Income Tax Appellate Tribunal - Delhi
Punjab Stainless Steel Industries,, vs Department Of Income Tax on 28 February, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : G : NEW DELHI
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER
AND
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.1910/Del/2006
Assessment Year : 2002-03
DCIT, Vs. M/s Punjab Stainless Steel
Circle 19(1), Industries,
New Delhi. B-61, Wazirpur Industrial Area,
New Delhi.
PAN : AAAFP4223G
ITA No.1786/Del/2006
Assessment Year : 2002-03
M/s Punjab Stainless Steel Vs. ACIT,
Industries, Circle 19(1),
B-61, Wazirpur Industrial Vikas Bhawan,
Area, New Delhi.
New Delhi.
PAN : AAAFP4223G
(Appellant) (Respondent)
Assessee by : Shri H. Mitter, CA
Revenue by : Shri Niranjan Kauli, CIT, DR
ORDER
PER I.P. BANSAL, JUDICIAL MEMBER
These are cross appeals. They are directed against the order passed by the CIT (A) dated 28th February, 2006 for Assessment Year 2002-03. The grounds of appeal filed by the assessee read as under:-
"1.1 That on the facts and in the circumstances of the case, the ld. CIT (A) has erred in confirming the action of the ld. A.O. in denying the entire claim of deduction of Rs.16598514/- u/s 80HHC of the Income Tax Act, 1961.2 ITA No.1786/Del/2006 ITA No.1910/Del/2006
1.2 That without prejudice to the foregoing grounds, the ld. CIT (A) has failed to appreciate that by virtue of insertion of clause (iiid) in Section 28 and amendment of clause (baa) in the Explanation to Section 80HHC by the Taxation laws (Amendment) Act, 2005, it is only 90% of the profits on transfer of DEPB credits (i.e., the total sale consideration as reduced by the DEPB credit allowed by the Government) that has to be reduced from the profits of the business. The ld. CIT (A) has erred in holding that it is 90% of the total sale consideration that has to be reduced from the profits of the business.
1.3 That without prejudice to the foregoing grounds, the ld. CIT (A) has erred in not directing the A.O. to compute the deduction u/s 80HHC on the basis of the income assessed under the head 'profits and gains' of the business and not on the basis of the business profits shown in the return of income for the purposes of determining whether there was positive or negative income. He has ignored the definition of 'profits of business' as defined in clause (baa) of the Explanation to section 80HHC.
1.4 That without prejudice to the foregoing grounds, the ld. CIT (A) failed to appreciate that notwithstanding the fact that the turnover of the appellant exceeded Rs.10 crores, the appellant is still entitled to deduction under the proviso inserted in sub section (3) of section 80HHC for the reason that the appellant had no option of exercising the option between duty draw back and DEPB, the DEPB being the only scheme applicable to the appellant.
2.1 That on the facts and in the circumstances of the case, the ld. CIT (A) has erred in sustaining disallowance of Rs.2228232/- out of interest paid by the appellant in respect of overdraft/cash credit account, the disallowance having been calculated with reference to the interest free debit balance in the account of the sister concern M/s Kesho Ram Industries.
2.2 That the impugned disallowance of Rs.2228232/- out of interest payment is wholly arbitrary, erroneous and illegal in as much as he failed properly to appreciate and attach due weight to the following fats and evidence of the case:
(a) That the appellant had its own interest free funds aggregating to Rs.22.72 crores at the beginning of the year and Rs.24.37 crores at the end of the year which far exceeded the interest free advances of only Rs.1.70 crores at the beginning of the year and 1.67 crores at the end of the year in the account of the sister concern.
(b) That it was a case of mixed funds and interest free funds, namely, trading receipts, partners contributions, interest free borrowings and profits of the business including those of the 3 ITA No.1786/Del/2006 ITA No.1910/Del/2006 current year were deposited in the same common cash credit account, namely, Punjab & Sind Bank and it cannot be presumed that interest free advances could not be made out of interest free funds lying deposited in the said account.
(c) That cash profits generated during the year and lying deposited in the cash credit account alone amounted to 3.09 crores.
2.3 That without prejudice to the foregoing ground and without in any manner detracting therefrom, in any case, the ld. CIT (A) has erred in disallowing interest on the opening debit balance i.e., the debit balance as on 01.04.2000 in the account of the sister concern, on which no interest has been disallowed by the department in the earlier years i.e., prior to 01.04.2000. The disallowance of Rs.2228232/- was therefore arbitrary and should have been restricted to the transactions in the account during the relevant year.
2.4 That without prejudice to foregoing grounds No.2.1, 2.2 and 2.3 the ld. CIT (A) has further erred in not excluding from the debit balance in the account of the sister concern the amounts of trade debits made in the account in the earlier years.
2.5 That without prejudice, the credit balance in the said bank account stood reduced to Rs.8949153/- as on 01.04.2001, Rs.969088/- as on 20.06.2001 and Rs.2693322/- as on 13.11.2001 as against which advances to sister concern amounted to Rs.1.70 crores at the beginning of the year and Rs.1.67 crores as on 31.02.2002. Without prejudice, the disallowance could at worst be confined to interest on the sum of Rs.8949153/- being the opening balance in the cash credit account. Such interest @ 14.50% on Rs.8949153/- worked out to Rs.1297627/- only.
3. That on the facts and in the circumstances of the case, the ld. CIT (A) has erred in sustaining disallowance to the extent of Rs.4377897/- being 15% of the total polishing charges of Rs.29185982/- paid by the appellant.
4. That on the facts and in the circumstances of the case, the ld. CIT (A) has erred in observing that it was only when the appellant was confronted with the fact that the appellant had wrongly claimed depreciation in respect of fixed assets at Kundli for the full year instead for of the half year as the factory had commenced effective commercial production during October, 2000. The ld. CIT (A) failed to consider that the trial of the manufacturing having commenced in September, 2001, the appellant was justified in claiming full depreciation. He further failed to appreciate that the appellant without any enquiry on 4 ITA No.1786/Del/2006 ITA No.1910/Del/2006 the point by the ld. A.O. had voluntarily brought the above fact to the notice of the ld. A.O.
5. The appellant craves permission to amend, alter, withdraw or add any ground of appeal at the time of hearing of the appeal."
1.1 The grounds of appeal filed by the revenue read as under:-
"i) On the facts and in the circumstances of the case, the ld.
CIT (A) has erred in restricting the disallowance on account of polishing charges at Rs.4377897/- out of the addition made by the A.O. The appellant raves leave for permission for addition/alteration to the ground of appeal during the course of hearing."
1.2 The assessee has also raised the following additional grounds and it was requested that the same may be admitted being legal grounds:-
" That the retrospective application with effect from 1.4.1998 of the proviso to section 80HHC by Taxation Laws (Amendment) Act, 2005 was ultra vires and constitutionally invalid."
2. Referring to the additional grounds, it was submitted by the learned AR that the aforementioned ground is a legal ground and should be admitted. After hearing both the parties, we find that in the aforementioned additional ground the assessee has challenged the Constitutional validity of the provisions of Section 80HHC and it was pointed out to the Ld. counsel that the Tribunal has no authority to examine the Constitutional validity of the provisions as the Tribunal is an authority constituted under the provisions of the Income-tax Act, 1961. Therefore, after hearing both the parties, we decline to admit the aforementioned additional ground raised by the assessee as the subject matter of the aforementioned additional ground cannot be 5 ITA No.1786/Del/2006 ITA No.1910/Del/2006 adjudicated by the Tribunal and if it cannot be adjudicated, then, the question of admission thereof does not arise. The additional ground raised by the assessee is dismissed in the manner aforesaid.
3. Now, coming to the grounds raised by the assessee, Ground Nos.1.1 to 1.4 relates to grant of deduction to the assessee u/s 80HHC on the strength of DEPB credit. The turnover of the assessee exceeds ` 10 crore. Recently Hon'ble Supreme Court vide decision in the case of M/s Topman Exports vs. CIT in Civil Appeal No.1699 of 2012 arising out of SLP (C) No.26558 of 2010 dated 8th February, 2012 has upheld the order of the Special Bench of the Tribunal in M/s Topman Exports and the decision of Hon'ble Bombay High Court in the case of Kalpataru Colours and Chemicals has been overruled. After hearing both the parties, we consider it just and proper to restore this issue to the file of Assessing Officer with a direction to decide the issue raised by the assessee with regard to deduction u/s 80HHC on the basis of the aforementioned decision of Hon'ble Supreme Court in the case of M/s Topman Exports after giving the assessee a reasonable opportunity of hearing in this regard and after bringing all the relevant facts on record. We direct accordingly. These grounds of the assessee are allowed for statistical purposes in the manner aforesaid.
4. So as it relates to ground Nos.2.1 to 2.5, it has been the contention of the learned AR that though this issue has been decided against the assessee, but, on facts the matter should be restored back to the file of Assessing Officer. He submitted that the disallowance has wrongly been calculated by the Assessing Officer. According to his contention, the interest disallowance should be restricted only to the amounts which are linked or found to be advanced by the assessee as the interest free advances out of its cash credit limit on which the interest paid has been claimed. The facts relating to this issue are that 6 ITA No.1786/Del/2006 ITA No.1910/Del/2006 the Assessing Officer had found that the assessee had debited ` 1,00,34,524/- to the Profits & Loss Account under the head "interest" as follows:-
(a) Payments to bank Rs. 99,72,508/-
(b) Payments to partners on their fixed
Capital @ 18% per annum Rs. 1,80,000/-
(c) Payment to Kotak Mahindra Pvt. Ltd. Rs. 39,456/-
Total Rs.1,01,91,964/-
Less : Interest received on FDRs Rs. 1,57,440/-
Net interest debited in P&L a/c Rs.1,00,34,524/-
5. It was further observed by the Assessing Officer that the assessee was also paying huge interest on funds borrowed by it from Bank. On the other hand, it was making interest free advances to its sister concern, namely, M/s Kesho Ram Industries against whose name the interest free advances as at the end of the year have been shown at ` 1,66,63,346/-. It is also observed by the Assessing Officer that these interest free advances were made by the assessee to its sister concern out of Punjab and Sind Bank, Current A/c No.40 and there is a direct nexus between interest bearing funds and interest free advances and, thus, it is a case of diversion of interest free funds out of borrowed funds for making interest free advances. In this manner, the Assessing Officer calculated the disallowance @ 14.5% by working out a disallowance of ` 22,28,232/-. The assessee made various submissions to the Assessing Officer showing that ample interest free funds were available with the assessee. It was also submitted that there were cash credits generated out of which such funds can be said to have been advanced and, thus, it was pleaded that the disallowance should not be made. Alternatively, it was submitted that total overdraft balance in the cash credit account was only ` 92,61,795/- as on 1st April, 2001 and ` 9,69,088/- as on 20th June, 2001 and ` 7 ITA No.1786/Del/2006 ITA No.1910/Del/2006 26,93,322/- as on 13th November, 2001 and, thus, the disallowance at worst can be confirmed to the debit balance in the cash credit account and not on the entire loan advanced to the sister concern. Learned CIT (A) has rejected all these contentions of the assessee and has confirmed the disallowance.
6. We have heard both the parties on this issue. Admittedly, the issue in earlier years has been decided against the assessee and the order of the Tribunal upholding such disallowance has also been confirmed by the Hon'ble Delhi High Court and the decision is stated to be reported as 324 ITR 396. The assessee was having opening debit balance in the account of M/s Kesho Ram Industries of ` 1,75,49,633/- which has been reduced to ` 1,66,63,346.35 as at the end of the year. Therefore, the amount on which interest disallowance has been confirmed upto 31st March, 2001 is a sum of ` 1,75,49,633.35. Now, it has been the contention of the assessee that the debit balance in the account of Kesho Ram Industries has decreased to ` 1,66,63,346 as at the end of the year. It is also the case of the assessee that during the year certain payments were received and given and, therefore, disallowance of interest should be restricted to the amount actually utilized by the assessee for this purpose out of interest bearing borrowed funds. It is also the case of the assessee that for computing such disallowance reference should also be made to the bank account of the assessee on which it has paid the interest. The total interest burden of the assessee as described earlier is a sum of ` 1,01,91,964/- out of which the major amount of interest paid by the assessee to bank is a sum of ` 99,72,508/-. The Assessing Officer has given the calculation of interest in Annexure-A attached to the assessment order. He has worked out the debit in the account of M/s Kesho Ram Industries on day-to-day basis without relating the same to the bank account of the assessee out of which the amount has been stated to be 8 ITA No.1786/Del/2006 ITA No.1910/Del/2006 paid. The amount which has been obtained by the assessee from the aforementioned current account and directly advanced to M/s Kesho Ram Industries should be considered for disallowance. Therefore, the disallowance should be computed by taking the aforementioned amount of ` 1,75,49,633/- as on 1st April, 2001 as being utilized by the assessee out of interest bearing funds as upto the said date, the interest disallowance is made and sustained only on the basis that for making such advance the assessee has utilized the interest bearing borrowed funds and it has so been established by the order of Tribunal for Assessment Year 2001-02, which has been confirmed by Hon'ble High Court. Thereafter, the decreasing or increasing debit balance should be considered on day-to-day basis and if the said amount has come from the interest bearing borrowed funds of the assessee and it has been directly advanced to Kesho Ram Industries account, then, the same should be taken for the purpose of disallowance of interest. Therefore, on principle we hold that the disallowance has rightly been made by the Assessing Officer, but it has to be calculated in the manner that opening balance of ` 1,75,49,633.35 should be considered to be made out of interest bearing borrowed fund and, thereafter day- to-day calculation should be made and if the amount is found to be advanced by the assessee to its sister concern out of interest bearing borrowed funds, which include the assessee's aforementioned current account in Punjab & Sind Bank, then related disallowance should be made. We direct accordingly. For statistical purposes, this ground of the assessee is treated as partly allowed in the manner aforesaid. Therefore, the ground Nos.2.1 to 2.5 are disposed of in the manner aforesaid.
7. So as it relates to ground No.3 of the assessee which is common with the ground raised by the department, the disallowance on account of polishing charges was made by the Assessing Officer to the extent 9 ITA No.1786/Del/2006 ITA No.1910/Del/2006 of ` 2,91,85,982/- and this disallowance has been sustained to the extent of 15% by the CIT (A) which is computed at ` 43,77,897/-. It was submitted that this ground is covered by the earlier decision of the Tribunal the copies of which were provided to us and are placed on record. This issue was first decided by the Tribunal in Assessment Year 2005-06 vide order dated 26th November, 2009 in which the order of the CIT (A) was upheld in which 15% disallowance was considered proper. The relevant observations of the Tribunal from the said decision are reproduced below:-
"9.8 From facts discussed above, it is clear that the assessee has not led sufficient evidence to prove the genuineness of its claim of polishing expenses of Rs.3,02,74,918/-. From the orders of tax authorities below, it becomes clear that they have not disputed that in the manufacturing business of utensils, the assessee has to incur the polishing expenses. On the face of its, 50% of disallowance made by the Assessing Officer out of the total assessee's claim of polishing, especially without any basis, is definitely on a higher side, whereas 15% disallowance made by the ld. CIT (A) appears to be quite fair and reasonable. Accordingly, the order of the ld. CIT (A) in restricting the disallowance @ 15%, as detailed in his order is upheld and ground of appeal taken by the Revenue and ground of the appeal of the assessee are rejected."
8. Thereafter, the Tribunal followed this decision for Assessment Year 2004-05 vide order dated 18th June, 2010 and also for Assessment Year 2007-08 vide order dated 27th January, 2011. Therefore, after hearing both the parties, we decline to interfere in the order passed by the learned CIT (A) on this issue and this ground in both the appeals is dismissed.
9. Ground No.4 of the assessee relates to grant of depreciation in respect of fixed assets at Kundli. It has been noted in the assessment order that effective commercial production of this plant was commenced in the October, 2001 only, therefore, A.O. restricted the depreciation to 50% and has made disallowance of ` 27,27,488/-.
10 ITA No.1786/Del/2006 ITA No.1910/Del/2006Learned CIT (A) has upheld this disallowance on the ground that the assessee did not place on record documentary evidence to substantiate its contention that trial production of the plant took place much earlier in August-September, 2001. The learned AR was required to submit what is the documentary evidence according to which it can be said that the trial production of the said unit had started in August- September, 2001. He expressed his inability to produce any documentary evidence in this regard. However, he submitted the commencement of commercial production is in October, 2001, itself establishes the fact that the trial production had commenced much before that. We do not find any substance in such argument of the learned AR. In the absence of any evidence which establishes that trial production took place in August-September, 2001, we decline to interfere in the sustenance of disallowance. There is no material brought on record by the assessee to substantiate that trial production had actually commenced in the month of August -September, 2001. Therefore, this ground of the assessee is rejected.
10. In the result, the appeal filed by the assessee is partly allowed for statistical purposes in the manner aforesaid and the departmental appeal is dismissed.
The order pronounced in the open court on 29.02.2012.
Sd/- Sd/-
[B.C. MEENA] [I.P. BANSAL]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 29.02.2012.
dk
11 ITA No.1786/Del/2006
ITA No.1910/Del/2006
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches