Income Tax Appellate Tribunal - Ahmedabad
Alidhara Textool Engineers Pvt.Ltd.,, ... vs Department Of Income Tax on 12 March, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH " C "
Before Shri T.K.SHARMA, JUDICIAL MEMBER and
Shri D.C.AGRAWAL, ACCOUNTANT MEMBER
Date of hearing : 11/03/2010eve Drafted on: 12/03/2010
Sl. ITA No(s) Assess- Appeal(s) by
No(s). ment
Year(s) Appellant Respondent
1. 924/Ahd/2007 2003-04 Dy.CIT Alidhara Textool
Circle-1, Surat Engineers Pvt.Ltd.
Flat No.2, Build No.1
S.No.55,
Part Nos.2 & 3
Dungara, Dist.Vapi
PAN AAACD 8469 M
2. 1043/Ahd/2007 -do- Alidhara Textool Dy.CIT
Engineers Pvt.Ltd., Circle-1,
Plot No.168, Road Surat
No.6-B,
Udhyognagar,
Udhna, Surat
3. 3592/Ahd/2007 2004-05 -do- Addl.CIT
Range-1, Surat
4. 3778/Ahd/2007 -do- Dy.CIT Alidhara Textool
Circle-1, Surat Engineers Pvt.Ltd.,
Surat
Assessee by : Shri Rasesh Shah
Revenue by: Shri M.C. Pandit, Sr.DR
ORDER
PER BENCH:
Appeal Nos.924/Ahd/2007 & 1043/Ahd/2007 are the cross appeals; one filed by the Revenue and the another filed by the Assessee (respectively) against the order of the Learned CIT(Appeals)-I, Surat dated 18/12/2006 passed for Assessment Year 2003-04. Appeal Nos.3592/Ahd/2007 & 3778/Ahd/2007 are the cross appeals against the ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05 -2- order of the ld.CIT(Appeals)-I, Surat dated 19/07/2007 passed for Assessment Year 2004-05 being one filed by the Assessee and the another filed by the Revenue. Since appeals involve common issues, they are taken together and being disposed of by a common/consolidated order for the sake of convenience.
2. In ITA No.1043/Ahd/2007 for Assessment Year 2003-04: In this appeal, the assessee has raised following grounds:
1. On the facts and in circumstances of the case as well as law on the subject, the learned CIT(Appeals) has erred in confirming the action of the Assessing Officer in making addition of Rs.5,00,000/- for alleged Undervaluation of Semi-finished goods and stock in transit.
2. On the facts and in circumstances of the case as well as law on the subject, the Learned CIT(Appeals) has erred in confirming the action of the Assessing Officer in reducing deduction u/s.80IB of the Act by Rs.41,847/- by not allowing L/C margin money interest of Rs.1,39,490 as income from industrial undertaking.
3. On the facts and in circumstances of the case as well as law on the subject, the Learned CIT(Appeals) has erred in confirming the action of the Assessing Officer in disallowing Depreciation of Rs.6,55,186/-.
4. It is therefore prayed that above additions made by Assessing Officer and confirmed by Learned CIT(Appeals)may please be deleted.
5. Appellant craves leave to add, alter or delete any ground(s) either before or in the course of hearing of the appeal.
ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05 -3- 2.1. In ITA No.924/Ahd/2007 for Assessment Year 2003-04: In this appeal, the Revenue has raised following grounds:
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs.9,73,704/- on account of disallowance u/s.40A(2)(b) of the Act.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs.10,00,000/- in respect of estimation of income on account of low net profit.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A), Surat ought to have upheld the order of the Assessing Officer on the above issues.
4. It is, therefore, prayed that the order of the CIT(A) may be set aside and that of the A.O. may be restored to the above extent.
3. The brief facts of the case are that the assessee-company is engaged in the business of manufacturing of Textile Machinery and its parts. The assessee has declared total sales of Rs.45,10,89,798/- giving a Gross Profit of Rs.12,20,62,427/- (showing a Gross Profit rate of 27.06%) as against turnover of Rs.37,97,86,301/- and Gross Profit of Rs.13,86,67,67,458/- (showing a Gross Profit rate of 36.60%). During the course of assessment proceedings, the Assessing Officer noticed that the assessee has not shown correct value of semi-finished goods and stock in transit. No day-to-day quantitative record was maintained. There was no record of consumption of various raw-materials. No stock register was maintained. Eventhough manufacturing activity of the ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05 -4- assessee is a continuous process throughout the year, there is consumption of power expenditure of labour and wages but there was no method as to how work-in-progress was valued. Assessee has, in fact, not shown any work-in-progress as on 31/03/2003. The Assessing Officer accordingly rejected the books of account after relying on the decision of ITAT Mumbai Bench "C" in the case of DCIT vs. Samir Diamonds Exports Ltd (71 ITD 75)[Mum.]. After rejecting the books, the Assessing Officer proposed an addition of Rs.10 lacs in the trading results.
3.1 In addition to above, Assessing Officer noticed that assessee has made the payment of Rs.97,37,042/- to one Alidhara Warptex Engineers, Surat which is a sister-concern and specified person as per provisions of section 40A(2)(b) of the I.T. Act, 1961. He noticed that it is only party to whom labour charges are paid. According to the Assessing Officer, assessee was not able to show the reasonableness of the payments. There was no verification of rates at which payments are made. No tenders were invited specifying kind of services for which payment were made. Since payments were not found reasonable, the Assessing Officer disallowed 10% thereof at Rs.9,73,704/-.
3.2. The Assessing Officer examined the valuation of semi-finished goods and stock in transit. The assessee had shown semi-finished goods and stock-in-transit as under:-
ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05 -5- Sl.No(s) Particulars Amount (Rs.)
(a)Semi-finished stock
1. Feed Assembly 7,50,909/-
2. Heater Assembly 25,80,000/-
3. Material Lying with 31,25,350/-
job worker 64,56,259/-
(b) Stock-in-transit 98,63,661/-
3.3. Assessee was not able to convince the Assessing Officer as to how these items were valued. He accordingly proposed an addition of Rs.5 lacs by estimate.
4. The next issue relates to claim of depreciation for the purposes of calculating deduction u/s.80-IB of the I.T. Act, 1961. The assessee had not taken into account depreciation for working out eligible profit for deduction u/s.80IB of the I.T. Act, 1961. The Assessing Officer relied on the decision of ITAT Ahmedabad Special Bench in the case of Vahid Paper Converters vs. ITO 98 ITD 165 (Ahd.) (SB) and held that for calculating deduction u/s.80_IB of the I.T. Act, 1961 allowable deduction under Income Tax Act would be taken into account. He accordingly, worked out deduction u/s.80IB of the I.T. Act, 1961 by including depreciation at Rs.25,23,838/- in place of Rs.31,79,027/-. Thus, Assessing Officer excluded depreciation allowable but not claimed in earlier year. The Assessing Officer accordingly, revised the claim of deduction u/s.80-IB of the I.T. Act, 1961.
5. The Learned CIT(Appeals) considered the rejection of the books but did not give any definite finding whether books can be rejected or ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05 -6- not. He only held that specific addition has been made on account of valuation of semi-finished goods and stock-in-transit. Therefore, no separate addition in the Gross Profit is required to be made. He accordingly deleted adhoc addition of Rs.10 lacs.
6. Regarding addition of Rs.5 lacs in the valuation of semi-finishd goods, the Learned CIT(Appeals) pointed out that assessee has himself admitted that overhead manufacturing expenses to the extent of Rs.1,64,416/- were not included while valuing the semi-finished stocks. However, the assessee did not give the details of freight expenses or payment to job-workers for including in a valuation of semi-finished goods. He accordingly confirmed the addition of Rs.5 lacs.
7. The next issue is regarding disallowance of Rs.41,847/- being the interest on L/C margin money from calculation of deduction u/s.80-IB of the I.T. Act, 1961. The assessee has claimed deduction u/s.80-IB of the I.T. Act, 1961 by including a sum of Rs.1,39,490/- as interest income on L/C margin money. This interest income was not treated as income from eligible business. The Learned CIT(Appeals) held that interest on margin money is nothing but income from other sources as held by various Courts as under:-
Sl.No(s) Decision in the case of ... Reported in...
1. Hindustan Lever Ltd. vs. CIT (1999) 239 ITR 297 (SC)
2. CIT vs. Sterling Foods (1999) 237 ITR 579 (SC)
3. Pandian Chemicals Ltd. vs. CIT (2003) 262 ITR 278 (SC) ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05 -7- 7.1. He accordingly confirmed the order of the Assessing Officer on this point.
8. The next issue is about disallowance of depreciation of Rs.6,55,186/-. The Learned CIT(Appeals) confirmed the order of the Assessing Officer as he had relied on the decision of the ITAT Ahmedabad Special Bench in the case of Vahid Paper Converters vs. ITO 98 ITD 165 (Ahd.) (SB) [supra]. In respect of disallowance of Rs.9,73,704/- u/s.40A(2)(b) of the I.T. Act, 1961. The Learned CIT(Appeals) held that such disallowance cannot be done in adhoc manner by applying a percentage without bringing anything on record about the unreasonableness or unascertainability of the payments made in comparison with the fair market value. In absence of any material to support the conclusion of the Assessing Officer, the Learned CIT(Appeals) deleted the addition.
9. In is appeal, the Learned Authorised Representative of the assessee submitted that adhoc valuation of semi-finished goods or stock-in-transit should not be upheld. In fact, assessee has himself found a sum of Rs.1,64,416/- being overhead manufacturing expenses not included in the valuation and, accordingly, the same has been offered before the Learned CIT(Appeals). Neither the Assessing Officer nor the Learned CIT(Appeals) has based their decision on any definite formula or on accounting principles. In any case, according to Learned Authorised Representative of the assessee, two additions should not be made; one ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05 -8- for Gross Profit addition and other for valuation of stock which will only enhance Gross Profit.
10. On the other hand, Learned Departmental Representative submitted that assessee has not been able to show as to how he has valued the semi-finished goods and stock-in-transit. There is no details of cost of raw-material, labour, wages and overheads. The onus is on the assessee to properly value the closing stock and to explain how he has valued them. If he fails to do so, then this would be major defect not only for rejecting the books of account but also making suitable estimation of profits.
11. Regarding disallowing a sum of Rs.1,38,490/-, the Learned Authorised Representative of the assessee submitted that L/C margin money is in relation to business and a compulsion imposed on the assessee to make deposit in the bank account for obtaining L/C in respect of sales. Therefore, this interest income should be treated as part of the business income and the claim of deduction u/s.80-IB of the I.T. Act, 1961 should be allowed on this amount. The Learned Authorised Representative of the assessee relied on the decision of CIT vs. Koshika Telecom Ltd. (2006) 287 ITR 479 (Delhi), wherein it has been held that interest income earned on deposits of margin money for opening L/C would be business income.
12. Against this, Learned Departmental Representative submitted that interest income earned on fixed deposits has to be assessed as income ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05 -9- from other sources, following the decision of Hon'ble Supreme Court in the case of Pandian Chemicals vs. CIT (2003) 262 ITR 278 (SC) and, therefore, assessee will not be entitled for deduction u/s.80-IB of the I.T. Act, 1961.
13. Regarding claim of depreciation the Learned Authorised Representative of the assessee submitted that W.D.V. (written down value) as last available should be taken for the purposes of calculating of depreciation and where assessee has not claimed depreciation in any of the earlier assessment year, then Assessing Officer cannot hypothetically reduced depreciation for the intervening period and reduce the WDV for working out depreciation for the current year. The WDV as appeared in the record should only be taken for calculating depreciation in the current year.
14. The Learned Departmental Representative, on the other hand, submitted that it is not a case of claiming depreciation u/s.32 of the I.T. Act, 1961 but it is a case of calculating depreciation for the purposes of computing deduction u/s.80-IB of the I.T. Act, 1961. Since the ITAT Ahmedabad Special Bench in the case of Vahid Paper Converters vs. ITO (supra) has decided the issue against the assessee, there is no case for taking a different view than taken by the Special Bench.
15. In its appeal, the Revenue has raised the issue in respect of addition u/s.40A(2)(b) of the I.T. Act, 1961 and Gross Profit addition. In respect of addition u/s.40A(2)(b) of the I.T. Act, 1961, the Learned Departmental Representative submitted that assessee has failed to furnish details as to ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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for what services payment is being made to M/s.Alidhara Warptex Engineers and whether the payment is reasonable. Therefore, Assessing Officer was justified in disallowing a part of it.
16. The Learned Authorised Representative of the assessee, on the other hand, submitted that assessee has been paying labour charges to Alidhara Warptex Engineers in the past also which has been accepted by the Department and no disallowance has been made. This year also, assessee has made payment for labour charges and, therefore, there is no case for making disallowance. Assessee has claimed a reasonable sum. It was for the Assessing Officer to show that as per market rates, payment was excessive. As Assessing Officer has not brought any material on record, addition is not justified.
16.1. Regarding Gross Profit addition, the Learned Departmental Representative submitted that assessee has not explained why the Gross Profit rate has decreased from 36.60% to 27.06%. No plausible explanation has been furnished. The Assessing Officer has pointed out so many defects, therefore, rejection of books were also justified. By making addition of Rs.10 lacs, the Gross Profit rate is only originally increased by less than 0.3%. Therefore, addition proposed is not very high.
17. Against this, Learned Authorised Representative of the assessee submitted that assessee has already shown very high profit rate. The business is not mathematics and every year there cannot be same rate of ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
- 11 -
profit. No business man is showing such a high Gross Profit. The books of account of assessee are audited and no acceptable defect has been found by the Assessing Officer. Thus, no adhoc addition in Gross Profit should be made.
18. Finally, after hearing both the parties and perusing the material on record, our decision in respect of each issue is as under:
(A) Regarding rejection of books In our considered view, the Assessing Officer was justified in rejecting the books. The Learned CIT(Appeals) has not given clear decision on this matter but we can infer that he has not upheld the rejection. In our considered view, not properly valuing the closing stock including semi-finished goods or stock-in-transit and not maintaining quantitative record of consumption and product and various inputs would be sufficient to hold that income cannot be correctly deduced from books of account maintained. It is argued by the Learned Authorised Representative of the assessee that it is maintaining records as per Excise Rules, but it is nowhere shown that assessee has been maintaining quantitative records of receipt, issue and balance of various types of stocks or raw-material. Assessee has large number of small parts which are either manufactured or purchased and which are used for manufacturing the textile machines. It was for the assessee to convince the authorities or even to us that there is a definite quantitative record which is not found defective. Further, it is admitted position that valuation of stock is defective. Assessee has ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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himself admitted that he ought to have been included a sum of Rs.1,64,416/- which is 4.94% of overhead manufacturing expenses. It is not known how assessee has been able to work out that overhead expenses of 4.94% only are to be allocated to semi- finished goods. Further, there is no working given for labour charges required to be included in valuation of semi-finished goods and stock-in-transit. In view of this, we hold that books are not reliable and income cannot be deduced correctly. As a result, Assessing Officer was justified in invoking the provisions of section 145 and estimating the profits.
(B) Regarding issue of depreciation In our considered view, the issue is covered by the decision of ITAT Ahmedabad Special Bench in the case of Vahid Paper Converters vs. ITO against the assessee. There is no contrary decision referred to by the Learned Authorised Representative of the assessee. Possibly assessee is misunderstanding claim of deduction of depreciation u/s.32 of the I.T. Act, 1961 with the claim of deduction under Chapter VI-A. If it was a case where deduction is claimed u/s.32 of the I.T. Act, 1961 for the purposes of computation of total income in normal way, within the meaning of sections 28 to (43D), the stand taken by the Learned Authorised Representative of the assessee would have been correct. But when it comes the question of computing deduction under Chapter VI-A, then calculation of depreciation has to be done, irrespective of whether it has been claimed by the assessee in the normal computation of income or not. For the sake of clarity, we ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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reproduce the following portion of Head Notes from Vahid Paper Converters vs. ITO(supra).
"While computing the income for the purpose of deduction under Chapter VI-A of the Income-tax Act, 1961, the depreciation has to be allowed whether or not it is claimed by the assessee.
On a fair reading of sections 80A, 80AB and 80B of the Income- tax Act, 1961, it is apparent that for allowing deductions under Chapter VI-A the first step is to compute the gross total income of the assessee in accordance with all the provisions of the Act, except Chapter VI-A. The second step is to ascertain what part of the total income so computed represents the profits and gains derived from the business of the industrial undertaking that is included in that gross total income. If there be any profits and gains so derived found included in the gross total income, a deduction of such profits and gains or a part thereof is to be allowed under a particular section to arrive at the total income liable to tax.
In all the sections, i.e., sections 80HH, 80-IA and 80-IB, the emphasis is on "a deduction from such profits and gains" that are to be computed as stated in section 80AB in accordance with the provisions contained in the Act. Depreciation and other deductions falling within sections 30 to 43A will have to be deducted before making any deduction under Chapter VI-A of the Act. The logic behind the deductibility of depreciation while computing the eligible profits for Chapter VI-A, is that if the depreciation is not reduced while computing the income, the assessee would claim the deduction on the gross amount of income and that would amount to allowing a greater deduction than the assessee is entitled to.
CIT v. Cadila Chemicals P. Ltd. [2003] 259 ITR 692 (Guj), Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC), Vijay Industries v. CIT [2004] 270 ITR 175 (Raj), CIT v. Milling Trading Co. P. Ltd. [1995] 211 ITR 690 (Guj) and Indian Rayon Corporation Ltd. v. CIT [2003] 261 ITR 98 (Bom) followed.
ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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In the Income-tax Act there is no provision for "disclaimer" of depreciation for the purpose of computing deduction under Chapter VI-A under which "the amount of income of that nature as computed under the provisions of this Act" has to be taken. Therefore, while computing the eligible income effect to all the provisions of the Act (excluding Chapter VI-A) is to be given. The provisions of the Income-tax Act include section 32 which provides for depreciation. Therefore this is deductible before making any deduction under section 80HH.
The decision of the Supreme Court in Mahendra Mills' case [2000] 243 ITR 56 was applicable for the period to April 1, 1988, i.e., before the law was amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986. The controversy in that case did not concern the deduction under Chapter VI-A of the Act. The observations of the Supreme Court in the case can be taken as applicable only in the context of computing normal income for the assessment years prior to the assessment year 1988-89 and not for the computation of income for the purpose of Chapter VI-A. CIT v. Mahendra Mills [2000] 243 ITR 56 (SC) explained and distinguished.
It could be the privilege of the assessee to claim or not to claim such deduction. However, when the income of the assessee is to be determined for the purpose of computing deduction under Chapter VI-A either the whole or a certain percentage of the income is exempt. Therefore, if the depreciation is not claimed, the resultant income would be higher and consequently a higher deduction would be available to the assessee under Chapter VI-A. Certainly therefore it cannot be the privilege of the assessee to claim a higher deduction than he is entitled to.
CIT v. Mahalaxmi Sugar Mills Co. Ltd. [1986] 160 ITR 920 (SC) relied on.
Separate computation of the profits and gains of the eligible business for the purpose of deduction under this Chapter is the ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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clear mandate of the Legislature. By virtue of the deeming fiction that the industrial undertaking would be the only source of income for computing the income, there is bound to be difference in both the incomes as well as the written down values from year to year. Again the different written down value is for computing the income for the purpose of Chapter VI-A and would have no impinging effect in disturbing the written down values for the purpose of section 43(6) in determining the income of the assessee under section 29 of the Act.
Alembic Chemical Works Ltd. v. Deputy CIT [2004] 266 ITR 47 (Guj) relied on."
18.1. In view of this, we uphold the orders of the Authorities below on this point and reject this ground raised by the assessee.
(C) Regarding issue of deduction u/s.80-IB of the I.T. Act, 1961 on interest earned L/C margin money.
The Assessing Officer disallowed the claim on the ground that this interest income is not derived from the business of the assessee. Though, it may be attributable to it. The Learned CIT(Appeals) confirmed the same on similar reasoning.
18.2. In our considered view, there is no case for interference in the orders of the authorities below on this point. The reasons being that the interest income on fixed deposits opened for obtaining Letter of Credit has only a distant relationship and no direct relationship, with the business of the assessee. When it comes the question of taxing such income under the head "business" u/s.28 of the I.T. Act, 1961, then the issue will certainly go in favour of the assessee as held by the Hon'ble ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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Delhi High Court in the case of Koshik Telecom Ltd. (supra) referred to by Learned Authorised Representative of the assessee. But when it comes the question of considering such interest income for allowing deduction u/s.80-IB of the I.T. Act, 1961, then words used in that section has to be compared with the words used in other sections under Chapter VI-A of the I.T. Act, 1961 and authorities pronounced thereon has to be relied upon. In this regard, we refer to the decision of Hon'ble Kerala High Court in the case of K.Ravindranathan Nair vs. DCIT (2003) 262 ITR 669 (Ker.) wherein it has been held that deduction u/s.80-HHC of the I.T. Act, 1961 would not be available on interest income earned on fixed deposits made for obtaining Letters of Credit. Interest from such 'short-term deposits' received by the assessee was not the direct result of any export of any goods or merchandise. The FDs were made only for the purposes of obtaining Letters of Credit and for getting other benefits. The interest income received on such short term deposits could be attributed to export business but could not be treated as income derived from the export business. Even where the banks have insisted for making such deposits for obtaining Letters of Credit or other facilities, still it cannot be said that income was derived from export business. Similarly, view was taken by the Hon'ble Madras High Court in the case of CIT vs. The Madras Motors Ltd. (2002) 257 ITR 60 (Mad.) and in the case of CIT vs. Menon Impex (P) Ltd. (2003) 259 ITR 403(Mad.). The language used in section 80-IB of the I.T. Act, 1961 is the same as in section 80HHC of the I.T. Act, 1961. It uses the words "any profit and gains derived from any business referred to in sub-section (3)......." Section 80HHC of the I.T. Act, 1961 uses words in sub-section (3) "the ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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profits derived from such export......". Thus, interest income should have direct nexus with the business of the "Industrial Undertaking" as referred to in section 80IB of the I.T. Act, 1961. The business of the assessee is manufacturing textile machines and not of earning interest, then interest earned on fixed deposits made for opening Letters of Credit or for obtaining other facilities cannot be said to be derived from "business of manufacturing of machines" The connection is remote and not proximate which is the requirement resulting from the words "derived" used in this section. In view of this, we confirm the orders of authorities below on this point. As a result this ground of the assessee is rejected.
(D) Regarding addition on account of undervaluation of semi-finished goods and stock-in-transit.
18.3 After considering the rival submissions, we are of the view that this addition would be covered in the overall Gross Profit addition which we will consider in revenue's appeal. Therefore, no separate addition is required to be made on this account. This addition is, accordingly, deleted. This ground of assessee is allowed.
Revenue's appeal for Assessment Year 2003-04
19. After considering the submissions of both the parties and perusing material on record, our decision on the issues raised by the Revenue are as under:-
(A) Addition on account of disallowance u/s.40A(2)(b) of the I.T. Act, 1961.
ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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The claim of Learned Authorised Representative of the assessee is that the assessee has been making payment to M/s. Alidhara Warptex Engineers in the past and it has been accepted by the Department. Therefore, Department should have taken a consistent view. On the other hand, Learned Departmental Representative is of the view that onus on the assessee to show that payments were made by the assessee for certain services rendered by the sister-concern and such payments were receivable. In our considered view, onus is on the assessee to show that payments made to sister-concern were for certain work done for the assessee and payments made by the assessee to it were reasonable and were at arm's length price. Onus cannot be shifted on the Revenue. It is the duty of assessee who is claiming certain expenditure in the Profit & Loss account to show that it was incurred for the business purpose and payments were reasonable. Further, even if such claims have been allowed in the past, but rule of consistency cannot prevent the Assessing Officer from examining the issue every year. The fact of rending services will remain specific to that year as facts may differ or circumstances may change. It is for the assessee to show that sister-concern had provided services for which payments were made which is reasonable. Therefore, we restore this issue to the file of the Assessing Officer for giving opportunity to the assessee to show as for what payments were made to that party and whether these payments are on reasonable ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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rates. Accordingly, this ground of revenue is allowed but for statistical purposes.
(B) issue regarding Gross Profit addition It was claimed by the Ld.AR that it had submitted explanation as to the fall in Gross Profit, but after going through the record, no specific explanation could be noticed. Eventhough turnover of the assessee is increased, but this cannot be the reason for fall in Gross Profit, as in subsequent year, we notice that increase in turnover has not accelerated the fall in Gross Profit. On the other hand, Gross Profit has increased in subsequent year. In fact, the Assessing Officer has made an addition of Rs.10 lacs which is affecting the Gross Profit rate by only 0.3% which is quite nominal. We, therefore, uphold the Gross Profit addition of Rs.10 lacs. This will cover the addition made by the Assessing Officer on account of valuation of semi-finished goods/goods in transit. 19.1. As a result, this ground of Revenue is restored. Appeal filed by the Revenue is partly allowed but for statistical purposes.
ITA Nos.3592/Ahd/2007 & 3778/Ahd/2007 for Assessment Year2004-05 by Assessee & Revenue respectively
20. In this year, the Assessee as well as Revenue raised the following grounds in their appeals:-
Assessee's appeal, ITA No.3592/Ahd/2007 ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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1. On the facts and circumstances of the case as well as law on the subject, the Learned CIT(Appeals) has erred in confirming the action of the Assessing Officer in making addition of Rs.10,00,000/- for alleged Undervaluaton of Semi-finished goods and stock in transit.
2. On the facts and circumstances of the case as well as law on the subject, the Learned CIT(Appeals) has erred in confirming the action of the Assessing Officer in disallowing Rs.82,689/-, being 30% of interest received on L/C margin money and labour charges for calculation of deduction u/s.80IB.
3. On the facts and circumstances of the case as well as law on the subject, the Learned CIT(Appeals) has erred in confirming the action of the Assessing Officer in disallowing Depreciation of Rs.4,95,293/-.
4. It is therefore prayed that above additions made by Assessing Officer and confirmed by Learned CIT(Appeals) may please be deleted.
5. Appellant craves leave to add, alter or delete any ground(s) either before or in the course of hearing of the appeal.
Revenue's appeal, ITA No.3778/Ahd/2007
1. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.19,53,967/- made on account of disallowance out of payments made to persons covered u/s.40A(2)(b) of the I.T. Act as the same were excessive and unreasonable.
2. On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs.25,00,000/- made on account of rejection of books of account and estimation of further net profit.
ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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3. In the facts and circumstances of the case, the learned CIT(A) ought to have upheld the order of the assessing officer.
4. It is, therefore, prayed that the order of the CIT(A) be set-aside and that of assessing officer be restored.
Assessee's appeal for Assessment Year 2004-05
21. The brief facts of the case are same as were taken in the Assessment Year 2003-04(supra).
21.1. Ground No.1 relates to addition on account of undervaluation of semi-finished goods and stock-in-transit. The ground, the basis for addition, the reasoning of Learned CIT(Appeals) in confirming the addition, the arguments of the Learned Authorised Representative of the assessee and the Learned Departmental Representative are the same as were taken by them in ground No.1 in Assessment Year 2003-04(supra).
22. Following our decision in Assessment Year 2003-04(supra), we delete the addition on account of undervaluation of semi-finished goods and stock-in-transit.
23. Ground No.2 relates to allowing the deduction u/s.80-IB of the I.T. Act, 1961 on interest income on L/C margin money and labour charges. This ground is the same as were taken in ground No.2 in Assessment Year 2003-04(supra). The reasoning given by the Assessing Officer, Learned CIT(Appeals) and the arguments of both the parties are same as in Assessment Year 2003-04(supra).
ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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24. Following our reasoning and decision given in Assessment Year 2003-04(supra), we confirm the order of the Learned CIT(Appeals) and dismiss this ground of assessee.
25. Ground No.3 is about disallowing depreciation of Rs.4,95,293/- from computation of deduction u/s.80-IB of the I.T. Act, 1961. This ground, the basis of addition, reasoning of Learned CIT(Appeals) and arguments of the parties are the same as in respect of ground No.3 in Assessment Year 2003-04.
26. Following our reasoning and decision given in Assessment Year 2003-04(supra), we confirm the order of the Learned CIT(Appeals) and dismiss this ground of assessee.
Revenue's appeal for Assessment Year 2004-05
27. Ground No.1 relates to addition u/s.40A(2)(b) of the I.T. Act, 1961 and Ground No.2 Gross Profit addition of Rs.25 lacs. Both the grounds are the same as were taken in ground Nos.1 & 2 in Revenue's appeal for Assessment Year 2003-04(supra). The basis for addition, the reasoning for giving relief and arguments of both the parties are the same as were taken by them in the Assessment Year 2003-04(supra).
28. Following our reasoning and decision given in Assessment Year 2003-04(supra), we set aside the issue relating to addition u/s.40A(2)(b) of the I.T. Act, 1961 to the file of Assessing Officer for giving opportunity to the assessee to justify the payments made to sister-
ITA Nos.924,1043,3592 & 3778/Ahd/2007 M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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concern. This ground of Revenue is, accordingly, treated as allowed but for statistical purposes.
29. After considering all the facts, circumstances and arguments of the parties in respect of Gross Profit, we restrict the addition to Rs.12.5 lacs as against Rs.25 lacs made by the Assessing Officer. This covers the addition proposed by the Assessing Officer on account of undervaluation of semi-finished goods and stock-in-transit. Thus, assessee gets a resultant relief. Therefore, this ground of Revenue is partly allowed.
30. As a result, the appeal filed by the assessee is party allowed, whereas appeal filed by the Revenue is party allowed but for statistical purposes.
31. In the result, we summarize the result as under:
(1) Revenue's appeal, ITA No.924/Ahd/2007 for Assessment Year 2003-04 is partly allowed and partly allowed for statistical purposes.
(2) Assessee's appeal, ITA No.1043/Ahd/2007 for Assessment Year 2003-04 is partly allowed.
(3) Assessee's appeal, ITA No.3592/Ahd/2007 for Assessment Year 2004-05 is partly allowed.
(4) Revenue's appeal, ITA No.3778/Ahd/2007 for Assessment Year 2004-05 is partly allowed and partly allowed for statistical purposes.
Order signed, dated and pronounced in the Court on 26/03/2010.
Sd/- Sd/-
( T.K.SHARMA ) ( D.C.AGRAWAL )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 26/ 03 /2010
T.C. NAIR
ITA Nos.924,1043,3592 & 3778/Ahd/2007
M/s.Alidhara Textool Engineers Pvt.Ltd. vs. Dy.CIT Asst.Years - 2003-04 & 2004-05
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Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals)-I, Surat
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER, स×याǒपत ूित //True Copy// (Dy./Asstt.Registrar), ITAT, Ahmedabad