ITO, CHENNAI vs. PERFECT STONE LTD., CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

The assessee filed the appeals in I.T.A. Nos. 1610, 1611, 1612, 1613,

1614, 1615 & 1616 /Mds/2017 for the assessment years 2007-08 to 2013-14

against the orders of the CIT (A)-3, Chennai in ITA No. 190 to 196/2015-

16/CIT(A)-3 dated 28.02.2017.

M/s. Perfect Stone Ltd., the assessee, is a resident domestic company in 2.

which public are not substantially interested. A Search & Seizure action was

carried out in the case of Mr. L.S. Vishnu Prasad and related concern, M/s. G-

Tech Stones Ltd. on 11.05.2012. Assesseeis a sister concern of M/s. G-Tech

Stones Ltd. Further, Mr. L.S. Vishnu Prasad is a Director in both the

companies whose nature of business are same. During the Search &

Seizure,the accounts maintained in the tally belong to M/s. G. Tech Stone Ltd,

M/s. Perfect Stone Ltd & Tally account of M/s Perfect Stone Ltd (oil) for the

period 01.04.2005 to 31.03.2009 and 01.04.2005 to 31.03.2010 &01.04.2001

to 31.03.2012 was seized. On verification of it , it was found that the

assessee M/s Perfect Stone Ltd. was in receipt of cash on various dates

from the sister company, M/s G. Tech stone Ltd, about which no explanations

were offered for the said cash transactions at the time of search and seizure

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action. The seized materials and other records were forwarded to the A O.

At the time of assessments, the assessee was unable to provide any

convincing reply for the said receipts. The A O held that the assessee’s reply

that the said transactions have been disclosed in the hands of G-tech stone

Ltd., and hence they are not to be taxed in the hands of the assessee, lacks

merit. There is every reason to believe that the said cash receipt is the

assessee's own un-disclosed income and hence invoking the provisions of

section 68, the said cash receipts were added by the AO and brought to tax

in the respective ays from ay 2007-08 to ay 2012-13.

2.1 Further, on perusal of the CD containing seized tally, the AO noticed

that several accounts in the creditors name were recurring from 2001 to till

date. The creditor for expenses in the name of Mr. Chittibabu at

Rs.1,39,345/- has been found from 2001-02 onwards . Similarly, in the case

of M/s. Coromandal Agencies, Rs.4,34,353/- shown as outstanding for a

very long period (ie) from 2004 onwards. The assessee could not provide any

satisfactory explanation. In the said scenario, the AO treated them as un-

disclosed income in the hands of the assessee and added them in ay 2008-

09.

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2.2 Further, on perusal of the accounts , the AO found that the assessee

had purchased Jellyfish from M/s SeagulAgri Marines. Pvt Ltd., by paying

cash. The assessee explained that the payment has been made for purchase

of fish products, which is exemptunder Rule 6 DD . The AO held that Rule

6DD (e)(iii) exempts payments made for the purchase of Fish or fish products

to the producer of Fish or fish products. The impugned purchase has not been

made from the fishermen directly but from a company registered under the

trade name of M/s SeagulAgri Marines Pvt Ltd violating the provisions of Sec

40A (3) and hence added 20% of the impugned sum as income for ays

2007-08, 2008-09 & 2010-11.

2.3 On perusal of the records , the AO found that the assessee company

had made investments as long term loans and advances at Rs.9,91,53,778/-

as on 31/03/2007 which stood at Rs. 9,77,06,234/- as on 31/03/2006.

Further, the assessee had invested in shares and was earning a dividend

which was claimed to be exempt. The investments in shares was at

Rs.29,19,363/- as on 31/03/2007 which was at Rs.31,71,615/- on

31/03/2006. The assessee explained that the company had sufficient funds as

reserves and that the interest paid on loan borrowed for regular business may

not be disallowed. The AO held that though the interest expenditure of the

assessee is for business purposes, the assessee is still liable for disallowance

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U/s 14 A read with Rule 8D and accordingly made disallowance under

Sec.14Ar.w. Rule 80[(i) +(ii)+(iii)] for ays 2007-08 to ay 2011-12 & 2013-14.

The A O has also seen from the details furnished by the assessee that 2.4

the employees' contributions to EPF for the Year 06-07 relevant to

assessment year 2007 -08 has been remitted into the respective accounts

from M/s G- Tech stones Ltd, the sister concern, and not from the assessee's

company. The AO held that these contributions collected from the employees

constitute income in the hands of the assessee as an employer u/s 2(24)(x)

of the Act. Since, the employees' contributions was not remitted into the

respective account by the assessee, the A O treated it as income u/s 2(24)(x)

of the Act for ays2007-08 to 2011-12.

2.5 In the assessment year 2010-11, the assessee claimed Rs. 2,46,692/-

under “loss on sale of fixed assets”. The AO held that this expenditure being

capital in nature is not admissible and hence disallowed. Similarly, in the

assessment year 2013-14, the assessee claimed Rs. 68,137/- towards “loss on

sale of assets”. The AO disallowed this claim as inadmissible. Further, the

AO found that the assessee claimed Rs. 5,89,480/- towards rent paid to H.P.

Horticultural Produce Marketing and Processing Corporation Limited, a

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Government undertaking, for storing jelly fish without deducting TDS. Since,

the payee is not the Government or the RBI or a corporation established by or

under a Central Act, the AO disallowed Rs. 5,89,480/- u/s. 40(a)(ia).

the CIT(A) in the ordersITA No. 192 to 196/2015-16/CIT(A)-3 dated

28.02.2017, partly allowed the appeals. The operative portion of the order is

extracted as under:

“ 5.3 I have considered the submissions of the Ld. AR and the findings of the AO. In the instant case, search & seizure u/s 132 was carried out at the residential premises of its Director, namely, Mr. L.S. Vishnu Prasad and at the business premises of its sister concern, M/s. G-Tech Stones Ltd. During the search, certain incriminating documents were found and seized. In the appellant's case, tally accounts for the period 01.04.2001 to 31.03.2012 was seized and forwarded to the AO. Further, the Officer who has forwarded the information has categorically stated that no explanation was offered in relation to cash transaction at the time of search. Further, AO had examined seized material and provided an opportunity to explain the cash receipt. However, appellant has taken a shelter under the sister concern's disclosure but not explained cash receipts before the AO. In the circumstances AO has held that appellant's own cash may have been routed through its sister concerns as no satisfactory explanation was offered. During the appellate proceedings, Id. AR has taken same stand as was taken before the AO. He has neither filed an explanation nor adduced an evidence to rebut the findings of the AO. 5.4 On consideration of the facts of the case, I am of the opinion that appellant does not have any satisfactory explanation to substantiate cash receipts. Further, I hold that the collusive nature of transaction between the two group concerns cannot be rule out. In the circumstances, I do not see anything wrong

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in the action of the AO and applying Sec.68. In the light of the above discussions, I confirm, the addition made by the AO on account unexplained cash credits u/s 68 in respect of A.Ys 2007-08 to 2013-14, The grounds taken on this issue are dismissed. 6. Disallowance u/s 14A : 6.1 AO has made an addition u/s 14A after verifying investments made in shares and earning dividend income which was claimed as exempt income. Before me, the Id. AR has argued that if 0.5% is taken on average investment in shares then, the disallowance would become much lesser than the amount of addition made by the AO. Secondly, it is argued that AO has failed to identify exact expenditure corresponding to the exempt income from the investments. Thirdly, Id. AR has placed reliance in the case of Redington India Ltd. Vs. Addl.CIT, Chennai (77 taxmann.com 215) wherein the Hon'ble HC has held that disallowance should be restricted to the extent of exempt income and no disallowance can be made in relation to notional or anticipated income. 6.2 I have considered the submissions of the Ld. AR and the findings of the AO. I agree with the arguments of Ld. AR that disallowance should be restricted to the extent of exempt income. However, Ld. AR has worked out disallowance on the basis of Rule 8D and requested to modify the disallowance made by the AO. He has further given details in each A.Y. as to how much disallowance can be made @ 0.5% on average investments in shares. He has taken average investments for the F.Y. ending 31.03.2007 at Rs . 29,19,366/- and F.Y. ending 31.03.2006 at Rs.31,71,615)/-. AO is directed to re-work the disallowance on the basis of average investments given by the Id. AR in respect of A.Ys.2007- ·08 to 2013-14 under appeal. The grounds taken on this issue are partly allowed. 7. In the result, the appeals for A.Ys. 2007-08 to 2013-14 are partly allowed.”

almost with similar grounds. The grounds related to ay 2007-08 are extracted

as under:

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“1. The order of the Commissioner of Income tax (Appeals) is contrary to law, facts and in the circumstances of the case. 2. The Commissioner of Income tax (Appeals) erred in confirming the undisclosed income u/s 68 amounting to Rs.33,00,000/- received from G-Tech Stones Ltd. 2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that amounts received from a sister concern for business needs which is as per the books of account maintained by both the companies and also the deposit is not from any undisclosed source and hence the addition u/s 68 is not warranted. 3. The Commissioner of Income tax (Appeals) erred in confirming that the undisclosed income amounting to Rs.5,73,698/- was outstanding for a long period. 3.1 The Commissioner of Income tax (Appeals) ought to have appreciated that these credits due to the parties were pending payment for various reasons and hence the addition was not warranted 4. The Commissioner of Income tax (Appeals) erred in confirming the disallowance amounting to Rs.4,62,000/- u/s 40A(3) being 20% of Rs.23,10,000/- being payments made for purchase fish products. 4.1 The Commissioner of Income tax (Appeals) ought to have appreciated that section 40A(3) would not be applicable for payments made for purchase of fish products 5. The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of employees contributions to EPF amounting to Rs. 28,634/- u/s. 36(1)(va). 5.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that by virtue of the Taxation Laws Amendment Act w.e.f. 01.04.2003, the second proviso was omitted thereby any amount remitted within the due date for filing of the return would be allowable as deduction. 5.2 The Appellant relied on the decision in the case of Alom Extrusions 319 ITR 306 (SC) and decision of Delhi Tribunal in the case of M/s. Seagram Distilleries Ltd v. DCIT reported in 2009-TIOL-331 (Del) 5.3 The Commissioner of Income Tax (Appeals) ought to have appreciated that these payments were remitted before the due date of filing the return and hence disallowance is unwarranted. CIT (VS) Sabari Enterprises 298 ITR 141

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SLP dismissed in 328 ITR (st.) 10. CIT vs. AIMIL 321 ITR 508 (Del) and the Chennai tribunal decision in the case of ACIT vs. M/s. S.M. Apparels P. Ltd., ITA No. 2119/2011, AY 2003-04.”

4.1 The AR submitted that the issues under the assessment orders are not

based on the seized material. Since the regular assessment proceedings are

completed U/s 143(3) , there would be no abatement of proceedings. There is

no jurisdiction to the AO to review the completed assessments. Therefore, the

scope of assessment U/s 153A/153C should be restricted to incriminating

materials found during the search proceedings. In this case , there are no

incriminating material found during the search which has a bearing on the

assessment orders, therefore, assessment orders are liable to be quashed.

He further submitted that the returns were filed by assessee, Intimations U/s

143(1) were also received and the time limit for issue of notices U/s 143(2)

have expired . Therefore, the returns should have been treated as having

been accepted and attained finality. There is no jurisdiction to the AO to

verify returns . Since, noassessment proceedings are pending, there would be

no abatement of any proceedings. Therefore, the scope of assessments U/s

153A/153C should be restricted to incriminating material found during the

search proceedings. In this case , there are no incriminating material found

during the search which has a bearing on the assessment orders, therefore,

assessment orders are liable to be quashed. The AR continued his submission

to say that there is no satisfaction note that the seized materials belong to the

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searched assessee, therefore assuming jurisdiction U/s 153C is invalid and the

assessment orders are liable to be quashed. On the impugned cash

transactions, the AR submitted that they represented the amounts received

from a sister concern for business needs which is as per the books of account

maintained by both the companies and also the deposit is not from any

undisclosed sources and hence the additions made U/s 68 is invalid in as

much there is no undisclosed income. Also, the AO in the assessment orders

discussed the provisions of sec 269SS and finally said that he has reason to

believe that the said cash is assessee's own undisclosed income. Whereas, the

fact is that transactions are duly included in the audited books of account

which were finalised well before the date of search during May 2012. Inviting

our attention to the confirmation letter issued by G-Tech Stone Ltd, dated

22.11.2017, he submitted that the cash credit additions made u/s. 68 from

the ays 2007-08 to ay2012-13 flown from G-Tech Stones Ltd accounts and

these transactions are reflected in their balance sheet etc., From the letters

issued by SeagulImpex & SeagulAgrri Marine Pvt. Ltd., dated 22.11.2017, the

AR submitted that the cash payments were collected by them from the

assessee and paid to the fishermen. The genuineness of these transactions

have not been examined properly. The CIT(A) just disposed the orders of

various ays , on a consolidated manner, on the basis of assessment order

2007-08 alone, without considering various pleas raised by the assessee in

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the ays 2010-11& 2013-14. Per contra, the DR supported the orders of the

CIT(A).

with regard to the issue on the assumption of the jurisdiction lacks merit as

the assessments were made on the basis of incriminating materials seized,

questioned and forwarded to the AO. However, we find that the assessee’s

various plea before the CIT(A) on the impugned issues have not been

properly examined. In the facts and circumstances, we deem it fit to set

aside these orders and remit all these issues back to the AO for a re-

examination, afresh. The AO shall afford adequate opportunity to the

assessee and the assessee shall place the relevant materials as required

under the law for the early disposal . After affording adequate opportunity to

the assessee, the AO shall pass a speaking order(s). In the facts and

circumstances, the assessee’s appeals are treated as allowed for statistical

purposes.

1614, 1615 & 1616 /Mds/2017 are treated as allowed for statistical purposes.

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REVENUE’S APPEAL IN ITA NOs:1430, 1431, 1432, 1433 & 1434 /Mds/2017 FOR AYS 2008-09 to 2011-12& 2013-14

assessment orders of ays 2008-09 to 2011-12 & 2013-14, the CIT(A) agreed

with the arguments of the assessee that disallowances should be restricted to

the extent of exempt income. The assessee has worked out disallowances on

the basis of Rule 8D and requested to him to modify the disallowances made

by the AO. It has further given details in each A.Y. as to how much

disallowance can be made @ 0.5% on average investments in shares. Based

on which, the CIT (A) directed the AO to re-work the disallowances on the

basis of average investments given by the assessee in respect of ays. 2007-

08 to 2013-14. Aggrieved against such orders of the CIT(A) in appeal No. 191

to 194 &196/2015-16/CIT(A)-3 dated 28.02.2017, the revenue filedthe above

appeals with the following common grounds:

“ The order of the Ld CIT(A) is contrary to law and facts and circumstances of the case. 2.1 The Ld CIT(A) erred in directing the AO to rework the disallowance u/s 14A r.w.r 8D done by the AO. on the basis of 0.5% of average investments given by the assessee in all the above assessment years. 2.2 The ld ought to have noted that from AY 2008-09 onwards, application of the provisions of Sec.14A r.w.r 8D is mandated by the legislature with a view to disallow any expenditure attributable to any income which is. not included in the total income and accordingly the AO has invoked the provisions of. Sec.14A r.w.r 8D.

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2.3 The Id CIT(A) failed to note that there is no choice for the AO, but to invoke the provisions of Sec. 14A r.w.r. 8D from AY 2008-09 to disallow expenditure attributable to exempt income, if the assessee is round to have made investments in shares and claimed exempt income. 3.1 The Id CIT(A) erred in relying on the decision of the Hon'ble jurisdictional High Court in the case of M/s. Redington India Limited (TGA No.520 of 2016 dt. 23.12.2016) for AY 2007-08, holding that the disallowance should be restricted to the extent of exempt income and no disallowance can be made in relation to notional or anticipated Income. 3.2 The ld. CIT(A) failed to note that the case relied upon is distinguishable on facts to the present case. In the relied upon case, the assessee had no exempt income during the year, but in the present case, the assessee has claimed exempt income. 3.3 The Id CIT(A) ought to have noted that in the relied upon case, the Hon'ble High Court relied all the decision of the Hon'ble Apex Court in the case of Madras Industrial Corporation Limited Vs CIT (225 ITR 802) and held that by application of matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. Thus, the Hon'ble Court held that the provisions of Sec 14A r.w.r 8D cannot be made applicable in the absence of exempt income and allowed the appeal of the assessee, whereas in the present case the situation is different and the assessee has claimed exempt income. 4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.“

correctly u/s 14A after verifying the investments made in shares and earning

of dividend income which was claimed as exempt income. However, the

CIT(A) erred in deleting them. He supported the AO’s orders on the lines of

the above grounds. Per contra, the AR submitted that the AO failed to identify

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exact expenditure corresponding to the exempt income from the investments.

The AR furnished the following particulars and pleaded that the A O failed to

note that the assessee had sufficient funds as reserves and capital to meet

the exempt income producing investments and hence there is no need to

make any interest disallowance at all . Further, he submitted that the

additions made by the AO was on wrong as per the following facts and

figures.

FY AY Exempt income Equity Reserves Net profit Actual producing investments Capital and surplus before dividend 01st April 31st As on 01st April tax income March recd 2006- 2007- 3,171,615 2,919,36 6,652,000 17,742,180 894,991 5,697 07 08 2007- 2008- 2,919,366 2,150,059 6,652,000 18,091,263 2,671,742 - 08 09 2008- 2009- 2,150,059 938,882 6,652,000 19,834,498 1,264,235 - 09 10 2009- 2010- 938,882 - 6,652,000 20,582,690 921,596 - 10 11 2010- 2011- - - 9,935,000 21,304,395 632,718 - 11 12 2011- 2012- - - 9,935,000 21,728,586 253,795 - 12 13 2012- 2013- - - 9,935,000 21,995,088 968,631 - 13 14

It appears from the above details that this issue requires to be re-examined,

afresh , and hence we deem it fit to set aside these issues and remit them

back to the AO for a re-examination, afresh. The AO shall afford adequate

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opportunity to the assessee and the assessee shall place the relevant

materials as required under the law for the early disposal of these appeals.

After affording adequate opportunity to the assessee, the AO shall pass a

speaking order(s). In the facts and circumstances, the Revenue’s appeals are

treated as allowed for statistical purposes.

1433 & 1434 /Mds/2017 for ays 2008-09 to 2011-12 &2013-14 are treated as

allowed for statistical purposes.

Order pronounced on Wednesday, the 27th day of December, 2017 at Chennai.

Sd/- Sd/- (एन एन एन.आर एन आर आर.एस आर एस एस . . . .गणेशन एस गणेशन गणेशन) गणेशन (एसजयरामन एसजयरामन एसजयरामन) एसजयरामन (N.R.S. GANESAN) (S. JAYARAMAN) �याियकसद�य/Judicial Member �याियकसद�य लेखासद�य/Accountant Member लेखासद�य �याियकसद�य �याियकसद�य लेखासद�य लेखासद�य

चे�ई/Chennai, �दनांक/Dated: 27th December, 2017 JPV आदेशक��ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकरआयु� ) अपील(/CIT(A) 4. आयकरआयु�/CIT 5. िवभागीय�ितिनिध/DR 6. गाड#फाईल/GF