DCIT CIR 2(2), MUMBAI vs. KAYTEE CORPORATION LTD, MUMBAI

The captioned appeal by the assessee is directed against the order of the CIT(A)-5, Mumbai dated 13/01/2012, pertaining to the Assessment Year 2005-06, which in turn has arisen from an order passed by the Assessing Officer dated 28/07/2012 under section 143(3)of the Income Tax Act, 1961 (in short ‘the Act’) .

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in disallowing the addition made on account of sampling expenses by holding it that the Aa did not bring anything on record to prove that the expenses are bogus, inflated and not laid out for business purpose and Ld. CIT(A) ignored the fact that assessee failed to give any evidence or any details of the sampling expenses at the time of framing of assessment.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting disallowance of Rs. 16,44,647/- for interest attributable for investment . in shares and failed to appreciate that above disallowance is almost in the nature of disallowance u/s 14A and not in the nature of diversion of interest free funds which Ld. CIT(A) misinterpreted.

3. In so far as the first issue is concerned, the same arises from the action of the Assessing Officer in disallowing an amount of Rs.35,04,272/- out of sampling expenses. The respondent-assessee is engaged in the business of both trading and manufacturing of garments and hosiery, which are mainly exported. In the year under consideration, the Assessing Officer noticed that sampling expenses incurred by the assessee was Rs.2,10,65,583/- as against Rs.1,89,25,795/- in the immediately preceding year, although the sales during the year had declined to Rs.68.00 crores as against Rs.73.00 crores of the preceding year. On being asked to explain the increased sampling expenses, assessee contended that having regard to the nature of business, assessee was required to keep making innovative designs, patterns, colours, etc., which are sent to the customers, who are situated in various parts of the world for approval. The requisite details were also furnished, however, the Assessing Officer was not satisfied. It was observed by the Assessing Officer that though assessee had furnished details of expenditure but no evidence or detail in respect of the despatch of the samples or names of the parties were given and it was not explained whether the parties to whom samples were given, purchased any goods from the assessee. Accordingly, the Assessing Officer restricted the expenses to 2.58% of the total sales (which was the ratio of sampling expenses in the immediately preceding year) and accordingly, a sum of Rs.35,04,272/- was disallowed.

4. Before CIT(A), the assessee pointed out that 99% of its total sales were by way of exports and the sales were not made to any related party. Therefore, the expenditure on sampling could not be disallowed and it was also pointed out that no such disallowance was made in the past or in the subsequent years. The CIT(A) noted the submissions put- forth by the assessee and has deleted the addition on the ground that there was no material brought on record by the Assessing Officer to prove that the expenses under the head ‘sampling’ were either bogus or inflated or were not incurred for the business purposes. Against the aforesaid decision, the Revenue is in appeal before us.

5. Before us, the Ld. Departmental Representative appearing for the Revenue reiterated the objection taken by the Assessing Officer, which is to the effect that during the assessment proceedings assessee had failed to provide any evidence or details of sampling expenses.

6. Ld. Representative for the respondent-assessee justified the decision of the CIT(A) and has referred to the detailed submissions made before the CIT(A), a copy of which has been placed on record. Ld. Representative for the assessee also pointed out that requisite details of sampling expenses were furnished to the Assessing Officer and it was also pointed out that there was no such disallowance either in the past or in the subsequent years. Ld. Representative for the assessee had referred to a chart showing the turnover and sample expenses incurred for the last 10 years to point out that the ratio of sampling expenses over turnover cannot be static and it varies, having regard to assessee’s nature of business. In any case, it is argued that there is no material to doubt the sample expenses claimed by the assessee.

7. We have carefully considered the rival submissions. The incurrence of sampling expenses in the course of assessee’s business is not the subject matter of dispute because the Assessing Officer has not made wholesale disallowance but has made only a partial disallowance. The Assessing Officer was not convinced with the level of sampling expense incurred vis-a-vis the amount incurred in the preceding assessment year. In our considered opinion, the variation in the level of expenses, vis-a-vis an earlier year can be a ground to further investigate the matter, but the same by itself cannot be a ground to disallow any expenditure, specially, without bringing on record any infirmity or falsity in the claim made by the assessee. In the present case, in our view, the CIT(A) made no mistake in deleting the disallowance of Rs.35,04,272/- made by the Assessing Officer , which was essentially an adhoc disallowance bereft of any factual support. Thus, on this aspect we affirm the order of CIT(A) and Revenue fails.

8. The next ground in the appeal of the Revenue relates to a disallowance of Rs.16,44,647/- made by the Assessing Officer on account of interest expenditure under section 36(1)(iii) of the Act. In this context , brief facts are that the Assessing Officer noted that the assessee had made investment in shares of Rs.64,74,625/- and had also given interest free loans to its sister concerns, namely, M/s. Premier Knit Processors Pvt. Ltd. – Rs. 4,49,43,996/- and M/s. Kaytee Apex Ltd. – Rs.83,41,385/-. The Assessing Officer also noticed that assessee had debited interest expenditure of Rs.1,21,01,211/- in its Profit & loss account. The Assessing Officer disallowed the interest proportionate to the aforesaid amount and quantified the amount at Rs.16,34,647/- by invoking section 36(1)(iii) of the Act.

9. Before CIT(A), assessee assailed the disallowance out of interest expenditure on facts and in law. With respect to the interest free advances made to the sister concerns, the CIT(A) has upheld assessee’s assertion that the same were trade advances and, therefore, no interest could be disallowed as such advances involved commercial expediency. In coming to such conclusion the CIT(A) has relied upon the judgment of Hon’ble Supreme Court in the case of S.A. Builders vs. CIT, 288 ITR 1(SC). Further, CIT(A) also noted that assessee had sufficient own interest free funds to cover the impugned advances and, therefore, no disallowance was called for having regard to the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd., 313 ITR 340(Bom). Against such decision of the CIT(A), the Revenue is in appeal before us.

10. Before us, Ld. Departmental Representative appearing for the Revenue has assailed the order of the CIT(A) by merely reiterating the stand of the Assessing Officer to the effect that the assessee-company was having a common kitty of funds, both interest free as well as interest bearing, and therefore, interest expenditure proportionate to the impugned amount was liable to be disallowed under section 36(1)(iii) of the Act.

12. We have carefully considered the rival submissions. Having perused the orders of the authorities below and also the written submissions made by the assessee to the CIT(A), it is quite clear that the factual findings of the CIT(A) are borne out of record. The Annual Financial statements of the assessee, a copy of which has been placed at Pages 1 to 35 of the Paper Book, clearly bring out the nature of the advances to the sister concerns, being trade advances. The assessee- company had pointed out before the CIT(A) that the amount advanced to M/s. Premier Knit Processors Pvt. Ltd. was for purchasing yarn of requisite quality and getting garments manufactured at various factories at Tirupur for supplying to the assessee. It was also pointed out that the said concern was providing dyeing services to the assessee. It was pointed out that due to such arrangement, assessee’s job orders got priority from M/s. Premier Knit Processors Pvt. Ltd. and, therefore, there was a measure of commercial expediency in making such advances. Further, with regard to the advance of Rs.83,41,385/- to M/s. Kaytee Apex Ltd., it was explained that the amount was advanced for setting-up stitching facility at Tirupur, which was exclusively provided to the assessee. Therefore, such loan was for the ultimate advancement of the assessee’s business operations as it facilitated timely delivery and quality of products, which was crucial for meeting the export obligations. These aspects have been appreciated by the CIT(A), and in our view, there is no cogent material before us, which would require us to distract from ultimate finding of the CIT(A).

12.1 With regard to the investment in shares of Rs. 64,74,625/-, the Ld. Representative for the assessee explained that all investments except to the extent of Rs.50,000/-, were made in the past years and there was no disallowance out of interest expenditure in the past years. On this aspect also, we find no reason to interfere with the decision of the CIT(A) in deleting the disallowance, as no nexus can be established between the interest bearing funds and the investment in shares. Thus, on this aspect also the order of the CIT(A) is affirmed.

Order pronounced in the open court on 20/11/2015.