Commissioner of Income Tax vs Indu Nissan Oxo Chemical Industries Ltd.

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Akil Abdul Hamid Kureshi, J.—In this tax appeal, the Revenue has proposed three questions, which read as under:

"(1) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was correct in upholding the decision of the Commissioner of Income-tax (Appeals), which was perverse on fact in so far as his finding that the assessee had furnished required information before the Assessing Officer was not supporting facts on record as held by Assessing Officer in the assessment order?

(2)(i) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was correct in deleting the addition of Rs. 96,43,855 on account of excess consumption of heptene without considering that the assessee failed to furnish explanation for excess consumption of 488 MT of heptene?

(ii) Whether the decision of the Income-tax Appellate Tribunal is perverse on facts in upholding the decision of the Commissioner of Income-tax (Appeals), wherein the Commissioner of Income-tax (Appeals) deleted the addition on account of excess consumption of heptene after relying upon his order in the case of the assessee for the assessment years 1994-95 and 1995-96 without appreciating that the facts and circumstances of these assessment years were different from the current assessment year?

(3)(i) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was correct in deleting the addition of Rs. 86,87,381 on account of excess consumption of catalyst without considering that the assessee failed to furnish explanation for excess consumption of 1593 Kg. catalyst?

(ii) Whether the decision of the Income-tax Appellate Tribunal is perverse on facts in upholding the decision of the Commissioner of Income-tax (Appeals) wherein the Commissioner of Income-tax (Appeals) deleted the addition on account of excess consumption of catalyst after relying upon his order in the case of the assessee for the assessment years 1994-95 and 1995-96 without appreciating that the facts and circumstances of these assessment years were different from the current assessment year?

(4)(i) Whether the Income-tax Appellate Tribunal has erred in law in not holding the lease transaction as financial lease transaction when the actual nature of transaction was lease finance and not an operating transaction?

(ii) Whether the hon''ble Income-tax Appellate Tribunal has erred in law and on facts in directing the Assessing Officer to follow the decision of the hon''ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Gujarat Gas Co. Ltd., which cannot be considered a good law in respect of finance lease in view of the hon''ble Supreme Court decision in the case of Asea Brown Boveri Ltd. Vs. Industrial Finance Corporation of India and Others, ?

(iii) Whether the hon''ble Income-tax Appellate Tribunal erred in law in not applying the ratio of the Income-tax Appellate Tribunal Mumbai Special Bench decision in the case of Induslnd Bank Ltd. v. Addl. CIT [2012] 15 ITR (Trib) 89 (Mum) [SB] : [2012] 19 Taxman.com 173 (Mumbai) [SB], which was applicable to the facts of this case?"

Question No. (1) may be discussed at the end more conveniently.

Questions Nos. (2) and (3) pertain to the addition of Rs. 96.43 lakhs (rounded off) and Rs. 86.87 lakhs (rounded off) made by the Assessing Officer on account of the excess consumption of heptene and catalyst. It appears that the said substance was being used by the assessee for its manufacturing process. The Assessing Officer noticing that during the period relevant to the assessment year 1996-97, the assessee consumed a larger quantity of heptene and catalyst compared to the earlier years, made matching addition in the income of the assessee. The matter was carried in appeal. The Commissioner of Income-tax (Appeals) deleted the same placing reliance on the orders in the case of the very assessee for the assessment years 1994-95 and 1995-96. The matter was carried in appeal before the Tribunal by the Revenue in the earlier years. The Tribunal rejected the Revenue''s appeal, making the following observations:

"14. The fourth ground is with respect to the addition of Rs. 96,43,855 on account of excess consumption of hexene. The Assessing Officer noticed that the assessee has fetched 101 per cent yield of production of 5024 MT of Iso Octonol whereas, in the immediately preceding assessment year the yield was 111.81 per cent. The consumption ratio of heptene was 98 per cent as compared to 89 per cent in the immediately preceding assessment year. The assessee, inter alia, submitted that it had received 2377 MT of heptene against which it had manufactured 2222 MT of octonol on job work basis for Shreeji Plasticizers and Balaji Polymers. On perusing the monthly details of receipt of goods for conversion, the Assessing Officer noticed the 2873 MT of heptene was received for conversion. He, therefore, considered the unexplained difference of 488 MT (2837 MT minus 2377 MT) as the assessee''s own production of Iso Octonol. To this, he applied the average sales price of Rs. 19762/mt and worked out the total value of goods of Rs. 95,43,855 as being the sales outside the books of account and added to the income. Aggrieved by the order of the Assessing Officer, the assessee carried the matter before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) deleted the addition by holding as under:

''The next two grounds of appeal relate to the addition on account of excess consumption of raw materials and excess consumption of the catalysts. The Assessing Officer has observed that the appellant''s consumption of the raw material heptene during the year under consideration has increased as compared to that of the immediately preceding year. The Assessing Officer further observed that had the consumption ratio of heptene remained constant, the production of Iso Octonol should have been more. The Assessing Officer, therefore, came to the conclusion that to the extent there is excess consumption, which led him to presume that the appellant has sold the said goods outside the books of account and, accordingly, made the addition of Rs. 96,43,855. On similar observations, the Assessing Officer also made the addition of Rs. 86,87,381 on account of excess consumption of nickel based and copper based catalysts. However, for working out the excess consumption of the catalysts, the Assessing Officer has taken the basis of the consumption figures for the assessment year 1993-94 and has ignored the figures of consumption for the assessment years 1994-95 and 1995-96 being immediately preceding two years. The appellant''s counsel primarily relied upon the submissions made for the earlier two years for similar additions. The appellant further supplemented the arguments which can be summarized as under:

(i) For working out the excess consumption of raw materials, the Assessing Officer has ignored the job work carried out. The appellant''s counsel submitted that if the same is taken into consideration, the consumption figures would become substantially comparable. The excess consumption would be less than 1.4 per cent of the total consumption of material which is normal in these type of industries and should be ignored.

(ii) The Assessing Officer has failed to point out any reasons for rejection of the books of account before going for estimation of the income. It was pointed out that detailed books of account including quantitative details thereof have been maintained by the appellant, and, therefore, there is no reasons for rejection of the same.

(iii) There is increase in the rate of gross profit as compared to earlier years including the assessment year 1993-94 with which the production figures have been compared. The appellant submitted that the rate of gross profit was 40.93 per cent for the assessment year 1993-94 which had gone up to 41.59 per cent in the assessment year 1995-96 and had further risen to 47.21 per cent in the year under consideration. This factor was totally ignored by the Assessing Officer.

I have gone through the submissions made in this behalf. I find that the issue is clearly covered by my detailed order for the assessment years 1994-95 and 1995-96 wherein it has been held by me, inter alia, that there is no justification for rejection of books and consequent addition. Following the said decisions and for the detailed reasons given in the orders for those two years and also the additional reasons given above, both the additions made as accounts of excess consumption of raw material heptene and excess consumption of catalysts are deleted.''

Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue is now in appeal before us.

Before us, the learned Departmental representative relied on the order of the Assessing Officer whereas, on the other hand, the learned authorised representative submitted that the Assessing Officer has not rejected the book results nor found any defect in the books. He further submitted that the assessee has maintained complete quantity records as per the central excise laws and no defect was found therein. He further submitted that gross profit rate was better compared to earlier years. He thus supported the order of the Commissioner of Income-tax (Appeals).

We have heard the rival submissions and perused the material on record. It is seen that while deleting the addition, the Commissioner of Income-tax (Appeals) has held that the facts in the present group are identical to that the assessment year 1995-96 and he relying on his orders for the assessment years 1994-95 and 1995-96 deleted the addition. Before us, the assessee has submitted that it has maintained compete quantity records as per the central excise laws and no defect has been found therein. Before us, the Revenue could not controvert the findings of the Commissioner of Income-tax (Appeals) or the submissions made by the assessee by bringing any tangible material on record. We, therefore, do not feel necessary to interfere with the order of the Commissioner of Income-tax (Appeals). Thus, this ground of Revenue is dismissed."

From the above discussion of the Tribunal, it clearly emerges that the assessee had given reasons for excess consumption of heptene and catalysts. The change in the manufacturing process was also demonstrated. Such grounds were also placed before the Tribunal in the earlier years in which the assessee''s stand was accepted. We have also perused the orders of the Tribunal made in the earlier assessment years, i.e., the assessment years 1994-95 and 1995-96 where such a question cropped up. Apparently, the Revenue has not carried the decision of the Tribunal in further appeal. In view of such facts and in view of issue being predominantly based on appreciation of facts on record, we do not find any question of law arising.

Question No. (4) pertains to the agreement of lease and buy back entered into by the assessee with the Rajasthan State Electricity Board. Learned counsel for the Revenue vehemently contended that the machinery was purchased and leased back on the same day without actual payment. He, therefore, desire to distinguish the judgment of this court in the case of Commissioner of Income Tax Vs. Gujarat Gas Co. Ltd., .

We, however, notice that by the impugned judgment, the Tribunal has merely remanded the issue back to the Assessing Officer for reconsideration, after full opportunity to the assessee. The Tribunal has observed as under:

"25. We have heard the rival submissions and perused the material on record. It is seen that the Assessing Officer has treated the entire transaction to be devise use to reduce the incidence of tax. However, he has not brought anything on record with respect to the treatment given by the assessee to the income received and on the disputed lease transactions. We, therefore, feel that the issue needs to be examined in all respect in the light of the decision of Commissioner of Income Tax Vs. Gujarat Gas Co. Ltd., . We accordingly set aside the issue to the file of the Assessing Officer for him to decide the issue de novo after a giving an adequate opportunity of hearing to the assessee. Thus, both these grounds of the Revenue is allowed for statistical purposes."

In view of mere remand by the Tribunal, we do not see any reason to interfere. The Tribunal of course referred to the decision in the case of Gujarat Gas Ltd. (supra). Needless, however, to state that the Assessing Officer would consider the entire case law, as may be presented before him and applicable to the facts on hand.

This brings us to the sole surviving question No. 1. We admit the following substantial question for our consideration:

"(1) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was correct in upholding the decision of the Commissioner of Income-tax (Appeals), which was perverse on fact in so far as his finding that the assessee had furnished required information before the Assessing Officer was not supporting facts on record as held by Assessing Officer in assessment order?"

We take up this question for hearing with the consent of learned advocates for the parties.

In the return filed, the assessee had claimed a sum of Rs. 10,11,025 by way of foreign travelling expenses of the directors and employees. The Assessing Officer disallowed such claim in the following manner :

"2. The first ground of appeal relates to the disallowance of travelling expenses amounting to Rs. 10,11,025. The Assessing Officer has disallowed the claim for travelling expenses on the ground that the details called for were not furnished. During the course of hearing the learned counsel for the appellant brought to my notice that all the relevant details were furnished to the Assessing Officer during the course of assessment proceedings. The appellant also produced before me the copies of the details which were furnished before the Assessing Officer. In the appellant''s own case for the assessment years 1994-95 and 1995-96, on identical facts the issue was decided in favour of the assessee and the entire addition was deleted by me. Following the same, I delete the addition of Rs. 10,11,025 made in the year under consideration."

In further appeal, the Tribunal dismissed the Revenue''s appeal in the following manner:

"6. We have heard the rival submissions and perused the material on record. It is seen that the Assessing Officer had disallowed the expenses for the reason that the assessee had not furnished the details. The Commissioner of Income-tax (Appeals), while deleting the addition, has noted that the details were indeed furnished by the assessee before the Assessing Officer. He further noted that the facts of the case in the year under appeal are identical to that of the assessment years 1994-95 and 1995-96 and following his own order in the aforesaid years, he deleted the addition. Before us, the Revenue could not controvert the findings of the Commissioner of Income-tax (Appeals) by bringing any tangible material on record. We, therefore, do not feel necessary to interfere with the order of the Commissioner of Income-tax (Appeals). Thus, this ground of the Revenue is dismissed."

From the orders on record, it clearly emerges that the Assessing Officer disallowed the claim on the premise that the assessee failed to establish that the expenditure was incurred for the purpose of business. On the other hand, the Commissioner of Income-tax (Appeals) and the Tribunal, merely referring to their earlier orders in the case of this very assessee, allowed the claim. In our view, the Commissioner of Income-tax (Appeals) as well as the Tribunal committed an error in allowing the expenditure without its full verification. Surely, the foreign travelling expenses, if incurred for the purpose of business, would be allowable as the business expenditure. However, the assessee has to establish that the travelling was undertaken for the purpose of business, and, therefore, the expenditure was "business expenditure". Merely because on the basis of the material for the earlier years, the Commissioner (Appeals) and the Tribunal allowed such expenditure would not by itself mean that in the later years also, any expenditure under the same head must be automatically allowed. The assessee owed a duty to establish the basic facts to demonstrate, particularly when called upon by the Assessing Officer that the expenditure was in fact incurred for the purpose of business.

In our opinion, the Commissioner of Income-tax (Appeals) and the Tribunal mechanically allowed the expenditure referring to their earlier decision in the case of the assessee. The issue must be examined on year-to-year basis on the basis of evidence on record.

In the result, the question is answered in favour of the Revenue. The decision of the Commissioner of Income-tax (Appeals) and the Tribunal stands reversed to that extent and that of the Assessing Officer is restored. The tax appeal stands disposed of in the above terms.