ORDER
Ram Bahadur, J.M.
1. These 3 appeals are respectively filed by the assessee as well as Revenue against the order of CIT(A)-II, Jabalpur, dt. 21st Jan., 2002 for the asst. yrs. 1995-96, 1996-97 and 1997-98 under Section 143(3)/147 of the IT Act 1961.
2. Since the issues involved in all the appeals are more or less the same and arise out of the same order of CIT(A), all these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience.
3. Below reproduced are the common grounds of appeal raised by the assesses in all its appeals :
“1. That the learned CIT(A) ought to have quashed the entire assessment proceedings inasmuch as the cases were selected for scrutiny by issuing notice under Section 143(2) in clear defiance to guidelines mentioned in Board’s Instruction No. 1967, dt. 7th June, 1999 and 1984 dt. 9th June, 2000 (common for all 3 years).
2. That the learned CIT(A) was not justified in sustaining disallowances as under and the same be deleted or reduced–
(a) Rs. 3,823, Rs. 4,013 and Rs. 4,258 out of staff welfare expenses (for three years respectively)
(b) Rs. 688 out of shop expenses (asst. yr. 1995-96)
Rs. 3,029, Rs. 3,742 and Rs. 5,049 out of postage and telephone expenses (for three years respectively)
(c) Rs. 6,813 out of interest account (asst. yr. 1995-96)
Rs. 16,050, Rs. 43,562 out of service charges account (for asst. yrs. 1996-97 and 1997-98)
3. That the appellant craves the leave to amend or alter any of above grounds and further to take additional ground or grounds on or before the date of hearing.”
4. Below reproduced are the common grounds of appeal raised by the Revenue in all its appeals :
“1. On the facts and in the circumstances of the case, learned CIT(A) erred
(i) in deleting the addition of Rs. 6,590, Rs. 83,338 and Rs. 1,01,820 made by the AO to the declared gross profit in motorcycle parts and tractor parts account (respectively for all 3 years)
(ii) in deleting the addition of Rs. 96,000, Rs. 1,41,600, and Rs. 1,08,000 made by the AO by disallowing part of the travelling expenses claimed (respectively for all three years).
(iii) in deleting the addition of Rs. 27,640 made by the AO by disallowing the discount expenses claimed.
2. That the order of CIT(A) is erroneous in law and on facts
3. That the appellant reserves the right to amend any of the grounds of appeal/add other grounds of appeal at the time of hearing.”
First, I will take up the assessee’s appeals.
5. Ground No. 3 of all the appeals is general in nature and requires no adjudication. Hence, this ground is rejected.
6. At the very outset of the arguments, regarding first ground, the learned counsel for the assessee submitted that IT Department has issued Instruction No. 1967, dt. 7th June, 1999, regarding guidelines for selection of cases for assessment under s. 143(3) of the IT Act, 1961, a copy of which is filed at page No. 26 of the paper book. Similarly the Department again issued Instruction No. 1984, dt. 9th June, 2000, a copy of which is placed at page No. 27 of the paper book and reported in (2000) 111 Taxman 329 (Tax Lit). It is stated in the said instructions that scrutiny of cases be restricted only to the following :
(i) Search and seizure cases,
(ii) Assessment following survey under Section 133A,
(iii) Reassessment under Section 147,
(iv) Set aside assessments,
(v) Cases where assessment under Section 143(3) becomes mandatory in order to comply with the directions of the Supreme Court/High Court/Special Courts,
(vi) All cases of Central circles not specifically covered in above items.
7. The exception is where the Chief CIT authorises scrutiny. His power is also limited to exceptional cases and that too on recording of reasons in writing,
8. It has further been provided in the said notification that in all other cases, therefore, what the assessee declares is to be accepted.
9. It is claimed by the learned counsel of the assessee that none of the parameters specified above have been met in the case of the appellant and the assessment should not have been taken up for scrutiny, and the impugned additions should not have been made at all.
10. Briefly stated, the facts of the case are that the AO issued notice under Section 148 dt. 30th Dec., 1998 for all the years and in the said notice, it is proposed to assess the income and the word ‘reassess’ has specifically been deleted by the AO. Copies of notices under Section 148 have been placed at page Nos. 39-41 of the paper book. The assessee filed returns for all the three years on 28th March, 2000, declaring income/loss as under :
Asst. yr. Income/(Loss) 1995-96 Rs. (838) 1996-97 Rs. (15,322) 1997-98 Rs. Nil
11. The AO issued notice under Section 143(2) on 14th Aug., 2000 fixing the case for hearing on 18th Aug., 2000. The assessee objected before the AO regarding issue of notice under Section 143(2) on the basis of Board’s Instruction No. 1984, dt. 9th June 2000 and submitted before the AO that his case did not fall within the ambit of reassessment under Section 147 of the IT Act, 1961 and the proceeding should be dropped. However, the above contention of the assessee was not accepted by the AO. The assessee moved an application under Section 144A before the Addl. CIT, Range-I, Jabalpur, for necessary direction to AO not to scrutinise the assessment on the basis of notice under Section 143(2), on the basis of Board’s instructions. However, the Addl. CIT passed direction under Section 144A dt. 2nd March, 2001 directing the AO to proceed with the assessment.
12. Accordingly, the AO passed the assessment orders dt. 29th March, 2001, and determined income as under after giving credit to income declared under VDIS 1997 :
Asst yr. Income determined Credit for VDIS Assessed income 1995-96 Rs. 1,75,800 Rs. 14,120 Rs. 1,61,680 1996-97 Rs. 2,91,655 Rs. 31,430 Rs. 2,60,225 1997-98 Rs. 3,16,970 Rs. 46,360 Rs. 2,70,610
13. The assessee, aggrieved against the above order, went in appeal before CIT(A), Jabalpur, and CIT(A) vide order dt. 21st Jan., 2002, granted substantial relief as under but regarding quashing of assessment proceedings, he decided the issue against the assessee by holding that these instructions are for the purpose of the administrative convenience of the Department and though binding on the AO, the assessee cannot seek any relief because they are not meant for any favour to the assessee.
Asst. yr. Relief granted 1995-96 Rs. 1,62,062 1996-97 Rs. 2,83,172 1997-98 Rs. 2,09,821 14. The assessee, still dissatisfied against the order of the CIT(A), is in appeal before the Tribunal and the Revenue is also in appeal before the Tribunal against the relief given to the assessee by the CIT(A). 15. I have heard the arguments of Shri M.L. Daga, FCA, learned Authorised Representative on behalf of the assessee and Shri A.K. Bar learned Departmental Representative on behalf of the Revenue.
16. The learned Authorised Representative of the assessee has argued and invited attention to provisions of Section 119 of the IT Act and stated that the Board may, for the purpose of proper and efficient management of the work of assessment and collection of revenue, issue, from time to time (whether by way of relaxation of any of the provisions of Sections 139, 143, 144, 147, 148, etc.), general or special orders setting forth such directions or instructions (not being prejudicial to the assessee) as to the guidelines, principles or procedures to be followed by IT authorities in relation to assessment or collection of revenue, etc. It was further argued by learned Authorised Representative of the assessee that such instructions of the Board are binding on AO and the AO cannot deviate from relaxation, if any, given by Board. It is also claimed that these instructions are binding on the AO in the light of the ratio of the decision of Hon’ble apex Court in the case of UCO Bank v. CIT (1999) 237 ITR 889 (SC). It was further stated that, like Board’s circulars, instructions by Board too are binding on AO and for this purpose, he relied on judgment reported as CIT v. Abdul Ahad Najar (2001) 248 ITR 744 (J&K). The learned Authorised Representative of the assessee filed a copy of judgment of Hon’ble Madhya Pradesh High Court in the case of CIT v. Ladharam Lakhimal (2000) 245 ITR 340 (UP), wherein the assessment proceedings were quashed on the ground that requisite approval for issue of notice under Section 143(2) was not obtained from Ranga Dy. CIT. The learned Authorised Representative of the assessee also filed a copy of judgment decided by Tribunal, Hyderabad Bench in the case of Smt. Nayana P. Dedhia v. Asstt. CIT (2004) 84 TTJ (Hyd) 233 : (2003) 86 ITD 398 (Hyd) wherein the scrutiny assessment was quashed for not following CBDT instructions. It was held that taking up assessment for scrutiny in contravention of Board’s instruction was not justified at all. The learned Authorised Representative of the assessee further stated that if the Department wanted to scrutinise the assessment, it could have sought prior approval of Chief CIT. But no such approval is on record. The learned Authorised Representative of the assessee further submitted that only cases of reassessment under Section 147 could have been taken for scrutiny by AO as per Board’s instructions. He submitted that this is first assessment and the word ‘reassessment’ presupposes an assessment already completed earlier. The law has made clear distinction between cases of first assessment and reassessment. In this connection, attention was drawn to Expln. 3 to Section 234A, Expln. 2 of Section 234B of the IT Act which provides that an assessment made for the first time under Section 147 shall be regarded as a regular assessment for the purpose of the Act. The word ‘regular assessment’ has been defined under Section 2(40) which says an assessment made under Section 143(3) or 144 shall be treated as regular assessment. For completing assessment under Section 143(3) (i.e. assessment made after scrutiny), notice under Section 143(2) is mandatory. The learned Authorised Representative of the assessee vehemently submitted that assessment proceedings be quashed as they have been completed in. total disregard to the clear Board’s instructions.
17. On the contrary the learned Departmental Representative submitted that since the assessee did not file return inspite of heavy turnover, the AO has correctly issued notice under Section 148 to assess the income escaping assessment. He drew my attention to Expln. 2(a) to Section 147, which says — Where no return of income has been furnished by the assessee, although his total income in respect of which he is assessable under this Act during the previous year exceeded the maximum amount, which is not chargeable to income-tax. The assessee cannot take benefit from above instructions, which are meant for persons filing return voluntarily and not in response to Section 148. He relied upon the order of CIT(A) on this issue who has elaborately discussed the matter in para 4 of his order.
18. After hearing arguments of learned Authorised Representatives of both the parties, I am of the view that the assesses deserves to succeed. It is clear from the records that none of the conditions stipulated by the Board for taking up case for scrutiny are applicable on the assessee. The learned Departmental Representative has not been able to place before me any record showing approval of Chief CIT for selection of case for scrutiny. It is trite law that Board instructions/circulars being benevolent in nature are binding on Revenue and all the officers of IT Department are legally bound to follow the said instructions/circulars. A person may have a legitimate expectation of being treated in a certain way by an administrative authority even though he has no legal right in private law to receive such treatment. The expectation may arise either from a representation or promise made by the authority, including an implied representation or from consistent past practice. The Board has widely publicised its intention in leading newspapers too and the learned Authorised Representative of the assessee filed a copy of news item in Economic Times dt. 9th March, 2001 placed at p. 30 of paper book wherein it was stated that IT Department has decided against scrutiny of tax returns for the second year in a row as a part of its drive to promote the image of an assessee-friendly tax Department.
19. In the light of above case laws and the doctrine of legitimate expectation, I hold that the AO was not justified in taking up the case of the assessee for scrutiny in violation of the promise contained in the said instructions. Though on this short ground, the assessment so framed deserves to be quashed (without any further consideration, however, I will take up the other grounds on merits also). I am supported in my view by the apex Court judgment in the case of Navneetlal Javeri v. K.K. Sen, AAC (1965) 56 ITR 198 (SC) and Hon’ble Madhya Pradesh High Court in the case of Assn. CIT v. Aradhna Oil Mills (2002) 30 ITC 446. I therefore hold that scrutiny case in violation of CBDT instructions are bad in law and I quash the assessment framed by the AO for all the three years.
20. Regarding disallowances out of staff welfare expenses, it was claimed that looking to the turnover and number of employees, the expenditure claimed is most justified because the same have been incurred for and on behalf of staff working for the assessee and expenditure is fully incurred for business purposes. The learned Departmental Representative relied upon order of CIT(A). I have perused the comparative chart filed at page No. 51 of the paper book and found that the expenses claimed are quite reasonable. Accordingly addition of Rs. 3,823, Rs. 4,013 and Rs. 4,258 are hereby deleted for asst. yrs. 1995-96 to 1997-98.
21. Regarding disallowance of Rs. 688 out of shop expenses of Rs. 3,444 for asst. yr. 1995-96, it was submitted that AO has disallowed the expenses on estimate and has not made any disallowance for subsequent 2 years. It was also claimed that such expenses are allowable upto Rs. 10,000 under Section 37(2). Looking to the meager claim, the disallowance of Rs. 688 is hereby deleted.
22. Regarding disallowance of Rs. 3,029, Rs. 3,742 and Rs. 5,049 out of postage and telephone account, it was submitted that the expenditure are reasonable looking to the turnover of the assessee-firm. It was also claimed that the expenditure includes postage expenses also and none of the partners reside at Rewa. As such, the disallowance of 20 per cent of claim is highly excessive. I have considered the comparative chart filed at page No. 51 of the paper book and considering the facts of the case, a disallowance of Rs. 1,500 each for asst. yrs. 1995-96 and 1996-97 and Rs. 2,000 for asst. yr. 1997-98 will meet the ends of justice.
23. Regarding disallowance of Rs. 6,813 out of interest account, it was claimed that Shri Neeraj Agrawal has been paid interest @ 18 per cent though interest @ 12 per cent was paid to some other loan creditors. It was stated that Shri Neeraj Agarwal has been paid interest @ 18 per cent since asst. yr. 1992-93 and no further amount was received during the year. It was also claimed that partners of firm have been paid interest @ 18 per cent on their capital in accordance with provisions contained in Section 40(b) and have been allowed by AO. Rate of interest charged by bank was 18 per cent to 21 per cent during this period, as such interest paid to Shri Neeraj Agrawal @ 18 per cent is not excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business and Section 40A(2)(b) is not applicable. He drew my attention to decision in the case of Omkarmal Gaurishanker v. ITO (1991) 39 TTJ (Ahd) 223 and a copy of same is placed at p. 117 of the paper book wherein interest paid ranging between 12 per cent to 24 per cent to family members was held to be reasonable. The learned Departmental Representative relied upon the order of CIT(A). Looking to the facts and history of the case, I hold that Section 40A(2)(b) is not applicable in the instant case and accordingly, disallowance of Rs. 6,813 out of interest account is hereby deleted.
24. Regarding disallowance of Rs. 16,050 and Rs. 43,562 out of service expenses, it was stated that a comparative chart has been mentioned by CIT(A) at p. 21 of his order. It was claimed that expenditure has gone up because of after-sales service expenses in respect of tractors sold during the year as well as earlier years covered in warranty period. The assessee furnished details of service expenses for all the 3 years, which are placed at pp. 52 to 115 of the paper book. It was stated that old records were partly damaged due to termite and this fact was pointed out to the ITO as well as CIT(A). Because of this reason, some vouchers could not be produced for verification but all the expenses incurred are in normal course of business as may be seen from details filed. The counsel drew my attention to the order of CIT(A) for asst. yr. 2000-01 in the case of Agrawal Tractors placed at pp. 142-146 of the paper book and stated that service expenses to the tune of Rs. 7.22 lakhs claimed were allowed in full and disallowance of Rs. 92,200 made by AO in the case of above firm were deleted in its entirety. It was stated that the assessee makes after-sales service of tractors sold by M/s Agrawal Tractors. The learned Departmental Representative relied upon the order of CIT(A) who has discussed this ground in para 8 (pp. 20-23) of his order and stated that due Justice has been given by CIT(A). Considering the facts of the case, details filed and nature of expenses as well as order of CIT(A) in the case of Agrawal Tractors (supra) and particularly the fact that no disallowance by AO has been made in asst. yr. 1995-96, assessment of which was completed simultaneously, I hold that CIT(A) was not justified in sustaining the disallowance made by AO. Accordingly disallowances of Rs. 16,050 and Rs. 43,562 out of service expenses are hereby deleted.
25. Now I take up the appeal of Revenue for all the three years.
26. Ground Nos. 2 and 3 of the appeal are general in nature and require no adjudication. Hence, these grounds are rejected.
27. Regarding additions on account of gross profit in spare parts account, it was stated by learned Departmental Representative that the assessee has not maintained day-to-day stock register and the AO has verified some purchase bills wherein gross profit of 12.56 per cent was found on sales of spare parts. As such, the AO has correctly applied gross profit of 12.5 per cent for all the 3 years and CIT(A) was not justified in deleting the additions on account of gross profit for all 3 years.
28. The learned Authorised Representative of the assessee drew my attention to gross profit chart filed at p. 118 of paper book and stated that sales have gone up by 60 per cent in asst. yr. 1995-96 and 250 per cent in asst. yr. 1997-98. It was stated that purchase and sales are fully supported by bills and no defect has been pointed by AO in method of accounting. Proviso of Section 145 has not been applied by AO and simply non-maintenance of stock register is no ground for making such huge additions looking to the past and subsequent years trend. It was stated that AO has verified only one sale bill dt. 28th March, 1997 mentioned at p. 13 of the order of AO and came to the conclusion that gross profit rate of 12.5 per cent should be applied for all 3 years. It was submitted that principal of appellant-firm–M/s Agarwal Tractors were adjudged as best dealer on all India basis for asst. yr. 1996-97 and second best dealer in a row for asst. yr. 1997-98. It was claimed that for a person having its business at such a small place like Satna, Rewa, it is a unique achievement. It was claimed that thrust of appellant was to achieve maximum sales on behalf of their principal and supply spare parts at cheaper rates to achieve the targets. The learned Authorised Representative of the assessee drew my attention to a chart placed at pp. 125-126 of the paper book and stated that seed drills worth Rs. 4.80 lakhs were sold at a price of Rs. 4.92 lakhs earning a gross profit of 2.36 per cent. It was also claimed that calculation of gross profit for asst. yr. 1996-97 by AO was wrong inasmuch as gross profit shown by assessee is Rs. 81,726 and not Rs. 75,232. The learned Authorised Representative of the assessee drew my attention to page Nos. 122 to 124 of the paper book which contains copies of sales-tax orders for all the 3 years and it was claimed that book results as shown by the appellant were almost accepted. It was stated that AO has mentioned in his order that stocks have been suppressed by appellant by showing less profits. The CIT(A) has held that closing stock of a year will be the opening stock of subsequent year and the Revenue will not be benefited by such bald claim. Accordingly the learned Authorised Representative of the assessee relied upon the order of CIT(A) who has discussed this issue very elaborately.
29. I have gone through the order of CIT(A) on this issue and find no infirmity. Considering the above facts of the case, the order of the CIT(A) is sustained on this ground.
30. Regarding disallowances out of travelling expenses for all the 3 years, it was claimed by learned Departmental Representative that AO has examined 2 employees of the appellant-firm and considering the averment made by 2 employees, he came to a reasonable conclusion and accordingly made disallowances of Rs. 96,000, Rs. 1,41,600, and Rs. 1,08,000, respectively, for 3 years and CIT(A) was not justified in deleting the above disallowances.
31. The learned Authorised Representative of the assessee drew my attention in respect of comparative chart placed at p. 127 of paper book. He also drew my attention to statement of account of various employees to whom such travelling allowance has been given placed at page Nos. 128 to 130 of the paper book. It was stated that in the course of hearing when the 2 employees namely Shri D.M. Singh and Shri A.P. Tiwari were examined, the appellant was not allowed any opportunity to cross-examine the witnesses. When the matter was taken up before CIT(A), the CIT(A) directed the AO to allow opportunity of cross-examination and submit his remand report. In remand report, the AO conceded before CIT(A) that the said employees have accepted and verified their signatures made on vouchers for advance taken against travelling expenses. The learned Authorised Representative of the assessee also filed copies of statement recorded on oath by AO of above two employees, which is placed at page Nos. 134 to 141 of paper book. He drew my attention that both employees have categorically stated that expenditure on travelling allowance varies from year to year and depends upon volume of work. The learned Authorised Representative of the assessee submitted that in asst. yrs. 1996-97 and 1997-98, the appellant-firm got service commission on 291 and 277 tractors, respectively as compared to 117 tractors in asst. yr. 1995-96 and this fact has been mentioned by CIT(A) in his order. The learned Authorised Representative of the assessee drew my attention to order of CIT(A) for asst. yr. 2000-01 in the case of Agarwal Tractors placed at page Nos. 142 to 146 of paper book and in the case of this firm also, the CIT(A) deleted the disallowance of Rs. 32,725 out of total claim of Rs. 2.88 lakhs in respect of 6 employees.
32. Looking to the above facts and history of the case and reasoning given by CIT(A), I find no infirmity and order of the CIT(A) is sustained on this ground.
33. Regarding disallowance of Rs. 27,420 out of discount account made by AO, it was stated by learned Departmental Representative that all entries pertain to current asst. yr. 1995-96 and if the sum was not recoverable, the same should have been written off in subsequent years. Accordingly, CIT(A) was not justified in deleting the said disallowance.
34. The learned Authorised Representative of the assessee drew my attention to a chart showing details of discount account placed at p. 147 of paper book and submitted that petty amounts irrecoverable from 34 customers ranging from Rs. 500 to Rs. 1,500 in maximum cases have been written off. The accounts of above year were finalised very late and return was submitted on 28th March, 2000. Since there was no recovery, as such the same were written off. It was claimed that as per provisions of Section 36(1)(vii), claim of bad debt has to be allowed in the year of write off and the law makes no distinction between claim of current or earlier year. It was submitted that order of CIT(A) being in accordance with law on this issue may kindly be sustained.
35. I have gone through the order of CIT(A) on this issue and find no infirmity. Considering the above facts of the case, the order of the CIT(A) is sustained on this ground.
36. In the result, the appeals of the assessee are allowed and appeals of the Revenue are dismissed.