Income Tax Appellate Tribunal - Jaipur
Handmade Paper & Board Industries, ... vs Dcit, Jaipur on 22 November, 2016
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI BHAGCHAND, AM AND SHRI KUL BHARAT, JM
vk;dj vihy la-@ITA No. 235/JP/2016
fu/kZkj.k o"kZ@Assessment Year : 2011-12.
M/s. Handmade Paper & Board Ind.
1/282, Gramodyog Road,
Sanganer, Jaipur.
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Vs.
Deputy Commissioner of Income Tax,
Circle-7,
C-95, Lal Kothi Scheme,
Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AABFH 9173 L
vihykFkhZ@Appellant
izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Sadaf Rais (C.A)
jktLo dh vksj ls@ Revenue by : Shri R.A. Verma (Addl. CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 03.11.2016.
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 22/11/2016.
vkns'k@ ORDER
PER SHRI KUL BHARAT, JM.
This is an appeal by the assessee directed against the order of ld. CIT (A)-3, Jaipur dated 28.01.2016 pertaining to assessment year 2011-12. The assessee has raised the following grounds of appeal :-
On the facts and circumstances of the case, the learned CIT (A) has erred in confirming the trading addition of Rs. 14,85,641/- made by the learned AO.
On the facts and circumstances of the case, the learned CIT (A) has erred in confirming the disallowance of bank interest of Rs. 28,32,613/-.
On the facts and circumstances of the case, the learned CIT (A) has erred in confirming the disallowance of 10% of certain expenses like Telephone Exp., tour & travelling exp., vehicle rep & maint. Exp., Salary, Insurance Ep., Repairs exp. and Business promotions exp.
On the facts and circumstances of the case, the learned CIT (A) has grossly erred in not allowing bank interest of Rs. 88,34,269/- on secured loan.
2. Briefly stated the facts are that while framing the assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act), the AO made various additions and disallowances by rejecting the books of accounts and assessed the total income at Rs. 43,12,052/-. The assessee aggrieved by this order, preferred an appeal before ld. CIT (A), who after considering the submissions, partly allowed the appeal.
3. Aggrieved, the assessee has filed the present appeal before this Tribunal.
4. Ground No. 1 is against confirming the trading addition of Rs. 14,85,641/-.
4.1. The ld. Counsel for the assessee has reiterated the submissions as made in the written brief. The submissions made by the ld. Counsel are as under :-
"We strongly rely on the submission made before the learned CIT(A)-III, Jaipur which forms part of paper book from page no. 29 to 37 The Hon'ble ITAT Jaipur bench itself in the case of the this assessee for the A.Y. 2005-06 and A.Y. 2008-09 has accepted the gross profit rate declared by the assessee. Kindly refer the ITA No.1525/JP/2008 & ITA No. 1556/JP/2008 for the A.Y. 2005-06 in which the Hon'ble bench has dismissed the revenue appeal filed against assessee for deletion of trading addition by the CIT (A).
Similarly refer to ITA No.256/HP/2012 in which revenue appeal filed against deletion of trading addition by the CIT(A) was dismissed by the Hon'ble bench for the A.Y. 2008-09. During the A.Y.2008-09 the assessee declared gross profit rate of 23.10% but the learned AO rejected the gp rate declared by the assessee and applied gross profit rate of 33%. The assessee preferred an appeal and the learned CIT (A) substantially reduced the trading addition from Rs.73, 94,851/- to Rs.5.00 Lacs only which means gross profit rate of 23.77% was sustained by the learned CIT (A) as against 23.10 declared by the assessee.
During the year under consideration i.e. A.Y. 2011-12, the assessee declared gross profit rate of 25% which is higher than 23.77% for the A.Y. 2008-09 duly restricted by the leaned CIT(A) and also confirmed by the Hon'ble ITAT Jaipur Bench vide its order in appeal no. ITA NO. 256/JP/2012 in the case of Assistant Commissioner of Income Tax, Jhunjhunu V/s M/s Handmade Paper & Board Industries. [Copy of the Order of Hon'ble ITAT Jaipur Bench for above appeals are furnished on page no.1 to 20] Even the leaned AO has applied the gross profit rate of 26.05% while making scrutiny assessment for the A.Y. 2013-14 of the assessee firm M/s Handmade Paper & Board Industries which proves the claim of the assessee. A copy of said assessment order is being furnished herewith on page no. 21 to 25.
It is clear from the above discussion that the assessee has declared gross profit rate of 25% which is far better than an average gross profit rate declared by other similar units engaged in same area and operating at same scale and also assessed by the same AO. "
Therefore, the ld. Counsel requested to delete the trading addition made by the A.O. 4.2. On the contrary, ld. D/R supported the orders of the authorities below.
4.3. We have heard rival contentions and perused the material available on record. We have already dealt with the similar matter for the assessment year 2009-10 in ITA No. 377/JP/2014 in the assessee's own case wherein we have restricted the GP @ 28% by observing in para 10.2 of our order as under :-
"10.2. We have heard rival contentions, perused the material available on record and gone through the orders of the authorities below. The AO rejected the books of account and proceeded to apply the GP @ 33% on the total turnover disclosed at Rs. 1,59,63,225/-. The basis of applying this rate was that the GP rate during the year under consideration is lower than the earlier year. Therefore, considering the past history of the assessee, the AO applied the rate of 33%. The submission of the assessee in this regard before the authorities below was that in earlier years matter travelled upto the stage of this Tribunal and this Tribunal was pleased to confirm the finding of the ld. CIT (A) who had upheld the GP rate at 33.33% as disclosed by the assessee in the A.Y. 2005-06. In that year the AO had adopted the GP rate at 41%. It was submitted before ld. CIT (A) by the assesee that due to recession in Europe and America, the assessee has cut down the sale prices as all the production of the assessee are exported outside India, especially in these countries. After considering the submission, the ld. CIT (A) adopted the GP rate at 29.11% on the basis of average GP rate of different assessment years. We find that in earlier this Tribunal had confirmed the GP rate for the A.Y. 2005-06 at 33.33% which was disclosed by the assessee. In the assessee's own case in ITA No. 256/JP/2012 pertaining to A.Y. 2008-09 the decision of ld. CIT (A) restricting the adhoc addition to Rs. 5,00,000/- was confirmed by this Tribunal. Though in the year under consideration, there is no change in facts and circumstances of the case, but taking into consideration the fact that there was reasonable cause in the form of international market fluctuations for low GP rate, after considering the fact, we find it reasonable to restrict the GP rate at 28%. Hence the impugned order is modified to this extent and the ground of the assessee is partly allowed."
Therefore, taking a consistent view of the matter, we restrict the GP @ 28% in the year under consideration thereby allowing part relief. The ground of assessee is partly allowed.
5. Ground No. 2 relates to confirming the disallowance of bank interest of Rs. 28,32,613/-.
5.1. The ld. Counsel for the assessee has reiterated the submissions as made in the written brief. The assesee has submitted as under :-
" We strongly rely on the submission made before the CIT (A)-III, Jaipur which forms part of the paper book from page no. 27 to 28 & 38 to 39.
The assessee firm has utilized credit facility from bank amounting to Rs.1,72,98,393/- during the year under consideration against closing stock of Rs.27,37,790/- and trade debtor of Rs.3,81,34,870/- as appearing the balance sheet of the firm as on 31/03/2011 hence the assessee rightly claimed bank interest of Rs.28,32,613/- as the same credit facility was used to finance the working capital of the firm in the form of closing stock and trade debtors.
The learned AO has pointed out that the assessee has diverted the interest bearing funds of the firm to its sister concern amounting to Rs.4, 48, 11,357/-. In this connection it is submitted that out of it Rs.1, 19, 94,724/- is related to business investment made by the firm in the name of M/s Al-Saideen Trading Com which was wrongly shown under the head "Loans & Advances" instead of Investment, hence net loans and advances remains Rs.3, 28, 16,633/- in which many advances were made in regular course of business.
It is important to mention that the partners of the assessee firm has invested Rs.1, 60, 71,893/- in the form of own capital on which no interest was claimed by the firm which is otherwise firm is eligible to claim interest @12% PA and similarly the firm has also utilized interest free unsecured loan from sister concerns to the tune of Rs.1, 17, 89,438/- during the year under consideration. Both these facts have been ignored both by the AO as well as by the learned CIT (A). Only one aspect of interest free loans and advances was (Rs.32816633/-) considered but interest free own capital and interest free unsecured loans obtained by the firm (27861331/-) was not considered while disallowing interest expenses of Rs.28, 32,613/-."
In view of the above submission, the ld. Counsel requested to delete the disallowance made by the A.O. 5.2. On the contrary, the ld. D/R supported the orders of the authorities below.
5.3. We have heard rival contentions and perused the material available on record. We find that the ld. CIT (Appeals) while deciding the issue has observed as under :-
" 5.3. I have carefully considered the findings of the AO as also the submission of the appellant. The AO's case is that the interest free loan and advance of Rs. 4,48,11,357/- was without any business consideration as also that the assessee has paid interest of Rs. 28,32,613/- and that such interest free advances were made out of borrowed funds on which interest has been paid accordingly the AO disallowed interest amounting to Rs. 28,32,613/-. On the other hand the appellant case is that the assessee was having partners capital and unsecured loan amounting to Rs. 27,86,133/- on which no interest was paid. It was accordingly stated that the interest free advances can be said to have been made from the partners capital.
On careful consideration of all the facts as discussed above, it may be noted that there is no dispute on the fact that such interest free advances of Rs. 4,48,11,357/- were made without any business consideration. It is also fact that the assessee has claimed total interest of Rs. 28,32,613/- in the P&L account. As regards the contention of the assessee that partners capital and unsecured loans of Rs. 22,86,133/- was there and that the interest free advances should be treated to have been made from the partners capital, it may be noted that first of all the assessee has failed to prove that such interest free advances were made out of partners capital or unsecured loan. As that when the assessee is paying such huge amount of interest amounting to Rs. 28,32,613/- then the natural inference is that the partners capital etc. has already been utilized in the business by way of fixed assets etc. as no borrowed fund may not be availed when own funds are available. Accordingly it is believed that the interest free advances of Rs. 4,48,11,357/- were without any business consideration and out of the borrowed funds. Accordingly the AO has rightly disallowed the interest amounting to Rs. 28,32,613/-.
The ground of appeal is dismissed."
At the time of hearing, the ld. Counsel for the assessee could not controvert the above findings of ld. CIT (A). Therefore, we find no infirmity in the order of ld. CIT (A), the same is hereby affirmed. The ground of the assessee is rejected.
6. Ground No. 3 relates to confirming the disallowance of 10% of certain expenses.
6.1. The ld. Counsel for the assessee reiterated the submissions as made in the written brief. The ld. Counsel submitted as under :-
" The assessee is engaged in the manufacturing and export of handmade paper and paper products. It has to incur certain expenditure in day to day business activities to ensure timely shipment to the foreign buyers. It has to comply strictly with certain standard fixed by the foreign buyers which includes basic amenities to the workers, good working environment in the factory, proper sanitation facilities to the workers, first aid facilities and so on and so forth. The expenses claimed by the assessee is quite reasonable looking to the scale of operation carried out by the assessee during the year under consideration."
The assessee, therefore, prayed that addition be deleted.
6.2. On the other hand, the ld. D/R supported the orders of authorities below.
6.3. We have heard rival contentions, perused the material available on record and gone through the orders of the authorities below. On careful consideration of facts, though the assessee has not disputed the finding of the authorities below that most of these expenses are claimed on self made vouchers, at the same time the AO has not pointed out any specific instance of bogus claim. Therefore, in the interest of natural justice, we find it reasonable to restrict the disallowance to the extent of 5% of the expenses claimed i.e. Rs. 1,48,292/-. The ground of the assessee is partly allowed.
7. Ground no. 4 relates to not allowing bank interest of Rs. 88,34,269/- on secured loan.
7.1. The ld. Counsel for the assessee has reiterated the submissions as made in the written submission. The ld. Counsel submitted that -
"Assessee firm obtained term loan from EXIM bank to establish new factory at Sitapura Industrial Area to finance factory building and Plant & Machineries. Later on the plant was shifted to Sanganer factory and building was let out to INFOSYS from which firm is regularly receiving rental income and shown in its return of income. Balance Sheet of the firm as on 31/03/2011 shown balance of Rs.110738403/- toward balance of term loan from EXIM Bank but due to some inadvertence, interest of Rs.88,34,269/- on term loan could not be booked by the assessee in its books of accounts and return of income filed before the department. This fact was not brought up before the AO but first time brought out before the CIT (A) as an additional ground.
It is an established fact that the assessee firm has taken term loan from EXIM bank and the outstanding amount at the year end 31/03/2011 is 110738403/- as reflected in the balance sheet [refer to paper book page no. 335 & 338]. It is also an established fact that no interest on such term loan has been claimed by the assessee during the year under consideration. The assessee only claimed interest on bank overdraft facility of Rs. 1, 72, 98,393/-but forgot to claim interest on term loan liability of Rs.110738403/- which is assessee is otherwise eligible to claim.
The learned CIT (A) has wrongly observed that the assessee has not brought any evidence regarding utilization of term loan. The loan was procured 7-8 years before and the assessee is regularly assessed u/s 143(3) since 2002 and there was no dispute over utilization when the amount was taken and subsequently utilized.
Further the learned CIT (A) has also erred in holding that no evidence was brought on record that the same interest may be claimed in next year. It is important to mention here that the assessee's books of accounts are duly audited u/s 44AB of the I.T. Act, 1961 and follow mercantile system of accounting as reflected in the audit report[refer to paper book page no.326]. In such a situation it is highly illogical to arrive at that this interest may be claimed in next year."
The assessee, therefore, prayed that the claim of assessee be allowed.
7.2. On the other contrary, the ld. D/R supported the orders of the authorities below.
7.3. We have heard rival contentions, perused the material available on record and gone through the orders of the authorities below. On careful consideration of the matter, in the interest of natural justice, we are of the view that the matter be restored to the file of AO for fresh decision after giving proper opportunity of hearing to the assessee thereby setting aside the order of ld. CIT (A). The assessee is directed to submit the necessary evidences in support of its claim before the AO. The ground of the assessee is allowed for statistical purposes.
8. In the result, appeal of the assessee is partly allowed for statistical purposes.
Order is pronounced in the open court on 22/11/2016.
Sd/- Sd/-
( HkkxpUn ½ ( dqy Hkkjr)
( BHAGCHAND) ( KUL BHARAT )
ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member
Jaipur
Dated:- 22/11/2016.
Das/
vkns'k dh izfrfyfi vxzsf"kr@Copy of the order forwarded to:
1. The Appellant- The DCIT,Circle-7, Jaipur.
2. The Respondent -M/s. Handmade Paper & Board Industries, Jaipur.
3. The CIT(A).
4. The CIT,
5. The DR, ITAT, Jaipur
6. Guard File (ITA No. 235/JP/2016)
vkns'kkuqlkj@ By order,
lgk;d iathdkj@ Assistant. Registrar
9
ITA No. 235/JP/2016
M/s. Handmade Paper & Board Industries.