Brief of the Case
ITAT Pune held in the case Shri M.D. Wadhokar vs. CIT that it is an admitted fact that neither any details of donations were called for by the AO nor the assessee has given the breakup of such details during the course of assessment proceedings. Only during section 263 proceedings, the assessee has stated that an amount of Rs.31 lakhs has been paid to M/s. Jnana Prabodhini Samshodhan Sanstha, Pune, an institution notified u/s.35(1)(iii) and the balance amounts were made out of business exigencies. Whether the part of the donation is for business exigency or not has not at all been examined. Since the AO has not at all applied his mind on this issue, we are of the considered opinion that the CIT was justified in invoking the jurisdiction under section 263 on the issue of donation.
Facts of the Case
The assessee is engaged in the business of engineering works under the name and style of proprietary concern S.M. Rolling Mills. The assessee filed his return of income on 31-08-2007 declaring total income of Rs.5,99,90,726/-.The AO completed the assessment u/s 143(3) on 27-11-2009 determining the taxable income of Rs.6,02,81,921/- by making various additions. Subsequently, the CIT called for the records and noted that the order passed u/s 143(3) was erroneous in so far as it is prejudicial to the interest of the revenue within the meaning of section 263. The major reasons recorded for revision were, a sum of Rs.35,12,316/- is debited under the head Donation and the same has been accepted by the Assessing Officer without any verification , payments made to persons specified u/s. 40A(2)(b) are not verified, expenses claimed under the head Building repair and computers repair are allowed without verifying whether the same are revenue or capital in nature, not verified the Tax deducted and paid to the Government account, where as certain payments like Machining charges, freight and octroi and consultancy expenses are prima-facie liable for TDS.
Based on the arguments by the assessee, the CIT dropped the issue regarding depreciation on vehicles. So far as other issues are concerned he did not agree with the contentions of the assessee. So far as the issue regarding donation is concerned, he observed that the AO has not at all applied his mind to the claim of deduction claimed under the head ‘donation’ amounting to Rs.35,12,316/-. No details were filed by the assessee. This amount of donation which was otherwise clearly disallowable has not been added back by the assessee in the computation of income filed along with the return of income. The assessee had not substantiated as to how the amount of donation which has been claimed as business expenditure in the profit and loss account has been spent wholly and exclusively for the purpose of business of the assessee.
Contention of the Assessee
The ld counsel of the assessee submitted that the assessee before the CIT had enclosed the details of donation debited to the profit and loss account according to which an amount of Rs.31 lakhs was paid to M/s. Jnana Prabodhini Samshodhan Sanstha, Pune, an institution notified u/s.35(1)(iii). Therefore, there is nothing erroneous in claiming said payment as deduction by the assessee. The other payments are made out of business exigency and hence are eligible for deduction u/s 37(1).Therefore; these deductions did not make the claim of the assessee as an erroneous claim.
So far as payments made to persons specified u/s. 40A (2) (b) is concerned it was submitted that the payments were made to the same parties in A.Y 2005-06 and 2006-07. It was submitted that the assessee maintained Arms Length distance while dealing with these parties. The information was duly disclosed in the tax audit report and therefore there was no apparent reason to believe that the payments to the parties covered u/s.40A (2) (b) were excessive and unreasonable.
So far as regarding payment of machinery hire charges etc. and TDS thereof is concerned, the assessee agreed that the AO failed to make necessary verification with respect to the TDS deducted on various payments. So far as regarding building repairs and computer repairs is concerned it was submitted that the buildings repairs were for year to year maintenance of factory building in the form of painting, roofing repairs, floor damaged due to handling of heavy materials etc. as the building was 25 years old. It was submitted that the expenses amounting to Rs.41.15 lakhs which qualified for capital addition has already been capitalized in the books of account. So far as computer repairs are concerned, it was submitted that the amount was on account of current repairs and maintenance expenses. An amount of Rs.69.80 lakhs has already been stated to be capitalized in the current year.
As regards depreciation on vehicles purchased on 30-032007 is concerned it was submitted that the 4 vehicles purchased during the year under consideration were purchased on various dates prior to March 2007 except Tata Indigo which was purchased on 08-03-2007.It was submitted that since the motor vehicles were purchased on various dates prior to March 2007 the notice on this issue does not survive. It was accordingly submitted that the Section 263 proceedings initiated should be dropped.
Contention of the Revenue
The ld counsel of the revenue submitted that the AO has not at all applied his mind on the various issues raised by the Ld.CIT in the notice issued u/s.263. Whether the donation is an allowable deduction or not has not at all been considered by the AO. The assessee has also not furnished the details regarding such claim. Only during 263 proceedings he has submitted that out ofthe total amount of Rs.35,12,316/- an amount of Rs.31 lakhs is eligible for deduction u/s.35(1)(iii). Further, no details were given for the balance amount as to how the expenditure incurred is wholly and exclusively for the business of the assessee. Similarly, the amount of Rs.45.45 lakhs paid to related parties covered u/s.40A(2)(b) has not been considered by the AO. The building repair expenses amounting to Rs.49.32 lakhs also was not considered by the AO during the assessment proceedings. No details were furnished by the assessee. She accordingly submitted that the order passed by the Ld.CIT u/s.263 is fully justified and therefore the appeal filed by the assessee should be dismissed.
Held by ITAT
ITAT held that regarding donations, it is an admitted fact that neither any details were called for by the AO nor the assessee has given the breakup of such details during the course of assessment proceedings. Only during 263 proceedings the assessee has stated that an amount of Rs.31 lakhs has been paid to M/s. Jnana Prabodhini Samshodhan Sanstha, Pune, an institution notified u/s.35(1)(iii) and the balance amounts were made out of business exigencies. Whether the part of the donation is for business exigency or not has not at all been examined. Since the AO has not at all applied his mind on this issue, we are of the considered opinion that the CIT was justified in invoking the jurisdiction under section 263 on the issue of donation.
So far as the issue relating to payment of Rs.45.45 lakhs to related parties is concerned, ITAT held that the assessee during the course of assessment proceedings had filed the profit and loss account for the preceding years. The AO after verification of the various items in the profit and loss account has accepted the payment to the related persons. Even the tax audit report also specifically mentions the name of the related persons. Therefore, it cannot be said that there is non-application of mind. Even the AO in the subsequent proceedings has accepted 50% of the salary paid to the related parties as allowable expenditure on adhoc basis. We, therefore, hold that the Ld.CIT is not justified in assuming jurisdiction u/s.263 on the issue of payment made to related parties covered u/s.40A(2)(b) merely because the AO has not passed an elaborate order on this issue.
So far as the issue relating to building repair expenses at R.49.32 lakhs is concerned, admittedly there was no query raised by the AO during assessment proceedings or any reply given by the assessee on this issue. When the gross block of the building as on 01-04-2006 was shown at Rs.25,57,697.39 the AO should have given attention to the huge amount of repair and maintenance claimed in the profit and loss account. Although we find the assessee in the profit and loss account has claimed expenditure of Rs.49,32,179, the assessee has also claimed addition to gross block at Rs.41,15,297.26. The AO in the order passed u/s143 (3) has disallowed only Rs.8,16,882/- out of the total debit of Rs.49,32,179/- observing that the balance amount has been capitalized. However, from the computation statement, we find the assessee has not disallowed any repair and maintenance expenditure out of the expenditure debited to the profit and loss account. Since the order of the AO is completely silent on this vital issue, we are of the considered opinion that the CIT was fully justified in assuming jurisdiction u/s.263 on this issue.
Since the AO in the instant case has not applied his mind on these 2 vital issues, therefore, the order has become erroneous as well as prejudicial to the interest of the revenue to this extent. Therefore, the CIT, in our opinion, was fully justified in invoking jurisdiction u/s.263 on these two issues.
Accordingly appeal of the assessee partly allowed.