ACIT, Pune v. M/s. Agarwal Enterprises,, Pune

ITA 1201/PUN/2009 | 2005-2006
Pronouncement Date: 08-11-2011 | Result: Dismissed

Appeal Details

RSA Number 120124514 RSA 2009
Assessee PAN AACFA6974D
Bench Pune
Appeal Number ITA 1201/PUN/2009
Duration Of Justice 2 year(s) 1 month(s) 1 day(s)
Appellant ACIT, Pune
Respondent M/s. Agarwal Enterprises,, Pune
Appeal Type Income Tax Appeal
Pronouncement Date 08-11-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 08-11-2011
Date Of Final Hearing 13-09-2011
Next Hearing Date 13-09-2011
Assessment Year 2005-2006
Appeal Filed On 07-10-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B PUNE BEFORE SHRI I.C. SUDHIR JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO ACCOUNTANT MEMBER ITA NO. 1201/PN/2009 (ASSTT. YEAR: 2005-06) ASSISTANT COMMISSIONER OF INCOME TAX APPELLANT CIRCLE 3 1 ST FLOOR PMT BUILDING SWARGATE PUNE 411 037 V. M/S AGRAWAL ENTERPRISES ... RESPONDENT 364 GOKHALE ROAD NEAR DEEP BUNGLOW PUNE 411 016 PAN: AAACFA6974D APPELLANT BY : MS. S. PRAVEENA RESPONDENT BY : SHRI S.N. DOSHI DATE OF HEARING : 13.9.11 DATE OF PRONOUNCEMENT: 08 .11.11 ORDER PER I.C. SUDHIR JM THE REVENUE HAS QUESTIONED FIRST APPELLATE ORDER MERELY ON 2 GROUNDS THAT LD CIT(A) HAS ERRED IN DELETING THE ADDITION OF (1) RS.27 63 920/- MADE BY THE A.O U/S. 37(1) OF THE ACT FROM OUT OF THE ASSESSEES CL AIM TOWARDS KEYMAN INSURANCE PREMIUM; AND (2) RS. 42 48 052/- MADE IN THE ASSESS MENT TOWARDS UNDERVALUATION OF CLOSING STOCK OF SHARES AND BONDS. GROUND NO. 1 2. THE RELEVANT FACTS ARE THAT THE ASSESSEE ENGAGE D IN THE BUSINESS OF PURCHASE AND SALE OF SECURITIES AND INVESTMENT IN CAPITAL MA RKET CLAIMED EXPENDITURE OF RS. 1 38 19 600/- UNDER THE HEAD KEYMAN INSURANCE PREM IUM ON THE LIFE OF 2 PARTNERS SHRI DINESH GUPTA AND SHRI SATISH GUPTA. BEFORE TH E A.O THE ASSESSEE EXPLAINED THAT THIS EXPENDITURE WAS DEDUCTIBLE U/S. 37(1) OF THE ACT SINCE IT WAS INCURRED BY ITA . NO. 1201 /PN/2009 M/S. AGRAWAL ENTERPRISES A.Y. 2005-06 PAGE OF 7 2 THE FIRM TO PROTECT THE BUSINESS FROM LOSS WHICH M AY ARISE DUE TO DEATH OF PARTNER FOR WHICH CERTAIN DOCUMENTS AND LITERATURE ISSUED BY LIC WAS ALSO SUBMITTED BEFORE THE A.O. IT WAS SUBMITTED THAT THE BENEFICIARY OF THE INSURANCE POLICY WAS THE FIRM ITSELF AND NOT THE INDIVIDUAL PARTNERS AND THEREF ORE IT WAS NOT AN EXPENDITURE RELATED TO THE PARTNERS. THE A.O DID NOT AGREE AND OBSERVED THAT THE FIRM AS A LEGAL ENTITY HAS NO EXISTENCE APART FROM ITS PARTNERS AND THEREFORE THE KEYMAN INSURANCE PREMIUM COULD BE TREATED AS PERSONAL EXPE NSES OF THE PARTNERS. THE A.O ACCORDINGLY DISALLOWED 20% OF THE KEYMAN INSURANCE PREMIUM ON THE BASIS THAT THE INSURANCE PREMIUM EXPENDITURE WAS PERSONAL IN NATUR E OF THE PARTNERS AND IT WAS NOT INCURRED WHOLLY AND SOLELY FOR THE PURPOSE OF B USINESS OF ASSESSEE FIRM. THE LD CIT(A) HAS HOWEVER DELETED THE DISALLOWANCE REFER RING THE CBDT CIRCULAR NO. 762 DATED 18 TH FEBRUARY 1998 AND THE EXPLANATION GIVEN BELOW SEC. 10(10D) AND OTHERS. HE HAS ALSO PLACED RELIANCE ON SOME DECISIONS REFER RED BEFORE HIM. 3. IN SUPPORT OF THE GROUND THE LD. D.R. HAS BASIC ALLY PLACED RELIANCE ON THE ASSESSMENT ORDER WHICH WE HAVE ALREADY DISCUSSED HE REINABOVE. 4. THE LD. A.R. ON THE OTHER HAND TRIED TO JUSTIFY THE FIRST APPELLATE ORDER ON THE ISSUE WITH THIS FURTHER SUBMISSION THAT IN THE A.Y. 2008-09 THE A.O. HAS NOT MADE ANY DISALLOWANCE OUT OF THE CLAIMED EXPENDITURE ON PAYMENT OF KEYMAN INSURANCE PREMIUM TO THE PARTNERS. 5. HAVING GONE THROUGH THE ORDERS OF THE AUTHORITIE S BELOW WE FIND THAT THE LD CIT(A) HAS DELETED THE DISALLOWANCE MADE BY THE A.O ON ADHOC BASIS AT 20% OF THE PREMIUM PAID TOWARDS KEYMAN INSURANCE POLICY OF PAR TNERS TAKING SUPPORT OF CBDT CIRCULAR NO. 762 DT. 18.2.98 EXPLAINING THE ALLOWA BILITY OF THE PREMIUM PAYMENT OF KEYMAN INSURANCE POLICY OF THE PARTNERS ALONG WITH THE TAXATION OF SUMS RECEIVED UNDER THE KEYMAN INSURANCE POLICY. IT HAS BEEN MAD E CLEAR IN THAT CIRCULAR THAT THE PREMIUM PAID ON THE KEYMAN INSURANCE POLICY IS ALLO WABLE AS BUSINESS EXPENDITURE ITA . NO. 1201 /PN/2009 M/S. AGRAWAL ENTERPRISES A.Y. 2005-06 PAGE OF 7 3 WHEREAS THE SUM RECEIVED LATER BY THE ORGANIZATION TAKING SUCH POLICY AS A RESULT THEREOF IS TO BE TAXED AS BUSINESS PROFIT. THE LD CIT(A) HAS ALSO REFERRED THE EXPLANATION GIVEN BELOW SECTION 10(10D) GIVING THE DEFINITION OF KEYMAN INSURANCE POLICY AS UNDER : EXPLANATION : FOR THE PURPOSES OF THIS CLAUSE KE YMAN INSURANCE POLICY MEANS A LIFE INSURANCE POLICY TAKEN BY A PERSON ON THE LIFE OF ANOTHER PERSON WHO IS OR WAS THE EMPLOYEE OF THE FIRST-MENTIONED P ERSON OR IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINES S OF THE FIRST-MENTIONED PERSON; THE LD CIT(A) HAS ALSO MADE REFERENCE OF THE PROVIS ION OF SECTION 28(VI) AND SECTION 17(3) OF THE I.T. ACT. AS PER SECTION 28( VI) ANY RECEIPT UNDER KEYMAN INSURANCE POLICY LIKE MATURITY PROCEEDS RECEIPTS ON ACCOUNT OF AN UNFORTUNATE CONTINGENCY BONUS ETC. ACCRUING TO THE ASSESSEE FIRM IS TAXABLE IN ITS HAND UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSIO N. AS PER SECTION 17(3) OF THE ACT ANY RECEIPT UNDER KEYMAN INSURANCE POLICY INC LUDING BONUS BY AN ASSESSEE FROM AN EMPLOYER OR FORMER EMPLOYER WAS TO BE TREAT ED AS PROFIT IN VIEW OF SALARY IN HIS HANDS. THE LD CIT(A) HAS ALSO REFERRED DECISI ON OF HONBLE SUPREME COURT IN THE CASE OF SASSOON J. DAVID & CO.(P.) LTD. VS. CIT (1979) 118 ITR 261 (SC) HOLDING THAT THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF DEDUCTION UNDER SECTION 10(2)(XV) OF THE ACT IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY LAW. RELIANCE HAS ALSO BEEN PLACED ON THE DECISI ON OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SALES MAGNESITE (PVT.) LTD. (1995) 214 ITR 1 (BOM.) ON THE ISSUE OF ALLOWABILITY OF EXPENDITURE U/S. 37 THAT IT IS NOT ESSENTIAL THAT IT SHOULD BE NECESSARY LEGALLY OR OTHERWISE TO INCUR THE SAM E OR THAT IT SHOULD DIRECTLY OR IMMEDIATELY BENEFIT THE BUSINESS OF THE ASSESSEE. EVEN EXPENDITURE INCURRED VOLUNTARILY ON THE GROUND OF COMMERCIAL EXPEDIENCY AND IN ORDER INDIRECTLY TO FACILITATE THE CARRYING ON OF THE BUSINESS WOULD BE DEDUCTIBLE UNDER THIS SECTION. THE FIRST APPELLATE ORDER ON THE ISSUE AS DISCUSSED IS REASONED ONE AND SUPPORTED ITA . NO. 1201 /PN/2009 M/S. AGRAWAL ENTERPRISES A.Y. 2005-06 PAGE OF 7 4 WITH THE CBDIT CIRCULAR NO. 762 DATED 18.2.98 AS WE LL AS THE ABOVE REFERRED DECISIONS HENCE WE ARE NOT INCLINED TO INTERFERE T HEREWITH. THE SAME IS UPHELD. GROUND NO. 1 IS ACCORDINGLY REJECTED. GROUND NO. 2 6. THE A.O NOTICED THAT IN THE TRADING ACCOUNT CLO SING STOCK OF SHARES AND BONDS SHOWN AT RS. 14 80 27 012/- WERE VALUED AT CO ST OF THE MARKET PRICE WHICHEVER IS LOWER. HOWEVER MANY SCRIPTS WERE VAL UED AT FIGURES WHICH WERE NEITHER PURCHASE PRICE NOR THE MARKET VALUE. THE ASSESSEE EXPLAINED THAT ACTUALLY THE VALUATION WAS AT COST WHICH WAS CALCULATED AT WEIGHTED AVERAGE COST OF PURCHASES WHICH WAS WORKED OUT BY DIVIDING THE TOTA L COST OF SHARES BY THE NO. OF SHARES PURCHASED OF A PARTICULAR COMPANY. ACCORDIN GLY THE ASSESSEE EXPLAINED THE VALUATION OF CLOSING STOCK OF THE BALLARPUR IN DUSTRIES SCRIPT IN WHICH THE TOTAL VALUE OF STOCK IN OPENING STOCK AS WELL AS THE PURC HASE WAS TAKEN TO WORK OUT THE AVERAGE CLOSING COST VALUED AT AVERAGE COST AT RS. 76.89 PER SHARE. IT WAS EXPLAINED BY THE ASSESSEE THAT THIS METHOD WAS BEIN G FOLLOWED FOR THE LAST 16 YEARS BY IT. IT WAS FURTHER EXPLAINED THAT IN CASE STOC K WAS VALUED ON FIFO METHOD THE ASSESSEE WILL BE ENTITLED TO ADJUST THE OPENING STO CK AND THERE WILL NOT BE ANY LONG TERM EFFECT. IT WAS CONTENDED THAT BASED ON THIS METHOD THE OPENING STOCK AS ON 1.4.2004 WILL HAVE TO BE INCREASED BY RS. 91 83 954 /- AND CLOSING STOCK WILL BE INCREASED BY RS. 42 48 052/- THEREFORE THERE WILL BE NET LOSS OF RS. 49 35 902/- I.E. THE INCOME WILL BE REDUCED TO THIS EXTENT. THE A.O DID NOT AGREE WITH THE SAME AND MADE ADDITION OF RS. 42 48 052/- ON ACCOUNT OF UNDE RVALUATION OF CLOSING STOCK REJECTING THE WEIGHTED AVERAGE METHOD FOR COST WHIC H WAS CONSISTENTLY BEING ADOPTED BY THE ASSESSEE SINCE ITS INCEPTION. THE A .O HAS DISCUSSED THE ISSUE IN PARA NO. 6 OF THE ASSESSMENT ORDER. ITA . NO. 1201 /PN/2009 M/S. AGRAWAL ENTERPRISES A.Y. 2005-06 PAGE OF 7 5 7. AFTER CONSIDERING THE DETAILED SUBMISSIONS OF TH E ASSESSEE REPRODUCED AT PAGE NOS. 9 TO 16 OF THE FIRST APPELLATE ORDER LD CIT(A) HAS DELETED THE DISALLOWANCE. THE LD CIT(A) HAS NOTED A FINDING O N THE ISSUE IN PARA NOS. 4.4 TO 4.8 OF THE FIRST APPELLATE ORDER. 8. BEFORE US THE LD. D.R. HAS PLACED RELIANCE ON THE ASSESSMENT ORDER WHEREAS THE LD. A.R. ON THE OTHER HAND TRIED TO JUSTIFY THE FIRST APPELLATE ORDER ON THE ISSUE. THE LD. A.R. HAS ALSO PLACED RELIANCE ON THE FOLLOWING DECISIONS : 1) CONCORDIA CORPORATION LTD. VS. CIT 22 ITR 344 (TR V-COCHIN) 2) CIT VS. J.S. ELECTRONIC LTD 213 CTR 138 (DELHI HIG H COURT) 3) CIT VS. H.P. STATE CIVIL SUPPLIES CORPORATION LTD. 309 ITR 102(HP) 4) CIT VS. RAMESHWAR PRASAD KEJAREWAL AND SONS P. LTD 76 TAXMAN 124 CALCUTTA HIGH COURT. 5) DCIT VS. DISCOUNT AND FINANCE HOUSE OF INDIA LTD 14 SOT 334 MUMBAI 6) CIT VS. A. KRISHNA SWAMI MUDLIYAR 53 ITR 122 (SC) 7) P.M. MOHAMMAD MIRA KHAN VS. CIT 73 ITR 7735 (SC) 8) CIT VS UCO BANK LTD 200 ITR 68 CALCUTTA 9) A.L.A. FIRM VS. CIT 189 ITR 285 (SC) HE ALSO REFERRED ACCOUNTING STANDARD 2 THAT WEIGHT ED AVERAGE METHOD IS NOT AN ABNORMAL METHOD. 9. HAVING GONE THROUGH THE ORDERS OF THE AUTHORITIE S BELOW WE AGREE WITH THE CONTENTION OF THE ASSESSEE RAISED BEFORE THE LD CIT (A) THAT THE PERCEPTION OF THE A.O THAT THE VALUE TAKEN ON THE BASIS OF WEIGHTED AVER AGE METHOD IS NOTIONAL IS INCORRECT. WHILE MAKING SUCH OBSERVATION THE A.O HAS CERTAINLY OVERLOOKED THE FACT THAT UNDER THIS METHOD THE COST ACTUALLY PAID IS C ONSIDERED WHICH CANNOT BE REGARDED AS NOTIONAL. THE AVERAGE COST IS WORKED O UT BY CONSIDERING THE TOTAL COST ACTUALLY PAID FOR PURCHASING THE SHARES AND THE DIV IDEND BY THE NUMBER OF SHARES. WEIGHTED AVERAGE METHOD IS A RECOGNIZED METHOD AND IT CANNOT BE BRANDED AS ITA . NO. 1201 /PN/2009 M/S. AGRAWAL ENTERPRISES A.Y. 2005-06 PAGE OF 7 6 SOMETHING ABNORMAL OR BASELESS. IT IS A CASE WHERE ASSESSEE HAS BEEN FOLLOWING A CONSISTENT METHOD OF VALUATION OF CLOSING STOCK FO R THE LAST 16 YEARS. RELIANCE ON THE PRINCIPLE OF COST OF MARKET PRICE WHICHEVER IS LESS FOR DETERMINING THE CLOSING STOCK AS PER COST THE ASSESSEE HAS BEEN EMPLOYING THE WEIGHTED AVERAGE COST METHOD. THE APPROVED ACCOUNTING STANDARD 2 FOR VAL UATION OF INVENTORIES ALSO MAKE IT CLEAR THAT THE COST OF INVENTORIES IS TO BE DETERMINED BY FOLLOWING THE FIFO METHOD OR THE WEIGHTED AVERAGE COST METHOD. IT WA S EXPLAINED BY THE ASSESSEE THAT IN RESPECT OF STOCKS AND SHARES WHICH ARE HELD IN DEMAT FORM THE PHYSICAL IDENTITY OF THE SCRIPTS IS LOST THEREFORE ACTUAL COST METHOD CANNOT BE APPLIED AT ALL. WHEN THE SCRIPTS OR THE SECURITIES ARE HELD IN DEMA T FORM THERE IS NO INDIVIDUAL IDENTIFICATION LIKE THE DISTINCTIVE NOS. ETC. WHIC H WOULD HAVE BEEN THERE IN CASE THE SECURITIES WERE EXISTING IN A PHYSICAL FORM. UNDIS PUTEDLY IT IS NOT A CASE OF CHANGE OF METHOD OF VALUATION IN THE CASE OF ASSESSEE BUT THE METHOD OF VALUATION WHICH HAS CONSISTENTLY BEEN FOLLOWED FOR THE LAST SO MAN Y YEARS. UNDER THESE CIRCUMSTANCES WE FULLY CONCUR WITH THE FINDING OF THE LD CIT(A) THAT THE METHOD OF VALUATION OF STOCK FOLLOWED BY THE ASSESSEE WAS AN ACCEPTED METHOD IN CONSONANCE WITH THE LAW AS WELL AS ACCOUNTING STANDARD AND THE REFORE THERE IS NO REASON TO DISCARD THE SAME. WE THUS DO NOT FIND REASON TO IN TERFERE WITH THE FIRST APPELLATE ORDER ON THE ISSUE WHICH IS A SPEAKING ORDER SUPPOR TED WITH THE DECISIONS RELIED UPON BY HIM. THE SAME IS UPHELD. GROUND NO. 2 IS ACCORDINGLY REJECTED. 10. IN RESULT APPEAL IS DISMISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 8TH N OVEMBER 2011. SD/- SD/- ( D. KARUNAKARA RAO ) ACCOUNTANT MEMBER (I.C. SUDHIR ) JUDICIAL MEMBER PUNE DATED THE 8TH NOVEMBER 2011 US ITA . NO. 1201 /PN/2009 M/S. AGRAWAL ENTERPRISES A.Y. 2005-06 PAGE OF 7 7 COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT II PUNE 4. THE CIT(A)-II PUNE 4. THE D.R. B BENCH PUNE 5. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE