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TMI Blog2017 (1) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... n cross objection, is upheld and, for that reason, grievance of the Assessing Officer, in appeal, is dismissed as infructuous. Section 68 addition as well as interest expenditure incurred there upon - Held that:- Assessing Officer as well as DDIT (Inv) were first of all of the opinion that although six out of seven entities were based at Mumbai whereas their business were in Surat, they were able to trace all these creditors later on and get statement of their authorised persons recorded in the corresponding proceedings. It is thus not a case of identity dispute. Coming to the capacity aspect of the creditors, the assessee has already proved that its transactions have been routed through banking channel including repayment. We accordingly find no reason to interfere with CIT(A)’s observation hereinabove deleting the impugned section 68 addition as well as interest expenditure incurred there upon. This Revenue’s substantive ground on both these aspects is accordingly declined. - Decided in favour of assessee Disallowance of provision of forward contract payable - whether the entry passed in the books of account in respect of difference in exchange rate cannot be said to be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition as these issues had already been considered and elaborately discussed by the Transfer Pricing Officer and thereafter based on valid reasoning order u/s. 92CA(3) dtd. 28.10.2011 was passed by the TPO which fact was not considered by the first appellate authority. [3] On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in admitting and deciding the appeal in contravention of the provisions of section 144C of I.T. Act. [4] On the facts and in the circumstances of the case and in law, the Ld. CIT[A] failed to appreciate that no objection filed by the assessee before the A.O., after receipt of draft assessment order as per the explicit provision of section 144C(2)(b)(ii) of I.T. Act. 3. In the cross objection, the assessee has raised a grievance which is interconnected with the above grievances of the Assessing Officer and which is required to be taken up together with the above grievance of the Assessing Officer: 1. On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of Income Tax (Appeals) has erred in not giving any findings on assessee s contention that M/s Blue Gems BVBA is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Enterprise as defined u/s. 92A(1) (2) of the Act. It has also stated that report u/s.92E is required to be filed only after transactions are done with associate enterprise. Further, it has stated that it does not fall within the deeming provisions of section 92A(2). The contention of the assessee is not correct. For the sake of clarity, the relevant provision of sec.92(A)(2)(j), (k) and (m) are reproduced below. Meaning of associated enterprise 92A.(1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, associated enterprise , in relation to another enterprise, means an enterprise - (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirect, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) [For the purposes of sub-section (1), two enterprises shall be deem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 5,22,64,779 was made. On the matter being carried in appeal before the CIT(A), even before deciding whether the assessee and Blue Gems BVBA can indeed be held to be associated enterprises , the CIT(A) proceeded to deal with examine correctness of the ALP adjustment impugned in appeal before him, held it to be unsustainable on the facts of the case and in law, and then observed that as addition stands deleted on merits of the case, no discussion is made as to whether Blue Gems BVBA is associated enterprises of the assessee or not as the same is only academic in nature . For the reasons we will set out a little later in this order, it is not really necessary to take note of the facts regarding ALP adjustment in more detail. Suffice to the note that none of the parties is satisfied with the stand so taken by the CIT(A). While the Assessing Officer is aggrieved of his deleting the impugned ALP adjustment of ₹ 5,22,64,779 on merits, the assessee is aggrieved that the CIT(A) did not adjudicate on the fundamental question as to whether the assessee and Blue Gems BVBA could at all be said to be AEs. Both the parties are in appeal before us. 6. We have heard the rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise . Section 92(A)(2) only provides illustrations of the cases in which such an enterprise participates in management, capital or control of another enterprise. In other words, what Section 92A (1) decides is the principle on the basis of which one has to examine whether or not two or more enterprise are associated enterprise or not. The principle is, as we have noted above, that one of the enterprise, in relation to other enterprise, participate, directly or indirectly, in the management or control or capital of the other enterprise and that persons who participate in such management, control or capital of both the enterprises are common. As long as an enterprise participates in any of the three aspects of the other enterprise, i.e. (a) management; (b) capital; or (c) control, these enterprises are required to be treated as associated enterprise, as also is the position when common persons participate in management, contro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this clause does not apply to the facts of this case, that is end of the matter. This clause provides that where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual . In the present case, the assessee is a partnership concern and the assessee firm, therefore, cannot be said to be controlled by an individual which is starting point for Section 92A(2)(j) being invoked. In the TPO s order, a reference is also made to some other clauses of Section 92A(2) as follows: The firm has made substantial purchases from M/s. Blue Gems BVBA. The partners of the firm are three brothers viz. Shri Piyush M. Shah, Mukesh M. Shah, Dilip M. Shah and their wifes/son, together holding the entire partnership stake. The fourth brother Nareshkumar Shah, along with his wife Surekhaben Shah and his son Mitesh Shah control the entire share holding of M/s Blue Gems BVBA, the fourth brother and his son being directors of the firm. It is clear that both the entities are being controlled by the same family of four brothers and their close relatives. It is also clear that M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nos. 1 to 4, raised in the appeal filed by the Assessing Officer, are dismissed as infructuous, and grievances raised by the assessee, in the cross objection, are allowed. 12. Revenue s next substantive ground seeks to restore section 68 unexplained cash credits addition of ₹ 8,50,00,000/- followed by disallowance of interest expenses thereupon of ₹ 66,94,929/-, made by the Assessing Officer and deleted in the lower appellate proceedings. 13. We come to the relevant facts first. Assessee s relevant books would show loans of ₹ 50 lakhs, ₹ 1.50 crores, ₹ 2 crores, ₹ 1.50 crores ₹ 1 crores each; obtained from M/s Saransh Gems (Surat), Impex Gems, Jinesh Gems, Minakshi Exports Laxmi Diamonds, Milan Co. And Navkar Diamonds (all Mumbai based entities). It filed confirmation and PAN details of all the said entities. The Assessing Officer issued section 133(6) notice as well as section 131 summons. He first of all expressed surprise that these seven entities stated premises had remained closed for past 6 7 years. He thus issued a commission to the DDIT (Inv.), Mumbai to carry out necessary enquiries. The said authority submitted its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act calling for information from various parties from whom unsecured loan was received during the year under consideration. In response, the parties filed following details: Sr. No. Name of Parties Details 133(6) submitted In response to notice u/s 1. Shri Jayprakash S. Jain (Prop. M/s Milan Co.) Confirmation of account Acknowledgment of return of income Bank statement Tax Audit Report 2. Shri Manish A. Agarwal (Prop. M/s Laxmi Diamonds) Confirmation of account Acknowledgment of return of income Bank statement Tax Audit Report 3. M/s Meenakshi Exports Confirmation of account Acknowledgment of return of income Bank statement Tax Audit Report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd on the part of assessing officer to doubt their identity, genuineness and creditworthiness on the pretext that parties could not be found at Surat address. It is further submitted that assessing officer received all the relevant information from the parties in compliance of the letters issued on them. No addition can be made on the basis of report of DDIT(Inv), Mumbai as all the relevant details are already filed on record even otherwise also, it is evident on perusal of statement of Shri Bhanwarlal Jain that he confirmed the existence of various concerns from whom unsecured loans have been received as complete details of concerns being operated from the premises i.e. 316, Panchratna, Opera House, Mumbai was given by him along with their assessment details. In view of these facts, the contention of assessing officer that no books of accounts / stock is found does not have any bearing so far as assessee is concerned especially considering the fact that loans have been repaid in the same financial year. Creditworthiness of the parties from whom assessee had taken loan can not at all be doubted as these parties are regularly filing their return of income and capabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve also been repaid in the same financial year. Now when all the depositors are assessed to tax and their assessment orders along with confirmation letters and bank statements are also filed on record, no addition can be made u/s 68 of the Act on the ground that identity/capacity of the parties have not been established. Similarly, adverse inference cannot be drawn on the basis of report of DDIT (Inv) as department has passed scrutiny assessment orders in various cases. Considering the overall facts and material on record, I am of the opinion that the ratio of Honourable Gujarat High Court decision in case of M/s Rohini Builders 256 ITR 230 (Guj) is squarely applicable and no addition can be made u/s 68 of the Act as identity and capacity of depositors and genuineness of transactions stands very much established. Hence, addition made by assessing officer is hereby deleted. As the addition made on account of unexplained cash credit stands deleted, the disallowance of interest of ₹ 66,94,929/- is not sustainable and, hence, the addition made on this disallowance is also hereby deleted. 15. We have heard both the parties. Learned Departmental Representative strongly ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing disallowance of provision of forward contract payable of ₹ 34,35,000/- by holding that the entry passed in the books of account in respect of difference in exchange rate cannot be said to be in the nature of notional/unascertained liability. The assessee had made the impugned provision as per MTM certificate for the impugned assessment year followed by its reversal in the succeeding assessment year 2009-10 on account of foreign exchange rate difference as on 31.03.2008. The Assessing Officer disallowed the same by calling it as unascertained liability not allowable. 17. The CIT(A) accepts assessee s arguments as follows :- 7.1. During the course of assessment proceedings, vide order sheet entry dated 01.11.2011, the assessee was required to give the full details of the provision entry of ₹ 34,35,000/- on account of forward contract payable. The assessee vide its submission dated 16.12.2011 submitted that the account shown as payable as per MTM certificate for A.Y. 2008-09 was reversed in the A.Y. 2009-10. Assessing officer observed that this liability which is worked out as on 31.03.2008 has not crystallised as on that date. According to A.O the same represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract which is in line with the accrual system of accounting. As such assessee has passed entry for loss only in respect of the balance amount the exchange loss is divided into two years as per accrual system of accounting the Accounting Standard of ICAI. Now, if any disallowance is made for the year under consideration in that case, deduction should be allowed of this amount in subsequent year, as assessee has claimed only balance loss i.e. loss arising on account of difference between exchange rate as on 31/03/2008 exchange rate prevailing as on the date of cancellation. The addition made by assessing officer has thus, resulted into double taxation as after set off of provision entry of ₹ 34,35,000/- made at the end of current year, only the balance amount is claimed as deduction in subsequent year. Decision: 7.3. I have considered the reasons given by assessing officer also the submissions of appellant. The assessee has made provision in respect of forward contract entered into by it on the basis of difference in exchange rate prevailing as on the date on which forward contract has been booked and the exchange rate prevailing at the end of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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