2011 (8) TMI 515 - HC - Income Tax

Court rules against assessee on disallowance, guest house expenses, revaluation reserve.

The court ruled against the assessee on all three issues. Firstly, the disallowance under Rule 6D was held to be computed per journey rather than ... Disallowance - 20 per cent of Rs. 6,16,346 out of cash purchases of Rs. 30,80,730 under section 40A(3) - bogus purchases Rs. 30,80,730 - There is no dispute that the assessee has made payments of Rs. 30,80,730 by cheques to M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics. During the course of search, the statement was also recorded of Shri Ashish Mehta on 20-6-2003 wherein he has stated that against the cheque transactions, cash has been received which is found recorded at page No. 152 of the assessee's paper book - During the course of assessment proceeding, it was stated by the assessee that the said cash, against cheque payments was utilised to purchase cloth from the Grey market and in support, the assessee has also filed details of closing stock as on 31-3-2003 appearing at page 143 of the assessee's paper book wherein fabric cloth totalling to Rs. 30,80,730 is appearing as closing stock - In the absence of any material to show that no such cheque payments were made by the assessee or cash amount received by the assessee against the cheque payments was utilised by the assessee other than purchases or the entry recorded in the closing stock amounting to Rs. 30,80,730 is found to be fictitious or false or no such closing stock was found during the course of search, we are of the view that the assessee has made cash purchases of Rs. 30,80,730 which undisputedly found recorded in the inventory of closing stock, therefore, the Assessing Officer was not justified in treating the said purchases of Rs. 30,80,730 as bogus purchases.Regards the application of provisions of section 40A(3) of the Act, find that during the course of search, no such material was found to show that the assessee has made cash payments in violation of provisions of section 40A(3) of the Act - Disallowance cannot be made merely on presumption basis that the assessee had made the purchases by way of cash from the Grey market in violation of the provisions of section 40A(3) of the Act - Held that:- the ld. CIT(A) was not justified in sustaining the addition of Rs. 6,16,346 being 20 per cent of total purchase of Rs. 30,80,730 and accordingly we delete the entire addition of Rs. 30,80,730. The ground taken by the assessee is therefore allowed and the ground taken by the Revenue is dismissed.Addition of Rs. 19,29,711 incurred on renovation of office premises - Property was taken on lease for three years commencing from 16-10-2001 in respect of three properties and the fourth property was taken on lease from 1-4-2002 not relevant for the year under consideration - The assessee has starts repairs expenses from 1-4-2001 i.e., prior to the property taken on lease - The Assessing Officer invoked the Explanation 1 to section 32(1) of the Act and held that assessee holds the 'right of occupancy' in the property within the meaning of Explanation 1 to section 32(1) and accordingly disallowed the repair expenses - The assessee has placed no material on record to show that there was any obligation to the assessee to incur expenditure on repairs of the premises taken on lease - Held that :- the expenditure incurred by the assessee are capital in nature not allowable as revenue expenditure as claimed by the assessee.Addition of commission payment of Rs. 38,70,055 to Shri Vinod Jaiswal - Assessee submits that the assessee has explained through a chart appearing at page No. 20 of the order of the ld. CIT(A) that the above payment of Rs. 38,70,055 was made by the assessee to Shri Vinod Jaiswal on the basis of entries of incentive at the rate of Rs. 12.50 per member payable to Shri Vinod Jaiswal, the Director of the company - He further submits that since the Assessing Officer has himself allowed the payment by cheques, therefore, the disallowance of cash payment for the same purpose is not justified - He further submits that in the Income-tax Return filed by Shri Vinod Jaiswal, he has disclosed the same amount as his income and the Assessing Officer after considering in detail has also taxed the same- Held that:- in the absence of any finding recorded in respect of the application of the provisions of section 69 of the Act and TDS, held that the payment made by the assessee are allowable under Act as business expenditure. Issues Involved:1. Disallowance under section 37(3) read with Rule 6D of the Income-tax Act.2. Disallowance of expenses on the guest house under section 37(4) of the Income-tax Act.3. Reduction of the amount withdrawn from the revaluation reserve account in computing book profits under section 115J of the Income-tax Act.Detailed Analysis:Issue 1: Disallowance under section 37(3) read with Rule 6D of the Income-tax ActThe primary issue was whether the disallowance under Rule 6D should be computed by consolidating all travel undertaken by each employee in a year or by considering each trip separately. The assessee had aggregated trips made by an employee during the year, adjusting any surplus against deficits from subsequent trips. The Assessing Officer (AO) disagreed, computing the disallowance on a per-trip basis, resulting in a higher disallowance amount. The Tribunal reversed the AO's decision, supporting the assessee's method.The court examined Rule 6D(2), which specifies limits on travel expenses based on the mode of travel and daily allowances for employees. The court concluded that disallowance must be computed per journey due to varying factors such as different cities and guest house provisions, which affect the limits. The court agreed with the Bombay High Court's view in CIT v. Aorow India Ltd., rejecting the aggregation method. Thus, the question was answered in the negative and against the assessee.Issue 2: Disallowance of expenses on the guest house under section 37(4) of the Income-tax ActBoth parties agreed that this issue was covered against the assessee by the Supreme Court's decision in Britannia Industries Ltd. v. CIT. The court did not provide further analysis, simply noting the consensus and ruling against the assessee.Issue 3: Reduction of the amount withdrawn from the revaluation reserve account in computing book profits under section 115J of the Income-tax ActThe AO had included the revaluation reserve in the book profits calculation, arguing that the assessee's method of providing depreciation on revalued assets without crediting the profit and loss account deflated book profits. The Tribunal disagreed, allowing the reduction of the amount withdrawn from the revaluation reserve.The court analyzed the provisions of section 115J and the explanation regarding book profits, noting that the revaluation reserve was created before the insertion of section 115J. The court emphasized that the reduction is only permissible if the reserve was created by crediting the profit and loss account, which was not the case here. The Supreme Court's decision in Indo-Rama Synthetics (I.) Ltd. v. CIT was cited, supporting the AO's view that the reduction is not allowable if the reserve did not increase book profits initially. Thus, the question was answered in the negative and against the assessee.Conclusion:The court ruled against the assessee on all three issues, emphasizing the correct interpretation of the Income-tax Act provisions and relevant rules. The reference was disposed of accordingly, with costs following the result.