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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI D. KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER
PER VIKAS AWASTHY, JM :
ITA No. 672/PUN/2015 by the assessee and cross appeal by the Revenue in ITA No. 834/PUN/2015 are directed against the order of Commissioner of Income Tax (Appeals)-2, Nashik dated 27-03-2015 for the assessment year 2010-11.
The brief facts of the case as emanating from records are: The assessee company is one of the concerns of Rajmal Lakhichand group engaged in manufacturing and trading of gold, silver, diamond ornaments and bullion. The assessee is also engaged in generation of power through windmill. The assessee filed its return of income for the impugned assessment year on 01-10-2010 declaring total income as Nil. The case of the assessee was selected for scrutiny under CASS. Accordingly, statutory notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) was issued to the assessee on 23-09-2011. During the course of scrutiny assessment proceedings, the Assessing Officer made additions/disallowances on following counts : i. Disallowance u/s. 40A(2)(a) Rs.8,15,19,070/-. ii. Disallowance u/s. 14A Rs.9,24,259/-. iii. Addition on account of under valuation of closing stock Rs.54,87,702/-. iv. Disallowance of interest and depreciation on house property Rs.85,63,967/-. v. Disallowance of expenditure relating to Khar Flats Rs.7,61,579/-. vi. Addition of Godown Rent Rs.1,22,484/-.
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Aggrieved by assessment order dated 26-09-2013, the assessee filed appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) deleted the disallowances made by Assessing Officer u/s. 40A(2)(a) and estimated GP at 2.75% as against GP of 2.22% declared by assessee. Further, the Commissioner of Income Tax (Appeals) upheld the additions/disallowances made by Assessing Officer in respect of under valuation of stock, disallowance of interest, depreciation and other expenses relating to flats at Khar, Mumbai. The Commissioner of Income Tax (Appeals) however deleted the disallowances made by Assessing Officer u/s. 14A r.w. Rule 8D. Against the findings of Commissioner of Income Tax (Appeals), now both, the assessee and the Revenue are in appeal before the Tribunal.
Shri Sunil Pathak appearing on behalf of the assessee submitted that he is not pressing ground No. 1 raised in appeal relating to time barred assessment. The ground No. 2 raised in the appeal is general in nature.
3.1 In respect of ground No. 3, the ld. AR submitted that the Assessing Officer had made disallowance of Rs.8,15,19,070/- u/s. 40A(2)(a) in respect of purchases made by assessee from sister concerns allegedly at higher rate. The ld. AR submitted that the assessee-appellant entered into various transactions for purchase/sale of bullion/ornaments from sister concerns located at Jalgaon. The assessee has maintained proper stock register of all the items. All sales and purchases are properly recorded and vouchers are maintained for all the transactions with sister concerns. The assessee has paid VAT. Apart from transactions with sister concerns the assessee has transactions with third parties. The assessee also gives gold
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to „Karigars‟ for making of gold ornaments. The assessee has maintained separate stock register in respect of details of gold given to Karigars. The ld. AR pointed that the defects as pointed by Assessing Officer are not per- se defects in maintenance of stock register and the books of assessee. The Commissioner of Income Tax (Appeals) rejected disallowance made u/s. 40A(2)(a) by Assessing Officer and instead estimated GP at 2.75% to cover up the deficiencies in transactions with sister concerns. The ld. AR further pointed that identical issue had come up before the Tribunal in the case of assessee‟s sister concern M/s. Rajmal Lakhichand in assessment year 2009-10 in ITA Nos. 532 & 663/PN/2013 decided on 16-01-2015. The Tribunal estimated GP of M/s. Rajmal Lakhichand at 1.20% instead of 1.13% declared by assessee. Thus, the Tribunal made addition of 0.07% in the GP declared by assessee. In the assessment year under appeal, the assessee had declared GP of 2.22%, the Commissioner of Income Tax (Appeals) estimated GP at 2.75% which is very much on higher side. The turnover of assessee in assessment year 2010-11 is Rs.888.30 crores as compared to Rs.473.23 crores in assessment year 2009-10. Since, the turnover in the assessment year under appeal is higher than the turnover in immediately preceding assessment year, the GP would go down. Thus, the addition made by Commissioner of Income Tax (Appeals) is not justified. The ld. AR referred to P & L account (at page 14 of the paper book) for the assessment years 2009-10 and 2010-11.
3.2 In respect of ground No. 4 relating to valuation of closing stock, the ld. AR submitted that the assessee has made addition of Rs.54,87,702/- on account of under valuation of stock. The assessee is consistently making valuation of its closing stock on cost or net realizable value, whichever is less. For calculating net realizable value the assessee applies
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gold/bullion rate as quoted by Bombay Bullion Association. The assessee has been consistently following this method of valuation of closing stock in the preceding and succeeding assessment years. No objection whatsoever was ever made by Assessing Officer either in the earlier assessment years or in the subsequent assessment years in assessee adopting Bombay Bullion Association rates for valuation of closing stock.
3.3 In respect of ground Nos. 5 and 6 the ld. AR submitted that the assessee has purchased flats at Khar, Mumbai for business purpose. The said flats were purchased by assessee in the name of its Directors Shri Ishwarlal Jain and Shri Manish Jain. The Board of Directors vide resolution dated 10-02-2006 had authorized purchase of flats in the name of Directors. The assessee paid interest on loan taken from State Bank of India for purchase of said flats and has claimed the same as expenditure in P & L Account. The assessee had also claimed depreciation and other expenditure in respect of flats mentioned above. However, the authorities below disallowed the claim of assessee on the premise that the said flats belong to Shri Ishwarlal Jain and Shri Manish Jain and not the assessee. The ld. AR pointed that similar disallowances were made in the assessment years 2007-08 and 2009-10. The matter travelled up to the Tribunal. The Tribunal in ITA No. 891/PN/2013 for assessment year 2007-08 decided the issue in favour of assessee holding that the assessee is the owner of flats and thus, eligible to claim expenditure in respect of interest, depreciation and expenses in relation to the said flats. Similar view was taken by the Tribunal in ITA No. 671/PN/2015 for assessment year 2009-10.
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On the other hand Shri Rajeev Kumar representing the Department vehemently supported the findings of Assessing Officer and the Commissioner of Income Tax (Appeals) on the issues raised by assessee in appeal. The ld. DR prayed for dismissing the appeal of assessee.
The Revenue in its appeal has assailed the findings of Commissioner of Income Tax (Appeals) by raising following grounds : “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-2, Nashik has erred in deleting the addition of Rs.8,15,19,070/- made on account of Addition u/s. 40A(2) without appreciating the fact that the books of accounts are not reliable and special audit u/s 142(2A) was therefore carried out. The Ld. CIT(A) has relied on ITAT Pune's decision in the assessee's own case on the similar facts for AY. 2009-10. However, the basis of adoption of GP percentage has not been mentioned by the Hon'ble ITAT in the assessee's own case for A.Y. 2009-10.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-2, Nashik has erred in deleting the addition of Rs.9,24,259/- made on account of disallowance u/s 14A read with rule 8D. From the facts of the case, it can be seen that assessee has invested interest bearing funds and has deliberately diverted its interest bearing funds into the shares of its own sister concerns and the sole purpose of this transaction was to avoid payment of taxes.
On the facts and circumstances of the case and in law, the order of the Ld. CIT(A)-2, Nashik be cancelled on the above issues and that of the A.O. be restored. 4. The appellant craves leave to add, alter, modify, delete amend any of the grounds at any stage of appellate proceedings.
The appellant prays to file any of the additional evidence appropriate to the grounds taken in appeal.”
The ld. DR submitted that a special audit was carried out in the case of assessee. During the course of audit it transpired that the assessee has entered into various transactions with its sister concerns. In invoices the details of ornaments, making charges etc. are not mentioned. There are variation in the rates charged from sister concerns and third parties. Further, the invoices do not bear the time of transactions. The assessee
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has inflated purchase price of gold ornaments from sister concerns. Accordingly, excess purchase price paid by assessee to its sister concerns amounting to Rs.8,15,19,070/- was disallowed by Assessing Officer. The Commissioner of Income Tax (Appeals) by placing reliance on the decision of Tribunal in the case of assessee‟s group concern M/s. Rajmal Lakhichand in ITA Nos. 532 & 663/PN/2013 for assessment year 2009-10 decided on 16-01-2015 deleted the addition made u/s. 40A(2) and estimated GP rate of 2.75%. The ld. DR submitted that no basis has been given by Commissioner of Income Tax (Appeals) for estimating GP at 2.75%. During special audit it was found that the assessee has carried out purchases at higher rate from the sister concerns and thus, suppressed the taxable profits.
In respect of ground No. 2 relating to disallowance u/s. 14A r.w. Rule 8D, the ld. DR submitted that the Commissioner of Income Tax (Appeals) has deleted disallowance after taking into consideration the decision of Hon‟ble Delhi High Court in the case of Commissioner of Income Tax Vs. Holcim India Pvt. Ltd. in ITA No. 486/2014 and ITA No. 299/2014 decided on 05-09-2014 and various other decisions. During the course of assessment proceedings, the Assessing Officer has recorded the fact that the assessee has diverted its interest bearing funds for investment in its sister concerns. There is a direct nexus of borrowings and investments made in subsidiary companies from borrowed funds. The assessee has not been able to show that the funds have been invested by assessee in subsidiary/group companies out of any business exigencies. The assessee has deliberated diverted its interest bearing funds for investment in the shares of sister concerns with the sole purpose of
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avoiding payment of tax. Thus, the diversion of interest bearing funds is a colourable device adopted by assessee to reduce its tax liability.
In respect of grounds raised by the Department in appeal, the ld. AR submitted that the Tribunal in the case of assessee‟s sister concerns M/s. Rajmal Lakhichand (supra) under identical set of facts has upheld the decision of Commissioner of Income Tax (Appeals) in deleting disallowance u/s. 40A(2)(a) and has thereafter estimated GP. The detailed submissions in this regard has already been made while addressing the arguments in respect of ground No. 3 of the appeal by assessee.
In respect of disallowance made u/s. 14A the ld. AR submitted that the assessee has invested a sum of Rs.1,36,40,800/- in shares of group companies. The details of investments made by assessee in group companies are as under : a. Manraj Housing Finance Ltd. Rs.21,90,800/-. b. R.L. Gold Pvt. Ltd. Rs.1,00,000/-. c. Manvi Holdings Pvt. Ltd. Rs.1,12,50,000/-. d. Manraj Jewellers Pvt. Ltd. Rs.1,00,000/-. Rs.1,36,40,800/-.
The assessee has not received any dividend from any of these companies, therefore, no exempt income has been earned by assessee from investments made in group concerns. The ld. AR placing reliance on the decision of Special Bench of Tribunal in the case of Assistant Commissioner of Income Tax Vs. Vireet Investments (P) Ltd. reported as 188 TTJ 1 (Del) (SB) and Goyal Ishwarchand Kishorilal Vs. JCIT in ITA No. 422/PN/2013 for assessment year 2009-10 decided on 26-06-2014
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submitted that where no exempt income has been earned, no disallowance u/s. 14A is warranted.
We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. The ground No. 1 raised in the appeal by assessee is with respect to time barred assessment. The ld. AR of assessee stated at the Bar that he is not pressing ground No. 1. Accordingly, ground No. 1 and sub-grounds raised there under are dismissed as not pressed.
The ground No. 2 in the appeal is general in nature. Hence, requires no adjudication.
The ground No. 3 raised in appeal by the assessee relating to GP addition and ground No. 1 raised in appeal by the Department assailing deleting of addition u/s.40A(2) of the Act and substituting the addition on estimated GP by Commissioner of Income Tax(Appeal) are inter connected and hence, are taken up together for adjudication. During the course of scrutiny assessment proceedings, the Assessing Officer made disallowance of Rs.8,15,19,070/- u/s.40A(2)(a) of the Act in respect of purchase of gold ornaments and gold bullion by assessee from sister concerns at higher rate. The findings of the Assessing Officer were assailed by the assessee before the Commissioner of Income Tax (Appeal). The First Appellate authority following the decision of Tribunal in the case of assessee‟s group concerns M/s. Rajmal Lakhichand, for assessment year 2009-10 (supra) deleted the disallowance u/s.40A(2)(a) of the Act made by the Assessing Officer and made addition by estimating GP at 2.75% on the total sale of Rs.888,30,42,858/- as per audited accounts.
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A perusal of the orders of Authorities below show that during the assessment year under consideration, the assessee had purchased gold bullion to the tune of Rs.250 crores from sister concerns and to the tune of Rs.65 crores from the third parties. Further, the assessee had purchased gold ornaments of Rs.283.99 crores from group concerns and Rs.3.56 crores from unrelated parties. The Assessing Officer compared the assessee‟s purchase rates of gold bullion with the rates prevailing at the Bombay Bullion Market. The Assessing Officer on the basis of special audit report and by applying rates of Bombay Bullion Market came to the conclusion that the assessee had paid excessive or unreasonable payments to the tune of Rs.8,15,19,070/- to its sister concerns. Thus, the Assessing Officer made disallowance of the same under the provisions of section 40A(2) (a) of the Act.
The case of the assessee is that assessee has purchased gold bullion and gold ornaments from sister concerns at Jalgaon rates. The details furnished by assessee before the Commissioner of Income Tax (Appeal) with regard to differences on comparison of Bombay rates and local rates in respect of gold bullion and gold ornaments are as under:
Summary Actual purchase Purchase price Excess Less amount price as per Jalgaon amount paid paid rate New 2,83,98,28,666 2,94,29,75,490 4,64,822 (10,36,11,647) Ornaments Bullion 2,50,07,83,500 2,57,17,72,000 59,11,500 (4,69,00,000) Total 5,34,06,12,166 5,48,47,47,490 63,76,322 (15,05,11,647) Net less (14,41,35,325) (14,41,35,325) paid
The Commissioner of Income Tax (Appeal) worked out the difference between the Bombay rates adopted by the Assessing Officer and Jalgaon rates applied by the assessee with respect to purchase of gold bullion and
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jewellery. The relevant extract of the findings of Commissioner of Income Tax (Appeal) are as under:
“6.9 If we take and compare the excess payments worked out by the Auditors and the A.O. applying the purchase rates prevailing at the Bombay Bullion Association and the excess or less payments worked out by the appellant using the purchase rates prevailing at Jalgaon, then the picture that emerges is under:
Excess payment to sister Excess payment to sister Less payment to sister concerns worked out by concerns worked out by concerns worked out by the A.O. applying Bombay the appellant applying the appellant applying Bullion Association Rates Jalgaon purchase rates Jalgaon purchase rates. Rs.8,15,19,070/- Rs.63,76,322/- (-) Rs.14,41,35,325/- As seen above, there is a huge gap between the excess payments arrived at by the auditors and the A.O. applying Bombay Bullion Association purchase rates and the appellant applying Jalgaon local purchases rates.”
The Commissioner of Income Tax (Appeal) finally following the order of Tribunal in assessee‟s group concerns M/s. Rajmal Lakhichand in assessment year 2009-10 discarded the addition made by Assessing Officer under section 40A(2)(a) and estimated GP @ 2.75% of the total sale as per audited accounts.
We find that identical disallowances u/s.40A(2)(b) was made in the case of M/s. Rajmal Lakhichand a flagship concern of the group in assessment year 2010-11. The Co-ordinate Bench of the Tribunal, after taking into consideration entire facts of the case concluded that the average price formula adopted by Assessing Officer and Commissioner of Income Tax (Appeal) is not correct. The Tribunal made the addition by estimating GP. The Commissioner of Income Tax (Appeal) in the impugned order has extracted the findings of the Tribunal on this issue. For the sake of brevity, we are not reproducing the same here. However, the gist of observations made by Tribunal on the issue in the case of M/s. Rajmal Lakhichand (supra) are as under:
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(a) The sale and purchase of gold bullion and gold ornaments within a group concerns are only paper transactions without involving any real transfer of bullion/ornaments.
(b) The assessee entered into fictitious transactions within the group to inflate purchases and sales to obtain higher bank finance. This fact is evident from increase in turnover of the assessee in the last two years by 11.5 times. The turnover of assessee increased from Rs.82.55 crore in assessment year 2007-08 to Rs.955.78 crores in assessment year 2009-10.
(c) The books of account of the assessee do not reflect the correct picture of its true state of financial affairs, therefore, the same are to be rejected.
(d) Both the Authorities below i.e. Assessing Officer/ Commissioner of Income Tax (Appeal) have failed to understand the trading transactions in gold bullion and gold ornaments in right perspective. The method of average price of the year is not correct method to determine reasonableness of the amount paid for purchasing gold bullion from sister concerns. There are certain instances where the assessee had paid lesser price as compared to the local market and Bombay market to the sister concerns. This fact has not been considered by both the Authorities below.
(e) There are mistakes in the recasted trading account prepared by the Commissioner of Income Tax (Appeal) as the total turnover of the assessee as shown in the recasted trading account is Rs.1065.32 crores whereas the actual turnover is Rs.955.78 crores. Similarly, transactions with the third parties including gold bullion and gold
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ornaments as per recasted trading account is Rs.679.66 crores as against cost of actual transaction Rs.435.37 crores. Therefore, no reliance can be placed on recasted trading account.
(f) While making addition in respect of sale of gold ornaments to group concerns/ sister concerns, both the Authorities below have adopted comparison formula based on the sale of ornaments to the unrelated parties and sale of ornaments to the related parties. The average price method adopted by the Assessing Officer and Commissioner of Income Tax (Appeal), as far as the issue of ornaments is concerned; the price may vary from design to design, item to item, purity of gold etc. Therefore, average price method of ornaments cannot be taken to the entire sale of the year as different factors are involved in the price of ornaments. Apart from difference in design, purity of gold, there is variation in the labour charges as well. Thus, method adopted by the Authorities below on account of lower price charge from sister concerns were rejected by the Tribunal.
(g) For invoking the provisions of section 40A(2)(b), the Assessing Officer has to establish that the payments made to the related parties is not reasonable. Both the Authorities below have not considered the local conditions of the gold market. The average price method adopted by both the authorities is erroneous considering the market conditions of the bullion. Thus, the basis after computing excess payments made to sister concerns by assessee is faulty, therefore, provisions of section 40A(2)(b) cannot be applied.
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The Co-ordinate Bench of the Tribunal after taking into consideration various facets of the transaction in sale/purchase of gold ornaments/bullion with related/unrelated parties concluded as under: “8.35 In the light of our above discussion, we are of the opinion that approach of both the authorities below is not correct for making high pitch additions in the hands of the assessee by invoking provisions of section 40A(2)(b) and for alleged selling of the ornaments to the related entities at a lower price. As per the financial accounts of the assessee, the GP worked out at 1.13%. The possibility of purchasing the bullion and ornaments from the group entities at a higher price cannot be ruled out even though there is no strict proof against the assessee. Even the exercise done by both the authorities below is not based on any scientific method. We therefore are of the opinion that adoption of GP rate of 1.20% as against 1.13% disclosed by the assessee will meet the ends of justice. We hold and direct accordingly. We accordingly set-aside the order of the Ld. CIT(A) and direct the AO to work out the GP @1.20% on the total sale of Rs.955,78,81,767/- as per audited accounts. After reducing the GP declared by the assessee at Rs.10,79,15,449/-, the balance GP is to be added to the total income of the assessee. This covers the grounds on the addition made by invoking provisions of section 40A(2) (b) i.e. purchase of bullion from the sister concerns/related entities by paying higher price as well as sale of the ornaments at lower price. Accordingly, the relevant grounds taken by the assessee are partly allowed and the grounds of appeal No. 1 and 2 by the Revenue are dismissed.”
Both sides are unanimous in admitting that the transactions carried out by the assessee during the assessment year under appeal are similar in nature and their accounting has also been done in similar manner. Thus, there are fictitious transactions between assessee and other group concerns to inflate the turnover. The Commissioner of Income Tax (Appeals) while estimating GP at the rate of 2.75% has taken cue from the decision of the Tribunal in the case of M/s. Rajmal Lakhichand (supra). The relevant extracts of the findings of Commissioner of Income Tax (Appeal) in this regard are as under: “As discussed above, the appellant had also entered into fictitious transactions within the group to inflate the purchases and sales of all the group concerns. The facts of M/s. Rajmal Lakhichand are identical to the facts of the appellant. Therefore, the appellant's transactions with the sister concerns in the gold bullion are held to be paper transactions without delivery and are fictitious. Similarly, the appellant's transactions with the sister concerns in respect of gold ornaments are mostly fictitious without
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delivery though the same could be justified on the grounds of business needs. Further, the Auditors and the A.O. have compared the prices at which the appellant have purchased gold from sister concerns and outside parties with the purchase rates prevailing at the close of the day at Bombay Bullion Association without considering the local Jalgaon rates and local market conditions. As held by the Hon'ble ITAT in the case of Rajmal Lakhichand, I am also of the view that the provisions of section 40A(2)(a) of the Act cannot be invoked in the facts and circumstances of this case as discussed above. However, the G. P. declared by the appellant at 2.22% cannot be accepted in view of the facts that almost all the purchase and sale transactions entered by the appellant with the sister concerns are fictitious. As held by the ITAT in the case of Rajmal Lakhichand, the possibility of purchasing the bullion and ornaments from the group concerns at a higher price can never be ruled out. Therefore, the appellant's books of account are not fully reliable and needs to be rejected. The appellant had disclosed the total sales at Rs.888.30 crores on which the appellant had declared G.P. of Rs.19.69 crores and the N.P. of Rs.2.78 crores for the year under appeal. The G.P. rate works out to 2.22% and the N.P. rate to 0.31%. Whereas the appellant had disclosed the total sales of Rs.432.72 crores and the gross profit of Rs.18.52 crores for the A.Y. 2009-10, and the N.P. was declared at Rs.10.18 crores. The G. P. rate came to 4.28% and the N.P. rate to 2.35%.
There is substantial increase in the turnover of the appellant during the year as compared to the last year. However, there is huge fall in G.P. and N.P in this year. The appellant continues to be engaged in the same business and the market conditions remain the same. The appellant has no convincing explanation for such steep fall of G.P. for the year.
Thus, following the decision of the Hon'ble ITAT in the case of Rajmal Lakhichand, the adoption of G.P. rate of 2.75% as against the G.P. rate of 2.22% disclosed by the appellant will be fair and meet the ends of justice. Therefore, the A.O. is directed to work out the G.P at 2.75% on the total sale of Rs.888,30,42,858/- as per the audited accounts. The revised G.P. comes to Rs.24,42,83,678/- as against G.P. shown by the appellant at Rs.19,69,50,707/-. After reducing the G.P. shown by the appellant at Rs.19,69,50,707/-, the balance G.P. is to be added to the total income of the appellant which comes to Rs.4,73,32,971/-. This covers the grounds on the addition made by invoking provisions of section 40A(2)(a) i.e. purchase of gold bullion and gold ornaments from the sister concerns by paying higher price. The other income shown by the appellant will remain unchanged. The other confirmed additions will not be affected.”
The assessee has assailed the G.P. estimated by Commissioner of Income Tax (Appeal) being on the higher side. As against the GP of 2.22% disclosed by assessee the Commissioner of Income Tax (Appeals) has estimated GP at 2.75%, thereby enhancing the GP rate by 0.53%. Taking into consideration entirety of facts, we are of considered view that increase
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in G.P. rate by 0.13% would meet the ends of justice. Thus, G.P. is enhanced from 2.22% to 2.35% of the total sale of Rs.888,30,42,858/- as per audit accounts.
In so far as disallowance made by the Assessing Officer u/s.40A(2)(a) in respect of purchase of gold bullion and gold ornaments is concerned, the same is rejected for the reasons given by the Tribunal in the case of M/s. Rajmal Lakhichand for assessment year 2009-10 (supra). Thus, in view of our above findings, the ground No. 3 raised in appeal by assessee is partly allowed and ground No. 1 raised in appeal by Department is dismissed.
The ground No. 4 of appeal by assessee is with respect to addition on account of under valuation of stock. The contention of ld. AR of assessee is that closing stock is valued by the assessee on cost or net realizable value, whichever is less. For the valuation of stock the assessee adopts closing rate quoted by Bombay Bullion Association. The assessee is consistently following this method of valuation of closing stock in the earlier assessment years as well as in the subsequent assessment years. No objection was ever raised by the Assessing Officer on the method of valuation or rates adopted for valuation either in the earlier assessment years or in the subsequent assessment years. A perusal of impugned order shows that the authorities below have not disputed the method of valuation but has raised objection to the adoption of Bombay Bullion Association rates for the valuation purpose of stock. As per the Revenue the assessee should have applied Jalgaon rates as the assessee has its business at Jalgaon and most of customers of the assessee are located in and around Jalgaon. The fact that the assessee has been consistently valuing its closing stock as per rates quoted by Bombay Bullion Association in the earlier assessment years and subsequent assessment
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years has not been disputed by the Revenue. The Revenue has also not disputed that in the earlier assessment years or in subsequent assessment years no addition has been made by Assessing Officer for adopting Bombay Bullion Association rates for valuation of closing stock by assessee. It is only in the assessment year under appeal that the Assessing Officer deviated and applied Jalgaon rates instead of rates quoted by Bombay Bullion Association for valuation of closing stock. We do not find any merit in the reasoning given in the impugned order to disturb the method of valuation of closing stock. Accordingly, the findings of Commissioner of Income Tax (Appeals) on this issue are set aside and ground No. 4 raised in appeal by assessee is allowed.
In ground Nos. 5 and 6 the assessee has assailed disallowance of interest Rs.42,02,453/-, depreciation Rs.43,61,514/- and expenditure Rs.7,61,579/- relating to Khar, Mumbai flats. The assessee has paid interest on loan taken for purchasing flats at Khar, Mumbai. The contention of the ld. AR is that the flats were purchased by assessee for business purpose and are being used by employees of the assessee companies whenever they visit Mumbai for purchase/sale of gold/bullion. We find that identical issue had come up before the Tribunal in assessee‟s own case in assessment year 2007-08. The Tribunal after examining the facts allowed depreciation, payment of interest and other expenditure in respect of said flats. The relevant extract of the findings of Tribunal on this issue are as under :
“11. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case disallowed interest of Rs.38,87,288 and telephone/electricity charges of Rs.48,154/- in respect of the property at Khar, Mumbai on the ground that the interest and other expenses claimed has no relation with the business of the assessee company. We find in appeal the Ld.CIT(A) not only upheld the action of the AO but he further
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enhanced the disallowance by Rs.31,71,672/- being the interest on loan amount of Rs.2,64,30,607/- diverted for non business purposes. The reasoning for such enhancement has already been reproduced in the findings given by the CIT(A). It is the submission of the Ld. Counsel for the assessee that since the flats have already entered into the block of asset and depreciation claimed in the original return has been allowed and the same has not been withdrawn, therefore, it is to be held that the flat at Khar is a business asset and utilized for the purpose of business. It is also his submission that in view of various decisions the flats need not to be registered in the name of the assessee company. 12. We find merit in the submission of the Ld. Counsel for the assessee. There is no dispute to the fact that the flats purchased at Khar has been shown in the asset side of the balance sheet and the loan obtained from bank in the name of the directors has been shown as liability in the liability side of the balance sheet. The Board of Directors vide resolution dated 10- 02-2006 have approved for the purchase of the flats in the name of the 2 directors. Depreciation in the computation statement is as per Form No.3CD enclosed along with return of income. In the schedule of depreciation enclosed along with Form 3CD we find depreciation has been claimed at Rs.2,18,73,103/- which includes the depreciation of Rs.62,39,688/- on building/flats amounting to Rs.5,98,28,719/- (page 35 of the paper book). The submission of the assessee before the CIT(A) that the assessee’s claim for depreciation has been accepted for the A.Y. 2007-08 is also not disputed by the CIT(A). We find before CIT(A) the assessee has inter alia made following submissions : “It was only for the sake of convenience that the said flats were registered in the name of the Directors. The facts of the case clearly show that the company is the real owner of both the flats notwithstanding their registration in the names of directors. It is the defacto and beneficial ownership which is material and relevant. In the context of depreciation the courts have accepted the assessee’s claim for the same even when property/vehicles are not registered in the name of company/firm but in the names of directors/partners. Addl.CIT Vs. Manjeet Engg. Ind. 154 ITR 509 Delhi CIT Vs. Fazilka Dabwali 270 ITR 398; P&H Ratio of the said decisions would also apply to the facts of our case also. It is also important to note that the appellant’s claim for depreciation has been accepted also for the A.Y. 2007-08. We are enclosing herewith a copy of our sales tax registration certificate wherein the particulars of Offices and its addresses are mentioned.” 13. From the above it is clearly seen that the assessee’s claim of depreciation which has been accepted by the AO in the original assessment has not been withdrawn. This otherwise implies that the AO has accepted the flat as business asset used for the purpose of business. We find the Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Fazilka Dabwali TPT Company Pvt. Ltd. following the decision of Hon’ble Supreme Court in the case of CIT Vs. Poddar Cement Pvt. Ltd. and others reported in
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226 ITR 625 has allowed the claim of depreciation on buses purchased in the name of its directors. Although the buses were not registered in the name of the company it was held that registration of the same in the name of the company is not relevant and the company is entitled to depreciation in respect of the buses. 14. The Hon’ble Supreme Court in the case of CIT Vs. Poddar Cement Pvt. Ltd. (Supra) has held that under the common law, “owner” means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income tax Act, 1961 having regard to the ground realities and further having regard to the object of the Income tax Act, namely, " to tax the income", " owner " is a person who is entitled to receive income from the property in his own right. The Hon’ble Delhi High court in the case of Addl.CIT Vs. Manjeet Engineering Industries (Supra) has held that when a partner brings his property to the partnership firm and the firm treats his property as belonging to the firm only, it has the effect of transferring the property to the firm. Document in writing and registration is not necessary. Following the above principles and considering the fact that the company has already shown the asset in the balance sheet of the assessee company and the loan obtained by the directors for purchase of the flats has been shown as liability in the liability side of the balance sheet and the depreciation claimed by the assessee on such flat has not been rejected in the assessment completed u/s.143(3), therefore, disallowance of interest and the telephone/electricity expenses on account of flat at Khar, Mumbai in our opinion is not justified. In view of the above discussion, we are of the considered opinion that the CIT(A) was not justified in disallowing the interest expenditure and telephone and electricity expenditure relating to the flats at Mumbai. We accordingly set aside the order of the CIT(A) and the grounds raised by the assessee are allowed.”
The Revenue has not brought to our notice any material contrary to the findings of Tribunal with regard to real ownership of flats in question. Thus, in view of the findings of Co-ordinate Bench of Tribunal on this issue, ground Nos. 5 and 6 raised in appeal by assessee are allowed.
In result, the appeal of assessee is partly allowed in the terms aforesaid.
Now we proceed on to decide the appeal of Revenue. The ground No. 1 raised in appeal has been adjudicated along with ground No. 3 of appeal by the assessee. For the detailed reasons given above, the ground No. 1 raised in appeal by Revenue is dismissed.
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In ground No. 2 of appeal, the Revenue has assailed deleting of disallowance Rs.9,24,259/- u/s. 14A r.w.Rule 8D of the Act. As per the contention of the assessee, the assessee had invested Rs.1,36,40,800/- over a period of time in its group companies. The assessee has not received any dividend income from the said companies in the period relevant to the assessment years under appeal. This fact has not been re-butted by the Revenue. The Special Bench of the Tribunal in the case of ACIT Vs. Vireet Investment (P) Ltd.(supra) has held that no disallowance u/s.14A r.w. Rule 8D(2)(iii) can be made where no exempt income from investment is received during the year. In other words, only those investments are to be considered for computing average value of investments under Rule 8D(2)(iii) which yield exempt income during the year. Similar view has been taken by Pune Bench of the Tribunal in the case of Shri Goyal Ishwarchand Kishorilal Vs. JCIT in ITA No. 422/PN/2013 decided on 26.06.2014. The Tribunal after placing reliance on the decisions in the case of CIT Vs. Shivam Motors Pvt. Ltd. in ITA No.88/2014 decided on 05.05.2014 by Hon'ble Allahabad High Court and CIT Vs. Lakhani Marketing in ITA No.970/2008 decided on 02.09.2014 by the Hon'ble Punjab & Haryana High Court, held as under:
“9.4 Since in the instant case the assessee has not received any dividend income out of the shares held as investment and since no disallowance u/s. 14A has been made in the preceding as well as succeeding assessment years, therefore, we agree with the contention of the Ld. Counsel for the assessee that no disallowance u/s.14A can be made under the facts and circumstances of the case. Accordingly, the order of the CIT(A) is set aside and the Assessing Officer is directed to delete the disallowance of Rs.5,86,962/- made u/s.14A. Ground raised by the assessee is accordingly allowed.”
Thus, in view of the undisputed fact that the assessee has not received any tax free income from the investment made in group companies during the assessment year under appeal and decisions
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referred above, we hold that no disallowance u/s. 14A r.w.Rule 8D is called for. We do not see any infirmity in the findings of Commissioner of Income Tax (Appeal) in deleting the said disallowance. Accordingly, ground No. 2 raised in appeal by the Department is dismissed.
The ground Nos. 3, 4 and 5 in appeal by the Department are general in nature, hence, require no adjudication.
In result, the appeal of Revenue is dismissed.
To sum up, appeal of the assessee is partly allowed and appeal of the Department is dismissed.
Order pronounced on Wednesday, the 07th day of March, 2018.
Sd/- Sd/- (डी. करुणाकरा राव/D. Karunakara Rao) (ववकास अवस्थी / Vikas Awasthy) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 07th March, 2018 RK आदेश की प्रयिलऱवऩ अग्रेवषि / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. आयकर आयुक्त (अऩीऱ) / The CIT(A)-2, Nashik 3. 4. The Pr. Commissioner of Income Tax-2, Nashik ववभागीय प्रयतयनधध, आयकर अऩीऱीय अधधकरण, “ए” बेंच, 5. ऩुणे / DR, ITAT, “A” Bench, Pune. गाडड फ़ाइऱ / Guard File. 6. //सत्यावऩत प्रयत // True Copy// आदेशानुसार / BY ORDER,
यनजी सधचव / Private Secretary, आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune