Income-tax Appeal No. 445 of 2010 -1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH. --- Income-tax Appeal No. 445 of 2010 Date of decision: 15.9.2010 Commissioner of Income-tax Faridabad --- Appellant Versus M/s. P.R. Packaging Ltd. Ballabgarh --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- PRESENT: Ms. Urvashi Dhugga, Advocate for the appellant. --- 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 13.11.2009, passed by the Income Tax Appellate Tribunal, Delhi Bench “F” New Delhi, (in short “the Tribunal”) in Income-tax Appeal No. 2700/Del/2009, in respect of assessment year 2005-06. The facts of the case are that the respondent, i.e. assessee- company is engaged in manufacture of thermocol packing/ duplex cartons and corrugated boxes. For the assessment year 2005-06, the Income-tax Appeal No. 445 of 2010 -2- assessee filed return of income declaring total income of Rs. NIL. The return was taken up for scrutiny. The assessment was completed under Section 143(3) of the Act vide order dated 31.12.2007 at an income of Rs. 39,65,890/-. The assessing officer made an addition of Rs. 2,57,417/- on account of deferred revenue expenditure on the ground that the assessee had failed to furnish any evidence in support of its claim despite repeated opportunities. The assessing officer made another addition of Rs. 50,18,599/- on account of bogus purchases as it was observed that the assessee had failed to prove the genuineness of the said purchases. The assessee filed appeal before the Commissioner of Income-tax (Appeals), Faridabad {in short “CIT(A)”}. The CIT (A) vide order dated 31.3.2009, partly allowed the appeal of the assessee giving relief of Rs. 56,16,739/- and confirming the addition of Rs. 1,14,981/- besides enhancing the income of the assessee by Rs. 5,120/- subject to directions in para 20.1 of its order for verification of set-off of the brought-forward unabsorbed business loss/depreciation. The Revenue preferred appeal before the Tribunal. The addition of first amount indicated above, i.e. Rs. 2,57,417/- is concerned, the Tribunal upheld the order of CIT(A) in that behalf. In regard to addition of Rs. 50,18,599/- made by the assessing officer which was deleted by the CIT(A), the Tribunal concurred with the view of the CIT(A) and upheld the order of the said authority. Qua disallowance of Rs.50,000/- which the assessee had paid as loan processing fee, by the assessing officer, which was deleted by the CIT(A) after relying on the decision of the Madras High Court in CIT v. Shree Meenakshi Mills Ltd. (2007) 290 ITR 107, the Tribunal put Income-tax Appeal No. 445 of 2010 -3- its seal of affirmation. The order with regard to additions of amounts of Rs. 18,859/- on account of employees’ contribution to provident fund and Rs.21,010/- on account of ISO expenses even though the expenditure incurred were capital expenditure, passed by the assessing officer and deleted by the CIT(A) was also upheld by the Tribunal by order dated 13.11.2009. This is how the Revenue has claimed that the following substantial questions of law arise in this appeal for consideration of this Court: 1- 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. 2,57,417/- made by the Assessing Officer on account of deferred revenue expenditure even though the assessee had failed to furnish any evidence/justification in support of its claim despite repeated opportunities provided and is contrary to the decision of Hon’ble Madras High Court in the case of Ashoka Betelnut Co. (P) Ltd. 259 ITR 733 wherein their Lordship had observed that the said provisions permit the writing off of deficiencies between WDV in the money realized on the assets which is sold, discarded, demolished or destroyed in the previous year together with the amount of scrap value, if less than WDV? 2- Whether on the facts and in the circumstances of the Income-tax Appeal No. 445 of 2010 -4- case, the learned ITAT was right in law in upholding the order of the learned CIT(A) in deleting the addition of Rs. 50,18,599/- made by the Assessing Officer on account of bogus purchases even though the assessee had failed to prove the genuineness of these purchases?” We have heard learned counsel for the Revenue-appellant and have also gone through the record. The appeal relates to deletion of Rs.2,57,417/- and Rs.50,18,599/- made by CIT(A) which has been upheld by the Tribunal. Regarding Question No.1 The CIT(A) deleted the addition of Rs. 2,57,417/- which was made by the assessing officer on account of deferred revenue expenditure with the observations that in the re-opened assessment proceedings under Section 147 of the Act for assessment years 2001- 01 and 2002-03, the assessing officer had taken a view that the assessee was to be allowed depreciation on moulds and dyes as against the deferred revenue expenditure claimed by him. It was further observed that on the basis of Written Down Value so worked out, the depreciation allowable during the assessment year under reference would be Rs.9,60,358/-. The CIT(A) further observed that in the light of the said position, deduction was to be allowed by way of depreciation or by invoking Section 32(1)(iii) of the Act, and since depreciation was found to be higher than the deduction claimed by the assessee at Rs. 6,43,542/-, disallowance of Rs. 2,57,417/- being 40% of Rs. 6,43,542/- was not called for. The relevant observations of the CIT(A), while Income-tax Appeal No. 445 of 2010 -5- deleing the aforesaid deduction as recorded in para 9.5 of its order are as under: “I have carefully gone through the assessment order, written submissions and heard the Ld. AR at length coupled with the fact that the AO has not contributed any assistance to rebut or oppose the detailed facts and the position of law stated in the written submissions and reproduced above. It cannot be disputed that the appellant has failed to substantiate the correctness of the explanation rendered before the AO that scrap value of the old dyes / moulds are adjusted in the cost of the new dyes/ moulds, but the fact that dyes And moulds are purchased year after year have not been disputed. The matter needs to be examined as to what deduction is admissible on facts and in law, to controvert the assessee’s claim of deferred revenue expenditure at Rs. 6,43,542/-. Though the AO has opted to invoke provisions of section 32(1)(iii) of the Act, but it is evident that he has not understood the provisions of section 32(1)(iii) in its true import. The Ld. AR has given the working of Rs. 6,43,542/- as mentioned below: Purchases of dyes/moulds during the year Rs. 15,43,771/- ; 20% thereof = Rs.3,08,754 20% of purchases for A.Y. 2004-05 (Rs.11,53,049) = Rs. 2,30,610 20% of purchases for A.Y. 2003-04 (Rs.5,58,823) = Rs.1,04,178 Income-tax Appeal No. 445 of 2010 -6- Total: = Rs.6,43,543 However, if depreciation is to be allowed in the manner provided u/s 32(1)(iii) and as decided by the AO, it is found that deduction would work out at Rs. 8,56,373/-, as demonstrated below:- B.F. Value of dyes and moulds is Rs.9,12,715 as per balance sheet (Page 16 of P.B.) and if 40% of it is disallowed, 60% of it would work out at = Rs. 5,47,629 In addition, additions of dyes/moulds during the year are at = Rs.15,43,771 (6 of the P.B. and dep. as per Appendix 1 of the I.T. Rules would work at = Rs.3,08,744 Total: = Rs. 8,56,373 The learned A.R. has also contended that the AO has reopened proceedings u/s 148 for A.Y. 2000-01 and 2002- 03 and held that the assessee is to be allowed depreciation instead of deferred revenue expenditure claimed by the assessee. It is pleaded that the Department cannot adopt contradictory stand in different assessment years and in case, depreciation is allowed during the year under consideration on the WDV/cost from 31.3.2002 onward, depreciation to be allowed would work out at Rs.9,60,358/-. The Ld. AR has also contended that in fact, expenses on the cost of dyes/moulds is revenue expenditure, as it represents replacements and it does not constitute plant and machinery in its own form and has thus Income-tax Appeal No. 445 of 2010 -7- claimed that correct amount of deduction as revenue expenditure would be admissible at Rs.24,56,486/- qua Rs.6,43,542/- claimed by the assessee. The AO has not controverted the correctness of the above mentioned calculations given in the written submissions. In my considered opinion, on the facts and circumstances of the case and the position of law, the AO has to adopt a consistent approach and deduction is to be claimed in accordance with law; inter alia, either by invoking section 32(1)(ii) or by allowing depreciation, the deduction allowable would work out at a higher amount than deduction claimed at Rs.6,43,542/- claimed as deferred revenue expenditure. Yet I am not inclined to allow deduction of the higher amount than what is claimed in the return of income, but in my firm opinion, on the facts of the case, no addition is called for from the claim of deduction made at Rs. 6,43,542/-. Accordingly, the addition of Rs. 2,57,417/- is cancelled. Ground No.2 is thus, allowed.” The Tribunal affirmed the order of the CIT(A) deleting the deduction. No error or perversity could be pointed out by the counsel for the appellant in the above finding of the CIT(A) as affirmed by the Tribunal. Thus, it cannot be said to be a substantial question of law. Regarding Question No.2 This question relates to addition of Rs. 50,18,599/- made by the assessing officer on account of bogus purchases. The CIT (A) Income-tax Appeal No. 445 of 2010 -8- after elaborate discussion had allowed the application filed by the assessee under Section 46A of the Income-tax Rules, 1962 whereby the assessee had furnished all relevant documents relating to genuineness of the purchases made by it from M/s. Rajesh Dyes & Chemicals, M/s. Sameer Enterprises, M/s. Sharma Traders and M/s. Aneja Papers. The CIT(A) after analyzing the evidence and the documents produced by the assessee had concluded that all the aforesaid four parties were assessed to income tax and were having their permanent account numbers with the Department. It was also recorded that the assessee had made payments to the aforesaid parties by account payee’s cheques. The findings by the CIT(A) have been recorded in detail in para Nos.10.3 to 10.10 of its order. The CIT(A) after appreciating the evidence on record had arrived at the conclusion that the purchases made by the assessee were genuine and not bogus as viewed by the assessing officer. The aforesaid findings of the CIT(A) recorded were affirmed in appeal by the Tribunal. While affirming the findings, the Tribunal observed as under: “The learned CIT(A) has elaborately discussed and analyzed the various evidence and materials in support of purchases made from various parties, and has considered the respective evidence in support of the contention that all the purchases were genuine and have been duly confirmed by the respective parties. In the light of the detailed verification made by the learned CIT(A) and in the absence of any material rebutting the learned CIT(A)’s finding, we are inclined to uphold the order of learned CIT(A) in Income-tax Appeal No. 445 of 2010 -9- deleting the addition of Rs. 50,18,599/- made on account of bogus purchases.” The appellate authorities on appreciation of material on record had arrived at a conclusion that the purchases from the aforesaid parties were genuine. Learned counsel for the appellant-Revenue could not show or point out any material or error of law in the findings of fact so arrived at by the appellate authorities below to persuade this Court to interfere therewith in any manner. In view of the above, no substantial question of law as claimed by the Revenue arises for determination by this Court. The appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) September 15, 2010 JUDGE rkmalik/gbs