Judgment:
1. These three appeals have been filed by the assessee against the orders passed by the CIT(A) relevant to asst. yr. 1986-87, 1987-88 and 1988-89. Since common issues are involved in these three appeals, we, therefore, proceed to dispose of these appeals by way of a common consolidated order for the sake of convenience.
2. The first ground relates to the disallowance of Rs. 2,26,000 paid to M/s N.B.E. Food Systems (P) Ltd. (hereinafter referred to as "NBEFS").
The AO while framing the assessment under s. 143(3) observed that the assessee had made payment of Rs. 2,26,000 to NBEFS in which Shri B. M.Lal, the husband of the assessee was the managing director. The AO called upon the assessee to explain the nature of the payment made to the said company. It was explained that these payments were in respect of design and assembly of the plant supplied to M/s Chand Fabricators (P) Ltd. (hereinafter referred to as "CFPL"). It was contended that the assessee had not undertaken the manufacture of such a big plant of 50,000 bread capacity earlier and it was involved in the machines of smaller capacity ranging from 8,000 loaves per day to 25,000 loaves per day. It was further contended that the proprietor of the firm being a non-technical person, it was absolutely essential that these big equipments must be designed as well as fabricated for the first time by an expert and these drawings should then confirm the basis for making big plants in future. Keeping in view the interests of the business, the work was assigned to M/s NBEFS and it is in this connection that the payment was made to the said concern. The AO disallowed the assessee's claim by observing that the assessee had supplied ovens to two other parties at higher prices prior to making the sales to M/s CFPL. It was thus concluded by the AO that the description of ovens supplied to M/s CFPL was identical with those supplied to other parties before making sale to the CFPL with minor deviations here and there.
Before the first appellate authority, it was contended on behalf of the assessee that the firm had never before manufactured or supplied this type of first proffer and it was for the first time that it got developed the same for M/s CFPL having higher capacity with swing tray design and controlled through chains. It was contended that the firm had earlier supplied only the rotating table for first proffer requiring manual labour for feeding and unloading dough pieces and were of a simple rotating table design. It was further contended that the assessee got such type of machine designed for the first time enabling it to supply the same to M/s CFPL only because of the qualification and knowledge of the engineers of M/s NBEFS. It was further pointed out that the supply by the assessee for and up to the relevant previous year except to M/s CFPL were on smaller capacity up to 24,000 loaves.
Considering the submissions of the assessee, the learned CIT(A), held that the payment to M/s NBEFS was unwarranted and was not related to the business of the assessee and accordingly confirmed the action of AO in this regard. Before us, the learned counsel for the assessee reiterated the submissions as advanced before the first appellate authority. It was contended by him that in the asst. yr. 1985-86, the assessee had made payments of similar nature to Shri B. M. Lal in his individual capacity which also the AO disallowed under s. 40A(2). It was pointed out that the Tribunal in ITA Nos. 5650 and 5651/D/1998 had deleted the said addition. It was on this basis that the learned counsel contended that the payments made to M/s NBEFC be allowed as deduction because Shri B. M. Lal, who earlier received the payment in his individual capacity had, during the year under consideration, floated a private limited company rendering technical services to which the payment was made by the assessee. On the other hand, the learned Departmental Representative relied on the order passed by the AO. It was further pointed out that the assessee had not furnished any evidence for rendering of services by M/s NBEFS before the AO. It was thus concluded by the learned Departmental Representative that both the Revenue authorities had rightly disallowed the amount in question under s. 40A(2)(b).
3. We have considered the rival submissions in the light of material placed before us and precedent relied upon. It is obvious that the assessee made payment of Rs. 2,26,000 in the year under consideration to M/s NBEFC in consideration of designing machines of higher capacity which were to be supplied to M/s CFPL. There is no dispute that the payment was made to a private limited company which had on its Board Shri B. M. Lal as the M.D. of the company, who is husband of the proprietor of this concern. Simply because the amount was paid to a concern in which the assessee had interest, it did not mean that any payment made to the said concern is excessive or unreasonable and falls within the ambit of 40A(2). The Tribunal in asst. yr. 1985-86 has accepted the qualifications of Shri Lal and allowed the assessee's claim in that regard. Respectfully following the precedent, we are of the considered view that the assessee deserves to succeed on this ground.
4. Next ground relates to disallowance made by the AO under s. 40A(3) of a sum of Rs. 1,28,601. The AO during the course of assessment proceedings noted that the assessee had made payments to M/s Bombay Poona Rodways (Regd.) on different dates totalling to Rs. 43,600 in cash towards freight which were in excess of Rs. 2,500. In the like manner seven payments were found by the AO to have been made in contravention of s. 40A(3). The AO claimed upon the assessee to furnish explanation in this regard. It was contended that the payments totalling Rs. 43,600 were paid to transporters in cash as it was the prevalent practice of the transporters to receive payment in cash, who came along with the trucks. It was further submitted that the transporters insisted in making payments in cash. As regards other payments, it was explained that these were in the nature of payments towards repairs and maintenance and purchases. The AO made the addition under s. 40A(3) which action was also confirmed by the CIT(A).
5. Before us, the learned counsel for the assessee contended that the transporters insisted on making payments in cash. It was further pointed out that if the assessee had not made these payments in cash, they must have taken the goods back. It was under this compulsion that the assessee had to make payments in cash. In the like manner, the learned counsel pointed out that all the parties to whom payments on account of repair, maintenance and purchases were made, insisted on making the payment in cash. On the other hand, the learned Departmental Representative contended that the payment on account of purchase of goods was covered within the ambit of s. 40A(3) in view of the judgment of the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh vs. ITO. It was further pointed out by the learned Departmental Representative that assessee had not produced any evidence or confirmation from the concerned parties in regard to its claim for compelling the assessee to make the payments in cash.
6. Having heard both the sides on this issue, we are of the view that the assessee deserves to succeed insofar as payment totalling to Rs. 43,600 made to M/s Bombay Poona Roadways (Regd.) on account of freight for the reason that it is a general practice with the transporters that the drivers who bring the goods to the destination do not accept the payments otherwise than in cash. As regards other payments disallowed by the AO we are of the view that the same were rightly added because the assessee had not furnished any confirmation from these parties. The Hon'ble Punjab & Haryana High Court in the case of Agarwal Steel Traders vs. CIT (2000) 159 ITR (P&H) 13 has confirmed the disallowance where the case was covered under s. cl. (j) of r. 6DD but confirmation from parties were not filed. Respectfully following the precedent, we allow partial relief to the assessee on this ground to the extent of Rs. 43,600 only.
7. The next ground relates to the alleged profit on sale of machines.
The AO estimated the profit on sale of machinery at Rs. 20,000, which according to him must have been sold at such a profit as against the profit of Re. 1 shown by the assessee on its sale. The learned CIT(A) confirmed the order of AO for the reason that the assessee had failed to furnish the details of machinery for which the investment allowance amounting to Rs. 17,300 had been transferred to P&L a/c or the sale of the price of the machinery sold. Before us, the learned counsel for the assessee contended that the assessee was not asked to furnish the details in respect of machinery sold. It was further submitted that the addition has been made by the AO on estimate basis, without considering the relevant material on record. On the other had, the learned Departmental Representative supported the order of the CIT(A) on this issue.
8. Having heard the rival submissions in the light of material placed before us, we are of the considered view that this issue needs fresh investigation by the AO. Under these circumstances, we set aside the impugned order on this issue and restore the matter back to the file of AO for making appropriate enquiry in this regard by affording reasonable opportunity to the assessee to furnish her case.
9. The next ground relates to disallowance of Rs. 69,000 claimed as deduction being the payment made to Shri B. M. Lal on account of consultation. The learned CIT(A) disposed this issue by observing that these payments are already covered in the discussion for ground No. 1 above, relating to disallowance of Rs. 2,26,000 and accordingly no action was taken on this ground. The learned counsel for the assessee contended that the finding of the first appellate authority with the disallowance of Rs. 69,000 was part of Rs. 2,26,000 was factually incorrect On the other hand, the learned Departmental Representative supported the order of the AO. Under these circumstances, we are of the considered view that the learned CIT(A) has not disposed of this ground taken by the assessee under a misconception. We, therefore, set aside the impugned order and restore this issue to the file of CIT(A) for deciding the matter afresh after giving reasonable opportunity of being heard to the assessee.
10. The last ground raised in this appeal is the grievance of the assessee that the learned CIT(A) had not adjudicated upon ground Nos.
4, 5, 8 and 10 of the memo of appeal. We restore the matter to the file of the CIT(A) for deciding these grounds afresh, in accordance with law, after giving opportunity of being heard to the assessee.
12. The first ground relates to disallowance of Rs. 38,000 out of Rs. 76,000 claimed by the assessee out of final setting and commission charged. At the outset, the learned Departmental Representative invited our attention to the order passed by the Tribunal in ITA No.7007/D/1991 on 31st January, 2000, wherein the Revenue had filed appeal against the allowance of Rs. 38,000 by the learned CIT(A). From the order of the Tribunal, it is clear that the action of CIT(A) was accepted and the appeal of the Revenue was dismissed.
13. As this ground relates to the same issue which has been decided by the Tribunal. Respectfully following the precedent, we are of the view that the CIT(A) rightly disallowed Rs. 38,000 and no further relief to the assessee, as claimed in this regard is admissible.
(2) "That the learned CIT(A) has erred in failing to adjudicate upon the following ground of appeal raised before him in the memos of the appeal (ground No. 3).
The learned Dy. CIT(A) has erred in adopting a lower rate of depreciation @ 5 per cent on factory building against the rate @ 10 per cent prescribed under the IT Act, 1961 for the relevant assessment year. He has further erred in adopting a lower capitalised value on factory building than shown in the balance sheet., and P&L a/c. Therefore, further reducing the amount of depreciation eligible to the assessee. He has further erred in restricting the depreciation to 40 per cent of the eligible amount to the assessee against the facts of the case and law on the subject." 14. From the order of the CIT(A) at p. 4, it is obvious that he has not adjudicated upon the grounds raised before him, rather the same has been set aside to the AO with a direction to verify whether the rate of depreciation is 5 per cent or 10 per cent.
15. Since the grievance of the assessee is not coming out of the order of the CIT(A), wherein this issue has been set aside, we dismiss this ground as defective.
16. Similarly, the assessee has raised ground No. 3 against the order of CIT(A) challenging the sustenance of interest charged under s. 216 of the Act, after giving partial benefit in the appeal. The learned Departmental Representative pointed out that here also the CIT(A) has directed the AO to recompute the interest chargeable under s. 216 on reduced income. We are of the considered view that this ground as raised by the assessee also does not arise out of the order of the learned CIT(A) and the same is accordingly dismissed.
18. The first ground again relates to the disallowance of 50 per cent to final setting and commission charges paid by the assessee. The learned Departmental Representative point out that the Tribunal in ITA No. 1681/D/1992, in a cross appeal filed by the Revenue had confirmed the action of the learned CIT(A) in this regard. Under these circumstances, we dismiss the ground following our order on this issue for asst. yr. 1987-88 above.
19. Ground No. 2 relates to labour charges paid by the assessee to M/s NBEFS for erecting, commissioning plant of 50,000 loaves, supplied by the assessee. This issue has been decided by us in appeal for asst. yr.
1986-87 in preceding paragraphs, wherein the payments made to M/s NBEFS in the identical circumstances were allowed as deduction. Following the same, we allow this ground of appeal.
20. The next ground relates to trading addition amounting to Rs. 54,043 made by the AO. The learned CIT(A) set aside the issue to the file of AO for considering the facts of the case in this regard, after giving opportunity to the assessee of being heard. The assessee is aggrieved against the setting aside of the issue to the AO. The learned counsel for the assessee contended that the CIT(A) erred in setting aside the matter instead of deleting the same. On the other hand, the learned Departmental Representative contended that no harm was caused to the assessee by setting aside this issue to the AO.21. Having heard the rival submissions on this issue, we are of the considered view that the order of the learned CIT(A) on this issue does not call for any interference. The assessee is free to make submissions before the AO in the second round of the disposal of the matter.
22. Ground No. 4 relates to depreciation of building, which issue the learned CIT(A) has set aside to the AO we are of the view that the learned CIT(A) has not disallowed the assessee's claim. Instead he has restored the matter to the file of AO for making appropriate investigation and allowing the assessee's claim accordingly. Under these circumstances, we uphold the order of the CIT(A) on this issue.
"The learned CIT(A) has erred in sustaining the interest charged under s. 216 on income after giving partial reliefs in the appeal.
That the disallowance made and sustained on the aforesaid grounds deserve to be allowed in computing the income of the assessee.
It is therefore, prayed that the income returned by the assessee be accepted and the various addition or disallowance made by the learned Dy. CIT (Asst.) and sustained in appeal filed before CIT(A) deserve to be deleted." 23. The learned counsel contended that the CIT(A) has erred in sustaining the interest charged under s. 216 of income, after giving partial reliefs in the appeal.
24. From the order of the CIT(A), p. 4 para 15, it is obvious that he has directed the AO to charge interest on the reduced income according to his order. In view of this clear position, this ground taken by the assessee being defective, is dismissed.