Income Tax Appellate Tribunal - Delhi
Jindal Dyechem Industries Pvt. Ltd, New ... vs Assessee on 31 March, 2009
ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09
A.Y. 2004-05
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "D" NEW DELHI
BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. No. 2877/Del/2009
[A.Y. 2004-05]
DCIT, Circle4(1), vs. M/s Jindal Dyechem Industries Pvt. Ltd.
Room No. 407, CR Bldg., 110, Babar Road, Opp. World Trade
New Delhi Centre, New Delhi - 110001
AND
C.O. NO. 240/DEL/2009
(IN ITA NO. 2877/DEL/2009)
M/s Jindal Dyechem Industries Pvt. Ltd. vs. Dy. Commissioner of Income Tax,
110, Babar Road, Opp. World Trade Circle-4(1),< New Delhi
Centre, New Delhi - 110 001
(PAN: AAACJ0719Q)
[Appellant] (Respondent)
ASSESSEE BY : Sh. Salil Aggarwal, Adv. & Sh. Gautam Jain, CA
DEPARTMENT BY : Shri I.A. Khan, Sr. DR
ORDER
PER SHAMIM YAHYA, AM
This appeal by the revenue and Cross objection by the assessee emanate out of orders of the ld. CIT(A) dated 31.3.2009 and pertains to assessment year 2004-05.
REVENUE'S APPEAL - ITA NO. 2877/DEL/2009
2. The first issue raised is that the ld. CIT(A) erred in deleting the disallowance of claim as to foreign exchange loss of Rs. 50,02,815/-.
1ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05
3. The assessee in this case is a Private Limited Company engaged in the business of trading in bullion and other items. During the course of assessment AO disallowed the assessee's claim of foreign exchange loss by observing as under:-
"The claim of foreign exchange loss of Rs. 50,02,815/- on revaluation of loan to subsidiary cannot be accepted on the basis of the revised computation. The subsidiary is wholly owned by the assessee company. It has ceased its operations in subsequent years. There is no reason or possibility of recovery of the loan from its subsidiary in future. In this particular case, the claim can only be allowed on actual basis. In the view of these facts, the claim of foreign exchange loss of Rs. 50,02,815/- is donated.
The basis of computation of assessed income shall originate / emanate only from the return of income filed on 01.11.2004. the revised computation is ignored except the admitted inadvertent mistakes. No separate addition of Rs. 50,02,815/- is required to be made."
4. Upon asseessee's appeal ld. CIT(A) referred the decision of the Jurisdictional High Court in the case of CIT vs. Woodword Governor reported in 294 ITR 451. Ld. CIT(A) held that advances to the subsidiary was a revenue account and once the same was on revenue account any loss on account of fluctuation in the rate of foreign exchange on the last day of the financial year is not a notional loss and has to be allowed as deduction under section 37 of the Act.
2ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05
5. Against the above order the revenue's is in appeal before us.
6. It has been urged on behalf of the revenue that the claim of exchange loss was made on the basis of a revised computation without filing any revised return of income. Thus, the allowability of said claim is contrary to ratio laid down in the case of Goetze (India) Ltd. vs. CIT [2006] 284 ITR 323 (SC). It has further been urged that the said claim was made on the revaluation of loan provided to the wholly owned subsidiary of the assessee company. The said subsidiary has ceased its operations in subsequent years and there is no possibility of recover of the loan from this subsidiary in future. Thus, in this particular case, it is rightly held by AO that the claim can only be allowed on actual basis.
7. We have heard both the counsels and perused the records. As regards the objection the claim was made on the basis of revised computation, we find that the claim of the assessee was genuine one and hence the same cannot be denied. We find that in the above said decision the Hon'ble Apex Court had clarified that the decision referred in that case shall not restrict the powers of the Tribunal to admit and adjudicate the claim of the assessee. In our considered opinion the claim of the assessee was genuine. Article 265 of the Constitution of India states that no tax can be collected except by authority of law. CBDT Circular No. 114 XL-35 of 1955 dated 11.4.1955 states that officer of the department must not take advantage of the ignorance of an assessee as to his rights. Hon'ble Apex Court in the case of CIT Vs. Mr. P. Firm in 56 ITR 67 wherein the Bench comprised three of their Lordships had expounded that if a particular income is not taxable under IT Act, it cannot be taxed on the basis of estoppel of any other equitable doctrine. If a particular income is not exigible to tax, AO has no power to impose 3 ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05 tax on the said income. In the background of the aforesaid discussion, we find that assessee's claim in this regard is justified. Hence in our considered opinion there is no infirmity in admitting a genuine claim of the assessee.
8. Now coming to the merit of the issue, we find that the advance was given by the assessee to subsidiary company for trading purpose. In such a case loss on account of foreign exchange fluctuation has to be dealt with in accordance with the decision of the Hon'ble Jurisdictional High Court referred by the ld. CIT(A) in the case of Woodword Governor cited above. This decision has also been affirmed by the Hon'ble Apex Court. As per the ratio emanating from this case, loss on account of foreign exchange fluctuation is not a notional loss and if the loss is on revenue a/c it has to be allowed as revenue loss. In this view of the matter, we do not find any infirmity in the ld. CIT(A) orders on this issue. Accordingly, we uphold the same.
9. The next issue raised is that ld. CIT(A) erred in deleting the addition of Rs. 14,51,465/- made by the AO by invoking provisions contained in section 92CA of the Act.
10. On this issue the AO noted that assessee had given loans and advances to M/s PPML its wholly subsidiary without charging any interest. Assessee has also explained to the AO that the subsidiary company was regularly declaring divided and the same has been offered for taxation in the year of receipt and advances made to the subsidiary company were free of interest. AO observed that assessee company has failed to explain why interest free loans was advanced to M/s PPML. He observed that even an advance payment were made for M/s PPML for purchase of bullion, the advances cannot be retained for very long period. In 4 ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05 his opinion, the reasonable period may be one month to 45 days or so. But in this case, the debit balance was continuously maintained. In this background the AO proceeded to determine the arms' length price as per comparable uncontrolled price method and he has applied the average labor + 1.25% premium. AO proceeded to consider the arms' length price on the interest free loans to M/s PPML, Rs. 14,51,465/- under section 92CA of the IT Act.
11. Upon assessee's appeal in this regard ld. CIT(A) referred to the provisions of section 92CA. Ld. CIT(A) held that in this case there was neither any reference made to the transfer pricing officer nor any order has been made by the Transfer Pricing Officer. Ld. CIT(A) further observed that the Assessing Officer has made addition by computing the arm's length price under section 92C of the Act. He further observed that "in doing so, he has adopted the Libor rate + 1.45% which is not based on any comparable uncontrolled transaction. He overlooked the fact that in the instant year, the appellant company has received dividend of Rs. 18,51,800/- which is higher than the income sought to be taxed under section 92CA of the Act. It is not a case where income has been exempt. It is a case where dividend received is offered and assessed tot ax at a maximum marginal rate. In such circumstances, in my opinion, learned officer could not proceed to make an addition of Rs. 14,51,465/- by adopting the arm's length price on the basis of labor price and therefore, addition so made is directed to be deleted."
12. Against this order the Revenue is in appeal before us.
13. In this regard it has been urged by the revenue that it is not mandatory on the part of the AO to refer to the TPO all cases relating to international transaction by an assessee in the previous year for the determination of arms 5 ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05 length price. It has further been urged that the addition on the said count was also made in the immediate preceding year on the said count.
14. We have heard both the counsels and perused the records. We find that the transactions entered into by the assessee company with the subsidiary company falls into the meaning of international transactions, as per the prescription of section 92B of the IT Act. Section 92C provides for computation of arms length price. This section does not stipulate that AO has to mandatorily refer the matter the Transfer Pricing Officer in all cases. Section 92CA which provides for reference to TPO postulates that when AO considered it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the matter to the TPO hence the first plank of the assessee's argument and the ld. CIT(A) reliance on the same that AO cannot computed the arms length price without referring the matter to the TPO is not sustainable.
15. We find that Hon'ble Apex court in the case of Kapurchand Shrimal Vs. CIT, 131 ITR 451, it was held that the appellate authority has jurisdiction as well as the duty to correct the errors in the proceedings under appeal. Accordingly, we remit the issue to the files of the CIT(A) to consider the issue afresh after granting adequate opportunity to the assessee of being heard.
16. The next issue raised is that the on the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting addition of Rs. 1,19,07,201/- made on account of alleged understatement of sale of bullion completely ignoring the aspect that of non-identification of alleged purchase to whom the cash sales were made.
6ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05
17. On this issue the AO observed that the sales made by the assessee company at various branches have wide variance with the prevailing rates of Mumbai and Delhi Bullion Associations. He observed that sales at Delhi were mostly in cash and no particulars of parties were recorded. In his opinion, the sales were not verifiable on cross verification. AO proceeded to compare the cash at Delhi at the average rate prevailing at the Delhi Bullion Association as in the assessment order in assessment year 2003-04. AO asked the assessee to explain the reasons in decease of sales and also offer explanation on the observation of the Special Audit Report. Considering the assessee's submissions, AO proceeded to hold as under :-
"9.6 In the case of gold, the cash sales of gold were compared to the rates of Delhi Bullion market Association. It is seen that the assessee has sold gold below average of DBA. The aggregate working of sales of gold and silver shows the suppression by Rs. 1,02,50,282/- and Rs. 16,56,919/- respectively, totaling Rs. 1,19,07,201/- as per the computation provided by assessee company. 9.7 It is also a fact that the rates of DBA are decided by the market mechanism of Bullion market of which the assessee company is a prominent participant. It is the contribution of the bullion dealers like our assessee company who play the decisive role in the determination of the DBA rates. Then how the assessee company can claim that the sales were made at lower rates. Even if the claim of varying rates of DBA through out the working day is considered, then it is also the undisputed fact that the assessee company also makes sales at different point of time and not a t a single point of time. Thus the factor of variations/fluctuations is for both i.e. DBA and the assessee. Had it not been cash sales without identify of purchasers, the inference of 7 ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05 suppressed sales could not have been drawn. It shows the intention of the assessee company to suppress substantial sales by way of making cash sales while concealing the identity of purchasers to avoid any verification at any stage. It is worth mentioning that this is not the case of purchase recorded out of books and consequent sales. It is a case of suppression of sales of goods already recorded in the books. Only a part of sales is unrecorded in the books i.e. Rs. 1,19,07,201/- and by way of under-invoicing. Therefore, the entire amount of Rs. 1,19,07,201/- is liable to be added to the income under section 69A of Income Tax Act, 1961."
18. Upon assessee's appeal ld. CIT(A) observed that it has been verified by the AO that he confirmed that Bullion Associations rates are in respect of retail transaction and not in respect of wholesale trade. In this view, he held that since Delhi Bullion Association rates are not applicable to the business of the assessee company, therefore, the same cannot be applied to compute understatement of sales. Hence, he held that addition of Rs. 1,19,07,201/- made on account of alleged understatement of sales by adopting Delhi Bullion Association rates was no in accordance with law. Even otherwise, the ld. CIT(A) found that assessee has submitted books of accounts which have been audited and have been duly accepted. He further referred to the fact that sales were declared by the assessee to the sales tax authorities and in support of which sales tax assessments returns were placed on record. On these facts the ld. CIT(A) observed that it was not justified by the AO to adopt the rates of Bullion 8 ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05 Association. According to the CIT(A) AO ought to have brought some material on record to establish any consideration over and above the declared consideration were received by the assessee company or was receivable by the assessee company. Mere fact that there were cash sales and, actual cash sales rates at time higher or lower than the average Bullion Association rates did not confer power on the AO to make any addition on account of understatement of sales. In this regard, ld. CIT(A) referred to the decision in the case of the CIT(A) vs. Calcutta Discount Co. Ltd. reported in 91 ITR 8 and also Hon'ble Calcutta High Court decision in the case of CIT vs. Nandini Nopany reported in 230 ITR 679.
Considering the above ld. CIT(A) concluded as under:-
"8.5 In view thereof, I am of the opinion that the learned officer was not justified to substitute the rates of actual sales made with the rates of Delhi Bullion Association to determine the understatement of sales made by the assessee. In any case, rates at best are indicative rates of Association and as such, mere fact that there was some variation cannot be aground to make an addition on account of such variation of the rates of Delhi Bullion Association. In fact, the appellant during the course of appellate proceedings, has also placed on record the material to show that addition made by adopting the average rates of Delhi Bullion Association is also not tenable for the reason that if the lower rates of Delhi Bullion Association are adopted then it will be seen that there will be no understatement of cash sales. On the contrary, it will be a case, where the assessee would have shown the higher sales of Rs. 64,464/- in the case 9 ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05 of silver and Rs. 1.95 crores higher sales in case of Gold. These figures have been accepted by the learned Officer in his comments dated 20.2.2009. However, he has contended that yet despite the above position, average rates of Delhi Bullion Association should be adopted since the sales made by the assessee are both higher than the average rates and also lower than the applied rates. This logic of the learned Officer cannot be accepted a;;lying the same logic, it will be seen that even when lower rates of Delhi Bullion Association are applied, at times, sale are more than Delhi Bullion Association and at times lower than DBA rates. Thus, mere fact that sales made on actual basis are at times, higher or at times lower than the average DBA rates cannot be a ground to suggest that addition has been made by adopting the average rates of DBA. In any case, what is relevant here is that there is no material which establishes that assessee has received sums or was entitled to receive sums in excess of declared consideration. In my opinion, in such circumstances, there was no statutory provision of the Act which enables the learned Assessing Officer to levy tax on a sum which has neither accrued to the assessee and, nor received by it. In the light of the above position, addition made of Rs. 1,19,07,201/- is held to be made not in accordance with law and is therefore, deleted. "
19. Against this order the revenue is in appeal before us.
20. We have heard both the counsels and perused the records. AO's basic reason is that there are cash sales which are not verifiable and the rates whereof is below the average rate of Delhi Bullion Association. As pointed out by the ld. CIT(A),AO on remand has himself accepted that the Delhi Bullion Association rates are wholesale rates and are not applicable to the case of the assessee. In any case, it is not the case of the AO that he has come across any material showing 10 ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05 that the assessee is receiving something over and above that entered into the books of accounts maintained. All the requisite books and records are maintained and the same are duly audited and no specific defect in the same has been pointed out. Moreover, ld. CIT(A) rightly observed that the lower rates of the Delhi Bullion Association are quite comparable with that shown by the assessee. In the case of CIT vs. Kolkata Discount Company ltd. 91 ITR 8, the Hon'ble Apex Court has held that transactions between the assessee and its subsidiary company was bonafide transactions; that assessee had transferred its value shares at cost price to its subsidiary in order to so arranged its affairs as to reduce its tax burden and therefore, unless AO on the basis of the material before him was able to come to the conclusion that the assessee has really made profits in the transactions. It was not permissible for him to add back the assessee's return and fictional income. In the background of the aforesaid discussion and precedent, we do not find any infirmity in the orders of the ld. CIT(A) in this regard and accordingly we uphold the same.
ASSESSEE'S C.O. NO. 240/DEL/2009
21. The first issue raised is that the ld. CIT(A) has also erred both in law and on facts in confirming the disallowance of a sum of Rs. 7,04,440/- out of the business promotion expenses claimed by the appellant company.
22. On this issue the AO referred to the details of the expenses filed by the assessee. He referred to the copy of the vouchers and specifically pointed out by mentioning in detail in his assessment order that vouchers containing a sum of Rs. 704440 were personal expenses in various hotels for dinning etc. purposes. AO held that assessee has failed to substantiate the genuineness of these 11 ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05 expenses and accordingly he disallowed a sum of Rs. 704440/- as personal in nature and not related to the business of the assessee company.
22.1 Before the ld. CIT(A) it was submitted that no disallowance can be made for personal use by referring to the several case laws and it was also claimed that in the preceding year, no disallowance in this regard was made. Considering the submissions, ld. CIT(A) held that AO has made the specific disallowance by referring to the specific bills which have been held to be personal expenses. During the course of assessment proceedings no material has been produced to rebut the specific findings recorded by the AO other than making the general statement and referring to past history. Ld. CIT(A) held that it is a settled law that principles of resjudicata are not applicable to the income tax proceedings. When AO had pointed out specific expenditure which he has held as non- business expenditure, it was incumbent upon the assessee to lead material to rebut the finding of the AO. Since none of the findings were rebutted, ld. CIT(A) held that disallowed so made by was valid.
22.2 Against this order the assessee is in appeal before us.
23. We have heard both the counsels. We find that AO has made specific reference to the vouchers wherein various hotels bills of dinning etc. including that through credit cards were mentioned. AO observed that some of the expenditure related to the other concerned, some were personal expenditure of Shri SK Jindal etc.; ticket for Ms. Prachi Jindal; visa charges of Mrs. A. Jindal; ticket for Ms. Manju Aggarwal; payment to Ladies Club etc. AO has specifically pointed out that these expenditures were not related to the business of the assessee. Assessee did not rebut these findings by leading any cogent material to show that 12 ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05 these expenses in fact related to the business of the assessee. Under such circumstances, we do not find any infirmity in the order o the ld. CIT(A) and accordingly we uphold the same.
24. The next ground raised is that the ld. CIT(A) has further erred both in law and on facts in confirming the disallowance of Rs. 1,66,571/- representing the stocks written off by the appellant company.
24.1 On this issue AO noted that assessee was asked to give detail of stock reduced through general entries. The Assessee submitted the details wherein total silver stock was reduced 14.298 kg. The value whereof was Rs. 166571/-. The assessee further informed that gold bars are standard One Kg. There is no shortage in them. The silver bars vary in the weight range of 27 Kg to 34 Kg internationally. In Delhi market, they are re-weighed and there are marginal difference in weight. In the case of the assessee, the difference is as small as 0.0120% which may be ignored. However, AO was not satisfied with this explanation. He held that transit process of these items are handled by reputed agencies and this process is full-proof and the items are not perishable in nature. Moreover, even if there is some breakage on corners, such breakage remains of material retains its original value and cannot be written off. Hence AO held that the assessee had sold sliver material worth of Rs. 166571/- which are not accounted with entries in the books and he made the addition thereof.
24.2 Upon assessee's appeal ld. CIT(A) confirmed the order of the AO.
24.3 Against this order the assessee is in appeal before us.
13ITA NO. 2877/DEL/09 & CO NO. 240/DEL/09 A.Y. 2004-05 24.4 We have heard both the counsels and perused the records. We find that the assessee has submitted that in case of silver the bars are re-weighed and sometimes there is weight loss due to breakage of corners in bricks and during the concerned year total loss was 14.28 kg which was only 0.010%. This explanation was not accepted by the AO. AO has not made any verification as to whether in this type of trade a negligible amount of breakage is prevalent or not. He has just opined that this represents sale made by the assessee outside the books. For this proposition, it is not the case that there is any material found. Without any material of sales outside the books of accounts and without any finding as to whether in the line of business any miniscule percentage of breakage are allowed or not, the inference drawn by the revenue cannot be sustained. Hence we set aside the orders of the authorities below and decide the issue in favour of the assessee.
25. In the result, the appeal filed by the revenue and cross objections filed by the assessee are partly allowed.
Order pronounced in the open court on 26/02/2010.
Sd/- Sd/-
[C.L. SETHI] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 26/02/2010
SRB
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY By Order,
Deputy Registrar, ITAT, Delhi Benches
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