Income-tax Appeal No. 530 of 2010 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 530 of 2010 Date of decision: 31.1.2011 Commissioner of Income Tax, Faridabad --- Appellant Versus M/s. Faridabad Entertainment (P) Ltd. Faridabad --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present: Ms. Urvashi Dhugga, Standing Counsel for the appellant-Revenue. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-Tax Act, 1961 (for short “the Act”) has been filed by the Revenue against the order dated 31.12.2009, passed by the Income Tax Appellate Tribunal Delhi Bench ‘B’, New Delhi (in short “the Tribunal”) in ITA No. 313/Del/2009, relating to the assessment year 2004-2005. The following substantial questions of law have been claimed for determination by this Court: Income-tax Appeal No. 530 of 2010 2 1- Whether on the facts and in the circumstances of the case, the Ld. ITAT was right in deleting the addition of Rs. 13,88,866/- made on account of operations/ expenses by the Assessing Officer after invoking Section145 of the Income Tax Act, 1961 and bringing on record the defect that the assessee is not maintaining mercantile system regarding the receipts of management charges and, thereafter, estimating the income on the basis of previous record of the assessee and whether the ITAT was right in holding that no defect has been brought on record by the Assessing Officer? 2- Whether on the facts and in the circumstances of the case, the learned ITAT was right in law in upholding the order of the learned CIT(A) in deleting the addition of Rs. 2,73,680/- made by the Assessing Officer on account of rebate and discount even though the genuineness of these expenses were not established?” 2. The facts, in brief, necessary for adjudication, as narrated in the appeal, are that the respondent-assessee filed its return of income for the assessment year 2004-2005, on 1.11.2004 declaring loss of Rs. 29,81,221/-. The assessment was completed under Section 143(3) of the Act, vide order dated 22.12.2006 at a loss of Rs. 12,75,130/- in which many additions were made and certain deductions were disallowed. As regards the operational receipts and expenses, the assessing officer held that genuineness of the claim of the operational expenses was not established and the correct profit or Income-tax Appeal No. 530 of 2010 3 loss from business could not be ascertained from the receipts and expenses shown during the year. The assessing officer, therefore, rejected the book result shown by the assessee, under Section 145 of the Act. In so far as the rebate and discount expenses are concerned, the assessing officer held that since the genuineness of those expenses was not established, the expenses claimed by the assessee amounting to Rs. 2,73,680/- were not allowable. 3. The assessee feeling aggrieved against the order of the assessing officer, preferred an appeal before the Commissioner of Income-tax (Appeals) {in short “the CIT(A)”}. The CIT(A) allowed the appeal and granted a relief of Rs. 17,06,069/- to the assessee. The findings of CIT(A) have been affirmed by the Tribunal, vide order dated 31.12.2009, in the appeal carried by the assessee. This is how, the Revenue is in appeal before this Court. 4. We have heard learned counsel for the Revenue and have perused the record. 5. The point for consideration in this appeal relates to the genuineness of the claim of the assessee under the heads, ‘operational expenses’ and ‘rebate and discount’. 6. The CIT(A) while allowing the appeal of the assessee with regard to its claim for ‘operational expenses’ held as under: “9. I have carefully considered the submissions of the Ld. A.R. a and perused the order of assessment. The plain reading of the assessment order makes it quite evident that the A.O. has resorted to the provisions of Section 145 of the Income Tax Act only on presumption / or suspicion Income-tax Appeal No. 530 of 2010 4 without bringing any material on record to justify his action. The A.O. himself admitted that the receipts shown had been more than the preceding year i.e. Rs. 24,75,215/- as against the last year’s Rs. 6,13,645/-. Last year, the GP was 66%. The loss during the year had been largely due to the operational expenses which have increased from Rs. 2,05,578/- of the last year to this year’s Rs. 26,26,474/-, the details of which had been furnished in schedule ‘K’ of the P & L account. Also, marginally responsible for the loss have been the personal expenses as per Schedule-L increased from Rs. 12,68,633/- of the last year to this year’s Rs. 16,36,648.95, which fact has not been considered by the A.O. while he has referred to administrative expenses, selling expenses (which have been less than year rather from Rs.4,05,339.55 to Rs. 3,98,636.50 etc. Thus, the AO has focussed his enquiries on the increase into the operational expenses, and while he was even so satisfied with the other expenses in the Schedule ‘K’ he was not convinced with the justification given by the appellant company during the course of regular proceedings regarding the increase in the pay channel expenses. 10. The appellant had explained the entire issue vide its letter dated 28.11.2006 enclosed in the paper book which has been duly studied by me. By this letter, the appellant had explained the increase in the operational expenses as Income-tax Appeal No. 530 of 2010 5 per clause No.2.4-2.2(ii) of the agreement with the Siti Cable Net Work Ltd. and income as per clause No. 2.4-2.2 (i). While the A.O. seems to have accepted the explanations of the appellant regarding the management charges of Rs. 23,68,503/- arrived on the basis of total billing raised to the cable operators for Rs. 1,57,90,022/-, the detailed annexure of billing raised at management charges of which has been examined by me. The A.O,. has not accepted the appellant’s explanations regarding the takeover of pay channel as per clause No. 2.4 -2.2(ii), wherein the details of 50% Pay Channels transferred to Siti Cable Network Ltd. on the basis of the total billing of Rs. 1,57,90,022/- i.e. Rs. 78,95,011/- were also attached and which have been also examined by me. I have again examined all these documents as well as the month-wise details of operational expenses in respect of the agreement between Siti Cable Net work Limited and the appellant company filed during the course of assessment proceedings vide letter dated 23.11.2006 and which has also now been submitted during the course of appellant proceedings i.e. distribution-cum-management agreement between Siti Cable Network and the appellant company dated 27.5.2002 and the addendum to DCM agreement dated 3.4.2003 which have also been perused by me. I find that all the operational expenses have been genuinely and accurately arrived at as per these agreement deeds, Income-tax Appeal No. 530 of 2010 6 especially clause 2.4 of the DCM agreement. The A.O. has not pointed out any discrepancy or contradiction in the operational charges arrived at by the appellant company as per the above agreements. Neither he has pointed out any defect or deficiency in the regular books of account maintained by the appellant company nor any defect in the bills and vouchers for such expenses maintained by it during the course of normal business. As to the method of accounting, the receipts of management charges as admitted by the A.O. are on the basis of realisation i.e. they are crystallised in this year and thus they are to be accounted for only during the year under consideration and hence the mercantile method of accounting adopted by the appellant company as per note of Schedule-P of the audit report dated 24.8.2004 is in no way in variation or contradiction with the facts and the circumstances of the case. The appellant company has got its accounts duly audited by the C.A. M/s. Subhash C. Gupta and Co. and vide their report dated 24.8.2004, it is declared by them that the proper books of account as required by law had been kept by the company and the P & L account and its balance sheet are in consonance with the books of account which give a true and fair view of the company’s affairs. The A.O. has not found out or pointed out any adverse finding regarding the audited version of the books of account nor in the mercantile system of account Income-tax Appeal No. 530 of 2010 7 followed by the company generally, debiting expenses on accrual basis. Thus, the completeness and correctness of the books of accounts maintained by the appellant company are in no way in dispute or doubt by the A.O. and hence the provisions of Section 145 have been incorrectly and indiscreetly applied by the A.O. on the facts and circumstances of this case. Therefore, in view of the ratio laid down by the jurisdictional High Court in the case of CIT vs. Om Overseas Shivsagar (supra) and that of Gauhati High Court in the case of M/s. Madnani Construction Corporation Pvt. Ltd. the A.O. was not justified in invoking the provisions of Section 145 when the duly audited book version was not challenged by the A.O. or any Court, and the audited particulars/ details were not at all disputed as to there being defects whatsoever in them. 11. As to the books of accounts and vouchers maintained, they, therefore, reflect a true picture of the accounts of the appellant company. Hence, the business results declared by the appellant company need not have been interfered by the A.O. in estimating its profits by applying an arbitrary rate of G.P. at 50%. Merely because the profits are low compared to the earlier year is not a circumstance or material to justify an estimate in the circumstances and facts of the case, as held by the jurisdictional High Court in the case of Pandit Bros. Vs. CIT, 26 ITR 156 (P&H). Income-tax Appeal No. 530 of 2010 8 Similarly, the books of account can be rejected under Section 145 only where either no method of account was employed or the method employed was such that it did not disclose the true profits, in view of the decision of the jurisdictional High Court in the case of CIT vs. K.S. Bhatia, 269 ITR 257 (P&H). In the instant case, neither of the two above premises are applicable. Thus, the addition of Rs. 13,88,866/- both on facts and law is meritless and hence stands deleted.” The issue regarding discount and rebate has been discussed by the CIT(A) in para 20 of its order, which reads thus: “20. I have carefully considered the submissions of the learned A.R. and perused the order of assessment. From the assessment order, it is quite evident that the A.O. has proceeded on some misunderstanding of the nature of subscription charges as per the agreement entered by the appellant company with M/s. Siti Cable Network Limited. These expenses as detailed as per schedule-N of the audited accounts have been duly examined by me vis-à-vis the method embedded in clause No. 2.4 of the addendum to DCM agreement dated 3.4.2003. It has been found that 50% distribution charges are paid to the distributors from the realisation of the service charges from the bills raised which amount to Rs. 1,57,90,022/- on behalf of Siti Cable Network Limited. However, during the year under consideration, certain credit notes were issued by the Siti Income-tax Appeal No. 530 of 2010 9 Cable to the clients/customers against whom the billing was raised by the appellant company and these credit notes are exactly the rebate and discount expenditure being incurred for the appellant company which amount to Rs. 2,73,680/-. As everything is transparent in the account maintained in a separate heads of rebate and discount, as against that of the subscription charges, and since the A.O. has not pointed out any defect or deficiency in the rebate and discount account, no adverse inference can be drawn as to the genuineness of these expenses claimed at Rs. 2,73,680/- under the head “rebate and Discount”. Therefore, the disallowance of Rs. 2,73,680/- too, is deleted.” 7. The Tribunal held that the ‘operational expenses’ had been genuinely and accurately shown which were as per various clauses of the agreement and further that no defect in the regular books of account was pointed out by the assessing officer nor any discrepancy in the operational charges shown by the assessee-company in terms of those agreements were pointed out and, thus, the CIT(A) had rightly deleted the disallowance of Rs. 13,88,866/- made by the assessing officer. The Tribunal further held in plain words that no infirmity could be found in the order of the CIT(A), allowing the claim of the assessee relating to ‘rebate and discount’. The Tribunal had concluded that the genuineness of ‘rebate and discount’ could not be doubted. Income-tax Appeal No. 530 of 2010 10 8. Learned counsel for the appellant-Revenue has not been able to pin-point any perversity or illegality in the findings of the CIT(A) and the Tribunal on both the counts, which may warrant interference by this Court. In view of this, no substantial question of law arises for consideration of this Court and the appeal is accordingly dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) January 31, 2011 JUDGE *rkmalik*