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Income Tax Appellate Tribunal, “A” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-1, Coimbatore in dated 27.02.2017 for assessment year 2012-13.
M/s. Rajasayee Fine Linen Pvt. Ltd, the assessee, is engaged in the business of textiles, handlooms & power looms. While making the assessment for ay 2012-13, the Assessing Officer (AO), inter alia, disallowed Rs.2,81,91,042/-, proportionate interest, on Rs. 12,69,71,011/- advanced out of its interest bearing loan to M/s. Coimbatore Popular Mills Ltd. Further, on verification the AO noticed that the rate of consumption to sales in the assessee’s case was 184% whereas the normal rate of consumption in this type of Industry was 70% - 75% of the sales. Hence, the AO treated 25 % of consumption ie Rs.5,34,02,684/- as the difference in the valuation of stock and added to the total income. Aggrieved, the assessee filed an appeal before the CIT(A).The CIT(A) sought a remand report and after considering the assessee’s submissions etc, dismissed the appeal. Aggrieved against the order of the CIT(A), the assessee filed this appeal.
The AR invited our attention to the copies of the agreement in the paper book and submitted that the assessee company has taken the manufacturing facility on operating lease basis from M/s Coimbatore Popular Spinning Mills Limited. For which, a lease advance of Rs.12.69 crores have been given to the lessor based on the lease agreement and it has been treated as lease advance in its books. The AO has not disputed the fact that the assessee company has taken the mill premises on lease and they have not disputed the payment of conversion charges to the Coimbatore Popular Spinning Mills Ltd. Since, the assessee has utilized the loan amount only for the purpose of carrying on its main business activities, the interest expenses on secured loan has to be treated as expenses incurred wholly and exclusively for the purpose of business and hence the expenses are to be allowed in full u/s 37 and relied on the decisions of Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, CIT vs Birla Cotton Spg & Wvg Mills Ltd / CIT vs Birla Bros P Ltd (1971) 82 ITR 166 (SC) , CIT vs Panipatwoollwn & General Mills Co Ltd (1976) 103 ITR 66 (SC), CIT vs Sales Magnesite P Ltd (1995) 81 Taxman 334 (Born.), Industrial Feeders vs ACIT, (2016) 68 taxmann.com 92 (Madras), DCIT vs Alliance Retreat P Ltd (2015) 61 taxmann.com 249 (Chennai - Tribunal) etc.
3.1 Regarding the high percentage of consumption of raw materials to production value, the AR invited our attention to the copies of the ledger account of purchases and debit notes, opening and closing balance of cotton supplier – to show that the balance dues are net of debit notes etc in the paper book and submitted that during the financial year 2011-12, the company had purchased cotton at higher prices prevailing during the first quarter of FY 2011-12 and sold the finished products at lower rate, incurred heavy gross loss on the production. The reduction in finished product has fallen due to the fact that the cotton prices have come down during the course of first quarter onwards and settled down at 50% lesser than the purchase price. Consequently, the yarn prices also have significantly fallen down in line with the down trend in cotton price. While selling the finished products, the assessee could get only lesser sale value and accordingly the company has shown only gross loss. During the assessment proceedings, the Quantitative details were also been submitted. Further, to the above factual points, the action of the Assessing officer in disallowing the expenditure on assumption basis is not valid based on the below judicial pronouncements in K. M. Adam vs CIT(A) - High Court of Madras - 56 ITR 605 (Mad), Raza Textiles Ltd - High Court of Allahabad - 86 ITR 673 (All) etc.
Per contra, the DR submitted that the CIT (A) has decided these issues after calling for a remand report and after due consideration of the matters. He invited our attention to the observation made by the CIT(A) in his order that:
“As per the above agreement, M/s. Coimbatore Popular Mills Ltd has to manufacture yarn and other related work and in return the assessee company M/s. Rajasayee Fine Linen Ltd has to pay conversion charges only.
During the remand proceedings,the assessee's AR submitted details of ledger copy pertaining to conversion charges as per which, Rs.67,88,983/- was charged and paid. This amount only represents the actual business related payments and the outstanding amount of Rs.12,69,71,011 represents diversion of funds from interest bearing borrowed capital. The assessee company relied on the case of M/s. SA Builders cited in 288 ITR 1 In support of its claim. However, it is submitted that on a SLP filed by Department against the Delhi High Court's decision in the case of CIT v Tulip Star Hotels Ltd [2012J 204 Taxman 11 (Mag.)/[2011] 16 taxmann.com 335, the Hon'ble Supreme Court ruled that their earlier decision In the case of S. A. Builders Ltd. needs reconsideration. In view of the above, the Assessing Officer has rightly disallowed interest of Rs.2,81,91,042/- which needs to be sustained. In view of the above findings of the Assessing Officer that conversion charges was paid of Rs.67,88,983/- and this amount only represents the actual business related payments and the outstanding amount of Rs.12,69,71,011/- represents diversion of funds from interest bearing borrowed capital. Therefore, the interest amount of RS.2,81,91,042/- disallowed by the Assessing Officer will stand confirmed in the hands of the appellant”.
4.1 With regard to the disallowance on account of higher rate of consumption to sales at Rs.5,34,02,684/- , the DR invited our attention to the following portions of order of the CIT(A)
“The matter was remanded to the Assessing Officer for furnishing Remand Report. The Assessing Officer has disallowed a sum of Rs.5,34,02,684/- in view of his detailed reasoning in the following paragraphs in the Remand Report dated 19.08.2016 : "On verification of records, it is seen that the Assessing Officer noticed that the rate of consumption to sales is 184% whereas the normal rate of consumption in this type of Industry is 70% - 75% of the sales and the Assessing Officer added an amount of Rs.5,34,02,684/- to the total income. The assessee company in its submissions before the learned CIT(A) has stated that the company had purchased cotton at higher prices prevailing during the first quarter of FY 2011-12 and sold the finished products at lower rate, incurred heavy gross loss on the production. The assessee company listed three companies viz., M/s. Bannari Amman Spinning Mills Ltd; M/s. Shiva Tex yarn Ltd and M/s. Loyal textile Mills Ltd to show comparatively that these companies are showing huge losses in the Financial Year 2011-12. During the course of remand proceedings, the assessee's AR submitted comparative financial accounts of the above three companies. However, on an analysis, it is seen that the rate of consumption to sales of these companies (as given below) are below the average 75%, the same as adopted by the assessing Officer. (Rs. In lakhs) Company Sales Consumption Consumption/ sales % Shiva Tex Yarn Ltd 32506.34 23556.84 72.46% Loyal Textile Mills 91059.00 39908.00 43.82% Ltd Bannari Amman 45107.89 31798.20 70.65% Spinning Mills Ltd Average rate 62.31 % Since the Assessing Officer has rightly ·held that only 75% of such claim is allowable and the remaining deserved to be added back on account of capital and the same is in order in comparison and on facts and circumstances of the case. In view of the above, it is submitted that the addition made by the Assessing Officer may kindly be sustained. The assessee company was asked to submit further clarification which has been submitted only on 16.8.2016 and thereafter the report is being submitted for kind consideration and further necessary action. As directed, the paper book is returned herewith".
The assessee was not able to offer his counter to the findings of the Assessing Officer in the Remand Report that the assessee stated that the rate of consumption to sales is 184% of the sales whereas the Assessing Officer has painted out that Similar mills operating in Coimbatore region have only consumption to sales figure at 75%. Therefore, the figure adopted by the assessee at 184% consumption to sales does not hold water and therefore this addition will stand confirmed in the hands of the appellant. This ground of appeal is dismissed.”
and submitted that the assessee did not place any material before the CIT(A) to counter the findings of the AO and hence the above decision of the CIT(A) is correct. The material on which the AR sought the attention of the tribunal were not placed either before the AO nor before the CIT(A) and hence the transactions on which the assessee canvases its case before the tribunal is not a transparent one and hence its plea may be rejected .
We heard the rival submissions and gone through relevant material.
From the agreement copies, it is seen M/s. Coimbatore popular Spinning Mills Limited (The Mills') is represented by its MD, Shri G.
Venkataramachandran and the assessee company M/s. Rajasaayee Fine Linen Pvt. Ltd ('The Job Party') is represented by its Director Smt. Lakshmi Ramachandran, W/o. Sri G. Venkataramachandran. From the other materials in the paper book, it is seen that Shri G. Venkataramachandran is holding 20.01% shares in the assessee company and 11.35% shares in M/s. Coimbatore popular Spinning Mills Limited. Smt. Lakshmi Ramachandran is holding 20.01% shares and M/s. Rajasayee Fine Linen Pvt. Ltd is holding 6.16% sharesin M/s. Coimbatore popular Spinning Mills Limited, respectively . It appears other family members also hold substantial interest. It is also seen from the P& L account of the assessee company that its revenue from the operations fell from Rs. 25,51,83,661/- from the earlier year to Rs 4,89,59,447/- in the current year and its finance cost rose from Rs. 43,11,280/- in the earlier to Rs 2,84,13,585/- in the current year. It is also seen from the P& L account of the M/s. Coimbatore popular Spinning Mills Limited that its revenue from the operations fell from Rs. 66,248,485/- from the earlier year to Rs 67,88,983/- in the current year and its finance cost fell from Rs.1,1,54,791/- in the earlier to Rs 22,31,046/-in the current year. Although, there is no agreement for payment of any advance as held by the CIT (A), from the orders of the lower authorities, it appears that the relevant facts and circumstances required for deciding the commercial expediency or otherwise , diversion of interest bearing funds or otherwise have not been properly examined.
So also the facts and circumstances associated with the assessee’s claim with regard to the disallowance on account of higher rate of consumption to sales at Rs.5,34,02,684/-. In the facts and circumstances, we deem it fit to remit these issues back to the AO for a fresh examination. The assessee shall place all the materials in its support before the AO and comply to the AO’s requirements as per law. The A O is free to conduct appropriate enquiry as deemed fit, but he shall furnish adequate opportunity to the assessee on the material etc to be used against it and decide the matter in accordance with law .
In the result, the assessee’s appeal is treated as allowed for statistical purposes.
Order pronounced on Thursday, the 15th February, 2018 at Chennai.