Gujarat Ambuja Protiens Ltd. vs Assistant Commissioner of Income Tax

Akil Kureshi, J.—The assessee is in appeal against the judgment of the Income Tax Appellate Tribunal (""the Tribunal for short) dated

25.1.2012. For the assessment year 1992-1993, the following questions have been presented for our consideration:

(i) Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in reversing the order passed by the

CIT(A) and thereby confirming disallowance of rent of Rs. 72,48,000/- paid to M/s. Coastal Roadway as revenue expenditure?

(ii) Whether in the facts and circumstances of the case the order passed by the ITAT was not illegal and perverse inasmuch as:

(a) it has not considered the reasons which weighed with the CIT(A) while allowing the appeal;

(b) it does not consider the evidences led by the appellant in support of its claim; and

(c) it is contrary to facts on record?

Only one issue is involved in this appeal namely, that of disallowing of rent amount of Rs. 72.48 lakhs allegedly expended by the assessee for the

purpose of hiring godown from one M/s. Coastal Roadways Ltd. Assessee is in the business of manufacturing and also exporting certain items

including Soya Deoiled cake. Case of the assessee was that the assessee had received contracts for exporting a total of 7500 metric tonnes of

such product for which the assessee required to procure and store soybean before the same was processed and deoil cake was prepared. For

such purpose the assessee entered into an agreement with said M/s. Coastal Roadways Ltd. on 13.9.1991. As per such agreement M/s. Coastal

Roadways Ltd. agreed to provide a total of 3,25,000 sq. ft. of godown space at Ahmedabad, Junagadh, Jamnagar and Gandhidham for a period

of six months between 1.9.1991 to 31.3.1993. The assessee agreed to pay service charge at the rate of Rs. 4 per sq. ft. per month. Assessee for

the said period paid a sum of Rs. 72.48 lakhs as per the bills raised by M/s. Coastal Roadways Pvt. Ltd. and claimed such payment as revenue

expenditure. The claim was however, rejected by the Assessing Officer on various grounds. The Assessing Officer questioned the very

expenditure. He examined various factors emerging from the record and disallowed the claim on following grounds:

i. Coastal Roadways Ltd., was neither the owner nor in position of these godowns, when the agreement was made or at any time thereafter.

ii. The assessee has neither seen nor taken possession of these godowns at any point of time.

iii. The assessee did not write nor gave any advertisement in the paper for hiring of godown but instead only after on telephonic talk by one of its

employees with the Regional Manager of Coastal Roadways Ltd. (CRL) entered into agreement in a hurry.

iv. One of the agreement has been prepared on stamp paper purchased by sister concerns of the assessee Gujarat Ambuja Vita Pharma. The

stamp paper were not even purchased for the purpose of this agreement.

v. Mr. Parikh, Regional Manager of CRL had not seen the Director of the assessee company Mr. Manish Gupta who has signed this agreement.

From the statement of Mr. Parikh, it is seen that he has signed one of the agreement in Bombay whereas in the agreement, the place mentioned is

Ahmedabad.

vi. The CRL was never in the business of hiring/letting of godowns in the past but is engaged only in the business of transportation. Thus the

agreement is made with party not doing the regular business of hiring of godowns.

vii. It is a normal business practice that the bills/invoices are prepared and checked by the employees of the company and then signed by the

executive/officer of the concern. In the present case all the bills for the godown rent are signed by Mr. Parikh, the Regional Manager of CRL who

has signed the agreement. There are no signature by the person who prepared and checked these bills.

viii. There are no services rendered whatsoever in pursuance of these agreement and no such evidence was found even in the file found and

stamped during the course of survey in the office of the assessee company.

ix. All the vouchers prepared by the one and the same person in which the narration of the voucher in the godown rent account. There is no

mention about other services being rendered. In some of the bills prepared by the CRL the year mentioned is 1993 which has been subsequently

corrected as 1991.

x. Though the assessee was required to make the payment in April, 1993 i.e. after a period of six months, the CRL no such payments were made.

Supportingly, the CRL also did not write any letter till No. 93. The return of income was also filed by Nov''93, though the return was due in

December''92. The first payment for the godown rent was made by cheque only in September''93.

xi. Though the assessee had tried to show that in anticipate of export/business in Soya bin DOC it wanted to hire this godowns but the fact remains

for the contract of export of only about 7,500 metric tonnes but assessee hired godowns at 4 different places in Gujarat admeasuring 3,25,000 sq.

ft. though a payment of rent of about 72 lacs for six months alone and surprisingly he never executed the export orders.

xii. The assessee''s sister concerns already has godowns admeasuring 25000 sq. ft. some of which were not even utilized. The godown charges

paid by the assessee for the past years and the subsequent years and show that expenditure on amount is very nominal say below Rs. 10,000/-.

In view of the above discussion, the entire transactions of hiring of godowns etc., is treated as afterthought and the expenditure has to be

disallowed. Even otherwise no services have been rendered and expenditure shown is totally out of proportion and therefore in view of the High

Court decision discussed and cited above, the expenditure cannot be allowed u/s. 37 of the I.T. Act, and accordingly the same is disallowed.

Assessee carried the matter in appeal. CIT(Appeals) reversed the decision of Assessing Officer. Several factors recorded by the Assessing

Officer and noted above were viewed differently. CIT(Appeals) was of the view that expenditure was actually made during the course of business

and was therefore, allowable.

Revenue carried the matter in appeal. The Tribunal reversed the decision of the CIT(Appeals) and restored the order of Assessing Officer

making following observations:

We have heard the rival contentions on this issue. The Ld. A.R. carried us through the agreements and various documents in support of the said

claim. He submitted that, as per the agreement entered with M/s. CRL, the said company is required to provide the Godown space as and when

required. Hence, the assessee did not bother about verifying the availability of Godown space with the said company. He submitted that the

requirement of Godown space is proved by the export orders received by the assessee. Since the exports could not materialize, the assessee was

not able to use the Godown space that was agreed to be provided by M/s. Coastal Roadways Ltd. He further submitted that the necessity of

incurring expenditure cannot be questioned by the Income tax authorities as they are required to see only whether an expenditure is incurred

Wholly and Exclusively"" for the purpose of business. In this regard, he relied upon the decision of Hon''ble Apex Court in the case of S.A.

Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, and another decision reported in M.A. Mammoo (Decd.)

Vs. Deputy Commissioner of Agricultural Income Tax and Sales Tax, . He further submitted that the Ld CIT(A) has relied upon the decision

rendered in the case of United Agency of India (P) Ltd. v. CIT reported in 108 CTR 390 to grant relief and the said decision squarely applies to

the facts of the instant case. On the other hand the Ld DR strongly relied upon the assessment order and the written submissions filed by the

Department.

We have heard the rival contentions and carefully perused the record. On a careful consideration of the arguments of the counsel and the

record, we are of the view that the dispute is with regard to the genuineness of the impugned expenditure claim and not about the ""necessity of

incurring the impugned expenditure. As per the main finding of the A.O. on the impugned issue, which are extracted in para 2 supra, M/s. Coastal

Roadways Ltd was neither the owner nor in possession of the godowns, which he has offered to provide to the assessee. We are unable to

understand how a person could offer any thing, which he does not possess at all. We are also doubtful, whether a prudent businessman would

enter into an agreement for a non-existent Godown and also agree to make payment of Rs. 72.48 lakhs as Godown rent to a person, who does

not have the required infrastructure facility. The Ld. A.R. has relied upon various documents in support of the said claim of expenditure. In our

view, those documents are self serving and much reliance could not be placed upon them. The assessee placed reliance on the copies of export

orders to substantiate the requirement of Godown space. However, on a careful perusal of the copies of export orders, we notice that the exports

are required to be completed between 15th January and 15th February. However, the assessee has accounted for rent for the period from

September, 1991 to March 1992. Under these facts, the question that would arise is whether any business man would pay the rent for the month

of March, when there is no requirement of Godown space at all. The necessity of Godown space arises only when the product is procured. The

assessee has not brought in any material to show the procurement plans, the places from where the products shall be procured, the storage period,

volume to be procured at a time, the quantity to be shipped at a time etc. In our view, a prudent business man would have analysed these kind of

details before determining the requirement of Godown space. Unfortunately, the assessee has failed to bring these documents on record to

substantiate the genuineness of the claim. More particularly, the observation of the Assessing Officer that M/s. Coastal Roadways Ltd. did not

have Godown space has not been disputed and the said fact places doubt of shadow on the impugned expenditure claim. The Ld A.R. placed

heavy reliance on the decision in the case of United Agency of India (P) Ltd., supra. However, in our view, the said decision is not applicable to

facts of the instant case for the reason that, in the case of United Agency of India (P) Ltd., the assessee therein took on hire two motor vessels and

also took possession thereof, where as in the instant case, the assessee has not taken possession of any Godown and further the hirer did not have

possession of any such godown. In view of the above discussions, we are of the view that the assessee has failed to establish the genuineness of

the impugned expenditure and we are in agreement with the view of the Assessing Officer in this regard. Accordingly, we set aside the order of Ld

CIT(A) on this issue.

Learned senior counsel Shri S.N. Soparkar for the appellant vehemently contended that the Tribunal committed a grave error in going into the

question of advisability or prudence for booking the godown space and making payments for the same even though the export orders did not

materialise. He submitted that there was voluminous evidence before the Assessing Officer to show that the assessee actually had certain export

obligations. However, on account of high cost of raw materials, same could not be executed. Arbitration proceedings have commenced for failure

on part of the assessee to complete the export obligations. CIT(Appeals) had correctly examined and appreciated the evidence on record. The

Assessing Officer as well as the Tribunal both put undue importance on payment being made without availing the facility of storage. Counsel

submitted that export turnover was likely to touch Rs. 20 crore. Expenditure incurred was thus reasonable and genuineness thereof was established

through documents on record.

From the record however, we notice that the agreement between the assessee and M/s. Coastal Roadways Ltd. recorded that M/s. Coastal

Roadways Ltd. claimed to be the owner/hirer of certain godowns or warehouses at Ahmedabad Junagadh, Jamnagar and Gandhidham.

Agreement also recorded that the list of such godowns/warehouses is attached as Schedule-A showing the area of the said warehouses and exact

location. Admittedly, however, the agreement dated 13.9.1991 did not contain any such schedule. It has also come on record that M/s. Coastal

Roadways Ltd. did not own or possess any godown at any of the above-mentioned places.

Thus a very important claim made by M/s. Coastal Roadways Ltd. was proved to be completely false. The authorities particularly, the

Assessing Officer and the Tribunal found it difficult to believe that the assessee did not verify whether service provider had in fact any godown in

his possession as owner or hirer. Further one Mr. M.L. Pareek, Regional Manager of M/s. Coastal Roadways Ltd. in his statement before the

Assessing Officer stated that company had never rented any godown to any party since last five years. In the said statement he further stated that

the company did not own or possess any godowns at the four above-named locations. He in fact went on to add that during the period between

1.9.1991 to 31.3.1992, the company had also not hired godowns of anyone else.

It is true that as per the agreement dated 13.9.1991, the assessee company was obliged to make payment for godown space which the

assessee committed to hire from M/s. Coastal Roadways Ltd. irrespective of whether such godowns utilised by the assessee or not. However, it is

a matter of considerable importance that M/s. Coastal Roadways Ltd. never owned or possessed such godowns though so falsely claimed in the

agreement dated 13.9.1991. More importantly during the entire period between 1.9.1991 to 31.3.1992, M/s. Coastal Roadways Ltd. had not

even hired the godown from any other source. Meaning thereby during the entire period of agreement, M/s. Coastal Roadways Ltd. made no

arrangement whatsoever for making even storage space available. Surely M/s. Coastal Roadways Ltd. could not have foreseen that the assessee

company would not require such storage space because of the company running into some kind of financial difficulty in executing its export

obligations. M/s. Coastal Roadways Ltd. made a false representation in the agreement to the assessee of owning or possessing godowns at four

different locations for which it went on charging the assessee company full rent for the entire period of six months totalling to Rs. 72.48 lakhs

without even having acquired such space for a single day during the entire period of six months. We wonder what would have been the position of

M/s. Coastal Roadways Ltd. if suddenly the assessee had landed up with its goods which it required to store at any of the four locations for which

month after month the assessee was making periodical payments without using the storage space.

In our view the Assessing Officer as well as the Tribunal viewed the entire expenditure not from the angle of prudence but from the question of

genuineness thereof. It is true that such genuineness was examined on the basis of normal conduct of a business man and in such context the

Tribunal did make some observations with respect to what in the opinion of the Tribunal a prudent business man would do. However, such

observations cannot be seen in isolation losing the background in which same was made. Surely, the Tribunal never questioned the prudence of

expenditure but the very genuineness thereof.

Tribunal also noted that assessee was to execute its export contracts latest by 15.2.1992. Assessee however, rented the godown for more than

a full month thereafter till 31.3.1993. The observations and conclusions of the Tribunal being purely factual in nature and also otherwise supported

by documents and other evidence on record, we do not see any reason to interfere. No question of law arises. Tax Appeal is therefore, dismissed.