In case of concealment of income in return deduction under sec 80HHC is allowed appropriately and expenses related to business only allowable

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES “D”, MUMBAI

BEFORE SHRI R. S. SYAL, AM AND SHRI VIJAY PAL RAO, JM

ITA Nos. : 2915 & 2916/Mum/2007

Assessment Years: 2002-03 & 2003-04

Income Tax Officer

Ward 18(1)(3),

1st Floor, Parel,

Mumbai-400 012

(Appellant)

Vs.

M/s. Ratan Silk Mills

Gala Wood Work Compound,

Opp. B. D. D. Chawl No. 115,

Worli, Mumbai-400 013

PAN NO: AACFR 7220 D

 (Respondent)

ITA No. : 6035/Mum/2007

Assessment Year: 2004-05

M/s. Ratan Silk Mills

Gala Wood Work Compound,

Opp. B. D. D. Chawl No. 115,

Worli, Mumbai-400 013

PAN NO: AACFR 7220 D

(Appellant)

Vs.

Income Tax Officer

Ward 18(1)(3),

1st Floor, Parel,

Mumbai-400 012

 (Respondent)

ITA No.: 6785/Mum/2007

Assessment Year: 2004-05

Income Tax Officer

Ward 18(1)(3),

1st Floor, Parel,

Mumbai-400 012

(Appellant)

Vs.

M/s. Ratan Silk Mills

Gala Wood Work Compound,

Opp. B. D. D. Chawl No. 115,

Worli, Mumbai-400 013

PAN NO: AACFR 7220 D

 (Respondent)

&

ITA Nos.: 2247 & 2248/Mum/2007

Assessment Years: 2002-03 & 2003-04

M/s. Ratan Silk Mills

Gala Wood Work Compound,

Opp. B. D. D. Chawl No. 115,

Worli, Mumbai-400 013

PAN NO: AACFR 7220 D

(Appellant)

Vs.

Income Tax Officer

Ward 18(1)(3),

1st Floor, Parel,

Mumbai-400 012

 (Respondent)

Assessee by: Shri M. V. Subramanian

Department by: Shri C. G. K. Nair

Date of hearing: 15.05.2012

Date of Pronouncement: 23.05.2012

O R D E R

Per R. S. SYAL, AM:

This batch of six cross appeals – three by the assessee and equal number by the Revenue in respect of the captioned years, involve some common issues. For the sake of convenience, we have clubbed these appeals for disposal by a consolidate order.

Assessment Year 2002-03

2. The assessee has raised an additional ground challenging the initiation of reassessment proceedings. Since this ground involves determination of a question of law, without investigation into fresh facts, we, following the decision of the Hon'ble Supreme Court in the case of NTPC vs. CIT (1998) 229 ITR 383 (SC), admit this additional ground and take it up for disposal on merits.

3. Briefly stated, the facts of the case are that the assessee filed its return of income on 30.10.2002, inter alia claiming the deduction u/s.80HHC. The return was proceeded u/s.143(1)(a). There was no regular assessment under the provisions of the Act. Thereafter, a notice was issued u/s.148 on the ground that the assessee incurred loss and hence was not entitled to deduction u/s.80HHC. The A.O. has recorded the reasons which are reproduced as under:-

Name of the Case M/s. Ratan Silk Mills

A.Y. 2002-03

PAN AACPR 7220 D

Reasons for reopening of assessment u/s.148 of the I.T. Act:-

Assessee has filed return of income for the aforesaid A.Y. on 30.10.00 declaring income at `.62,595/-. The return was processed u/s. 143(1)(a)/ accepted u/s.143(1) on _______________.

Assessee is a

During the year, assessee has shown net profit of `.17,90,133/- and received amount of `.28,17,955/- towards export incentives. If the export incentives are not taken into account, the assessee has incurred loss i.e. negative profit. Assessee has claimed deduction u/s. 80HHC amounting `.50,75,805/-.

As the assessee has incurred loss, he is not entitled for deduction claimed u/s.80HHC as per Supreme Court’s decision in case of IPCA Lab Vs Dy CIT reported in 266 ITR 521, Bombay High Court’s decision in the case of Rohan Dyes & Intermediate Ltd. reported in 270 ITR 370 & Hon'ble ITAT ‘F’ Bench, Mumbai’s decision in ITA No. 6345/Mum/98 in the case of Mangalya Trading & Investment Pvt. LTd. vs. Dy CIT Spl Rg 20, Mumbai. In view of the above, there is reason to believe that the income amounting `.50,75,805/- has escaped assessment. Therefore, issue notice u/s.148 of the I.T. Act.

- sd -

I.T.O. 18(1)(3), Mumbai

4. The assessment was thereafter finalised by modifying the claim of deduction u/s.80HHC determining the total income at `.31.33 lakh.

5. In support of this additional ground, the learned counsel for the assessee submitted that the reasons so recorded by the A.O. were not valid as these were not dated by the A.O. and further the particulars of the assessee were filled in by pen on a performa drafted by the A.O. His main contention was that there was no tangible material with the A.O. to initiate the reassessment proceedings and hence it was a simple case of change of opinion not warranting any action u/s.147. On the other hand, the learned DR supported the assessment order by contending that the reasons were validly recorded and there was no justifiable cause to interfere with the initiation of reassessment.

6. Having heard both the sides and perused the relevant material on record, it is found that the assessee filed its return on 30.10.2002, which was proceed u/s.143(1)(a). There was no regular assessment. As is evident from the reasons reproduced above that the learned A.O. has relied inter alia on the judgment of the Hon'ble Supreme Court in the case of IPCA Laboratory VS. CIT (supra) dated 11.03.2004 and that of the Hon'ble Jurisdictional High Court in the case of Rohan Dyes & Intermediate Ltd. (supra), which is dated 04.08.2004, for canvassing the opinion that there was escapement of income. In view of the above two judgments, viz. one of the Hon'ble Supreme Court and the other of the Hon'ble Jurisdictional High Court, it is obvious that the assessee was wrongly allowed deduction u/s.80HHC to a higher level in disregard to these two cases. Explanation 2 to section 147 clearly provides under clause (b) that where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the A.O. that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, it shall be deemed to be a case where income chargeable to tax has escaped assessment. Present is a case in which the deduction claimed by the assessee u/s.80HHC has been allowed at a higher level in contravention to these two judgments. In such circumstances, no fault can be found with the A.O. in forming the view that the income chargeable to tax escaped assessment within the meaning of section 147.

7. As regards, the contention of the learned AR that there was no fresh material in the hands of the A.O. for initiating the assessment proceedings, we find that this contention is bereft of any force for the reason that these two judgments were rendered after the processing of return by the A.O. u/s.143(1)(a). The Hon’ble Supreme Court in ITO VS. Saradbhai M. Lakhani & Anr (2000) 243 ITR 1 (SC) has held that a subsequent decision of superior appellate authority constitutes `Information' and reassessment on that basis is valid. It is pertinent to note that the Hon’ble Supreme Court in the case of A.L.A Firm VS. CIT (1991) 189 ITR 285 (SC) has upheld reassessment even on the basis of a decision of a High court available at the time of assessment, but which was omitted to be considered. Such earlier decision has been held to be `Information' justifying reassessment. Here it is relevant to note that these judgments were rendered in the context of the provisions of section 147 prior to its substitution by the Direct Tax Laws (Amendment) Act, 1987, when the scope of reassessment was thin vis-à-vis the its scope post amendment, with which we are concerned in the extant appeal. Now we are confronted with a situation in which the AO has taken note of later decisions of none other than the Hon’ble Supreme Court and the Hon’ble jurisdictional High Court on the point, as per which the assessee was not entitled to the deduction u/s 80HHC to the extent it was so claimed and allowed. Such judgments rendered after the processing of return constitute tangible material with the AO to opine that the claim was wrongly allowed, which led to the escapement of income. Respectfully following the ratio decidendi of the above noted judgment of the Hon’ble Supreme Court in Saradbhai M. Lakhani & Anr, we uphold the initiation of reassessment proceedings.

8. In so far as the other minor objections taken by the learned AR are concerned, we find that there is no force. There is hardly anything wrong with the A.O. in taking the format of similar cases and thereafter, filling in particulars by pen in respect of each assessee to serve the purpose. On a pertinent query, it was admitted by the ld. AR that all the particulars and figures recorded by the AO in such reasons were correct. As regards, the question of non-dating of the reasons, the learned AR candidly accepted that notice u/s.148 was duly dated and served on the assessee. When a notice u/s.148 is properly dated, it does not make any difference whether the reasons, annexed to such notice, are specifically dated or not. In view of the foregoing reasons we are satisfied that the reassessment has been properly initiated. It is more so for the reason that the main action of the A.O. in modifying the amount of deduction u/s.80HHC on this bedrock, has been accepted by the assessee. This additional ground, therefore, fails.

9. Ground no. 1 of the assessee’s appeal is against the sustenance of addition of `.11,90,550/-, being 50% of the total disallowances of interest of `.23,81,097/- made by the AO. Briefly stated the facts of this ground are that the assessee paid interest on loans to various financial institutions. During the course of the assessment proceedings it was noticed by the A.O. that the account of M/s. Modern Textile Rayon & Silk Mills Pvt. Ltd. (hereinafter called MTRS) had opening balance of `.1.46 crore. The A.O. noted that the assessee made certain purchases from this party and the closing balance was at `.2.00 crore. In the opinion of the A.O., the assessee diverted its interest bearing funds in making the payment to MTRS, a sister concern of the assessee. Accordingly, the A.O. held that the interest on borrowings was not allowable u/s.36(1)(iii) to this extent. This has resulted into an addition of `.23.81 lakhs.

10. The learned CIT(A) accepted the assessee’s stand in particular that the assessee was dealing in such types of commodities which were not usually available in the market. MTRS supplied the goods to the assessee on the condition of 100% advance. He observed that “the appellant, therefore, is understandably under obligation to keep the advance amount with MTRS”. He however, held that the A.O. should have allowed credit for the sales figure during the year and advance for 4 to 5 months was justifiable. Considering these facts, he directed the A.O. to reduce the disallowance of interest by 50%. The assessee is aggrieved against the sustenance of addition to the tune of `.11.90 lakhs. Ground no. 3 of the revenue’s appeal is against the relief allowed by the ld. CIT(A) on this issue.

11. After considering the rival submission and perusing the relevant material on record, it is observed from the assessee’s balance sheet (a copy of which is available on page 4 of the paper book) that there is balance in the partners’ capital account to the tune of `.4,71,25,950/-. From the partner’s capital account, it is noticed that no interest was paid to partners on such credit balances. It, therefore, becomes apparent that the assessee had interest free funds available at its disposal at a higher figure then the amount advanced to its sister concern, the closing balance of which has been reported by the A.O. at `.2.00 crore. The Hon'ble Jurisdictional High Court in the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) has held that if there are interest free fund available with the assessee sufficient to meet its investment and at the same time, loan has been raised, it can be presumed that the investments were made from interest free funds. In this case, the Hon'ble Jurisdictional High Court ordered for the disallowance of interest. As admittedly, the interest free funds in the shape of partners’ capital balances are far in excess of the amount paid by the assessee to its sister concern, in our considered opinion, the ratio in the case of Reliance Utilities and Power Ltd. (supra) would squarely apply as not to warrant any disallowance of interest.

12. Be that as it may, it is found as an admitted position that the assessee was making purchases from this sister concern, who was manufacturing the goods as per the specific orders of the assessee. The A.O. has himself admitted this fact when he noted that as against the opening balance of `.1.46 crore, the assessee effected purchase from is sister concern during the year at `.1.42 crore. There cannot be any dispute on the proposition that if funds are advanced for the purpose of business, there cannot be any question of disallowance of interest on the ground that the interest free funds were utilised to make such advance. From the very prescription of section 36(1)(iii), it is discernible that the amount of interest paid in respect of capital borrowed, for the purpose of business or profession, is allowed as deduction. So long as the purpose of utilisation of the capital borrowed is towards business, no disallowance can be made. As admittedly, the advances were made by the assessee to its sister concern for effecting purchases, in our considered opinion, the learned CIT(A) cannot be held to be justified in restricting the addition on account of disallowance of any interest. In the result, this ground of the assessee is allowed and that of the Revenue is dismissed.

13. Ground no.2 of the assessee’s appeal is against the sustenance of additions of motor car expenses. The facts apropos this ground are that the assessee claimed deduction in respect of motor car expenses to the  tune of `.8,28,597/-. The A.O. observed that the assessee had used 9 motor cars, out of which 5 were in the names of persons other than the assessee firm or its partners. Considering the nature of the business of the assessee firm, the A.O. also found the use of 9 motor cars as quite unreasonable. On being called upon to justify the deduction, the assessee stated that the use of these nine motor cars was for the purpose of its business, because it was 100% export firm and the overseas customers were frequently visiting the assessee in connection with the export orders. It was stated that on an average 5 different customers were always on visit for business purpose to whom the assessee was providing cars so as to make their stay comfortable. The A.O. did not accept this contention. He disallowed complete motor car expenses in respect of the five cars which were not in the assessee’s name and for the remaining three cars, he made disallowance at 20% of the expenses claimed. The learned CIT(A) reduced the total disallowance to 50%, against which the assessee is aggrieved. There is no appeal by the

Revenue on this issue.

14. After considering the rival submissions and perusing the relevant material on record, we find that the mere fact, being the vehicle not standing in the name of the assessee, cannot be a reason for making or sustaining any disallowance on the account of motor car expenses. So long as the expenses are incurred on the motor vehicles for the purpose of business, the same have to be allowed as deduction. The Hon'ble Jurisdictional High Court in the case of CIT vs. Mirza Ataullaha Baig and other (1993) 202 ITR 291 (BOM) has held the assessee to be entitled to depreciation on vehicle purchased which was not registered in the assesses’s name. In the light of this judgment and several other judgments on the same issue we hold that this reason of the A.O. for making the disallowance of expenses cannot be sustained. Be that as it may, it is observed from the assessment order that the assessee did not have complete details in respect of motor car expenses because no log book etc. were maintained. Considering the totality of the facts and circumstances of the present case, in our considered opinion, it will be just and fair if 10% of the total motor car expenses, in respect of all the 9 cars, are held to be relatable to be personal use by the partners of the firm. We accordingly sustain the disallowance at `.82,859/-. This ground is partly allowed.

15. Ground no.3 of the assessee’s appeal is against the sustenance of disallowance of depreciation and interest paid on loan for motor car on the ground that the 5 motor cars were not registered in the name of the assessee. For the reasons discussed in respect of ground no. 2, we hold that the sustenance of the disallowance of depreciation on that ground cannot be sustained. However, considering the mandate of section 38(2), we sustain disallowance of depreciation @ 10% on account of personal use by the partners in respect of all the motor cars. In so far as the interest part of `.1,57,319/- towards loan on motor car is concerned, in our considered opinion, the same is deductible in view of the fact that the cars were purchased by the assessee firm and were standing in its balance sheet. Further in view of the fact that the said cars were used by the assessee for the business purpose, there can be no question of disallowance of interest for the purchase of such cars. To sum up, we sustain the disallowance on motor cars at the rate of 10% towards personal use by the partners. This ground is partly allowed.

16. Ground no. 4 is against the sustenance of disallowance of `.40,706/- being 50% out of Sales Promotion expenses disallowed by the A.O. The assessee claimed deduction for `.4,07,058/- on account of sales promotion expenses. The A.O. observed that the vouchers for these expenses were not properly backed by bills. He, therefore, made disallowance at 20% of such expenses at `.81,412/-, which was reduced in the first appeal to 10%.

17. After considering the rival submissions and perusing the relevant material on record, we are of the opinion that the learned CIT(A) was justified in sustaining the disallowance at 10% of such expenses in view of the facts that these expenses were not properly substantiated with bills etc. This ground is not allowed.

18. The last ground of the assessee’s appeal is against the sustenance of addition of `.14,285/- being 50% of the travelling expenses. The assessee claimed the deduction of `.1,42,850/- towards Travelling and Conveyance Expenses. Only kutcha bills and vouchers were produced. The A.O. made disallowance of 20% of such expenses which was reduced to 10% in the first appeal. In our considered opinion, the learned CIT(A) was justified to this extent. No further interference is called for in the impugned order on this issue.

19. Ground no. 1 of the Revenue’s appeal is against the direction of the learned CIT(A) for reducing the amount of depreciation from the profits of the business. On the perusal of the computation of claim of deduction u/s.80HHC, the A.O. noted that the assessee claimed the deduction on net profit before claiming depreciation allowance. The A.O. modified the claim of deduction u/s.80HHC accordingly by considering the amount of depreciation allowable as per law. The learned CIT(A) noted that the said claim of depreciation related to the idle machinery which was let out of hire and the income was shown under the head “Income from other sources”. He thus observed that the deduction of same amount once again from the net profit will tantamount to double reduction.

20. After considering the rival submissions and perusing the relevant material on record, we find that the view canvassed by the learned CIT(A) on this issue is fallacious. The computation of total income of the assessee is available on page 1 of the paper book. It can be observed that the assessee offered entire income of `.62,595/- as “Business income”. No amount was offered under the head “Income from other sources”. The view point of the learned CIT(A) that the assessee had hired out the idle machinery from which a sum of `.4.20 lakhs was declared under the head “Income from other sources”, is thus incorrect. The entire income was offered as the “business income” and the same has been assessed accordingly, as is evident from the computation of total income made by the A.O. on the last page of the assessment order. There is no reference to any income under the head “Income from other sources”. The other reasons for which the order of the learned CIT(A) cannot be upheld is about the amount of depreciation. It was contented before the ld. first appellate authority as well as us that the depreciation in question related only to the idle machinery. On the other hand, it can be seen from the Schedule of assets of the assessee (a copy of which is available at page 1 of the paper book) that the depreciation of `.29.90 lakh is in relation of all the assets including machinery, furniture and fixture etc. There is nothing like any segregation of assets into idle and working assets. When the facts are seen in this light, it becomes apparent that the amount of depreciation for the current year has to be allowed u/s.32 against under the head “Profit and gains of business or profession”. The contention of the learned AR that section 57 will govern the deductibility of depreciation is, therefore, rejected. We, therefore, overturn the impugned order on this issue and restore the assessment order to this extent. The ground is, therefore, allowed.

21. Ground no.2 by the revenue is against the direction of the learned CIT(A) for treating the sample sale as export sales. The A.O. excluded the same sales from the export turnover on the ground that the assessee had not filed the necessary details in this regard. It was shown to the learned first appellate authority that the assessee had filed full details of samples sales showing the names, addresses and invoice numbers and also the amount in US Dollars which was realised in foreign exchange. A copy of the letter addressed to the A.O., furnishing such disallowance, is available on record. The first appellate authority recorded satisfaction with the assessee’s contention and directed the A.O. to allow the deduction by treating it as export sale.

22. We have heard the rival submissions and perused the relevant material on record. The learned CIT(A) reversed the action of the A.O. on the ground that the assessee had furnished the complete details before him. A copy of such letter is available on record, from which it is borne out that the assessee had also furnished such details at the assessment stage. Apart from that, the learned Departmental Representative could not show as to why the said amount could not be considered as export sale. In view of the foregoing reasons, we uphold the impugned order to this extent.

23. In the result, both the appeals are partly allowed.

Assessment Year 2003-04

24. Both the sides are in agreement that the facts and circumstances of the appeals for this year are mutatis mutandis similar to those for the immediately preceding year. In fact, no separate arguments were advanced by the either side in respect of the grounds for this year.

Following the view taken in the A.Y. 2002-03 we hold as under :-

1. Ground no.1 of the assessee’s appeal towards the sustenance of disallowance of 50% of interest on trade advance given to MTRS is allowed.

2. Ground no.2 on sustenance of motor car expenses is partly allowed by restricting the addition to 10% of total expenses.

3. Ground no.3 about the sustenance of disallowance of depreciation of motor car is partly allowed by restricting the disallowance to 10% of depreciation. However, interest part of the ground on the motor car loan is allowed.

4. Ground no.4 about the sustenance of disallowance at 10% of sales promotion expenses is not allowed.

5. Ground no.5 of the assessee’s appeal about the sustenance of disallowance at 10% of total travelling expenses is not allowed.

6. Ground no. 1 of the Revenue’s appeal is about the reduction of the amount of depreciation from the profits of the business for the purpose of computation of deduction u/s.80HHC is allowed.

7. Ground no.2 is about the direction of treating the sample sales as export sales, is dismissed.

8. Ground no.3 about restricting the disallowance of interest on loan at 50% which is dismissed.

25. In the result, both the appeals are partly allowed.

Assessment Year 2004-05

26. Both the sides are in agreement that the facts and circumstances of the appeals for this year are also mutatis mutandis similar to those for the immediately preceding year except for few new grounds. In fact, no separate arguments were advanced by the either side in respect of the similar grounds for this year. Following the view taken in the A.Ys. 2002-03 and 2003-04, we hold as under :-

27. Ground no. 1 of the assessee’s appeal about the sustenance of disallowance of interest towards trade advance to MTRS is allowed.

28. Ground no.2 about the sustenance of motor car expenses is partly allowed by restricting the addition to 10% of motor car expenses. However, the interest component on motor car loan is directed to be allowed in full.

29. Ground no. 3 about the confirmation of disallowance of deprecation on motor cars is restricted at 10% towards personal use of partners.

30. Ground no. 4 about the sustenance of disallowance at 10% of sales promotion expenses, is not allowed.

30. Ground no. 5 about the sustenance of disallowance of travelling expenses, is not allowed.

31. There is a new ground for this year, which is against the sustenance of disallowance at `.21,991/- out of the disallowance on account of telephone expenses of `.40,000/- out of the total telephone expenses of `.2,19,910/-. The A.O. disallowed a sum of `.40,000/- out of telephone and mobile charges of `.2,19,910/- on the ground that these were incurred towards personal use. The learned CIT(A) reduced the disallowance at 10% of total expenses. In our considered opinion, the learned CIT(A) was justified in sustaining the disallowance at this level. No interference is called for. This ground is not allowed.

32. Ground no. 1 of the revenue’s appeal about the direction of the learned CIT(A) not to reduce the amount of depreciation from the profits of the business for the purpose of computation of income u/s.80HHC, is allowed by following the view taken in the A.Y. 2002-03.

33. Next ground is about the disallowance of interest to the sister concern is dismissed in consonance with the view taken earlier.

34. The only other issue in this appeal is against the deletion of addition of foreign travel expenses. The facts of this ground are that the assessee incurred foreign travelling expenses to the tune of `.23.50 lakh. The A.O. disallowed a sum of `.3 lakh for the reason that the journeys undertaken were not in connection with the business. The learned CIT(A) deleted the addition by observing that all the places visited by the assessee were in connection with the business. No material has been brought on record to controvert this finding of the learned CIT(A). We, therefore, uphold the impugned order to this extent. This ground is not allowed.

35. In the result, both the appeals are partly allowed.

Order pronounced on this 23rd day of May, 2012.

                                                        Sd/-                                 Sd/-

                                             (VIJAY PAL RAO)           (R. S. SYAL)

                                        JUDICIAL MEMBER  ACCOUNTANT MEMBER

MUMBAI, Dt: 23rd May, 2012.

Copy forwarded to:

1. The Appellant,

2. The Respondent,

3. The C.I.T.

4. CIT (A)

5. The DR, - Bench, ITAT, Mumbai

//True Copy//

BY ORDER

ASSISTANT REGISTRAR

ITAT, Mumbai Benches, Mumbai

Roshani