BIT CORP PRIVATE LIMITED,GUNTUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1), GUNTUR

Brief facts of the case are that the assessee filed the return of income for the A.Y.2018-19 on 10.10.2018, admitting total loss of Rs.18,55,61,547/-. The case was selected for scrutiny under CASS, therefore, statutory notices u/s 143(2) and 142(1) along with questionnaire were issued and served on the assessee through ITBA portal. In response to the above notices, the assessee furnished information / documents from time to time. It was stated that the assessee is engaged in the business of trading and export of tobacco and its allied products. Considering the submissions made by the assessee, the Ld.AO framed the assessment by making following additions : (i) Loss on writing off of stock / undisclosed sales – 14,52,29,605 (ii) Disallowance u/s 36(1)(iii) Rs.81,00,000 (iii) Provision for investments Rs.22,97,300

On being aggrieved by the assessment order, the assessee filed appeal before the CIT(A)/NFAC and made various submissions regarding the writing off of stock and contested that the AO has not brought any material on record on his allegation that the assessee has sold the closing stock of tobacco in the grey market. Further, it was also stated before the Ld.CIT(A)/NFAC that the stock was more than three years old and being a perishable product, there was no market value for the same. It was also argued before the Ld.CIT(A)/NFAC that no auction bidder has come forward to purchase the stocks. However, with respect to the disallowance of interest, it was argued that the loan related parties was paid out of the realised sundry debtors and non interest bearing funds.Examining all the above submissions, the Ld.CIT(A) rejected the arguments made by the assessee and dismissed the appeal.

The Learned CIT(Appeals) is not justified in rejecting the claim of the appellant company that the closing stock was correctly shown at NIL on account of non-availability of any physical saleable stock after making sale of the entire saleable material available in the stock when the company closed its business during the year.

The Learned CIT(A) ought to have appreciated that the disallowance made by the Assessing Officer on account of loss on write off of the closing stock /unaccounted sales is based on mere surmise, conjecture and presumption that the appellant may have made unaccounted sale of stocks without an iota of evidence to establish such unaccounted sales.

The Learned CIT(A) ought to have seen that the allegation of the Assessing Officer that unaccounted sale of closing stock was made with the intention of avoiding repayment of bank loan is baseless and unsubstantiated since the appellant repaid the bank loan in the subsequent years as reflected in the returns filed by the appellant, by selling the land owned by the appellant company.

Per contra, the Ld.DR fully supported the orders of the revenue authorities.

We have heard both the parties and perused the material available on record. It is the case of the Ld.AO that the assessee has written off stock to the extent of Rs.14.52 crores, without providing any proper evidence regarding the valuation of the closing stock as at the end of the year. The Ld.AO, while disallowing the same observed that the assessee’s contention about the loss of stock is due to dryage, process, storage, and handling, which has accounted over the years was not supported with any documentary evidence and hence rejected the same. It was the contention of the assessee that the Ld.AO has disallowed the write off of closing stock, assuming that the assessee has sold it in the grey market and has realised money out of the books of accounts. However, the Ld.AO has also observed that the assessee has not declared any scrap sales during the impugned assessment year. The closing stock for the assessment year, amounting to Rs.14.52 crores is added by the Ld.AO due to non-production of any evidence by the assessee to substantiate the claim that the entire stock has become scrap. The Ld.AO observed that the assessee has made grey market sales of the closing stock which is out of the books of accounts to avoid payment to the bankers and sundry creditors. The Ld AR contention is that the AO has framed the assessment based on the assumptions and presumptions. In this connection, the assessee has filed a petition under Rule 29 of the ITAT Rules for producing the additional evidence in the form of bank statements and audited accounts for the subsequent years to substantiate the claim that the assessee has sold the immovable property to re-pay the loans taken from banks and also to discharge the payment due to sundry creditors. We therefore are of the considered view that the petition under Rule 29 of the ITAT Rules is allowed and the additional evidence is remitted back to the Ld. CIT (A) with a direction to call for the remand report from the Ld. AO before deciding the issue in accordance with law. Accordingly, this ground is allowed for statistical purposes.

With respect to ground No. 7 to 9 regarding disallowance of interest expenditure of Rs.81 lakhs u/s 36(1)(iii) of the Act, the Ld.AR submitted that the assessee from time to time received and paid inter corporate deposits, depending upon the requirements. The Ld.AR, therefore, argued that that the assessee has given loan of Rs.6,41,80,241/- during the impugned assessment year to M/s Gogineni Tobaccos Ltd. arising out of the sources on account of loan obtained from M/ s Tobacco Bye Products Ltd. of Rs.50 lakhs and realisation of sundry debtors of Rs.8,27,22,510/-. He, further argued that no part of the bank loan was utilised for the purpose of giving inter corporate loan to M/s Gogineni Tobacco Ltd. He, therefore, pleaded that since non interest bearing funds have been used for giving loan to the related party, interest payment cannot be disallowed.

Per contra, the Ld.DR relied on the order of the revenue authorities.

We have heard both the sides and perused the material available on record. We find from the submissions made by the Ld.AR that the assessee has accumulated huge losses as at the end of the financial year. It was observed by the Ld.AO that the interest free loan of Rs.6.48 crores from other group companies was taken by the assessee in the preceding years, however, the contention of the assessee that the interest free loans were paid to M/s Gogineni Tobacco Ltd. does not have any nexus with the funds flow provided by the assessee. It is the observation of the Ld.AO that the assessee has outstanding liability to the bank and hence liable to pay interest thereon, but the assessee has utilised the available funds to give interest free loan to the related party, instead of repaying the outstanding loan to the bank. We also find that the assessee has not proved beyond doubt that the interest free unsecured loans have been used to give interest free unsecured loan to the related parties. We, therefore, find no merit in the argument of the Ld.AR and therefore, no interference is required into the orders of the Ld.CIT(A). We find no infirmity in the order of the Ld.CIT(A), thereby dismiss the ground raised by the assessee.

In the result, appeal of the assessee is partly allowed for statistical purposes.