Income Tax Appellate Tribunal - Mumbai
P. Jayantilal, & Co. (P) Ltd. vs Dy Cit on 15 February, 2005
Equivalent citations: (2006)97TTJ(MUM)100
ORDER
G.E. Veerabhadrappa, V.P. There are three appeals in all for the assessment years 1989-90 and 1991-92. For the assessment year 1989-90, there are cross-appeals, one by the assessee and the other by the department, directed against the order of the CIT(A)-X, Mumbai, dated 28-9-1993. The other appeal of the assessee for the assessment year 1991-92 is directed against the order of the CIT(A)-X, Mumbai, dated 5-4-1995. As common issues are involved, these appeals are being disposed of, by a common order for the sake of convenience.
2. The first issue involved in the appeal for the assessment year 1989-90 relates to disallowance of interest amounting to Rs. 3 lakhs under section 36(1)(iii) of the Act.
3. Facts of the case, in brief, are that the assessing officer noticed that the assessee had cash in its cash book far in excess of its cash requirements. He took note that while opening and closing cash balances came to Rs. 2.21 lakhs and Rs. 3.05 lakhs, the peak cash balance during the year reached a figure of Rs. 38.62 lakhs and when compared to the similar figures in the earlier assessment year, viz., 1988-89, the average cash holding in the year under appeal was double the amount of average cash holding in that year. Further, noting that a disallowance of Rs. 1,51,108 towards interest on such idle cash was made for the assessment year 1998-99 and the said disallowance was also confirmed by the CIT(A) on appeal, the assessing officer made disallowance of Rs. 3 lakhs out of interest for the year under appeal.
4. On appeal, the CIT(A) observing that facts of the case' for the year under appeal are similar to those of the preceding year, except for the difference that interest charges for the year under appeal were Rs. 47.18 lakhs, inclusive of a sum of Rs. 33.29 lakhs being interest payable on cash credit and other facilities from the bank, as compared to Rs. 16.46 lakhs for the preceding year, confirmed the disallowance made by the assessing officer. Hence, assessee preferred the present appeal before us.
5. We have heard both sides and perused the orders of the lower authorities and other material on record. We find that while the impugned disallowance for the year under appeal is based on corresponding disallowance made for the preceding year, viz., assessment year 1988-89, the decision of the Tribunal dated 12-6-1998, in the context of assessee's appeal against corresponding disallowance for the assessment year 1988-89, in ITA No. 6270A/Bom/1991, for that year, is in favour of the assessee and against the revenue. Vide para 8 of that order, the Tribunal held that in view of the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) and the decision of the Madhya Pradesh High Court in Ram Kishan Oil Mills v. CIT (1965) 56 ITR 186 (MP), unless a connection is established between, the borrowings made and the withdrawal of the borrowings for the purposes other than the business, no disallowance can be made. It accordingly deleted the disallowance made by the assessing officer and confirmed by the CIT(A). Respectfully following the said decision of the Tribunal, we delete the addition of Rs. 3 lakhs made by way of disallowance out of interest for the year under appeal. Assessee's grounds on this issue are accordingly allowed.
6. The next issue relates to disallowance of Rs. 71,300 out of interest paid to M/s. P.J. Pipes & Vessels (P) Ltd.
7. The assessing officer noted that the assessee- company has claimed payment of interest of Rs. 4,64,748 on the current account maintained in their books to M/s. P.J. Pipes & Vessels (P) Ltd. and the said interest was calculated at 21 per cent. Observing that the rate of interest calculated is excessive in view of the fact that the market rate of interest during the relevant accounting period was 15 per cent and the excess payment seems to have been made on account of the fact that M/s. P.J. Pipes & Vessels is an associated concern of the assessee, the assessing officer disallowed interest payment in excess of 15 per cent, which resulted in a disallowance of Rs. 1,42,800.
8. On appedl, the CIT(A) found that the assessee has paid interest on an average at 18 per cent on the borrowings made from the banks. Taking the same as fair indication of the market rate, the CIT(A) sustained disallowance of interest in excess of 18 per cent, which resulted in upholding a net addition of Rs. 71,300. Still aggrieved, assessee preferred the present appeal on this issue. On this very issue, revenue has also raised grounds, questioning the relief granted by the CIT(A).
9. We have heard both sides and perused the impugned orders of the lower authorities and other material on record. On careful consideration of the matter, we find that the material on record clearly indicate that on some of the borrowings made by the assessee, other than from the banks, 'assessee, has paid interest at the rate of 21 per cent. As such, it is not correct to say that the interest paid on borrowings from bank is indicative of the market rate at the relevant point of time. In the circumstances, we are of the view that the interest paid to M/s. P.J. Pipes & Vessels is reasonable and there is no excess payment of interest to it and, as such, no disallowance is called for. We accordingly delete the addition of Rs. 71,300 sustained by the CIT(A). Consequently, assessee's grounds on this issue are allowed and the grounds of the revenue in its appeal on this issue are rejected.
10. The next ground of the assessee in its appeal relates to an addition of Rs. 86,175, as interest receivable on advance of Rs. 5,67,893 to M/s. Apurva Tubes (P) Ltd.
11. The balance sheet of the assessee showed that it has sundry debtors for Rs. 8,39,092 on account of goods supplied by it and debtor for the loan of Rs. 5,67,893 advanced by the assessee to M/s. Apurva Tubes, a sister-concern. However, it was seen that no interest was charged on the aggregate amount of Rs.. 14,06,925. Considering the fact that the assessee has claimed huge payment of interest amounting to Rs. 47.18 lakhs, the assessing officer calculated interest at 15 per cent on the above amount and made an addition of Rs. 2,10,000.
12. On appeal, the CIT(A) noted that so far as the amount of Rs. 8.39 lakhs due from M/s. Apurva Tubes (P) Ltd., on account of goods supplied by the assessee is concerned, as per the practice followed by the assessee in the cases of similar dues, no interest was to be charged. As for the issue of charging interest receivable on the advance made to the said company, after considering the decisions of the Bombay High Court in CIT v. Confinance Ltd. (1973) 89 ITR 292 (Bom); of the Allahabad High Court in Shiv Prasad Ram Sahai v. CIT (1966) 61 ITR 124 (All); and of the Calcutta High Court in Reform Flour Mills (P) Ltd. v. CIT (1981) 132 ITR 184 (Cal), sustained disallowance out of interest to the extent of Rs. 85,176. Aggrieved by the addition sustained, assessee raised ground in the present appeal, whereas the revenue is contesting the relief granted by the CIT(A) through its appeal.
13. We have heard both sides and perused the impugned orders of the lower authorities and other material on record. It is evident from the orders of the lower authorities, as also from the material on record, that there is no chance of recovery of any of the amounts outstanding from M/s. Apurva Tubes (P) Ltd. When recovery of even principle amount due is in doubt and there is no chance of recovery of the same, it is improper to expect the assessee to charge interest at 18 per cent. Merely because assessee was paying out huge amounts of interest on its borrowings, impugned disallowance cannot be justified. In the circumstances, we delete the disallowance of Rs. 85,175 sustained by the CIT(A). Assessee's grounds on this issue are allowed and revenue's appeal on this issue is rejected.
14. In the revenue's appeal, which is for the assessment year 1989-90, first issue relates to addition on account of inflated purchases transacted through M/s. P.J. Pipes & Vessels.
15. The assessing officer has made the addition of Rs. 6 lakhs on the basis of addition made to the trading results in the earlier assessment year 1988-89. According to him, in the earlier year, the assessee had inflated the purchases made from several third parties, such as, M/s.. H.K. Traders, M/s.. Sejal Steels and M/s.. Nagurjuna Metals & Engg. (P) Ltd., and in the year under appeal as well, the assessee has inflated purchases made from M/s.. P.J. Pipes. In this connection, he noted from a copy of account of M/s.. P.J. Pipes in the books of assessee that a sum of Rs. 74,97,384 was shown payable by the assessee to the said concern, which indicated that the purchases made from this concern are highly inflated, especially when the said goods have been supplied directly to the ONGC by the said concern. Hence, relying on the decision of the Supreme Court in CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC) and for the detailed reasons discussed in the impugned assessment order, made an addition of Rs. 6 lakhs on estimate basis. On appeal, the CIT(A) deleted the said addition of Rs. 6 lakhs. Hence, revenue preferred appeal on this issue.
16. We have heard both sides on this issue and perused the impugned orders of the lower authorities, in the light of the case law on the point, and other material on record. We find that the CIT(A), after elaborate discussion of the contentions urged before him on this point, deleted the impugned addition of Rs. 6 lakhs, for the reasons discussed in para 7 of the impugned order dated 28-7-1993. In the first place, he found that the decision of the Supreme Court in the case of British Paints India Ltd. (supra) is distinguishable from the facts of the present case. He next observed that reliance on the assessment order for the assessment year 1988-89 for making the impugned addition is also misplaced, as the addition for that year was made on a totally different footing. His observations in this context read as under :
"7 Moreover, the reliance upon the assessment order in earlier year assessment year 1988-89 is also misplaced, as in that year, the addition made to the total income was on a totally different footing in that year. The appellant had sold the goods to various third parties which were found to have subsequently, been purchased by the appellant at a figure higher than the figure at which it had sold these goods to the said parties. In the present case, the appellant has given cogent reasons for the loss incurred in respect of the sales made of Rs. 34,01,696 to the ONGC. It is not also a case of the goods being imported by the sister-concerns for sales to the ONGC. In fact, the goods purchased from M/s. PA. Pipes are the goods manufactured by the said party as per the technical specifications of the ONGC in terms of the order received by the appellant from ONGC. In this connection, it is significant to note that out of the total purchases made from M/s. P.J. Pipes for more than Rs. 3.73 crores, often goods including both types of pipes under consideration, the goods worth Rs. 13,48,888 were in stock as on 31-3-1989, and the balance goods so purchased had been sold for Rs. 3,76,80,365 to the ONGC at an aggregate profit of Rs. 16,70,049. No adverse inference can also be drawn from the credit balance in the account of M/s. PJ. Pipes as appearing in the books of the appellant. There is nothing on record that the said transactions as mentioned by the assessing officer are collusive in nature. In view of this the addition of Rs. 6 lakhs made to the trading results is deleted."
We find no infirmity in the above reasoning given by the CIT(A). We, accordingly, uphold his order and reject the ground of the revenue on this issue.
17. The next ground of the revenue is that the CIT(A) erred in deleting the addition of Rs. 2 lakhs made on account of inflated valuation of opening stock. The assessing officer observed that in the earlier assessment year 1988-89, the purchases effected from certain parties were highly inflated. On that basis, he observed that the valuation of opening stock has been made at inflated figures. On a comparative analysis of the figures of opening stock and closing stock for the assessment years 1988-89 and 1989-90, the assessing officer noted that in assessment year 1988-89, the opening stock was less than the closing stock by Rs. 1,65,820, but in the assessment year 1989-90 under appeal, the opening stock was more than the closing stock at Rs. 1,20,54,453. He also noted that out of the purchase made from several third parties at an inflated figure in assessment year 1988-89, the purchases to the extent of Rs. 57,16,545 also formed a part of the opening stock for the assessment year 1989-90. He accordingly, made an addition of Rs. 2 lakhs to the trading results, on this count. On appeal, the CIT(A) deleted this addition. Hence, revenue is in appeal on this count.
18. We heard both sides and perused the impugned orders of the lower authorities. The CIT(A) has discussed this issue in para 9 of the impugned order. It is evident from the impugned order of the CIT(A) that for the assessment year 1988-89, there was no addition made to the closing stock and whatever closing stock was shown as on 30-9-1987, relevant for the assessment year 1988-89, has been taken as the opening stock as on 1-10-1987, for the year under appeal. He also further observed that the ratio worked out by the assessing officer vide para 6 of the assessment order are not relevant. In the absence of any material to arrive at a different conclusion, we find no infirmity in the action of the CIT(A). Consequently, impugned order of the CIT(A) on this issue is upheld and this ground of the revenue is rejected.
19. The next grievance of the revenue in this appeal is that the CIT(A) erred in deleting the addition of Rs. 5,18,526 out of total payment of Rs. 25,92,631 paid to M/s. P.J. Pipes & Vessels Ltd., ignoring the fact that payments were found to have been made over and above normal rate. It is also contended in the alternative by ground No. 4 of this appeal that the CIT(A) ignored the fact that the payment was in contravention of section 40A(3) of the Act.
20. We have heard both sides on this ground. We find that the CIT(A) has granted relief to the assessee in relation to payment made to M/s. P.J. Pipes & Vessels, on the following reasoning :
"Having carefully considered the facts and circumstances governing the paying labour charges to M/s. P.J. Pipes, I find that there is no material difference as regarding the narrations in the challans. There is also no difference in regard to the supply and receipt of pipes in terms of quantity. I also find that the pipes (4. 1/2" OD) were sold to M/s. Oil India Ltd. for Rs. 1.77 crores on which the surplus earned comes to Rs. 7.28 lakhs. It cannot also be said on the basis of the extract from the auditors report, which is reproduced in para 10 above, that the payment of labour charges made by the appellant is more than the market rates or calls for the application of the provisions of section 40A(2)(a) of the Act. In view of this, I am inclined to delete the disallowance of Rs. 5,18,526."
We are in agreement with the above reasoning given by the CIT(A). In the absence of any material to take a contrary. view of the matter, we uphold his order and reject this ground of the revenue.
21. The next grievance of the revenue in this appeal relates to deletion of disallowance to the extent of Rs. 71,300 out of payments made to M/s. P.J. Pipes & Vessels Ltd. We have considered this issue in the context of assessee's appeal on this issue hereinabove and vide para 9 above, we have decided the same in favour of the assessee, and against the revenue, accepting the contentions of the assessee in that behalf. Consequently, revenue's ground on this issue is rejected.
22. The next grievance of the revenue in this appeal is that the CIT(A) erred in deleting the addition of Rs. 1,64,748 made on account of excess rent paid to Shri Bharat J. Vora under section 40A(2)(b) of the Act.
23. The assessing officer noticed, and disallowed an amount of Rs. 1,64,748 out of total rent of Rs. 2,24,748 paid by the assessee to Shri Bharat J. Vora, managing director of the assessee- company. The assessing officer made this disallowance observing that Shri Vora had purchased the said premises for Rs. 3,60,000 and maximum return on the said cost even at 21 per cent should not exceed Rs. 5,000 per month as rent for the premises. On that basis the assessing officer allowed a sum of Rs. 60,000 per annum as reasonable return, and disallowed the balance amount of Rs. 1,64,748 paid by the assessee by way of rent to Shri Vora. On appeal, the CIT(A) deleted the said addition. Hence, revenue preferred the present appeal on this issue.
24. We heard both sides on this issue and perused the material on record. The CIT(A) deleted the addition made by the assessing officer discussing this issue at length in para 19 of the impugned order on the following lines :
"In appeal, it is stated that even if the basis adopted by the assessing officer is accepted, the amount of rent works out to Rs. 6,300 per month or Rs. 75,600 per annum and not Rs. 60,000 per annum as taken by the assessing officer. Moreover, the accounting period of the appellant is of 18 months but the assessing officer has wrongly taken only a period of 12 months while calculating the said disallowance and on this basis, the allowance works out to Rs. 1,13,400 as against allowance of Rs. 60,000 made by the assessing officer. It is further submitted that Shri B.J. Vora had purchased the said premises in 1978 and the appellant is using the same as its office premises since October, 1980, as per the leave and licence agreement dated 20-10-1980 and the rent paid is Rs. 1,22,486 per month @ Rs. 6 per sq. ft which cannot be regarded as the excessive rent payment for the premises situated in a commercial area such as Masjid Bunder Road, Bombay, and more particularly, in a building like Vyapar Bhavan. The said rent is being paid from very beginning and now the rate for the rent prevailing in this area is not less than Rs. 25 per sq. ft. On these facts, I am of the opinion that the rent paid does hot call for any disallowance. The disallowance of Rs. 1,64,748 is, therefore, deleted.
No material to take a different view of the matter has been brought to our notice. In the circumstances, we agree with the view taken by the CIT(A) and reject the ground of the revenue.
25. The next ground of the revenue in this appeal is that the CIT(A) erred in reducing addition made on account of interest-free advance made to M/s. Apurva Tubes (P) Ltd., from Rs. 2,10,000 to Rs. 85,175. We have already decided this issue in favour of the assessee and against the revenue vide para 13 above, while considering the grievance of the assessee in this behalf in its appeal. Consequently, this ground of the revenue is also rejected.
26. Now, let us turn to the appeal of the assessee for the assessment year 1991-92.
27. The first effective grievance of the assessee in this appeal is that the CIT(A) erred in confirming the addition of Rs. 66,220, as interest receivable on advance of Rs. 3,67,883, as on 31-3-1991, to M/s. Apurva Tubes (P) Ltd. Facts and circumstances leading to the disallowance in question are similar to those considered by us while considering corresponding disallowance made by the assessing officer and sustained by the CIT(A) for the assessment year 1989-90. Hence, following our decision for that year vide para 13 hereinabove, we delete the addition of Rs. 66,220 sustained by the CIT(A) for the assessment year 1991-92 as well and allow the grounds of the assessee on this issue.
28. The next grievance of the assessee in this appeal is that the CIT(A) erred in sustaining disallowance of interest amount of Rs. 5,640 on account of alleged cash balance held by the assessee. Facts and circumstances leading to the disallowance in question are similar to those considered by us while considering corresponding disallowance made by the assessing officer and sustained by the CIT(A) for the assessment year 1989-90. Hence, following our decision for that year vide para 5 hereinabove, we delete the addition of Rs. 66,220 sustained by the CIT(A) for the assessment year 1991-92 as well and allow the grounds of the assessee on this issue.
29. In the result, appeal of the assessee for the assessment year 1991-92 is allowed.
30. To sum up, both the appeals of the assessee are allowed and the only appeal of the revenue is dismissed.