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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM]
ORDER Per N.V.Vasudevan, JM This is an appeal by the Revenue against the order dated 07.02.2013 of CIT(A)-XII, Kolkata relating to AY 2004-05.
2. Ground No.1 raised by the revenue in this appeal reads as follows :- “1. Whether on the facts and in the circumstances of the case, ld. CIT(A) was justified in allowing a sum of Rs.1,69,41,519/- towards liability of Excise under Section 43B of the I.T.Act. “
The Assessee is a company in which the public are substantially interested. During the previous year it carried on the business of manufacturing and selling of textiles, yarns, nylon and polyester Filament yarn, Polyster Chips, Nylon Chips, Steel Wires, Wire Ropes, Polyester Staple Fibre, Partially oriented yarn etc., and export of these products. In the course of assessment proceedings, the AO noticed that as Annexure IV of the Tax Audit Report, the valuation of closing stock lying at the year-end was made at cost price or net realizable value whichever is lower and was exclusive of excise
2 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 duty. The AO also noticed that as per Annexure V(a), V(b), V(c) and V(d) of the Tax Audit Report, the excise duty liabilities in respect of finished goods were as follows :- Filament Division, Hoshairpur Rs.13,51,378/- Textile Division, Phagwara Rs.26,20,554/- Textile Division, Sriganganagar Rs.13,75,000/- Steel Division, Hoshiarpur Rs.15,94,587/- Rs.1,69,41,519/-
As per the provisions of Sec.145-A of the Income Tax Act, 1961 (Act), prior to its Substitution by Finance (No. 2) Act, 2009 (w.e.f. 1-4-2010), read as follows:
“145A. Method of accounting in certain cases.—Notwithstanding anything to the contrary contained in section 145 the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head “Profits and gains of business or profession” shall be— (a) in accordance with the method of accounting regularly employed by the assessee; and (b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation: For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.”
According to the AO, as per the provisions of Sec.145-A of the Act, the Assessee ought to have added the excise duty liability to the value of closing stock. He accordingly called upon the Assessee to show cause as to why the excise duty liability should not be added back to the value of the closing stock as per provisions of Section 145A. In reply, the assessee submitted that in accordance with the method of accounting regularly and consistently followed by the assessee, excise duty in respect of 3 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 finished goods lying at the factory premises is accounted for at the time of removal/clearance of such stocks from the factory premises in pursuance of Rules 8 of the Central Excise Rules. Therefore, even where the stock after manufacture lies in the factory or in the godown of the manufacturer, there is no liability incurred for paying excise duty. If there is no liability toward excise duty payable on the finished stock, the same could not form part of the value of the closing stock. Without prejudice to the foregoing submissions, the assessee also submitted that since a similar addition of an amount of Rs.2,50,99,120/- to the closing stock as on 31-03-2003 was done for AY 2003-04 by the AO, the value of the opening stock as on 01-04-2003 should be increased by the same amount.
The AO however held that the liability for payment of excise duty is incurred by the assessee when the process of manufacture is complete in relation to that excisable item and in coming to the above conclusion referred to the decisions of the Hon’ble Madras High Court in the case of CIT vs English Electric Co. of India ltd. 243 ITR 612 (Mad). CIT vs. Dynavision Ltd. 267 ITR 600 (Mad). The AO was therefore of the view that as per provisions of Section 145A, the excise duty element has to be added to closing stock as the liability to pay excise duty arises the moment an excisable good is produced or manufactured. The assessee’s method not to include the same in the closing stock is, therefore, not correct. Regarding the submission of the assessee that in the earlier year closing stock was enhanced on the same reasoning and therefore in this year the opening stock value needs to be enhanced by an amount by which closing stock of earlier year was enhanced, the AO held that the assessee has preferred an appeal before the CIT(A) against the assessment order for the year 2002-03 and that the decision of the CIT(A) has not been received so far. Hence, there is no justification to change the figure of the opening stock as the corresponding closing stock figure is still being adjudicated.
4 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 7. The assessee also submitted that the excise duty payable on finished goods of the Steel Division (amounting to Rs.15,94,587/-) has been paid before the due date of filing return and hence, the amount should be allowed as deduction on payment basis. The AO however found that the Assessee has not submitted copies of challans in support of the said payments. In these circumstances, the claim of the assessee for deduction of a sum of Rs.15,94,587/- was also rejected by the AO. Thus the AO added a sum of Rs.1,69,41,519/- to the total income of the assessee.
Before CIT(A), the Assessee apart from reiterating submissions made before AO submitted that the AO has not properly applied the ratio of the decisions rendered by the Hon’ble Madras High Court in the case of (i)CIT v English Electric Company of India Ltd 243 ITR 512 (ii) CIT Vs Dynavision Ltd 267 ITR 600. It was submitted that the Madras High Court has clearly observed in the decisions that "Inclusion of excise duty in the valuation of closing stock was held to be permissible only if the liability for that amount in the excise duty account was given a deduction. It was pointed out that the ruling rendered by the Hon’ble Madras High Court took into consideration the fact no allowance was given by the AO for payment of Excise duty under section 43B which has been paid prior to the date of submission of return. The Hon’ble Court took into consideration the fact that if the duty element due is included while valuing the closing stock, the result would be anomalous and therefore, the liability was deductible for the purpose of arriving at the profits for the year and only when such deduction was given, the amount could be added to the value of the closing stock and thus, the excise duty liability is not to be included in the valuation of closing stock.
After considering the submissions of the Assessee, the CIT(A) deleted the addition made by the AO observing as follows :-
“4. I have considered the finding of the A.O. in his order dt. 29-12-2006 and the written submission filed by the A.R. during the appellate proceeding. Appeal on 4
5 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 ground no. 1 (i), (ii), (iii) and (iv) are against the addition of Rs. 16941519/- to the value of closing stock of finished goods on account of excise duty payable on finished goods. The A.R. in his written submission has mentioned that this issue is squarely covered in favour of the assessee vide CIT(Appeal) 's order in appeal no. 24/C1T(A)-X/Cir-10/04-05 dt. 04-10-2005 in assessee's own case. I have seen the order of my predecessor and I find that a detailed and speaking order has been passed by my predecessor on this issue. Therefore, there is no reason to interfere with the finding of the Ld. CIT(A)-X, Kolkata on the same issue in assessee's own case in his order for A.Y. 2001-02. Thus, assessee's appeal on ground no. 1 (i), (ii), (iii) and (iv) are allowed.”
Aggrieved by the order of CIT(A) the revenue has raised ground No.1 before the Tribunal. At the time of hearing of the appeal, it was agreed by the parties that identical issue has already been decided by the Tribunal in A.Y.2001-02 in assessee’s own case and the decision of the CIT(A) for A.Y.2001-02 based on which the addition was deleted by the CIT(A) in the impugned order, was upheld by the Tribunal.
We have perused the decision of the Tribunal in assessee’s case in A.Y.2001-02 in order dated 15.02.2013. The Tribunal on an identical issue held as follows :- 5. We have heard the rival submissions and carefully considered the same. This issue has now been decided in favour of the assessee by the Hon'ble Bombay High Court in the case of CIT -vs- Loknete Balasaheb Desai S.S.K. Ltd., in which the Hon’ble High Court has observed as under: "Section 145A of the Income-tax Act, 1961, was inserted by the Finance (No. 2) Act, 1998, with effect from April 1, 1999. It provides for valuation of purchase and sale of goods and inventory for the purposes of determining . the. income chargeable under the head "Profits and gains of business or profession". The expression "incurred by the assessee" in section 1 45A(b) is followed by the words "to bring the goods to the place of its location and condition as on the date of valuation ". Thus, the expression "incurred by assessee" relates to the liability determined as tax, duty, cess or fee payable in bringing the goods to the place of its location and condition of-the goods. The Explanation to section 145A(b) makes it further clear that the income "chargeable' under the head "Profits and gains of business " shall be adjusted by , the . amount paid as tax, duty, cess or fee. Therefore, the expression "incurred" in section 145A (b) must be construed to mean the liability actually incurred by the assessee. Though the 5
6 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 date of manufacture is the relevant date for dutiability, the relevant date for the duty liability is the date on which the goods are cleared. In other words, in. respect of excisable goods; manufactured and lying in stock, the excise duty liability would get crystallised on the date of clearance of goods and not on the date of manufacture.
The assessee was engaged in the business of manufacture and sale of white sugar. In the assessment year 2001-02 the Assessing Officer held that the excise duty on sugar manufactured but not sold and lying in closing stock was a liability incurred by the assessee under section 145A(b) and had to be considered for disallowance under section 43B of the Act. The Tribunal deleted the addition. On appeal to the High Court:
Held, that the manufactured sugar 1vas lying in stock and was not cleared from the factory. Therefore, the Tribunal was justified in holding that in respect of the unsold sugar lying in stock, Central excise liability .was not incurred and consequently the addition of excise duty made by the Assessing Officer to the value of the excisable goods was liable to be deleted. “
No contrary decision was brought to our knowledge by the ld.D.R. In view of these facts, in our opinion, no interference is called for in the order of the CIT(A). Hence, ground no.1 taken by the Revenue stands dismissed. As ground no.1 taken by the Revenue is dismissed and decided in favour of the assessee, so the C.O. filed by the assessee, in support of the order of the CIT(A), becomes infructuous. Hence, the C.O. filed by the assessee is dismissed being infructuous.”
In A.Y. 2002-03 and 2003-04 in and ITA NO.1064/Kol/2008 respectively by order dated 15.02.2013 the Tribunal followed the decision in A.Y.2001-02 on an identical issue. Respectfully following the decisions of the Tribunal referred to above, we uphold the order of CIT(A) and dismiss ground no.1 raised by the revenue.
Ground No.2 raised by the revenue reads as follows :- “2. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in allowing interest on interest free loan of Rs.25,09,37,839/- u/s 36 (1)(iii). “
7 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 14. The Assessing Officer disallowed Interest and Financing charges of Rs. 25,09,37,839/- u/s 36(1)(iii) of the Act, on the ground that the loans / advances were given to the subsidiary companies and other companies free of interest out of the borrowed funds which were not utilised for the purpose of the business, although a sum of Rs.25,00,97,839/- had been debited to the Profit and Loss Account for the year ended 31st march 2004 towards Interest etc but excluding Lease Rent (Rs. 266,69,967 - 16,593,128 lease rent).
The details of the loans and Advances allegedly given by the Assessee to its subsidiary companies and other companies along with the Statement of Account are given as under:- Subsidiary Companies 1.M/s. Chohal Exports Limited Rs. 20,76,61,960/ 2.M/s. Polytex Fibres Trading Limited Rs113,86,84,136/- 3.M/s. Gupta & Syal Limited Rs. 36,49,616/- Rs.134,99,95,712/- Other Companies 1.M/s. Narandas Rajaram & Company Ltd Rs 88,10,87,753 2.M/STeju Holdings Pvt Limited Rs. 72,50,00,000
The Assessee explained the nature of loans given to the subsidiary and other companies and as to why the disallowance u/s.36(1)(iii) of the Act ought not to have been made by the AO, as follows: Subsidiary Companies (i)Gupta & Syal Ltd. The Assessee submitted a copy of the statement of account of the aforesaid party and pointed out that it would be apparent from the statement of Account of M/S Gupta Syal Ltd submitted that no advance had been given to them. All the Debit 7
8 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 entries apart from Rs 2,480/- pertains to payment of electric charges which were realized by the assessee prior to the date of payment. Hence, these transactions will not come under the head "Loans & Advances". Regarding the payment of Rs.2,480/- towards Advance Tax, it was pointed out that it was made on behalf of Subsidiary Company which was subsequently realized. Both the opening balance and the dosing balance are same. As no advances were paid, question of charging interest does not arise.
(ii)Polytex Fibres Trading Limitd: The Assessee pointed out that it had paid Rs 500/- & Rs 300/- towards expenses on behalf of them which were subsequently realised. Both the opening and closing balances are same. No fresh advances were given apart from the above entries. No interest was charged.
(iii) Chohal Exports Ltd: The Assessee pointed out that during the year the Assessee had paid a sum of Rs 15 lac out of the credit balance with the current account with Bank of Baroda, Parliament Street Branch, New Delhi - 1100001 and the Assessee has also realised a sum of Rs 21,00,000/-. Apart from the above, the Assessee incurred expenses on their behalf which had been realised during the year. The Assessee pointed out that it would be apparent from the statement of Account that the closing balance as on 31/03/2004 was Rs.20,76,61,959.55 while the opening balance was Rs 20,85,07,790.55. The Assessee submitted that it would be clear from the above statement that the Assessee had received more than Rs 7 lacs during the year 2003-04. Advance of Rs 15 Lacs was paid out of the current Account with Bank of Baroda.(credit balance). Xerox copy of the bank statement was also enclosed. It was submitted that the said sum was not paid out of borrowed fund, but from own fund. Xerox copy of the Bank Statement was submitted in support of such transaction.
Other Companies:- 8
9 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 Narandas Rajaram & Co Ltd(interest free) Rs. 88,10,87,753 The Assessee furnished a copy of the Statement of Accounts of Narandas Rajaram & Co Ltd and submitted that during the previous year the Assessee had paid Rs.5000/- on their behalf for expenses which had been realised, which is neither a Loan nor an Advance. Moreover, the Assessee had realised a sum of Rs.8,60, 59,774/- against dues of Rs.96,71,47,527/- brought forward from earlier year.
Advance to Teju Holdings Private Limited Rs.172, 50, 00,000/- The Assessee filed the statement of account of this party and submitted that were no movement of funds during the year 2003-2004. The outstanding balance as on 31.03.2003 was the closing balance as at 31.03.2004.
Advance to JCT Chemicals and Fibres Limited: Rs.8,80,000 The Assessee pointed out that advances were paid from Assessee's own business realisations received by cheque from its customers which were deposited to Bank, prior to the date of giving such advances, The advances were paid by cheques. A copy of the Bank Statements as well as vouchers and Bank Deposit Slips etc., were also filed to substantiate the Assessee’s contention.
The Assessee further pointed out that the Loans and advances given in the earlier years were out of own generated fund. As such, no interest was charged. Moreover, the advances were paid out of mixed composite fund where business realizations were also deposited. The Assessee submitted that it was settled law that where loans are made out of mixed composite fund where business realizations were also deposited and when there is sufficient own fund as well as borrowed money, the presumption is that the money is advanced out of own capital instead of borrowed fund. The Assessee placed reliance on the decision of the Hon’ble A.P. High Court in the case of CIT Vs Gopikrishna Murlidhar 47 ITR 469 (AP) whihch was followed by Gujrat High Court in 9
10 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 Digvijay Cement Co Ltd Vs CIT 138 ITR 45. It was further pointed out that in actual business situations, the borrowed fund and own fund are kept in a common pool. Even in case of Cash Credit A/cs, Overdraft A/cs. own funds are deposited therein and where the interest free advances are made by cheques, the advances were debited to Cash Credit /Overdraft A/cs. As such, the amount advanced is relatable to own funds deposited in that account from time to time. The Assessee highlighted that sufficient interest free funds were available for the purpose of making such advances, or that advances having been made when there were no such borrowing and subsequent borrowing were also utilized for the purpose of the business. The Assessee relied on the decision of the Hon’ble Allahabad High Court in the case of CIT Vs Radico Khaitan Ltd. (2005) 274 ITR 354(All) wherein it was held that where interest free loan had been made to sister concerns in the earlier years and no interest were disallowed in earlier year, disallowance could not be made in the relevant Assessment Year particularly when the assessee had sufficient fund on a/c. of Share Capital, Share Premium, Reserve & Surplus out of which advance to sister concern could have been made. The Assessee also gave details of availability of own funds. It was further submitted that for the sake of argument, if the Assessing Officer's view is taken correct, it means that all the borrowed fund had been utilised for the purpose of giving advances and loans to the aforementioned companies and no borrowed fund had been utilised for acquiring fixed assets and to meet the working capital requirements which is not only untrue and incorrect but also absurd. Hence, it was argued that the Assessing officer's action is not tenable in law.
Apart from the above, it was also submitted that interest and finance charges also include bill collection charges, cheque collection charges, cheque collection /discounting charges, bank charges paid for export bills, interest paid on vehicle loan, interest paid to Customs and Excise Authorities, Commission paid on Letter of Credit, payment made to various parties of LC's against supplies, Overdue interest paid to raw 10
11 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 material suppliers, interest on workers/employees security deposit, incidental and bank charges, interest on F.D and corporate deposits etc., which were not in the nature of Interest on Loans totaling to Rs.91,42 5,305.54/-. If all these payments are deducted from the total payment of interest and finance charges, total interest outgo on Loan will be substantially reduced.
It was further pointed out that Commissioner of Income Tax (Appeal) -V and Commissioner of Income Tax (Appeal) -X have allowed such payments in the assessment year 1998-99 & 2001-02 respectively and that the Department had not filed any appeal before the Income Tax Appellate Tribunal against the Order of Commissioner of Income tax (Appeals)-V for the assessment year 1998-99.
Without prejudice to the above, the Assessee furnished comparative statement of Loan outstanding as on 31.03.2000,as on 31.03.2001 as on 31.03.2002 as on 31.03.2003 and as on 31.03.2004 : Secured: As on As on As on As on As on 31.03.2000 31.03.2001 31.03.2002 31.03.2003 31.03.2004 Interest 122,44,25,990 X 12,11,54,000 8,07,69,600 79,137,600 bearing Debentures Zero Rated X 59,98,46,800 58,58,81,100 53,50,33,300 533,306,300 Debentures Term Loans 250,82,21,329 155,55,49,407 81,65,86,703 66,47,42,232 580,920,389 Cash Credit 187,80,55,451 76,84,58,690 58,71,39,108 67,45,99,435 755,959,375 Unsecured: As on As on As on As on As on 31.03.2000 31.03.2001 31.03.2002 31.03.2003 31.03.2004 Interest 113,44,02,206 18,44,58,602 15,68,79,103 21,64,06,691 237,426,731 bearing Non Interest 42,00,000 28,00,000 161,400,000 160,000,000 160,000,000 bearing 674,93,04,796 311,11,13,499 242,90,40,014 233,15,51,258 234,67,50,395
12 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 It was argued that from the above chart it would be evident that the outstanding loans have decreased in the assessment Year 2004-05. The closing balance as at 31/03/2004 was Rs.234,67,50,395/- which include non interest bearing loan of Rs.693,306,300/- and interest bearing loan of Rs.16,53,444,095/-.The increase in total loans in comparison to 2003 was on account of hike in Cash Credit Loan and hike in receipt of Fixed Deposits from public. As these loans were not utilised for giving loans and advances to subsidiary and other companies, interest on such loans should not be disallowed as the advances were given long back before receiving these loans and deposits. It was pointed out that the Loans outstanding as on 31.03.2004 are Rs.234,67,50,395 while loans outstanding as on 31.03.2000 are Rs.674,93,04,796. It means that the assessee had repaid the loan to the tune of Rs.440,25,54,401 which is more than 65% of Rs.674,934,796/-. It was argued that even for the sake of argument if it is considered that the borrowed fund were utilised for the purpose of giving loan to subsidiary and other companies then by the same analogy the repayment/waiver of such loan amounting to Rs.4402,554,401 should have been deducted from the advances given to subsidiary and other companies while disallowing interest u/s 36(l)(iii) of the Act. It was submitted that if the old loans are repaid, the same should not be the subject matter of disallowance of interest on the advances given in earlier years. The old loans which have been refunded / waived should have been deducted from the advances given in earlier years. The Assessee also pointed out that in case of cash Credit account the interest is charged on the current debit balance as the old debts are realised first from the deposit. If the interest is charged for the current debit balance, the same could not be disallowed on the basis of the inference that the advance were given in the earlier years out of old borrowed funds.
The Assessee also drew attention to two statements of year wise Advances given and loan received starting from the Assessment Year 90-91 to 31/03/2004 which were also submitted at the time of Assessment proceedings. It was argued that it would be 12
13 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 evident from the said statement that interest free loan had been made to subsidiary companies and other companies, but no interest was disallowed till the assessment year 1993-94 as there were huge profits as well as huge funds received by the Assessee by the issue of Share Capital at a premium. In the assessment year 1994-95 in the assessment U/S 147/143(3) of the Act, interest was disallowed on the advances given to subsidiary companies, although the advances were given out of own generated fund. An appeal against such disallowance was pending before the Hon'ble Calcutta High Court. In the assessment year 1995-96 no interest was disallowed on the advances given to subsidiary companies but interest was disallowed in respect of advances given to other companies which was allowed by the Hon'ble Income Tax Appellate Tribunal Kolkata. An appeal was filed by the Department before the Kolkata High Court. On this issue an appeal before The Kolkata High Court is pending for the Assessment Year 1996-97. Appeal is pending before the Hon'ble Tribunal for the Assessment Year 2001-02, 2002- 03 & 2003-04. Appeal was pending before the CIT (Appeal) - V for the Assessment Year 1999-2000. In the Assessment Year 2001-2002, 2002-2003 & 2003-2004 the learned CIT(A)-X and CIT(A)- XII had allowed interest U/S 36(1)(iii) of the Act. Interest was also not disallowed in the assessment on the advances given to subsidiary companies for the assessment years 1995-96,1996-97,1997-98 and 2000-01. It was submitted that as such, no interest should be disallowed on the advances given upto 31/3/2000 to the subsidiary companies which has been brought forward in The assessment year 2003-2004 following the decision of The Hon'ble Karnataka High Court given in the case of Commissioner of Income Tax Vs Sridev Enterprises192 ITR 165 (Ker).The Court held that if the interest is allowed as being for the business purposes, a different stand cannot be taken by the department in the subsequent year on the sane loan. It was argued that the Learned Assessing Officer has not considered all these submissions and disallowed the interest U/S 36(1)(iii) on the basis of his predecessor's comments and opinion without applying his mind and as such the addition should have been deleted. At last for the sake of argument taken as granted that the 13
14 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 Loans / advances were given in earlier years out of borrowed funds to the subsidiary and other associate companies, but the same was paid for business consideration and the same was utilised by the subsidiary & other associate companies for the purpose of business. If the loans & advances were given for the purpose of business consideration , interest on such loans & advances will not be disallowed. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT (Appeals) (2007) 288 ITR 1, Munjal Sales Corporation (2008) 298 ITR 298. The above decision has been followed in the case of CIT vs Rockman Cycle Industries Ltd (2009) 176 Taxman 21 (Punj. & Har). In view of the facts stated above, evidences and the aforementioned decisions, the Assessee pleaded that no interest ought to have been disallowed.
The CIT(A) deleted the addition made by AO for the following reason :-
“5. Appeal on grounds no. 2(i), (ii), (iii), (iv), (v), (vi) and (vii) are against the disallowance of interest of Rs. 250937839/- paid on capital borrowed for the purpose of business. The A.R. has filed a written submission in which he has mentioned that this issue is covered in favour of the assessee vide Kolkata Tribunal B Bench order in dt. 15-06-2012 in assessee's own case. Respectfully following the order of the Hon'ble ITAT on the same issue in assessee's own case. Appeal on grounds no. 2(i), (ii), (iii), (iv), (v), (vi) and (vii) are allowed.”
Aggrieved by the order of the CIT(A), the revenue has raised ground No.2 before the Tribunal. We have heard the rival submissions. At the time of hearing it was brought to our notice that this Tribunal considered the very same issue which was the subject matter of disallowance u/s 36(1)(iii) of the Act in A.Y.2003-04 and this Tribunal has deleted the disallowance of interest in & 1137/Kol/2003 and 268/Kol/2004 for A.Y.1996-97 to 1998-99 by following the tribunal’s order in ITA No.1135/Kol/2013 dated 15.06.2012 for A.Y.1994-95. It was not disputed before us that the aforesaid findings of the tribunal equally apply to the present assessment year also.
15 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 Respectfully following the decision of the Tribunal referred to above we uphold the order of CIT(A) and dismiss ground No.2 raised by the revenue.
In the result the appeal of the revenue is dismissed. A.Y.2006-07 : 25. This is an appeal by the Revenue against the order dated 07.02.2013 of CIT(A)- XII, Kolkata relating to AY 2006-07.
Ground No.1 and 2 raised by the revenue in this appeal read as follows :- “1. Whether on the facts and in the circumstances of the case, ld. CIT(A) was justified in allowing a sum of Rs.1,36,29,630/- towards liability of Excise duty under Section 43B of the I.T.Act. “
“2. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in allowing interest on interest free loan of Rs.20,15,650/- u/s 36 (1)(iii). “
It is not in dispute before us that the issues raised in ground nos. 1 and 2 are identical to ground nos. 1 and 2 of the revenue in and arise on identical facts and circumstances. Following the reasons given while deciding the identical grounds for A.Y.2005-06 in we uphold the order of CIT(A) and dismiss ground nos. 1 and 2 raised by the revenue.
Ground No.3 raised by the revenue reads as follows :- “3. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in treating capital gain of Rs.53,04,906/- from sale of land as business income.”
During the previous year the assessee sold land situated at Phagwara which it had acquired during the year ending 31.01.1980. The land was purchased by the Assessee for the purpose of expansion of its Mills situated at Phagwara. The Assessee decided to 15
16 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 sell surpIus land lying with the Mills for raising funds for use in the business as the Assessee was facing accute paucity of funds. Accordingly, the land was sold plot by plot according to the requirements of funds for the past 2 to 3 years. The land was converted from agricultural land to residential status with a view to get more price. Although the land was sold at Rs. 15,15,750/- but in terms of Section 50C the full value of consideration was taken at Rs. 36,31,800/- for computing Capital Gains as per law. The land was never considered as stock in trade.
Similarly land situated at JCT Enclave, Jagraon, Punjab was sold during the year 2005-06 which was acquired prior to 01.04.1981 ( acquired between 31.01.58 and 31.01.66). The Assessee had carried out improvement to the property so acquired on 31.01.2001 and on 01-04-2004. The land was purchased as agricultural land for setting up factory. Ginning factory was set up there prior to 01.04.l981.Ginning Factory was closed on account of change of production method and as result the land was lying vacant. The vacant land was sold in order to meet the Assessee’s requirement of funds. The land was agricultural land at the time of sale. No conversion was done by the Assessee . The land was never treated as Stock in Trade.
The Long Term capital gain (LTCG) on sale of the aforesaid land was offered to tax under the head “Capital Gain”. The learned A.O was of the view that the gain in question was assessable under the head “Income from Business”.
According to the AO the assessee made additions to land by purchase as well as pursuant to amalgamation during the financial year 2005-06. According to the Assessee no land was acquired by the Assessee during the year 2005-2006. The Assessee drew attention to the fixed assets Schedule as well Tax Audit Report where the details of additions to Fixed Assets were given. The summary of the same is as follows:
17 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 Particulars Amount Ref Opening Balance as on 01.04.2005 51,962,195.00 Schedule ‘E ‘of Accounts Addition on account of amalgamation 3,532,050.00 -----------Do---------------- Addition on account of Revaluation 1,019,790,658.00 Schedule ‘B ‘of Accounts (Ref Note-7 of Schedule-IX of Accounts) 1,075,284,903.00 Less:Sale during the year 2005-2006 1,865,109.00 Balance as at 31.03.2006 1,073,419,794.00
According to the Assessee, therefore the inference drawn by the Assessing Officer as to the purchase of land during the year 2005- 06 to establish another line of business was contrary to facts.. The Assessee reiterated its stand that it was facing acute shortage of fund and thus, question of purchase of land (either the underdeveloped land or agricultural land) does not arise. The Assessee pointed out that development of land (at Jagron, Punjab) which was purchased long back was done in 2000-01 and 2004-05. These lands were never considered as stock in trade. It was all along used as Fixed Asset. The land was used as an asset of the Assessee for the purpose of business i.e running ginning factory and Mills. After closing down the Ginning Factory and surplus land of the Mill at Phagwara sold at a profit to meet the requirements of funds. The transaction i.e sale / profit was shown under the head' Capital Gains'. The sale was for the realization of the investment which cannot be termed as adventure in the nature of trade. It was submitted that purchase of land was not with the intension to resale at a profit but the sale of the land was only a realization of investment and utilizing the same for the purpose of requirements of funds. Obviously, the surplus in such a case, will not be trading or business profit, because the transaction is one of the realization of asset in capital investment rather than one in the course of trade carried on by the assessee or an adventure in the nature of trade. Moreover, if the motive of the assessee was to engage in another line of business, the assessee must have sold the land and within 2/3 years 17
18 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 from the date of purchase of land. But this motive is totally absent. It was argued that the Assessing Officer has not at all brought any circumstances or evidence on the record to show that at the time of purchase of the property, the assessee had an intention to sell the property. It was submitted that merely Carving out plots in a portion of land, without proof of anything more, cannot give rise to the conclusion that the transaction is an adventure in the nature of trade. As far as land situated at JCT Enclave, Jagroan, Punjab, is concerned, the Assessee pointed out that the land was purchased on 31.01.58 and 31.01.66 for the purpose of business i.e setting up of ginning factory. This land was sold during the year 2005-2006. There was no series of transactions of purchase. Hence, the Assessing Officer's conclusion of continuous processes is not correct. It was submitted that the Profit earned on sale of land had been correctly considered as 'Capital Gains' by the appellant. It was argued that the learned Assessing Officer has erred in deciding the same as another line of business and considered the profit as Income from business.
It was submitted that the term ‘business’ covers every facet of an occupation carried on by a person with a view to earning profits. Though profit motive is one of the primary requisites of the business, it is not an essential ingredient of business. Risk, uncertainty, foresightedness to visualize the imponderables and capacity to overcome the unforeseen hurdles are essential requisites for business activities. A person looks for safety of the principal amount when he intends to invest money for the purpose other then business or trade. As against this, business involves some risk in the transaction. The very word 'business' connotes chance plus risk. It was argued that following the above the principles it would be apparent form the transaction of sale of land that the main motive of the Assessee was to collect fund to meet the capital requirements as it was facing acute shortage of funds. The Assessee had not engaged in the occupation of dealer in land with a view to earn profit Transaction as a dealer in land where there is scheming and organization on the part of a person constitutes an occupation in the 18
19 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 nature of trade. This ingredient is absent in the sale transaction. Moreover, purchase of land long back did not involve any risk and uncertainty. Investment in land was safe. There was no risk and uncertainty in realizing the amount of investment if sold. As to Assessing Officer's view of continuous process, it is true that the land situated at Phgwara was sold in the preceding years as well, but this land was acquired by the Company once only in 31.01.1980 for the purpose of business. The land was not purchased in a continuous process. Hence the Assessing Officer's action is not tenable and liable to be vacated.
On a consideration of the above submissions, the CIT(A) held as follows :-
“Appeal on grounds no. 3(i) & (ii) are against the order of long term capital gains arising from sale of land as business income. The A.O. in his assessment order has mentioned that the assessee made improvement of agricultural land at JCT Enclave, Jagraon, Punjab. The assessee got it converted from agricultural to residential use. The assessee incurred further expenditure for its improvement and sold the land for profit. The same thing has happened at Phagwara, Punjab. The A.O. treated it as another line of business of the assessee ond profit earned from such transactions were treated as business income. The A.R. in his written submission filed has mentioned that plot situated at Phagwara, Punjab was acquired in the year 1980. This land was purchased by the company for the purpose of expansion of its mills situated at Phagwara, Punjab. Now, it was decided to sale the surplus land lying with the mills for using the money in the business as the company was facing acute paucity of funds. Accordingly, the land was sold plot by plot as per the requirements of the funds for the last 2 or 3 years. The land was converted from agricultural land to residential one with a view to get more price. Similarly, land situated at JCT, Enclave, Jagraon, Punjab was acquired in the year 1958 and 1966. It was also purchased for setting of factory. Ginning factory was set off there in 1981 . At present since the factory was closed on account of change of production method. The land was lying vacant. The vacant land was sold in order to meet the requirement of funds. The A.R. has emphasized that the land was never treated as stock-in-trade. The A.R. has further pointed out that A.O's finding that the assessee made additions to land on purchase and addition on account of amalgamation during the F.Y. 2005-06 was wrong. No land was acquired by the company during the F. Y. 2005-06. It was clear from the fixed assets scheduled as well as the TAX AUDIT REPORT (TAR). The A.R. has relied upon the DCM case in which it was held " where property in question was held by assessee for several years in capital account and was shown in the balance sheet of assessee as capital 19
20 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 assets, profit corned by assessee on sale of said property was to be assessed under the head "Capital Gains" and not under the head "Income From Business". CIT Vs. DCM Ltd. (2010) (320 ITR 307)(Del.). I have considered the finding of the A.O. and the written submission as well as case laws brought on record by the A.R. It is clear that the land sold by the assessee was acquired by it more than 25 years ago and it was shown as capital assets in its balance sheet for the last 25 years. It was never converted into stock-in-trade. Therefore, keeping in view the decision of Hon'ble Delhi High Court in the case of DCM Ltd. (supra), assessee's income from the sale of land should be treated as capital gains and not as business income. Thus, assessee's appeal on grounds no. 3{i) & (ii) are allowed.”
Aggrieved by the order of CIT(A) the revenue has preferred ground no.3 before the Tribunal. We have heard the rival submissions. The ld. Counsel for the assessee relied on the order of CIT(A). The ld. DR relied on the order of AO.
We have considered the rival submissions. The Hon’ble Supreme Court in the case of G. Venkataswamy Naidu Vs. CIT 35 ITR 594 (SC) has laid down the guide-lines as to when a transaction could be considered as an adventure in the nature of trade. The Hon’ble Supreme Court has laid down that where a property is held for a fairly long number of years and income there from is enjoyed then income accruing as a result of sale of such property that would be a case of capital accretion and not an adventure in the nature of trade when the property is sold. The guiding factors that are relevant in such cases have been laid down as follows. Was the purchase by a trader and the purchase of the commodity and its resale allied to his usual trade or business or incidental to it. The nature of the commodity purchased and resold and the quantity thereof. The subsequent act done by the purchaser before resale and the frequency of such transaction. The Hon’ble court has, explained that the above rules are not general or universal test, and is only helpful tools to enable a court to come to a definite conclusion. The total effect of all relevant factors and circumstances would determine the character of the transaction and only some general assistance could be taken from the guide-lines laid down above.
21 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 38. Keeping in mind the principles laid down in the aforesaid judgment which principles are still applied in deciding question whether a person has indulged in an “adventure in the nature of business” or not, we shall now look at the facts of the present case. The land situated at Phagwara, Punjab was acquired in the year 1980. This land was purchased by the Assessee for the purpose of expansion of its mills situated at Phagwara, Punjab. It was decided to sell the surplus land lying with the mills for using the money in the business as the Assessee was facing acute paucity of funds. Accordingly, the land was sold plot by plot as per the requirements of the funds for the last 2 or 3 years. The land was converted from agricultural land to residential one with a view to get more price. Similarly, land situated at JCT, Enclave, Jagraon, Punjab was acquired in the year 1958 and 1966. It was also purchased for setting of factory. Ginning factory was set off there in 1981 . Since the factory was closed on account of change of production method, the land was lying vacant and the vacant land was sold in order to meet the requirement of funds. The facts of the case suggest that the intention of the Assessee at the time of purchase was never to indulge in trading in land but was for setting up factory premises for carrying out manufacturing which was its main line of business. The length of the period of ownership clearly suggests that the acquisition of the property was not for sale within a short period of time. The frequency or number of similar transactions by the Assessee also shows that it is not done systematic and continuously over a period of time. Supplementary work on or in connection with the property realized, also does not suggest that it was done in the nature of business but was only for easy marketability of the property. Most importantly, the property was sold to meet the financial requirements of the Assessee and not for realization of any profit. Overall consideration of all relevant material shows that motive was never to indulge in trading in land. The inference one can draw from the surrounding circumstances of the case is that the Assessee never wanted to indulge in any adventure in the nature of trade so as to constitute the gains on sale of the property giving raise to “Income from Business”. We are of the view that the conclusions drawn by the CIT(A) 21
Ground No.4 raised by the revenue reads as follows :- “4. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in allowing Rs.8,61,892/- as provision for wealth tax for computing book profit u/s 115JB. “
The Assessee being a company the provisions of Sec.115JB of the Act were applicable to it. While computing book profits in accordance with the provisions of Sec.115JB of the Act, the Assessing Officer added back wealth tax provision of Rs. 8,61,892/- on the ground that the wealth tax being a direct tax has to be included in the' book profit as is done in the case of provision for income tax.
Before CIT(A), the Assessee submitted that the finding of the Assessing Officer is totally unreasonable and unjustified. It was submitted that the provisions of Sec.115JB of the Act are silent with regard adding wealth tax provision. It was submitted that though Wealth tax is a direct tax, yet the law maker while enacting Sec.115JB of the Act never thought it fit to include in clause (a) to Explanation to Section 115JB, provision for wealth tax. Hence, provision for wealth tax should not be added back with the book profit. It was argued that Fringe Benefit Tax is also a direct tax but it is an allowable deduction in the computation of book profit u/s. 115JB of the Act and in this regard attention was drawn to Board Circular No, 8/2005 dtd. 29.08.2005 ref. FAQ No. 103. It was argued that if the Assessing Officer's contention is taken as correct, then Fringe Benefit Tax should have been added with the book profit. But it is not done. It was argued that the Assessing Officer had also disregarded the decision of Hon'ble ITAT, Kolkata given in case of Usha Martin Industries Ltd. Vs. CIT (2003) 81 TTJ (Cal) 518. Special bench of ITAT, Kolkata had decided in the case of CIT Vs. Usha Martin Industries Ltd. 288 ITR (2007) 63 that there was no provision for making addition with regard to any provision for wealth tax in Explanation to 1I5JA of the Act. 22
23 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 It was argued that the same explanation is also used in section 115JB. Accordingly, the Assessing Officer's action was based on surmises and conjecture and thus, was unreasonable &. totally unjustified.
The CIT(A) agreed with the contentions of the assessee. He held as follows :
“9. Appeal on ground no. 6{i) & (ii) are against the disallowance of Rs. 8,61,892/- under the deduction of provision for W.T. while computing the book profit u/s. 115JB. The AR. has filed a written submission in which he has mentioned that this issue is covered in favour of the assessee vide Kolkata Tribunal Special Bench decision in the case of JCIT VS. Usha Martine Industries Ltd. 2881TR (2007) 63 in its decision the Hon' ble Tribunal has held 11 there is no provision for making addition with regard to any provision for Wealth Tax in explanation to Sec. 115JA. 'The same explanation is also used in Sec. 115JB of the IT. Act, 1961. I have considered the finding of the A.O. and the decision of the Jurisdictional Tribunal on the same issue in Usha Martine Industries case (supra). I find that this issue is squarely covered vide this order of the Special Bench of Kolkata Tribunal. Thus, assessee's appeal on grounds no. 6{i) and (ii) are allowed.”
Aggrieved by the order of CIT(A) the revenue has raised ground no.4 before the Tribunal.
We have heard the submissions of the ld. Counsel for the assessee and the ld. DR. The ld. Counsel for the assessee relied on the order of CIT(A). The ld. DR relied on the order of AO. The ITAT in the case of Usha Martine Industries Ltd. (supra) has also decided on an identical issue and it has been held as follows :- “7. Now coming to the provision of wealth-tax of Rs.1,25,000 made by the assessee which have also been added by the authorities below to the net profit for computing the book profit within the meaning of s.115JA of the Act, we hold that cl.(a) of the said Explanation provides for disallowance of any provision made for income-tax only. Since the term wealth-tax chargeable under WT Act, 1957, cannot be held as income-tax, the provision of Rs.1,25,000 made in the P&L a/c for its liability to pay wealth-tax cannot be added back to the net profit for the purpose of computing the book profit by invoking the provision of cl.(a) or any other clause being cls. (b) to (f) of the Explanation of s.115JA(2) of the Act. We agree with the contention of the learned authorized representative of the assessee that a provision 23
24 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 made for wealth-tax cannot be equated to any liability towards income-tax and accordingly, cannot be disallowed while computing the book profit by invoking cl.(a) of the Explanation to s.115JA(2) of the Act. “
The same view has also been taken by the Hon’ble Bombay High Court in the case of CIT vs Echjay Forgings Pvt. Ltd. 251 ITR 15 (Bom). In view of the aforesaid precedents of the issue we do not find any merits in ground no.4 raised by the revenue. Consequently ground no.4 raised by the revenue is dismissed. A.Y.2007-08 : 46. This is an appeal by the Revenue against the order dated 07.02.2013 of CIT(A)- XII, Kolkata relating to AY 2007-08.
Ground Nos.1 to 3 raised by the revenue in this appeal read as follows :- “1. Whether on the facts and in the circumstances of the case, ld. CIT(A) was justified in allowing a sum of Rs.1,79,75,892/- towards liability of Excise duty under Section 43B of the I.T.Act. “
2. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in allowing interest on interest free loan of Rs.68,31,978/- u/s 36 (1)(iii).
3. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in allowing Rs.7,46,024/- as provision for wealth tax for computing book profit u/s 115JB. “
It was not disputed by the parties before us at the time of hearing that the aforesaid grounds are identical to ground nos. 1,2 and 4 raised by the revenue in and arise from identical facts and circumstances. For the reasons stated while deciding the appeal in ITA No.1107/Kol/2013 we dismiss ground nos. 1 to 3 raised by the revenue.
In the result the appeal by the revenue is dismissed.
25 to 1109/Kol/2013 J.C.T. Ltd. A.Y.2004-05,2006-07 to 2008-09 ITA No.1109/Kol/2013 A.Y.2008-09 : 50. This is an appeal by the Revenue against the order dated 07.02.2013 of CIT(A)- XII, Kolkata relating to AY 2008-09.
Ground Nos.1 to 3 raised by the revenue in this appeal read as follows :- “1. Whether on the facts and in the circumstances of the case, ld. CIT(A) was justified in allowing a sum of Rs.1,10,01,948/- towards liability of Excise duty under Section 43B of the I.T.Act. “
Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in allowing interest on interest free loan of Rs.58,93,838/- u/s 36 (1)(iii).
3. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified in allowing Rs.11,83,635/- as provision for wealth tax for computing book profit u/s 115JB.” “
It was not disputed by the parties before us at the time of hearing that the aforesaid grounds are identical to ground nos. 1,2 and 4 raised by the revenue in and arise from identical facts and circumstances. For the reasons stated while deciding the appeal in ITA No.1107/Kol/2013 we dismiss ground nos. 1 to 3 raised by the revenue.
In the result the appeal by the revenue is dismissed.
In the result all the appeals of the revenue are dismissed.
Order pronounced in the Court on 19.10.2016.