DCIT, CHANDIGARH vs. M/S KHANDELIA OIL & GENERAL MILLS PVT. LTD., CHANDIGARH

PER DR.B.R.R.KUMAR, A.M. : The present appeal has been filed by the Revenue and Cross appeal filed by the Assessee against the order of the Ld. CIT(A), Chandigarh dt. 05/03/2015.

4.1 Brief facts of the issue are that as per balance sheet as on 31.03.2010, the assessee was having investments in equity shares of various companies and concerns, from where it was to earn exempt income. The Assessing Officer asked the assessee regarding disallowance of proportionate interest and administrative expenses u/s 14A of the Act. 4.2 It was submitted that besides other investments, the company had invested only Rs. 2,30,000/- as initial investment in Khandelia Mercantile LLP and rest of the amount was due to profits of this concern. The investment was made in earlier years and there were sufficient profits to fund the investment and there was no related direct expenditure. Since the investments have been made from own funds and so no disallowance was warranted.

4.3. Not satisfied with the explanation of the assessee and disallowed an amount of Rs. 3,54,665/- u/s 14A read with section 8D of the Income Tax Rules, 1962.

4.4 During the hearing before us, the Ld. AR submitted that the company has reserves of Rs. 20.71 Crores and the cash profits for the year is Rs. 2.49 Crores and hence no disallowance is called for.

4.5 The assessee has also submitted that the breakup of the total interest expenditure which is as under and argued that no disallowance is called for.

(a) Rs. 3,92,733/- on vehicle loan. (b) Rs. 6,20,518/- on pledge account of HDFC Bank Ltd against storage of raw material under approved warehouse. (c) Rs. 14,59,562/- on deposits.

(d) Rs. 82,12,641 /- on overdraft account of HDFC Ltd. (e) Rs. 1,29,84,248/- to Punjab National Bank on cash credit account against drawing powers made against stocks and debtors. 4.6 We have gone through the facts on record. We find that the assessee has earned dividend of Rs. 29,018/-. In any case based on the settled position of law, the disallowance cannot exceed the dividend earned. The assessee has fairly submitted before the A.O. that at best 0.5% of the average investment may be considered in relation to indirect expenditure. Keeping in view the facts specific to the instant case and action of the Assessing Officer we direct the Assessing Officer to restrict the disallowance to Rs. 29,000/-.

4.7 As a result the appeal of the Revenue on this ground is dismissed and that of the Assesee is allowed for statistical purposes.

5.1 Brief facts of the issue are that out of total interest on loan, the assessee

had paid interest of Rs. 12,60,531/- on unsecured loans to persons covered u/s

40A(2)(b). The rate of interest paid was @ 12% per annum. The Assessing Officer

required the assessee to justify the reasonableness of interest payment @ 12%,

but was not satisfied with the explanation of the assessee in this regard. The

Assessing Officer has referred to the assessment order of the preceding year and

observed that the maximum rate of interest on unsecured loans should not be

more than 11% and so he restricted the claim of interest to 11%. Disallowance of

Rs. 1,21,628/- was made on this account.

5.2 The Ld. CIT(A) having considered the facts of the issue and held that some

of the persons, in respect of whom interest has been

restricted, are not covered by section 40A(2)(b) and the rate at which

interest was paid cannot be considered excessive if one takes into account

the conditions of borrowing as the borrowings are obtained without any

collateral securities unlike banks.

5.3 Before us, the Ld. AR relied on the order of the Ld. CIT(A) and the Ld. DR

relied on the order of the Assessing Officer.

5.4 The disallowance of 1% on account of interest paid the outside parties

which the assessee categorically explains to be not related as per the Section

40A(2)(b) is against the provisions of the Act. Even so keeping in view the market

condition since the monies have to be raised at a faster pace, payment of 1%

excess interest cannot be said to be unreasonable and hence the addition

made is hereby deleted.

5.5 As a result, appeal of the Revenue on this ground is dismissed.

on account of diversion of funds to the sister concern.

6.1 Brief facts of the issue are that the Assessing Officer noticed that debit

balance was outstanding in the name of M / s Khandelia Mercantile LLP, a sister

concern of the assessee. The Assessing Officer questioned the assessee

regarding disallowance of interest on diversion of funds to sister concern and

the assessee had submitted that it has the same stand on the issue as in the A.Y.

2010-11. The Assessing Officer has reproduced the relevant portion of the

assessment order of A.Y. 2010-11 and has disallowed an amount of Rs.

19,84,563/- u/s 36(l)(iii) of the Act.

6.2 The Ld. CIT(A) based on the decision of the Hon'ble ITAT, Chandigarh in

A.Y. 2006-07 in ITA No. 937/Chd/2009 dated 30.04.2011 deleted the addition.

6.3 On perusal of the fact on record we find that there is no evidence on

record except a presumption that interest bearing funds were used for giving

loan to the sister concerns. The similar issue has been adjudicated in the case of

the assessee for the A.Y’s 2006-07, 2008-09, 2009-10 and 2010-11 on similar facts.

We therefore uphold the order of the Ld. CIT(A) and deleting the disallowance.

10,00,000/- on adhoc lump sum basis:

7.1 The Assessing Officer has made addition of Rs. 10,00,000/- vide para 6 of

his order as under:

"6. On the perusal of profit and loss account it was seen that expenses under the following heads has gone up despite the decrease in net profit by about 45% as compared to last year. The details of expenses are as under: Head/ Particulars A.Y. 2010-11 A.Y. 2011-12 Freight outward Rs. 89,47,796/- Rs. 1,89,09,981/- Advertisement expenses Rs. 39,00,726/- Rs. 40,74,136/-

6.1 The above chart shows that there is increase in expenses under these heads. The appellant was asked to explain the reason for the same. The relative bills/ vouchers were produced. It was seen that in certain vouchers the details of expenses were not on account of business purpose in entirety. Therefore, lumpsum adhoc addition amounting to Rs. 10 lacs is being made to cover the leakage of revenue loss."

7.2 The Ld. CIT(A) deleted the addition.

7.3 Before us Ld. DR relied on the assessment order.

7.4 Ld. DR argued that the ratio of freight outward to sales expenses has increased from 0.63% to 0.96% because of the increase in diesel rates and advertisement to sales ratio has decreased from 0.27% to 0.21%. According to the assessee, all the expenses were incurred for the purposes of business. The Assessing Officer has made the disallowance on the ground that expenses have increased despite decrease in its profit and certain vouchers were not for business purposes in entirety, but the Assessing Officer has not given a single instance of expenditure, which was not incurred for business purposes.

7.5 It was argued that lump sum disallowance without giving any cogent reason for making disallowance and without pointing out that any claim of expenditure out of these expenses was not genuine.

7.6 Having gone through the issue and the assessment order we find that the Assessing Officer has not brought any material on record primarily to disallow the expenditure. Keeping in view the assessee’s argument that the rise in expenditure is due to rise in diesel prices and the fact that advertisement expenses have come down with relation to the overall sales, we find no reason to confirm the disallowance made by the Assessing Officer in the absence of any cogent material brought on record by the Assessing Officer.

Year Amount 1987-88 300000.00 1988-89 10000.00 1993-94 1500000.00 1994-95 2000000.00 2005-06 - 1125000.00 2006-07 746500.00 2008-09 2500000.00 2009-10 2500000.00 Total 10681500.00 8.2 The Assessing Officer proposed the assessee to add back the aforesaid subsidy amount as per Explanation-10 below section 43(1) as per judgment of Hon'ble Supreme Court in the case of M/s Saharanpur Electric Supply Co Ltd (194 ITR 294) and the assessee had. Submitted that amounts received in F.Ys. 2005-06, 2008-09 and 2009-10 of Rs. 11.25 lacs, Rs. 25 lacs and Rs. 25 lacs respectively were reduced from the assets while claiming depreciation. The assessee had not filed any such evidence regarding rest of the amount of subsidy of Rs. 45,56,500/- (1,06,81,500 - 61,25,000). The Assessing Officer disallowed this amount with the following observations:

"Since no documentary evidence was not provided by the appellant at the time of assessment proceedings it is not clear whether the balance amount of.Rs. 45,56,500/- has been adjusted against fixed assets or not. From the depreciation chart it has seen that appellant has claimed depreciation from its block of assets much more than the amount of subsidy received from the Government. The excess depreciation as shown above may also be due to the reasons that additions to the fixed assets might have been made during the period after report of subsidy and depreciation claimed. The appellant was required to adjust the subsidy against the block of assets and claim less depreciation, which did not happen with the appellant to the extent of Rs.

45,56,500/-. In view of this fact as well as the ratio lay down by the Hon'ble Supreme Court in the case of M/s Saharanpur Electric Supply Co. Ltd. Vs. CIT [1992] 194 ITR 294, the balance amount of subsidy amounting to Rs. 45,56,500/- received by the appellant is added to the returned income of the appellant."

8.3 The Ld. CIT(A) has deleted the addition on the grounds that the subsidy was received in F.Ys. 1987-88 to 2009-10 - the total amount being Rs. 1,06,81,500/-. Out of this subsidy, the Assessing Officer has made addition of subsidy of Rs. 45,56,500/- on the ground that the relevant documents were not produced to prove that the amount of subsidy had been adjusted against value of fixed assets.

8.4 The Ld. CIT(A) further held that the assessment of the company has generally been done under scrutiny in the earlier years and there is little chance that Assessing Officer failed to consider subsidy as per relevant provisions of law and since the Assessing Officer must have certainly satisfied himself in the respective assessment years that the subsidy was treated as per the law, prevalent in the respective year(s). For the same reason, there is no substance in the observation of the Assessing Officer that the depreciation claimed was more than the amount of subsidy.

8.5 The Assessing Officer made addition as documents has not been submitted regarding the receipt of the subsidy.

8.6 The Ld. CIT(A) has also deleted the addition on assumption that the earlier Assessing Officers must have satisfied themselves about the correctness of the claim.

8.7 We hereby direct the assessee to produce the documents pertaining to receipt of subsidy and also calculation of depreciation. The Assessing Officer is hereby directed to go through the documents submitted, satisfy himself and allow as per the rules in force and in accordance with the provisions of the Income Tax Act,1961.

8.8 As a result the appeal of the Revenue is dismissed.

9.1 Brief facts of the issue are that the assessee had given following interest free advances: Haryana State Agriculture Market Board Rs. 29,78,100/- Sh. Nikhil Gupta Rs. 40,00,000/- Sh. GangaRam Rs. 1,50,000/-

9.2 The assessee had debited interest of more than Rs. 2.35 crores to the profit & loss account. The Assessee explained that advance to Haryana State Agriculture Board was for purchase of shop and to Sh. Nikhil Gupta was for construction of prefabricated shed in the end of February, 2011, which did not materialize, since the company decided to install silos and so the amount was returned by him in May, 2011. It was also submitted that advance to Sh. Ganga Ram was a sundry advance. The Assessing Officer was of the view that these advances were not for business purposes and the asset (fabricated shed) had also not been put to use during the year"under consideration. He accordingly disallowed proportionate interest of Rs. 5,88,977/- u/s 36(l)(iii) of the Act on these advances.

9.3 The Ld. CIT(A) deleted the addition on the grounds that the

(i) Advance to Haryana State Agriculture Market Board was for purchase of shop, which is to be used for the purpose of business of the company. (ii) Advance to Sh. Nikhil Gupta was made for construction of prefabricated shed in the end of February, 2011 for storage, which did not materialize, since the company decided to install silos and so the money was returned by him in the month of May, 2011. Sh. Nikhil Gupta is not a related party. (iii) Sh. Ganga Ram is a contractor. The amount given is advance and his bills are credited in the statement of account and there is always credit balance in the operational account. (iv) The company had not borrowed any fund for the above advances. (vi) The interest has been calculated for the whole year whereas these remained with the parties only for the part period.

However, while deleting the disallowance of expenses pertaining to Nikhil Gupta and Ganga Ram, the Ld. CIT(A) directed the AO to restrict the disallowance and to re-compute the same for the period for which it remained with Haryana State Agriculture Market Board.

9.4 We have gone through the facts on record, placing reliance in the case of Bright Enterprises Pvt. Ltd. Vs. CIT 381 ITR 107-wherin Hon’ble P&H High Court has observed that if the interest free funds are available a presumption would arise that investment would be out of interest free funds. The commercial expediency is not in doubt as the advance was given for purchase of Shop for the business of the company in the Mandi Area to be set up by the Board.

10.1 Brief facts are that the assessee had shown an amount of Rs. 51,000/- as advance to Rotary Club, Chandigarh Mid Town. The Assessing Officer has disallowed this amount.

10.2 The Ld. CIT(A) held that the assessee has submitted that this amount was not claimed as an expenditure and it is shown as advance only. An expenditure cannot be disallowed if it has not been debited to the profit & loss account. Therefore, the Assessing Officer is directed to verify as to whether the assessee has claimed this amount and if the assessee has not claimed this amount, then not to make the disallowance.

10.3 The revenue shouldn’t have come to higher forums on such clear finding by the Ld.CIT(A) which is purely a matter of factual verification. Hence we decline to interfere in the order of the Ld.CIT(A).

10.4 As a result, this ground of appeal of the Revenue is dismissed.

11.1 Brief facts relating to the issue are that the Assessing Officer noticed that as per 'notes on accounts' attached with the balance sheet, the assessee had made huge sales to related parties/associated concerns. The Assessing Officer noticed that the sales to the sister/associated concern had been made at a lower rate as compared to sales made to independent parties. The Assessing Officer identified a few instances and questioned the assessee on the issue. The

Assessing Officer was not satisfied with the explanation of the assessee and worked out the suppression in sale at Rs. 22,35,446/- and added this amount.

11.2 Ld. CIT(A) while deleting the addition held that an assessee cannot be expected, much less be compelled, to make profit in every transaction of sale he makes. However, if the transaction is with a related party and the transaction results in a loss, the onus will be on the assessee to establish that it was a bonafide transaction and was not entered into with the motive of benefitting the related party. In the absence of such evidence being led by the assessee, the revenue will be entitled to disallow/ignore the loss while computing the taxable income. However, if the sales to the related party result in a profit to the assessee, even though the sales are made at a rate, lower than at which the sales are made to other parties, the revenue cannot bring to tax the notional profit which the assessee would or could have earned, had the sales been made at the rates charged from unrelated parties.

11.3 Before us Ld. AR brought to our notice that the matter stands covered by the earlier orders of the ITAT, Chandigarh Bench in ITA No. 37/CHD/2014, in ITA No. 1144/CHD/2012 for A.Y. 2009-10 and in ITA No. 775/CHD/2012 for A.Y. 2008- 09 and also in ITA No. 1068/CHD/2013 for A.Y. 2011-12.

11.4 Ld. DR relied on the assessment order.

11.5 Having perused the matter on record and history of the case we are in total agreement with the observation of the Ld. CIT(A) that, the assessee has cited many cogent reasons like huge volume of sales to these concerns etc. to justify the sales to the sister concerns at lower rates. It may be clarified that while the addition for inflated purchases in respect of purchases made from sister concerns could be made u/s 40A(2)(a), but there is no corresponding provision in respect of sales made to sister concerns. The department cannot compel a person to make profit out of every transaction since the department does not have any authority to, ask a person to maximize its profits. If the assessee chooses to give discount to someone, he is free to do it. The only criteria/condition is that the transaction (sale) should not result in loss.

11.6 This principle was enumerated by the Hon'ble Supreme Court in the case of M/s Calcutta Discount Company Ltd. (91 ITR 8) in which Their Lordships have held that when a trader transfers his goods to another trader at a price which is less than the market price, so long as the transaction is bonafide, the revenue

authorities cannot consider the market price ignoring the real price fetched to compute profits from the transaction. It was also held by the Apex Court in this case that an assessee was at liberty to arrange his affairs so as to minimize his tax burden. In the instant case, the persons to whom sales are made at lower rates are tax payers in the highest marginal tax bracket and so it can not even be viewed as a scheme for tax reduction. In view of this discussion, it is held that the Assessing Officer was not justified in making addition of Rs.-22,35,446/- on account of sales made to associated concerns at lower rate and the same is deleted.

11.7 As a result this ground of appeal of the Revenue is dismissed.

12.1 Brief facts of the issue are that the assessee had paid commission to the following persons:

(i) ManojJoshi Rs. 41,840/- (ii) Babu Ram Singhal Rs. 2,888/- (iii) Dinesh Rastogi Rs. 2,53,661/- (iv) Kolkatta Unit (cash payments) Rs. 68,207/- Total Rs. 3.66,536/- 12.2 As per assessment order, the assessee had not furnished any details of the services rendered and confirmations from these persons which were specifically asked for in the assessment proceedings. The Assessing Officer has also noticed that all the payments of brokerage have been made in cash in Kolkatta unit. The Assessing Officer finally disallowed the entire amount of commission paid of Rs. 3,66,536/-.

12.3 Ld. CIT(A) confirmed the addition holding that the assessee has merely submitted that the confirmation can be asked for from the respective parties! It is noteworthy that the Assessing Officer had duly observed that the amount was being disallowed because the assessee had not filed details of services rendered and the confirmations and so the assessee should have filed confirmations and details of services rendered if it wanted the commission paid

to be allowed in appeal. In the absence of the details of services rendered and the confirmations, the commission payment is not verifiable.

12.4 We find that the commission payments have been regularly debited by the assessee to the P&L Account from 2008-09 onwards. We therefore consider it fit in the interest of justice to restore the matter back to the file of the Assessing Officer with directions to the assessee to produce relevant documents and evidences before the Assessing Officer so as to make him eligible for allowance of this expenditure. 12.5 As a result, this ground of appeal of the Assessee is allowed for statistical purposes.

13.1 Brief facts of the issue are that the assessee had claimed an expenditure of Rs. 2,49,613/- on account of foreign travelling. The Assessing Officer asked the assessee to provide details regarding foreign visits and the assessee had submitted that this expenditure was incurred for visit to USA towards stay and ticket to explore possibility of export of DOC and import of Soyabean oil and to explore the possibility of efficiencies of process and process improvements. The Assessing Officer was not satisfied with the explanation of the assessee and disallowed the entire amount with the following observations: "The above reply of the appellant is not acceptable. Except this submission, appellant has not submitted any documentary evidence regarding the business purpose of the appellant for taking the foreign visit. The appellant has not filed any copy of passport/ visa and detail regarding date of journey etc. Moreover, all the sales and purchases have been effected in India. Further, no details of persons contacted in USA was provided to show that this visit was for a business purpose. Since the appellant failed to provide the nexus between the foreign visit and business purpose, an amount ofRs. 2,49,613/- spent on foreign visit is required to be added back to the income of the appellant u/s 37(1)." 13.2 Ld. CIT(A) has confirmed the disallowance as the assessee has not filed any such particulars before the Ld. CIT(A) or before the A.O.

13.3 We have heard the argument of both the parties and perused the material available on record, and consider it fit in the interest of justice to restore the matter back to the file of the Assessing Officer with directions to the

assessee to produce relevant documents and evidences before the Assessing Officer so as to make him eligible for allowance of this expenditure.

13.4 As a result, this ground of appeal of the Assessee is allowed for statistical purposes.

14.1 Brief facts of the case are that the assessee company constructed a school building by spending Rs. 17,46,331/- in the vicinity of its factory in Sri Ganganagar and had claimed this amount under the head 'staff and labour expenses'. The Assessing Officer disallowed this expenditure on the ground that it was not for the purposes of business of the assessee company.

14.2 Ld. CIT(A) after going through the correspondence between the assessee and the Additional Director (Administration), Elementary education, Government of Rajasthan, Bikaner, found that the assessee had agreed for getting constructed a school in the name of 'Gauri Shanker Rajkiya Prathmik Vidyalaya' in Udyog Vihar, Sri Ganganager. As per this order, this building was donated to the school by the assessee. According to the assessee, the school was being used by the employees of the company.

14.3 Ld. CIT(A) upheld the addition holding that as per the provisions of section 37(1) of the Act, the expenses incurred wholly and exclusively for the purposes of business can only be allowed whereas the impugned expenses cannot be said to have been incurred wholly and exclusively for the purpose of business.

14.4 Before us, The Ld. AR argued that the company had contributed for the Government School as per the direction of the state authorities for the construction of the government school in the vicinity of the factory of the company in Sri Ganganagar. (The minutes of the meeting and the directions are enclosed)

It was argued that the assessee incurred this expenditure for the purposes of facilitating a school with the help of the state government which was used by the employees of the company and this being welfare expenses of the workers and was for the purposes of the business of the company is allowable as business expenditure u/s 37. In support it was held that:

Payment made to a trust for opening a school in the assessee company's premises will be allowable as deduction since the amount was paid with the object of providing education to the children of employees of assessee company within the company premises itself and was necessitated for business purpose. (Chambal Fertilisers & Chemicals Ltd. vs. ACIT Tax World. December Vol. XLW. Part 6. P. 195).

14.5 We have gone through the arguments of the assessee and also of the Ld. DR who relied on the orders of the lower authorities. We find that the expenditure is involved as a part of the Staff Welfare wherein the wards of the employees are benefited by studying in the school which was constructed in the remote area with the collaboration of the State Education Department. Hence, this can be treated as Staff Welfare Expenses and hence the addition made by the Assessing Officer is hereby directed to be deleted. 14.6 Appeal of the Assessee on this ground is allowed.

Order pronounced in the open Court.

Sd/- Sd/- (SANJAY GARG) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 04/06/2018 AG Copy to: 1.The Appellant, 2. The Respondent, 3. The CIT(A), 4. The CIT, 5. The DR