Case Law Details

Case Name : M/s HMM Coaches Ltd. Vs ACIT (ITAT Chandigarh)
Appeal Number : Income Tax Appeal Nos. 66/CHD/2014 & 39/Chd/2014
Date of Judgement/Order : 20/10/2015
Related Assessment Year : 2009-10
Courts : All ITAT (1730) ITAT Chandigarh (56)

Brief of the Case

ITAT Chandigarh held In the case of M/s HMM Coaches Ltd. vs. ACIT that according to the Arbitration and Conciliation Act, the Arbitral Award is like a decree of the Court and is executable by the Courts. It is, therefore, like an order/judgement enforceable at law and as such, could not be construed as document or evidence. It is well settled law that judgement and orders of the Courts are admissible and could be looked into at any stage. Further, there were no requirement after amendment to Section 36(1)(vii) that assessee should establish that debt has become irrecoverable. It is enough if the debt has been written off as recoverable in the accounts.

Facts of the Case

ITA No. 39/CHD/2014 (Revenue’s appeal)

The assessee had claimed an amount of Rs.1.77 C r on account of bad debts written off in respect of non-recovery of the amount outstanding from M/s Inderson Motors (P) Ltd. for sales which were booked in the earlier years. The Assessing Officer noticed that the sales were regularly made to this party upto Feb., 2008 and the amount was suddenly written off during the year under consideration. As per assessment order, no legal action was taken by assessee against /s Inderson Motors (P) Ltd. and no proof had been filed by assessee to prove that the said amount had become bad during the relevant financial year and there was nothing on record to show that there were no chances of recovery. The Assessing Officer, therefore, noted that impugned claim was a device to reduce the income and tax liability and accordingly made the addition. In this departmental appeal, revenue challenged the order of CIT (A) in deleting the disallowance of bad debts written off amounting to Rs. 1,77,19,645/- by admitting the additional evidences in the form of arbitration award to allow bad debts, which is in contravention to Rule 46A of the IT Rules.

ITA No. 66/CHD/2014 (Assessee’s appeal)

Disallowance of interest on free advances u/s 36

The assessee had debited interest of more than Rs. 2.59 Cr to the Profit & Loss Account on various loans taken. The Assessing Officer noticed that assessee had given interest free advances of more than Rs. 68.83 lacs. The assessee submitted that advances were given for business purposes which was not accepted by the Assessing Officer and disallowed proportionate interest of Rs. 7,43,556/- under section 36(1)(iii).

Disallowance of interest on capital work in progress u/s 36

The assessee had shown capital work in progress of Rs. 1,80,07,163/- as on 31.03.2008 on account of building and dies and tools. The Assessing Officer noticed that interest expenditure was not capitalized on the capital work in progress, whereas assessee had debited interest of more than r. 2.59 Cr to the Profit & Loss Account and accordingly, made the disallowance.

Rejection of books of account & addition on estimated GP

The assessee had declared GP rate of 11.83% in this year as against 13.64% in the preceding year. The Assessing Officer noted that if the additional income offered for taxation under section 133A was reduced from the net profit, there would be net loss. Some other observations made by the Assessing Officer are that there was a steep fall in the gross profit, downfall in net profit rate, gross loss in Khapoli unit and that nothing had been filed which could explain such a loss. As per Assessing Officer, the assessee had offered Rs. 4 Cr for taxation as additional income during the course of survey but had subsequently arranged its affairs in such a manner that the income returned was below the additional income offered for taxation. The Assessing Officer rejected the books of account under section 145(3) and applied gross profit rate of preceding assessment year i.e. 13.64% and made addition of Rs. 1,18,04,269/-.

Contention of the Assessee

Rejection of books of account & addition on estimated GP

The ld. counsel for the assessee reiterated the submissions made before authorities below and also filed a chart to show that if other income of Rs. 4.57 Cr is taken into consideration alongwith the surrendered income, the GP rate in Ambala unit would come to 18.53% as against 13.92% of the preceding assessment year. In case the surrendered income is excluded, the percentage of GP would come to 12.66%. He has, therefore, submitted that even if books of account are rejected, addition is wholly unjustified. He has submitted that CIT (A) accepted loss in Kapholi unit which was the main reason for fall in GP on which there is no departmental appeal, as such the claim of assessee should be accepted.

Contention of Revenue

The ld counsel of the revenue relied upon the Assessment Order and the order passed by the CIT (A). He submitted that the Assessment order and the CIT (A)’s order are just and proper. He also relied upon the Bank information given at the time of the hearing before the ITAT wherein it was stated that account statement shows that most of the payments were made/take by Kapoor Singh and his sons.

He further submitted that there were deposits in bank account which were withdrawn in the name of assessee and his two sons. The assessee has not revealed at any stage that these are loans taken by him for purchase of land. In fact this version came during the assessment proceedings. As relates to the loan on 8/12/2006 there was no explanation given by the assessee. He further submitted that there is no confirmation of repayment of the alleged loan by the assessee and there is no evidence put up by the assessee in that respect. Therefore, the amount was rightly added by the Assessing Officer in the income of the assessee.

Held by CIT (A)

The assessee submitted before CIT (A) that the matter regarding dispute with M/s Inderson Motors (P) Ltd. was referred to Arbitrator under the Arbitration and Conciliation Act, 1966 and the Arbitrator has passed the award in February,2013. It has also been submitted that after the amendment to Section 36(1)(vii) w.e.f. 01.04.1989, it is not necessary for the assessee to establish that debt has become irrecoverable and it is enough if the debt has been written off as irrecoverable in the accounts. The assessee relied upon decision of the Hon’ble Supreme Court in the case of T.R.F. Ltd. 230 CTR 14. The CIT(A) considering the explanation of assessee, following the decision of the Hon’ble Supreme Court in the case of T.R.F. Ltd., deleted the addition.

ITA No. 66/CHD/2014 (Assessee’s appeal)

The CIT (A) following the judgement of Hon’ble Punjab & Haryana High Court in the case of Abhishek Industries 286 ITR 1 confirmed the addition.

Rejection of books of account & addition on estimated GP

The CIT (A), considering the submissions of the assessee and material on record, found that observation of the Assessing Officer with regard to new unit at Kapholi is not correct because Assessing Officer has not controverted the explanation of the assessee with regard to this unit suffered loss during the initial year. However, there is no satisfactory explanation regarding fall in GP at Ambala Unit. The CIT (A) noted that prices are increasing, is no ground for fall in GP. The CIT (A), however, accepted the loss in Kapholi unit and did not accept contention of the assessee with regard to fall in GP at Ambala Unit and accordingly, directed the Assessing Officer to adopt GP rate of 13.66% of Ambala unit as per previous year’s profit as against declared profit of 12.41% and directed to work out the addition to Rs. 83,60,726/- and granted relief to the assessee in a sum of Rs. 34,43,543/- and this ground was partly allowed.

Held by ITAT

ITA No. 39/CHD/2014 (Revenue’s appeal)

ITAT held that we do not find any merit in this ground of appeal of the revenue. The grievance of the department is that arbitration award was relied upon by CIT (A) in contravention of Rule 46A. According to the Arbitration and Conciliation Act, the Arbitral Award is like a decree of the Court and is executable by the Courts. It is, therefore, like an order/judgement enforceable at law and as such, could not be construed as document or evidence. It is well settled law that judgement and orders of the Courts are admissible and could be looked into at any stage. Further, there were no requirement after amendment to Section 36(1)(vii) that assessee should establish that debt has become irrecoverable. It is enough if the debt has been written off as recoverable in the accounts. Admittedly, assessee has written off the bad debts as irrecoverable in its accounts. The issue is squarely covered by judgement of the Hon’ble Supreme Court in the case of M/s T.R.F. Ltd. 230 CTR 14, therefore, CIT (A) rightly deleted the addition. There is no violation of Rule 46A in the matter. This ground of appeal of the revenue is dismissed.

ITA No. 66/CHD/2014 (Assessee’s appeal)

Disallowance of interest on free advances u/s 36

ITAT held that the matter requires re-consideration at the level of the Assessing Officer. The ld. counsel for the assessee submitted that assessee has sufficient interest free funds in the shape of capital, reserves and surplus amounting to Rs. 36.83 Cr and balance sheet of the assessee and relied upon decision of the Hon’ble Punjab & Haryana High Court in the case of M/s Brite Enterprises Pvt. Ltd. V CIT in ITA 224 of 2013 dated 24.07.2015. The judgement of the Hon’ble Punjab & Haryana High Court in the case of M/s Brite Enterprises Pvt. Ltd. is with regard to disallowance made under section 36(1)(iii) n which the assessee claimed to have sufficient interest free funds available with the assessee so that disallowance was claimed to be unjustified. Hon’ble Punjab & Haryana High Court in this case considered its earlier judgement in the case of M/s Abhishek Industries (supra), judgement of the Hon’ble Supreme Court in the case of S.A. Builders 288 ITR 1 and its earlier decision in the case of Marudhar Chemicals & Pharmaceuticals 319 ITR 75 and decided the issue in favour of the assessee.

Hon’ble High Court also considered the funds/reserves of the assessee were sufficient to cover the interest free advances made by it to the sister concern and agreed with the judgement of Bombay High Court in the case of Reliance Utilities & Power Ltd. 313 ITR 340 in which it was held that if there are interest free funds available, a presumption would arise that investment would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment. The later decision has since considered its earlier decision of the same High Court and the authorities below have not examined the issue in the light of sufficient interest free funds/reserves available to the assessee. Accordingly, matter remanded to AO.

Disallowance of interest on capital work in progress u/s 36

ITAT held that the matter requires re-consideration at the level of the Assessing Officer. The assessee claimed that there was no expansion of business and assessee did not claim any deduction of the interest on the same issue. The findings of the authorities below were precisely on applying the proviso to Section 36(1) (iii) which was meant for acquisition of asset for expansion of existing business or profession which fact is neither verified by the Assessing Officer nor by CIT (A). The assessee further claimed to have sufficient interest free funds and on the similar issue, we have restored the matter to the file of Assessing Officer in the light of judgement of the Hon’ble Punjab & Haryana High Court in the case of M/s Brite Enterprises P. ltd. ITA 224 of 2013 dated 24.07.2015.

Rejection of books of account & addition on estimated GP

ITAT held that the survey in this case was conducted on 20.02.2009 and the assessee offered an additional income of Rs. 4 Cr under the five heads i.e. Excess Stock, Cash, Building, Plant and machinery and Sundry Receivables. The assessee also offered this additional income for taxation. No other defects have been pointed out in the books of account. The previous year would close on 31.03.2009 and as such survey was conducted at the close of the financial year. Since assessee made surrender of additional income, therefore, books of account of the assessee were not reliable and have been correctly rejected under section 145(3).

We are fortified in our view by judgement of Hon’ble Delhi High Court in the case of Action Electricals 258 ITR 188 in which it was held that “Amount discovered during search and surrender. Rejection of accounts proper. Estimated assessment on previous years’ basis is justified.” Hon’ble Allahabad High Court in the case of Bimal Kumar Anant Kumar 288 ITR 278 held that, “When cash credits are surrendered, absence of stock register, rejection of the books of account justified.”   We, therefore, confirm findings of authorities below with regard to rejection of the books of account.

Further the Assessing Officer found there is a fall in GP rate and also considered that there are certain expenses which have been claimed by assessee which has reduced the income of the assessee i.e. bad debts written off, discount and rebate and TDS written off. The CIT (A) deleted all the three additions. The department has come up in appeal only against bad debts written of in which also, we have dismissed the departmental appeal. Thus, the only reason for consideration was fall in GP which by itself is no ground to make addition against the assessee. Further, the assessee explained that there was a heavy loss in the new unit established by assessee at Kapholi, Maharashtra. The reason was accepted by the CIT (A) that there was heavy loss in new unit at Kapholi, Maharashtra.

Considering the totality of the facts and circumstances above, it is clear that there was no basis for authorities below to make the addition against the assessee for Ambala Unit even if books of account of the assessee have been rejected. The Hon’ble Rajasthan High Court in the case of Gotan Lime Khanij Udyog 256 ITR 243 held that “On mere rejection of books of account, does not mean that addition is to be necessarily made”. We, therefore, do not find any justification to sustain the addition of Rs. 83,60,726/- as is restricted by the CIT(A).

Accordingly appeal of the assessee partly allowed and appeal of the revenue dismissed.

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