Income Tax Appellate Tribunal - Ahmedabad
N.K. Proteins Ltd.,, Ahmedabad vs Assessee on 27 July, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD '' C " BENCH - AHMEDABAD
Before Shri Rajpal Yadav, JM, & Shri Manish Borad, AM.
ITA No.1986/Ahd/2012
Asst. Year: 2009-10
N. K. Proteins Ltd., Vs. Addl. CIT, Range-5,
th
9 floor Popular House, Ahmedabad.
Ashram Road, Ahmedabad.
Appellant Respondent
PAN AAACN 9377N
AND
ITA No.2133/Ahd/2012
Asst. Year: 2009-10
Addl. CIT, Range-5, Vs. N. K. Proteins Ltd.,
Ahmedabad. 9th floor Popular House,
Ashram Road,
Ahmedabad.
Appellant Respondent
Appellant by Shri S. N. Soparkar, AR
Respondent by Shri Prasoon Kabra, Sr.DR
Date of hearing: 10/6/2016
Date of pronouncement: 27/7/2016
ORDER
PER Manish Borad, Accountant Member.
These cross appeals are directed against the order of ld. CIT(A)-XI, Ahmedabad dated 26.7.2012 in appeal No.CIT(A)- XI/368/Addl.CIT.R-5/11-12, passed against order u/s 143(3) of the IT ITA No. 1986 & 2133/Ahd/2012 2 Asst. Year 2009-10 Act, 1961 (in short the Act) for Asst. Year 2009-10 on 29.12.2011 by Addl. CIT, Range-5, Ahmedabad. Following grounds have been raised in these appeals :-
2. ITA No.1986/Ahd/2012 for Asst. Year 2009-10 (Assessee's appeal):
Grounds of appeal raised :-
1. The learned CIT(A) has erred in confirming the disallowance of 14,40,000 under Section 40(a)(ia) in the absence of details.
2. The learned CIT(A) has erred in confirming the disallowance of depreciation of Rs. 16,83,501 on five tankers on the ground that they are not used for business in as much as all the five tankers have been hired to N.K. Roadways P. Ltd. and that the said company has in fact used the tankers as per evidence furnished and that the hire charges was not charged through oversight which was offered voluntarily for taxation.
2.1 The appellant says and submits that the learned CIT(A) is not correct in observing that the evidences furnished are internal. In fact, the evidences furnished are from N.K. Roadways P. Ltd. which is separate company.
2.2 The appellant says and submits that the disallowance is on presumption and conjuncture.
3. The learned CIT(A) has erred in confirming the disallowance of depreciation of Rs.4,64,850 on Plant & Machinery and electrical installation of Rs. 30,99,000 on the ground that it is included in work in progress as stated by way of note in Auditors Report in Form No. 3CD in as much as the WIP of Rs. 138.49 lacs in the opening .balance which is included in the plant & machinery and electrical installation and the said assets have been used during A.Y. 2009- 2010 as per the details provided in the chart of depreciation.
4. The learned CIT(A) has erred in confirming the disallowance of Rs. 1,13,521 under section 14A in as much as the investment is made out of interest free funds and that # the assessee has not incurred any expenditure on investments.
4.1 The appellant says and submits that only transaction is the purchase of shares worth Rs. 17,85,000 of N.K. Industries Ltd. [NKIL] during the whole year, therefore the question of disallowing any expenditure does not arise since there is no expenditure incurred therefore.
ITA No. 1986 & 2133/Ahd/2012 3Asst. Year 2009-10
5. The learned CIT(A) has erred in confirming the disallowance of Rs. 56,000 being the provision for diminution in assets in as much as it is allowable as deduction following the Supreme Court decision in the case of Vijya Bank 323 ITR 166
3. Briefly stated facts of the case as culled out from the records are that the assessee is a limited company engaged in the business of manufacturing edible and non-edible oil products. Return of income for Asst. Year 2009-10 was filed on 30.09.2009 declaring total income of Ra.19.40 crores (approximately) and book profit u/s 115JB of the Act at Rs.13.33 crores (appeoximately). The case was selected for scrutiny assessment and notice u/ 143(2) of the Act was issued on 19.8.2010. Various informations were called for and duly complied by the assessee. During the course of assessment proceedings assessee vide its letter dated 5.12.2011 filed a revised computation of income declaring total income at Rs.19.93 crores (approximately). After making various additions totaling to Rs.2,61,94,422/- income was assessed at Rs.22,55,48,604/-.
4. In appeal before ld. CIT(A) assessee got part relief. Now both the assessee and Revenue are in appeal before the Tribunal.
5. First we take up assessee's appeal in ITA No.1986/Ahd/2012 :
Ground no.1 of this appeal read as under :-
1. The learned CIT(A) has erred in confirming the disallowance of 14,40,000/-
under Section 40(a)(ia) in the absence of details.
6. During the course of assessment proceedings ld. Assessing Officer denied the claim of assessee of Rs.14,40,000/- as ITA No. 1986 & 2133/Ahd/2012 4 Asst. Year 2009-10 miscellaneous expenses u/s 40(a)(ia) of the Act. Ld. AR submitted that prior period expenditure of Rs.14.40 lacs was claimed as miscellaneous expenses under the provisions of section 40(a)(ia) of the Act, as the impugned expenses pertained to earlier years not claimed in books in the year of incurrence. During the year under appeal income-tax deducted was deposited on these prior period expenses and the miscellaneous expenditure of Rs.14.40 lacs was claimed as deduction. However, ld. CIT(A) confirmed the disallowance on the basis of his view that in the absence of specific detail of the miscellaneous expenses it is hard to believe that these expenses attracted TDS liability and these impugned expenses were not required to be disallowed as per section 40(a)(ia) of the Act in the first instant the same cannot be disallowed in this year.
7. On the other hand, ld. DR supported the orders of lower authorities.
8. We have heard the rival contentions and perused the material on record. In this ground the issue relates to allowability of deduction of prior period miscellaneous expenditure of Rs.14.40 lacs which have been claimed in the year of appeal on the basis of depositing due TDS as per the provisions of section 40(a)(ia) proviso (i) which reads as under :-
[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be ITA No. 1986 & 2133/Ahd/2012 5 Asst. Year 2009-10 allowed as a deduction in computing the income of the previous year in which such tax has been paid:]
9. From going through the submissions of ld. AR we understand that the only reason for which ld. Assessing Officer has not allowed the deduction that there is no record about the type of expenditure of Rs.14.40 lacs as the same has been mentioned as miscellaneous expenses and if an expenditure on which TDS is not required to be deducted then such expenses cannot be allowed in this year as they pertained to earlier years.
10. We are, therefore, of the view that this issue needs to be set aside to the file of Assessing Officer before whom necessary details will be supplied by the assessee showing the type of expenditure, year of incurring such expenditure and provisions of TDS applicable on this expenditure was incurred. If on examining the above details Assessing Officer is satisfied that this impugned expenditure at Rs.14.40 lacs were allowable in the year in which they were spent subject to deduction of TDS then the same should be allowed in the year under appeal after verifying that the TDS has been paid. Needless to mention that assessee should be provided sufficient opportunity of being heard on the issue. This ground is allowed for statistical purposes.
11. Ground No.2 of the appeal reads as under :-
2. The learned CIT(A) has erred in confirming the disallowance of depreciation of Rs. 16,83,501 on five tankers on the ground that they are not used for business in as much as all the five tankers have been hired to N.K. Roadways ITA No. 1986 & 2133/Ahd/2012 6 Asst. Year 2009-10 P. Ltd. and that the said company has in fact used the tankers as per evidence furnished and that the hire charges was not charged through oversight which was offered voluntarily for taxation.
2.1 The appellant says and submits that the learned CIT(A) is not correct in observing that the evidences furnished are internal. In fact, the evidences furnished are from N.K. Roadways P. Ltd. which is separate company.
2.2 The appellant says and submits that the disallowance is on presumption and conjuncture.
12. During the course of assessment proceedings it was observed by Assessing Officer that depreciation of Rs.16,83,501/- was claimed on purchase of 5 trucks (tankers) for a total cost of Rs.67,34,444/- and were put to use on 31.3.2009 i.e. at the end of the year. Ld. Assessing Officer further observed that various documents provided by assessee to prove that assets were put to use during Asst. Year 2009-10 were internal evidences only which included supplementary memorandum of understanding between the assessee and N. K. Roadways, consolidated bills were raised to N. K. Roadways for fuel charges and also the proof of hire charges income which was declared by assessee during the course of assessment proceedings. Assessing Officer was not satisfied with these proofs of use of the assets and disallowed depreciation on these 5 trucks at Rs.16,83,501/-.
13. When the issue came up before ld. CIT(A), the ground was dismissed by ld. CIT(A) by observing as under :-
4.3 I have carefully considered the rival submissions. I have also perused various evidences furnished by the appellant during the appellate proceedings. It is seen that the appellant is placing heavy reliance on the RC Books of the five ITA No. 1986 & 2133/Ahd/2012 7 Asst. Year 2009-10 trucks in question which indicate that these trucks were registered on or before 31/3/2009. To prove the fact that these trucks were used for the purposes of business, the appellant is placing reliance on the diesel bills raised by N.K. Roadways Pvt. Ltd. The appellant has also placed reliance on supplementary MOU entered with M/s.N.K. Roadways Pvt. Ltd. wherein these trucks were shown as hired to M/s. N.K. Roadways Pvt. Ltd. The appellant has also offered hire charges of Rs. 31.936/- for the purpose of taxation, which was received from M/s. N.K. Roadways Pvt. Ltd. but the same was not declared as income in the accounts of the appellant by oversight. Taking entirety of the facts in view, I am of the considered view that the appellant has failed to make a fool proof case as far as the business use of trucks is concerned. It is a matter of record that M/s.
N.K, Roadways Pvt. Ltd. is a sister concern, which is engaged in transportation business. Making convenient entries in the books of accounts of M/s. N.K. Roadways Pvt. Ltd. towards the diesel expenses is not difficult. Otherwise also, in the normal course of business N.K. Roadways Pvt. Ltd. is purchasing diesel on day today basis. This way the evidence furnished by the appellant towards the purchase of diesel does not prove the fact that the trucks-were used for the purpose of business. The mere purchase of diesel does not conclusively proves that the trucks were used for the purpose of business as the trucks may be idle even after the purchase of diesel. As far as plying the trucks for the purpose of business is concerned, the appellant has filed very weak evidences. It is seen that these trucks were not included in the main memorandum of understanding with M/s. N.K. Roadlines Pvt. Ltd. These trucks were hired out to M/s. NX Roadlines Pvt. Ltd. by way of a supplementary agreement. It is also a matter of fact that the appellant has not declared any income towards truck hire charges. During the appellate proceedings the appellant submitted that income of Rs.31,936/- is voluntarily declared as hire charges. The above mentioned facts makes the case of the appellant very weak as the appellant has purchased the trucks towards the fag end of the year, internal evidences towards diesel purchase has been filed, the trucks were leased out to M/s. N.K.Roadlines Pvt. Ltd. through a supplementary memorandum of understanding and the hire charges statedly earned by plying these trucks were not recorded in the books of appellant and consequently not declared to tax. In view of above facts, I am inclined to agree with the contentions of the Ld. A.O. Accordingly, disallowance of Rs. 16.83.501/- against depreciation on trucks is confirmed. This ground of appeal is dismissed.
14. Aggrieved, assessee is now in appeal before the Tribunal.
15. Ld. AR submitted that all these 5 trucks were purchased on 27.3.2009 and hired to M/s N. K. Roadways. Further Assessing Officer has mentioned that only internal evidences were provided to ITA No. 1986 & 2133/Ahd/2012 8 Asst. Year 2009-10 prove that assets were put to use in the year, was not correct because assessee has placed on record copy of purchase bill, goods carriage permit issued by Regional Transport Office, insurance of vehicle, certificate of fitness and copy of RC book on Form No.23 along with Pollution Under Control (PUC) certificate. All these evidences are external evidences and the fact has repeatedly coming out from external evidences that assets were purchased and put to use during Asst. Year 2009-10 only and, therefore, depreciation is allowable on the same. Ld. AR relied on the judgments of Hon. Jurisdictional High Court in the case of ACIT vs. Asima Syntex (2001) 251 ITR 133 (Guj), CIT vs. Pinnacle Finance Ltd. 268 ITR 395 (Guj) and CIT vs. UTI Bank Ltd. 319 ITR 357 (Guj).
16. On the other hand ld. DR supported the orders of lower authorities.
17. We have heard the rival contentions and perused the material on record. Through this ground assessee has challenged the order of ld. CIT(A) confirming the disallowance on depreciation of Rs.16,83,501/- on 5 tankers on the ground that they were not put to use for business purposes before the close of the year. From going through the pages 99 to 131 of the papar book dated 6.11.2015 we find that assessee has placed copies of goods carriage permit, vehicle insurance, certificate of fitness, certificate of registration and PUCC for all the 5 trucks which show that all the 5 vehicles were owned by assessee and were ready to use. As far as assets being actually used we observe that on pages 11 to 98 of the paper book ITA No. 1986 & 2133/Ahd/2012 9 Asst. Year 2009-10 dated 6.11.2015 exhibiting invoice no.140 dated 31.3.2009 issued by N. K. Proteins to M/s N/ K. Roadways Ltd. for fuel charges. It is pertinent to now that assessee entered memorandum of understanding on 31.3.2008 with M/s N/ K. Roadways on hiring various commercial vehicles owned by assessee which are exhibited at Annexure-A of the Paper Book. There is no dispute raised by Revenue in regard to depreciation in respect of these vehicles. Further supplementary deed to the Memorandum of Understanding dated 31.3.2008 was executed on 15th November, 2008 wherein assessee agreed for giving on hire the trucks or tankers purchased by it during financial year 2008-09. Impugned 5 trucks which were purchased on 27.3.2009 and were ready to use also form part on the supplementary agreement. We further observe that Hon. Jurisdictional High Court in the case of ACIT vs. Asima Syntex (supra) has dealt with similar issue of allowability of depreciation with regard to the use of the asset in the relevant year by observing as under :-
"43. We are, therefore, of the opinion that when there is commencement of the business by way of production of the articles, it can be said that the assessee is entitled to depreciation.
44. It is required to be noted that when an entrepreneur undertakes to invest a huge amount for the manufacture of the product, be has to plan it properly. Installation of machinery or plant and machinery in the building itself is not sufficient to attract the provisions contained in Section 32of the Act. There must be use of plant and machinery for the purpose of business as contemplated in Section 32 of the Act. There is thus a thin line between the trial run and actual production, or many a time, the word used is "commercial production". If the machines are installed properly and it gives good result, then one need not wait for any rectification in the system. There may be some cases wherein after commencement of the production, the machine may not give proper results-may be on account of failure of certain parts, may be on account of requirement of certain additional machinery, etc. In such a case, the production obtained at the initial stage would be considered as trial production. In the instant case, there is ITA No. 1986 & 2133/Ahd/2012 10 Asst. Year 2009-10 nothing to indicate that the assessee was required to instal any additional part or machinery with a view to run the entire unit. It is not a case similar to that case where before the Bombay High Court there was no production and only tools were tested. The present case is not similar to that of Speciality Paper Ltd. (1982] 133 ITR 879 (Guj) (Appex.) where wet press was required to be installed and even thereafter additional machinery was required to be installed. In the instant case, plant and machinery were installed and it worked smoothly. There may be certain machines, which in view of the latest technology, require no trial run. If separate parts are fitted and the machine is brought into existence, it may require a trial run, but if machinery is imported and it is merely fixed here, it does not mean that the machine would not work. Ultimately, on evidence, the Tribunal has found that 2,68,412 mtrs. of grey cloth was manufactured.
45. The law does not require that there must be optimum production for granting the benefit. Law only requires that there must be use of plant and machinery for the purpose of business. Use of such words that plant and machinery was run more extensively or was required to be used for larger production is not to be found in the Act or Rules. Whether the plant and machinery were up to the extent of its efficiency is irrelevant for the purpose of deciding depreciation. The test is that building, plant and machinery are used for the purpose of business. It is not even necessary that in a year it must have been used fora particular number of days. If the intention of the Legislature was that if the plant and machinery is used for a particular number of days, only then one is entitled to get the benefit of depreciation, the Legislature would have made that provision. Earlier, rules were to the aforesaid extent. Even recently, with regard to depreciation of vehicles, law is made clear. Therefore, it is for the Legislature to make a provision in that regard. Unless and until that provision is made, plant, machinery and building used for the purpose of business in a particular year irrespective of the number of days for which it worked, and if worked for the purpose of business, would attract the provisions of Section 32 of the Act."
18. Respectfully following the decision of Hon. Jurisdictional High Court in the case of ACIT vs. Asima Syntex (supra) discussed above, we are of the view that as the assessee has proved beyond doubt that the impugned assets consisting of 5 trucks purchased for Rs.67,34,004/- satisfy all the conditions as provided u/s 32 of the Act and, therefore, are eligible for depreciation for Rs.16,83,501/-. Accordingly, this ground of Assessee is allowed.
19. Ground No.3 of assessee's appeal -
ITA No. 1986 & 2133/Ahd/2012 11Asst. Year 2009-10
3. The learned CIT(A) has erred in confirming the disallowance of depreciation of Rs.4,64,850 on Plant & Machinery and electrical installation of Rs. 30,99,000 on the ground that it is included in work in progress as stated by way of note in Auditors Report in Form No. 3CD in as much as the WIP of Rs. 138.49 lacs in the opening .balance which is included in the plant & machinery and electrical installation and the said assets have been used during A.Y. 2009- 2010 as per the details provided in the chart of depreciation.
20. Assessing Officer disallowed depreciation of Rs.4,64,850/- on plant and machinery and electrical installation on the ground that as per the auditors report these items were included in work-in-progress and, therefore, not eligible for depreciation. This addition was challenged before ld. CIT(A) but assessee could not succeed as the same was dismissed by ld. CIT(A) by observing as under :-
5.2 I have carefully considered the rival submissions. It is seen that the depreciation on the addition to plant & machinery and electric installation of Rs.30.99 lacs has been disallowed on the basis of auditors observation. It is clearly mentioned by the A.O. that the auditors observation pertains to 31/3/2008.
I have perused Annexure-3 to Form No.SCD which consist of WDV and allowable depreciation for the A.Y.2009-10. In this annexure the auditors has observed as under :-
"Additions during the year includes an amount of Rs. 30.99 lacs which has been qualified under capital work-in-progress in the financial statement."
It is also observed that the details of capital work-in-progress has been elaborated in Annexure C to the balance sheet for the year ended on 31/3/2008. For the sake of ready reference the capital work-in-progress mentioned in this balance sheet is reproduced as under:-
Sr.No. Narration Amount Rs.
1. Building 1,07,49,986
2. Plant & Machinery 27,83,222
3. Electric Installation 3,15,984
Total 1,38,49,192
ITA No. 1986 & 2133/Ahd/2012 12
Asst. Year 2009-10
The above facts clearly indicate that the auditors certified that as on 31/3/2008 the appellant was having a total work-in-progress of Rs. 1,38,49,192/-. This includes capital work-in-progress under the head building of Rs.1,07,49,986/-. It also includes capital work-in-progress under the heads Plant & Machinery and Electric installation of Rs. 30,99,206/-. The auditors in the balance sheet relevant for A.Y.2009-10 had not classified building capital work-in-progress as on 3173/2009. The A.O. had agreed with the observations of statutory auditors and has not disallowed depreciation against capital work-in progress under the head buildings. It is interesting to note that the auditors has specifically mentioned that there exists work-in-progress of Rs. 30.99 lacs under the head Plant & Machinery and Electric installations. The appellant had only contended that the auditors observation is relevant for 31/3/2008. In this regard the appellant has furnished copies of Form No.SCD for the A.Y.2008-09. However, the appellant has not furnished any evidence to controvert the specific observations made by the statutory auditors in the balance sheet of A.Y.2009-10. The appellant's contention cannot be accepted as capital work-in-progress as on 31.3.2008 was Rs. 1,38,49,192/- while the auditors has certified capital work-in-progress as on 31.3.2009 at Rs. 30,99,000/-. Since the auditors had made specific comments which remains uncontroverted, accordingly, I am inclined to agree with the contentions of Ld. A.O. In view of above facts, disallowance of depreciation of Rs. 4,64,815/- is confirmed. This ground of appeal is dismissed.
21. Aggrieved, assessee is now in appeal before the Tribunal. Ld. AR submitted that the addition of Rs.4,64,850/- needs to be deleted because it emanates out of typographical error made by the statutory auditors in the notes given in Annexure-3 of form No.3CD for F.Y.2008-09. Ld. AR submitted that impugned amount of Rs.30,99,000/- which has been provided as work in progress by both the lower authorities in F.Y.2008-09 i.e. Asst. Year 2009-10 is not correct. In fact at the close of F.Y.2007-08 capital work in progress related to plant and machinery was at Rs.27,83,223/- and Rs. 3,15,984/- under electrical installation head. These two totals to Rs.30,99,207/-. These two items were part of the total capital of work in progress as on 31.3.2008 shown at Rs. 1,38,49,192/-, the impugned work in progress of Rs.30,99,207/- were put to use for the ITA No. 1986 & 2133/Ahd/2012 13 Asst. Year 2009-10 business during F.Y.2008-09 in the month of May, 2008. In the statutory auditor of the company in annexure-3 of form No.3CD of F.Y.2008-09 relate to depreciation allowable as per IT Act mentioned under marked point -3 that addition during the year includes an amount of Rs.30.99 lacs which has been classified under the capital in progress in the audited financial statement. Ld. AR further clarified that this remark was mentioned to show that addition during the year includes Rs.30.99 lacs which was classified under capital work in progress in the financial statement of FY 2007-08. Further depreciation has been charged on the impugned assets which have been duly certified by the auditors. Therefore, disallowance of Rs. 4,64,850/- needs to be deleted. Ld. AR further referred to letter dated 28.5.2012 placed before ld. CIT(A) for supporting the claim that depreciation of Rs. 4,64,850/- on electrical installation and plant & machinery should be allowed and the same reads as under :-
"5.Depreciation OH Electrical Installation and Plant & Machinery of Rs.4,64,850:
5.1 The learned AO has disallowed depreciation on electrical installation and Plant & Machinery of Rs. 4,64,850 on the ground that it forms part of WIP as per the Note No. 3 of the depreciation chart. The depreciation chart is enclosed. The Note No.3 reads as under:
"Addition during the year includes an amount of Rs. 30.99 lacs which has been classified under [Opening Balance] Capital WIP in the audited financial statements." -
5.2 In the said chart the word opening balance is left out to be mentioned through oversight. It is not a closing balance. The Annual Report for the year ended on 31st March, 2008 and 31st March, 2009 are enclosed. The opening and closing balance are reconciled as under: .
Plant & Machinery: -
Closing Balance as on 31-03-2008 Rs. 1932.30 lacs
Plant & Machinery included in WIP last year Rs. 27.84 lacs
Opening Balance as on 01-04-2008 Rs. 1960.14 lacs
ITA No. 1986 & 2133/Ahd/2012 14
Asst. Year 2009-10
Electrical Installation:
Closing Balance as on 31-03-2008 Rs. 141.83 lacs
Electrical installation included in WIP last year Rs. 3.15 lacs
Opening Balance as on 01-04-2008 Rs. 144.98 lacs
5.3 From the above, it may please be seen that the Electrical Installation and Plant & Machinery of Rs. 30.99 lacs was the opening balance and that the said machinery and electrical installation have been used throughout the year. Therefore, the depreciation of Rs. 4,64,850 is wrongly disallowed. The same may please be allowed."
22. On the other hand, ld. DR supported the orders of lower authorities.
23. We have heard the rival contentions and perused the material on record. Through this ground assessee has challenged the order of ld. CIT(A) sustaining the disallowance of depreciation of Rs.4,64,850/- on the impugned assets of Rs.30.99 lacs by treating them as work in progress. In order to examine the facts relating to impugned assets of Rs.30,99,207/- we find that this amount comprises of Rs.27,83,223/- towards plant & machinery and Rs.3,15,984/- towards electrical installation. Analysing the Tax audit report for Asst. Year 2007-08 we observe that at page 146 of the paper book dated 6.11.2015 Annexure-C to Tax audit report is appearing which shows depreciation working u/s 32 of the I.T. Act for FY 2007-08 showing the capital work in progress Rs.27,83,223/- and Rs.3,15,984/- in the plant & machinery and electrical installation respectively. Further when we move to the Tax Audit report of FY 2007-08 the relevant data is available at page 185 of the paper book at Annexure-3. This Annexure-3 is further supported by Annexure-3A showing itemwise details of addition to block of assets with the ITA No. 1986 & 2133/Ahd/2012 15 Asst. Year 2009-10 column no., sl.no., detail of assets, amount, date of putting to use and assets held more than 180 days or less than 180 days. On this examination of this detailed annexure-3 at page 188 of the paper book there appears details of assets costing Rs.27,83,223/- which were transferred from capital work in progress to fixed assets a/c. under plant & machinery head and were put to use on 3rd May, 2008. Similarly, on page 195 of this paper book shows that assets of Rs.3,15,984/- under electrical installation head were put to use on 22nd May, 2008. Auditors remark which both the lower authorities are referring to is appearing at remarked-3 of Annexure-3 on depreciation details for FY 2008-09 in form 3CD report is just referring that the addition during the year includes the capital work in progress which means that the addition includes some assets which have been purchased during the year and some assets which were forming of capital work in progress upto previous year were now shifted under the block of assets for the purpose of claiming depreciation. We are of the view that remark of statutory auditors has to be seen in totality that Annexure-3A of the same assets duly certified by the same auditor giving bifurcation of each and every assets to the date of its being put to use and above all the depreciation for the year claimed by the assessee is also duly certified by the same auditor. Therefore, we are of the view that no disallowance was called for on depreciation of Rs.4,64,850/- on the assets of Rs.30,99,207/- treating them capital working in progress upto FY 2007-08 and FU 2008-09 i.e. the Asst. Year under consideration, We allow this ground of assessee.
ITA No. 1986 & 2133/Ahd/2012 16Asst. Year 2009-10
24. Ground No.4 of assessee's appeal -
4. The learned CIT(A) has erred in confirming the disallowance of Rs. 1,13,521 under section 14A in as much as the investment is made out of interest free funds and that # the assessee has not incurred any expenditure on investments.
4.1 The appellant says and submits that only transaction is the purchase of shares worth Rs. 17,85,000 of N.K. Industries Ltd. [NKIL] during the whole year, therefore the question of disallowing any expenditure does not arise since there is no expenditure incurred therefore.
25. Disallowance u/s 14A of the Act of Rs.1,13,521/- made by ld. Assessing Officer was challenged before ld. CIT(A) and the same was dismissed by ld. CIT(A) by observing as under :-
7.2 I have carefully considered the rival submissions. It is seen that disallowance u/s.14A has been made by the A.O. as per provisions of rule 8D of I.T. Rules, 1962. On the other hand the appellant is contending that disallowance u/s.14A cannot be made as the appellant is having much more interest free funds than the investment made in shares. The appellant has also placed reliance on Reliance Utilities and Power Ltd 313 ITR 340 (Bom).
7.3 It is a matter of fact that the provision of rule 8D has come into effect from the A.Y.2008-09 onwards. As per the provisions of sec.14A(2) r.w. rule 8D, the Income tax Act has clearly provided for disallowance under rule 14A as per the computation elaborated in rule 8D of the I.T. Rules, 1962. Provisions of 14A(2) r.w. rule 8D does not prescribe any exceptions. In fact provisions of Sec.14A(3) makes it very clear that even in the cases where appellant claims that no expenditure has been incurred by it in relation to the income which does not form part of total income under this Act, provisions of sec.14A(2) will be applicable.
This way disallowance u/s.14A is mandatory in nature after the A.Y.2008-09. In view of above, I am inclined to agree with the contentions of A.O. Accordingly, disallowance of Rs. 1.13.521/- is confirmed. This ground of appeal is dismissed.
26. Now the assessee is in appeal before the Tribunal. At the outset ld. AR submitted that the issue is squarely covered in favour of assessee by the judgment of Hon. Gujarat High Court in the case of CIT vs. Corrtech Energy P. Ltd, reported in [2015] 372 ITR 97 (Guj.), ITA No. 1986 & 2133/Ahd/2012 17 Asst. Year 2009-10 "Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010. Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that sub-section(1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of Commissioner of Income Tax v Winsome Textile Industries Ltd reported in (2009) 319 ITR 204 (P & H) in which also the Court had observed as under (Page 207):
"7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR 1 (P&H) was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application."
5. We do not find any question of law arising, Tax Appeal is therefore dismissed."
27. Ld. AR further submitted that there is no exempt income earned by assessee during the year and therefore no disallowance is called for u/s 14A of the Act.
ITA No. 1986 & 2133/Ahd/2012 18Asst. Year 2009-10
28. On the other hand, ld. DR supported the orders of lower authorities.
29. We have heard the rival contentions and perused the material on record. Assessee is aggrieved with the disallowance u/s 14A of the Act of Rs.1,13,521/- confirmed by ld. CIT(A). We further observe that ld. AR specifically mentioned that there is no exempt income earned by the assessee during the year. We also observe that in the judgment of Hon. Jurisdictional High Court in the case of CIT vs. Corrtech Energy P. Ltd.(supra) has confirmed the order of the Tribunal deleting disallowance u/s 14A of the Act as the assessee has not claimed any exempt income. Similar is the situation in the case of assessee and we respectfully following the judgment of Hon. Jurisdictional High Court are of the view that no disallowance is called for u/s 14A as assessee has not claimed any exempt income in the year under appeal. We hold that ld. CIT(A) was not correct in upholding the disallowance and allow the ground of assessee.
30. Ground no.5 of assessee is as under :-
5. The learned CIT(A) has erred in confirming the disallowance of Rs. 56,000 being the provision for diminution in assets in as much as it is allowable as deduction following the Supreme Court decision in the case of Vijya Bank 323 ITR 166
31. Disallowance of Rs.56,000/- was made by ld. Assessing Officer by not allowing the claim of sundry debit balance written off during the year by treating them of capital in nature. These sundry debit balance were the old balances lying in the bank account held by assessee which were not recovered as no transactions were entered through ITA No. 1986 & 2133/Ahd/2012 19 Asst. Year 2009-10 both banks for last many years. Ld. CIT(A) confirmed the disallowance by observing as below :-
9.2 I have carefully considered the rival submissions. It is seen that the appellant has claimed an expense of Rs. 56.000/- under the head "sundry debit balances written off." It is also a matter of fact that these are statedly old balance in the bank accounts and the appellant does not have any transaction with these banks for so many years. The facts on record indicate that the income in respect of the above said bank balances had never been accounted for by the appellant as income in the earlier years. Accordingly, the conditions of sec.36(1)(vii) are not fulfilled jn the case of the appellant and accordingly, the appellant cannot write off these advances as per the provisions of sec.36(1)(vii) of the IT Act. In view of these facts, I am inclined to agree with the contention of the ld. A.O. and disallowance of Rs.56,000/- is confirmed. This ground of appeal is dismissed.
32. On appeal before the Tribunal, ld. AR submitted that sundry debit balance written off for Rs.56,000/- pertained to old balance lying with Bank of Baroda and Bank of Maharashtra Ltd. which were very old accounts. Assessee did not enter into transactions with the said banks and nothing was recoverable from the said banks. Therefore, these balances were written off by claiming them as expenditure in profit and loss account and accordingly reduced them from the gross deposit in Schedule-9 to audited accounts. This type of expenses falls under the category of general expenditure u/s 37 which should have been allowed. In this connection ld. AR relied on the judgment of Hon. Jurisdictional High Court in the case of CIT vs Abdul Razak & Co. (1982) 136 ITR 825 (Guj)
33. Ld. DR supported the orders of lower authorities.
34. We have heard the rival contentions and perused the material on record and gone through the judgment relied on by the assessee.
ITA No. 1986 & 2133/Ahd/2012 20Asst. Year 2009-10 Through this ground assessee has challenged the action of ld. CIT(A) confirming disallowance of Rs.56,000/-. We observe that Rs.56,000/- was claimed as sundry debit balance written off in the profit and loss account. This ground related to irrecoverable balance with Bank of Baroda and Bank of Maharashtra which were lying in these accounts since last many years and no transaction with the said banks happened to be in past few years. We observe that assessee is a limited company carrying on business for last many years and transactions with the bank is in regular course of business. Some times for business expediencies new bank accounts are opened for having smooth working of business and quick services. In this process business transaction moves to the new bank account and the previous bank account become inoperative. Similar things happened in the case of assessee where Rs.56,000/- remained unutilized in such defunct bank account and due to lack of entering transactions for last many years such type of balances are transferred to suspense account by the banks. Certainly transfer of such type of balance in sundry debit balances written off account is rightly covered under the provisions of section 37 of the Act. We further observe that Jurisdictional High Court in the case of CIT vs. Abdul Razak & Co. (supra) has dealt with similar issue about irrecoverable advances and has held the same to be allowable revenue expenditure by observing as under :-
7. In view of these well accepted legal principles, in our opinion, by necessary implication, either short-term or long-term financing is an integral part of the commission agency business. As a commission agent, one either buys the goods or sells the goods for one's principal. When he acts as a commission agent for sales of goods, he purchases the goods for supply to his principal from his funds ITA No. 1986 & 2133/Ahd/2012 21 Asst. Year 2009-10 and then he is reimbursed by his principal on supply of such goods. A commission agent, therefore, has got to advance amounts from time to time according to the nature of his business. It may be a short-term advance if he is a commission agent for purchase of goods or it may be a long-term advance if it is for sale of goods. We have, therefore, not been able to appreciate as to how the Tribunal approached the problem as if the financial lending which is involved in the business of commission agency is a seperate and exclusive business and not an integral part of the commission agency business. It is an admitted position here before us that the assessee-firm was doing the business as commission agents and dealers in grocery articles. It is also an admitted position that M/s.
Mohmad Peer Mohmad of Nasik engaged the assessee-firm as commission agents for purposes of purchase of goods. The one set of account in the trading books of the assessee-firm comprises of this commission agency business for purchase of the goods carried on by the assessee-firm known as "sarafi account". It is, however, in out opinion, the interference of the Tribunal from these two sets of accounts of M/s. Mohmad Peer Mohmad of Nasik that these were two different businesses, which is not justified. It is no doubt true that in the present case before us the bad debt which has been claimed by the assessee-firm was in respect of advance made to the principal, M/s. Gokaldas Virjibhai of Sangli with whom the said principal had independent dealings. It is also an admitted position that the trading account of M/s. Mohmad Peer Mohmad of Nasik in the books of the assessee-firm was settled and there was no outstanding which had been carried to the sarafi account of the said party. These facts, however, in our opinion, are not sufficient to necessarily reach the conclusion as has been done by the Tribunal that the lending was not a part of the general commission agency business. The general lien granted, inter alia, to the factors who are the commission agents for sale of goods under s. 171 and of agents under s. 221 of the Indian Contract Act extends to the general balance of account of their principal which would, therefore, necessarily include the advances made apart from strictly in the course of the business as factors or commission agents for purchase and supply of goods. It is a matter of surprise how the Tribunal lost sight of the finding made by the ITO that in the course of the business of commission agency, the assessee-firm had advanced money to the constituents who where required to pay interest on such advances. It is no doubt true that the ITO has found that these advances were made to the constituents against the goods received from them for sale on commission basis, but that observation of the ITO, in our opinion, does not detract from the nature of the business of commission agents, whether for sale or purchase of the goods, which, in our opinion, necessarily requires the advances to be made. We should not be, however, understood to subscribe to the view that if in a given case a trader doing commission agency business makes advances or lends money to an unknown outsider or to a complete stranger, it would be a part of his commission agency business. In the present case, however, the ITO has not only found that the assessee-firm was making such advances in the course of commission agency business but the ITO, Rajkot, has also recorded the statement of one of the partners of the assessee- firm where Shri Ahmed Ibrahim Sahigra stated, inter alia, that the firm was carrying on money-lending business at Bombay and no licence was necessary for ITA No. 1986 & 2133/Ahd/2012 22 Asst. Year 2009-10 such business and the transactions were recorded in the common trading books of account of the firm. In answer to question No. 10 he stated that M/s. Mohmad Peer Mohmad of Nasik approached them for loan and requested them to send money on their behalf to M/s. Gokaldas Virjibhai of Sangli from whom M/s. Mohmad Peer Mohmad of Nasik had purchased the goods were not prepared to wait for their dues and as the latter enjoyed better credit facility with the assessee-firm they approached them for paying off the dues to the Sangli party. In answer to question No. 17 as to when they post entries for interest in the books, the deponent stated that in the accounts of their constituents they make entries at the end of the accounting period while in the case of other advances, the entries are made when the interests amounts are received. Admittedly, M/s. Mohmad Peer Mohmad of Nasik was the constituent of the assessee-firm. The ITO, Nasik, has also recorded the statement of one of the partner of this debtor-firm, where the deponent-partner has stated that their firm of M/s. Mohmad Peer Mohmad of Nasik had trading relations with the assessee-firm for more than 30 years, and they enjoyed greater credit facility with them which was not available from M/s. Gokaldas Virjibhai of Sangli. The Tribunal has overlooked these statements of the assessee and the debtor-firm where it has been clearly stated that these advances were asked for and made in fact having regard to the commercial relations were admittedly of principal and commission agents. In our opinion, therefore, the Tribunal was not justified on the facts and in the circumstances of the case to hold that the advance to M/s. Mohmad Peer Mohmad of Nasik was not in the ordinary course of business of the assessee-firm and merely incidental to it. As held by this court in CIT v. Equitorial Pvt. Ltd. [1974] Taxation 37(3)-82, the debt owed by M/s. Mohmad Peer Mohmad of Nasik was one which sprang directly from the business of the assessee and was allowable as a bad debt, and, consequently, therefore, a trading loss under section 28(1). It is no doubt true that every loss is not so deductible unless it is incurred in carrying out the operation of the business. [vide CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC)]. In that view of the matter, therefore, for the reasons stated in this order, we are of the opinion that the said loss being a bad debt is allowable as trading loss under s. 28 of the I.T. Act, 1961, and, therefore, for the reasons stated hereinabove, the answer to the question referred to us is in the affirmative, that is, in favour of the assessee and against the revenue.
35. Respectfully following the judgment of Hon. Jurisdictional High Court in the case of CIT vs. Abdul Razak & Co. (supra), we are of the considered opinion that sundry debit balance written off for Rs.56,000/- should be allowed as a revenue expenditure. This ground of assessee is allowed.
ITA No. 1986 & 2133/Ahd/2012 23Asst. Year 2009-10 In the result, assessee's appeal is partly allowed for statistical purposes.
36. Now we take Revenue's appeal in ITA No.2133/Ahd/2012 for Asst. Year 2009-10 wherein following grounds have been raised :-
i) The Id, CIT (A) has erred in law and on facts in deleting the disallowance of Rs.36,30,000/- made u/s 40(a)(ia) of the I T Act,
ii) The Id. CIT (A) has erred in law and on facts in deleting the disallowance of Rs.83,98,0007- made on account of non compliance of the provision of Section 194H of the I T Act while making payment of commission to the Directors.
iii) The Id. CIT (A) has erred in law and on facts in deleting the disallowance of Rs.91,07,505/- made on account of on account of interest on non interest bearing advance.
iv) On the facts and circumstances of the case, the Ld. CIT (A) ought to have upheld the order of the Assessing Officer.
v) It is, therefore, prayed that the order of the Ld. Commissioner of Income tax (A) may be set-aside and that of the Assessing Officer be restored.
37. Ground no. (i) of Revenue's appeal is as under -
i) The Id, CIT (A) has erred in law and on facts in deleting the disallowance of Rs.36,30,000/- made u/s 40(a)(ia) of the I T Act,
38. During the course of assessment proceedings it came up before the ld. Assessing Officer that a deduction of 50,70,317/- was claimed for prior period expenditure which were not debited in the books of account by the assessee in the earlier years and the same were claimed in the year under appeal as assessee has deducted and paid TDS in respect of these prior period expenditure. This amount of prior period expenditure was disallowed at the time of framing assessment order by ld. Assessing Officer. In appeal before ITA No. 1986 & 2133/Ahd/2012 24 Asst. Year 2009-10 ld. CIT(A) disallowance of Rs.36.30 lacs was deleted since assessee has deducted and paid taxes on these expenses and confirmed the disallowance for Rs.14.4 lacs as no specific details about the type of expenditure incurred were available on record by observing as under-
B. Disallowance of Rs. 50.70.317/-
It is seen that during the year under consideration the appellant has claimed deduction of Rs, 50, 70, 3171- which are prior period expenses. These expenses were not debited in the books of accounts by the appellant in the earlier years. This way the disallowance of these expenses in the earlier years as per the provisions of sec.40(a)(ia) does not arise. However, the appellant has deducted and paid TDS in respect of these expenses during the year under consideration. The appellant has claimed these expenses during the year under consideration as per the provisions of sec.40(a)(ia). The A.O. was of the opinion that for allowance of these expenses during the year under consideration as the same has to be debited in the books of accounts in the respective assessment year and the same should have been disallowed in that year u/s.40(a)(ia). After fulfillment of these conditions, the appellant can claim these expenses during the year under consideration after payment of TDS.
It is seen that a similar issue has been decided in favour of the assessee by the Hon'ble Gileu.tta ITAT in ABN Amro Bank vs JCIT reported at 97 ITD 1 (3rd Member). For the sake of ready reference the concluding para of this order is reproduced as under :-
"81.lt is interesting to note that the provisions of s.40(a)(i) are disabling provisions as well as enabling provisions. While s.40(a) lays down the restrictions on deducibility of certain expenses, proviso to s. 40(a)(i) lays down the conditions in which such an expense is to be allowed.
82.Normally, proviso to a section sets out an exception to the scope of section. It craves out an area, out of the area covered by the scope of the section, and takes it away from applicability thereof. As Lush J said, "When one finds a proviso to a section, the natural presumption is that, but for the proviso, the enacting part of section would have included the subject-matter of the proviso."
As Lord Macnaghaten observed, 'the proviso may be a qualification of the preceding enactment which is expressed in terms too general to be accurate'. No doubt that, more often than not, it is somewhat alien to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is not directly relevant to the section of which it is a proviso. In other words, normally a proviso operates as an exception, rather than as a ITA No. 1986 & 2133/Ahd/2012 25 Asst. Year 2009-10 substantive provision. However, as was observed by the Hon'ble Supreme Court in the case of CIT vs. Jagannath Mahadeo Prasad (1969) 71 ITR 296 (S.C) "where the language is quite clear and no other view is possible, it is futile Jo-go into the question whether the proviso to s. 24(1) operates as a substantive provision or only by way of an exception to s.24(1)". The words of proviso to s. 40(a)(i) also being clear and being free from any ambiguity, and in view of the principle so laid down by the Hon'ble Supreme Court in the case of Jagannath Mahadeo Prasad (supra), this proviso is to be viewed as a substantive provision and as, to repeat my words in the preceding para, an enabling provision.
83. In the light of the above discussions and in view of the fact that the learned Vice President has confirmed the disallowance of remuneration and tax in respect of 1990-91 and 1991-92 only on the ground that the assessee had not made claim for deduction thereof in the respective years, dissociate myself from this conclusion arrived at by the learned Vice President. In my considered view, therefore, the deduction of remuneration and tax in respect of 1990-91 and 1991- 92 is to be allowed in the asst yr. 1995-96, i.e., the year in which the assessee has duly discharged the tax deduction at source obligation in respect of the same."
Respectfully following the above said decision I am of the considered view that the following three expenses where provisions of Chapter XVII of the Income-tax should be allowed since the tax deduction and payment obligation on these expenses has been discharged by the appellant during the year under consideration.
Sr. No. Particulars Amount
(Rs. in lacs)
1. Advertisement expenses 19.66
2. Brokerage and 13.77
commission expenses
3. Legal and professional 2.87
expenses
TOTAL 36.30
The A.O. is directed to allow expenses to the extent of Rs. 36.3 lacs. The appellant will get relief to this extent.
The appellant has also claimed other miscellaneous expenses of Rs. 14.4 lacs which pertains to earlier years but on these expenses the appellant had deducted toe taxes and paid the same to the Government Account during the year under consideration. It is interesting to note that appellant has not furnished nature of these expenses. Apparently these expenses does not attract the liability of tax ITA No. 1986 & 2133/Ahd/2012 26 Asst. Year 2009-10 deducted at source as per the provisions of Chapter XVII of I.T.Act. Accordingly, these expenses can neither be disallowed as per the provisions of sec.40(a)(ia) on the first instance in the earlier years u/s.40(a)(ia) and the same cannot be allowed as per the provisions of sec.40(a)(ia) on payment of TDS during the year under consideration. In view of above, disallowance to the extent of Rs. 14.4 lacs is confirmed.
As a result the appellant will get relief of Rs. 36.3 lacs. Addition to the extent of Rs. 26,94,384/- (14,40,000/- + 12,54,384/-) is confirmed. This ground of appeal is partly allowed.
39. Aggrieved, Revenue is now in appeal before the Tribunal.
40. Ld. DR supported the order of Assessing Officer.
41. On the other hand, ld. AR submitted that expenditure of Rs.36.3 lacs which was not claimed in earlier years but as during the year under appeal due TDS was deducted and deposited, claiming of these expenditures of Rs.36.3 lacs were justified. Ld. AR further submitted that even in case these expenses had been claimed in the earlier year they certainly would have been disallowed because as per the provisions of section 40(a)(ia) of the Act no TDS was deducted and deposited and should be allowed only in the year when TDS is paid. Therefore, ld. CIT(A) has rightly deleted the disallowance of Rs.36.3 lacs.
42. We have heard the rival contentions and perused the material on record. Through this ground Revenie is aggrieved with the deletion of addition of Rs.36.3 lacs u/s 40(a)(ia) of the Act made by Assessing Officer. From going through the record, we observe that claim of Rs.50,70,317/- was made for prior period expenditure incurred under the following heads :-
ITA No. 1986 & 2133/Ahd/2012 27Asst. Year 2009-10
i) Development expenses Rs.19.66 lacs
ii) Brokerage & Commission Rs.17.77 lacs
iii) Leval professional expenses Rs.2.87 lacs.
-----------------
Rs.36.3 lacs
iv) Miscellaneous expenses Rs.14.4 lacs
--------------
Rs.50.7 lacs
43. We find that ld. CIT(A) sustained disallowance on the amount of Rs.14.4 lacs towards miscellaneous expenses which we have dealt while adjudicating ground no.1 of assessee's appeal.
44. Now as far as remaining amount of Rs.36.3 lacs is concerned we find that there is no dispute on the part of Revenue about the genuineness of the expenditure claimed for Rs.36.3 lacs as well as the amount of TDS deducted and deposited. Disallowance of these expenses on the part of Assessing Officer arose because of his view that the expenditure which has never been claimed in earlier years and was not disallowed u/s 40(a)(ia) of the Act in the year of incurring of these expenses due to non-deduction of TDS then such expenditure cannot be claimed in the following years because they were never debited in the account of earlier years.
45. We observe that in the given circumstances when there is no dispute to the genuineness of the expenditure which proves that these expenses of Rs.36.3 lacs were actually incurred in earlier years but could not have been claimed for some reason or other. Even if ITA No. 1986 & 2133/Ahd/2012 28 Asst. Year 2009-10 these expenditure had been claimed, they certainly would have been disallowed u/s 40(a)(ia) of the Act as no tax was deducted and deposited. This exercise of deducting and depositing TDS was carried out in the year under appeal which fulfills all the conditions of section 40(a)(ia) of the Act which allows to claim deduction of such expenditure in the year in which due taxes (TDS) are deposited. By claiming this expenditure of Rs.36.3 in this year there is no impact to the Revenue in terms of tax liability. We are, therefore, of the view that assessee should be allowed deduction u/s 40(a)(ia) of the Act for Rs.36.3 lacs and therefore, no interference is called for in the order of ld. CIT(A) with respect to this ground. Accordingly this ground of Revenue is dismissed.
46. Ground no.(ii) of Revenue's appeal -
ii) The Id. CIT (A) has erred in law and on facts in deleting the disallowance of Rs.83,98,0007- made on account of non compliance of the provision of Section 194H of the I T Act while making payment of commission to the Directors.
47. During assessment proceedings it was observed by ld. Assessing Officer that commission of Rs.83.98 lacs was given to the Chairman and Managing Director at Rs.41.99 lacs each. No tax was deducted at source on this amount during the year. As per ld. Assessing Officer disallowance was called for on this amount of Rs.83,98 lacs. Assessee submitted that commission paid to Directors was part of salary and the due TDs was deducted and deposited in subsequent year and also provisions of section 40(a)(ia) of the Act do not apply on the expenditure incurred on salary subject to TDS u/s ITA No. 1986 & 2133/Ahd/2012 29 Asst. Year 2009-10 192 of the Act. Assessing Officer was not convinced and made disallowance of Rs.83.99 lacs. In appeal before first appellate authority impugned disallowance of Rs.83,98,000/- was deleted by ld. CIT(A) by observing as under :-
6.3 I have carefully considered rival submissions. It is seen that the A.O. disallowed commission paid to the directors of Rs. 83,98,000/- on the premise that deduction of tax at source on the commission payment was not made as per the provisions of sec.194H of the I.T. Act. It is also observed that the commission of Rs. 83,98,000/- has been paid to the directors as part of the directors remuneration. In this regard the appellant has filed copies of minutes of meeting of Board of Directors of the appellant company dated 173/2009, wherein the company had agreed to pay to the directors fixed salary of Rs.3,00,000/- per month. In addition to this 30% of net profit made by the company during the year 2008-09 and subsequent years was also to be paid to the directors as part of directors remuneration. It is also a matter of record that TDS on directors remuneration has been made by the appellant as per the provisions of sec.192 of the I.T Act. This includes TDS on impugned commission payment of Rs.
83,98,000/-. The TDS was duly deposited to the Govt. account as per the provisions of the I.T. Act, The above facts clearly reveals that the commission was part and parcel of the directors remuneration and in my considered view the appellant has rightly deducted tax on these payments as per the provisions of sec.192 of the I.T. Act. In this regard the appellant has rightly placed reliance on Jahangir Biri Factory vs DCIT reported at 126 TTJ 567 (Kol). In this case it is held by the Hon'ble ITAT that commission paid to the directors as per the terms of employment has to be treated as incentive in addition to salary and the same did not come within the purview of commission or brokerage as defined in sec.194H of the I.T. Act. In view of the above I hold that the commission paid to the directors is part and parcel of salary and the appellant has rightly deducted tax on directors remuneration as per the provisions of sec. 192 of the l.T. Act. In view of above the addition of Rs. 83,98,000/- is untenable. Otherwise also the method adopted by the A.O. is prejudicial to the interest of revenue. As per the provisions of sec.192 of the l.T. Act, TDS on salary is deducted at the rate of almost 30 to 33%. In this case the tax has been deducted at the rate of 33%. As per the provisions of sec.194H, the tax is to be deducted @10% only. As the appellant has deducted more tax by following the provisions of sec. 192, accordingly, it cannot be said that by deducting the tax as per the provisions of sec. 192, the appellant had tried to deduct lesser tax at source. In view of above facts, the A.O. is directed to delete addition of Rs.83,98,000/-. This ground of appeal is allowed.
48. Aggrieved, Revenue is now in appeal before the Tribunal.
ITA No. 1986 & 2133/Ahd/2012 30Asst. Year 2009-10
49. Ld. DR supported the order of Assessing Officer.
50. On the other hand, ld. AR of assessee submitted that sume of Rs.83,98,000/- was actually part of salary to the Directors on which TDS was deducted as per section 192 of the Act whereas as per ld. Assessing Officer TDS had to be deducted as provisions of section 194H of the Act. Ld. AR also submitted that provisions of section 40(a)(ia) of the Act are not applicable on the expenditure calling for TDS u/s 192 of the Act and for this reason also no disallowance is called for u/s 40(a)(ia) of the Act. Further ld. AR relied on the judgment of Hon. Gujarat High Court in the case of CIT-II vs. Prayas Engineering Ltd. in Tax Appeal No.1237 of 2014 and the decision of the ITAT, Kolkata "C" Bench in the case of Jahangir Biri Factory (P) Ltd. v. Dy. CIT [2009] 126 TTJ 567.
51. We have heard the rival contentions and perused the material on record. Revenue is aggrieved with the deletion of disallowance of Rs.83,98,000/- by ld. CIT(A), incurred towards commission to two Directors on which provisions of section 194H were attracted and disallowance was rightly made u/s 40(a)(ia). We observe that salary of Rs.7.22 lacs and Rs.7 lacs were paid to Shri Nilesh K. Patel, Chairman and Shri Nimish K. Patel, Managing Director of the company respectively. Similarly, commission of Rs.41.99 lacs each was shown to the Chairman and Managing Director. We further observe that in Annexure-5 form No.3CD attached to the Tax Audit Report for FY 2008-09 in the statement giving details of payments ITA No. 1986 & 2133/Ahd/2012 31 Asst. Year 2009-10 made to persons specified u/s 40a(2)(b) of the Act commission is shown to Director Nilesh K. Patel and Nimish K. Patel at Rs.41.99 lacs each and director's remuneration is separately shown at Rs.772,012/- and Rs 794,256 to Nilesh K. Patel & Nimish K. Patel respectively. We further observe that in the same audit report and Annexure-9 auditors have qualified the report of mentioning under the head tax deductible but not deducted at all with regard to payment of commission or brokerage to directors u/s 192 of the Act at Rs.4,297,530/- & Rs.1,460,730/-.
52. Now we observe that there are two questions which need to be answered -
(i) Whether commission or brokerage paid to Chairman/whole time Director is part of salary on which TDS is deducted u/s 192 of the Act or it is to be treated as commission/brokerage on which TDS is deductible u/s 194H of the Act ?
(ii) Whether provisions of section 40(a)(ia) of the Act are applicable for non-deduction of TDS u/s 194H?
53. Now as far as question no.1 is concerned, issue has been settled by the Co-ordinate Bench, Kolkata in the case of Jahangir Biri Factory (P) Ltd. v. Dy. CIT (supra) wherein it has been held that commission paid to the Directors as per their terms of employment for the work done in their capacity as whole time directors should have been treated as an incentive in addition to salary, bonus and other perquisites and they do not fall under the purview of sec.194H or 194J. It is true that tax is deductible on such commission at the rate ITA No. 1986 & 2133/Ahd/2012 32 Asst. Year 2009-10 prescribed u/s 192 of the Act, since such commission is nothing but part of salary and the appellant has failed to deduct such tax. However, provisions of sec.40(a)(ia) of the Act do not cover expenditure subject to tax deductible u/s 192 of the Act. We are therefore of the view that the impugned amount of commission/brokerage paid to directors is a part of salary and remuneration to the Chairman and Managing Directors and income- tax is required to be deducted at source u/s 192 of the Act.
54. Now coming to question 2 whether section 40(a)(ia) of the Act covers the expenditure incurred on salary or not. Now provisions of section 40(a)(ia) of the Act reads as under :-
40. Notwithstanding anything to the contrary in sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",--
(a) in the case of any assessee--
[(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,-- (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid [during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200] :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
The following proviso shall be substituted for the existing proviso to sub-
clause (i) of clause (a) of section 40 by the Finance (No. 2) Act, 2014, w.e.f 1-4-2015 :ITA No. 1986 & 2133/Ahd/2012 33
Asst. Year 2009-10 Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation.--For the purposes of this sub-clause,--
(A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;
(B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
(ia) [any interest, commission or brokerage, [rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work)], on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid23a on or before the due date23a specified in sub-
section (1) of section 139 :] [Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) ofsection 139, [thirty per cent of] such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :] [Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.] Explanation.--For the purposes of this sub-clause,--
(i) "commission or brokerage" shall have the same meaning as in clause (i) of the Explanation to section 194H;
(ii) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
(iii) "professional services" shall have the same meaning as in clause (a) of the Explanation to section 194J;
(iv) "work" shall have the same meaning as in Explanation III to section 194C;
27[(v) "rent" shall have the same meaning as in clause (i) to the Explanation to section 194-I;
(vi) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;] ITA No. 1986 & 2133/Ahd/2012 34 Asst. Year 2009-10
55. From going through the above provisions we observe that it relates to interest, commission or brokerage, rent, fees for professional and technical services payable to contractor or sub- contractor being resident. We find that there is no mention about the payment of salary in these provisions. Therefore, we are of the view that payments on which tax is deductible under section 192 of the Act is out of the ambit of the provisions of section 40(a)(ia) of the Act.
56. In view of our above discussions and in the given facts and circumstances of the case, where the assessee has deducted and deposited the part of TDS during the year and the remaining in the following year on the commission paid to whole time directors which is in the nature of salary is rightly subject to TDS u/s 192 of the Act and not u/s 194H of the Act and, therefore, no disallowance is called for u/s 40(a)(ia) of the Act on the sum of Rs.83,98,000/-. No interference is called for in the order of ld. CIT(A). This ground of Revenue is dismissed.
57. Ground No.(iii) of Revenue's appeal -
iii) The Id. CIT (A) has erred in law and on facts in deleting the disallowance of Rs.91,07,505/- made on account of on account of interest on non interest bearing advance.
58. During the course of his examination of books of account of assessee Assessing Officer came across certain advances on which no interest was charged and ld. Assessing Officer treated as prima facie cause of diversion of interest bearing funds to non-interest bearing advances which was in relation to 4 parties namely -
ITA No. 1986 & 2133/Ahd/2012 35
Asst. Year 2009-10
N. K. Industries 8400000
Vipui Industries 600000
Guru Commodities 30000
Pearl Energy 77595
Total 9107595
Reply of the assessee was not found satisfactory and Assessing Officer went ahead to make disallowance of Rs.91,07,595/-. On appeal before ld. CIT(A) assessee got relief as ld. CIT(A) deleted the disallowance by observing as below :-
10.3 I have carefully considered rival submissions. I have also perused evidences furnished by the appellant and the case laws relied upon by the Id.
A.R. It is seen that interest expenses of Rs.91,07,595/-was disallowed u/s.36(1)(iii) of IT. Act. As per the provisions of section 36(1)(iii), to claim interest expenses, following conditions should be fulfilled.
(i) The Assessee must have borrowed money
(ii) The interest should have been payable
(iii) Borrowing should be made for the purpose of business.
In my considered view, appellant has fulfilled all the above conditions and accordingly it is entitled to claim deduction u/s.36(1)(iii) of IT. Act against interest payment, Perusal of the assessment order reveals that the A.O. has not challenged basic enabling conditions as laid down u/s.36(1)(iii) for the allowance of interest. Since the enabling conditions for allowance of interest u/s.36(1)(iii) are fulfilled, accordingly in my considered view disallowance of interest is unwarranted.
10.4 The only observation made by the A.O. is that the assessee has not charged interest on interest free advance of Rs.13,58,96,000/-[13,00,00,000/- + 50,00,000/- + 2,50,000/- + 64,60,000/-]. However, the action of the A.O. is not tenable as non charging of interest on interest free advance cannot be a reason for disallowance of interest. It is well settled principle of law that non charging of interest on interest free advances given by the assessee cannot by itself, be ITA No. 1986 & 2133/Ahd/2012 36 Asst. Year 2009-10 sufficient ground for disallowing interest paid by the assessee on loans taken by it. Reliance in this regard is placed on following decisions:
(i) Meenakshi Synthetic Pvt. Ltd. v/s.ACIT (2003) 84 ITD 563
(ii) ACIT v/s. Arunkumar Gupta (2003) 78 TTJ 288 10.5 Perusal of records further reveals that the A.O. has not established nexus between interest bearing funds and loans with interest free advances. It is held by Mumbai Tribunal in the case of Oceanic Investments Ltd. v/s. CIT (1997) 57 TTJ 549 that it is necessary to establish nexus between borrowed funds and the amount advanced, and in the absence of this finding the lower authorities were not justified in making the disallowance of interest. It was also held in the case of M/s.Jai singh's Sons & Co. Ltd. v/s. ITO (1977) 4 TTJ 1452 that interest expenses has to be allowed as the A.O. has not established nexus between borrowings and lendings by the assessee company to the subsidiary company.
Further reliance in this regard is placed on the following case laws:-
(i) Raj Vikas Quaries and Ind. P.Ltd. v/s. ACIT (1992) 42 TTJ 262
(ii) United Agencies V/s. ITO (1990) 37 TTJ 374 (Ahd.)
(iii) CIT v/s.Dhampur Sugar Mills Ltd. (2006) 148 Taxman 321 (All.)
(iv) CIT v/s.Radico Khaitan Ltd. 274 ITR 354 (All.) In view of the above decisions, I hold that the A.O. was not justified in disallowing interest without establishing nexus between interest bearing funds and interest free funds.
10.6 It is well settled law that burden is on the revenue to prove that any part of borrowed funds was diverted to non business use. Reliance in this regard is placed on the following case laws:
i) Shhadiram & Sons v/s. DCIT 92 ITD 22
ii) Modipon Ltd. v/s.ITO 22 TTJ 108
iii) JCIT v/s. Sterisheets Ltd. 106 TTJ 460 It is noticed that the A.O. had miserably failed to discharge his onus and failed to prove that part of interest bearing fund was diverted as non interest bearing funds.
10.7 It is further seen that appellant was having interest free funds of Rs. 49.02 crores (in the form of paid up share capital of Rs.6.46 crores and reserves & surplus of Rs. 42,55 crores). The A.O. has mentioned that appellant has made interest free loans and advances of Rs.13.58 crores. Thus, interest free advances made is much below the interest free funds available with the appellant in the form of paid up share capital and reserve & surplus. It is held by Hon'ble Mumbai High Court in Reliance Utilities and Power Ltd. 313 ITR 340 that if funds are available, both interest free and. interest bearing, then a pre assumption ITA No. 1986 & 2133/Ahd/2012 37 Asst. Year 2009-10 arise that investments are made out of interest free funds generated or available with the assessee. If the interest free funds were sufficient to meet investment, no disallowance of interest is warranted. Respectfully following the ratio of Hon'ble Mumbai High Court decision in the case of Reliance Utilities & Power Ltd. I am inclined to agree with the contentions of the Id. A.R. 10.8 During the appellate proceedings the appellant submitted that the advance made to M/s. N.K. Industries Ltd. of Rs. 13 crores was for business purposes. The A.O. had clearly mentioned that the appellant is making purchases of Rs. 3 crores per month from the above said company. In view of these facts, I am of the considered view that the said advance is a business advance and accordingly as per the ratio of S.A. Builders 288 ITR 1 (S.C.) interest on these advances cannot be disallowed as per the provisions of sec.36(1)(iii) of the I.T.Act.
10.9 In view of the above, I am inclined to agree with the contentions of the Id. A.R. Accordingly, disallowance of Rs.91,07,595/- is ordered to be deleted. This ground of appeal is allowed.
59. Aggrieved, Revenue is now in appeal before the Tribunal.
60. Ld. DR supported the order of ld. Assessing Officer.
61. Ld. AR submitted that disallowance of Rs.91,07,595/- is in relation to 4 parties out of which major disallowance of Rs.84 lacs relates to M/s N. K. Industries with whom assessee is carrying out transactions round the year which relates to purchase of non-edible oil. As the transaction with N. K. Industries are of purely business nature, no disallowance of interest was called for on the advance given to this party. As far as other three parties namely (i) Vipul Industries, (2) Guru Commodities & (3) Perl Energy are concerned these advances were given in the normal course of business for the purpose of business in the past for commercial expediency and as the assessee has sufficient interest free funds no disallowance was ITA No. 1986 & 2133/Ahd/2012 38 Asst. Year 2009-10 called for u/s 36(1)(iii) of the Act. Ld. AR placed reliance on the judgment of Hon. Gujarat High Court in the case of CIT v. Raghuvir Synthetics Ltd.(2013) 354 ITR 222(Guj) and that of Hon. Supreme Court in the case of Hero Cycles P. Ltd. Vs. CIT(Central), Ludhiana 63 taxmann.com 308 (SC).
62. We have heard the rival contentions and perused the material on record and gone through the judgments relied on by ld. AR. In this ground Revenue has challenged the action of ld. CIT(A) relating to deletion of disallowance of Rs.91,07,595/- made on account of interest bearing funds and non-interest bearing advances. The issue emanating in this ground is with regard to advances in the name of M/s N. K. Industries, Vipul Industries, Guru Commodities & Pearl Energy. As per ld. Assessing Officer in the case of M/s N.K. Industries the opening debit balance was at Rs.6.42 crores (approx.) and closing debit balance was at Rs.13.78 crores and round the year the closing balance has never come below approx. Rs.10 crores at the end of every month and no justification was given for keeping this heavy advances to this party. However, in the case of Vipul Industries to which sum of Rs.50 lacs has been shown as deposit and was received back in the subsequent year and in the case of Guru Commodities and Pearl Energy old advances of Rs.2.50 lacs and Rs.646627/- were given since about 15 years ago.
63. We find that assessee company is dealing with edible oil and non-edible oil and the gross turnover of Rs.1478.7 crores and profit before taxes at Rs.13.49 crores. We further observe that reserve and ITA No. 1986 & 2133/Ahd/2012 39 Asst. Year 2009-10 surplus of Rs.42.56 crores stood along with 6.47 crores as capital as on 31/3/2008. We also observe that total of share capital reserve and surplus at Rs.49.03 crores is almost 3 times of loan funds of Rs.15.36 crores. The reason for observing these financial datas are to analyse that assessee company is having huge turnover, heavy profits, sufficient capital basis and availability of interest-free funds. Further we find that there is no dispute to the basic finanancial results i.e. GP or NP of the company and audited books of account have been accepted by the Revenue. Now as far as M/s N. K. Industries is concerned, we find that assessee is regularly purchasing non-edible oil on exclusive basis and if we analyse the advances standing at the end of the month with the monthly sales of the assessee company, we find that the monthly sales of the company are approx. Rs.120 crores and the closing balance of M/s N. K.Indus. is approx. Rs.10 crores. These transactions are undoubtedly business transactions and there is no evidence on record to show that these are interest free advances. These are purely business advances and profit earning company in the regular course of business and for commercial expediency has to keep funds advanced to the supplier of raw material to have uninterrupted supply of quality goods. We are of the view that ld. Assessing Officer was not justified in making disallowance of Rs.84 lacs on the advances to M/s N.K. Industries. As far as advances of Rs.50 lacs to Vipul Industries is concerned which has been settled in the subsequent year seems to be a normal business advance looking to the over all financial volume of assessee company and do not call for any disallowance of interest. Similarly in the case of Guru Commodities and Pearl Energy calling debit ITA No. 1986 & 2133/Ahd/2012 40 Asst. Year 2009-10 balances of Rs. 25000/- and Rs.646627/- are also old advances and revenue has also not brought on record any evidence to prove that these are non-business advances, we are of the view that in the given facts and circumstances of the case where assessee has sufficient interest free funds, liquid funds and profit earning business, these advances have been made in the regular course of business for commercial expediency. Accordingly, no disallowance was called for Rs.91,07,595/- on account of interest expenditure u/s 36(1)(iii) of the Act as the advances were for business purposes, commercial expediency and no nexus being proved by the Revenue for actual diversion of interest bearing funds to non-interest bearing advances. No interference is called for in the order of ld. CIT(A). In the result, appeal of Revenue is dismissed.
63. Ground no.(iv) & (v) of Revenue's appeal are general in nature, hence no adjudication is required.
64. In the result, appeal of assessee is partly allowed for statistical purposes and the appeal of Revenue is dismissed.
Order pronounced in the open Court on 27th July, 2016 Sd/- sd/-
(Rajpal Yadav) (Manish Borad)
Judicial Member Accountant Member
Dated 27/7/2016
Mahata/-
ITA No. 1986 & 2133/Ahd/2012 41
Asst. Year 2009-10
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Asst. Registrar, ITAT, Ahmedabad
1. Date of dictation: 22-25/07/2016
2. Date on which the typed draft is placed before the
Dictating Member: 26/07/2016 other Member:
3. Date on which approved draft comes to the Sr. P. S./P.S.:
4. Date on which the fair order is placed before the Dictating Member for pronouncement: __________
5. Date on which the fair order comes back to the Sr. P.S./P.S.:
6. Date on which the file goes to the Bench Clerk: 27/7/2016
7. Date on which the file goes to the Head Clerk:
8. The date on which the file goes to the Assistant Registrar for signature on the order:
9. Date of Despatch of the Order: