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Facts
N.K. Proteins Pvt. Ltd. (assessee) and the Revenue filed cross-appeals against the CIT(A)'s order for AY 2012-13. The assessee challenged disallowances of Rs. 100 crore loss from alleged fictitious NSEL paper transactions, Rs. 4.2 crore hedging loss treated as speculative, interest expenditure, and prior period income. The Revenue contested the deletion of additions related to CWO/mustard seed purchases and additional depreciation.
Held
The Tribunal allowed the assessee's appeals on the Rs. 100 crore loss, Rs. 4.2 crore hedging loss (holding it non-speculative under Section 43(5)), Rs. 4.88 lakh interest expenditure, and Rs. 1.05 crore prior period income. It dismissed the Revenue's appeals concerning the deletion of additions for CWO/mustard seed purchases and additional depreciation. However, the Tribunal allowed the Revenue's appeal regarding the deletion of Rs. 4.24 lakh and Rs. 61,677 interest expenses under Section 36(1)(iii), thereby restoring these disallowances.
Key Issues
1. Whether losses from transactions on the NSEL platform were genuine business losses or fictitious/speculative in nature. 2. Whether additional depreciation claimed by the assessee for assets used for less than 180 days is fully allowable over subsequent years. 3. Whether certain interest expenditures and expenses claimed by the assessee are allowable under the Income Tax Act. 4. Whether income declared as prior period income was correctly treated or constituted an addition. 5. Whether the special audit was valid and its impact on the assessment limitation period.
Sections Cited
250, 142(2A), 143(1), 143(3), 133A, 132(4), 43(5), 73, 40(a)(ia), 36(1)(va), 36(1)(iii), 32(1), 32(1)(iia), 115JB, 263, Securities Contracts (Regulation) Act, 1956: 236
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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: DR. B.R.R. KUMAR, VICE-SHRI T.R. SENTHIL KUMAR
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD BEFORE DR. B.R.R. KUMAR, VICE-PRESIDENT SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER (Assessment Year: 2012-13) Vs. N.K. Proteins Pvt. Ltd., DCIT, 7th Floor, Popular House, Circle 3(1)(1), Ashram Road, Ahmedabad Ahmedabad PAN : AAACN 9377 N (Appellant) .. (Respondent) (Assessment Year: 2012-13) Vs. ACIT, N.K. Proteins Pvt. Ltd., Central Circle 1(2), 7nd Floor, Popular House, Ahmedabad Ashram Road, Ahmedabad PAN : AAACN 9377 N (Appellant) .. (Respondent) Assessee by : Shri Biren Shah, AR Revenue by: Shri V. Nandakumar, CIT-DR Date of Hearing 20.03.2025 & 19.06.2025 Date of Pronouncement 23.06.2025 O R D E R PER DR. B.R.R. KUMAR, VICE-PRESIDENT :
These appeals have been filed by the assessee & Revenue against the order of the Ld. Commissioner of Income-tax (Appeals)-11, Ahmedabad (hereinafter referred to as "CIT(A)" for short) dated 27.09.2022, passed u/s 250 of the Income-tax Act, 1961, (hereinafter referred to as "the Act" for short) for the Assessment Year (AY) 2012-13. – Assessee’s appeal 2. The assessee has raised following grounds of appeal:-
1. In law, facts and circumstances of the Appellant's case, the learned CIT(Appeals) has erred by not appreciating the fact of the case and hence, the order passed is void and bad in law. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 2–
2. In law and in the facts and circumstances of the appellant's case, the learned CIT(Appeals) has erred by not appreciating the fact that the special audit has been conducted u/s 142(2A) merely on the basis of Press Report without satisfying about the complexity of this account and that the nature of accounts have remained the same since years.
3. The appellant further states that if the reference u/s. 142(2A) is held to be invalid then the assessment is time barred since it is passed only on 19-11-2015 i.e. after 31-03-2015 being last date for the completion of the A.Y. 2012-13. 4. In law and in the facts and circumstances of the appellant's case, the learned CIT(Appeals) erred in confirming the addition made by the Ld. Assessing Officer towards the disallowance of the loss/finance cost of Rs. 1,00,00,000/- since the loss was incurred during the normal course of business and was genuine in nature. 5. In law and in the facts and circumstances of the appellant's case, the learned CIT(Appeals) erred in confirming the addition made by the Ld. Assessing Officer towards the disallowance of the hedging loss of Rs. 4,20,57,547/- by holding it as speculative loss even though there was enough quantity of stock underlying the transaction.
6. In law and in the facts and circumstances of the appellant's case, the learned CIT(Appeals) erred in confirming the addition made by the Assessing Officer towards the disallowance of the interest expenditure of Rs. 4,88,000/- even though the appellant has already capitalized the entire interest expenditure eligible for capitalization.
7. In law, facts and circumstances of the Appellant's case, the learned CIT (Appeals) erred in confirming the addition made by the Assessing Officer of Rs. 1,05,89,848/- as prior period income without appreciating the fact that such income is already offered to tax in A.Y. 2011-12.”
3. The brief facts of the case are that the assessee is a private limited company and engaged in the business of manufacturing and sale of edible and non-edible oil products/by-products. The assessee for the year under consideration filed its return of income on 28.09.2012 declaring total income of Rs. 14,79,59,760/-. The return of income was processed u/s 143(1) of the Act. Thereafter, the matter was referred for Special Audit and that the auditors were appointed on 26.03.2015 subsequent to which order u/s 143(3) r.w.s 142(2A) was passed wherein total income was assessed at Rs.103,02,53,338/- after making following additions/disallowances: & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 3– Particulars Amount (in Rs.) Loss on A/c of trading in Cotton Wash Oil 1,00,00,000 Purchase of CWO & Muster Seed 0,51,28,071 Additional Depreciation on Akola Plant 1,27,09,375 Excess Remuneration paid 7,64,000 Loss on F&O 4,20,57,547 Disallowance u/s 36(1)(va) 71,060 Interest Capitalization of WIP 4,88,000 Prior Period Income 1,05,89,848 Interest free advances 4,24,000 Interest free advances to Shri Nilesh Keshavlal Patel 61,677
4. Aggrieved by the order of the Assessing Officer, assessee filed appeal before the Ld. CIT(A) who has given partial relief to the assessee.
5. Aggrieved by the order of the ld. CIT(A), the assessee and Revenue, both are in appeal before the Tribunal. The Revenue is in appeal against the relief allowed by the Ld. CIT(A) while the assessee is in appeal against the addition sustained by the Ld. CIT(A).
Disallowance of the loss/finance cost of Rs.1,00,00,000/-
6. For the sake of completeness, the relevant portion of the Assessment Order is reproduced as under:
7.1. Special auditor, M/s Pramodkumar dad & Associates (hereinafter referred to as Special Auditor) in its report submitted to undersigned on 21.09.2015 (hereinafter referred to as special audit report) has reported vide observation 2 on page 6 of its report that from the analysis of purchase and sale transactions, it is noticed that M/s. NKPL has made paper transaction of purchases and sales of Cotton Washed Oil (CWO). In these transactions of purchases and sales, the company NKPL has shown paper losses of Rs. 100,00,000/-, the details of such transactions are as under.
Group Concerns Qty (Kg) Amount (Rs) Purchases Parties (Group) Tirupati Proteins Pvt. Ltd 2000000 129400000 Total Purchases = A 2000000 129400000 Sales Parties (Group) & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 4– Tirupati Proteins Pvt. Ltd 2000000 119400000 Total Sales = B 2000000 119400000 Losses in transaction = A-B -1,00,00,000 Thus, the assessee company has shown losses in fictitious / paper transactions (without delivery) with Group concerns, the details are as under:
Losses in Transactions with Group / Losses (Rs) Associated Concerns Cotton Washed Oil (CWO) 100,00,000 Total Losses through NSEL (-)100,00,000 Therefore, vide notice u/s 142(1) dated 01.10.2015 assessee company was requested to show cause as to why the losses of (-) Rs. 1,00,00,000/- be not disallowed it being fictitious/paper transactions (without delivery)?
7.2 In response to the above, the assessee, vide its letter received in this office on 02.11.2015 submitted as under:
"Vide point no. 1 of the notice, your good selves have referred to the observation made by the Special Auditor whereby it is stated that NKPL has made paper transaction of purchase and sales of Cotton Washed Oil (CWO). In these transactions of purchases and sales, the assessee company has shown paper losses of Rs. 1,00,00,000/-. Your good selves have asked the assessee to show cause as to why the losses of Rs. 1,00,00,000/- be not disallowed being fictitious/paper transactions. In this regards, the assessee proceeds to explain as under:
It is submitted that every Industry has its own market dynamics and it is best left to the businessman to take policy decisions. The business man is required to take certain business decisions, the outcome of which may be different in future. Moreover, the business man does not have control over the market fluctuations. He might not be aware that the transactions undertaken once would result into loss in future.
Notwithstanding the above, there was nothing to be gained by diverting the profits of the assessee company to another company, since both are resident taxpaying companies which were not claiming any tax-free or exempt incomes. It is most important fact that both the companies are taxable at maximum marginal rate and there is no tax planning or tax avoidance. Under these conditions, profits in the hands of either company would be tax neutral. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 5– Looking at the above explanation, it will be noticed by your good selves that the assessee had no control over the prices that it fetched as a result of the transactions entered into by it with TPPL and therefore, the contention of Special Auditor that it is paper loss is factually erroneous. Even otherwise, in case your good selves are desirous to take adverse view then also, there would be no ultimate benefit to the revenue authorities as in one case there will be disallowance and in other case, credit would be allowed."
7.3. The submission of the assessee has been perused carefully. However it is not tenable for the reasons discussed in the following paras:
7.3.1. During the course of survey proceedings, statement of Shri Nilesh Patel was recorded u/s. 133A of the Act. Shri Nilesh Patel & Shri Nimish Patel are the key persons of the group. Shri Nilesh Patel is the Managing Director of N.K. Proteins Ltd. & N.K. Industries Ltd. & Shri Nimish Patel is the Chairman & Managing Director of N.K. Proteins Ltd & N.K. Industries Ltd. Shri Nilesh K Patel is closely related to the ex-chairman of NSEL. The ex-chairman of NSEL, Shri Shankarlal Guru (since reported to have resigned) happens to be father-in-law of Shri Nilesh Patel. During the course of survey proceedings, statement of Shri Nilesh Patel was recorded u/s. 133A of the Act. In the statement recorded, he explained in detail the trading activities carried out by N.K. Proteins Ltd. as well as its subsidiary concerns on the platform of National Spot Exchange Ltd. He stated that in the year 2008, M/s. N.K. Proteins Ltd. became the member of National Spot Exchange Ltd. The subsidiary concerns of M/s. N.K. Proteins Ltd., namely M/s. N.K. Industries, M/s. N.K. Corporation, M/s. Tirupati Retail Pvt. Ltd. Tirupati Proteins P. Ltd. and N.K. Corporation (Prop) etc. were involved in the trading activities with NSEL as clients of M/s. N.K. Proteins Ltd. According to his statement, Shri Amity Mukherjee, Vice President of NSEL, approached him in F.Y. 2008-09 with a request to utilize the newly launched Farmer's Contract by NSEL. As per the said contract, the farmers could directly sell agricultural products through NSEL and N.K. Industries Ltd. can purchase the products through NSEL platform. For the said purpose, N.K. Industries Ltd. offered its godown and office to NSEL. However, the exchange discontinued the Farmer's Contract and launched a Trade Contract since the farmers could not sell the sufficient quantity of material as per the requirement of M/s. N.K. Proteins group.
7.3.2. Shri Nilesh Patel further submitted that the 'Trade contract with National Spot Exchange Ltd. was meant for availing finance by executing paper trade on the electronic platform of NSEL. The modus operandi adapted was such that client of M/s. N.K. Proteins Ltd, say for e.g. M/s. N.K. Industries Ltd. (henceforth NKIL) executes a T+3 contract in the electronic platform of NSEL whereby NKIL sells 100 kg of castor seeds to another prospective investor/client of another broker of NSEL for Rs. 100/-. The another prospective investor client of NSEL in turn executes a T+36 trade contract on the electronic platform of NSEL whereby it sells the castor seeds to another client of M/s. N.K. Proteins Ltd. such as M/s. N.K. Corporation (associate concern) for Rs. 110/-. Thereafter, the associate concern le. M/S. N.K. Corporation, carry out intra-group sale back to M/s. N.K. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 6– Proteins Ltd. to square off the sale/purchase transaction and to maintain the stock position. All the above three transactions are executed simultaneously. Thus, after the above set off of circular transactions, M/s. N.K. Proteins Ltd, has to receive the amount on the 3rd day from prospective investor (T+3) and the subsidiary concern of M/s. N.K. Proteins Ltd. has to pay to the prospective investor after 36 days (T+36). To keep the process going, a new T+3 contract is executed by with NSEL 2 to 3 days prior to the due date of making payment as per T+36 contract. The funds receivable from such T+3 contract neutralized the fund outflow needed to settle the initial T+36 contract. In this way. the T+36 contracts are rolled over from one settlement cycle to the next cycle.
7.3.3. For the above purpose, NSEL has maintained a Settlement Account with HDFC Bank in the name of N.K. Proteins Ltd. All the pay-in and pay-out transactions with National Spot Exchange Ltd. have taken place through this account only. This account was controlled by NSEL officials. For the purpose of carrying out transactions with NSEL, they used to keep 3 to 5% of the value of the transaction as margin money in this account which is released only after the transaction is over. Likewise, for each and every transaction, sufficient margin money is required to be maintained in this account. In other words, trading through NSEL is possible only if there is sufficient margin money in the settlement account. In the case of N.K. Proteins Ltd. the settlement account is being maintained at HDFC Bank, Account No. 00990680014847. 7.3.4. Regarding the position of stock as shown by NSEL in its website, Shri Nilesh Patel in his statement categorically admitted that in fact, physical delivery with respect to the purchase and sale of commodities, as shown in the books of assessee group, never takes place and the investors and brokers are very well aware of this fact from the beginning. Only fictitious stock was shown in the NSEL warehouse by creating paper evidence. Since all the transactions were financial transactions and NSEL treated the profit on sale of commodities as interest in their books, on account of accrued interest, in the books of NSEL, the position of N.K. Proteins Ltd (NKPL) kept on increasing with every settlement cycle. As NKIL made no payouts, the said position was shown by NSEL as having been covered by stock, which was fake. In this way, the warehouse stock position in the books of NSEL kept on building up. As the transactions were primarily of financing in nature, there was question of such transactions/traders being supported by any physical stock and delivery thereof. The trades to be executed from the electronic platform of NESL were also decided by NSEL and all such trades were executed from the Kadi office of NSEL which was in the premises of M/s. N.K. Industries Ltd. 7.3.5. In answer to question No. 13 of his statement as to whether any stock belonging to N.K. Group is lying in the accredited godown of NSEL, Shri Nilesh Patel submitted that a lease agreement was entered into in the year June, 2013 with NSEL, according to which, the warehouse of N.K. Industries Ltd. was given on lease to NSEL. However, the N.K. Group companies never kept any stock in the accredited godowns of NSEL and the lease agreement was entered into just for the purpose of fulfilling the procedure as laid down by FMC. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 7– 7.3.6. Further, during the course of survey operation, a copy of e-mail communication dated 11th August, 2013 was found and impounded which has been inventoried as Annexure A-1 (loose paper file). The communication has been addressed to Mr. Anjani Sinha, MD & CEO-NSEL & Mr. Amity Mukharjee, AVP Business Development of NSEL by Shri Nilesh Patel regarding the appointment of SGS India Pvt. Ltd. for the purpose of verification of quality and quantity of stock by SGS India Pvt. Ltd. on 12.08.2013. In the said communication, Shri Nilesh Patel has specifically written that 'we see no purpose of such so-called inspection/verification to be carried out, as you and your team are well aware of the entire facts and true nature of transactions since beginning. These are always financing transactions and there is no question of stock verification by any party. All transactions are carried out by our clients".
7.3.7. It is also pertinent to mention here that in answer to question No. 15 in this regard, Shri Nilesh Patel stated that the storage capacity of washed cotton seed oil in the NSEL accredited warehouse is only 2000 MT and the storage capacity of Cotton Seed is 10000 MT. However, NSEL has shown the stock of 90000 MT of washed cotton seed and 97000 MT of cotton oil, which no stretch of imagination is possible. The copy of the Inspection Visit Slip of SGS India Pvt. Ltd. dated 12.08.2013 on the inspection carried out at the factory premises of M/s. N.K. Proteins Ltd. & N.K. 7.3.8. All the above facts clearly establish the fact that N.K. Proteins Ltd. is the registered member of National Spot Exchange Ltd. and the group concerns of N.K. Proteins Ltd. namely, N.K. Industries Ltd. N.K. Corporation, Tirupati Retail (India) P Ltd. and Tirupati Protein P Ltd. had become the clients of M/s. N.K. Proteins Ltd. for carrying out the trading activities on the platform of National Spot Exchange Ltd and no outside independent third party ever became the client of M/s. N.K. proteins Ltd. In other words, all trades executed by M/s. N.K. Proteins Ltd. on behalf of its so called clients on the electronic platform of NSEL were meant for the benefit of the N.K. Proteins Group and its controlled entities.
7.3.9. Further, it is pertinent to mention here that Shri Nilesh Patel, has categorically admitted in his statement recorded on 22.08.2013 that they started trading on the platform of NSEL in the year 2008-09 and the transactions used to take place only on paper as per the directions of the NSEL and there was no physical delivery of goods. The above facts clearly show that the losses booked by the assessee in their respective books of account and declared in the returns of income during the above period are based on only paper transactions and there was no physical delivery of goods at any point of time. 7.3.10. As far as the claim of Shri Nilesh Patel in answer to question No. 16 of his statement recorded on 22.08.2013, that the rate difference between the purchase and sale transactions are the financial interest cost for the assessee company, it is pertinent to mention here that the assessee& its group concerns have not claimed any expenses under the head "interest" in its books, on the contrary, the assessee has shown loss on account of the purchase & sale transactions on the platform of NSEL by way of circular transactions, & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 8– which is fictitious, since these are mere book entries, as per the direction of NSEL, without the actual delivery of goods. 7.3.11. It will not be out of place to mention here that on the basis of information received regarding the alleged irregularities of NSEL in connivance with the investors/brokers of NSEL, a search & survey operation was also carried out in the cases of M/s. Swastik Overseas Corporation and its group concerns, in whose case, as per the website of NSEL, cumulative outstanding amount of Rs. 98.18(As per survey report dated 10.11.2014 crores was shown. During the course of search & survey operations, it was detected that the transactions in respect of various commodities on the platform of NSEL as shown in the books of account were only paper transactions and delivery of commodities had never taken place. The above concerns were merely recording the transactions on the platform of NSEL as purchase and sales in their books as per the directions of NSEL. In this regard. Shri Rajesh B Mehta, Power of Attorney Holder of M/s. Swastik Overseas Corporation in his statement recorded u/s. 132(4) of the Act on 18.09.2013 categorically admitted in response to question no. 15, that the transactions used to take place only on paper and there was no physical delivery of goods which strengthens the finding of the undersigned that the loss incurred by the NKPL is fictitious.
7.3.12. As mentioned above, it is clear that entire gamut of transactions were not real transactions and institutionalized shape of the entire transactions was given to obtain funds from the investors on short term basis. These investors were assured for a handsome interest rate. The entire scheme collapsed when there was default on the part of the NSEL with the active connivance of the borrowers like M/s. Ν.Κ. Proteins Ltd. 7.3.13. During the course of assessment proceedings, the assessee also claimed that in substance, the losses represent the interest expenses incurred on finances obtained by using the platform of NSEL. If this contention of the assessee is accepted then the repayments of finance, which are debited in the books in the form of purchases, contain the element of interest payment too. If assessee's own contention of looking at the substance rather than the form of the transactions is to be accepted, then at the time of crediting the accounts of the parties from whom purchases have been made, tax should have been deducted at source, on the so-called interest component, as per the provisions of section 40(a)(ia). Since tax was not deducted by the assessee, the interest payments are liable to be disallowed even under section 40(a) (la). There is another aspect to this argument of the assessee. If the interest expenses are to be allowed as business expenses then the onus is on the assessee to establish a nexus between the funds obtained from the NSEL platform and their use for the assessee's business, Apart from furnishing a list of suppliers to whom payments were made by the assessee company, supposedly out of the funds obtained from the NSEL platform, the assessee company failed to submit any cash flow statement to corroborate its claim, Moreover, purchase price is inflated through rotation through sister concerns. How much of the loss actually represents interest cost payable to third parties, the so-called financiers, has not been established. 7.3.14. The fictitious loss incurred without taking of giving delivery cannot be set off against the regular business income. From the statement of the assessee it is very much & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 9– clear that this is an arrangement by the assessee in connivance of NSEL to withdraw the funds available with NSEL. Therefore the transactions cannot be considered as part of its normal business. Accordingly, transaction carried out and the loss arose out of these arrangement/transactions cannot be considered as normal business. Therefore the loss incurred is nothing but an arrangement made between NSEL and assessee a colorable device to reduce the tax liabilities. Therefore the contrived loss cannot be considered as normal business loss and cannot be allowed to be set off against taxable income.
7.3.15. Notwithstanding the above argument, the assessee had admitted that the transactions of various commodities on the NSEL platform were concluded without physical delivery which is covered by the section 43(5) read with section 73 of the Act being Speculative Loss. Therefore Speculative loss created out of these transactions cannot be set off against the normal business income. SUMMARY 7.4 The above arguments are summarized as under: a. The assessee group is closely linked with NSEL. b. Though NKPL claimed to a broker for NSEL in effect all transactions done by it were done for the entities of the NKP group only. Thus the charade of being a broker was created only to mask the true nature of the transactions entered into by the group entities on the NSEL platform. c. These was systemic misuse of the NSEL platform and what was apparent was admittedly as per the assessee group itself not the true form of the transactions. d. Though NSEL was a physical exchange that is all the trades were to be backed with goods and the transactions on paper were to be settled against delivery of goods, delivery never took place and transactions of buy and sell remained on paper only. e. In effect the whole of the stock on paper was nonexistent. The assessee group being one of the main warehouses of NSEL was aware of the true nature of NSEL and was in effect an active collaborator for misuse of the NSEL platform. f. Though in his submissions before the IT authorities the assessee group claimed that the true nature of the transactions on NSEL were finance transactions it has never withdrawn the claim of losses of Rs. 1,00,00,000debited in its books in this year nor for similar loss in earlier years. g. Even if the form in which the transactions are booked is taken to be true the loss of Rs. 1,00,00,000/- admittedly incurred on transactions that were settled without effecting delivery being speculative in nature cannot be allowed to be set off against business income. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 10– h. Even if the form of the transactions is taken to be financing transactions then as discussed above the difference between the sale purchase partakes the character of interest and as no TDS was done on these the same is disallowable. Further as till date the assessee group has not been able to discharge the onus of explaining the use of the funds that it got from the so called financing transactions, for the purpose of its business the interest expenses claimed to have been incurred on the said finance is disallowed. How much of the loss is actual interest component payable to the third parties has also not been established. 7.5 Thus the assessee tried to hide the facts by furnishing different types of contentions before the department and the auditor nominated by the department. Accordingly, the claim of loss of Rs.1,00,00,000/- is disallowed.”
6.1 Aggrieved by the order of the Assessing Officer, the Assessee filed appeal before the Ld. CIT(A) who confirmed the order of the Assessing Officer on this issue as under:-
11.1 I have carefully considered assessment order and submission filled by appellant. On perusal of relevant facts on record, it is observed that appellant had sold CWO of 2,00,000 kgs on 30th September, 2011 to TPPL for Rs 11.94 crore and purchased CWO of 2,00,000 Kgs on 1st October, 2011 from TPPL. at Rs 12.94 crore. The details submitted by appellant in form of purchase and sale bills along with observation of Special Auditor in his report u/s 142(2A) makes it clear that such transactions were not carried out at NSEL platform. However, details submitted by appellant clearly prove that there is only time gap of one day between purchase and sale of CWO with TPPL. The appellant has not explained the reasons for purchase and sell of exactly same quantity of goods with TPPL within a gap of 1 day. Though appellant has submitted copies of purchase of 2,00,000 kg of CWO and sale invoices of 2,00,000 kg of CWO relating to transactions with TPPL, same are not supported by delivery challans or proof of transportation of huge quantity of 4,00,000 kg within a short period. The appellant has not provided any details regarding availability of goods with TPPL for supply to appellant or details of corresponding purchase of goods by TPPL from third party. The appellant has not provided details regarding justification of market price of CWO at the time of purchase and sale. Details submitted by appellant inform of purchase and sale nowhere prove that actual delivery of goods have taken place but camouflage to show that real transactions have taken place hence such loss is speculative loss. In absence of any third party contemporary corroborative evidences to prove genuineness of transactions along with the fact that there is only one day gap between purchase and sale of CVVO with TPPL being group concern, such loss is nothing but contrived and non-genuine loss. Considering such fact, disallowance made by AO is correct. 11.2 So far as alternate contention of appellant that both the appellant and TPPL are assessed to tax at maximum marginal rate and there is no loss of revenue, it is observed that in present case, appellant has incurred speculative loss in such transactions apart from such loss being bogus and accommodative loss. Once loss incurred by appellant is speculative in nature, such loss cannot be set off against any taxable income whereas speculative income can be set off against any business loss. Considering this fact, alternate contention of appellant that there is no loss of revenue cannot be accepted.
& 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 11– 6.2 Aggrieved by the order of the Ld. CIT(A), the Assessee filed appeal before the Tribunal.
6.3 Before us, Ld. AR reiterated the arguments taken up before the Revenue Authorities and Ld. DR relied on the order of the authorities below.
6.4 Heard both the parties and perused the material available on record.
The pertinent facts relating to this issue are that the Assessing Officer disallowed an amount of Rs.1,00,00,000/-, based on a Special Auditor's report under section 142(2A), which alleged that the assessee was engaged in paper transactions with Tirupati Proteins Pvt Limited. The Special Auditor noted the purchase transactions of Rs.12,94,00,000/- for 2,00,000 Kgs of Cotton Washed Oil and corresponding sale transactions for Rs.11,94,00,000/-, resulting in Rs.1,00,00,000/- loss, allegedly without the delivery of goods. The Assessing Officer concluded that the transactions on the National Spot Exchange Limited (NSEL) platform, where these trades purportedly occurred, were essentially financing transactions and settled without actual delivery, thus he held the loss as speculative. Before us, Ld. AR submitted that the assessee had already substantiated that the transactions have not been carried out at the NSEL Platform which has been accepted by the CIT(A) and hence they are not the speculative transactions of the assessee; the Ld. CIT(A) , however, has made the addition only on the basis of the observation that no delivery challans had been submitted by the assessee to substantiate the delivery of such goods within a short time of 1 day. The assessee has submitted copies of purchase of Cotton Washed Oil as well as the sale made to Tirupati Proteins Pvt Limited. Since the transactions have not been in question, the profit or loss arising out of the same would have the consequent effect. Hence, the addition made by the Assessing Officer solely on the basis that that the transactions are with Tirupati Proteins Pvt Limited and hence the losses cannot be allowed is not an acceptable proposition. The appeal of the assessee on this ground is allowed. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 12– Disallowance of the hedging loss of Rs.4,20,57,547/-
7. For the sake of completeness, the relevant portion of the Assessment Order on this issue is reproduced as under: ` “11.1. During the year the assessee has debited in Other Expenses, Loss of Rs. Rs. 420,57,547/- incurred from Future & Option transactions. Special Auditor has vide observation 17 stated as under: "The assessee company has claimed loss on future & option (commodities) of Rs. 420,57,547/- (loss of Rs. 680,36,603/- and profit of Rs. 259,79,056/-). The company has not provided any working for the same." 11.2. Vide order sheet entry dated 17.11.2015, assessee was requested to show cause as to why the F & O loss debited in P & L be not disallowed it being speculative in nature? 11.3. The assessee has vide its response submitted on 18.11.2015 stated as under: "It is stated to justify the loss in F&O transactions. In this connection, it may please be noted that NKPL is a manufacturer of crude palm oil, soya seeds, soya oil and refined oll, etc. and therefore the company has to purchase said commodities from the market. The prices of these commodities are highly fluctuating and therefore with a view to safeguard from the fluctuation risk, the assessee entered into F&O transaction. The loss so incurred is a hedging loss. The statement showing the stock position on the date of entering into transaction and the quantity of the stock hedge is enclosed herewith vide Annexure 1 and the same reflects that the assessee has sufficient stock for the purpose of hedging." 11.4. The hedging loss incurred in Future & Option transactions are speculative as per the provisions of section 43(5) of the Act. Thus the assessee company concealed it's income by debiting the loss as expense under the head Other Expenses'. Therefore, the sum of Rs. 4,20,57,547/- debited in the Administrative & Selling Expenses is disallowed being speculative and added to the total income of the assessee.”
7.1 Aggrieved by the order of the Assessing Officer, the Assessee filed appeal before the Ld. CIT(A) who confirmed the order of the Assessing Officer on this issue as under:-
15.1 I have carefully considered the Assessment Order and submission filed by Appellant. It is observed that Appellant is engaged in the business of manufacturing of edible and non- edible products. During the course of its business, it has purchased various commodities (raw material) from the market and prices of these commodities are fluctuating hence to safeguard against such fluctuation, Appellant has entered into future & option transactions. During the course of assessment proceedings, Appellant has submitted stock & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 13– position on the date of entering into transaction and quantity of the stock hedged. It is relevant to refer to provisions of Section 43(5) of the Act which reads as under: …… On perusal of above referred provisions of the Act, it is apparent that appellant has entered into Future & Option transaction in commodities which are actually raw material for finished goods manufactured by it. It can be seen from first proviso to Section 43(5) that loss incurred from future and option transaction is treated as business loss and not speculative loss only when there is contract in respect of raw materials required for manufacturing activity and to safeguard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by assessee which means there has to be correlation between contract for raw material and future & option transaction of finished goods. lt is observed that Appellant has not submitted any existing contract for supply of finished goods for actual delivery as envisaged in Explanation to Section 43(5) of the Act. Once the Appellant is not having existing contract for supply of finished goods, future & option transaction carried out by Appellant for raw material is without any existing liability for actual delivery or to safeguard against any loss as envisaged in the section 43(5). Thus, loss incurred by Appellant is purely speculative in nature as no contract for actual delivery of finished goods is involved or evidence to that effect was produced. 15..2 Considering these facts, transactions of future & option carried out by appellant cannot be considered as hedging transactions as covered by proviso to Section 43(5) of the Act. Considering these facts, addition made by AO for Rs.4,20,57,547/-, is confirmed.
7.2 Before us, Ld. AR reiterated the arguments taken up before the Revenue Authorities and Ld. DR relied on the order of the authorities below.
7.3 Heard the arguments of both the parties and perused the material available on record.
This issue relates to the disallowance of Rs.4,20,57,547/- claimed as loss from future and option (commodities) transactions. Before the Ld. CIT(A), the assessee submitted that these transactions were undertaken to hedge its existing stock and thus should be considered a business loss under the proviso to Section 43(5) of the Act, rather than a speculative loss, as held by the Assessing Officer. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 14– 7.4 Before us, Ld. AR submitted that the assessee had incurred future and option loss on commodities at Rs.7,50,40,681/- and in similar transaction profit of Rs.3,29,83,134/- was earned and thus net loss was arrived at Rs.4,20,57,547/-. The assessee-company submitted that the assessee is a manufacturing entity and its main business operation in itself is to manufacture vegetable oils and fats by using various commodities as raw materials. The Ld. AR argued that when the main business of the assessee was to manufacture such goods, it is implied that the sales made by the assessee include the sales of the manufactured goods under contracts of supply on Actual Delivery Basis. The facts of the case have been examined against the provisions of the Act.
Section 43(5) of the Act reads as under:-
(5) "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:
Provided that for the purposes of this clause— (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; [or]
(d) an eligible transaction in respect of trading in derivatives referred to in clause 35[(ac)] of section 236 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange;] shall not be deemed to be a speculative transaction.
& 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 15– The provisions of said Act are squarely applicable to the facts of the instant case, hence the same cannot be treated as speculative transaction. The appeal of the assessee on this ground is allowed.
Disallowance of the interest u/s 36(1)(iii) of Rs.4,88,000/-
8. Depreciation shall be allowed on the capitalization of interest. The appeal on this ground is hereby allowed for statistical purposes.
Addition on account of prior period income of Rs.1,05,89,848/-
9. Apropos this issue, the relevant facts are that the assessee has shown prior period income of Rs. 1,05,89,848/- in Profit & Loss account but such income was reduced from computation of total income. During the course of assessment proceedings, the assessee has explained that such income was offered to tax in AY 2011- 12 based upon copy of Form No. 26 of such year; however, this contention of the assessee was not accepted by Assessing Officer on the ground that the assessee has not submitted party-wise details of prior period income along with Form No. 26AS. The Ld. CIT(A) confirmed the impugned addition by observing as under:-
'18.1 I have carefully considered the Assessment Order and the submission filed by the Appellant. On perusal of relevant facts of record, it is found that Appellant has shown prior period income of Rs. 1,05,89,848/- and prior period expenditure of Rs.32,84,664/-. While filing the return of income for current year, Appellant has reduced taxable income by above referred income and disallowed expenditure as mentioned herein above. Based upon this computation, Appellant has submitted revised computation of total income for AY 2011-12 to Assessing Officer in assessment proceedings along with challan for Rs.46,26,868 paid on 2nd November, 2012. On this basis Appellant has contended that as prior period income and expenditure pertain to AY 2011-12 and same is offered to tax in such year, it has correctly reduced prior period income while filing the return of income f<J>r current year. However, this contention of Appellant cannot be accepted for the reason that Appellant has not filed any revised return of income for AY 2011-12. The Appellant has simplicitor submitted revised computation of total income for such year. While passing the Assessment Order of AY .2011-12 on 21/11/2014, AO has considered total income as shown in original & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 16– return of income which means that AO has not considered such revised computation of income. Once income shown in Profit & Loss Account for current year which was pertaining to earlier year, taxable income for current year cannot be reduced as such income was not assessed to tax in AY 2011-12 as claimed by Appellant. On this basis, the contention of Appellant is rejected and addition made by AO for Rs.1,05,89,848/- is confirmed.
9.1 Heard the arguments of both the parties and perused the material available on record. The details pertaining to prior period income of Rs. 1,05,89,848/- and prior period expense of Rs. 32,84,664/- was duly provided by the appellant company in Form No. 3CD. (PB 68). This amount was considered in earlier year by the appellant by furnishing a revised computation of income and the appellant company has filed challan of Rs. 46,26,868/- on 02.11.2012 which is reflected in Form 26AS (PB 66). The said tax is paid on the basis of revised computation in which prior period income taken into consideration is Rs. 1,19,45,801/-. There was an error in the amount as Rs.1,19,45,801/- instead of Rs.1,05,89,948/- which stands corrected. The Assessing Officer shall verify these facts from the record and allow. The appeal of the assessee on this ground is allowed.
In the result, appeal of the assessee is allowed.
10. The Revenue has raised following grounds of appeal:-
“1. On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the addition on account of purchase of cotton wash oil (CWO) and mustard seed amounting to Rs.73,07,10,220/- and Rs.7,44,17,851/- respectively, without appreciating the fact that the assessee could not substantiate the payments made towards such purchases, even after sufficient opportunity was given.
On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the disallowance of additional depreciation of Rs.1,27,09,375/- without appreciating the fact that the assets were installed and put to use after 30th September, hence only 10% of additional depreciation is allowable till A.Y. 2016-17 as the 3rd proviso to section 32(1) took effect from 1/4/2016. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 17–
On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the disallowance of interest expenses of Rs.4,24,000/- u/s 36(1)(iii) despite the assessee was paying interest @ 12% p.a. on the loans availed.
On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the disallowance of interest expenses of Rs.61,677/- u/s 36(1)(iii) despite the assessee was paying interest @ 12% p.a. on the loans availed.”
Purchase of Cotton Wash Oil and Mustard Seed:-
11. The brief facts relating to this issue are that the assessee had purchased Cotton Wash Oil at Rajkot plant through NSEL Platform. The Assessing Officer has referred to observation 3, on page No. 7 of Special Audit Report obtained under Section 142(2A) of the Act, wherein it was stated that the assessee has purchased CWO on NSEL platform but goods are received by company without any payment. Since the assessee has failed to substantiate its claim that payments have been made by it regarding purchase of Cotton Wash Oil and Mustard Seed at NSEL platform, a total amount of Rs. 80,51,28,071/- have been added to the total income of the assessee. The Ld. CIT(A) deleted this addition by observing as under:-
“12.5 It can be seen from Remand Report as well as NSEL report that purchases shown by Appellant are on record of NSEL and they have confirmed the payment made by Appellant. It can be seen from Assessment Order that entire purchases shown by Appellant were disallowed by AO on the ground that no payment has been made by Appellant whereas Exchange itself has confirmed that payment has been made by Appellant. The details submitted by Exchange were further stated by AO in Remand Report and he has not raised any objections to such details/evidences, which clearly means that AO was satisfied with the explanation of Appellant which was further corroborated by NSEL in response to notice u/s 133(6) of the Act. Though in Assessment Order AO has disputed that payment has not been made by Appellant to NSEL, but based upon information received from NSEL, AO has accepted that relevant payment was made by Appellant. In the Remand Report dated 31st January, 2018 the AO has not given any single adverse remark against the submission made by Appellant or data received from the Exchange, which support the contention of Appellant that payment against such transaction has already been made by it. 12.6 With this background, the other contentions raised by AO are dealt with in subsequent paras. 12.7 So far as observation of AO that Appellant was not able to give details of payment regarding purchases of Rs. 11.11 crores out of aggregate purchase of Rs.80.51 crores of & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 18– CWO/mustard seed, it is observed that NSEL as well as AO in the Remand Report has confirmed entire payment hence this issue has now become inconsequential.
12.8 So far as observation of AO that as per bills of purchases is concerned, late payment interest is required to be charged @ 18% whereas no such interest is charged. In the present case Appellant has already made payment from NSEL Settlement Account and there is no objection from NSEL for not charging interest. Whether to charge interest on any late payment is on NSEL and even if interest is not charged, entire purchase cannot be disallowed.
12.9 So far as observation of AO that, when Appellant has made payment in NKPL-NSEL Settlement Account, such amount is immediately withdrawn, it is observed that funds are withdrawn by NSEL on which there is no control of Appellant. Once the NSEL has confirmed these transactions, such observation cannot lead to disallowance of entire purchases. The Appellant has explained that for the transactions executed on NSEL, Appellant was required to transfer necessary funds in separate bank account being NKPL-NSEL Settlement Account and from such account, NSEL transfer requisite amount into their bank account. Such settlement account is running account and NSEL is required to obtain necessary dues from Appellant from such bank account. Whenever NSEL is required to make any payment, such funds are credited in this very account. It is observed that during the course of Remand Proceedings, NSEL vide letter dated 24th January, 2018 has given details of funds received from Appellant and such details are matching with banking entries reflected in bank account being NKPL-NSEL Settlement Account.
12.10 So far as observation of AO that Appellant has not submitted copies of purchase bills of mustard seeds at NSEL platform, such purchases are confirmed by NSEL and date-wise purchase details are also submitted by it, which is not disputed by AO in Remand Report. So far as observation NSEL that as per their record, Appellant has purchased mustard seeds for Rs.7,01,83,360/- as against purchases of Rs.7,44,17,851/- mentioned by AO in Assessment Order, it is relevant to consider the explanation of Appellant that purchases of Rs.7.44 crores include purchases of Rs.56.05 lacs from third parties other than NSEL. The break-up of such purchases are given by Appellant at para 4.5 of its written submission-which is reproduced herein above and such details are based upon purchases mentioned in Special Audit Report referred by AO. It is pertinent to note that special auditor has given details of purchase of mustard seeds at page No. 58 of its report which contains purchase through NSEL and purchase from third party whereas while passing the Assessment Order AO has considered aggregate purchase of Rs.7.44 crores as purchase from NSEL. The relevant chart showing such reconciliation is already reproduced at para - 4.5.1 of Appellant's written submission referred herein above. On perusal of these details contention of Appellant is found to be correct as purchase from third party for mustard seeds if Rs.56,04,898/- and purchase from NSEL is Rs.6,81,12,953/-. Considering these facts, argument of AO that purchases are not supported by evidences is not correct.
12.11 So far as observation of AO that as per survey report of October 2013, amount of Rs. 109 crores is mentioned as amount payable for purchase of goods in case of NKPL/NKIL, which proves that payment of Rs.80.51 crores is not made. However, this contention of AO is incorrect as NSEL in its reply has duly confirmed that Appellant has already made payment towards purchase of Rs.80.51 crores. This fact is also stated by AO in Remand Report and he has not contravened such fact that payment was made. Further on perusal of bank account being NKPL-NSEL Settlement Account it is observed that payment of Rs.628.40 crores is made during the period October 2011 to March 2012 and such payment is after the purchases made from NSEL which is presently in dispute. There is no correlation between purchases and outstanding amount of Rs. 109 crores as mentioned in survey report of 2013. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 19– 12.12 On perusal of relevant facts it is observed that purchases of CWO was from Rajkot depot and mustard seed from Kota depot. The AO in entire Assessment Order has not disputed the delivery of the goods. The AO at para 8.1 to 8.3 of his Assessment Order has referred to relevant extracts of Special Audit Report and stated that goods are received by Appellant1, Company. These goods are further used in manufacturing process which is not disputed by AO in Assessment Order. Further, on perusal of information received from NSEL and referred by AO in Remand Report dated 31st March, 2013, it is observed that purchases of CWO was out of electronic trading platform and was not on T+3/T+36 contracts. It is further observed that purchase of mustard seed was from Kota Depot and transactions were executed on electric trading platform launched in year under consideration only. However, the goods were received on such purchases. There is no back-to-back contract of sale for such purchases as was the case in AY 2011-12. In year under consideration, goods received by Appellant Company are not in dispute and even further consumption/sale are not in dispute by AO. It is observed that AO had made disallowance of losses occurred in back-to-back contract being simultaneous execution of T+3 and T+36 contract in AY 2011-12 as there was no delivery of goods whereas in year under consideration, delivery of goods is not in dispute. Even AO has not treated such transactions as speculation transactions in current year whereas in AY 2011-12, loss arising from NSEL transaction was treated as speculative losses by Assessing Officer.
12.13 In view of holistic consideration of all the material facts as discussed herein above, Appellant has in fact made payment against purchases made from NSEL which is further confirmed by them in reply to notice under Section 133(6) )f the Act, no adverse finding has been given by the AO in Remand Report hence addition made by AO only on the ground that Appellant has failed to make payment towards purchases cannot be accepted. Therefore, the addition made by AO for Rs.80,51,28,071/- is deleted.”
11.1 Having heard the rival contentions and perused the material available on record, we find that the Assessing Officer made addition on the following grounds:-
(a) The purchase invoices are dated 25th August, 2011 as per which NSEL has sold CWO for Rs.76.68 crores and Rs.3.77 lacs. The payment details were highlighted by Appellant in HDFC NKPL NSEL settlement account as per which Appellant has made payment of Rs.69.40 crores during the period 9th August, 2011 to 19th September, 2011. Thus, Appellant is unable to reconcile the payment of Rs.11.11 crores (80.51 crore LESS 69.40 crores);
(b) As per terms & conditions mentioned on the bills, it was stated that payment is to be made within 7 days and in case of late payment, interest would be charged at 18%. On this basis AO concluded that there is no correlation between purchases and payments made by NKPL; & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 20–
(c) The Appellant has claimed that it has made payment in NSEL Settlement Account but it is found that similar or bigger amounts have been withdrawn from settlement account on same day or a day before, smaller or bigger amounts have been withdrawn from settlement account;
(d) Both the bills furnished by Appellant are in relation to Cotton Wash Oil and no bills relating to purchase of Mustard Seed at NSEL platform has been furnished;
(e) The purchase transactions have been in Margin Account of Assessee and not in purchase register;
(f) As per survey report received from ITO, Mehsana, during the course of post- survey enquiries, vide letter dated 7th October, 2013, Appellant was asked to furnish details of application of NSEL funds utilised by NK Group. As per such letter, amount of Rs. 109 crore is mentioned as payable for purchase of goods by NKPL/NKIL hence it can be stated that purchase of Rs.80,51,28,071/-are unpaid.
Hence, the allegations of the Assessing Officer that Rs.80.51 crores have not been paid against the purchase of goods. However, the facts reveal otherwise. • The purchase of Cotton Wash Oil was made on 25.08.2011 for Rs.73.03 crores and Rs.3.76 lacs. • The purchases were made from Rajkot and reflected in the stock register. • The payments have been made through NSEL Settlement Account and such payments were through banking channel. • The Assessing Officer made addition holding that the assessee has not proved that payment was made against such purchases. • Letter dated 24thJanuary, 2018 addressed by NSEL to Assessing Officer confirmed that purchases made by NKPL were on peer-to-peer basis and payment was made against such purchases by Rajkot Depot of the Company. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 21– • These purchases were recorded in books of account of Kota Branch and payment was also made against such purchases. • NSEL has confirmed the details of payment as under:
Date Amount 08.06.2011 150000000 20.06.2011 300000000 27.06.2011 150000000 05.07.2011 115000000 06.07.2011 52247869 Total:- 767247869 • With regard to purchase of mustard seeds at Kota branch from NSEL for Rs.7,44,17,851/-, NSEL has stated that as per Exchange Appellant has purchased mustard seeds for Rs.7,01,83,360/- in Mustard Kota Contract, which was launched during FY 2011-12. • NSEL has further confirmed that assessee has purchased mustard seeds on electronic exchange trading platform and payment in respect of such purchases has been made by NKPL from NKPL-NSEL Settlement Account by settlement date mentioned in the contracts. • Based upon such report of NSEL, the Assessing Officer, vide letter dated 31st January, 2018 has given Remand Report wherein he has stated that NSEL has confirmed the transactions of CWO and mustard seeds and payment was made from NKPL-NSEL Settlement Account. • Thus, from the reading of the remand report and the reply of NSEL, it is proved beyond doubt that the payments have been indeed made. • Though in Assessment Order the Assessing Officer has disputed that payment has not been made by Appellant to NSEL, but based upon information received from NSEL, the Assessing Officer has accepted that relevant payment was made by Appellant. & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 22– Hence, keeping in view the entire facts on record, we decline to interfere in the order of the Ld. CIT(A) on this issue. The appeal of the Revenue on this ground is hereby dismissed.
Disallowance of additional depreciation of Rs.1,27,09,375/- :-
12. The Assessing Officer disallowed additional depreciation for the reason that such assets were put to use in preceding AY for less than 180 days and therefore assessee is eligible for depreciation at only 50% rate in preceding year and balance 50% depreciation have to forego and not allowable in succeeding year following section 32(1)(iia) of the Act. The issue stands covered by the order of the Co-ordinate Bench of the Tribunal in the case of Kalpataru Power Transmission in 2472 & 2853/Ahd/2017 and, further, similar issue stands adjudicated by the judgments of the Hon’ble High Court of Bombay in the case of Godrej Industries Ltd in Tax Appeal No. 511 of 2016 and by the Madras High Court in the case of Brakee India Ltd in Tax Appeal No. 551 of 2013. For the sake of ready reference, the relevant part of the judgment of Hon’ble Bombay High Court is reproduced as under:-
“The brief facts are as under:- (1) The assessee firm filed E return of income for A.Y. 2007-08 on 7.11.2007. The assessee declared total in-come at Rs. Nil as per the normal provisions of the Income Tax Act, 1961 (for short "the Act,") and Rs. 21,86,10,387/-under Section 115JB of the Act. Subsequently, the case was selected for scrutiny and order under Section 143(3) of the Act, was passed by the AO vide order dated 21.12.2009 computing total loss of Rs. 29,83,16,673/- under the normal provision and total income under Section 115JB of the Act. Subsequently, Commissioner (Appeals) passed order under Section 263 of the Act, on 17.01.2012 on the issue of additional depreciation claimed, carry forward unabsorbed depreciation and provision of doubtful advances not added back while computing the Book Profit under Section 115JB and thus set aside the original assessment order. (ii) Subsequently, the AO issued notice to the assessee under section 142 (1) on 06.02.2012 pursuant to the or-der under section 263 of the Act. The AO vide order dated 04.12.2012 restricted the claim for additional depreciation to Rs. 3.21.29,304/- as against Rs. 5,04,88,906/- thereby disallowing the claim for depreciation of 1,83,59,602/- which pertains to additional depreciation claimed under Section 32(1)(iia) of the Act @ 20% in & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 23– respect of eligible assets put to use for less than 180 days, as against the rate of 10% (Le. restricted to 50% of the additional depreciation) (iii) Being aggrieved by the assessment order dated 4.12.2012, the assessee filed an appeal before CIT(A) (iv) CIT(A) vide order dated 05.08.2013 partly allowed the appeal of the assessee. The CIT(A) by relying on the decision for 2009-2010 directed to allow 50% of the additional depreciation in the year under consideration and to allow the balance 50% in the subsequent year. (v) Being aggrieved by the order passed by the CIT(A), the Revenue filed an appeal before the Tribunal. (vi) The Tribunal by an order dated 1 June, 2015, dismissed the appeal of the Revenue 5. Having heard Counsel for the Revenue and for the Assessee, we notice that the Assessee's claim of additional depreciation arises out of clause (iia) of sub-section 1 of Section 32 of the Act. Clause (u) of subsection 1 of Section 32 of the Act recognizes the depreciation on block of assets. Clause (iia) grants additional depreciation in case of acquisition and installation of new machinery or plant by an Assessee after 31 March, 2005, the Assessee being engaged in business of manufacture or production of an article or things.
We may also notice that the second proviso to clause (u) of sub-section 1 of Section 32 of the Act, would restrict Assessee's claim of depreciation to 50% in case, the assets are acquired by the Assessee during the previous year and put to use for the purposes of business or profession for a period less than 180 days in the said previous year.
In the context of such statutory provisions, the Revenue has raised the question whether when 50% of the additional depreciation is claimed by the Assessee in a particular Assessment Year, since the acquisition and putting in to use of the assets in the previous Year was for less than 180 days, the Assessee can claim the remaining depreciation in the subsequent Assessment Year. Such a question came up for consideration before the Division Bench of Karnataka High Court in Commissioner of Income Tax v. Rittal India Pvt. Ltd., re- ported in 380 ITR 423. The Court, after referring to the statutory provisions, held and observed in para 8 as under:- "8:- The aforesaid two conditions, ie., the undertaking acquiring new plant and machinery should be a new industrial undertaking, or that it should be claimed in one year, have been done away by substituting clause (iia) with effect from April 1, 2006. The grant of additional depreciation, under the aforesaid provision, is for the benefit of the assessee and with the purpose of encouraging industrialization. ion, by either setting up a new industrial unit or by expanding the existing unit by purchase of new plant and machinery, and putting it to use for the purposes of business. The proviso to clause (1) of the said section makes it clear that only 50 per cent of the 20 per cent would be allowable, if the new plant and machinery so acquired is out to use for less than 180 days in a financial year. However, it & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 24– nowhere restricts that the balance 10 per cent would not be allowed to be claimed by the assessee in the next assessment year. The language used in clause (iia) of the said section clearly provides that "a further sum equal to 20 per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (11)". The word "shall" used in the said clause is very significant. The benefit which is to be granted is 20 per cent additional depreciation. By virtue of the proviso referred to above, only 10 per cent can be claimed in one year, if plan and machinery is put to use for less than 180 days in the said financial year. This would necessarily mean that the balance 10 per cent additional deduction can be availed of in the subsequent assessment year, otherwise the very purpose of insertion of clause (iia) would be defeated because it provides for 20 per cent deduction. which shall be allowed. It has been consistently held by this Court, as well as the apex court, that the beneficial legislation, as in the present case, should be given liberal interpretation so as to benefit the assessee. In this case, the intention of the legislation is absolutely clear, that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to only half of the same being granted in one assessment year, if certain condition was not fulfilled. But, that, in our considered view, would not restrain the assessee from claiming the balance of the benefit in the subsequent assessment year. The Tribunal, in our view, has rightly held, that additional depreciation allowed under Section 32(1)(iia) of the Act is a onetime benefit to encourage industrialization, and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting the additional allowance. We are in full agreement with such observations made by the Tribunal. In view of the aforesaid, we do not find that any interference is called for with the order of the Tribunal, or that any question of law arises in this appeal for determination by this court."
After the said judgment of the Karnataka High Court in Rittal India Pvt. Ltd., (supra), legislation has also amended the statutory provisions by adding the third proviso to clause (ii) of sub section 1 of Section 32 of the Act, which reads as under- "Provided also that where an asset referred to in clause (iia) or the first proviso to clause (ia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent of the amount calculated at the percentage pre-scribed for an asset under clause (iia) for that previous year, then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset."
The third proviso, thus, now recognizes the right of an Assessee to claim the remaining 50% depreciation in subsequent year in a case where machinery and plant being acquired and put to use for less than 180 days in the previous year, the depreciation was restricted & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 25– to 50%. Such a situation as in the present case, was considered by the Division Bench of the Madras High Court in Commissioner of Income Tax v. Shri T.P. Textiles Pvt. Ltd., 394 ITR 483, the Court referred to the judgment of the Karnataka High Court in Rittal India Pvt. Ltd., (supra) as well as the addition of third proviso to clause (in) of sub-section 1 of Section 32 of the Act and observed as under:- "10.1: The plain language of section 3201 Gia) read along with relevant proviso would have us come to the conclusion that, there is no limitation in the assessee claiming the balance 10 per cent of additional depreciation in the succeeding assessment year 10.2.- As a matter of fact, with effect from April 1. 20916. the ambiguity, if any, in this regard, in the mind of the Assessing Officer, stands removed by virtue of the Legislature, incorporating in the Statute, the necessary clarificatory amendment. 11: We may only indicate that during the course of the arguments, our attention was drawn to the "Memorandum explaining the provisions in Finance Bill, 2015" whereby, the aforementioned amendment was brought about. 11.1: The relevant part of the memorandum is extracted hereafter. To remove the discrimination in the matter of allowing additional depreciation on plant or machinery used for less than 180 days and used for 180 days or more, it is proposed to provide that the balance 50 per cent of the additional depreciation on new plant or machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant or machinery, shall be al-lowed in the immediately succeeding previous year. This amendment will take effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016-17 and subsequent assessment years. 11.2:- A perusal of the extract of the memorandum relied upon would show that the legislature recognized the fact that the manner in which the Revenue chose to interpret the provision, as it stood prior to its amendment would lead to discrimination, in respect of plant and machinery, which was used for less than 180 days, as against that, which was used for 180 days or more 11.3: In our opinion, as indicated above, the amendment is clarificatory in nature and not prospective, as is sought to be contended by the Revenue. The memorandum cannot be read in the manner, in which, the Revenue has sought to read it, which is that the amendment brought in would apply only prospectively. 11.4: We are, clearly, of the view that the memorandum, which is sought to be relied upon by the Revenue, only clarifies as to how the unamended provision had to be read all along. 11.5:- In any event, in so far as the court is concerned, it has to go by the plain language of the unamended provision, and then, come to a conclusion in the matter. As alluded to above, our view, is that, upon a plain reading of the unamended provision, it could not be said that the assessee could not claim balance depreciation in the assessment year, which follows the & 546/Ahd/2022 Assessee- NK Proteins Ltd Asst. Year : 2012-13 - 26– assessment year, in which, the machinery had been bought and used, albeit, for less than 180 days.
It could be thus, to seen that the Karnataka High Court in Rittal India Pvt. Ltd., (supra) even without the aid of the statutory amendment held that remaining 50% unclaimed depreciation would be available to the Assessee in the succeeding Assessment Year. Now the legislation has amended the provision by adding a proviso which, specifically recognizes the said right. The Madras High Court in Shri T.P. Textiles Pvt. Ltd., (supra) ruled that such proviso being clarificatory in nature, would apply to pending cases, covering past period also.
We have no reason to take view different from two High Courts, examining the situation at considerable length. In the result, no question of law arises.
Accordingly, Appeal is dismissed.”
Respectfully following the same, we find no reason to interfere with the order of the Ld. CIT(A) deleting the impugned disallowance. The appeal of the Revenue on this ground is hereby dismissed.
Disallowance of interest expenses u/s 36(1)(iii)
Owing to the smallness of the quantum, the assessee stated that they would not like to rebut the grounds on this issue. Hence, the appeal of the Revenue on this ground is allowed.
In the result, the appeal of the assessee is allowed and the appeal of the Revenue is partly allowed.