EPF paid before the date of return cannot be disallowed as per Delhi High court decision and all expenses should be genuine to claim deduction

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH “E” NEW DELHI) BEFORE SHRI RAJPAL YADAV AND SHRI B.C. MEENA ITA No. 4561/Del/2009 Assessment Year: 2002-03 Income-tax Officer, Ward 6(1), New Delhi. (Appellant) Vs. Maharishi Solar Technology Pvt. Ltd., A-14, Mohan Co- Operative Industrial Estates, Mathura Road, New Delhi (PAN: AACCM0458M) (Respondent) ITA No. 4393/Del/2009 Assessment Year: 2002-03 Maharishi Solar Technology Pvt. Ltd., A-14, Mohan Co- Operative Industrial Estates, Mathura Road, New Delhi (PAN: AACCM0458M) (Appellant) Vs. Income-tax Officer, Ward 6(1), New Delhi (Respondent) Department by: Shri R.S. Negi, Sr.DR Assessee by: Shri Sanjay Kumar, CA ORDER PER RAJPAL YADAV: JUDICIAL MEMBER The revenue and the assessee are in cross-appeal against the order of Learned CIT(Appeals) dated 25.09.2009 passed for assessment year 2002- 03. First, we take the appeal of the revenue. In ground No.1, revenue has pleaded that the order of the Learned CIT(Appeals) is erroneous, contrary to facts and law. No specific arguments were addressed by the parties on this ground. It is just a general ground of appeal and does not call for recording of any specific finding. Hence, this ground of appeal is rejected. 2. In ground NO.2 and 2.1, revenue has pleaded that Learned CIT(Appeals) has erred in deleting he addition of Rs.13,52,000 made under sec. 92CA(i) of the Act. 3. The brief facts of the case are that assessee during the year was engaged in the business of solar photo-voltaic wafers, cells, modules and systems etc. It has filed its return of income on 30th October, 2002 declaring loss of Rs.7,47,14,276. The case of the assessee was selected for scrutiny assessment and a notice under sec. 143(2) of the Income-tax Act, 1961 was issued and served upon the assessee. On an analysis of the record, it reveled to the Assessing Officer that assessee had entered into an international transaction with M/s. Maharishi Technology Corporation BV, The Netherlands which is an associate enterprises of the assessee. It took a loan of Rs.12,95,000 US dollars, based on certain guidelines of External Commercial Borrowings (ECB), during the accounting year. The assessee has claimed an amount of Rs.32,19,503 payable towards interest as on 31.3.2002. Learned Assessing Officer made a reference under sec. 92CA(i) of the Income-tax Act, 1961 to the Learned Transfer Pricing Officer for determining whether the interest shown by the assessee as payable to the associate enterprises is at arm’s length or not. Learned TPO after giving an opportunity to the assessee recording a finding that assessee paid interest @ 8.5% whereas as per the comparable instances, the interest ought to have been paid @ 4.934%. He worked out a disallowance of Rs.13,52,191.. On the basis of the recommendation of the learned TPO, learned Assessing Officer has made the disallowance. 4. Dissatisfied with the disallowances, assessee carried the matter in appeal before the learned CIT(Appeals). It pointed out that assessee company had entered into a loan agreement with its associate enterprise on 21.12.2007 for a loan of US $ 2 millions. This amount was for a fixed period of seven years at a fixed rate of interest at 8.5% and carried a moratorium of two years. This agreement was subject to approval by the RBI and other government agencies. The assessee has actually drawn a sum of US $ at 1.295 millions. The assessee had paid interest @ 8.5%. Learned TPO has selected five comparables and collected their datas in order to compare the rates which read as under: Sl.No. Name of Company Amt. Borrowed US$ million Rate of interest (%over LIBOR) 1 Haldia Petrochemicals 50 2.25 2 HPL Cogeneration Ltd. 20 2.75 3 Larsen & Toubro Ltd. NA 1.20 4 Reliance Industries Ltd. 125 1.00 5 Shipping Corporation of India 85 1.64 Arithmetic mean 1.64 5. The assessee pointed out that whenever any institution gave loan to any concern then it used to take into consideration money factors, namely, capacity of a borrower to repay the loan, security provided by the borrowers, capital invested by the shareholder owners in their own business/company and the conditions prevailing in the borrower’s industries i.e. the economic climate in general, state of the borrower’s business which could effect the borrowers ability to repay the loan and the intended purpose of the loan, general impression of the borrowers. Learned TPO compared the case of the assessee with the concern who are well established and who borrowed huge amount running into 125, 85 or 50 US million dollars. 6. Learned First Appellate Authority has gone through all these aspects and arrived at a conclusion that the companies selected by the learned TPO for the purpose of benchmarking suggest that all these companies are much bigger in size and have taken loan which is much bigger then the loan taken by the assessee. He also found that the learned TPO has not made any comparison with the contractual terms governing the loan agreement of all the comparables vis-à-vis that of the assessee. He accordingly deleted the disallowance. 7. With the assistance of learned representatives, we have gone through the record carefully. Learned DR relied upon the order of the Assessing Officer. He pointed out that the learned TPO has recommended the adjustment in respect to the transaction entered by the assessee with its associate enterprises. We find that learned TPO while working out the alleged excess amount of interest paid by the assessee has considered the average LIBOR (London Inter-Bank Offered Rate) between the period of April 2001 to March 2002 plus arithmetic mean of the interest rate paid by the comparables in addition to LIBOR. Learned TPO has committed two errors. He considered the arithmetic mean of LIBOR between April 2001 to March 2002. The assessee entered into an agreement for the loan on 25.12.2000. What was the rate of LIBOR at that particular time has not been considered. Similarly, we concur with the finding of the Learned CIT(Appeals) that the comparables selected by the learned TPO are not comparables with the assessee in terms of their size quantitatively. Learned TPO also not compared the terms and conditions enumerated in the assessee’s agreement for the loan vis-à-vis the terms and conditions of the five comparables. Thus, to some extent, learned TPO has compared the incomparable with the assessee. In view of the above discussion, we do not find any merit in this ground of appeal. It is rejected. 8. In the next ground of appeal, grievance of the revenue is that Learned CIT(Appeals) has erred in deleting the addition of Rs.56,21,217 which was added by the Assessing Officer on the ground that assessee failed to file confirmation. The brief facts of the case are that the following amounts were shown by the assessee as outstanding: S.No. Name Amount (Rs.) 1 Hyderabad Cable Company 2.09,365 2 Comstar Technology Co. Ltd. 28,33,294 3 G.T. Equipment Technology 20,62,557 9. Learned Assessing Officer has observed that the liability to pay these amounts have ceased, therefore, the assessee should have shown them in the total income. On appeal, Learned CIT(Appeals) has deleted the addition. 10. With the assistance of learned representatives, we have gone through the record carefully. With regard to the first amount, i.e. Rs.2,09,365 payable to Hyderabad Cable Co., Learned First Appellate Authority has observed that this company had served a legal notice upon the assessee for payment of the amount. It suggests that liability to pay has not ceased and it cannot be added in the total income of the assessee under sec. 41(1) of the Income-tax Act, 1961. Once it is factually established by the assessee that liability has not ceased, no addition can be made. Learned CIT(Appeals) has considered this aspect and we do not see any reason to interfere in his order. With regard to the two other creditors, we find that the Learned CIT(Appeals) has deleted the addition on the ground that these amounts have been written off by the assessee in the subsequent years and offered for tax. Assessing Officer has made the addition of these amounts in the present years on the ground that assessee failed to file the confirmation from these two entities. The case of the assessee was that a dispute was pending between the assessee and these parties and it was not possible for it to ask for a confirmation. The assessee has not written off these amounts in its books of account. Assessing Officer has not brought any positive evidence on the record indicating the liability to pay these amounts has ceased. On due consideration of the order of the Learned CIT(Appeals), we do not find any merit in the ground of appeal raised by the revenue. Hence, it is rejected. 11. In the next ground of appeal, grievance of the revenue is that Learned CIT(Appeals) has erred in deleting the addition of Rs.17,738 which represents the employees contribution towards EPF and it was paid after the expiry of the due date provided in the EPF Act. Learned CIT(Appeals) has deleted this disallowance on the ground that the amount was paid before the due date of the filing of the return and the issue is squarely covered in favour of the assessee by the decision of Hon'ble Delhi High Court in the case of CIT vs. PM Electronics Ltd. reported in 177 Taxman 1. In our opinion, Learned CIT(Appeals) has rightly placed reliance on the decision of Hon'ble Delhi High Court and no interference is called for in his findings on this issue. 12. In the appeal of the assessee, the solitary grievance is that Learned CIT(Appeals) has erred in confirming the addition of Rs.24,22,217. 13. The brief facts of the case are that assessee had debited a sum of Rs.2,42,21,667 under various heads of expenses. Learned Assessing Officer disallowed 10% of such expenses by recording a brief finding which reads as under: “8. The assessee has claimed expenses to the tune of Rs.2,42,21,667 debited in the P & L account. The assessee failed to produce complete books of account with supporting vouchers which has been discussed in details vide para 3 above the genuineness of the expenses incurred, therefore, could not verified. I, therefore, disallow 10% of the expenses incurred being not verifiable. ADDITION: Rs.24,22,167/-“ 14. Apart from this addition, learned Assessing Officer has made the addition on account of low g.p. Learned First Appellate Authority has considered both these issues together and recorded a finding that 17 opportunities were given to the assessee but it failed to submit the requisite details, thus under the compelling circumstances, Assessing Officer has made ad hoc disallowance out of the expenses claimed by the assessee. Learned CIT(Appeals) deleted the g.p. addition but confirmed the ad hoc disallowance and observed that this disallowance can take care of the g.p. addition made by the Assessing Officer. 15. Before us, learned counsel for the assessee placed on record the details of expenses debited by the assessee in a tabular form. He pointed out that out of the certain items, there could not be any disallowance, otherwise in principle, he did not dispute the disallowance made by the Assessing Officer. This list has been given to the Learned DR also. It contains 36 items, out of these 36 items, learned counsel for the assessee pointed out that item No.14; is a difference in foreign exchange Rs.25,78,359; item No.26 bank charges Rs.5,97,199; insurance charges Rs.5,99,694; interest on term loan Rs.49,81,807 and depreciation of Rs.116,21,599. He pointed out that out of these expenses, there cannot be any disallowance because assessee cannot inflate these expenses or it cannot be said that they are not for business purpose, because learned Assessing Officer himself allowed 90% of expenses. On the other hand, Learned DR relied upon the order of Learned CIT(Appeals). 16. We have duly considered the rival contentions and gone through the record carefully. Since the assessee failed to submit the requisite details at the time of assessment proceedings, therefore, learned Assessing Officer has rightly made ad hoc disallowance out of expenses on the ground that genuineness of such expenses could not be verified. But we agree with the submissions made by the learned counsel for the assessee that out of certain expenses, there cannot be any disallowance. The nature of the expenses is such that no doubt on their quantification can be raised. Now, as far as difference in foreign exchange is concerned, it is to be computed based on straight formula. Similarly, depreciation could also be verified from details available on the record. Considering all these aspects, we set aside this issue to the file of the Assessing Officer for readjudication. The observations made by us will not impair or injure the case of the Assessing Officer and would not cause any prejudice to the defence/explanation of the assessee. Learned Assessing Officer shall verify the details of expenses and provide due opportunity of hearing to the assessee before exclusion of certain items from the total expenses out of which disallowance at 10% can be made. 17. In the result, the appeal of the assessee is partly allowed and that of the revenue is dismissed. Decision pronounced in the open court on 03.05.2012 Sd/- Sd/- (B.C. MEENA) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 03/05/2012 Mohan Lal Copy forwarded to: 1) Appellant 2) Respondent 3) CIT 4) CIT (Appeals) 5) DR: ITAT ASSISTANT REGISTRAR