Punjab & Haryana H.C : The assessee is not maintaining mercantile system regarding the receipts of management charges and, thereafter, estimating the income on the basis of previous record of the assessee and whether the Income-tax Appellate Tribunal was right in holding that no defect has been brought on record by the Assessing Officer

High Court Of Punjab & Haryana

CIT vs. Faridabad Entertainment (P.) Ltd.

Assessment Year : 2004-05

Section : 145

Adarsh Kumar Goel And Ajay Kumar Mittal, JJ.

ITA No. 530 Of 2010

January  31, 2011

JUDGMENT
 
Ajay Kumar Mittal, J. – This appeal under section 260A of the Income-tax Act, 1961 (for short “the Act”) has been filed by the Revenue against the order dated December 31, 2009, passed by the Income-tax Appellate Tribunal, Delhi Bench “B”, New Delhi (in short “the Tribunal”) in I. T. A. No. 313/Del/2009, relating to the assessment year 2004-05.

2. The following substantial questions of law have been claimed for determination by this court :

“(1) Whether on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was right in deleting the addition of Rs. 13,88,866 made on account of operational expenses by the Assessing Officer after invoking section 145 of the Income-tax Act, 1961 and bringing on record the defect that the assessee is not maintaining mercantile system regarding the receipts of management charges and, thereafter, estimating the income on the basis of previous record of the assessee and whether the Income-tax Appellate Tribunal was right in holding that no defect has been brought on record by the Assessing Officer ?

(2) Whether on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was right in law in upholding the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 2,73,680 made by the Assessing Officer on account of rebate and discount even though the genuineness of these expenses were not established ?”

3. The facts, in brief, necessary for adjudication, as narrated in the appeal, are that the respondent-assessee filed its return of income for the assessment year 2004-2005, on November 1, 2004 declaring loss of Rs. 29,81,221. The assessment was completed under section 143(3) of the Act, vide order dated December 22, 2006 at a loss of Rs. 12,75,130 in which many additions were made and certain deductions were disallowed. As regards the operational receipts and expenses, the Assessing Officer held that the genuineness of the claim of the operational expenses was not established and the correct profit or loss from business could not be ascertained from the receipts and expenses shown during the year. The Assessing Officer, therefore, rejected the book result shown by the assessee, under section 145 of the Act. In so far as the rebate and discount expenses are concerned, the Assessing Officer held that since the genuineness of those expenses was not established, the expenses claimed by the assessee amounting to Rs.2,73,680 were not allowable.

4. The assessee feeling aggrieved against the order of the Assessing Officer, preferred an appeal before the Commissioner of Income-tax (Appeals) (in short “the CIT(A)”). The Commissioner of Income-tax (Appeals) allowed the appeal and granted a relief of Rs. 17,06,069 to the assessee. The findings of the Commissioner of Income-tax (Appeals) have been affirmed by the Tribunal, vide order dated December 31, 2009, in the appeal carried by the assessee. This is how, the Revenue is in appeal before this court.

5. We have heard learned counsel for the Revenue and have perused the record.

6. The point for consideration in this appeal relates to the genuineness of the claim of the assessee under the heads, “Operational expenses” and “Rebate and discount”.

7. The Commissioner of Income-tax (Appeals) while allowing the appeal of the assessee with regard to its claim for “operational expenses” held as under :

“I have carefully considered the submissions of the learned authorised representative and perused the order of assessment. The plain reading of the assessment order makes it quite evident that the Assessing Officer has resorted to the provisions of section 145 of the Income-tax Act only on presumption/or suspicion without bringing any material on record to justify his action. The Assessing Officer himself admitted that the receipts shown had been more than the preceding year, i.e., Rs. 24,75,215 as against the last year’s Rs.6,13,645. Last year, the GP was 66 per cent. The loss during the year had been largely due to the operational expenses which have increased from Rs. 2,05,578 of the last year to this year’s Rs. 26,26,474, the details of which had been furnished in schedule K of the profit and loss account. Also, marginally responsible for the loss have been the personal expenses as per schedule L increased from Rs. 12,68,633 of the last year to this year’s Rs. 16,36,648.95, which fact has not been considered by the Assessing Officer while he has referred to administrative expenses, selling expenses (which have been less than the year rather from Rs. 4,05,339.55 to Rs. 3,98,636.50, etc. Thus, the Assessing Officer has focussed his enquiries on the increase into the operational expenses, and while he was even so satisfied with the other expenses in schedule K he was not convinced with the justification given by the appellant-company during the course of regular proceedings regarding the increase in the pay channel expenses.

The appellant had explained the entire issue vide its letter dated November 28, 2006 enclosed in the paper book which has been duly studied by me. By this letter, the appellant had explained the increase in the operational expenses as per clause No. 2.4-2.2(ii) of the agreement with the Siti Cable Net Work Ltd. and income as per clause No.2.4-2.2(i). While the Assessing Officer seems to have accepted the explanations of the appellant regarding the management charges of Rs. 23,68,503 arrived at on the basis of total billing raised to the cable operators for Rs. 1,57,90,022, the detailed annexure of billing raised at management charges of which has been examined by me. The Assessing Officer has not accepted the appellant’s explanations regarding the takeover of pay channel as per clause No. 2.4 – 2.2(ii), wherein the details of 50 per cent. pay channels transferred to Siti Cable Network Ltd. on the basis of the total billing of Rs. 1,57,90,022, i.e., Rs. 78,95,011 were also attached and which have been also examined by me. I have again examined all these documents as well as the month-wise details of operational expenses in respect of the agreement between Siti Cable Net work Limited and the appellant-company filed during the course of assessment proceedings vide letter dated November 23, 2006 and which has also now been submitted during the course of appellate proceedings i.e. distribution-cum-management agreement between Siti Cable Network and the appellant-company dated May 27, 2002 and the addendum to DCM agreement dated April 3, 2003 which have also been perused by me. I find that all the operational expenses have been genuinely and accurately arrived at as per these agreement deeds, especially clause 2.4 of the DCM agreement. The Assessing Officer has not pointed out any discrepancy or contradiction in the operational charges arrived at by the appellant-company as per the above agreements. Neither he has pointed out any defect or deficiency in the regular books of account maintained by the appellant-company nor any defect in the bills and vouchers for such expenses maintained by it during the course of normal business. As to the method of accounting, the receipts of management charges as admitted by the Assessing Officer are on the basis of realisation i.e. they are crystallised in this year and thus they are to be accounted for only during the year under consideration and hence the mercantile method of accounting adopted by the appellant-company as per note of schedule P of the audit report dated August 24, 2004, is in no way in variation or contradiction with the facts and the circumstances of the case. The appellant-company has got its accounts duly audited by the chartered accountants M/s. Subhash C. Gupta and Co. and vide their report dated August 24, 2004, it is declared by them that the proper books of account as required by law had been kept by the company and the profit and loss account and its balance-sheet are in consonance with the books of account which give a true and fair view of the company’s affairs. The Assessing Officer has not found out or pointed out any adverse finding regarding the audited version of the books of account nor in the mercantile system of accounting followed by the company generally, debiting expenses on accrual basis. Thus, the completeness and correctness of the books of account maintained by the appellant-company are in no way in dispute or doubt by the Assessing Officer and hence the provisions of section 145 have been incorrectly and indiscreetly applied by the Assessing Officer on the facts and circumstances of this case. Therefore, in view of the ratio laid down by the jurisdictional High Court in the case of CIT v. Om Overseas [2009] 315 ITR 185 (P&H)  and that of the Gauhati High Court in the case of Madnani Construction Corporation Pvt. Ltd. v. CIT [2008] 296 ITR 45 (Gauhati) the Assessing Officer was not justified in invoking the provisions of section 145 when the duly audited book version was not challenged by the Assessing Officer or any court, and the audited particulars/ details were not at all disputed as to there being defects whatsoever in them.

As to the books of account and vouchers maintained, they, therefore, reflect a true picture of the accounts of the appellant-company. Hence, the business results declared by the appellant-company need not have been interfered with by the Assessing Officer in estimating its profits by applying an arbitrary rate of G. P. at 50 per cent. Merely because the profits are low compared to the earlier year is not a circumstance or material to justify an estimate in the circumstances and facts of the case, as held by the jurisdictional High Court in the case of Pandit Bros. v. CIT  [1954] 26 ITR 159 (P&H). Similarly, the books of account can be rejected under section 145 only where either no method of accounting was employed or the method employed was such that it did not disclose the true profits, in view of the decision of the jurisdictional High Court in the case of CIT v. K.S. Bhatia [2004] 269 ITR 577 (P&H). In the instant case, neither of the two above premises are applicable. Thus, the addition of Rs. 13,88,866 both on the facts and law is meritless and hence stands deleted.”

8. The issue regarding discount and rebate has been discussed by the Commissioner of Income-tax (Appeals) in para. 20 of his order, which reads thus :

“I have carefully considered the submissions of the learned authorised representative and perused the order of assessment. From the assessment order, it is quite evident that the Assessing Officer has proceeded on some misunderstanding of the nature of subscription charges as per the agreement entered into by the appellant-company with M/s. Siti Cable Network Limited. These expenses as detailed as per schedule N of the audited accounts have been duly examined by me vis-a-vis the method embedded in clause No. 2.4 of the addendum to the DCM agreement dated April 3, 2003. It has been found that 50 per cent. distribution charges are paid to the distributors from the realisation of the service charges from the bills raised which amount to Rs. 1,57,90,022 on behalf of Siti Cable Network Limited. However, during the year under consideration, certain credit notes were issued by the Siti Cable to the clients/customers against whom the billing was raised by the appellant-company and these credit notes are exactly the rebate and discount expenditure being incurred for the appellant-company which amount to Rs. 2,73,680. As everything is transparent in the account maintained in a separate heads of rebate and discount, as against that of the subscription charges, and since the Assessing Officer has not pointed out any defect or deficiency in the rebate and discount account, no adverse inference can be drawn as to the genuineness of these expenses claimed at Rs.2,73,680 under the head ‘Rebate and discount’. Therefore, the disallowance of Rs. 2,73,680 too, is deleted.”

9. The Tribunal held that the “operational expenses” had been genuinely and accurately shown which were as per various clauses of the agreement and further that no defect in the regular books of account was pointed out by the Assessing Officer nor any discrepancy in the operational charges shown by the assessee-company in terms of those agreements were pointed out and, thus, the Commissioner of Income-tax (Appeals) had rightly deleted the disallowance of Rs. 13,88,866 made by the Assessing Officer. The Tribunal further held in plain words that no infirmity could be found in the order of the Commissioner of Income-tax (Appeals), allowing the claim of the assessee relating to “rebate and discount”. The Tribunal had concluded that the genuineness of “rebate and discount” could not be doubted.

10. Learned counsel for the appellant-Revenue has not been able to pinpoint any perversity or illegality in the findings of the Commissioner of Income-tax (Appeals) and the Tribunal on both the counts, which may warrant interference by this court. In view of this, no substantial question of law arises for consideration of this court and the appeal is accordingly dismissed.

[Citation : 336 ITR 129]

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