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TMI Blog2018 (4) TMI 861X X X X Extracts X X X X X X X X Extracts X X X X ..... r made additions/disallowances on various counts which inter alia includes : i. Addition u/s. 2(22)(e) Rs.10,16,06,967/-. ii. Disallowance of interest u/s. 36(1)(iii) Rs.3,08,889/-. iii. Disallowance u/s. 40A(2)(a) Rs.33,31,94,731/-. iv. Disallowance u/s. 14A Rs.6,21,87,068/-. v. Disallowance of Advertisement Expenses Rs.37,70,543/-. vi. Disallowance of Remuneration to partners Rs.17,50,000/-. vii. Disallowance of interest paid to partners Rs.38,61,612/-. Aggrieved by assessment order dated 26-09-2013, the assessee filed appeal before the Commissioner of Income Tax (Appeals). During the First Appellate Proceedings, the Commissioner of Income Tax (Appeals) apart from making GP addition of Rs. 5,65,54,895/- @1.20% on sales, confirmed, addition u/s. 2(22)(e) and disallowance of interest u/s. 36(1)(iii). Further, the Commissioner of Income Tax (Appeals) deleted disallowance u/s. 40A(2)(a), disallowance u/s. 14A, disallowance of advertisement expenses, disallowance of remuneration to partners, and disallowance of interest paid to partners. Against the findings of Commissioner of Income Tax (Appeals), both, the assessee and the Revenue are in appeal bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on sale to third parties only. The ld. AR pointed that the GP for the assessment year 2009-10 from sales to third party is 0.41%, whereas in assessment year 2010-11 the GP from sale to third parties is 1.52%. 3.2 The ld. AR contended that the sales/purchases with sister concerns are made on cost to cost basis, therefore, there is no element of profit in such transactions. The ld. AR further pointed that for assessment year 2012-13 on turnover of Rs. 3110 crores, the assessee has declared GP of 0.55%. The Assessing Officer made addition of only 0.02%. In assessment year 2013-14 the assessee declared GP at 0.28% against the turnover of Rs. 3535 crores. The Assessing Officer accepted the GP declared by assessee. The ld. AR pointed that in view of the decision of Tribunal in assessment year 2009-10 and the trend of reducing GP with increase of turnover, the addition made by Commissioner of Income Tax (Appeals) in the assessment year under appeal is not justified. 3.3 In respect of ground No. 4 with regard to addition of Rs. 10,16,06,967/- u/s. 2(22)(e), the ld. AR submitted that the provision of section 2(22)(e) are not attracted. It has been alleged that the assessee has received de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,44,572/- (at page 300 of the paper book). The ld. AR to support this alternate argument placed reliance on the decision of Tribunal in the case of P. Satya Prasad Vs. Income Tax Officer reported as 141 ITD 403 (Visakhapatnam). 3.7 The ld. AR finally submitted that the assessee is a partnership firm and thus, is not a separate legal entity. The assessee cannot be a shareholder in any of the companies. For attracting the provisions of section 2(22)(e) it is necessary to be a registered shareholder holding 10% or more shares in any of the group companies. Hence, the provisions of section 2(22)(e) of the Act are not attracted. 3.8 In respect of ground No. 5 regarding disallowance of interest of Rs. 3,08,889/- u/s. 36(1)(iii), the ld. AR submitted that during the course of day-to-day business the assessee has provided funds to various unrelated parties. These parties have neither paid interest nor refunded the loans. Since, the loans have not been given by the assessee to related parties, therefore, disallowance of interest is not justified. 4. On the other hand Shri Rajeev Kumar representing the Department vehemently supported the findings of Assessing Officer and Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h has been deliberately adopted. This method of showing gold deposit as a capital of the partner is nothing but an arrangement and colourable device used to reduce taxable income. 6. On the facts and circumstances of the case and in law, the order of the Ld. CIT(A)-2, Nashik be cancelled on the above issues and that of the A.O. be restored. 7. The appellant craves leave to add, alter, modify, delete amend any of the grounds at any stage of appellate proceedings. 8. The appellant prays to file any of the additional evidence appropriate to the grounds taken in appeal." 6. The ld. DR submitted that a special audit was carried out in the case of assessee. During the course of audit it transpired that the assessee has entered into various transactions with its sister concerns. The assessee has inflated purchase price of gold ornaments from sister concerns. Accordingly, excess purchase price paid by assessee to its sister concerns amounting to Rs. 33,31,94,731/- was disallowed by Assessing Officer. The Commissioner of Income Tax (Appeals) by placing reliance on the decision of Tribunal in assessee‟s own case in assessment year 2009-10 deleted the addition made u/s. 40A(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e part of current year depreciation under the provisions of section 32(2) of the Act. As per Chapter IV-D, the book profits are determined after deduction of depreciation. In the assessee‟s case, there would be loss after deduction of unabsorbed carry forward depreciation to the tune of Rs. 10,84,75,430/-, therefore, remuneration to the extent of Rs. 1,50,000/- would only be allowable. The ld. DR to support his submissions placed reliance on the decision of Vikas Oil Mills Vs. Income Tax Officer reported as 95 TTJ 1126 (Jaipur). 10. In respect of ground No. 5 relating to disallowance of interest paid on gold deposit scheme to the partners, the ld. DR submitted that the assessee has accepted gold deposit as capital of the partner and interest Rs. 58,58,221/- is paid on partner‟s capital. The ld. DR submitted that the partners have paid interest of Rs. 19,96,609/- to the depositors of gold deposit scheme as against interest of Rs. 58,58,221/- received on capital from assessee. Thus, the assessee has paid excess interest of Rs. 38,61,612/-. The assessee has deliberately shown gold deposit as capital of the partner to reduce taxable income. The ld. DR concluding his submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 2009-10 decided on 26-06-2014 submitted that where no exempt income has been earned, no disallowance u/s. 14A is warranted. 13. In respect of ground No. 3 relating to advertisement expenses, the ld. AR submitted that though the assessee has business outlet in Jalgaon but the assessee has customers coming from other cities as well such as Surat, Thane etc. The assessee has well established market in Jalgaon, therefore, no advertisement is required in the local area. The assessee intends to expand its business at other places, therefore, advertisements were made in other towns. The advertisement expenditure is debited for the group in Rajmal Lakhichand Jewels Pvt. Ltd. and the same is distributed to the other group concerns in proportion of turnover. In earlier years, advertisement expenditure has been incurred and the same was allocated to the group concerns in similar manner. The Assessing Officer never raised any objection or disallowed the expenditure. To support his contentions the ld. AR referred to assessment order for assessment year 2009-10 at pages 386 to 421 of the paper book and Advertisement Expenditure Account in Ledger for Financial Year 2008-09 at pages 663 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade disallowance of Rs. 33,31,94,731/- u/s.40A(2)(a) of the Act in respect of purchase of gold ornaments and gold bullion by assessee from sister concerns at higher rate. The findings of the Assessing Officer were assailed by the assessee before the Commissioner of Income Tax (Appeal) and the First Appellate authority following the decision of Tribunal in assessee‟s own case for assessment year 2009-10 deleted the disallowance u/s.40A(2)(a) of the Act made by the Assessing Officer and estimated the addition by adopting GP at 0.90% on the total sale of Rs. 1961,54,11,702/- as per the audited accounts. 19. A perusal of the orders of Authorities below show that during the assessment year under consideration, the assessee had purchased gold bullion to the tune of Rs. 842 crores from sister concerns and to the tune of Rs. 65 crores from the third parties. Further, the assessee had purchased gold ornaments of Rs. 933.15 crores from group concerns and Rs. 8.32 crore from unrelated parties. The Assessing Officer compared the assessee‟s purchase rates of gold bullion with the rates prevailing at the Bombay Bullion Market. The Assessing Officer on the basis of special audit repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer under section 40A(2)(a) and estimated GP @0.90% of the total sale as per audited accounts. 21. We find that identical disallowances u/s.40A(2)(a) was made by the Assessing Officer in assessee‟s own case in assessment year 2010-11. The Co-ordinate Bench of the Tribunal, after taking into consideration entire facts of the case concluded that the average price formula adopted by Assessing Officer and Commissioner of Income Tax (Appeal) is not correct. The Tribunal made the addition by estimating GP. The Commissioner of Income Tax (Appeal) in the impugned order has extracted the findings of the Tribunal on this issue. For the sake of brevity, we are not reproducing the same here. However, the gist of observations made by Tribunal on the issue in assessment year 2009-10 are as under: (a) The sale and purchase of gold bullion and gold ornaments within a group concerns are only paper transactions without involving any real transfer of bullion/ornaments. (b) The assessee entered into fictitious transactions within the group to inflate purchases and sales to obtain higher bank finance. This fact is evident from increase in turnover of the assessee in the last two year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties is not reasonable. Both the Authorities below have not considered the local conditions of the gold market. The average price method adopted by both the authorities is erroneous considering the market conditions of the bullion. Thus, the basis for computing excess payments made to sister concerns by assessee is faulty, therefore, provisions of section 40A(2)(b) cannot be applied. 22. The Co-ordinate Bench of the Tribunal after taking into consideration various facets of the transaction in sale/purchase of gold ornaments/bullion with related/unrelated parties concluded as under: "8.35 In the light of our above discussion, we are of the opinion that approach of both the authorities below is not correct for making high pitch additions in the hands of the assessee by invoking provisions of section 40A(2)(b) and for alleged selling of the ornaments to the related entities at a lower price. As per the financial accounts of the assessee, the GP worked out at 1.13%. The possibility of purchasing the bullion and ornaments from the group entities at a higher price cannot be ruled out even though there is no strict proof against the assessee. Even the exercise done by both the autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvoking provisions of section 40A(2)(a) i.e. purchase of gold bullion and gold ornaments from the sister concerns by paying higher price. The other income shown by the appellant will remain unchanged. The other confirmed additions will not be affected." 24. The assessee has assailed the G.P. estimated by Commissioner of Income Tax (Appeal) being very much on the higher side. As against the addition of 0.07% made by the Tribunal in assessment year 2009-10, the Commissioner of Income Tax (Appeal) has enhanced G.P. rate by 0.30% (approximately). The assessee in the assessment year under appeal has disclosed G.P. @ 0.61%. Taking into consideration entirety of facts, we are of considered view that increase in G.P. rate by 0.09% would meet the ends of justice. Thus, G.P. is enhanced from 0.61% to 0.70% of the total sale of Rs. 1961,54,11,702/- as per audit accounts. In so far as disallowance made by the Assessing Officer u/s.40A(2)(a) in respect of purchase of gold bullion and gold ornaments is concerned, the same is rejected for the reasons given by the Tribunal in assessment year 2009-10. Thus, in view of our above findings, the ground No. 3 raised in appeal by assessee is partly al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here-in-below : "(22) dividend includes - (a) ............... (b) ............... (c) ............... (d) ............... (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987 , by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for- the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. [Explanation 3- For the purposes of this clauses, - (a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company; (b) a person shall be deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncorrect. Also, what is important is the addition, by way of amendment, of such beneficial owner holding not less than 10% of voting power. This is another indicator that the amendment speaks only of a beneficial shareholder who can compel the registered owner to vote in a particular way, as has been held in a catena of decisions starting from R. Mathalone vs. Bombay Life Assurance Co. Ltd., [1954] SCR 117." [Emphasized by us.] In view of Explanation 3 to section 2(22)(e) of the Act which has been elucidated by Hon‟ble Apex Court, we are of view that the provisions of section 2(22)(e) would be applicable to the assessee firm. 27. The second limb of argument of ld. AR is that the advances received by assessee are in the normal course of business and are trade advances. The term „loans and advances‟ has not been defined under the provisions of Act. Therefore, they have to be understood in the commercial sense. It is true that all advances received from group companies cannot be treated as deemed dividend within the meaning of section 2(22)(e) of the Act. The Hon‟ble Delhi High Court in the case of Commissioner of Income Tax Vs. Creative Dyeing and Printi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee but have not rebutted the claim of the assessee in order to treat the excess payments received by the assessee as non-trade advances and not on current account. In our view, this is the case where certain questions are left unanswered which are vital for adjudication of the issue under consideration. The key question is whether the excess funds received by the assessee constitute trade advance or otherwise. The question as to why group companies paid advances much higher than the transactions, i.e. on account of purchases and sales is also unanswered. Ancillary to the same, there is requirement for the Assessing Officer to probe the treatment of such advances in the earlier and subsequent assessment years, whether, the provisions of section 2(22)(e) of the Act were invoked on similar set of facts, i.e. excess payments received the assessee? Both the sides have failed to provide information on this aspect. The exclusion of advance business transactions by way of trade advances from the purview of section 2(22)(e) of the Act are required to be examined, if the advances so given are substantially higher than the normal business requirements. In other words, if the payments rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of the Tribunal in the case of M.B. Stock Holding (P) Ltd. Vs. Assistant Commissioner of Income Tax (supra). The Tribunal held that business profits of the company accrue only at the end of the year and therefore, the current year‟s business profits are not to be included in the accumulated profits for computation of deemed dividend. 29. In view of the facts of the case, we are of considered view that this issue needs revisit to the file of Assessing Officer. The Assessing Officer shall decide the issue de novo in the light of our above observations after affording opportunity of hearing to the assessee, in accordance with law. Accordingly, ground No. 4 raised by assessee in appeal is partly allowed for statistical purposes. 30. The ground No. 5 raised in appeal by assessee relates to disallowance of interest Rs. 3,08,889/- u/s.36(1)(iii) of the Act. The assessee has sought deletion of above disallowance on the ground that advances were given to unrelated parties during the course of business. The Commissioner of Income Tax (Appeal) has confirmed the addition by observing as under: "10.1 In para 8.3 of the assessment order, the A.O. has stated the entire source of fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in the case of Shri Goyal Ishwarchand Kishorilal Vs. JCIT in ITA No. 422/PN/2013 decided on 26.06.2014. The Tribunal after placing reliance on the decisions in the case of CIT Vs. Shivam Motors Pvt. Ltd. in ITA No.88/2014 decided on 05.05.2014 by Hon'ble Allahabad High Court and CIT Vs. Lakhani Marketing in ITA No.970/2008 decided on 02.09.2014 by the Hon'ble Punjab & Haryana High Court, held as under: "9.4 Since in the instant case the assessee has not received any dividend income out of the shares held as investment and since no disallowance u/s. 14A has been made in the preceding as well as succeeding assessment years, therefore, we agree with the contention of the Ld. Counsel for the assessee that no disallowance u/s.14A can be made under the facts and circumstances of the case. Accordingly, the order of the CIT(A) is set aside and the Assessing Officer is directed to delete the disallowance of Rs. 5,86,962/- made u/s.14A. Ground raised by the assessee is accordingly allowed." Thus, in view of the undisputed fact that the assessee has not received any tax free income during the assessment year under appeal and decisions referred above, we hold that no disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd losses. The computation of Book Profit is as per section 40(b) while the setoff of brought forward losses is to be granted in terms of section 72. Therefore, while arriving at the business income, the deduction of section 40(b) is to be given first and then if at all there remains positive income, the brought forward losses are to be set off. The appellant had rightly claimed the deduction in the computation of income and therefore, the addition made on this score is deleted. The appellant gets a relief of Rs. 17,50,000/-." The findings of Commissioner of Income Tax (Appeal) are well reasoned in deleting the aforesaid disallowance u/s.40(b) of the Act. We find that identical issue had come up before Ahmedabad Bench of Tribunal in the case of M/s. Shree Yogeshwar Vs. Income Tax Officer (supra). The Tribunal deleted the addition by observing as under: "10. We have given a thoughtful consideration to the orders of the authorities below qua the issue. The book profit has been defined in Explanation 3 below section 40(b) of the Act and the same reads as under: "Explanation - 3 - For the purpose of this clause, "book profit" means the net profit, as shown in the profit and loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest @9% on the gold deposit by the partner which is below the prescribed limit of 12% as per the partnership deed, therefore, there should not be any disallowance u/s.40A(2)(b). Further, according to the Ld. Counsel for the assessee, the assessee firm could receive additional gold deposit than what it could have received under its own gold deposit scheme on account of gold deposit scheme started by one of its partner. It is also the submission of the Ld. Counsel for the assessee that the firm would have paid higher amount of bank interest by getting that much quantity of gold than it paid to the partner on account of such quantity of gold. 12.7 We find merit in the above submission of the Ld. Counsel for the assessee. There is no bar for the partner to obtain the gold under the gold deposit scheme which was simultaneously done by the assessee firm also. As long as the interest paid to the partner on such gold under the gold deposit scheme is within the permissible limit, there should not be any disallowance. Since in the instant case the firm has paid interest @9% on the gold deposited by the partner obtained from the customers under the gold deposit scheme account, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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