NOT BEEN PRESSED CONSID ERING THE SMALL AMOUNT INVOLVED THE DR SUBMITTED THAT HE HAS NO FURTHER SUBMISSION TO MAKE ON THIS ISSUE. 20.5. OUR FINDINGS: THIS GROUND IS ON THE ISSUE OF DISALLOWANCE U/S 14A. IN VIEW OF THE SUBMISSION MADE BY THE LEARNED AR FOR NOT PRESSING THI S GROUND, THIS GROUND IS DISMISSED WITH LIBERTY TO THE ASSESSEE THAT THE ISSUE OF DISALLOWANCE UNDER SECTION 14A TO BE KEPT OPEN IN OTHER YEARS. 21 . GROUND NO.21 READS AS FOLLOWS: 21 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERR ED, BOTH ON FACTS AND IN LAW, IN MAKING ADDITION OF AN AMOUNT OF RS. 1,18,63,125/ - ON ACCOUNT OF SHORTAGE OF MOBILE PHONES. (II) THAT THE ADDITION HAS BEEN MADE REJECTING THE EXPLANATION AND EVIDENCES BROUGHT ON RECORD BY THE ASSESSEE. (III) WITHOUT P REJUDICE TO THE ABOVE ADDITION HAS BEEN MADE MOST ARBITRARILY ESTIMATING THE COST OF MOBILE PHONE @ RS. 3,000/ - WITHOUT THERE BEING ANY BASIS FOR THE SAME. 21.1. FACTS RELATING TO THIS GROUND ARE THAT: IN GROUND NO.21 THE ASSESSEE AGITATING THE ADDITION OF RS.1,18,63,125/ - . DURING THE COURSE OF THE SEARCH A PHYSICAL INVENTORY OF THE MOBILE SETS WAS PREPARED. AS PER THIS PHYSICAL INVENTORY PREPARED, THE TOTAL NUMBER OF HANDSETS FOUND WAS 122287. AS PER THE BOOKS OF ACCOUNT THE STOCK OF INVENTORY WAS FOU ND TO BE 125412. THUS THERE WAS A SHORTAGE OF 3125 MOBILE HANDSETS. THE ASSESSEE WAS ASKED TO RECONCILE THE DIFFERENCE. THE AO NOT BEING SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE HAS HELD ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 69 THAT THE ASSESSEE HAS SOLD OUT THESE MOBILE PHONES OUT SIDE THE BOOKS OF ACCOUNTS. THE AO ESTIMATED THAT THE COST OF SUCH MOBILE PHONES AT RS.3,000/ - AND WORKED OUT THE TOTAL COST OF 3125 MOBILE PHONES AT RS.93,75,000/ - . THE AO APPLYING GROSS PROFIT RATE OF 26.54% ON THIS AMOUNT FURTHER ESTIMATED PROFIT OF R S.24,88,125/ - ON THE SALE OF SUCH MOBILE PHONES AND ACCORDINGLY MADE ADDITION OF RS.1,18,63,125/ - . 2 1 .2. DRP FINDINGS : TH E ABOVE CONTENTIONS OF THE APPELLANT WERE CONSIDERED VIS - A - VIS THOSE OF THE AO. TIE DRP IS OF THE CONSIDERED VIEW THAT THE FAIL URE OF THE APPELLANT TO RECONCILE HE DIFFERENCE DURING SEARCH AND POST SEARCH PROCEEDINGS AMOUNTED TO CONCEALMENT OF FACTS. IT IS TOO LATE TO TAKE SUCH A PLEA. THE RECONCILIATION CAN ONLY BE REGARDED AS AN AFTER - THOUGHT. ACCORDINGLY THE OBJECTION OF THE AP PELLANT S OVER RULED. 21.3. FINAL ORDER BY AO : THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS OVER RULED THE OBJECTION OF THE ASSESSEE ON THIS ISSUE . IN VIEW OF THIS, ADDITION OF RS.118,63,125 IS MADE TO THE INCOME OF THE ASSESSEE. 21.4. ASSESSEE S SUBMISSIONS : I . THE ADDITION HAS BEEN MADE BY THE AO AND CONFIRMED BY DRP IGNORING THE FACTS AND THE EXPLANATION. II . DURING THE COURSE OF POST - SEARCH PROCEEDINGS VIDE LETTER DATED 8.4.2011 (PAPER BOOK PAGE 441) THE RECONCILIATION OF STOCK PHYSICALLY FOUND WAS SUBMITTED. THESE DETAILS ARE AT PAPER BOOK PAGES 442 - 459. III . VIDE LETTER DATED 16.5.2011 ADDRESSED TO THE DY. DIRECTOR OF INCOME TAX (INV.) (P APER BOOK PAGE 436) THE ASSESSEE ALSO SUBMITTED THE DETAILS OF THE STOCK TRANSFER. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 70 IV . IT ALSO SUBMITTED THE DETAILS OF SALES MATERIAL OUTWARD REGISTER, MATERIAL INWARD REGISTER, ETC. V . VIDE LETTER DATED 9.1.2013 (PAPER BOOK PAGE 440) ASSESSEE SUBMITTE D THE RECONCILIATION OF THE STOCK PHYSICALLY FOUND WITH STOCK REGISTER TO THE AO. VI . IN RESPONSE TO THE SHOW CAUSE NOTICE ISSUED BY THE AO, VIDE LETTER DATED 1.11.2013 (PAPER BOOK PAGE 1258), THE ASSESSEE AGAIN SUBMITTED THE EXPLANATION REGARDING THE DIF FERENCE IN THE STOCK PHYSICALLY FOUND AND THE STOCK AS PER THE STOCK REGISTER ALONG WITH EVIDENCES PLACED AT PAPER BOOK PAGES 1262 - 1284. VII . THUS THE ALLEGATION OF THE AO THAT THE EXPLANATION SUBMITTED BY THE ASSESSEE IS NOT SUPPORTED BY ANY RECONCILIATIO N WITH CORRESPONDING REFLECTION IN THE BOOKS OF ACCOUNT IS INCORRECT. AS EXPLAINED ABOVE, ASSESSEE HAS SUBMITTED DETAILED REPLY WITH EVIDENCES. VIII . THE ALLEGATION OF THE AO THAT THE ASSESSEE HAS NOT SUBMITTED THE COST OF THE MOBILE PHONES IS ALSO INCORRECT BECAUSE COMPLETE BOOKS OF ACCOUNT WITH PURCHASE INVOICES WERE BEFORE THE AO. IX . THE AO HAS GONE WRONG IN TAKING THE VALUE OF MOBILE HANDSET AT RS.3000 PER HANDSET AND ADDING GROSS PROFIT OF 26.54% THEREON IGNORING THE FACT THAT AVERAGE SALE PR ICE OF THE MOBILE HANDSET SOLD BY THE COMPANY (WHICH INCLUDED GROSS PROFIT ALSO) AS PER THE QUANTITATIVE SCHEDULE 23 ATTACHED TO THE AUDITED BALANCE SHEET (PAPER BOOK PAGE 31) COMES TO RS.1997/ - . THE TOTAL HANDSETS SOLD DURING THE YEAR WAS 1,10,92,239 FOR A CONSIDERATION OF RS.2216.57 CRORES GIVING AN AVERAGE SALE CONSIDERATION OF RS.1997/ - . THIS FIGURE HAS ALSO BEEN ENDORSED BY THE SPECIAL AUDITOR IN ITS REPORT WHEREBY HE HAS GIVEN THE QUANTITATIVE DETAILS OF THE MOBILE PHONES SOLD DURING THE YEAR AT 1,1 0,92,239 (PAPER BOOK PAGE 4931). X . THE ADDITION IS OTHERWISE UNTENABLE ON ACCOUNT OF THE SHORTAGE OF PHYSICAL STOCK. IT IS NOT THE CASE OF EXCESS STOCK FOUND DURING THE COURSE OF THE SEARCH. THE SHORTAGE OF 3125 MOBILE HANDSETS (0.028%) IN A BUSINESS WH ERE THE QUANTITY SOLD DURING THE YEAR IS 1,10,92,239 IS NOT VERY MUCH. THE TOTAL INVENTORY COMPUTED WAS ALSO 1,22,287 AT DIFFERENT LOCATIONS. XI . FURTHER THERE CAN ALWAYS BE AN ERROR IN TAKING PHYSICAL INVENTORY SPREAD OVER AT VARIOUS LOCATIONS AT TH E TIME OF THE SEARCH. THERE CAN ALSO BE A SHORTAGE DURING THE PHYSICAL MOMENT OF THE STOCKS. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 71 XII . SUCH SHORTAGE IS NORMAL IN SUCH A HUGE BUSINESS. XIII . IT CANNOT BE ASSUMED WITHOUT THERE BEING ANY MATERIAL OR EVIDENCE THAT ASSESSEE HAS SOLD THE SE MOBILE HANDSETS OUTSIDE THE BOOKS OF ACCOUNT PARTICULARLY KEEPING IN VIEW THE FACT THAT A SEARCH HAS BEEN CARRIED OUT AND DURING THE COURSE OF THE SEARCH AND NOT A SINGLE PIECE OF PAPER OR EVIDENCE WAS FOUND SHOWING ANY SALE OUTSIDE THE BOOKS OF ACCOUNT . XIV . THE ASSESSEE HAS MAINTAINED COMPLETE STOCK RECORD. XV . THE ADDITION HAS BEEN MADE BY THE AO AND CONFIRMED BY THE DRP IGNORING THE DETAILED EXPLANATION AT PB PGS. 6508 - 6510.THE ADDITION IS BASED ON SURMISES AND CONJECTURE WITHOUT THERE BEIN G ANY EVIDENCE OR MATERIAL ON RECORD AGAINST THE ASSESSEE. 2 1 . 5 . REVENUE S SUBMISSIONS : IT WAS SUBMITTED BY THE LEARNED DR THAT THE AO WAS JUSTIFIED IN DRAWING ADVERSE INFERENCE AS ASSESSEE HAS FAILED TO RECONCILE THE DIFFERENCE IN THE PHYSICAL STOC K FOUND AT THE TIME OF THE SEARCH AND THE ACTUAL STOCK AS PER THE BOOKS OF ACCOUNT. AS REGARDS THE EXPLANATION OF THE ASSESSEE THAT THE ASSESSEE HAS SUBMITTED RECONCILIATION ALONG WITH EVIDENCES THE LEARNED DR SUBMITTED THAT ALL THESE EXPLANATION AND EVI DENCES HAVE BEEN DULY CONSIDERED BY THE AO AS WELL AS DRP AND ON BEING FOUND UNSATISFACTORY THE ADDITION HAS BEEN MADE. HE FURTHER SUBMITTED THAT NO EVIDENCE WAS FOUND DURING THE COURSE OF THE SEARCH OF ANY SALE OR PURCHASE BEING MADE OUTSIDE THE BOOKS OF ACCOUNT BUT THE FACT REMAINS THAT THERE WAS A DIFFERENCE IN THE STOCK AS PER THE BOOKS OF ACCOUNT AND THE STOCK PHYSICALLY FOUND. AS REGARDS THE CONTENTION OF THE ASSESSEE THAT THE DIFFERENCE IN ANY CASE IS TOO MINISCULE, CONSIDERING THE FACT THAT THE ST OCK WHICH WAS PHYSICALLY COUNTED WAS SPREAD OVER AT MANY LOCATIONS IT WAS SUBMITTED BY THE LEARNED DR THAT IT IS THE DUTY OF THE ASSESSEE TO GIVE RECONCILIATION OF EACH AND EVERY DIFFERENCE AND BENEFIT OF SUCH ERROR OR DISCREPANCY CANNOT BE GIVEN WHILE DET ERMINING TAXABLE INCOME. 2 1 . 6 . OUR FINDINGS ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 72 T HE ASSESSEE HAS FILED A RECONCILIATION STATEMENT, RECONCILING THE STOCK PHYSICALLY FOUND, DURING THE POST SEARCH PROCEEDINGS, BEFORE THE DY.DIRECTOR OF INCOME TAX (INVESTIGATION) VIDE LETTER DT. 8.11.2 011 AND 16.5.2011. THIS EXPLANATION WAS AGAIN REPEATED BEFORE THE AO ON 1.11.2013. WE HAVE PERUSED THE DETAILED REPLY AS WELL AS THE CONNECTED PAPERS. IN OUR VIEW THE REVENUE AUTHORITIES HAVE NOT BESTOWED ANY ATTENTION TO THE EXPLANATION GIVEN BY THE A SSESSEE. THERE IS NO EVIDENCE WHATSOEVER FOUND DURING THE COURSE OF SEARCH OF THE ASSESSEE HAVING SOLD STOCK OUTSIDE THE BOOKS OF ACCOUNTS. WE FURTHER NOTE THAT THE TOTAL SHORTAGE OF MOBILE PHONES IS OF 3125 HANDSETS. THE TOTAL QUANTITY SOLD DURING TH E YEAR BY THE ASSESSEE IS 1,01,92,239. FURTHER, THE INVENTORY AT THE TIME OF THE SEARCH WAS COUNTED AT 122,287 AT DIFFERENT LOCATIONS. CONSIDERING THIS VOLUME OF BUSINESS, THE NUMBER OF MOBILE PHONES FOUND SHORT ARE NOT SIGNIFICANT. FURTHER THIS SHORTA GE IN OUR VIEW IS NORMAL IN SUCH VOLUMES FOR VARIOUS REASONS SUCH AS ERROR IN TAKING PHYSICAL INVENTORY, MOVEMENT OF STOCKS, ETC. UNDER THESE CIRCUMSTANCES WE DELETE THIS ADDITION OF RS.1,18,63,125 AND ALLOW THIS GROUND OF THE ASSESSEE. 22 . GROUND NO.22 READS AS FOLLOWS. 22 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING ADDITION OF AN AMOUNT OF RS. 7,44,24,668/ - ON ACCOUNT OF ENTRIES APPEARING IN HSBC A/C NO 05441758900 AT GURGAON. (II) THAT THE ABOVE ADDITION HAS BEEN MADE IGNORING THE FACT THAT THE SAID BANK ACCOUNT IS PROPERLY DISCLOSED IN THE BOOKS OF THE ASSESSEE AND AS SUCH EACH & EVERY ENTRY OF THIS BANK ACCOUNT HAVING BEEN TAKEN INTO ACCOUNT. (III) ON THE FACTS AND CIRCUMSTANCES OF TH E CASE, THE DRP HAS ERRED IN NOT DELETING THE ABOVE ADDITION PROPOSED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER DESPITE THE FACT THAT EACH AND EVERY ISSUE RAISED BY THE LEARNED AO IN THE DRAFT ASSESSMENT ORDER AND THE SPECIAL AUDIT REPORT HAS BEEN RE BUTTED WITH EXPLANATION AND EVIDENCES BEYOND DOUBT . 22.1 . FACTS RELATING TO THIS GROUND ARE THAT: ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 73 IN GROUND NO.22 ASSESSEE IS AGITATING ADDITION OF RS.7,44,24,668/ - MADE BY THE AO ON ACCOUNT OF THE TOTAL DEBITS IN HSBC ACCOUNT. AS PER THE ASSESSM ENT ORDER ASSESSEE WAS ASKED TO SUBMIT DETAILS OF THE DEBIT/CREDIT ENTRIES IN RESPECT OF HSBC ACCOUNT ALONGWITH DOCUMENTARY EVIDENCE OF THE DEPOSITS/ WITHDRAWAL AND FIXED DEPOSITS. IT IS ALLEGED IN THE ASSESSMENT ORDER THAT ASSESSEE HAS FAILED TO SUBMIT T HE SUPPORTING DOCUMENTS OF THE TRANSACTIONS STATED IN THE BANK ACCOUNT AND ON THAT BASIS THE AO DREW ADVERSE INFERENCE AND MADE THE ABOVE SAID ADDITION OF RS.7,44,24,668/ - BEING THE TOTAL DEBIT BALANCE IN THE SAID ACCOUNT. 22.2 . DRP FINDINGS THE VARI OUS ARGUMENTS OF THE AO WERE DULY CONSIDERED. UPON A BALANCED VIEW OF THE FACTS THE DRP IS OF THE CONSIDERED VIEW THAT THE AO WAS TOTALLY UNJUSTIFIED IN ADDING BACK EVEN PAYMENTS MADE FOR PURCHASES BANK CHARGES, L/C CHANGES AND TDS. THEREFORE THE AO SHALL REFER TO THE SPECIAL AUDITOR'S REPORT ONCE AGAIN AND FIND OUT THE INCRIMINATING ENTRIES. THE AMOUNT OF RS.4.27 CRORES IS DELETED SUBJECT TO PROPER VERIFICATION BY THE AO. THE REMAINING ADDITION ON THIS ACCOUNT IS UPHELD. 22.3. FINAL ORDER BY AO: T HE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS PARTLY ALLOWED THE OBJECTION OF THE ASSESSEE ON THIS ISSUE OBSERVING THAT, THE AMOUNT OF RS.4.27 CRORE IS DELETED SUBJECT TO PROPER VERIFICATION BY THE A.O. THE REMAINING ADDITION ON THIS ACCOUNT IS UPHELD . 22.4. ASSESSEE S SUBMISSIONS : I . IN THE FINAL ASSESSMENT ORDER (PAGE 73 - 74), THE AO AFTER RECORDING THE DIRECTION OF THE DRP HAS HELD THAT ASSESSEE HAS NOT S UBMITTED ANY RECONCILIATION AND DOCUMENTARY EVIDENCES IN THE ASSESSMENT PROCEEDINGS AND HAS MADE AGAIN THE TOTAL ADDITION OF RS.7,44,24,668. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 74 II . THE OBSERVATION OF THE AO IN THE DRAFT ASSESSMENT ORDER, FINDING OF THE DRP AND THE OBSERVATION OF THE AO IN THE FINAL ASSESSMENT ORDER ARE FACTUALLY INCORRECT AND IN TOTAL DISREGARD TO THE FACTS ALREADY ON RECORD. III . THE ALLEGATION OF THE AO, AS STATED IN PARA 6 OF THE FINAL ASSESSMENT ORDER, WHEREBY THE AO HAS STATED THAT THE REPLY DATED 7.11.2013 WAS FU RNISHED BUT NO SUPPORTING DOCUMENTS WERE SUBMITTED. IN THIS REGARD IT IS SUBMITTED THAT VIDE QUESTIONNAIRE DATED 2.3.2012, PARA VIII (PAPER BOOK PAGE 89) THE AO HAS ASKED FOR THE BANK ACCOUNTS MAINTAINED AND OPERATED BY THE COMPANY. THE REPLY TO THE SAME WAS SUBMITTED VIDE LETTER DATED 10 TH SEPTEMBER, 2012, (PARA 5, PAGE 93 OF THE PAPER BOOK) WHEREBY LIST OF ALL BANK ACCOUNTS MAINTAINED AND OPERATED WITH RECONCILIATION WAS SUBMITTED. THE NAME OF HSBC BANK IS APPEARING ON PAGE 96 AND RECONCILIATION AND TH E BANK STATEMENT AT PAPER BOOK PAGE 98 - 99. IV . THEREAFTER VIDE LETTER DATED 30.10.2013 (PAPER BOOK PAGE 1190 - 1192, RELEVANT PAGE 1192, PARA 3) COPY OF BANK STATEMENT OF HSBC ALONG WITH COPY OF LEDGER ACCOUNT WAS AGAIN SUBMITTED. V . COMPLETE COPY OF BAN K ACCOUNT IS AVAILABLE IN THE PAPER BOOK PAGES 1193 - 1214. THE EXPLANATION FOR THE DEBIT AND CREDIT OF EACH ENTRY IS AVAILABLE AT PB PG. 1215 ALONG WITH VOUCHERS EXPLAINING THE TRANSACTION AND THE NATURE THEREOF ARE AVAILABLE FROM PAPER BOOK PAGES1216 - 1234 . VI . THEN AGAIN VIDE LETTER DATED 7.11.2013 (PAPER BOOK PAGE 1632) IT WAS BROUGHT TO THE NOTICE OF THE AO, THAT DETAILS IN RESPECT OF TRANSACTIONS OF HSBC ACCOUNT MAY KINDLY BE VERIFIED FROM EARLIER STATEMENT WHEREBY BANK BOOK AND BANK STATEMENT OF HSBC WERE FILED. VII . THUS THE ALLEGATION OF THE AO AS STATED IN THE FINAL ASSESSMENT ORDER THAT ASSESSEE HAS NOT FILED THE DETAILS IS FACTUALLY INCORRECT AS REFERENCE IN THIS LETTER DATED 7.11.2013 WAS TO AN EARLIER LETTER DATED 30.10.2013 AS STATED HEREINA BOVE, WHERE COMPLETE DETAILS OF THE BANK ACCOUNT WITH NARRATION AND EVIDENCES WERE SUBMITTED TO THE AO. VIII . IT IS NOT THE CASE OF THE AO THAT IT IS AN UNACCOUNTED BANK ACCOUNT. THE ASSESSEE HAS BEEN MAINTAINING REGULAR BOOKS OF ACCOUNT AND ALL TH E TRANSACTIONS IN THIS BANK ACCOUNT ARE DULY ACCOUNTED FOR. IX . THESE BOOKS OF ACCOUNTS HAVE BEEN AUDITED NOT ONLY BY THE AUDITOR APPOINTED BY THE ASSESSEE BUT ALSO BY THE SPECIAL AUDITOR AND THERE IS NO ADVERSE COMMENT ABOUT THIS BANK ACCOUNT. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 75 X . ON - GOING THROUGH THE TRANSACTION IN THIS BANK ACCOUNT IT CAN BE EASILY SEEN THAT THESE ARE DEBITS AND CREDITS AND MAINLY IN RESPECT OF TRANSFER FROM ANOTHER BANK ACCOUNT OF THE ASSESSEE WITH STATE BANK OF INDIA. XI . THE DRAFT ASSESSMENT ORDER PA SSED BY THE AO, DIRECTION GIVEN BY THE DRP AND THE FINAL ASSESSMENT ORDER PASSED BY THE AO IS IN TOTAL DISREGARD TO THE FACTS AND THE WRITTEN SUBMISSIONS BEFORE DRP (PB PG. 6505 - 6507) WHICH CLEARLY DEMONSTRATE THAT THIS BANK ACCOUNT IS A REGULAR BANK ACCOU NT AND THERE IS NO TRANSACTION ABOUT WHICH ANY DOUBT COULD BE RAISED. 22.5 . REVENUE S SUBMISSIONS : LD.DR SUBMITTED THAT THIS GROUND IS COMMON WITH NO.9 IN THE REVENUE APPEAL WHERE THE REVENUE IS CHALLENGING THE DIRECTION OF THE DRP TO DELETE THE ADDITI ON TO THE EXTENT OF RS.4.27 CRORES AFTER VERIFICATION. THE LEARNED DR SUBMITTED THAT THIS ADDITION HAS BEEN APPARENTLY MADE BY THE AO ON THE BASIS OF THE NON - SUBMISSION OF THE DETAILS BY THE ASSESSEE COMPANY. HOWEVER AS SUBMITTED BEFORE THE DRP THIS ACCO UNT IS A REGULAR BANK ACCOUNT OF THE ASSESSEE FORMING PART OF THE BOOKS OF ACCOUNTS. THE ASSESSEE FROM THE DOCUMENTS PLACED IN THE PAPER BOOK AND AS PER THE SUBMISSION BEFORE THE AO HAS SUBMITTED THE COPY OF THE ACCOUNT ALONGWITH NARRATION OF DEBIT AND CR EDIT. THE DRP THEREAFTER HAS DIRECTED THE AO TO VERIFY THE ACCOUNT HAS BEEN DIRECTED DELETION TO THE EXTENT OF RS.4.27 CRORES. THE AO IN THE FINAL ASSESSMENT ORDER, HOWEVER, HAS MADE THE ENTIRE ADDITION OF RS.7,44,24,668/ - . AS REGARDS CONTENTION OF THE ASSESSEE THAT COMPLETE COPY OF ACCOUNT WITH EXPLANATION FOR DEBIT AND CREDIT ALONGWITH VOUCHERS WAS FILED BEFORE THE AO, THE LEARNED DR SUBMITTED THAT THIS IS A FACTUAL ASPECT. HE FURTHER SUBMITTED THAT THOUGH THIS BANK ACCOUNT FORMING PART OF THE ACCOUNT WHICH BEEN AUDITED AND NO ADVERSE OBSERVATIONS HAVE BEEN MADE BY THE SPECIAL AUDITOR BUT STILL THE AO WAS JUSTIFIED IN DRAWING ADVERSE INFERENCE ON NOT GETTING THE SATISFACTORY REPLY AS ASKED FOR BY HIM FROM THE ASSESSEE COMPANY DURING THE ASSESSMENT PROC EEDINGS. 22.6 . OUR FINDINGS ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 76 IN THIS CASE THE AO HAS ADDED THE ENTIRE DEBIT BALANCES IN THE HSBC ACCOUNT OF THE ASSESSEE. THIS ACCOUNT IS AN OFFICIAL BANK ACCOUNT OF THE ASSESSEE AND THE DETAILS ARE AVAILABLE IN THE BOOKS OF ACCOUNTS. THE DRP HAD HEL D THAT THE AO WAS TOTALLY UNJUSTIFIED IN ADDING BACK PAYMENTS MADE FOR BANK CHARGES, LC CHARGES AND TD. THE AO RECORDS THAT THE ASSESSEE HAS NOT SUBMITTED PROPER RECONCILIATION STATEMENT AND DOCUMENTARY EVIDENCE. THIS IS A BANK ACCOUNT MAINTAINED OFFICIA LLY BY THE ASSESSEE. THIS WAS STATED AS SUCH BEFORE THE AO IN A LETTER DT. 10 TH SEPTEMBER,2012. THE ASSESSEE HAS FURNISHED EXPLANATION OF THE DEBIT AND CREDIT BALANCES WITH VOUCHERS FROM PAGES 1216 TO 1234 OF THE PAPER BOOK. THE ALLEGATION OF THE AO THA T THE ASSESSEE HAS NOT FILED THE DETAILS IS FACTUALLY INCORRECT. THE TRANSACTIONS DONE THROUGH THIS BANK ACCOUNT, APART FROM REGULAR BOOKS OF ACCOUNTS OF THE ASSESSEE. THE BOOKS HAVE BEEN AUDITED NOT ONLY BY THE AUDITORS APPOINTED BY THE ASSESSEE BUT ALS O BY THE SPECIAL AUDITORS. UNDER THE CIRCUMSTANCES THE ADDITION IN QUESTION IS TOTALLY UNJUSTIFIED. THE VERY FACT THAT THE ENTIRE DEBIT BALANCES HAVE BEEN AUDITED BY THE AO DEMONSTRATES THAT THERE IS TOTAL NON APPLICATION OF MIND BY THE ASSESSING AUTHORI TY. THE ENTIRE ADDITION IS ARBITRARY. HENCE WE ARE OF THE CONSIDERED OPINION THAT SUCH ADDITIONS SHOULD BE DELETED. AS THE BANK RECONCILIATION STATEMENT HAS NOT BEEN VERIFIED, THE AO MAY CARRY OUT THE VERIFICATION OF THE SAME. IN THE RESULT THIS GROUND OF THE ASSESSEE IS ALLOWED. 23. GROUND NO.23 AND 24 READ AS FOLLOWS. 23(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED IN REJECTING THE BOOKS OF ACCOUNT. (II) THAT THE BOOKS OF ACCOUNTS HAVE BEEN REJECTED ARBITRARILY DESPITE T HE FACT THAT EVEN THE SPECIAL AUDITORS HAVE CERTIFIED IN THEIR AUDIT REPORT THAT THE BOOKS OF ACCOUNTS GIVE A TRUE AND CLEAR VIEW OF THE PROFIT OF THE YEAR UNDER CONSIDERATION. 24(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING ADDITION OF AN AMOUNT OF RS.33,61,06,480/ - ESTIMATING THE G.P. OF THE ASSESSEE AT AN ARBITRARY RATE OF 28%. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 77 (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ADDITION MADE BY THE AO ON ACCOUNT OF THE ENHANCED GROSS P ROFIT IS UNTENABLE IN THE ABSENCE OF ANY MATERIAL OR EVIDENCES BROUGHT ON RECORD BY THE AO THAT THE APPELLANT COMPANY HAS RECEIVED ANY AMOUNT OVER AND ABOVE THE AMOUNT STATED IN THE BOOKS OF ACCOUNT. 2 3 .1 . FACTS RELATING TO THIS ISSUE ARE AS FOLLOWS. IN GROUNDS NO. 23 AND 24 THE ASSESSEE IS AGITATING THE REJECTION OF THE BOOKS OF ACCOUNT AND ENHANCEMENT OF THE GROSS PROFIT RATE. AS PER THE AO THERE HAVE BEEN NUMEROUS INSTANCES WHERE REFERENCES HAVE BEEN MADE BY THE SPECIAL AUDITOR AND M/S KP MG INDIA IN THEIR RESPECTIVE REPORTS PERTAINING TO THE ASSESSEE COMPANY REGARDING IMPROPER MAINTENANCE OF ACCOUNTS. IN THIS REGARD HAS REFERRED TO THE DIFFERENCE IN SHORT OF THE 3125 MOBILE HANDSETS, SCRAP SALES, PAYMENTS EXCEEDING RS.20,000 BEING IN CASH , SWAP UNITS, DIFFERENCE IN THE CREDIT NOTES, ETC. ON THE BASIS OF THESE ALLEGATIONS THE AO HELD THAT HE IS NOT SATISFIED ABOUT THE CORRECTNESS AND COMPLETENESS OF THE BOOKS OF ACCOUNT AND REJECTED THE SAME. 18.1 AFTER REJECTION OF THE BOOKS OF ACCOUNT THE AO HAS TAKEN INTO CONSIDERATION THE GROSS PROFIT RATE OF THE YEAR UNDER CONSIDERATION I.E. 26.54% AND THE GROSS PROFIT RATE OF THE PRECEDING YEAR AT 31.21% WORKED OUT THE AVERAGE OF THE SAME AT 28.87%. ON THIS BASIS HE INCREASED THE GROSS PROFIT RATE TO 28% AS AGAINST 26.54% DECLARED BY THE ASSESSEE AND MADE ADDITION OF RS.33,61,06,480/ - . 23.2. DRP FINDINGS: CONSIDERING THE SURROUNDING FACTS AND CIRCUMSTANCES OF THE CASE THE CONTENTION OF THE APPELLANT IS NOT CONSIDERED TO APPROXIMATE TO THE FA CTS. THERE WAS ABUNDANT INCRIMINATING MATERIAL PRESENT AGAINST THE APPELLANT SUGGESTING SUPPRESSION OF INCOME BY MANIPULATING WITH THE RECORDS AND THEREBY NOT ACCOUNTING FOR SUCH INCOME. ACCORDINGLY THE ADDITION ON ACCOUNT OF GP@ 28% WAS NOT ARBITRARY. HEN CE, THIS OBJECTION IS DISMISSED 23.3 . FINAL ORDER BY AO: THE ASSESSEE FILED OBJECTION TO THE DRAFT ASSESSMENT ORDER IN FORM NO. 35A ON 13.12.2013 AND THE DRP VIDE ITS DIRECTIONS DATED 29.08.2014 HAS DISMISSED THE OBJECTION OF THE ASSESSEE ON THIS IS SUE OBSERVING THAT THERE WAS ABUNDANT INCRIMINATING MATERIAL PRESENT AGAINST THE APPELLANT SUGGESTING SUPPRESSION ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 78 OF INCOME BY MANIPULATING WITH THE RECORDS AND THEREBY NOT ACCOUNTING FOR SUCH INCOME. IN VIEW OF THIS, ADDITION OF RS.33,61,06,480 IS MADE TO THE INCOME OF THE ASSESSEE. 2 3.4 . ASSESSEE S SUBMISSIONS : REJECTION OF BOOKS OF ACCOUNTS I . THE AO HAS GONE WRONG IN REJECTING THE BOOKS OF ACCOUNT. THE ASSESSEE HAS BEEN MAINTAINING REGULAR BOOKS OF ACCOUNTS. THESE BOOKS OF ACCOUNTS HAVE BEEN AUDITED BY THE STATUTORY AUDITOR APPOINTED UNDER THE COMPANIES ACT. IN ITS AUDIT REPORT (PAPER BOOK PAGE 6) THE AUDITORS HAVE CERTIFIED THAT IN THEIR OPINION PROPER BOOKS OF ACCOUNTS, AS REQUIRED BY LAW, HAVE BEEN KEPT BY THE ASSESSEE COMPANY. THE SE BOOKS OF ACCOUNT HAVE BEEN AGAIN AUDITED BY THE TAX AUDITOR APPOINTED UNDER SECTION 44AB OF THE ACT. NO ADVERSE COMMENT HAS BEEN GIVEN ABOUT THE BOOKS OF ACCOUNTS. II . THESE BOOKS OF ACCOUNTS HAVE BEEN AUDITED BY THE SPECIAL AUDITOR APPOINTED BY THE AO HIMSELF. THE SPECIAL AUDITOR IN THEIR REPORT AT PAPER BOOK PAGE 4924 HAS AGAIN CERTIFIED THAT PROPER BOOKS OF ACCOUNTS HAVE BEEN KEPT BY THE HO AND BRANCHES OF THE ASSESSEE VISITED BY THEM SO FAR IT APPEARS FROM THEIR EXAMINATION OF BOOKS AND PROPER RE TURNS, ADEQUATE FOR THE PURPOSES OF THE AUDIT HAVE BEEN RECEIVED FROM THE BRANCHES NOT VISITED BY THEM. III . THE ASSESSEE HAS MAINTAINED ALSO THE STOCK RECORDS AND THE STOCK TALLY HAS BEEN CERTIFIED BY THE COMPANY AUDITORS AT PAGE 31, BY THE TAX AUDITOR AT PAGE 57 AND BY THE SPECIAL AUDITOR APPOINTED BY THE AO HIMSELF AT PAGE 4931. IV . NO MATERIAL WAS FOUND DURING THE COURSE OF THE SEARCH INDICATING ANY SALE OR PURCHASE OUTSIDE THE BOOKS OF ACCOUNTS. V . DURING THE COURSE OF THE ASSESSMENT PROCEE DINGS THE ASSESSEE HAS PRODUCED THE BOOKS OF ACCOUNT BEFORE THE AO AT NUMBER OF TIMES AS IS EVIDENT FROM VARIOUS LETTERS PLACED IN THE PAPER BOOK. IT IS NOT THE CASE OF THE AO THAT BOOKS OF ACCOUNTS WERE NOT PRODUCED OR DETAILS WERE NOT FILED. VI . AS RE GARDS THE SPECIFIC ISSUES STATED IN PARA 24 ON PAGE 67 OF THE DRAFT ASSESSMENT ORDER BY THE AO FOR REJECTING THE BOOKS OF ACCOUNTS IT SUBMITTED THAT KPMG INDIA REPORT WAS OBTAINED BY A PROSPECTIVE INVESTOR FOR DUE DILIGENCE. AS PER THIS REPORT (PAPER BOOK PAGE 2199 - ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 79 2304) ON THE VERY FIRST PAGE IT HAS BEEN CLEARLY STATED THAT THIS REPORT IS NOT SUITED FOR ANY PURPOSE OTHER THAN TO ASSIST IN VALUATION OF THE TARGET. FURTHER THIS KPMG INDIA REPORT NOWHERE LEADS TO ANY DOUBT ABOUT THE BOOKS OF ACCOUNT BEING U NRELIABLE. ALL OBSERVATIONS ARE MADE FOR PROSPECTIVE INVESTOR WHICH IS NORMAL IN A DUE DILIGENCE REPORT. IT IS IMPORTANT TO NOTE THAT ASST. DIRECTOR OF INCOME TAX (INV.) IN THE POST - SEARCH INVESTIGATION HAS ISSUED A NOTICE UNDER SECTION 131(1A) TO KPMG I NDIA PVT. LTD. SEEKING CLARIFICATION ON THE REPORT ISSUED BY THEM AND IN ITS REPLY DATED 1.4.2011 IT WAS CLARIFIED BY THE KPMG INDIA THAT THEY DID NOT ISSUE ANY LETTER, CERTIFICATE AND INFORMATION DON MICROMAX REGARDING ANY FINANCIAL OR ANY OTHER TRANSACTI ON AND THEIR ROLE WAS LIMITED TO DUE DILIGENCE FOR TA ASSOCIATES ADVERTISER INC. VII . IT IS ALSO IMPORTANT TO NOTE THAT POST - KPMG INDIA REPORT THE REVENUE HAS CARRIED OUT A SPECIAL AUDIT UNDER SECTION 142(2A) WHEREIN THE SPECIAL AUDITOR HAS, AS STAT ED HEREINABOVE, CATEGORICALLY CERTIFIED THAT APPELLANT COMPANY HAS MAINTAINED PROPER BOOKS OF ACCOUNTS. VIII . IN VIEW OF THE ABOVE FACTS THERE WAS NO REASON FOR THE AO TO DRAW ADVERSE INFERENCE ON THE BASIS OF THE KPMG INDIA REPORT. IX . THE SECOND ISSUE STATED IN THIS PARA IS REGARDING THE DIFFERENCE IN THE MOBILE HANDSETS FOUND AT THE TIME OF THE SEARCH. AS EXPLAINED ABOVE IN GROUND NO.21 ON THIS ISSUE, THAT FIRSTLY ASSESSEE HAS SUBMITTED THE COMPLETE RECONCILIATION AND SECONDLY IN ANY CASE IN SUCH A LA RGE INVENTORY DIFFERENCE OF 3125 MOBILE HANDSETS IS TOO SMALL AND NORMAL IN TRADE. FURTHER THE CHANCES OF ERROR WHILE TAKING PHYSICAL INVENTORY OR SOME SHORTAGE AT DIFFERENT LOCATIONS ALSO CANNOT BE RULED OUT AND HENCE NO ADVERSE INFERENCE ON THIS ACCOUNT CAN BE DRAWN. X . THE THIRD ISSUE IS REGARDING THE SCRAP SALES WHICH HAS BEEN DISCUSSED IN GROUND NO.14. THIS ADDITION HAS BEEN PROPOSED ON ESTIMATE BASIS ABOUT CARTONS AND BOXES AND THIS GROUND CANNOT BE A REASON FOR REJECTION OF THE BOOKS OF ACCOUNT. XI . SIMILARLY THE ISSUE RAISED BY THE AO ON THE SWAP UNITS HAS BEEN DISCUSSED IN GROUND NO.8, 9 AND 10 WHEREIN IT HAS BEEN CLARIFIED THAT THE ADDITION MADE PER SE IS IN DISREGARD TO THE EXPLANATION AND EVIDENCES ALREADY ON RECORD. THERE IS NO UNACCOUNTE D SWAP UNIT AS ALL PURCHASES ARE THROUGH CUSTOMS AND DOCUMENTARY EVIDENCES IN SUPPORT THEREOF HAVE BEEN FILED. XII . SIMILARLY ADDITION ON ACCOUNT OF DIFFERENCE IN CREDIT NOTES FOR REJECTION OF BOOKS OF ACCOUNT HAS BEEN EXPLAINED IN GROUND NO. 6, 7 AND 13 ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 80 WHEREBY IT HAS BEEN POINTED OUT THAT THE ADDITION HAS BEEN MADE IGNORING THE FACTS AND EVIDENCES BROUGHT BY THE ASSESSEE. XIII . FURTHER REJECTION OF ACCOUNTS CANNOT BE DONE LIGHTHEARTEDLY. THE ACCOUNTS CAN BE REJECTED AS UNRELIABLE IF IMPORTANT TRANSACT IONS OF PURCHASE AND SALES ARE OMITTED OR THE ACCOUNTS DO NOT INCLUDE A PARTICULAR CLASS OF BUSINESS. IT IS A SETTLED LAW WHEN THE ACCOUNT BOOKS ARE PRODUCED IT IS FOR THE TAXING AUTHORITIES TO GIVE VALID REASONS FOR DECLARING THEM TO BE EITHER FALSE OR N OT TO HAVE BEEN MAINTAINED PROPERLY. THE BOOKS OF ACCOUNT CANNOT BE REJECTED MERELY ON THE GROUND THAT CERTAIN STOCK WAS FOUND TO BE REJECTED OR UNFIT FOR SALE BY THE ASSESSEE AND ALSO ON THE GROUND OF THE LOW PROFITS. THE BOOKS OF ACCOUNT CANNOT ALSO BE REJECTED MERELY ON THE GROUND THAT CERTAIN EXPENSES HAVE BEEN CLAIMED WHICH ARE NOT ALLOWABLE IN FACT AND WHERE THE DEFECTS POINTED OUT IN THE BOOKS OF ACCOUNT WAS OF GENERAL OR TECHNICAL IN NATURE. IT IS ALSO A SETTLED LAW THAT IT NOT OPEN TO THE AO TO DISCARD THE BOOKS OF ACCOUNT ALTOGETHER. EVEN WHEN THE BOOKS OF ACCOUNT ARE REJECTED THE AO MUST HAVE REFERENCE TO THE ASSESSEE S ACCOUNT. EVEN IF REJECTION OF BOOKS OF ACCOUNT, THE AO IS NOT ENTITLED TO MAKE A PURE GUESS AND IGNORE THE EVIDENCES OR MATE RIAL IN THE ASSESSMENT YEAR UNDER CONSIDERATION. XIV . THE BOOKS OF ACCOUNTS HAVING BEEN AUDITED NOT ONLY BY THE COMPANY AUDITOR BUT ALSO BY THE SPECIAL AUDITOR AND A CERTIFICATE BEING ISSUED BY THE SPECIAL AUDITOR THAT PROPER BOOKS OF ACCOUNTS HAVE BEE N MAINTAINED THE AO AND DRP HAVE GONE WRONG IN REJECTING THE BOOKS OF ACCOUNT IGNORING THE DETAILED SUBMISSIONS AT PB PG. 6399 - 6420. ENHANCEMENT OF GROSS PROFIT I . THE AO IN THE DRAFT ASSESSMENT ORDER AT PAGE 72 - 73 HAS ENHANCED THE GROSS PROFIT RATE T O 28.% AS AGAINST 26.54% DECLARED BY THE ASSESSEE. THE REASONING GIVEN BY THE AO IS THAT THE GP RATE IN THE PRECEDING YEAR WAS 31.21% AND IN THE CURRENT YEAR IT IS 26.54%. THUS THE AVERAGE OF TWO YEARS HAS BEEN WORKED OUT AND 28% RATE HAS BEEN APPLIED WH ICH HAS RESULTED INTO ADDITION OF RS.33,61,06,480. II . DRP HAS CONFIRMED THE ABOVE ADDITION. III . THE ADDITION ON THIS ACCOUNT IS UNTENABLE. THE ASSESSEE IS MAINTAINING REGULAR BOOKS OF ACCOUNT. THESE BOOKS OF ACCOUNTS HAVE BEEN AUDITED BY T HE COMPANY AUDITOR UNDER SECTION 227 OF THE COMPANIES ACT, 1956, BY TAX AUDITOR UNDER SECTION 44AB OF THE INCOME TAX ACT. THESE BOOKS HAVE BEEN ALSO AUDITED BY THE SPECIAL AUDITOR UNDER SECTION 142(2A) OF THE INCOME TAX ACT. EACH ONE OF THE AUDITOR HAS ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 81 C ERTIFIED THAT PROPER BOOKS OF ACCOUNTS HAVE BEEN MAINTAINED AND THE PROFIT AND LOSS ACCOUNT GIVES A TRUE AND FAIR VIEW OF THE PROFIT FOR THE YEAR ENDED 31 ST MARCH, 2011. THUS THE AO WAS NOT JUSTIFIED IN IGNORING THE BOOKS OF ACCOUNT AND THE CERTIFICATES O F THE AUDITORS. IV . THE ASSESSEE HAS MAINTAINED COMPLETE STOCK RECORD. QUANTITATIVE DETAILS HAVE BEEN PROVIDED. V. THE ASSESSEE HAS PROVIDED DETAILS OF PURCHASES AND SALES WITH COMPLETE NAME OF SUPPLIERS AND BUYERS, THEIR ADDRESSES AND OTHER CONTACT D ETAILS. VI . THERE IS NO ALLEGATION THAT THE PURCHASES HAVE BEEN OVERSTATED OR SALES HAVE BEEN UNDERSTATED. VII . THE GROSS PROFIT IS THE OUTCOME OF THE DIFFERENCE IN THE SALE PRICE AND THE PURCHASE PRICE. IN THE ABSENCE OF ANY FINDING OR MATERIAL THAT SALE PRICE STATED IS NOT CORRECT OR PURCHASE PRICE IS NOT CORRECT THERE WAS NO REASON FOR ENHANCING THE GROSS PROFIT. VIII . THE ASSESSEE ON ITS PART HAS SUBMITTED THE COMPLETE DETAILS OF SALES AND PURCHASES, DEBTORS AND CREDITORS VIDE LETTER DATE D 23.10.2012 (PB PG. 101) ALONG WITH DETAILS AT PB PGS. 107 - 223. THE ASSESSEE HAS SUBMITTED THE STOCK DETAILS AT PB PGS. 320 - 398. ASSESSEE HAS PRODUCED BOOKS OF ACCOUNTS IN SUPPORT THEREOF BEFORE THE AO VIDE LETTER DATED 20.2.2013 AT PB PG. 732 - 734, RELE VANT PARA 6 ON PAGE 734 WHICH INCLUDED STOCK REGISTER, SALE AND PURCHASE BILLS AND VOUCHERS. FURTHER VIDE LETTER DATED 28.2.2013 SOFT COPY OF THE BOOKS OF ACCOUNTS WERE ALSO SUBMITTED. IX . VIDE LETTER DATED 8.10.2013 PLACED PB PG. 899 - 900 EXPLANAT ION FOR DECLINE IN G.P. DURING THE YEAR WAS ALSO SUBMITTED. IN THIS LETTER IT WAS EXPLAINED THAT THE SALES DURING THE YEAR HAS INCREASED BY 47% AS COMPARED TO LAST FINANCIAL YEAR. CONSIDERING THE LINE OF THE BUSINESS, THERE IS A CHANGE IN PRODUCT LINE VE RY YEAR AND THERE IS A VARIATION IN MARGIN ON EACH PRODUCT LINE. IT WAS ALSO EXPLAINED THAT THE COST OF GOODS SOLD DURING THE YEAR HAS INCREASED TO 57% WHICH ITSELF HAS REDUCED THE GROSS PROFIT AS COMPARED TO LAST YEAR BY 4.67%. X . THE AO HAS NOWHER E BEEN ABLE TO POINT OUT ANY FAULT OR DEFECT IN THE EXPLANATION GIVEN BY THE ASSESSEE. XI . THE ASSESSEE COMPANY HAVING PRODUCED ALL DETAILS AND EVIDENCES AND HAVING GIVEN EXPLANATION THERE WAS NO REASON FOR AO AND THE DRP TO IGNORE THE SAME AND ACCORDINGLY THE ADDITION MADE BY ENHANCING THE GROSS PROFIT ARE UNJUSTIFIED. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 82 23.5 . REVENUE S SUBMISSIONS : THE LEARNED DR ON THE ISSUE OF REJECTION OF THE BOOKS OF ACCOUNT AND THE ADDITION ON ACCOUNT OF THE GROSS PROFIT RATE HAS SUBMITTED THAT HE RELIES UPON THE ORDER OF THE AO AND THE ORDER OF THE DRP. 23.6. OUR FINDINGS ON CONSIDERATION OF RIVAL CONTENTIONS WE ARE OF THE CONSIDERED VIEW THAT THE REJECTION OF BOOKS OF ACCOUNTS IS BAD IN LAW FOR THE FOLLOWING REASONS: THE ASSESSEE HAS MAINTAINED REGULA R BOOKS OF ACCOUNTS AND TH E SE HAVE BEEN AUDITED BY THE TAX AUDITORS AS WELL AS BY THE SPECIAL AUDITORS APPOINTED BY THE AO. BOTH THESE AUDITORS HAVE CERTIFIED THAT THE ASSESSEE WAS MAINTAINING PROPER BOOKS OF ACCOUNTS. THE AO SEEMS TO HAVE BASED HIS OPIN ION ON THE REPORT OF KPMG INDIA. THIS REPORT WAS A DUE DILIGENCE REPORT OBTAINED BY THE PROSPECTIVE INVESTORS. SUCH DUE DILIGENCE REPORTS CANNOT LEAD TO FORMATION OF AN OPINION THAT PROPER BOOKS OF ACCOUNTS HAVE NOT BEEN KEPT BY THE ASSESSEE. THE ASSESSE E ALSO MAINTAINED QUANTITATIVE DETAILS OF INVENTORY. SIMILARLY ON THE ISSUE OF SWAP UNITS WHILE DISPOSING OF GROUND NOS. 8, 9 AND 10, WE HAVE DEALT WITH THE ISSUE AND FROM OUR OBSERVATIONS IT IS CLEAR THAT THIS CANNOT BE A BASIS FOR REJECTION OF BOOKS OF A CCOUNTS. ADDITION ON ACCOUNT OF DIFFERENCE IN CREDIT NOTES CANNOT ALSO FORM A GROUND FOR REJECTION OF BOOKS OF ACCOUNTS FOR THE REASON THAT WE HAVE COME TO A CONCLUSION THAT THE ADDITION ITSELF IS ARBITRARY AND DELETED THE SAME. IN FACT THE AO RELIED ON THESE VERY BOOKS OF ACCOUNTS AND TO MAKE HUGE ADDITIONS DURING THE COURSE OF ASSESSMENT. ON THE ONE HAND THE AO SEEKS TO RELY ON THE BOOKS OF ACCOUNTS AND ON THE OTHER HAND THE AO REJECTS THE BOOKS OF ACCOUNTS FOR ESTIMATED PROFITS ON ADHOC BASIS. THIS I N OUR VIEW IS NOT PERMISSIBLE. THE REJECTION OF THE BOOKS OF ACCOUNTS CANNOT BE DONE IN A LIGHT HEARTED MANNER. SECTION 44AA OF THE INCOME TAX ACT MANDATES THAT EVERY PERSON CARRYING ON BUSINESS OR PROFESSION SHALL KEEP AND MAINTAIN SUCH BOOKS OF ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 83 ACCOUNT AND OTHER DOCUMENTS AS MAY ENABLE THE ASSESSING OFFICER TO COMPUTE THIS INCOME IN ACCORDANCE WITH THE PROVISIONS OF THIS ACT. THUS, THE REQUIREMENT IS TO MAINTAIN SUCH BOOKS OF ACCOUNTS AS MAY ENABLE THE ASSESSING OFFICER TO COMPUTE ITS TOTAL INCOME. IT IS ONLY WHEN THE BOOKS OF ACCOUNTS ARE MAINTAINED IN SUCH A MANNER WHICH MAKES IT DIFFICULT FOR THE ASSESSING OFFICER TO COMPUTE ITS TOTAL INCOME THEN ONLY THE BOOKS OF ACCOUNTS CAN BE REJECTED. THIS IS NOT THE CASE HERE. EVEN IF, THERE ARE CERTAIN DISCREPAN CIES OR ERRORS WHICH ARE NOT SO CRUCIAL SO AS TO DISABLE THE ASSESSING OFFICER TO COMPUTE THE TOTAL INCOME OF THE APPELLANT, THEN THE BOOKS OF ACCOUNT CANNOT BE REJECTED BUT SUCH DISCREPANCIES CAN BE TAKEN INTO CONSIDERATION WHILE COMPUTING THE TOTAL INCOM E. FURTHER, THE REJECTION OF BOOKS OF ACCOUNTS IS NOT JUSTIFIED WHEN MISTAKES IN THE BOOKS OF ACCOUNTS ARE OF GENERAL OR TECHNICAL NATURE. THE REMARKS GIVEN BY THE ASSESSING OFFICER IN THE APPELLANT'S CASE ARE NEITHER SUFFICIENT FOR REJECTING THE DULY A UDITED BOOKS OF ACCOUNTS NOT THE ASSESSING OFFICER HAS SHOWN THAT HOW THESE REMARKS WOULD HAVE A BEARING IN GIVING A FINDING THAT TRUE INCOME CANNOT BE COMPUTED ON THE BASIS OF BOOKS OF ACCOUNTS MAINTAINED BY THE APPELLANT ON DAY TO DAY BASIS IN REGULAR C OURSE OF BUSINESS. AS ALREADY STATED THERE IS NO GROUND WHATSOEVER WHICH JUSTIFIES THE AO TO REJECT THE BOOKS OF ACCOUNTS. THUS WE AGREE WITH THE CONTENTIONS OF THE ASSESSEE AND REVERT THE ORDER OF THE AO AS UPHELD BY THE DRP. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. AS WE HAVE HELD THAT THE REJECTION OF BOOKS OF ACCOUNTS IS BAD IN LAW THE QUESTION OF ENHANCEMENT OF GROSS PROFIT ON ESTIMATE BASIS DOES NOT ARISE. THE AO IS DIRECTED TO ADOPT THE PROFITS AS DECLARED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS. IN VIEW OF THE ABOVE, WE DELETE THIS ADDITION AND THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 24. GROUND NO.25 READS AS FOLLOWS. 25. IN THE ALTERNATIVE AND WITHOUT PREJUDICE TO ABOVE, THE VARIOUS ADDITIONS MADE BY THE AO AF TER ESTIMATING THE GROSS PROFIT RATE IS UNTENABLE IN THE EYE OF THE LAW. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 84 24.1. F ACTS RELATING TO THIS GROUND ARE THAT: IN GROUND NO.25 THE ASSESSEE HAS TAKEN AN ALTERNATIVE GROUND THAT THE AO WAS NOT JUSTIFIED IN MAKING INDIVIDUAL ADDITIONS ON ACCOU NT OF THE TRADING ITEMS ONCE HE HAS APPLIED THE GROSS PROFIT RATE TO THE ENTIRE SALES. THIS GROUND IS ARISING ON ACCOUNT OF THE FOLLOWING: - S.NO. PARTICULARS AMOUNT (IN RS.) 1. SALE OF SCRAP 84,20,360 2. SHORTAGE OF DOA (DEAD ON ARRIVAL) MOBILES 3,82, 03,224 4,62,00,000 3. CREDIT NOTES OF M/S. BRIGHT POINT 10,97,61,523 4. CREDIT NOTES TO DISTRIBUTORS 3,37,09,95,646 5. CREDIT NOTES TO SUPER DISTRIBUTORS 9,47,21,431 6. SWAP UNITS 26,73,07,426 7. G P ON SWAP UNITS 7,09,43,390 8. SUNDRY CREDITORS 2,37,11,754 9. SHORTAGE OF MOBILES 1,18,63,125 TOTAL 404,21,28,178 24.2 . ASSESSEE S SUBMISSIONS: BEFORE DRP AN ALTERNATIVE GROUND WITHOUT PREJUDICE TO THE VARIOUS INDIVIDUAL GROUNDS, IT WAS CONTENDED (PB PG. 6533 - 6534) THAT THE AO HAVING APP LIED GROSS PROFIT RATE TO THE TURNOVER, THE VARIOUS INDIVIDUAL ADDITIONS MADE TO THE TRADING RESULTS ARE UNSUSTAINABLE. WITHOUT PREJUDICE TO THE INDIVIDUAL GROUNDS AND IN THE ALTERNATIVE, THE AO AND DRP HAVE GONE WRONG IN MAKING VARIOUS TRADING ADDITIONS AFTER ESTIMATION OF GROSS PROFIT. NO FURTHER ADDITION ON ACCOUNT OF VARIOUS EXPENSES EFFECTING THE TRADING RESULTS CAN BE MADE ONCE THE TRADING PROFIT HAS BEEN ASCERTAINED APPLYING GROSS PROFIT RATE. FOLLOWING ADDITIONS AND DISALLOWANCES OUGHT NOT HAVE BEEN MADE AS THE SAME ARE DIRECTLY EFFECTING THE TRADING RESULTS AS SUCH AFTER ESTIMATING THE GROSS PROFIT. S.NO. PARTICULARS AMOUNT (IN RS.) 1 . SALE OF SCRAP 84,20,360 2 . SHORTAGE OF DOA (DEAD ON ARRIVAL) MOBILES 3,82,03,224 ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 85 4,62,00,000 3 . CREDIT NOTE S OF M/S. BRIGHT POINT 10,97,61,523 4 . CREDIT NOTES TO DISTRIBUTORS 3,37,09,95,646 5 . CREDIT NOTES TO SUPER DISTRIBUTORS 9,47,21,431 6 . SWAP UNITS 26,73,07,426 7 . G P ON SWAP UNITS 7,09,43,390 8 . SUNDRY CREDITORS 2,37,11,754 9 . SHORTAGE OF MOBILES 1,18,63,12 5 TOTAL 404,21,28,178 IN SUPPORT THEREOF RELIANCE IS PLACED ON THE FOLLOWING JUDGMENTS: I) CIT VS. BANWARI LAL BANSHIDHAR (1997) (ALL)(HC) II) INDWELL CONSTRUCTION VS. CIT (1998) (AP) III) CIT VS. AGGARWAL ENGG. CO. (2006) (P&H) IV) CIT VS. SMT. SA NTOSH JAIN (2006) (P&H) V) CIT VS. GAIN CHAND LABOUR CONTRACTOR (2007) (P&H) VI) AMRIT SUGAR CO. VS. ITO (2010) (HP) 24.3 . REVENUE S SUBMISSIONS : THE LEARNED DR SUBMITTED THAT THE AO HAS MADE VARIOUS ADDITIONS ON THE BASIS OF THE FINDINGS GIV EN FOR EACH OF THE ADDITIONS AND ACCORDINGLY IT CANNOT BE CONTENDED THAT ONCE GROSS PROFIT RATE HAS BEEN APPLIED THESE ADDITIONS CANNOT BE MADE. 24.4 . OUR FINDINGS : IN VIEW OF OUR DECISION IN GROUND NO.24 REVERSING THE REJECTION OF BOOKS OF ACCOUNTS BY THE AO, THE PLEA OF THE ASSESSEE THAT ADDITIONS AND DISALLOWANCES OUGHT NOT TO HAVE BEEN MADE WHEN BOOKS ARE REJECTED AND TRADING RESULTS ARE ESTIMATED, NEED NOT BE ADJUDICATED BY US. IN THE RESULT THIS GROUND OF THE ASSESSE IS DISMISSED AS INFRUCTUOU S. 25. GROUND NO.26 READS AS FOLLOWS. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 86 26. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING ADJUSTMENT OF AN AMOUNT OF RS. 62,10,949/ - ON ACCOUNT OF ARM S LENGTH PRICE. 25.1 . THIS GROUND IS GENE RAL IN NATURE WHICH DO NOT REQUIRE OUR ADJUDICATION. 2 6 . GROUND NO.27 READS AS FOLLOWS. 27(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED TPO HAS ERRED, BOTH ON FACTS AND IN LAW, IN PROPOSING TO MAKE ADJUSTMENT OF AN AMOUNT OF RS. 7,71,349/ - ON THE TRANSACTION OF LOAN GIVEN TO THE AE. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED IN HOLDING THAT THE INTEREST PAID ON AMOUNT ADVANCED TO ASSOCIATED ENTERPRISES BE COMPUTED ON THE BASIS OF SBI BASE RATE AS ON 30 TH JUNE, 2010 P LUS 150 BASIS POINT AS AGAINST INTEREST RATE OF 9.25% CHARGED BY THE APPELLANT COMPANY. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED TPO HAS ERRED IN COMPUTING INTEREST AT THE RATE OF 13.25% CONSEQUENT TO THE DRP DIRECTIONS. 26.1. FA CTS RELATING TO THIS GROUND ARE THAT: IN GROUND NO.27 THE ASSESSEE IS AGITATING THE ADDITION OF RS.7,71,349/ - CONFIRMED BY THE DRP ON ACCOUNT OF THE ADJUSTMENT IN RESPECT OF THE INTEREST RATE ON LOAN TO THE ASSOCIATED ENTERPRISE. DURING THIS YEAR ASSESSEE COMPANY PROVIDED A LOAN TO ITS SUBSIDIARY COMPANY IN DUBAI IN US DOLLAR EQUIVALENT TO RS.26,77,20,000/ - ON WHICH IT HAS CHARGED INTEREST AT THE RATE OF 9.25%. THE CASE WAS REFERRED TO THE TP:O WHO VIDE HIS ORDER DATED 1 ST NOVEMBER, 2013 HAS HELD THAT TH E INTEREST RATE TO BE CHARGED IN SUCH CASES SHOULD BE THE OPPORTUNITY COST OF MONEY. HE FURTHER HELD THAT THE PROPER OPPORTUNITY COST IS THE RETURN OF MONEY IT GENERATES IN THE BUSINESS OF THE ASSESSEE. THE TPO WAS OF THE VIEW THAT THE AVERAGE YIELD OF THE LONG TERM INSTRUMENT IS 11.91% AND SBI PRIME LENDING RATE IS 12.625% AND THE NET PROFIT BEFORE TAX, THE AVERAGE RETURN IN THE CASE OF THE ASSESSEE COMES TO 12.51% BY TAKING AVERAGE OF THESE THREE AND ADDING FURTHER 300 BASIS POINT HE COMPUTED THE RATE OF INTEREST AT 15.35% AND ACCORDINGLY BY APPLYING THIS RATE PROPOSED AN ADDITION OF RS.1,05,66,451/ - . THE DRP, HOWEVER, HELD THAT THE INTEREST TO BE CHARGED SHOULD BE THE SBI BASE RATE PLUS 150 BASIS POINTS. THE AO IN THE FINAL ASSESSMENT ORDER RESTRICTE D THE ADDITION TO RS.7,71,349/ - . ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 87 26.2 . DRP FINDINGS : KEEPING IN VIEW THE SAFE HARBOUR RULE, THE DRP DIRECTS THE AO/TPO THAT THE INTEREST SHOULD BE COMPUTED ON THE BASIS OF SBI BASE RATE AS ON 30TH JUNE OF THE RELEVANT PREVIOUS YEAR PLUS 150 BAS IS POINTS . 26.3. FINAL ORDER BY AO THE ABOVE WAS ADJUDICATED BY DRP & EFERRED TO TPO FOR COMPUTATION. THE TPO VIDE THEIR ORDER NO.328 DATED 24.9.2014 HAS BEEN RECEIVED IN THIS OFFICE BY DIARY NO.616 DATED 30.09.2014. THE TPO HAS ARRIVED AT THE FOLLOWING CONCLUSION AFTER CONSIDERING THE DRP DIRECTIONS. RECOMPUTATION FOR ADJUSTMENT IN INTEREST ON LOAN ADVANCED TO AE AMOUNT OF ADJUSTMENT IN ORIGINAL ORDER RS.1,05,66,451 LESS: AMOUNT OF ADJUSTMENT AS PER DRP ORDER RS. 7,71,349 NET RELIEF RS.97,95,102 RECOMPUTATION FOR ADJUSTMENT IN STAND BY LETTER OF CREDIT/BANK GUARANTEE AMOUNT OF ADJUSTMENT IN ORIGINAL ORDER RS.1, 22,39,100 LESS: AMOUNT OF ADJUSTMENT AS PER DRP ORDER RS. 54,39,600 (2% OF STAN D BY LETTER OF CREDIT GIVEN OF RS.27,19,80,000) NET RELIEF RS. 67,99,500 ADDITION ON ACCOUNT OF INTEREST RS. 7,71,349 ADDITION ON ACCOUNT OF SBLC RS. 54,39,600 TOTAL ADDITION RS. 62,10,949 THE TRANSFER PRICING ADJUSTMENT IN THE CASE OF THE ASSESSEE STANDS AT RS.62,10,949/ - FROM RS.2,28,05,551/ - IN THE ORIGINAL ORDER . ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 88 26.4. ASSESSEE S SUBMISSIONS: (I) THE ADJUSTMENT MADE BY THE TPO AND AS CONFIRMED BY THE DRP IS LEGALLY UN TENABLE. (II) THERE HAVE BEEN NUMBER OF CAS ES DECIDED ON THIS ISSUE BY THE JURISDICTIONAL TRIBUNAL AS WELL AS OTHER TRIBUNALS WHEREBY IT HAS BEEN HELD THAT THE DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE BEING LIBOR SHALL BE APPLIC ABLE. (III) THE POINTS ON THIS ISSUE WHICH EMERGE FROM THE DECISIONS OF VARIOUS HON BLE TRIBUNAL IN VARIOUS CASES DISCUSSED HEREINAFTER ARE - : ( A) CUP METHOD IS THE MOST APPROPRIATE METHOD IN ORDER TO ASCERTAIN ARM'S LENGTH PRICE OF THE AFORESAID INTERNATI ONAL TRANSACTION. (IN THIS CASE ALSO, THE METHOD ADOPTED IS CUP METHOD) (B) WHERE THE TRANSACTION WAS OF LENDING MONEY, IN FOREIGN CURRENCIES, TO ITS FOREIGN SUBSIDIARIES, THE COMPARABLE TRANSACTION, THEREFORE, WAS OF FOREIGN CURRENCY LENDED BY UNRELATED PARTIES. (C ) THE FINANCIAL POSITION AND CREDIT RATING OF THE SUBSIDIARIES WILL BE BROADLY THE SAME AS THE HOLDING COMPANY. (D) IF THAT WAS SO, THEN THE DOMESTIC PRIME LENDING WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEING LIBOR WOULD COME INTO PLAY AS IT IS THE MOSTLY USED AND RECOGNISED BENCHMARK RATE FOR INTERNATIONAL LOAN. ( I V ) . IN THE CASE OF SIVA INDUSTRIES & HOLDINGS LTD. V. ASSTT. CIT [2011] 11 TAXMANN.COM 404 (CHENNAI - ITAT) , THE ASSESSEE HAD GRANTED A LOAN OF RS. 50 CRO RES TO ITS SUBSIDIARY IN MAURITIUS FOR THE PURPOSE OF MAKING INVESTMENTS AND HAD CHARGED INTEREST AT THE RATE OF 6 PER CENT PER ANNUM. THE ISSUE WAS REFERRED TO THE TPO. BEFORE THE TPO IT WAS SUBMITTED THAT THE AVERAGE OF 12 MONTHS US $ DENOMINATED LIBOR R ATE FOR THE PERIOD 1 - 4 - 2005 TO 31 - 3 - 2006 WAS 4.42 PER CENT AND CONSEQUENTLY NO ADDITION ON ACCOUNT OF THE ARM S LENGTH INTEREST RATE WAS LIABLE TO BE MADE. THE ASSESSING OFFICER HAD TAKEN A VIEW THAT THE US$ DENOMINATED LIBOR RATE COULD NOT BE CONSIDERED A S THE LOAN WAS GIVEN FROM INDIA AND THE PRIME LENDING RATE IN INDIA WAS TO BE CONSIDERED. CONSEQUENTLY, THE ASSESSING OFFICER HAD DETERMINED THE RATE AT 11.75 PER CENT AND THE DIFFERENCE TO THE EXTENT OF RS. 45,23,817.53 WAS ADDED TO THE ASSESSEE S INCOME. THE ASSESSEE SUBMITTED THAT THE PRIME LENDING RATE WAS A DOMESTIC RATE AND THE TRANSACTION DONE BY THE ASSESSEE WAS AN INTERNATIONAL TRANSACTION FOR WHICH THE LIBOR RATE WAS TO BE APPLIED. IT FURTHER SUBMITTED THAT THE RBI HAD ALSO GIVEN DIRECTIONS WHEREI N IT WAS SPECIFICALLY MENTIONED THAT THE LIBOR RATE WAS TO BE APPLIED. THEREFORE, IT PRAYED FOR THE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 89 DELETION OF ADDITION TO THE TOTAL INCOME AS MADE BY THE AO. THE TRIBUNAL HELD THAT THE ASSESSEE HAD GIVEN THE LOAN TO THE ASSOCIATED ENTERPRISES IN US DOLLA RS, AND ASSESSEE WAS ALSO RECEIVING INTEREST FROM THE ASSOCIATED ENTERPRISES IN INDIAN RUPEES. ONCE THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES WAS IN FOREIGN CURRENCY AND THE TRANSACTION WAS AN INTERNATIONAL TRANSACTION, THEN THE T RANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLYING THE COMMERCIAL PRINCIPLES IN REGARD TO INTERNATIONAL TRANSACTION. IF THAT WAS SO, THEN THE DOMESTIC PRIME LENDING WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEING LIBOR WOULD COME INTO P LAY. IN THE CIRCUMSTANCES, THE VIEW THAT LIBOR RATE HAD TO BE CONSIDERED WHILE DETERMINING THE ARM S LENGTH INTEREST RATE IN RESPECT OF THE TRANSACTION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES WAS TO BE UPHELD. AS IT WAS NOTICED THAT THE AVERAGE OF THE LIBOR RATE FOR 1 - 4 - 2005 TO 31 - 3 - 2006 IS 4.42 PER CENT AND THE ASSESSEE HAD CHARGED INTEREST AT 6 PER CENT WHICH WAS HIGHER THAN THE LIBOR RATE, NO ADDITION ON THIS COUNT WAS LIABLE TO BE MADE IN THE HANDS OF THE ASSESSEE . IN THE CIRCUMSTANCES, THE ADDITION MADE BY THE ASSESSING OFFICER ON THIS COUNT WAS DELETED. ( V ) . IN THE CASE OF M/S FOUR SOFT LTD, HYDERABAD V. DCIT (ITA NO.1495/HYD/2010) , HON BLE TRIBUNAL HELD AS BELOW: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABL E ON RECORD. WE DO NOT FIND ANY MERIT IN THE ARGUMENTS OF THE LEARNED DEPARTMENTAL REPRESENTATIVE AS WE FIND THAT THE ALP IS TO BE DETERMINED FOR THE INTERNATIONAL TRANSACTION, THAT IS, ON INTERNATIONAL LOAN AND NOT FOR THE DOMESTIC LOAN. HENCE, THE COMPARABLE, IN RESPECT OF FOREIGN CURRENCY LOAN IN THE INTERNATIONAL MARKET, IS TO BE LIBOR BASED WHICH IS INTERNATIONALLY RECOGNISED AND ADOPTED . IN OUR CONSIDERED VIEW, THE DRP RIGHTLY DIRECTED THE ASSESSING OFFICER TO ADOPT THE LIBOR PLUS FOR THE PURPOS E OF TP ADJUSTMENT. OUR VIEW IS FORTIFIED BY THE DECISION OF THE MADRAS BENCH IN THE CASE OF SIVA INDUSTRIES [SUPRA]. WE DO NOT FIND ANY MERIT IN THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE DRP SHOULD HAVE ADOPTED THE EURIBOR FOR THE PUR POSE OF THE TP ADJUSTMENTS, AS WE FIND THAT THE MOSTLY USED AND RECOGNISED BENCHMARK RATE FOR INTERNATIONAL LOAN IS LIBOR BASED. HENCE, THE DRP RIGHTLY DIRECTED THE ASSESSING OFFICER TO ADOPT THE LIBOR RATES. WE CONFIRM THE DIRECTIONS OF THE DRP. HOWEVER, BY CONSIDERING THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ACTUAL LIBOR WAS 4.42% AS AGAINST THE 5.78% APPROVED BY THE DRP, WE FIND IT PROPER TO RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER, TO VERIFY THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE COMPANY. IN VIEW OF THIS MATTER, WE REMIT THIS MATTER TO THE FILE OF THE ASSESSING OFFICER TO VERIFY THE ACTUAL AVERAGE LIBOR PREVAILED IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION AND ADOPT THE INTER EST RATE 4.42% IF THE CLAIM OF THE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 90 ASSESSEE IS FOUND CORRECT. THE GROUND RAISED BY THE ASSESSEE ON THIS ISSUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ( V I ) . THE MUMBAI BENCH IN CASE OF DY. CIT V. TECH MAHINDRA LTD. [2011] 46 SOT 141 (URO)/12 TAXMANN.COM 132 (MUM.) FOR ASSESSMENT YEAR (AY) 2004 - 05, HELD THAT THE ARM'S LENGTH PRICE IN CASE OF INTEREST ON EXTENDED CREDIT PERIOD ALLOWED TO AN ASSOCIATED ENTERPRISE (AE) BASED IN USA SHALL BE DETERMINED ON THE BASIS OF USD LONDON INTER BANK OFFER RATE (LIBOR) I NSTEAD OF APPLYING THE RATE OF INTEREST PERTAINING TO EURO DENOMINATED LOAN CHARGED TO AE BASED IN GERMANY SINCE THE AE WAS BASED IN USA. THE FACTS OF THE CASE WERE THAT THE ASSESSEE IN THAT CASE WAS A JOINT VENTURE BETWEEN MAHINDRA & MAHINDRA LIMITED (IND IAN COMPANY) AND BRITISH TELECOMMUNICATIONS (UK COMPANY), WAS ENGAGED IN RENDERING OF SOFTWARE SERVICES RELATING TO TELECOMMUNICATION, INTERNET TECHNOLOGY AND ENGINEERING ETC. DURING THE PREVIOUS YEAR, THE TAXPAYER HAD EXTENDED CREDIT BEYOND THE STIPULATED CREDIT PERIOD TO ITS AE BASED IN USA WITHOUT CHARGING ANY INTEREST ON SUCH EXTENDED CREDIT PERIOD. DURING THE ASSESSMENT PROCEEDINGS, THE TPO REJECTED TAXPAYER'S ARGUMENTS AND DETERMINED THE ARM'S LENGTH INTEREST FOR SUCH EXTENDED CREDIT PERIOD TO US AE A T THE RATE OF 10 PERCENT PER ANNUM. THE TPO DETERMINED THIS RATE BASED ON THE RATE OF INTEREST CHARGED BY THE TAXPAYER ON EURO DENOMINATED LOAN GRANTED TO ITS GERMAN AE. THE RESULTANT TRANSFER PRICING ADJUSTMENT AMOUNTED TO INR 1.87 CRORES. THE AO ADOPTED THE ADJUSTMENTS MADE BY THE TPO. AGGRIEVED BY THE DECISION OF THE AO, THE TAXPAYER FILED OBJECTIONS BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)]. THE CIT(A) CONFIRMED THE TRANSFER PRICING ADJUSTMENT, HOWEVER, RESTRICTED THE SAME TO 2 PERCENT BA SED ON THE USD LIBOR RATE PLUS 80 BASIS POINT MARK - UP. AGGRIEVED BY THE ORDER OF THE CIT(A), THAT AO FILED AN APPEAL BEFORE THE TRIBUNAL. THE TRIBUNAL HAD THAT THE TPO MADE AN ERROR IN SELECTING THE TRANSACTION OF CHARGING OF INTEREST TO GERMAN AE ON LOAN GRANTED AT THE RATE OF 10 PERCENT PER ANNUM AS INTERNAL COMPARABLE. FOLLOWING THE POSITION SETTLED IN CASE SKODA AUTO INDIA AND RULE 10B(1)(A) OF THE INCOME - TAX RULES, 1962, TO BE AN INTERNAL COMPARABLE UNDER THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD, THE TRANSACTION NEEDS TO OCCUR BETWEEN THE TAXPAYER AND AN INDEPENDENT PARTY. EVEN ASSUMING THAT THE ADJUSTMENT FOR EXTENDED CREDIT WAS NECESSARY, USD LIBOR IS MORE APPROPRIATE BASIS THAN THE RATE OF INTEREST ON EURO DENOMINATED LOAN CONSIDERING THE FACT THAT THE AE IS BASED IN USA AND COMMERCIAL PRINCIPLES AND PRACTICES RELATED TO USD DENOMINATED EXTENDED CREDIT. THE TRIBUNAL HAS ALSO MADE A CRUCIAL POINT THAT THE ARM'S LENGTH INTEREST RATE SHOULD BE TAKEN FROM THE COUNTRY OF THE BORROWER/DEBTOR, I.E. THE RATE OF INTEREST TO BE USED FOR BENCHMARKING SHALL BE THE RATE OF INTEREST IN RESPECT OF THE CURRENCY IN WHICH THE UNDERLYING TRANSACTION HAS TAKEN PLACE IN CONSIDERATION OF ECONOMIC AND COMMERCIAL FACTORS AROUND THE SPECIFIC CURRENCY DENOMINATED INTEREST RATE. ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 91 ( V I I ) . MUMBAI TRIBUNAL IN THE CASE OF TATA AUTOCOMP SYSTEMS LTD. V. ASST. CIT [2012] 21 TAXMANN.COM 6 (MUMBAI - TRIB .) ALSO HELD THAT LENDING OR BORROWING MONEY BETWEEN TWO ASSOCIATED ENTERPRISES COMES WITHIN THE AMBIT OF INTERNATIONAL TRANSACTION AND WHETHER THE SAME IS AT ARM'S LENGTH PRICE HAS TO BE CONSIDERED. THE QUESTION OF RATE OF INTEREST ON THE BORROWINGS IS AN INTEGRAL PART OF ARM'S LENGTH PRICE DETERMINATION IN THIS CONTEXT. THE FACT THAT THE LOAN HAS THE RBI'S APPROVAL DOES NOT PUT A SEAL O F APPROVAL ON THE TRUE CHARACTER OF THE TRANSACTION FROM THE PERSPECTIVE OF TRANSFER PRICING REGULATION AS THE SUBSTANCE OF THE TRANSACTION HAS TO BE JUDGED AS TO WHETHER THE TRANSACTION IS AT ARM S LENGTH OR NOT. FURTHER, CUP IS THE MOST APPROPRIATE METHO D FOR DETERMINING ALP IN THE PRESENT CASE. IN THIS CASE THE TRIBUNAL HELD AS BELOW: IN THE PRESENT CASE THE AE IS A GERMAN COMPANY. EUROBIOR RATES ARE BASED ON THE AVERAGE INTEREST RATES AT WHICH A PANEL OF MORE THAN 50 EUROPEAN BANKS BORROW FUNDS FROM ONE ANOTHER. THERE ARE DIFFERENT MATURITIES, RANGING FROM ONE WEEK TO ONE YEAR. THESE RATES ARE CONSIDERED TO BE THE MOST IMPORTANT RATE IN THE EUROPEAN MONEY MARKET. THE INTEREST RATES DO PROVIDE THE BASIS FOR THE PRICE AND INTEREST RATES OF ALL KINDS OF FINANCIAL PRODUCTS LIKE INTEREST RATE SWAPS, INTEREST RATE FUTURES, SAVING ACCOUNT AND MORTGAGES. WE FIND THAT THE RBI IN RESPECT OF EXPORT CREDIT TO EXPORTERS AT INTERNATIONALLY COMPETITIVE RATES UNDER THE SCHEME OF PRE - SHIPMENT CREDIT IN FOREIGN CURRENCY (PCFC) AND REDISCOUNTING OF EXPORT BILLS ABROAD (EBR), HAS PERMITTED BANKS TO FIX THE RATES OF INTEREST WITH REFERENCE TO RULING LIBOR, EURO LIBOR OR EURIBOR, WHEREVER APPLICABLE AND THERETO APPROPRIATE PERCENTAGE RANGING FROM 1% TO 2%. THE REFERENCE TO T HE SAID CIRCULAR IS AT PAGE - 80 OF THE ASSESSEE'S PAPER BOOK. IN OUR VIEW THE CLAIM OF THE ASSESSEE TO ADOPT EURIBOR RATE AS STATED BEFORE THE TPO IS REASONABLE AND DESERVES TO BE ACCEPTED. FOLLOWING THE RULING OF THE TRIBUNAL IN THE AFORESAID CASES, WE AR E OF THE VIEW THAT THE CLAIM MADE BY THE ASSESSEE IN THIS REGARD HAS TO BE ACCEPTED. THE AO IS DIRECTED TO WORK OUT THE TP ADJUSTMENT ACCORDINGLY. COTTON NATURALS (I) PVT. LTD. VS. DCIT, CIRCLE 3(1) NEW DELHI, ITA NO. 5855/DEL/2012 DT. 08 - 02 - 2013 14. WE NOTE THAT CUP METHOD IS THE MOST APPROPRIATE METHOD IN ORDER TO ASCERTAIN ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION AS THAT OF THE ASSESSEE. WE AGREE WITH THE ASSESSEE S CONTENTION THAT WHERE THE TRANSACTION WAS OF LENDING MONEY IN FOREIGN CURRENCY TO ITS FOREIGN SUBSIDIARIES THE COMPARABLE TRANSACTIONS, THEREFORE, WAS OF FOREIGN CURRENCY LENDED BY UNRELATED PARTIES. THE FINANCIAL POSITION ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 92 AND CREDIT RATING OF THE SUBSIDIARIES WILL BE BROADLY THE SAME AS THE HOLDING COMPANY. IN SUCH A SITUA TION, DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEING LIBOR SHOULD BE TAKEN AS THE BENCHMARK RATE FOR INTERNATIONAL TRANSACTIONS. 15. THE ABOVE VIEW IS DULY SUPPORTED BY FOLLOWING CASE LAWS RELIED UPON BY THE ASSESSEE S COUNSEL. IN SIVA INDUSTRIES AND HOLDING LTD. VS. ACIT SUPRA IT WAS HELD BY ITAT THAT THE ASSESSEE HAD GIVEN THE LOAN TO THE ASSOCIATE ENTERPRISE IN U.S. DOLLARS, AND IN SUCH A SITUATION WHEN THE TRANSACTION WAS IN FOREIGN CURRENCY, AND THE TRAN SACTION WAS AN INTERNATIONAL TRANSACTIONS, THEN THE TRANSACTION WOULD HAVE TO BE LOOKED UPON BY APPLYING THE COMMERCIAL PRINCIPLES IN REGARD TO INTERNATIONAL TRANSACTIONS. IN SUCH A SITUATION DOMESTIC PRIME LENDING WOULD HAVE NO APPLICABILITY AND THE INTER NATIONAL RATE FIXED BEING LIBOR RATE WOULD HAVE TO BE ADOPTED. ( V I I I ) . SIMILAR VIEW AS ABOVE WAS EXPRESSED BY THE ITAT IN THE CASE OF M/S FOUR SOFT LTD., HYDERABAD VS. DCIT SUPRA, DY. C.I.T. VS. TECH. MAHINDRA SUPRA, TATA AUTOCOMP SYSTEMS VS. ACIT SUPRA. 26.5. REVENUE S SUBMISSIONS : IT WAS SUBMITTED BY THE LEARNED DR THAT THE DRP HAS DIRECTED TO APPLY SAFE HARBOR RULE ACCORDING TO WHICH THE RATE HAS TO BE COMPUTED ON THE BASIS OF THE SBI BASE RATE PLUS 100 BASIS POINT. HE FURTHER ARGUED THAT THE CONTENTION OF THE ASSESSEE THAT THE RATE SHOULD BE COMPUTED WITH REFERENCE TO THE LIBOR APPLIED BY THE ITAT IN THE VARIOUS JUDGMENTS HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AS THE SAME IS SUBJECT MATTER OF FURTHER APPEAL BEFORE THE HIGH COURT. 26.6. OUR FINDINGS : GROUND NO.27 IS ON ADDITION AS A TRANSFER PRICING ADJUSTMENT REGARDING INTEREST ON LOAN GIVEN TO SUBSIDIARY COMPANY. THE DRP HA S DIRECTED TO APPLY SBI BASE RATE PLUS 150 BASE POINTS. THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE FOLLOWING DECISIONS: 1 . SIVA INDUSTRIE S & HOLDINGS LTD. V S. ASST.CIT(2011) 11 TAXMANN.COM 404 (CHENNAI - ITAT) 2 . M/S FOUR SOFT LTD., HYDERABAD VS. DCIT (ITA NO.1495/HYD/2010) ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 93 3 . DY.CIT VS. TECH MAHINDRA LTD. (2011) 46 SOT 141 (URO)/12 TAXMANN.COM 132 (MUM) 4 . TATA AUTOCOMP SYS TEMS LTD. V S ACIT (2012) 21 TAXMANN.COM 6 (MUMBAI TRIB. ) AS PER THESE DECISIONS FOR PROPER BENCH MARKING, INTEREST RATE TO BE APPLIED IS THE INTEREST RATE OF THE CURRENCY IN WHICH THE AMOUNT HAS BEEN ADVANCED. SINCE IN THIS CASE THE LOAN HAS BEEN GIVEN IN USD, THE INTEREST RATE WILL BE LIBOR+ . THE INTERNATIONAL RATE FIXED BY THE LIBOR H AS TO BE CONSIDERED FOR BENCH MARKING. THE ASSESSEE HAS CHARGED INTEREST @ 9.25% WHICH IS MUCH ABOVE THE LIBOR AND HENCE, NO FURTHER ADJUSTMENT ON THIS ACCOUNT NEEDS TO BE MADE. THUS THIS GROUND OF TH E ASSESSEE STANDS ALLOWED. 27 . GROUND NO.28 READS AS FOLLOWS. 28 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED TPO HAS ERRED, BOTH ON FACTS AND IN LAW, IN PROPOSING TO MAKE AN ADJUSTMENT OF RS. 54,39,600/ - ON ACCOUNT OF PROVI SION OF THE FACILITY OF STANDBY LETTER OF CREDIT. (II) THAT THE ABOVE ADJUSTMENT HAS BEEN PROPOSED REJECTING THE CONTENTION OF THE ASSESSEE THAT THE SBLC TO AN AE IS NOT A TRANSACTION IN THE NATURE OF INTERNATIONAL TRANSACTION AS DEFINED UNDER SECTION 92B OF THE ACT. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED IN IGNORING THE CONTENTION OF THE APPELLANT COMPANY THAT THE BENEFIT OF STANDBY LETTER OF CREDIT WAS NOT EXCLUSIVELY MEANT FOR THE ASSOCIATED ENTERPRISES AND HENCE NO ADJUS TMENT ON THIS ACCOUNT IS REQUIRED. (IV) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED IN HOLDING THAT THE ARM S LENGTH PRICE FOR PROVIDING SBLC BE COMPUTED AT THE RATE OF 2% PER ANNUM. 27.1 . FACTS RELATING TO THIS GROUND ARE THAT: IN GROUND NO.28, THE ASSESSEE IS AGITATING THE ADDITION OF RS.54,39,600/ - MADE BY THE AO ON THE BASIS OF THE ADJUSTMENT IN ARM S LENGTH PRICE IN RESPECT OF THE STANDBY LETTER OF CREDIT. DURING THE YEAR ASSESSEE HAS ISSUED A STANDBY LETTER OF CRE DIT OF US$ 60,00,000 FOR ITS SUBSIDIARY COMPANY IN UAE. THE MATTER WAS REFERRED TO THE TRANSFER PRICING OFFICER WHO WAS OF THE VIEW THAT FOR ISSUING THIS STANDBY LETTER OF CREDIT THE ASSESSEE SHOULD HAVE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 94 CHARGED A FEE FROM THE SUBSIDIARY COMPANY. HE WAS OF THE VIEW THAT THE NORMAL RATE CHARGED BY THE BANK FOR ISSUING SUCH STANDBY LETTER OF CREDIT IS 1 TO 2.25%. THE TPO FURTHER ADDED 2% TO THE 2.5% AND BY APPLYING RATE OF 4.5% PROPOSED AN ADDITION OF RS.1,32,39,100/ - . THE DRP, HOWEVER, DIRECTED THAT THE RATE TO BE APPLIED BE 2% PER ANNUM AND CONSEQUENT TO THAT RESTRICTED THE ADDITION TO RS.54,39,600/ - . 27. 2 . DRP FINDINGS KEEPING IN VIEW THE SAFE HARBOUR RULE, THE DRP DIRECTS THE AO/TPO THAT THE ARM S LENGTH PRICE FOR PROVIDING SBLC SH OULD BE COMPUTED AT THE RATE OF 2 PER CENT PER ANNUM ON USD 6000000. 27.3 . F INAL ORDER BY AO: RECOMPUTATION FOR ADJUSTMENT IN INTEREST ON LOAN ADVANCED TO AE AMOUNT OF ADJUSTMENT IN ORIGINAL ORDER RS.1,05,66,451 LESS: AMOUNT OF ADJUSTMENT AS PER DRP ORDER RS. 7,71,349 NET RELIEF RS.97,95,102 RECOMPUTATION FOR ADJUSTMENT IN STAND BY LETTER OF CREDIT/BANK GUARANTEE AMOUNT OF ADJUSTMENT IN ORIGINAL ORDER RS.1, 22,39,100 LESS: AMOUNT OF ADJUSTMENT AS PER DRP ORDER RS. 54,39,600 (2% OF STAN D BY LETTER OF CREDIT GIVEN OF RS.27,19,80,000) NET RELIEF RS. 67,99,500 ADDITION ON ACCOUNT OF INTEREST RS. 7,71,349 ADDITION ON ACCOUNT OF SBLC RS. 54,39,600 TOTAL ADDITION RS. 62,10,949 THE TRANSFER PRICING ADJUSTMENT IN THE CASE OF THE ASSESSEE STANDS AT RS.62,10,949/ - FROM RS.2,28,05,551/ - IN THE ORIGINAL ORDER . 27.4. ASSESSEE S SUBMISSIONS: ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 95 THE A SSESSEE HAS OBTAINED STANDBY LETTER OF CREDIT BY PAYING 1% COST. HENCE THE DRP WAS NOT CORRECT IN APPLYING THE RATE OF 2% IGNORING THE FACT THAT THE ASSESSEE COMPANY HAS OBTAINED THE STANDBY LETTER OF CREDIT AT THE RATE OF 1% ONLY. RATE OF 2% WILL MEAN 1 00% PROFIT ON THE COST INCURRED BY THE ASSESSEE IN OBTAINING THE STANDBY LETTER OF CREDIT. AS HELD IN VARIOUS JUDGMENTS CITED HEREINABOVE ON THE ISSUE OF DETERMINATION OF RATE OF INTEREST ON THE MONEY LENT TO SUBSIDIARY COMPANY, THE FINANCIAL POSITION AND CREDIT RATING OF THE SUBSIDIARIES WILL BE BROADLY THE SAME AS THE HOLDING COMPANY. ACCORDINGLY NO DIFFERENCE CAN BE MADE ON THIS ACCOUNT. THUS THE RATE APPLIED BY DRP OF 2% IS TOO HIGH CONSIDERING THE COST BEING 1%. 27.5. REVENUE S SUBMISSIONS: IT WAS SUBMITTED BY THE LEARNED DR THAT THIS GROUND IS COMMON WITH GROUND NO.1 IN REVENUE S APPEAL. THE LEARNED DR FURTHER SUBMITTED THAT THERE ARE TWO ISSUES ARISING ON THIS POINT. THE FIRST IS WHETHER THE ASSESSEE IS REQUIRED TO CHARGE AN AMOUN T FROM ITS SUBSIDIARY IN RESPECT OF THE STANDBY LETTER OF CREDIT AND THE SECOND IS IF IT HAS TO BE CHARGED THEN AT WHAT RATE. THE FIRST ISSUE IS NOT BEING ADMITTED BY THE ASSESSEE COMPANY AS THE LEARNED AR HAS NOT DISPUTED THE FACT THAT SOME AMOUNT IS TO BE CHARGED ON THE STANDBY LETTER OF CREDIT. AS REGARDS THE SECOND CONTENTION THAT THE AMOUNT CHARGED AT THE RATE OF 2% IS TOO HIGH AS COMPARED TO THE COST AT THE RATE OF 1% TO BE INCURRED BY THE ASSESSEE COMPANY, IT IS SUBMITTED THAT THE ASSESSEE HAS PROV IDED SERVICE TO THE SUBSIDIARY COMPANY BY PROVIDING STANDBY LETTER OF CREDIT. ACCORDINGLY FOR THE SERVICES RENDERED BY IT, IT IS REQUIRED TO ADD SERVICE CHARGES ON THE COST IT HAS INCURRED IN PROVIDING THE STANDBY LETTER OF CREDIT. HE FURTHER CONTENDED T HAT THE COMPUTATION DONE BY THE TPO BY DEDUCTING COST OF SUCH PROVIDING SUCH SERVICES AT 2.5% AND FURTHER ADDITION OF 200 BASIS POINT ON SUCH COST WAS JUSTIFIED. ON THIS BASIS HE SUPPORTED THE ORDER OF THE TPO. 27. 6. OUR FINDINGS : GROUND NO.28 IS AGAINST THE TRANSFER PRICING ADJUSTMENT AS CONFIRMED BY THE DRP IN RESP ECT OF STAND BY LETTER OF CREDIT. AS THE ASSESSEE HAS OBTAINED STAND BY LETTER OF CREDIT @ 1%, THE RATE SUGGESTED BY THE DRP AT ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 96 2% IN OUR VIEW IS NOT JUSTIFIED . WE DIRECT THAT 1% OF STAND BY LETTER OF CREDIT AMOUNT BE TAK EN AS ARM S LENGTH PRICE. IN THE RESULT THE ASSESSEE GETS PART RELIEF AND THIS GROUND IS PARTLY ALLOWE D . 28 . . GROUND NO.29 READS AS FOLLOWS. 29. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTER ANY OF THE GROUNDS OF OBJECTION. 28.1. THIS GROUND IS GENERAL IN NATURE. 29 . WE NOW CONSIDER THE REVENUE S APPEAL ITA NO.5829/DEL /2014. 30 . GROUND NO.1 READS AS FOLLOWS. L . THE HON BLE DRP HAS ERRED IN LAW AND ON FACTS AS WELL IN DIRECTING THE A.O. AND THE TPO THAT THE ARM'S LENGTH PRICE FOR PROVIDING SBLC SHOULD BE COMPUTED AT THE RATE OF 2 PER CENT PER ANNUM ON USD 6000000 IN RESPECT OF ADDITION OF RS . 2,28,05,551 / - - ON ACCOUNT OF TRANSFER PRICING ISSUE WITHOUT EXAMINING AND ADJUDICATING UPON ON MERITS OF THE CASE. 30.1 . WE HAVE DEALT WITH THIS ISSUE WHILE ADJUDICATING GROUND NO.28 IN THE ASSESSEE S APPEAL. CONSISTENT WITH THE VIEW TAKEN THEREIN WE DISMISS THIS GROUND OF THE REVENUE. 31. GROUND NOS. 2 AND 3 READ AS FOLLOWS. 2 . THE HON'BLE DRP HAS ERRED IN LAW AND ON FACTS AS WELL IN DIRECTING SUBSTITUTE THE FIGURE OF RS . 84,20,360 / - - WORKED OUT BY THE SPECIAL AUDITOR & A . O. INSTEAD OF PROPOSED ADDITION OF RS.2.74 C R ON ACCOUNT OF EXTRAPOLATION OF SCRAP SALES WITHOUT EXAMINING AND ADJUDICATING UPON ON MERITS OF THE CASE. 3 . THE HON BLE DRP HAS ERRED IN LAW AND ON FACTS AS WELL IN DIRECTING THE A.O . TO RE - VERIFY THE CLAIM OF THE APPELLANT WITHOUT EXAMINING AND ADJUDICAT ING UPON ON MERITS OF THE CASE. OUR FINDING : THESE GROUNDS ARE SIMILAR TO GROUND NO.14 IN THE ASSESSEE S APPEAL CONSISTENT WITH THE VIEW TAKEN THEREIN WE DISMISS THESE GROUNDS OF REVENUE. 32. GROUND NO.4.1 READS AS UNDER. 4. (I) THE HON BLE DRP HAS ERRED IN LAW AND ON FACTS AS WELL IN ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 97 DIRECTING THE A.O. TO IDENTIFY THE NATURE OF THE TRANSACTIONS AS GIVEN IN THE CHART WHICH IS BASED ON SEIZED MATERIALS AND THE SPECIAL AUDITOR ' S REPORT AND ITEMS WHICH DO NOT ATTRACT 40(A)(IA) SHALL BE EXCLUDED UPON THE VERIFICATION IN RESPECT OF ADDITION OF RS. 3,22,40 , 175 / - ON ACCOUNT OF TDS DEFAULT WITHOUT EXAMINING AND ADJUDICATING UPON ON MERITS OF THE CASE. 3.2.1 . OUR FINDING: THIS IS SIMILAR TO GROUND NO.17 OF THE ASSESSEE S APPEAL. THE REVENUE IN THIS GROUND IS FI NDING FAULT WITH THE DIRECTIONS OF THE DRP WHEREIN THE AO WAS ASKED TO IDENTIFY THE NATURE OF TRANSACTIONS AS GIVEN IN THE CHART AND EXCLUDE SUCH TRANSACTIONS WHICH DO NOT ATTRACT PROVISIONS OF TAX DEDUCTION AT SOURCE. WE DO NOT FIND ANY INFIRMITY IN SUCH DIRECTIONS. CONSISTENT WITH THE VIEW TAKEN BY US WHILE DISPOSING GROUND NO.17 OF THE ASSESSEE S APPEAL WE DISMISS THIS GROUND OF THE REVENUE. 33 . GROUND NO.4(II) READS AS FOLLOWS. 4. (II) THE HON'BLE DRP HAS ERRED IN LAW AND ON FACTS AS WELL IN HOLDING THAT THE APPELLANT IS ENTITLED TO THE BENEFIT OF THE JUDGMENT RELIED ON BY HIM IN AS MUCH AS HIS WAS NOT A CASE OF NON DEDUCTION OF TAX BUT SHORT DEDUCTION OF TAX AT SOURCE AND THE APPEL LANT LIABLE U/S 201 AND NOT U/S 40(A)(IA) IN RESPECT OF ADDITION OF RS . 53,17,42,328/ - ON ACCOUNT OF TDS DEFAULT WITHOUT EXAMINING AND ADJUDICATING UPON ON MERITS OF THE CASE. 33.1. OUR FINDING : THE ISSUE IS WHETHER DISALLOWANCE U/S 40A(IA) CAN BE MADE FOR S HORT DEDUCTION AT SOURCE. ADMITTEDLY TLG(I) LTD. IS BEING ASSESSED TO TAX AND THE AMOUNT IN QUESTION HAS BEEN INCLUDED IN ITS INCOME AND TAX PAID THEREON. UNDER THE CIRCUMSTANCES WE UPHOLD THE FINDING OF THE DRP THAT S.40A(IA) CANNOT BE INVOKED FOR SHORT DEDUCTION OF TAX AS HELD BY HON BLE CALCUTTA HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. AK TEKRIWAL (2013) 90 DTR (CAL) 26. EVEN OTHERWISE, THIS ADDITION OTHERWISE CANNOT BE SUSTAINED IN VIEW OF THE AMENDMENT MADE BY THE FINANCE ACT, 2012 WHERE A PRO VISO HAS BEEN INSERTED BELOW SECTION 201(1) TO PROVIDE THAT THE ASSESSEE SHALL NOT BE TREATED AS AN ASS ESSEE IN DEFAULT IN CASE THE DEDUCTEE HAS FURNISHED THE RETURN OF INCOME, INCLUDED THE SUM IN THE INCOME AND PAID TAXES AS PER THE RETURN OF INCOME. IN THE PRESENT C ASE, ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 98 THE ASSESSEE HAS COMPLIED WITH THESE CONDITIONS AS IS EVIDENT FROM THE LETTER DATED 8 TH NOVEMBER,2013 FILED BEFORE THE AO ALONG WITH THE CERTIFICATE IN THE PRESCRIBED FORM TO THIS EFFECT. IN THE RESULT THIS GROUND O F THE REVENUE STANDS DISMISSED. 34. GROUND NO.5 READS AS FOLLOWS. 5. THE HON'BLE DRP HAS ERRED IN LAW AND ON FACTS AS WELL IN DIRECTING THE A.O TO ALLOW THE CLAIM OF THE ASSESSEE U/S 43B OF THE ACT AFTER PROPER VERIFICATION IN RESPECT OF ADDITION OF RS . 51,59 , 3801 - ON ACCOUNT OF DISALLOWANCE OF BONUS U/S 43B WITHOUT EXAMINING AND ADJUDICATING UPON ON MERITS OF THE CASE . OUR FINDING : - THE DIRECTIONS OF THE DRP TO THE AO TO ALLOW THE CLAIM OF THE ASSESSEE U/S 43B OF THE ACT AFTER PROPER VERIFICATION IS DISPUTED BY THE REVENUE. WE FIND NO INFIRMITY IN THE DIRECTIONS OF THE DRP. WE HAVE DEALT WITH THIS ISSUE WHILE DISPOSING OF GROUND NO.18 OF ASSESSEE S APPEAL. CONSISTENT WITH THE V IEW TAKEN THEREIN WE DISMISS THIS GROUND OF APPEAL. 35 . GROUND NO.6 READS AS FOLLOWS. 5 . THE HON BLE DRP HAS ERRED IN LAW AND ON FACTS AS WELL IN OBSERVING THAT THE EXPENSES OF RS. 16,06,037 / - WAS A PRIOR PERIOD EXPENDITURE AND SHOULD HAVE BEEN ALLOWED THERE AND SINCE IT WAS NOT DONE IT SHOULD BE ALLOWABLE EXPENDITURE IN RESPECT OF ADDITION ON ACCOUNT OF PRIOR PERIOD EXPENSES AMOUNTING TO RS.16,06 , 037 / - , WITHOUT EXAMINING AND ADJUDICATING UPON ON MERITS OF THE CASE . 35.1 . OUR FINDING: THE DRP IN ITS ORDER CAME TO A CONCLUSION THAT PRIOR PERIOD EXPENDITURE HAS CRYSTALLISED DURING THE YEAR. THE ASSESSEE HAD EXPLAINED THAT THE PRIOR PERIOD EXPENDITURE OF RS.16,037/ - AND THAT A SUM OF RS.15,94,202/ - RELATING TO CLEARING AND FORWARDING OF M/S SSS SAI SHIPPING SERVICES P.LTD. THE CLEARING AND FORWARDING AGENT REPORTED LOSS OF MOBILE UNITS AND HENCE A DEBIT NOTE WAS RAISED ON THE SAID AGENT DURING THE PREVIOUS YEAR 2009 - 10. IN THE CURRENT AY, AFTER MUTUAL CONSULTATION THE DEBIT NOTE WAS REVERSED. AS THE DISP UTE WAS SETTLED IN THE YEAR UNDER CONSIDERATION AS IS EVIDENT FROM THE MOU, THE ASSESSEE WAS CORRECT IN REVERSING THE CLAIM AMDE IN THE PRECEDING YEAR . ON THESE FACTS AND ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 99 CIRCUMSTANCES WE UPHOLD THE FINDING OF THE DRP THAT THE CLAIM IN QUESTION HAS CRYSTALLISED DURING THE YEAR AND THE SAME IS EVIDENCED BY WAY OF MOU WHEREIN THE DISPUTE OF THE ASSESSEE IS SETTLED WITH THE SHI PPING AGENT. IN THE RESULT THIS GROUND IS DISMISSED. 36. GROUND NO.7 READS AS FOLLOWS. THE HON BLE DRP HAS ERRED IN LAW AND ON FACTS AS WELL IN DELETING THE ADDITION ON ACCOUNT OF DISALLOWANCE OF ADVERT ISEMENT EXPENSES AMOUNTING TO RS.2,00,00,000 / - - WITHOUT EXAMINING AND ADJUDICATING UPON ON MERITS OF THE CASE. 36.1 . OUR FINDING: THIS G ROUND IS ON DISALLOWANCE OF ADVERTISING EXPENDITURE ON ADHOC BASIS. THIS DISALLOWANCE IS MADE ON AN ADHOC BASIS. THE BOOKS OF ACCOUNTS OF THE ASSESSEE WERE SUBJECT TO SPECIAL AUDIT THERE WAS NO ADVERSE COMMENT MADE BY THE SPECIAL AUDITORS ON THE ACCIDENT CLAIM . UNDER THESE CIRCUMSTANCES AN ADHOC DISALLOWANCE OF RS.2 CRORES IS UNCALLED FOR. THE AO HAS ACCEPTED THE DIRECTIONS OF THE DRP BUT THE REVENUE HAS FILED THIS APPEAL. THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE AUDITED AND NO ADVERSE COMMENTS HAVE BEEN GIVEN BY THE AUDITOR. THESE BOOKS OF ACCOUN TS HAVE ALSO BEEN PROVIDED BEFORE THE AO. AS THE AO HAS NOT GIVEN ANY SPECIFIC INSTANCE OR VALID REASON FOR MAKING THIS ADHOC DIS ALLOWANCE WE SUSTAIN THE FINDING OF THE DRP AND DISMISS THIS GROUND OF THE REVENUE. 37 . GROUND NO.8 READS AS UNDER. THE HON'BLE DRP HAS ERRED IN LAW AND ON FACTS AS WELL IN DIRECTING THE A.O . TO RELOOK THE ISSUE BY CARRYING OUT THE NECESSARY VERIFICATION AND RECONCILIATION BY THE APPELLANT IN RESPECT OF ADDITION ON ACCOUNT OF SUNDRY CREDITORS AMOUNTING TO RS . 2,37,11,754/ - WITHOUT EXAMINING AND ADJUDICATING UPON ON MERITS OF THE CASE. 37.1 . OUR FINDINGS: - THIS GROUND IS DIRECTED AGAINST THE DIRECTIONS OF THE DRP, WHEREIN VERIFICATION OF OUTSTANDING AMOUNT OF SUNDRY CREDITORS WAS ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 100 DIRECTED. WE HAVE DEALT WITH THIS ISSUE WHILE DISPOSING OF GROUND NO.19 OF THE ASSESSEE S APPEAL. CONSISTENT WITH THE FINDING GIVEN THEREIN, WE DISMISS THIS GROUND OF THE REVENUE. 38. GROUND NO.9 READS AS UNDER. THE HO N BLE DRP HAS ERRED IN LAW AND ON FACTS AS WELL IN DIRECTING THE A . O. TO DELETE THE ADDITION TO THE EXTENT OF RS.4.27 CRORE SUBJECT TO PROPER VERIFICATION BY THE A . O. IN RESPECT OF ADDITION ON ACCOUNT OF HSBC ACCOUNT AMOUNTING TO RS. 7,44,24 , 668/ - WITHOUT EXAMINING AND ADJUDICATING UPON ON MERITS OF THE CASE . 38.1 . OUR FINDINGS: THIS GROUND IS AGAINST DIRECTION OF THE DRP FOR VERIFYING AN AMOUNT OF RS.4.27 CRORES ON TRANSACTIONS AMOUNTING TO RS.4.27 CRORES IN HSBC ACCOU NT. THIS ISSUE IS DEALT BY US WHILE DISPOSING OF GROUND NO.22 OF THE ASSESSEE S APPEAL. CONSISTENT WITH THE VIEW TAKEN THEREIN, WE DISMISS THIS GROUND OF THE REVENUE. 39. GROUND NO.10 READS AS UNDER. THE HON BLE DRP ERRED IN LAW AND ON FACTS AS WE LL IN REDUCING THE ADDITION TO RS.5,41,301/ - MADE ON ACCOUNT OF DISALLOWANCE U] S 40 (A)(IA) AND DIRECTING THE A.O . TO VERIFY THE CLAIM OF THE ASSESSEE. 39.1 . OUR FINDINGS: - THIS GROUND IS ON DISALLOWANCE U/S 40A(IA), WHEREIN THE DRP HAS DIRECTED VERIFICATION OF THE OUTSTANDING AMOUNT AS ON THE LAST DATE. WE HAVE DEALT WITH THIS ISSUE WHILE DISPOSING OF GROUND NO.1 6 OF THE ASSESSEE S APPEAL. CONSISTENT WITH THE VIEW TAKEN THEREIN WE DISMISS THIS GROUND OF THE REVENUE. 40 . GROUND NO.11 READS AS UNDER. THE HO N'BLE DRP ERRED IN NOT ADJUDICATING UPON PASSING SPEAKING ORDER IN RESPECT OF ADDITION OF RS.3,5L,09,95,646/ - MADE ON THE BASIS OF CREDIT NOTES. OUR FINDINGS: - THIS GROUND IS MISCONCEIVED. THE DRP HAD DIRECTED THE AO TO VERIFY THE AMOUNT AND THE AO AFT ER VERIFICATION DISALLOWED THE ENTIRE ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 101 AMOUNT. WE HAVE DEALT WITH THIS ISSUE AT GROUND NO.6 AND 13 OF THE ASSESSEE S APPEAL. CONSISTENT WITH THE VIEW TAKEN THEREIN WE DISMISS THIS GROUND OF THE REVENUE. 41 . GROUND NO.12 IS GENERAL IN NATURE. 42. IN THE RE SULT ASSESSEE S APPEAL IS PARTLY ALLOWED AND REVENUE S APPEAL STAND DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH FEBRUARY, 2015. SD/ - SD/ - ( I.C. SUDHIR ) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: THE 20 TH FEBRUA RY , 2015 *MANGA ITA NO. 6135/DEL/2014 & ITA 5829/DEL/2014 A.Y. 2011 - 12 MICROMAX INFORMATICS LTD., NEW DELHI 102 COPY OF THE ORDER FORWARDED T O: 1.APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT(A); 5.DR; 6.GUARD FILE BY ORDER ASST.REGISTRAR