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Income Tax Appellate Tribunal, DIVISION BENCH’B’, CHANDIGARH
Before: SHRI SANJAY GARG & DR. B.R.R. KUMAR
PER DR.B.R.R.KUMAR, A.M. :
The present appeal has been filed by the Revenue and Cross Objection
filed by the Assessee are against the order of Ld. CIT(A), Patiala dt. 08/06/2017.
The Revenue has raised the following grounds of appeal:
Whether on the facts and circumstances of the case, the CIT(A) has erred in allowing relief of Rs. 3,81,409/- on account of disallowance of interest made by the Assessing Officer without appreciating the fact that the assessee has taken interest bearing loans and made interest free advances to various parties. 2. Whether on the facts & circumstances of the case, Ld. CIT(A) was right in holding that addition of Rs. 12,40,470/- on account of excess consumption of paddy husk cannot be made without rejecting books of accounts of the assessee under section 145(3) of the I.T. Act, 1961. Further the CIT(A) has erred in appreciating the fact that the paddy milled by the assessee is directly dehusked through mechanical process without any aid from the boiler. 3. Whether on the facts & circumstances of the case, Ld. CIT(A) erred in holding that the Assessing Officer has failed to state the reasons for non- acceptance of valuation made by the assessee but unable to appreciate that the assessee had not valued its closing stock on the basis of market price or cost price whichever is lower as followed by the assessee in preceding years. The CIT(A) has also erred in holding that the Assessing Officer did not give any basis to
estimate 15% of adjustment in value on account of overhead expenses in weighted average cost of raw material whereas the Assessing Officer has specifically pointed out that the assessee has not taken into account all kind of expenses e.g. Dami, Market Fee etc. while valuing its closing stock of raw material.
The only ground raised by the assessee its cross objection reads as under: 1. That the Ld. CIT(A) was not justified to sustain the disallowance of interest of Rs. 7,13,235/- without considering the facts that own capital was sufficient to make advances interest free.
Ground No. 1of the Revenue relates to deletion on account of interest of
Rs. 3,81,409/-. And the Cross Objection of the Assessee relates to Rs. 7,13,235/-.
Brief facts of the case are that the Assessing Officer held that the assessee
has given interest free loans to various people, and disallowed the interest
claimed by the assessee on the payments made to the banks on the loans
raised. The Assessing Officer has observed that it was immaterial whether the
assessee had free reserves and made interest free advances out of those
reserves. The Assessing Officer held that the entire money in a business entity
comes in a common kitty and only the relevant fact was that the assessee had
raised interest bearing funds and has given interest free advances at the same
time. He relied on the decision of Hon’ble Punjab & Haryana High Court in the
case of Abhishek Industries Ltd. 286 ITR 1. The Assessing Officer thus disallowed
Rs. 10,94,644/- on account of the interest.
The action of the Assessing Officer has been modified by the Ld. CIT(A) to the
extent of Rs. 3,81,409/- and hence the appeal of the Revenue and Cross
Objection of the assessee.
Before us, the Ld. DR relied on the order of the CIT(A) to the extent of the
amount confirmed and argued that the deemed interest on other creditors
needs to be upheld.
Ld. AR argued that the parties to whom interest free advances were
made or the trade debtors from whom regular purchases were being made by
the assessee and that the amount was paid in lieu of the purchases or was
adjusted in the next year purchases. It was argued that the advances were
made on account of commercial expediency. The Ld. AR relied on the
judgment of SA Builders Vs. CIT 288 ITR 1(Supreme Court). Further the assessee
submitted that the assessee has its own capital of Rs. 72,62,060/- and if the
interest component is calculated @12% it would also amount to Rs. 8,71,440/-.
Ld. AR further relied on the judgments in case of M/s Munjal Sales Corporation
Vs. CIT 215 CTR 105 for the proposition that interest free loan if less than the own
funds, no disallowance is called for. Similarly in case of TATA Chemical Ltd. Vs.
ACIT 138 ITD 458 Mumbai ITAT held that the Addition of notional interest towards
borrowing is not justified where assessee’s own fund were sufficient to cover the
loan given to certain parties.
Since the assessee has given advances for the business expediency and
also keeping in view the fact on record that the assessee has got sufficient own
funds in the form of capital no disallowance is called for.
As a result the grounds of the Revenue’s appeal is dismissed and C.O. of
the assessee is treated as allowed.
Ground No. 2 of the Revenue relates to the deletion of Rs. 12,40,470/- on
account of excess usage of husk. The Assessing Officer held that the assessee
has used an excess of 3938 Quintals of paddy husk in boiler.
The Ld. CIT(A) has deleted the addition.
Before us the Ld. DR submitted that the assessee has not maintained any
day to day record of paddy husk utilization and consumption. The assessee has
consumed 13579 quintals of husk in the boilers. The assessee has milled paddy
weighing 18120 quintals on behalf of Punjab Agro. The paddy milled by the
assessee for State Agencies is directly dehusk through mechanical process
without any aid from the boilers. Thus the assessee has not used any paddy husk
for processing of Government paddy.
Ld. AR submitted that the consumption was in fact less and provided the
chart of consumption levels of paddy husk. It shows the percentage of husk
consumed of own paddy milling was 22.24% for the year in question and 24.34%
for the year 2010-11 similarly the percentage of husk consumed of total paddy
milled is 17.96% for the current year and 20.15% for the A.Y. 2010-11. Hence the
consumption @ 29% calculated by the Assessing Officer was just an estimate
without bringing any material to prove the higher consumption.
We have gone through the material on record the Assessing Officer has
worked out the excess consumption at 29% of paddy husk on mere estimate
basis, hence we decline to interfere in the order of Ld. CIT(A) in deleting the
addition.
Ground No. 3 relates to the addition on account of under valuation of
stock.
The Assessing Officer made addition of Rs. 47,57,258/- on account of
under valuation of closing stock. The assessee has valued closing stock of 4945
quintals at Rs. 50,80,870/- in respect of PR paddy. Similar is the case of paddy DP
rice, rice bran , paddy sarbati, and Bardana katta. The Assessing Officer has
valued the closing stock at weighted average cost and a further benefit of 15%
for overhead expenses. The valuation of goods is arrived by adopting weighed
average sale price. The Assessing Officer held that the assessee has failed to
substantiate the justification for change in method of valuation of stock at
market rate during the year in contravention to the earlier practice.
Before us the Ld. DR argued that the action of the Assessing Officer is
correct and change in valuation lead to change in the profits for the year.
Before us the Ld. AR argued that the action of the Assessing Officer in
changing the valuation is not acceptable. It was submitted that the old stock
valuation in the case of bardana was accepted in the earlier years and relied
on the submissions made before the Ld. CIT(A)
We have heard Ld. Representatives of both the parties and perused the
material placed before us. We find that while the case laws filed by the both the
parties deal with the legal aspects of the valuation. It is an admitted fact that
the aseesee has been consistently following the valuation method at cost or at
market price whichever is less. The assessee for the year under consideration
changed the method to ‘market price” where as the Assessing Officer has
applied his own method of average price and revalued in the closing stock. The
assessee has not given any justification for change of method of valuation. In
view of this the matter is restored to the file of the Assessing Officer to apply the
method of valuation of closing stock as has been adopted by the assessee in
the earlier assessment years.
In the result appeal of the Revenue is dismissed and the cross objection of
the assessee is allowed.
Order pronounced in the open court.
Sd/- Sd/- (SANJAY GARG) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 27/03/2018 AG Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. The CIT 5. The DR