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Income Tax Appellate Tribunal, KOLKATA BENCH “A” KOLKATA
Before: Shri N.V.Vasudevan & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the Revenue is against the order of Commissioner of Income Tax (Appeals)-XII, Kolkata dated 25.11.2011. Assessment was framed by DCIT, Circle-10, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 16.12.2010 for assessment year 2008-09. The grounds raised by Revenue as per its appeal are as under:- “1) Whether on the fats and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition on account of undisclosed sales of 258 liters injectible without showing proof that it did not form part of the 941 liters that was sold during the year under consideration.
ACIT Cir-10, KOL v. Stadmed Pvt. Ltd. Page 2
2) Whether on the fats and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition on account of Ad-hoc cost allocable which was made without showing any nexus between the produced item and direct and indirect cost involved.
3) Whether on the fats and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition on account of interest on loans & advances to the directors which was otherwise than for business purposes.”
Shri Subash Agarwal, Ld. Authorized Representative appeared on behalf of assessee and Shri Rajat Kumar Kureel, Ld. Departmental Representative appeared on behalf of Revenue.
First issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by Assessing Officer on account of undisclosed sales of 258 liters injectable.
Facts of the case are that assessee is a Private Limited Company engaged in the manufacturing business of various kinds of allopathic medicines and one of them was injectables. However the assessee was manufacturing the injectables products till the Assessment Year 2007-08 prior to the assessment year under consideration. The assessee got produced the same (injectables) 941.12 liters @2554.83 per liters for Rs. 24,04,403.59 from outside on loan license basis. These injectable products purchased from outside were sold during the year for an amount of ₹28,52,854/- (941 lt. @ 3031.73 per ltr.) The AO during assessment proceedings observed from the cost audit report of the assessee that there was a closing balance of injectables of 258 liters in the assessment year 2007-08 which will naturally become the opening stock for the year under consideration. However the last year closing stock figures was not carried forward in the cost audit report and current year closing stock was also shown at nil. Accordingly, the AO opined that the closing stock of the earlier year must have been sold during the current year without showing in ACIT Cir-10, KOL v. Stadmed Pvt. Ltd. Page 3 assessee’s books of account. Accordingly, he treated the sale of earlier year stock as undisclosed sale for an amount of ₹7,82,186/- (258 ltr. x ₹3031.73) and added it to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) who deleted the addition by observing as under:- “4. Regarding ground no. 1 relates to addition of Rs.7,82,186/- on account of undisclosed sales. The AO relied upon Cost Audit Report for quantitative details and has not considered the sales account of the audited accounts for the year ended 31-03-2008 which reflected the sales of injectible of 258 ltrs. Having value of Rs.28,52,854/-. Therefore, the addition of Rs.7,82,186/- is deleted. Hence, ground no. 1 is allowed.”
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
Before us Ld. DR submitted that the cost records maintained by assessee have been duly audited by Cost Auditor and therefore it is a reliable document. As per the report, the closing stocks of 258 liters of injectables have not been carried over in the year under consideration and the same is not reflecting in the closing stock of the current year as well. So it is clear that closing stock has been sold out by assessee without recording the same in its books of account. The ld. DR vehemently supported the order of the AO.
On the other hand, Ld. AR filed a paper book which is running pages from 1 to 99. The ld. AR before us admitted that the figures of the 258 liters of last year closing stock was not reflecting in the cost audit report but the same was very much reflecting in the financial data maintained by the assessee. The ld. AR drew our attention at page 85 of the paper book where the quantitative details of injectables were duly recorded. As per the financial report, there is opening balance of 258 liters and purchase of 1079.83 liters, return inward 26.066 liters, sample 35.244 liters, breakage 90.288 liters and sales of 941.12 liters along with closing stock of 296.716 liters which are placed on page 85 in the ACIT Cir-10, KOL v. Stadmed Pvt. Ltd. Page 4 paper book. The Ld. AR further submitted that AO has relied on the cost audit report without pointing out any flaw in the financial audit report where all the details about the injectables were duly recorded. He further relied on the order of Ld. CIT(A).
We have heard the rival contentions of both the parties and perused the materials available on record. From the aforesaid discussion, we find that there was some mismatch in the quantitative detail in the product injectables for 258 liters in the cost audit report of the assessee. As a result the AO assumed that 258 liters of injectables have been sold out by the assessee without recording the correspondence sales in its books of account. However, ld. CIT(A) has deleted the addition by holding that AO has relied merely on the cost audit report without bringing any defect in the audited sales account of assessee. Now the question before us arise is as to whether the data of cost audit report can be relied for the purpose of making the addition and without having any flaw in the audited financial data of assessee. We find that AO has not brought anything on record in the financial audited accounts of assessee. The AO merely has relied on the cost audit report of assessee. In our considered view, AO before making the addition was to reconcile the data found from the cost audit report with the financial data of assessee and if he finds same difference then he should proceed for making the addition / disallowance. In the instant case, there is no defect in the financial year data of the assessee and therefore, the addition made by AO deserves to be deleted. Accordingly we are not inclined to interfere in the order of Ld. CIT(A). This ground of Revenue’s appeal is dismissed.
Next ground raise by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by AO on account of ad hoc cost allocation made by assessee without showing any nexus between the item produced and cost involved.
ACIT Cir-10, KOL v. Stadmed Pvt. Ltd. Page 5 During the year the assessee has shown sales of ₹ 2,59,23,719.50 in the cost audit report without mentioning the quantity and product details against the above sale amount. The assessee against the above sale amount has allocated a cost of ₹2,22,66,492.03 without mentioning any quantity and products. During the course of assessment proceeding, AO observed that there has to be complete disclosure in the cost audit report about the sales of the product and its pertinent cost. But in the instant case, assessee has allocated the cost on ad hoc basis without referring to the relevant necessary details in terms of quantity and products. In the absence of relevant details like name of product, quantities produced, turnover, cost of raw materials, costs of other ingredients, direct wages, salary, indirect cost and other overheads with respect to the all the products produced and sold, the AO found that the cost allocated is not proper and not supported by evidence. Accordingly, the AO has disallowed the total cost allocated for Rs.2,22,56,492.03 as bogus and added to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) who has deleted the addition by observing as under:- “5. Regarding ground no. 2 relates to addition of Rs.2,22,56,492/- on account of Cost Audit Report. The AO did not consider the Financial Account and the Tax Audit Report. The purpose of cost audit report is different than the financial reporting. The AO had accepted the sale value of other products at Rs.2,59,23,719/- while the cost allocating had not been accepted. Since no defect has been pointed out in the audited accounts and books of account the addition of Rs.2,22,56,492/- is deleted. Hence ground no. 2 is allowed.”
Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.
Before us Ld. DR submitted that cost audit report is a primary source documents and it does not contain the full details about the product sold and cost incurred on manufacturing. The Ld. CIT(A) has erred in not considering the same. He relied on the order of AO and stated that issue may be decided on merit.
ACIT Cir-10, KOL v. Stadmed Pvt. Ltd. Page 6 On the other hand, Ld. AR submitted that assessee is manufacturing more than thousand items and do not find feasible to show allocated cost in respect of all the items manufactured by it in the cost audit report. Therefore the assessee has recorded the consolidated sales of other products along with consolidated cost incurred by assessee. He vehemently relied on the orders of Ld. CIT(A).
We have heard rival contentions and perused the materials available on record. From the aforesaid discussion, we find that AO has made the addition on the basis of cost audit report where the product-wise detail for sale and manufacturing cost were not specified. However the AO has not pointed out any defect in the financial audit report furnished by assessee. The AO has made the addition merely on the ground of non-disclosure of the cost of the items manufactured and at the same time accepted the sale declared by the assessee. In our considered view, the addition made by AO is based on whimsical ground and therefore we find no reason to interfere in the order of Ld. CIT(A). This ground of Revenue is dismissed.
Last ground in this appeal of Revenue is that Ld. CIT(A) erred deleting the addition made by AO on account of interest on the loan and advances given to the Directors of assessee-company. The assessee has shown in its books of accounts secured and unsecured loan amounting to ₹7,79,97,616/-. The assessee has incurred cost on such loan by way of interest and financial charges of ₹ 1,12,59,548/- as per Schedule 19 to the Profit and Loss A/c. At the same time, it was reflected in the balance sheet that assessee has given interest free loan for an amount of ₹22,38,883/- to the directors. Accordingly, Assessing Officer opined that the interest bearing loan has been diverted by the assessee to the interest free loan account i.e. loan given to the director for ₹22,38,883/-. The AO worked out the proportionate interest on the loan given to the director for an amount of ₹2,68,700/- which was disallowed and added to the total income of assessee.
ACIT Cir-10, KOL v. Stadmed Pvt. Ltd. Page 7 11. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who deleted the addition by observing as under:- “6. Regarding ground no. 3 relates to disallowance of Rs.2,68,700/- on account of advances given to directors. The assessee had relied upon the order of ITAT, Kolkata Bench in its own case in AY 2001-02. The own funds available with the company in the financial year were Rs.5.89 crores while the advances given to the directors are Rs.22.38 lakh. Since, no nexus have been established the addition of Rs.2,68,700/- is deleted relying upon the ITAT’s judgment. Therefore, ground no. 3 is allowed.”
Both the parties are relied on the orders of Authorities Below as favourable to them. We find that Ld. AR submitted that loan was advanced to the directors out of its own fund which is ₹5,89,14,826/- as per the audited account for the year ended 31.03.2008. He further submitted that amount was not made by assessee-company in the year under appeal but it was given in the earlier years. The Ld. AR also submitted that in assessee’s own case for the AY 2001-02 the Co-ordinate Bench of this Hon’ble Tribunal has decided the issue in favour of assessee on the similar facts and circumstances in dated 26.08.2005, wherein the relevant extract is reproduced below:- “12. We have given our careful consideration to the rival submissions made before us and have perused the orders of tax authorities. In this case, though the AO has disallowed a sum of Rs.1,04,376/- presuming that interest bearing borrowed fund has been diverted for advancing interest-free loans to the Directors. However, that the amount borrowed from Bank has been diverted to the Directors interest free loans. Apart from this, perusal of paper book filed by the assessee also suggests that the assessee had sufficient own fund to enable it to advance interest-free loans to its Directors towards housing loan. We, therefore, keeping in view the above facts and circumstances of the case, are of the opinion that the ld. CIT(A) was justified in deleting the addition and, therefore, uphold the same and reject the ground raised by the Revenue in this regard.”
From the facts of the case, we find that the interest free loan given to Directors was assumed by the AO as this money was advanced to directors out of interest bearing borrowed fund. Accordingly, AO disallowed the proportionate ACIT Cir-10, KOL v. Stadmed Pvt. Ltd. Page 8 interest claimed by assessee. However, the Ld. CIT(A) has granted relief to assessee on the ground that there was no nexus between the money borrowed by assessee and loan advanced to the directors. Ld. CIT(A) also relied on co-ordinate bench in assessee’s own case for AY 2001-02 (supra). We also find that the assessee’s own funds are sufficient enough to advance the interest free loan to the directors. After considering the facts in totality we find no merit in the ground of appeal raised by Revenue. As such, we are not inclined to interfere in the order of Ld. CIT(A). Hence, this ground of Revenue’s appeal is dismissed.