THE DCIT, CIRCLE-8,, AHMEDABAD vs. STERLING ABRASIVES LTD,, AHMEDABAD

आयकर अपील�य अ�धकरण, अहमदाबाद �यायपीठ ‘ए’ अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL “ A ” BENCH, AHMEDABAD सव�ी एन.के. �ब�लैया, लेखा सद�य एवं महावीर �साद, �या�यक सद�य के सम� । BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER And SHRI MAHAVIR PRASAD, JUDICIAL MEMBER आयकर अपील सं आयकर अपील सं./ ITA Nos. 704 & 705/Ahd/2014 आयकर अपील सं आयकर अपील सं िनधा�रण िनधा�रण वष� िनधा�रण िनधा�रण वष� वष�/ Assessment Year : 2009-10 & 2010-11 वष� Dy. Commissioner of Income Sterling Abrasives Ltd. Tax, Vs 45/46, GIDC, Circle-8, Odhav Road, Ahmedabad Ahmedabad – 382 415 आयकर अपील सं आयकर अपील सं./ ITA No. 334/Ahd/2015 आयकर अपील सं आयकर अपील सं िनधा�रण िनधा�रण वष� िनधा�रण िनधा�रण वष� वष�/ Assessment Year : 2011-12 वष� Sterling Abrasives Ltd. Dy. Commissioner of Income 45/46, GIDC, Vs Tax, Odhav Road, Circle-8, Ahmedabad – 382 415 Ahmedabad अपीलाथ� अपीलाथ�/ (Appellant) अपीलाथ� अपीलाथ� �� य �� यथ� �� य �� य थ� थ�/ (Respondent) थ� Assessee by : Shri K. Madhusudan, Sr.D.R. Revenue by : Shri S. N. Soparkar, A.R. सुनवाई क� तारीख/Date of Hearing : 27/10/2017 घोषणा क� तारीख /Date of Pronouncement: 13/11/2017 आदेश/O R D E R आदेश आदेश आदेश PER MAHAVIR PRASAD, JUDICIAL MEMBER:- These three appeals, two by the Revenue and one by the Assessee are directed against the separate orders of the Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad dated 04/12/2013 (revenue) & CIT(A)-10, Ahmedabad dated 19/12/2014 for Assessment Year 2009-10, 2010-11 & 2011-12 respectively. 2. The revenue has taken following grounds in its appeal vide ITA No.704/Ahd/2014 for Asst. Year 2009-10:

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 2

i. The Ld. CIT(A)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance of Rs.2,41,077/- made on account of depreciation to Assessee at higher rate on vehicles not registered as commercial vehicles with RTO. ii. The Ld. Commissioner of Income-tax(Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of Rs.22,57,434/- made on account of foreign travel expenses not proved to have been incurred for the purpose of Assessee's business. iii. The Ld. Commissioner of Income-tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of Rs.80,738/- made on account of unsubstantiated commission expenses not proved to have been incurred for the purpose of Assessee's business. iv. The Ld. Commissioner of Income-tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of Rs.24,54,519/- made u/s.68 of the Act not proved to be an advance from customer either during assessment or remand proceedings. v. The Ld. Commissioner of Income-tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of Rs.14,07,613/- made on account of valuation of closing stock. vi. On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer. vii. It is therefore, prayed that the order of the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad may be set-a-side and that of the order of the Assessing Officer be restored.

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 3 In response to the same assessee vide its letter dated 12/12/2011 has submitted as under: "The assessee company has claimed depreciation @ 50% on certain vehicles acquired during the year. You have further observed that such vehicles, are not registered as "Commercial vehicles" with the RTO. We have been asked to explain as to why the higher rate of depreciation should not be disallowed.

In this regard, we would like to draw your kind attention to Appendix-I to Income Tax Rules wherein rates of Depreciation are prescribed. Your attention is drawn to item No. 111(3) (via), which is reproduced hereunder:

"New commercial vehicle which is acquired on or after the 1st day of January 2009 but before the 1st day of October, 2009 and is put to use before the Ist day of October, 2009 for the purpose of business or profession [See paragraph 6 of the Notes below the Table]"

As can be seen, there is a reference to Paragraph 6 of the Notes, which is also reproduced here under:

"Commercial vehicle" means "heavy goods vehicle", "heavy passenger mote vehicle", "light motor vehicle", "medium goods vehicle" and "medium passenger motor vehicle" but does not include "maxi-cab", "motor-cab” "tractor" and "road- roller". The expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle”, “medium goods vehicle”, “medium passenger motor vehicle”, “maxi-cab”, “motor-cab”, “tractor” and “road-roller”, shall have the meaning respectively assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988)”

As can be seen, commercial vehicle would include light motor vehicle. For this purpose, as mentioned in the notes we have to refer to the definition of light motor vehicle in section 2 of the Motor Vehicles Act, 1988. The relevant definition is reproduced hereunder for your ready reference.

(21) “light motor vehicle” means a transport vehicle or omnibus the gross vehicle weight of either of which or a motor car or tractor or road-roller the unladen weight of any of which, does not exceed [7500] kilograms.

As can be seen from the definition, Light Motor vehicle includes, motor car, the unladen weight of which does not exceed 7500 kgs.

Thus, from the above discussion it can be easily concluded, that a motor car having unladen weight below 7500kgs. Is eligible for higher rate of depreciation. There is no requirement to get it registered with RTO authorities as Commercial Vehicle.

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 4 Relevant Portion of Appendix I to income tax rules with notes and section 2 of Motor Vehicles Act, 1988 is enclosed herewith for your ready reference.”

4.3 The assessee's submissions have been considered carefully and found acceptable. From the provisions of section 32 of the Act read with the Appendix-Income tax rules it can be seen that the higher rate of depreciation is allowable on "New Commercial vehicle". The word commercial has to be construed in its natural meaning. There is distinction between commercial vehicle and private vehicle. Even the rate/fees for registration with the RTO for commercial vehicle are different as compared to private vehicle. The requirement for registration for commercial vehicle is different from private vehicle. Even the number plates which are issued to commercial vehicle are different as compared to private vehicle. The plates for private vehicle have white background with black lettering, whereas in the case of commercial vehicle the plates have a yellow background with black lettering.

4.4 From the above it is evident that the Commercial vehicle is distinct and different from private vehicle. Once the legislature has used the word/phrase "Commercial vehicle" and not "any vehicle", then it has to be given its natural meaning. It admitted fact that in the case of the assessee the vehicle on which higher rate depreciation has been claimed is not registered as "Commercial vehicle" with the RTO and hence the benefit of higher rate of depreciation cannot be allowed on such vehicle. Accordingly the assessee's explanation in this respect is rejected. If assessee's claim of depreciation on such vehicle @ 50% is rejected and depreciation on such vehicle is allowed at the normal rate of 15%.

4.5 The assessee has claimed depreciation of Rs.34,43,957- on such vehicle at 25%, (half of 50% as the asset has been put to use for less than 180 days), on addition of vehicle of Rs.13,77,579/-. In view of above discussion the eligible depreciation on such vehicle @7.5% is works out to be Rs.1,03,318/-. Hence the excess claim of depreciation at Rs.2,41,077/- is disallowed and added back to total income.

(Disallowance of depreciation-Rs.2,41,077/-)

Disallowance of foreign travel expense:

During the course of assessment proceedings the assessee was asked to submit the details of expenses incurred on foreign tour and purpose of same and proof that such foreign tour was undertaken for business purpose. Assessee has submitted the tour report as under and has also submitted the copies of passport of such person who have traveled aboard.

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 5 Tour Name Place Month Exp. on Exp. on Other Total No. of ticket forex travel 1. Nirav Parikh USA May 383922 72350 18561 474833 2008 2. Nirav Parikh Europe Sep 50860 80825 189511 321196 2008 3. Nirav Parikh USA Nov 112500 49450 183366 345316 2008 4. Nirav Parikh Europe Feb 145471 64600 206660 416731 2008 5. Nirav Parikh USA May 259024 73666 10387 343077 2008 USA 6. Pravin Patel May 107957 21406 11087 140450 2008 USA 7. Pravin Patel Nov 117974 52670 35981 206625 2008 8. Umesh Darji Visa 9205 9205 Charges- rejected 1177708 414967 655554 2257434

Tour Report No.1 USA – Year 2008-09 Name of person travelled : Nirav Parikh Designation of person travelled : (M.D.) Sr. Name of Customer Type of Customer Visited on Month Purpose of visit No. 1. American Grinding – New Customer May 2008 Business USA Development 2. Anchor Abrasives Regular customer May 2008 Business development and attending complaints 3. A.R. Soltis West LEC - New Customer May 2008 Business USA development 4. Grier Abrasives – USA New Customer May 2008 Business development 5. Siera Grinding New Customer May 2008 Business Development & to explore the possibility of purchase of any plant and machinery 6. Blount Ic. USA New Customer May 2008 Business

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 6 Development 7. International Regular May 2008 Business Abrasives – USA Customer development and attending complaints 8. Colonial West – USA Regular May 2008 Business Customer development and attending complaints 9. Midwest Superior Regular May 2008 Business Customer development and attending complaints 10. Jame R Kukurin Regular May 2008 Business Association - USA Customer development and attending complaints

Tour report No -2 – Europe – Year 2008-09 Name of person travelled : Nirav Parikh Designation of person travelled : (M.D.) Sr Name of Customer Type of Visited on Purpose of No. customer month Visit 1. Comet Schleifscheiben GmbH Regular Sep/Oct, 2008 Business Customer Development & attending Complaints 2. AVN Slijpmateralen – Regular Sep/Oct, 2008 Business Netherland Customer Development & attending Complaints 3. Meister Abrasives Regular Sep/Oct, 2008 Business Customer Development 4. Buhler Gmbh (Germany) Regular Sep/Oct, 2008 Business Customer Development 5. Stumpp Schuele & Sommappa Regular Sep/Oct, 2008 Business Springs (P) Ltd. Customer Development 6. The Carbo Group (Germany) Regular Sep/Oct, 2008 Business Gmbh Customer Development 7. Zische Schleifwerkzeuge Gmbh Regular Sep/Oct, 2008 Business Customer Development

Tour report No. – 3 USA – Year 2008-09 Name of person travelled : Nirav Parikh Designation of person travelled : (M.D.)

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 7 Sr Name of customer Type of Visited on Purpose of visit No. customer month 1. Anchor Abrasives Regular November, Business Development & Customer 2008 attending Complaints 2. Pacific Hoe – Saw – Regular November, Business Development & USA Customer 2008 attending Complaints 3. Blount Ic- USA New November, Business Development Customer 2008 4. Grier Abrasives – USA New November, Business Development Customer 2008 5. Siera Grinding New November, Business Development & Customer 2008 to explore the possibility of purpose of any plant and machinery 6. Blount Ic. USA New November, Business Development Customer 2008 7. International Abrasives Regular November, Business Development & –USA Customer 2008 attending Complaints 8. Colonial West – USA Regular November, Business Development & Customer 2008 attending Complaints 9. Midwest Superior Regular November, Business Development & Customer 2008 attending Complaints

Tour report No - 4 – Europe – Year 2008-09 Name of person travelled : Nirav Parikh Designation of person travelled : (M.D.) Sr Name of customer Type of Visited on Purpose of visit No. customer month 1. Beco – Austria Regular February, Business development & customer 2009 attending complaints. 2. AVN Slijpmaterialen - Regular February, Business development & Netharland customer 2009 attending complaints. 3. Tormek AB- Sweden New February, Business development customer 2009 Business development 4. Darmann – Eastern New February, Europe customer 2009 5. Noma Tools New February, Business development customer 2009 Business development 6. Electroprecizia S.A. – New February, Romania customer 2009 Business development 7. MVM Srl. Italy New February, customer 2009 Business development 8. Olesch Impex Srl – New February, Romania customer 2009 Business discussion 9. Carbo Group – Germany Regular February,

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 8 customer 2009

Tour report No. – 5 USA – Year 2008-09 Name of person travelled : Nirav Parikh Designation of person travelled : (Director)

Sr Name of customer Type of Visited on Purpose of visit No. customer month 1. Anchor Abrasives Regular May, 2008 Business development & Customer attending complaints. 2. International Regular May, 2008 Business development & Abrasives – USA Customer attending complaints. 3. Colonial West – USA Regular May, 2008 Business development & Customer attending complaints. 4. Midwest Superior - Regular May, 2008 Business development & USA Customer attending complaints.

Tour report No. – 6 USA – Year 2008-09 Name of person travelled : Pravin Patel Designation of person travelled : (Production Manager ) Sr Name of customer Type of Visited on Purpose of visit No. customer month 1. Siera Grinding – USA New May, 2008 Business development & to customer explore the possibility of purchase of any plant and machinery 2. Blount Ic – USA New May, 2008 Business development customer 3. International Regular May, 2008 Business development & Abrasives – USA customer attending complaints. 4. Colonial West – USA Regular May, 2008 Business development & customer attending complaints. 5. Midwest Superior – Regular May, 2008 Business development & customer USA attending complaints. 6. Jame R. Kukunin Regular May, 2008 Business development & customer Associates - USA attending complaints.

Tour report No. – 7 USA – IRAN - Year 2008-09 Name of person travelled : Pravin Patel Designation of person travelled : (Production Manger) Sr Name of customer Type of Visited on Purpose of visit No. customer month 1. Blount Ic. –USA New November Business development Customer 2008

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 9 2. International Abrasives Regular November Business development & USA Customer 2008 attending complaints. 3. Colonial West – USA Regular November Business development & Customer 2008 attending complaints. 4. Midwest Superior – Regular November Business development & USA Customer 2008 attending complaints. 5. Omid Fannar – IRAN New November Business development customer 2008

The assessee's submissions have been considered carefully and found acceptable. From the above it can be seen that the assessee has only submitted details of payments made and the tour conducted. In respect of purpose of business the assessee has submitted only the general explanation such as Business development attending complaints and to explore the possibilities of purchase of any Plant and Machinery. However the assessee has not submitted any proof that any such meetings were conducted with such persons with whom the assessee has claimed to had meeting for business development or has attended the complaints. No proof of any correspondence, whatsoever with such person have been placed on records. Even the copies of complaints received and rectification thereof have not been submitted by the assessee. The assessee has also failed to submit the copy of tour report submitted by any of such persons who had undertaken foreign tour. In absence of such details/proof it can be seen that the assessee has miserably failed to substantiate its claim that the foreign tour was anyway related for business purposes.

But ld. AO was not agreed with the contention of the assessee. Hence, he disallowed the foreign travel expenses of Rs.22,57,434/-

Disallowance of Commission Expense The assessee company has claimed expenses on account of "Commission" at Rs.5692470/-. During the course of assessment proceedings the assessee was requested to submit the details of same and also the nature and proof of services being rendered by such persons to whom the Commissions were claimed to have been paid during the year, along with the copy of agreements entered into with such persons. In response to the same the assessee vide its letter dated 25.11.2011 has

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 10 submitted the details of persons to whom the commissions were claimed to have been paid. From the perusal of same it was observed that the assessee have claimed to have paid commission to total 36 Persons. Following notice was sent to the assessee, as under: "During the course of assessment proceedings you were requested to submit the nature and proof of services rendered by the persons to whom commissions were paid and copy of agreements with such persons. In response to same vide your letter 16.09.2011, you have submitted the copy of agreements entered into with Shri Anil Jain, M/s Anil Traders, Ms/ Bonded Abrasives Agencies, M/s kamdar Metal cutting Solutions, Shri NB Sharma, Shri PJ Thomas, M/s PS Associates, M/s Pee Dee Corporation, M/s Poly Abrasives Corp., Shri Rajesh Pandey, M/s Rakshit Enterprise, Smt. Renu Sharma and Tejas M Shah. However in respect of other persons to whom you have paid commission during the year, neither any details/proof of services rendered by such persons no, agreements entered into with such persons have been submitted. Hence you are requested to explain to why commission paid to such persons in respect of whom neither the details/proof of services being rendered nor agreements have been submitted should not be disallowed".

In response to the above the assessee vide its letter dated 12.12.2011 submitted as under: "In this regards we are enclosing herewith the statement showing details of person to whom commission paid, address, PAN, Amt of Commission paid, IDS deducted thereon, & details of agreement available & copy of agreement available. (There are only 6 party for which commission agreement is not available i.e. out of total commission amt of Rs.56,92,470/- amt for which commission agreement not available is only Rs.66,796/-. We are also enclosing herewith the details of customer for which commission is paid to the agents for which agreement copy is not available & sales to those customers during the year".

6.4 It is admitted fact that the assessee during the course of assessment proceedings could not submit copy of agreements in case of following persons, even though enough opportunities was allowed to them. Hence the assessee has failed to establish that indeed these persons were engaged by the assessee for some services. In absence of any agreement even the basis of payment of commission is not ascertainable. Further no proofs of services being rendered by these persons have been submitted by the assessee.

Name of person Total amount (Rs.) a. D. Venkitaram Rs. 4145 b. Manoj J. Singh Rs.18341

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 11 c. Saikrishna Enterprise Rs. 13942 d. Sanwarmal Rs.21696 e. Sasa India Rs. 11024 f. Shiva Subramanium Rs. 6047 g. Surya Chandra Traders Rs. 5543

6.5 The assessee’s explanations have been considered carefully, From the above it can be seen that the assessee has failed to submit any details or evidence to prove the genuineness of the payments of sales commission, need of same and the proof of services rendered by above referred persons. The assessee has given only the details of payments made and the details of TDS deducted on said payments being made. It is settled legal principle that burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purposes of business is on the assessee.”

Therefore, disallowance of commission at Rs.80,738/- was made against the assessee.

Addition u/s 68 of the Act During the course of assessment proceedings the assessee was requested to submit the confirmations from the customers from whom the advances were received in excess of Rs. 1 Lakh. In response to the same the assessee vide its letter dated 30.11.2011 has submitted as under:

“In this regard we have to state that we have already submitted partywise details of advances. Ledger A/c, payment confirmation from Bank and copy of invoices against the advance received is attached herewith for the party from whom advance is more than Rs. 1 Lacs."

7.2 The assessee had not submitted confirmation from such customer M/s Hillcrest Granite Company against whom the advance received has been shown at Rs.24,43,389/-. Hence vide letter of this office dated 08.12.2011 the assessee was requested to explain as under.

"During the course of assessment proceedings you were requested to submit the confirmations from the customer from whom the advances have been received in excess of Rs.1,00,000/-. However till date you have not submitted confirmations from such persons. In view of same you are once again requested to submit the

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 12 confirmation from such persons failing which the matter will be decided as per facts available on records".

7.3 In response to the same the assessee vide its letter dated 16.12.2011 has submitted as under: "In this regards we have to state that there is only one customer "Hillcrest Granite Co. INC" situated at 1402, Old Middleton Road, Elberton, GA 30635, USA from whom the advance received in excess of Rs.1,00,000/- as on 31st March 2009. Assessee has asked for the balance confirmation via email communication from the customer but Assessee is not getting any reply from their customer. Also note that the customer is overseas customer hence personal follow up possible.

Further to support our claim in this regards, we are submitting herewith copy of email through which customer has ordered for the goods. Confirmation from the bank about receipt of the Advance, copy of customer ledger for the period April 2008 to April 2009 and copy of the Sales Invoice.

It may be noted that the sum so received has been adjusted against invoice sales invoice raised in subsequent year and thus offered for taxation in subsequent year".

Assessee’s submission has been considered by the ld. AO but not found acceptable. Therefore, an addition of Rs.24,54,519/- was added to the total income of the assessee.

Valuation of closing stock During the course of assessment proceedings it was observed that the assessee had shown the amount recievabel on account of unutilized/closing balance on account of MODVAT/CENVAT credit under “Loan and Advances” and the same was not included in the value of closing balance of stock. Since the provisions of section 145A of the act requires that the taxes/duty/cess/fees related to stock need to be included in the value of closing stock, so assessee was requested to explain as under:

"From the perusal of details submitted vide your letter dated 25.11.2011, it is observed that you have shown following amounts as receivables from Excise/Sales Tax Authorities.

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 13 a. Excise duty set off RG 23A Rs. 64048/- b. Excise duty set off RG 23C- Suspense Rs. 263451 /- c. Sales tax- receivable Rs. 32584/- d. Service tax receivables Rs. 1047530/-

In this respect you are requested to explain as to whether the same are included in the value of the closing stock or not. If not then you are requested to explain as to why the same should not be included in the value of the closing stock as per provisions of section 145A of the Act.

8.2 In response to the same the assesses vide its letter dated 16.12.2011 has submitted as under:

"Your goodself has asked as to whether the closing balance of Excise Duty Set off RG 23A amounting to Rs.64,048/-, Excise Duty Set off RG 23C -suspense amounting to Rs.64,048/-,Sales tax receivable amounting to Rs.32,584/- and Service Tax receivable amounting to Rs.10,47,530/- have been added to the value of closing stock or not. In this regard, we would like to clarify that since the assessee is following net method for accounting for excise duty and sales tax, it is not including the closing balance of various taxes in its valuation of closing stock.

It may be noted that the taxes paid on purchases are not booked as expenditure since the set off credit is available for the same. Since these items have not been debited to profit & loss account, it cannot be added to the value of closing stock. In support of our claim, we rely on following decisions:

ACIT vs Narmada Chematur Petrochemicals Ltd. 327ITR 369 (Guj) CIT vs English Electric Co. of India Ltd. 243 ITR 512 (Mad) CIT vs Dynavision Ltd. 267 ITR 600 (Mad) CIT vs Parry Confectionery Ltd. 299 ITR 321 (Mad)

Without prejudice to what is stated above, we would further like to state that if your goodself decides to add the value of such taxes to the value of closing stock, than similar adjustment should be done to the value of opening stock also.”

The explanations of the assessee were considered by the ld. AO but not found acceptable as the unutilized credit of taxes viz. Modvat/Cenvat is a kind of subsidy and incentive given by the Government. It cannot be treated as advances given to the Government on account of Sales tax/excise duty payable. In fact, Modvat/Cenvat received/claimed by the assessee on purchase of raw material is benefit given by the Government. It can be set

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 14 off against the liability of the assessee on account of excise duty payable on the finished product manufactured by the assessee company.

Hence, addition of Rs.14,07,613/- on account of valuation of closing stock was made against the assessee and total income of the Rs.6,55,65,561/- was assessed by the ld. AO.

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 15 definition of light motor vehicle in section 2 of the Motor Vehicles Act, 1988. The relevant definition is reproduced hereunder for your ready reference: "light motor vehicle" means a transport vehicle or omnibus the gross vehicle weight of either of which or a motor car or tractor or road-roller the unladen weight of any of which, does not exceed [7500] kilograms:

As can be seen from the definition, Light Motor vehicle includes, motor cat unladen weight of which does not exceed 7500 Kgs.”

Therefore, from the above discussion, it can be said that Motor Car a mote having unladen weight below 7500 Kgs. is eligible for higher rate of depreciation. There is no requirement to get it registered with RTO authorities as Commercial Vehicle. We are of the opinion that this Ground deserves to be dismissed.

5.2 So far addition of Rs.22,57,434/- made on account of foreign travel expenses are concerned. In respect of this ground ld. AR stated that foreign tour was for the purpose of business only. Assessee has submitted copies of travelling bills and bills for foreign exchange purchase and copy of E-mails related to foreign visit.

Ld. AR stated that similar existences were also allowed in the earlier years. We can see assessee has submitted each and every detail pertaining to foreign tour and same was for business purpose and ld. AO and further stated that this Business development and attending complaints and to explore the possibilities of purchase of any Plant and Machinery etc.

It is further stated profit of the company is after tax is Rs.3,00,58,558/- and out of the said profit Rs.22,57,434/- was incurred on the foreign tour.

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 16 On account of above observation, we dismiss this Ground of the appellant.

5.3 So far deleting the addition of Rs.80,738/- made on account of unsubstantiated commission expenses are concerned. It is admitted fact that assessee during the course of the assessment proceeding could not submit copy of agreements in case of following persons. The assessee has given details of payments made and the details of the TDS deducted on said payments being made.

Ld. AR stated that these expenses were for the purpose of business of the assessee. Reliance in this respect is placed on the following decision. a. CIT vs. Calcutta Agency Ltd. 19 ITR 191 (SC)

As assessee has given names and address of concerned persons and TDS was also deducted from said payment.

Therefore, we heard the ld. DR and AR as well. In our considered opinion this Ground is not sustainable; therefore, we dismiss this ground.

5.4 So far deleting the addition of Rs.24,54,519/- made u/s.68 of the act is concerned. In reference to details for advances received by appellant more than Rs.1 lack, the AO in the case of M/s. Hillcrest Granite Co. found advance of Rs.24,43,389/- as on 31/03/2009. The appellant failed to give confirmation from the party and AO held this advance as unexplained cash credit and added u/s.68 of the Act. The appellate during appeal submitted such confirmation as additional evidences since the customer is a foreign

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 17 party. The appellant further contended that money is received in USD through regular banking channel as advance and appellant supplied the goods to said party in April 2009. Such export was duly evidenced by bills, vouchers and banking transactions with now a confirmation was filed with ld.CIT. The AO in his remand report casted doubt about certificate so produced. But we are agree with the contention of the AR because assessee as filed bill vouchers and payment of fees through banking channel. Therefore, we dismiss this ground of appellant.

5.5 So far deleting the addition of Rs.14,07,613/- made on account of valuation of closing stock are concerned. The AO observed from the balance sheet under the head “Loan & Advances” the following amounts on account of unutilized & closing balance on account MODVAT/CENVAT credit and invoked the section 145A of the Act. i. Excise duty set off RG 3G 23A Rs.64048 ii. Excise duty set off RG 23C – (Suspence) Rs. 263451 iii. Sales tax receivable Rs. 32584 iv. Service tax receivable Rs.1047530

In support of the case, ld. AR stated that appellant has fulfilled the obligation by way of observation in the audit report. The same practice was followed in earlier years. Therefore, it cannot be said that appellant is not following the provision of section 145A. In respect of its contention ld. AR cited an order of coordincate bench of Ahmedabad in the matter of Alphanil Industries vs. ACIT in ITA No.169/Ahd/2005 and 170/Ahd/2005 for Asst. Year 1999-00 & 2000-01 has

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 18 discussed the principle related to valuation of closing stock u/s.145A of the Act, which has follows as under:

"17. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the dispute is regarding valuation of closing stock in view of the insertion of provisions of section 145A of the Act. The Learned Assessing Officer observed that the assessee has not included the element of excise duty which was paid by the assessee on his purchases of raw material. In view of non inclusion of this excise duty in respect of which Modvat Credit was available to the assessee, according to the Learned Commissioner of Income Tax(Appeals), income of Rs.26,95,884/- was understated by the assessee. On the other hand the claim of the assessee is that by inclusion of this excise duty in the closing stock there will no effect in the profit as the corresponding amount will also be then-included in the purchases. The assessee in support of the above argument relied upan the view expressed by the Institute of Chartered Accountants of India in its guidelines, wherein it was explained that following of either inclusive method of accounting or exclusive method of accounting will not have any effect on the profit disclosed by the profit and loss account. The only effect of following inclusive method will be that the excise duty liability will appear in the balance sheet which will be added back to the income of the assessee in view of the provisions of section 43B to the extent not paid by the assessee before the due date of furnishing of return of income under section 139(1) of the Act. The above view was also expressed by this Bench of the Tribunal in the case of The Deputy Commissioner of Tax, Circle-1, Baroda Vs. Gujarat Fluoro- Chemicals Ltd. in ITA No.3742/AHD/2002 Assessment Yea 00 order dated 28.09.2006. In our considered opinion, the lower authorities have not properly appreciated the effect of section 145A of the Act. The Learned Commissioner of Income Tax (Appeals) by way of an illustration concluded that there will be a difference in the profit on following inclusive and exclusive method of accounting for excise duty. In the illustration cited in the order, the Ld Commissioner of Income Tax(Appeals) found the difference at Rs.80/-. According to the Ld Commissioner of Income Tax(Appeals) in the inclusive method in the illustration, the assessee's worked out to Rs.380/- whereas in the exclusive method, the assessee's profit comes to Rs.300/-. there was a difference of Rs.80/- in the profit. We on a closer look at the illustration find that difference has occurred due to an error by the Learned Commissioner of Income Tax(Appeals) in not considering the excise duty expenditure of the assessee. It was observed from the illustration that assessee has collected excise duty of Rs.180/- by utilizing the raw material on which excise duty of Rs.100/- was paid to the Government. Thus, the assessee was liable to pay a further excise duty of Rs.80/- to the Government, When the expenditure of Rs.80/- is taken into account in the illustration, given for inclusive method then the profit as per inclusive, method also works out to Rs.300/- which is exactly the same as per exclusive method. Further, the Learned Commissioner of income Tax (Appeals)in the illustration cited in his order has not accounted for the amount of

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 19 Modvat utilised by the assess in payment of excise duty in respect of raw material not utilised for manufacturing. In the illustration the Learned Commissioner of Income Tax(Appeals) has shown that assessee has utilised amount of Rs.180/- out of amount of Rs.200/- of excise duty paid on purchase against the excise duty liability of Rs.180/- sales. However, this utilization of Rs.180/- was allowed to the assessee in respect of stock which was not used for manufacturing also to the extent of Rs.80/-. The Learned Commissioner of Income Tax (Appeals) ignored the fact that if in future the closing stock is not utilised for manufacturing, then the Modvat Credit utilised would be reversed and the assessee would be further liable to pay Rs.80/- to the Government. In a nutshell the Learned Commissioner of Income Tax(Appeals) arrived at a wrong conclusion because of not considering the assessee's liability for utilization of Modvat Credit in respect of unconsumed raw material. The issue can be looked into from yet another angle. Section 145A requires revaluation of not inventory alone but also requires revaluation of purchase and sales. On revaluation of purchase by including the amount of excise duty in respect of which Modvat Credit is available to the assessee, the purchase of the assessee will increase resulting in corresponding decrease in the profit of the assessee. The assessee's contention that value of closing stock is credited in the profit and loss account to set off the value of unconsumed items of purchase and therefore, both should have same basis cannot be controverted. The only exception to this theory is that when the Modvat value is less than the cost then effectively unrealised loss is allowed as a deduction to the assessee on the well settled principles. In the instant case, the lower authorities were not justified in revaluing only closing stock so as to include the amount of excise duty paid on purchase without revaluing the corresponding purchases. We have gone through the guidelines explained by the ICAI and find ourselves in agreement therewith that there will not be any effect on the profit of loss arrived at either by following inclusive method of accounting or exclusive method of accounting for excise duty. The only effect will be that the excise duty payable on closing stock of finished goods will be to the extent not deposited with the government before the due date of furnishing of return will be added to the ncome of the assessee in view of provision of Section 43B of the Act. In view of the discussion made hereinabove, in our considered opinion, there will be no effect in the taxable profit of the assesses by including the amount of excise duty paid on purchases in the value of closing stock of raw material, whether as raw material or as forming part of work-in progress or finished goods. We therefore, set aside the orders of the lower authorities on this issue in both the year under appeal and allow the grounds of appeal of the assessee."

After considering the above judgment and arguments of the ld.AR, we dismiss this Ground of appeal of the department.

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 20 6. Now we take the department’s appeal in ITA No.705/Ahd/2011 for Asst. Year 2010-11, on the following Grounds: i. The Ld. Commissioner of Income-tax((Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of Rs.3,61,615/- made on account of depreciation to Assessee at higher rate on vehicles not registered as commercial vehicles with RTO. ii. The Ld. Commissioner of Income-tax(Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of Rs.27,47,361/- made on account of foreign travel expenses not proved to have been incurred for the purpose of Assessee's business. iii. The Ld. Commissioner of Income-tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of Rs. 16,79,194/- made on account of valuation of closing stock. iv. The Ld. Commissioner of Income-tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of Rs. 14,450/- made u/s.14A of the Act. v. On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XlV, Ahmedabad ought to have upheld the order of the Assessing Officer. vi. It is therefore, prayed that the order of the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad may be set-a-side and that of the order of the Assessing Officer be restored.

6.2 So far Ground related to deleting the disallowance of Rs.3,61,615/- made on account of depreciation to Assessee at higher rate on vehicles are concerned. We have already confirmed order of the CIT(A) in ITA No.704/Ahd/2014. On the same we dismiss this ground of appeal.

6.3 So far Ground related to deleting the addition of Rs.27,47,361/- made on account of foreign travel expense are concerned. We have already given relief to the assessee in ITA No.704/Ahd/2014 and same will apply in this appeal also. Therefore, we dismiss this Ground.

6.4 So far Ground related to deleting the addition of Rs.16,79,194/- made on account of valuation of closing stock is concerned. In ITA

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 21 No.704/Ahd/2014, we confirmed the order of the CIT with duly discussion. Same will apply here, therefore, this Ground of department is dismissed.

6.5 So far Ground related to deleting the addition of Rs.14,450/- made u/s.14A of the Act is concerned. The appellant company has calculated the disallowance of Rs.37,667/- i.e. @ 0.5% of Rs.75,33,508/- (Being of average value of investment). However, no disallowance has been made in respect of interest expense of Rs.3,18,503/-. Since the sum of Rs.81,424/- was pertaining to term loan, as the Company is paying interest on term loan and such term loan has been granted for specific project. Hence interest cost having direct nexus with the said project, and the remaining amount of interest was out of working capital limits which have not been utilized to make the investments. In support of the contention the appellant relied on ratio of Reliance Utilities & Power Ltd. and justified alternatively that no prudent business person will invest for return of 6 to 8% p.a. from the borrowed fund having interest rate of 12% p.a. CIT(A) of the opinion that the contention of appellant that there is no direct as well as indirect nexus that borrowed funds were utilized for investment. Further following ratio of Reliance Utilities & Power Ltd (supra), the appellant has sufficient interest free funds which can be considered for investment. In our considered opinion, ld CIT(A) has rightly deleted the addition of Rs.14,450/-. Therefore, this Ground of department is dismissed.

6.6 So far Ground No.5 and 6 are concerned. Same are general and need not be adjudicated.

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 22 7. Now we take the Assessee’s appeal in ITA No.334/Ahd/2015 for Asst. Year 2011-12, on the following Grounds: On the facts and in the circumstances of the case it is most respectfully submitted that the ld. CIT(A) has erred on facts by confirming the addition on account of disallowance of foreign travel expense of Rs.35,15,007/-.

Dated 19/08/2013, the assessee was asked to furnish details/explanation/justification in respect to foreign travelling expenses.

In response to the same the assessee filed submission dated 12/09/2013. The relevant portion of the same is reproduced as under: "Details foreign Traveling Expenses (Point No. 30) The same are enclosed for your ready reference. We are submitting herewith a table showing tour wise details of expenses, name of the person traveling, places visited and purpose of visit. We also submit photocopy of the passport of all the persons who have traveled.

We are also enclosing tour wise details of parties contacted/met and copies of all expenses vouchers pertaining to each travel. We are also enclosing the copy of email correspondence with foreign parties in respect of foreign travel to substantiate our claim that the travel was done for the purpose of our business."

The assessee has submitted the details of expenses incurred on foreign tour at Rs.35,15,007/- in respect of foreign tours conducted by Shri Nirav Parikh, Shri Pravin S. Patel, Pramit Dave , Umesh Darji along with copies of travelling bills and bills for foreign exchange purchase. However the assessee has not submitted the purpose and proof that such foreign tour was undertaken for the purposes of business.

From the above it can be seen that the assessee has only submitted the details of payments made and the tour conducted. In respect of purpose of business the assessee has submitted only the general explanation such as

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 23 Business development, attending complaints and to explore the possibilities of purchase of any Plant and Machinery. However the assessee has not submitted any proof that any such meetings were conducted with such persons with whom the assessee has claimed to have meeting for business development or has attended the complaints. No proof of any correspondence, whatsoever with such person have been placed on records. Even the copies of complaints received and rectification thereof have not been submitted by the assessee. The assessee has also failed to submit the copy of tour report submitted by any of such persons who had undertaken foreign tour. In absence of such details/proof it can be seen that the assessee has miserably failed to substantiate its claim that the foreign tour was anyway related for business purposes.

Ld.AO was not convinced with the plea of the assessee. Hence, made the addition of Rs. 35,15,007/-. And same was confirmed by the ld. CIT(A).

ITA Nos. 704 & 705/Ahd/2014 & 334/Ahd/2015 Assessee & Revenue – Sterling Abrasives Ltd. AY : 2009-10, 2010-11 & 2011-12, respectively 24 9. In the result, appeals filed by the department in ITA Nos.704, 705/Ahd/2014 for Asst year 2009-10 & 2010-11 are dismissed and filed by the assessee in ITA No.334/Ahd/2015 for Asst. Year 2011-12 is allowed. This Order pronounced in Open Court on 13/11/2017

Sd/- Sd/- एन.के. �ब�लैया महावीर �साद (लेखा सद�य) (�या�यक सद�य) ( N.K. BILLAIYA ) ( MAHAVIR PRASAD ) ACCOUNTANT MEMBER JUDICIAL MEMBER

Ahmedabad; Dated 13/11/2017 **Bt �ितिलिप अ�ेिषत/Copy of the Order forwarded to : आदेश क� आदेश क� �ितिलिप अ�ेिषत आदेश क� आदेश क� �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबंिधत आयकर आयु� / Concerned CIT 4. आयकर आयु�(अपील) / The CIT(A)-XIV & 8, Ahmedabad. 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. देशानुसार/ BY ORDER, आदेशानुसार देशानुसार देशानुसार True copy

सहायक पंजीकार (Dy./Asstt.Registrar) उप/सहायक पंजीकार उप उप उप सहायक पंजीकार सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद अहमदाबाद / ITAT, Ahmedabad आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण अहमदाबाद अहमदाबाद 1. Date of dictation- ….. 27/10/2017 …… 2. Date on which the typed draft is placed before the Dictating Member …03/11/20147 Other member ……………. 3. Date on which the approved draft comes to the Sr.P.S./P.S. - …….…. 4. Date on which the fair order is placed before the Dictating Member for Pronouncement ……………….. 5. Date on which the file goes to the Bench Clerk……………… 6. Date on which the file goes to the Head Clerk……………………………. 7. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. Date of Despatch of the Order………………