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Facts
The assessee, a private limited company dealing in retail gold jewellery, filed its return of income for AY 2017-18. The case was selected for scrutiny, and during the assessment, the Assessing Officer (AO) disallowed hire charges of Rs. 41,85,000/- paid by the assessee for hiring gold stock, treating it as not related to the business.
Held
The Tribunal held that the assessee's decision to hire gold stock was a better business option than taking a loan to purchase it, considering the interest cost involved. The hire charges were incurred solely for the purpose of business.
Key Issues
Whether the hire charges paid by the assessee for gold stock are deductible as a business expenditure, or if they are to be disallowed as not related to business operations.
Sections Cited
143(2), 142(1), 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI JAGADISH
the order of the Ld. Commissioner of Income Tax (Appeals)(NFAC)
Delhi [CIT(A)] dated 10.07.2022 for Assessment Year 2017-18.
Brief facts are as under:
The assessee is a private limited company and engaged in the retail business of gold jewellery, silver, diamonds etc. The assessee filed its return of income for AY 2017-18 on 30.10.2017, which was revised on 20.03.2018 admitting income of Rs.19,28,420/-. The case was selected for scrutiny and notices u/s.143(2) & 142(1) were issued calling for details. Assessee company was incorporated by takeover of existing business which was carried out by one Shri Nathmal with name & style of M/s.Parag Jewellery. This business was taken over as running business by the company and all the assets and liabilities were taken over by the assessee. Hence, the stock of gold jewellery was taken over as per the arrangement, the assessee had to pay hire charges for the stock of gold taken by the assessee. The cost are incurred for the purpose of solely carrying on the business of the assessee. The assessee is a retailer and cannot carry on its operations without having stocks in trade to display trade or stock to sell. The stocks are owned by director of the company who was carrying on this running business. It was decided to take over the business and form a company form of organization.
Hence, the business was taken over after agreeing to pay a nominal hire charges for the stock of gold jewellery. Also during the preceding year acquired stock on hire and paid stock hire charges on the same. The assessee is in a retail business, the more stock they have the more display they will have and the sales will increase based on the display of stock available on the counters of the assessee. This being the case, these expenses have been solely incurred for the purpose of business of the assessee. A sum of Rs. 39,00,000/- has been paid to Mr.Nathmal, the Managing Director of the company for letting out the stock in trade on hire. The balance of Rs. 2,85,000/- has been paid to Smt. Tara Jain and Smt. Indra Bai, for hiring of stock. On perusal of the details and financials of the assessee company furnished by the assessee, the AO has noticed that assessee has availed unsecured loans from Shri Nathmal, Tara Jain and Indra Bai and claimed interest paid to them. The AO was of the view that considering nature of business of assessee, hiring gold interest paid is not related the business of the assessee and hence, disallowed hire gold interest paid amounting to Rs.41,85,000/- and added the same to total income.
Aggrieved, the assessee challenged order of assessment passed u/s.143(3) dated 31.12.2019, before the ld.CIT(A), who sustained the addition made by the AO by holding as under:
“4.3 I have gone through the grounds of appeal, facts of the case, assessment order and the submissions of the appellant. It is submitted by the appellant that the company hired the stock from the directors and used for the purpose of its business. The stock was used for sale to the customers and again new stock was purchased. Considering the nature of business, hiring of gold is not necessary. On The other hand, the company shows the value of gold said to have been received from Shri Nathmal, Smt. Tara Jain and Smt. Indra Bai as unsecured loan to the tune of Rs. 18,13,50,000/-. It is seen from the Gold Hire agreement, the appellant has to credit a sum of security deposit of Rs. 6,00,00,000/- (rupees six crore only) at the time of this agreement is signed. This will be interest free security deposit. It is seen from the submissions the appellant had closing stock worth of Rs. 9 crores and paying the rent of Rs. 41,85,000/-. The appellant ought to have made the payment to the directors of Rs. 9 crores instead of paying security deposit of Rs. 6 crores and can avoid the hire charges. The appellant is following this procedure in order to tax evasion at higher rate on the profits earned by the company. Under the circumstances and in my opinion, the AO has correctly disallowed the hire charges of Rs. 41,85,000/-. In view of the above, the addition of Rs. 41,85,000/- Is upheld and the ground raised in this regard is dismissed.
4. Aggrieved by the CIT(A) order, assessee is in present appeal before us.
The ld.AR for the assessee referred pages 1-8, 9-25, 75-89 @ 78, 82 and contended that as per Gold Hire Agreements, the transactions in question are fully vouched in the schedule forming part of the balance sheet. He also submitted that assessee Company has no stock-in-trade of his own. He furthermore, submitted that the genuineness of the Gold Hire Agreements is never questioned by the authorities below since 2013 or 2016 as the case may be.
Per contra, the ld.DR, Ms. Pushpa Hemachand, JCIT for the revenue strongly contested the submissions of the assessee. The ld. DR submitted that in the facts of the present case the orders of the lower authorities are reasonable and justified.
We have heard the rival submissions and perused the records of the case file. We have also gone through the paper book filed by the assessee containing pages 1-174 which is reproduced below:
INDEX FOR PAPERBOOK
S.No Particulars Page Nos
Copy of Gold Hire Agreement between M/s. Parag 1-2 Jewelley Pvt Ltd and Shri. Nathmal dated 06.02.2013 2. Copy of Gold Hire Agreement between M/s. Parag 3-5 Jewelley Pvt Ltd and Smt. Indra Bai dated 27.02.2016 3. Copy of Gold Hire Agreement between M/s. Parag 6-8 Jewelley Pvt Ltd and Smt. Tara Jain dated 27.02.2016 4 Copy of ITR Acknowledgement & Tax Audit Report in 9-25 Form 3CA-3CD of M/s. Parag Jewellery Pvt Ltd for AY 2016-17 5 Copy of Auditor's Report of M/s. Parag Jewellery for 26-32 the Year ended 31.03.2016 6 Copy of Financial Statements of M/s. Parag Jewellery 33-44 Pvt Ltd for the year ended 31.03.2016 7 Copy of Intimation u/s. 143(1) of the Income Tax Act, 45-51 1961 for the AY 2017-18 8 Copy of ITR Acknowledgement & Tax Audit Report in 52-67 Form 3CA-3CD of M/s. Parag Jewellery Pvt Ltd for AY 2017-18 9 Copy of Auditor's Report of M/s. Parag Jewellery for 68-74 the Year ended 31.03.2017 10 Copy of Financial Statements of M/s. Parag Jewellery 75-89 Pvt Ltd for the year ended 31.03.2017 11 Copy of ITR Acknowledgement & Tax Audit Report in 90-110 Form 3CA-3CD of M/s. Parag Jewellery Pvt Ltd for AY 2018-19 12 Copy of Auditor's Report of M/s. Parag Jewellery for 111-117 the Year ended 31.03.2018 13 Copy of Financial Statements of M/s. Parag Jewellery 118-128 Pvt Ltd for the year ended 31.03.2018 Copy of ITR Acknowledgement of Shri Nathmal for AY 14 129-120 2016-17 15 Copy of Financial Statements of Shri. Nathmal for the 130-135 year ended 31.03.2016 16 Copy of ITR Acknowledgement of Shri. Nathmal for AY 136 2017-18
Copy of Financial Statements of Shri. Nathmal for the 17 137-141 year ended 31.03.2017 Copy of ITR Acknowledgement of Shri. Nathmal for AY 18 142 2018-19 19 Copy of Financial Statements of Shri. Nathmal for the 143-148 year ended 31.03.2018 20 Copy of ITR Acknowledgement of Smt. Indra Bai for 149 AY 2016-17 Copy of Financial Statements of Smt. Indra Bal for the 21 150-152 year ended 31.03.2016 Copy of ITR Acknowledgement of Smt. Indra Bai for 22 153 AY 2017-18 23 Copy of Financial Statements of Smt. Indra Bai for the 154-156 year ended 31.03.2017 24 Copy of ITR Acknowledgement of Smt. Indra Bai for 157 AY 2018-19 Copy of Financial Statements of Smt. Indra Bai for the 25 158-160 year ended 31.03.2018 Copy of ITR Acknowledgement of Smt. Tara Jain for 26 161 AY 2016-17 27 Copy of Financial Statements of Smt. Tara Jain for the 162-165 year ended 31.03.2016 28 Copy of ITR Acknowledgement of Smt. Tara Jain for 166 AY 2017-18 Copy of Financial Statements of Smt. Tara Jain for the 29 167-169 year ended 31.03.2017 Copy of ITR Acknowledgement of Smt. Tara Jain for 30 170 AY 2018-19 31 Copy of Financial Statements of Smt. Tara Jain for the 171-174 year ended 31.03.2018
We find that in year 2013, the Gold Hire Agreement dated 06.02.2013 between appellant and Shri Nathmal wherein we find that 65 kg gold was hired to the assessee. Similarly, in year 2016, by the separate Gold Hire Agreements dated 27.02.2013 between appellant and Smt. Indra Bai 2100 grams gold was hired to the assessee and between appellant and Smt. Tara Devi 2650 grams gold was hired to the assessee. In all agreements it is clear covenant that the renter shall have obligation to pay Rs.5/- per gram per month to the owner. It is also clear stipulation in the Gold Hire Agreements that apart from the hire charges, the renter shall also deposit security charges with the owner. Schedule 3(B) forming part of balance sheet duly records loan from Nathmal (Director) and and Tara Jain and related party Indra Bai (Page 78 paper book).
Schedule 20 forming part of balance sheet duly records hire gold interest paid of Rs.41,85,000/- (Page 78 paper book). We also find that the company hired the stock from the directors and used for the purpose of its business. In fact, the company has no stock-in-trade of its own. Pursuant to bench query, ld. AR for the assessee submitted that stock-in-trade is exempt from the Wealth Tax. It is undisputed fact that the company has closing stock of Rs.9,76,12,546/-. We find force in the argument of the AR for the assessee that the company has to pay interest, if it has purchased stocks worth Rs. 9,76,12,546/- at least at 12% being bank rate which will be Rs.1,08,00,000/-. We are of the view that assessee’s decision to take on hire charges which requires payment of Rs.41,85,000/- was better option than taking loan from the bank to purchase the stocks. Hence, in the light of our above view, we delete the addition made by the AO.
In result, the appeal of the assessee is allowed.