Income Tax Appellate Tribunal - Ahmedabad
Prabhudas Kishordas Tobacco Products ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL AT
AHMEDABAD
AHMEDABAD "B"BENCH
Before Shri G.D. Agarwal, Vice-President (AZ) and
Shri Mahavir Singh, Judicial Member
IT A No.782/ Ahd/2006
[Asstt.Year: 2002-03]
Asstt. Commissioner of Incom e- vs Prabhudas Kishordas Tobacco
Tax, Circle-5, Ahm edabad Products Pvt. Ltd. Ahm edabad
PAN No. AABLP1495Q
ITA No.2064/ Ahd/2006
[Asstt. Year: 2003-04]
Asstt. Commissioner of Incom e- vs Prabhudas Kishordas Tobacco
Tax, Circle-5, Ahm edabad Products Pvt. Ld. Ahmedabad
PAN No. AABLP1495Q
(Appellant) (Respondent)
Revenue by : Shri B.S. Gahlot, CIT-DR
Assessee by: Shri S.N.Soparkar &
Shri Y.R. Shah
ORDER
PER Mahavir Singh, Judicial Member:-
These two appeals by Revenue are arising out of order of Commissioner of Income-tax (Appeals)-XI, Ahmedabad in appeal Nos.CIT(A)- XI/119 & 233/2005-06 of dated 13-01-2006 and 18-07-2006. The assessments were framed by the Asstt. Commissioner of Income-tax, Circle-5, Ahmedabad u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') vide his orders dated 31-03-2005 and 23- 03-2006 for assessment years 2002-03 and 2003-04 respectively.
2. The first issue in this appeal of the Revenue in ITA No.782/Ahd/2006 is against the order of CIT(A) in allowing the deduction u/s.80-IA of the Act on the ground that the assessee is a manufacturer of bidi, which is manufacturing activity ITA No.782 & 2064/Ahd/2006 A.Ys 02-03 & 03-04 ACIT, Cir-5, A'bd v. Prabhudas Kishordas Tobacco Products Ltd. Page 2 and deduction u/s.80-IA is allowable. Aggrieved, Revenue is in appeal before us on this issue.
3. At the outset, Ld. Counsel for the assessee stated that this issue is squarely covered in favour of the assessee and against the Revenue in its own case by the decision of Hon'ble jurisdictional High Court in the case of CIT v. Prabhudas Kishordas Tobacco Products P. Ltd. (2006) 282 ITR 568 (Guj), wherein the Hon'ble jurisdictional High Court has considered the issue that tendu leaves and tobacco, which are used as inputs, do no retain their independent identity after he bidis are rolled after undergoing several process. Commercially, the final product is known in the trade as a distinct commodity and has a separate market. Furthermore, merely because an assessee gets the work done through contract workers, in other words, enters into a contract with the workers and pays them per piece the relief could not be denied. The test is whether the outside agency works directly under the supervision and control of the assessee, it being immaterial whether the processing is done by the workers employed by the assessee at a place outside the premises of the assessee. In relation to the additional reason given by the Assessing Officer for denying relief under section 80-I of the Act, both the Commissioner (Appeals) and the Tribunal had found that, for the purposes of determining whether a unit is a small scale industrial undertaking or not, while ascertaining the monetary limit laid down in the provision, all asses of the business were not to be taken into consideration. The Tribunal was justified in treating the activities carried on by the assessee as amounting to manufacturer of bidies, entitling the assessee to relief under sections 80HH and 80-I. The Hon'ble High Court has decided this issue in assessee's own assessee, respectfully following the same, we dismiss this issue of the Revenue's appeal and the order of CIT(A) is upheld.
4. The next common issue in these appeals of the Revenue in ITA No.782/Ahd/2006 and ITA No.2064/Ahd/2006 is as regards to the order of CIT(A) in restricting the disallowance claimed u/s.37 of the Act to Rs.25,000/- and Rs.65,000/- respectively in both the years and the facts being exactly identical in both the years, we find that the Tribunal in assessee's own case in ITA No.4002/Ahd/2003 for assessment year 2001-02 vide order dated 27-07-2007 has ITA No.782 & 2064/Ahd/2006 A.Ys 02-03 & 03-04 ACIT, Cir-5, A'bd v. Prabhudas Kishordas Tobacco Products Ltd. Page 3 already considered this issue and confirmed the action of CIT(A) deleting the addition by giving following finding in para-15:-
"15. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. We find that similar issue came up before the Tribunal in the assessment year 2000-01, wherein vide order dated 22.12.2006 in ITA No.3120/Ahd/2003, the Tribunal dismissed the appeal of the Revenue and upheld the order of the ld. CIT(A) in allowing 1/3 expenses in assessee's own case. Accordingly, we confirm the order of the ld. CIT(A) in allowing 1/3 of the expenses out of Rs.1,33,136/- claimed by the assessee and this ground of Revenue is dismissed."
Respectfully following the Tribunal's decision in assessee's own case (supra), of earlier year, we uphold the orders of CIT(A) and this common issue of Revenue's appeals, in both years, is dismissed.
5. The next issue in Revenue's appeal in ITA No.782/Ahd/2006 is as regards to the order of CIT(A) deleting the addition made by the Assessing Officer on account of Gross Profit (GP). For this, Revenue has raised the following ground No.3:-
"3. The Ld. CIT(A) XI, A'bad has further erred in law and facts while deleting addition of Rs.1,14,00,920/- on account of G.P."
6. The brief facts leading to the above issue are that the Assessing Officer during the course of assessment proceedings noticed that during the year under consideration the GP ratio is reduced to 10.54% as against GP of earlier year at 11%. Accordingly, the AO discussing the GP ratio, made addition, being the difference of GP disclosed by the assessee and estimated by him at 11%. The AO has not rejected the book results and also not invoked the provision of Section 145 of the Act and without rejecting the book results, he estimated the GP rate based on earlier year. It is the case of the assessee that the assessee-company is dealing in manufacturing of bidi for more than 30 years and maintaining full quantitative and qualitative records of raw materials, production and finished products and such quantitative and qualitative records were produced before the Assessing Officer from time to time and no defect whatsoever was found in the same. Even the accounts are audited u/s.44AB of the Act and further the accounts are subject to audit by Excise Department and also examined by Labaour Department and no discrepancy whatsoever have been pointed out by the AO in the books of account. We, in view of these facts, are of the view that AO cannot estimate the GP rate without pointing out ITA No.782 & 2064/Ahd/2006 A.Ys 02-03 & 03-04 ACIT, Cir-5, A'bd v. Prabhudas Kishordas Tobacco Products Ltd. Page 4 defects in the books of account and without rejecting the book results. Ld. Counsel for the assessee before us supported the order of CIT(A) by relying the jurisdictional High Court's decision in TAX Appeal No.1878 of 2008 in the case of IT v. Suesh Scrap Industries Ld. dated 02-03-2010, wherein Hon'ble High Court in para-6 and 7 as under:-
"6. The entire appeal proceeds on misconception. Excise of powers under Section 145 of the Act cannot be an aspect of Gross Profit addition but it is the other way round. Only after books of accounts have been rejected for any of the reasons provided by Section 145 of the Act would the Assessing Officer be able to make estimate of profits. Even on facts, when one considers the submissions made by the departmental representative before Tribunal, as recorded in paragraph no.3 of the impugned order dated 02nd May, 2008, it becomes clear that at no stage was it ever urged that Commissioner (Appeals) had wrongly cancelled rejection of books of accounts.
7. In the circumstances, in absence of any error in the impugned order of Tribunal, no question of law, much less a substantial question of law arises from the impugned order of Tribunal."
7. Since, no defects were pointed out by the Assessing Officer in the books of account and the books of account are not rejected, in absence of the same, the GP rate cannot be applied arbitrarily. Accordingly, we uphold the order of CIT(A) and this issue of the Revenue's appeal is dismissed.
8. The next common issue in these appeals of the Revenue in ITA No.782/Ahd/2006 and ITA No.2064/Ahd/2006 is as regards to the order of CIT(A) deleting the disallowance made by the Assessing Officer u/s.40A(2)(b) of the Act. For this, Revenue has raised the common ground as under:-
ITA No.782/Ahd/2006"4. The Ld. CIT(A) XI, A'bad has further erred in law and on facts while deleting disallowance of Rs.77,09,880/- made u/s.40A(2)(b) of the IT Act, 1961."ITA No.2064/Ahd/2006
"2. The Ld. Commissioner of Income tax (A)-XI, Ahmedabad has erred in law and on facts in deleting the addition made of Rs.1,16,26,420/- on account of disallowance of excess interest paid to persons specified under section 40A(2)(b) of the I.T. Act, 1961."
9. The facts in both years are exactly identical, hence we will discuss the facts in ITA No.782/Ahd/2006 for assessment year 2002-03. The brief facts are that the ITA No.782 & 2064/Ahd/2006 A.Ys 02-03 & 03-04 ACIT, Cir-5, A'bd v. Prabhudas Kishordas Tobacco Products Ltd. Page 5 Assessing Officer made disallowance of interest paid to the associate parties @ 22%, being unreasonable as against the loan taken from banks @ 18.25% to 19.05%. The AO disallowed the excess interest being differential of the amount of 22% minus 19.05% = 2.5% of the total interest paid to related parties u/s.40A(2)(b) of the Act. Before the Assessing Officer the assessee pleaded that to carry on the business of about Rs.248 crores of volume, the company requires huge funds and accordingly the funds were arranged from associate concerns, who are in a position to give big loans. Majority of the borrowings are old and from shareholders of the company. The assessee stated the reason, why higher rate of interest @ 22% comparing the bank interest of 19.5% was paid by the assessee and for this the reasons were submitted as under:-
"the assessee is carrying on business of manufacturing of bidies. The turnover of the assessee company for the year under review is Rs.2,47,84,60,723/- i.e. about 248 Crores. To carry on the business of such large volume, the Company requires huge funds at the disposal of assessee. The assessee has borrowed funds from person specified u/s.40A(2)(b) who are in a position to give large loan to the assessee. Majority of the borrowings are old borrowings. The company has borrowed unsecured loan from he shareholders of the Company. The shareholders from whom the company obtained unsecured loans covered under the definition of specified persons envisaged u/s.40A(2)(b) of the Income Tax Act. The deposits are by and large in the nature of permanent deposits and they being shareholders of the company/specified persons, the company is in a position to stop the withdrawals if the company needs to continue the deposits. These loans being unsecured, the company is not required to give any security to the depositors even though they have given the loans exceeding more than Crores of Rupees. The assessee company has paid 22 percent to the unsecured depositors. Similarly the assessee company was paying interest @ 22% in earlier years. For the company, it is difficult to raise such huge funds as given by the specific persons.
We hereby submit that alternatively, we may avail this huge amount fro banks only. To obtain bank loans, we have to undergo lot of formalities as under:-
1. To offer primary security & 100% collateral security as per he norms of the banks which is not practical and possible.
2.The directors of the company are required to give personal guarantee which may not be acceptable by each and every director.
3. The company is required to furnish forms statements such as CMA Data, stock statements, and other necessary documents required by the bank from time to time. As per Banking Practice they have to Inspect periodically the security offered by the company."
ITA No.782 & 2064/Ahd/2006 A.Ys 02-03 & 03-04 ACIT, Cir-5, A'bd v. Prabhudas Kishordas Tobacco Products Ltd. Page 6 The Assessing Officer has not believed the explanation of the assessee as satisfactory and made disallowance. Aggrieved, assessee preferred appeal before CIT(A).
10. The CIT(A) allowed the claim of the assessee by giving following finding in para-6.2, 6.2.1` and 6.2.2 as under:-
"6.2 I have perused the submissions of the A.R of the appellant carefully. I have also gone through the decisions relied upon by the A.R and the observations of the assessing officer in the assessment order. It is seen that he deposited/loans received by the appellant are admittedly for business purposes and for which the assessing officer has not doubted and no stated any thing that the same is not utilized by the appellant for its business purposes. It is further seen that majority of the borrowers are old borrower and that too are the shareholders of the appellant company.
6.2.1 As it could be seen from the reply filed by the appellant, during the course of assessment proceedings that all the persons to whom the appellant company had paid interest are paying tax at maximum marginal rate and copy of acknowledgement of return filed by such depositors are filed before the assessing officer. This shows that there is no loss of revenue with regard to tax liability. Further, the assessing officer has not given any adverse comments in this regard. It is further seen that the appellant is paying interest payment at 22% since last ten years and its claim is consistently allowed by the assessing officer.
6.6.2 As it could be seen from the submission of the A.R., if the appellant had to borrow heavy loans from Banks, several formalities to be followed which could delay in meeting immediate financial needs of the appellant apart from spending various incidental expenses as narrated by the A.R. in getting loans from financial institutions. Therefore, commercial expediency compels the appellant to borrow money from shareholders which is more convenient to the appellant. It is also seen that the appellant need not offer any security to obtain loans from the shareholders."
Aggrieved, Revenue came in appeal before us.
11. Before us Ld. CIT-DR Shri B.S. Gehlot relied on the assessment order and stated that the Assessing Officer has rightly disallowed the excess interest paid to related parties by invoking u/s.40A(2)(b) of the Act. Accordingly, he urged the Bench to confirm the assessment order. On the other hand, Ld. Counsel for the assessee, Shri S.N. Soparkar argued that the order of CIT(A) is a reasoned order and the disallowance is deleted by the reasons that for obtaining bank loan 100% collaterals security is to be provided, which is not possible and practicable. He stated that even the Directors of the company are required to give personal guarantee which is not ITA No.782 & 2064/Ahd/2006 A.Ys 02-03 & 03-04 ACIT, Cir-5, A'bd v. Prabhudas Kishordas Tobacco Products Ltd. Page 7 acceptable to each and every Director. Even so much formalities are required in the shape of forms, stock statements are to be submitted periodically, CMA data and other necessary documents from time to time to the bank for obtaining such loans. Even he argued that interest charge by associate parties @ 22% is quite reasonable by considering the rate charged by the bank rate i.e. 19.5%. Ld. Counsel for the assessee stated that there are huge legal expenses such as stamp charges, registration charges etc. which are to be incurred, which will cost as additional 2.2% on getting the loan from bank and the loan from the associate parties will not incur such expenses. He also relied on the decision of Amritsar Bench in the case of ITO v. Bansilal Gupta in TTJ 113 (2008) 898 (ASR), wherein the Tribunal has held as under:-
"11. We have heard both the parties and carefully considered the rival contentions, examined the facts, evidence and material placed on record. We have referred to the decision of Tribunal (SMC), Amritsar Bench, in the case of H.S. Sales Corpn. Vs. ITO (supra), where the Tribunal by referring to the earlier order of Tribunal. Amritsar Bench, in the case of AIM Forgins, Jalaldhar vs. Asstt. CIT, has held that interest paid @ 24% per cent was fair and reasonable and did not warrant any disallowance. While doing so, the Tribunal further relied on the decision of Tribunal (SM) Amritsar Bench, in the case of Parmod Kumar Raj Kumar, Phagaram vs. Asstt. CIT in ITA No.267/Asr/2005 for the asst. yr. 2001-02, where it was held as under:-
"5.1 I have heard both the parties and considered the rival contentions, examined the facts, evidence and material on record and gone through the orders of the authorities below. The undisputed facts of the case are that the assessee has paid interest @ 24 per cent to persons covered under s. 40A(2)(b) i.e. at the same rate at which interest was claimed and allowed in the past i.e. asst. yr. 2000-01. There is also no disputed about the fact that the borrowed amounts were utilized for the purpose of business. Similar issue came up before the Tribunal. (SMC) Amritsar Bench in the case of M/s. Parmod Kumar Raj Kumar vs. Asst. CIT. in ITA No.267/AST/2005 for the asst. yr. 2001-02 dt. 2nd Sept. 2005 and the Tribunal decided the same in favour of the assessee and against the Revenue by recording following findings in para 6 of the order:-
"6. I have heard both the parties and carefully considered the rival contentions with reference to facts, evidence and material on record. The fact that the assessee had claimed interest @ 24 per cent and was allowed by the Revenue in the asst. yr. 2000- 01 has not been disputed by the Revenue. Therefore, principle of consistency demanded that no addition in respect of the same should have been made for the assessment year under reference. Besides, this issue is squarely covered by the decision of the Tribunal (SMC). Amritsar Bench, in the case of ITA No.782 & 2064/Ahd/2006 A.Ys 02-03 & 03-04 ACIT, Cir-5, A'bd v. Prabhudas Kishordas Tobacco Products Ltd. Page 8 M/s. Rimpy Processors (P) Ltd; vs, Asstt. CIT. Cir.5, Amritsar (supra) where it was held in para 4 as under:-
"4. Having heard the rival submissions and perused the relevant material on record. It is noted that the assessee was paying the interest to these persons @ 24 per cent in the preceding assessment years as well. Page 173 of the paper book is a chart showing interest to these persons @ 24 per cent in the preceding and succeeding years which was accepted by the Revenue. Even the assessment for the immediately preceding year was made in scrutiny under s. 143(3) by accepting the payment of interest @ 24 per cent. Assessment order for the said year has been placed at p.49 of the paper book. These facts indicate that the assessee had paid interest to these persons @ 24 per cent in the preceding as well as succeeding years and the same was accepted by the Revenue. That being the position, there was no reason to disturb the finality given to these transactions by the Department itself. Principle of consistency requires that in the absence of any change in the factual or legal position, a view taken should not be altered. This view has been recently reiterated by the Hon'ble Delhi High Court in the case of Director of IT (Exemption) vs. Guru Nanak Vidya Bhandar Trust (2004) 187 CTR (Del) 558 ; (2005) 272 ITR 379 (Del). In view of these facts, I am satisfied that the addition made and sustained by allowing interest to such specified that the addition made and sustained by allowing interest to such specified persons at 18 per cent only was not justified. By reversing the impugned order on this score, I direct the deletion of this addition.
The facts of the present case are similar to the fats of the abovementioned case. Therefore, respectfully following the order of the Tribunal, I set aside the order of the CIT(A) and delete the impugned disallowance. Accordingly, the grounds of appeal of the assessee are allowed.
This order was followed by the Tribunal, Amritsar Bench, in the case of AIM Forgings vs. Astt. CIT (supra) for the asst. yr. 2001-02. The facts of the present case are similar to the facts of the cases already decided by the Tribunal. Respectfully following the same, the order of the CIT(A) is set aside and the AO is directed to allow the interest claimed by the assessee. His ground of appeal is accordingly allowed."
12. Ld. Counsel for the assessee further also relied on the decision of this Tribunal in ITA No.59/Ahd/2005 dated 03-03-2009 in the case of Saumil Traders Pvt. Ld. v ITO Ward-8(1) A'bd for assessment year 2001-02, wherein the Tribunal has held in para-13 as under:-
ITA No.782 & 2064/Ahd/2006 A.Ys 02-03 & 03-04 ACIT, Cir-5, A'bd v. Prabhudas Kishordas Tobacco Products Ltd. Page 9
"13. We have considered the submissions made. There is no denial of fact that the amount was borrowed by the assessee for the purpose of business in earlier years i.e. since Assessment Year 1993-94. No disallowance has been made in the past. This fact is not controverted by either the Assessing Officer or the learned DR. It is incorrect to compare that rate of interest paid by the assessee on unsecured loan with the rate of interest in secured loan obtained from the bank and financial institutions. The amounts borrowed from bank are secured and hence carries lesser risk. Therefore, the comparison of rate of interest paid by the assessee on unsecured loan with the secured loan is incorrect. It is also settled law that the decision how the business should be carried on is the prerogative of the assessee and the Assessing Officer cannot dictate the terms as to how the business should be carried on. While considering the claim under section 36(1)(iii) what is to be examined is whether the amount is borrowed for the purpose of business or not. Since the amount is borrowed in earlier years at a stipulated rate of interest and which is still utilized for the purpose of business, the interest rate could not have been renegotiated. Even the leading rate by banks in respect of secured loan is as high as 17.5%. Therefore, rate of interest paid by the assessee is reasonable having regard to the fair value of such services. The Assessing Officer has not compared the rate of interest on unsecured loans. Therefore, the Assessing Officer was incorrect in restricting the interest payable to the extent of 18% only. Since the rate of interest paid by the assessee is reasonable, the Assessing Officer is directed to allow same."
Ld. Counsel for the assessee also argued that these loans are carry forward loan from earlier years and no such disallowance was made in earlier years. He sated that these deposits are since assessment year 1992-93 and interest from that year is paid @ 22% to the related persons from whom the loans have been obtained and no such disallowance is made in any of the years earlier.
13. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that these loans were borrowed by the assessee for the purpose of business in earlier years i.e. since Assessment Year 1992-93. No such disallowance has been made in the past. This fact is not controverted by either the Assessing Officer or the learned DR. It is a fact that the rate of interest paid by the assessee on unsecured loan vis-à-vis the rate of interest in secured loan obtained from the bank and financial institutions, the rate of interest to associate concern is little higher but the amounts borrowed from bank are secured and hence carries lesser risk. Even the bank interest is almost at 19.5% and if we calculate the overhead expenses i.e. the registration charges, stamp duty charges, expenses to be incurred for submitting stock statements etc. to the bank, the bank interest will automatically increase to a certain level. Therefore, the comparison of rate of interest ITA No.782 & 2064/Ahd/2006 A.Ys 02-03 & 03-04 ACIT, Cir-5, A'bd v. Prabhudas Kishordas Tobacco Products Ltd. Page 10 paid by the assessee on unsecured loan with the secured loan is incorrect. It is also settled law that the decision how the business should be carried on is the prerogative of the assessee and the Assessing Officer cannot dictate the terms as to how the business should be carried on. While considering the claim under section 36(1)(iii) what is to be examined is whether the amount is borrowed for the purpose of business or not. Since the amount is borrowed in earlier years at a stipulated rate of interest and which is still utilized for the purpose of business, the interest rate could not have been renegotiated. Even the lending rate by banks in respect of secured loan is as high as 19.5%. Therefore, rate of interest paid by the assessee is quite reasonable having regard to the fair market value of such services. The Assessing Officer has not compared the rate of interest on unsecured loans. Therefore, the Assessing Officer was incorrect in restricting the interest payable to the extent of 19.5% only. Since the rate of interest paid by the assessee is reasonable, the order of CIT(A) is confirmed deleting the disallowance.
14. In the result, both appeals of revenue are dismissed.
Order pronounced on this day of 30th April,2010
Sd/- Sd/-
(G.D.Agarwal) (Mahavir Singh)
(Vice President) (Judicial Member)
Ahmedabad,
Dated : 30/04/2010
*Dkp
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT(Appeals)-XI, Ahmedabad
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad