Income Tax Appellate Tribunal - Ahmedabad
Zaveri & Co.,, Ahmedabad vs Assessee on 31 October, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "A" BENCH AHMEDABAD
आयकर अपीलीय अिधकरण,
अिधकरण अहमदाबाद Ûयायपीठ 'ए
ए'
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL
MEMBER,
AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER.
ITA.No.470 & 669/Ahd/2007
(Assessment Year:2004-05)
M/s. Zaveri & Co.,
Swagat Building,
C.G. Road, Ahmedabad. Appellant
Vs.
Asstt. Commissioner of Income
Tax,Central Circle-2(4),
Ahmedabad. Respondent
AND
Asstt. Commissioner of Income
Tax,Central Circle-2(4),
Ahmedabad. Appellant
Vs.
M/s. Zaveri & Co.,
Swagat Building,
C.G. Road, Ahmedabad. Respondent
PAN: AAAFZ0785D
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05
(M/s. Zave ri & Co. vs. ACIT) Page 2
राजःव कȧ ओर से / By Revenue :Shri Subhash Bains, CIT D.R.
आवेदक कȧ ओर से / By Assessee : Shri M. K. Patel with Shri
Jayesh C. Charedalal,A.R.
सुनवाई कȧ तारȣख/Date of Hearing :13.10.2014
घोषणा कȧ तारȣख/Date of
Pronouncement :31.10.2014
ORDER
PER SHAILENDRA KUMAR YADAV, JM:
These cross appeals are arising out form the order of ld. CIT(A)-III, Ahmedabad, dated 27.11.2006 for the assessment year 2004-05. So, they are being disposed of by way of this common order for the sake of convenience.
2. In ITA No. 470/Ahd/2007, assessee has raised following grounds:
"1. That the learned Commissioner of Income-tax (Appeals) III, Ahmadabad ought to have deleted the entire addition of Rs. 7,15,982/- made by the learned Assessing Officer on the ground of alleged undisclosure of excess stock of ornaments instead of granting only partial relief of Rs.2,75,343/-.
2. The addition retained Rs.4,20,639/- be deleted the same being unwarranted of fact, bad in law and against evidence and explanation of the appellant."
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 3 2.1. In ITA No. 669/Ahd/2007, Revenue has raised following grounds:
"1. The ld. CIT(Appeal) erred in law and on facts in partially deleting addition of Rs. 2,95,243/- made on account of difference in valuation of stock found during search.
2. The ld. CIT(Appeal) erred in law and on facts in deleting addition of Rs. 2,29,45,449/- made on account of "Interest loading" charges.
3. The ld. CIT(Appeal) erred in law and on facts in deleting addition of Rs. 61,467/- made on account of disallowance of interest.
4. On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer on the above points"
3. The assessee is a manufacturer and trader of jewellery, bullion, silver articles and of shares/securities was subjected to action u/s. 132 of the Act, at its business premises on 18/12/2003. Its partners were also searched. In its return of income for A.Y. 04-05, loss of Rs.41,28,52,779/- was declared. In the assessment proceedings, Assessing Officer noted that difference was found in the stock as per books of account and as physically inventorised at time of search, for which the partner Shri Zaverilal offered the income of Rs.75 lacs for taxation, details of which are as under:
Ornaments Rs.48.49 lakh
Diamonds Rs. 28 lakh
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05
(M/s. Zave ri & Co. vs. ACIT) Page 4
For any error Rs.1.11 lakh
Rs. 75 lakh.
3.1 The value of net difference of 8949.7 gms of gold ornaments was offered @ Rs. 543/- per gram which is the average of the opening stock and purchases made during the year. The Assessing Officer felt that the value should have been taken at Rs. 623/- per gram (i.e. as per Annexure TF of valuation report) and so the difference of Rs.80/- per gram for 8949.7 gm. i.e. Rs. 7,15,982/- amounted to under disclosure of excess stock of gold ornaments. The Assessing Officer rejected the contentions, that average value was the most approximate method of valuing. The Assessing Officer felt that since there was no evidence of the date of acquisition of the ornaments, the prevailing market rate, on date of search was appropriate and addition of Rs.7,15,982/- was made.
3.2 Matter was carried before the first appellate authority wherein various contentions were raised on behalf of the assessee and having considered the same CIT(A) found that method adopted for arriving at cost was being consistently followed and accepted. The decision of the ITAT, Delhi in case of R.P. Bakshi was applicable to the facts of the assessee's case, wherein it was held as under:
"The assessee firm has adopted the method of stock valuation by taking cost arrived by averaging yearly cost of purchase including opening stock. In support of the same, it has cited the decision of ITAT Delhi Bench in the case of R.P. Bakshi vs. Income-tax Officer reported in 39 TTJ (Del)
202. The arguments of the assessee firm to value the I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 5 disclosed stock at average purchase price during the year are therefore not acceptable."
3.3 CIT(A) further observed that while average rate adopted by the assessee was Rs. 543/- gm., till the date of search, average rate actually worked out to Rs.590/- per gram for the previous year and total purchases of 46526 kg. of gold. The bulk of purchases had been through/from STC/MMTC/LCs. In other words, the rate of landed gold with reference to its payment when made, was known before hand. Hence, CIT(A) thought it appropriate to adopt the rate at Rs. 590/- per gm. in stead of Rs.543/- on undisclosed stock. This works out to 43 per gm. additional as such addition made by Assessing Officer was restricted to Rs.4,20,639/- and assessee was granted relief of Rs.2,95,343/-.
3.4 Both the parties are before us on this ground. The stand of assessee has been that the reasons for discrepancy in stock found/entered in books, was due to recording of incorrect gross/net weight and the estimates taken as also the treatment of rough diamonds (vilandi) as cut/finished ones. Nevertheless the assessee offer/surrender was made u/s. 132(4). The value was worked out by taking average of opening stock and purchases from 1/4/2003 till 17/12/2003. This has been the regular method adopted and has been accepted by Assessing Officer in the current year as well as in earlier assessment years. So, he requested to delete the addition of Rs.4,20,639/-. On the other hand, ld. D.R. supported the order of Assessing Officer.
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 6 3.5 After going through the rival submissions and material on record. We are not inclined to interfere with the finding of CIT(A). The method adopted for arriving at cost was being consistently followed and accepted vide average rate adopted by the assessee was Rs.543/- gm. till the date of search, average rate actually worked out Rs.590/- per gm. for previous year, on total purchases of 46526 kg. of gold. Purchases are mainly from STC/MMTC. The rate of landed gold with reference to its payment when made was known to the assessee. Under these circumstances, CIT(A) preferred to adopt the rate of Rs. 590/- per gm. in stead of Rs.543/- on undisclosed stocks. Accordingly, CIT(A) rightly allowed partial relief of Rs. 2,95,343/- and thus, restricted the addition made by the Assessing Officer to Rs. 4,20,639/-. This reasoned finding of CIT(A) need no interference from our side. This take care of ground raised by assessee as well as Revenue in its appeal.
4. Next issue in Revenue's appeal is with regard to addition of Rs.2,29,45,449/- made on account of "interest loading" charges. Assessing Officer observed that assessee purchased gold against LC for which FDRs. Were purchased. Vide letter dated 30/08/2005, Assessing Officer inquired as to why the purchase price of bullion be not treated as inflated and why the interest on FDR not be considered for the full period of one year and/or purchases be not reduced by interest receivable for period of one year from date of deposit. Assessing Officer considered the reply on behalf of the assessee dated 24/11/2005 and observed that I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 7 bullion purchased at higher rate on L/C was sold at a lesser price, and thereby incurred loss as under:
Sales Purchases Gross loss
2318,35,94,155 2404,06,00,896 Rs.85,70,06,141/-
The Assessing Officer felt that the assessee firm has probably inflated the purchase price by the interest component involved therein. Stand of assessee has been that purchase price paid by it to the government nominee/agencies, i.e. MMTC and STC was a composite figure, not capable of being segregated into interest component and cost. It was agreed upon a lump sum basis. There was no inherent or explicit understanding, agreements or terms settled or interest, leave apart the rate and quantum of interest. The sales tax was recovered by STC/MMTC on the sale price mentioned in the invoice. The bonafides of the transactions were not doubted and since these were genuinely entered in the ordinary course of business (and not violative of any legal provisions/RBI guidelines, etc.) the expenditure debited as purchase price was to be allowed as such. It was contended that invoice price (as per bills of STC/MMTC) could not be artificially or hypothetically bifurcated into 'cost' and 'interest' simply because the invoice/purchase price was to be paid after a certain period of time. Moreover, the invoice/purchase price was independent of the international price of bullion due to purchases being made against L/C. The invoice/purchase price was also not linked to the investment in FDRs. After considering the objection on behalf of the assessee, Assessing Officer observed that assessee repeatedly made bullion purchase at rate I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 8 higher than the international bullion spot rates and sold the same, repeatedly below the purchase price. It simply evades logic not to conclude that the invoice price is "loaded" with interest component. Assessing Officer conceded that interest component cannot be derived from the sale invoice but he did not rule out the component of interest in it. The difficulty in quantifying/bifurcating the interest component in the purchase price did not deter him for computing/quantifying it. For doing so, he noted the daily rates of LIBOR from a website in United Kingdom and applied it to the net purchase price (worked out by him at Rs.23,30,96,62,826/-) from the details obtained from assessee (of the purchase value, custom duty, sale tax, service charge etc.). By applying LIBOR rates on the net purchase value, the Assessing Officer worked out interest loading at Rs.34,96,44,992/-. Assessing Officer then noted the quantum of interest earned on FDR (purchase by the appellant for obtaining LCs) in the period relevant to A.Y. 2004-05/2005-06 on the basis of interest earned on FDRs. In the previous years relevant to A.Y. 2004-05/2005-06, Assessing Officer noted that "The expenses incurred on account of interest loading of Rs.34,96,44,942/- also pertains to interest income shown of Rs.84,50,73,572/- in A.Y. 05-06. The gross loss shown Rs.85,70,06,141/- therefore does not give the correct trading result of the bullion transaction as per books of accounts maintained by the assessee. The expenses on account of LIBOR interest loading are therefore required to be deducted proportionately in the ratio of 44:84 for the A.Y. 2004- 05 & A.Y. 05-06 respectively.
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 9 4.1 As per Assessing Officer expenses were incurred by assessee probably to achieve a higher turnover, greater bargaining power unit bank / agencies / greater market reputation / other considerations beneficial to assessee's business. Assessing Officer allocated these expenses in the proportion of 44:84 to two assessment years. Assessing Officer had noted the interest earned as Rs. 44,36,47,595/- for A.Y. 2004-05 and Rs.84,50,73,572/- for A.Y. 05-06 and hence the proportion 44:84. The apportionment of the expenses of Rs.3,49,64,494/- was also made by him accordingly i.e. Rs.1,20,19,045/- and Rs.2,29,45,449/-. According to Assessing Officer the expenses attributable to earning of interest on bank FDRs.(Rs.3,49,64,494/-) were allowable in the proportion of 44:84 in A.Y. 04-05 and 05-06 i.e. Rs.1,20,19,045/- and Rs.2,29,45,449/- respectively. Therefore, he disallowed the amount of Rs.2,29,45,449/- in respect of A.Y. 2004-05.
4.2 In present appellant proceeding, assessee referred to his reply/explanation filed before the Assessing Officer who filed various letters dated 20/09/2005, 30/09/2004 and so on. Inter alia submitted that assessee had acted within the legal frame work especially the guidelines of RBI Import/Export policy of Government of India and dealt only with/through the approved nominees i.e. MMTC and STC. It had followed the established accounting principles. The transactions relating to purchase/sale of gold were all real and genuine. Assessee filed certificates of STC, UTI Bank, ICICI Bank, Industrial bank to establish that the import of gold in F.Y. 2003-04 and 2004-05 I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 10 was allowed through nominated agencies namely, MMTC, HHEC, STC for supply to non-exporters without any export obligations.
4.3 The chronology/sequence of events in the purchase of gold from STC/MMTC was explained as follows :
(a) Zaveri & Co. (buyer Indian Party) approaches STC-
Ahmedabad for purchase of gold.
(b) STC-Ahmedabad places order with Foreign Supplier at Dubai, U.A.E. or other countries.
(c) The buyer Indian party makes advance payment to STC-A Ahmadabad.
(d) STC- Ahmedabad opens a letter of credit (L/C) with Indian Bank for the required amount.(after 30-09-2003). Prior to 30-09-2003 buyer Indian party opens L/C on request and on authority of STC.
(e) STC- Ahmedabad makes FDR of this advance payment received. This FDR is pledged by STC- Ahmedabad for opening letter of credit with L/C opening Bank. The FDR will be for a term of one year. Upto 30-09-2003 the FDR is placed by Indian Party.
(f) The Foreign Supplier ships the Gold to STC- Ahmedabad through Air Cargo.
(g) Gold consignment arrives at Ahmedabad Airport.
(h) STC- Ahmedabad authorises buyer-private party to collect the gold from concerned Airlines.
(i) STC- Ahmedabad arranges to pay the customs duty.
(j) Buyer-Private Party takes delivery of gold.
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 11 (k) As per terms and conditions of L/C, thepayment to
Foreign Supplier is to be made by STC- Ahmadabad.
(l) The STC- Ahmedabad is required to pay a higher purchase price (as compared to the international Gold rate prevailing on date of shipment) to the Foreign Supplier due to the credit allowed to STC- Ahmedabad. The Foreign Supplier issues invoice in the name of STC- Ahmedabad.
4.4 Apart from the aforementioned choronology, the other evidence, for proving that goods were purchased from STC/MMTC only and not the foreign party, were
(a) Sales Invoice issued to us by STC,
(b) Delivery Order issued by STC.
(c) Customs duty payment by STC and Challan (Bill of Entry) in the name of STC.
(d) Sales Tax charged by STC in the sale Bill.
(e) Letter of Authority given to party by STC to open L/C and make payment to supplier (of STC) directly. Without such letter of Authority, payments to supplier of STC was not possible and the payment was made only on request of STC and for convenience of STC.
(f) The FDRS are placed by party as margin money for enabling them to open L/C as per letter of authority of STC,
(g) As per the terms with STC party got credit of 365 days hence party had to make payment only then and hence the money realised by party from sales is deposited in FDR as margin money to open L/C, for discharge of their liability to pay purchase consideration at a future date.
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 12 Accordingly purchase price debited is as per the Invoice of MMTC/STC which were government undertakings. Hence the sale price of bullion sold by MMTC/STC to us, in turn becomes our purchase price and can't be said to be inflated.
13. Assessee also disputed the A.O.'s proposal to tax interest of the full term of FDR in the current year. This preponement was agitated on the following grounds :
(a) Interest accrues on the basis of efflux of time i.e. it keeps on accruing on each day, and not in advance on the date of making the FDR.
Section 4 of the Income Tax Act permits the levy of tax only on the income chargeable to tax during the "previous year".
Section 3 defines the term "previous year". Accordingly the period of Financial year i.e. April to March is the previous year. Thus for I.T.A.Y. 2004-05 the "previous year" is the 12 month ' period from 01- 04-2003 to 31-03-2004.
Section 5 provides for the "Scope of Total Income".
Section 5(1) reads as under :
"5 (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which--
(a)is received or is deemed to be received in India in such year by or on behalf of such person : or
(b) accures or arises or is deemed to accure or arise to him in India during such Year : or
(c) accrues or arises to him outside India during such year:
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 13 Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section(6)* of section 6, the income which accrues of arises of him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India."
Thus if any income has either :
(i) accrued or
(ii) arisen or
(iii) received during the previous year, then only it will be chargeable to tax. The "accrual" of income will be determined by the method of accounting followed by the assessee as provided by Section 145 of the Income Tax Act. Assessed claims to have been consistently following "Mercantile Method of Accounting". Under the said method the interest upto 31-03-2004 can only accrue for previous year 2003-04 (I.T.A.Y. 2004-05). Accordingly in assessee's case interest on FDR upto 31-03-2004 has only accrued for I.T.A.Y. 2004-05. We have shown as income the interest accrued upto 31-03-2004.
Assessee relied on the following circulars issued by CBDT.
(a) Interest on reinvestment deposit schemes, recurring deposit schemes, cash certificates, etc. --accrual of interest departmental circular, -"Several banks are accepting deposits under the reinvestment deposit schemes, recurring deposit schemes, cash certificates and similar schemes. These schemes have been evolved to provide the public with an attractive medium of investment and simultaneously mobilise savings.
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 14 Under these schemes, a depositor invests a sum of money for a certain period of years and at the end of the contracted period, a lump sum payment is made to him. This lump sum amount comprises of the principal amount and the interest earned thereon, Normally, the interest is credited to the depositor's account at periodical intervals, but he is not entitled to collect such interest unless he decides to terminate the deposit. It he decides to terminate the deposit, he is entitled to receive back the principal amount plus interest thereon although at a reduced rate.
The question for consideration is whether the interest at the stipulated, rate earned on the principal amount can be said to have accrued annually and if so whether a depositor is' entitled to claim the benefit of deducations under section SOL of the Income-tax Act. 1961, in respect of such interest which has accrued.
Government has decided that interest for each year calculated at the stipulated rate will be taxed as income accrued in that year. The benefit of deductions under section SOL of the Income Tax Act, 1961, will be available on such interest." (Circular No. 243, dated 22nd June, 1978).
(b) Interest on cumulative deposit schemes of Government undertakings-taxability-departmental circular.- ' The issue regarding taxability of interest on cumulative deposit schemes announced by Government undertakings has been considered by the Board. The point for consideration is whether interest on cumulative deposit scheme would be taxable on accrual basis for each year during which the deposit is made or on receipt basis in the year of receiving the total interest.
The Central Government has decided that the interest on cumulative deposit schemes of Government undertakings should be taxed on accrual basis annually.
The Government undertakings will intimate the accrued interest to the depositors so as to enable them to disclose it in their returns of income filed before the I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 15 income-tax authorities.' Circular No.371, dated 21st November, 1983.) Both these circulars are squarely applicable to facts of our case. These circulars clearly lay down that interest for each previous year has to be calculated, which is to be included in Total Income.
In view of the above interest for full term of deposit is interest accruing after 31-03-2004 cannot be brought to tax in I.T.A.Y. 2004-05.
(C) The proposal of A.O. about purchases to be reduced by interest for full time was also contested as follows :
please note that the purchases cannot be reduced by interest accruing on FDR. Both the transactions are seperate.
The transaction of purchase ends as soon as the bullion is delivered to us.
The interest recovered from FDR is a seperate transaction. The transaction of purchase of bullion is not the genesis of FDR interest. The FDR interest is earned out of Margin Money- FDR for opening L/C. Further it may be noted that interest which is going to accrue after 31-03-2004 cannot at all be considered for any purpose while determining income of I.T.A.Y. 2004-05.
Hence purchase price cannot be reduced by interest at all, leave aside the interest accruing after the end of previous year ended 31-03-2004.
(d) Moreover, there is overall profits if the sum effect of loss arising from purchases/sales of gold is considered in relation to the earning of interest, seen as under :
Total purchases Total Gross Interest Interest Net From sales loss 1 upto after surplus MMTC/SRC/Otty Amount March, March, I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 16 , Amount 04 A.Y. 04 A.Y. 04-05 05-06 39948kgs 23183594 - 44,36,47 845073 431715 24040600896 755 85,70,06 595 572 026 141 4.5 CIT(A) having considered the contentions raised by above letters and arguments advanced in the appellate proceeding observed that assessee purchased gold from MMTC and STC within the legal framework laid down by the RBI, the import-
export policy etc. It purchased FDRs, from out of sale proceeds and bank overdrafts for placing them as margin money against the opening of LCs. The purchases price of gold against LCs, which were for a term of 365 days, was higher than the price of spot purchases. Since the purchases were made against the LCs, the purchase price had to be paid accordingly. The purchased gold was however sold at spot prices i.e. against immediate payment. This resulted in a trading loss. The purchases/sales have not been disputed and no discrepancy was found in the claim of trading loss, also. The applicability and appropriateness of LIBOR in the facts and circumstances of the assessee, had not been established by the Assessing Officer. Moreover, his attempt to segregate 'cost and interest component' in the purchase price, despite his own confusion (expressed in para 9 of this order), was contrary to the facts and judicial decision in this regard. CIT(A) found no infirmity in accounting of interest on FDR, on the accrual basis, a system consistently followed by the appellant.
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 17 4.6 Assessing Officer initially proceeded to bring to tax the interest income on all FDRs in the year in which they were purchased but realized that the circulars of the CBDT, the Income Tax Act, and accounting practices did not allow for it. Similarly his attempt to segregate the purchase price, didn't fructify, not being approved by the cited case laws and factual position. Hence he restored to LIBOR (London Interbank Offered Rate). After apportioning in ratio of 44:84 he allowed the amount of Rs.12019045 as expenses in A.Y. 2004-05 and held that Rs.2,29,45,449/- pertained to interest income accrued in A.Y. 2005-06 (and hence allowable in A.Y. 2005-06). This has turned out to be a hypothetical exercise in futility. Thus on a holistic consideration of all the facts, aforementioned contentions, details on record, the judicial decisions cited and legal position obtained so far, it is held that the addition of Rs.2,29,45,449/- made by the Assessing Officer on account of 'interest loading' could not be upheld. Accordingly, addition of Rs.2,29,45,449/- was deleted by CIT(A).
4.7 This reasoned finding of the CIT(A) need not interference from our side. We find that assessee engaged in business of trading of bullion. He purchased bullion mainly from Government Corporation like State Trading Corporation of India (STC) and Mainly Metal Trading Corporation of India (MMTC). There are various correspondence between Assessing Officer and assessee on point of various queries of Assessing Officer. The chronology of events in purchase of bullion from STC as under
and same is applicable to MMTC:
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 18
(a) Zaveri & Co. (buyer Indian Party) approaches STC-
Ahmedabad for purchase of gold.
(b) STC-Ahmedabad places order with Foreign Supplier at Dubai, U.A.E. or other countries.
(c) The buyer Indian party makes advance payment to STC-A Ahmadabad.
(d) STC- Ahmedabad opens a letter of credit (L/C) with Indian Bank for the required amount.(after 30-09-2003). Prior to 30-09-2003 buyer Indian party opens L/C on request and on authority of STC.
(e) STC- Ahmedabad makes FDR of this advance payment received. This FDR is pledged by STC- Ahmedabad for opening letter of credit with L/C opening Bank. The FDR will be for a term of one year. Upto 30-09-2003 the FDR is placed by Indian Party.
(f) The Foreign Supplier ships the Gold to STC- Ahmedabad through Air Cargo.
(g) Gold consignment arrives at Ahmedabad Airport.
(h) STC- Ahmedabad authorises buyer-private party to collect the gold from concerned Airlines.
(i) STC- Ahmedabad arranges to pay the customs duty.
(j) Buyer-Private Party takes delivery of gold.
(k) As per terms and conditions of L/C, thepayment to Foreign Supplier is to be made by STC- Ahmadabad.
(l) The STC- Ahmedabad is required to pay a higher purchase price (as compared to the international Gold rate prevailing on date of shipment) to the Foreign Supplier due to the credit allowed to STC- Ahmedabad. The Foreign Supplier issues invoice in the name of STC- Ahmedabad.
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 19 As per import export policy of Government of India prevailing at relevant time import of bullion for trading purposes into India was permitted only to the government nominated agencies like STC, MMTC, Banks etc. Private parties like the assessee were not allowed to import the bullion.
4.8 Assessee purchased the bullion from STC, MMTC etc. As per policy laid down by Reserve Bank of India, upto 30th September, 2003 the payment of bullion imported by STC, MMTC was made by opening letter of credit in the name of foreign supplier. This L/C was opened by the assessee at the behest and under authority of STC, MMTC, since the assessee had to make the payment for its purchases to STC/MMTC. However the Reserve Bank of India amended its policy and with effect from 1st October, 2003 and hence the assessee made the payment directly to STC / MMTC and not through the L/C in the name of Foreign Supplier of STC / MMTC. Assessee was purchasing the bullion from STC /MMTC on a credit of 365 days. Assessee was selling the bullion on spot payment basis. This resulted in purchase price at higher amount than the sale price. The sale bills issued by STC / MMTC were for a total price i.e. there was no segregation of any sort like spot price, interest etc. The invoices were for a composite amount. As per the Mercantile Method of Accounting followed by the assessee the entire purchase price as per the sale bill of STC / MMTC was treated as expenditure and debited to purchases. The sales price as per the sales bills issued by the assessee was treated as income and credited to sales I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 20 account. L/C were opened by assessee (upto 30-09-2003) by putting margin money, by way of Fixed Deposits with the concerned Bank. The assessee earned interest on FDR. The bank FDR interest income on margin money was shown on accrual basis upto 31st March, 2004 as income of I.T.A.Y. 2004-05. In spite of these submissions on behalf of assessee Assessing Officer made disallowance of Rs. 2,29,45,449/- by making a hypothetical exercise which is based on presumptions and conjectures. Assessing Officer was not justified in making addition of Rs. 2,29,45,449/- by disallowing the presumed amount of interest loading charges included in the purchases of bullion on account of credit period of 365 days. Assessing Officer has presumed that the purchases from STC/MMTC are inclusive of interest and assumed this figure of interest on the basis of irrelevant data compiled by him. He further made assumption that 90% of this assumed interest is for bullion turnover and remaining 10% for earning Bank FDR interest. Assessing Officer has apportioned the 10% assumed amount in two assessment years i.e. I.T.A.Y. 2004- 05 and 2005-06 in the proportion of interest accrual of Bank FDR as well as that receivable from STC / MMTC, which is not justified. In view of all, CIT(A) was justified in deleting addition of Rs.2,29,45,449/- made by A.O. on account of interest loading, we uphold the same.
5. Regarding addition of Rs.61,467/- made on account of disallowance of the interest. Assessing Officer noted loan/advance of Rs.51.11 crore to M/s. Zaveri & Co. Exports as on 31.03.2004. The Assessing Officer noted that explanation of I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 21 the source of this advance as "The assessee firm has contended that the partners have withdrawn the amount from the firm of M/s. Zaveri & Co. Exports which is shown in the balance-sheet as advance Rs.51,11,94,315/-. Assessing Officer ascertained that the assessee had to utilize its overdrafts facility to enable the withdrawal of patners and incurred expenses on interest of Rs.61,416/-. This interest expense was disallowed u/s. 14A as the Assessing Officer felt that overdraft has been utilized to earn exempted income u/s. 10A, 10B in case of M/s. Zaveri & Co. Exports.
5.1 Matter was carried before the CIT(A), wherein it was argued that expenses on borrowings for part refund to partners, of their own capital, was a business related expense and allowable. Further no income has been claimed as exempt by assessee and so provisions of Section 14A were not applicable. No income u/s. 10A/10B was earned by assessee. The interest incurred on overdraft was in business interest of assessee only and hence was allowable even u/s. 36(1)(iii) of the Act. Having considered the submission made on behalf of assessee CIT(A) had allowed the claim of assessee. Same has been opposed before us on behalf of Revenue inter alia submitting that CIT(A) erred in law and on facts in deleting addition of Rs.61,467/- made on account of disallowance of interest. Accordingly, ld. D.R. requested to set aside the order of CIT(A) on the issue and restore that of Assessing Officer. On the other hand, ld. A.R. supported the order of CIT(A) on the issue.
I.T.A. Nos. 470 & 669/Ahd/2007 A.Y. 04-05 (M/s. Zave ri & Co. vs. ACIT) Page 22
6. After going through the rival submissions and material on record, we find that assessee had not claimed any exempt income and provisions of Section 14A are not applicable being refund of capital of partners was during the course of business and interest incurred and doing so was allowable business expenditure. In this situation, disallowance was not justified and same has been rightly decided by CIT(A), which needs no interference from our side.
7. As a result, appeal filed by assessee as well as Revenue are dismissed.
Pronounced in the open Court on this the 31st day of October, 2014.
Sd/- Sd/-
(ANIL CHATURVEDI) (SHAILENDRA KUMAR YADAV)
ACCOUNTANT MEMBER JUDICIAL MEMBER
True Copy
S.K.SINHA
आदे श कȧ ूितिलǒप अमेǒषत / Copy of Order Forwarded to:-
1. राजःव / Revenue
2. आवेदक / Assessee
3. संबंिधत आयकर आयुƠ / Concerned CIT
4. आयकर आयुƠ- अपील / CIT (A)
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड[ फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद ।