DCIT, CIRCLE- 4(1)(1), AHMEDABAD, VEJALPUR, AHMEDABAD vs. SHREE SARAS SPICES AND FOOD PRIVATE LIMITED, S. G. HIGHWAY CROSS ROAD

The A.O. noted from the audited accounts that the respondent/assessee had claimed interest expenses of Rs.41,37,400/-. The A.O. also noted from the details submitted during assessment that the assessee had given long-term loans and advances of Rs.23,75,539/- to various persons without charging any interest thereon.

The Ld. CIT(A)/NFAC noted from the facts submitted by the assessee that the amounts treated as loans and advances by the A.O. were in fact regular advances as part of business activity. The A.O. was therefore directed to delete the disallowance.

Before us, the Ld. CIT-DR Shri Kiran Unavekar, placed strong reliance on the assessment order to contend that the disallowance u/s 36(1)(iii) was justified.

Shri Mehul K. Patel, Advocate appearing for the assessee reiterated the submission that the advances were in connection with regular business activity and not loans. He submitted copy of the Ledger account of M/s. Umiya Tea Depo, which shows that the amount of Rs.17,71,414/- stood as opening balance as on 01.04.2012. The advance, it was stated, was given for purchase of goods in a prior year and no loan/advance was given to this party during the year. No details, however, have been furnished for the balance amount treated as interest-free loans and advances by the A.O.

After considering the facts and submissions, we are of the view that the advance given to M/s. Umiya Tea Depo, Rs.17,71,414/, in a prior financial year has been rightly excluded by the Ld. CIT(A) from the interest-free loans and advances. We also note that the A.O. had not correctly applied Section 36(1)(iii) of the Act. That provision enables deduction for the interest paid in respect of capital borrowed for the purposes of business or profession. The A.O. has brought nothing on record to establish a nexus between the interest bearing loans and the interest free advances. The A.O. has also not alleged that the interest bearing loans were used by the assessee for non-business purposes.

The A.O. made an addition of Rs.26,54,130/- to the closing stock on the ground that VAT expense ought to be added to the value of closing stock in accordance with Section 145A of the Act.

Before the Ld. CIT(A), the assessee submitted as under: “The VAT was to be included in the value of opening as well as closing stock as done by the Assessing Officer in accordance with the provisions of section 145A, the same should be done even in respect of purchases and sales and if it is so done, there would be no impact on profit and loss of the year under consideration.

The Assessing Officer found from the financial statement of the assessee that an aggregate of Rs.25,61,03,538/- appearing as creditors in the books are very old entries. The A.O. called for details of all the creditors and made enquiries in respect of one creditor M/s. Young and Grow Marketing (I) Pvt. Ltd. The letter sent to this creditor, seeking information required u/s. 133(6), returned unserved. Based on this one attempt to make an enquiry from this creditor, the A.O. concluded that none of the creditors appearing in the books are genuine and the liability appearing in the books of the assessee was considered as cessation of liability liable to be added u/s 41(1) of the Act.

While considering the appeal against this addition, Ld. CIT(A) examined the assessee’s contentions and the evidence furnished in detail and noted, in the impugned appellate order, that the assessee company had continued dealings with some of the creditors whereas the credit balances of the other creditors including M/s. Young and Grow Marketing (I) Pvt. Ltd. were settled by way of adjustment against certain debtors in the succeeding financial year relevant to assessment year 2014- 15. This adjustment was made with the consent of the creditors and debtors. The details of such consent and confirmation was produced before and examined by Ld. CIT(A).

Before Ld. CIT(A), the assessee had relied upon decisions of the Hon’ble Gujarat High Court in the case of CIT-III v. Bhogilal Ramjibhai Atara [2014] 43 taxmann.com 55 (Gujarat) and in the case of PCIT v. Dharmendra Jagdishbhai Dubal, Tax Appeal No. 910 of 2017.

The Ld. CIT(A) concluded that on facts, it was evident that the assessee did not make adequate inquiries, apart from sending one letter to M/s. Young and Grow Marketing (I) Pvt. Ltd., and there was no cessation or remission of liability in favour of the assessee during the year under 5 appeal. The Ld. CIT(A) also noted that with some of the creditors such as M/s. SDP Industries Pvt. Ltd. (Ahmedabad Branch) and SDP Industries Pvt. Ltd., (Mumbai Branch) there was continuous transaction, so there was no question of cessation of liability. The accounts of other creditors such as M/s. DMM Marketing Pvt. Ltd. and M/s. Young and Grow Marketing (I) Pvt. Ltd have been settled/adjusted against debtors in the next year. On this basis, the addition made u/s. 41(1) was deleted.

Assailing this order, the Ld. CIT-DR placed strong reliance on the assessment order. The Counsel for the assessee reiterated the facts as narrated in the order of the Ld. CIT(A) and also placed reliance upon the decisions of the Hon’ble Gujarat High Court.

On perusal of the facts, we notice that the Ld. CIT(A) has correctly appreciated and recorded the fact that some of the creditors, there was continuity of transactions and no cessation of liability, while two other creditors were settled in the next year by way of adjustment with some of the outstanding debtors. There was, thus, no cessation of liability of any of these creditors in the year under appeal. Further, it is to be noted that u/s. 41(1) of the Act an addition can be made only when an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure of trading liability incurred by the assessee and subsequently, there is cessation of that liability. Nothing has been brought on record by the Assessing Officer to show that the amount appearing as creditors has ever been claimed and allowed as an allowance or deduction in any preceding assessment years. In view of the aforesaid, we are inclined not to interfere with the order of the Ld. CIT(A) on this issue.

Ground of appeal No. 3 is dismissed. 6

In the result, the appeal filed by the Revenue is dismissed.