C I T vs. M/S NUCHEM LTD.

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of decision: 17.9.2015 Commissioner of Income Tax, Faridabad ……Appellant

M/s Nuchem Limited …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE RAMENDRA JAIN

Ajay Kumar Mittal, J.

“80. On a careful consideration of the rival submissions and the material on record, we are satisfied that the CIT(Appeals) did not act unreasonably in deleting the addition. Firstly, when the overall gross profit rate has shown a consistent or even a better trend for the year in appeal – it is better by more than 2% compared to the earlier two years, there was no justification for tampering with the same by enhancing the gross profit rate of the MDF Division by 2%. The Assessing Officer seems to have overlooked that this is the first year of the Tohana Division and in the very first year, an impressive rate of gross profit has been shown by the assessee. We GURBAX SINGH 2015.11.02 16:46 integrity of this document High Court Chandigarh are doubtful about the correctness of the action of the Assessing Officer in tampering with the gross profit rate of a particular division of the assessee's business in order to make a trading addition. Be that as it may, even otherwise there was no justification for the addition. The records maintained by the assessee were accepted by the excise and sales tax authorities. The assessee did maintain a stock register in respect of the MDF Division which was also produced for the Assessing Officer's verification but his objection was that a stock register showing consumption of raw material was not produced. The total consumption of the raw material has been given in the financial statements which are audited and these figures have not been questioned at all. As regards the objection that higher figures of stock were given to the Bank,it is seen that the figures of cotton stalks given to the bank were actually less than the figure shown in the books. In respect of the other stock, the assessee's submission before the Assessing Officer that the figures given to the bank were based on theoretical assumptions and they were substituted by actual figures available to the assessee later has not been doubted and there is no evidence to show that the assessee did not make such corrections. Even before us, such a stand was not taken. As regards the objection of the Assessing Officer that the moisture content shown by the assessee in the logs of eucalyptus tree was not correct and that the assessee ought to have put in place a system by which the moisture content can be measured not only when the logs arrive in stock but also when they are fed into the plant for being sown, we can only say that the manner in which the manufacturing activity should be carried out must be left to the assessee who is the best judge in such matters; in fact the assessee pointed out that how impractical it would be to stop the production process merely to verify the moisture content of the logs at the point of time when they are fed into the plant to satisfy the curiosity of the Assessing Officer or to comply with his unreasonable direction. It seems to us that the assessee has a valid GURBAX SINGH 2015.11.02 16:46 integrity of this document High Court Chandigarh point here. As regards the use of cotton stalks, the assessee had a technical problem when they got entangled in the machinery and for a temporary period, the assessee switched over to the use of eucalyptus wood but it could not be continued for long because it is costlier than the cotton stalks. Had the assessee continued to use eucalyptus wood in the place of cotton stalks, perhaps the gross profit rate would have been lower. It is also true that the Assessing Officer had not pointed out any suppression of sales or inflation of expenses. For these reasons, we are of the view that the Assessing Officer was not justified in not accepting the results of the MDF Division. We confirm the decision of the CIT (Appeals) and dismiss the ground.” Learned counsel for the revenue has not been able to point out any error in the concurrent findings recorded by the CIT(A) and the Tribunal which are based on appreciation of material on record. Thus, no ground for interference by this Court is called for in the said findings.

The assessee had given interest free advances to sister concerns out of interest bearing borrowings. The Assessing officer disallowed ` 9,41,077/- which consisted of ` 4,43,730/- relating to interest free advances made to Southern Synthetics Limited and ` 4,97,347/- relating to the sister concerns. The CIT(A) restricted the disallowance to ` 4,97,367/- on interest free advance other than made to Southern Synthetic Limited and the amount GURBAX SINGH 2015.11.02 16:46 integrity of this document High Court Chandigarh of disallownace in respect of Southern Synthetic Limited amounting to ` 4,43,730/ was deleted. The Tribunal following its decision in the earlier years further deleted the disallowance of the interest referable to the advance made to Novika Investment amounting to ` 80,000/- while disallowance of interest referable to the advances made to other four sister concerns was sustained. The relevant findings recorded by the CIT(A) read thus:- “Ground No.4 is with regard to an addition of ` 9,41,077/- made by the Assessing Officer on the reason that the assessee had made interest on borrowed funds. It is stated by the appellant that the advances have been made by the company out of own funds from share capital, reserves and surplus and not out of borrowed funds. It is further stated that nowhere department has co-related that the dealt with by my predecessor in assessment year 1991-92 and assessment year 1992-93 in appeal No.185/94-95 dated 23.8.95 and 98/95-96 dated 31.3.1996 respectively, wherein the disallownace of interest has been deleted on the ground that the financial conditions of the said company deteriorated and recovery of principal amount of debts had become improbable and doubtful. The southern synthetic Limited subsidiary company which alter on became BIFR case, has merged with M/s Kothari Plantations Industries Limited (KPIL) w.e.f 31.3.1993 and stood dissolved without winding up on and from 23.4.1994. Since there was no change of recovering principal amount,hence the charge of interest is unreaslistic and hypothetical. The appellant has relied upon the case of CIT vs. Motor Credit & Co. (Pvt) Limited, (19881) 127 ITR 572 (Mad.) and 2015.11.02 16:46 integrity of this document High Court Chandigarh predecessor in assessment year 1991-92 and Assessment year 1992-

Interest

i) Nuchem Industries ` 2000/- ii)Ratan Chand Harjas Rai ` 64,000/- iii)Novika Investment ` 80,000/- iv)Nuchem Investment ` 3,35,062/- GURBAX SINGH 2015.11.02 16:46 integrity of this document High Court Chandigarh v) Nuchem engineering ` 16,085/- The case of the sister concerns has already been considered by us in the appeals for the assessment years 1991-92 and 1992-93. We have also considered the case of interest referable to the advances made to Southern synthetics Limited in those years. As in earlier years, the department has also come in appeal for this year vide ground No.(iv) in its appeal challenging the decision of the CIT(Appeals) to delete the interest of ` 4,43,730/-. This has also been considered by us in the appeals filed by the department in the earlier two years. In the earlier year's appeals, we have deleted the interest referable to advances made to Novika Investment following the order of the Tribunal for an earlier year. However, the interest referable to other four sister concerns was confirmed by us. In the appeals of the department, we had confirmed the decision of the CIT(Appeals) deleting the disallowance of interest referable to the advances made to Southern Synthetics Limited. It is common ground that the facts and circumstances relating to the disallownace of the interest of the year under appeal are identical with the earlier years. Therefore, in line with our decision for those years, the disallowance of the interest referable to the advance made to Novika Investment is deleted, while the disallowance of the interest referable to the advances made to other four sister concerns is sustained. The deletion of the disallownace of the interest referable to the advances made to Southern Synthetics Limited is sustained as in the earlier years. The result will be that the assessee's ground is partly allowed, whereas the ground of the department, which is dealt with here itself, is dismissed.” The findings of fact recorded by CIT(A) and the Tribunal are based on appreciation of material and evidence on record in which no error could be pointed out by the learned counsel for the revenue so as to hold the same to be perverse. The issue is thus adjudicated against the revenue.

The assessee claimed ` 8,33,593/- as inauguration expenses. The Assessing Officer disallowed ` 1,90,729/- on account of payment to hotel as entertainment expenses,` 1,34,063/- being travelling expenses in connection with the inauguration function of MDF Division at Tohana and ` 1,54,051/- being expenses incurred without vouchers in connection with the inauguration. The total amount came to ` 4,78,845/-. The CIT(A) deleted the disallowance of the inauguration expenses of ` 4,78,845/-. The Tribunal concurred with the findings recorded by the CIT(A) and held that the expenditure had been incurred wholly and exclusively for the purpose of the business of the assessee. The findings recorded by the CIT(A) read thus:- “11.Ground No.9 is with regard to disallowance of inauguration expenses amounting to ` 4,78,845/-. It is stated by the appellant that the inauguration expanses bills of Hotel Surya Sofital, New Delhi. The company's branch officials, dealers, distributors, stockists, agents of company have visited MDF Nuwud plant at Tohana, who have stayed in New Delhi at Hotel Surya Sofital. Similarly an amount of ` 1,34,063/- have been incurred on account of travel and other expenses of the dealers, stockists, distributors, Company's officials and agents, who have come from all over the country to participate in the inauguration function. Another item of disallowance ` 1,54,051/65 pertaining to the inauguration expenses of Pune office. It is stated by the appellant that the conference was organized at Bombay and Pune where dealers, distributors, architects, designers and builders have participated in the conference and inauguration of Pune branch. The expenditure includes travellign expenses, expenses incurred on hoardings, wall painting etc. It is further stated that the expenditure had been incurred wholly and exclusively for the purpose of business. The appellant has relied GURBAX SINGH 2015.11.02 16:46 integrity of this document inauguration expanses of ` 4,78,845/- are allowed and the disallowance in this respect is deleted.”