RAYMON PATEL GELATINE PVT.LTD.,,BARODA vs. THE ACIT.,CIRCLE-4,, BARODA

These two appeals pertain to the same assessee, are interconnected and were heard together. As a matter of convenience, therefore, both of theses appeals are being disposed of by way of this consolidated order.

By way of this appeal, the assessee appellant has challenged correctness of the order dated 18th November 2008 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2004-05.

In the first ground of appeal, the assessee has raised the following grievance:

The assessee before us is engaged in the business of manufacturing and production of ossein gelatine and dicalcium phosphate, apart from being engaged in processing and export of processed marine products. During the course of scrutiny assessment proceedings, it was noticed that the capitalized the work in progress in respect of new plant and building as Vasad, aggregating to Rs 11,51,83,344, on the ground that it was not put to use. It was in this backdrop that the assessee was required to disclose whether any interest was paid in respect of the capital work in progress. The idea essentially was to disallow the deduction of such interest as revenue expenditure and to add the same to capitalization. The assessee, however, pointed out that the assessee had sufficient interest free funds, and, as such, no part of the interest payments could be attributed to the investment in the work in progress. The detailed submissions were also made to demonstrate that the borrowed funds were not used in the work in progress and, as such, no part of the interest payments are required to be capitalized. This plea was rejected by the Assessing Officer. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) also rejected the plea of the assessee, and observed as follows:

The assessee is aggrieved and is in further appeal before us.

We have heard the rival contentions, perused the material on record and considered facts of the case in the light of the applicable legal position.

We find that the impugned disallowance is based on the presumption, and without any cogent material to support such presumption, that all the unsecured loans are raised for the purpose of making investments in the capital work in progress. This presumption clearly contradicts with CIT(A)’s own finding, as reproduced above, to the effect that “the appellant’s funds are mixed and from the common funds investments are made in CWIP as well as inventory and debtors etc”. If the funds are mixed funds, as is the finding of the CIT(A), there cannot be any basis for the conclusion, as has been eventually adopted by him, that entire unsecured loans are used for the purpose of investment in CWIP (i.e. capital work in progress). It is also not in dispute, and the financial statements filed by the assessee clearly re-establish that, that the investments in CWIP are far in excess of the interest free funds available to the assessee. In such circumstances, in the light of Hon’ble jurisdictional High Court’s judgment in the case of CIT Vs Raghuvir Synthetics Ltd (354 ITR 222) and Hon’ble Bombay High Court’s judgment in the case of CIT Vs Reliance Utilities & Power Ltd (313 ITR 340), the presumption has to be that the investments are made out of interest free funds. That is the approach consistently taken by various coordinate

Ground no. 1 is thus allowed.

In ground nos. 2, 3 and 4, which we will take up together and which deal with the adhoc disallowances, the assessee has raised the following grievances:

All the above disallowances are purely on adhoc basis and on the ground that despite specific requisitions, all the bills and vouchers were not produced, that complete examination of these expenses by the AO was not possible, and that element of personal expenses cannot be ruled out. In appeal, having noted the contentions of the assessee that all the details were duly produced, the CIT(A) confirmed, rather summarily, stand of the Assessing Officer. The assessee is not satisfied and is in further appeal before us.

Having heard the rival contentions and having perused the material on record, we are of the considered view that the impugned disallowance, which are purely adhoc in nature, are simply based on surmises and conjectures and cannot, therefore, meet any judicial approval. The stand of the assessee that all the details were duly produced

Ground nos. 2, 3 and 4 are thus allowed.

In ground no. 5, the assessee has raised the following grievance:

So far as this grievance of the assessee is concerned, the Assessing Officer disallowed 20% of the labour charges on the ground that “complete check over expenses” was not possible. When the disallowance was challenged before the CIT(A) and it was contended that the “allegation of the Assessing Officer was factually incorrect and contrary to the evidence available on record”, the CIT(A) simply brushed aside the argument and proceeded to scale down the disallowance to 10% by observing that “since entire payment is made by cash to 6-7 persons and vouchers were not properly maintained, the disallowance was justified” in principle. The assessee is not satisfied with the partial relief so given and is in further appeal before us.

We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

In our considered view, the reasons for upholding the disallowance are rather vague and proceed on sweeping generalizations. The allowances are purely adhoc in nature and no specific legally sustainable defects have been pointed out and the stand of the assessee that all the details were duly produced before the Assessing Officer, and that there is no requisition which remains to be complied with, has simply been brushed aside. We have also noted that similar disallowances have been deleted in the earlier years as well. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee and delete the impugned disallowance in entirety.

Ground no. 5 is also thus allowed.

In ground no. 6, the grievance raised by the assessee is as follows:

So far as this grievance of the assessee is concerned, learned representatives fairly agree that this issue is required to be restored to the file of the Assessing Officer for fresh adjudication with the benefit of direct decisions from Hon’ble Supreme Court in the case of ACG Associated Capsules Ltd Vs CIT (343 ITR 89) and Topman Exports Vs CIT (342 ITR 49). That is precisely what was done by the Tribunal in the earlier assessment years. We accept the plea and remit the matter to the file of the Assessing Officer for fresh adjudication as such. Ordered, accordingly.

Ground no. 6 is thus allowed for statistical purposes in the terms indicated above.

In the result, the appeal is partly allowed in the terms indicated above.

By way of this appeal, the assessee appellant has challenged correctness of the order dated 10th January 2012 passed by the CIT(A) in the matter of penalty under section 271(1)(c) of the Income Tax Act, 1961, for the assessment year 2004- 05.

The impugned penalty is levied with respect to disallowance of interest of Rs 40,65,595. This disallowance, however, stands deleted in the light of our order on ITA No. 278/Ahd/2009 set out earlier in this consolidated order. As the quantum itself stands deleted, the very foundation of the impugned penalty ceases to hold good in law. We, therefore, delete the impugned penalty of Rs 14,58,531.

In the result, this appeal is allowed.

To sum up, the ITA No. 278/Ahd/ 2009 is partly allowed and the ITA No. 806/Ahd/12 is allowed. Pronounced in the open court today on the 29th day of January, 2019.