ITA No.699 of 2010 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. ITA No.699 of 2010 Date of decision: 31.1.2011 The Commissioner of Income Tax, Karnal -----Appellant Vs. M/s Om Overseas, Shiv Nagar, Panipat ----Respondent CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. Yogesh Putney, Sr.Standing Counsel for the revenue. Adarsh Kumar Goel,J. 1. This order will dispose of ITA Nos.687, 699, 719 and 720 of 2010 as it has been stated by learned counsel for the revenue that all the four appeals involve common questions. 2. ITA No.699 of 2010 has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (for short, ‘the Act’) against the order of the Income Tax Appellate Tribunal, Delhi bench ‘B’ New Delhi passed in ITA No.2885/Del/2009 dated 29.1.2010 for the assessment year 2005-06, claiming following substantial questions of law:- “i) Whether on the facts and circumstances of the case and in law, the learned ITAT was right in holding that the CIT(A) had duly put all the objections and documents to all the parties for their comments, it cannot be said that there was violation of provisions contained in Rule 46A of the Income Tax Rules, 1962, despite the fact that opportunity was given by the AO under section 142A(3) of the 1 ITA No.699 of 2010 Income Tax Act, 1961 to the assessee during the course of assessment proceedings and any evidence if any or objections to the DVO’s report was to be submitted before the AO which was not done and that the assessee was not eligible to produce new evidence for the first time before the CIT(A) and also not appreciating the fact that there is no provision for a revised report under section 142A of the Income Tax Act, 1961? ii) Whether on the facts and circumstances of the case and in law, the learned ITAT was right in law in observing that there was no violation of Rule 46A of the Income Tax Rules, 1962, despite the fact that none of the conditions prescribed under rule 46A were satisfied by the assessee for admission of additional evidence in as much as there was no occasion where (a) the AO refused to admit the evidence, (b) or the assessee was prevented by sufficient cause from producing the evidence which was called upon to be produced by the AO, (c) or the assessee was prevented by sufficient cause for producing before the AO any evidence which is relevant to the ground of appeal, (d) or the AO passed the assessment order without giving the assessee sufficient opportunity to adduce evidence relevant to any ground of appeal? iii) Without prejudice to the above, whether on the facts and in the circumstances of the case, the learned ITAT is right in arriving at the conclusion that a sum of Rs.91,30,355/- on ‘Humidification 2 ITA No.699 of 2010 Plant’ and Rs.1,20,01,718/- under the head ‘Trenches’ considered by the DVO’s subsequent invalid report, be treated as investment and holding that the investment made in the building account under the head ‘Humidification Plant’ and ‘Trenches’ considered for allowing relief to the assessee is completely ignoring the provision of section 142A of the Income Tax Act? iv) Whether on the facts and in the circumstances of the case, the learned ITAT was right in deleting the addition of Rs.46,23,127/- made by the AO on account of disproportionate expenses in the P&L account in view of the fact that the books of accounts were rejected by applying the provisions of section 145(3) of the Income Tax Act, 1961 as the assessee failed to produce the stock register before the AO especially when the auditors in their audit report in column 22 had stated that the assessee has maintained stock register in respect of broad product only?” 3. The assessee is an exporter deriving income from manufacture and export of handloom goods. During assessment, dispute arose regarding correctness of the cost of construction of the factory as also claim for expenses as per trading and P&L account. The Assessing Officer appointed District Valuation Officer (DVO) and obtained report as to valuation which was higher than the valuation declared by the assessee. On that basis, addition was made to the declared income. The CIT(A) accepted the plea of the assessee for 3 ITA No.699 of 2010 calling revised report by admitting additional evidence under Rule 46A of the Income Tax Rules, 1962 (for short, ‘the Rules’). As per revised report, the assessee was given the benefit but objections of the assessee to the revised report seeking reduction of cost under the heads ‘Humidification Plant’ and ‘Trenches’ were rejected. The Tribunal upheld the said objections and allowed the appeal of the assessee while dismissing the appeal of the revenue against admission of additional evidence and acceptance of revised report. Questions (i) to (iii) relate to this aspect and it has been fairly stated that the same are covered against the revenue by our order passed today in ITA No.721 of 2010. Accordingly, the said questions cannot be held to be substantial questions of law. 4. As regards Question (iv), the Assessing Officer disallowed expenses claimed on the ground that the assessee failed to produce stock register and quantitative details of the raw material of furnished goods. It was observed that new machinery was installed by the assessee which resulted in higher production and quality in which case, rates of its products should have increased resulting in gross profit. Turnover had also come down which created doubt regarding genuineness of the books of account. On appeal, the CIT(A) set aside the addition holding that all the details were available and there was no reason to doubt the genuineness of books of account which had been accepted in the preceding as well as succeeding years. It was held that disallowance of expenses to the extent of 20% of the increased expenditure was not justified. As regards increase of expenses, it was 4 ITA No.699 of 2010 observed that the assessee had given due explanation and increase in expenses was justified on account of cost of diesel and electricity, salary, PF, bonus and other items. Though the turnover had decreased, the production was higher as shown by the higher closing stock. GP rate had also increased. Relevant observations are:- “After rejection of books of accounts the AO proceeded to disallow 20% of the increased expenditure as increased in comparison to the preceding year. As discussed and decided above, assessee has been maintaining complete books of accounts and the same were produced before the AO and the AO could not find any patent defect in the books of accounts or vouchers/bills relating to any expenditure. The AO has not disputed the genuinity of expenses claimed by the assessee and therefore, he has not pointed out any specific expenditure or any specific item of expenditure which is not an allowable expenditure. The disallowance has merely been made because there is an increase in the expenditure as compared to the preceding year and because the books of accounts have been rejected. Whereas, rejection of books of accounts was not justified and the decision of the AO has already been set aside as above. The assessee has explained and justified the reason for increase in expenses and AO has not disputed the claim of the assessee on merit or on facts. Assessee has explained that in the preceding year he was mainly in trading and therefore, buying the goods from market and then exporting them, whereas, in the year under consideration the assessee ahs installed various textile machineries like imported shuttle less weaving looms, warting machines, sizing plant etc. and therefore, it is claimed that certain expenditure have been increased but in long run the income and turnover of the assessee will increase and it is in the 5 ITA No.699 of 2010 interest of business to have its own manufacturing unit. The assessee has also given item wise explanation for increase in expenditure before the AO and during appellate proceedings and the same has been reproduced in the submissions of the assessee. Assessee has claimed that diesel and electricity expenses, salary, PF and bonus, dyes and chemicals consumable stores, fees and taxes and insurances etc. which have been compared by the AO have particularly increased due to establishment of its own plant and machinery and AO has not denied the claim of the assessee and no discrepancy was found either on merit or on facts. The AO has also claimed that turnover has not increased but asessee has explained that goods worth over Rs.9 crore were lying in the closing stock and if the same are added to the total turnover then closing stock and turnover in the preceding year are same as in this year. The assessee has also claimed that its GP rate has increased due to its own manufacturing and same has also not been denied by the AO, therefore, merely because expenses have increased cannot be the reason for any disallowance, particularly when all the expenses during the year have been incurred for the purpose of business only and AO has not found any defect or deficiency in the claim for expenses. The AO has disallowed 20% of the increased expenses as compared to the preceding year but he has not given any basis for doing so. If the AO held that 20% of the increased expenses are not the business expenses then automatically he has accepted the remaining 80% of the increased expenses allowable business expenses but for making any disallowance AO has to find out as to which are the expenses which are not business expenses. Generally if an expenditure is the business expenditure then only a part of it cannot be held as non business expenditure without any finding of the fact. There can be only four 6 ITA No.699 of 2010 reasons for which the expenditure may be held as not allowable, (1) the expenditure is of personal nature, or (2) the expenditure is a capital expenditure, or (3) the expenditure is not related to the business of the assessee and lastly (4) the expenditure does not relate to the period under consideration and therefore, AO has to find out as to which are the expenses or items of expenses which are disallowable because of any of the above reasons. AO cannot merely held that 20% of the expenses are disallowed whereas, he is unable to find any expenditure which is covered by any of the above reasons or which is to a business expenditure, therefore, making disallowance 20% of the increased expenses by the AO is not only without any basis but it is illogical also. Therefore, the disallowance made by the AO is deleted and the ground of appeal is allowed.” 5. The above view has been affirmed by the Tribunal. 6. We have heard learned counsel for the revenue. 7. Learned counsel for the revenue submitted that the Assessing Officer had given valid reasons for disallowing expenses claimed by rejecting books of accounts. The CIT(A) and the Tribunal were not justified in upholding the plea of the assessee. 8. We are unable to accept the submission. The CIT(A) has given valid reasons for setting aside the additions and for accepting the books of account. The reasons given by the Assessing Officer have been duly met. It has been held that inspite of new machinery, the expenses increased due to increase in price of diesel and also cost of establishment. Even though turnover did not increase, the closing stock had increased and the GP rate had not decreased. In these 7 ITA No.699 of 2010 circumstances, there was no reason to reject the books of account. The finding recorded by the CIT(A) and the Tribunal is not shown, in any manner, to be perverse. The books of account could be rejected only if it could be shown that they did not truly reflect the income of the assessee. Reasons given by the Assessing Officer for rejecting the books of account having not been found to be correct, view taken by the CIT(A) and the Tribunal being not perverse, the question raised cannot be held to be substantial question of law. 9. Accordingly, these appeals are dismissed. (Adarsh Kumar Goel) Judge January 31, 2011 (Ajay Kumar Mittal) ‘gs’ Judge 8