DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(2), HYDERABAD vs. CANDID INDUSTRIES LIMITED (FORMERLY KNOWN AS FUTURETECH INDUSTRIES LTD), HYDERABAD

O R D E R PER BENCH :

This Revenue’s appeal for AY.2011-12 arises from the CIT(A)-1, Hyderabad’s order dated 25-11-2016 passed in appeal No.0049/ CIT(A)-1/ Hyd/ 2014-15/ 2016-17 in proceedings u/s. 143(3) of the Income Tax Act, 1961 [in short, ‘the Act’].

3. The Revenue has raised the following substantive grounds in the instant appeal:

“1. The Learned CIT (Appeals) erred in deleting the addition made by the Assessing Officer on account of disallowance of financial charges of Rs.5,05,73,510/- claimed by the assessee.

2. The Learned CIT (Appeals) ought to have considered that said financial charges were incurred for arranging finance to associate enterprises through accommodation bills for purchases and sales to group concerns and subsequently by discounting the same and not for business purposes of the assessee.

3. The Learned CIT (Appeals) ought to have noted that authorities relied upon in the order of CIT(A) were all rendered in a different factual context and the said authorities are not applicable to the facts of the present case where the modus operandi is raising accommodation bills, discounting the same and arranging finance to associate concerns.

4. The Learned CIT (Appeals) ought to have further appreciated that similar disallowance made by the Assessing Officer in assessee's own case for A.Y. 2006-07 and A.Y. 2007-08 was sustained by the predecessor CIT(A) and on appeal by the assessee, Hon'ble ITAT vide order in & 1460/Hyd/2014 dated 31/01/2017 has restored the matter to the file of AO for certain verification”.

4. Both the learned representatives take us to the CIT(A)’s corresponding detailed discussion deleting the impugned finance charges disallowance as under:

“5. Only ground: Disallowance of Rs.5,05,73,510/- towards Bank Charges: 5.1 During the course of assessment proceedings, the Assessing Officer noticed that assessee had made purchases of Rs.713,25,25,959/- and sales of Rs.720,49,69,995/-. The P&L account (under "Schedule 12") under "Administrative and selling expenses" clearly indicates towards the nature of activity. The actual purpose for the assessee company was providing accommodation bills for purchase and sales to its group companies. This was further confirmed by the fact, when one looks at the abnormal financial charges of Rs.5,05,73,510/- paid by the assessee company during the F.Y.2010-11. The details of financial charges were mainly towards bill discounting charges and the corresponding interest paid to the banks for the same. By indulging into the above activity of providing accommodation bills and subsequently discounting the same, the assessee company was lending the monies to the group concerns. Thus, the underline picture of the overall activity of the company that emerges was that by showing these activities of purchase and sales the company was actually indulging in arranging finances for its group companies by way of bills discounting and subsequently transfer the funds either to the group concerns or as per their instructions. Thereby it was clear that the financial charges so incurred and claimed by the assessee company were not for the business purpose but for providing finance for the group companies. As this activity of bill discounting was not done with the intention of improving its own business but was carried out only to make good to the financials of the group companies, the Assessing Officer treated the same as not expended for the business purposes and disallowed the income of Rs.5,05,73,510/-.

5.2 Before me, the appellant submitted that it had debited an amount of Rs.5,05,73,510/- towards bank discounting charges during the course of business activity and were incurred exclusively for the purpose of trading activity and not for any unrelated activity. Applicant submitted annual report, tax audit report, details of finance charges for Rs.5,05,73,510/-, copies of letter of credits, details of receipts and utilization of LC proceedings, party wise breakup of purchases for Rs.713,25,25,959/- and party wise breakup of sales of Rs.720,49,69,995/-. Applicant stated that proper ledger accounts have been maintained with respect to each of the trade creditor in its books of account. Before me, the applicant submitted that the financial charges were incurred on a letter of credit granted by various financial institutions, the letter of credit proceeds were utilized for payments to various trade creditors and for these services, the amounts charged by the banks were shown under the head "financial charges". Applicant submitted that the present issue of disallowance of financial charges had already covered in its own group case of M/s. Global Forgings Ltd for A.Y. 2010-11 wherein the Hon'ble ITAT vide has dismissed the appeal of the Revenue and upheld the order of the CIT (A) wherein the disallowance of financial charges was deleted. Applicant also cited the following case laws in its support: 1. Decision of ITAT, Hyderabad Bench 'B' in the cases of DCIT C-2(3) Vs M/s. Global Forgings Ltd in ITA No. 543 & 1269/Hyd/14 dt 26.11.2014 2. CIT VS Alembic Glass Industries Ltd 103 ITR 715 (Guj.) 3. Decision of ITAT, Bangalore in the cases of ITA No. 711/1154/6ang/2003, 45/Bang/2004 for 1998-99, 1997-98, M/s. Bellary Steels & Alloys Ltd, Bangalore Vs JCIT, Hubli. Following the above orders of Hon'ble ITAT, I allow the claim of the applicant”.

2. As stated, the only issue for consideration is the disallowance of 50% of financial charges claimed by assessee. In AY.2006-07, assessee claimed financial charges by way of LC discounting to an extent of Rs. 83,89,594/- under the head ‘financial charges’. On the reason that assessee was diverting the funds obtained from this to advance as loans to sister concerns without interest, AO disallowed 50% of the charges as not pertaining to assessee’s business. Similarly, in AY. 2007-08, assessee has claimed an amount of Rs. 88,55,691/- towards ‘financial charges’; out of which for the same reasons, 50% of the amount was disallowed. Even though assessee submitted that the entire funds obtained from the banks by way of LC discounting was used for paying creditors and no part of the amount was diverted towards advances to other concerns, Ld. CIT(A) did not accept as similar disallowance was considered by the CIT u/s. 263 in AY. 2008-09 and further he relied on the orders for AY. 2008-09. His order in AY. 2006-07 is as under: “5. I have carefully considered the submissions of the appellant, remand report of the AO and comments of Addl.CIT and the assessment order. The appellant’s submissions that since identical issue was dealt in the A.Y.2008-09 and the amount of expenditure incurred towards the financial charges was allowed as business expenditure cannot be accepted since the assessment proceedings for each year are independent. The asst. order or the decision taken with respect to AY 2006-07 or AY 2007-08 should not have any impact or relation with the asst. order for the A.Y. 2008-09. Though the AO had not submitted detailed report regarding financial charges for AY. 2006-07, 2007-08 and 2008-09 as per the request of the CIT(Appeals)-II, Hyderabad, vide her letter dated 19-6-2012mentioned in para 303 of this order, the report of the AO dated 15-6-2014 is exhaustive and very much relevant and adequate on the issue of financial charges. Hence, I fully agree with the AO regarding the disallowance of 50% of the amount of financial charges debited i.e. Rs. 41,94,797, being interest related to the borrowed funds utilized for the purpose other than business and also agree with the report of the AO dated 15- 6-2012. The case-law cited by the appellant are also different from the facts of the appellant and hence, the appellant submission cannot be accepted. Therefore, I confirm the addition 2.1. Similar order was passed in AY. 2007-08 also. Hence, the present appeals.

“1. The learned CIT(A) erred in both facts and law while passing the order for the A.Y 2006-07.

2. The learned CIT(A) erred in confirming the disallowance towards interest Rs.41,94,797/- made by Asst. Commissioner of Income Tax, Circle 1(3), Hyderabad basing on suspicion and surmises which is not correct.

3. The learned CIT (A) erred in not appreciating the fact that the financial charges on discounting LC's was incurred for the business purpose only.

5. The learned CIT (A) erred in not considering the fact that the net proceeds of the discounted LCs were utilized for payment to the creditor parties only.

6. The learned CIT (A) ought to have appreciated the fact that special audit u/s 142(2A) was conducted in the case of assessee for the year under consideration and no adverse finding was made by the special auditor. Hence, no addition can be made to the income of the appellant.

7. The learned CIT (A) ought to have appreciated the orders of Hyderabad ITAT in the case of Bartronics India Limited vs. ACIT 1(3) wherein it is held that no addition can be made to the income of the assessee if no adverse finding is made in the special audit conducted u/s 142(2A) of the Act. 8. The Assessee may add, alter, and substitute any other grounds to the Grounds of Appeal at any time before or at the time of hearing of Appeal”.

3.1. Ld. Counsel referring to the Paper Books filed, submitted that assessee was contending that LC discounting charges are paid to the banks and was part of the business expenditure and no part of the amount was diverted as advance to sister concerns, the fact of which was not contradicted by the Revenue. It was further submitted that AO in the post search assessments u/s. 153A has allowed similar claims in AYs. 2004-05 & 2005-06. It was submitted that the claim in AY. 2005-06 was to an extent of Rs. 1,30,69,614/- and the same amount was allowed in the post search scrutiny assessments. Further, it is also submitted that in AY. 2008-09, AO has allowed the amount and even though 263 proceedings were initiated in that year also, the Ld. CIT did not take up any issue on disallowance of financial charges. Ld. Counsel referred to the orders in the AY. 2008- 09, wherein AO after detailed examination of the claim has disallowed only an amount of Rs. 3,07,808/- pertaining to discounting charges paid to M/s. DPJ Viniyog Pvt. Ltd., on the reason that assessee could not furnish any explanation. It was further submitted the Ld.CIT initiated proceedings u/s. 263 on the reason that ‘MBB transactions’ stated in the details pertain to third party and AO was wrong in allowing the expenditure. The ITAT vide its order dt. 26-03-2014 in has considered that M/s. MBB transactions are not third party transactions but multi- branch bank transactions and on that basis, proceedings are held to be bad in law, thereby it was submitted that there was no disallowance of financial charges in either earlier years or in later years and disallowance of 50% of financial charges on adhoc basis for the impugned years is not correct.

4. It was further submitted that the Co-ordinate Bench in the case of M/s. Bartronics India Ltd., in dt. 31-05- 2012 held that when there is a special audit in the particular year and special auditor has not reported any disallowance, AO is not correct in disallowing the amount ignoring the special audit report. It was submitted that there was a special audit in AY. 2007-08 and so the disallowance in that year not recommended by the special auditor is also bad in law. It was fairly submitted that there is no special audit in AY. 2006-07 and the grounds pertaining to that, particularly Ground Nos. 6 & 7 does not apply.

5. Ld.DR, however, submitted that there is no resjudicata involved and each year has to be considered on its own. Since the AO and CIT(A) examined and confirmed the disallowance at 50%, the same is to be upheld.

6. We have considered the rival contentions and perused the documents placed on record. As far as the facts are concerned, it was submitted that financial charges arose only on discounting of LC’s, which was incurred for the purpose of business. Even though AO has noted that assessee is diverting funds for interest free advances to sister concerns, no such nexus was established nor details of funds utilised for non-business purposes were placed on record by the AO. He has adhocly disallowed 50% of the amount without establishing that funds are diverted for non-business purposes. As seen from the contentions of assessee, it is the submission that these financial charges have arisen only because of discounting of the bills and funds are utilised for payment to the creditors. This contention of assessee was neither examined by the AO nor by the CIT(A), even though assessee is insisting on this. As seen from the orders in earlier years and also in AY. 2008-09 and 2009-10, the financial charges are allowed as such in scrutiny proceedings, that too in post search proceedings in AYs. 2004-05 and 2005-06. This means that the financial charges are utilised for the purpose of business only. We are prima-facie satisfied that the financial charges cannot be disallowed. However, AO has not given any finding whether the funds are really diverted to sister concerns, out of the funds availed due to discounting of bills. Therefore, for the limited purpose of verification, the issue is restored to the file of the AO. In case assessee has not diverted any of the funds so obtained for advancing interest free to its sister concerns, no amount of financial charges should be disallowed. AO is directed to examine this aspect and if funds are not diverted as stated by assessee, allow the full claim of financial charges. Accordingly, the grounds on this issue are considered allowed for statistical purposes”.

Order pronounced in the open court on 4th February, 2021