Income Tax Appellate Tribunal - Ahmedabad
Bhagwati Flour Miling Pvt.Ltd.,, ... vs Assessee on 7 June, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH - AHMEDABAD
(BEFORE SHRI A. MOHAN ALANKAMONY, AM AND
SHRI KUL BHARAT, JM)
ITA No.164/Ahd/2009
A. Y.: 2004-05
Bhagawati Flour Miling Vs The Income Tax
Pvt. Ltd., Officer,
309, Century Market, Ward 1 (2)
Prem Darwaja, Ahmedabad
Ahmedabad
P.A. No. AAACB 7721 L
(Appellant) (Respondent)
Appellant by Shri S.N. Divatia, AR
Respondent Shri B. Kulshreshtha, Sr.
by DR
Date of hearing: 07-06-2012
Date of pronouncement: 13-07-2012
ORDER
PER A. MOHAN ALANKAMONY: The assessee has filed this appeal aggrieved by the order of the learned CIT(A)-VI, Ahmedabad in appeal No. CIT(A)-VI/Ward 1 ITA No.164//Ahd/2009 (AY 2004-05) 2 Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad (2)/75/07-08 for assessment year 2004-05 dated 16-10-2008 passed u/s 143 (3) read with section 250 of the IT Act.
2. The assessee has raised five grounds in its appeal. However the learned AR has pressed only grounds No.2.1 and 3.1 of the appeal. Therefore, the grounds not pressed by the learned AR are dismissed as not pressed. The relevant ground No.3.1 and 2.1 are reproduced herein below for our consideration:
"3.1 The Ld. CIT(A) has grievously erred in law and/or on facts in upholding the rejection of books of account of the appellant.
2.1 The Ld. CIT(A) has grievously erred in law and/or on facts in confirming the following additions/disallowances:
(a) Suppressed production Rs.13,21,439/-
(b) Out of int. expenses Rs. 54,367/-
(c) Out of electric expenses Rs.1,98,107/-."
2.1 The assessee is a firm engaged in the business of manufacturing of the products such as maida, soji, atta and reva etc. filed its return of income on 01-11-2004 declaring total income of Rs.23,91,973/- along with tax audit report in Form No.3CD as per the provisions of section 44AB of the ITA No.164//Ahd/2009 (AY 2004-05) 3 Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad Act. Although, the return was processed initially u/s 143(1) of the Act, the case was taken up for scrutiny and the assessment order was passed on 22-12-2006 u/s 143(3) of the Act wherein certain additions were made. The assessee carried the matter before the Ld.CIT(A), however the Ld.CIT(A) confirmed the order of the Ld.AO. Now the assessee is in appeal before us.
3. Ground No.3.1: Upholding rejection of books of account by the learned CIT(A) and Ground No.2.1 (a):
Confirmation of addition of Rs.13,21,439/- made on account of suppressed production:-
On verification of stock register maintained by the assessee it was noticed by the ld.AO that;
(i) Quantity of raw materials consumed and production of different items in a particular day were not recorded on the same day but were recorded in the morning of the subsequent day. Thus it was apparent that the assessee had adjusted the production made with the quantity of raw materials consumed according to its convenience.ITA No.164//Ahd/2009 (AY 2004-05) 4
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
(ii) Wheat cleaned in a day was not consumed for production on the same day. This shows that the assessee was adding production of refraction along with other products on each day which was not related to the quantity of wheat consumed on that particular day. Therefore, the amount of refraction was added to other items on fixed percentage basis.
(iii) Method adopted by the assessee for weighing wheat after reducing weight of bardan of 1 kg in case of 100 kg jute bardan and in case of 50 kg jute bardan was also not proper because weight of different bardan could vary. This variation, even though small, but when considering large quantity of wheat purchased, could make a big difference.
(iv) In normal circumstances, production of maida should be 64% to 65% which in the case of the assessee appeared to be a maximum of 60% only.
(v) On the other hand, production of bran was on higher side which is 26% to 28% when whole atta is not produced and up to 24% t0 25% when whole atta is produced. Thus, assessee's production of the main item which was of higher value had been suppressed.
ITA No.164//Ahd/2009 (AY 2004-05) 5Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
(vi) Due to the above mentioned reasons, the records maintained by the assessee for stock of raw materials, production, sales, closing stock etc were found to be adjusted and not on the basis of actual day to day production and therefore cannot be relied upon.
4. The learned AO for the above mentioned reasons rejected the books of accounts of the assessee and made addition on account of suppression of production amounting to Rs.13,21,439/- with the following observations:
"As has been discussed in the above para that production of maida shown by the assessee is 60% which in normal condition should have been 64 to 65%. On the other hand production of bran in the case of assessee exceeds by 4 to 5%. Hence, production of maida in the case of assessee company is taking at 64% which comes to 171740.86 Quintal as against production of 168445.50 Quintal shown by the assessee. Value of the excess production of maida is computed at Rs.13,21,439/- after reducing the value of equal amount of bran from the value of maida produced. This amount of Rs.13,21,439/- is added to the total income of the assessee as suppressed production of maida."ITA No.164//Ahd/2009 (AY 2004-05) 6
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
5. The assessee carried the matter before the learned CIT(A). The learned CIT(A) endorsing the view of the learned AO, confirmed the addition made by the learned AO with respect to suppression of production of maida for Rs.13,21,439/- by rejecting the books of accounts.
6. The learned AR vigorously argued before us stating that the assessee was following the same method of accounting year after year for the last twenty five years and the same was also accepted by the department year after year. Further the assessee had maintained all the necessary books of account along with stock records etc. However, the learned AO without taking note of the actual facts being recorded in the books of accounts went ahead to make the additions on the basis of mere surmises and conjectures. It was, therefore, prayed that the order of the revenue authorities may be set aside.
7. The learned DR argued in support of the revenue and relied upon the orders of both the learned AO and the learned CIT(A) and prayed that the same may be sustained.
ITA No.164//Ahd/2009 (AY 2004-05) 7Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
8. We have heard the rival submissions and carefully perused the materials placed before us. It is pertinent to note that the assessee was following the same method of accounting for the last twenty five years and the same was not disputed by the Revenue on any earlier occasion. However the revenue has rejected the books of accounts for the relevant assessment year, without recording any fresh facts contrary to the facts of the earlier years, and made addition with respect to suppression of production, based on certain norms prevalent in the industry. With respect to the nature of activities of the assessee various factors need to be considered. The discrepancy pointed out by the Revenue could result due to various factors such as the nature of machinery utilized by the assessee, the aging factor of the machinery, the produce procured by the assessee from various regions which are of various varieties etc. Further, the revenue has not pinpointed any discrepancy on the physical quantitative recording of facts in the books of accounts. In these circumstances, we are of the considered view that rejection of the books of account by the revenue is not warranted and addition made thereof for suppression of production for Rs.13,21,439/-
ITA No.164//Ahd/2009 (AY 2004-05) 8Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad is also not justified. Therefore, we hereby delete the addition made by the learned AO which was further sustained by the learned CIT(A) with respect to suppression of production for Rs.13,21,439/-. Grounds No.3.1 and 2.1(a) raised by the assessee are accordingly allowed in its favour.
9. Ground No.2.1 (b): Confirming addition of Rs.54,367/- made on account of interest expenses:-
During the course of assessment proceedings it was noticed by the learned AO that the assessee had paid interest @15% and thus suffered expenditure of Rs.19,60,926/- for the loans received by it. It was further observed by the learned AO that the assessee had made advances to M/s. T. N. Associates @ 12%. On being queried as to why the assessee had advanced loan at a lower rate of interest than the interest expenses incurred by it for procuring such funds, the assessee came out with the following reasons:
"We have taken loan from various depositors at 15% interest p.a. which is normal prevailing market rate. The cost of bank loan is also similar to the said rate.ITA No.164//Ahd/2009 (AY 2004-05) 9
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad Moreover in case of bank loan, we have to mortgage our properties and we have also comply with other legal procedures. During the year under review, assessee company advanced its surplus fund to T. N. Associates and earned interest on surplus fund. Copy of bank statement is already submitted to your honour in which your honour has accepted that whenever loan was given to M/s. T. N. Associates, there was a credit balance. Instead of loosing interest, we earned interest at 12% and also paid tax on it. We would not have earned any income if we had not granted loan to that party. Moreover, we cannot repay the deposits because whenever we need more fund, we might not get it, since depositor's shall not keep the balance idle in their bank accounts. More over there is no nexus between the fund borrowed and fund advanced."
10. After due consideration, the learned AO rejected the contention of the assessee and made addition of Rs.54,367/- being the amount of lower rate of interest charged to M/s. T. N. Associates. The learned CIT(A) concurred with the view of the learned AO on this issue and confirmed the addition of Rs.54,367/- due to the following reasons:
"Due consideration have been given to the submission made by the assessee which is however not fully acceptable since the assessee has advanced loans to M/s. T.N. Associates out of funds obtained at a higher rate of interest. Therefore, interest expenses ITA No.164//Ahd/2009 (AY 2004-05) 10 Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad proportionate to the amount of loan given to M/s. T. N. Associates at a lower rate are disallowed which comes to Rs.54,367/-.
Keeping in view the aforesaid facts and circumstances, it is abundantly clear that whereas the appellant pays interest @15% on the loans received by it, the interest charged by the appellant on the loans given to it is @12% with the result, as the appellant has advanced loan to M/s. T. N. Associates out of the funds obtained by the appellant on a higher rage of interest; the Assessing Officer has rightly disallowed the sum of Rs.54,367/- (i.e. interest expenses proportionate to the amount of loan given to M/s. T. N. Associates at a lower rate). In the given facts and circumstances, the action of the Assessing Officer on this ground is hereby confirmed. Hence the appeal is dismissed on this ground."
11. The learned AR reiterated what was submitted before the learned AO and the learned CIT(A) while the learned DR supported the orders of the revenue.
12. Having heard both the sides, we also do not find any reasons as to why the assessee had extended loan to M/s. T. N. Associates at a lower rate of interest than the rate of interest paid by it for securing such funds. The rate of interest of 15% is quite nominal when it comes to private ITA No.164//Ahd/2009 (AY 2004-05) 11 Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad borrowings and the assessee should not have had any difficulty in receiving such interest from open market or from known parties. Further, it is quite relevant to note that the assessee has suffered interest @15% from its borrowing and the same fund is advanced charging lesser interest @12%. The assessee further has not come out with any cash flow or fund management statements to substantiate its claim that interim surplus of cash is advanced to earn interest to minimize expenditure on account of interest. Considering the facts and circumstance of the case, we do not have any hesitation to concur with the view of the revenue on this issue. Ground No.2.1 (b) of the appeal of the assessee is accordingly dismissed.
13. Ground No.2.1(c): Confirming addition of Rs.1,98,107/- made on account of electricity expenses:-
It was observed by the learned AO that the assessee had incurred expenditure of Rs.2,47,634/- (Rs.67,500/- + Rs.1,79,864/- sic 1,80,134) towards cable charged paid to GEB. The learned AO was of the view that this expenditure is "differed revenue expenditure" and, therefore, allowed deduction of one fifth of the expenditure claimed amounting ITA No.164//Ahd/2009 (AY 2004-05) 12 Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad to Rs.49,527/- for the relevant assessment year and disallowed the balance portion of Rs.1,98,107/-. The learned CIT(A) concurred with the view of the learned AO and confirmed the addition.
14. Having heard both sides on this issue, we are not in agreement with the view taken by the revenue. The learned AO has arbitrarily allowed deduction of one fifth of the expenses for the relevant assessment year considering the expenditure incurred for cable charges to be in the nature of differed revenue expenses. The amount paid towards cable charges to the Electricity Department is not refundable and it is onetime payment. Non-payment of cable charges to the Electricity Department will lead to disconnection of electricity supply to the assessee firm's factory and that will disrupt the business of the assessee. Further it is pertinent to note that the onetime payment for cable charges has neither resulted in creation of an asset to the appellant firm nor the amount is refundable. Therefore, the amount spent by the assessee towards onetime payment for cable charges will amount to be revenue expenditure in nature and is allowable for deduction for the year in which it is incurred. Therefore, ground No.2.1(c) of the appeal is allowed in its favour and the addition made by the learned AO for ITA No.164//Ahd/2009 (AY 2004-05) 13 Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad Rs.1,98,107/- which is further confirmed by the learned CIT(A) is hereby deleted.
15. In the result, grounds No.3.1, 2.1 (a) and 2.1 (c) are allowed in favour of the assessee and ground No.2.1 (b) is dismissed.
16. In the result, the appeal of the assessee is partly allowed as indicated above.
Order pronounced in the open Court on 13-07- 2012
Sd/- Sd/-
(KUL BHARAT) (A. MOHAN ALANKAMONY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Lakshmikant Deka/-
ITA No.164//Ahd/2009 (AY 2004-05) 14
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad 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 Dy. Registrar, ITAT, Ahmedabad
1. Date of dictation: 09-07-2012
2. Date on which the typed draft is placed before the Dictating Member: 10-07-12 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:
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: