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Facts
The assessee, engaged in manufacturing edible/non-edible oil products, filed its return of income for AY 2015-16. The Assessing Officer made various additions/disallowances under Section 143(3). The assessee appealed to the CIT(A), who granted partial relief, leading the Revenue to appeal to the Income Tax Appellate Tribunal.
Held
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete disallowances related to depreciation and interest on a motor car, interest under Section 14A r.w. rule 8D, gain from power trading, and prior period expenses. For the disallowance under Section 40A(2)(b), the Tribunal upheld the CIT(A)'s determination of a reduced disallowance amount, finding no reason to interfere with the well-reasoned order.
Key Issues
The key issues concerned the deletion of disallowances for depreciation and interest on a motor car, interest u/s 14A r.w. rule 8D, addition of gain from power trading, disallowance of prior period expenses, and disallowance u/s 40A(2)(b) for purchases from related concerns.
Sections Cited
250, 1961, 143(3), 14A, 8D, 40A(2)(b)
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Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
PER DR. B.R.R. KUMAR, VICE-PRESIDENT :
This appeal has been filed by the Revenue against the order of the learned Commissioner of Income-tax (Appeals)-11, Ahmedabad (in short ‘the CIT(A)’) dated 27.09.2022 passed under Section 250 of the Income-tax Act, 1961 [hereinafter referred to as "the Act" for short], for Assessment Year (AY) 2015-16.
The grounds of appeal
are as follows:- “1. On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the disallowance of depreciation on motor car of Rs. 11,10,606/- and interest on the loan taken for purchase of car of Rs.5,60,896/- in the name of the employee, without appreciating the fact that the ownership of the assets was not in the name of the assessee company.
2. On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the disallowance of interest of Rs. 92,838/- u/s 14A r.w. rule 8D of the IT Act, 1961 without appreciating the fact that the assessee has claimed huge interest expenses.
3. On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting addition of Rs.71,460/- made on account of gain accrued through power trading, despite the fact that the assessee was following mercantile system of account.
4. On the facts and in the circumstances of the case, Ld CIT(A) erred in deleting the disallowance of prior period expenses of Rs.5,99,001/- without appreciating the method of ACIT Vs. N.K. Proteins Ltd Asst. Year : 2015-16 - 2– account followed by the assessee, and the previous year expenses are not allowed to claimed for the current year.
5. On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the disallowance u/s 40A(2)(b) of Rs.2,83,14,105/- holding that assessee has purchased material from related concerns, such purchase price is inclusive of their original purchase price and other charges being freight, bank commission and other commission, without appreciating the fact that during the course of assessment proceedings the assessee failed to substantiate its claim.”
3. The brief facts of the case are that the assesses company is engaged in manufacturing of Edible and Non-Edible Oil Products and by-products thereof. It had filed its original return of income for the year under consideration on 28.11.2015 declaring total income at Rs.83,50,140/-. The Assessing Officer completed assessment u/s 143(3) of the Act in the case of the assessee on 29.12.2017 by making various additions/disallowances.
4. Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the Ld. CIT(A) who has given relief/partial relief to the assessee as per the following details:-
Sr. Particulars Addition/Disallow Addition/Disallow Relief given by No. ance made by ance confirmed by CIT(A) Assessing Officer Ld. CIT(A) (Rs.) (Rs.) (Rs.) 1 Disallowance of 17,35,255/- 63,753/- 16,71,502/- depreciation and interest 2 Disallowance of Interest 92,828/- - 92,838/- u/s 14A r.w.r. 8D(ii) 3 Addition on account of 71,460/- - 71460/- gain accrued through power trading 4 Disallowance of prior 5,99,001/- - 5,91,001/- period expenses 5 Disallowance u/s 3,01,24,794/- 18,10,689/- 2,83,14,105/- 40A(2)(b)
5. Aggrieved by the aforementioned relief given by the ld. CIT(A), the Revenue is now in appeal before the Tribunal.
ACIT Vs. N.K. Proteins Ltd Asst. Year : 2015-16 - 3–
We have heard the rival contentions and perused the material available on record.
Disallowance of depreciation on motor car – Rs.11,10,606/- & Interest on loan taken for purchase of car – Rs.5,60,896/-
The pertinent facts relating to this issue are that that the Assessing Officer had made disallowance of depreciation on vehicle for Rs. 11,10,606/- and interest disallowance on car loan for Rs.5,60,896/-. The Learned CIT(A) upheld the impugned addition, noting that a similar disallowance had been made by the Assessing Officer in AY 2016–17, which was also confirmed by the Learned CIT(A) in the appellate proceedings for that year. The facts reveal that the funds used for purchase of the car were from the company and the car has been utilized from the purpose of the business of the company. The car has been capitalized in the books of the company. It is for the convenience the name of the director has been used for registering the car owing to difference in the cost of registration between the private vehicle and the company owned vehicle. Thus, keeping in view the established judgments on this issue viz. Gold Finch Jewelry Ltd Vs. DCIT (ITA No. 1075/Ahd/2016), Adani Ports and Special Economic Zones (ITA No. 3481/Ahd/2014) & Mysore Minerals Ltd Vs. CIT (106 Taxman 166) (SC), we hold that no disallowance on depreciation is called for on this issue.
Disallowance of interest of Rs.92,838/- u/s 14A r.w.r. 8D
The Ld. AR argued that the disallowance made Rule 8D(2)(ii) be deleted as the assessee had own funds to the tune of Rs.92.16 Crores. On going through the balance- sheet, we find that no disallowance on account of interest is called for.
ACIT Vs. N.K. Proteins Ltd Asst. Year : 2015-16 - 4– Deletion of addition of Rs.71,460/- on account of gain accrued through Power Trading
We have gone through the order of the Ld. CIT(A) on this issue. For the sake of ready reference, the relevant portion of the order is reproduced as under:-
“8.1 On perusal of relevant facts on records, it is observed that assessee has made trading of electricity through Mittal Processing at IEX for the purpose of getting rate per unit benefit in their power cost. The Assessing Officer observed that assessee has not recognized income of Rs. 71,460/- accrued in March 2015 hence he made addition of such amount as assessee is following mercantile system of accounting. On the other hand, assessee has stated that credit of such income earned by appellant is given by GEB in the electricity bill of subsequent month. The appellant has stated that the addition made by AO for Rs. 71,460/- pertains to March 2014 and same was reduced from Electricity Bill by GEB for the month of April 2014. In support of its contention, appellant has submitted copy of GEB bill for April 2014 for Rs 25,96,210/- which is net off of such income of Rs.71,460/- and ledger account of Electricity from its books of account.
On perusal of relevant facts on record, it is observed that the AO has not made any addition for power trading gain accrued in the month of March 2015 but he has made addition of power trading gain accrued in the month of March 2014 in current year. As per the practice of GEB, credit of trading gain earned by assessee in particular month is given in the bill of next month and electricity bill to that extent is raised at lower amount. The appellant has recognized electricity bill as expenditure in its books of account in the month to which it pertains. As credit of power trading gain for Rs.71,460/- is given by GEB in the bill of April 2014, appellant has recognized electricity expenditure of Rs.25,96,210/- (net off of gain for Rs.71,460/-) in April 2014. As appellant has rightly taxed such gain in books of account based upon bill raised by GEB, addition made by AO for Rs.71,460/- is deleted.”
Having gone through the order of the Ld. CIT(A), since the assessee has ultimately offered the gains to tax, we decline to interfere with the order of the Ld. CIT(A).
Disallowance of prior period expenses – Rs.5,99,001/-
The brief facts of the case are that while filing return of income, assessee has suo- moto disallowed prior period expenditure of Rs. 10,15,662/-. During the course of assessment proceedings, Assessing Officer has found that prior period income of Rs.5,99,001/- has been reduced from Prior Period expenditure and net amount is ACIT Vs. N.K. Proteins Ltd Asst. Year : 2015-16 - 5– disallowed while filing return of income. Thus, he made separate addition of Rs.5,99,001/-. On the other hand, the assessee has contended that only net prior period expenditure is required to be disallowed for which reliance is placed on various judicial pronouncement. The assessee has contended that when prior period expenditure is disallowed, on similar way prior period income cannot be taxed; hence such net amount is required to be taxed. On careful consideration of relevant facts on record, it is observed that assessee has earned prior period income as well as prior period expenditure and net prior period expenditure is disallowed while filing return of income. Hence, we affirm the order of the Ld. CIT(A) deleting the addition.
Disallowance u/s 40A(2)(b) – Rs.2,83,14,105/-
The brief facts of the case are that the assessee has purchased material from related party as well as from third parties. The Assessing Officer has observed that assessee has made purchases from NK Corporation (DBF), Tirupati Retail India Pvt. Limited, Tirupati Proteins Pvt. Limited and NK Industries Limited, which are related concerns of assessee-company. The Assessing Officer has prepared the comparative chart showing date-wise purchase price of goods from third parties and date-wise purchase from related concern. On this basis, the Assessing Officer came to the conclusion that assessee has made excess payment of Rs.3,01,24,794/-. The Assessing Officer disallowed the same under Section 40A(2)(b) of the Act.
11.1 Before the Ld. CIT(A), the assessee has contended that related parties have purchased similar goods from third parties and after considering, their commission, freight and other charges, bills were raised to assessee company. There is only marginal increase in purchase price of third party while making sale invoice to the assessee. The assessee has stated that when it has purchased the goods from third parties directly, purchase rates are not inclusive of freight. Before the Ld. CIT(A), the assessee has ACIT Vs. N.K. Proteins Ltd Asst. Year : 2015-16 - 6– submitted sample copies of invoices raised by third parties to it in support of its contention. The assessee submitted chart showing comparable purchase price of goods purchased directly from third parties and purchases made from related concerns. On this basis, the assessee has contended that purchases made from related concerns are at market rate and there is no inflation of price as alleged by Assessing Officer.
11.2 The assessee has also referred to TPO order of AY 2016-17 wherein identical transactions made with related parties are considered as executed at arms-length price. The assessee has also argued that the related parties are corporate entities who are assessed to tax at maximum marginal rate hence there cannot be any issue for transfer of profit from one concern to another concern to reduce the tax liability.
11.3 The Ld. CIT(A) held that assessee is engaged in the business of manufacturing of edible and non-edible oil products and the rate of raw material varies frequently. The Assessing Officer has compared purchase price of material which is purchased from third parties as well as from related concerns. Ld. CIT(A) held that on perusal of chart along with difference in rates as worked out by the Assessing Officer, it is observed that difference in price for goods purchased from third parties and related concerns are less than 3%. When there is a negative difference i.e. purchase price from related concerns are lower than purchase price of goods from third parties, the Assessing Officer has ignored such difference. On perusal of sample copies of invoices of goods purchased from third parties directly, it is found that such purchase price is excluding freight. The assessee has also submitted sample copies of invoices from related concerns along with chart showing break-up of such purchases from which it is evident that related concerns have in fact purchased material from third parties and such material is directly supplied to the assessee Company after increasing purchase price by freight amount, bank commission, commission of related parties in such transactions and service tax on such commission.
ACIT Vs. N.K. Proteins Ltd Asst. Year : 2015-16 - 7– 11.4 These facts support the contention of assessee that related concerns have not abnormally increased their margin in purchases made by them from third parties. The assessee has also prepared comparative chart showing average purchase price of goods from related concerns after excluding freight, bank commission and other commission and such purchase price is compared with purchase price of goods from non-related concerns.
11.5 The Ld. CIT(A) held that on perusal of such tabular chart it is apparent that on 26.04.2014, assessee has purchased Wash Cotton Seed from Tirupati Retail India Pvt. Limited as well as from third parties. The Assessing Officer has considered average purchase price of goods purchased from Tirupati Retail India Pvt. Limited at Rs.62.98 per Kg., whereas rate from third party is considered at Rs.62.23 per Kg. The purchase price for goods purchased from related concern is inclusive of freight and other charges as discussed herein above and if above charges are excluded, average rate would work out at Rs.62.33 per Kg., which is comparable with purchases made directly from third party. The assessee has also submitted sample copy of invoice raised by Kumkum Cotton Industries on 26.04.2014 wherein rate per kg was Rs.63.00 which clearly prove that purchase price from related concern is comparable with purchase price of goods from third party. The assessee has provided similar chart for goods purchased from other related concerns which also supports the contention of assessee.
11.6 The Ld. CIT(A) gave a categorical finding that when the assessee has purchased material from related concerns, such purchase price is inclusive of their original purchase price and other charges being freight, bank commission and other commission. The Ld. CIT(A) found that in entire transactions made with related concerns, the related concerns have charged Rs.50 per MT for goods purchased by assessee as their commission, which means that if such goods would have been purchased directly from third party, assessee could have saved such amount.
ACIT Vs. N.K. Proteins Ltd Asst. Year : 2015-16 - 8–
Considering these facts, the Ld. CIT(A) determined the excess commission (price) paid by the assessee to related concern as under and determined the disallowance at Rs.18,10,689/-.
Details of Commission Expense Paid Name of Related Party Qty MT Rate/Mt Amount Tirupati Proteins Private Limited 17918.725 50 895936.25 Tirupati Retail (India) Private Limited 9543.556 50 477177.80 N.K. CORPORATION (DBP) 8735.318 50 436765.90 NK INDUSTRIES LIMITED 16.19 50 809.50
Total 1810689.45
Having gone through the allegations of the Assessing Officer, paper-book and the decision of the Ld. CIT(A), we find no cause to interfere with the well-reasoned order of the Ld. CIT(A).
In the result, the appeal of the Revenue is dismissed.
The order is pronounced in the open Court on 23.06.2025