. ACIT, MEERUT vs. M/S. THE BAGHPAT COOPERATIVE SUGAR MILLS LTD., BAGHPAT

Date of Hearing : 16-02-2016 Date of Order : 05-04-2016

ORDER PER H.S. SIDHU, J.M.

The Department has filed this Appeal against the impugned Order dated 26.08.2013 passed by the Ld. CIT(A), Noida relevant to assessment year 2008-09.

has erred in law and in facts in deleting the addition of Rs.

25,00,000/- made by AO on account of disallowance of manufacturing expenses under the head “Manufacturing material and chemicals”.

2. Whether in the facts and circumstances of the case the ld. CIT(A)

has erred in law in facts in deleting the addition of Rs.

6,30,57,609/- made by the AO on account of disallowance of accrued interest not paid by it in respect of secured / unsecured loans taken from various institutions of UP Government. The assessee has violated Section 43B(d) of the I.T. Act, 1961 by not paying the accrued interest before the due date of filing of return.

3. That the appellant craves leave to add, modify and / or delete any ground(s) of appeal.

4. In the facts and circumstances of the case, the order of the CIT(A), Noida may be set aside and that of the AO restored.

6.1 On the other hand, Ld. Counsel of the Assessee relied upon the order of the Ld. CIT(A) and stated that Ld. CIT(A) has passed a well reasoned order which does not need any interference and the same may be upheld.

7.1 Apropos Ground No. 1 relating to deletion of addition of Rs. 25 lacs made by the AO on account of disallowance of manufacturing expenses under the head ‘Manufacturing, material and chemicals’. During the course of assessment proceedings A.O. found that the assessee society has claimed Rs. 1,01,78,326/- - under the head "Manufacturing Material and Chemicals" whereas in the immediately preceding year i.e. F.Y. 2006-07 expenses under the above head were claimed/shown Rs. 50,27,813/- thus the expense claimed under the above head were more than double the expenses of the last year.

According to A.O. the AR of the assessee failed to explain the reasons for such a huge increase of expenses under the said head, and for want of proper explanation the A.O. made ad-hoc disallowance of Rs. 25 Lacs or estimate basis out of total claim under the said head.

As against the above addition the assessee has furnished the details of “Manufacturing Material and Chemicals” expenses as per Schedule-'N' of profit and loss accounts which is reproduced as under:-

S.No. Particulars 2007-08 2006-07 1 Chemical Consumed 900231.55 399360.24 2 Lab Chemical Consumed 55531.00 56038.75 3 Lime Consumed 2430189.61 1759992.90 4 Sulphur Consumed 5507503.36 1714905.40 5 Cleaning Equipment 198562.10 160517.25 6 E.T.P. Expenses 222883.00 165970.00 7 Mfg Contract Expenses 311999.45 373151.30 8 Nickel Screen/ Wirenetting 551426.00 397877.161

From the aforesaid details, it is observed that there is maximum increase in the amount spent on Sulphur whereas many other items such as chemicals consumed and others have also registered marginal increase. Regarding Sulphur it has been contended by the assessee that during the financial year under consideration rate of Sulphur went up from Rs. 4370/- per MT during the FY 2006-07 to Rs. 28,240/- per MT during the FY under consideration. Besides, steep price rise in Sulphur it has also been stated that the increase in expenditure under the head “Sulphur Consumed' is also because the assessee crushed additional quantity of 7.81 quintals of cane and there was excess production of 72,319 quintals of sugar in comparison to the previous year. As a result of above, the consumption of Sulphur went up by 57.02 Metric Tons in comparison to the previous year. In view of above explanation the assessee has contended that due to above reasons the overall expenses on account of Manufacturing and Chemical Expenses had gone up. In this regard the AO in his Remand Report dated 22/2/2013 has reiterated his stand on this issue and has justified the disallowance. In response to AO's justification for the said addition the Assessee in his Rejoinder dated 21/3/2013 has placed his reliance on the comparative figures of various items of expenses falling under the head "Manufacturing Material and Chemical Expenses" as per Schedule-N of Profit and Loss Accounts for the F.Y. 2006-07 along with quantitative details of cane crushed sugar produced, and consumption of Sulphur. We find that Ld. CIT(A) have gone through the details as given by the assessee in this regard and find that during the financial year under consideration the quantum of cane crushed and sugar produced have gone up substantially and as a result of which quantity of consumption of Sulphur has also gone up. This is besides the factor of Price rise in Sulphur which has caused further increase in the quantum of expenditure shown under the head “Sulphur Consumed” substantially. The details shows that as a result of increase in cane crushed and sugar produced the other items of expenditure under the head “Manufacturing Material and Chemical Expenses” have also registered increase of expenses in comparison to the last year’s figure of expenses. In this regard, besides above explanation for increase in “Manufacturing Material and Chemical Expenses” the AR of the assessee has vehemently argued that the assessee maintains regular books of accounts and appropriate stock register which are duly audited by the CA as well as by the Cooperative Auditors and that nowhere, the AO has doubted the genuineness of the transactions recorded in the books of accounts in support of expenditure claimed under the head Manufacturing Material and Chemical Expenses nor any adverse or incriminating materials have been placed on record by the A.O. so as to show that the purchases are bogus. The AO has also not doubted the authenticity of the books of accounts which was produced before him during the assessment proceedings. In fact the AO., has not doubted the genuineness of the books of accounts and the authenticity of the transactions recorded therein. Moreover, AO has also not recorded any justification for arriving at a figure of Rs. 25 lacs for ad-hoc disallowance under this head. Thus, the AO has also failed to specify any specific items of expenditure comprising total ad-hoc disallowance of Rs. 25 Lacs as above. It was also found that that as per record that the AO did not issue any show cause notice in this regard while making this addition and to that extent agree that it amounts to breach of principles of natural justice. In view of above discussions, we find that there was no no justification for adhoc disallowance of Rs. 25 lacs under the head “Manufacturing Material and Chemical Expenses”, hence, the same was rightly deleted by the Ld. CIT(A).

Keeping in view of the facts and circumstances of the case, we do find any infirmity in the order of the Ld. CIT(A), hence, we uphold the order of the Ld. CIT(A) on the issue in dispute and dismiss the ground raised by the Revenue.

During the assessment proceedings the AO noticed that in the Schedule ‘C’ of the Balance Sheet the assessee had shown interest accrued but not paid as under:-

- Against secured loans Rs. 96,10,292/- - Against unsecured loans Rs. 5,34,47,317/- Total Rs. 6,30,57,609/- In this regard the AO observed that the above loans have been taken from Public Financial Institutions and State Financial Corporation. According to AO interest accrued on these loans should have been paid before the due date for filing of return u/s. 43B(d) of the I.T. Act. Since the proof of payment of above interest accrued was not furnished by the assessee, the AO disallowed the same and added to the income of the assessee u/s. 43B(d) of the Act. In this regard vide Remand Report dated 23/2/2013 the AO has reiterated the stand taken by him in the assessment order and pleaded for disallowance of the same.

During the appellate proceedings the counsel of the assessee has pointed out some figure related to mistake committed by AO while working out quantum of interest accrued but not paid during the year under consideration. With the help of Annexures to the Balance Sheet of the assessee filed during the appellate proceedings it was pointed out that instead of Rs. 6,30,57,609/- (figure of interest accrued but not paid as adopted by the AO for disallowance i.e. interest against secured loan of Rs. 96,10,292 + Interest against unsecured loan of Rs. 5,34,47,317/-) the correct figure of disallowance under above head should have been 5,61,06,320/- only which represent interest due but not paid in respect of unsecured loan appearing in the Balance Sheet. We find that Ld. CIT(A) has observed that the mistakes as pointed out by the counsel, as above, are duly supported by the relevant figures appearing in the Balance Sheet. This factual position may be noted by the A.O. for necessary and appropriate action as deemed fit as per the provisions of law. So far as the claim for deduction against interest accrued but not paid is concerned the assessee has submitted that during the financial year under consideration the assessee has claimed total deduction of Rs. 5,61,06,320/- in respect of interest accrued but not paid on unsecured loans from Shakkar Visesh Nidhi, U.P. State Government Loan and U.P. Co-operative Sugar Factories Federation Ltd.

The assessee has claimed that these loans have been received by the asssessee from the U.P. Government through its institutional machinery for clearing all outstanding cane dues of farmers and for other specified purposes only. In this regard, copy of sanction letter for above loan was placed before the Ld. CIT(A) from which it was seen that the loan under consideration has been sanctioned by the U.P. State Government also specifying that Hon'ble Governor of U.P. has sanctioned these, loans for specified purposes for which the funds have been withdrawn from Consolidated Funds of U.P. Government and that the utiiization certificate is to be submitted by the respective mills to the designated authorities of U.P. Government and that its re-payment is also to be made by the mills to the U.P. Government only. In this regard, the assessee has vehemently argued before the Ld. CIT(A) that the definition of Public Financial Institutions/State Financial Corporation/State Industrial investment Corporation as given under the provision of Section 4A(2) of the Companies Act 1956 do not cover U.P. State Government; U.P. Sahakari Chinni Mills Sangh Limited and Sakkar Vikash Nikdhi from where the assessee has taken Loan and therefore, no disallowance on this account should be made and that the addition made by the A.O. deserves to be deleted. The assessee has further submitted that the provisions of 43B(d) of the Income Tax Act gives exhaustive definition of all Public Financial Institutions/State Financial Corporation/State Industrial Investment Corporation which has been prescribed u/s. 4A(2) of the Companies Act and on careful perusal of the same shows that the names of U.P. State Government, U,P. Sahakari Chini Mill Sangh Limited and Sakkar Vikash Nidhi are nowhere mentioned in the list of such investment institutions.

Further, the assessee also contended that in the tax audit report u/s.44AB even the auditor has not mentioned in clause 21 that the interest accrued and due but not paid on above loans are covered by section 43B(d) of the Income Tax Act.

We find that Ld. CIT(A) has rightly held that the UP State Government itself and also its institutions namely UP Sahakari Chini Mill Sangh Limited and Sakkar Vikash Nikdhi are not covered by the definition of Public Financial Institutions / State Finance Institutions/ State Industrial Finance Institutions as defined u/s. 4A(2) of the Companies Act, 1956 and therefore provisions of section 43B(d) of the I.T. Act are not attracted in this case. Accordingly, disallowance made on this account was rightly deleted by the Ld. CIT(A). We also find force in the assessee’s counsel contention that the issue in dispute is squarely covered by the decision of the ITAT, ‘H’ Bench, Delhi in assessee’s own case for the assessment year 2007-08 in in the case of ACIT vs. The Baghpat Cooperative Sugar Mills Ltd. wherein it was held that “as the interest in question is payable to Govt. of India and the State of UP Government, Section 43B(d) does not apply.” In view of the above, we do not find any infirmity in the order of the Ld. CIT(A), hence, we uphold the same and dismiss the issue in dispute raised by the Revenue.

Order pronounced in the Open Court on 05/04/2016.