Case Law Details
ITAT DELHI BENCH ‘C’
Assistant Commissioner of Income-tax
versus
Ganpati Enterprises Ltd.
IT Appeal No. 6112 (Delhi) of 2012
[ASSESSMENT YEAR 2009-10]
Date of pronouncement – 15.02.2013
ORDER
Rajpal Yadav, Judicial Member
The revenue is in appeal before us against the order of ld. CIT (A) dated 27.8.2012 passed for A.Y. 2009-10.
2. In the first ground of appeal, revenue has pleaded that ld. CIT (A) has erred in deleting the ad hoc disallowance of Rs. 5,00,000/- out of total expenditure claimed by the assessee.
3. The brief facts of the case are that assessee has filed its return of income on 26.9.2009, in the status of a firm declaring an income of Rs. 28,88,455/-. The case of the assessee was selected for scrutiny assessment and a notice u/s 143(2) of the IT Act, 1961, was issued on 23.8.2010. The ld. Assessing Officer has passed an assessment order u/s 143(3) on 26.12.2011. He has made an ad hoc disallowance of Rs. 5,00,000/- out of the expenditure claimed by the assessee. The discussion for making this addition is running into only 5 lines which read as under:
“On the perusal of the Profit & Loss Account, it is observed that the assessee has debited expenses under various heads. Assessee also produced bills & vouchers for verification of the same. On verification, some of the expenses were found to be unverifiable for want of complete bills and vouchers. Hence a lump sum disallowance of Rs. 5,00,000/- on estimate basis is made to cover up all possible leakages. “
4.On appeal ld. CIT (A) has deleted this disallowance on the ground that ld Assessing Officer has not properly examined the books of account and not demonstrated as to how the expenses are not admissible to the assessee.
5. The ld. DR relied upon the assessment order, whereas ld. Counsel for the assessee submitted that similar disallowance was made in A.Ys. 2004-05, 2005-06 and 2006-07. The dispute travelled up to the Tribunal and the Tribunal has deleted the disallowance. He placed on record, copy of the Tribunal’s order right from A.Ys. 2003-04 to 2006-07.
6. We have duly considered the rival contentions and gone through the records carefully. Section 145 has a direct bearing on the controversy, therefore, it is salutary upon us to take note of this provision.
“145(1) Income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the official gazette from time to time accounting standards to be followed by any class of assessee’s or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.”
6.1 From the bare reading of this section, it would reveal that it provides the mechanism how to compute the income of the assessee. According to sub-clause (i), the income chargeable under the head “Profits and gains of the business or professions or income from other sources” shall be computed in accordance with the method of accountancy employed by an assessee regularly subject to the sub-section (2) of section 145 of the Act. Sub-section (2) provides that the Central Government may notify in the Official Gazette from time to time the accounting standard required to be followed by any class of assessee in respect of any class of income. Thus, it indicates that income has to be computed in accordance with the method of accountancy followed by an assessee, i.e., cash or mercantile. Such method has to be followed keeping in view the accounting standard notified by the Central Government from time to time. Sub-clause (3) provides a situation, i.e., if the Assessing Officer is unable to deduce the true income on the basis of method of accountancy followed by an assessee then he can reject the book results and assess the income according to his estimate or according to his best judgment. The Assessing Officer in that case is required to point out the defects in the accounts of assessee and sought explanation of the assessee qua those defects. If the assessee failed to explain the defects then on the basis of the book results, income cannot be determined and Assessing Officer would compute the income according to his estimation keeping in view the guiding factor for estimating such income.
6.2 Before ld. first appellate authority, assessee has furnished details of the expenses in its return submissions such details have been noticed in Paragraph No. 3.1 of the order. The assessee has also pointed out that A.Y. 2004-05 an ad hoc disallowance of Rs.5,00,000/- was made by the AO it was confirmed by the ld. CIT (A) but ITAT has deleted the disallowance. The assessee has further pointed out that in A.Y. 2005-06 an ad hoc disallowance of Rs. 1,45,000/- was made which was restricted to Rs. 90,000/- by the ld. CIT (A) but ITAT has deleted the disallowance, in A.Y. 2006-07, ad hoc disallowance of Rs. 2,00,000/- was made, it was restricted to Rs. 1,00,000/-by the ld. CIT (A) but ITAT has deleted the disallowance. The ld. first appellate authority has gone through all these details and thereafter observed that Assessing Officer has not discussed the details of expenses and how assessee fail to prove the genuineness of the expenses. In our opinion the Scheme of the Act does not authorize the Assessing Officer to make a disallowance according to his wishes, rather it provide that he should first point out the defects in the accounts of the assessee. In the finding extracted (Supra) it nowhere reveals what was the total amount of expenditure claimed by the assessee, which specific vouchers was not in accordance with law. In a just sweeping statement, the ld. AO observed that on verification, some of the expenses were found to be unverifiable, but what were those expenses, he should make out in the assessment order, only then he can disallow them. This is more important when in a row in the last 4-5 years, similar disallowances were made by him but deleted by the ld. CIT (A) as well as ITAT. Therefore, if we weigh the finding of the Assessing Officer extracted (Supra) vis-a-vis the view taken by the ld. CIT (A) which is a higher authority in the pedestal of the hierarchy, the scale would tilt in favour of the ld.. first appellate authority, no interfere is called for in the order of ld. CIT (A) on this issue, the first ground of appeal is rejected.
7. In the next ground of appeal the grievance of revenue is that ld. CIT (A) has erred in treating the assessee as a firm instead of an AOP treated by the Assessing Officer, therefore allowing the relief of Rs.22,36,311/- on account of salary paid to the partners and Rs. 5,76,000/- on account of interest paid to the partners on their capital contributions.
8. We have duly considered the rival contention having gone through the record carefully, a similar issue came up before the Tribunal in A.Ys. 2003-04, 2005-06 and 2006-07 but Tribunal has held that the assessee is to be treated as a firm and consequent benefit of salary and interest would be given to the partners. The finding of the ld. Tribunal read as under:
“4. We have heard rival submissions and have gone through the relevant material available on record. We find merit in the argument of the learned counsel. From 1-4-1994 sections 184/185 have been amended and the earlier procedure of examining genuineness of firm has been dispensed with. As per the amended law, the firm shall be allowed registration if a certified copy of a deed, duly signed by all the partners showing the shares of the partners is filed, the firm is allowed to be registered. U.P. Excise policy does not prohibit constitution of partnership firm for carrying liquor business, so also licenses obtained by individuals can be converted into partnership firm on compliance of certain requirement. In view of these facts and legal propositions, the assessee firm having constituted specific clause (11) as mentioned above, it cannot be held that it is a non-genuine or illegal firm. Earlier Supreme Court cases are not applicable to assessee’s case in view of the amendment in sections 184/185 w.e.f. 1-4-1994, as mentioned above. In view thereof we hold that the assessee firm is eligible for registration u/s 184/185 and consequently eligible for deduction u/s 40(b) in respect of salary, interest as per law. In arriving this view we also find support by the order of ITAT Bangalore Bench in the case of DCIT v. H.E.D. Bros. Co. (Supra), which is to be followed by us. This ground of assessee for all the assessment years in question is allowed. “
9. The Assessing Officer has not disputed with the fact that assessee has been treated as a firm in the order of the ITAT but he refused to follow the order of the ITAT on the ground that this order has been challenged before the Hon’ble High Court. The observations made by the Assessing Officer in this regard are available on page No. 4 of the assessment order, which read as under:
“It is also pertinent to mention here that the for the A.Ys. 2004-05, 2005-06 & 2006-07 the status has been accepted as AOP and confirmed by Ld. CIT(A), Muzaffarnagar. The assessee has been provided relief from ITAT but the department is in appeal before the Hon’ble Allahabad High Court. Hence the matter raises the question of law and in the interest of revenue the assessment is made in the status of AOP. “
10. The ld. CIT (A) has followed the order of the ITAT in earlier assessment year and held that status of the assessee be taken as a firm. Respectfully following the order of ld. ITAT, we do not find any error in the order of ld. CIT (A), hence the second ground of appeal is also rejected.
11. In the result there is no merit in the appeal of the revenue, it is dismissed.
