Brief of the Case
ITAT Amritsar held In the case of M/s Aaren Exports vs. DCIT that a Keyman insurance policy is to enable business organizations to insure the life of a Keyman in order to protect the business against the financial loss which may occur in the likely eventuality of premature death. Such expenditure is treated as business expenditure by the Department itself and recognized as such in Circular dated 18.2.1998. The expenditure is to be seen at the time it is incurred. Merely because the policy was assigned after sometime would not mean that the expenditure incurred in the first instance would lose the entitlement of it being business expenditure.
Facts of the Case
The assessee is a manufacturer and exporter of garden tools, hand tools etc. and is also trading in certain items like PVC resin etc. The case of the assessee was selected for scrutiny. During the assessment proceedings, the A.O required the assessee to produce stock register which the assessee stated that in view of the number of items involved as raw material in the manufacturing process, it was not possible to maintain the stock register. The assessee was then required to furnish the breakup of finished goods, semi finished goods, and consumable stores and was also required to submit the basis of valuation of stocks. In the course of said verification and examination of books of account vis-à-vis bills produced of various items of raw material, the Assessing Officer observed a number of discrepancies in the quantity and valuation thereof.
The Assessing Officer further compared gross profit ratio declared by assessee in previous three years by excluding export incentives. From the analysis the Assessing Officer observed that assessee had in fact declared lower Gross Profit as compared to earlier years. Keeping in view all the facts and circumstances the books of account of assessee were rejected and addition of Rs.25.40 lac was made to the Gross Profit of assessee.
The Assessing Officer further observed that assessee had claimed an expenditure to tune of Rs. 37,15,584/- on account of foreign traveling expensesOn the basis of submissions made by assessee the Assessing Officer held that all of the expenses of Rs.31,41,265/- spent in foreign exchange were in cash and were not supported by third party bills. The Assessing Officer after analyzing of expenses held that there was element of personal expenditure on these tours and therefore, he held the assessee had failed to prove that expenditure was wholly and exclusively for the purposes of business and therefore, he disallowed 40% of expenses of foreign currency, and 15% of ticket and visa expenses making in all additions of Rs.13, 31,030/-.
The Assessing Officer also disallowed of claim of Rs.17 lac which the assessee had claimed as Insurance Premium paid for ‘Keyman Insurance Policy’ of Sh. Deepk Aggarwal, partner of the firm. The Assessing Officer further held that wages labour charges salary and labour welfare expenses were paid by assessee in cash and were supported by only self made vouchers and therefore the Assessing Officer made a disallowance of Rs.1,50,000/- representing approximately 10% of the total expenses under this head.
The Assessing Officer further observed that assessee had claimed deduction 80IB. The Assessing Officer held that export incentives, duty drawback, interest on FDR, interest on other deposits cannot be treated as profit derived from eligible business for the purposes of section 80IB and therefore, he disallowed deduction under section 80IB to the extent of Rs.1,64,198/-.
Contention of the Assessee
The ld counsel of the assessee submitted that the addition to the gross profit was made by Assessing Officer on account of non maintenance of stock registers which was not warranted by law as held by The Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Om Overseas 173 taxman 185 and in the case of Pandit Bros. vs. CIT. The learned AR submitted that Hon’ble Court has held that non maintenance of stock register cannot be the basis for rejection of books results of the assessee. The learned AR further submitted that Gross Profit declared by the assessee was consistent as compared to earlier three years and therefore, Assessing Officer should have accepted the audited results as declared by the assessee.
As regards addition on account of payment of labour and wages, the learned AR submitted that complete register of wages was produced and therefore, the additions sustained by CIT (A) were not justified.
With regard to disallowance on foreign currency expenses, he submitted that in the case of assessee itself in Asst. Year 2005-06, the Hon’ble Tribunal in ITA No.83 was pleased to restrict similar disallowance to the extent of 10%.
With regard to keyman insurance policy, the learned AR submitted that similar matter has been decided in the case of M/s Ambika Overseas which has been decided in favour of assessee vide Tribunal Order dated 31st August, 2015.
With regard to addition on account of certain expenses, the learned AR submitted that the addition sustained by learned CIT is arbitrarily and excessive and therefore needs to be allowed without prejudice to the above arguments. Without prejudice to the above arguments the learned AR submitted that once profits were estimated after rejection of books of accounts, no further addition on account of expenses was warranted.
Contention of the Revenue
The learned DR, on the other hand, as regards additions made by the Assessing Officer on account of G.P rate invited our attention to the assessment order and submitted that Assessing Officer had noted various discrepancies for which the assessee was unable to submit explanations and therefore, Assessing Officer had rightly rejected the books of account and had rightly made the addition on the basis G.P rates declared by other two assessees who were involved in the same line of business activity and therefore, she strongly relied upon the order of Assessing Officer.
As regards the disallowance on account on foreign trading expenses, the learned DR submitted that assessee was not having bills for expenses incurred in foreign exchange and therefore Assessing Officer had passed a detailed order and therefore, action of the learned CIT in restricting the disallowance to 25% was not justified. As regards disallowance on account of Keyman Insurance Policy and disallowance of other expenses, learned DR placed her reliance on the orders of authorities below.
Held by CIT (A)
The CIT (A) after going through the material on record and submissions of the assessee partly allowed the appeal. With respect to addition to Gross profit it was held that the appellant’s contention that the details being voluminous were not maintained cannot take away from its responsibility to show that closing stock and opening stock were correctly valued. Both the opening and closing stock go into the preparation of the trading account of the assessee, which in turn determines the income of the assessee. The assessee has conceded that even the list of these items could not be prepared and only an estimate was made. The admission by the appellant supports the AO’s contention that the stock of the assessee was valued, at least to some extent, on estimate without physical measurement. The GP rate has been maintained constant, at least, by adjusting the value of closing stock. These attempts at maintaining constant GP rate indicate an effort on the part of appellant not to reflect the correct state of its trading results. Under the circumstances, considering the defects in the wages / labour account and the unverifiability of valuation of part of the stock, an addition of Rs.7.50 lacs is sustained out of the addition of Rs.25,40,000/- made by the AO.
Regarding disallowance out of Foreign Traveling Expenses, It was held that disallowance of expenditure on estimate basis is essentially a matter of fact and no hard and fast rule can be laid down. I agree with the AO that, considering the quantum of the expenditure; the fact that the family members traveled with partner of assessee firm; the fact that no foreign exchange was stated to have been used for the expenditure in respect of family members of the partner; and the fact that no bills/vouchers in respect of utilization of foreign exchanges have been furnished/produced, disallowance out of foreign exchange expenditure claimed by the assessee firm is called for. In the facts ofthe case, I would estimate such expenditure at 25% of the foreign exchange utilized by the partners in place of 40% estimated by the AO. However, in respect of the ticket/visa expenses of the partner, since the partner had gone abroad admitted for business purposes, the disallowance of 15% out of these expenses is not called for and is directed to be deleted.
Regarding Keyman Insurance Policy, the learned CIT (A) has disallowed the claim of assessee in respect of Keyman Insurance Policy by following his earlier order in ITA No.516 in the case of Ambika Overseas & Others for Asst. Year 2006-07.
Regarding disallowance on account of certain expenses, the AO has rejected the book results in respect of trading account and has estimated the gross profit. She has not estimated the net profit of the assessee on the facts of this case. Hence, I am of the opinion that specific addition/disallowances could be made in respect of expenses not covered by trading/manufacturing account of the assessee. Considering the facts noted by the AO, the disallowance of Rs.1,50,000/- out of salary and labour welfare expenditure is upheld
With regard to disallowance under section 80IB, the issue is no longer res integra in view of the recent decision of Hon’ble Apex Court in the case of Liberty India vs. CIT 317 218 in which it had been held that deduction u/s 80IB was not allowable in respect of DEPB, Duty Draw back and other export incentives. The disallowance u/s 80IB is upheld.
Held by ITAT
We find that assessee had not maintained complete books of account and vouchers. The Assessing Officer had pointed out various discrepancies in the books of account and calculation of opening and closing stocks. The argument of learned AR the mere absence of stock register cannot lead to rejection of books of accounts is though correct but here is a case where not only stock register was not maintained but there were various discrepancies in the valuation of opening and closing stock and moreover the Assessing Officer has clearly held that Gross Profit declared by assessee in the present year was lower as compared to earlier years. Moreover, the Assessing Officer has also compared Gross Profit ratio of two parties for the same year, who were also engaged in the similar type of activities. Therefore, we do not find merit in the arguments of learned AR regarding further relief.
Regarding disallowance on account of certain expenses, we find that such a scenario of not making any further additions arises only in those cases where the net profits are estimated whereas here is a case where addition has been made to the Gross Profits, therefore, the Revenue Authorities were justified in making various other additions on account of disallowance of expense.
Regarding disallowance out of Foreign Traveling Expenses, We find that in ITA No.83 for Asst. Year 2005-06 in the case of assessee itself, the Hon’ble Tribunal vide order dated 25th September,2009 had confirmed the order of CIT(A) in restricting the disallowance of foreign traveling expenses to the extent of 10%. Respectfully following the above Tribunal Order in the case of assessee itself, we restrict the disallowances out of foreign tour expenses to 10%.
Regarding disallowance on Keyman Insurance Policy, we find that the learned CIT (A) had made disallowance by following his order in the case of Ambika Ovearses. We find that the case of Ambika Overseas has been dealt with vide consolidated Tribunal order dated 31.08.2015 in ITA No. 45 (Asr)/2010 and ITA No.700(Asr)/2013 for Asst. Years 2006-07 & 2007-08 respectively, where the Hon’ble Tribunal had allowed the relief to the assessee on account of payment of Keyman Insurance Policy.
It was held that no doubt, the object of a keyman insurance policy is to enable business organizations to insure the life of a keyman in order to protect the business against the financial loss which may occur in the likely eventuality of premature death. Such expenditure is treated as business expenditure by the Department itself and recognized as such in Circular dated 18.2.1998. The expenditure is to be seen at the time it is incurred. Merely because the policy was assigned after sometime would not mean that the expenditure incurred in the first instance would lose the flavor of it being business expenditure.
Further held that when expenditure of this nature is treated business expenditure per se by the Department itself, there cannot be any question of raising the issue of want of business expediency. The Department could not sit on the armchair of the assessee and decide as to whether it was appropriate on business expediency for the assessee to incur such expenditure or not. If the transaction is otherwise valid in law and is a part of tax planning, merely because it has resulted in reduction of tax, such expenditure cannot be ignored raising the issue of underlying motive of entering into this type of transaction.
Accordingly in total appeal of the assessee partly allowed.