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Facts
The appeals and cross-objections involved common issues regarding the disallowance of interest and the valuation of stock. The assessee firm had taken loans, paid interest, and also provided interest-free advances to group concerns. The assessing officer disallowed interest, and the issue of stock valuation also arose due to discrepancies noted by a special auditor.
Held
The Tribunal held that the disallowance of interest was not justified as the assessee had sufficient interest-free funds and had demonstrated commercial expediency. The court also found that the stock valuation methods used by the assessee were acceptable, and the additions made by the assessing officer on this count were partly deleted by the CIT(A). The grounds of appeal by the Revenue were dismissed, and the assessee's cross-objection was allowed.
Key Issues
The core issues were whether the disallowance of interest on borrowed funds used for interest-free advances to group concerns was justified and whether the valuation of closing stock of salt and Rapeseeds DOC was correctly done.
Sections Cited
36(1)(iii)
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI, AM.&
आदेश / O R D E R Per Bench: This is bunch of five appeals, consisting two appeals filed by the Revenue, Viz: in IT(SS) No.135/Ahd/2016, for assessment year 2011-12 and in IT(SS) No. 136/Ahd/2016, for assessment year 2012–13. The assessee filed an appeal in 2012-13, and also filed two cross objections, Viz: CO No.177/Ahd/ 2016 for A.Y. 2011-12 Page | 2
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation and CO. No.178/Ahd/2016 for A.Y. 2012-13, all these appeals and cross objections, are directed against the separate orders passed by the Learned Commissioner of Income Tax (Appeals) [in short, “the Ld. CIT(A)”], which in turn arise out of separate assessment orders passed by the assessing officer under sections 153A(1)(b)/ 143(3) of the Income Tax Act 1961 ( hereinafter referred to as the ‘Act’).
Since, the issues involved in all the appeals of Revenue and Assessee, and cross objections of the assessee, are common and identical; therefore, these appeals and cross objections, have been heard together and are being disposed of by this consolidated order.
At the outset Learned Counsel for the assessee, informs the Bench that assessee does not wish to press appeal in 2012–13, therefore we dismiss this appeal of the assessee, as not pressed.
Learned Counsel for the assessee, also informs the Bench that assessee, does not wish to press cross objection No. 177/Ahd/2016, for assessment year 2011– 12, therefore, we dismiss the cross objection of the assessee, as not pressed.
Now we have to adjudicate only two revenue`s appeals in IT(SS) No.135/Ahd/2016, for assessment year 2011-12 and in IT(SS) No. 136/Ahd/2016, for assessment year 2012–13, and assessee`s cross objection No.178/Ahd/2016, for assessment year 2012–13.
Although, appeals filed by the Revenue and cross objection filed by the Assessee, contains multiple ground of appeals. However, at the time of hearing we have carefully perused all the grounds raised by the Revenue and Assessee. Page | 3
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation We find that most of the grounds raised by the Revenue, are either academic in nature or contentious in nature. However, to meet the end of justice, we confine ourselves to the core of the controversy and main grievances of the Revenue and Assessee. With this background, we summarize and concise the grounds raised by the Revenue and Assessee, as follows.
7.Summarize and concise grounds of appeal of Revenue in and in are as follows:
(1)Ground No.1 :The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 68,13,140/-, being disallowance of interest u/s 36(1)(iii) of the Act, though the assessee had made interest free advance out of interest bearing funds.[This ground No.1 is in Revenue’s appeal in for A.Y. 2011-12, This ground No.1 is in of Revenue’s appeal for A.Y.2012-13 is at Rs. 2,18,04,979/-] (2)Ground No.2:The Ld. CIT(A) has erred in law and on facts in detecting the addition on account of disallowance of under valuation of stock of repressed Doc and salt at Rs. 3,95,62,067/-, though there were some errors in valuation of closing stock on FIFO basis.[This ground No.2 is in Revenue’s appeal in ITA No.135/Ahd/2016 for A.Y. 2011-12] 3.Ground No.3:The Ld. CIT(A) has erred in law and on facts in detecting the addition on account of disallowance of handling/ spillage/wastage loss of Rs. 1,35,69,000/-. (This is ground No. 2 in Revenue’s appeal in IT(SS) No. 136/Ahd/2016 for A.Y. 2012- 13).
The assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012–13, has pressed the following ground of appeal ( other grounds were not pressed, except noted below):
“ The learned CIT(A) has erred in law and on facts in confirming the disallowance made by the assessing officer of Rs.44,40,000/- out of the interest claim”
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation
Now we shall take above grounds of Revenue and Assessee, one by one, as follows:
10.The Summarize and concise groundNo.1 of Revenue, and ground raised by the assessee, in cross objection No.178/Ahd/2016, for assessment year 2012–13, are identical and common, therefore, we shall adjudicate them together, which are reproduced below for ready reference, as follows:
(1)Ground No.1 :The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 68,13,140/-, being disallowance of interest u/s 36(1)(iii) of the Act, though the assessee had made interest free advance out of interest bearing funds.[This ground No.1 is in Revenue’s appeal in for A.Y. 2011-12, This ground No.1 is in of Revenue’s appeal for A.Y.2012-13 is at Rs. 2,18,04,979/-] The assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012–13, has pressed the following ground of appeal:
“ The learned CIT(A) has erred in law and on facts in confirming the disallowance made by the assessing officer of Rs.44,40,000/- out of the interest claim”
Brief facts of the issue in dispute are stated as under. During the assessment proceedings, the assessing officer called for to ascertain the quantum of secured loan used for business purpose of the concern. On verification of Accounts, it was noticed by the assessing officer that the assessee- firm has taken loan from banks on hypothecation of stock -in- trade and personal properties of partners. The firm has paid interest on such loans amounting to Rs. 3,79,17,821/-, Bank charges Rs. 18,70,159/-, loan documentation charges Rs. 625,989/-. Thus, on borrowed funds interest is given to the banks by the assessee. On verification of Bank Loan Accounts and loan accounts in the computerized accounts, it was observed by the assessing officer that the assessee- firm has given loan to some group concerns, against which there is no business transactions, hence it appears
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation to be not for business purpose and no interest is charged on such loans. Therefore, during the assessment proceedings, the assessing officer, issued notice to the assessee, asking the assessee to furnish the nature of transactions and immediate source of advancement of such interest free advances.
In response to the above notice of the assessing officer, the assessee submitted its reply before the assessing officer with documentary evidences, which is reproduced below:
“As desired we are furnishing herewith copies of the concerned Group concerns, of the bank accounts from the books and also the bank statements. Further, we may submit for your kind information that the assessee-firm has huge funds of Rs. 28,34,76,940/-as against this interest-free advances of Rs.4,35,00,000/- were given us on 31.03.2011. It may further be submitted that out of Rs. 4,35,00,000/- Rs. 2,15,00,000/- were given to M/s. Maharaja Salt Works for purchase of Salt in the earlier year. As the said party has not supplied the Salt to the assessee-firm a Civil suit is filed against them in Gandhidham Court. Therefore, the advance mentioned to that extent are given for commercial consideration having business purpose. Further, there was no relationship attracting Section 40A(2)(b) of Act. As far as Opening Credit Balance of Rs. 1,26,868/-in the Account of M/s. Friends Mercantile Pvt. Ltd., are concern it may be submitted that the assessee-firm maintains two accounts (ie. Bill Account and Loan Account) in their books of M/s. Friends Mercantile Pvt. Ltd., and as per the bill account an amount of Rs. 1,26,868/-is payable to them. Your Honour will kindly see that disallowance is not called for on the facts of the case.”
However, assessing officer rejected the contention of the assessee and observed that assessee has paid interest on loan of Rs. 2,44,20,256/-. At the same time, the assessee has given loans and advances against which no interest have been charged. The details of the same are given by the assessing officer in the assessment order in table format, in para No.7.The assessing officer noticed that assessee has not given any specific reply on the points raised above. The assessee has simply stated that the interest free advances have been made out of the interest free capital and surplus funds.
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation However, looking to the capital and reserved surplus of the assessee and the investment in fixed assets, it was found by the assessing officer that no interest free funds were available with the assessee for giving interest free advances to the group concerns. Therefore, as per assessing officer, disallowance u/s 36(1)(iii) of the I.T. Act, 1961, is warranted. In respect of loans and advance given to M/s Maharaja Salt Works Co. Pvt. Ltd. it was submitted by the assessee that the assessee -firm has given advance of Rs. 2,05,00,000/- for the purchase of salt to the company. However, the said party failed to supply salt and the assessee has filed civil suit in the Civil Court, Gandhidham. As this is business advance against the purchase of goods, it should not be considered as interest free loans and advances. However, in respect of other loans and advances the assessee has not proved commercial expediency. Considering above facts, the assessing officer held that the advances were not made due to commercial expediency and for the purpose of business except in the case of M/s. Maharaja Salt Works Co. Pvt. Ltd. The assessee has not proved the nexus that non- interest bearing fund have been utilized for the purpose of giving non- interest bearing loans and advances and have not discharged onus cast upon it. Therefore, the corresponding interest @ 12% on loans and advance which works out to Rs. 68,13,104/- are as under :
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation 14.Therefore, assessing officer, made the addition in the hands of the assessee, to the tune of Rs.68,13,104/-.
Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the ld. CIT(A), who has decided the addition made by the assessing officer. The ld. CIT(A) observed that the relevant facts are discussed in para 7 of the assessment order and the very same issue was considered by him at length in connection with the appeal for AY. 2009-10. The facts are identical, subject, however, to the facts that as at the year of end, the assessee’s balance sheet clearly shows interest free advances to some individuals totaling to Rs. 2 Crores., about which neither any business relation not any expediency is either prima facie evident, or IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation claimed, or established. Though, as the interest free funds available with the assessee, and therefore, following his decision in AY 2009-10, the ld CIT(A) held that no disallowance u/s. 36(1)(iii) needs to be upheld, therefore, the disallowance of Rs. 68,13,104/- was deleted by the ld. CIT(A).
Aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us.
Shri Sanjay Punglia, Ld. CIT(DR), for the Revenue, has vehemently argued that assessee, during the course of assessment proceedings, has not established, the availability of interest free funds, and assessee has not proved the commercial expediency. The learned DR for the revenue, relied on various decisions listed by the assessing officer, in his assessment order and submitted that assessee does not have interest free funds and never established the commercial expediency. The learned DR thus reiterated that the assessee has not discharged the onus of proving that interest free advances have gone out for interest free funds of the assessee. The learned DR for the revenue, relied on the following decisions:
(i) Decision of Hon’ble Allahabad High Court in the case of CIT v. Sahu Enterprise (P.) Ltd. reported in (2013) 352 ITR 8 (Allahabad).
(ii). Decicion of Hon’ble ITAT, Hyderabad in the case of Sushee Hi Tech Constructions (P.) Ltd. v. DCIT reported in (2013) 33 taxman.com 236 (Hyd.).
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation (iii) Decicion of Hon’ble ITAT, Chandigarh in the case of ACIT v. Spray Engineering Devices Ltd. reported in (2012) 23 taxman.com 267 (Chandigarh).
(iv)The Hon’ble ITAT, Delhi in the case of ACIT v. Samrat Rice Mills (P.) Ltd. reported in (2012) 23 taxman.com 350 (Delhi).
(v).Hon’ble Delhi High Court in the case of Punjab Stainless Steel Inds. V. CIT, reported in (2010) 324 ITR (Delhi).
(vi).The Hon’ble Delhi High Court in the case of CIT v. Orissa Cement Ltd., reported in (2002) 258 ITR 365 (Delhi).
(vii)The Hon’ble Kerala High Court in the case of CIT v. V.I. Baby & Co., reported in (2002) 254 ITR 248 (Kerala).
(viii)The Hon’ble Allahabad High Court in the case of CIT v. H.R. Sugar Factory (P.) Ltd., reported in (1991) 187 ITR 363 (Allahabad).
(ix) Decision of Hon’ble Madras High Court in the case of A. Murali & Co. (P.) Ltd. V. ACIT, reported in (2013) 357 ITR 580 (Madras).
The ld. CIT -DR for the revenue, by referring to the above judgements, stated that in the assessee`s case, there are mixed funds and the assessee could not establish any commercial expediency. It is the duty of the assessee to explain before the assessing officer that whatever loans were raised by the assessee, were used for business purposes. If the assessee had advanced certain funds to sister concerns, there would be a very heavy onus on the assessee to discharge before the assessing officer to the effect that in spite of pending terms, loans and working capital loans, on which the IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation assessee is incurring liability to pay interest, there was justification to advance loans to sister concerns for non-business purposes.
19.The ld. DR further stated that during the appellate proceedings, the assessee submitted a chart showing interest free advances and interest free funds available, which is placed at page number 11 of the order of the ld. CIT(A). The ld. DR pointed out that first of all, this chart was not there before the assessing officer and such chart was submitted first time before the ld. CIT(A). Hence it is an additional evidence and therefore this matter may be remitted back to the file of the assessing officer for fresh adjudication. The ld. DR further stated that in the above chart, the assessee has used the sundry creditors, as a source of funds, which is not acceptable because the assessee purchases the goods from the sundry creditors, which forms part of the stock of the assessee, hance, no interest free funds available from sundry creditors, therefore, these sundry creditors should not be part of the interest free funds. Therefore, ld. DR contended that since the assessee has mislead the figures, therefore, addition made by the assessing officer may be sustained.
On the other hand, Learned Counsel for the assessee, Shri K. C. Thacker, vehemently argued that assessee, has huge funds of Rs.28,34,76,940/-, available, as on 31-03-2011, on which no interest is payable, as against interest-free advances given to parties of Rs.4,35,00,000/-. This included Rs.2,15,00,000/- given to Maharaja Salt Works, as advance for purchase of salt. The said party failed to supply salt. Therefore, a civil suit is filed against Maharaja Salt Works for recovery. Thus, the advance was given for commercial consideration for the purpose of business. There was also no instance of relationship attracting section 40A(2)(b) of the Act. The assessee also furnished the bank accounts, as per Page | 11
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation books, statement of accounts, from the banks and accounts of these concerns, as called for by the assessing officer. The assessee had also supplied detailed statement showing secured loans, interest-free funds advances etc. by letter filed on 20-11-2014 for all the financial years 2005- 06 to 2011-12, to examine as a bird eye, overall position of the group. The assessing officer in his "conclusion" has found that the claim disallowable, making vague observation that looking to the capital and reserved surplus and the investment in fixed assets it was found by the assessing officer that no interest-free funds were available with the assessee for giving interest- free advances to these concerns. Thus, assessing officer has accordingly made disallowance of Rs.68,13,104/-, on the ground that the assessee has not discharged the onus of proving nexus of non -interest bearing fund has been utilized for giving interest-free advances.
In this regard, Ld. Counsel submitted that the onus to prove the nexus between the interest bearing loans and interest-free advances is upon the assessing officer and not upon the assessee. The assessee had produced before the assessing officer, the ledger accounts of the concerned parties and also the bank book as well as the bank statements, as demanded by the assessing officer. With these details made available, as required by the assessing officer, it was for the assessing officer to show nexus before making the disallowance of Rs.68,13,104/-. Further, the assessing officer states that "looking to the capital and reserve and surplus and investment in fixed assets" no interest-free funds were available, when the fact is that there are no fixed assets of the assessee, as the assessee is a trading concern. Thus, the assessing officer has gone by wrong notion that capital and reserves are blocked in fixed assets in making the disallowance. The Ld. Counsel further submitted that the disallowance is made by the assessing officer invoking section 36 (1) (iii) of the Act, however, from IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation the data furnished it would be seen that the assessee has EPC/PCFC loans taken against the stock and export receivables and mortgage loan against the property, the assessee has submitted the details of stock in trade and sundry debtors (export) aggregating to Rs.32.55 Crores and interest-free funds of Rs.28.34 Crores, during the year. Thus, it is clear that the capital borrowed for the purpose of business has been apparently used for the purpose of business. The assessing officer has disregarded huge interest-free funds of Rs.28.34 Crores, during the year. The assessing officer has relied upon various decisions which are not applicable to the facts of the assessee`s case. The assessing officer has admittedly not established nexus between capital borrowed and interest-free advances, despite of having lot of information and documents before him, and has ignored the substantial interest-free funds available to the assessee. These aspects have been considered in several judicial pronouncements. The ld. Counsel for the assessee, relied on the following binding judgments of the Jurisdictional High Court of Gujarat and others, which are mentioned below:
(i). ACIT. v. Gujarat Narmada Valley Fertilizers Co. Ltd. (20 14)222 Taxman 28 (Mag)/42 taxmann.com 579 (Guj.)(HC)
(ii). CIT. v. Amod Stamping (P.) Ltd. (2014) 223 Taxman 256 (Guj.)(HC)
(iii). CIT v. Rajendra Brothers (2014)52 taxmann.com 334/(2015) 228 Taxman 348(Mag.) (Guj.)(HC)
(iv). CIT v. Shree Rama Multi Tech Ltd. (2013) 219 Taxman 162 (Mag.) (Guj.)(HC)
(v). CIT v. R.L. Kalthia Engineering & Automobiles (P.) Ltd. (2013) 215 Taxman 9 (Mag.) (Guj.)(HC)
(vi). CIT v. Mahanagar Gas Ltd. (2014) 221 Taxman 80 (Mag.) / 42 taxmann.com 40 (Bom.)(HC) Page | 13
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation (vii). Reliance Industries.v. Addl. ACIT (2014) 159 TTJ 349/55 SOT 8 (Mum.) (Trib.).
Learned Counsel further submitted that a chart showing interest free advances and interest free funds available, which is placed at page number 11 of the order of the ld. CIT(A), was submitted by the assessee before the Ld. CIT(A) to explain the overall position of the group and the figures mentioned in that chart were already available before the assessing officer, therefore, just to submit some figures in a presentation form, does not mean that it is an additional evidence, therefore, for the examination of the same figures, the matter should not be remitted back to the file of the assessing officer. Further, learned Counsel also submitted that assessee does not wish to rely on that chart, which is placed at page number 11 of the order of the Ld. CIT(A), without helping that chart, the assessee has made out a good case, in his favour. The Ld. Counsel also stated that assessee has not used the sundry creditors, as a source of funds. Apart from the sundry creditors, the assessee has enough interest free funds, which is available, to give interest free advance to sister concern. Therefore, ld. Counsel argued that ld. CIT(A) has passed a speaking order, therefore order of the ld. CIT(A) on this issue, may be upheld.
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. We note that assessing officer has made the disallowance u/s. 36(1) (iii) of the Act, out of claim of interest payment on loans taken by the assessee. We find that the provisions of IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation section 36 (1) (iii) of the Act, are enabling provisions, whereby interest claimed is required to be allowed, as a deduction to the assessee, provided the claim is genuine. For the sake of clarity and also being pertinent, we reproduce the provisions of section 36(1) (iii) of the Income Tax Act 1961, ( to the extent useful for our analysis), as follows:
"Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (i) ……; (ia)……..; (ib)…….- (ii)…….; (iia) [Ommited by the Finance Act,1999, w.e.f. 1-4-2000;] (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession, Provided…… Explanation.-……..,”
24.The above provision mandates that payment of interest on loans borrowed for business purpose shall be allowed. Therefore, the assessing officer is obliged to allow the payment of interest on loans taken for business purpose. If, however, the Assessing Officer seeks to make disallowance of interest by invoking the provision of section 36 (1) (iii) of the Act, it is for the assessing officer to establish that interest is paid on the loans, not used for business or that it is diverted for non-business purpose, provided the assessee has submitted all the details before the assessing officer for this purpose, as and when called by the assessing officer, then burden shifts on the assessing officer to explain the IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation assessee that based on the documents and evidences interest bearing funds were used by the assessee for giving interest free advances for non-business purposes. In the assessee`s case under consideration, the assessee submitted details and documents and explained before the assessing officer that had enough interest free funds available for giving interest free advances. There is no failure on the part of the assessee to submit relevant documents and evidences before the assessing officer to prove that sufficient interest free funds available in the Balance Sheet of the assessee. We find that in the assessee`s case, the assessee has taken interest-bearing loans for specific purposes, and the facts that these loans are actually used for the stated business purposes could be verified from paper-book pages 281 & 282 of the assessee`s paper book. We find that the issue of interest-free advances made to the parties, as mentioned by the Special Auditor, the assessing officer required the assessee to make compliance, as shown below.
"You are requested to furnish copies of the bank accounts as appeared in your account books and bank statements furnished by the banks, through which the transactions of advancing amounts were made by you with the aforesaid parties so that the immediate source of funds can be examined."
The above question of the assessing officer, reflects the assessing officer's intention to find immediate source of interest-free advances to the listed parties, as per the mandate of the section 36(1) (iii) of the Act. In the order of assessing officer, under appeal, the assessing officer has recorded that the accounts called for by him were produced by the assessee, including documents and evidences. The assessing officer has, however, not brought on record facts/material based on his examination of the accounts and has not established the immediate source of interest-free advances to be the interest-paid loans received by the assessee. When the burden shifts on the assessing officer, then it is duty of the assessing officer to find out the mistakes and errors in the documents so submitted by the IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation assessee. The whole exercise is to be based on facts and it is the duty of the assessing officer to marshal all the facts and come to a logical conclusion about the income of the assessee for the year under consideration. For that we rely on the Judgment of Hon'ble Supreme Court in case of Sreelekha Bannerjee (491 ITR 122), wherein it was held that “ ..... before the department rejects such evidence, it must either show an inherent weakness in the explanation or rebut it by putting to the assessee some information or evidence, which it has in possession ...”
We find that instead, the assessing officer made unverified and wrong statement that "no interest-free funds were available with the assessee" and irrelevant statement that "the assessee has also not furnished any details or evidence to establish that impugned advances were given for business expediency". The assessing officer has failed to realize that the obligation to establish business expediency would arise on the part of the assessee only when the assessing officer has discharged his obligation to show ( provided the assessee has filed all documents and evidences, as required by the assessing officer, to explain the interest free funds) that any part of interest-bearing loans have been diverted for non-business purposes. In this regard, reliance is placed upon the judgment of Hon'ble Delhi High Court, reported in (2011) 331 ITR 0502, wherein it was held as follows:
12. In the instant case, from the orders of the CIT (A) and that of Tribunal, as reproduced above, in paras 3 and 6, we note that the assessee was maintaining a bank account with mixed common funds in which all deposits and withdrawals were made. There was no specific instance noted by the assessing officer in respect of any direct nexus between the borrowed fund and the said advances made to the subsidiaries. The assessing officer had made general observations without going into the depth of the matter and without pointing out any specific instance where an interest- bearing borrowing was advanced to the subsidiaries or establishing that the borrowings made by the assessee were not for business purposes.
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation
We find that the issue of disallowance u/s.36 (1) (iii) of the Act, out of the claim of interest, arose in the assessment proceedings, on account of the report of the Special Auditor, who had only mentioned that the assessee has taken loans from Banks/Financial institutions and has paid interest. The Special Auditor, then, gave a list of parties who were given interest-free loans and also provided their ledger accounts (page 19/paper-book). When the Spl. Auditor was able to provide such information/ledger accounts from the books of account, obviously he had scanned through the entire ledger meticulously and thoroughly. However, while he could find the accounts listed by him, his discerning eye failed him to find accounts reflecting huge interest-free receipts by assessee from sister concerns, despite there being ledger accounts of sister concerns, reflecting interest free funds provided to the assessee. Further, the Spl. Auditor mentioned in his list, accounts of Friends Mercantile Pvt. Ltd. and Gautam Freight Pvt. Ltd, in receipt of interest-free advances from assessee, entailing disallowance of Rs.40,49,780/- but again failed to notice the ledger accounts of the very same parties, reflecting huge amounts owed to them by the assessee, towards purchases and services expenses. The ld Counsel submitted before the Bench, two ledger accounts, not noticed by the Spl. Auditor and also by the Assessing Officer, and working of interest impact of these accounts vis-à- vis the disallowance of Rs.40,49,780/- made in respect of the said parties. It would be noticed that as a matter of fact, considering the amount due to these two parties in trading accounts, interest payable to them worked out to more Rs.62,46,112/-, than the interest disallowed by the assessing officer. Therefore, even on facts, the disallowance of Rs.40,49,780/- is the result of lack of inquiry by the assessing officer.
Further, scanning of the entire ledger and picking up and choosing only such accounts (of interest-free advances) by the Spl. Auditor, again failed him to Page | 18
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation notice the accounts of other sister concerns providing huge interest-free funds to assessee, like:
(i) Friends & Friends Shipping Pvt. Ltd., (ii) Friends Salt Works and Allied Industries and (iii) Kandla Agro & Chemicals Pvt. Ltd. Therefore, ld Counsel argued that assessee have sufficient interest-free funds that the assessee has used for interest-free advances. Even before the CIT (A), assessee mentioned that assessee has huge interest free funds received from sister concerns. The assessee submitted ledger accounts of these three sister concerns, Friends & Friends Shipping Pvt. Ltd., Friends Salt Works and Allied Industries and Kandla Agro & Chemicals Pvt. Ltd., with corresponding bank- books to corroborate the transactions in the ledger accounts and working of interest that would have been payable at the rate of 12% (applied by the assessing officer) but not actually paid. This would make it amply clear that the Group as a whole followed a policy not charge interest when funds are made available to sister concerns, as these advances are out of interest free funds.
We find that learned CIT (A) gave importance to the fact that all the Group concerns happened to make such interest-free advances to one or the other concern, as per the needs of the business of the Group, which is more or less the same and complimentary to each other. The CIT (A) also noticed that similar disallowances were made in almost every case when each such concern happened to have received interest-free loans or given interest-free loans at some point of time. The ld Counsel pointed out that two concerns of the group, namely, Friends Mercantile Pvt. Ltd. and Gautam Freight Pvt. Ltd, in respect of which disallowance of over Rs.40 lakhs has been made, were in the subsequent Page | 19
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation year recipients of interest-free loans from the assessee. The CIT (A) also took notice of the fact that all the concerns were in paying tax in the highest tax- bracket and therefore there was no justification in making such disallowances in every case.
It is also a settled-principle that ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his business. The Hon'ble Apex Court in the case of Sassoon J David and Co. (P) Ltd vs CIT Bombay (118 ITR 261)(SC) held that expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction for the same. Even the Hon'ble Karnataka High Court in the case Commissioner of Income-tax vs Motor Industries Company Limited (1907) (223 ITR 112) was of the view that the commercial expediency of a businessman's decision to incur, an expenditure cannot be tested on the touchstone of strict legal liability to incur such an expenditure. Such decisions in the very nature of things have to be taken from a business point of view and have to be respected by the authorities no matter that it may appear, latter, that the expenditure incurred was unnecessary or avoidable. The assessing officer ought not to have questioned the commercial prudence of the transaction entered into by the assessee, businessman, when there was nothing on record to show that the transaction was not genuine. It is a settled principle of law that business or commercial expediency has to be judged from the perspective of the businessman and not of the Revenue, since it is the businessman who is being benefited from the services rendered and also it is he who knows to what extent the benefit ensures to him. Reliance in this regard may be placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Dhanrajgiri Raja Narasingirji, reported in 91 ITR 544 (SC), wherein it was held that "it is not open to the department to prescribe what expenditure an Page | 20
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation assessee should incur and in what circumstances he should incur the expenditure.
We find that assessee pleaded before the assessing that advances are out of interest-free funds available with the assessee and filed copy of accounts of parties and bank statements and subsequently also pleaded business expediency. The ld CIT(A) noted that all the business concerns of the group are assessed at the maximum marginal rate and therefore question of inference of any tax avoidance does not arise. It is also stated that the different concerns of the group have interdependent business operations and business activity of one concern cannot be carried out without availing services from other concerns. In this background, the requirements of business fund by each concern have to be examined. If one concern of the group faces urgent requirement of fund and the other concern is in a position to provide the same so that business interest of both the concerns are protected, any amount advanced without charging interest to/from such concerns is necessarily for the purpose of business/commercially expedient and in respect of providing/receiving such non- interest bearing advances, no question of making any disallowance should arise, as held by the Supreme Court in the case of S A Builders v. CIT 288 ITR 1, the findings of the Hon`ble court is reproduced below:
“…..In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. Thus in Atherton vs. British Insulated & Helsby Cables Ltd (1925)10 TC 155 (HL), it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business…The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of. business. The IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits......”
30.During the course of hearing, based on the audited balance-sheets for respective years, the ld. Counsel has also submitted the following position of interest-free funds from year to year to buttress the argument that the assessing, in the face of submissions made, and easily verifiable from the records available with him and produced before him, clearly erred in not appreciating the argument canvassed before him that the interest free advances have been made clearly out of interest-free funds available with the assessee and that there really remained nothing further to be established. The assessing has ignored this fact and has taken recourse to section 36(1)(iii) by making disallowance in all connected group cases. Therefore, we find that judgements on which ld DR for the revenue has relied, are distinguishable on facts and do not apply to the assessee under consideration. We find that the disallowance is made by the assessing officer by invoking section 36 (1) (iii) of the Act. From the data furnished it would be seen that the assessee has EPC/PCFC loans taken against the stock and export receivables and mortgage loan against the property. The assessee has submitted the details of stock in trade and advance against goods aggregating to Rs.60.74 Crores and interest-free funds of Rs.46.84 Crores during the year. Thus, it is clear that the capital borrowed for the purpose of business
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation has been apparently used for the purpose of business. The assessing officer, has disregarded huge interest-free funds of Rs.46.84 Crores, during the year. Thus, we find that assessing officer has admittedly not established nexus between capital borrowed and interest-free advances, despite of having data and information with him, and has ignored the substantial interest-free funds available to the assessee. These aspects have been considered in several judicial pronouncements, some of which are binding judgments of the Jurisdictional High Court of Gujarat, which are as follows:
(i). ACIT.v. Gujarat Narmada Valley Fertilizers Co. Ltd. (2014)222 Taxman 28 (Mag.)/42 taxmann.com 579 (Guj.)(HC)
(ii). CIT.v. Amod Stamping (P.) Ltd. (2014) 223 Taxman 256 (Guj.)(HC)
(iii). CIT v. Rajendra Brothers (2014) 52 taxmann.com 334 / (2015) 228 Taxman 348(Mag.) (Guj.)(HC)
(iv). CIT v. Shree Rama Multi Tech Ltd. (2013) 219 Taxman 162 (Mag.) (Guj.) (HC)
(v). CIT v. R.L. Kalthia Engineering & Automobiles (P.) Ltd. (2013) 215 Taxman 9 (Mag.) (Guj.)(HC)
Therefore, we find that it is not the case of the assessing officer that the interest free advances given by the assessee were withdrawn by the sister concern and utilized for personal purpose such as buying of property by the directors or making donations or gifts, as is the case, in many of the decisions cited by the assessing officer. In fact, short term advances to meet with urgent requirements of sister concerns with whom regular business is also transacted on daily basis, is squarely covered under the phrase "for the purpose of business"
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation occurring in section 36(1)(iii) as well as 37(i) of the Act. Thus, there is no tax- avoidance angle also, there can be no justification for assessing officer to have made a disallowance when firstly advance is made out of interest free funds and secondly the interest-bearing loans are deployed for the purposes for which the funds are borrowed and also there is manifest business expediency, and assessing officer has not demonstrated the personal or non-business or purely charitable use by the recipient. For that reliance is placed on the judgement of the jurisdictional High Court of Gujarat in the case of RL Kalthia Engineering & Automobiles (P.) Ltd,[2013] 33 taxmann.com 14 (Gujarat), wherein it was held as follows:
“6.It is well established proposition that when the Revenue fails to establish any nexus between the borrowed funds and the funds diverted/lent, any denial of allowances of interest under Section 36[1](iii) is not permissible. In the instant case, as both the authorities have held concurrently on the basis of material available that sufficient amount of interest-free funds were available with the assessee-respondent and therefore also, there is no justification in interfering with the decision of both these authorities. Resultantly, the question of law proposed is answered accordingly."
32.Deployment of fund available with one concern of the group, whether or not interest bearing, to other sister concern, to meet with business requirements of later with which the former has extensive business, cannot be termed as used not for business purpose as the term "for the purposes of business" is of wide import, and includes even the business of the associate. Therefore, we are of the view that when the recipient is not demonstrated by the assessing officer to have utilized the interest-free funds for personal, non-business or purely charitable purpose, the prudence of the businessman himself in making the interest-free advance is critically relevant and possibly decisive for a finding of business expediency, particularly if and when the recipient of interest free funds is also taxed at maximum rate. The facts of the case, in our view are also thus squarely covered by the Supreme Court decisions in the cases of M/s. S A Builders
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation (supra) Gujarat HC decisions in Kalathia Engineering and Gujarat Narmada Valley Fertilizers ( supra). Therefore, based on these facts and circumstances, we do not find any infirmity in the order of the ld. CIT (A).That being so, we decline to interfere with the order of Id. CIT(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed.
33.The assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012–13, has pressed the ground stating that learned CIT(A) has erred in law and on facts in confirming the disallowance made by the assessing officer of Rs.44,40,000/- out of the interest claim. We find that assessee`s claim for the interest, of Rs. 44,40,000/-, is genuine. As we have pointed out above that the commercial expediency of a businessman's decision to incur, an expenditure cannot be tested on the touchstone of strict legal liability to incur such an expenditure. Such decisions in the very nature of things have to be taken from a business point of view and have to be respected by the authorities no matter that it may appear, latter, that the expenditure incurred was unnecessary or avoidable. The assessing officer ought not to have questioned the commercial prudence of the transaction entered into by the assessee, businessman, when there was nothing on record to show that the transaction was not genuine. It is a settled principle of law that business or commercial expediency has to be judged from the perspective of the businessman and not of the Revenue, since it is the businessman who is being benefited from the services rendered and also it is he who knows to what extent the benefit ensures to him. Based on these facts and circumstances, we allow the ground pressed by the assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012–13.
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation
In the result, summarized ground No.1 (ground No.1 in for A.Y. 2011-12, and ground No.1 is in for A.Y.2012-13 at Rs. 2,18,04,979/-), of the revenue, is dismissed and ground pressed by the assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012–13, is allowed.
The summaries and concise ground No.2 is reproduced below:
“(2)Ground No.2:The Ld. CIT(A) has erred in law and on facts in detecting the addition on account of disallowance of under valuation of stock of repressed Doc and salt at Rs. 3,95,62,067/-, though there were some errors in valuation of closing stock on FIFO basis.[This ground No.2 is in Revenue’s appeal in for A.Y. 2011-12]”
Succinct facts qua ground No.2 are that during the assessment proceedings, the assessing officer noticed the some discrepancy was pointed out by the Special Auditor. The firm has valued closing stock of Salt weighing 210,978.767 MT @ 383.54 PMT. However, most of purchases in the Month of February and March 2011 are at Rs. 555/-. This shows that closing stock of Salt is undervalued. Therefore, assessing officer issued a notice to the assessee to explain for adopting valuation of closing stock at the rate of Rs.383.54 per MT, as against purchase rate of Rs.555/- during the year under consideration. Why the closing stock may not be revalued at the rate of Rs.555/- per MT?
In response, the assessee submitted, written submission before the assessing officer, along with documentary evidences, which is reproduced below: “Again, the Special Auditor has made the same kind of mistake. He has not taken note of the method of valuation of stock as mentioned in the Audit Report which in "cost or market whichever is lower". There is stock of over 2 lacs MTS at the end of the year and since we do not value the stock at market rate the question of straightway adapting the rate of purchase of last two months does not arise. It may also be kept in IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation
view that in salt what happens is later purchase happens to go in for sale first as salt is lying on open plots in heaps and what has arrived last gets sold and delivered first. Since the opening stock and purchases during the year got all mixed up it was difficult to arrive at the cost of stock available at the end of the year?. Therefore we divided the total quantity of opening stock quantity purchased during the year by the amount of total cost, which comes to Rs.363/. Unfortunately, the accountant has taken the figure of Rs.383/- instead of Rs.363/- as the value of stock. There is mistake to this extent, but this is not understatement value of closing stock.”
However, assessing officer rejected the contention of the assessee and observed that the assessee -firm has valued closing stock of salt weighing 210978.767 MT @ Rs. 383.54/- per MT, the most of the purchases of salt were made in the Month of February & March-2011 @ Rs. 555/- PMT. This clearly indicate that the assessee has undervaluation of closing stock of salt. The under valuation is Rs. 171.46/-PMT (Rs. 555- 383.54). The under valuation of closing stock, therefore, worked out of Rs. 3,61,74,419/- (Rs. 171.46 X 210978.767). Therefore, the amounting to Rs. 3,61,74,419/- was disallowed by the assessing officer and added to the total income of the assessee. Similarly, the assessing officer has also rejected the explanation of the assessee about the valuation of stock of Rapeseeds DOC, by reiterating the contents of the show-cause notice and insisting that while Rapeseeds DOC valuation should have been at average purchase rate, therefore, assessing officer worked out under valuation of Rapeseeds DOC at Rs. 84, 51,120/-. Therefore, the assessing officer has rejected the explanation of the assessee about the valuation of stock by reiterating the contents of the show-cause notice and insisting that while Rapeseeds DOC valuation should have been at average purchase rate, the salt valuation should have been at the rates of purchases made during the Month of February and March, and thus makes the respective addition of Rs. 84,51,120/- and Rs. 3,61,74,419/-, holding that there is under – valuation of closing stock. Therefore, assessing officer made total addition on account of undervaluation of closing stock at Rs. 4,46,25,539/- ( Rs. 84,51,120 + Rs. 3,61,74,419).
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation
On appeal, the learned CIT (A) deleted the addition partly. The ld CIT(A) observed that there is some adjustment to the valuation of closing stock adopted by the assessee, which is necessary, notwithstanding the fact that the assessing officer himself has not given effect to valuation adopted by him, in the opening stock of next year. This is for the reason that while the assessee submitted before the assessing officer that the valuation is based on the average cost price of opening stock plus purchases, the same could not be substantiated by the assessee, during the appellate proceedings. Moreover, the ld CIT(A) noted that the method of valuation for the year under reference adopted is not consistent with the method adopted for preceding and the subsequent years. Therefore, ld CIT(A) was of the view that the valuation for the year under reference would need to be revised upwards by Rs.24 per, mt. Though it was also submitted by the assessee, before ld. CIT (A) that such an action is uncalled for in view of the fact that in subsequent year also, the tax rate is same. Therefore, ld CIT(A) held that an addition of Rs. 50,63,472/- @ of Rs.24 per,mt. is called for, so as to maintain the consistency as also the matching principle. Thus, ld CIT(A) held that out of the total addition of Rs.4,46,25,539/-,( Rapeseed doc,Rs.84,51,120 + salt,Rs.3,61,74,419/-) on account of valuation of closing stock, an amount of Rs.50,63,472/- was upheld while the balance amount of Rs.3,95,62,067/- (Rs.4,46,25,539-Rs.50,63,472) was deleted.
Since, the ld. CIT(A) deleted the addition of Rs.3,95,62,067/- (Rs.4,46,25,539-Rs.50,63,472), therefore, revenue is in appeal before us. 39. Learned DR for the Revenue, argued that valuation of closing stock of Rapeseeds DOC and salt, the assessee, has not been following consistently one method. In some cases, the assessee valued the closing stock at average price, whereas in some cases, “ cost or net realization value, whichever is lower”, that is why, assessing officer has rejected the explanation of the assessee about the Page | 28
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation valuation of stock in respect of Rapeseeds DOC and salt. The assessing officer rightly held that valuation of Rapeseeds DOC should have been at average purchase rate, and the salt valuation should have been at the rates of purchases made during the month of February and March. Therefore, ld DR contended that valuation made by the assessing officer, in respect of Rapeseeds DOC and salt should be upheld.
On the other hand, learned Counsel for the assessee submitted that the valuation of closing stock in respect of Rapeseeds DOC and salt, made by the assessing officer, is itself wrong, because assessing officer does not give impact to the opening stock of the assessee and hence the assessing officer, has worked one side only, that is, to value the closing stock, however, does not give the effect of his evolution in the next year in the opening stock. Moreover, the income tax rates for the current year under consideration and in the subsequent year, are same, therefore, there is no escapement of income, by the assessee, that is, there is no loss to the revenue. The ld Counsel pointed out that the valuation of Rapeseeds DOC adopted by the assessing officer is representing the market value and the assessee on the other hand, is valuing the closing stock at "cost or market price", whichever is lower, which is correct valuation method, therefore, even addition sustained by the ld. CIT(A) to the tune of Rs. 50,63,472/-, may be deleted.
We have heard the Learned Counsel appearing on behalf of the respective parties at length. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. We find that assessing officer has made the addition, as discussed by him in para 5 the assessment order. The additions are based on observation of the special auditor in para 3 and 4 of the qualifications. While referring to the Page | 29
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation valuation of closing stock of Rapeseeds DOC, the special Auditor observed that the valuation is at a rate lower that the average purchase rate for the year. Similarly, with regard to valuation of closing stock of salt, the special Auditor observed that the rate adopted for valuation is less that the rates of most of the purchases in the month of February and March made by the assessee. The assessing officer, as discussed by him in para 5 of the assessment order, called upon the assessee to justify the rates of valuation adopted by the assessee. The assessee replied with regard to Rapeseeds DOC that the special Auditor has adopted the figure of Rs. 11,034 per,mt. on the basis of average purchase price for the year. However, the assessee is valuing the closing stock of Rapeseeds DOC at rates arrived at on the basis of FIFO, that is, the cost of latest purchase, which the assessee considers to be lying in the stock. It was further submitted by the assessee, during the appellate proceedings that the valuation at the rate of Rs. 9,503/- per,mt. is rightly arrived at by the assessee on the basis of method consistently followed. Similarly, with regard to the stock of salt, as the assessee does not value the stock at “market rate”, the question of straightaway adopting the rate of purchase of last two months, does not arise. It was further submitted before learned CIT(A) that the rate of valuation of closing stock is arrived at for salt by the assessee at an average cost of opening stock and purchase made during the year. It was further submitted by the assessee that as such, but for the mistake by the accountant, the correct rate as per the method consistently followed is lower at Rs. 363 per,mt. and not Rs. 383 per,mt. as adopted by the assessee. However, assessing officer has rejected the explanation of the assessee about the valuation of stock by reiterating the contents of the show-cause notice and insisting that while Rapeseeds DOC valuation should have been at average purchase rate, the salt valuation should have been at the rates of purchases made during the month of February and March, and thus makes the respective addition of Rs. 84,51,120/- and Rs. 3,61,74,419/-, holding that there is under – valuation of closing stock. Page | 30
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation
We find that during the appellate proceedings, the assessee pointed out that the valuation of Rapeseeds DOC adopted by the assessing officer is representing the market value and the assessee on the other hand, is valuing the closing stock at "cost or market price", whichever is lower. The ld CIT(A) observed that neither Special Auditor has made any adverse comment nor has the assessing officer made any addition with regard to valuation of closing stock either for assessment year preceding or succeeding the year under reference. When the assessee's submission is to the effect that the valuation method is consistently followed, picking up an intervening year and making addition on account of valuation of closing stock without any corresponding action in preceding or subsequent years, does not make a sound decision.
We note that assessing officer has also not based his decision of making the addition by changing the valuation of closing stock on the fundamental accounting principle of "valuation of stock to be at lower of cost or market price, whichever is lower, and to be consistently followed". We also find that despite having re-valued the closing stock for the year under reference, the assessing officer has not altered the opening stock of the subsequent year which makes his decision self-contradictory.
The ld CIT(A), having gone through the above facts, noticed that assessing officer has not gone into the factual verification of the submission made by the assessee, particularly vis-à-vis the claim of consistency with regard to the method of valuation. Accordingly, the ld CIT(A) had called for the statements of the valuation of stock of Rapeseeds DOC and of salt for the preceding and succeeding years and ld CIT(A) found that with regard to valuation of Rapeseeds DOC, the assessee is indeed following the method of arriving at the quantity as available in the closing stock starting from the last purchase and Page | 31
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation going back, so as to arrive at the quantity found in the closing stock. In other words, the closing stock is taken by the assessee to be comprising the last of the purchases and as per this FIFO method, the cost is arrived at as the figure of last purchases, therefore, ld CIT(A) observed that this method to be followed consistently. Therefore, ld CIT(A) held that there is no merit in disturbing the valuation of closing stock of Rapeseeds DOC.
Coming to the valuation of salt, the assessee has submitted the statements of valuation of closing stock of salt as on 31/3/2010, 31/3/2011 and 31/3/2012. It was submitted by the assessee, by way of a note that for all the three years under reference, the valuation of the closing stock of salt has also been done at FIFO method (this is different from what was submitted to the assessing officer or to ld CIT(A), and the average cost is arrived at on the basis of last of the purchases as comprised in the available closing stock. The audit note for the year under reference reads as under: "Method of valuation of stock of salt as followed in Assessment Year 2010-11 and 2012-13 is based on the average cost of the quantity of the last purchases of the year equaling the available quantity of closing stock i.e. on First in First out basis. However, in the year under consideration, due to bona fide calculation mistake as committed by the accountant stock were valued @Rs.383.54 PMT instead of Rs.407.43 PMT as worked out under FIFO Method. It may be submitted that there is no revenue implication as tax rate of both the years are same."
47.The ld CIT(A) observed the valuation done by the assessing officer and after perusal of the statements of valuation of closing stock, substantiating the valuation adopted, and the note to the statement, the ld CIT(A) was of the view that obviously there is some adjustment to the valuation of closing stock adopted by the assessee, which is necessary, notwithstanding the fact that the assessing officer himself has not given effect to valuation adopted by him, in the opening stock of next year. This is for the reason that while the assessee submitted before the assessing officer that the valuation is IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation based on the average cost price of opening stock plus purchases, the same could not be substantiated by the assessee, in a proper way. Moreover, ld CIT(A) noticed that the method of valuation for the year under reference adopted is not consistent with the method adopted for preceding and the subsequent years. Even by assessee's own submission, the valuation for the year under reference would need to be revised upwards by Rs.24 per,mt. though it is also submitted by the assessee that such an action is uncalled for in view of the fact that in subsequent year also, the tax rate is same. Therefore, ld CIT(A) made an addition of Rs. 50,63,472/- @ of Rs.24 per,mt. The ld CIT(A) noticed that this addition is obviously called for, so as to, maintain the consistency, as also the matching principle. Thus, out of the total addition of Rs.4,46,25,539/-, on account of valuation of closing stock, an amount of Rs.50,63,472/- was upheld while the balance amount of Rs.3,95,62,067/- ( Rs.4,46,25,539- Rs.50,63,472) was deleted, by ld. CIT(A). Therefore, after having regard to the given facts and circumstances of the case, in our considered view, the action of the ld.CIT(A) does not warrant any interference. Accordingly, the ground of appeal of Revenue is dismissed.
48. In the result, the summaries and concise ground No.2, (in Revenue’s appeal in for A.Y. 2011-12), is dismissed.
49. The summaries and concise ground No.3 of the revenue, is reproduced below for ready reference:
3.Ground No.3:The Ld. CIT(A) has erred in law and on facts in detecting the addition on account of disallowance of handling/ spillage/wastage loss of Rs. 1,35,69,000/-. (This is ground No. 2 in Revenue’s appeal in IT(SS) No. 136/Ahd/2016 for A.Y. 2012- 13). Page | 33
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation
Brief facts, qua the issue are that during the assessment proceedings, the assessing officer noticed the discrepancy pointed out by the special auditor and observed that assessee has claimed handling/spillage/wastage loss from salt trading. During the year, the firm has claimed handling/spillage/wastage loss of 18,092 M.T. During the course of audit, the firm was asked to provide explanation on such claim with proper evidences. However, no satisfactory written explanation and evidences were provided by the assessee. Therefore, assessing officer, issued a show- cause notice stating that why the handling/spillage/wastage loss of 18,092 M.T. may not be disallowed being non- genuine.
In response, to the notice of the assessing officer, the assessee submitted its reply before the assessing officer with documentary evidences, which is reproduced below: “The Assessee- firm submits that they are engaged in the business of trading of goods and commodity. During the year under consideration, they had opening stock and purchases, aggregate quantity of which came to 8,34,887.338 Mt. After considering the sales and closing stock aggregating to 8,16,795.595 Mt; the shortage came to 18,091.743 Mt. Thus, on the turnover of the total quantity of 8,34,887.338 Mt. the shortage of 18,091.743 Mt. works out to 2.17% only which could not be considered high considering the particular facts and circumstances of this line of business. It may also be submitted that the shortages cannot be expected to be at a fixed level and are necessarily variable on account of various factors including the natural forces like heavy rains, cyclones etc. The specific circumstances of the case are explained below. In the salt business the stock in trade of salt is not kept in well defined sheltered or protected area in packed and stacked bardans with fixed quantity The salt is kept in big heaps on open land. Such stock has to be regularly washed to remove the dust that would settle in course of time, and in the process the salt would also get washed away. The stock would also reduce heavily in monsoon due to rains. Due to these reasons the stock of salt is reduced. It may also be mentioned here that the quantity of stock in a heap cannot be actually weighed. Even when the salt is purchased or sold the weight is approximate based on the truck capacity or tonnage. When the purchased salt arrives, it is unloaded on the heap. At the year-end after considering the sales and closing stock the shortage is arrived at. The quantity of closing stock lying in a heap the open plot of land has to be determined by approximation taking into account the Page | 34
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation size (length and width) of the heap and its height. There is no other way to determine the quantity. It is simply impossible, impracticable and unviable to do weighing of the stock of salt in heap. If one happens to travel to Kutch many such big heaps of salt would be seen. We may submit that the Team of the Special Auditor demanded to see such heaps of salt and the process of washing etc. They were taken to visit several of such heaps where they personally saw the watering/washing of the salt in the heap and the consequential loss of stock with the salt getting washed away. In fact, the Special Auditor had also been informed in writing that as per his demand his Team Members were taken for visit and had seen the process of washing on 05-07-2014 and again on a second occasion on 01-09-2014. In this background of facts when Team of the Special Auditor having witnessed the process of washing and consequential loss of stock with their own eyes it is really incomprehensible that the Special Auditor has raised the issue and that too by working out in illogical manner highly exaggerated percentage of shortage.”
However, the assessing officer rejected the above contention of the assessee and observed that during the course of special audit, the assessee has not submitted any documentary evidence in respect handling/spillage/wastage loss from Salt trading of 18,092 MT. Further, the reply of the assessee in this regard is general nature. The assessee has claimed 18,092 MT of handling/Spillage/wastage loss. The value of such goods at closing rate comes to Rs. 750/- per MT; therefore, the claim of handling/Spillage/wastage loss work out to Rs. 1,35,69,000/-, ( 18,092 x Rs.750), hence, the same was disallowed by the assessing officer and added to the total income of the assessee.
Aggrieved, by the addition made by the assessing officer, the assessee carried the matter in appeal before the learned CIT(A), who has deleted the addition made by the assessing officer. The ld CIT(A) observed that the stock of salt is kept in open and obviously there are spillages and wastages on account of loading, unloading wind, washing, rain and even inaccuracy in quantification of purchase and sale, a reasonable claim of wastage/spillage is bound to be there and cannot be disputed without any adverse material brought on record. Hence, ld. CIT(A) deleted the addition.
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation
Learned DR for the revenue argued that during the year, the assessee has claimed handling/spillage/wastage loss of 18,092 M.T and when the assessee was asked to provide explanation on such claim, no satisfactory written explanation and evidences were provided by the assessee. Therefore, assessing officer, has rightly made the addition.
On the other hand, learned Counsel for the assessee pleaded that on a total turnover of 8.16 lacs MT, a shortage/handling loss of 18,092 MT, works out only to 2.17% and which is quite reasonable and incidental to the business of the assessee. The ld Counsel further submitted that the salt is kept in heaps in open areas and the spillage/wastage is a necessary aspect of assessee's business. Moreover, the quantity in heap is arrived at only on the basis of physical measurement and experienced estimate, and it is impossible to physically weigh the quantity and there are spillages and wastages on account of loading, unloading wind, washing, rain etc. Therefore, ld. Counsel stated that order passed by the ld. CIT(A) is just and proper, therefore, the same may be upheld.
We heard both sides in detail and also perused the records of the case including the paper book filed by the assessee. The necessary facts of the case have already been discussed in paragraphs above. On examination of the facts and circumstances of the case, we find that it is a natural phenomenon that due to loading, unloading wind, washing, rain and even inaccuracy in quantification of purchase and sale, a reasonable claim of wastage/spillage is bound to be there and cannot be disputed without any adverse material brought on record.We find that the addition made by the assessing officer is discussed by the assessing officer in para 5 of the order. The Special Auditor has observed that the assessee has claimed handling/ spillage/wastage loss from salt trading. It is further observed that the assessee has claimed such loss of Rs. 18,092 MT; and that in the absence of proper stack records of salt, and evidences for such claim, it is Page | 36
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation quite difficult to consider the claim. The assessing officer called for explanation of the assessee on the issue and the assessee's detailed reply has been reproduced by the assessing officer in the assessment order. It was submitted before the assessing officer that on a total turnover of 8.16 lacs MT, a shortage/handling loss of 18,092 MT, works out only to 2.17% and which is quite reasonable and incidental to the business of the assessee. It was further submitted that the salt is kept in heaps in open areas and the spillage/wastage is a necessary aspect of assessee's business. Moreover, the quantity in heap is arrived at only on the basis of physical measurement and experienced estimate, and it is impossible to physically weigh the quantity, the stock of salt, either at the time of purchase or at the time of sale or at the time of quantifying the same at the year end. It has been categorically submitted further by the assessee before the assessing officer that the position of stock in heap form and the watering/washing of the salt in such heap form was shown to the team of Special Auditors twice and that thereafter query was raised by the Special Auditors. The loss as claimed is genuine, is forming part of the audited accounts, is arrived at on the basis quantities of purchase/sale and being genuine, needs to be allowed. The assessing officer however, observing that there is no documentary evidence or stock details in respect of such loss, the same cannot be allowed. Thus, the assessing officer made the addition of Rs. 1,35,69,000/-[ @Rs.750 per mt.x18,092 MT).
57.Before, the ld. CIT(A), the assessee reiterated the submissions made before the assessing officer. Additionally, it was submitted by the assessee that the loss of Rs.2.17% claimed during the year under reference is not less as compared to the preceding year, no such disallowance is made or contemplated by the assessing officer in any of the preceding years. Additionally, it was submitted that even during the course of the search, no discrepancy with regard to the stock of salt was found. Besides, no any of the purchases or sales have been Page | 37
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation doubted by the assessing officer. The books of accounts have been audited with complete quantitative tally for purchase and sale of salt and no defects were found by the Special Auditor or even the assessing officer, in the books of accounts. It was thus, submitted that the action of the assessing officer was based merely on observation of the Special Auditor, has no merit and therefore, the same was deleted by the ld. CIT(A). Having given a considerable thought to the contents of the assessment order and the submissions made on behalf of the assessee, we find that indeed the assessing officer has not doubted or taken any adverse view in any of the years except the year under reference. Considering the fact that the stock of salt is kept in open and obviously there are spillages and wastages on account of loading, unloading wind, washing, rain and even inaccuracy in quantification of purchase and sale, a reasonable claim of wastage/spillage is bound to be there and cannot be disputed without any adverse material brought on record. Similarly, the ld CIT(A) also found favour with the submission of the assessee that during the course of the search, no discrepancy in the stock or evidences with regard to wrong claim of wastage/spillage or of unaccounted sales have been found or seized. Moreover, no such disallowance has even been considered by the assessing officer in any of the other years, that is, in previous years or subsequent years. In view of this, the assessee was right in his submission that the rejection of claim is arbitrary and not justified in law. Accordingly, it was held by ld. CIT(A) that there is no merit in the action of the assessing officer and therefore the addition of Rs. 1,35,69,000/- was deleted by ld CIT(A). In the wake of above delineation, we see no error in the conclusion drawn by the CIT(A) in this regard. The CIT(A) in our view, has rightly deleted the addition. We, thus, decline to interfere with the conclusion so drawn by the CIT(A) whose order is under challenge by the revenue. Therefore, based on these facts and circumstances, we dismiss the summarise and concise ground No.3 of the revenue.
IT(SS)A No.135, 136, 177, 178/Ahd/2016 Assessment Year.2011-12, 2012-13 Kandla Exports Corporation
In the result, the summaries and concise ground No.3, (in IT(SS) No. 136/Ahd/2016 for A.Y. 2012-13) of the revenue, is dismissed.
In the combined result, all appeals of the revenue, are dismissed, whereas, the relevant ground pressed in cross objection No.178/Ahd/2016, for assessment year 2012–13, is allowed, to the extent indicated above.
Order pronounced in the open court on – 28- 02-2025