CIT, FARIDABAD vs. M/S ALPHA TOYO LTD. FARIDABAD

This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 8.10.2008, Annexure III passed by the Income Tax appellate Tribunal, Delhi Bench 'A' New Delhi in ITA No.301/DEL/07 for the assessment year 1995-96 claiming following substantial questions of law:- i) Whether, on the facts and in the circumstances of the case, the learned ITAT was right in law in allowing relief of ` 35,27,423/- on account of trading additions disregarding the fact that the assessee had failed to explain the reasons for fall in GP rate despite sufficient opportunities having been provided? ii)Whether on the facts and in the circumstances of the case, the learned ITAT was right in law in confirming the order of the learned CIT(A) in deleting the addition of ` 1,21,283/- made by the Assessing Officer on account of interest on GURBAX SINGH 2014.10.07 12:20 integrity of this document High Court Chandigarh interest free loans advanced to sister concerns in the light of judgment of Hon'ble Punjab and Haryana High Court in the case of CIT vs. M/s Abhishek Industries reported in (2006) 286 ITR 1?”

A few facts relevant for the decision of the controversy involved as narrated in the appeal may be noticed. Return declaring loss of ` 19,43,010/- was filed on 30.11.1995. The assessment was completed under section 143(3) of the Act by effecting various additions vide order dated 23.3.1998, Annexure I. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (appeals) [CIT(A)]. Vide order dated 31.10.2006, Annexure II, the CIT(A) partly allowed the appeal by giving relief of ` 45,88,335/- and confirming the addition of ` 3,77,553/- as per details given below:- “Additions deleted by the learned CIT(A) i) Rs.35,27,423/- Trading additions ii)Rs.18,378/- Out of vehicle expenses iii)Rs.1,21,283/- on account of diversion of funds to sister concerns. iv)Rs.3,60,000/- out of machine hire charges. v) Rs.20,000/- telephone expenses. vi)Rs.71,285/- non payment of outstanding credit balances. Vii) Rs.42,340/- out of depreciation on Dies and moulds viii)Rs.42,399/- on account of ESI ix)Rs.3,60,900/- on account of PF x) Rs.24,327/- on account of bad debts. Additions confirmed by the learned CIT(A) Rs.3,77,553/- on account of trading addition. The department as well as the assessee both filed appeals before the Tribunal. Vide order dated 8.10.2008, Annexure III, the Tribunal allowed

We have heard learned counsel for the parties. The issue GURBAX SINGH 2014.10.07 12:20 integrity of this document High Court Chandigarh regarding applicability of gross profit rate without rejecting the books of account was considered by this Court in Commissioner of Income Tax vs. M/s Sunrays Exports Pvt. Limited, ITA No.767 of 2010, decided on 10.1.2011 wherein it was held as under:- “4. Question whether there are discrepancies justifying rejection of books of account has to be gone into from case to case by applying the test of probabilities. No doubt if reduction of GP rate, compared to earlier year, was claimed or if higher wastage, compared to earlier year is claimed,it may call for explanation but if explanation is duly furnished and there is no other material in the form of empirical data or any study indicating falsity of the claim, mere deviation in trading results compared to the previous year may not by itself be always enough to reject the books of account. In the present case, the Tribunal has duly considered the explanation and held that addition made by the Assessing Officer was not justified. This finding, in the facts and circumstances of the case, is not shown to be perverse. No substantial question of law arises.”

Further, The Tribunal in the present case had recorded as under:- “8. We have heard rival submissions of the parties and carefully considered the material on record. As the facts emerge, revenue could not point out any defects in the books of account and no suggestion was propounded to reject the books of account. Assessee maintains regular books supported by relevant record. Complete stock inventory is made. In view thereof, neither there is rejection of books or there can be rejection of books. This being the situation, in our view g.p. addition could not be made merely because comparative g.p is less than earlier years. In absence of rejection of books g.p addition is not called for. Reliance placed by the assessee on case laws is well placed.” GURBAX SINGH 2014.10.07 12:20 integrity of this document High Court Chandigarh

In view of the above findings recorded by the Tribunal, question No.(i) is answered against the revenue.

Adverting to question No.(ii), the findings recorded by the Tribunal read thus:- “11. Remaining grounds raised by the revenue are as under:- '

On the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in deleting `1,21,283/- added to the income of the assessee as interest on interest free loans advanced to sister concerns in the light of judgment of Hon'ble Punjab and Haryana High Court (Cit-I, Ludhiana vs. M/s Abhishek Industries Limited dated 4.8.2006). 3.On the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in deleting `71,285/- even when the assessee failed to explain the nature of outstanding credit balances. 4&5. On the facts and in the circumstances of the case,the learned Commissioner of Income Tax (Appeals) erred in deleting ` 42,339/- on account of ESI and ` 3,60,900/- on account of P.F. even when these payments were paid beyond the due date as prescribed under the Income Tax Act.

On the facts and in the circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in deleting `24,327/- added by the AO on account of bad debts even though no evidence was filed by the assessee to show how the debts had become bad.'

Apropos ground No.2, the facts of the case are that relying upon earlier year, the AO disallowed `1,21,283/- on account of interest paid on borrowed funds. In appeal, CIT(A) deleted the addition by observing as under:-

1 The learned AR has submitted a detailed statement, which gives the figure of loans given to the sister concerns in various years. Besides this, the details were also given to the AO about interest bearing funds and non interest bearing funds. He has GURBAX SINGH 2014.10.07 12:20 integrity of this document High Court Chandigarh pointed out that this is also a covered issue by the order of the Hon'ble ITAT in the AY 93-94 wherein the issue has been discussed in para 35 on page 20.While deleting this disallowance in AY 1993-904, the Hon'ble ITAT has followed its own decision in earlier years for the Ays 1991-92 and 92-93 in the case of the appellant company itself.

2 Therefore, keeping in view the history of the present case, in the light of the decision of the learned Tribunal, the addition on account of this matter in the year under consideration is also deleted.

The learned DR relied on the order of AO.

The learned counsel for the assessee, on the other hand, contends that similar issues came up for consideration before the ITAT in assessee's own case for AY 1993-94 wherein the ITAT vide its consolidated order dated 22.7.2005 rendered in ITA No.4085/Del/97 alongwith other appeals, deleted the addition by observing as under:- 'A sum of ` 1,12,500/- out of interest paid by the assessee was disallowed by the Assessing Officer on the ground that interest free advances totaling `4,96,494/- were given to the sister concern. The disallowance was worked out by Assessing officer by applying 20.75% being the prevailing bank rates to the outstanding due from sister concern. Similar disallowances had been made in the assessment year 1991-92 and 1992-93 in ITA No.2338 and 1630/Del/96. The Tribunal held that the interest free advances to the sister concern were made out of the non interest bearing funds that were lying with the assessee and hence the addition made by the revenue authorities was deleted. In the present assessment year it is observed in page 2 of the assessee's second paper book that the assessee had non interest bearing funds to the extent of `11,04,043/-. The loan to the sister concern was only to the extent of ` 4,96,495/-. In view of the above, no disallowance out of interest paid could be made. The revenue has failed to prove the nexus between the borrowed GURBAX SINGH 2014.10.07 12:20 integrity of this document High Court Chandigarh funds on which interest was paid and the interest free loan that was given to the sister concern. The addition is therefore directed to be deleted.'

Further reliance was placed on the ratio of decision in the assessee's own case (supra), we see no reason to interfere in the order of CIT(A). Ground fails.”

The above findings have not been shown to be illegal or perverse in any manner. As a result, Question No.(ii) is also answered against the revenue.

Consequently, finding no merit in the appeal, the same is dismissed. (Ajay Kumar Mittal) Judge August 21, 2014 (Fateh Deep Singh) Judge ‘gs' GURBAX SINGH 2014.10.07 12:20 integrity of this document High Court Chandigarh