C I T ALWAR vs. SAURABH AGROTECH PVT LTD

1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No.10/2013 CIT, Alwar v. Saurabh Agrotech (P) Ltd., Alwar D.B. Income Tax Appeal No.7/2013 CIT, Alwar v. Saurabh Agrotech (P) Ltd., Alwar Date of order : 13th July 2016 Hon'ble Mr. Justice Ajay Rastogi Hon'ble Mr. Justice J.K. Ranka Mrs. Parinitoo Jain, counsel for appellant By the Court (per Ranka, J.) 1. These two appeals under Section 260A of the Income Tax Act are directed against the order dated 18.10.2012 passed by the Income Tax Appellate Tribunal, Jaipur Bench. It relates to assessment years 2007-08 and 2008-09. 2. Brief facts noticed, for disposal of the appeals are, that the respondent-assessee is a Private Limited Company, and is basically engaged in the manufacturing of oil by means of crushing of oilseeds. The assessee is also manufacturing tin containers. 3. On perusal of the books of account, the Assessing Officer noticed that there were several defects in maintenance of the books of account/stock register and it was not possible to deduce true and correct profits, and accordingly intended to reject the books of account by invoking provisions of Section 145(3) of the Act and in arriving at proper income. The AO also noticed that the assessee had advanced money to sister concern, namely Vijay Solvex Limited, and also noticed that on the one hand the assessee was paying interest to

2 outsiders and financial institutions but had not charged any interest from the said concern, though there was heavy advance (debit balance). The AO also noticed that the assessee had claimed deduction under Section 80-IB of the Act at the rate of 100% of profits and gains of the eligible business. The AO also noticed that such claim was disallowed in the past. The AO also found that the assessee had purchased finished product and after putting agmark, was selling in the market and on the traded goods the deduction was not allowable as the assessee did not maintain separate trading account of the traded goods or/and the goods which were being manufactured/produced by the assessee. Thus, after analysing the above claims put by the assessee, AO made a trading addition in lump sum of Rs.20 lakh by rejecting the books of account under Section 145(3) of the Act. The AO also disallowed interest with reference to interest not having been charged from Vijay Solvex Limited to the extent of Rs.21,61,096/- and proportionately allowed deduction under Section 80-IB of the Act and disallowed the balance. 4. The assessee assailed the said order before the Commissioner of Income Tax (Appeals), who after taking into consideration the material placed before him, deleted the trading addition of Rs.20 lakh taking in view the judgment of the Tribunal in assessee's own case. The CIT(A) also took into consideration the fact that the transactions, if any, with Vijay Solvex Limited, were business transactions and the assessee

3 had been regularly selling goods to Vijay Solvex Limited and it was only on account of the sale consideration which was not realised that debit balance was shown in the accounts of Vijay Solvex Limited. The CIT(A) also found that interest-free funds were also available with the assessee, and accordingly deleted the disallowance of interest, and sofar as deduction under Section 80-IB is concerned, the CIT(A) analysing the material on record and taking into consideration the judgment of the Tribunal in assessee's own case, for past years held that the assessee is not eligible for deduction on the direct trading of mustard oil but proportionate deduction was, however, re-worked out by him on percentage of net profit and gross profit, and took into consideration that the proportion would be 0.41 paise per kg and accordingly enhanced the deduction under Section 80-IB of the Act. 5. Both the assessee as well as the Revenue preferred cross appeals before the Tribunal. While the Revenue raised issues on which the CIT(A) had allowed relief, the assessee also raised issues where the CIT(A) upheld the order of AO. 6. The Tribunal, taking into consideration the past history and also the judgment of the Tribunal in assessee's own case, upheld the finding of the CIT(A) about deletion of the trading addition, 6.1 The Tribunal also agreed with the finding of the CIT(A) that no interest could have been disallowed of the so-called advance/debit balance of Vijay Solvex Limited, and held that it was on account of commercial

4 expediency that the amount was lying with Vijay Solvex Limited and thus upheld the finding of the CIT(A). 6.2 Insofar as disallowance under Section 80-IB of the Act is concerned, the Tribunal concurred with the ultimate finding of the CIT(A), but noticed that the proportion of traded turnover vis-a-vis manufacturing in assessee's own case, was taken @ 0.30 paise per kg in the assessment year 2006-07 and accordingly, instead of 0.41 paise per kg adopted by the CIT(A), it further enhanced the deduction under Section 80-IB of the Act by adopting it at 0.30 paise per kg. for the purposes of reducing the same for eligible deduction. 7. Learned counsel for the Revenue contended that : (i) the assessee was unable to maintain proper books of account and the profits could not be deduced properly on the basis of the said books of account. Merely because in the past the addition has been deleted, is no ground to delete the addition. She further contended that in the past the assessee had brought some material on record about laboratory test reports, which lacked during the year under appeal, and when there were distinguishing facts in the year under appeal vis-a-vis the past years, the deletion of addition was wholly unjustified. (ii) admittedly, the assessee had advanced huge money to Vijay Solvex Limited, a sister concern, and colour was given that the advance is relating to sale consideration when the AO clearly brought on record that entire money was not on account of sale consideration remaining outstanding, rather funds were advanced on short-term basis and at-

5 least on those the assessee ought to have charged interest. On the one hand assessee has been paying huge interest to the Banks and to other creditors but has not charged any interest from Vijay Solvex Limited and, therefore, the finding by the two appellate authorities is unjust. (iii) that the claim of the assessee insofar as deduction under Section 80-IB of traded goods was concerned, was not eligible and it was proper for the assessee to have maintained separate trading account and the assessee having not done so vis-a-vis own manufactured goods, the Tribunal ought not to have allowed the deduction on its own, neither the CIT(A) had any basis of holding that the profit should be @ 0.41 paise per kg nor the Tribunal has any basis of holding that profit should be 0.30 paise per kg and such basis is not forthcoming, and thus contended that finding of the Tribunal is vague and by perverse finding relief has been granted and that substantial questions of law arise out of the order of the Tribunal which needs consideration by this Court. 8. We have heard the learned counsel for the appellant and have perused the orders. 9. In our view, after taking into consideration the submissions and the material on record, we find that the Tribunal in the past has held that provisions of Section 145(3) are not applicable, as similar additions were deleted by the Tribunal in the assessment years 2003-04, 2004-05 and 2006-07 respectively, and the Tribunal also found that the results are better in comparison to the past. Thus, taking into

6 consideration that both, the CIT(A) as well as the Tribunal, are satisfied about maintenance of proper books of account, we find no infirmity in the order of the Tribunal. Even otherwise, what should be proper G.P. rate, is essentially a finding of fact. (ii) As far as the deletion of interest is concerned, both the appellate authorities have found as a finding of fact, that the assessee had business transactions of purchase and sales with Vijay Solvex Limited and also noticed that the assessee had even otherwise sufficient interest-free funds of its own to advance to Vijay Solvex Limited, the transaction being on account of commercial expediency, was purely business transaction. In our view the finding of Tribunal is based on facts and material on record. Once the finding has been reached that even otherwise the assessee had interest- free funds available, no disallowance in our view can be made. Even the Appellate Authorities have found that the A.O. was not able to prove any nexus of diverting interest bearing loan to so-called sister concern, if any. A businessman takes into consideration as to how to run its own affairs taking into consideration commercial/business expediency and so also other factors and in our view, AO is not required to look into the commercial/business expediency which is within the domain of a person running business. The Apex Court in the case of S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC) after considering what is business expediency and taking into consideration disallowance of interest, held as under :-

7 “The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.” “To consider whether one should allow deduction under section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm- chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the c ircumstances of the case. No businessman can be compelled to maximize his profits.” This Court also taking into consideration the aforesaid judgment of Apex Court in the case of CIT v. Vijay Solvex [DBITA No.147/2004 decided on 10.12.2014] and CIT(Central), Jaipur v. B.D. Mundra [DBITA No.81/2014 decided on 23.5.2016], has held that if the AO is able to prove direct nexus of diverting interest bearing funds in advancing loan, then there may be a case of disallowance of interest and not otherwise but the facts noted hereinbefore even otherwise prove that the assessee had sufficient capital of its own and so also had business transactions with sister concern, namely Vijay Solvex Limited. Accordingly we find no infirmity or perversity in the impugned order. (iii) Admittedly, the assessee has not maintained separate trading account of the traded goods vis-a-vis

8 manufacturing goods and deduction under Section 80-IB is available to an assessee on manufactured goods and the Tribunal, after taking into consideration its own judgment in assessee's own case for the assessment year 2006-07 held as under :- “However, it is worth noting here that assessee has claimed loss of Rs. 1.58 per kg whereas as stated above, Assessing Officer has estimated profit at Rs. 1/- per kg. The Ld. CIT (A) following the order of Tribunal for earlier year, the profit was taken at 0.41 paise per kg which resulted a profit of Rs. 10,03,551/-. Accordingly, Assessing Officer was directed to reduce the addition to Rs. 10.00 lacs out of eligible profit for trading of mustard oil in place of Rs. 24,24,037/- made by the Assessing Officer. After taking into consideration the order of Tribunal for earlier two years and facts of the case in hand, we are of the view that if profit is taken @ 0.30 paise as taken for assessment year 2006-07 that will meet the ends of justice. Accordingly, we direct the Assessing Officer to re-compute the profit @ 0.30 paise per kg for the purpose of reducing the same out eligible profit in trading of mustard oil. One more contention of the assessee is that the Assessing Officer has ignored the loss in trading of mustard seeds at Rs. 28,07,827/-. No finding has been given by the Assessing Officer and again by Ld. CIT (A). Since no finding has been given by the Assessing Officer or Ld. CIT (A), therefore, while re-calculating the profit @ 0.30 paise per kg for the purpose of reducing the same for eligible deduction, the Assessing Officer should consider the loss incurred in trading of mustard seeds. We order accordingly.” 10. Taking into consideration the above, in our view, what should be the proper profit for deduction under Section 80-IB in the facts and circumstances of the case when there is joint account of traded goods vis-a- vis manufacturing goods, in our view is a finding of fact by the Tribunal based on the earlier judgment of the Tribunal and material on record. Admittedly, the order of the Tribunal for the assessment year 2006-07 has not been assailed by the Revenue further and thus has attained finality. The learned counsel for the

9 Revenue was unable to dispel the calculation of profit @ 0.30 paise per kg. made by the Tribunal. 11. In view of what we have observed hereinabove, all the three questions raised by the Revenue are based on finding of facts, based on the material placed and no question of law much less substantial question of law can be said to emerge out of the order of the Tribunal. We find no perversity and impropriety in the order of the Tribunal so as to call for interference of this Court. Consequently, the appeals being devoid of merits are dismissed. (J.K. Ranka) J. (Ajay Rastogi) J. db 44&45