2025 (8) TMI 1686 - AT - Income Tax

Tribunal upholds most assessee claims; rejects applying presumptive 44AD after specific AO additions; allows 80HH/80I deductions

DCIT, CIRCLE-3 (2), NEW DELHI Versus M/s ASIAN CONSOLIDATED INDUSTRIES LTD.

ITAT (Delhi - AT) upheld the appellate order allowing most of the assessee's claims. The Tribunal held AO erred in saying CIT(A) should apply presumptive ... Rejection of books of account - applying presumptive rate of taxation u/s 44AD - AO has rejected the books of account on the basis of allegation of various discrepancies which has led to various additions and disallowance - CIT(A) allowed claim - HELD THAT:- AO itself has not estimated the profit after rejecting the books of account. The AO has made various additions and disallowances itself as is evident from the assessment order. Thus, the contention of the Revenue that CIT(A) should have applied a presumptive rate of tax under section 44AD is not correct. Further section 44AD itself was introduced in the Income Tax Act by the Finance Act, 1994 w.e.f. 01.04.1994. This section was appliable in respect of civil contractor and not to any other business. Accordingly, the contention of the Revenue that CIT(A) should have applied section 44AD of the Act is otherwise not legally tenable. AO after rejecting the books of accounts has made individual disallowances on the basis of findings recorded by him. Thus it is the findings on the basis of which each of the addition or disallowances have been made are to be considered even after rejection of the books of accounts. CIT(A) has adjudicated independently each of the addition / disallowance taking into consideration the observations of the AO in the assessment order and the explanation, evidences submitted by the Assessee and material available on record. Thus, the contention of the Revenue that after rejection of books of accounts the CIT(A) should have applied presumptive rate by invoking provisions of section 44AD is not justified. Accordingly both the grounds no 1 and 2 of the revenue are dismissed. CIT(A) after examination has given a very detailed and reasoned finding in respect of each of the additions/disallowances. It is abundant clear that the CIT(A) has thoroughly examined each issue by analyzing the specific facts and available material and consequently, the CIT(A) has deleted various additions and disallowances. It is germane to mention here that where the CIT(A) has noticed that evidences are not sufficient or the explanation of the Assessee could not be verified, he has not accepted the contention of the Assessee and has confirmed the addition/ disallowance made by the AO. CIT(A) has discussed and analyzed each and every issue raised by the AO in the assessment order and after examination of the facts and documents on record, the CIT(A) has decided the issue. In the absence of any contrary facts being brought on record by the Revenue, the order of the CIT(A) is upheld and Grounds no 1 and 2 are dismissed on merit as well. Deduction u/s 80HH and 80l - AO has disallowed the claim on the ground that it is not possible to verify the claim of the appellant - HELD THAT:- On this issue we note that the assessee has submitted detailed explanation regarding its claim of deduction under section 80HH and 80l of the Act. The appellant company was incorporated on 18.01.1985 under the Companies Act. The company was engaged in the business of manufacturing of Flexible Packaging, Laminate, Open Top Sanitary Cans and General line metal Cans. The appellant being an industrial undertaking supported its commercial production since 19.08.1988 which was established in the backward area and therefore entitled to the benefit of section 80HH and 80l of the Act. In order to substantiate its claim, assessee has filed all the relevant documents. The appellant had duly furnished evidences to substantiate that the assessee is situated in a backward area, had employed prescribed labour force, certificate by the auditor under rule 18BBB and 18B, licence granted for manufacturing by the industries department, evidences for sales tax exemptions with respect to the claim of deduction u/s 80-HH and 80-l of the Act. The CIT(A) has examined the issue threadbare and thereafter has allowed the deduction. The Revenue couldn't controvert the findings of CIT(A). Disallowance of manufacturing expenses - as alleged assessee had failed to produce necessary evidences to substantiate the claim for such expenses - HELD THAT:- CIT(A) has deleted the disallowance made by the AO by holding that without incurring manufacturing expenses, manufacturing is not possible. It is not the case of the Assessing Officer that some of the expenditure claimed under the head manufacturing has been claimed at an inflated figure. No such evidence has been brought on record. In view of the above discussion, the claim of the appellant towards manufacturing expenses is found to be plausible and accordingly disallowance of manufacturing expenses is deleted. Disallowance of Administrative and selling expenses - alleging that the assessee has not produced the details of such evidences - Disallowance of above expenditure is at a higher side and is ordered to be restricted to 1/10th of the total expenditure claimed. Expenditure in accordance with the provisions of Section 35D(1) - Disallowance of Preliminary and Public Expenses - It is evident from the extract of the Section 35D(1), that the claim for preliminary expenses is allowed over a period of 10 years. Therefore, CIT(A) has rightly allowed 1/10th of the expenditure in the relevant previous year, and consequently the ground of revenue is dismissed. Depreciation on kegs restricted to 25% by the AO in spite of 100% claimed by the assessee - AO has allowed the depreciation at the rate of 25% on such kegs considering all the kegs manufactured as one unit, the assessee has considered each keg as an independent unit or drum in which beer is stored and accordingly claimed 100% depreciation thereon - HELD THAT:- Undisputedly the value of each keg is below Rs. 5000/-. The assessee placed reliance on the judgementi of S. VIJAYA KUMAR[2015 (6) TMI 769 - ANDHRA PRADESH HIGH COURT] wherein it has been held that once it is established that the assets do not lose their individual identity and can be disassembled after each use and reused again, in such circumstances, each asset is to be taken individually and independent of each other and accordingly depreciation at the rate of 100% is allowable. Thus, as is evident from the facts of the case, each keg is an independent unit/cask/drum in which beer is stored. Each keg has its own separate identity independent of each other and can be dis-assembled after each use and reused again as such in combination with same or different units thereof. The kegs are not an integral part of any other asset. CIT(A) has therefore deleted the disallowance of 75% of the depreciation made by the AO. Unexplained investment in Plant & Machinery - HELD THAT:-Machinery was installed during the year and the payments i.e. custom duties etc. were paid through bank and in this regard, appellant has filed copy of bill of exchange. Hence, the addition made on account of plant and machinery was not justified and the same is deleted. Disallowance of Administrative, selling and distribution expenses - As noted that the disallowance made by the AO is ad-hoc in nature, based on a ratio of sales. Further, all such expenditure were as per the regular books of accounts and were incurred during the course of normal business activities conducted during the year. Disallowance of Interest - AO has disallowed the proportionate interest on account of interest free advances made which were intricately linked with the borrowings on which interest has been paid - HELD THAT:- It is relevant to note that the interest debited in profit & loss account was paid against advances/loans taken for the business purposes. The advances which assessee has made and alleged to be interest free advances are towards the procurement of the supplies i.e. trade advances on which interest has not been charged. In view of the fact that most of the advances were against supplies and not as a loan, there was no occasion for charging of any interest. On perusal, it is noted that the AO has not brought out any material on record to substantiate his findings in respect of disallowance of interest. Further, on perusal of the appeal order in the case of the appellant for A. Y. 1994-95, it is noted that no such disallowance was made. It is noticed that the AO has not brought out the specific facts on record for disallowance of interest. In view of the above facts, disallowance of interest by the AO is deleted. Disallowance of manufacturing expenses - AO has disallowed the manufacturing expenses incurred by the assessee by alleging that the assessee had failed to produce necessary evidences to substantiate the claim for such expenses - HELD THAT:- CIT(A) has deleted the disallowance correctly held as gathered that nomenclature of the manufacturing and administrative, selling and distribution expenses is such that the same ought to have incurred in day to day business activities. Further in the impugned assessment order, the AO has failed to point out any specific shortcoming in the claim towards expenditure claimed. It is noted that the AO has not decided the above matter afresh during the course of set-aside proceedings and has simply copied the original assessment order. In the original assessment order, the expenses were disallowed in full. In this regard, it is noted that the appellant was engaged in the manufacturing activity for components of the tin container during the period under consideration, a fact duly accepted in the proceedings for the previous and subsequent years. Disallowance of Administrative and selling expenses - as alleged the assessee has not produced the details of such evidences - HELD THAT:- In this regard, it is relevant to note here that all such expenses such as salary, telephone and telex charges, audit fees, conveyance and staff welfare, electricity charges, bank charges and commission, insurance etc. are all incidental to the business of the assessee. These have been incurred in day to day business activities. The allegation made by the AO is itself flawed and contrary to the facts of the case. No material of any kind whatsoever has been brought on record by the AO to substantiate that no such expenses were incurred by the assessee. Considering the aforesaid factual matrix, the CIT(A) has rightly deleted that the disallowance. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer's rejection of books of account under section 145(3) can sustain additions/disallowances where the AO thereafter makes specific disallowances rather than estimating income under presumptive provisions. 2. Whether, after rejection of books, the Commissioner (Appeals) may examine evidentiary material and delete additions/disallowances made by the AO on specific findings. 3. Whether presumptive taxation under section 44AD is applicable or required to be applied by the appellate authority where books are rejected and AO has not estimated income but has made discrete additions. 4. Whether deduction under sections 80HH and 80-I is allowable in absence of alleged supporting documentary deficiencies, given production location, auditor certificates and other statutory/administrative evidence. 5. Whether certain items of expenditure (manufacturing expenses; administrative, selling and distribution expenses; interest) can be disallowed or restricted when claimed in regular books and the AO's disallowance is based on general or ad-hoc reasoning (e.g., proportionate reduction based on alleged bogus sales). 6. Whether depreciation at 100% under the proviso to section 32(1)(ii) is allowable for individually identifiable items (kegs) each costing below the monetary threshold. 7. Whether additions for unexplained investment in plant & machinery can be sustained where purchase documents, bank payments, import/clearing documents and AO's own allowance of depreciation exist. 8. Whether preliminary/public issue expenses are to be amortised as per section 35D(1) (one-tenth per year) and whether appellate authority may restrict/add accordingly. --- ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity and effect of rejection of books of account under section 145(3) Legal framework: Section 145(3) permits the Assessing Officer to reject books if not maintained/produced; consequence can be estimation of income or making additions/disallowances where specific defects are found. Precedent Treatment: The Court/Tribunal applied consistency across years and reviewed appellate scrutiny of AO findings; no authority overruled on point except reference to timing of s.44AD enactment. Interpretation and reasoning: The AO here rejected books on alleged discrepancies but did not proceed to compute income under presumptive rules; instead AO made specific additions/disallowances based on findings. The Tribunal held that where AO makes discrete additions founded on recorded findings and evidence, the appellate authority (CIT(A)) must examine the material and the assessee's explanations and may delete such additions if unsustainable. The Revenue's submission that CIT(A) should have applied presumptive taxation was rejected because (a) section 44AD was not applicable to the business in the relevant year (limited application to civil contractors and introduced later), and (b) AO had not adopted a presumptive computation but specific disallowances which required independent adjudication. Ratio vs. Obiter: Ratio - Where AO rejects books but himself makes specific additions/disallowances, appellate authority may examine evidence and decide those specific additions rather than applying presumptive estimation; s.44AD cannot be invoked where not legally applicable. Conclusion: Grounds based on mere rejection of books and submission that presumptive rate should have been applied are dismissed. Issue 2 - Extent of appellate authority's power to examine evidentiary material after books rejection Legal framework: Appellate authority may re-appraise evidence and reasons for AO's additions/disallowances; fairness requires providing opportunity and verifying supporting documents. Precedent Treatment: CIT(A) undertook detailed, item-wise analysis; where explanations/evidence were insufficient, CIT(A) confirmed AO; where evidence supported claims, deletions were made. Interpretation and reasoning: The Tribunal emphasised that CIT(A) must scrutinise each addition on record, assess plausibility of evidence, and may delete additions where AO's findings are not sustained by material. The Tribunal upheld deletions where assessee produced bank statements, invoices, audit certificates, licences, etc., and where AO had merely copied earlier orders without fresh verification. Ratio vs. Obiter: Ratio - Appellate authority may independently adjudicate specific additions despite earlier rejection of books, provided it proceeds on material and lawful reasoning. Conclusion: CIT(A)'s deletions/upholding of items were appropriate where based on evidence; Revenue's appeals on this ground dismissed. Issue 3 - Applicability of section 44AD presumptive taxation Legal framework: Section 44AD (as introduced) applies to specified classes and periods; its applicability depends on legislative scope and year of assessment. Precedent Treatment: Tribunal noted section 44AD introduced by Finance Act 1994 w.e.f. 01.04.1994 and its limited applicability (stated by AO/parties). Interpretation and reasoning: The Tribunal held that invoking section 44AD was legally untenable in these assessments either because AO did not opt for presumptive computation or because the statutory scope did not cover the assessee's business for the relevant year; hence CIT(A) was not obliged to apply it when AO had made itemised disallowances. Ratio vs. Obiter: Ratio - Presumptive provision cannot be imposed by appellate authority where statutorily inapplicable or where AO has proceeded on specific fact-finding basis. Conclusion: Revenue's contention to apply section 44AD was rejected. Issue 4 - Deduction under sections 80HH and 80-I Legal framework: Sections 80HH/80-I grant deductions to industrial undertakings on fulfilment of statutory conditions (location in backward area, commencement date, prescribed labour, licences, auditor's certificates, etc.). Precedent Treatment: The appellate authority examined documentary proofs - location evidence, auditor certificates under rules 18BBB/18B, manufacturing licence, sales tax exemption documents - and previous year acceptance for 1996-97 upheld by ITAT. Interpretation and reasoning: CIT(A) accepted the assessee's detailed supporting material showing eligible industry status and compliance with conditions; Revenue failed to controvert these findings or to produce contrary material. Tribunal found consistent treatment in subsequent year persuasive. Ratio vs. Obiter: Ratio - Where statutory conditions for deduction under sections 80HH/80I are substantiated by contemporaneous documentary and audit evidence, deduction must be allowed even if AO alleged inability to verify due to general objections. Conclusion: Deductions under 80HH and 80-I were rightly allowed; Revenue's grounds dismissed. Issue 5 - Disallowance/restriction of manufacturing, administrative and selling expenses Legal framework: Business expenses are allowable if incurred wholly and exclusively for business; AO must bring cogent material to disallow expenses; ad-hoc proportional disallowance requires foundation. Precedent Treatment: AO applied proportionate disallowances (e.g., based on alleged bogus sales ratio); CIT(A) required specific shortcomings and refused to accept ad-hoc reductions without evidence; where necessary CIT(A) restricted disallowance to one-tenth under recognized principles. Interpretation and reasoning: Tribunal sustained CIT(A)'s approach: where AO merely applied a ratio of alleged bogus sales to disallow wide categories, without evidence of inflated/false claims, such ad-hoc methodology is unsustainable. For administrative/selling expenses, CIT(A) allowed a limited restriction (1/10th) where borne out by statutory/amortisation rules or prior practice. For manufacturing expenses, where breakup, inventories and Form 3CD supported expenditure, disallowance was deleted. Ratio vs. Obiter: Ratio - Disallowance must rest on specific evidence; blanket proportionate reductions based on unrelated alleged errors in sales are not sustainable. Conclusion: AO's large ad-hoc disallowances were set aside or restricted; Revenue's grounds dismissed. Issue 6 - Depreciation on kegs under proviso to section 32(1)(ii) Legal framework: Proviso permits full deduction where actual cost of machinery/plant does not exceed prescribed monetary limit (here Rs.5,000) in year of use; treatment depends on whether assets retain individual identity or form integral collective unit. Precedent Treatment: CIT(A) relied on judicial principle (Andhra Pradesh HC decision) that individually identifiable items that retain identity and are separately usable qualify for treatment individually; where value per unit < threshold, 100% allowable. Interpretation and reasoning: Factual finding that each keg cost < Rs.5,000 and is separately usable, not integral to a larger plant, led to allowance of 100% depreciation. AO's approach of treating all kegs as single plant contrary to usage and statutory scheme. Ratio vs. Obiter: Ratio - Individually identifiable movable items each below threshold are eligible for full deduction under proviso to s.32(1)(ii) if they retain separate identity and are not part of an inseparable unit. Conclusion: 100% depreciation on kegs allowed; disallowance of 75% deleted. Issue 7 - Unexplained investment in plant & machinery Legal framework: Additions can be made when investments are unexplained; taxpayer may rebut by production of purchase, payment and import/clearing documents and AO's own allowance of depreciation is material. Precedent Treatment: Assessee produced bank payments, invoices, clearing agent receipts, import documents and AO himself allowed depreciation; CIT(A) treated material as sufficient to displace addition. Interpretation and reasoning: Tribunal agreed that documentary evidence and AO's depreciation allowance indicate genuineness of purchase; addition for unexplained investment was unjustified. Ratio vs. Obiter: Ratio - Where taxpayer furnishes contemporaneous documentary proof of acquisition and payment, and AO's records show use (e.g., depreciation claim accepted), unexplained investment additions cannot be sustained. Conclusion: Addition of Rs.41,05,522 was deleted. Issue 8 - Amortisation of preliminary/public issue expenses under section 35D(1) Legal framework: Section 35D(1) provides deduction of one-tenth of certain preliminary expenses for ten successive previous years beginning with commencement. Precedent Treatment & Interpretation: CIT(A) applied statutory formula allowing one-tenth in the relevant year; Tribunal endorsed this statutory computation. Ratio vs. Obiter: Ratio - Preliminary/public issue expenses must be amortised at one-tenth per year as provided by s.35D(1), not disallowed in entirety in the first year. Conclusion: AO's full addition/reduction was corrected to one-tenth allowance; Revenue's ground dismissed. Additional procedural and evidentiary observations 1. Repeated theme: AO in set-aside assessments often reproduced original orders without fresh adjudication; appellate scrutiny requires fresh consideration of explanations and materials filed post-revival/liquidation. 2. Where CIT(A) found evidentiary lacunae, additions were sustained; where evidence sufficed, deletions were confirmed - Tribunal refused to interfere absent contrary material from Revenue. Overall conclusion (ratio distilled): The appellate authority is empowered to reassess specific additions/disallowances even where books have been rejected, provided it examines evidence and reasons; presumptive provisions cannot be mechanically applied where inapplicable; statutorily mandated amortisation and depreciation rules apply to individually identifiable assets and preliminary expenses; ad-hoc proportional disallowances lacking specific foundation are not sustainable.