K.M RE-ROLLS PVT. LTD.,,JALNA vs. INCOME-TAX OFFICER,, JALNA

This appeal was taken up for hearing for the first time on 21- 06-2018, when the assessee was not represented. The matter has been adjourned from time to time on several occasions, but the assessee has chosen not to be present. Finally, the matter came to be fixed for hearing today. Neither the assessee is represented nor any adjournment application has been placed on record. We are therefore, disposing off the appeal ex-parte qua the assessee on merits.

The first ground is against the confirmation of disallowance of interest on advances amounting to Rs.4,81,775. Briefly stated, the facts of the case are that the assessee is a Private Limited company engaged in the manufacture of M.S. Bars and C.T.D. Bars. A return was filed declaring total income of Rs.8,67,440. During the course of the assessment proceedings, the Assessing Officer (AO) observed that the assessee advanced money to Om Trading Company and others to the extent of Rs.55,61,979/-. The assessee had paid interest to the bank amounting to Rs.14,54,805/-. On being called upon as to why the proportionate interest should not be disallowed, the assessee did not furnish any reply. The AO computed disallowance of interest @ 13% amounting to Rs.7,23,057. The ld. CIT(A), after considering the assessee‟s submissions advanced before him, restricted the disallowance to Rs.4,81,775, against which, the assessee is in appeal before the Tribunal.

We have heard the ld. DR through virtual court and gone through the relevant material on record. It is seen from the impugned order that the assessee categorically stated before the ld. CIT(A) that the advances of Rs.55,61,979, on which the AO computed disallowance of interest, were made for business purpose. The ld. CIT(A) has recorded in para 7 of the impugned order that the assessee made sales of Rs.57,56,015 to Om Trading company on various dates during the year, out of which a sum of Rs.18,56,015 was receivable at the end of the year. Similar position was shown in respect of other parties about having made sales, from which certain amounts were outstanding at the end of the year. The ld. CIT(A) did not accept the assessee‟s contention by observing that “however, no corroborative evidences have been filed by the appellant” in respect of the advances. We are unable to appreciate the view point of the ld. CIT(A). Here, the assessee is contending that the amounts were recoverable out of sales made during the year. Once sales have been stated to be made, there could have been no further evidence to corroborate the same, unless the contention of the assessee of having made sales was faulted with. The ld. CIT(A) simply rejected the contention of having made sales to these parties without showing as to how the same was not correct. Once it is held that the amount was outstanding out of sales made, the business purpose is automatically established and there can be no question of disallowance in respect of outstanding amount for business purpose. We therefore, order to delete the addition.

Ground 2 of the appeal is against the confirmation of disallowance of Rs.26,33,125 on account of rate difference. During the course of the assessment proceedings, the AO observed that the assessee purchased entire raw material in the form of Ingots/billets from its sister concern, viz., Mauli Steels Pvt. Ltd., Jalna. The assessee was found to have passed a journal entry on 31-03-2011 on account of rate difference at Rs.26,33,125 against the sales made by Mauli Steels Pvt. Ltd. Thereafter, the AO recorded that the assessee could not furnish any explanation and details substantiating the claim of rate difference leading to disallowance of Rs.26,33,125. It was also held that it was a case of diversion of income in the hands of its sister concern, being an entity, which was suffering losses, with an overall intention to reduce burden of taxes. The ld. CIT(A) affirmed the disallowance.

Having heard the ld. DR and gone through the relevant material on record, it is observed that the assessee admitted claim of Mauli Steels Pvt. Ltd., its sister concern, against the rate difference for sum of Rs.26,33,125/-. It can be seen from the impugned order that the same AO had assessed the case of Mauli Steels Pvt. Ltd., Jalna for the same assessment year and accepted the transaction of Rs.26.33 lacs as income shown in its Profit & Loss Account. It is further a matter of record as contended before the ld. CIT(A) that M/s. Mauli Steels Pvt. Ltd. did not file any loss return. Rather, it was a case of filing return declaring total income at Rs.8,67,440. In that view of the matter, there could have been no rationale for the assessee to book expenses in its accounts and the corresponding income in the hands of Mauli Steels Pvt. Ltd. The assessee further made out a case before the ld. CIT(A) that long credit period was offered to it by the supplier, for which some higher rate was charged. The assessee purchased total quantity of M.S. Ingots/billets of 6821.610 MT from M/s. Mauli Steels Pvt. Ltd., Jalna for Rs.16.45 crores, giving average rate of Rs.24,121 per MT. It was only for the purchases made during the period 01- 10-2010 to 31-03-2011 totaling 2633.12 per MT that the rate difference at Rs.1,000 per MT was debited totaling Rs.26.33 lacs. Such rate difference was worked out on the basis of excess credit period allowed than the normal payment of one week. Considering the fact that the assessee uncontrovertedly contended to have availed excess credit period from Mauli Steels Pvt. Ltd. during the last six months of the financial year in contrast to normal credit period of one week during the first half, the contention of assessee for excess small payment for purchases made during such period cannot be rejected.

It is further relevant to note that the authorities below have tried to make out a case that the assessee made purchases at excessive rate from its sister concern. Impliedly, the provisions of section 40A(2) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) have been invoked, though specific reference to the same is absent. If the authorities were satisfied that the assessee made purchases at excessive rate, then it was upon them to bring on record some material to indicate that the purchase rate was excessive in comparison with some comparable case or the market rate of the goods purchased. As nothing has been done in this regard, we are of the considered opinion that the assessee deserves to succeed on this ground. This ground is allowed.

Ground 3 is against confirmation of addition of Rs.69,55,384. The facts apropos this ground are that the AO found a sum of Rs.69,55,385 as outstanding under the head „Sundry Creditors‟ in the name of Bajrang Steels on and from the A.Y. 2005-06. Invoking the provisions of section 41(1) of the Act, the AO made disallowance of Rs.69.55 lacs on the ground that the assessee could not show that the liability was existing. The ld. CIT(A) echoed the assessment order on this point.

Having heard the ld. DR and gone through the relevant material on record, it is observed from the impugned order that the sum of Rs.69.55 lacs was shown as payable to Bajrang Steels. The assessee contended before the ld. CIT(A) that Bajrang Steels was a proprietorship concern of Shri Mukesh Gupta, a director of the assessee. On further query from the ld. CIT(A), assessee submitted that the account of Bajrang Steels Trading was squared up by journal entries passed during the years relevant to the A.Ys. 2012-13, 2013-14 and 2014-15. The assessee further detailed the narration of the parties who were allowed corresponding credit against the debit to the account of Bajrang Steels. It can be seen from the impugned order that the assessee specifically stated that sum of Rs.69,55,385 was unsecured loan. Such a finding has been recorded at page 26 of impugned order, which has not been controverted by the ld. CIT(A). If it was a case of unsecured loans coming from the A.Y. 2005-06 onwards, there could have been no addition u/s 68 of the Act in the year under consideration, namely, A.Y. 2011-12. If we go with the AO‟s point of view that the amount of Rs.69.55 lacs was on account of sundry creditors, then section 41(1) was attracted, but still no addition could have been made because the liability was existing, which was discharged in later years by means to passing journal entries. Viewed from any angle, the addition of Rs.69.55 lacs cannot be sustained and the same is directed to be deleted. 10. The next ground is against the enhancement of disallowance of Rs.11,12,149 by the AO to Rs.17,34,800 by the ld. CIT(A). During the course of assessment proceedings, the AO called for information u/s 133(6) of the Act from Sagar Trading Company, Surat and Vaishnav Steels Pvt. Ltd., Jalna. On tallying their accounts, the AO found that there was difference to the extent of Rs.2,42,658 and Rs.8,69,491, totaling to Rs.11,12,149. The AO made the disallowance. The ld. CIT(A) found that the difference was, in fact, to the tune of Rs.17,34,800, for which the enhancement was made.

Having heard the ld. DR and gone through the relevant material on record, it is seen from page 29 onwards of the impugned order that the assessee submitted that the difference was because of accounting mistakes committed by the other parties and not any lapse on the part of assessee company. Simply because there is a difference in closing balances of a creditor in the books of the assessee and the assessee‟s account in the books of the creditor, it cannot, automatically, lead to the addition for the differential amount. One needs to verify the transaction for the year. It is only if certain transactions for the year have been suppressed/overstated by the assessee that the enquiry initiates in the direction of disallowance. Such a difference is the beginning and not the end of the road for making any addition. If the difference arises only on account of opening balances and the transactions for the year tally, there can be no addition to the income of the assessee for the year on that score. Since such necessary details are not available on record, we deem it fit to set aside the impugned order on this issue and restore the matter to the file of AO. The assessee is directed to produce proper reconciliation of accounts before the AO for enabling him to reach a positive conclusion about the sustainability or otherwise of the addition.

Next ground against charging of interest is consequential.

In the result, the appeal is partly allowed. Order pronounced in the open Court on 25th August, 2020.