DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(2), HYDERABAD vs. COVALENT LABORATORIES PVT. LTD., , HYDERABAD

Ground Nos. 1 to 4 are related to the action of the ld. CIT(A) in deleting the disallowance of R&D Expenditure of Rs. 1,10,48,321/- by accepting the additional evidence in the form of bills for consumables submitted by the assessee for the first time before the CIT(A). Brief facts of the case are that during the assessment proceedings, the AO found that the assessee had debited in P&L Account R&D expenses to the extent of Rs. 1,10,48,321/-. Since the assessee failed to submit the bills/vouchers etc. pertaining to the said R&D expenses, the AO made the addition of the said amount of Rs. 1,10,48,321/-.

Against the order of ld. CIT(A), the revenue is in appeal before us.

Before us, the ld. DR submitted that the ld. CIT(A) has accepted the additional evidence in the form of bills, vouchers for consumables, which have been filed for the first time before the ld. CIT(A). He further submitted that the survey u/s 133A was conducted in the premises of the assessee and statements of the Sr. Executives were recorded wherein they had stated that no separate expenditure was incurred for acquiring material for R&D work and the entire raw materials required for R&D were procured from the regular purchases for production. He further submitted

On the other hand, ld. AR of the assessee supported the order of the ld. CIT(A).

We have considered the rival submissions and perused the material placed on record. The ld. CIT(A) deleted the disallowance made by the AO based on the additional evidence produced by the assessee. We find that the additional evidence has placed by the assessee for the first time before the ld. CIT(A) and the ld. CIT(A) has decided the addition without calling for remand report from the AO and without making any verification of the expenditure independently. Therefore, in the interest of justice, we are of the view that the issue is to be remitted back to the file of the AO and accordingly, we remit the issue back to the file of the AO with a direction to reexamine the issue and decide the same on merits in accordance with law after providing reasonable opportunity of being heard to the assessee. Thus, ground Nos. 1 to 4 are treated as allowed for statistical purposes.

The AO found that the assessee had accounted for the sales of Rs. 74,90,49,064/- through M/s ABS Mercantile Pvt. Ltd. (ABS in short) When the confirmation u/s 133(6) was called from the ABS, it was found that the sales effected was Rs. 94.70 crores as against 74.90 reported by the assessee. When the AO asked the assessee to explain the said difference, the assessee furnished the reconciliation statement reducing the sales of Rs.14,07,65,059/- stated to be relating to M/s Adley Formulation, cheques cancelled for the amount of Rs.2,14,66,883/- and also opening consignement stock of Rs.4,99,05,220/-. On verification the AO found that M/s Adley Formulation sales were not reflected in the Statement of sales for the AY 2013-14 and the amount representing cheques were not accounted as per the system of accounting followed by the assessee and the opening balance of consignment stock was not clarified as the information received from the ABS u/s 133(6) does not contain the same. Therefore the AO rejected the explanation of the assessee and made the addition of Rs. 19,80,08,010/-. Against which, the assessee went on appeal before the ld. CIT(A).

We have heard the rival contentions and perused the material placed on record. In the instant case, the AO made the addition of Rs. 19,80,08,010/- on account of under reporting of consignment sales. As per the information received from the consignee, the sales were Rs. 94.70 crores as against the admitted sales of Rs. 74.90 crores. During the assessment proceedings, the AO gave opportunity to the assessee to file reconciliation statement and on perusal of the reconciliation statement, the AO found the discrepancies with regard to sales made to M/s Adley Formulation, opening stock of consignment and the cancellation of cheques etc. The ld. CIT(A) merely relied on the reconciliation statement without verifying the same with the books of account representing the cheques cancelled. The ld. DR contended that the opening balance claimed by the assessee was not reported by the ABS in it’s reply and with regard to the cancellation of cheques and the stocks sold were required to be verified. Similarly with regard to the sales of M/s Adley Formulation the AO found that he same was not reflected

Ground Nos. 8 & 9 are directed against the action of the CIT(A) in deleting the addition of Rs. 5,06,343/- made by the AO on account of disallowance of expenditure u/s 14A of the Act.

We have heard the submissions of both the parties and perused the material placed on record. There was no dispute that in the impugned AY, the assessee did not earn any exempt income. When the assessee has not earned any exempt income and there can be no disallowance under section 14A of the Act. The Hon’ble Delhi High Court in the case of Cheminvest Ltd., reported in (2015) 378 ITR 33 (Del.) has held that section 14A will not apply where no exempt income is received or receivable during the relevant assessment year. Similar view is taken by this Tribunal in the case of Prathista Industries Ltd., Secunderabad in ITA No. 1302/hyd/2015

Ground Nos. 10 to 12 are directed against the action of CIT(A) in deleting the addition of Rs. 1,35,65,645/- made by the AO on account of disallowance of interest expenditure attributable interest free advances made by the assessee to the group concerns i.e. SV’s Remedies Ltd.

The contention of the revenue is that the assessee has advanced interest free funds to SV’s Remedies Ltd. out of interest bearing borrowed funds, hence, the disallowance needs to be made u/s 36(1)(iii) of the Act.

The contention of the ld. AR is that the assessee is having interest free funds, out of which, the assessee has advanced the sums and therefore, no disallowance is called for.

We have considered the rival submissions and perused the material on record. No information was placed before us to substantiate, whether the assessee has advanced interest free funds or interest bearing borrowed funds to it’s group concerns. Hence, this issue also needs verification at the end of the AO with regard to the availability of interest free funds and both the 8 ITA.Nos. 1022 & 863/Hyd/2017 Covalent Laboratories Pvt. Ltd., Hyd.. counsels have agreed to remit the matter back to the fie of the AO to verify the facts. Accordingly the issue is remitted back to the file of the AO with a direction to examine whether the assessee has made advances out of interest free funds or interest bearing funds and decide the issue afresh on merits after giving opportunity to the assessee. The grounds raised on this issue are treated as allowed for statistical purposes.

In the result, appeal of the revenue is partly allowed for statistical purposes.

The assessee has raised 6 grounds in its appeal, out of which ground Nos. 1 & 6 are general in nature, which need no adjudication.

Ground No. 2 is related to the addition of Rs. 18,55,71,506/- on account of difference of amount between the books of account of the assessee and the books of ABS Mercantile (P) Ltd. Ground No. 3 is related to sustaining the addition of Rs. 97,94,743/- made by the AO with regard to excess claim of purchases.

The AO made the addition of Rs. 18,55,71,506/- after calling for information u/s 133(6) form M/s ABS Mercantile Pvt. Ltd. wherein the ABS confirmed payables at Rs. 4,70,80,629/- as against Rs. 23,26,52,135/- reported by the assessee in the balance sheet. On calling for explanation, the assessee submitted the account copy of ABS in the books of the assessee and made certain adjustment to 9 ITA.Nos. 1022 & 863/Hyd/2017 Covalent Laboratories Pvt. Ltd., Hyd.. tally the balance in the books of the assessee with that of ABS. However no material was placed by the assessee to support the adjustments. Therefore the AO made the addition of Rs.18,55,71,506/- in hands of the assessee.

We have heard both the parties and perused the material on record. In this case, the AO collected information u/s 133(6) of the Act and as per the information received by the AO, the outstanding shown by the ABS Mercantile Pvt. Ltd. was Rs. 4,70,80,629/- whereas in the books of account of the assessee, it was shown at Rs. 23,26,52,135/-. Thus, there was a difference of Rs. 18,55,71,506/-. Though, the assessee filed account copy of the assessee in the books of M/s ABS Mercantile Pvt. Ltd., the assessee has not furnished the supporting evidences before the lower authorities. Since the entries are made in the books of accounts the claim of the assessee cannot be brushed aside merely because the assessee has not submitted the supporting documents. In this case the assessee is maintaining the 10 ITA.Nos. 1022 & 863/Hyd/2017 Covalent Laboratories Pvt. Ltd., Hyd.. regular books of accounts which were produced before the AO. The assessee also duty bound to explain the discrepancies with the books of accounts and the supporting documents. The correctness of the entries made in the ABS and the reconciliation submitted by the assessee needs verification. It appears to us that there were some issues which need to be verified relating to the accounts of ABS. As discussed in Paras 8 to 10 of this order, the AO made the addition of Rs. 19.80 crores due to under reporting of sales in respect of ABS. We are of the opinion that the account of ABS needs to be verified in detail to ascertain the factual position. Therefore we remit the matter back to the file of AO with a direction to cause necessary enquiries with M/s ABS Mercantile Pvt Ltd and decide the issue afresh on merits. Needless to say that opportunity should be given to the assessee.

The issue in ground No. 3 is with regard to the differences in purchases debited to the Profit and Loss account and the information received from the vendors. The difference is as under:

The ld. AR submitted before us that there was no difference in purchases and, thus, the addition of Rs. 97.94 lakhs is unwarranted. The Ld.AR further submitted that the differences were due to non- consideration of returned goods, credit notes and the cheques returned. The Ld. AR stated that though he has submitted the information before the lower authorities the same was not considered and if the opportunity is given the assessee would be able to establish the correctness of the purchases debited to the P&L account. He further submitted that all the payments were made through Banking Channels. He, therefore, requested to remit the matter back to the file of the AO, for which ld. DR did not express any objection.

We have carefully considered the submission of the assessee and find merit in the argument of the Ld.AR. In this regard there is no dispute that the assessee filed reconciliation statement before the Ld. CIT(A) and the Ld. CIT(A) rejected the assessee’s claim for want of 12 ITA.Nos. 1022 & 863/Hyd/2017 Covalent Laboratories Pvt. Ltd., Hyd.. cross verifications. The Ld. CIT(A) ought have verified the information or should have called for the remand report from the AO. It is unjustified to reject the claim without making proper verification. Therefore we, remit the issue back to the file of the AO with a direction make necessary verifications and cross verifications and decide the issue afresh on merits after providing reasonable opportunity of being heard to the assessee. Thus, ground Nos. 2 & 3 are treated as allowed for statistical purposes.

Ground No. 4 is related to disallowance of commission expenses of Rs. 1,75,06,656/- paid to M/s Feroz Tejarat Co.

The AO during the survey proceedings, found that the company had paid huge commission to one Mr. Feroz Tejarath, who is based at overseas for AY 2012-13 to AY 2015-16. It was further noticed that the complete amount of commission claimed on this account, for all these years was shown as payable on the date of survey. When the assessee was asked to provide documentary evidence in support of the genuineness of the commission expenses claimed, the assessee failed to provide the relevant documentary evidence despite sufficient opportunities were given. The AO, therefore, disallowance said amount of Rs. 1,75,06,656/-, which was confirmed by the CIT(A). Aggrieved, the assessee is in appeal before us.

We have heard the submissions of both the parties and perused the material on record. Before the ld. CIT(A), the assessee submitted that Feroz Tejarath is the sales agent to book orders from Alborz Bulk

Considering the submissions made by the ld. AR and the fact that the evidences were placed by the assessee before the Ld. CIT(A) for the first time, we are inclined to remit this issue back to the file of the AO with a direction to examine the correctness and genuineness

Ground No.5 is regarding levy of interest u/s 234B and 234C of the Act. Charging interest under these sections is consequential in nature, the AO is directed accordingly.

In the result, appeal of the assessee is allowed for statistical purposes.

To sum up, appeal of the revenue in is allowed for statistical purposes.