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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI A.K. GARODIA & SHRI VIJAY PAL RAO
Per Shri Vijay Pal Rao, Judicial Member These cross appeals are directed against the order dated 29.01.2013 of CIT(A) for the assessment year 2007-08. First we take up the appeal filed by the assessee wherein the ld. AR of the assessee has raised various grounds however at time of hearing ld. AR of assessee submitted that the summarized effective ground is only ground no. 1 (a) to (e) which reads as under: “1. BECAUSE, the Learned Commissioner of Income Tax (Appeals) erred in law as well as on facts while confirming / making the additions / disallowances made by the assessing officer, a) Disallowance of Jowar Purchases U/S 37 of the Income Tax Act, 1961 amounting to Rs. 19,59,000/-. b) Disallowance of Husk Purchases U/S 37 of the Income Tax Act, 1961 amounting to Rs. 7,77,757/-. c) Additions of Sundry Creditors – Disallowance of Liability U/S 41(1) of the Income Tax Act, 1961 amounting to Rs. 7,68,453/. d) Disallowance of Technical Consultancy Fees paid U/S 37(1) of the Income Tax Act, 1961 amounting to Rs. 10,50,000/-. e) Disallowance of Interest U/S 14(A) of the IT Act, 1961 amounting to Rs. 79,53,780/-.”
2. At the time of hearing the ld. AR of the assessee has stated at bar that the assessee does not press ground no. 1(a)(b) & (c) and the same may be dismissed as not pressed. The ld. DR has not objected if the ground no. 1(a)(b) & (c) of the assessee’s appeal are dismissed as not pressed. Accordingly the ground no. 1(a)(b) & (c) of the assessee’s appeal are dismissed being not pressed. & 552/Bang/2013 Page 3 of 18 3. Ground no. 1(d) is regarding disallowance of technical consultancy fee. During the assessment proceedings the AO found from the Profit and Loss account that Shri S.S. Mallikarjun, S/o Sri Shamanur Shivashankarappa has received Rs. 42 lakhs as payment towards providing technical consultancy to the assessee company.
The AO asked the assessee to explain the basis on which this payment is made to Shri S.S. Mallikarjun who is the son of the person controlling this company. The AO observed that the only qualification of Shri S.S. Mallikarjun is that he is son of Sri Shamanur Shivashankarappa who is controlling the affairs of the company. Accordingly, the AO has held that the assessee company has failed to prove the services rendered by technical consultant for which Rs. 42 lakhs has been paid and disallowed the amount of Rs. 42 lakhs in question. The assessee challenged the action of the AO before the CIT(A) and contented that the AO did not consider the services rendered by the technical persons in spite of the fact that full particulars of his services were explained at the time of assessment. The CIT(A) restricted the disallowance to 25% of the total payment amounting to Rs. 10,50,000/-. & 552/Bang/2013 Page 4 of 18 4. Before us the ld. AR of the assessee has submitted that Shri S.S. Mallikarjun is the chief promoter of distillery and upgradation.
Because of his support the expansion and technical upgradation was possible. Only because of his knowledge and technical expertise the assessee could set up a plant to manufacture the spirit out of grain. The ld. AR has referred to the technical and industrial training undergone by Shri S.S. Mallikarjun as recorded by the CIT(A) and submitted that his commercial degree as well as the technical knowledge made it possible for the assessee to set up and manage the sugar factories, rice and dhal manufacturing unit as well as distilleries. Thus the ld. AR has contented that because of his technical knowledge and service provided the assessee was able to increase its production and profitability since 1999-2000 till the year under consideration. She has referred to the production details and profits during the said period and submitted that production of the assessee company was increased manifold in this period and correspondingly the profits of the company are also increased. Thus the ld. AR has submitted that when the assessee has proved the technical knowledge and expertise of Shri S.S. Mallikarjun then no disallowance is called for in respect of technical / consultancy fee paid by the assessee. & 552/Bang/2013 Page 5 of 18 5. On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that the payment is made to the related person and assessee has failed to produce any evidence to show that any technical service was actually rendered by Sri S.S. Mallikarjun to the assessee. Therefore in the absence of any supporting material of actual service rendered to the assessee the payment is not allowable u/s. 37(1) being the expenditure not laid out wholly and exclusively for the purpose of business of the assessee.
We have considered the rival submissions as well as relevant material on record. The assessee has claimed that shri S.S. Mallikarjun is the chief promoter of distilleries and because of his dynamic support the assessee could expand its production and technical upgradation. The assessee explained the competence of shri S.S. Mallikarjun in technical and industrial field and particularly in distilleries, sugar, rice industry management in latest technology. Having accepted this contention of the assessee the question remains whether shri S.S. Mallikarjun has rendered any service apart from his capacity of Managing Director of the assessee company. The assessee has produced certain certificates & 552/Bang/2013 Page 6 of 18 in this regard showing his knowledge and undergoing training and technical qualifications. However, no documents or material has been produced by the assessee to show which service has been rendered by shri S.S. Mallikarjun to the assessee. The assessee being a company was required to produce atleast some decision taken by the Board of Directors regarding the technical consultancy services to be rendered by shri S.S. Mallikarjun against which the fee was to be paid over and above the salary and other remuneration being a Director / Managing Director of the assessee company. In the absence of any material evidence regarding the service actually rendered by shri S.S. Mallikarjun the mere competence or qualification cannot be a criteria for allowing the payment made by the assessee on account of technical consultancy fee. Accordingly, in the facts and circumstances of the case we do not find any reason to interfere with the impugned order of the CIT(A) qua this issue.
Ground no. 1(e) is regarding disallowance of interest u/s. 14A. The AO found that the assessee has invested Rs. 7,52,23,804/- in the shares of Indian Cane Power Ltd., and Rs. 6,71,76,368/- in Universal Bottles Pvt. Ltd., Begur. Thus the AO noted that during the year under consideration the assessee made total investment in & 552/Bang/2013 Page 7 of 18 shares of two companies of 13.24 crores however this investment was shown in the balance sheet under the head loans & advances.
The AO further noted that the source of investment is the money available in the overdraft account from Indian Bank. The overdraft limit to the company given by this bank is Rs. 7.5 crores. The assessee has also taken loan of Rs. 53,53,730/- from the directors and share holders. The assessee has debited to Profit and Loss Account Rs. 79,53,780/- under head ‘financial charges’. The AO accordingly disallowed the interest of Rs. 79,53,780/- debited under the head ‘financial charges’ by invoking the provisions of section 14A. The assessee challenged the action of the AO before the CIT(A) and contented that the investment in question have been made exclusively and only for the purpose of business and not for the purpose of earning dividend. An investment has been made in the companies which are in the same business of sugarcane processing unit where molasses is available. It was further contented that the investment was made in the shares of Indian Cane Power Ltd. to get the benefit of supply of molasses which is raw material for the assessee company. The said company was subsequently merged with the assessee company and therefore this was the reason for making the investment. Similar contention was & 552/Bang/2013 Page 8 of 18 raised in respect of Universal Bottles Pvt. Ltd. The CIT(A) was not impressed with the explanation and contention of the assessee and upheld the disallowance made by the AO.
Before us the ld. AR of the assessee has reiterated its contention as raised before the authorities below and submitted that the investment was made for commercial expediency and not for earning the dividend income. She has further submitted that increase in the overdraft / cash credit limit during the year is only Rs. 2,79,18,345/-. Therefore the disallowance if any on account of interest u/s. 14A can be only in respect of the increase in the overdraft / cash credit limit during the year. She has further submitted that there is a corresponding increase in the current assets from 18.64 crores on 31.03.2006 to Rs. 33.07 crores as on 31.03.2007. Thus there is an increase of Rs. 14.43 crores in the current assets. The AO has considered the entire overdraft facility as utilized for investment in shares whereas the same was utilized for improvement of current assets only. Thus the ld. AR has submitted that the borrowed fund was not utilized for investment purpose. On the other hand, the ld. DR has submitted that the AO has given a finding that the overdraft facility was used for the & 552/Bang/2013 Page 9 of 18 purpose of investment. Therefore, there is a direct nexus between the borrowed fund and the investment. He has relied upon the orders of the authorities below.
We have considered the rival submissions as well as relevant material on record. As regards the contention of the assessee that the investment was made for the purpose of the business of the assessee, we are of the view that this contention is relevant in respect of the disallowance made u/s. 37(1) and not for the purpose of disallowance u/s. 14A. So long the assessee is showing the investment in the shares the said transaction clearly falls in the ambit of section 14A as a dividend income from the investment is exempt u/s. 10(38) of the IT Act. Further the assessee has raised the contention by pointing out that the increase in the overdraft limit during the year is only Rs. 2,79,00,000/- and there is much more corresponding increase in the current assets. However we note that neither the AO nor the CIT(A) has analysed these facts or given any finding on this issue. This aspect is relevant only when there is no direct nexus between the borrowed fund and investment. In case there is a direct nexus between the borrowed fund and investment and if it is found that the investment has been directly assets is not relevant. Accordingly, we set aside this issue to the record of the AO for proper verification and adjudication after considering all the relevant facts as pointed out by the assessee.
The revenue has raised the following grounds.
“1.The order of the Commissioner of Income Tax (Appeals), Hubli, is opposed to law and not on the facts and circumstances of the case.
The order of the Commissioner of Income Tax (Appeals), Hubli, is not a speaking order.
The order of the CIT(A) is perverse with regard to reworking of grain price by adopting at the average rate at Rs. 950/- per quintal (including the expenses for conversion to flour) and allowing assessee’s appeal partly on this issue.
The Commissioner of Income Tax (Appeals), Hubli, has not given any finding on the correctness or otherwise of the disallowances made based on detailed verification made by the Assessing Officer with regard to the issues of Payment made to husk suppliers, Sundry Creditors added u/s 41(1) of the Act & Payment made to technical consultancy.
For these and other grounds that may be urged upon at the time of hearing.
6. The appellant craves leave to add, alter, amend any of the grounds.”
Ground nos. 1 and 2 are general in nature and does not require any specific adjudication.
Ground no. 3 is regarding reworking of grain price by adopting the average rate of Rs. 950 per quintal. The AO has stated in the assessment order that the assessee has installed a grain plant during the year under consideration for production of spirit from grain and cereals. The AO noted from the ledger account that the assessee has purchased jowar flour of Rs. 7,64,01,000/- at the rate of Rs. 975/- per quintal during the year. The assessee produced copy of bills issued by M/s. Kalleshwara Bio-products, Davanagere. The AO concluded that the assessee paid excess amount of Rs. 2,93,85,000/- to M/s. Kalleshwara Bio-products, Davanagere for purchase of jowar flour. The AO took the excess rate of Rs. 375/- per quintal to work out the disallowance. Accordingly, the AO has disallowed this amount of Rs. 2,93,85,000/- on the ground that this was excess price paid towards purchase of jowar flour. The assessee challenged the action of the AO before the CIT(A) and contented that the AO adopted rate of Rs. 600/- as collected from Agricultural Produce Marketing Committee (APMC), Davanagere and APMC, Haveri for third grade jowar instead of considering the rate for moderate good jowar. The CIT(A) after considering the rate of APMC, Bagalkot, APMC, & 552/Bang/2013 Page 12 of 18 Mahalingapur and APMC, Davanagere come to the conclusion that the average price per quintal comes around Rs. 950/- and accordingly by applying the said rate of Rs. 950/- per quintal restricted the disallowance to Rs. 19,59,000/- as against the disallowance made by the AO of Rs. 2,93,85,000/-.
Before us the ld. DR has submitted that the AO has applied the APMC rate of davanagere which is the place M/s. Kalleshwara Bio- products belongs to. Whereas the CIT(A) has considered the rates of three different places which are not relevant for estimating the average rate. He has further contented that the CIT(A) has applied the highest rate prevailing at three places instead of the average rate prevailing at these three APMCs. On the other hand, the ld. AR has submitted that M/s. Kalleshwara Bio-products purchases the grain from Bagalkot, Bijapur and other places depending upon the availability of the grain and therefore the rate prevailing at APMC of Bagalkot, Bijapur and other places are relevant. He has thus contented that the average price prevailing in the market of moderate good jowar is much more than the rate adopted by the CIT(A) and therefore no disallowance is called for. & 552/Bang/2013 Page 13 of 18 14. We have considered the rival submissions as well as relevant material on record. There is no dispute that the AO while making the disallowance has adopted the rate of jowar as prevailing at APMC Davanagere at Rs. 600/- per quintal. The CIT(A) has taken into consideration the rates prevailing at three APMCs namely Bagalkot, Mahalingapur and Davanagere. However we find that the average rate computed by the CIT(A) is the maximum rates prevailing at these three APMCs. The assessee claimed before the CIT(A) that the AO should have considered the rates for moderate good jowar. Therefore the assessee itself has not claimed that it has purchased the best jowar available in the market. Accordingly, having considered the facts and circumstances of the case we are of the view that the mean rate which is minimum + maximum / 2 of all three APMCs to be considered for working out the average market price of jowar during the year under consideration. The CIT(A) has applied the rates as under.
Financial Minimum Maximum Sl.No. Area Year (Rs.) (Rs.) 1 APMC, Bagalkot (2006-07) 600.00 1100.00 2 APMC, Mahalingapur (2006-07) 750.00 1100.00 3 APMC, Davangere (2006-07) 400.00 850.00 Accordingly, the average rate ought be computed by considering the minimum and maximum of each of the APMCs as under.
APMC Bagalkot – Rs. 850/- per quintal 2. APMC Mahalingapur – Rs. 925/- per quintal & 552/Bang/2013 Page 14 of 18 3. APMC, Davanagere – Rs. 625/- per quintal The AO is directed to apply the rate of Rs. 800/- per quintal. 15. Ground no. 4 is regarding disallowance made on account of husk purchase. The AO found that the assessee has debited Rs. 1,21,25,517/- in the Profit and Loss account on account of husk purchase as against Rs. 46,25,517/- shown in the last year under the head power and fuel. From the ledger accounts of the parties the AO noted that the assessee has purchased husk amounting to Rs. 70,16,985/- from Shri Kaleemulla and Rs. 7,60,259/- from Shri Dayamappa. From the party ledger account the AO found that the assessee has also purchased husk from Mr. Mushtaq Ahmed of Rs. 8,84,000/- and the total purchase from Shri Dayamappa is Rs. 26,70,829/- and from Shri Kaleemulla is Rs. 30,83,977/- whereas the ledger account of power and fuel expenditure shows only two husk suppliers i.e. Shri Kaleemulla and Shri Dayamappa from Davanagere. By considering all these facts and payment made by the assessee to Karnataka Electricity Board for purchase of power the AO doubted the genuineness of the quantity of purchase of husk from the parties claimed by the assessee. Accordingly, the AO allowed the purchase of husk to the extent of Rs. 3,10,000/- and disallowed the balance amount of Rs. 74,67,244/-. & 552/Bang/2013 Page 15 of 18 16. Before the CIT(A) the assessee furnished the details of steam generated during the financial year relevant to the assessment year under consideration and also given the details of the required husk to generate the said amount of steam. After considering the relevant details the CIT(A) restricted the disallowance to 10% of the total purchases of Rs. 77,77,579/- amounting to Rs. 7,77,757/-.
Before us the ld. DR has submitted that there is a steep rise in the fuel consumption during the year under consideration in comparison to the earlier years. He has further submitted that there is no extra generation of power during the year under consideration in comparison to the earlier year and therefore the Assessing Officer has rightly pointed out this fact that the assessee has shown excess consumption of husk during the year in comparison to the earlier year when there is no increase of generation of power. He has relied upon the orders of the Assessing Officer. On the other hand, the ld. AR has submitted that the assessee furnished all the details of steam generated during the year. The details are furnished monthwise generation of steam and therefore the fuel required for generation of this total steam generated during the year has not been disputed by the department. He has supported the orders of the CIT(A).
We have considered the rival submissions as well as relevant material on record. The AO has made a disallowance on account of excess purchase of husk on the ground that during the earlier year the assessee has shown the purchase of Rs. 46,25,200/- whereas in this year the assessee has debited Rs. 1,21,25,527/-. Therefore the AO found that there is an excess of purchase Rs. 74,67,244/- during the year under consideration. We find that in respect of examining the actual purchases and consumption during the year under consideration the AO has made the disallowance only by comparing the expenditure on this account in the earlier year. Before the CIT(A) the assessee furnished the monthwise details of steam generated as under:
Month Steam Generated (MTs) April,06 3061.000 May,06 9932.000 June,06 8401.000 July,06 8138.000 Aug,06 9732.000 Sept,06 6359.000 Oct,06 10387.000 Nov,06 9656.000 Dec,06 10166.000 Jan,07 8149.000 Feb,07 8919.000 Mar,07 10394.000 Total 103294.000 These details have not been disputed by the revenue before us.
Therefore the total husk required for generation of this quantity of shown the purchase of 10,312.75 MTs of husk during the year and the remaining fuel was used as biogas. The CIT(A) after considering all these facts has restricted the disallowance to 10% of the total disallowance made by the AO. In view of the above facts we do not find any reason to interfere with the impugned order of the CIT(A) qua this issue when the revenue has not brought before us to counter the facts recorded by the CIT(A).
The AO has also disallowed the amount of Rs. 67,43,296/- on account of sundry creditors by invoking the provisions of section 41(1). The AO held that the amounts in the books of accounts are coming from earlier years and there is no transaction during the year. The CIT(A) has restricted this disallowance as under.
“I have gone through the facts of the case, contents of the assessment order and written submission of the assessee. Out of the outstanding creditors Rs. 67,43,296/- the assessee filed the details for all cases, except three cases ([i] M/s. Malvi Manufactured Power Association Rs. 12,626/- [ii] M/s. Nagenhalli Industries, Harihar Rs. 5,97,886/- [iii] M/s. Bem Seals Rs. 1,57,941/- total amount Rs. 7,68,453/- Hence out of the total disallowance of Rs. 67,43,296 and amount of Rs. 7,68,453 was upheld and remaining amount is allowed. As a result this ground of appeal is partly allowed.”
20. Thus it is clear that the assessee filed the details of all the cases except the three cases for which the CIT(A) has confirmed & 552/Bang/2013 Page 18 of 18 disallowance. The details filed by the assessee have not been disputed by the revenue and therefore we do not find any error or illegality in the order of the CIT(A) qua this issue.0
In the result the appeal of the assessee as well as revenue are partly allowed.
Pronounced in the open court on this 31st day of May, 2017