M/S. MADURA BIOTECH (P) LTD.,HARIDWAR vs. DCIT, NEW DELHI

As with regard to this ground no. 2, the Ld. AR has submitted that the purpose of the shares is for investment and not trading and for making the investment, the assessee deputed owned funds without any borrowings. It was submitted that the investments were made in limited shares, with almost 98.92% made in just one company. Ld. AR has stressed on the fact that the frequency and volume of shares were not very high, viz a viz, the turnover of the assessee, being maximum of 13.66% of the turnover. It was also contended that the transactions were not frequent and were occasional, with average holding time of 45 days. The weighted period of shares being held is 63 days, which is not typical for a trader.

As we appreciate the material on record and submissions on this issue we find that at page No.47 to 59, a copy of Memorandum of Association of the assessee company is provided and in Part-C, the ‘other objects of the company’ are mentioned wherein at Sl. No.42, it is mentioned that the assessee has one of the objects as ‘to carry on the business as shares and stock brokers and to buy, sell and deal in all kind of shares, stocks, securities, bonds, debentures, units and such other instruments of all types.’ Thus, transacting in business of shares is one of the objectives of the assessee company. Then, we find that at pages 38 to 41, the assessee has provided the list of transactions giving rise to short-term capital gains and short-term capital loss on sale of shares. It is observed that the assessee has primarily transacted by way of sale and purchase of shares of only four companies, i.e., Kwality Dairy India Ltd., Uflex Ltd., Tata Motors and elspun-Gujarat Stahl Rohren Ltd.. We find that the first purchase of the shares was of Kwality Dairy. On 06.08.2009 which was sold after 32 days of 07.02.2009 and, thereafter, there were 95 such transactions upto 31.03.2010 on which short-term gain was earned and, there were 25 transactions in which short-term capital loss occurred. We find that there were instances where the holding was of 1 to 8 days and the lot was also as small as of 36 shares.

Thus, whatever has been asserted on behalf of the assessee by the ld. AR does not hold good. There is no substance in the contention that merely because the shareholding is in seven companies at the end of the year which is shown as investments, therefore, the transactions resulted in capital gains. It is quite apparent that during the year the assessee has entered into the trading not to earn capital gains, but, the profit motive was out of the habitual dealing in the quoted shares. The crucial factor as allegedly observed by the ld. tax authorities is the period of holding which is very short in case of a trader as in the instant case. There is no substance in the assertion that period of holding was average to 63 days. It is not the average of the days of holding, but, the frequency which matters coupled with the lots in which the shares are purchased and sold. Furthermore, since the transactions are broadly in just four scrips that all the more shows that the intention was not at all to buy the shares and hold them for a period to earn a capital gain, but, the intention was to leverage in the prices fluctuating in the stock exchange.

Then, the judgement in the case of CIT vs. Smt. Sonia Uppal (2014) 52 taxmann.com 62 (P&H) was in regard to investments in the land deals. The judgement in the case of DCIT vs. SMK Shares & Stock Broking (P) Ltd. (2010) 8 taxmann.com 120 (Mum) was in regard to an assessment year 2005-06 while the AO while passing the assessment orders for earlier years had not disputed assessee’s claim regarding profit on sale of investment. In that case, it was also established that the assessee had maintained separate investment portfolio. In the 10 case of the present assessee, it is second year of the business and half way through the financial year, the trading was initiated in shares. Thus, by merely mentioning the shares to be the investments, benefit of Circular No.4 of 2007 dated 15.06.2007 cannot be granted. Then, in the judgement in the case of Indi Stock (P) Ltd. Vs. CIT (2023) 148 taxmann.com 449 (Cal) again the assessee was found to be maintaining separate account for trading in shares and stock-in-trade and the assessee was found to have purchased shares by way of investments only and debited cost to the investment account. Then in the order in ACIT vs. Jignesh Madhukant Mehta (2017) 83 taxmann.com 349 (Mumbai Trib.), it was found that the assessee had undertaken delivery based transactions. In the order in the case of Second Leasing (P) Ltd. vs. ACIT (2018) 95 taxmann.com 133 (Delhi – Trib) again in the preceding years income arising on sale of investments was accepted by the AO as capital gains and all the transactions was delivery based. Therefore, we are of the considered view that the claim of the ld. AR that the assessee was investing its own funds which were lying idle is not in itself sufficient to establish that the trading in shares was done as investments to earn capital gain. Accordingly, findings of CIT(A) sustained and this ground is decided against the assessee.

Ground no. 3 of appeal is directed against denying deduction u/s 80-IC of the Act, for business income. Assessee has shown income from business at Rs.85,33,519/- and has claimed deduction u/s 80-IC of the entire amount. AO observed that as per the notification issued by the CBDT, certain khasras of village Rawali Mahdood in Distt. Haridwar have been included in the schedule under the heading of "State of Uttaranchal" which are eligible for deduction u/s 80-IC of the Act. The assessee has furnished a copy of lease deed dated 11.07.2005 entered into by State Industrial Development Corpn. of Uttaranchal Ltd.(SIDCUL) and Madura Agro Food Industries that the land measuring 4000 sq.mtr. which has been conveyed through this lease deed is situated at villages Rawali Mehdood and Salempur Mehdood of Distt. Haridwar. AO observed that, as per the notification only the Rawali Mehdood village has been, included. The other villages namely Salempur Mehdood is not appearing in the Board's Notification dated 03.10.2006. The assessee has not furnished any evidence to prove that the area in which the undertaking is situated is covered by the CBDT Notification. Therefore, the deduction u/s 80-IC is not allowable.

Further, AO observed that the said lease deed was entered into by SIDCUL with the Madura Agro Food Industries which was a partnership concern. No evidence has been furnished as to how the deduction u/s 80-IC would be available to the assessee which is a company. Copy of letter dated 26.11.2008 from the SIDCUL was been furnished by the assessee in which permission to change in constitution from partnership firm to Pvt. Ltd. company has been allowed with change of name from Madura Agro Food Industries to Madura Biotech (P) Ltd. As per the letter of SIDCUL, addition of product such as bakery products, confectionary products, all kind of food juices, instant foods, all kinds of edible and non edible herbal products and other food products was allowed with the certain conditions. Therefore, AO held that the above change is clearly reconstruction of a business already in existence within the meaning of Sec.80- IC(4)(i) of the I.T. Act and hence, deduction u/s 80-IC is not allowable to the assessee. AO was of the view that mere copy of letter from SIDCUL permitting to change in constitution from partnership firm to Pvt. Ltd. Company with permission to change of name from Madura Agro Food Indus, to Madura Biotech (P)Ltd. is not sufficient. AO observed that the assessee has not furnished requisite evidence as to how the firm namely M/s Madura Agro Food Industries was first eligible for deduction u/s 80-IC and how the assessee company subsequently was eligible to continue to get such deduction. AO concluded the assessee has failed to adduce evidence that the undertaking is not formed by the transfer to a new business of machinery or plant previously used for any purpose, as per the provisions of Sec. 80-IC(4)(ii). In view of the above, AO held that the assessee company is not eligible for deduction u/s 80-IC claimed in the return of income at Rs 85,33,519/-. The same was sustained by the CIT(A) with following relevant findings; “4.2.2 During the appellate proceedings I have examined the statutory audit report, tax audit report and audit report in Form No. 10 CCB filed by the assessee. It is seen that in the tax audit report in Form No. 3 CD the auditor has shown purchase of finished products at Col.No.28 B at Rs.1,39,94,513/- and sales of finished products at Rs.1,92,90,745/- whereas in the statutory audit report the auditor has shown the purchases at Rs.9,80,34,902/- and sales at Rs.11,46,90,509/-. In the tax audit report the figures of opening stock and closing stock of raw material, raw material purchases .and consumption during the year were shown as 'Nil'. In the statutory report the auditor has shown Trading and P&L a/c only. No manufacturing a/c has been shown in 13

As with regard to this ground no 3 Ld. AR submitted that the AO and CIT(A) have disallowed the claim under Sec 80IC on different pretext. It was submitted that AO had based his reasoning on allegation that the designated zone of the assessee is not notified in the circular of zones for Sec 80IC and the conversion of assessee to company from partnership is reconstruction of business. It was submitted that as against the above, before the CIT(A), the assessee submitted the notification [PB Pg No 104-222] stating that it’s zone is covered as a designated zone under Sec 80IC. Further it submitted that the conversion of partnership to a company is not reconstruction and thus, Sec 80IC to the assessee deserved to be allowed by CIT(A). Ld. AR submitted that while accepting the above contentions, the CIT(A) changed the basis of disallowance, by pointing the following points: i. That the turnover and stock in Tax Audit Report versus the Financial Statements is different ii. The Form 10CCB mentions the initial assessment year as AY 2009- 10 and not AY 2007-08, being the date of inception of partnership 11.1 As regards the assertion of the AO on change in constitution of partnership firm to private limited company disentitles the assessee to the benefit, we find no substance as the deduction is available to undertaking and not to individual assessee. We are of the considered view that there is a mere change in the status of the company in terms of its composition and that does not brings into action provisions of section 80IC(4)(ii) of the Act. Thus, this ground is decided in favour of the assessee.

Against this, the Ld. AR submitted that clerical inadvertent errors don’t entail any disallowance under Sec 80IC. The differences in balances of tax audit does not entail a disallowance of claim of Sec 80IC, if all the conditions are fulfilled. It was pointed out that Section 80IC claims were accepted in subsequent years. The Ld. AR relied on the assessment order of AY 2012-13 [PB Pg No 247- 251] where the claim of Sec 80IC has been accepted by the department. Accordingly, on the pleas of consistency, the Ld. AR submitted that the claim should be allowed in present year also. 15

Ld. DR has relied the order of tax authorities below.

Ground no. 4 of appeal is directed against disallowing Rs 60,84,325/- as 20% out of the total purchases of milk Rs 3,04,21,625/- during this year. AO observed that the assessee had shown 13 sundry creditors of Rs 2,61,81,3255/- in respect of the supply of milk to assessee company. The above creditors had made sales of milk to the assessee company but barring few creditors, no payment has been made to any of the creditors by the assessee company throughout the year. 16 The assessee furnished confirmations from these creditors as also the affidavits. In order to verify the genuineness of the transactions letters were issued by the AO to the above creditors at the addresses as furnished by the assessee. The letters issued to the above creditors were received back with the postal remarks that "addresses were incomplete". On being informed by the AO the assessee furnished fresh addresses which were stated to be complete. Letters calling for information u/s 133(6) were again issued by the AO at the given fresh addresses. This time also the letters were received back unserved. The assessee was intimated about this and was asked as to why adverse inference be not drawn in view of this. The assessee was also afforded fresh opportunity by the AO vide note sheet entry dated 18.03.2013 to produce the creditors on 21.03.2013 since letters issued to them had been received back twice. In response assessee furnished letter dtd. 21.03.2013 expressing its inability to produce any of the above creditors for the reasons that they are petty, illiterate villagers/milk vendors who will lose their day earning if they attend the office of the AO and it is not practical and feasible to produce these milk vendors. AO observed that the assessee company has shown sales amounting to Rs 11,46,90,509/- and net profit of Rs 84,71,623/- @ 07.38% (excluding profits on sale of share amounting to Rs. 1,56,69;577/-). Since the assessee eventually failed to produce any of the milk vendors, therefore, 20% of the expenditure incurred for purchase of milk of Rs 3,04,21,625/- from the above named milk vendors which works out to Rs 60,84,325/- is disallowed and added back by the AO to the income of the assessee. CIT(A) has sustained the same with following findings; “4.3.2 Requisition issued by the AO to the sundry creditors u/s 133(6) at the addresses provided by the assessee was received back un-served with the postal remarks "incomplete address". The assessee was duly informed about this fact and was asked to furnish latest complete address of sundry creditors. Accordingly, the assessee has furnished the latest complete addresses of the sundry creditors. Letters for calling confirmation were again issued by the AO u/s 133(6) at the given fresh addresses. Again letters were received back unserved. Since the letters returned back unserved twice therefore the AO asked the assessee to produce the sundry creditors on 21.03.2013. In response the assessee expressed his inability to produce the creditors before the AO on the ground that the creditors being petty, illiterate villagers/milk vendors will lose their day earning if they attend before the AO and it is nor practical and feasible to produce them. While the claim of the assessee is that the creditors are petty, illiterate villagers/milk vendors and loss of a day earning would be a great loss to them, on the other hand no payment has been made by the assessee to most of the creditors and the same has been outstanding throughout the entire period for months since the purchases were made. Out of the 13 creditors, not a single payment has been made by the assessee to 12 of them where the outstanding is ranging from Rs 9 lacs to Rs 16 lacs. Payments were made only partly to Shri Sattar on few occasions as against large number of purchases where the outstanding is Rs.96.41 lacs. It is beyond any logic as to how petty illiterate villagers/vendors who cannot afford to lose a days earning to appear before the AO, can afford to supply milk to the assessee of such huge magnitude without getting a single payment throughout entire year, It is beyond any comprehension that such small and petty milk vendors can afford to provide such, large credit to the assessee without getting payments throughout the entire period. The submission of the appellant that affidavits from the sundry creditors were filed before the AO is without any merit. It is held in plethora of decisions that affidavit cannot be accepted unless corroborated by intrinsic or extrinsic evidence. As the existence of the sundry creditors are not prove, therefore, the genuineness of the affidavits are also not proved. The above view finds support from the decisions in the case of Technical Glass Industries v/s CIT(All) 281 ITR 61, Chowkchand Balabux v/s CIT(Assam)41 ITR 465, Munilal Ramdayal v/s ITO & ors. (Ori) 76 ITR 151. From the above it is evident that the assessee failed to prove the genuineness of the milk purchases from the above vendors. In view of the above, AO is fully justified in disallowing 20% of the purchase of milk i.e. of Rs 60,84,325/-. Therefore the disallowance made by the AO is sustained. The appeal fails in this ground.”

As with regard to this ground no. 4, Ld. AR primarily stressed on the proposition that there cannot be rejection of purchases if sales not doubted and the books of accounts are accepted. It was submitted that the AO and the CIT(A) have accepted the books of accounts and have not pointed any infirmity in it. As a matter of fact, the AO has barely chose to disallow a selective portion of such purchases, without prescribing any adequate reasoning to the disallowable portion. Ld. AR has submitted that if the AO wanted to make a specific disallowance, he must have rejected the books of accounts and made assessment under Sec 144 of the Act, being not the present case of the assessee. Thus, according to him the disallowance is vague and void-ab-inito.

At the same time, Ld. AR submitted that even otherwise the disallowance is to be restricted to the amount of Gross Profit. He submitted that while the AO has accepted the books of accounts, he has also accepted the sales made thereby by the assessee. Essentially, if the AO was to consider the purchases non-genuine, the AO ought to make an addition of the GP being 7.38%, as a disallowance otherwise would lead to double jeopardy, being not allowable by law.

Ld. DR has relied the order of tax authorities below.

In regard to this ground, we are of the considered view that ld. tax authorities have fallen in error in making ad hoc disallowance without pointing out any error in the books of account of the assessee. As we go through the books of account of the assessee in the form of tax audit report available at pages 18-27 of the paper book and audit report in Form 10CCB available at pages 28 to 37 and audited financial statements available at pages 7-17 of the paper book, we find that the assessee has maintained a composite trading and profit & loss account for the year ending 31st March, 2010 and all expenses of the nature like advertisement expenses, director’s remuneration, interest expenses, machine running & maintenance, salary, staff welfare expenses, vehicle running and maintenance expenses, have been debited and which have not been doubted. We are of the considered view that the nature of business of the assessee primarily requireS electricity consumption and fuel expenses which along with substantial purchases stands allowed. Thus, there is no justification to doubt the purchases by accepting the sales and the income. Further, as we have observed on the basis of assessment order for AY 2012-13, the assessee’s net profit ratio for AY 2010-11 have been considered for making an assessment of the net profit for AY 2012-13. Thus, there is no justification to discredit the purchases on ad hoc basis. Accordingly, we allow this ground.