SURESH BROTHERS,MUMBAI vs. ADDL CIT RG 16(3), MUMBAI

Appellant by Shri. Apurva Shah Respondent by Shri. N.K Chand Date of Hearing : 16.06.2016 Date of Pronouncement :15.09.2016 ORDER

PER R.C SHARMA, AM

2. Transfer Pricing – Adjustment made on Export Sales to Associated Enterprises (‘AE’) The learned AO/TPO has erred in law and on facts in making transfer pricing adjustment to the international transaction of Export

Sales of assesses to AE on the basis of various presumptions and surmises. a. The learned AO/TPO has erred in applying the difference of 1.61 percent [7.32 percent (ROCE of comparable companies as selected by the learned TPO) less 5.71 percent (ROCE of Assessee as recomputed by the TPO)], to the entire sales of the Assessee instead of restricting the same to the export sales made to AE as international transactions during the previous year. b. The learned AO/TPO has erred in considering non-operating expenses of Bad debts and Finance Charge as operating expenses while computing the Net Profit of Assessee for calculation of ROCE. c. The learned AO/TPO has erred in including Goenka Diamond and Jewels Limited and SB & T International Limited in the list of comparable companies selected by the TPO for benchmarking of the international transaction with AE. d. The assesses value of export sales falls within the plus-minus 5 percent of the arm‟s length price determined by restricting the adjustment to the International transaction of export sales and humbly prays the Hon‟ble Tribunal to delete the Transfer Pricing Adjustment.

3. Transfer Pricing – Restriction of adjustment to International Transactions. The learned AO/TPO has erred in law and on facts in not restricting the adjustment to the value of International transactions between the Assessee and its AE‟s.

4. Transfer pricing – Grant of Plus-minus 5% Benefit Under Section 92C. The assessee humbly prays for application of plus-minus 5% variation while computing arm‟s length price under section 92C. 5. Transfer Pricing – Computation of Assesse’s Profitability. The assessee humbly prays that for the purpose of transfer pricing, assessee profitability be computed after considering the effect of various allowances/disallowances made by the learned AO and contested by the assessee in this appeal.

(A) FACTS OF THE CASE: 2. The assessee is a partnership firm engaged in the business of Import, Manufacturing and Export of cut and polished diamonds. Return of income was electronically filed by the assessee firm on 30.09.2008, declaring total income at Rs. 5,85,90,152/-. The return of income filed by the assessee firm was thereafter selected for scrutiny assessment. During the course of the assessment proceedings the A.O after perusing the ‘Audit report’ filed by the assessee firm in ‘Form 3CEB’ which revealed International transactions of the assessee firm with its Associate enterprises (‘AE’s) in excess of an amount of Rs. 15 crore during the year under consideration, therein considering it necessary and expedient so to do, with the previous approval of the CIT-XVI, Mumbai, referred the computation of the arms length price (ALP) in relation to the said International transactions to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the ‘Act’, wherein the latter passed an order u/s 92CA(3), dt. 25.10.2011, making an adjustment of Rs. 5,06,84,790/- to the International transactions of the assessee firm. Thereafter Draft assessment order u/s 143(3) of the ‘Act’ was passed on 30.12.2011, wherein the A.O proposed to assess the income of the assessee firm at an amount of Rs. 11,15,68,660/-, pursuant whereto objections were raised by the assessee firm u/s 144C(2) before the Dispute Resolution Panel (DRP), who vide his order dt. 22.08.2012 issued directions u/s 144C(5), considering which the A.O framed the assessment u/ss. 143(3) r.w 144C of the ‘Act’ and assessed the income of the assessee firm at an amount of Rs.9,40,59,730/-.

2.1 That during the year under consideration the assessee firm had entered into the following International transactions with its AEs:- S.No. Name of the AEs Nature of transaction Amount in INR 1. Diamstar B.V.B.A Import of Rough 26,93,03,737 diamonds 2. Diamstar B.V.B.A Export of Rough 2,12,00,879 diamonds 3. Diamstar B.V.B.A Export of cut and 37,43,731 polished diamonds 4. Suresh Brothers (HK) Limited Export of cut and 16,64,11,870 polished diamonds 5. Suresh Brothers DMCC Export of cut and 13,16,62,424 polished diamonds 6. Suresh Brothers (HK) Limited Loan 2,20,42,500 7. Suresh Brothers (HK) Limited Interest on loan 4,90,438 8. Suresh Brothers DMCC Loan 26,74,195 9. Suresh Brothers DMCC Interest on loan 1,48,611 The Auditor of the assessee firm in his audit report in ‘Form 3CEB’, dt. 30.09.2008, claiming that the aforesaid International transactions entered into by the assessee firm with its AE’s were at arms length, therein taking 4 comparables, namely, Saushish Diamonds, Sun-raj Diamonds, Su-raj Diamonds and Asian Star, worked out their average margin (OP/Sales) at 4.26%, against which the margin of the assessee firm (OP/Sales) was shown at 5.83%. (B). BEFORE THE „TPO‟ : 2.2 The assessee firm further during the course of the Transfer Pricing Proceedings, in its TP study report filed vide submission dated: 03.01.2011 with the TPO, benchmarked its International transactions listed as S.No. 1 to 6 above, by using the Transactional Net Margin Method (‘TNMM’) at the entity level. As per the report, the assessee firm had referred to a set of four comparables, which were dealt with by the TPO, as under:- S.No. Assesses Comparables Comments of TPO 1. Shrenuj & Co. Ltd. (Diamond division) RPT more than 25%. Hence, rejected as comparable 2. Classic Diamonds Ltd. (Diamonds division) RPT more than 25%. Hence, rejected as comparable 3. Su-raj Diamonds Ltd. Accepted as comparable.

The TPO thereafter taking cognizance of the comparables prepared by the Department for Diamond Cuting and Polishing, wherein the calculation of Operating Profit (OP) in the departmental comparables had been done having regard to EBIDTA margin, therein computed the assessee’s margin, as under: Sales Rs. 325,60,68,789 Other Income Not considered Cogs Rs. 296,63,55,115 Admin & other Rs. 9,31,34,342 Less non op. exp. - Exchange diff. On loan revaluation -2,13,694 Bank charges 2,08,53,831 Interest Not considered Depreciation Not considered OC 308,01,29,594 OP 17,59,39,195 OP/OC 5.71% OP/NS 5.40% and rejecting some of the comparables selected by the assessee firm in its documentation, proceeded with and selected 11 comparables, as under:- S.No. Company Source Net Sales OP OP/OC% OP/NS% Name

1. Asian Star Co. C Line 1305.11 73.47 5.97% 5.63% Ltd.

2. C. Mahendra C Line 1366.45 108.7 8.64% 7.96% Exports. 3. Dimexon BB 1658.71 105 6.76% 6.33% Diamond Ltd. 4. Goenka C Line 200.56 17.07 9.30% 8.51% Diamond & Jewels Ltd. 5. Laser C Line 1.59 0.18 12.77% 11.32% Diamonds Ltd. 6. Mohit BB 215.08 13.48 6.69% 6.27% Diamonds Pvt. Ltd. 7. SB & T C Line 94.49 6.3 7.14% 6.67% International Ltd. 8. Suashish C Line 1222.97 83.57 7.33% 6.83% Diamonds Ltd. 9. Sunraj Diamond C Line 12.75 0.48 3.91% 3.76% Exports Ltd. 10. Su-raj Diamond C Line 246.71 9.67 4.08% 3.92% Industries Ltd. 11. Zodiac –JRD- C Line 11.88 0.87 7.90% 7.32% MKJ-Ltd. Average 7.32% 6.77% 2.5 The assessee firm on being confronted by the TPO with the fact that as its margin were found to be less as in comparison to that of the comparables, and thus on being called upon to ‘Show cause’ as to why adjustments should not be made to its transactions, therein objected to the use of the comparables mentioned at Sr. No. 4, 5, 7 and 11 hereinabove, however the said objections raised by the assessee firm were dismissed by the TPO, who therein adopting the comparables, as such, therein proceeded with and made adjustments to the assesses transactions, as under:- (I). FOR EXPORT TRANSACTIONS OF ASSESSEE WITH ITS AE‟S: S.No. Particulars 1. The TPO adopted the average OP/OC of the Comparables, i.e 7.32% as the Profit Level Indicator (PLI).

2. The TPO in the course of computing the ALP Profit, therein applied the ALP Profit margin of 7.32% to the total OC of Rs. 308,01,29,594/-, and thus computed the same at Rs. 22,54,65,486/-.

(II). FOR IMPORT TRANSACTIONS OF ASSESSEE WITH ITS AE‟S:

S.No. Particulars

1. The TPO adopted the average OP/OC of the Comparables, i.e 6.77% as the Profit Level Indicator (PLI).

Thus the TPO therein observing that as the transactions of the assessee firm on both the export and import side were found to be tainted, as a result whereof adjustments to prices paid and prices taken stood computed at Rs. 4.45 Crore (aprox) and Rs. 4.95 Crore (aprox), respectively, therefore carried out adjustment of Rs. 4,95,26,291/- as regards the export-import transactions of the assessee firm.

(III). FOR LOANS GIVEN BY ASSESSEE FIRM TO ITS AE‟S:

S.No. Particulars Treatment by TPO 1. (i). Loan of US$ 5 Lakh was given (i). The TPO called upon the to the AE in Hongkong in assessee firm to justify the January, 2006, which loan adoption of the US PLR was repaid by the AE in full to rate of 7.25% as the assessee firm on benchmark for receivable 23.10.2007. rate of interest, in light of the fact that the loan was (ii).The TP auditor of the given to the AE in Hong assessee firm in his TP report Kong. in ‘Form 3CEB’ , referring to US-PLR rate of 7.25% in (ii).That in absence of any January, 2006, computed the explanation from the Interest for the period assessee firm, coupled 01.04.2007 to 23.10.2007 at with absence of the details US$ 20,391, to which he w.r.t the cost of finance applied the closing rate of US involved in giving the $ of Rs. 39.38 and computed aforesaid loan by the the ‘Interest receivable’ for the assessee firm to the AE, aforesaid period at Rs. the TPO therefore 8,02,998/-. proceeded with and referring to the financials of (iii).The TP auditor of the the assessee firm, therein assessee firm, thereafter computed the applicable referring to ‘Interest received’ ‘Arms length’ ROI for of Rs. 4,90,438/- as stood lending of loan to AE at reflected in the ‘Books of 10.6%, and accordingly on accounts’ of the assessee the basis of rate differential firm, therein worked out the of by adopting the said ROI shortfall of ‘Interest received’ of 10.6%, therein carried at Rs. 3,12,560/-, which was out a further adjustment of reflected as such in the TP Rs. 6,90,501/- on account report in ‘Form 3CEB’, dt of under remunerated 30.09.2008 of the assessee interest receivable/interest firm. received. 2. (i). Loan of AED 2,18,054 was (i). The TPO in absence of any given by the assessee firm to explanation from the its AE in Dubai on assessee firm to justify the 01.04.2005, 30.04.2005, adoption of the US PLR 06.06.2005 and 29.10.2005. rate of 7.25% as benchmark for receivable (ii). The TP auditor of the rate of interest, in light of assessee firm in his TP report the fact that the loan was in ‘Form 3CEB’ , referring to given to the AE in Dubai ,

US-PLR rates on the coupled with absence of respective lending dates, the details w.r.t the cost of computed the Interest income finance involved in giving at AED 13634, to which he the aforesaid loan by the applied the closing rate of 1 assessee firm to the AE, AED = Rs. 10.9, and therefore proceeded with computed the ‘Interest and referring to the receivable’ at Rs. 1,48,611/-. financials of the assessee firm, computed the applicable ‘Arms length’ ROI for lending of loan to AE at 10.6%, and accordingly on the basis of rate differential of by adopting the said ROI of 10.6%, therein carried out a further adjustment of Rs. 4,67,998/- on account of under remunerated interest receivable/interest received w.r.t the aforesaid transaction of the assessee firm.

Thus in light of the aforesaid facts, the TPO vide his order dt. 25.10.2011 passed u/s 92CA(3) of the ‘Act’, therein carried out an aggregate adjustment of Rs. 5,06,84,790/- to the International transactions carried out by the assessee firm. (C). DRAFT ASSESSMENT ORDER : 3. The A.O on receipt of the report of the TPO passed a ‘Draft assessment order’ u/s 143(3) of the ‘Act’, dt. 30.12.2011, therein making adjustments of Rs. 5,06,84,790/- u/s 92C(4) r.w.s 92CA(4) of the ‘Act’ to the value of the International transactions of the assessee firm with its AE’s during the year under consideration, coupled with certain other disallowances/additions in the hands of the assessee firm, as under: Income from Business Rs. 5,85,90,151/- (As per Computation of income filed by assessee) Additions: 1. Transfer Pricing Rs. 5,06,84,790/- additions 2. Disallowance of Rs. 3,90,000/- Software expenses 3. Disallowances of Rs. 30,568/- Expenses u/s 14A 4. Addition of Interest Rs. 18,73,150/- Rs. 5,29,78,508/- income

Rs. 11,15,68,660/- Total Income (D). BEFORE „DRP‟: The assessee firm filed objections to the variations proposed in the ‘draft assessment order’ before the Dispute Resolution Panel-II, Mumbai (DRP). The DRP vide its order dt. 22.08.2012, issued ‘directions’ u/s 144C(5), which are briefly culled as under:- S.No. GROUNDS OF OBJECTIONS RAISED DIRECTIONS OF DRP BY ASSESSEE

1. TPO instead of restricting the difference No directions on the issue between the PLI of the assessee firm given by DRP. and the PLI of comparables to the sales made to AE’s, had erroneously applied the same to the total sales of the assessee (including sales made to non- AE’s).

2. TPO had erred in not adjusting the The claim of the assessee entire ‘financing costs’ while arriving at firm was rejected by the the Operating Profit/Total Cost as the DRP, as under:- ‘Profit level indicator’ (PLI) of the assessee firm, due to which the PLI of (i).That as bill discounting the assessee firm as computed by the & other financial costs TPO is found to be suppressed. related to obtaining finance capital, therefore the same not being directly incurred in the process of manufacture and sales, were thus rightly included under the head Administrative or financial costs. (ii).That as ‘Bad debts’ were purely an administrative cost and not an operating expenditure, which all the more pertained to a debt of an earlier year which is ‘written off’ in a subsequent year and therefore did not even relate to the sales of the year for which ratios were being worked out, the same in absence of any details furnished by the assessee firm to prove otherwise, was therefore rejected. TPO had wrongly included the following DRP dealt with the 3. 4 comparables, for reasons assigned contention of the assessee as under: firm as regards exclusion of 4 comparables, as Party Name Reason (as under:- per assessee) (i). Laser Diamonds Ltd: (i).Laser Diamonds The DRP agreed with the claim of the assessee firm and Ltd. company observing that the was into company was not trading comparable to the business. assessee firm, therein (ii).Goenka Diamond The directed the A.O/TPO to & Jewels Ltd. company

was into exclude the said company trading from the set of business. comparables and recompute the adjustments (iii).SB&T The RPT are accordingly. International more than (ii).Goenka Diamond & ltd. 20% of total Jewels: sales. DRP rebutting the (iv). Zodiac JRD-KJ The contention of the assessee company firm, therein observed that was into the sale of diamond trading studded jewellery of the business. company was in the start up stage and not a dominant business, wherein the sales of jewellery was Rs. 40 crore (aprox), as in comparison to the sales of diamond cut & polished of Rs. 158 Crores. Still further the DRP observing that as the company during the year had incurred substantial expenditure in promoting its jewellery brand, setting up shops in different places, therefore the said costs/expenditure would offset the advantage it might have over the assessee firm in its total profit ratios due to its being in the jewellery business. (iii). S B & T International Ltd: That as the RPT of the company was less than 25%, the DRP therefore holding that in number of cases the threshold of 25% had been held as an acceptable limit to filter out comparables, therefore rejected the objection of the assessee firm.

(iv). Zodiac JRD-KJ No directions as regards the aforesaid comparable company was given by the TPO.

5. The A.O has erred in not granting DRP directed the A.O to deduction of the ‘Exchange Difference verify the claim of the Loss on Revaluation of foreign currency assessee firm and make Loans’ aggregating to Rs. 5,68,129/- the necessary amendment while computing the income for the year in the order, if necessary. under consideration. 7. A.O had erred in making addition of Rs. DRP directed the A.O/TPO 18,73,150/- on account of interest to verify the contention of income from State Bank Of India. The the assessee firm in light of assessee firm claimed that as per the the evidence available on AIR information received by the A.O, record and decide the the ‘Interest received’ from the SBI was same. reflected twice. The assessee firm explaining the reason for the aforesaid discrepancy therein leading to twice reporting of the ‘Interest received’, therein submitted before the DRP that SBI which was required to deduct TDS @11.33% on the ‘Interest income’ of Rs. 31,04,124/-, however erred and initially deducted at a rate less than 11.33%, and subsequent thereto in order to make up for the shortfall/deficit in the TDS, carried out the deduction on the said ‘Interest income’ as regards the balance shortfall amount of TDS, pursuant whereto the said ‘Interest income’ was reported at an amount of Rs. 49,77,274/- in the AIR information received by the A.O. The assessee firm in order to substantiate its contention

that it was in receipt of ‘Interest income’ of Rs. 31,04,124/-, therein furnished a certificate of interest dated: 16.09.2008 issued by SBI, wherein the bank had certified that interest of Rs. 31,04,124/- was paid to the assessee firm during the F.Y. 2007-08.

(E). ASSESSMENT FRAMED BY THE A.O : 4. That the A.O thereafter proceeded with and framed assessment vide his order dated. 29.10.2012, passed u/s 143(3) r.w Sec. 144C of the ‘Act’ and assessed the income of the assessee firm at Rs. 9,40,59,730/-, as against the latters returned income of Rs. 5,85,90,151, as under:- Particulars Amount Income returned by the assessee firm : Rs. 5,85,90,151/- Additions: (A). For Export transactions of assessee : The A.O going by the directions of the DRP excluded M/s Laser Diamonds from the set of comparables and adopting the recasted PLI of 6.77%, recomputed the adjustment of Rs. 3,25,85,579/- as regards the export transactions of the assessee firm. (B). For Import transactions of assessee : The A.O going by the directions of the DRP excluded M/s Laser Diamonds from the set of comparables and adopting the recasted PLI of 6.32% recomputed the adjustment of Rs. 2,98,44,352/- as regards the import transactions of the assessee firm. The A.O in light of the aforesaid facts, observing that the Assesses transactions on both export and import side were tainted, therein adopted the higher of the aforesaid adjustments, i.e Rs. 3,25,85,579/- , and making a further addition of Rs. 11,58,499/- as : Rs.3,37,44,078/- regards TP adjustments which had remained unchanged, therein made an aggregate addition of Rs. 3,37,44,078/- in the hands of the assessee firm. Excess amount of deduction towards Software : Rs. 3,90,000/- expenditure. Disallowance of expenses attributable for earning : Rs. 30,568/- exempt income U/s 14A r.w Rule 8D. Difference in the Interest income received from SBI. Rs. 18,73,150/- Total Income : Rs. 9,40,59,730/- SUBMISSIONS OF THE ASSESSEE:

5. The assessee firm aggrieved with the aforesaid assessment framed by the A.O in light of the directions of the ‘DRP’, had therein assailed the aforesaid additions/disallowance before the Tribunal. However the Ld. AR has mostly confined his argument stating that, even if the margin of TPO is applied only to international transaction with the AE, then no adjustment would be required to be made as they would fall within the tolerance range of ALP.

GROUND OF APPEAL 2(a) & (d), 3 AND 4: 5.1 That as the issue involved in GROUND OF APPEAL 2(a) & (d),

3. AND 4 is the same, therefore the same are being taken up and disposed of together. The A.R for the assessee firm at the very outset had challenged the action of the TPO by claiming therein that the difference of 1.61 percent between the PLI of the assessee firm and PLI of comparables though was liable to be restricted to only the transactions with the AE’s, but however the TPO had most arbitrarily applied the same to the total sales of the assessee firm (including sales made to non-AE’s). The A.R had fortified the aforesaid logical reasoning, by placing reliance on the judgment of the ITAT in the case of M/s Ratilal Becharlal & Sons, order dated 07.11.2012, which now has been confirmed by the Hon‟ble High Court of Bombay in the case of The CIT-16, Mumbai Vs. M/s Ratilal Becharlal & Sons (ITA No. 1906 of 2013; Dt. 24/11/2015) , wherein the Hon’ble High Court clarifying the scope and gamut of Chapter X of the ‘Act’, and concluding that that the ‘Special provisions’ contemplated therein are strictly to be restricted as regards the domestic and International transactions of the assessee concern with its Associated Enterprises and cannot be extended to the entire sales of the assessee, held as under:-

(d). Chapter X of the Act inter alia deals with computation of income from international transactions having regard to the ALP. Section 92 thereof specifically brings to charge income arising from International transactions with an Associated Enterprise to tax on computation of income having regard to the ALP of the transactions entered into between the Associated Enterprises, as the heading of Chapter X itself indicates that these are special provisions relating to avoidance of tax and the mandate is to ensure adjustment in respect of the International transactions with Associated Enterprises or specified domestic transactions on the determination of ALP. It does not allow adjustment of the income on the basis of determining of ALP in respect of the Assesses transactions. If the contention of the Revenue is to be accepted, it would result in taxing non-existing income/profits of transactions entered into between the Respondent assessee and Independent third parties. This in the present fact, even in the absence of an allegation that the transactions with parties other than Associated Enterprise is not at ALP. The transactions with parties other than the International Transactions with Associated Enterprise or in respect of specified domestic transactions are not within the ambit of Chapter X of the Act.

The Ld. D.R on the other hand though conceded to the settled position of law that TP adjustment, if any, is to be made only as regards the International transactions of an assessee with its AEs, but it was averred by him that the assessee firm in the course of the proceedings before the lower authorities had failed to provide the segmental accounts for AE and non AE transactions, and as such had failed to discharge the Onus as was cast upon it, therefore the latter could not be allowed to take benefit of its own failure. The Ld. D.R further supporting the TP adjustments carried out by the TPO, therein submitted that as the Department in the absence of AE/non-AE segments is regularly working out cost of non-AE transaction by applying average PLI of external comparables, therefore no infirmity could be attributed to the working carried out by the TPO.

We have perused the report of the TPO and are of the prima facie view that the latter vide his working at Page 4 -5 of his report had ostensibly failed to restrict the application of the difference of 1.61 percent between the PLI of the assessee firm and PLI of comparables w.r.t the transactions of the assessee firm with the AE’s, and rather had applied the same to the total sales of the assessee firm (including sales made to non-AE’s). Thus in the interest of justice and fairness, we restore the issue to the file of the TPO, with a ‘direction’ to verify the genuineness and veracity of the aforesaid contention of the assessee, and keeping in view the scope of applicability of the ‘Special provisions’ contemplated under Chapter X of the ‘Act’, as had been looked into by the Hon‟ble High Court of Jurisdiction in the case of : M/s Ratilal Becharlal & Sons (supra), therein restrict the adjustments in the hands of the assessee firm only as regards the latter International transactions with its Associated Enterprises, and thereafter adjudicate upon the said issue after verifying as to whether the PLI of the assessee firm as in comparison with the PLI of the comparables falls within the +/- 5% limit of Safe Harbour, as contemplated u/s 92C of the ‘Act’. However, before parting, it is directed that the TPO before adjudicating on the aforesaid issue in light of the directions given hereinabove, shall afford a reasonable opportunity of being heard to the assessee firm to substantiate its aforesaid contention.

It has been admitted that, if the above issue is decided in favour then, issues raised in ground no. 2(b) & 2(c) will become purely academic and need not be adjudicated, as there would be no adjustment required to be made. Accordingly, we are keeping the issues raised in ground no. 2(b) & 2(c) open and are treated as dismissed as in-fructuous.

GROUND OF APPEAL

6. The A.R of the assessee firm had submitted before the Tribunal that the profitability of the assessee firm be computed after considering the effect of various allowances/disallowances made by the A.O and contested by the assessee firm in this appeal. We find force in the submissions of the A.R and herein direct the A.O that the profitability of the assessee firm for the purpose of transfer pricing be computed after giving effect to and considering the modifications carried out in light of the allowances/adjustments made in the hands of the assessee firm. GROUND OF APPEAL NO. 6

7. The A.R of the assessee firm had averred that the A.O had erred in making an addition for interest income merely on the basis of AIR reporting, without adequately considering the claim of the assessee firm that the said income was reported twice by State Bank of India (SBI). It was submitted by the A.R that the ‘Interest income’ which was stated to have been paid/credited as per the AIR information received by the A.O from SBI, was factually incorrect and inconsistent as against the actual ‘Interest income’, as under:-

Name of Bank As per ‘AIR’ Actual ‘Interest Difference information income’ received from bank received/credited (as claimed by assessee firm) State Bank Of Rs. 49,77,274/- Rs. 31,04,124/- Rs.18,73,150/ India - The A.R of the assessee firm submitted that though an explanation demonstrating the factum as regards the discrepancy as had crept in the AIR reporting of the bank was furnished with the A.O, wherein it was submitted that certain entries of interest were shown twice in the ‘Bank statement’, however the latter vide his ‘Draft assessment’ order passed U/ss. 143(3) r.w 144C of the ‘Act’, without verifying the genuineness and veracity of the claim of the assessee firm, most arbitrarily made an addition of Rs. 18,73,150/- (supra) in the hands of the assessee firm. It was further submitted by the A.R that the assessee firm in its objections filed against the ‘Draft order’ passed by the A.O U/ss. 143(3) r.w 144C of the ‘Act’, therein demonstrated at length before the DRP the fact that the interest entries had been shown twice in the ‘AIR’ information received by the A.O from the bank, pursuant whereto the DRP vide his order passed U/s 144(5) of the ‘Act’, in all fairness though directed the A.O/TPO to verify the contention of the assessee firm in light of the evidence on record and then decide the claim, however the A.O vide his order passed U/ss. 143(3) r.w. 144C of the ‘Act’, dt. 29.10.2012, instead of following the specific ‘directions’ of the DRP, rather proceeded with in a callous manner and without making any verification, as directed by the DRP, therein proceeded with and made an addition of the impugned ‘Interest income’ of Rs. 18,73,150/-(supra) in the hands of the assessee firm. The A.R of the assessee firm further challenging the adoption of the interest income by the A.O merely on the basis of AIR reporting, without adequately considering the claim of the assessee firm that the said income was reported twice by State Bank of India (SBI), had relied on a recent order of a co-ordinate bench of the Tribunal, passed in the case of:

M/s Kroner Investments Limited, Mumbai vs. DCIT-5(2), Mumbai (ITA No. 5125/M/2013; Dt. 10.04.2015), wherein the Tribunal held as under:-

“4. We find that addition in this case has been made solely on the basis of AIR information and without any corroborative evidence regarding the receipt of any interest by the assessee from the said M/s Essar Oil Limited. The assessee has specifically denied the receipt of such an interest income. The Revenue has not made any enquiries to find out whether the AIR information was correct or not. It has been held time and again by this Tribunal that the additions made solely on the basis of AIR information are not sustainable in the eyes of law. If the assessee denies that it is in receipt of income from a particular source, it is for the AO to prove that the assessee has received income as the assessee cannot prove the negative. Reliance can be placed on the decision of the Tribunal in the case of “DCIT vs. Shree G. Selva Kumar” in decided on 22.10.10 and another case in the case of “Aarti Raman vs. DCIT” in ITA No. 245/Bang/2012 decided 0n 05.10.12.”

We have considered the rival submissions and relevant materials on record, including the orders of the authorities below, and therein find that despite there being a specific ‘direction’ by the DRP to the A.O to verify the contention of the assessee firm in light of the evidence on record , the A.O had proceeded with most arbitrarily and except for taking cognizance of the ‘directions’ of the DRP ostensibly for academic purposes only, had rather blatantly failed to follow and effect compliance to the same in the right spirit, which act on the part of the A.O is deprecated. The Ld. Representatives of both the parties have agreed before us that in light of the factual position as it so remains, the issue be restored to the file of the A.O for considering afresh. Thus we accordingly restore this issue to the file of the A.O to consider and verify the contention of the assessee firm and pass a speaking order as regards the same.

Order pronounced in the open court on this 15/09/2016.