DCIT, CIRCLE-1(1), KOLKATA, KOLKATA vs. M/S KAMARHATTY COMPANY LTD., KOLKATA

आदेश/O R D E R PER Dr. A.L. Saini, AccountantMember:-

This caption appeal filed by the Revenue, pertaining to Assessment Year 2011-12, is directed against anorder passed by the Ld. Commissioner of Income Tax (Appeals)-I, Kolkata, in appeal No.359/CIT(A)-1/R-1/2014-15, dated 30.08.2016, which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’),dated 28.03.2014.

2.The Revenue has raised the following grounds of appeal: “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting addition of Rs.7,49,749/- on

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 2 account of employee’s contribution to provident fund and ESI fund, beyond the sales. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting addition made u/s.14A r.w.s. 8D of Rs.7,11,527/- in contravention on provisions of CBDT Circular No.5/2014. 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowances of Rs.58,29,079/- as interest on loan to subsidiary. 4. Whether on the facts and in the circumstances of the case and in law, the LD. CIT(A) erred in deleting addition made on account of bogus purchases of raw materials, to the tune of Rs.25,12,469/- on account unexplained shortage in production. 5. That the appellant craves leave to add, alter and / or modify, substitute all or any of the grounds of appeal, during the course of hearing.”

3.Ground No.1 raised by the Revenue relates to addition of ₹7,49,749/- on account of employees’ contribution to Provident Fund and ESI fund beyond due date.

3.1.Brief facts apropos this issue are that during the course of assessment proceedings, the Assessing Officer noted that employees contribution to PF amounting to ₹66,554/- and ESI fund amounting to ₹6,83,195/- have been deposited by the assessee-company after the due date as mentioned u/s 36(1)(va) of the Act. During the course of assessment proceedings, it was submitted by the assessee that online system for payment of ESI was introduced by the ESI Department from October, 2010 and at the initial stage of the change in system, challans could not be generated due to the server problem of ESI Department. The above explanation of the assessee has not been accepted by Assessing Officer as there was no such provision to condone the delay. Therefore, the Assessing Officer made addition to the tune of ₹7,49,749/- i.e. (₹66,554 + ₹6,83,195/-).

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 3 3.2.On appeal, Ld. CIT(A) deleted the addition made by the assessing officer. Not being satisfied with the order of Ld. CIT(A), the Revenue is in appeal before us. The Ld. DR for the Revenue has relied on the order passed by Ld. Assessing officer, whereas the Ld. counsel for the assessee has defended the order passed by Ld. CIT(A).

3.3.We have given a careful consideration to the rival submissions and perused the material available on record. We note that ld CIT(A) deleted the addition relying on the decision of the Co-ordinate Bench of ITAT Kolkata, in assessee’s own, ITA No. 947/Kol/2009, for the preceding Assessment Year 2008-09. We note that the payments of PF and ESI had not beenpaid by the assessee within the grace period as specified in the relevant statute. However, we note that the payment of ESI and PF have been made by the assessee within the due date of filing return of income u/s. 139(1) of the Act. Therefore, it is a sufficient compliance made by the assessee and there is no breach of duty or default on the part of the assessee and for that we rely on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Alam Extrusions Ltd. 390 ITR 306 (SC) and jurisdictional High Court in the case of CIT vs. Vinya Cement Ltd. (2007) 213 CTR 268 (Cal) and the Co-ordinate Bench of this Tribunal in ITA No.947/Kol/2012 in assessee’s own case for Assessment Year 2008-09, on the identical issues. Therefore as the issue is squarely covered in favour of the assessee by the order of the Co-ordinate Bench of this Tribunal cited (supra) in assessee’s own case and there is no change in facts and in law and the revenue is unable to produce any material to controvert the aforesaid finding of Ld. CIT(A) and Ld. CIT(A) has allowed the appeal of assessee by following the decision of the Tribunal in assessee’s own case for AY 2008-09. Therefore, we find no reason to interfere in the order of Ld. CIT(A) and same is hereby upheld. This issue of Revenue’s appeal is dismissed.

3.4. In the result, appeal filed by Revenue (ground No.1) is dismissed.

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 4 4.Ground No.2 raised by the Revenue relates to addition made by Assessing Officer u/s. 14A r.w.r. 8D of the IT Rules, 1962 of ₹7,11,527/-.

4.1.The brief facts apropos this issue are that during the course of assessment proceedings the Assessing Officer noted that assessee hadshown in its balance-sheet the amount of investment at the beginning and at the close of the year at ₹3,78,47,850/- and ₹3,80,97,850/- respectively. The funds were invested in equities of subsidiary company and various other companies. Therefore, Assessing Officer noted that any expenditure relatable to earning of such income is liable to be disallowed u/s14A of the Act. The assessee submitted before the Assessing Officer that it has not earned tax free income during the Assessment Year under consideration,therefore section 14A would not be applicable in his case. However, the Assessing Officer rejected the contention of assessee and held that provision of Section 14A of the Act would be applicable in case of all the investments, the income of which is tax free as per the provision of the Act and he also referred the CBDT Circular No.5/2014, dated 11.02.2014, wherein it had been clarified by the CBDT that disallowance under Rule 8D r.w.s 14A of the Act is mandatory even if the taxpayers in a particular year does not earn any exempt income. Therefore, the Assessing Officer worked out the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) at ₹ 5,21,663/- and ₹1,89,864/- respectively, aggregating to ₹7,11,527/-.

4.2 On appeal, the Ld. CIT(A) deleted the addition.Not being satisfied with the order of Ld. CIT(A), the Revenue is in appeal before us. The Ld. DR for the Revenue has primarily reiterated the stand taken by the assessing officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, Ld. counsel for the assessee has defended the order passed by Ld. CIT(A).

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 5

4.3.We have given a careful consideration to the rival submissions and perused the material available on record. We note that ld CIT(A) deleted the addition stating the reasons in his order that the assessee had not earned any exempt income during Assessment Year 2011-12, therefore invoking the provisions of Section 14A r.w.r. 8D of the I.T. Rules, 1962, by the Assessing Officer were not warranted.We note that assessee has not earned any exempt income during the Assessment Year 2011-12 by way of dividendtherefore unless there is a receipt of exempt income for the concerned assessment year, the disallowance u/s 14A of the Act cannot be made. For that, we rely on the judgment of Hon’ble Delhi High Court in the case of Cheminvest Ltd. Vs CIT 317 ITD 33 (Delhi) wherein it was held that if the assessee does not receive dividend income or exempt income, the disallowance under section 14A r.w.r. 8D is not warranted. Besides, the coordinate Bench of ITAT Kolkata in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141 (Kol-Trib) has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) & (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the Hon’ble Calcutta High Court in G.A.No.3581 of 2013 in the appeal against the order of the Tribunal in the case of REI Agro Ltd. (supra). We also rely of the following judgments, wherein it was held that if there is no dividend income, the disallowance under section 14A should not be made.

a) CIT vs. Corrtech Energy Pvt. Ltd. (2014) 45 taxmann.com 116 (Guj) b) ACIT v. M. Bhaskaran (2014) 50 txmann.com 138 (ITAT Chennai) c) CIT vs. Hero Cycles Ltd. ITA No. 331 of 2009 P & H High Court

The sum and substances of these judgments are that disallowance cannot be made u/s. 14A r.w.r. Rule 8D of the IT Rules, where the assessee has not earned / received any exempt income during the assessment year under

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 6 consideration i.e. until and unless there is receipt of exempt income for the concerned assessment year, the disallowance u/s 14A r.w.r. Rule 8D of the IT Rules cannot be invoked. Therefore, we note that since the issue in dispute is squarely covered by the above narrated judgments wherein it has been held that if there is no exempt income, no disallowance should be made under section 14A.Since in the assessee case under consideration, as the assessee had not earned any exempt income during assessment year 2011-12, therefore, the invoking of the provision of Section 14A r.w.r. Rule 8D of the I.T. Rules by the Assessing Officer is not warranted. That being so, we decline to interfere in the order passed by the Ld. CIT(A). Hence, we confirm the order passed by Ld. CIT(A).

4.4.In the result, the appeal filed by Revenue (in Ground No.2) is dismissed.

5.Ground No.3 raised by the Revenue relates to disallowance of ₹58,29,079/- as interest on loan to subsidiary company.

5.1.Brief facts apropos this issue are that during the assessment proceedings the Assessing Officer noted that assessee-company had advanced loan to its subsidiary company, Kamarhatty Power Ltd and loan was outstanding at the beginning and at the close of year at ₹3,70,90,000/- and ₹3,29,50,000/- respectively. The Assessing Officer noted that the borrowed funds were utilized as interest free advance given to the said subsidiary company. However, the assessee submitted during the assessment proceedings before AO that loan was advanced out of cash profits of the company. However, the AO rejected the contention of the assessee and held that interest free advance to the subsidiary company is a colourable device to evade tax.Therefore, the Assessing Officer concluded that the loan was not utilized for the purpose of business and made proportionate disallowance of interest @ 12% amounting to ₹58,29,079/-.

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 7 5.2.On appeal, Ld. CIT(A) deleted the addition. Not being satisfied with the order of Ld. CIT(A) the Revenue is in appeal before us. The Ld. DR for the Revenue has primarily reiterated the stand taken by the AO which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, Ld. counsel for the assessee has defended the order passed by Ld. CIT(A).

5.3.We have given a careful consideration to the rival submissions and perused the material available on record. We note that ld CIT(A) deleted the addition made by assessing officer observing that assessee was having sufficient interest free funds and the Assessing Officer was unable to establish any nexus between borrowed funds and the loan given to subsidiary company. We note that money was advanced to the subsidiary company on account of commercial expediency and the ratio of the judgment of Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT And Another (2007) 288 ITR 1 (SC) is applicable to the facts of the assessee’s case under consideration. We also note that assessee was having sufficient interest free fund and the Assessing Officer was unable to establish any nexus between borrowed fund and the loan fund to the subsidiary company. Therefore, the ratio laid down of the judgment of Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra) is squarely application to the case of assessee under consideration and therefore the disallowance for interest on loan to subsidiary u/s 36(1)(iii) by the Assessing Officer is not justified.

5.4 We also note that the said issue is squarely covered by the order of Co- ordinate Bench of Kolkata Tribunal, in assessee’s own case, in ITA No.947/Kol/2009 for Assessment Year 2008-09, wherein it was held as follows:- “17. We have heard the rival submissions. Whenever acheque issued bya party is cleared through a Bank loan account, the dues to the Bank will increase, if the cheque is cleared out of a deposit account, the dues

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 8 from the Bank will be decreased. This arithmetic by itself will not show that money had gone out of interest bearing funds. Assesseehas clearly pointed out that the cash credit balance had gone down over the relevant to previous year. In other words, the cash credit account stood replenished why more than what was given out as advance, through deposits made by the assessee during the relevant previous year. Assessee had substantial profit during the relevant previous year and, therefore, there is much strength in its argument that loans did not go out of any interest bearing funds. In any case, the loans were given only to a subsidiary of the assessee and Assessing Officer has not doubted the commercial expediency of such loans. We are, therefore, of the opinion that ld. CIT(Appeals) was justified in deleting this addition. Ground No.4 of the Revenue stands dismissed.”

We note that the issue is squarely covered in favour of assessee by the order Coordinate bench Kolkata in assessee`s case (supra) and there is no change in fact and laws and Ld. DR for the Revenue is unable to produce any materials to controvert to the aforesaid finding of Tribunal. We find no reason to interfere in the said order of Ld. CIT(A) and same is hereby upheld. Therefore, this ground of Revenue’s appeal is dismissed.

5.5.In the result, appeal of Revenue (in Ground No.3) is dismissed.

6.Ground No.4 raised by the Revenue relates to addition made on account of bogus purchases of raw materials to the tune of ₹25,12,469/-.

6.1 The brief facts apropos this issue are that theassessee-company has claimed that it has purchased raw jute for a total amount of ₹13,21,385/- from M/s Kajal Agencies Pvt. Ltd. The director of this party was summoned u/s. 131 of the Act, and then one Shri R.A. Dhoot, the Authorized Representative of M/s Kajal Agencies Pvt. Ltd, appeared on 25.03.2014. It was noted that this Company has no premises to carry on its so-called trading activities. Mr. Dhoot, who has allowed the company to carry on its activities from the premises rented by him. Mr. Dhoot submitted certain documents including Balance Sheet and profit and loss account, in respect of M/s Kajal Agencies

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 9 Pvt. Ltd. It was noted by AO that the Balance sheet and profit and loss showed that it was a “jamakharchi” company. The balance sheet as at 31.03.2011 showed that its share capital was Rs.1.44 crore whereas the balance of share premium account was at Rs.4.08 crore. It was also revealed that during the financial year 2010-11, the company has received Rs.30,00,000/- as share application money. The total sales of the company was Rs.4.10 crores and total purchases of the company was at₹.4.78 crore. The company has suffered a net loss of ₹64,779/- before tax. It was also revealed that the company has earned a net profit before tax for Rs.5,950/- in the financial year 2009-10. The profit and loss account shows that it has purchased jute for Rs.1,81,17,699/- and sold jute for an amount of ₹1,80,89,257/-. The AO noted that this company was either suffering loss or earning a negligible profit year after year and it was not understandable how the company managed to mobilize ₹4.08 crore as share premium on the basis of such dismal performance year after year. Therefore, AO concluded that M/s Kajal Agencies Pvt. Ltd. was an entry operator. So the assessee‘s claim of purchase of raw jute for an amount of ₹13,21,385/- from M/s Kajal Agencies Pvt. Ltd. was rejected.

6.2 The assessee-company has also claimed that it has purchased raw jute for a total amount of ₹11,91,084/- from M/s High Growth Vanijya Pvt.Ltd. Shri R.K. Singh AR appeared, before AO, on behalf of M/s High Growth Vanijya Pvt. Ltd. on 25.03.2014. Shri R.K. Singh, the AR submitted certain documents of M/s High Growth Vanijya Pvt. Ltd, before the AO. The AO noted from the profit and loss account of the company that it purchased raw jute amounting to₹77,25,786/- and sold the entire stock at Rs.77,88,253/- and after allowing various expenditure, the profit earned before taxation was only ₹.900/-. The amount of profit for the corresponding previous year was at ₹6,856/-. Therefore, AO noted that the activities of M/s High Growth Vanijya Pvt. Ltd. show that it is nothing but a “Jama Khrchi company”. The assessee-company claimed two purchase transactions for ₹6,00,184/- and ₹5,90,900/- on

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 10 31.03.2011 i.e. on the last day of the year. Therefore, the AO rejected the assessee’s claim of purchase of raw jutes from M/s High Growth Vanijya Pvt. Ltd. and made addition of ₹11,91,084/-. This way, the total addition made by the assessing officer was to the tune of ₹ 25,12,469/- ( ₹ 13,21,385 + ₹ 11,91,084).

6.3 On appeal, Ld. CIT(A) deleted the addition. Not being satisfied with the order of Ld. CIT(A), the Revenue is in appeal before us. The Ld. DR for the Revenue has primarily reiterated the stand taken by the AO which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, Ld. counsel for the assessee has defended the order passed by Ld. CIT(A).

6.4.We have given a careful consideration to the rival submissions and perused the material available on record, we note that ld CIT(A) deleted the addition made by assessing officer, observing that assessee had produced details, copies of vouchers for purchase of raw jute, sales invoices, delivery memo, ledger account, bank statement, deduction of TDS for payment made for purchase etc. The ld CIT(A) also noted that the delivery of goods were made by the sellers to the assessee-company and payments were also through banking channels.

6.5 We note that assessee-company had purchased raw jute for ₹13,21,385/- from M/s Kajal Agencies Pvt. Ltd. and Assessing Officer on the basis of enquiry made from one Shri R.A Dhoot, AR of M/s Kajal Agencies Pvt.Ltd. found that the said company was carrying on its activities from business premises rented from Shri R.A. Dhoot and as per profit and loss account although the said company had purchased jute for ₹1,81,17,699/- crores and sold jute for an amount of ₹ 1,80,89,257/- and the said Company had either suffered loss or had shown negligible profit from year to year. Based on this fact, the Assessing Officer concluded that M/s Kajal Agencies Pvt. Ltd. was an

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 11 entry operator and rejected the claim of purchase of raw jute amounting to ₹13,21,385/-.

Similarly, the assessee had also purchased raw jute for ₹11,91,084/- from M/s High Growth VanijyaPvt. Ltd. On the basis of enquiry from the AR, Shri R.K. Singh and based on profit and loss account, the Assessing Officer observed that assessee-company had purchased raw jute amounting to ₹77,25,786/- and sold the same for ₹77,88,253/- and after allowing various expenditure shows a profit of ₹900/- only. Based on this fact, Assessing Officer concluded that M/s High Growth VanijyaPvt. Ltd. was also “jamakharchicomapny” and thus rejected the assessee’s claim for purchase of raw jute. The Assessing Officer also noted that assessee had shown yield of finished product to the raw jute at 92.46% and was unable to substantiate the claim of shortage and observed that a part of the shortage was attributable to the purchase of raw jute and disallowed the purchase from the two parties aggregating to ₹25,12,469/-( ₹.13,21,385 + ₹ 11,91,084).

6.6 We note that there is direct correlation between raw material purchased and finished products and the Assessing Officer had accepted the sales as per books of account of the assessee, therefore it cannot be said that purchases were bogus. We note that ratio of finished goods production of raw material consumption ratio was more or less in line with those of the previous year, that is, the percentage of consumption disclosed @ 92.46% for the financial year 2010-11is found to be increased from @ 91% for the financial year 2009-10, hence there is no material difference so far consumption ratio is concerned.

6.7We note that assessee-company has been showing an increasing trend of gross profit and net profit of 5.47% and net profit 1.58% for the financial year 2010-11 under consideration which had further increased in financial year 2012-13 to 6.78% and 2.16% and 7.04% and 2.97% for assessment year

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 12 2013-14 respectively. We note that assessee made the payment by account payee cheque and duly encashed by the parties in their names and assesseehas submitted before the assessing officer the copies of bills, invoices, books of accounts which are duly audited by Chartered Accountant. We note that purchases have been recorded in regular books of accounts, maintained by assessee and all purchases are supported by bills, invoices, and there was a physical movement of goods by delivery memo.We observe that theassessee had filed necessary details regarding name, address, PAN of the suppliers, and payments were made through banking channel therefore such purchases cannot be held to be bogus. For that we rely on the judgment of Hon'ble Gujarat High Court in the case of CIT Vs. NangaliaFabrict (P) Ltd. 40 taxmann.com 206 (Guj) and in the case of Balaji Taxtile Industries Pvt. Ltd. vs. ITO (1994) 49 ITD 177 (Mum) (Trib) in these judgments, it was held that where purchases has been recorded in regular books of accounts maintained, purchases are supported by bills and vouchers, physical details regarding name address, PAN of the supplier, and payment were made through banking channel, therefore, such purchases cannot be held to be bogus.

6.8 We note that assessee has produced details, such as copy of vouchers of purchases of raw jute,invoices, delivery memo, ledger account, bank statement and deduction of TDS for payment made for purchases etc. There is physical movement of goods in the assessee`s case under consideration. We also note that once sales were accepted by the assessing officer then the corresponding purchases could not be disallowed, because without purchase there can not be sale. Further, we note that Assessing Officer has not found any patent defect in the method of accounting and has accepted the books result of the assessee.In view of the totality of factual matrix of the case, we note that the Assessing Officer has failed to bring any cogent evidence on record to show that purchases made by the assessee are bogus. Therefore, we are of the view that addition made by the Assessing Officer is not justified. That being so, we decline to interfere in the order passed by Ld. CIT(A) in

ITA No.2080/Kol/2016 A.Y 2011-12 DCT Cir-1(1), Kol. Vs. M/s Kamarhtty Co. Ltd. Page 13 deleting the aforesaid addition, his order on this issue is hereby upheld and the ground of appeal raised by the Revenue is dismissed.

6.9.In the result, appeal of Revenue (in Ground No.4) is dismissed.

Order pronounced in the open court 28/03/2018.

Sd/- Sd/- (Aby. T. Varkey) (Dr. A.L. Saini) (Judicial Member) (Accountant Member) कोलकाता ।Kolkata, *Dkp, Sr.P.S �दनांकः- 28/03/2018 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-DCIT, Circle-1(1), P-7, Chowringhee Sq. R.No20, 7th Fl, Kolkata-69 2. ��यथ�/Respondent-M/s Kamarhatty Co. Ltd. 16A, Brabourne Rd. 8th Fl, Kolkata-001 3. संबं�धत आयकर आयु�त/ Concerned CIT Kolkata 4.आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध,आयकर अपील�य अ�धकरण,कोलकाता/ DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, Sr. Private Secretary, Head of Office/DDO आयकर अपील�य अ�धकरण, कोलकाता ।