JCIT, NEW DELHI vs. M/S. DAAWAT FOODS LTD., NEW DELHI

These two appeals are filed by the assessee and Revenue against the order of the ld. Commissioner of Income Tax (Appeals)- 44 [hereinafter referred to CIT (Appeals)] New Delhi, dated 9.09.2016 for assessment year 2010-11.

Ground No. 1 of grounds of appeal

Even otherwise, we find strength in the ornament of the Ld. AR that in order to avoid the double taxation once in the hands of the firm and secondly in the hands of the partner, the share in the profits of the partnership form is not taxable in the hands of the partner as has been held by the Mumbai bench of the Tribunal in the case of Sudhir Kapadia VSITO in ITA No. 7888 of 2013, which was followed in the case of Hamid A Moochhala VS. ACIT in ITA No2218/Mum/2010.

Further, there is no denial of the fact that as on 31/3/2006 and 31/3/2007, the capital and free reserves of Cross I.T.A. Nos. 1758 & 2387/Del/2017 the assessee were Rs. 60, 92, 50, 784/- and Rs. 1,19,99,27,510/- respectively as against the investment in the partnership form on 31/3/2006 and 31/3/2007 stood at Rs.3,49,55,937/-and 3,67,57,562/- only and therefore, it cannot be said that any borrowed funds could have been utilised to make such investment incurring any interest expenditure.

Viewing from any angle, we did not find any ground to sustain addition made under 14A of the Act read with Rule 8D of the Rules. Such an addition is, therefore, is directed to be deleted. Ground number 17 is accordingly allowed."

We observe that the disallowance under section 14A read with Rule 8D was deleted by the Tribunal in assessee’s own case for the subsequent assessment years i.e.assessment years 2011-12 to 2014-15 holding that the share of profit from the partnership is mere distribution of income and is already been taxed, hence provisions under section 14A are not attracted in such cases. We observe that the Tribunal also held that if there is no exempt income no disallowance is called for under section 14A of the Act and finally the Tribunal directed the Assessing Officer to re-compute the disallowance keeping in view the guide-lines mentioned therein. Following the judgement of the Tribunal we direct the Assessing Officer to recompute the disallowance, if any, under section 14A read with Rule 8D of the I.T. Rules keeping in 6 Cross & 2387/Del/2017 view the guide-lines set out by the Tribunal in the order for the assessment years 2011-12 to 2014-15. This ground is partly allowed.

Ground No. 2 of grounds of appeal

In so far as write off of sundry advances of Rs.7,82,259/- the ld. Counsel submits that in the financial year 2007-08 the assessee was proposing to enter into new business of supply of packaged food items and for that purpose had advanced certain amounts to various parties as referred to in page Nos. 87 to 99 of the paper book. However, the said venture could not materialize and thereby the assessee was unable to recover the advances made. The management of the assessee decided to write off of the set of the aforesaid amounts as irrecoverable and accordingly the amount of Rs.7,82,259/- was written off and, therefore, it is an allowable deduction as loss incidental to business as bad debt.

On the other hand, the ld. DR strongly placed reliance on the orders of the authorities below.

Heard rival submissions perused the orders of the authorities below and the decisions relied on. On perusal of the order of the Assessing Officer as well as the ld. CIT (Appeals) we observe that there is no dispute that the assessee has acquired M/s. Race Allied Services business of supply of diesel to tours and allied services to telecom companies, Proprietor Mr. Amit Jain in the name of M/s. Race Allied Services. It is also not in dispute that the assessee has duly offered to tax the business receipts of Rs.14,95,81,877/- of M/s. Race Allied Services for the assessment years 2008-09 and 2009-10 and receipts and profits earned thereon of Rs.49,89,522/- and paid taxes accordingly. We observe that after acquiring the business of M/s. Race Allied Services the assessee employee Mr. Amit Jain to look after day-to-day operations of the business and in the business interest and exigencies assessee had also given interest-free loan to Mr. Amit Jain to repay the liabilities of his business existing at the time of acquisition of M/s. Race Allied Services from him. The assessee discontinued the business of M/s. Race Allied Services in the financial year 2009-10 relevant to assessment year under consideration as it was no more economically viable and on shutting down of business operation the recovery of 11 Cross I.T.A. Nos. 1758 & 2387/Del/2017 loan including imprest amount lying with Mr. Amit Jain became remote and, therefore, the assessee wrote off the outstanding balance of Rs.31,22,886/- recoverable from Mr. Amit Jain. This was claimed as business loss/bad debt by the assessee. This amount was disallowed by the Assessing Officer for the reason that this was not accounted for as income by the assessee in its P & L Account and the ld. CIT (Appeals) observed that there is no evidence to show that this amount was irrecoverable and, therefore, not allowable deduction. We observe that the loan was provided to Mr. Amit Jain on the business interest and exigency of the assessee for the reason that Mr. Amit Jain can look after the day-to-day operations of the business which he was previously doing when he was the Proprietor of M/s. Race Allied Services. We also observe that on account of shutting off of the said business possibility of recovery from Mr. Amit Jain became bleak and, therefore, the outstanding balance was written off by the assessee.

In the case of Harshad J. Choksi Vs. CIT (supra) the assessee claimed deduction of advance written off of bad debt under section 36(2) of the Act. The Assessing Officer rejected the claim of the assessee holding that for claiming deduction under section 36(2) of the Act the amount first should be offered to tax in the previous year which finding was affirmed by the CIT (Appeals) and also the Tribunal. However, the Hon’ble High Court held that even if a deduction is not allowable as bad debt the same should have been considered for deduction as business loss.

In the case of Vasanji Sons & Co. (P) Ltd. Vs. CIT (supra) the Hon’ble Bombay High Court held as under:- 12 Cross & 2387/Del/2017 "To turn once again to the statement of the case and the facts found therein, it is important to bear in mind that the memorandum of association of the assessee permitted it to carry on business as managing agents of any other company. Further, as stated in para. 3 of the statement of case, the assessee company along with two others (the two other parties designated by the Tribunal as its partners) promoted Navanagar Industries Ltd. as also its managing agency company, V.H.D. Agencies Ltd. in which all the three parties had an equal share-holding. The short question which then arises and which is required to be answered in this reference is: can the principle which has been accepted in respect of a loan by the managing agency to the managed company be extended to apply to a constituent of the managing agency company of the type and nature of the assessee company (bearing in mind the description of the three shareholders as partners by the Tribunal)It is true that this description is not strictly tenable in law. But it must be realised that the Tribunal was well aware of the legal or technical distinction between a limited company and a partnership firm, and being aware of this distinction it chose to describe the three shareholders as the three partners of V.H.D. Agencies Ltd. the managing agents. The question then is: if one of the three shareholders, constituents of the managing agency company, were to lend amounts to the managed company, can the advances be not regarded as springing directly from the carrying on of business or trade and incidental to it but only regarded as merely having some connection with the trade or business of the constituent? If it is the former, then the amount lost to the assessee-company will be required to be allowed as a deduction; if it is the latter, it cannot be so allowed. In our view, bearing in mind the basic reality of the situation as derived from the facts stated by the Tribunal, this would be one of the cases in which the court is entitled to pay regard to the economic realities which existed behind the legal facade. The assessee- company under its memorandum of association is entitled to undertake managing agency business. It undertook that business in the instant case and in the case of Navanagar Industries Ltd. but not directly and wholly but acting in concert with two other parties and through the device of a limited companyviz., V.H.D. Agencies Ltd. We do not see how the moneys lent by the assessee-company Cross & 2387/Del/2017 to the managed company could not be regarded as finances provided for a company in which the assessee was substantially interested. This is in fact the very phraseology employed by the ITO who was of the opinion that even if this be so, unless this was part of the money-lending activity of the assessee, the deduction had to be disallowed. We are of opinion that it was not necessary for the assessee-company to have undertaken any money-lending activityIf the object of the advancing of money was to provide finance for a company in which the assessee was substantially interested, the debt must be regarded as directly springing from its business activity and the connection cannot be considered to be too remote for the purpose of the allowance as a trading debtThe test and the approach to be applied in this case must be that of a businessman and on that approach we are of opinion that the answer given by the Tribunal cannot be sustained and the amount will have to be allowed to the assessee as a trading debt for the year in question. "

The Hon’ble Delhi High Court in the case of CIT Vs. Investa Industrial Corporation Ltd. (supra) held that if as a result of managed company having gone into liquidation the advances become irrecoverable the loss arising to the assessee would be allowable as a trading loss.

In view of the above, we hold that since the assessee had advanced the loan to its employee on account of business interest and due to shut down of the operations entity the loan become irrecoverable and was written off by the assessee along with the imprest lying with the employee who was looking after day-to-day business and the same is allowable as business loss under section 28 of the Act. 19. In so far as sundry advances written off of Rs.7,82,259/- is concerned we observe that the same was provided as advances to Cross & 2387/Del/2017 various parties for entering into a new business of supply of packaged food items and since the business could not be materialized the assessee had written off the sundry advances given to various parties. 20. We observe that the Mumbai Tribunal in the case of DCIT Vs. M/s. Edelweiss Capital Ltd. in ITA. No. 3971/Mum/2009 held that the moneys advanced for development of web site of the assessee which was written off subsequently for the reason that the web site did not materialize and the advances became irrecoverable the write off claim by the assessee is a loss incidental to the business and, therefore, allowable as business loss in terms of the provisions of section 28 of the Act. The Delhi Tribunal in the case of Minda HUF Vs. JCIT (supra) has taken a similar view. Therefore, in our view the sundry advances written off by the assessee are allowable as deduction under section 28 of the Act as business loss. Thus, we direct the Assessing Officer to delete the disallowance of Rs.39,05,136/- made out of bad debts. This ground is allowed. 21. Ground No. 3 of the grounds of appeal is in respect of transfer pricing adjustment of Rs.13,59,665/- in respect of receipt of receivables from AE. 22.1 The ld. Counsel for the assessee submits that During the year under consideration, the appellant inter-alia raised invoices on account of sales made to the following associated enterprises: Kusha Inc. Nice International FZE Cross I.T.A. Nos. 1758 & 2387/Del/2017 22.2 On perusal of the invoice wise details of rice sold to the aforesaid associated enterprises, it was noted by the Transfer Pricing Officer (TPO) that the remittances were received by the appellant after some time lag beyond 120 days [refer para 6.11 of the TPO order]. Before the TPOthe appellant, vide letter dated 12.08.2013, explained, inter alia, that: (a) the company does not have the policy of charging any interest on overdue receivables from AE's as well as Non-AE's; (b) the delay is not abnormal and the same is on account of logistic issues when cargo is delayed on account of shipments; and (c) the delay has been compensated by early realizations. 22.3 Without appreciating the aforesaid the TPO in his order dated 28.03.2013 while exceeding his jurisdiction re-characterized the delay in receipt of receivables as unsecured loans advanced to the associated enterprise and imputed notional interest @14.88%, being average SBI prime lending rate for the financial year 2009-10 i.e.11.88% plus 300 basis points. The TPO accordingly proposed an adjustment of Rs.13,59,665 to the income of the appellant. 22.4 The CIT(A) upheld the adjustment made by the TPO/AO on account of interest for the period of delay in receipt of trade receivables from the associated enterprises.

The ld. Counsel further submits that the issue is squarely covered by the order of the Tribunal in the case of L.T. Foods Ltd. Vs. DCIT (supra) which is a group entity for the assessment years 2008-09 and 2009-10 in and 6222/Del/2012 dated 11.04.2022 wherein it has been held that adjustment in respect of 16 Cross I.T.A. Nos. 1758 & 2387/Del/2017 receivables from AE is un-warranted. The ld. Counsel submits that while holding so the Tribunal followed the decision of the jurisdictional High Court in the case of Kusum Health Care Pvt. Ltd. [398 ITR 66].

Heard rival submissions perused the orders of the authorities below and the decisions relied on. On perusal of the order of the Tribunal in the case of assessee’s group entity, namely, L.T. Foods Ltd. Vs. DCIT (supra) an identical issue has been decided observing as under:-

Ground No. 8.4 relates to interest on outstanding receivables. During the course of TP assessment proceedings, it was noticed from the invoice-wise details of rice sold to AE that the assessee has received sale consideration after some time lag, beyond the period agreed to between the parties that is 25 days to 120 days. Such details are at pages 24 to 30 of the TPO order.

The TPO re-characterised the delay in receipt of receivables as unsecured loans advanced to the AE and imputed notional interest @ 7.26% and, accordingly, proposed adjustment of Rs.28.57 lakhs which was upheld by the DRP. However, the DRP directed the TPO to consider the rate of interest at 12.72% being PLR of interest by SBI. 43. Pursuant to the directions of the DRP, final adjustment was made at Rs. 21,05,962/-. Before us, the learned counsel placed strong reliance on the decision of the Hon'ble jurisdictional High Court of Delhi in the case of Kusum Healthcare Limited and also relied upon the decision in the case of Avenue Asia Advisors 398 ITR 120. 44. The learned counsel further pointed out that interest cost has also been suitably factored in sale price as operating profit 17 Cross I.T.A. Nos. 1758 & 2387/Del/2017 margin of the assessee is much higher than operating margin of the comparable companies.

The ld. counsel for the assessee further stated that the assessee is also in receipt of remittances against sale of rice from unrelated 3rd parties wherein also, on similar delay, no interest has been charged by the assessee.

Per contra, the ld. DR strongly supported the findings of the TPO and read the relevant observation of the Assessing Officer/DRP.

We have carefully considered the rival submissions. The Hon'ble Jurisdictional High Court of Delhi in the case of Kusum Healthcare Pvt. Ltd [Supra] has held as under: "10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 928 of the Act of the expression "receivables" does not mean that de hors the context every item of "receivables" appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Appellant will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.

The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself."

In light of the aforementioned findings of the Hon'ble High Court, the contention of the assessee that no interest has been 18 Cross & 2387/Del/2017 charged from non-AEs on similar delay cannot be brushed aside lightly. In fact, in the case of Aura OI SAS, delay was of 81 days and in the case of Sabi Foods, delay was of 52 days and no interest was charged by the assessee.

We have elsewhere mentioned the operating profit margin of the assessee vis a vis comparable companies from where it can be seen that the operating profit margin of the assessee is much higher than that of the comparable companies.

Considering the facts in totality in light of the ratio laid down by the Hon'ble Jurisdictional High Court [supra[ and keeping in mind that no interest was charged from receivables from non-AES, we are of the considered view that this adjustment is unwarranted and, accordingly, direct the Assessing Officer to delete the addition of Rs. 21,05,962/-, Ground No. 8.4 is, accordingly, allowed.”

We observe that the facts in the case of L.T. Foods Ltd. Vs. DCIT (supra) which is the group concern of the assessee are almost identical to the facts of the assessee’s case and thus following the order of the co-ordinate bench in the case of L.T. Foods Ltd. Vs. DCIT (supra) we direct the Assessing Officer to delete the transfer pricing adjustment made on account of receivables from AE. This ground is allowed. 27.1 Coming to Revenue’s appeal the only issue for adjudication is whether ld. CIT (Appeals) erred in law and on facts of the case in allowing the assessee deduction under section 80IB(11A) of the Act. The assessee had, in the previous year relevant to the assessment year 2008-09, commenced the integrated business of handling, transportation and storage of food grains in Mandideep, District Raisen, Madhya Pradesh. In the said undertaking, the assessee had created significant infrastructure for storage handling 19 Cross & 2387/Del/2017 and transportation of paddy/rice and had employed the most advanced equipments which were imported to ensure least possible losses in post-harvest processing of food grains and to enhance the efficiency in the grain management system. 27.2 The assessee had, it is submitted, set up the aforesaid undertaking with a view to fulfill the larger objective of the agro economy of the Country, being: (i) obtaining best prices to the farmers for their produce, (ii) minimizing losses of food grains in the course of handling, storage and transportation and (iii) creating modern infrastructure to support agro economy. 27.3 Since handling, storage and transportation of paddy/ rice constituted the major components of the integrated business of the assessee, deduction of Rs10,02,32,292 was claimed under section 80IB(11A) of the Act by the assessee on fulfillment of all conditions specified therein (being the 2nd year of claim). Case of the Assessing officer: 27.4 In the impugned assessment order, the assessing officer, has held that the assessee was not eligible to claim deduction under section 80IB(11A) of the Act as the assessee was engaged in manufacture and sale-purchase of rice and not storage handling & transportation of food grains as provided under that section. Findings of CIT(Appeals) On appeal against the aforesaid, the CIT(A) after considering the facts of the case and position in law and following the order Cross I.T.A. Nos. 1758 & 2387/Del/2017 passed for the preceding assessment year 2009-10, deleted the disallowance made by the assessing officer and held that the assessee was engaged in the integrated business of transporting, handling and storage of foodgrains and condition stipulated in section 80IB(11A) of the Act stood fulfilled, thereby the assessee was eligible to claim deduction under that section 28. The ld. Counsel for the assessee submits that the issue is squarely covered by the order of the Tribunal in assessee’s own case in dated 7.06.2021 for the assessment year 2009-10 being the first year of claim wherein the Tribunal following the order of the co-ordinate bench in the case of group company L.T. Foods Ltd. Vs. DCIT (supra) for the assessment year 2007-08 in ITA. No. 4046/Del/2013 dated 30.09.2020 allowed the claim for deduction under section 80IB(11A) of the Act.

The ld. DR placed reliance on the orders of the Assessing Officer.

Heard rival submissions perused the orders of the authorities below and the case laws relied on. On perusal of the order of the Tribunal in assessee’s own case for the assessment year 2009-10 in ITA. No. 4042/Del/2013 we observe that the issue in appeal has been decided by the Tribunal in assessee’s favour holding that the deduction under section 80IB(11A) of the Act is allowable in the case of the assessee as it fulfills the parameters of the exemption clauses specified under this section. While allowing the deduction under section 80IB (11A) of the Act the Tribunal observed as under:-

We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the Section 80IB (11A) of the Act mandates that the undertaking of the assessee should be engaged in an ‘integrated business’ and the assessee has demonstrated before us that the combining or co-ordinating of the three elements i.e. handling, storage and transportation of food grains is harmonious interrelated as whole activity and thus eligible for deduction under Section 80IB(11A) of the Act. The decision in case of Dilip Kumar (Supra) held that exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue. In the present assessee’s case, the assessee has demonstrated that the assessee fulfilled the parameters of the exemptions. Besides this, in case of Group company of assessee i.e. L T Foods Ltd. for A.Y. 2007-08 in ITA No. 4046/Del/2013, the Tribunal on identical facts allowed deduction claimed under Section 80IB (11A) of the Act. The Tribunal held as under: 22 Cross I.T.A. Nos. 1758 & 2387/Del/2017 “53. As we have stated above, we will have to test the expression “handling”, occurring in section 80IB(11A) of the Act on the touchstone of the object sought to be achieved through such incentive, namely, achieving the enhanced food security by way of greater efficiency in the grain management system by minimizing the post- harvest food grain losses. It is an undeniable fact that traditionally pounding was the way in which the paddy was converted to the form of rice by separating the husk and brawn. It is also common knowledge that in that process there used to be quantitative and qualitative losses, caused by the breaking of the grains etc. By de- husking the paddy and converting it into rice, no new article is brought into existence which is qualitatively different from the inputs, but is the simple process of de-husking the paddy to obtain the rice. This conversion meets the objective of minimizing the post-harvest losses which would lead to the greater efficiency of the food grain management system and consequently to the enhanced food security. In Commissioner of Customs (Import) vs. Dilip Kumar and Company & Ors. CA No. 3327 of 2007 (SC), the Hon’ble Supreme Court held that while interpreting the taxing statutes, the applicability of the section has to be seen in strict sense, and once the section is found to be applicable, then it has to be constructed liberally. Since undoubtedly the provisions of section 80IB(11A) of the Act are applicable to the activities of the assessee like clearing, steaming, soaking, drying, polishing and grinding it can also be not denied that de-husking the paddy would significantly enhance the life of the food grain, thereby reduces the loss of food grain and contributes to the preservation of food grains. In such an event, we are unable to understand how this particular process does not fit in the expression “handling”. For these reasons, we are of the considered opinion that the de-husking of the paddy to convert it into rice is also an integral part of reducing the post-harvest food grain loss. ......... .........

We, accordingly find that the assessee cannot be denied the deduction under section 80IB(11A) of the Act either in respect of the activities conducted by the 23 Cross & 2387/Del/2017 assessee to meet the demand of the section, namely, deriving income from the integrated business of handling, storage and transportation of food grains or for non-compliance with the conditions depleted under Section 80IB(2) of the Act. We do not find anything illegality are regularity either in the reasoning or the conclusions reached by the Ld. CIT(A) on this aspect, and while confirming the same find the grounds number 1 to 3 of Revenue’s appeal devoid of merits and reliable to be dismissed.” Thus, the CIT(A) has rightly allowed the claim of deduction under Section 80IB(11A) of the Act. It is pertinent to note that all the conditions which have been stipulated in the statute have been fulfilled i.e. all the three activities of handling, storing and transportation have been undertaken on an integrated basis by the assessee. Thus, Ground No. 3 to 5 of Revenue’s appeal are dismissed.”

Facts being identical respectfully following the decision of the Tribunal in assessee’s own case for the assessment year 2009-10 we reject the ground raised by the Revenue.

In the result, the appeal of the assessee is partly allowed as indicated above and the appeal of the Revenue is dismissed.