Paramount Rubber Industries , ... vs Department Of Income Tax

Asstt. Commissioner of Vs. M/s Paramount Rubber Industries Income Tax, Circle-II, Block-B, Plot No. 58B, Industrial Area, New CGO Complex, Faridabad NIT, Faridabad. (PAN:AABFP2024Q) (Appellant) (Respondent)

Appellant by : Sh. Vikram Sahay, Sr. DR Respondent by: S/sh. Ved Jain, Rano Jain & V. Mohan, CAs

Date of hearing: 08.04.2015 Date of pronouncement: 06.05.2015

ORDER

PER INTURI RAMA RAO, A.M.:

This is an appeal filed by the Revenue for the assessment year 2009-10

impugning the order of learned CIT(A), Faridabad, dated 27.08.2012 raising the

following grounds of appeal:

i. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 31,18,934/- on account of railway recovery without going into legal aspect of the addition. In this issue a law point is involved whether it is mandatory on the part of AO before making addition on this issue without rejecting the books of accounts?

ii. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 14,00,000/- and that whether as per the version of the Ld. CIT(A) the expenses were allowable u/s 37(1) of the Income Tax Act, 1961 and that the AO was wrong to invoke section 36(1)(vii) of the Income Tax Act, 1961.

2 ITA No 5682/Del/2012 AY: 2009-10

iii. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 11,54,862/- on account of' liability of M/s Rakesh Rubber and Chemicals which was written off by the assessee only when the same was unearthed by the AO during the assessment proceedings.

iv. On the facts and in the circumstances of the case, the Id. CIT(A) has erred on facts and in law in allowing the commission@ 1% of the total sale when the sole buyer is a govt. body i.e. Indian Railway who procures the goods by inviting tender.

v. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in allowing the increased remuneration as consultation charges when the beneficiary happens to be the son of both the partners .

vi. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 1,15,998/- made on account of foreign travel expenses when the tour has no connection with business activity and that both the partners who happened to husband and wife visited foreign for their recreation.

vii. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in reducing the addition of Rs. 99,866/- to 49,933/- made on the expenses claimed which are personal in nature and debited to P /L account stating to be sales promotion expenses. viii. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in which the assessee did not file any evidence in support of its claim under the head House Tax and that the Ld. CIT(A) allowed the relief to the assessee without asking any comment from the AO and even in the absence of sufficient cause for the assessee to file the said evidences before the AO.

2. The brief facts of the case are that the respondent assessee is a firm

engaged in the business of manufacturing of grooved rubber products for

Railways & Rubber Components. For the assessment year 2009-10, return of

income was filed on 27.09.2009 declaring income of Rs. 36,30,340/-. Against

the said return of income, assessment under Section 143(3) of the Income-tax

Act, 1961 (for short "the Act") was completed vide order dated 26.12.2011 after 3 ITA No 5682/Del/2012 AY: 2009-10

making several disallowances at Rs. 1,21,61,080/-. Being aggrieved, the

assessee filed an appeal before the learned CIT(A) who vide impugned order

partly allowed the appeal. Hence, the Revenue come up with the present appeal.

We shall now deal with the same ground of appeal wise.

Ground no. 1

3.1 This ground relates to the deletion of addition of Rs. 31,18,934/- on

account of railway recovery. It is submitted that the firm is regularly supplying

Grooved Rubber pads to Railways on contract prices as per there purchase

orders. The terms and conditions of Tenders / Contracts have to be complied

with by the firm for the supplies to be made to Railways, otherwise deductions

had been made by the Railways on payments towards L.D charges, short supply

and non compliances of terms and conditions of the contract. The Railway

recovery are the deductions made by them on the payments of various bills

raised, against which short payments have been made as per details attached,

adjusted under this head of expense, this method of accounting practice is

consistently followed by the firm in the earlier years also. The firm had debited /

claimed Railway recovery of Rs.463194/- during the F.Y 2002-03, thereafter

there was no amount of railway recoveries debited to Profit & Loss Account,

however a sum of Rs.2571379/- received on settlement of old issues/deductions,

the credit has been shown as Railway recoveries receipts and credited to Profit 4 ITA No 5682/Del/2012 AY: 2009-10

& Loss Account. This practice has been consistently followed by the firm for the

accounting treatment of the Railway recoveries. During the Financial Year

2008-2009, the firm had debited a sum of Rs. 3118364/- under the head Railway

recoveries on account of deductions made on payment of various bills, for late

delivery as per terms given in tenders. The deductions had been made by the

different Railways against the supplies made by the assessee firm, as shown in

the copy of ledger account of Railway recovery and Indian Railways for the F.Y

2008-2009 are enclosed for our consideration. Further, during the F.Y 2009-10

and 2010-11, Indian Railways have made deduction of Rs.2785996/- and

Rs.347873.42/- respectively, debited to Railways recoveries account, as such

railways recoveries were being charged by Indian Railways on the supplies

made by assessee firm as per contract and same is in the nature of deductions on

business dealings. As per the terms and condition of the purchase order of the

Railways there is a standard clause with respect to delay in supplies of materials

known as Liquidated Damages and the same is recovered/deducted against the

supplies bills which could be limited to maximum of 10% of the bill amount. In

the aforesaid amount of Railway recoveries, the major portion represents

towards delay in delivering charges. The assessee made the representation in

few cases for allowing credit to the deductions but noted that in spite of 2-3,

years no credit has been allowed by the Railway, as such the claim of Railway 5 ITA No 5682/Del/2012 AY: 2009-10

recovery made by the assessee for a sum of Rs.3118364/- during the F.Y 2008-

2009 was claimed as business expenditure.

3.2 The Assessing Officer disallowed the claim of Rs. 31,18,964/- on the

ground that the appellant could not substantially explain the source and failed to

adduce the evidence thereof. Learned CIT(A) deleted the said addition vide para

no. 6:

"6. I have considered the submissions of learned counsel for the appellant and gone through the documents filed on record as well as relied upon judicial rulings. In ground No. 3 of appeal, the appellant has challenged the addition of Rs.31,18,964/-. A perusal of para 3 of the assessment order reveals that the AO has disallowed Railway Recovery expenses of Rs.31,18,964/- on the grounds that the assessee could not satisfactorily explain the reasons for huge recovery and also failed to adduce necessary evidences. It was explained by the appellant vide submissions dated 05.12.2011 that the Railway does not issue any kind of debit note or other document for short payment on account of late delivery or for non compliance of terms and conditions of the contracts. On the basis of payments received from the Railways, the difference between the billed amount and the amount actually received is charged to Profit and Loss account as 'Railway Recovery' for the amounts which could not be recovered. In order to ascertain the facts further, the appellant was requested to file detail of such claims made in earlier or subsequent years on account of short payments received from the Railways and the amounts recovered subsequently on settlement of such claims. The appellant has filed a detailed note on this issue vide submissions dated 19.07.2012. Admittedly, the appellant has been supplying the goods to Indian Railways only throu.gh the tender process at a contracted price. When the terms and conditions of the Tenders/Contracts are not complied with, the deductions are made by the Railways towards liquidation charges @ 2% for every month for failure to complete supplies within the delivery period or for defective material or short supply or for termination of contract etc. The copies of various purchase orders issued by the Indian Railway pursuant to passing of tenders have been filed in the paper book from page Nos. 73 to 96 which clearly reveals such clause for liquidation damages or penalty. Thus, the Railway Recovery is basically the deduction made by the Indian Railway from the payments made towards various bills raised by the 6 ITA No 5682/Del/2012 AY: 2009-10

appellant. The appellant has filed the details of bill wise payments received and deductions made by the Railways during the Financial Year 2008-09 aggregating to Rs.31,18,964/- along with copy of account, which details were also filed before the AO. It is further seen from the copy of audited Profit and Loss account filed for A.Y. 2005-06 at page 98 of the paper book that the appellant had credited an amount of Rs.25,71,379/- on account of Railway Recovery as income on account of payments received against the settlement of short claims in the earlier years. In A.Y. 2010-11 and 2011-12, the appellant has claimed deduction of Rs.27,85,996/- and Rs.3,47,873/-, respectively, on account of Railway Recovery as per the copies of audited' Profit and Loss accounts filed in the paper book. Thus, when the appellant has filed the details of short payments received from the Railways against each individual bill, this by itself constitutes sufficient evidence that the amount on account of certain breach of terms and conditions of purchase orders have been deducted by the Railways, being the only customer and Govt. Department. The AO has neither disputed the amount raised as per bills nor the payments received from the Indian Railways. When the sales have been accounted for as per the bills, the amount short received by the appellant is in the nature of rate difference which has been claimed as Railway Recovery. This method of accounting has been consistently and regularly followed by the appellant over the years as evident from the fact that the amount received on settlement of short claims was offered as income in A.Y. 2005-06 on receipt basis. The AO has neither found any fault with the method of accounting nor has he rejected the books of account on this ground. Without appreciating these facts and evidences, the AO has drawn wrong inference that the documentary evidences and explanation offered by the appellant was not satisfactory. I do not find any merit in such conclusion of the AO as the disallowance has been made on wrong presumptions and assumptions. The claim made by the appellant on account of breach of contracts is allowable in view of the decision of Hon'ble Punjab and Haryana High Court in the case of Jamna Auto Industries vs. CIT (167 Taxmann.com 192). Hence, the addition of Rs.31,18,964/- made by the AO is deleted and ground No. 3 of appeal is allowed."

3.3 After considering the rival submissions of the parties and perusing the

records, we are of the considered opinion that the reasoning given by the learned

CIT(A) is proper that apart we also observe that non-realization of billed amount 7 ITA No 5682/Del/2012 AY: 2009-10

is nothing but loss incurred by the assessee which is clearly allowable under the

provisions of Section 37(1) of the Act. Therefore, ground no. 1 raised by the

Revenue is dismissed.

Ground no. 2.

4.1 This ground relates to disallowance of Rs. 14,00,000/-. Regarding this

ground, the amount written off of Rs. 14 lakhs, the appellant had debited a sum

of Rs. 7,69,091/- to profit and loss account as sundry balances written off. This

represents net of credit balances written off of Rs. 6,30,909/- and debited

balance written off on account of Kisan Traders of Rs. 14 lakhs. The Assessing

Officer while taxing the credit balance written of had not allowed the debit

balances written off of Rs. 14 lakhs by holding that the primary condition

necessary for allowing of bad debts under Section 36(2) of the Act are not

satisfied.

4.2 On the other hand, the appellant has submitted that Rs. 36 lakhs was given

to one party, namely, M/s Kissan Traders, Faridabad, for purchase of raw

material. The said party neither supplied the raw material nor returned the firm.

The said firm was closed. The advance was made during the normal course of

business. On an appeal, the learned CIT(A) vide para 6.1 of the impugned order

deleted the addition by holding as under:

"6.1. The admitted fact remains that the appellant has written back credit balances of Rs.6,30,909/- and the debit balance of Rs.14,00,000/- in the name of 8 ITA No 5682/Del/2012 AY: 2009-10

M/s. Kissan Traders, thereby making a claim of deduction of Rs. 7,69,091/- on account of amounts written off. The AO has made addition on the ground that the amount of Rs.14,00,000/- cannot be allowed as bad debt since no sales or revenue were ever booked by the assessee in earlier year(s). The appellant has raised the contention that the amount was advanced to the said party against supply of raw Rubber; and neither the purchases were made nor the party paid back the said amount. The said advance has been given wholly and exclusively for business purposes but the supplier failed to honour the commitment for commercial transactions and, therefore, the amount was ultimately written off and claimed as deduction u/s 37(1) of the Act. The fact that the appellant advanced the said sum against the supply of goods is not in dispute. It is true that the amount written off is not covered u/s 36(1)(vii) of the Act but certainly the appellant is eligible to claim deduction u/s 37(1) of the Act. To be an allowable expenditure under section 37(1), the money paid out or given away must be (a) paid out wholly and exclusively for the purpose of the business or profession; and further (b) must not be; (i) capital expenditure; (ii) personal expense; or (iii) an allowance of the character described in sections 30 to 36. Therefore, section 37 provide for allowance of any expenditure for the purpose of business but there has to be nexus between the business operation and the loss.

If the loss is directly connected with the business operation and incidental to carrying on of the business, the same has to be allowed as a deduction as held in CIT vs. Smt. Pukhraj Wati Bubber [2008] 296 ITR 290 (Punj. & Har.). When the transaction is properly entered into as a part of assessee's legitimate commercial undertaking in order to facilitate carrying on of its business, expenditure incurred is deductible under Section 37(1). The test adopted by the Hon'ble Supreme Court in Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277, that to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business, needs to be qualified by stating that if the expenditure is laid out by the assessee a owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business

- Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 (SC). Admittedly, the appellant has advanced money against purchase of raw Rubber and could not succeed either in recovering the advance or purchase of raw material. The advance was made during the ordinary course of business and was incidental to carrying on the business of the assessee. Therefore, the AO has wrongly invoked the provisions of section 36(1)(vii) of the Act. The claim of appellant is 9 ITA No 5682/Del/2012 AY: 2009-10

allowable u/s 37(1) of the Act. Accordingly, the addition of Ra. 14,00,000/- made by the A.O. is deleted and ground no. 4 of appeal is allowed."

4.3 We find no reason to interfere with the order of learned CIT(A) on this

grounds as it is settled principle of law that advances written off which were

made during the course of business are allowable as deduction as held in the

case of CIT Vs. Mysore Sugar Co. Ltd., (1962) 46 ITR 649 (SC) and therefore

ground no. 2 is dismissed.

Ground no. 3

5.1 The third ground relates to the deletion of addition of Rs. 11,54,862/- on

account of liability of M/s Rakesh Rubber and Chemicals which was written off

by the assessee. The amount of Rs. 11,54,862/- were shown as payable to one

M/s Rakesh Rubber and Chemicals, Delhi in the books of the appellant. During

the course of assessment proceedings, the assessee was called upon to file the

confirmation from this party but no confirmation was filed. The notice issued

under Section 133(6) of the Act was returned un-served by the postal authorities.

When this was confronted with the assessee, it was submitted that he was an old

supplier and due to death of the proprietor of the firm the supply was

discontinued and the credit balance standing was written off during the financial

years 2010-11 relating to the assessment year 2011-12. Therefore, the Assessing

Officer inferred that these credits are no more payable and therefore treated as

unclaimed balance and brought to tax. The learned CIT(A) vide para 6.3 deleted 10 ITA No 5682/Del/2012 AY: 2009-10

the addition by holding that it does not amount to cessation of liability and

placed reliance on the decisions of Hon'ble Allahabad High Court in the case of

CIT Vs. Willard India Ltd., 302 ITR 221 and the decision of ITAT, Delhi Bench

in the case of ACIT Vs. Fazal Frozen Foods Pvt. Ltd., in ITA No.

5626/Del/2010, dated 22.07.2011.

5.2 We heard the rival parties. We have no hesitation to hold that the sundry

creditors are not payable and fictitious, the next question that comes up for our

consideration is the year in which the amount is taxable under what provisions

of law either under Section 41(1) or 68 of the Act. We are required to examine

whether this amount should be brought to tax in the year in which credit was

made first time in the books of account or in the year in which these are found

not payable. An identical issue had come up for consideration before the

Hon'ble Gujarat High Court in the case of CIT Vs Bhogilal Ramjibhai Atara in

Tax Appeal No. 588 of 2013, dated 04.02.2013, in which it was held as under:

"Section 41(1) of the Act as discussed in the above three decisions would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year relevant to the assessment year 2007-08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The Assessing Officer undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them 11 ITA No 5682/Del/2012 AY: 2009-10

stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(c) f the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it."

5.3 In view of the above discussion, the addition made is hereby deleted and

the findings of learned CIT(A) are confirmed. Accordingly, ground no. 3 raised

by the Revenue is dismissed.

Ground No. 4

6.1 This ground relates to the sales commission @ of 1%. The appellant

claimed a sum of Rs. 12,90,547/- towards commission paid. This commission

was paid to six persons @ 1% on total sales amounting to Rs. 12,90,54,869/-. It

was submitted that the commission was paid in consideration of the service

rendered in connection with the tender finalization with Railway Authorities.

The Assessing Officer held that the only party to whom the assessee supplied

the goods is the Railway which is a public section undertaking and therefore the

payment of commission is unwarranted and doubted the genuineness of the

payments and disallowed the commission.

12

ITA No 5682/Del/2012 AY: 2009-10

6.2 The learned CIT(A) after noting that similar claim being allowed in the

earlier assessment year and following the Rule of Consistency allowed the

claim. The learned CIT(A) further noted that TDS has been deducted and the

payments have been made through account payee cheques and the confirmation

letters have been filed by the beneficiaries of commission.

6.3 We are of the considered opinion that when the payment was made

through account payee cheques and TDS has been deducted the parties have

confirmed having rendered the services then it does not call for any

disallowance. It is neither case of the Assessing Officer that the payment was

made for breach of any provision of law or against Public Policy. Hence, we

totally agree with the findings of the learned CIT(A) and find no reason to

interfere into. Accordingly, ground no. 4 raised by the Revenue is rejected.

Ground no. 5.

7.1 This ground relates to the allowance of remuneration as a consultation

charges paid to Sh. Anmol Khuran convered under Section 40A(2)(b) of the Act.

During the financial year 2008-09, the assessee firm has paid a sum of Rs.

6,00,000/- to Sh. Anmol Khurana son of Sh. Sunil Khurana, partner of the firm

towards consultancy charges. It is submitted that Sh. Anmol Khurana aged about

35 years is having the degree of B.B.A. from U.S.A. & having 10 years of vast

experience in the field of production quality control. He is a full time consultant 13 ITA No 5682/Del/2012 AY: 2009-10

of the firm with the responsibility of production quality control, testing of

finished goods at all stages as per Railways Specifications, implementation of

Q.A.P. as per RDSO & to meet the ISO requirements. In the financial year

2008-09, the assessee firm had paid Rs. 50,000/- per month towards his

consultancy charges. It was further submitted that Sh. Anmol Khurana is

associated with the assessee firm since 2001. The Assessing Officer had

disallowed the increment of Rs. 2,40,000/- paid during this year as

unreasonable. The learned CIT(A) had considered Rs. 1,80,000/- as reasonable

and the balance of Rs. 60,000/- addition was confirmed.

7.2 We don't find any reason to interfere with the order of CIT(A).

Accordingly, ground no. 5 is dismissed.

Ground no. 6

8.1 This ground relates to the addition of Rs. 1,15,998/- made on account of

foreign travel expenses of partners. The A.O. has made disallowance mainly on

the reasoning that the foreign tour was undertaken by the husband and wife, no

documentary evidence was filed regarding business conducted with the country

visited and the expenditure was capital in nature. It was submitted before the

learned CIT(A) that the assessee firm manufactured Rail Pads and exported to

Iraqi Republic Railways in past but due to UN Embargo, all exports were

stopped and orders cancelled. The foreign tour was undertaken to revive the 14 ITA No 5682/Del/2012 AY: 2009-10

business. The CIT(A) accepted the claim of the assessee on the ground that the

addition had been made on irrelevant consideration.

8.2 On perusal of material on record and the submissions made, we are of the

opinion that there is no evidence on record establishing that the foreign tour was

undertaken by the partners of the firm for the purpose of business. Even before

us, no evidence was filed in support of the contention advanced on behalf of the

assessee firm. Hence, we allow this ground of appeal filed by the Revenue.

Ground No. 7.

9.1 This ground relates to the disallowance of Rs. 99,866/- being 50% of the

sales promotion expenses. The disallowance had been made by the Assessing

Officer mainly on the ground that no proper details with complete bills were

filed and the expenditure was not wholly and exclusively for the purpose of

business and also included expenditure of personal nature. A perusal of para 10

of the assessment order reveals that the details were filed by the assessee and the

amount of Rs. 1,05,141/- was paid through credit card, which was in the name of

the partners of the firm. The assessee contended that in most cases the payments

for Hotel, Lunch and gifts etc. were made through credit card for business

promotion and the remaining expenditure was also incurred for the payment of

food, hotel, cold drinks etc. for the same purposes. The CIT(A) after

consideration of the submission had restricted disallowance to 25% of total 15 ITA No 5682/Del/2012 AY: 2009-10

expenditure by holding that the total expenses cannot be for the purpose of the

business.

9.2 We find that the learned CIT(A) is reasonable in restricting the

disallowance to 25% of the expenditure. Hence, we do not intend to interfere in

the order passed by CIT(A). Hence, this ground of appeal filed by the Revenue

is dismissed.

Ground no. 8

10.1 This ground of appeal relates to disallowance of house tax of Rs. 83,093/-.

The Assessing Officer disallowed the expenditure by holding that no details

were filed before him. The learned CIT(A) after perusing the receipts of house

tax of Rs. 46,678/- paid to Municipal Corporation of Hyderabad, vide receipt

no. 005161 dated 30.03.2009 for the factory premises and held that same is

allowable business expenditure since this factory premises is used by the

assessee for carrying out its business. The other payments of Rs. 29,900/- and

Rs. 6,515/- pertain to two residential houses which have no connection or

relation with the business activity. The other amount of Rs. 23,421/- has already

been disallowed by the assessee in the statement of income which pertains to the

let out property. After considering the submissions of the assessee, the learned

CIT(A) has held that house tax of Rs. 36,415/- is not allowable expenditure. 16

ITA No 5682/Del/2012 AY: 2009-10

10.2 On perusal of material on record and after the hearing both the sides, we

are of the considered opinion that there are no reasons to interfere with the order

passed by the learned CIT(A). Hence, we dismiss this ground of appeal filed by

the Revenue.

11. In the result, the appeal is partly allowed.

The decision is pronounced in the open court on 6 th day of May, 2015.

Sd/- Sd/- (G.C. GUPTA) (INTURI RAMA RAO) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 6th day of May, 2015. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi