SHEKHAWATI ART PALACE v. ASSISTANT COMMISSIONER OF INCOME TAX
[Citation -2007-LL-0921-15]

Citation 2007-LL-0921-15
Appellant Name SHEKHAWATI ART PALACE
Respondent Name ASSISTANT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 21/09/2007
Assessment Year 2002-03
Judgment View Judgment
Keyword Tags commencement of production • new industrial undertaking • partial disallowance • plant and machinery • initial assessment • alternative claim • state government • interest on fdrs • land development • levy of interest • comparable case • interest income • net profit rate • speaking order • stock register • total turnover • backward area • special bench • audit report • raw material • new plant
Bot Summary: In ground No. 3, the assessee is aggrieved that the learned CIT(A) has erred in confirming a partial disallowance by the AO of the deduction claimed under s 80-IB and also further erred in enhancing the income by withdrawing full deduction under s. 80-IB. We have heard the parties The brief facts of the case are that the assessee firm continues to derive income from manufacturing of wooden and iron handicrafts items and exporting the same. The date of commencement of production has been shown as 7th April, 2000 at the factory located at village Rukansar while the assessee is having factory building at Churu Gate Ram Gate as per balance sheet of the assessee. The alternative claim of the assessee does not lose the right of the assessee, has rightly been argued by the learned Authorised Representative. The learned CIT(A) is not justified in enhancing the income of the assessee and the assessee is allowed 100 per cent deduction under s. 80-IB of the Act, starting from 7th April, 2000 and not from 3rd June, 1997. The assessee is not maintaining the quantitative records and therefore, the correctness and completeness of the results declared by the assessee cannot be verified and therefore, the AO has rightly invoked the provisions of s. 145(3) of the Act. In the immediately preceding year, the assessee has declared GP rate of 27.18 per cent and in the impugned year, the assessee has declared 27.16 per cent. The brief facts of the case are that the AO disallowed 10 per cent of telephone expenses claimed by the assessee on account of non-business purposes since the assessee has not maintained the telephone register for verification of usage of telephone for the official purposes.


This is appeal filed by assessee against order of learned CIT(A) dt. 28th Feb., 2006 for asst. yr. 2002-03. During course of hearing, learned Authorised Representative of assessee has not pressed ground Nos. 1 and 2. Hence same is dismissed as not pressed. In ground No. 3, assessee is aggrieved that learned CIT(A) has erred in confirming partial disallowance by AO of deduction claimed under s 80-IB and also further erred in enhancing income by withdrawing full deduction under s. 80-IB. We have heard parties brief facts of case are that assessee firm continues to derive income from manufacturing of wooden and iron handicrafts items and exporting same. assessee has claimed 100 per cent deduction under s. 80-IB of Act against declared profit of Rs. 44,11,999 in his IT return for which he has also filed report in form No. 10CCB audited by auditor. AO observed that said deduction is not allowable and explanation of assessee in this regard as per reply dt. 22nd Feb., 2005 was that: "The assessee is manufacturing and exporting unit duly registered under S S I by District Industrial Centre, Sikar. unit has also started production before 31st March, 2002, hence duly eligible to claim deduction under s. 80-IB. unit is situated in backward area Sikar District which category B district where deduction under s. 80-IB is allowable for 100 per cent of profit for first five years and 25 per cent after 5 years and upto 10 years. Hence deduction under s. 80-IB may be allowed on basis of genuity and substance of case. And in further reply dt. 28th Feb., 2002, it has been further stated by assessee that: We are also enclosing SSI permanent registration showing production on 7th April, 2000, hence we are eligible 100 per cent exempted. assessee is manufacturing and exporting unit duly registered under SSI by District Industrial Centre, Sikar. unit has also started production before 31st March, 2002, hence duly eligible to claim deduction under s. 80-IB. unit is situated in backward area, Sikar District which is category B district where deduction under s. 80-IB is allowable for 100 per cent of profit for first five years and 25 per cent after 5 years and upto 10 years. Hence, deduction under s. 80-IB may be allowed on basis of genuity and substance of case ." AO was not satisfied with explanation of assessee and observed that assessee is not maintaining separate books of account regarding production, export sales and profit in respect of new unit. date of commencement of production has been shown as 7th April, 2000 at factory located at village Rukansar while assessee is having factory building at Churu Gate Ram Gate as per balance sheet of assessee. AO was of view that assessee s industrial undertaking came into existence on 3rd June, 1997 with four partners and prior to that it was proprietary of Shri Mahendra Kumar Johari. Therefore, assessee was not eligible for claim @ 100 per cent but @ 25 per cent and accordingly AO allowed deduction under s. 80-IB of Act at Rs. 11,93,767. learned CIT(A) observed that there was no dispute that assessee is industrial undertaking situated in backward district of category B. only dispute was what should be initial assessment year for allowing deduction under s. 80-IB of Act. learned CIT(A) further observed that entire deduction should be withdrawn as present industrial undertaking has been formed by splitting or reconstruction of same business which was already in existence. learned CIT(A) relied upon decision in Kerala State Cashew Development Corporation vs. CIT (1993) 113 CTR (Ker) 266: (1994) 205 ITR 19 (Ker) in support of his observation and therefore, he withdrew deduction allowed by AO and enhanced income of assessee accordingly. We have perused facts of case. learned Authorised Representative argued that partners of assessee purchased altogether new land for new industrial undertaking. Further total assets at Ramgarh stood at Rs. 40,84,753 as on 31st March, 2002. substantial amount of Rs. 8,00,318.50 was further incurred during this year on construction of new factory building etc. at Rukansar, totalling to Rs. 48,85,072 as evident from chart of fixed assets (PB 38). Further heavy investment in purchases and installation of new plant and machinery totalling to Rs. 5,38,354 have been made right since inception of new partnership firm i.e. from asst. yr. 1999-2000 onward as would appear from year-wise details (PB 56) and copies of various bills and vouchers (PB 57-106A) which were submitted before authorities below. These apart for first time, new power connection was also taken from State Government (PB 47-55). Further assessee was also granted registration by District Industrial Centre (DIC), Sikar, as is evident from certificate dt. 22nd June, 2000 and duplicate issued on 18th Aug., 2000 (PB 46) showing commencement of production on 7th April, 2000. Even production obtained now, was qualitatively much better and having more life. Further learned CIT(A) has heavily relied upon decision of Kerala State Cashew Development Corporation vs. CIT (supra) and reproduced headnote at p. 11 of his order. He submitted that in same very decision, it is held that original business must continue but identity of undertaking must not be lost. It also held that continuation of business must be of s m e undertaking. In present case, though business of old undertaking owned by proprietor Shri Mahendra Kumar Johari discontinued [though not stated by learned CIT(A) yet what is important is that identity of earlier unit stood lost because of formation of new partnership firm. altogether new undertaking has come into effect under ownership of partnership firm, which came into existence w.e.f. 3rd June, 1997, consisting of 4 partners as against 1 person. These facts are admitted even by learned CIT(A) and mentioned at p. 8 of his order. Thus it cannot be denied that altogether new undertaking has come into existence and that too owned by totally different ownership i.e. new partnership firm. AO has stressed upon word business . very decision cited by Hon ble Kerala High Court held that continuance of business is with reference to same undertaking which is not in present case. Thus, admittedly new undertaking coming into existence from later date hence, it cannot be said that there was reconstruction/splitting up as contemplated under s. 80-IB(2) of Act. objection of learned CIT(A) that various decisions cited by learned Authorised Representative before him are not relevant inasmuch as they were based on provisions of IT Act, 1922, learned Authorised Representative argued that provisions contained under s. 80-IB of Act are pari materia to provisions of old Act and learned CIT(A) has neither disputed nor appreciated same, though admittedly such decisions are quite relevant and hence may kindly be considered. further objection of learned CIT(A) that audit report given by chartered accountant under s. 80-IB is not reliable inasmuch as note has been given (on computation of total income) that if deduction under s. 80-IB is not considered or allowed, deduction under s. 80HHC be allowed. learned Authorised Representative submitted that learned CIT(A) proceeded on gross misconception of law inasmuch as to make main claim as also alternate claim is right of assessee and nobody can deny. Making alternate claim does not mean that main claim is not k. On contrary, CBDT long back directed its officers to help appellant making claim, to which it is entitled [refer Circular No. 14(XL-35) of 1955 dt. 11th April, 1955]. It is also necessary to clarify here that note referred to by learned CIT(A) at p. 10 para 5.3 was not given by chartered accountant who audited accounts of assessee but it was note given by assessee itself on computation of total income (PB 45). Such note was given with view to safeguard right of assessee to make as many claims, to which it is entitled under other provisions of Act. Therefore, to say that report by auditor was prepared on guesswork is not at all desirable. Thus it is amply clear on facts read with various case law that new industrial undertaking set up by assessee is not case of splitting up reconstitution and therefore, deduction under s. 80-IB may be allowed @ 100 per cent in this very year [refer written submission before learned CIT(A) p. 8-11]. Also this is very clear from s. 80-IB(14)(c)(i) itself. bare reading suggests that initial assessment year, for this purpose shall be previous year in which industrial undertaking begins to manufacture or produce article or thing. In this case, admittedly, assessee started production/ manufacturing as per certificate of DIC on 7th April, 2000. Hence first asst. yr. 2001-02 and second year being 2002-03, which is under consideration. assessee therefore, rightly made claim of deduction @ 100 per cent, however, authorities below did not apply their mind on this aspect. We are convinced with arguments of learned Authorised Representative that assessee has set up new industrial undertaking as is evident from new power connection taken from State Government (PB 47 to 55), registration by District Industrial Centre, Sikar as per their certificate dt. 22nd June, 2000 and 18th Aug., 2000 showing commencement of production on 7th April, 2000 and installation of machinery and construction of new factory building at Rukansar as per chart of fixed assets (PB 38). various bills and vouchers (PB 57 to 106-A) have been perused for investment in purchase and installation of new plant and machinery. case relied upon by AO is not applicable as argued by learned Authorised Representative. alternative claim of assessee does not lose right of assessee, has rightly been argued by learned Authorised Representative. Therefore, learned CIT(A) is not justified in enhancing income of assessee and assessee is allowed 100 per cent deduction under s. 80-IB of Act, starting from 7th April, 2000 and not from 3rd June, 1997. Therefore AO is directed to allow deduction under s. 80-IB as claimed by assessee. Thus ground No. 3 of assessee is allowed. In ground No. 4.1, assessee is aggrieved that learned CIT(A) has erred in confirming application of s. 145(1). provision so applied and confirmed being contrary to provisions of law and facts, same may kindly be quashed. Consequently trading addition of Rs. 1,00,000 may be deleted in full. In ground No. 4.2, assessee is aggrieved that learned CIT(A) has erred in partly confirming trading addition of Rs. 1,00,000 as against Rs. 5,92,984 made by AO. addition so made and partly confirmed is totally contrary to provisions of law and facts on record and hence partly sustained addition may be deleted in full. brief facts of case are that assessee has declared turnover of Rs. 2,99,09,187 and gross profit of Rs. 80,87,133 (81,25,416 - 98,283) at GP rate of 26.83 per cent as compared to gross profit of Rs. 62,81,685 (62,94,485- 12,800) at GP rate of 27.13 per cent on total turnover of Rs. 2,31,54,327 in immediately preceding year. assessee has not maintained stock register and day-to-day register for raw material and finished and semi-finished goods. AO rejected books of account invoking provisions of s. 145(3) of Act and applied GP rate of 28.52 per cent which was declared by assessee in asst. yr. 2000-01 on declared turnover during impugned year, thus making trading addition of Rs. 5,02.967. learned CIT(A) confirmed applicability of provisions of s. 145(3) of Act and learned CIT(A) observed that assessee including direct income has maintained GP rate of 27.16 per cent as compared to 27.18 per cent in immediately preceding year and GP rate of 28.52 per cent for asst. yr. 2000-01 applied by AO is not justified as AO has not considered enhanced turnover during impugned year and moreover gross profit cannot be constant in all years. It depends on demand and supply of market and therefore, learned CIT(A) sustained lump sum addition of Rs. 1 lac on account of defects in books of account. We have perused facts of case. assessee is not maintaining quantitative records and therefore, correctness and completeness of results declared by assessee cannot be verified and therefore, AO has rightly invoked provisions of s. 145(3) of Act. There is no comparable case on record and in such circumstances, past results of assessee have to be taken into consideration. In immediately preceding year, assessee has declared GP rate of 27.18 per cent and in impugned year, assessee has declared 27.16 per cent. There is negligible difference of declaration of profit as compared to preceding year. But at same time, assessee has declared better net profit rate of 14.74 per cent as compared to 14.26 per cent in immediately preceding year, relying upon decision of Hon ble jurisdictional High Court in case of CIT vs. Gotan Lime Khanij Udhyog (2001) 169 CTR (Raj) 318: (2002) 256 ITR 243 (Raj) where it has been held that mere rejection or deficiency in books of account would not mean that it must necessarily lead to additions to returned income. result of changes in either case would depend on other principles of computing income. Since assessee has declared similar results as in past years and better net profit as compared to last year, therefore, learned CIT(A) was not justified in sustaining lump sum trading addition. Therefore, AO is directed to delete addition sustained by learned CIT(A) on this account. Thus ground Nos. 4.1. and 4.2 of assessee are allowed. In ground No. 5, assessee is aggrieved that learned CIT(A) has erred in holding treatment by AO, income from interest on FDRs as "income from other sources" as against income from "business or profession" declared by appellant. Hence interest income of Rs. 1,10,617 may kindly be held and directed to be treated as "income from business" and deduction under s. 80HHC can be allowed accordingly. Alternatively benefit of netting be directed. brief facts of case are that assessee has declared interest on bank FDR at Rs. 1,10,617 which was treated as business income by assessee. AO treated same as income from other sources in view of decisions of various Courts of law as under: (1) CIT vs. Manglam Cement Ltd. (1996) 217 ITR 369 (Raj); (2) CIT vs. Rajasthan Land Development Corporation (1995) 125 CTR (Raj) 261: (1995) 211 ITR 597 (Raj) and various other decisions of Tribunal Jaipur Bench. learned CIT(A) confirmed action of AO. We have perused facts of case. In view of consistent decisions of this Bench and decisions relied upon by authorities below, we concur with views of learned CIT(A) who has rightly treated interest on FDR as income from other sources. Thus ground No. 5 of assessee is dismissed. In ground No. 6, assessee is aggrieved that learned CIT(A) has erred in confirming disallowance of Rs. 21,067 made by AO on account of telephone expenses. In ground No. 7, assessee is aggrieved that learned CIT(A) has erred in confirming disallowance of Rs. 30,460 made by AO on account of vehicle maintenance expenses. In ground No. 8, assessee is aggrieved that learned CIT(A) has erred in confirming disallowance of Rs. 18,277 made by AO on account of depreciation. brief facts of case are that AO disallowed 10 per cent of telephone expenses claimed by assessee on account of non-business purposes since assessee has not maintained telephone register for verification of usage of telephone for official purposes. AO also disallowed 20 per cent of vehicle maintenance and depreciation since assessee has not maintained log book and it was not possible to verify genuineness of expenses. learned CIT(A) confirmed action of AO. We have perused facts of case. assessee has not maintained t h e telephone register and therefore, non-business purposes in such expenditure cannot be ruled out. assessee has not maintained log book for day-to-day use of vehicle and therefore, non-business element cannot be ruled out in such expenditure. AO has disallowed expenditure on account of telephone and vehicle maintenance on reasonable basis. We find no infirmity in order of learned CIT(A) on this account. Similarly, disallowance on account of depreciation has rightly been made. Thus ground Nos. 6, 7 and 8 of assessee are dismissed. In ground No. 9, assessee is aggrieved that AO has erred in charging interest under ss. 234A, 234B and 234D and withdrawing interest under s. 244A. AO has charged interest under ss. 234A, 234B and 234D of Act which was confirmed by learned CIT(A). We have perused facts of case. In view of consistent decisions taken by this Bench and in view of decisions of Special Bench in case of Motorola Inc vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1: (2005) 95 ITD 269 (Del)(SB) where it has been held that liability to pay interest arises on default being committed and thereafter any reference to specific section of IT Act under which it is charged is only matter of procedure. If AO does not give reasons for levy of interest, assessee may not get opportunity to show cause why in his case interest cannot be levied at all. Therefore, AO in present case is required to pass speaking order but by providing opportunity to assessee of being heard. Hence matter is restored to file of AO for deciding issue as directed hereinbefore. Thus ground No. 9 of assessee is allowed for statistical purposes. ground No. 10 of assessee is general in nature which needs no adjudication by us. In result, appeal of assessee in ITA No. 378/Jp/2006 is partly allowed. *** SHEKHAWATI ART PALACE v. ASSISTANT COMMISSIONER OF INCOME TAX
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