Income Tax Appellate Tribunal - Ahmedabad
Gujarat Insecticides Limited, ... vs Assessee on 2 January, 2012
आयकर अपीलीय अिधकरण, अहमदाबाद Ûयायपीठ 'बी', अहमदाबाद सव[ौी ौी ौी डȣ.क डȣ के.×या ×यागी ×यागी, गी Ûयािय Ûयाियक ियक सदःय एवं ौी ए.मो मोह मोहन अलंकामो कामोनी कामोनी, नी लेखा खा सदःय के सम¢ IN THE INCOME TAX APPELLATE TRIBUNAL : 'B' BENCH : AHMEDABAD Before Hon'ble Shri D.K.Tyagi, J.M. & Hon'ble Shri A.Mohan Alankamony, A.M.) आयकर अपीलपील सं. ITA No. 462/Ahd./2008 : िनधा[रण वष[ः- 2003-2004 Gujarat Insecticides Ltd.,Ankleshwar -vs-ACIT, Bharuch Circle, Bharuch (PAN : AAACG 8436D) (अपीलाथȸ/Appellant) (ू×यथȸ/Respondent) आयकर अपील पील सं. ITA No. 501/Ahd./2008 : िनधा[रण वष[ः- 2003-2004 ACIT, Bharuch Circle, Bharuch -vs- Gujarat Insecticides Ltd.,Ankleshwar (अपीलाथȸ/Appellant) (ू×यथȸ/Respondent) आयकर अपील पील सं. ITA No. 463/Ahd./2008 : िनधा[रण वष[ः- 2004-2005 Gujarat Insecticides Ltd.,Ankleshwar -vs-ACIT, Bharuch Circle, Bharuch (अपीलाथȸ/Appellant) (ू×यथȸ/Respondent) आयकर अपील पील सं. ITA No. 502/Ahd./2008 : िनधा[रण वष[ः- 2004-2005 ACIT, Bharuch Circle, Bharuch -vs-Gujarat Insecticides Ltd.,Ankleshwar (अपीलाथȸ/Appellant) (ू×यथȸ/Respondent) आयकर अपीलपील सं. ITA No. 2566/Ahd./2008 : िनधा[रण वष[ः- 2005-2006 Gujarat Insecticides Ltd.,Ankleshwar -vs-ACIT, Bharuch Circle, Bharuch (अपीलाथȸ/Appellant) (ू×यथȸ/Respondent) आयकर अपीलपील सं. ITA No. 2647/Ahd./2008 : िनधा[रण वष[ः- 2005-2006 ACIT, Bharuch Circle, Bharuch -vs-Gujarat Insecticides Ltd.,Ankleshwar (अपीलाथȸ/Appellant) (ू×यथȸ/Respondent) आयकर अपीलपील सं. ITA No. 272/Ahd./2009 : िनधा[रण वष[ः- 1999-2000 Gujarat Insecticides Ltd.,Ankleshwar -vs-ACIT, Bharuch Circle, Bharuch (अपीलाथȸ/Appellant) (ू×यथȸ/Respondent) आयकर अपीलपील सं. ITA No. 2131/Ahd./2009 : िनधा[रण वष[ः- 2006-2007 Gujarat Insecticides Ltd.,Ankleshwar -vs-ACIT, Bharuch Circle, Bharuch (अपीलाथȸ/Appellant) (ू×यथȸ/Respondent) ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 आयकर अपील पील सं. ITA No. 345/Ahd./2009 : िनधा[रण वष[ः- 1999-2000 DCIT, Bharuch Circle, Bharuch -vs-Gujarat Insecticides Ltd.,Ankleshwar (अपीलाथȸ/Appellant) (ू×यथȸ/Respondent) िनधा[ǐरती कȧ ओर से/ Appellant By : Shri M.G.Patel, A.R. राजःव कȧ ओर से / Respondent By : Shri Alok Johri, Sr.D.R./ Shri Samir Tekriwal, Sr.D.R. सुनवाई कȧ तारȣख / Date of Hearing : 02/01/2012 घोषणा कȧ तारȣख / Date of Pronouncement : 27/03/2012 आदे श / Order Per Bench:
These cross appeals are filed by the Assessee and the Revenue, aggrieved by the orders of the Learned Commissioner of Income Tax(Appeals)-VI, Baroda - in Appeal No.CAB/VI-8/2005-06 dated 15.11.2007 for the assessment year 2003-2004 in respect of first two appeals viz ITA No.462/Ahd/2008 and 501/Ahd/2008 - in Appeal No.CAB/VI-336/2006-07 dated 15.11.2007 for the assessment year 2004-05 in respect of next two appeals - in ITA No.463/Ahd/2008 and 502/Ahd/2008 - in Appeal No.CAB/VI-484/2007-08 dated 15.05.2008 for the assessment year 2005-06, in respect of next two appeals passed under section 250 read with section 143(3) of the I.T. Act, 1961in ITA No.2566/Ahd/2008 and 2647/Ahd/2008 - in Appeal No.CAB/VI-30/08-09 dated 28/11/2008 for the assessment year 1999-2000 for the next appeal passed under section section 271(1)(c) of the I.T. Act, 1961 in assessee's appeal in ITA No.272/Ahd/2009 - in Appeal No.CAB/VI-
374/2008-09 dated 23.04.2009 in respect of last appeal for the assessment year 2006-07 in ITA No. 2131/Ahd/2009 and 345/Ahd/2009. The assessee company is engaged in the business of manufacturing and 2 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 trading of insecticides, pesticides and its formulations. The assessee company and the Revenue have raised the following grounds in their respective appeals for the assessment years 2003-04, 2004-05, 2005- 06, 1999-2000 and 2006-07 respectively.
I.T.A. No.462/Ahd/2008 (Assessee's appeal)
2. In this appeal the assessee has raised the following main issues:
"1. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by holding that the Appellant has transferred borrowed funds to holding company as the Appellant has not collected sale amount from the said company in time and has allowed undue credit and accordingly has erred in directing the Assessing Officer to rework the disallowance of interest after allowing four months credit period for each transaction with the holding company.
2. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming the disallowance of Rs .1,21,17,001/- made by the Assessing Officer in respect of reimbursement of marketing expenses to Gharda Chemicals Ltd. after invoking provisions of Section 40A(2)(b) of the Income Tax Act.,1961 and holding that the expenditure in question is unreasonable and excessive.
3. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.56,79,436/- out of total sales promotion expenditure of Rs.68,19,636/- made by the Assessing Officer after holding that the same are for non-business purposes.
4. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of commission of Rs.23,21,500/- made by the Assessing Officer.
5. The Learned Commissioner of Income Tax (Appeals )-VI, Baroda has erred in law and on facts of the case by confirming addition of notional interest of Rs.27,00,000/-- made by the Assessing Officer in respect of ICD placed with Nipun Investments Pvt. Ltd.
6. The Learned Commissioner of Income Tax (Appeals )-VI, Baroda has erred in confirming disallowance of Rs.41,179/- made out of total expenditure of Rs.8,23,579/- incurred under the head of Miscellaneous expenditure.3
ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09
7. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming reduction of 90% of notional interest income of Rs,27,00,000/- and other income of Rs.4,16,457/- made by the Assessing Officer for working out claim u/s 8OHHC."
I.T.A. No.501/Ahd/2008 (Departmental appeal) 2.1 In this appeal the Revenue has raised the following main issues:
"1. The Learned CIT(A) has erred on facts and in law in directly to rework out the interest disallowance after allowing for 4 months credit period in respect of each transaction with the holding company.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that interest of Rs.1,29,25,000/- was for huge debit balance which the assessee was not regularly and timely recovering. Regular and timely recovery of the debit balances had direct bearing on the assessee's profitability."
I.T.A. No.463/Ahd/2008(Assessee's appeal) 2.2 In this appeal the assessee has raised the following main issues:
"1. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by holding that the Appellant has transferred borrowed funds to holding company as the Appellant has not collected sale amount from the said company in time and has allowed undue credit and accordingly has erred in directing the Assessing Officer to rework the disallowance of interest after allowing four months credit period for each transaction with the holding company.
2. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming the disallowance of Rs .2,07,68,013/- made by the Assessing Officer in respect of reimbursement of marketing expenses to Gharda Chemicals Ltd. after invoking provisions of Section 40A(2)(b) of the Income Tax Act.,1961 and holding that the expenditure in question is unreasonable and excessive.
3. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming 4 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 disallowance of Rs.53,46,005/- out of total sales promotion expenditure of Rs.64,03,460/- made by the Assessing Officer after holding that the same are for non-business purposes.
4. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.9,74,339/- made by the Assessing Officer holding that replacement of items to the plant and machinery is in nature of capital.
5. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of commission of Rs.9,40,000/- made by the Assessing Officer in respect of commission.
6. The Learned Commissioner of Income Tax (Appeals )-VI, Baroda has erred in law and on facts of the case by confirming addition of notional interest of Rs.25,83,290/-- made by the Assessing Officer in respect of ICD placed with Nipun Investments Pvt. Ltd.
7. The Learned Commissioner of Income Tax (Appeals )-VI, Baroda has erred in confirming disallowance of Rs.46,933/- made out of total expenditure of Rs.9,38,649/- incurred under the head of Miscellaneous expenditure.
8. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming reduction of 90% of notional interest income of Rs,25,83,290/- and Job work income of Rs.82,71,710/- made by the Assessing Officer for working out claim u/s 8OHHC."
I.T.A. No.502/Ahd/2008(Departmental appeal) 2.3 In this appeal the Revenue has raised the following main issues:
"1. The Learned CIT(A) has erred on facts and in law in directing to rework out the interest disallowance after allowing for 4 months credit period in respect of each transaction with the holding company.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that interest of 5 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 Rs.1,54,90,000/- was for huge debit balance which the assessee was not regularly and timely recovering. Regular and timely recovery of the debit balances had direct bearing on the assessee's profitability."
I.T.A. No.2566/Ahd/2008(Assessee's appeal) 2.4 In this appeal the assessee has raised the following main issues:
"1. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by holding that the Appellant has transferred borrowed funds to holding company as the Appellant has not collected sale amount from the said company in time and has allowed undue credit and accordingly has erred in directing the Assessing Officer to rework the disallowance of interest after allowing four months credit period for each transaction with the holding company.
2. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.49,07,959/- out of total sales promotion expenditure of Rs.60,07,000/- made by the Assessing Officer after holding that the same are for non-business purposes.
3. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.4,30,000/- made by the Assessing Officer holding that replacement of items to the plant and machinery is in nature of capital.
4. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.19,17,652/- made by the Assessing Officer in respect of commission.
5. The Learned Commissioner of Income Tax (Appeals )-VI, Baroda has erred in law and on facts of the case by confirming addition of notional interest of Rs.11,56,000/-- made by the Assessing Officer in respect of ICD placed with Nipun Investments Pvt. Ltd.
6. The Learned Commissioner of Income Tax (Appeals )-VI, Baroda has erred in law and on facts of the case by confirming to 6 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 the extent of Rs.26,76,655/- made by the Assessing Officer u/s 40(a)(i) of Income Tax Act, 1961 relating to fresh charges reimbursed to C&F agents.
I.T.A. No.2647/Ahd/2008(Departmental appeal) 2.5 In this appeal the Revenue has raised the following main issues:
"1. The Learned CIT(A) has erred on facts and in law in directing to rework out the interest disallowance after allowing for 4 months credit period in respect of each transaction with the holding company.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that interest of Rs.87,95,000/- was for huge debit balance which the assessee was not regularly and timely recovering. Regular and timely recovery of the debit balances had direct bearing on the assessee's profitability.
3. The Ld. CIT(A) has erred in facts in law in deleting the addition of Rs.17,00,000/- made by the AO on account of interest on accrual basis.
4. The Ld. CIT(A) in facts and circumstances of the case and in law has erred in not appreciating the facts that the assessee was maintaining the books of accounts on mercantile basis and as per the provisions of section 5 and section 145 of the Act the interest of Rs.17,00,000/- on deposit of the assessee was required to be taxed on accrual basis."
I.T.A. No.272/Ahd/2009(Assessee's appeal) 2.6 In this appeal the Assessee has raised the following main issue:
"1. The Learned CIT(A)-VI, Baroda has erred in law and on facts of the case by holding that the Assessing Officer has rightly levied penalty u/s 271(1)(c) of the Income Tax Act, 1961, in respect of disallowance of Rs.72,76,000/- made on account of marketing expenditure."
I.T.A. No.2131/Ahd/2009(Assessee's appeal) 2.7 In this appeal the assessee has raised the following main issues:
7ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 "1. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by holding that the Appellant has transferred borrowed funds to holding company as the Appellant has not collected sale amount from the said company in time and has allowed undue credit and accordingly has erred in directing the Assessing Officer to rework the disallowance of interest after allowing four months credit period for each transaction with the holding company.
2. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.82,08,470/- out of total sales promotion expenditure made by the Assessing Officer after holding that the same are for non-business purposes.
3. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.2,77,307/- made by the Assessing Officer holding that replacement of items to the plant and machinery is in nature of capital.
4. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs.5,00,000/- made by the Assessing Officer in respect of commission.
5. The Learned Commissioner of Income Tax (Appeals )-VI, Baroda has erred in law and on facts of the case by confirming addition of notional interest of Rs.4,59,000/-- made by the Assessing Officer in respect of ICD placed with Nipun Investments Pvt. Ltd.
I.T.A. No.345/Ahd/2009(Departmental appeal) 2.8 In this appeal the Revenue has raised the following main issues:
"1. On the fact and in the circumstances of the case the Ld. CIT(A) has erred in holding that the amount of Rs.22,74,745/- disallowed u/s 40A(2)(b) is not liable to be reckoned for the purpose of levy of penalty u/s 271(1)(c) of the Act.
2. The Ld. CIT(A) did not appreciate the fact that the resolution of the board of directors to justify the payment has passed at the end 8 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 of the year to legitimize the payment from the beginning of the year, rendering in itself a self-serving document."
3. First we deal with the assessee's appeal in ITA No.462/Ahd/2008 and Revenue's cross appeal in ITA No.501/Ahd/2008 for the assessment year 2003-04.
Ground no.1 of assessee's appeal and ground nos.1 and 2 of the Revenue's appeal : Brief facts are that the assessee company filed its return of income along with audited accounts and other relevant enclosures for the assessment year 2003-04 on 25.11.2003 declaring total income at Rs.6,47,93,040/-. Initially the return was processed under section 143(1) of the Act on 23.03.2004 accepting the income as returned by the assessee company granting refund of Rs.16,16,870/-. Subsequently, the case was selected for scrutiny and the assessment was completed on 06.03.2006 under section 143(3) of the Act. During the assessment proceedings, the ld. AO observed that the assessee- company has shown total turnover of Rs.1,06,38,38,922/- (including excise-duty of Rs.11,52,99,633/- on which the gross profit was declared at Rs.22,54,22,774/- which works out to 21.19%. The net profit, declared by the assessee company was Rs.6,38,40,000/-, which works out to 6% of the total turnover as against GP and NP respectively at 18.93% and 3.41% declared in the last year. After examining in detail the accounts and records furnished by the assessee-company, the ld. AO came to the conclusion that the assessee company is not entitled to claim the entire interest expenditure of Rs.129.24 lakhs since it has diverted its borrowed funds to its holding company. Therefore, the ld. AO added Rs.129.25 lakhs to the returned income of the assessee by observing as under:
"5. On verification of the profit a, loss account and balance sheet filed together with the return of income, it was seen that the 9 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 assessee-company has obtained working capital facilities from Bank of Baroda and has paid interest and other financial charges to the tune of Rs.129.24 lakhs, out of total expenses of Rs.197.99 lakhs. A further perusal of the balance sheet reveals that the assessee company has shown amounts receivable from Gharda Chemicals Limited appearing under the head 'Sundry Debtors' as under:
(Figures in 000s) GCL Others Total Over six months Rs. 91,778 Rs.2,42,995 Rs.3,34,773 Others Rs.1,39,744 Rs. 84,427 Rs.2,24,171 Total Rs.2,31,522 Rs.3,27,422 Rs.5,58,944 Further, the sundry creditors and advances received from the customers are shown as under:
Sundry Creditors Rs. 1,82,890
Advances from Customers Rs. 8,085
Total Rs. 1,90,975
5.1. On further scrutiny of copy of the accounts of GCL furnished by the assessee, it is seen that there was debit balance of Rs.11,57,51,774/- as on 01/04/2002. A further analysis of this account as appearing in the books of the assessee company reveals that the assessee company has during the year credited the account of GCL by Rs.3,77,07,794/- in respect of following purchases :
Raw Material purchases Rs. 3,45,17,890/-
Store Item purchases Rs. 2,19,574/-
DEPB License Purchase Rs. 29,33,683/-
Expenses on behalf of GIL paid by GCL Rs. 36,647/-
TOTAL Rs.3,77,07,794/-
Against this, the assessee has made payment of Rs.6,50,52,041/-.
On the other hand, sales to the tune of Rs.29.61 crores have been made to GCL, against which, payments were received to the tune of Rs.19.56 crores only. Further, the assessee company has made reimbursement of expenses for marketing expenses to the tune of Rs.1,21,17,001/-. As against the opening debit balance of Rs.11,57,51,774/- as on 01/04/2002, the closing balance as on 31/03/2003 was shown at Rs.23,15,22,618/-. As such, there was an increment of Rs.11 crores (approx.) during the year. As per the 10 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 assessee's letter dated 20/2/2006 the summarized account of GCL is tabulated as under:
PARTICULARS Dr. Amt. Cr. Amt. Opening Balance 115751774.83 SALES: Products 296149207.23 Payment Received 195605610.66 PURCHASES: RM Purchases 34517890.00 Store Items Purchases 219574.00 DEPB License Purchases 2933683.00 Expenses on behalf of GIL 36647.00 paid by GCL Payment effected 65052041.56 Marketing Exp. 12117001.00 Outstanding Balance as 231522617.96 on dt. 31.03.2003 TOTAL 476953023.62 476953023.62
5.2. Thus, it can be seen that while the assessee company is incurring huge expenditure towards interest payments, it has shown an amount receivable to the tune of Rs.23,15,22,618/-, which includes opening debit balance of Rs.11,57,51,774/-, from its holding company, namely, GCL. The assessee has not charged interest on the entire debit balance, including the opening balance.
5.3. In view of the above, the assessee company is requested, vide this office letter dated 15/02/2006, to show cause, as to why, proportionate interest on account of such funds diverted to GCL, should not be disallowed treating the diversion of interest bearing 11 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 funds to GCL considering the provisions of section 40A(2)(b) of the Act.
5.4. In this regard, the assessee has contended as under:
"Proposed disallowance of interest payment to bank in respect of outstanding from M/s. Gharda Chemicals Ltd. (GCL):
(a) It is submitted that as per the provisions of section 36(iii) interest on money borrowed for the purpose of business is necessary and for allowance of claim for deduction of interest under this provision all that is necessary is that:
(i) The money must have been borrowed by the assessee;
(ii) It must have been borrowed for the purpose of business:
and (iii)The assessee must have paid the interest on the amount borrowed.
In the present case, all the above conditions are fully satisfied and therefore, the interest (payment to bank) by the Appellant has to be allowed
(b) As we have not made any interest payment to the relative parties, the question of evoking Section 40A(2)(b) does not arise.
(c) Further it is submitted that :-
(i) GCL is a major customer and purchasing major quantity of our products.
(ii) We are also purchasing our raw materials from GCL, which are the monopoly products and are enjoying long credit facilities for these purchases.
(iii) We are also getting their valuable and specialized services in the field of manufacturing and marketing of our Toll Pack Products.
(iv) It is also submitted that we are not charging any interest on the amount outstanding fr8m any other customers with whom we are having substantial business.
(v) We are in the business of agricultural products, where the realization of outstanding from farmers, depends on the climatic conditions.
Considering all the above referred factors we are not charging any interest on outstanding amount from GCL, as we are not charging to other customers and as GCL is a 12 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 major customer for our products, supplier for monopoly items of raw materials and valuable and specialized services (for recipe, production and marketing) for Toll Pack Products and their commercial expertise.
(d) The details of payment made to M/s. Gharda Chemicals Ltd.
Under the circumstances, no interest should be disallowed out of the interest payment to the bank as the same has been incurred wholly and exclusively for the business purpose."
5.5. The above submission of the assessee has been gone through by the undersigned, and the contention made by the assessee in this regard, is not found acceptable considering that the same are not borne out of the facts of the case. There is an opening debit balance of Rs.11.57 crores and also closing debit balance of Rs.23.15 crores and even when the transactions during the year with GCL are taken into consideration as mentioned in above table, it is a case of parking of interest-bearing funds of the assessee company with its associates during the entire previous year. Therefore, the assessee's contention that they were not charging any interest on the amount outstanding from any other customer is not acceptable.
5.6 Further, on verification of detailed copy of account of GCL produced during the course of assessment proceedings, it is noticed that there was debit balance at the end of each month as mentioned here under:
Month Debit Balance (Rs.)
April, 2002 14,74,33,385
May, 2002 15,07,62,399
June, 2002 12,00,33,833
July, 2002 17,41,10,642
August, 2002 16,91,47,155
September, 2002 16,15,69,852
October, 2002 19,61,84,584
November, 2002 23,90,22,661
December, 2002 25,75,02,746
January, 2003 23,89,73,978
February, 2003 24,77,14,677
March, 2003 23,15,22,617
13
ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 5.7 As would be evident from the account statement reproduced hereinabove, the sums received for the entire year is only Rs.19.56 crores as compared to the sales of Rs.29.61 crores. Moreover, the assessee- company has paid marketing expenses to the tune of Rs. 1,21,17,001/- to GCL. Further, against the payment received from GCL to the tune of Rs.19.56 crores, the assessee-company has made payments to GCL at Rs.6.50 crores. As such, though, there was debit balance through out the year, the assessee company was prompt to make the payment of Rs.6,50,52,041/- although it was not required to make any payment at all considering the opening debit balance and further increase in the debit balance. In totality, there is an outstanding debit balance of Rs.23.15 crores as on 31-03-2003. It would be pertinent to state here that the assessee company has borrowed funds towards working capital facilities. However, by affecting such huge sales on credit, and that too at the prevailing market rates, and also, by making payment of Rs.6,50,52,041/- the assessee company has given an undue advantage to its holding company. It would be interesting to note that the total outstanding of GCL as at the end of the year is Rs.23.15 crores, whereas the total borrowings in the form of working capital facilities are to the tune of Rs.8.99 crores. Thus, if the assessee company had not resorted to such diversion of funds and had been regular in receiving payments outstanding from the beginning of the year, it would not be required to bear huge interest burden, which has a direct bearing on its profitability. It is settled law that onus u/s. 36(1)(iii) of the Act lies on the assesses to prove that all the borrowings on which interest paid were used for the purpose of business. Reliance is placed on the following case laws -
CIT v M.S.Venkateswaran, 222 ITR 163 (Mad.);
K. Somasundaram & Brothers v CIT, 233 ITR 934 (Mad.); Kishanchand CheUaram v CIT, 114 ITR 654 (Bom.); and R. Dalmia vs. CIT, 133 ITR 169 (Del) Further, it was held in CIT Vs. Motor General Finance Ltd. 254 ITR 249 (Del.) that it is riot the picture of borrowed funds vis- a vis the assets appearing in the balance sheet on the last date of the accounting year that determines the matter. It is the immediate source of funds on the particular date of diversion which matters and the onus is on the assessee to establish that interest bearing funds have not been diverted for non business use. This was 14 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 confirmed in principle but set aside for factual verification by the Supreme Court in the case of Motor General Finance Ltd. Vs. CIT 267 ITR 381 (SC).
5.8 In view of the above, since the assessee-company has diverted its interest bearing funds for non-business purposes, the interest expenditure claimed u/s. 36(l)(iii) of the Act on borrowings made not for the purpose of business as aforesaid is required to be disallowed. Further, GCL is a holding company falling within the proviso of sec. 40A(2)(b) and therefore the assessee company has parked its funds with GCL without interest. In order to arrive at the disallowable interest payment during the year under consideration, it is mentioned here that through out the year the debit balance was ranging from Rs. 12,00,33,833 to Rs.25,75,02,746. The assessee has obtained funds in the form of working capital facilities from bank amounting to Rs.899 lacs in addition to opening demand loan of Rs.62,50 lacs from Bank of Baroda and paid interest and financial charges of Rs. 129.24 lacs thereon. Thus, the entire loan/borrowed funds have been used in financing the interest free credit given to GCL (Gharda Chemical Ltd.).
5.9 Considering the above, the assessee company is not entitled to claim the entire interest expenditure of Rs.129.24 lacs as it has diverted its borrowed funds to its holding company in the form of debit balance with GCL which remained outstanding throughout the year. Accordingly, interest and financial charges of Rs.129.24 lacs (i.e. Rs.103.32 lacs + Rs.23.23 lacs + Rs.2.69 lacs) as discussed above, is added to the returned income. The addition is rounded off to Rs.1,29,25,000/- as the assessee has not submitted the exact figures and the above figures have been taken from the printed annual report which gives the figures in thousands."
3.1 The assessee took up the issue before the ld. CIT (A) for relief. After careful consideration of the assessee's contentions and perusal of the assessment order, the ld. CIT (A) observed as under:
"4.3 I have carefully considered the rival contentions. It has been fairly admitted in appeal that the credit period allowed to other customers is on an average of 4 months. Although in some cases it was higher also. It has also been admitted that total borrowings including demand loans and working capital facility from bank to the tune of Rs.8.99 crores and had the fund been received from the 15 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 holding company i.e. Garda chemicals Ltd. the interest liability would have reduced.
4.3.1 Under the circumstances the Assessing Officer is directed to rework the interest disallowance after allowing for 4 months credit period for each transaction with the holding company as is the norm with other customers. The ground is thus partly allowed."
3.2 Against this order, both the parties have come in appeal before us and during the course of hearing, the ld. A R reiterated the submissions made before the ld. A.O. and the ld. CIT(A). The ld. A.R. further submitted that this issue is covered in favour of the assessee in assessee's own case by the order of the ITAT, 'B' Bench, Ahmedabad dated 31.05.2011 in ITA Nos.460/Ahd/2008 for the assessment year 2001-02. Therefore, the ld. A.R. submitted that the order of the ld. CIT(A) may be cancelled and the appeal of the assessee may be allowed on this issue whereas the appeal of the Revenue may be dismissed.
3.3 On the other hand, the ld. D. R. could not controvert the submissions of the ld. A.R. 3.4. We have carefully considered the rival submissions and also perused the materials available on record and the paper book submitted by the ld. A.R. At the outset, it is observed that this issue is covered in favour of the assessee in assessee's own case by the order of the ITAT, 'B' Bench, Ahmedabad dated 31.05.2011 in ITA No.460/Ahd/2008 for the assessment year 2001-02 as submitted by the ld. A.R., wherein the Tribunal held as under:
"5. We have heard both the sides at some length. We have also carefully perused several evidences placed on record. It is not in dispute that the sales made to GCL remained outstanding and on the other hand, the assessee had a bank liability. The fundamental objection of the AO was that had the 16 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 assessee recovered the outstanding dues from GCL, then there would not be the liability of that extent of interest of the bank as it was debited to Profit & Loss account under the head "interest and financial charges". That objection was dealt with in the following manner. That as far as the liability towards bank was concerned, the ld.AR has placed on record certain figures to demonstrate that the said bank liability had gone down in comparison to the last year. That it has also been argued before us that even the notional interest @ 15% was incorrect because the prevailing rate charged by the Bank was only 11.25% during the year. That the assessee was otherwise having a regular business transactions of purchase and sales with GCL. That the said GCL was the major customer during that year. That it has also been placed on record that the assessee was purchasing certain raw- material from GCL which was its monopoly product. That the vehement contention was that in the like manner the assessee was also enjoying credit facility against purchases made from GCL. That it was not a case of mere purchase and sale as it has happened with other debtors or customers but the business relationship with GCL was on different terms being a holding company and in that capacity GCL has provided specialized services to assessee in the field of manufacturing and marketing. All these facts were narrated to ld.CIT(A) through written submissions which were placed before us on page Nos.138 to 190 of paper-book. From this discussion, it is evident that the assessee-company had a regular business transaction and it was not for any extraneous consideration. In the regular course of business purchases and sales have been made with the said concern and not with the intention to siphon out the borrowed funds. The factum of the case thus demonstrated that the assessee has taken a commercial decision keeping in mind the interest of its business and the other surrounding circumstances under which the assessee was getting facilities. Once it was a commercial decision, then the Courts have held that it is not proper for the revenue authorities to step into the shoes of a business man to decide whether such a commercial decision was advantageous or not. Rather, we are of the view that the AO has proceeded merely on this presumption that the 17 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 borrowed funds of Bank of Baroda have been siphoned to GCL,but no specific instance or transaction was demonstrated. As far as the ld.CIT(A)'s view was concerned, the grant of four months credit facility also appeared to be on presumption because that facility must not be applied in uniform manner to all the parties. In general, as per the business trend, each customer has its own terms and condition and, therefore, the terms of payment differ from one party to another party. A businessman's view point must be seen and for that, the test of commercial expediency to be adjudged from business benefit. Therefore by one single yard-stick all the transactions having different nature of character or modalities must not be measured. We are of the view that this is not the case where some undue advantage was passed on to the said holding company. In the light of the above discussion, we therefore conclude that the disallowance was made merely on certain presumptions which could not be substantiated through some cogent evidence therefore the view taken by the AO deserves to be reversed. Likewise, we are also of the view that the part relief granted by the ld.CIT(A) was also on a presumption that the credit facility to all the customers against sales was uniform, so the assessee should have given the credit facility of four months to GCL as well. This presumption had no substance, therefore, considering the totality of the circumstances of the case, we hereby reverse the said view of the ld.CIT(A) as well. This ground of the assessee is, therefore, allowed."
3.5 Therefore, following the above decision of the ITAT, we allow the ground no.1 of the assessee in its favour and dismiss the ground nos.1 and 2 of the Revenue.
4. Ground No.2 of the assessee's appeal - Disallowance of Rs.1,21,17,001/- : This issue is relating to confirmation of disallowance by the ld. CIT(A) of Rs.1,21,17,001/- in respect of additions made on account of reimbursement of marketing expenses to Gharda Chemicals Ltd., by the ld. A.O. after invoking provisions of section 40A(2)(b) of the 18 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 I.T. Act, 1961 holding that the expenditure in question is unreasonable and excess. Brief facts of this issue is that the assessee company had incurred expenditure of Rs.1,21,17,001/- under the head of 'Marketing expenses' paid to Gharda chemicals Ltd. in terms of agreement entered into by the assessee with Gharda Chemicals Ltd. for marketing of formulation in Toll pack business. In this context, the assessee submitted that they have furnished detailed note on marketing expenditure. As per the ld.AO, a similar issue of reimbursement of expenses was involved in the assessment years 1999-2000 to 2002-2003 and the same was disallowed as elaborately discussed in the respective assessment orders. The assessee company was requested to justify its claim for the allowability of marketing expenses vide point no.3 of the show-cause letter dated 15.02.2006. In response to the above, the assessee contended that looking at the size of the market of toll pack products in the country, availability of many brands of toll pack products in the market, their target for sales and cost of setting up their own infrastructure for toll pack products, it was considered expedient to avail the services of its holding company, namely, GCL for marketing of toll pack products considering their well-established existing marketing network throughout the country. The assessee further contended that GCL was also providing technical know-how and specialized services in the field of manufacturing i.e., recipes for products, packing and labeling of products etc. without charging any fees or any royalties. The assessee company had also tabulated the sales of Toll Pack Products and compared with the total turnover to buttress its claim that the marketing expenses were commensurate with that of the total business achieved in respect of Toll Pack Products. The assessee company also contended that on sales of Formulation, 10% marketing expenses were paid to GCL. Necessary details of product wise and depot wise sales made were 19 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 also filed. The ld. AO, after considering the contention of the assessee- company, observed that the payment of marketing expenses to GCL was not at all necessary as the assessee-company had incurred total selling expenses of Rs.344.26 lakhs which includes the expenses like sales promotion expenses, field staff expenses, transportation expenses etc. which are over and above the marketing expenses paid to GCL at Rs.1,21,17,001/- The ld. AO further observed that the assessee- company has also incurred other direct expenses and commission on sales to various parties. The assessee-company has not been able to justify how it had derived the total amount to exact Rs.1.21 crores, which is 10% of total sales made through GCL in all these years. According to the ld. AO, there is no base for marketing expenses claimed by the assessee company. It is, therefore, clear that the payments are not towards marketing expenses but for extraneous consideration and with a view to reduce its taxable profits. The ld. AO also did not accept the explanation of the assessee company due to the following reasons:
(a) The assessee has not produced any details regarding the expenses incurred by marketing agent for the marketing purposes.
(b) Debit entry was passed at the end of the year, though the details of sales were periodically maintained.
(c) No such type of an agreement was made by the assessee with any other agent in the normal course of business.
(d) Nature and details of services rendered by GCL was not furnished.
The ld. AO, while framing the assessment order, cited the decisions of the Hon'ble Supreme Court in the case of Laxmi Ratan Cotton Mills Ltd. Ltd. -vs- CIT 73 ITR 634 (SC) and also in CIT-vs- Swadeshi Cotton Mills Co. Ltd. 63 ITR 57 (SC). The ld. AO also cited decision of the Hon'ble Gujarat High Court in the case of CIT-vs- Shahibaug Entrepreneurs (P) 20 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 ltd. 215 ITR 810. Lastly, the AO disallowed a sum of Rs.1,21,17,001/- under section 40A(2)(a) r.w.s. 40A(2)(b) r.w.s. 37(1) and added to the total income by observing that the provisions of section 40A(2)(a) r.w.s. 40A(2)(b) are clearly applicable in this case in respect of this payment as the assessee has not filed any supporting evidence to justify the claim of reimbursement of such expenses.
4.1 The assessee carried the matter before the ld. CIT(A). The ld. CIT(A), after considering the submissions of the assessee and the observations made by the ld. A.O. in the assessment order, confirmed the order of the ld. A.O. 4.2 Before us, the ld. A.R. reiterated the submissions made before the revenue authorities and vehemently argued the matter in favour of the assessee. On the other hand, the ld. D.R. relied upon the orders of the revenue authorities.
4.3 We have heard the rival submissions and perused .the materials available on record and the paper book submitted by the parties. It is pertinent to note that this issue was decided against the assessee by the ITAT, 'B' Bench, Ahmedabad in its earlier orders dated 12th March, 2010 and 19th March, 2010. The relevant portion of the order of the Tribunal dated 19th March, 2010 is reproduced hereinbelow:
"We have in our order dated 12.3.2010 in ITA no. 1438/Ahd./2007 in the assessee's own case for the AY 1999-2000 held on this issue as under:
14. We have considered rival submissions and material available on record Learned Counsel for assessee referred to agreement dated 7.04.1997 (PB-131) executed between assessee and the holding company through which the holding company M/s. Gharda Chemical Company Ltd. was appointed as marketing agent for the 21 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 assessee to carry out the task of marketing of the products of the assessee. In this agreement, it is mentioned that the marketing efforts and for the product developments efforts by the marketing agent, the assessee being manufacturer shall compensate the marketing agent/ holding company by way of payment of one time fees of Rs.2 crores (Clause-8). This payment shall be made after successful placement of the product in concerned State. The assessee shall keep the above amount as security deposit and the amount will be adjusted against the fees of Marketing Agent and Marketing Agent shall pay interest @ 13.5% per annum to the assessee from the date of receipt to the date of adjustment. We may mention that none of the clauses in this agreement have explained reimbursement of any marketing expenditure by the assessee to the holding company. The assessee explained that after this agreement, another supplementary agreement was executed on 9.10.1998 for payment on marketing expenses @10% of sales of formulation (Toll pack). However, such a supplementary agreement or the justification to enter into such agreement, which is contrary to the main agreement dated 7.04.1997 is not explained before the authorities below and did not find mention in the impugned orders. By supplementary agreement dated 9.10.1998, the assessee has completely changed the earlier agreement dated 7.04.1997. During the course of the agreement, the learned counsel for assessee has not pointed out any justification for executing such a supplementary agreement by which entire main agreement was reviewed/changed except that it was mentioned in the note on marketing commission PB-167. Only debit note was produced before the authorities below to show that the payment is made to the holding company. Learned Commissioner of Income Tax (Appeals) specifically noted the observation of the Assessing Officer that assessee is an independent company engaged in its manufacturing, sale and export of the products for which it has own marketing network. Learned Counsel for assessee did not dispute the above findings of the authorities below during the course of the argument. It is therefore, clear that assessee was doing the same marketing activities of its product which work was assigned to the holding company through the supplementary agreement. In the main agreement, no such payment was agreed for reimbursement of marketing expenses. Learned Counsel for assessee though referred to note on marketing commission PB-167, but no submissions are made as regards justifiability of the expenditure under the head sales promotion, travelling, conveyance, telephone etc. and vehicle maintenance, because these are the common 22 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 expenditure, which is to be spent by the holding company for its business also. Therefore, assessee was required to file sufficient evidence before the authorities below to claim that some services are rendered by the holding company for the assessee in this way to claim reimbursement of the expenditure but no such efforts have been made. Even no such evidences were filed before the Tribunal. It is also not explained as to why the 10% of the sales have been claimed as reimbursement of the expenditure on the above expenses only. It is also not explained whether holding company has exactly incurred the same expenditure on the above heads at 10% of the sales for and on behalf of the assessee. The explanation of the assessee is thus, not believable that the holding company exactly spent expenditure of 10% of the sales on the above expenditure. As noted above, the nature of the expenses shows that the same would be spent by the holding company for its own purposes therefore, in the absence of specific evidence that the amount is spent by the holding company for the purpose of business of the assessee, the explanation of the assessee could not have been accepted. The assessee has failed to prove any nexus between the payment to the holding company and the expenditure incurred for the purpose of business of the assessee.
We therefore do not find any justification to interfere with the orders of authorities below. The decision cited by learned Counsel for assessee and the circular of the board, would not advance the case of the assessee in view of the facts and circumstances noted by the authorities below. We accordingly, confirm the findings of authorities below and dismiss this ground of appeal of the assessee.
13. In the light of our aforesaid decision in the appeal for the AY 1999-2000 and undisputedly facts in the year under consideration being similar, we confirm the findings of the ld. CIT(A) and accordingly, ground no. 3 in the appeal of the assessee is dismissed."
4.4 We, therefore, following the above decisions of the ITAT in its earlier orders, uphold the order of the ld. CIT(A) on this issue. Resultantly, this issue of the assessee is dismissed.
5. Ground no.3- Disallowance of Rs.56,79,436/- being sales promotion expenses :- brief facts are that the assessee had incurred 23 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 sales promotion expenses of Rs.68,19,636/- disclosed under the head 'selling expenses' of Rs.344.26 lacs for payment towards purchase of dry fruits, sweets, etc. for distributing to customers. The AO had allowed Rs.11,40,200/- out of total sales promotion expenses of Rs.68,19,636/- and disallowed the balance of Rs.56,79,436/-, on the ground that most of the expenses were incurred in cash and that supporting evidences and justification for incurring such expenses were not furnished and moreover there was substantial increase in such expenses as compared to previous year. For the assessment year 2002-03, the expenses of Rs.13,53,600/- were considered reasonable and were allowed. Accordingly, expenses to the extent of Rs.11,40,200/- was considered reasonable and allowed for the relevant assessment year and the balance amount of Rs.56,79,436/- was disallowed.
5.1 Aggrieved, the assessee went in appeal before the ld. CIT(A). The ld. CIT(A), after considering the submissions made by the assessee, confirmed the disallowance made by the ld. AO by observing that though the turnover of the business has decreased from Rs.126.61 crores in assessment year 2002-03 to Rs.106.38 crores, the sale promotion expenses have increased substantially from Rs.16.12 in assessment year 2002-03 to Rs.68.19 in assessment year 2003-04. Since the assessee's business has remained similar to the earlier years and admittedly majority of the expenses were incurred in cash through vouchers and no explanation could be provided for four fold increase in such expenditure, the disallowance of such expenses by reasonable assumption by the AO is valid.
5.2 During the course of hearing both the parties agreed that the issue may be adjudicated in the light of decision of the ITAT for the AY 1999- 24 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 2000. The Tribunal, in its order dated 12.3.2010 in ITA no. 1438/Ahd./2007 in the assessee's own case for the AY 1999-2000 held this issue as under:
"8. On ground no.4, assessee challenged the addition of Rs.7,12,866/- out of sale promotion expenses. The assessee had incurred sales promotion expenses of Rs.33,19,680/- as compared to Rs.13,69,055/- in the immediately preceding year. The expenditure of Rs.28,51,464/- was claimed towards payment of purchase of silver coins and articles from M/s. Pratap Jewellers, Mumbai for distributing to customers on formulation packs. On being asked the assessee submitted before the Assessing Officer that the assessee distributed silver coins and other articles to customers for the first time as it had launched new products in consumer packs. It was also submitted that because of this the sale of formulation was Rs.7.27 crores. Assessing Officer was of the view that the coins were purchased in December, 1998 & January 1999 and as the product was launched in September, 1998 it would be difficult to accept that entire stock of Rs.28,51,464/- was exhausted between December, 1998 to March, 1999. Thus, 75% of the said claim was allowed and the balance 25% amounting to Rs.7,12,866/- was disallowed. It was submitted before Learned Commissioner of Income Tax (Appeals) that amount was spent wholly and exclusively for the purpose of business and that in the AY 1996-97, Learned Commissioner of Income Tax (Appeals) on the identical matter, deleted the addition. The Learned Commissioner of Income Tax (Appeals) however, confirmed the addition.
9. After hearing rival submissions, we are of the view that addition is clearly unjustified. The Assessing Officer made part of the addition by presuming that the entire stock would not have been adjusted upto March 1999. The Assessing Officer on the presumption without pointing out any inadmissible item, made the ad-hoc addition which is not permissible in law. The Assessing Officer has not disputed the genuineness of the expenditure laid out wholly and exclusively for the purpose of business by the assessee. The Learned Commissioner of Income Tax (Appeals) confirmed the presumption of the Assessing Officer on making the part addition by holding it to be a valid presumption of the Assessing Officer in disallowing part addition. It therefore, appears that the authorities below have made the addition on this issue on 25 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 mere presumption without bringing any adverse material against the assessee. We accordingly set aside the orders of authorities below and delete the entire addition. This ground of appeal of assessee is allowed.
30. In the light of our aforesaid decision in the appeal for the AY 1999-2000 and undisputedly facts in the year under consideration being similar, we set aside the order of the ld. CIT(A) on this issue and accordingly, allow ground no. 8 in the appeal of the assessee."
5.3 We, therefore, following the decision dated 19th March, 2010 of the Tribunal, delete the disallowance made by the AO and confirmed by the ld. CIT(A). Resultantly, this ground of the assessee's appeal is allowed.
6. Ground no.4 of assessee's appeal - disallowance of commission expenditure amounting to Rs.23,21,500/- :- brief facts of this issue are that during the year under consideration, the assessee had debited commission to following parties on the sale effected by them.
Nipun Finvest Pvt. Ltd. Rs.18,21,500
VFC Industries ltd. Rs. 5,00,000
The Assessing Officer observed that only the credit notes in support of the commission payment was furnished without any details of actual services rendered by the above referred parties. It is also stated by the Assessing Officer that commission to the Nipun finvest Pvt.Ltd. was disallowed right from A.Y. 2000-01 to A,Y. 2003-04. The Assessing Officer had also issued summons to both the parties to furnish details relating to the commission income however nobody attended in response to the summons. It is indicated by Assessing Officer that the assessee company had claimed to have secured business from Nipun Finvest Pvt. Ltd. for sale of items of Maharashtra Insecticides Ltd. but details of services rendered by these commission agents could not be furnished. It is also mentioned by Assessing Officer that the assessee company 26 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 had given a loan of Rs.2.25 crores to Nipun Investment Pvt.Ltd. an associate concern of Nipun Finvest Pvt. Ltd. and the said amount was claimed to be non-recoverable by the assessee whereas Nipun Finvest Pvt. Ltd. operating from the same premises at Mumbai was considered reliable and paid sales commission. As regards commission payment of Rs.5 lacs to VFC Industries no details were furnished by the assessee company. Hence, as the assessee failed to furnish any details, the ld. A.O. disallowed Rs.23,21,500/- on account of commission expenditure.
6.1 On appeal, the ld. CIT(A) confirmed the disallowance made by the ld. A.O. 6.2 During the course of hearing both the parties agreed that this issue may be adjudicated in the light of decision of the ITAT for the AY 2000- 2001.
6.3 We have heard the rival submissions and perused the materials available on record. It is observed that this issue is covered by the decision of the Tribunal in its order dated 19.3.2010 in ITA no. 459/Ahd/2008 in the assessee's own case for the AY 2000-2001, wherein it has been held on this issue as under:
"5. We have heard both the parties and gone through the facts of the case. We find that in the preceding year also disallowance of Rs.5 lakhs on sales commission to Nipun Finvest Pvt. Ltd. was made and on appeal , the ld. CIT(A) dismissed the appeal of the assessee. In the year under consideration, as pointed out by the AO, though terms and conditions of commission payment were fixed vide letter dated 19.05.1999, Rs.5,00,000 was paid to M/s Nipun Finvest P Ltd. on 20.4.1999. Further all the commission payments were in round figures such as Rs.5 lacs, Rs.7 lacs, etc. whereas if it was worked out at percentage of sales it was not likely to be in round figures. The onus is on the assessee claiming deduction for payment of commission to establish that payments had been made for services rendered. There is nothing to suggest 27 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 in the impugned orders that the aforesaid party had rendered any services to the assessee nor the ld. AR appearing on behalf of the assessee referred us to any such evidence. Mere existence of an agreement, without anything more, is not enough for allowance of deduction[ Lachminarayan Madan Lal Vs. CIT,86 ITR 439(SC),Precision Instrument Mfg. Co. Vs. CIT,137 ITR 5(Del.). The burden of proving that the amount of commission was actually expended as commission for the purpose of business lies on the assessee as held in Goodlas Nerolac Paints Ltd. vs. CIT,137 ITR 58(Bom.). Since in the instant case not even an iota of evidence has been brought to our notice that the aforesaid party had indeed rendered services to the assessee nor genuineness of payment of commission has been established, we are not inclined to interfere with the findings of the ld. CIT(A). Accordingly, the disallowance of commission of Rs.17,63,500 is confirmed."
6.4 We, therefore, following above order of the Tribunal, uphold the orders of the ld. CIT(A). Resultantly, this ground of the assessee's appeal is dismissed.
7. Ground no.5 of assessee's appeal - Confirmation of addition of notional interest of Rs.27,00,000/- : brief facts are that the assessee company had provided interest income for financial year 1997- 98 and 1998-99 for the inter-corporate deposits placed with M/s. Nipun Investment Pvt. Ltd. of Rs.4,50,00,000/-. The balance recoverable in the year under consideration was Rs.2,25,00,000/-. However for the relevant assessment year, the assessee company had not provided any interest for the inter-corporate deposits placed with the aforesaid party on the ground that neither interest nor capital has been received during the year. The assessee company had not placed on record any facts as to whether the said amount of capital and interest accrued thereon are not recoverable or doubtful. Further there was nothing on record to show that the assessee company had made any effort for recovery of capital/ interest with the aforesaid company and in view of AS 9 of ICAI which is 28 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 applicable to the assessee, the AO added the interest accrued amounting to Rs.27,00,000/- @12% on inter-corporate deposits to the total income of the assessee.
7.1 The assessee went in appeal before the ld. CIT(A). The ld. CIT(A), after considering the submission of the assessee and the observations made by the AO in the assessment order, confirmed the addition made by the AO.
7.2 During the course of hearing both the parties agreed that this issue may be adjudicated in the light of decision of the ITAT in assessee's own case for the AY 2000-2001.
7.3 We have heard the rival submissions and perused the materials available on record. It is observed that this issue is covered by the decision of the Tribunal in its order dated 19.3.2010 in ITA no. 459/Ahd./2008 in the assessee's own case for the AY 2000-2001, wherein it has been held on this issue as under:
"22. We have heard both the parties and gone through the facts of the case. Undisputedly the assessee is consistently following mercantile system of accounting and as pointed out by the ld. CIT(A) the assessee had shown interest on ICDs on accrual basis until the period relevant to the AY 1999-2000. However in the year under consideration, such interest has not been shown on the ground of uncertainty of its collection . In from 3CD [pg. 123 of paper book] in col.11(a), the auditors have mentioned that interest income on doubtful ICDs is recognized on realization basis. Before the AO, the assessee did not place any material, suggesting that the principal or interest accrued thereon were not recoverable or doubtful. However, the ld. CIT(A) found that an amount of Rs.160 lacs had already been recovered until 31.3.2006. Before us, the assessee submitted that entire amount on account of ICDs has been recovered until 31.3.2007.Of this Rs. 50 lacs was recovered in January,2004,Rs. 1 crore in April,2004,Rs. 60 lacs in July,2005 & remaining Rs. 15 lacs in March,2007. However, the assessee is 29 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 silent on recovery of interest. There is nothing to suggest that the financial condition of Nipun Investment P Ltd. was such that it was unable to pay its debts or that the said company was insolvent. Not an iota of evidence has been placed before us either for the view taken by the assessee that accrued interest was not recoverable nor the relevant terms and conditions of the ICDs were placed before us. It is well settled that taxability of income is attracted not only when income is actually received but also when it accrues. Income accrues when it falls due, that is to say when it becomes legally recoverable, irrespective of whether it is actually received or not and accrued income is that income which the assessee has a legal right to receive. Since the assessee had been consistently following mercantile system of accounting and accordingly, had shown interest accrued on ICDs as its income until the AY 1999- 2000 while there was no material before the lower authorities nor even before us, suggesting that recovery of principal amount or interest accrued thereon was doubtful, we are of the opinion that income had accrued to the assessee and that the aforesaid amount was not a sticky debt, having already been recovered. This view which we have taken finds support from the decision of the Hon'ble Delhi High Court in the case of Magnum Power generation Ltd. Vs. Addl. CIT,311 ITR 332(Delhi). In these circumstances, especially when there is no material before us for taking a different view in the matter, we are not inclined to interfere. Therefore, ground no. 6 in the appeal of the assessee is dismissed.."
7.4 We, therefore, following above order of the Tribunal, uphold the order of the ld. CIT(A). Resultantly, this ground of the assessee's appeal is dismissed.
8. Ground no.6 of assessee's appeal - Disallowance of miscellaneous expenditure amounting to Rs.41,179/-:- brief facts of the issue are that the ld.AO noticed that the assessee company had debited miscellaneous expenses of Rs.238.42 lacs and staff welfare and other expenses of Rs.22.47 lacs which consists of the following expenses:
30ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 Guest house expenses Rs. 2,28,065/-
Misc. expenses Rs. 8,23,579/-
Travelling expenses Rs.31,24,276/-
Rs.41,75,920/-
The ld. AO found that the expenses comprised of expenditure on milk, tea, dry fruits, gold coins and lunch expenses. The ld.AO observed that most of the above expenses were incurred in cash and therefore not verifiable. Accordingly, 5% of these expenses Rs.64,23,846/- (Rs.41,75,920/- + Rs.22,47,926/-) amounting to Rs.3,21,192/- was disallowed by the ld. AO and added to the income of the assessee.
8.1 On appeal before the ld. CIT(A), the assessee argued that the complete details of expenditure were furnished before the AO and these expenditure was vouched. Further in earlier assessment years 1997-98 and 1998-99, the ld. CIT(A) has restricted the disallowance to 5% of the expenditure on miscellaneous items and not relating to other expenditure. After considering the submissions of the assessee, the ld.
CIT(A) restricted the disallowance to 5% of miscellaneous expenses of Rs.8,23,579/- i.e. Rs.41,179/- and deleted the balance disallowance by following the order of the predecessors for the earlier assessment years 1997-98 and 1998-99.
8.2 During the course of hearing both the parties agreed that this issue may be adjudicated in the light of decision of the ITAT in assessee's own case for the AY 2001-2002.
8.3 We have heard the rival submissions and perused the materials available on record. It is observed that this issue is covered by the decision of the Tribunal in its order dated 31.5.2011 in ITA no.
31ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 460/Ahd./2008 in the assessee's own case for the AY 2001-2002, wherein it has been held on this issue as under:
"17. On hearing the submissions of both the sides, we are of the view that the reason for disallowance, as per AO, was that the expenditure was incurred in cash and it could not be verified. Ld. CIT(A) has partly allowed the same following the decisions of his predecessors, therefore, restricted 5% of the total disallowance. We therefore, deem it proper that the disallowance being nominal in nature which was partly upheld by ld. CIT(A) for want of verification being incurred in cash, therefore under the circumstances, no disturbance is required. With the result, this ground of the assessee is hereby dismissed."
8.4 We, therefore, following above order of the Tribunal, uphold the order of the ld. CIT(A). Resultantly, this ground of the assessee's appeal is also dismissed.
9. Ground no.7 of assessee's appeal - Confirmation of reduction of 90% of notional interest income of Rs.27,00,000/- and other income of Rs.5,16,457/- made by the ld.AO for working out claim under section 80HHC:- brief facts are that in the return of income the assessee has claimed deduction under section 80HHC of Rs.30,79,128/- on the turnover of Rs.1,06,38,38,922/-. The assessee had not included excise duty in the turnover. However, the ld.AO was of the view that in view of amendment to section 80HHC, Explanation below section 80HHC defines 'total turnover' as turnover which does not include freight or insurance attributable to the transport of goods beyond the customs station and also include profit on sale of import license, cash assistance received against export under any scheme of the Government of India and custom & excise duty drawback on exports. Hence for computing the deduction u/s. 80HHC total turnover should be inclusive of excise duty.
32ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 9.1 Before the ld. CIT(A), the assessee argued that in view of the judgment in the case of CIT-vs- Chloride Indis Ltd. 256 ITR 625(Cal.) and CIT vs. Sudarshan Chemicals Industries Ltd. 245 ITR 769 (Bombay) and the decision of Hon'ble ITAT Special Bench Calcutta in the case of IFB Agro Industries -vs- DCIT 83 ITD 96 (Cal), the sales tax and excise duty be excluded from the total turnover. The assessee further argued that the AO had erred in reducing the eligible profit by 90% of notional interest of Rs.27,00,000/-. The assessee again submitted that 90% of the miscellaneous income of Rs.4,16,457/- form part of business income which has been wrongly reduced by the ld.AO. It was further contended by the assessee that for assessment years 1996-97 and 1997-98, the issue was decided in favour of the assessee by the then ld. CIT(A). After considering the submissions of the assessee, the ld. CIT(A) opined that the AO was justified in excluding 90% of the above income in view of the provisions of section 80HHC.
9.2 We have heard the rival submissions at the time of hearing and perused the materials available on record. It is observed that this issue is also covered by the decision of the ITAT, Ahmedabad in its order dated 31.05.2011 in ITA No.460/Ahd/2008 for the assessment year 2001-02 in assessee's own case. The relevant portion of the Tribunal's order dated 31.05.2011 is reproduced hereinbelow:
"18.1. As per the calculation of deduction of section 80HHC, annexed as Annexure-A of assessment order, it was noticed that there was a disallowance of 90% of the interest from Nipun Investments Pvt Ltd. of Rs.38,81,250/-. When the matter was carried before the first appellate authority, the calculation of the AO was confirmed. Ld.AR has submitted before us that this ground is consequential in nature because the issue of notional interest from Nipun Investments Pvt. Ltd. has been taken up in Ground No.4 of this appeal. We have already taken a view that interest on ICD laced with Nipun Investments Pvt. Ltd. had accrued to the 33 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 assessee for the year under consideration. Now the question is that once the assessee has not offered the interest from the said ICD, whether the AO was justified in taking into account the impugned notional interest while computing the deduction of section 80HHC. According to us, this calculation deserves to be revised in the light of our decision on Ground No.4 as also the observations made hereinabove so as to recalculate as per law. We order accordingly and this ground may be treated as allowed for statistical purposes.
9.3 We, therefore, following the ratio of order of the Tribunal, set aside the order of the ld. CIT(A) and remit back this issue to the file of the AO in the light of the above observation of the Tribunal rendered in its order in ITA No.460/Ahd/2008 for the assessment year 2001-02. Resultantly, this ground of the assessee's appeal is allowed for statistical purposes.
9.4 Hence, the assessee's appeal in ITA No.462/Ahd/2008 for the assessment year 2003-04 is partly allowed for statistical purposes whereas the Revenue's appeal in ITA No.501/Ahd/2008 is dismissed.
10. Now we deal with ITA Nos. 463/Ahd/2008 of assessee's appeal and 502/Ahd/2008 of the Revenue's appeal for the assessment year 2004-2005.
10.1 It is observed that ground nos.1,2,3,5,6,7 and 8 of assessee's appeal in ITA No.463/A/2008 are identical with that of ground nos.1,2,3,4,5,6 and 7 which have already been dealt in paragraph nos. 3,4,5,6,7,8 and 9 of ITA No.462/Ahd/2008 for the earlier assessment year. Therefore, following the same ratio, we allow ground nos.1 and 3 of the assessee's appeal in favour of the assessee relating to disallowance of interest payment and disallowance of sales promotion expenses and dismiss the ground nos.2,5,6 and 7 of assessee's appeal on account of 34 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 disallowance of marketing expenses, disallowance of commission expenditure, disallowance of notional interest and disallowance of miscellaneous expenses and the ground no.8 regarding deduction under section 80HHC is set aside to the file of the AO. Consequently, the ground nos.1 and 2 taken in appeal by the Revenue are also dismissed.
10.2 Regarding ground no.4 of assessee's appeal on account of plant and machinery of Rs.9,74,339/-, brief facts of the issue are that the ld. AO observed that on verification of the details filed during the course of assessment proceedings, it is seen that the assessee company has claimed an amount of Rs.2,90,06,087/- under the head 'repair and maintenance expenses', out of which amount of Rs.1,98,78,767/- belongs to repairs and maintenance to plant and machinery. Out of such expenditure, it is observed that certain items debited therein, are capital in nature. The ld. AO also found that some machinery are in the nature of independent machine or apparatus and therefore are to be treated as capital expenditure. Accordingly, the purchases of the following machinery were not considered as current repairs and found to be incorrectly claimed under the revenue head.
1) Metering Pump BR2 Model: DP/60/HYD62.6/S Rs.1,40,658/-
2) MS Blower HP: 10,CAP.20000 M3/HOUR Rs.1,22,129/-
3) Tolune Condensor for R-116 Plant A Rs.1,75,680/-
4) Condensate Heat Recovery Units Thermo Rs.7,11,552/-
TOTAL Rs.11,50,019/-
Assessee Company contended that these machineries were part of the plant and therefore eligible to be considered as repairs and maintenance expense under the revenue head. This machinery had to be replaced due to continuous usage for many years as a part of the highly corrosive plant. The assessee company placed reliance on the various judgments 35 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 in support of its contentions. However, the ld.AO concluded that the replacement of the above-stated machineries to be capital expenditure.
The ld. AO further observed that most of the machineries purchased mentioned above pertain to the period prior to 1985. Hence, the ld. AO disallowed the expenditure on account of replacement of plant and machinery.
10.3 During the course of hearing, the ld. A.R. filed certificates of the General Manager of the assessee company stating that these equipment are part of the plant along with the invoice copies for the purchase of machinery/equipment etc. before us, which were not submitted before the revenue authorities earlier. Hence, considering the submissions of both the sides, we set aside this issue to the file of the ld.AO to verify the issue afresh, after giving opportunity of being heard to the assessee. Resultantly, this issue of the assessee is allowed for statistical purposes.
10.4 Ground No.8 of ITA 462/Ahd/2008 and Ground No.9 of ITA 463/Ahd/2008 being the summary of the grounds raised in the respective appeals are therefore ignored. Ground no.9 of ITA 462/Ahd/2008 and Ground no.10 of ITA 463/Ahd/2008 are general in nature and therefore do not survive for adjudication.
11. Now we take up appeal in ITA Nos.2566/Ahd/2008 of the assessee and ITA No.2647/Ahd/2008 of the Revenue for the assessment year 2005-06.
11.1 At the outset it is observed that ground nos.1,2,4 & 5 of assessee's appeal in ITA No.2566/A/2008 are identical, which have already been dealt in paragraph nos. 3, 5, 6 and 7 of ITA No.462/Ahd/2008 for the earlier assessment year. Therefore, following the same ratio, we allow 36 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 ground nos.1 and 2 of the assessee's appeal in favour of the assessee relating to disallowance of interest payment and disallowance of sales promotion expenses and dismiss the ground nos.4 and 5 of assessee's appeal on account of disallowance of commission expenditure and disallowance of notional interest . Consequently, the ground no.1 & 2 taken in appeal by the Revenue is also dismissed.
11.2 Regarding ground no.3 of assessee's appeal in ITA No.2566/A/2008, during the course of hearing, the ld. A.R. filed some certificates before us, which were not submitted before the revenue authorities earlier. Hence, considering the submissions of both the sides, we set aside this issue to the file of the AO to verify the issue afresh, after giving opportunity of being heard to the assessee. Resultantly, this issue of the assessee is allowed for statistical purposes.
11.3 Regarding ground no.6 relating to confirmation of addition to the extent of Rs.26,76,655/- made by the ld. AO under section 40(a)(i) of I.T. Act, brief facts of this issue are that during the course of assessment proceedings, the ld. AO asked the assessee to furnish complete details of TDS deducted on payments towards various expenses and also on annual maintenance charges paid to M/s. Gharda Chemicals Ltd. The ld. AO during verification noticed that the assessee has not deducted TDS as per the provisions of the Act. The ld. AO observed that proper TDS has not been deducted in respect of various payments and regarding assessee's claim that payment to GCL was reimbursement and no TDS was deductible was not sustainable. Hence, the ld. AO made addition of Rs.35,62,622/- as per provisions of section 40(a)(i) of the Act.
11.4 Before the ld. CIT(A), the assessee reiterated the submissions made before the ld. AO and further submitted that there was no short 37 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 deduction of TDS in respect of payments made to the parties. All the parties are C&F agents through whom the assessee company is effecting sales. C&F agents on behalf of the assessee paid the freight charges to various transporters and raised claim in respect thereof and the same were reimbursed by the assessee to them. On the invoice amounts, the ld. AO had calculated TDS at the relevant rate and compared the same with the TDS made by the assessee which is incorrect because reimbursement of freight to the said parties is not income of the said parties and therefore, no TDS is required to be made as the tax is to be paid only on income. TDS deducted by the assessee is in respect of commission payments which is income of the C&F agents and on the said amount TDS has been deducted and there was no short fall. The assessee argued that the AO has wrongly computed TDS with respect to reimbursement of freight which has resulted into disallowance of expenditure on freight. In respect of C&F agents, Okara Trade Parcel Carriers, the assessee submitted that tax has been duly deducted from the payment made to the said party @2% upto August, 2004. Thereafter, the said party has furnished certificate from the Income Tax authority for lower deduction of tax at the rate of 0.25% and thereafter on payments made after 31st August, 2004, tax has been deducted at lower rate and there is no default of short deduction of TDS in respect of payment made to the said party. Regarding less deduction of TDS in respect of petty labour payment, the assessee submitted that the said payment is made to casual labourers engaged by the assessee for unloading the goods and these petty payments are much below the limit on which tax is required to be deducted. Regarding payment to Gharda Chemicals Pvt. Ltd. of Rs.4,27,039/- the assessee submitted that the said payment is in respect of reimbursement of freight expenditure incurred by Gharda Chemicals Pvt. Ltd. on behalf of the assessee. Gharda Chemicals Pvt.
38ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 Ltd., while making payment to the transporter on behalf of the assessee, has duly deducted tax at source from the said payment which is evident from the certificates issued by Gharda Chemicals Pvt. Ltd. As the expenditure is reimbursement of freight, which is not the income of Gharda Chemicals Pvt. Ltd., no tax is required to be deducted by the assessee and, therefore, no tax was deducted. Regarding payment to Gharda Chemicals Pvt. Ltd. of Rs.2,18,750/-, the assessee argued that this payment is reimbursement of expenditure in relation to annual maintenance charges to Ramco Systems Ltd. for ERP Software programme for which consolidated agreement was entered into with Gharda Chemicals Pvt. Ltd. and the assessee and the said Ramco Systems Ltd. raised bills for annual maintenance charges in the name of Gharda Chemicals Pvt. Ltd., wherein share of the assessee was also mentioned. While making payment to the said company, Gharda Chemicals Pvt. Ltd. is deducted tax and thereafter Gharda Chemicals Pvt. Ltd. issued debit notes to the assessee in respect of the same which has been reimbursed by the assessee to the said company. Therefore, the assessee submitted that it is not the income of Gharda Chemicals Pvt. Ltd. and tax has been duly deducted by them while making payment to the account of Ramco Systems Ltd. and thus the assessee has not committed any default in respect of TDS.
11.5 On appeal, after considering the submissions of both the sides and the facts of the case, the ld. CIT(A) upheld the action of the AO in respect of payment to C&F agents, that TDS was deductible on the invoice amount inclusive of transportation charges. Regarding M/s. Okara Trade Parcel Carriers, the ld. CIT(A) directed the AO to verify the computation of disallowance after considering the rate of 2% TDS upto August, 2004 and 0.25% from September, 2004 onwards. Regarding 39 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 reimbursement of expenditure of annual maintenance charges to Ramco Systems Pvt. Ltd., the ld. CIT(A) observed that the holding company of the assessee i.e. Gharda Chemicals Ltd. had made payment to Ramco systems Pvt. Ltd. for ERP software and that in terms of tripartite agreement between GCL, assessee and Ramco systems, the assessee has to partly bear the cost of maintenance charges. Regarding payment of Rs.9,35,417/- to Ramco systems, the ld. CIT(A) deleted Rs.2,18,750/-. Regarding disallowance of expenditure of Rs.4,27,039/-, the ld. CIT(A) opined that there was no contract between the assessee and the transporter and there was no liability to deduct TDS. Hence, the ld. CIT(A) deleted Rs.4,27,039/-. Thus out of total disallowance of Rs.35,62,622/-, the disallowance of Rs.6,45,789/- (Rs.2,18,750/- + Rs.4,27,039/-) was deleted and balance disallowance of Rs.26,76,655/- relating to freight charges to other C&F agents was confirmed.
11.6 We have heard the rival submissions and perused the materials on record. The ld. A.R. at the time of hearing submitted there was no short deduction of TDS in respect of payments made to the parties. All the parties are C&F agents through whom the assessee company is making sales. C&F agents on behalf of the assessee paid the freight charges to the various transporters and raised claim in respect thereof and the same were reimbursed by the assessee to them. The ld. D.R. opposed to the above submission of the ld. A.R. It is pertinent to note that if TDS is deducted for payment made towards reimbursement of freight in the cases where the TDS are already deducted by the payee then it will amount to double deduction of TDS. If the TDS is deducted by the payee on behalf of its principal then the principal who reimbursed this expenses to the payee need not once again deduct TDS. If done so, it will amount to double deduction of TDS. Therefore, we are of the opinion that this 40 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 issue is to be remitted back to the file of the ld. AO to verify whether there was such double deduction or short deduction of TDS by the assessee and decide the matter in the light of our discussion hereinabove. Hence, this issue of the assessee's appeal is allowed for statistical purposes.
12. Regarding ground no.3 & 4 of Revenue's appeal on account of interest on accrual basis amounting to Rs.17,00,000/-, brief facts are that on verification the ld. AO observed that the assessee company had advanced ICD of Rs.100 lacs to M/s. Lok Housing & Construction Pvt. Ltd. and the assessee company was regularly receiving interest on this deposit up to August, 1996. However the interest income has not been shown for the year under consideration. The assessee was thus asked as to why interest income should not be added as the company is maintaining its accounts on mercantile system. The assessee submitted in assessment proceedings that the cheque issued by Lok Housing & Construction Ltd. in August, 1996 was returned unpaid and thus case was filed under Negotiable Instrument Act. Further the Lok Housing & Construction Ltd. is before BIFR. It is also submitted that in A.Y. 2006-07 the party had refunded the principle amount with interest and the same was offered for taxation in A.Y. 2006-07. However the Assessing Officer has not accepted the contentions and opined that since the assessee is maintaining its books of account on mercantile system as per section 5 and 145 of Income-tax Act the interest income accrued during the current year & should have been offered for taxation. The Assessing Officer thus relying on various decisions on this issue made an addition of Rs.17,00,000/- on account of accrued interest.
41ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 12.2. In appeal, the assessee reiterated the submissions made before the AO and further stated that the assessee has made ICD of Rs. 1 Crore with the said company in F.Y. 1996-97. Thereafter, the assessee has received following amounts from the said company towards principal and interest:
F.Y. Principal Amt. Rs. Interest Amt. Rs.
1997-98 7,13,578 1,24,733
1998-99 2,15,592 37,566
Total 9,29,170 1,62,299
Thereafter, no payment towards principal and interest has been received by the assessee. Thus, balance principal amount of Rs.90,70,830/- (10000000-929170) remained outstanding and interest of Rs.1,62,299/- has been shown as income in the respective years. Thereafter, during the F.Y. 2005-06 relevant to A.Y. 2006-07, final settlement has been reached with the said company and the assessee has received back Rs.90,70,830/- towards principal amount and interest of Rs.27,29,170/- towards full and final settlement. Interest received during F.Y. 2005-06 relevant to A.Y. 2006-07, has been duly offered for tax in that year.
12.3. After considering the submissions of the assessee and the facts of the issue, the ld. CIT(A) deleted the addition of Rs.17,00,000/- by observing as under:
"I have carefully considered the issue at hand. It is not in dispute that Low Housing and Construction Ltd. is a BIFR company and further no interest was received by the appellant since 1996 and that no addition in respect of the interest on ICD was made by AO in any of the earlier years except A.Y. 1997-98 and even for A.Y. 1997-98 the CIT(A) deleted the addition. Further after out of court settlement with Lok Housing and Construction Ltd. the final amount received has been offered to tax in A.Y.2006-07. Under these facts I am of the view that there is no justification for taxing the accrued interest on notional basis by the Assessing Officer. The addition is therefore directed to be deleted."42
ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 12.4 We have heard the rival submissions and perused the materials on record. It is pertinent to note that no interest was received by the assessee since 1996 and that no addition in respect of the interest on ICD was made by AO in any of the earlier years except A.Y. 1997-98 and even for A.Y. 1997-98 the CIT(A) deleted the addition. Further after out of court settlement with Lok Housing and Construction Ltd. the final amount received has been offered to tax in A.Y.2006-07. Under these facts and circumstances of the case, we are of the considered view that there was no justification for taxing the accrued interest on notional basis by the Assessing Officer. Hence, we confirm the order of the ld. CIT(A) on this issue and dismiss the ground taken by the Revenue.
12.5 Resultantly, the appeal of the assessee is partly allowed for statistical purposes whereas the appeal of the Revenue is dismissed.
13. Now we take up the appeal of the assessee in ITA No.2131/Ahd/09 for the assessment year 2006-07.
13.1 It is observed that ground nos.1, 2, 4 and 5 of assessee's appeal in ITA No.2131/Ahd/2008 are identical, which have already been dealt in paragraph nos. 3,5,6 and 9 of ITA No.462/Ahd/2008 for the earlier assessment year. Therefore, following the same ratio, we allow ground nos.1 and 2 of the assessee's appeal in favour of the assessee relating to disallowance of interest payment and disallowance of sales promotion expenses and dismiss the ground nos.4 and 5 of assessee's appeal on account of disallowance of commission expenditure and disallowance of notional interest.
13.2 Regarding ground no.3 of assessee's appeal in ITA No.2131/Ahd/2008 on account of confirmation of disallowance of Rs.2,77,307/-, brief facts are that the ld. AO, on verification of details of 43 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 expenses claimed under the head 'repairs to plants & machinery', was of the view that expenses amounting to Rs.4,90,015/- are capital in nature and provide enduring benefits. Further, the assessee had not submitted any supporting evidences/ justification in favour of claiming the same as revenue expenses. Therefore, the ld. AO after allowing applicable depreciation, made addition of Rs.4,47,540/- on this account. 13.3 On appeal before the ld. CIT(A), the assessee reiterated the submissions made before the ld. AO and submitted that the replacement items etc. are part and parcel of the processing plant and are not independent items of equipment/machinery itself. The assessee also relied on various judicial pronouncements in this regard. The assessee further submitted that similar disallowances made by the AO for assessment year 1992-93, 1993-94 and 1994-95 have been deleted by Hon'ble ITAT holding that the expenditure of replacement of part of Plant & Machinery is a revenue expenditure. The ld. CIT(A) also followed the ITAT order in respect of appeals for the assessment years 1995-96, 1996-97 and 1997-98 and allowed the appeals. Therefore, the assessee requested that addition made by the ld. AO on account of replacement of Rs.4,47,540/- may be deleted. The ld. CIT(A), after carefully considering the submissions of the assessee and perusing the details of various expenditure, allowed Rs.2,12,708/- as revenue expenditure and justified the action of the ld. AO in treating Rs.2,77,307/- as capital in nature. 13.4 We have heard the rival submissions and perused the materials available on record. The learned CIT(A) has analyzed the issue threadbare and has made a finding that certain machineries are functionally independent providing enduring benefits and accordingly, treated them as capital expenditure while as other machineries being replacement or consumables were treated under revenue category. Thus, in our considered opinion, the ld. CIT(A) has rightly decided the 44 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 issue by treating Rs.2,77,307/- as capital in nature. We, therefore, confirm the order of the ld. CIT(A) on this issue and dismiss the ground no.3 taken by the assessee.
13.5 As a result, the appeal in ITA No.2131/Ahd/2009 of the assessee is partly allowed.
14. Now we come to the appeal of the Revenue in ITA No.345/Ahd/2009 for the assessment year 1999-2000. 14.1 Brief facts of this case are that return of income was filed on 31.12.1999 declaring total income of Rs.9,27,29,672/- and assessment under section 143(3) of the Act was completed on 29.12.2000, determining the total income at Rs.127,214,140/-. Against the assessment order, the assessee preferred appeal before the ld. CIT(A) and the ld. CIT(A) partly allowed the appeal and confirmed the additions of Rs.22,74,745/- on account of reimbursement of salary and Rs. 72,76,000/- on account of reimbursement of marketing expenses totaling to Rs.95,50,745/- made under section 40A(2)(b). Subsequently, the penalty proceedings under section 271(1)(c) were initiated. During the course of penalty proceedings, the assessee submitted that detailed explanations along with necessary evidences were furnished in respect of the disallowances. However, the ld. AO did not accept the explanation of the assessee and the ld. AO imposed penalty against the assessee. The assessee submitted that none of the evidences were found to be false by the ld. AO and the explanation was rejected only on the basis of assumption and conjectures. Before the ld. AO, the assessee stated that for the purpose of imposition of penalty under section 271(1)(c) of the Act, such disallowance alone is not sufficient. For imposing the penalty, it is further necessary to bring on record some material or evidences leading to reasonable conclusion that the amount of disallowance under consideration represents the income of the assessee. The assessee 45 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 further submitted that for imposition of penalty, it is also necessary that there is concealment or act of furnishing inaccurate particulars of income on the part of the assessee. Moreover onus lies on the department to prove that the explanation of the assessee is false. The assessee further submitted that there is no material evidence brought on record to prove beyond any doubt that explanation given is false. The assessee relied on various judicial pronouncements in this regard and submitted that considering the facts and circumstances of the case and the judgments relied on, the penalty under section 271(1)(c) cannot be imposed. The ld. AO was of the view that as regard the addition of Rs.22,74,745/- the assessee had failed to furnish the details of services rendered by Dr. Bomi Patel and U.A. Maroo and that only resolution passed at the fag end of the year was submitted. As regards the addition of Rs.72,76,600/, the assessee had not produced the details of expenses incurred under various heads and that mere furnishing of debit note at the end of the year amounts to diversion of profit to the parent company. Accordingly, Rs.95,50,745/- was treated as concealed income and penalty of Rs.33,42,760/- was levied.
14.2 In appeal before the ld. CIT(A), the assessee argued that in terms of board resolution dated 5/2/99, Rs.22,74,745/- was reimbursed for the technical services from Dr. Bomi Patel and Mr.U.A. Maroo. It is also stated that a detailed explanation was provided to the assessing officer justifying need for such professionals. In respect of reimbursement of marketing expenses it is stated that details as well as justification were submitted on 26/3/02 to the assessing officer stating that by entering into such agreement with Gharda Chemicals Limited, the appellant had gained a large customer base. It is submitted that though this explanation given by the appellant was not accepted nothing had been brought on record by the assessing officer to suggest that the 46 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 submissions made by the appellant were false. It is contended that for imposition of penalty, it is necessary that there is conscious concealment or act of furnishing of inaccurate particulars of income on the part of the assessee Moreover, onus lies on the Department to prove that the explanation offered by the assessee is false. It is added that it is possible for the Income-Tax Authority to add an amount or disallow an expenditure by rejecting the explanation offered for the purpose of assessment but when it comes to the levy of penalty, that authority must consider whether the explanation which was offered was bona fide and whether all the facts relating to the addition of the income or disallowance of the expenditure were disclosed.
14.3 The assessee interpreted the law in particular way disclosing all the relevant facts in the return and legal position taken by him is not accepted, full tax can be imposed, it cannot be said that the assessee had filed false return and the mere rejection of the explanation or claim of the assessee does not show that it was false. Therefore, it is submitted that considering the facts and circumstances of our case, penalty u/s 271(1) (c) cannot be imposed.
14.4 The ld. CIT(A), after carefully considering the submissions of the assessee and the assessment order and the penalty order, deleted the penalty in respect of disallowance under section 40a(2)(b) of the Act and confirmed the penalty in respect of disallowance of marketing expenses.
"5. I have carefully considered the submissions of the appellant, the assessment order and the penalty order. It is noted that in respect of reimbursements of salary to Dr. Bomi Patel and U.A. Maroo, the assessing officer had requested for details of the services rendered by these two personnel's at the time of a;ssessment proceedings and no such details could be furnished. Although a justification note was submitted stating that payments were made in view of the professional services rendered 47 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 by these persons. I am in agreement with the appellant that though the explanation was not accepted by the assessing officer, the said explanation was also not found to be false by the assessing officer or shown to be malafide. Therefore though the addition was justified, the same is not liable for purposes of levy of penalty in terms of explanation to sec 271(l)(c).
5.1. As regards, the penalty on disallowance of marketing expenses, the said expenses were claimed to be reimbursed to the parent company and by its very nature the proof of having actually incurred such expenditure was required to be produced in assessment or in appellate proceedings. However it was found that these expenses were actually 10% of the total of the expenses incurred under various heads. Thus it cannot be reimbursement to the parent company for services provided and the Assessing Officer had rightly concluded that this amounts to diversion of profit to the holding company. In my view the said claim is in the nature of furnishing inaccurate particulars of income. Furthermore, full and true particulars were also not submitted in respect of such claim of reimbursement as also the details of actual services provided by the parent company for such claim were also not furnished. Therefore, the said disallowance of Rs.72,76,000/- is liable for penalty."
14.5 Against the deletion of penalty of Rs.22,74,745/- by the ld. CIT(A), the Revenue has come in appeal before the Tribunal.
14.6 During the course of hearing, the ld. A.R. reiterated the submissions made before the revenue authorities and submitted that though the explanation was not accepted by the ld. AO but the same was also not found to be false by the ld. AO or shown to be malafide. Hence, though the addition was made, the same may not liable for purposes of levy of penalty in terms of explanation to sec. 271(1)(c) of the Act.
14.7 On the other hand, the ld. D.R. stoutly relied on the order of the ld. A.O. and submitted that the order of the ld. CIT(A) may be cancelled and that of the order of the ld. AO be restored.
48ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 14.8 We have heard the rival submissions and perused the materials on record. It is pertinent to note that in terms of board resolution dated 05.02.1999, Rs.22,74,745/- was reimbursed for the technical services from Dr. Bomi Patel and Mr. U.A. Maroo and the assessee's explanation was provided to the ld. AO justifying need for such professionals. The ld. A.R. submitted that though the explanation of the assessee was not accepted but nothing had been brought on record by the ld. AO to suggest that the submissions made by the assessee were false. It is also argued by the ld. A.R. that for imposition of penalty, it is necessary that there is conscious concealment or act of furnishing inaccurate particulars of income. In our considered opinion, the ld. AO has not brought on record any materials to establish that the assessee has concealed income or furnished inaccurate particulars of income which is the essential ingredient for imposition of penalty. Therefore, the penalty imposed by the ld. AO has rightly been deleted by the ld. CIT(A). Hence, this appeal of the Revenue is dismissed.
15. Now we come to the appeal of the Assessee in ITA No.272/Ahd/2009 for the assessment year 1999-2000.
15.1 The assessee has raised two grounds in its appeal wherein ground No.2 is general in nature and does not survive for adjudication. The crux of the issue raised by the assessee in its ground is that the learned CIT(A) has erred in upholding the order of the learned AO for levying penalty u/s 271 (1) ( c) of the Act in respect of disallowance of Rs.72,76,000/-.
15.2 The addition was made by the learned AO for Rs.72,76,000/- for payment made to the holding company in view of a written agreement 49 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 between both the parties for reimbursement of expenditure incurred on account of sales promotion expenses, travelling expenses, conveyance expenses, telephone and postage expenses and vehicle maintenance expenses. The assessee has not produced any details before the learned AO with regard to the said expenses but simply produced a debit note issued at the fake end of the year to claim such expenses. The learned AO opined that the agreement reached by both the parties in this regard is not genuine because such agreements cannot be made by two parties in the normal course of business. The learned AO concluded this was a mere modus-operandi for diversion of profits for the holding company. In view of the above mentioned reasons and taking cue from section 40A (2) (a) read with section 40A (2) (b) of the IT Act made an addition of Rs.72,76,000/- and thereby initiated the penalty proceedings u/s 271 (1) (c ) of the IT Act. When the matter reached before the learned CIT(A), the learned CIT(A) confirmed the order of the learned AO.
15.2 The learned AR stoutly argued stating that the assessee company and its holding company based on a valid agreement and considering the business nexus of both the parties had decided to reimburse the expenses to is holding company. The learned AR further relied on the case PSB Industries Pvt. Ltd. Vs CIT, in ITA No.792/2011 High Court of Delhi pronounced on 11-07-2011wherein it was held that penalty is not leviable where assessment was made on the notional income. The learned AR pleaded that in the case of the assessee, though the addition made by the learned AO is sustainable, penalty proceedings is unwarranted because the whole basis of the addition is due to the non- recognization of the basis of allocation of expenditure adopted by the 50 ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 assessee. The learned DR vehemently opposed to the submission of the learned AR and relied upon the decision of Revenue.
15.3 We have heard the rival submission and carefully perused the material on record. From the facts of the case it is apparent that the Revenue has not accepted the basis of allocation of expenditure between the assessee company and the holding company. We also find that the whole basis of addition is not arrived on a scientific basis, but they are arrived at notionally. In these circumstances, we also place reliance on the decision of the Hon'ble High Court of Delhi cited supra and hereby dismiss the penalty levied by the learned AO which was further confirmed by the learned CIT(A). Thus, the appeal of the assessee is allowed.
16. In the result, the assessee's appeals in ITA Nos.462/Ahd/2008, 463/Ahd/2008, 2566/Ahd/2008 are partly allowed for statistical purposes and the assessee's appeal in ITA No.2131/Ahd/2009 is partly allowed and assessee's appeal in ITA No.272/Ahd/2009 is allowed; whereas the Revenue's appeals in ITA No.501/Ahd/2008, 502/Ahd/2008, 2647/Ahd/2008 and 345/Ahd/2009 are dismissed.
इस आदे श कȧ घोषणा Ǒदनांकः /03/2012 को Ûयायालय मɅ कȧ गई ।
Sd/- Sd/-
(D.K.Tyagi) (A.Mohan Alankamony)
Judicial Member Accountant Member
DATED : 27/3/2012
51
ITA Nos. 462,463,501,502,2566 & 2647-Ahd-2008 & 272,345 & 2131-Ahd-09 आदे श कȧ ूितिल ितिलǒप िलǒप अमेǒषतः ǒषतः-
ǒषतः
1. अपीलाथȸ
2. ू×यथȸ
3. संबंिधत आयकर आयुƠ
4. आयकर आयुƠ- अपील-
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद ।
6. गाड[ फाइल आदे श से, उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद।
Talukdar/ Sr. P.S./Deka 52