Alidhara Texpro Engineers Pvt.Ltd.,, ... vs Assessee

M/s. Alidhara Texpro V/S Dy. Commissioner of Engineers Pvt. Ltd, Plot No. Income-tax, Circle-1, Surat B-52, Road No. 3, Udhyognagar, Udhna, Surat

(Appellant) (Respondent)

PAN: AACCA0256D

Appellant by : Shri Mehul Shah, A.R. Respondent by : Shri M.K. Singh, Sr. D.R

(आदे श)/ORDER

Date of hearing : 29-05-2015 Date of Pronouncement : 05 -06-2015

PER ANIL CHATURVEDI, ACCOUNTANT MEMBER.

1. This appeal filed by the Assessee is against the order of CIT(A)-I, Surat dated 06.06.2012 for A.Y. 2008-09.

2. The relevant facts as culled out from the material on record are as under.

3. Assessee is a company stated to be engaged in the business of manufacturing of textile machineries and their spare parts. Assessee filed its return of income for A.Y. 2008-09 on 27.09.2008 declaring total income of Rs. 3,80,18,190/-. The case was selected for scrutiny and thereafter the 2 ITA No 2007/AHD/2011 . A.Y. 2008-09 assessment was framed under section 143(3) vide order dated 31.03.2010 and the total income was determined at Rs. 4,35,61,980/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who vide order dated 06.06.2011 dismissed the appeal of the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us and has raised the following grounds:-

1. On the facts and in circumstances of the case as well 'as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer in rejecting book results u/s. 145 (3) of the I. T. Act.

2. On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of income-tax (Appeals) has erred in confirming the action of the Assessing ' Officer in estimating Gross Profit at the rate of 19.32% and thereby erred in making addition of Rs. 52,12,690/- for alleged low Gross Profit.

3. On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer in disallowing deduction of the Act of Rs. 96,335/- for alleged excess claim of depreciation.

4. On the facts and in circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of the Assessing Officer in disallowing Rs. 1,43,750/- u/s 14A of the I.T. Act as proportionate expenditure in relation to exempt income.

5. On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of income-tax (Appeals) has erred in confirming the action of the Assessing Officer in disallowing Rs. 2,27,540/- on account of software programme expense by treating the same as capital expenditure instead of revenue expenditure as claimed by assessee.

First two grounds are interconnected and is in connection with estimation of gross profit.

4. During the course of assessment proceedings, A.O noticed that for the year under consideration Assessee had shown G.P of 17.33% as against the G.P of 17.87% in the immediate preceding assessment year. He also noticed that there was no particular pattern of raw material consumption or related expenses even though the raw material consumption and related expenses 3 ITA No 2007/AHD/2011 . A.Y. 2008-09 had increased considerably without proportionate increase in sales turnover. He also noticed that Assessee had not maintained day to day stock register relating to issue of spares to machine shop. A.O has also noted that Assessee did not furnish the details of month-wise opening stock, purchases, sales, closing stock and its valuation with supporting evidence. Apart from the aforesaid facts, A.O has also noted that Assessee had made payments amounting to Rs. 1,84,25,577/- to persons specified u/s. 40A(2)(b) for which no supporting evidence to justify the reasonableness of the payments were made. He therefore issued a show cause notice and asked the Assessee to explain as to why the book results not be rejected u/s. 145(3) and G.P be estimated at 19.87%. The submissions of the Assessee was not found acceptable to the A.O as he was of the view that in the absence of day to day consumption stock register, the raw material consumption was not verifiable and the books of accounts were not reliable. He therefore rejected the book results by invoking the provisions of Section 145(3) of the Act and considered it fair and reasonable to estimate the G.P at 2% above the G.P rate shown by the Assessee and accordingly on the basis of G.P of 19.32%, estimated the gross profit for the year at Rs. 4,02,76,320/-as against the gross profit of Rs. 4,50,63,630/- shown by the Assessee and the difference amount of Rs. 52,12,690/- was added as income on account of low gross profit. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

Decision:

The arguments of the appellant as well as the A.O has been considered.. There is considerable force in the arguments advanced by the A.O. One of the major reasons given by the A.O. for rejecting the books of accounts is that the appellant has not established reasonableness of payment made u/s.40 A(2)(b) amounting to Rs. 1,84,25,577/-. During the course of hearing before the undersigned, appellant has admitted that they could not give any comparable figures to establish reasonableness of payments made to persons specified u/s.40A(2)(b). If the appellant had made payments

4 ITA No 2007/AHD/2011 . A.Y. 2008-09 covered u/s.40A(2)(b), it is up to them to prove its reasonableness. They have provided no details to the A.O nor they have given any clue to the A.O. so that A.O. could have ascertained reasonableness of the payments made amounting to Rs.1.84 Crores as mentioned above.

Thus, it is clear that appellant has not discharged its onus of providing reasonableness of payment discussed above. In view of assessee's failure to discharge its onus. A.O. has rightly concluded that it is fit case for .rejection of books of accounts. Similarly, another reason advanced for holding that books are unreliable is assesses failure to prove the genuineness of commission paid of Rs.8,70,003/- to one of sister concern namely Alidhara Textile Engineers Pvt. Ltd. If the appellant is claiming any expenditure u/s.37 of the IT. Act, it is his duty to prove its genuineness and also furnish evidence for the expenditure to the satisfaction of the A.O. Failure of the appellant to perform its duty, correctly led the A.O. to hold that book results cannot be relied upon. Similarly the A.O. has pointed out major defects in the manner in which books of account have-been maintained, like, absence of day to day stock register as discussed by the A.O. in detail for rejection of books of accounts.

Having rejected books of account, the A.O. has proceeded with caution and care and has enhanced G.P. by 2%. The A.O. has given cogent reasons for enhancing G.P. by 2% and making addition of Rs.52,12,690/-. Having regard to totality of circumstances, the addition made by the A.O. by increasing G.P. rate amounting to Rs.52,12,690/- is upheld

5. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

6. Before us, ld. A.R. reiterated the submissions made before A.O and ld. CIT(A) and further submitted that similar addition on account of gross profit was made in the case of Assessee in earlier years also but the addition was deleted by Hon'ble Tribunal in A.Y. 07-08 (in ITA No. 1853 & 1854/Ahd/2010 order dated 31.01.2013) by following earlier years orders. He also placed on record the copy of the aforesaid order. He further submitted that there is no change in the facts of the case for the year under appeal with that of earlier years and therefore following the decision of the Tribunal in earlier years, the addition be deleted. The ld. D.R on the other hand supported the order of A.O and ld. CIT(A).

5 ITA No 2007/AHD/2011 . A.Y. 2008-09

7. We have heard the rival submissions and perused the material on record. The issue in the present ground is about addition on account of estimation of G.P We find that addition on account of G.P. was also made in A.Y. 07-08 by the A.O but in 2nd appeal, the Co-ordinate Bench of Tribunal by following the decision of Tribunal in Assessee's own case for A.Y. 03-04 to 06-07 deleted the addition by holding as under:-

3. When the matter was carried before the first appellate authority, ld.CIT(A) has held that the AO had not mentioned any particular item of defect in the books of account.

The AO had not brought on record any material to show that there was disproportionate consumption of raw-material. On facts, it was noted by the ld.CIT(A) that the assessee was required to manufacture Tailor made machine, therefore, the requirement of every customer was distinct, hence it was not possible to maintain a particular standard of profit rate. Further, he has also noted that as per the requirement of the Excise Department, the assessee had maintained RG-23A Register. Finally, the rejection of books of accounts was overruled and the addition was deleted.

4. At the outset, we have been informed that in assessee's own case from A.Y. 2003- 04 to 2006-07 a consistent view has been taken by the Respected Co-ordinate Benches in the following cases:-

Sl.No(s) In the case of case of.... In ITA No(s). 1. M/s.Alidhara Texpro Engineers (P) Ltd. vs. ITA No.3290/Ahd/2009 Addl.CIT For A.Y. 2006-07 ITAT "C" Bench Ahmedabad order dated 23/09/2011 2. M/s.Alidhara Texpro Engineers Pvt.Ltd. vs. ITA No.3496 & DCIT and Alidhara Textool Engineers 3497/Ahd/2008 for A.Y. Pvt.Ltd. vs. DCIT respectively 2005-06 ITAT "D" Bench Ahmedabad order dated 12/08/2011 3. DCIT vs. Alidhara Texpro Engineers ITA Nos.925 & Pvt.Ltd. (cross-appeals) 3777/Ahd/2007 and ITA Nos.1042 & 3591/Ahd/2007 for A.Ys.2003-04 & 2004-05 ITAT "C" Bench Ahmedabad order dated 11.06.2010 6 ITA No 2007/AHD/2011 . A.Y. 2008-09

4.1 Keeping brevity in mind, we hereby conclude that on identical facts the Respected Co-ordinate Benches have consistently rejected the stand of the Revenue Department by deleting the GP addition. For A.Y. 2006-07, the Tribunal has followed an earlier order of A.Y. 2005-06, wherein it was held that for a small variation in GP it was not justified to reject the books of accounts and to make a GP addition. Likewise for A.Ys. 2003-04 & 2004-05, the Tribunal has held that all the items are subject to Excise Duty and no defect was noted by the AO in the Excise Register or other Registers maintained in respect of the excisable items manufactured by the assessee. In that decision, the Tribunal has cited CIT vs. Gotan Lime Khanij Udhyog 256 ITR 243 (Raj.) for the legal proposition that it is not always necessary to make an addition even if the books of accounts have been rejected.

5. Since a consistent view has regularly been taken in the past in the case of the assessee, therefore, respectfully following the past history, we hereby uphold the view taken by the ld.CIT(A). Before we part with the issue, it is worth to mention that the ld.AR has also pointed out that factually there was no fall in GP rate for the year under consideration because in one year the percentage of GP ratio was taken by including the "other income" in the total turnover; while the turnover of the assessment year compared with was after excluding the "other income". Meaning thereby the comparison of the GP ratio was unfair and if the discrepancy is removed, then there is no significant variation in the profit ratio for the year under consideration. Ground is dismissed.

8. Before us, ld. A.R. has submitted that the production and sale of finished goods are recorded in RG1 register maintained by Excise authorities and further no specific defects have been pointed in the audited accounts of the Assessee. These facts have not been controverted by Revenue. Further, Revenue has also not pointed out any distinguishable feature of the case with that of earlier years. We therefore respectfully following the decision of Co- ordinate Bench of Tribunal in Assessee's own case for A.Y. 07-08 hold that in the present case estimating the G.P by rejecting the books of accounts was not warranted. We therefore direct the deletion of addition made by A.O. Thus this ground of appeal is allowed.

Ground no. 3 is with respect to disallowing deduction of Rs. 96,335/- on account of alleged excess claim of depreciation.

7 ITA No 2007/AHD/2011 . A.Y. 2008-09

9. A.O has noted that Assessee's claim of deduction u/s. 80IB of the Act in the earlier years was found to have been worked out without claiming depreciation which according to him was not in accordance with law. He therefore, following the decision of Special Bench of Ahmedabad Tribunal in the case of Vahid Paper Converters 98 ITD 165 (Ahd) (SB), reduced the claim of deduction to the extent of Rs. 96,335/- and made addition on account of excess claim of deduction. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

Decision:

There is considerable force in the arguments of the A.O. The appellant has not been able to meet the points raised by the A.O. In view of the arguments advanced by the A.O. and weak defence put up by the appellant, the action of the A.O. is confirmed and disallowance of Rs.96,335/-u/s.80IB is upheld.

10. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

11. Before us, ld. A.R. submitted that in earlier years, Assessee did not succeed before Hon'ble Tribunal on the issue of claim of deduction under 80IB on the basis of decision of Vahid Paper Converter (supra). However in the year under consideration, Assessee has not claimed deduction u/s. 80IB and therefore there was no question of re-working of deduction under 80IB. He therefore submitted that the addition be deleted. The ld. D.R on the other hand supported the order of A.O and ld. CIT(A).

8 ITA No 2007/AHD/2011 . A.Y. 2008-09

12. We have heard the rival submissions and perused the material on record. We find that A.O has noted that Assessee's claim of deduction under 80IB in earlier years was without claiming depreciation and therefore he added the excess claim of deduction. On the other hand it is Assessee's submission that it has claimed no deduction u/s. 80IB in the year under consideration therefore no addition was called for. We find that there is no finding by the A.O. with respect to Assessee's claim of deduction under 80IB for the year under consideration. We therefore are of the view that the matter needs to be re-considered, in view of the aforesaid submission of ld. A.R. We therefore restore the issue to the file of A.O to decide it afresh after giving an adequate opportunity of hearing to the Assessee. The Assessee is also directed to promptly furnish all the required details called for by the A.O. Thus the ground of Assessee is allowed for statistical purposes.

Ground no. 4 is with respect to disallowance u/s. 14A

13. During the course of assessment proceedings, A.O noticed that Assessee has claimed dividend income of Rs. 6,62,641/- as exempt. He also noticed that no expenditure in relation to such exempt income has been shown by the Assessee. A.O therefore, following the method prescribed under Rule 8D of the I.T. rules, worked out the disallowance at Rs. 1,43,750/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

Decision:

The arguments of the appellant as well as the A.O. has been considered in totality. The appellant has repeated the same arguments advanced by them at the time of assessment proceedings indicated in the preceeding para. The A.O. has given cogent reasons for 9 ITA No 2007/AHD/2011 . A.Y. 2008-09 making disallowance U/S.14A of the IT. Act. In view of the arguments of the A.O. reproduced in the preceedings para, disallowance of Rs.1,43,750/- U/S.14A of the Act is upheld.

14. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

15. Before us, ld. A.R. reiterated the submissions made before A.O and ld. CIT(A). He further submitted that the dividend amount is received through ECS or automatically re-invested under dividend re-investment option and therefore Assessee has not incurred any expenditure on earning the exempt income. He further submitted that the A.O has not recorded any satisfaction but has mechanically proceeded to make disallowance on the basis of formula prescribed by Rule 8D of the I.T. rules. He therefore urged that no disallowance was called for and therefore the same be deleted. The ld. D.R on the other hand supported the order of A.O and ld. CIT(A) and further submitted that method prescribed under Rule 8D is applicable for the year under consideration. He thus supported the order of A.O and ld. CIT(A).

16. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the year under consideration is A.Y. 08-09 and on the basis of ratio of decision in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81 (Bom) Where it has been held that provisions of Rule 8D are applicable from A.Y. 08-09 and in view of the aforesaid ratio laid down by Hon'ble High Court, we are of the view that the methodology prescribed by Rule 8D of the I.T. Rules would be applicable for the year under consideration. Before us, Assessee has only made oral submissions about not incurring by any expenditure to earn the dividend income but however it has 10 ITA No 2007/AHD/2011 . A.Y. 2008-09 not placed on record any details of expenses nor the frequency of the receipt of income. In view of the aforesaid facts, we find no reason to interfere with the order of A.O and thus the ground of Assessee is dismissed.

5th ground is with respect to disallowance of software programme expenses.

17. A.O noticed that Assessee had debited Rs. 2,27,540/- towards software programme expenses in the Profit and Loss account. A.O was of the view that the software programme purchased by the Assessee gives an enduring benefit and therefore the expenses is of capital in nature and therefore cannot be allowed as deduction. He accordingly disallowed the same. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

Decision The rival submissions have been considered. The appellant has not raised any credible arguments which would call for interference with the line of action taken by the A.O. The appellant has not given any evidence that life of software is only 1 year and that such software are replaced every year. The arguments of the appellant is correct that the software programme becomes obsolete at faster rate. Having regard to this fact, the Act itself has provided accelerated depreciation @ 60%. The A.O. is directed to allow depreciation in this respect in the subsequent years on WDV as stated by the appellant in the form of alternative remedy. In view of the above, the action of the A.O. in disallowing expenditure of Rs.2,27,540/- is confirmed and this ground of appeal is dismissed.

18. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

11 ITA No 2007/AHD/2011 . A.Y. 2008-09

19. Before us, ld. A.R. reiterated the submissions made before A.O and ld. CIT(A) and further submitted that the Assessee had incurred expenditure on account of programming and customization of the software and A.O has not doubted the genuineness of expenditure. He further submitted that the software expenditure does not result into enduring benefit as the life of application software is short and the same is bound to become technically obsolete very fast and in these circumstances the Assessee had rightly treated the expenditure as Revenue expenses and therefore the same be allowed. The ld. D.R on the other hand supported the order of A.O and ld. CIT(A) and further submitted that no details about the nature of software has been submitted by the A.O before the lower authorities nor has been submitted before the Tribunal. He thus supported the order of A.O and ld. CIT(A).

20. We have heard the rival submissions and perused the material on record. Before us, it is Assessee's submission that the expenditure incurred on software is towards the customization and programming and life of application software is short. Before us, apart from the aforesaid oral submission, ld. A.R. could not place any material to show the nature of software and for what purpose it was to be used. He has just submitted that ledger copy of the expenditure. We are of the view that in the absence of full details about the nature of software, the purpose and its use etc and merely on the basis of the ledger account which does not give any details of the nature of expenses, the expenditure cannot be allowed. We therefore find no reason to interfere with the order of ld. CIT(A) and thus the ground of Assessee is dismissed.

12 ITA No 2007/AHD/2011 . A.Y. 2008-09

21. In the result, the appeal of Assessee is partly allowed for statistical purposes.

Order pronounced in Open Court on 05 - 06 - 2015.

Sd/- Sd/- (RAJPAL YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad. TRUE COPY Rajesh

Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) - 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad