CASE STORIES
I-T - Major relief for DPS; Transport facility provided by schools to their students only, are incidental to educational activity, and hence exempted: ITAT
I-T - Stock discrepancy in books of account can lead to subsequent addition based on Gross Profit: HC
I-T - Compensation paid to retrenched workers upon closure of one manufacturing unit is an allowable business expenditure u/s 37: ITAT
CASE LAWS
2018-TIOL-953-HC-AHM-IT + Case Story
VARDAN PETROCHEMICALS PVT LTD Vs ACIT :
GUJARAT HIGH COURT (Dated: April 30, 2018)
Income Tax - Evaporational loss - Gross Profit addition - Reason for reopening & Stock discrepancy.
The assessee company, engaged in manufacturing chemicals, had returned loss for the relevant AY. This return was accepted without scrutiny. Subsequently, the AO noted that there was discrepancy in the stock between the assessee's books of accounts and stock statement given to the bank. The assessee tried to explain that the said discrepancy was on account of the stock in transit. However, issued the reopening notice. During the reassessment proceeding, the AO rejected the assessee's books of accounts. Further, it was also recorded that the assessee had declared excessive loss as compared to the normal range of evaporation reported in the trade. The AO adjusted the assessee's Gross Profit rate by making an addition of Rs.38.93 lakhs but, no separate addition was made on account of excessive loss reported by the assessee. While concluding the proceeding, a sum of Rs. 35.67 was added as assessee's undisclosed income. When the matter reached before the Tribunal, the assessee submitted that the AO failed to make addition on the reasons cited for issuing the reopening notice. However, this submission was not accepted by the Tribunal. The Tribunal held that the AO had not made any separate addition on the reasons recorded in light of the general addition of Rs.31.98 lakhs made under the revised Gross Profit ratio.
On appeal, the High Court held that,
Whether stock discrepancy in books of account can be resulted into subsequent addition based on Gross Profit - YES: HC
Whether therefore, reassessment initiated by the AO is justified since, such discrepancies resulted into decrease in Gross Profit - YES: HC
++ the prime contention of the assessee before us was based on the ratio of the judgment of this Court in Mohmed Juned Dadani's case. This Court, in the said judgment, has held that in the reassessment proceedings, if the AO makes no addition on the reasons recorded by him for reopening the assessment, he, thereafter, cannot make additions on other grounds. In the present case, the reason for reopening the assessment was described in the stock reported by the assessee in its books of account, as compared to the stock reported to the bank. The assessee's contention before the AO was that this discrepancy was on account of transit of stock. Contrary to what was canvassed before us, we do not find that the AO has accepted such explanation of the assessee. He merely recorded it and thereafter, examined the materials on record;
++ two things emerge from such exercise; firstly, he did not accept the assessee's declared evaporational loss of raw materials and secondly, he noticed that the assessee was unable to produce the books of accounts on the ground that the Sales Tax Department had impounded them. He, therefore, proceeded to frame the best judgment assessment. He was of the opinion that the Gross Profit shown by the assessee was low. He made adjustments by citing reasons, which resulted into the additions being made. No where can we see that the AO has accepted the assessee's contention that the stock discrepancies stood explained. The AO noted that in view of the Gross Profit addition, the evaporational loss has not been separately added. The Gross Profit addition, being global in nature, would also include the stock discrepancy. No where do we find that the AO dropped his prime objection to the stock discrepancy cited as a reason for reopening the assessment.
Assessee's appeal dismissed
2018-TIOL-741-ITAT-DEL + Case Story
DELHI PUBLIC SCHOOL Vs ACIT: DELHI ITAT (Dated: May 8, 2018)
Income Tax - Sections 2(15) & 11(4A).
Keywords - Commercial activity - Educational services - General public utility - Transport facility fees.
The assessee under present case is running a private school. Apart from the tution fees and other administrative expenses, the assessee used to charge separate fees from its students for providing transport facility to them. During the course of its scrutiny assessment, the AO disallowed a sum of Rs.1,73,20,960/- in relation to the activity of assessee running the school buses, on the premises that the said activity amounts to business in view of the proviso to Section 2(15), and as such the assessee was not entitled for exemption u/s 11(4A). To reach this conclusion, he noted that surpluses generated from running of transport business was not reduced from the fee of the next year.
On appeal, the CIT(A) found that the fee charged from the students was on commercial basis and not on charitable basis, as such the assessee was engaged in commercial activity and could not be termed as education as covered u/s 2(15). The CIT(A) further observed that transport running for the children of school was not an advancement of general public utility and the assessee was not charging as per market rate but had charged more from the students which shows the commercial motive of the assessee. Thus, as per the CIT(A), the AO had correctly denied exemption u/s 11(4A) of the act.
On appeal, the ITAT held that,
Whether collection of fees by a school from the students for their transport facility, will not render it a commercial organization, and hence entitled for exemption u/s 11(4A) - YES: ITAT
++ the AO has recorded that the assessee society has charged Rs.3,00,42,296/- towards transport fee which is included in the income and expenditure account and corresponding expenses was debited to Rs.3,09,33,029/- for providing transport facility to students. There is no dispute that the assessee has been running 37 school buses and the AO has allowed the salary of 7 drivers. The contention of the assessee that 37 buses cannot be run by 7 drivers, goes uncontradicted. Further, the AO did not bring on record as to the use of the vehicles for any other purpose than the conveyance of the children and further its repair and periodical maintenance. It is not the case of Revenue also that the assessee has been deriving any income from the use of these vehicles other than collecting the fees from the students for their transport facility. It is, therefore, clear that the material on record suggests that all the buses are being used only for providing facility to the students and staff that also only for transport to and from the school to the respective houses of the children in the given routes;
++ it clear that the entire dispute in this matter revolves around the question whether or not the activity of running school buses exclusively for the facility of the students and staff, is an intrinsic part of the activity of running a school. Such a question is no longer res Integra by the decision in the case of Krishna Charitable Society Vs. Addl CIT - 2017-TIOL-1321-ITAT-DEL, wherein it was held that transport and hostel facility surplus cannot be considered as business income of the society as these activities are incidental to the main object of the assessee society of education. Similarly, in case of Kanha Charitable Trust Vs. ACIT, it was held that in the absence of any clinching evidence to show that the hostel facilities and transport facilities were provided to anybody other than students and staff of the trust, they shall be construed to be the intrinsic part of the 'educational activities' of the assessee and they cannot be considered different than activities of the society of 'education'. In the present case also, it is not the case of Revenue that the transport facility is also provided to the outsider. Therefore, the transport activities of the assessee trust are not in the nature of business, inasmuch as the transport is also incidental to the attainment of the main object of the trust of the education. Therefore, the provisions of Section 11(4A) do not apply to the assessee.
Assessee's appeal allowed
2018-TIOL-739-ITAT-DEL + Case Story
ACIT Vs LUMAX AUTOMOTIVE SYSTEMS LTD: DELHI ITAT (Dated: May 02, 2018)
Income Tax - Sections 35DD & 37.
Keywords - Business purpose - Retrenchment compensation - Closure of manufacturing unit - Safeguard against future loss.
The assessee company, engaged in the manufacture of auto components, had returned loses for the relevant AY. During the AY, the assessee closed down one of its seven manufacturing units due to heavy financial loses. The management notified the workers regarding closure w.e.f. 31st March, 2010. The closure was approved by the Board of Directors and and an agreement was executed between worker’s union and assessee for retrenchment of its employees on account of closure. On assessment, the AO observed that the assessee had claimed deduction u/s 37 on account of retrenchment compensation u/s 37 to the extent of Rs.57,25,789/-. However, the AO disallowed the said amount of retrenchment compensation.
On appeal, the ITAT held that,
Whether compensation paid to retrenched workers upon closure of one manufacturing unit, as a safeguard against future losses of other units, is an allowable business expenditure u/s 37 - YES: ITAT
++ the assessee explained that it has closed down its Aurangabad unit due to heavy losses suffered by the assessee. This loss of Rs.4.34 crores was declared by the assessee in its return, and after making addition as well, the net taxable loss have been determined at Rs.3.77 crores. Therefore, the contention of the assessee is correct that in order to save future losses, Aurangabad unit was closed down by the assessee. The closure is approved by the Board of Directors and there was an agreement executed between the worker’s union and the assessee for retrenchment of its employees on account of closure of the Aurangabad factory. These facts have not been rebutted by the Revenue. Therefore, it is clear that amount in question have been paid by assessee on account of retrenchment compensation on closure of the Aurangabad unit of the assessee. The amount is thus paid for business purposes only and as such, it was an allowable deduction u/s 37.
Revenue's appeal dismissed
