DIAMOND TEXTILES MILLS LTD.,,AHMEDABAD vs. THE INCOME TAX OFFICER, WARD-1(1)(4),, AHMEDABAD

ITA No. 2709/Ahd/2016 & ITA No. 1071/Ahd/2017 are two separate appeals by the assessee preferred against two separate orders of the Ld.

As common issues are involved in the impugned appeals, they were heard together and are disposed of by this common order for the sake of convenience and brevity.

First ground relates to the addition on account of process loss amounting to Rs. 32,14,385/-.

The assessee is in the business of processing of grey cloth and is also engaged in construction activities. Return for the year was filed on 28.09.2012 declaring total income at Rs. 9,72,48,980/-. The return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee.

During the course of the scrutiny assessment proceedings, the A.O. noticed that the assessee has claimed process loss of Rs. 1,89,57,661/-. The assessee was asked to justify the claim of loss with supporting evidences. Assessee stated that while processing the grey cloth as a result of process loss, scrap, chindadi etc. are generated and the same are sold and the company has realized Rs.1,57,43,276/-. The assessee further pointed out that the net process loss suffered is of Rs. 32,14,385/- and the gross profit is at 30.75% with net profit at 28.75%. The assessee heavily relied upon the book results. The reply of the assessee was considered by the A.O. but the same was not found to be

Assessee carried the matter before the ld. CIT(A) and reiterated its claim of process loss.

After considering the facts and the submissions, the ld. CIT(A) found that the assessee has shown income of Rs. 1,57,43,276/- which was sale proceeds of the scrap generated during the process of grey cloth. The ld. CIT(A) netted off the loss and restricted the disallowance to Rs. 32,14,385/-.

Aggrieved by this, the assessee is before us.

The ld. counsel for the assessee once again explained the processing of grey cloth and pointed out that after processing the grey cloth, the quantity shrink and any loss in the quantity has to be borne by the assessee. The ld. counsel further pointed out that some scrap is also generated which has been sold at

We have given a thoughtful consideration to the orders of the authorities below. We have also carefully considered the modus operandi for the processing of grey cloth. Let us take an example. The assessee receives grey cloth of 1000 meters for processing. After processing, the grey cloth becomes 990 meters which means that there is loss of 10 meters in the process. We fail to understand why would the assessee bear the loss of 10 meters when such loss is bound to happen in this line of business. A perusal of the sample invoices shows that the assessee has billed the party with the quantity returned back after processing. This means that the assessee is not billing the party with the quantity received by it for processing of grey cloth. If we continue with our example then the assessee has billed the party with 990 meters and not with 1000 meters. This clearly shows that the assessee has already discounted the quantity with the process loss. In our understanding of the facts, the assessee cannot claim the process loss once again. Further, the sale of scrap has generated Rs. 1,57,43,276/- and the First Appellate Authority has netted off the process loss of Rs. 1,89,57,661/- and has restricted the addition justifiably at Rs. 32,14,385/-. The finding of the First Appellate Authority needs no disturbance. Ground no. 1 is accordingly dismissed.

Ground no. 2 relates to the addition of commission expenses of Rs. 10,55,028/-.

Assessee carried the matter before the ld. CIT(A) but without any success.

Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. The ld. D.R. supported the findings of the A.O.

We have given a thoughtful consideration to the orders of the authorities below. We find that the assessee in its reply has heavily relied upon the fact that Raxaben H Shah is an Income tax assessee, the commission has been paid through account payee cheques and tax has been deducted at source as per the provisions of the law. Nowhere, the assessee has demonstrated the services provided by Raxaben H. Shah. Nothing has been brought on record to suggest that she has actually done some broking for the business of the assessee. Merely because, tax has been deducted at source on the impugned payment would not justify the genuineness of the transaction. It would not be out of

Ground no. 3 relates to the disallowance of interest on interest free loans and advances amounting to Rs. 49,79,253/-.

While analyzing the balance sheet of the assessee, the A.O. found that the assessee has made interest free loans and advances to various parties amounting to Rs. 12,78,83,916/-. The A.O. further observed that in the case of major parties, the opening balance and the closing balance is the same and observed that there is no business transaction during the year. The assessee was asked to justify that advances were given for business purpose. Assessee field a detailed reply vide letter dated 23.03.2015 in which it explained that the advances are capital advances and furnished the copies of account of the parties and further explained that the assessee incurred capital expenditure out of the said advances towards the machinery/goods supplied.

The reply of the assessee was considered by the A.O. who was of the opinion that the assessee failed to justify the business purpose of the impugned advances and went on to compute the disallowance taking 12% as the rate of interest and made addition of Rs. 49,79,253/-.

Assessee was unsuccessful before the First Appellate Authority.

We have carefully considered the orders of the authorities below. A perusal of the documentary evidences shows that assessee was having interest free funds available with it totaling to Rs. 48.58 crores and the impugned advances were at Rs. 12.78 crores. This shows that the interest free funds available with the assessee were far more in excess of the interest free advances. We further find that long term loan from banks, maturity term loan and unsecured loans taken by the assessee amounting to Rs. 32.80 crores whereas the total project expenses which included fixed assets and capital work in progress amounted to Rs. 64.76 crores. This shows that the term loans taken by the assessee have been utilized in fixed assets and capital work in progress.

The Hon’ble High Court of Gujarat in the case of Consumer Marketing (India) (P.) Ltd. 64 taxmann.com 16, on identical facts has held that the term loan on which deduction of interest was sought, had entirely been used for the purpose of purchasing the assets and the assessee has sufficient interest free funds to take care of the advances. Therefore, the disallowance of interest was not justified.

We accordingly direct the A.O. to delete the disallowance of Rs. 49,79,253/-. Ground no. 3 is allowed.

Ground no. 4 relates to the treatment of profit on sale of land as business income instead of capital gain.

While scrutinizing the computation of total income, the A.O. noticed that the assessee has shown long term capital gain of Rs. 3,52,96,322/-. On sale of land alongwith unfinished flats. The assessee was asked to furnish the copy of purchase deed as well as sale deed for the land sold during the year and was further asked to justify its claim of capital gain and to explain why the same should not be treated as business income of the assessee.

In its reply, the assessee stated that it has purchased unfinished flats of the society Ashita Co-op. Housing Society alongwith the land for Rs. 3,08,54,400/-. It was stated that the same was shown under the head investment in the balance sheet. It was further explained that the same was sold without carrying out any construction for a consideration of Rs. 8.11 crores to Noble Antrix Construction and the capital gains has been computed as per the provisions of the law.

After considering the reply of the assessee, the A.O. observed that the said property was purchased in three assessment years namely A.Y. 2006-07, 2008-

Assessee carried the matter before the ld. CIT(A) and reiterated that the land purchased along with unfinished flats were sold as it is without carrying out any constriction activities and therefore the gains should be treated as capital gains.

It was further brought to the notice of the ld. CIT(A) that the A.O. has not even considered the cost of Rs. 3,08,54,400/- which was shown in the balance sheet since A.Y. 2006-07.

After considering the facts and the submissions, the ld. CIT(A) observed that the assessee was in fact doing an adventure in the nature of trade and confirmed the findings of the A.O. However, the ld. CIT(A) directed the A.O. to ascertain the cost of acquisition and relief to that extent should be given from the total sale consideration of Rs. 8.25 crores.

Aggrieved by this, the assessee is before us.

The ld. counsel for the assessee vehemently stated that the assessee purchased the land alongwith unfinished flats and have been showing as investment in its balance sheet from earlier assessment years. The ld. counsel further stated that this is the only transaction done by the assessee and therefore the same cannot be considered as an adventure in the nature of trade. The ld. counsel concluded by saying that since the said property was shown as investment, therefore in the year of sale the same cannot be treated as business asset of the assessee and the

We have given a thoughtful consideration to the orders of the authorities below. There is no dispute that the assessee purchased the land alongwith unfinished flats. It is also true that alongwith the processing of grey cloth, the assessee is also engaged in the construction business . What is paramount is to see the manner in which the said piece of land along with unfinished flats were purchased from Ashita Co-op. Housing Society. The following details as exhibited on page 267 of the paper book is most relevant:- Sr. No. Flat No. Name of individuals Total Value 1 Flat No. C-6 Amitbhai V. shah 1149000 2 Flat No. A-3 Anilaben N Patel 1149000 3 Flat No. C-11 Ashokbhai C. Patel 1149000 4 Flat No. A-4 Merraben N Patel 1149000 5 Flat No. A-10 Sukanyaben V. Pandya 1149000 6 Flat No. B-3 Nilimaben S. Modi 1200000 7 Flat No. C-12 Sumanbhai S. Gupta 1149000 8 Flat No. B-2 Hasmukhbhai N Ladiya 1149000 9 Flat No. A-5 Dimpalbhai S. Patel 1149000 10 Flat No. C-5 Shreya M. Shah 1149000 11 Flat No. A-2 Kanubhai Ambalal Patel 1149000 12 Flat No. C-1 Trivendrabhai S. Bhandari 1207800 13 Flat No. C-10 Udayabhai d. Velvan 1207800 14 Flat No. C-9 Hiteshbhai B. Patel 1207800 15 Flat No. A-9 Nikhilbhai A. Patel 1149000 16 Flat No. B-1 Kaushal K. Shah 1149000 17 Flat No. B-5 Kamlesh R. Trivedi 1200000 18 Flat No. B-4 Arunbhai B. Patel 1149000 19 Flat No. A-8 Rajendrabhai R. Patel 1149000 20 Flat No. C-2 Shrutiben N. Patel 1149000 21 Flat No. B-6 Kirtibhai P. Kapasi 1149000 22 Flat No. A-12 Himanshu K. Patel 1649000 23 Flat No. A-6 Dhruvbhai N Patel 1149000 24 Flat No. C-4 Jigneshbhai P. Patel 1649000 25 Flat No. C-7 NJileshbhai N. Shah 2000000 Total 30854400

Ground no. 5 relates to the addition of Rs. 51,00,000/- u/s. 68 of the Act.

On verification of the balance sheet, the A.O. found that the assessee has received Rs. 51,00,000/- from Shri Bhupendrabhai J Patel. The assessee was asked to explain the said cash credit in the light of Section 68 of the Act. On receiving no plausible reply, the A.O. treated Rs. 51 lacs as unexplained cash credit and made the addition of Rs. 51 lacs.

Assessee carried the matter before the ld. CIT(A) but without any success.

Before us, the ld. counsel for the assessee stated that the said advance was taken on 01.02.2008 and not during the year under consideration, therefore

We have carefully considered the issue vis-à-vis exhibit 289 of the paper book. It is true that on 01.02.2008 Rs. 51 lacs was taken by cheque No. 432066 of Bank of India. The ld. counsel further shows that during the year under consideration, the said loan was adjusted by the allotment of 51,000/- shares of Rs. 100 each. Since, there was no unsecured loan taken during the year under consideration, provisions of Section 68 do not apply. We accordingly direct the A.O. to delete the addition of Rs. 51 lacs. Ground no. 5 is accordingly allowed.

In the result, the appeal filed by the Assessee is partly allowed.

Ground no. 1 relates to the disallowance of process loss to the extent of Rs. 4,48,825/-.

An identical issue has been considered by us in ITA No. 2709/Ahd/2016 (supra) vide ground no. 1 of that appeal. For our detailed discussion therein and for similar reasons, ground no. 1 is dismissed.

Ground no. 2 relates to the disallowance of commission expenses amounting to Rs. 2,98,930/- Paid to Raxaben H. Shah.

Ground no. 3 relates to the disallowance of interest on interest free loans and advances amounting to R. 43,59,961/-.

A similar issue has been considered and decided by us in ITA No. 2709/Ahd/2016 (supra) vide ground no. 3 of that appeal. For our detailed discussion therein and for similar reasons, ground no. 3 is allowed.

In the result, the appeal filed by the Assessee is partly allowed.