2015 (7) TMI 147 - AT - Income Tax

Rejection of the books of account of the assessee for the reason that assessee is not maintaining qualitative stock tally - Held that - It is not disputed that the assessee s yield commensurate to the industrial GP disclosed by the assessee is comparable and satisfactory. In our considered view, when no palpable inconsistency in the books of account they cannot be rejected merely on the basis of assumption that assessee is not producing quantitative tally. Had there been any quantitative tally, assessee has produced stock register but in the absence of day-to-day stock tally at various places of business by itself cannot be a conclusion to give that assessee is shine away from producing the day-to-day tally. In view of these facts, we see no justification in rejection of books of account. The assessee has demonstrated that its yield of rice, bran and faak is as per the industry norm and the GP rate in all the years is favourably comparable. Under these circumstances, it cannot be held that the assessee s book results are unsatisfactory. Merely because a search is carried on it is not automatically meant that assessee is indulging in some nefarious activities. This is the burden of the revenue to prove in this behalf with material and cogent reasons. Rejection of audited books of account otherwise properly maintained cannot be recourse to by Assessing Officer in a casual and wishy vice manner. The ad hoc disallowance, rejection of books and taking support of this fact which we are not able to subscribe the ad hoc addition of 1% of sales is again without any basis whatsoever. Stock tally cannot lead to an ad hoc assumption that 1% of sales are liable to be added in the income of the assessee. Our findings are supported by Gotan Lime Khanji Udyog (2001 (7) TMI 19 - RAJASTHAN High Court ) and ITAT, Amritsar Bench in the case of Asha Mehra cited 2012 (10) TMI 989 - ITAT AMRITSAR . In view thereof, we delete the ad hoc addition of 1% sales. - Decided in favour of assessee. Addition made on account of undisclosed sales of pulses - Held that - Assessee has pleaded that it is a market practice that no debit of milling expenses are made in the profit & loss account of the person who get milled the pulses. The additional evidences are confirmations from the millers located at Indore (M.P.) with regard to the processing losses. The pulses are re-exported after processing. These confirmations from miller go to the root of the controversy with regard to the shortage of pulses. One of the major reasons for making the addition by the Assessing Officer was not furnishing the names and addresses of these milling parties. In our considered view, the issue cannot be properly decided without admitting and verifying the veracity of these confirmations from millers located at Indore. We find these as necessary for proper and fair decision on this ground of appeal. Therefore, in the interest of justice and equity, we find it appropriate to admit the same and restore the issue to the Assessing Officer as the issue requires a re-look/reexamination at the level of the Assessing Officer. Accordingly, we restore this issue to the file of the Assessing Officer to be decided afresh after providing adequate opportunity of being heard to the assessee.- Decided in favour of assessee for statistical purposes. Addition on account of undervaluation of closing stock - Held that - The details of valuation of closing stock (rice/paddi) is placed at page 230 of the paper book which clearly states that stock of non-Basmati rice at Port was of 2,46,308.40 qtls. which is valued totalling to ₹ 14,06,83,500.03. Similarly, the description of non-Basmati rice which is stocked at factory at Muthal and Amritsar is shown at 71461.8 qtls. valued ₹ 4,06,61,764.20. The stock with FCI was of 90,000 qtls. valued ₹ 5,40,00,000.00. Thus, the total valuation of non-Basmati rice comes to ₹ 23,53,45,264.23. In our considered view, the assessee was able to explain the closing stock of non-Basmati rice. The Assessing Officer has made this addition by not considering the stock of non-Basmati rice at the port and the stock with the FCI. Besides this addition becomes academic in nature as the closing is to be allowed to be carried over to next year as opening stock and the profits of next year will get correspondingly reduced. Therefore, in our considered view, there is no justification in making this addition. Accordingly, we direct to delete the same.- Decided in favour of assessee. Disallowance on account of excess deduction claimed u/s 80HHC and not allowing the deduction on sale of licences - Held that - Assessing Officer has not followed the direction of the DRP by not allowing the deduction u/s 80HHC in respect of sale of Replacement of Export Policy Licences in the light of the judgment of Hon ble Supreme Court in the case of Topman Export (2012 (2) TMI 100 - SUPREME COURT OF INDIA ). Thus we restore this issue to the file of the AO to give effect of the direction of DRP as per law.- Decided in favour of assessee. Disallowance of reimbursement of advertisement expenses - Held that - M/s. Nashar Trading Company is a distributor of the assessee and has been reimbursed 50% of the advertisement of the promotional expenses incurred as per the mutual understanding of the assessee. In our considered view, the revenue has failed to bring on record anything which can show that this expenditure was not incurred wholly and exclusively for the purpose of business. The assessee is selling Basmati rice through its distributor in Saudi Arabia. The sales have been increased for the year. In such circumstances and in absence of any adverse material, we find that this expenditure was incurred for commercial expediency and it is allowable u/s 37 (1) of the Act. Further such expenditure was not liable to be taxed in India as it was reimbursed to a non-resident, therefore, we direct to allow this expenditure and delete the addition. Decided in favour of assesses. Charging of interest u/s 234B is mandatory in view of the decision of CIT v. Anjum M.H. Ghaswala 2001 (10) TMI 4 - SUPREME Court - Decided against assessee. Disallowance of credit of cash seized during search operation - Held that - We direct the AO to give credit of ₹ 27 lacs of cash seized during the search operation according to law and procedure. Decided in favour of assessee. Addition made on account of unexplained purchases - Held that - Both the sides have agreed that this issue may go back to AO to decide de novo where the assessee shall have the opportunity to file all the relevant documents whichever it wants to rely upon to prove the genuineness of the purchases. Therefore, this issue is restored to the file of AO.- Decided in favour of assessee for statistical purposes. Enhancement of value of closing stock - Held that -This is the consequential result of enhancement of the opening stock on the basis of addition made in the preceding year. Since we have deleted the addition made in the closing stock for assessment year 2002-03, therefore, there is no question of making any enhancement in the opening stock for the assessment year 2003-04. - Decided in favour of assessee . Addition made on account of unaccounted stocks - Held that - The assessee has tried to explain the discrepancy by way of showing non-Basmati rice. Besides, the facts about availability of non-Basmati rice in the stock needs verification at the level of Assessing Officer. Therefore, it will be in the interest of justice that this issue is restored back to the file of the AO. We restore the issue to the file of Assessing Officer.- Decided in favour of assessee for statistical purposes. Addition on account of trade mark expenses - Held that - As these expenses were mostly incurred on petty expenses of renewal of trademarks. Therefore, in our considered view, there was no creation of intangible assets which could give enduring benefit to the assessee. After considering these facts, we direct to allow these expenditure as revenue expenditure. - Decided in favour of assessee. Addition on account of unaccounted cash receipts - Held that - The affidavits of Shri Gopal Manchanda and Shri Anil Sapra were filed as additional evidences during the proceedings before the DRP. These affidavits were also containing the PAN of Shri Gopal Manchanda and other details. After hearing both the sides, we find that this issue requires a relook at the level of AO as the correct facts are needed to be brought on record to decide the issue. Therefore, we restore this issue to the file of the AO for deciding de novo. - Decided in favour of assessee for statistical purposes. Depreciation on intangible assets like trade mark registration - Held that - While deciding ground no.15 for Assessment Year 2006-07, we hold that expenses incurred for renewal of trademark was allowable as revenue expenditure. Since we have already allowed whole of expenditure as revenue, therefore, there is no question of allowing any depreciation thereon. Rather we also draw the attention of the Assessing Officer to withdraw the depreciation allowed in Assessment Year 2006-07. Decided against assessee. Addition made on account of loss in forex derivatives - Held that -The export invoices also establish that there are underlying contracts. The assessee has covered exchange risk against these outstanding foreign exchange convertible bonds. The assessee has also covered the exchange fluctuation risk against outstanding foreign currency convertible bonds, import of commodities and machinery and also outstanding PCFC loans drawn in EURO and US Dollar. The Assessing Officer without examining the details filed by the assessee and without making specific enquiries simply brushed aside the evidences and mentions that no specific underlying assets/liabilities/transactions which were hedged. In our considered view, all the relevant details were filed by the assessee before the Assessing Officer and Assessing Officer was not justified in the absence of any particular derivative transaction was for hedging for any assets/liabilities/expenditure/income/transaction. It is also a fact that assessee has made profit on similar hedging transactions in the Assessment Year 2006-07 and 2007-08 of ₹ 3.72 crores and ₹ 1.34 crores respectively and the same have been offered as business profit in the respective year. Thus the revenue was not justified in not allowing the loss incurred by the assessee on the hedging transactions and holding the same as speculative loss. - Decided in favour of assessee. Restatement of foreign currency loans to subsidiaries - Held that - This is the loss incurred by the assessee on account of restatement of foreign currency loans to the subsidiary companies. This loss has been calculated by the assessee on account of restatement of the foreign currency loan to the subsidiary companies. The assessee company is not engaged in the business of granting the loans. Therefore, this loss calculated by restatement of the foreign currency loan to the subsidiaries cannot be held to be a revenue loss. In our considered view, such loss calculated on the restatement of the loan is a capital loss and cannot be held to be allowable expenditure u/s 37 of the Income-tax Act, 1961. Therefore, we dismiss this ground of assessee s appeal by holding that the loss calculated on the restatement of the foreign currency loss was a capital loss. Decided against assessee. Unaccounted investment in stock - Held that - This issue requires a further examination with regard to the methodology of stock taking at the time of search at Murthal and Alipur. Further it also requires details with regard to the assessee s claim that goods were transferred from one place to another place. Since there was excess stock calculated at one place and shortage at other place, a detailed factual aspect with regard to the transfer from one place to another place requires further examination. Keeping these facts in view, we find it appropriate to restore the issue to the file of the Assessing Officer to be decided de novo. - Decided in favour of assessee for statistical purposes. Transfer pricing adjustment - Held that - During the course of these regular assessments, the TP working as submitted by the assessee was accepted by the TPO, thus the report remains accepted by the department on the issues of corporate guarantee, interest free loans and export of goods to AEs. It is not disputed by the department that no incriminating material has been found whatsoever in respect of assessee s TP working indicating that assessee s working of TP was flawed or inconsistent in any manner. In the absence of any incriminating material and any material finding that TPO s earlier acceptance of working of assessee s TP report was questionable in any way; merely because search was conducted, a new TP report cannot be substantiated with a new one by department. It will be wholly unjustified for TPO to review his own acceptance of assessee s TP report. In view thereof, we see no justification in making TP adjustments in Assessment Years 2002-03, 2003-04 and 2005-06. We find merit in the arguments of ld. Counsel in this behalf. Thus, the TP related grounds in Assessment Years 2002-03, 2003-04 and 2005-06 are decided in assessee s favour Interest free loans to AEs - Held that - Re-coursing straightaway to CRISIL, which deals in hardcore institutional finance transactions that too with clear commercial object of earning out of loans bereft on other considerations, is wholly inapplicable. There is no dispute on the issue that the real income theory has no application to a fictional working as provided by section 92 but this being part of the Income-tax Act, the valid consideration for properly assessing a transaction cannot be given a go by. Every fiction has limits to its application. In view thereof, we hold that the rate of 13.49% applied solely relying upon a third party opinion by applying on uncontrolled set of transaction is factually not correct and cannot be accepted. The correct comparable which can be applied in these facts and circumstances is of LIBRO rate which is internationally recognized. It is the most appropriate comparable for the relevant periods and being reasonable and scientific uncontrolled comparable to be applied to the assessee s loan transactions. We direct the AO/TPO to work out the TP adjustment accordingly depending on the LIBOR rate applicable to year from year. In view thereof, the grounds raised by the assessee on this issue are partly allowed. Adjustment for corporate guarantee - assessee charged 1% rate from one AE and nil from other for providing such guarantee - Held that - There is prevalence of various types of guarantee services in the commercial parlance, which carry different type of obligations, commitments and risk. In this case, the AO applied CUP method and first held that SBI rates an uncontrolled comparable transaction. The SBI replied as 2.25% to be the rate charged by the bank as its commercial activities while providing the bank guarantee, Ld. TPO went beyond the information called upon by him from SBI. Similar information from no other institution has been called and further mark up of 2% is added by TPO on reasons of his own that SBI may be setting off losses in giving the bank guarantees at 2.25%. In our consideration, the TPO s action, in first going to SBI and then further enhancing it, is based on surmises and conjectures. His adjustment has no basis or corroboration whatsoever from any authentic source. The assessee having itself charged the guarantee fee of 1% from one AE, in our considered view, in the given facts and circumstances, the guarantee commission adjustment under TP at the rate of 1% is fair and reasonable. The Assessing Officer will work it out accordingly. Decided in favour of assessee for statistical purposes. Export Turnover Adjustments - Held that - TPO having earlier adopted the TNMM method should not have reviewed his own report in the first place without giving cogent reasons. The business model, agreement, relationship of parties remaining the same, there is no justification in switching to CUP method. The reasons given by TPO for applying CUP method are totally vague and bereft of any cogent reasons. There is a perceptible difference in the risk between the sales made to related parties as the surety of repayments is within the control of the assessee and in case of sales to unrelated parties, the recovery of repayment of goods bears potentially high risk. In our considered view, the TNMM method as adopted earlier by TPO is the most appropriate method which deserves to be first applied. In view thereof, we direct the AO to apply adjustments based on TNMM method on export sales and work out the adjustments accordingly. Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Legality and jurisdiction of the assessment order under sections 153A and 144C.
2. Validity of search and subsequent proceedings under section 132.
3. Scope of assessment under section 153A.
4. Additions/disallowances without incriminating material.
5. Rejection of books of account under section 145.
6. Invocation of special audit under section 142(2A).
7. Reliance on the special audit report.
8. Conduct of the search operation and handling of seized material.
9. Basis of additions made.
10. Consideration of documents/explanations by the assessee.
11. Discrepancies in trading results.
12. Undisclosed sale of pulses.
13. Undervaluation of closing stock.
14. Disallowance of excess deduction claimed under section 80HHC.
15. Disallowance of reimbursement of advertisement expenses.
16. Transfer pricing adjustments.
17. Charging of interest under section 234B.
18. Credit for cash seized during search.
19. Overlapping and duplicate additions.
20. Unexplained purchases.
21. Enhancement of opening stock.
22. Credit for taxes paid.
23. Unaccounted stocks.
24. Trademark registration expenses.
25. Unaccounted cash receipts.
26. Unaccounted interest payment in cash.
27. Unexplained cash receipts.
28. Depreciation on intangible assets.
29. Loss in forex derivatives.
30. Restatement of foreign currency loans to subsidiaries.
31. Unaccounted investment in stock.
32. Unaccounted sales.
33. Transfer pricing issues (corporate guarantee, interest-free loans, export of goods).

Detailed Analysis:

1. Legality and Jurisdiction of the Assessment Order:
The assessee argued that the assessment order passed under section 153A read with sections 143(3) and 144C was illegal, bad in law, without jurisdiction, and void ab-initio. The Tribunal dismissed these grounds as not pressed by the assessee.

2. Validity of Search and Subsequent Proceedings:
The assessee contended that the search was conducted without fulfilling the preconditions envisaged in section 132, making all consequential proceedings void ab-initio. This ground was also dismissed as not pressed.

3. Scope of Assessment under Section 153A:
The assessee argued that the assessment made under section 153A was beyond the scope of the provisions contained therein. This ground was dismissed as not pressed.

4. Additions/Disallowances Without Incriminating Material:
The assessee claimed that additions made in the absence of any incriminating material found during the search were illegal and without jurisdiction. This ground was dismissed as not pressed.

5. Rejection of Books of Account Under Section 145:
The Tribunal held that the rejection of books of account by the Assessing Officer was based on surmises and conjectures. The books of account were regularly maintained, audited, and no discrepancies were indicated by the Assessing Officer. The addition of 1% of sales was deleted.

6. Invocation of Special Audit Under Section 142(2A):
The assessee argued that the provisions under section 142(2A) were wrongly invoked. This ground was dismissed as not pressed.

7. Reliance on the Special Audit Report:
The Tribunal found that the Assessing Officer erred in relying on the special audit report without confronting the assessee with the appraisal report. The assessment was against the principles of natural justice.

8. Conduct of the Search Operation and Handling of Seized Material:
The assessee contended that the search was conducted in an indiscriminate and arbitrary manner, resulting in mixing of seized material. This ground was dismissed as not pressed.

9. Basis of Additions Made:
The Tribunal found that additions made were based on guesses and conjectures, without proper material on record. These grounds were dismissed as not pressed.

10. Consideration of Documents/Explanations by the Assessee:
The Tribunal noted that documents and explanations filed by the assessee were not properly considered by the Assessing Officer.

11. Discrepancies in Trading Results:
The Tribunal held that the addition on account of discrepancies in trading results was unjustified. The yield was within industry norms, and the books of account were properly maintained. The addition was deleted.

12. Undisclosed Sale of Pulses:
The Tribunal restored the issue to the Assessing Officer for re-examination, allowing the assessee to submit additional evidence regarding milling losses.

13. Undervaluation of Closing Stock:
The Tribunal found that the Assessing Officer wrongly considered non-Basmati rice as Basmati rice, leading to an unjustified addition. The addition was deleted.

14. Disallowance of Excess Deduction Claimed Under Section 80HHC:
The Tribunal restored the issue to the Assessing Officer to give effect to the directions of the DRP in light of the Supreme Court judgment in Topman Export.

15. Disallowance of Reimbursement of Advertisement Expenses:
The Tribunal allowed the reimbursement of advertisement expenses, finding that it was incurred for commercial expediency and no TDS was required.

16. Transfer Pricing Adjustments:
The Tribunal found that the TPO's adjustments were unjustified, as the assessee's business model and relationship with AEs remained the same. The adjustments were deleted for the years where no incriminating material was found.

17. Charging of Interest Under Section 234B:
The Tribunal held that charging of interest under section 234B was mandatory and dismissed the ground.

18. Credit for Cash Seized During Search:
The Tribunal directed the Assessing Officer to give credit for Rs. 27 lakhs of cash seized during the search operation.

19. Overlapping and Duplicate Additions:
The Tribunal dismissed these grounds as general in nature and not requiring adjudication.

20. Unexplained Purchases:
The Tribunal restored the issue to the Assessing Officer for re-examination, allowing the assessee to submit relevant documents to prove the genuineness of the purchases.

21. Enhancement of Opening Stock:
The Tribunal dismissed the ground for enhancement of opening stock as it was consequential to the deletion of addition in the preceding year.

22. Credit for Taxes Paid:
The Tribunal directed the Assessing Officer to give correct credit for taxes paid by the assessee after due verification.

23. Unaccounted Stocks:
The Tribunal restored the issue to the Assessing Officer for verification of the stock details and methodology of stock-taking during the search.

24. Trademark Registration Expenses:
The Tribunal allowed the expenses incurred on trademark registration as revenue expenditure, finding that they were mostly for renewal and did not create any enduring benefit.

25. Unaccounted Cash Receipts:
The Tribunal restored the issue to the Assessing Officer for re-examination, allowing the assessee to submit affidavits and other evidence.

26. Unaccounted Interest Payment in Cash:
The Tribunal restored the issue to the Assessing Officer for re-examination, along with the issue of unaccounted cash receipts.

27. Unexplained Cash Receipts:
The Tribunal restored the issue to the Assessing Officer for re-examination, along with the issue of unaccounted cash receipts.

28. Depreciation on Intangible Assets:
The Tribunal dismissed the ground for depreciation on intangible assets, as the expenses were allowed as revenue expenditure.

29. Loss in Forex Derivatives:
The Tribunal allowed the loss in forex derivatives as a business loss, finding that the transactions were genuine and for hedging purposes.

30. Restatement of Foreign Currency Loans to Subsidiaries:
The Tribunal dismissed the ground, holding that the loss on restatement of foreign currency loans was a capital loss and not allowable as a revenue expenditure.

31. Unaccounted Investment in Stock:
The Tribunal restored the issue to the Assessing Officer for re-examination of the stock details and methodology of stock-taking during the search.

32. Unaccounted Sales:
The Tribunal restored the issue to the Assessing Officer for re-examination, along with the issue of unaccounted investment in stock.

33. Transfer Pricing Issues:
The Tribunal found that the TPO's adjustments were unjustified, as the assessee's business model and relationship with AEs remained the same. The adjustments were deleted for the years where no incriminating material was found. For other years, the Tribunal directed the Assessing Officer to apply the LIBOR rate for interest-free loans and 1% for corporate guarantee adjustments. The TNMM method was directed to be applied for export turnover adjustments.