DCIT, NAJIBABAD vs. M/S KISAN SAHKARI CHINNI MILLS LTD., NAJIBABAD

Since these are cross appeals, they are taken up together and disposed of by this common order for the sake of convenience.

Let us first take up the assessee’s appeal.

The assessee has raised the following grounds of appeal:

We have heard the rival submissions and perused the materials available on record. The assessee is a Cooperative Society and engaged in the business of manufacturing & trading of sugar & its by-products. The return of income for AY 2011-12 was filed by the assessee on 27/09/2011 declaring nil income after availing deduction u/s 80(P)(2)(d) to the extent of Rs.63,27,070/-, restricting to the gross total income. Actually the assessee quantified the claim of deduction u/s 80(P)(2)(d) of the Act at Rs.3,04,68,223/- but it restricted the same to the extent of gross total income of Rs.63,27,070/-. The Ld. AO show caused the assessee stating that as per the decision of Hon’ble Allahabad High Court in the case of CIT vs. Dugdh Utpadak Sangh Ltd., reported in 156 taxman 72 (All), the deduction u/s 80(P)(2)(d) of the Act is allowable only on net income and not on gross income. The Ld. AO, accordingly, directed the assessee to furnish the details of all expenses which can be attributed to earning of interest income in respect of which deduction u/s 80P (2)(d) of the Act is claimed. The assessee responded that it had not incurred single expenditure for earning interest from Co-operative institutions & bank amounting to Rs.3,04,68,223/- and, hence, the deduction would be allowable in its entirety as was allowed to the assessee in earlier years. The Ld. AO, however, ignoring the submissions estimated a sum of Rs.10,00,000/- as expenses attributable for earning the interest income and made disallowance u/s 80P(2)(d) of the Act for Rs.10,00,000/- and restricted the claim of deduction only to Rs.2,94,68,223/- (3,04,68,223-10,00,000). The Ld. CIT(A) upheld the action of the AO.

At the outset, we find that the assessee had given loans to three Co-operative Societies and earned interest income thereon.

These loans and deposits were carried forward from earlier years.

With regard to other grounds of the assessee, the same are concerning addition made u/s 145A of the act.

We have heard rival submissions and perused the materials available on record. The assessee as per its accounting policy enclosed in the financial statements had been consistently following the method of valuation of its closing stock as under: a. Free Sugar-At cost price or market price whichever is lower b. Levy sugar-At cost price or market price whichever is lower c. Molasses-At market price d. Bagasse- At market price

During the year, there is no absolutely change in the method of valuation of closing stock by the assessee. The assessee has valued the closing stock of sugar as on 31/03/2010 as below:

Similarly, there is no change in the method of valuation of closing stock of Molasses. The assessee has been consistently following the method of valuation of stock of molasses at market price since inception. The market price is determined by U.P. Co-op Sugar Factories Federation Ltd, Lucknow on the basis of tendering process. The details of closing stock of Molasses are as under:

The assessee has been consistently following the method of valuation of closing stock of Bagasse at market price since inception. The market price is determined by the U. P. Co-operative Sugar Factories Federation Ltd., Lucknow on the basis of tendering process. There is no change in the method of valuation of closing stock during the year.

We find that similar issue had been adopted by this Tribunal for AY 2010-11 in dated 13/10/2021, wherein this issue has been remanded back by the Tribunal for factual verification to the file of the Ld. CIT(A). Similar directions are given for this year also and this issue is restored to the file of Ld. CIT(A). Accordingly, the grounds No.3 & 4 raised by the assessee are allowed for statistical purposes.

In the result, the appeal of the assessee is allowed for statistical purposes.

Let us take up the Revenue Appeal.

The Ground No.1 raised by the Revenue is challenging the deletion of addition of Rs.4,39,19,785/- by the Ld. CIT(A). Page 9 of 20

We have heard the rival submissions and perused the materials available on record. The Ld. AO rejected the books of accounts of the assessee u/s 145(3) and proceeded to estimate the net profit of the assessee @ 4.5% and made addition of Rs.4,39,19,785/-. It was submitted before the Ld. CIT(A) that assessee its accounts have been duly audited by the statutory auditors appointed by the CANE Commissioner of Registrar of all the Co-operatives Mills in UP. The auditors submitted their report on 05/11/2011 and accepted the results shown by the assessee and were satisfied that proper books of account as required by law has been maintained by the Co-operative Society. The main trigger by the Ld. AO resorting to rejection of books of accounts was that the assessee had shown profit of Rs.23,82,04,844/- in the immediately preceding year, whereas during this year, there was a loss of Rs.2,52,06,506/-. The assessee pointed out that the basic reason for the loss in this year is the sale of finished goods brought forward from previous year were actually sold at a price lesser than its cost price due to market conditions. The assessee submitted the factual details to buttress the deficiencies pointed of the by the Ld. AO in its assessment order. All these factual submissions made by Page 10 of 20 the assessee were subjected to remand proceedings before the Ld. AO at the behest of Ld. CIT(A). The Ld. AO examined the entire submissions of the assessee together with the price of opening stock of finished goods at which they were sold when compared to its cost price. The assessee furnished the entire details of free sale sugar for the year 2009-10 out of the opening stock of sugar on monthly basis together with the sale invoices thereon. The assessee also furnished the cost of production workings for the FY 2009-10 wherein the cost of production as on 31/03/2010 was arrived at Rs.2824.51 per bag. Apart from this, the following details were furnished by the assessee to justify the incurrence of loss during the year:-

The assessee also submitted that as on 01/04/2009, the value of opening stock of the assessee was as under:

This opening stock as on 01/04/2009 was sold during financial year 2009-10 relevant to AY 2010-11 at Rs.2391.18 per bag resulting in sales realization of 69,49,56,906/-. This excess sale realization has resulted in profit of Rs.23.44 Crores in AY 2010-11, whereas during the year under consideration, the assessee could not sell its opening stock at a price higher than for which it was valued as on 31/03/2010 thereby resulting in loss.

All these facts were duly examined by the Ld. AO in the remand proceedings and a remand report was submitted by the Ld. AO, wherein he did not give any adverse comment on the submissions made by the assessee but only stated that these factual details were not submitted by the assessee during the original assessment proceedings despite having ample opportunities. The Ld. CIT(A) deleted the addition made an estimated basis in the sum of Rs.4,39,19,785/- by observing as under:

From the above, it is very clear that assessee had furnished all the details in support of its contention with factual material. These details were duly subjected to verification by the Ld. AO in the course of remand proceedings. Even in the remand report, the Ld. AO had not drawn any adverse inference on the said factual submissions made by the assessee with supporting evidences. The only grievance of the Ld. AO is that these details were not submitted by the assessee during the course of assessment proceedings.

Ground No.2 raised by the Revenue is challenging the deletion of disallowance of interest in the sum of Rs.9,39,382/- on loans borrowed by the assessee. The assessee had given interest free loans and advance of Rs.2.89 Crores & 1.07 Crores to UP Cooperative Sugar Factories Federation Ltd. on account of molasses & general account as well as Rs.97.68 lacs to other factories. The Ld. AO observed that the borrowed funds of the assessee had been diverted for giving interest free loans and advance and accordingly, he proceeded to disallow the interest payment made by the assessee Page 15 of 20 in the sum of Rs.9,39,382/-. It was submitted by the assessee that UP Cooperative Sugar Factories Federation Ltd., Lucknow is an Apex Body of all many sugar factories in UP and advances were given by the assessee in the normal course of its business and for the purposes of its business. Similarly, advance money paid to other factories were also made for the purpose of business only. We find from the balance sheet of the assessee that it has got sufficient own funds of Rs.62.77 Crores as against the borrowings of Rs.12.99 Crores. Since, the own funds are sufficiently available with the assessee, it can be reasonably presumed that interest free advances were given by the assessee out of its own funds and not out of the borrowed funds. Reliance in this regard is placed on the decisions of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 and in the case of HDFC Bank Ltd reported in 366 ITR 505. In any case, we find that interest free money advanced is also made on account of commercial expediency and in view of the decision of the Hon’ble Supreme Court in the case of SA Builders reported in 288 ITR 01, there cannot be any disallowance of interest. Accordingly, we hold that the Ld. CIT(A) rightly deleted the disallowance of interest. Accordingly, ground No.2 raised by the Revenue is dismissed.

Ground No.3 raised by the Revenue is challenging the deletion of disallowance of Rs.26,22,529/- made on account of repair & maintenance of factory.

We have heard the rival submissions and perused the material available on record. The Ld. AO sought for details of expenses debited to the profit and loss account and asked for copy of bill of Rs.26,22,529/- debited on 31/03/2011 in the name of M/s Mohan Trading Corporation. The assessee submitted the same before the Ld. AO. The Ld. AO on perusal on the same held that the said expenditure is incurred for substantial repairs/ overhaul and hence, it has to be construed as capital in nature. Accordingly, the Ld. AO disallowed this expenditure on account of repair & maintenance in the sum of Rs.26,22,589/- in the assessment. The assessee submitted the complete breakup of the said bill before the Ld.CIT(A) which are reproduced herein under:

The assessee submitted that no asset has been brought into existence which would provide any benefit of enduring nature to the assessee. These repair expenses are in the nature of repairing and laying of G.C.I Sheet roofing in place of worn out G.C.I. roof and laying of tarfelt on the roof etc. which were damaged or worn out because of rains, sunlight, duststore etc. It was pleaded that all these expenses are only Revenue in nature. On without prejudice basis, the assessee submitted that the Ld. AO having treated it as capital in nature ought to have granted depreciation on the same.

In the result, appeal of the Revenue is dismissed.

To sum up, the appeal of the assessee is allowed for statistical purposes and appeal of the revenue is dismissed.