LA CASA DE JOAILLIER PRIVATE LIMITED ,MUMBAI vs. DCIT, CIRCLE - 10(2)(1), MUMBAI

The assessee has challenged the validity and sustainability of various disallowances made by the Assessing La Casade Joaillier Pvt. Ltd., Officer, namely, Rs.13,16,356/- towards advertisement and business promotion expenses, Rs.12,56,629/- under the same head, Rs.1,50,261/- representing 25% of labour charges of Rs.6,01,046/-, Rs.1,69,064/- towards miscellaneous expenses, Rs.7,10,202/- on account of amortisation of goodwill, and Rs.21,00,000/- being disallowance of interest expenditure on alleged diversion of funds.

The assessee-company is engaged in the business of manufacturing and retailing gold and diamond jewellery. It had declared total receipts of Rs.15,72,16,154/- and other income of Rs.5,74,939/-. After claiming expenses under various heads such as cost of materials consumed, changes in inventories of work-in-progress and finished goods, employee benefit expenses, finance cost, depreciation, and other operational expenses the assessee declared a taxable income of Rs.45,05,100/- in its return of income.

The Assessing Officer observed a significant decline in the gross profit ratio from 53.86% in the preceding year to 29.84% during the relevant previous year. However, the net profit ratio was noted to have improved from 1.38% to 2.16%. Despite this, the Assessing Officer drew adverse inference regarding certain expenditures. Specifically, he found that the assessee had not furnished adequate explanations or supporting details in relation to labour charges, advertisement and business promotion expenses, and miscellaneous expenses. On this basis, he proceeded to make

1. Advertisement & Business Promotion: Rs.13,16,356/- 2. Business Promotion: Rs.12,56,629/- 3. Labour Charges (25% of Rs.6,01,046): Rs.1,50,261/- 4. Miscellaneous Expenses (Restricted to previous year Rs.6,32,383 - Rs.4,63,319): Rs.1,69,064/- Total: Rs.28,92,310/-

The Assessing Officer further noted that under the head “Other Expenses,” the assessee had claimed Rs.7,10,202/- towards amortisation of goodwill which had not been claimed in the preceding year, and accordingly, he made an addition of the said amount.

In addition, the Assessing Officer disallowed Rs.21,00,000/- out of total financial expenses of Rs.51,13,512/- by invoking an allegation of fund diversion. He noted that the assessee had advanced Rs.4.20 crores to a related party under “Deposits Pending Allotment” without charging interest thereon. Since the assessee failed to furnish a satisfactory explanation or supporting documents regarding the nature and purpose of such advance, the Assessing Officer presumed a diversion of interest-bearing funds and proceeded to disallow an estimated 5% of the deposit amount, aggregating to Rs.21,00,000/-.

La Casade Joaillier Pvt. Ltd., 7. We have heard the rival submissions, perused the impugned orders, and examined the material placed on record, including the paper book filed before us and the written submissions by the learned counsel for the assessee.

As regards the disallowances pertaining to advertisement and business promotion, labour charges, and miscellaneous expenses, it is evident from the assessee’s replies dated 16.12.2019 and 21.12.2019 that complete ledger accounts, party-wise details, vouchers, and audited financials were submitted during the course of assessment proceedings. Despite the voluminous submissions, the Assessing Officer has not referred to any specific instance where the expenditure was found to be either unverifiable, non-business in nature, or inflated. The disallowance is wholly ad hoc and arbitrary, without any objective standard or defect being identified in the books of account.

Insofar as the disallowance of Rs.12,56,629/- towards business promotion expenses and Rs.7,10,202/- towards amortisation of goodwill is concerned, we find that these figures have not been debited in the standalone profit and loss account of the assessee. They appear to have been inadvertently culled out by the Assessing Officer from the consolidated financials, which include the accounts of the assessee’s subsidiary company. It is trite law that a subsidiary, being a separate legal entity, cannot be fiscally amalgamated with the holding company except where consolidation is mandated for limited disclosure purposes La Casade Joaillier Pvt. Ltd., under accounting norms. Since the impugned amounts were neither claimed nor debited in the books of the assessee, the question of disallowing them does not arise.

Turning to the issue of interest disallowance of Rs.21,00,000/-, we find that the assessee had placed a deposit of Rs.4.20 crores with Conwood Realty Pvt. Ltd. for the acquisition of two commercial floors in the Conwood Paragon Project at Goregaon East, Mumbai. This was supported by the letter of intent dated 11.12.2013 and the relevant ledger account, both of which were placed on record. Of this sum, Rs.3.70 crores had been advanced in the earlier years and the remaining Rs.50 lakhs during the year under consideration. The entire transaction was in the nature of a business investment in immovable commercial property.

Furthermore, as per the balance sheet, the assessee had interest-free funds comprising share capital of Rs.1 crore, reserves of Rs.4.25 crores, and unsecured interest-free loans from related parties amounting to over Rs.10.40 crores. In the absence of any direct nexus between borrowed funds and the interest-free deposit, no disallowance can be made on presumptive or notional basis. The Hon’ble Supreme Court in CIT v. Reliance Industries Ltd. (410 ITR 466) has categorically held that where interest-free own funds are available, it shall be presumed that the assessee has utilised the same for non- interest-bearing advances.

As for the claim of finance costs aggregating to Rs.51,13,512/-, it comprises Rs.13,64,779/- towards interest on car loans and Rs.35,82,245/- towards term loan from HDFC Ltd. The loan from HDFC Ltd. was not availed during the year, as evident from the opening and closing balances in the audited notes to accounts. Thus, the allegation of fund diversion is not borne out from the facts or evidence on record and is purely speculative.

In view of the foregoing analysis, we hold that the disallowances made by the Assessing Officer are devoid of legal merit and factual foundation. They are either based on incorrect appreciation of financial statements or made arbitrarily without substantiating any defect or irregularity in the assessee’s claims. Accordingly, all disallowances are hereby directed to be deleted.

The appeal of the assessee stands allowed.