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Facts
The assessee filed an Income Tax Return for AY 2021-22, which was selected for complete scrutiny. The Assessing Officer made various additions and completed the assessment under Section 143(3) read with 144B. The CIT(A) subsequently allowed the assessee's appeal, prompting cross appeals by the Revenue and the Assessee before the ITAT.
Held
The Tribunal upheld the CIT(A)'s deletion of additions related to contingent liability and bogus purchases. However, it remanded the issues of loan processing fees and disallowance under Section 57 to the Assessing Officer for re-examination to ascertain the purpose of the loan and source of investments. The Revenue's appeal was partly allowed for statistical purposes, and the assessee's cross-objection was dismissed.
Key Issues
Whether the CIT(A) erred in deleting additions for contingent liability and bogus purchases; whether loan processing fees should be capitalized or treated as revenue expenditure; and the correct disallowance of expenses under Section 57 related to investments.
Sections Cited
143(3), 144B, 133(6), 37, 46A, 57
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SHRI T R SENTHIL KUMAR & SHRI NARENDRA PRASAD SINHA
(Assessment Year: 2021-22) Income Tax Officer, Vs. Shree Gayatri Cottex Ward-4(1)(1), Engineers Pvt. Ltd., Ahmedabad GF/3, Soham Terraces, Opp. Sandesh Press Road, Boadkdev, Ahmedabad-380054 [PAN No.AACCG0754A] (Appellant) .. (Respondent) C.O. No. 46/Ahd/2025 (in (Assessment Year: 2021-22) Shree Gayatri Cottex Vs. Income Tax Officer, Engineers Pvt. Ltd., Ward-4(1)(1), GF/3, Soham Terraces, Ahmedabad Opp. Sandesh Press Road, Boadkdev, Ahmedabad-380054 [PAN No.AACCG0754A] (Appellant) .. (Respondent) Appellant by : Shri Alpesh Parmar, CIT DR Respondent by: Shri Keyur Bavishi, CA 09.07.2025 Date of Hearing Date of Pronouncement 18.07.2025 O R D E R PER NARENDRA PRASAD SINHA, AM: These cross appeals are filed by the Revenue and the Assessee against the order of National Faceless Appeal Centre ((in short “the CIT(A)”), Delhi dated 22.01.2025 pertaining to the A.Y. 2021-22 in the proceedings under Section 143(3) of the Act.
C.O. No. 46/Ahd/2025 ITO vs. Shree Gayatri Cottex Engineers Pvt. Ltd. & Shree Gayatri Cottex Engineers Pvt. Ltd. vs. ITO Asst. Year –2021-22 - 2– 2. The cross objection filed by the assessee is delayed by 2 days. The assessee has filed a condonation application explaining the reason for delay. It is explained that the delay was due to time taken in obtaining professional advice on the legality and the complexity of the issue involved. Considering the explanation of the assessee the delay in filing the cross objection is condoned.
The brief facts of the case are that the assessee had filed its return of income for A.Y. 2021-22 declaring income of Rs. 13,76,71,580/-. The case was selected for complete scrutiny under CASS. In the course of assessment various additions were made by the Assessing Officer and the assessment was completed under Section 143(3) r.w.s. 144B of the Act on 28.12.2022 at total income of Rs. 1,39,76,17,731/-.
Aggrieved with the order of the Assessing Officer, the assessee had filed an appeal before the First Appellate Authority which was decided by the Ld. CIT(A) vide the impugned order and the appeal of the assessee was allowed.
Now the Revenue is in appeal before us and following grounds have been taken in this appeal:
“(a) The CIT(A) has erred in law and on facts in deleting the addition of Rs, 1,50,81,767/- made by AO on account of disallowance of contingent liability u/s. 37 of IT Act, without appreciating that: (i) the assessee failed to provide adequate supporting evidence, such as bills, invoices, and proof of TDS compliance before the AO. (ii) the CIT(A) also erroneously admitted additional evidence at the appellate stage, violating Rule 46A of the Income Tax Rules, 1962
(b) The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 4,57,73,285/- made by AO on account of bogus purchase despite the fact that: (i) the vendors failed to respond to Section 133(6) notices during the assessment proceedings. (ii) the assessee failed to produce primary evidence, such as invoices, delivery challans, and payment proofs, to establish the genuineness of the purchases. (iii) Mere furnishing of ledger confirmations at the appellate stage cannot replace the requirement of primary documentary evidence. Further, TDS Deduction alone does not establish the genuineness of transactions. (c) The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 4,61,195/- made by AO on disallowance of loan processing fees despite the fact that: (i) It is contrary to Accounting Standard- 16 (AS-16), which mandates the capitalization of expenses incurred for acquiring a capital asset. (ii) the assessee failed to furnish details to demonstrate that the expenditure was incurred for working capital purposes rather than capital acquisition. (d) The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 37,31,239/- made by AO on disallowance of expenses u/s 57 despite the fact that: (i) the assessee failed to establish a direct nexus between borrowed funds and taxable income. (ii) the assessee merely claimed that the investments were made from its net worth, but failed to furnish fund flow statements or other financial documents to support this claim. (iii) Judicial precedents such as CIT v. Abhishek Industries Ltd. (2006J 286 1TR 1 (P&H HC) and CIT v. Rajendra Prasad Moody (1978) 115 ITO 519 (SC) mandate that an assessee must demonstrate a clear linkage between borrowed funds and taxable Income, falling which disallowance under Section 57 is justified. (e) The appellant craves leave to add, alter and /or to amend all or any the ground before the final hearing of the appeal.”
The assessee has filed cross appeal supporting the order of the Ld. CIT(A) in respect of the grounds as raised by the Revenue.
C.O. No. 46/Ahd/2025 ITO vs. Shree Gayatri Cottex Engineers Pvt. Ltd. & Shree Gayatri Cottex Engineers Pvt. Ltd. vs. ITO Asst. Year –2021-22 - 4– Ground No. 1:- Addition of Rs. 1,50,81,767/- on account of disallowance of contingent liability.
Shri Alpesh Parmar, Ld. CIT DR submitted that as per Note 7 of financial statement, contingent liability of Rs. 1,50,81,767/- was appearing in the accounts. In the course of assessment, the assessee was required to provide party-wise details and the nature of this contingent expenses, which were not complied. Further, it was also not explained whether any TDS was made on this amount of Rs. 1,50,81,767/- shown as contingent expenses. He, therefore, supported the disallowance as made by the Assessing Officer.
Per contra, Shri Keyur Bavishi, Ld. AR of the assessee explained that the details of the expenditure were duly filed before the Ld. CIT(A) in the course of appellate proceedings. Further, the Ld. CIT(A) had called for a remand report from the Assessing Officer on this issue and thereafter, considering the report of the Assessing Officer, the Ld. CIT(A) had rightly deleted the addition.
We have considered the rival submission. The contingent liability of Rs. 1,50,81,767/- was added for the reason that no detail in this respect was filed before the Assessing Officer. However, the assessee had furnished party-wise details of these expenses in the course of appeal proceedings. It is found that these expenses were on account of Audit Fee, Godown Rent, Interest on SBI Global, Freight Charges, Professional Fees etc. and represented the provision made at the end of the year. The matter was verified C.O. No. 46/Ahd/2025 ITO vs. Shree Gayatri Cottex Engineers Pvt. Ltd. & Shree Gayatri Cottex Engineers Pvt. Ltd. vs. ITO Asst. Year –2021-22 - 5– by the Assessing Officer in the course of remand proceedings and he had certified that the provision of expenses was on account of ascertained liability and was eligible for deduction. Further, TDS was also made in respect of these expenses. Considering the explanation of the assessee as well as the remand report of the Assessing Officer, the Ld. CIT(A) had rightly deleted the addition. We do not find anything wrong with order of the Ld. CIT(A) on this issue. Therefore, the order of Ld. CIT(A) deleting the addition of Rs. 1,50,81,767/- in respect of contingent liability is upheld. The ground taken by the Revenue is dismissed.
Ground No. 2: Addition of Rs. 4,57,73,285/- on account of bogus purchase.
The Ld. CIT-DR explained that the Assessing Officer had made the disallowance for the reason that the parties had not responded to the notice under Section133(6) of the Act issued by the Assessing Officer in the course of assessment proceedings and did not confirm the transactions as claimed by the assessee. Therefore, the purchase to the extent of Rs. 4,57,73,285/- was treated as non-genuine and bogus. He further submitted that those parties had also not filed their Income Tax Return.
On the other hand, Ld. AR submitted that the confirmation of the two parties to which the purchase of Rs. 4,57,73,285/- pertained was filed before the Ld. CIT(A). Further that Ld. CIT(A) had called for a remand report from the Assessing Officer on this issue and on the basis of the remand report the addition was deleted.
C.O. No. 46/Ahd/2025 ITO vs. Shree Gayatri Cottex Engineers Pvt. Ltd. & Shree Gayatri Cottex Engineers Pvt. Ltd. vs. ITO Asst. Year –2021-22 - 6– 12. We have considered the rival submissions. The purchase of Rs. 4,57,73,285/- was disallowed by the Assessing Officer for the reason that the concerned parties did not respond to the notice under Section 133(6) of the Act issued by the Assessing Officer and did not confirm the transaction. However, the assessee had filed a copy of the ledger account and balance confirmation of the parties in the course of appellate proceedings. The matter was referred to the Assessing Officer and in the remand proceedings, the Assessing Officer had again issued notice under Section 133(6) of the Act to the said parties, who had responded to the notices and furnished the requisite details. Since the purchase made by the assessee from these two parties was duly confirmed in the course of remand proceedings the Ld. CIT(A) had rightly deleted the addition on the basis of the report of the AO. The ground raised by the Revenue has not merit as the addition was deleted on the basis of the remand report of the Assessing Officer. Hence, the ground is dismissed.
Ground No. 3 Addition of Rs. 4,61,195/- on account of loan processing fee.
The Assessing Officer had treated the processing fee of Rs. 4,61,195/- as not a valid business expenses and disallowed the same. The Ld. CIT-DR explained that the assessee had not explained the purpose for which the loan was taken.
On the other hand, Ld. AR submitted that the loan processing fee cannot be treated as capital in nature as the loan was utilized for purpose of business.
C.O. No. 46/Ahd/2025 ITO vs. Shree Gayatri Cottex Engineers Pvt. Ltd. & Shree Gayatri Cottex Engineers Pvt. Ltd. vs. ITO Asst. Year –2021-22 - 7– 15. We have considered the rival submission. The contention of the assessee before the Ld. CIT(A) was that the loan processing fee was a revenue expenditure. The Ld. CIT(A) has held that the loan processing fee cannot be construed as capital in nature. However, the purpose for which the loan was taken was not explained by the assessee either before the Assessing Officer or before the Ld. CIT(A). If the loan was taken for acquisition of capital asset, then the loan processing fee had to be capitalized. Therefore, no general stand could be taken that loan processing fee is always revenue in nature. Since the purpose for which the loan was taken was not examined nor explained by the assessee, we deem it proper to set-aside the matter to the file of the Assessing Officer with a direction to examine the purpose of loan in connection of which the loan processing fee was paid by the assessee. If the loan was on account of working capital, then the loan processing fee has to be allowed as revenue expenditure. The Assessing Officer may decide the matter after calling for the necessary details and explanation of the assessee in this respect. The ground of the Revenue is allowed for statistical purposes.
Ground No. 4 Addition of Rs. 37,31,239/- on account of disallowance of expense u/s 57 of the Act.
The Ld. CIT-DR explained that the assessee had made investment of Rs. 8.50 crores in shares of various other companies. Further, the assessee had debited an amount of Rs.7,98,38,014/- as finance cost. The Assessing Officer had disallowed proportionate finance cost of Rs. 37,31,239/- in the C.O. No. 46/Ahd/2025 ITO vs. Shree Gayatri Cottex Engineers Pvt. Ltd. & Shree Gayatri Cottex Engineers Pvt. Ltd. vs. ITO Asst. Year –2021-22 - 8– ration of total assets to the total investment in shares of other companies. In this respect, he has placed reliance on proviso to Section 57 of the Act.
Per contra, the Ld. AR supported the order of Ld. CIT(A) on this issue. He submitted that no borrowed fund was utilized for earning exempt income and therefore, the addition as made by the Assessing Officer was not correct.
We have considered the rival submissions. It is found from Balance Sheet and Note 9 that the assessee made the following non-current investments during the current year:
(i) Sky Primewear India Pvt. Ltd. Shares Rs. 10000000 (ii) Sky Textiles India Pvt. Ltd. Shared Rs. 75000000 Total Rs. 85000000 The investment in these shares was made during the current year. The contention of the assessee is that it had sufficient self-generated funds to make these investments. It is found from the balance sheet that the assessee had reserves and surplus of Rs. 3.47 crores as on 31.03.2020 which had increased to Rs. 13.65 crores as on 31.03.2021. At the same time short-term borrowings of the assessee had also increased from Rs. 10.76 crores on 31.03.2020 to Rs. 20.24 crores as on 31.03.2021. Considering the fact that the short-term borrowings of the assessee had almost doubled during the year, it was incumbent upon the Assessing Officer to examine whether the short-term borrowings obtained during the year were utilized towards investment in shares, rather than making ad-hoc addition on mere suspicion. At the same time the assessee had merely submitted that it had sufficient own funds C.O. No. 46/Ahd/2025 ITO vs. Shree Gayatri Cottex Engineers Pvt. Ltd. & Shree Gayatri Cottex Engineers Pvt. Ltd. vs. ITO Asst. Year –2021-22 - 9– without explaining the immediate source of the investment made in the shares. As the shares were acquired during the year it was necessary to examine the immediate source from which these investments were made. The disallowance of interest under section 57 of the Act, can be made only if the borrowings of the assessee was utilized towards making the investment in the shares, the income of which was exempt from tax. We, therefore, deem it proper to set-aside the matter to the file of Assessing Officer with a direction to examine the source of investment in shares made by the assessee during the year. It should be examined whether the short-term borrowings were utilized towards investment in the shares made during the year. The Assessing Officer is directed to provide proper opportunity of being heard to the assessee on this issue. At the same time the assesse is also directed to produce the required details and evidences before the AO to establish its contention that the investment in the shares was made out of own funds and not out of the borrowings. The ground taken by the Revenue is allowed for statistical purposes.
In the result the appeal of the Revenue is partly allowed for statistical purpose.
C.O. No. 46/Ahd/2025 20. As the grounds raised in the Cross Objection only support the order of Ld. CIT(A) in respect of issues raised in the Revenue’s appeal, the Cross Objection is dismissed.
In the combined result, the appeal of the Revenue is partly allowed for statistical purposes and the Cross Objection of the assessee is dismissed.
This Order pronounced in Open Court on 18/07/2025
Sd/- Sd/- (TR SENTHIL KUMAR) (NARENDRA P. SINHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 18/07/2025 TANMAY, Sr. PS TRUE COPY आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��थ� / The Respondent. 3. संबंिधत आयकर आयु� / Concerned CIT 4. आयकर आयु�(अपील) / The CIT(A)- 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,