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Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: SHRI PRADIP KUMAR KEDIA & SHRI MAHAVIR PRASAD
PER MAHAVIR PRASAD, JUDICIAL MEMBER
1. This appeal filed by the Assessee is directed against the order of the Ld. CIT(A)-7, Ahmedabad dated 21.10.2016 pertaining to A.Y. 2011-12 and following grounds have been taken:
2 . A.Y. 2011-12 1) The Ho'nable CIT-A without considering the provisions of section 40A(3) r.w.r. 6DD (g), facts of the matter, circumstances of the payment, location from which payments made, payment being made to the drivers delivering the goods and documents & justifications provided and nature of payment confirmed the disallowance of transportation expenses of Rs. 16,26,033/- and hence the same addition to total income be deleted now. 2) The Ho'nable CIT-A grossly neglected in interpretation of law and treatment as per the Accounting Standards and confirmed addition of interest income of Rs.16,86,286/- earned on temporary deposits with the banks during period of construction/acquisition of fixed assets as income of the year. The addition of Rs. 16,86,286/- so confirmed being contrary to the provisions of income tax law and 9W accounting treatment to be followed as per the Companies Act, 1956 be set aside now and not to be treated as income of the year and allowed be adjusted to the cost of respective fixed assets for which such deposits were made. 3) The Ho'nable CIT-A contrary to the provisions of section 43B confirmed disallowance of Employer PF contribution of Rs. 1,45,777/- though paid on or before the date of filling of return of income. As the said expenses are allowable as per the provision of section 43B your appellant pleads to allow the same now. 4) The Ho'nable CIT-A contrary to the provisions of section 115JB, provisions of section 14A and other applicable provisions of the Income Tax Act, 1961, the facts of the case and the judicial position in this regard confirmed disallowance U/s.14A amounting to Rs. 5,64,385/- to book profit U/s. 115JB and such addition being contrary to the provisions of section 115JB now be deleted from the book profit as computed by the Ld A.O.
Facts of the case are that the assessee is in the business of manufacturing of vitrified tiles & ceramics tiles and Trading of machinery & its parts . During the year under consideration, assessee has made cash payment various parties aggregating to Rs. 1626033/- in cash. Thereafter ld. A.O. issued a notice as to why payment exceeding Rs. 35,000/- cash as per Annexure-3 should not be disallowed u/s. 40A(3).
3. In its reply, assessee stated that cash payment above Rs. 35,000/- was made to different parties as commercial production, company was started from 3 . A.Y. 2011-12 01.03.2011. The company has started procuring material first time from various suppliers from the month of Jan-2011. This is being the first time transactions were made to various transporters for raw material freight. The company has also made cash payment to GTA as per the Service Tax Act and due to initial transaction, the company has made payment in cash as transporter and not accepting other than cash. But ld. A.O. was not agree with the contention of the assessee and made addition of Rs. 1626033/- u/s. 40A(3).
4. Thereafter assessee preferred first statutory appeal before the ld. CIT(A), ld. CIT(A) confirmed the action of the ld. A.O. holding that appellant could have made payments to the contractors by cheque since a perusal of the vouchers show that the payments have not been made to transport contractors.
5. Now assessee has come before us against the order of the lower authorities.
We have heard both the parties and gone through the relevant record. Assessee is in the business of manufacturing of tiles and trading ceramics tiles machinery and its parts etc. Assessee company started its activities in the month of Jan- 2011 and started production of tiles in the month of March-2011. In order to start a new business, one can make payment in cash because unknown persons generally do not trust.
And we draw support from the order of the Jurisdictional High Court in the matter of CIT vs. Shree Vallabh Glass Works Ltd. wherein in similar facts and circumstances where cash payment was made to transporter was allowed by the Hon’ble Gujarat High Court with following observation:
4 . A.Y. 2011-12 DCIT [68 TTJ 53], wherein the payment of freight charges in cash could not be disallowed u/s. 40A(3) as it is a general practice that transporters do not accept payments otherwise than in case. ... DCIT reported in 68 TTJ 53 by Delhi Bench of ITAT by holding as under: Payment of freight charges in cash could not be disallowed us. 40A(3) as it is a general practice that transporters do not accept payments otherwise than in cash. ... In view of above following the above decisions, cash payments in respect of freight charges are to be treated as covered under Rule 6DD(j) and the disallowance made are deleted.
Respectfully following the aforesaid Jurisdictional High Court judgment, we allow this ground of appeal of the assessee.
9. Now we come to ground no. 2 is against the addition of Rs. 16,86,286/- on account of difference between the income as per the books of accounts of the assessee and the TDS certificate. During the assessment proceedings, the ld. A.O. noted that the appellant had received an amount of Rs. 16,86,286/- as interest income from different banks which had not been disclosed by the assessee. In the interest of justice, we set aside this matter to ld. A.O. to grant appropriate relief to Assessee on furnishing satisfactory explanation by it towards inclusion of such income in other years as claimed.
But during the course of appellate proceedings, assessee given his submission as follows: "As stated above company had commenced commercial production for the first time from 01.03.2011and before that plan of the company was under construction/acquisition. During the construction period the company had made fixed deposits as security to open Line of Credit (LC) for procuring machineries for the limited purpose and period upto which such machineries were acquired and LC liabilities to bank honoured. The company had to keep such amount as FOR as 5 . A.Y. 2011-12 margin with the banks for the period and purposes specified above. During the financial year 2010-11, the banks have credited interest income of Rs. 13,04,383 on such FDRs and issued TDS certificates in Form 16A and such details were reflected in Form 26AS. However, the interest income of Rs. 8,78,703/- relating to and for the period for which machineries were under acquisition were considered as part of recovery of cost of finance for acquiring the respective fixed assets for which LC charges i.e. interest were incurred and debited to cost of acquisition of the assets and hence such interest income of Rs. 8,78,703/- was reduced from the interest expenses which were capitalised to fixed assets and such net interest expenses were capitalised to the fixed assets.
The Id AO grossly neglected in interpretation of law and treatment as per the Accounting Standards and considered interest income of Rs. 8,78,703/- on temporary deposits with the banks during period of construction/acquisition affixed assets as income of the year. The Ld A.O. also added interest balance interest income of Rs. 8,07,583/- even though the same included in the income .The addition of Rs. 16,86,286/- being contrary to the provisions of income tax law and accounting treatment to be followed as per the Companies Act, 1956 be set aside now and not to be treated as income of the year and allowed be adjusted to the cost of respective fixed assets for which such deposits were made,"
Ld. CIT(A) dismissed the ground of the assessee as assessee could not substantiate his claim with any documentary evidence.
We have heard both the parties and considered facts and circumstances of the case, the assessee did not find any documentary evidence in support of its contention before the lower authorities and even before us no documentary evidence was furnished by the assessee. Therefore, in the absence of 6 . A.Y. 2011-12 documentary proof in support of its contention of the assessee, we dismiss this ground of appeal.
13. Now we come to ground no. 3 relating to disallowance of Rs. 1,45,777/- on account of contribution to PF/ESIC.
14. Ld. CIT(A) rejected the claim of the assessee on the ground that assessee has not made any submission and in view of the Jurisdictional High Court judgment in the matter of CIT vs. GSRTC (2014) 41 taxmann.com 100 (Guj.) wherein it is held that the employees’ contribution to the Employees’ Provident Fund (EPF/Employees’ State Insurance Corporation (ESIC) deposited beyond the due date prescribed under section 36(1)(va) of the Income-tax Act would not be eligible for deduction under section 43B.
Even before us no details supported by documentary evidence filed by the assessee. Therefore, in the absence of any documentary evidence, we dismiss this ground of appeal.
16. Now we come ground no. 4 relating to addition of Rs. 5,64,385/- u/s. 14A of the Act whereas appellant contended that this amount could not be added while computing book profit u/s. 115JB.
17. And before the ld. CIT(A), assessee submitted as follows:
1. The company had not earned any exempt income from any source during the financial year 2010-11 (AY. 2011-12).
2. The company had introduced new capital ofRs. 21,,63,,85,330/- during the financial year 2010-11 relevant to A. Y. 2011-12. The paid up capital of the company as at 31st March, 2011 was Rs. 46,26,59,290/-while it was Rs. 24,62,73,960'/- as at 31st March, 2010.
7 . A.Y. 2011-12 3. The company had accumulated balance of Profits ofRs. 2,77,79,822 as at 31st March, 2011 and Rs. 2,62,32,125 as at 31st March, 2010.
4. The company had investments ofRs. 3,58,62,500/- as at 31st March, 2011 and Rs. 2,75,02,500/- as at 31st March, 2010.
The company had available interest free amounts of share capital of Rs. 46,26,59,290/- and accumulated balances of profits of Rs. 2,77,79,822/-besides interest free deposits by the directors of the appellant company. The total interest free funds available with the company without considering interest free unsecured loans by the directors was Rs. 49,04,39,112/-. Out of which the company had made investments ofRs. 3,58,62,500/- only, which is 7.31% of the interest free funds available with the company.
6. During the course of assessment proceedings, your appellant had explained to the Id AO that company had made investments in the shares out of interest free funds out of equity share capital and accumulated balance of profits. Your appellant had availed term loans and working capital loans from banks/financial institutions for business purposes. The Term loans/working capital loan accounts on which interest is paid are bank monitored account which do not allow transaction which have not been sanctioned by the banks while allowing credit facilities and hence such transaction are usually not possible from such accounts. The appellant company had availed terms loans from bank for purchase of fixed assets and working capital for its business operation and hence it was not possible that such fund could have been applied for other purposes i.e. for purchase of share. The summary of outstanding balances of loans availed vis-a- vis fixed assets purchased and working capital employed as at 31st March, 2011 has been given as under: Sr. No. Particulars Amount (Rs.)
1. Net Block of Fixed Assets 1,15,05,45,247
2. Net Working Capital 27,62,42,586
Total Application of Funds which was financed from Bank Loans
93,75,21,213 Loans from Banks on which interest was paid (Secured Loans)
Shortfall of Loans over Funds Applied for Purchase 48,92,66,620 of Assets and in Working Capital
So, in fact there were no surplus loans (interest bearing funds) available with the company which could have been applied for investment the shares. It is apparent from the above details that the balance amounts for purchase of fixed assets and working capital requirements were financed in various proportions at various 8 . A.Y. 2011-12 times as per the requirements from Share Capital, interest free loans by directors & their associates and accumulated profits of the company.
Additions Made on Assumption Basis without verifying the basic facts: The Id AO without factually going into the details of the transactions, submission made before him and apparent view of the financial statements simply assumed and without any basis held that there was intermingling of own funds and borrowed funds and hence borrowed funds were utilised for making investments in the shares. Even though if we accept that there was intermingling of funds, from the facts of the case and details given above it is very much clear that the company did not at all had any balance of interest bearing funds which it could have applied for making investments in the shares.
2. Judicial Position As to Section 14A vis-a-vis Income Other Than Section 115JB income:
Your appellant had shortfall of interest bearing loans over assets applied in the business and part was financed from interest free funds as discussed above and surplus of interest free funds which were applied for making investment in the shares. Where there was no application of interest paid funds for investments in shares, the question of applying provisions of section 14A r.w.r. 8D to such transactions does not arise. If there are funds available both own and borrowed, and if the own funds are sufficient to meet the amount of investment yielding the exempt income, then a presumption would arise that the investment was made out of the own funds available with the assessee
The Ho'nable ITAT Mumbai Bench 'B' in case of Deputy Commissioner of Income- tax v. Mahendra Brothers Exports (P.) Ltd Mahendra Brothers Exports (P.) Ltd has held that where that assessee hadsurplus funds, it could be safely presumed that investments had been made from surplus funds even though there is common pool of funds and composite books of account and hence no disallowance under section 14A read with rule 8D(2)(ii)~ could be made.
But ld. CIT(A) was not convinced with the contention of the assessee and confirmed the addition of Rs. 5,64,385/-.
We have heard both the parties and considered facts and circumstances of the case. As we can see from the impugned order, assessee has contended that it has not earned any exempt income, therefore, provisions of section 14A has no applicability at the threshold. In view of the above, we direct A.O. to delete 9 . A.Y. 2011-12 addition of Rs. 5,64,385/-. Thus, this ground of appeal of the assessee is allowed.
In the result, appeal filed by the Assessee is partly allowed.
Order pronounced in Open Court on 29 - 11- 2019