Income Tax Appellate Tribunal - Ahmedabad
Ornet Intermediates Ltd.,, Ahmedabad vs Department Of Income Tax on 30 December, 2009
आयकर अपीलीय अिधकरण,
अिधकरण, अहमदाबाद Ûयायपीठ ''A'', अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD,
"A" BENCH
ौावत, Ûयाियक सदःय एवं ए.
सव[ौी ौी मुकुल कुमार ौावत, ए.के.गरोǑडया,
गरोǑडया, लेखा सदःय के
सम¢ ।
BEFORE S/SHRI MUKUL Kr. SHRAWAT AND
A.K. GARODIA, ACCOUNTANT MEMBER)
IT(SS)A No.247/Ahd/2010
[Asstt.Year : 2006-2007]
With
CO No.120/Ahd/2010
AND
IT(SS)A.No. 248/Ahd/2010
[Asstt.Year : 2007-2008]
ACIT, Cent.Cir.2(2) बनाम/Vs. Ornet Intermediates Ltd.
Ahmedabad. 3D-E, Suryarath Complex
Panchvati, Ahmedabad.
PAN No.: AAACO 2744 E
(अपीलाथȸ / Appellant) (ू×यथȸ / Respondent)
राजःव कȧ ओर से/ :
Revenue by Shri Pranjeet Singh, CIT.DR
िनधा[ǐरती कȧ ओर से/ :
Assessee by Shri D.P. Soni
सुनवाई कȧ तारȣख/ :
Date of Hearing 20th May, 2013
घोषणा कȧ तारȣख/ :
Date of Pronouncement 31/5/2013
आदे श / O R D E R
PER MUKUL Kr. SHRAWAT, JUDIIAL MEMBER: These
two appeals by the Revenue and a CO by the assessee are arising from
a consolidated order of the CIT(A)-III, Ahmedabad dated 30.12.2009
IT(SS)A No.247 and 248/Ahd/2010 With
CO No.120/Ahd/2010
for the assessment year 2006-2007 and 2007-2008. All these appeals
and the CO are disposed of by this common order.
2. The ground no.1 is common for both the years, which is
reproduced below from the lead assessment year i.e. A.Y.2006-2007.
"1. The CIT(A) has erred in law and facts and circumstances
of the case in deleting the addition of Rs.1,16,39,481/- (and
Rs.54,04,558/- for A.Y.2007-2008) on account of disallowance
of interest u/s.40(a)(ia) due to non-payment of TDS."
3. Through orders under Section 153A r.w.s Section 143(3) dated
26-12-2008 for A.Y.2006-2007 and AY.2007-2008, the AO noted that
the assessee had paid the alleged interest of Rs.1,16,39,481/- for
A.Y.2006-2007 and Rs.54,04,558/- for A.Y.2007-2008. The AO has
noted down the details of payments of alleged interest in the
assessment order stated to be paid to M/s.DSP Meril Lynch Ltd., and
M/s.Kotak Mahindra. The explanation of the assessee was that a
short-term financial arrangement was taken from these institutions for
the purpose of investment in shares issued in IPOs of the companies.
Under the scheme of these institutions, 5% contribution was required
to be made by the assessee and the balance 95% was provided by
these institutions as short term financial arrangement for investment in
shares of IPOs. The assessee had admittedly not deducted TDS on
payment of alleged interest. During the assessment proceedings, it
was also informed that ITO (TDS), Ahmedabad had passed an order
under Section 201 of the IT Act, which was challenged before the
CIT(A). However, at that time, the order was awaited. In that
proceeding it was pleaded that the provisions of section 194A was not
applicable in view of Hindustan Cocacola Pvt. Ltd., 163 Taxman 355
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IT(SS)A No.247 and 248/Ahd/2010 With
CO No.120/Ahd/2010
on the technical ground that there was no loss to the Revenue, because
the deductee had paid the tax. However, the AO has opined that the
question of applicability of section 194A was to be considered in
respect of provision of applicability of section u/s.40(a)(ia) of the Act.
An alternative plea has also been raised by the assessee that no TDS
was deducted because the said amount paid was considered as cost of
shares purchased with the said funds. According to the AO, these
companies must have shown the said amount in their respective
hands, as interest received from the assessee-firm. By assigning these
reasons, finally the AO had invoked the provision of section
u/s.40(a)(ia) and the addition was made. When the matter was carried
before the learned CIT(A), it was reiterated that the payment of
interest was not an interest on loan, but it was cost of shares. It was
also pleaded that the amount so paid was not claimed as interest
expenditure. The amount disallowed by the AO was never debited to
P&L account as interest. It was not claimed as deduction under
Sections 32 to 38 of the I.T. Act, while computing the business
income. It was always treated as cost of investment, therefore while
computing the capital gain under section 45 of the Act, it was
considered towards the cost of investment. Copies of ledger account
of shares of Reliance Petroleum, M/s.D.S.Kulkar Developers Ltd.,
M/s.Power Finance Corporation Ltd., Suzlon Ltd. etc. have also been
furnished in support of the contentions that the payments to
M/s.Kotak Mahindra and DSP Meril Lynch were actually the amount
paid for acquiring these shares. Having considered these submissions,
the learned CIT(A) has concluded as under:
"8.2 The AO had himself considered the capital gains by
adopting the purchase price of the impugned shares. It is seen
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IT(SS)A No.247 and 248/Ahd/2010 With
CO No.120/Ahd/2010
that the appellant had disclosed income from short tern/long
term capital gains separately in the computation of income.
Thus income had been shown under the head, house property,
business and capital gains. The capital gain shown by the
appellant formed part of the total income of the appellant. In the
computation of capital gains, the payments made to M/s. Kotak
Mahendra/M/s. Meril Lynch, etc. for the borrowings were
treated as having nexus with the cost of acquisition and were
capitalized and considered for purpose of computation of
capital gains. The AO has accepted the computation/capital
gains as shown. Thus the stated interest paid was not claimed as
a revenue expenditure and was not segregated from the amount
of investment, by the AO also, and thus enhanced the cost of the
capital asset. It has been accordingly considered as part of cost
of acquisition while computing the capital gains. The
genuineness of the transactions related to capital gains has itself
not been disputed by the AO. In these facts and circumstances,
the ratio of the decision in case of S. Balan vs. DCIT, reported
in 120 TTJ (Pune), 397 is applicable. As such, the disallowance
made by the AO u/s. 40a(ia) was not warranted and is therefore
deleted for both the assessment years."
4. With this brief background, we have heard both the sides.
From the side of the Revenue, the learned DR, Shri Praseenjeet Singh
appeared, and has supported the order of the AO and mainly argued
that the assessee has not explained the exact nature of the said
payments, hence, the AO had rightly considered the said payment as
interest expenditure. The learned DR has also argued that in any case
the said financial arrangement was for the purpose of investment in
shares by the assessee. Therefore, the nature of payment was nothing
but loan granted to the assessee, which were invested in IPO shares.
The assessee was required to deduct the TDS at source, and in case of
the failure on the part of the assessee, the AO had rightly invoked the
provisions of u/s.40(a)(ia) of the Act. According to him, all
subsequent acts, such as, the calculation of cost on acquisition at the
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IT(SS)A No.247 and 248/Ahd/2010 With
CO No.120/Ahd/2010
time of computation capital gain was an after-thought, hence the
liability of deduction of TDS was required to be fulfilled at the time of
actual payment or credit of the account. On the other hand, from the
side of the respondent-assessee, Shri D.P.Soni has raised a technical
argument that in a situation when admittedly no interest was debited
to P&L Account, hence the provisions of section 40(a)(ia) were not at
all required to be invoked.
5. Having heard the submissions of both the sides, at the outset,
we are inclined to accept this technical argument of the learned AR
that the provision of section 40(a)(ia) of the Act can only be invoked
in a situation when the assessee has claimed a deduction falling within
the provision of sections 30 to 38 of the Act. The reason being, the
opening sentence of section 40 is "Notwithstanding anything to the
contrary to sections 30 to 38, the following amount shall not be
deducted in computing the income chargeable under the head "Profits
and gains of business or profession", meaning thereby that, the first
and the foremost condition for the invocation of section 40 is that the
impugned amount should be claimed as deduction of expenditure
falling within the provision of sections 30 to 38 of I.T.Act. Naturally
this section 40 is in respect of those expenditure which are otherwise
allowable under sections 30 to 38 of the I.T.Act, but not to be
deducted in computing the income chargeable under the head "Profits
and gains of business or profession", in case it is found that the
interest, commission, brokerage, rent, fees etc. paid but TDS has not
been deducted. Once the admitted factual position is that as per the
P&L account maintained for the year under consideration, the
assessee has admittedly not claimed any expenditure of the alleged
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IT(SS)A No.247 and 248/Ahd/2010 With
CO No.120/Ahd/2010
interest, therefore, there was no question of invocation of section
40(a)(ia) of the Act. For these legal propositions, case laws cited
before us are, (i) Mahatma Gandhi Seva Mandir Vs. Dy. Director of
IT (Exemption), [2012] 21 taxmann.com 321 (Mum) and (ii)
Mrs.Sushila Mallick Vs ITO, [2012] 19 taxmann.com 233 (Luck.).
Respectfully following the ratio decidendi laid down in these
precedence, we find no fallacy in the finding of the learned CIT(A),
resultantly, the grounds of the Revenue are hereby dismissed.
6. For Asstt.Year 2007-2008, the Revenue has raised another
ground, which is reproduced below:
"(ii) The CIT(A) has erred in law and facts and circumstances
of the case in deleting the addition of Rs.11,53,581/- on account
of excess stock found during the search."
7. During the course of survey under Section 133A, it was found
that the stock contained raw-material, work-in-progress and finished
goods. As per the AO, on verification of it was noted as under:
Annexure Goods Quantity (Kg) Value (Rs.)
SF-1 Finished Goods 101700 64,78,290
SF-2 Raw-material 110397 70,31,758
SF-Z Work-in-process 11620 ---
SF-3 Finished goods 11710 ---
Finished goods found on physical verification 101700 kg. + 11710 = 113410 Kg.
Finished goods as per books of accounts = 2831 Kg.
Excess Stock found 110579 Kg.
The assessee's explanation was that the entries of "work-in-progress
was made on daily basis". The assessee had maintained quantitative
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IT(SS)A No.247 and 248/Ahd/2010 With
CO No.120/Ahd/2010
details of raw-material and transfer of raw-material in batches from
the racks of raw-material, which was thereafter shown as WIP. It has
also been submitted that the assessee had maintained complete records
as prescribed by Excise Department. Therefore, stock as alleged by
the survey party was not stock of finished goods, but it was shown in
RG-1 register as batches of WIP issued for manufacturing process. It
was further clarified that even if the batches of work-in-progress are
completed as a finished goods, but if not transferred in records of
excise as finished goods, then it was considered as goods in progress.
Therefore, it was informed that the goods reflected in 83 items were
not transferred to excise records, and are items of stock which were
not sold and reflected as batches in progress as on 31-3-2007 i.e. the
day proceeding under Section 132 was carried out. However, the AO
was not convinced and held that annexures were prepared at the time
of survey operations, which were duly signed by the assessee's
representative, and on that basis, the assessee was unable to explain
the difference of 8879 Kg. (i.e. 11710 kg. minus 2831 kg). By
applying the rate of Rs.179/-, on the said difference, the AO had
worked out the impugned addition of Rs.15,53,825/- in the hands of
the assessee. The matter was carried before the learned CIT(A) who
had recorded a finding on the basis of the explanation of the assessee
that the WIP, raw-material and finished goods were entered in the
books of accounts, which were under the supervision of Excise
Authorities. On the basis of these facts, the learned CIT(A) has held
that the closing stock of goods, considered as finished goods, after
completion of excise formalities was 13,946 kgs. as against the
finished goods of 11,710 kgs. The learned CIT(A), has therefore
worked out the difference of 2236 kgs. and applying the value of
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IT(SS)A No.247 and 248/Ahd/2010 With
CO No.120/Ahd/2010
Rs.179/-, he has worked out the difference of Rs.4,00,244/-.
Accordingly, part relief was granted.
8. With this factual background, we have heard both the sides. It
is worth to mention that the fact about the maintenance of stock
register, such as RG-1 was whether within the supervision of Excise
Authority was not correctly appreciated by the learned CIT(A). Had it
been a situation that, the assessee carried out on the manufacturing
process under the self-removable scheme of the Excise Department,
then, there was no possibility of maintaining the stock records under
the supervision of Excise authorities. This fact was required to be
affirmed first and then the actual method of maintenance of accounts
of the stock would have been examined. If the assessee is maintaining
RG-1 register, as prescribed by the Excise Department, then the
quantity records, as stock of finished goods, can easily be ascertained
from that register, thereupon the stock inventorized as work-in-
progress could also have been ascertained. We, therefore, hold that
the learned CIT(A) is expected to first verify whether the
manufacturing process and the connected record were under the direct
supervision of the Excise Authorities or not. After ascertaining these
facts, rest of the records is now required to be examined accordingly.
With these limited purpose, we deem it proper, as also justifiable, to
restore this ground back to the stage of first Appellate Authority, to be
decided de novo, as per the observations made hereinabove.
Resultantly, this grounds of the Revenue are to be treated as allowed,
but for statistical purpose only.
CO No.120/Ahd/2010 (Assessee's CO)
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IT(SS)A No.247 and 248/Ahd/2010 With
CO No.120/Ahd/2010
9. The respondent-assessee has filed this CO by raising several
grounds, however, all of them revolve around a single issue of part
relief granted by the learned CIT(A). In this CO an addition of
Rs.4,00,244/- as applied by the learned CIT(A) is challenged.
However, while deciding this issue, as raised by the Revenue
authorities (supra), has already been restored back to the stage of the
First Appellate Authority, in consequence thereupon, the grounds
raised through this CO are hereby remanded back to the stage of the
learned CIT(A) to be decided as per law, as directed above.
Resultantly, CO be treated as allowed for statistical purpose only.
10. In result, the appeal for A.Y.2006-2007 of the Revenue is
dismissed. However, the appeal for A.Y.2007-2008 of the Revenue
and the CO of the assessee are allowed for statistical purpose.
Order pronounced in Open Court on the date mentioned
hereinabove.
Sd/- Sd/-
(ए.के.गरोǑडया /A.K. GARODIA) मुकुल कुमार ौावत /MUKUL KR. SHRAWAT)
(मु
Ûयाियक सदःय /JUDICIAL MEMBER
लेखा सदःय /ACCOUNTANT MEMBER
Copy of the order forwarded to:
1) : Appellant
2) : Respondent
3) : CIT(A)
4) : CIT concerned
5) : DR, ITAT.
BY ORDER
DR/AR, ITAT, AHMEDABAD -9-