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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
PER SHRI VIKRAM SINGH YADAV, A.M.
This is an appeal filed by the assessee against the order of ld. CIT(A)-2,
Jaipur dated 19.01.2015 wherein the assessee has taken the following
grounds of appeal:
“(i) (a) The Ld. CIT (Appeals)-II, Jaipur has erred in law as well as on facts while estimating the GP rate @ 6% arbitrarily instead of @ 4.75% as declared without considering the facts and circumstances of the case, thereby making an addition of Rs.13,09,166/-. (b) The Ld. CIT (Appeals)-II has erred in law as well as on fact while considering the rejection of accounts u/s 145(3) of the IT Act.
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur (c) The Ld. CIT (Appeals)-II has erred in law as well as on facts while making observation that valuation of closing stock is undervalued. (d) The Ld. CIT (Appeals)-II has erred in law as well as on facts while observing that the stock records have not been maintained properly in spite of fact that assessee is registered with excise department and all the records have been maintained regularly as required under relevant Act/rules”. “2. The Ld. CIT (Appeals)-II has erred in law as well as on facts while considering the addition of Rs.498,414/- being interest paid without deduction of tax at source u/s 40a(ia)”.
“3. The Ld. CIT (Appeals)-II has erred in law as well as on facts while making disallowance of Rs.388,276/- out of Interest exp. assuming notional interest income on advance paid.”
Firstly, we take up the ground regarding rejection of books of accounts
and estimation of gross profit rate. Briefly, the facts of the case are that the
assessee is engaged in the business of manufacture of DPC Copper wire and
aluminium wire. For the year under consideration, the Assessing officer
observed that though the turnover has increased vis-a-vis last year, the gross
profit ratio has dropped to 4.74% as against 7.46% in A.Y. 2010-11 and
5.06% in A.Y. 2009-10. The Assessing Officer thereafter found certain defects
in the books of accounts and basis that, the books of accounts were rejected.
Being aggrieved, the assessee carried the matter in appeal. The ld CIT(A) has
given his findings on each of the grounds raised by the AO forming the basis
for rejecting the books of accounts after taking into consideration the
explanation of the assessee which is reproduced as under: 2
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur “(a) The Valuation of closing stock is not correct since a large part of
the closing stock has been valued as sub standard stock at prices below
the cost price. The appellant stated that this part of the stock had been
rejected and therefore, the assessee expected to sell it at a lower price.
The appellant has stated that this stock was sold at a lower price in the
next year. Out of the bills submitted by the appellant, I only find two
bills of sale of sub standard stock. Also, the appellant has not given any
details of the customer who had rejected the stock.
The Assessing Officer has also stated that the stock of aluminum
and DPC wire is under valued. The appellant has given a valuation chart
for the above stock on FIFO basis. As per this valuation chart, the value
of closing stock is close to the value of this valuation but not equal to
this valuation, as should be the case.
(b) The Assessing Officer has observed that the assessee has sold
goods to two entities viz M/s. Keshav Electrical Pvt. Ltd. & M/s.
Rajasthan Transforms & Switchgears at prices lower than the material
cost. The Assessing Officer has also cited such instances in the
assessment order. The appellant has not disputed the above findings
but has stated that this was due to fluctuation of the price of copper in
the international market and the method of pricing adopted by M/s.
Sterlite Industries Ltd. I have perused the chart of average price of
copper in each month and find that this price has fluctuated during the 3
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur year. However, this fluctuation has been both on the higher side as well
as the lower side. Therefore, the G.P. component would contain
instances of high profits as well as low or no profits. The appellant has
stated that it has sold around 20% of its goods to M/s. Keshav Electrical
Pvt. Ltd. and has thereore, given them good rates. Regarding,
Rajasthan Transforms & Switchgears, the appellant has not furnished
any valid reason.
(c) The Assessing Officer has observed that appellant maintains only
a WIP register wherein the quantity of copper and aluminium is only
recorded. No raw material or finished goods register is maintained. No
register for insulation material or kraft paper is maintained. This has
been discussed in detail by the Assessing Officer in para 3.1(iii) of the
Assessment Order.
In view of the specific defects pointed out by the Assessing
Officer which the appellant has not been able to fully explain, as
discussed above, the books of accounts are rejected u/s. 145(3) of the
I.T. Act”.
“2.4 The Assessing Officer has estimated the turnover at
Rs.10,70,00,000/- as against Rs.10,48,03,179/- shown in the books of
accounts. The appellant has submitted the copy of assessment order of
VAT/CST in which the turnover of the assessee has been accepted at
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur almost the value disclosed in the books of accounts. In view of the
above, I do not agree with the Assessing officer in estimating its
turnover at Rs.10,70,00,000/-. Instead, the turnover disclosed in the
books of accounts is accepted. As regards the estimation of G.P. rate is
concerned, it is seen that the turnover of the appellant has increased
from Rs.6,40,57,943/- in A.Y. 2010-11 when its G.P. rate was 7.46% to
Rs.10,48,03,179/- in this previous year, when its G.P. rate has declined
to 4.75%. An increase in turnover would invariably lead to some
contraction in margin. In para 2.3 of this order, the defects upon which
the Assessing Officer has based his estimate have been discussed along
with the explanation of the appellant. It has already been held that the
appellant has not been able to fully explain the defects pointed out by
the Assessing Officer. In view of the above discussion, the G.P. rate is
estimated at 6% of the turnover of Rs.10,48,03,179/-. The trading
addition made by the Assessing Officer is restricted accordingly, to
Rs.13,09,166/- (= 6% of Rs.10,48,03,179 – Rs.49,79,025). The balance
addition is directed to be deleted. This ground is partly allowed.”
In this regard, the Ld. AR has submitted that some material was
manufactured on the demand of a customer at specific size and chemical
composition but due to technical defect the material was rejected during
inspection and the party denied to purchase. As the material was for a specific
size and not for normal use, the assessee had to sell the same at lower rate
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur and therefore, the valuation was made at expected selling rate. We are
submitting herewith the chart of sale of sub-standard material vis-a-vis normal
material during the F.Y. 2011-12 (A.Y. 2012-13):
Normal Goods Bill No. Date Rate 37 11.05.2011 488 70 24.06.2011 450 Rejected Goods Bill No. Date Rate 34 08.05.2011 434 68 22.06.2011 355-359 84 08.07.2011 440 147 26.10.2011 413 156 06.11.2011 385 158 07.11.2011 400 169 20.10.2011 413-417 187 01.11.2011 406
From the above, your goodself will find that the valuation was made at
expected selling rate. Further, in invoices of above sub-standard material, the
description of material has been mentioned as sub-standard material
(Rejected material). We are enclosing herewith copy of the invoices for your
kind verification. The above facts were explained during assessment
proceedings also.
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur 4. It was further submitted that as regards assessing officer’s observation that
valuation of DPC and aluminium was undervalued, the assessing officer has
not pointed out any discrepancy/shortfall in valuation, though we had
enclosed the detailed chart for valuation of copper, aluminium and craft paper
which is being summarized as under:
Name of Item Valuation as Valuation as per books per chart Copper Rod/Wire 487 @ 486 and @ 428 (as explained above) Aluminum Rod/Wire 129 @ 140 Craft Paper 92 @ 90
We are submitting herewith copy of invoices in support of our above
submission. From the above, your goodself will find that the assessing
officer’s observation is not correct.
The ld AR further reiterated the following facts as submitted during the
assessment proceedings:
5.1 Due to fluctuation in copper rates in international market, the assessee
could not maintain the G.P. rate. We are enclosing herewith monthly rate
chart of copper wire of Hindustan Copper Lts. and Sterlite Industries Ltd.
which shows that copper wire rates were fluctuated between Rs.337 per Kg.
to Rs.495/- per Kg. during the year.
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur 5.2 Further, as per practice adopted by Vedanta (Sterlite Industries Ltd.) the
supplies were made during the month as per provisional rates and final rates
were decided at the end of the month for supplies made. We had enclosed
copy of rates structure of July 2010 determined by Sterlite Industries Ltd. as
example.
5.3 Due to fluctuation in copper rate and price fixation system adopted by
suppliers, the assessee had to sale the goods at part in April 2010 and June
2010 and in other months at very low margin without recovering the
manufacturing expenses which proves the above facts, we are enclosing
herewith copy of purchase and sales register in support our submission.
It was further submitted that as regards the sales made to M/s Keshav
Electricals (P) Ltd., the assessee had sold the goods amounting to Rs.203.32
Lacs during the year under consideration. The sales were made at the rates to
be decided on the basis of Vedanta/sterlite industries. The difference in prices
charged/by issuing debit note to party. The assessee issued debit note on the
total quantity sold during the period and after considering the amount of debit
note the assessing officer’s observation that the prices charged from KEPL
were lower than others is misguiding looking to the quantum of sales to the
party. (Copy of Ledger account and debit note enclosed and copy of account
of Rajasthan Transformers & Switchgears is also being enclosed showing sales
of Rs.186.98 Lacs). We had also enclosed a letter received from Excise
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur department specifically mentioning the rate difference matter and raised no
objection in respect of rates charged.
It was further submitted that the assessee’s turnover and G.P. rate during
the year under consideration as well as preceding two years was as under:-
A.Y. __ A.Y. __ A.Y.____ 2011-12 2010-11 2009-10
Sales 103293344/- 62904666/- 81750120/- Job Work 1509835/- 1153277/- 1411826/- ---------------- --------------- --------------- 104803179/- 64057943/- 83161946/- ---------------- --------------- --------------- G.P. Rs. 4979025/- 4781628/- 4213250/- G.P. @ 4.75% 7.46% 5.06%
From the above, your goodself will find that the turnover of the Assessee
increased substantially from 640 Lacs to Rs.1048 Lacs i.e. by 61%. It is well
known fact that while the increase in the sales; the GP is bound to go low.
The increase in sales is achieved with slight compromise with GP rate.
7.1 The assessee is dealer and manufacturers of copper wire, aluminium
wire and DPC wire of copper & aluminium. The main raw material is of copper
rod, aluminium rod and wire. The other raw material like enamel(chemical)
and craft paper is also being used during manufacturing process. The prices
of copper and aluminium are fluctuated daily depending on the import/export
policy of the government and demand and supply position of the products.
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur The assessee’s purchases are from Hindustan Copper, Sterlite Indusries and
their agents/depots. The assessee’s products are used in electrical, electronics
industries and electricity boards. All the purchases and sales are from
registered dealers of VAT/CST and fully vouched. We are enclosing herewith
copy of account of Pashupati Enterprises who is authorized dealer of
Hindustan Copper Ltd. From whom purchases have been made Rs.716.57
Lacs out of total purchases of Rs.1009.89 Lacs.
7.2 The assessee is also Registered under VAT/CST Act, and is being
regularly assessed by CTO “Ë” circle Jaipur. We have already submitted the
assessment order of VAT/CST act which shows the turnover(sales) of
Rs.103260960/- and is being again enclosed for ready reference. We have
already explained the reasons of differences in sales of Rs.32384/- in our
letter dt. 14.10.2013.
7.3 The assessee is registered under Excise Act since long. All the records
have been maintained and are being maintained regularly which have been
checked by Excise authorities during their visit at factory. All the returns and
audit have been conducted by Excise authorities and no discrepancy was
noticed.
7.4 The assessee’s product is Excisable commodity and excise is based on
sale value and any undervaluation of sales directly affects the revenue of
excise department, which excise authority would never have been allowed.
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur Excise audit of the year under consideration is completed and no adverse
remarks were pointed out.
7.6 Quantitative reconciliation has been submitted which is being
reproduced below:
Input Output
Raw Material 237198.725 Finished Goods 229437.145
Work in Process 12682.227 Scrap 1031.095
Work in process 18807.400
Total 249880.952 Total 249275.640
Burning Loss 605.312 Kg.
From the above, your goodself will find that scrap generation is only 0.41%
and wastage (Burning Loss) is only 0.24% of quantity consumed.
7.7 The assessment of the assessee for A.Y. 2008-09 was also completed
u/s 143(3) and no trading additions were made.
7.8 Section 145(1) provides “Income chargeable under the head “Profits
and gains of business or profession” or “Income from other sources” shall,
subject to the provisions of sub-section (2), be computed in accordance with
either cash or mercantile system of accounting regularly employed by the
assessee”. The assessee is following mercantile system of accounting
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur regularly and there is no change in method of accounting. Assessing Officer
has also not observed anything contrary to it.
7.9 Section 145(2) provides “The Central Government may notify in the
Official Gazette from time to time accounting standards to be followed by any
class of assessee or in respect of any class of income”. The Assessing Officer
has not pointed out any non-compliance of accounting standard to be
followed by the assessee.
7.10 Section 145(3) provides “where the Assessing Officer is not satisfied
about the correctness or completeness of the accounts of the assessee, or
where the method of accounting provides in sub-section (1) or accounting
standards as notified under sub-section (2) have not been regularly followed
by the assessee, the Assessing Officer may make a assessment in the manner
provided in section 144”. The assessee produced all books, vouchers, excise
stock register, purchase and sale bills for verification of assessing officer.
Books are duly audited by independent chartered accountant. The assessing
officer has not pointed out any discrepancy in the accounting of
purchase/sale, has not pointed out any unrecorded transaction, has not
pointed out any transaction which could not be verified from supporting
documents. In absence of above, the accounts are correct and complete and
assessing officer’s action of applicability of section 145(3) is arbitrary and is
bad in law.
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur 7.11 As regards, valuation of stock, the Income Tax Act and Income Tax
Rules does not prescribe any particular method of valuation of stock. The
assessee may value its stock either at cost price or at market price whichever
is lower. In this case also, the assessee has valued the stock of copper wire in
two parts:-
(a) Normal Stock: At cost Price. ITO has accepted the valuation and raised
no objection.
(b) Sub-standard Stock: At Realizable value for which the assessee has
submitted the proof of actual realization in F.Y. 2011-12 (A.Y. 2012-13).
7.12 Assessment for ensuing years have also been completed u/s 143(3) and
declared results were accepted as under:-
A.Y. 2013-14
Sales/Job Work 82121707/-
Gross Profit 4404727/- 5.36%
Net Profit 1481860/- 1.80%
Assessment completed by ITO Ward 4(2) Jaipur. Additions/disallowance: NIL
A.Y. 2014-15
Sales/Job Work 92801471/-
Gross Profit 4697268/- 5.06%
Net Profit 1601125/- 1.72%
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur Assessment completed by ITO Ward 4(3) Jaipur. Additions/disallowance: NIL
7.13. The Ld. AR further submitted that the turnover of the Assessee has
increased substantially from Rs.640.57 lacs to Rs.1048.08 Lacs in preceding
year. We had also submitted that sharp increase in turnover is possible only at
reduced margin. We had also submitted that during the year under
consideration the assessee effected sales of Rs.203.32 Lacs to M/s Keshav
Electricals (P) Ltd. and of Rs.186.98 Lacs to M/s Rajasthan Transformers &
switchgears (P) Ltd. out of total sales of Rs.1048.08 lacs. The heavy sale to
any party is possible only by reducing the rates in comparison to others. The
assessee had reduced the rates to these parties as detailed below. In support
of our above submission; we are enclosing herewith the copies of sales
invoices to the above parties’ vis-a-vis to other parties.
Sales to M/s Keshav Electricals (P) Ldt.
B. No. Date Qty. (in Kg.) Rate per Kg. 10 13.04.2010 2962 390 15 15.04.2010 3122 391 20 17.04.2010 2985 391 30 24.04.2010 2604 390 35 27.04.2010 3120 390 45 30.04.2010 2965 390
Sales to M/s Rajasthan Transformers & Switchgears (P) Ldt.
B. No. Date Qty. (in Kg.) Rate per Kg. 170 18.07.2010 1087.300 355 14
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur 171 19.07.2010 1143.200 355
Sales to others
Name of Party B. Date Qty. Rate No. per Kg. Neelu Metals 11 13.04.2010 86.165 408 14.04.2010 199.745 Maheshwari Electros (P) Ltd. 14 422 19.04.2010 10.940 Kalpana Industries 21 415 24.04.2010 190.755 Shri Balaji Enterprises 31 418 29.04.2010 235.330 Rajasthan Transformer & Electricals 37 418 01.05.2010 321.740 Anupam Udyog 46 403 02.07.2010 141.160 Tantia Transformer & Electricals (P) Ltd. 152 385 08.07.2010 146.390 Rajasthan Transformer & Electricals 160 385 10.07.2010 23.635 Agarwal Transformers & Electricals 163 384 16.07.2010 160.820 Shri Krishna Sudershan Urja (P) Ltd. 166 370 21.07.2010 8.535 Balaji Industries 172 370
From the above, your goodself will find that assessee had sold the metal to
M/s Keshav Electricals (P) Ltd. and M/s Rajasthan Transformers & Switchgears
(P) Ltd. at very low margin. Further, the terms of payment of these parties
were also very much favourable, which is as under:-
Sales to M/s Keshav Electricals (P) Ltd. 203.32 Lacs
Balance outstanding at year end Nil
Sales to M/s Rajasthan Transformers & Switchgears (P) Ltd. 186.98 Lacs
Balance outstanding at year end .24 Lacs (Excess Received)
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur From the above submissions, your goodself will find that reduction in G.P.
Rate is very much supported with documentary evidences and therefore
declared results deserves to be accepted.
7.14 The ld AR also relied upon the decision of Hon’ble High Court of Delhi in
the case of Commissioner of Income Tax V/s Paradise Holidays, IT Appeal
No.445 of 2010 dt. 28.04.2010 (2010) 325 ITR 13 (Del.). In this Case it was
held as under:
“The question as to whether the accounts produced by the assessee
were defective or not is a question of fact. The CIT(A) as well as Tribunal
have found that the accounts maintained by the respondent were neither
defective nor incomplete. Even the AO has not found any fault as such
with the system of accounting being followed by the assessee. The
tribunal which is the final fact-finding authority has held that considering
the nature of the business of the assessee, it was not obligatory to enter
into a formal agreement with the foreign principal. Hence non-production
of formal agreement with the foreign principals would not render the
accounts of the assessee incomplete and would not give justification to
the AO to reject them under s. 145(3) of the Act. Similarly, the
explanation given by the assessee for the tour expenses not reconciling
with tour itinerary having been accepted, both by CIT(A) as well as by
the Tribunal, the accounts of the assessee cannot be said to be defective
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur on this ground and, therefore, could not have been rejected. If any
particular expense claimed by the assessee remained unverified, the AO
could have disallowed that particular expense. But, that by itself cannot
be a ground for rejection of accounts as a whole under s. 145(3) of the
Act. The finding of fact recorded by the Tribunal has not been shown to
be perverse, and hence cannot be interfered with by this court”.
From the above, your goodself will find that assessing officer’s action is not
based on facts and circumstances of the case. Further, enhancement of sales
and estimation of G.P. rate is based on assumption, without any basis and
therefore deserves to be deleted.
The ld DR is heard who has relied upon the order of the lower authorities.
We have heard the rival contentions and pursued the material on record.
The books of accounts have been rejected by the Assessing Officer primarily
on account of under valuation of the closing stock in respect of the sub-
standard stock at prices below the cost price and secondly, on account of
sales made by the assessee at prices lower than the material cost. Regarding
the sales which have been affected by the assessee, the same is a function of
cost of manufacture (including cost of purchase) as well as competitive
market condition in order to secure the business orders. The appellant is
engaged in the business of manufacture of DPC Copper wire and the price of
the copper has fluctuated during the year, a fact which has not been
controverted by the Revenue and hence, cost of purchase is not in dispute.
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur In respect of the sales which have been affected during the year, the Ld.
CIT(A) has taken note of the assessment order under VAT/CST legislation
wherein the turnover of the assessee as disclosed in the books of accounts
have been accepted by the assessing authority. Further, the excise audit has
also been completed and there is no adverse finding which has been reported
therein. Given the fluctuation in the copper prices, as per the regular practice
followed, the assessee raises the necessary debit notes on its customers to
recover the differential price than billed provisionally. The differential pricing
and all the sales have been duly recorded in the financial statement which has
been duly audited. The Assessing Officer has also disputed the turnover of the
assessee and computed the same at Rs.10.70 Cr. as against Rs.10.48 Cr.
shown in the books of accounts. The Ld. CIT(A) has upheld the turnover
figure as reflected in the books of accounts and the Revenue is not in appeal
against the said confirmation of the turnover as upheld by the Ld. CIT(A).
Effectively, the price at which the goods have been sold during the year has
been accepted by the Revenue and the same cannot, therefore, be a basis for
upholding the rejection of books of accounts. Secondly, regarding the under
valuation of the sub-standard stock, the assessee has submitted that the
same has been valued at a realizable value at which such stock has been sold
in the subsequent F.Y. 2011-12 as demonstrated through actual sales invoices
and the results of the subsequent financial year have been accepted by the
Revenue. Further, it is noted that the assessee is in the same line of business
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur over the years and is following the same method of accounting in respect of
valuation of its stock as well as accounting for purchase and sales and its
books of accounts have all along been accepted by the Revenue for the
previous and the subsequent years. In light of above, we do not see a
justifiable reason for rejection of books of accounts as maintained by the
assessee. Hence, the action of the Ld. Assessing Officer in rejecting the books
of accounts cannot be sustained. In light of above, the trading addition of
Rs.13,09,166/- as upheld by the Ld. CIT(A) on account of rejection of books
of accounts is hereby deleted. In the result, ground no.1 of the assessee is
allowed.
Regarding ground no. 2, briefly the facts of the case are that the
assessee has paid interest amounting to Rs.4,98,414/- to M/s. Reliance
Capital Ltd. without deducting tax at source, as required by the provisions of
section 194A. The appellant has relied upon the proviso to section 201 and
40(a)(ia). As per ld CIT(A), the second proviso to Sec 40(a)(ia) has been
introduced by the Finance Act, 2012 and is effective from 1/4/2013. Also, the
first proviso to section 201(1) has been inserted by the Finance Act, 2012,
w.e.f. 01.07.2012. Both the above amendments do not apply to the
assessment year, under consideration and therefore, this contention of the
appellant was not accepted. In view of the above, addition made by the
Assessing Officer on account of disallowance of interest u/s. 40(a)(ia) was
sustained.
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur 11. In this regard, the Ld. AR submitted that the assessee received loan
from Reliance Capital Ltd., in personal name for the purpose of business of
Doshi Metals. The payment was made to the Reliance Capital Ldt. through
Bank. The Reliance Capital Ltd. is well-known, non-banking finance company
having PAN No.AAACR5054J and is listed in major stock exchange of India
and is supposed to comply all the legal requirement of Income Tax in time.
It was further submitted that section 40(a)(ia) is applicable only in respect
of TDS defaults if amount is payable. If amount is actually paid and tax is not
deducted under the above sections, section 40(a)(ia) is not applicable. Section
40(a)(ia) has to be subjected to restrict interpretation. Going by the rule of
strict interpretation, the default with reference to actual “payment” of
expenditure would not entail disallowance. The aforesaid observation has now
been upheld by different benches of Tribunal – Teja Consturction V.
CIT(2010)39 sot 13 (Hyd.). Merilyn Shipping & transporters V. CIT(2012) 20
taxmann.com 244 (Visakapattnam), S.S. Warad V. CIT(2012)19 ITR (Trib.) 35
(Bang.). T.T. Kuruvilla v. CIT (2012) 149 TTJ (Coch.) 533. Emdee Apparels v.
CIT (2012) 54 SOT 600 (Bang.), Barronics India Ltd. v. CIT (2012) 52 SOT
188 (Hyd.), Cadtrium Engineering Solutions (P) Ltd. v. ITO (2013) 33
taxmann.com 269(Delhi), ITO v. Vinod Datta (2013) 33 taxmann.com 440
(Mum.) ITO v. MGB Transport(2013) 143 ITD 564 (Kol.) Cadtrium Engineering
solutions (P) Ltd. v. ITO (2013) 58 SOT 3 (Delhi). A similar ruling is given by
the Allahabad High Court in the case of CIT v. Vector Shipping Services (P)
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur Ltd. (2013) 218 taxmann 93 (SLP against this judgment has been rejected by
the Apex Court on July 2, 2014).
It was further submitted that the assessee has debited Rs.498414/- as
interest payment to Reliance Capital Ltd. and total amount has been paid
during F.Y. 2010-11 (A.Y. 2011-12) in monthly instalments and nothing was
payable at the end of the F.Y. 2010-11 i.e. as on 31.03.2011. We are
enclosing herewith copy of account of Reliance Capital Ltd. which proves that
payment has been made in monthly instalments during the financial year
2010-11 (A.Y. 2011-12) and no amount is payable as at the end of the year.
A similar issue has been dealt recently by the Coordinate Bench in Jaipur
in case of Siyaram Export India (P) Ltd. vs. Addl. CIT, Range-6, Jaipur ITA No.
501/JP/14 dated 26/07/2016 wherein the issue around disallowance u/s
40a(ia) has been discussed in light of Special Bench decision in case of M/s
Merilyn Shipping & Transport and the conflicting decisions of various High
Courts. The operative part of the decision is as under:
“2.5 In the context of factual matrix and above legal developments, firstly, it
would be relevant to refer to the decision of the Hon’ble Andhra Pradesh High
Court in case of Janapriya Engineers Syndicate (I.T.T.A No 352 of 2014 vide
its order dated 24.06.2014) wherein the appeal for statistical purpose was
admitted on the following substantial question of law:
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur “Whether the ld. Tribunal was justified in law on the facts and
circumstances of this case in passing order of remand for redecision ignoring
the Special Bench decision of the Tribunal on the issue though the appeal
against the same is pending adjudication before the Hon’ble Court?”
The findings of the Hon’ble High Court are as under:
“3. We find that the learned Tribunal taking note of the pendency of the
appeal in this Court, preferred by the Revenue against the decision of the
Special Bench of the Tribunal in M/s Merilyn Shipping & Transport in ITA
No.477/Viz/2008 dated 29.03.2012, directed the Assessing Officer to re-
decide the issue after the disposal of the appeal by this Court.
We are of the view that until and unless the decision of the Special
Bench is upset by this Court, it binds smaller Bench and co-ordinate Bench of
the Tribunal. Under the circumstances, it is not open to the Tribunal, as
rightly contended by Mr. Narasimha Sarma, learned counsel, to remand on
the ground of pendency on the same issue before this court, overlooking and
overruling, by necessary implication, the decision of the Special Bench. We
simply say that it is not permissible under quasi judicial discipline. Under the
circumstances, we set-aside the impugned judgement and order, and restore
the matter to the file of the Tribunal which will decide the issue in accordance
with law and it would be open to the Tribunal either to follow the Special
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur Bench decision or not to follow. If the special Bench decision is not followed,
obviously remedy lies elsewhere.”
2.6 Subsequently, the Coordinate Bench in case of Shri Amit Naresh Shah in
ITA No. 4154/Mum/2013 dated 10.09.2014 taking into cognisance the
decision of Hon’ble Andhra Pradesh High Court in case of Janapriya Engineers
Syndicate (supra) has held as under:
“From the clarification issued by the Hon’ble High Court, it is clear that
until and unless the decision of Marilyn Shipping and Transport (supra) is
reversed by the court, it is binding on all the benches of the Tribunal. We
find that Hon’ble court has held that judicial discipline mandates that the
decision of the special bench has to be followed by other benches. As on
today, the stay order granted by the Hon’ble court has been vacated and the
order of the special bench is binding on other benches of the Tribunal.
Therefore, respectfully following the same, we hold that the FAA was justified
in following the order of Marilyn Shipping & Transport (supra). Considering
the facts of the case and the clarification issued by the Hon’ble Andhra
Pradesh High court on 24.06. 2014 in the case of Janapriya Engineers
Syndicate, we decide the effective ground of appeal in favour of the assessee
and confirmed the order of the FAA.”
2.7 In light of decision of Hon’ble Andhra Pradesh High Court in case of
Janapriya Engineers Syndicate (supra), it is thus clear that the decision of the
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur Special Bench of the Tribunal in case of M/s Merilyn Shipping & Transport
(supra) continues to bind the Coordinate Benches till the time the same is not
overruled by the Hon’ble High Court.
2.8 Further, it is noted that the special Bench decision in case of M/s
Merilyn Shipping & Transport (supra) has been approved and referred by the
Allahabad High Court in case of Vector Shipping Services (P) Ltd. At the same
time, there are decisions of Calcutta High Court in case of Crescent Exports
Syndicate and Gujarat High Court in case of Sikandarkhan N Tanvar where the
High Courts have disagreed with the view of the Special Bench in case of M/s
Merilyn Shipping & Transport (supra). It is thus evident that the view of the
Allahabad High Court and other two High Courts are in direct conflict with
each other. The question that arises for consideration is where there is no
decision of a jurisdictional High Court and there are conflicting views of the
different High Court, which view should be followed. In this regard, we draw
support from the judgement of Hon’ble Supreme Court in the matter of CIT
vs. Vegetable Products Ltd. (1972) 88 ITR 192 (SC) wherein the Hon’ble
Supreme Court has laid down the principle that “ïf two reasonable
constructions of a taxing provisions are possible, that construction which
favours the assessee must be adopted.
In view of the above discussions and the entirety of facts and circumstances
of the case, the disallowance of sum of Rs.14,14,534/- u/s 40(a)(ia) of the IT
Act, is hereby deleted.” 24
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur 15. In light of above, following the earlier decision of the Coordinate Bench in
case of Siyaram Exports (supra), we hereby delete the disallowance under
section 40(a)(ia) as no amount remained payable as on 31st March. In the
result, the ground no. 2 of assessee is allowed.
Regarding 3rd ground of appeal, the Assessing Officer found that the
assessee has given interest free advances to two family members with whom
the assessee did not have any business connection. The appellant has
explained that these advances were given due to urgent requirement of funds
in the normal course of business. The appellant has stated that it has received
interest free loans also. As per the ld CIT(A), this contention of the appellant
is not acceptable because the assessee has not able to show that moneys
were advanced to the above two persons for business purposes. Also, the
appellant has not been able to establish any nexus between the interest free
loans and the interest free advances given by it. In view of the above, the
disallowance of interest expenditure made by the Assessing Officer @ 12% on
the interest free advances was sustained since this part of the expenditure
has not been incurred for business purposes or for any commercial
expediency.
In this regard, the Ld. AR submitted that during the year under
consideration the assessee had paid advance to Smt. Sneh Lata Jain and Yash
Doshi. The amount was given for meeting out urgent requirement of funds for 25
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur a short period but not in the nature of loan and therefore no interest was
charged. We are summarizing the loan position as under:-
Smt. Sneh Lata Jain 1. Opening Balance 3216365/- Paid during the year 04.10.2010 1000000/- 4216365/- Received back 1552600/- 2663765/- Closing Balance Yash Doshi 2. Opening Balance 319366/- Paid during the year 10.04.2010 75000/- Paid during the year 26.07.2010 500000/- 894366/- Received back 1900000/- 704366/- Closing Balance
It was submitted that during normal course of business, looking to the
situation and relations with each other, amount was paid/received without
interest for meeting out the urgent requirement of funds. The assessee has
also received interest free amount from M/s Zodiac Enterprises (P) Ltd. which
shows outstanding balance of Rs.48.73 lacs as at the year end (Copy
enclosed).
It was further submitted that the assessing Officer has calculated &
disallowed interest on closing balance including old interest free advances 26
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur also. If ITO was not satisfied with our submission, he should at the most
calculate & disallow the interest on advances paid during the year under
consideration which is as under:-
Smt. Sneh Lata Jain Rs.10,00,000/- paid on 04.10.2010 interest @ 12% Rs.60000/-
Yash Doshi Rs.75000/- paid on 10.04.2010 interest @ 12% Rs.9000/- Rs.500000/- paid on 26.07.2010 interest @ 12% Rs.40000/- 109000/-
We have heard the rival contentions and pursued the material on record. We have gone through the order of Ld. CIT(A) who has held that the assessee has given interest free advances to two family members with whom the assessee did not have any business connection. The assessee has not been able to controvert the said findings of the ld CIT(A). In light of above, the test of commercial expediency having not been satisfied, we confirm the order of Ld. CIT(A). In the result, ground taken by the assessee is dismissed.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 17/03/2017.
Sd/- Sd/- (KUL BHARAT) (VIKRAM SINGH YADAV) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Jaipur
ITA No. 276/JP/15 Himmat Mal Doshi Vs. ITO ward (4)-2, Jaipur Dated:- 17/ 03/2017. *SANJEEV* आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू
vihykFkhZ@The Appellant- Shri Himmat Mal Doshi, G-845, Road, No.14, 1. V.K.I. Area, Jaipur. 2. izR;FkhZ@ The Respondent- The ITO, Ward-4(2), Jaipur vk;dj vk;qDr@ CIT-2, Jaipur 3. 4. vk;dj vk;qDr¼vihy½@The CIT(A)-2, Jaipur विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. 6. xkMZ QkbZy@ Guard File (ITA No.276/JP/2015)
vkns'kkuqlkj@ By order, सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत