TaxTMI 
TaxTMI 
2012 (12) TMI 1230
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....sions of section 145(3) ignoring the fact the assessee did not produce any bills and vouchers as mentioned in assessment order/order sheet and noted by the Authorised Representative of the assessee. 2. Whether on the facts and circumstances of the case Ld. CIT( A) is justified in deleting the addition of Rs.54,77,084/- being part disallowance of expenses of material consumed, labour charges and power and fuel etc. ignoring the fact that no vouchers of these expenses were produced before the A.O. 3. Whether on the facts and circumstances of the case Ld. CIT(A) is justified in deleting the addition of Rs.6,28,883/- being part disallowance of various expenses of profit and loss account ignoring the fact admittedly no bills/vouchers of these expenses were produced before the A.O. 4. Whether on the facts and circumstances of the case Ld. CIT(A) is justified in deleting the addition of Rs.19,35,849/- being addition of interest income of FDR not shown by the assessee during the year under consideration and or in any other year. 5. Whether in the facts and circumstances of the case Ld. CIT(A) is justified in accepting the version of the assessee and allo....
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.... Particulars Amount Claimed Rate of disallowance Amount disallowed 1. Interest from Bank with PNB as per AIR information 750242/- 1935849/- 2. Material consumed 155244128/- 2% 1633003/- 3. Labour charges 81650150/- 2% 1633003/- 4. Power & Fuel 17674338/- 2% 353486/- 5. Repair & Maintenance 9246259/- 2.5% 231156/- 6. Water exp. 1545570/- 10% 154557/- Total 5477084/- 7. Conveyance Exps 521986/- 10% 52199/- 8. Medical Exps 445740/- 20% 89148/- 9. Mess Exps 1339570/- 10% 133957/- 10. Misc. Exps 128597/- 10% 12860/- 11. Site Office Exps 2123475/- 5% 106174/- 12. Staff & Labour welfare Exps 289288/- 10% 28893/- 13. Traveling Eps 145440/- 10% 14544/- 14. Vehicle Running & Maint. 1911081/- 10% 191108/- 7. During the assessment proceedings, the A.O. noticed that the assessee did not show any interest of income whereas there is AIR information about the interest payment and TDS. The A.O. made addition of Rs.19,35,849/- as un....
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..... 9246259/- 2.5% 5 Water Exps 1545570/- 10% I have gone through the facts of the case, submissions of the assessee and reason given by the Assessing Officer in the assessment order, remand report u/s 250(4) and submission of the appellant put before us on remand report for invoking addition/disallowances. I considered submission of the remand report and appellants and I observed that the Assessing Officer has mentioned in his order that the assessee has produced books of account, cash book, Ledger, journal and bank book also but not produced bills and vouchers. In my opinion without any specific point which has gathered by the Assessing Officer during the course of investigation of the case, "no disallowance can be made merely on making vague observation that expenses were not verifiable". It is noticed that the assessing Officer has made vague disallowances @ 2% for material consumed, labours, power and fuels, 2.5% for repair & maintenance and 10% of water expenses. The Assessing Officer has not pointed out the specific terms which were inadmissible in nature. This working of the Assessing Officer only shows that the disallowances have been made capricio....
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....pecific terms which were inadmissible in nature. This working of the Assessing Officer only shows that the disallowances have been made capriciously without properly measuring actual extent of unverifiability. The case clearly gets hit by the decision in the case of M/s Chandra Confectionary P. Ltd. reported in 2003(2) MTC 1022, wherein it has been held by the Hon'ble ITAT Bench, Lucknow that such ad-hoc disallowances, without assigning any reasons and without pointing out any defect, are unjustifiable. In view of above factual position, the disallowances mentioned in above are hereby deleted." 11. The CIT(A) has also deleted the addition of Rs.19,35,849/- as under :- (Paragraph No.7, page nos.16 & 17) "7. First issue is relating to the addition of Rs.19,35,849/- on the account of interest received from Bank with Punjab Nation Bank as per AIR information. It is seen that during the course of assessment proceedings the appellant has submitted the details along with TDS certificate and certificate received from Punjab National Bank, Pandeypur reference to Joint Commissioner of Income Tax, Varanasi interest on FDR for the F.Y. 2008-09 has credited Rs.7,50,242/- and TDS the....
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....are whether under the facts and circumstances of the cases the A.O. is correct in rejecting books of account invoking section 145(3) of the Act and whether on merit expenses have been rightly disallowed by the A.O. To examine the issue, we would like to refer relevant provisions of section 145 of the Act which reads as under:- "145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.]" ....
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....its accounts are maintained by a method of accounting regularly employed, he expects the Incometax Officer to act upon such method and compute the income accordingly. 14. The Hon'ble Rajasthan High Court in the case of CIT vs. Gotanlime Khanij Udyog, 256 ITR 243 (Raj) held that provisions do not envisage that by resorting to best judgment assessment, the assessing authority must reach a different figure of income and profit than what has been disclosed by the assessee. 15. The judgment of Hon'ble Delhi High Court in the case of CIT vs. Smt. Poonam Rani, 326 ITR 223 (Delhi) is applicable to the facts of the case under consideration. The facts of that case were that the assessee was engaged in the business of manufacturing copper wires. For the relevant assessment year, she filed a return declaring gross profit at the rate of 1.4 per cent against gross profit rate of 5.91 per cent for the preceding year. On being asked, the assessee attributed the fall in gross profit rate to the increase in the purchase price. The Assessing Officer rejected the explanation given by the assessee on the ground that no supporting evidence was produced to show increase in the purchase price and de....
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....ur operators. Hence, the second part of sub-section (3) of section 145 would not apply to the instant case. [Para 5] ..............The Assessing Officer had not pointed out any particular defect or discrepancy in the account books maintained by the assessee. During the course of hearing before the Commissioner (Appeals), it was pointed out by the assessee that her account books were duly audited under section 44AB of the Central Excise Act and the quantitative details as required by ................. (Page 227 .....) clause 28(b) of Form No. 3CD regarding raw material and finished products (i.e., opening stock of raw material, raw material issued to production department, raw material consumed and closing stock of raw material, opening stock of finished goods, finished goods produced during the year, finished goods sold and closing stock of finished goods) were prepared and audited by certified accountant and were enclosed with Form No. 3CD which had been placed on record, but the Assessing Officer had ignored the factual figures, both in qualitative and quantitative terms, enclosed with the return and filed during the course of assessment proceedings. It was for ....
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....e account books. In those circumstances, the Commissioner (Appeals) and the Tribunal were justified in holding that the Assessing Officer could not have increased the gross profit ratio merely because it was low as compared to the gross profit ratio of the preceding year. [Para 9] The revenue contended that the assessee was not maintaining the daily stock register. However, no such finding was found in the assessment order. On the other hand, the assessee had submitted before the Commissioner (Appeals) that Form No. 3CD containing all the quantitative details in respect of raw materials as well as the finished goods and duly audited by the certified accountant had been placed on record, but the Assessing Officer ignored those actual figures enclosed with the return. In any case, there is no statutory provision under the income-tax regime requiring the assessee to maintain the daily stock register. Hence, even if no such register was being maintained by the assessee, that, by itself, would not lead to the inference that it was not possible to deduce the true income of the assessee from the accounts maintained by her, nor the accounts could be said to be defective or incompl....
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....en held by the I.T.A.T. Bench, Lucknow that such ad-hoc disallowances, without assigning any reasons and without pointing out any defect in books of account, are unjustifiable. From above discussions, we find that under the facts and circumstances of the case, section 145(3) is not applicable. The A.O. has wrongly invoked section 145(3) of the Act 17. As regards second aspect of the matter that is merit of the case, we find that the A.O. has made ad-hoc disallowance out of various expenses. Weather under the facts and circumstances, the action of the A.O. is justified in disallowance of various expenses. Business expenditures incurred for the purpose of business are allowable under section 37 of the Act. The said section 37 reads as under:- "General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". [Explanation.-Fo....
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.... (section 80VV was omitted with effect from April 1, 1986);(ii)The expenditure should not be of the nature of capital expenditure ;(iii)It should not be a personal expenditure; and (iv)The expenditure should have been laid out or expended wholly and exclusively for the purposes of the business or profession.It is thus clear that conditions at (i), (ii) and (iii) above are negative conditions whereas the condition at (iv) above is a positive condition. If the expenditure satisfies the negative conditions, it has to satisfy the positive condition in order to be eligible for deduction under section 37(1) of the Act. Thus, section 37(1) allows deduction of any "expenditure" subject to conditions noticed above. In Indian Molasses Co.'s case [1959] 37 ITR 66, the Supreme Court pointed out that the word "expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention. But the idea of "spending" in the sense of "paying out or away" money is the primary meaning and it is with this meaning that one is concerned. "Expenditure" is thus what is "paid out or away" and is something which is gone irretrievably. The apex court in CIT v. Nainital Bank Ltd. [1966] ....
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....R 102 (Guj), it is held that if the expenditure is doubted by the assessing authority, it is the duty of the assessee to prove by leading evidence that the expenditure was in fact, incurred." 19. Newtone Studios Ltd. vs. Commissioner of Income-tax [1955] 28 ITR 378 (Mad.). The facts of the case are that the assessee was a Private Limited Company owning a studio and engaged in the production of motion pictures. There were six shareholders. The Managing Director and the three Technicians were remunerated by payments of what were called honoraria, which really meant salaries and also by payments of commission on a fixed percentage basis. In addition, each of them got a car allowance, and when the profits justified it payment of a month's salary as bonus. In 1944 and 1945 what was paid as honoraria, that was, salary, to those four amounted to Rs. 18,000 a year. Their scales of salaries were revised for 1946 by a resolution passed by the shareholders on 30-03-1946, and the total came to Rs. 59,100 for 1946. The genuineness of the payment of that amount of Rs.59,100 was never in dispute. The assessee claimed that payment as a deduction under section 10(2)(xv) of the 1922 Act. The ....
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....iew of the businessman and not from the point of view of outsiders including the Income-tax Officer." It was the same principle to which Lord Wright referred in Craddock v. Zevo Finance Company Ltd. [1946] 27 TC 267 at 290: "The transaction here being a perfectly straightforward and honest bargain between the two companies, it seems to me that, if the present claim were upheld, it would amount to a precedent enabling the Revenue to revise every such bargain and to defeat what the parties had agreed on. The Revenue in a case under schedule D has no power to examine what they think was reasonable or to say what expenditure was necessary." 20. The Court held as under:- "Under our taxing system, it is for the assessee to conduct his business, and in his wisdom or otherwise to fix the remuneration to his staff. The Income-tax Act does not clothe the taxing authority with any power or jurisdiction to determine the reasonableness of the amount so fixed and paid by the assessee. The only test for the deductibility of such remuneration is whether the expenditure has been incurred solely and exclusively for the purpose of the business. If the reality of the payment....
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....refore, merely because there is some minor deficiency in the books of account or merely because of rejection of the books of account it does not mean that it must lead necessarily to additions in the returned income of the assessee. In the light of these facts and circumstances we did not find any infirmity in the order of CIT(A). The order of the CIT(A) is confirmed on the issue. 22. The Hon'ble Madras High Court in the case of Newtone Studios Ltd. vs. Commissioner of Income-tax [1955] 28 ITR 378 (Mad.) held that under our taxing system, it is for the assessee to conduct his business, and in his wisdom or otherwise to incur business expenditures. The Income-tax Act does not clothe the taxing authority with any power or jurisdiction to determine the reasonableness of the amount so fixed and paid by the assessee. The only test for the deductibility of such remuneration is whether the expenditure has been incurred solely and exclusively for the purpose of the business. If the reality of the payment is challenged or is in dispute different considerations arise: so also in cases where the tax authorities are able to point to some consideration other than the purpose of the business ....
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.... has gone through the facts of the case, submissions of the assessee and reasons given by the Assessing Officer in the Assessment Order, remand report under section 250(4) and submissions of the assessee put before him. The Assessing Officer has not pointed out the specific terms which were inadmissible in nature. This working of the Assessing Officer only shows that the disallowances have been made capriciously without properly measuring actual extent of non-verifiability. The Revenue has failed to point out any contrary material to the finding of the CIT(A). In the light of the facts of the case, we confirm the order of the CIT(A) on this issue. 24. As regards deletion of addition of Rs.19,35,849/- by the CIT(A), we notice that the A.O. has made addition simply on the basis of AIR information on the basis of form no.26AS in which the assessee has satisfactorily explained the details of interest and TDS. As per the assessee, the CIT(A) noted that the amounts of interest and TDS have wrongly submitted by the Bank in is Annual Tax Return for the year 2009-10. Against the explanation of the assessee, the CIT(A) called for the remand report. In the Remand Report the A.O. has failed....
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....de para no.1.b to 1.d stated that "the assessee failed to explain that how has interest received of Rs.19,35,849/- has been reflected in the income of the assessee and failed to reconcile the same." The assessee in his submission has already brought on record vide reply dated 12.12.2011 as per paper book page no. 7 to 9 and submitted a fresh certificate reference made to Joint CIT Circle-3, Varanasi which is placed in page no.24, but the Assessing Officer ignored the facts of the case in his assessment order as well as in remand report. In view of above factual position the addition on said account is hereby deleted." 25. In the light of the above discussion and reply of the assessee, we are of the view that merely on the basis of wrong submission of annual return by Bank or wrong information in form no.26AS, addition is not warranted automatically. The issue is required to be examined in the light of books of account of the assessee. The correct facts were already brought on record before the Assessing Officer. The CIT(A) found that the amount has already been taken in the computation of Income along with TDS and also the appellant has submitted the reconciliation char....
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....e case Ld. CIT(A) is justified in deleting the addition of suppression of contract receipt of Rs.53,019/- of EECD PWD Chandauli and suppression of interest on FDR of Rs.11,981/- ignoring the facts mentioned in assessment order. 5. Whether on the fact and circumstances of the case Ld. CIT(A) is justified in deleting the addition and allowing the appeal of the assessee without making any discussion on remand report submitted by the A.O. and brushing aside the remand report. 6. Craves for leave to raise any grounds of appeal that may be taken at the time of hearing." 30. The brief facts of the case are that the assessee firm is engaged in the business of civil contract and derives income from civil construction. The A.O. on the basis of AIR information noticed about the contract receipts, interest receipts and TDS. The A.O. asked the assessee to reconcile the figures as per AIR information and as per books of account. After considering the assessee's submission, the A.O. made addition of Rs.53,019/- being the difference of turnover as per AIR information and as per books of account of the assessee. The A.O. has also noted a comparative position of G.P. which is re....