Income Tax Appellate Tribunal - Jaipur
Arpit Marbles Pvt. Ltd., Jaipur vs Acit, Jaipur on 13 January, 2017
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 768/JP/2016
fu/kZkj.k o"kZ@Assessment Year : 2012-13.
M/s. Arpit Marbles Pvt. Ltd.,
C-146-147, Road No. 9, VKI Area,
Jaipur.
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Vs.
The Assistant Commissioner of Income Tax, Circle-5,
Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AACCA 0145 P
vihykFkhZ@Appellant
izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Manish Agarwal (CA)
jktLo dh vksj ls@ Revenue by : Shri R.A. Verma (Addl. CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 06.01.2017.
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 13/01/2017.
vkns'k@ ORDER
PER SHRI KUL BHARAT, JM.
The appeal by the assessee is directed against the order of ld. CIT (Appeals)-2, Jaipur dated 20.06.2016 pertaining to assessment year 2012-13. The assessee has raised the following grounds of appeal :-
On the facts and in the circumstances of the case and in law, ld. CIT (A) erred in confirming the disallowance of interest on advances made to Andhi Marbles Pvt. Ltd. (AMPL) during the year ignoring the fact that the same was under business and commercial expediency and in the nature of trade advance. Appellant prays the disallowance so made may please be held as bad in law.
Without prejudice to above, on the facts and in the circumstances of the case and in law, ld. CIT (A) erred in confirming the disallowance of interest on advances made to AMPL during the year without considering the fact that assessee company had large amount of interest free funds in the shape of interest free unsecured loans from directors, which were utilized for the purpose of making advance to AMPL, thus no disallowance is called for. Appellant prays the disallowance made my be held as bad in law.
On the facts and in the circumstances of the case the ld. CIT (A) erred in confirming the disallowance @ 10% out of following expense claimed in Profit & Loss a/c, which was made by ld. AO alleging the same as incurred for non business purposes :
S. No. Particulars Amount % of disallowance Disallowance
1.
Telephone Exp 67,171.00 10% 6717.00
2. Vehicle repairs & maintenance exp 5,15,046.00 10% 51,505.00
3. Staff welfare exp.
59,426.00 10% 5942.00
4. Travelling exp.
4,79,129.00 10% 47,913.00 1,12,077.00 Disallowance so made, were without proving a single instance of non business purposes, thus same deserves to be hold bad on law as well as on facts more particularly when the appellant is a private limited company having separate legal entity.
On the facts and in the circumstances of the case and in law, ld. CIT (A) erred in upholding disallowance of Bonus claimed u/s 36(1)(ii) at Rs. 82,638/- ignoring the fact that the same was fully paid before the due date of filing return of income. Thus disallowance so made deserves to be deleted.
2. At the outset, the ld. Counsel for the assessee submitted that he does not wish to press ground no. 3. The revenue has no objection. Therefore, ground no.3 is dismissed a not pressed.
3. Briefly stated the facts giving rise to this appeal are that the case of the assessee was picked up for scrutiny assessment and assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act) was completed vide order dated 23.02.2015. While framing the assessment, the AO made addition on account of valuation of closing stock of Rs. 7,34,902/- and interest free advances given to sister concern of Rs. 19,36,195/-. The AO also made addition on account of disallowance of various expenses on adhoc basis i.e. telephone, vehicle repair and maintenance, depreciation on car, staff welfare expenses and travelling expenses. The AO also made disallowance of Rs. 82,638/- on account of disallowance of bonus payment. Aggrieved by this, the assessee has preferred an appeal before ld. CIT (A), who after considering the submissions partly allowed the appeal. While partly allowing the appeal, the ld. CIT (A) deleted the addition made on account of valuation of closing stock of Rs. 7,34,902/-. However, ld. CIT (A) sustained the disallowance of interest in respect of M/s. AMPL and also affirmed the disallowance on account of telephone expense, vehicle repair and maintenance, staff welfare and travelling expenses. Further, the addition on account of disallowance of bonus was also sustained.
4. Now the assessee has preferred the present appeal before this Tribunal.
5. The ld. Counsel for the assessee submitted that Ground Nos. 1 & 2 are covered by the decision of Coordinate Bench in assessee's own case in earlier year. He submitted that in respect of ground no. 1 and 1.1 disallowance of interest in respect of M/s. AMPL, the Coordinate Bench vide its order in ITA No. 203 & 704/JP/2016 and C.O. No. 05/JP/2016 dated 31.10.2016 has restored this issue to the file of AO for decision afresh. Therefore, he prayed that the issue may be decided in the light of the Hon'ble ITAT's order passed in the assessee's own case for the A.Y. 2010-11.
5.1. At the outset, the learned D/R has vehemently supported the assessment order, but conceded the fact that the issues involved in the appeals are covered by the order of Hon'ble ITAT passed in assessee's own case for A.Y. 2010-11.
5.2. We have heard the rival contentions of both the parties, perused the material available on record as well as order passed by the Coordinate Bench in the assessee's own case. We find that the issue related to ground no. 1 an 1.1 has been decided by the Coordinate Bench in ITA No.203 & 704/JP/2016 and C.O. No. 05/JP/206 at para 5.3 of its order by observing as under :-
"5.3. We have heard rival contentions, perused the material available on record and gone through the orders of the authorities below. We find that the ld. CIT (A) has decided this issue by following the order of the Coordinate Bench of the Tribunal in the assessee's own case in ITA No. 96/JP/2010 for the assessment year 2006-07. We also find that the Coordinate Bench of the Tribunal vide its order dated 11.02.2016 in assessee's appeal in ITA No. 648/JP/2014 has decided the identical issue by observing in para 1.4 of its order as under :-
" 1.4 We have heard the rival contentions and perused the material available on record. The AO noted that the assessee has given additional interest free advances of Rs. 1,44,67,000/- during the year to M/s AMPL. Further no purchases have been made either against opening debit balance of Rs. 1,58,04,153/- or against the additional advances given to M/s AMPL during in the year. The AO further observed that the assessee company has taken loans from financial institutions such as SIDBI, RFC, ICICI bank, Bank of Rajasthan Ltd, etc. and the nexus between the loan taken and advances given to sister concern is also established as loans raised from these institutions in turn transferred to M/s AMPL.
1.5 It is noted that during the year under consideration, the assessee company has debited a sum of Rs. 1,22,42,655/- towards interest expense in his profit and loss account. Out of this, the AO disallowed a sum of Rs. 37,28,395/- being interest at the rate of 15% paid to the financial institutions. The Ld. CIT(A) confirmed the findings of the AO that the nexus has been established between the loans taken from financial institutions and advances given to M/s AMPL. However, there is no discussion as to how such a nexus has been established which we could gather from the order of AO and ld CIT(A). Further the ld. CIT(A) held that no purchases have been made from M/s AMPL during the year and inspite of opening debit balance of Rs. 1,58,04,153/-, further advances have been made to it leaving a closing debit balance of Rs. 4,40,07,213/- which does not indicate that advance given during the year was based on any commercial expediency. Ld CIT(A) accordingly upheld the disallowance of interest on advances given to M/s AMPL during the year under consideration. At the same time, in respect of interest payment on the opening debit balance of advances, following order of the Co-ordinate Bench for A.Y, 2006-07 and 2007-08, necessary relief was given to the assessee.
1.6 It is noted from the perusal of the audit report where the auditors have observed that the company has incurred cash losses during the Financial Year covered by our audit and have incurred cash losses during the immediately preceding financial year, which has resulted in accumulated losses to the tune of Rs. 2,42,55,443/- as on 31.03.2009 which effectively wipes out the share capital of 2,41,06,500/- leaving aside an amount of Rs. 54,91,900/- in the reserve and surplus account. Further, from the perusal of the notes to the financial statement of the assessee, it is noted that there are transactions which have been carried out during the year in terms of purchase of marble blocks amounting to Rs. 60,51,457/- and sale of marble slabs and tiles amounting to Rs. 55,15,779/-to M/s AMPL.
1.7 Firstly, regarding nexus which the AO and the Ld. CIT(A) has held to have been established between the amount borrowed from the financial institutions and advances given to M/s AMPL, it is unclear as to how such an nexus has been established by merely stating that the cheques have been issued to M/s AMPL from the cash credit account of the assessee maintained with Bank of Rajasthan Ltd. It is unclear whether at the time of issuing cheques and making payment to M/s AMPL, there was a debit or a credit balance in the cash credit account. It is likely that there are sales realization and other deposits received by the assessee prior to making such advances to M/s AMPL and out of which such advances have been paid. Here, what needs to be examined is at the point of time when the funds were actually advanced to M/s AMPL, what was the position of funds actually available with the assessee in terms of the borrowed funds to establish the necessary nexus. In absence of such a finding, it cannot be said that the nexus has been established between the borrowings from the financial institutions and advances to AMPL.
1.8 Secondly, where a nexus has not been established between the borrowings and the interest free advances, the Courts have held that where the assessee has sufficient interest free funds available in the form of share capital reserves and surplus, no disallowance of interest can be made where the assessee establishes the commercial expediency behind giving such advances. The assessee have taken this alternate contention and let's examine the same in the context of facts before us. In the instant case, we have noted above that in view of the consistent cash loss position of the assessee, the accumulated losses have almost wipes off entire share capital leaving side a sum of Rs. 54,91,900/- which is a minuscule number as against the additional advances of Rs. 12,44,67,000/- made by the assessee to M/s AMPL. Therefore, it cannot be said that the advances have been made out of share capital and free reserves and surplus and the contention of the ld AR to this extent cannot be accepted. The ld AR has further submitted that the assessee company has interest free funds in the form of unsecured loan of Rs. 2.58 crores taken from Director and relatives on which no interest was given by the appellant and out of such interest free funds, the advances were given to M/s AMPL. Here again, what needs to be examined (which is not apparent from the records) is that at the point of time when the funds were actually advanced, what was the position of interest free funds actually available with the assessee in the form of cash and bank deposits and how the same has been dispersed to M/s AMPL to establish the necessary nexus as claimed by the ld AR.
1.9 Lastly, regarding the test of commercial expediency, the assessee has submitted that it is engaged in the manufacturing and producing of marble slabs which have been made from the marble blocks. The mining of the blocks from the mines owned by the assessee company was very low due to closer of mines and majority of raw material was purchased from the mines owned by sister concern M/s AMPL and payment was made in advance which is in the nature of business advances and thus no disallowance of interest paid on borrowed funds should be made. It is submitted that it is under such business expediency, the advance payments were made towards purchase of raw material and the same cannot be tagged as interest free funds given for non-commercial purposes. It was further submitted that under similar facts pattern, the Co-ordinate Bench of ITAT in assessee's own case for AYs 2006-07 and 2007-08 has deleted the disallowance of interest in the hands of the assessee. We have gone through the order of Co-ordinate Bench for AY 2006-07 and noted the following findings of the Co-ordinate Bench :
"We have considered the arguments of both the parties and have perused the material available on record. The contention of the assessee that it had business relationship with the sister concern is a fact proved from the records as the AO in the assessment order have admitted that during the year under appeal the assessee had received goods of Rs. 28,77,791/- from its sister concern M/s Andhi Marble Pvt. Ltd. The contention of the assessee that there is no diversion of the funds and the circumstances explaining the business expediency having arisen due to closer of its marble mining area also inspires confidence and prove the necessity of acquiring raw material of the nature of marble blocks required to keep its marble cutting establishment running."
1.10 In this regard, the ld. CIT(A) has noted that during the year under consideration, there are no purchases made by the assessee from M/s AMPL hence the alleged decision of Co-ordinate Bench are distinguishable on facts. As we have noted above, there are transactions which have been carried out during the year in terms of purchase of marble blocks amounting to Rs. 60,51,457/- and sale of marble slabs and tiles amounting to Rs. 55,15,779/-to M/s AMPL. However, at the same time, there is an opening balance of Rs. 1,58,04,153/- against which no purchases have been reflected during the year except for Rs 60,51,457/-. Further there is an additional advance of Rs. 1,44,67,000/- which has been made during the year. Nothing has been brought on record in terms of basis of advancing such huge amount to sister concern year on year basis in absence of any corresponding purchases either in the year under consideration or in subsequent years. It is true that the Courts cannot sit in judgement to decide the quantum of advances and the terms and conditions of such advances. At the same time, the assessee has to demonstrate through its conduct and appropriate documentation in order to satisfy the test of commercial expediency which apparently has not been done in the instant case. In this regard, we refer to the decision of Hon'ble Supreme Court in case of S.A. Builders 288 ITR 1 where the Court have laid down the following proposition of law in respect of commercial expediency (head notes):
"The High Court and other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with the money, in order to decide whether it was for commercial expediency, but that had not been done. [Para 30] It is not in every case that interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances. Where holding company, has a deep interest in its subsidiary, and the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the holding company would ordinarily be entitled to deduction of interest on its borrowed loans. [Para 35]"
1.11 Considering the entirety of facts and circumstances of the case and in light of Hon'ble Supreme Court in case of S.A. Builders 158 Taxmann 74 , in our view, the contention of both sides needs to be adequately demonstrated through appropriate documentation and in absence thereof, the matter require further examination and we accordingly set-aside this issue to the file of the AO to examine the same afresh after giving reasonable opportunity to the assessee."
The issue involved in this appeal is identical to ground raised in ITA No. 648/JP/2014 for the immediately preceding year 2009-10 wherein the Coordinate Bench while dealing with the issue, placing reliance on the judgment of Hon'ble Supreme Court rendered in the case of S.A. Builders, 158 Taxmann 74 (SC), set aside the order of ld. CIT (A) and restored the matter to the file of A.O. for deciding the matter afresh. In the present case, considering the entirety of facts and circumstances of the case and in the light of judgment of Hon'ble Supreme Court (supra), it will be appropriate to examine the matter in detail thereby affording opportunity to both the parties to prove their contentions. Therefore, respectfully following the decision of Coordinate Bench in the assessee's own case in ITA No. 648/JP/2014, we set aside the order of ld. CIT (A) and restore the matter to the file of A.O. to be decided afresh after giving reasonable opportunity of being heard to the assessee. This ground of the revenue is allowed for statistical purposes."
Therefore, respectfully following the decision of the Coordinate Bench in the assessee's own case in ITA No. 648/JP/2014, we set aside the order of ld. CIT (A) and restore the matter to the file of AO to be decided afresh after giving reasonable opportunity of being heard to the assessee. This ground of the assessee is allowed for statistical purpose.
6. Ground No. 2 relates to confirming the disallowance @ 10% on account of telephone expense, vehicle repairs and maintenance expenses, staff welfare expense and travelling expenses.
6.1. At the outset, the ld. Counsel for the assessee submitted that the issue is covered by decision of Hon'ble Coordinate Bench in the assessee's own case in ITA No. 648/JP/2014 for the A.Y. 2009-10.
6.2. On the contrary, the ld. D/R supported the order of the Assessing Officer.
6.3. We have heard rival contention, perused the material available on record and gone through the orders of the authorities below. We find that the Coordinate Bench of the Tribunal in the assessee's own case in ITA No. 648/JP/2014 for the assessment year 2009-10 has decided this issue in favour of the assessee by observing in para 2.2 of its order as under :-
"2.2. We have heard the rival contentions and pursued the material on record. The AO has disallowed 10% of telephone, vehicle repair & maintenance and depreciation on car holding that these facilities are such that they can be used for other than business purposes. Further, 10% of staff welfare and travelling expenses have been disallowed holding that the expenses are not fully verifiable. In our view, these disallowances cannot be sustained in eye of law on ground of adhoc nature and secondly, the concept of personal use is alien to a corporate entity. In a corporate structure, the facilities are provided to employees as per terms of his / her employment and such facilities suffer the necessary perquisite taxation in hands of the employees. There is nothing on record which proves that the facilities have been used for personal purposes and secondly, they have escaped the perquisite taxation. Regarding disallowance of bonus, no basis has been given by AO to disallow the same. Hence, these disallowances are hereby deleted. Hence, these grounds are allowed."
Therefore, following the order of Coordinate Bench in the assessee's own case referred above, we set aside the order of the ld. CIT (A) to this extent and allow the claim of the assessee. The AO is hereby directed to delete the disallowances. The ground of the assessee is allowed.
7. In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 13/01/2017. Sd/- Sd/- ¼foØe flag ;kno½ ( dqy Hkkjr) (VIKRAM SINGH YADAV) ( KUL BHARAT ) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Jaipur Dated:- 13/01/2017. Das/ vkns'k dh izfrfyfi vxzsf"kr@Copy of the order forwarded to: 1. The Appellant- M/s. Arpit Marbles Pvt. Ltd., Jaipur. 2. The Respondent- The ACIT Circle-5, Jaipur. 3. The CIT, 4. The CIT (A) 5. The DR, ITAT, Jaipur 6. Guard File (ITA No. 768/JP/2016) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar 11 ITA No. 768/JP/2016 M/s. Arpit Marbles Pvt. Ltd.