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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 ..... than the transactions, i.e. on account of purchases and sales? - Held that:- Similar view has been taken by Ahmedabad Bench of the Tribunal in the case of M.B. Stock Holding (P) Ltd. Vs. Assistant Commissioner of Income Tax (2001 (12) TMI 190 - ITAT AHMEDABAD-B ). 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 - 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. Disallowance of interest u/s.36(1)(iii) - Held that:- Assessee has neither furnished any document nor any meaningful submissions to controvert the findings of Commissioner of Income Tax (Appeal). Thus, we do not find any reason to interfere with the findings of Commissioner of Income Tax (Appeal) in confirming addition Addition u/s 14A - Held that:- In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material as to at what rate of interest the partner has paid to the customers. In this view of the matter, we set-aside the order of the CIT(A) on this issue and direct the Assessing Officer to delete the addition. - ITA No.670/PUN/2015 And ITA No.832/PUN/2015 - - - Dated:- 28-2-2018 - SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri Sunil Pathak For The Revenue : Shri Rajeev Kumar ORDER PER VIKAS AWASTHY, JM : These cross appeals by the assessee and the Revenue are directed against the order of Commissioner of Income Tax (Appeals)-2, Nashik dated 31-03-2015 for the assessment year 2010-11. 2. The brief facts of the case as emanating from records are: The assessee is a partnership firm engaged in the business of making gold and silver ornaments and sale of bullion. The assessee filed its return of income for the impugned assessment year on 26-09-2010 declaring total income as Nil. The case of the assessee was selected for scrutiny under CASS. Accordingly, statutory notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) was issued to the assessee on 23-09-2011. During the course of sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchases bullions/ornaments form parties situated outside Jalgaon depending upon its requirements at the rates prevailing at the time and place of purchase. Purchase rates of gold ornaments from sister concerns are inclusive of making charges, whereas the gold ornaments sold by sister concerns to third parties are excluding making charges. Making charges are separately charged by sister concerns from third parties. The assessee has been consistently following this method of transacting with sister concerns for a long time. The ld. AR pointed that identical issue had travelled up to the Tribunal in assessee‟s own case in assessment year 2009-10 in ITA Nos. 532 663/PN/2013 decided on 16-01-2015. The Tribunal estimated GP of the assessee at 1.20% instead of 1.13% declared by assessee. Thus, the Tribunal made addition of 0.07% in the GP declared by assessee. In the assessment year under appeal, the assessee has declared GP of 0.61%, the Commissioner of Income Tax (Appeals) estimated GP at 0.90%. The addition of 0.29% in the assessment year 2010-11 by Commissioner of Income Tax (Appeals) is very much on higher side. The turnover of assessee in assessment year 2010-11 is ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the paper book. All these transactions indicate that they are on account of normal business trading account and not loans/advances. Hence, these closing balances of sales and purchases do not constitute deemed dividend. In support of his contentions the ld. AR placed reliance on the following decisions : i. Commissioner of Income Tax Vs. Creative Dyeing and Printing P. Ltd., 318 ITR 476 (Delhi); ii. Commissioner of Income Tax Vs. Nagindas M. Kapadia, 177 ITR 393 (Bom.); iii. Assistant Commissioner of Income Tax Vs. Smt. Lakshmikutty Narayanan, 105 ITD 558 (Cochin-Trib.); 3.5 The ld. AR further placed reliance on CBDT Circular No. 19/2017 dated 12-06-2017 to contend that trade advances in the nature of commercial transactions do not fall within the ambit of provisions of section 2(22)(e) of the Act. 3.6 The ld. AR contended that without prejudice to his submissions already made on the issue of deemed dividend, the earlier years accumulated profits should have been ignored on the ground that they could not be taxed in the assessment year under appeal. If at all they were to be taxed, it could have been taxed in relevant years. In the earlier years also there were su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage has not been mentioned by the Hon'ble ITAT in the assessee's own case for A.Y. 2009-10. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-2, Nashik has erred in deleting the addition of ₹ 6,21,87,028/- made on account of disallowance u/s 14A read with rule 80. From the facts of the case, it can be seen that assessee has invested interest bearing funds and has deliberately diverted its interest bearing funds into the shares of its own sister concerns and the sole purpose of this transaction was to avoid payment of taxes. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-2, Nashik has erred in deleting the addition on a/c of Advertisement expenses of ₹ 37,70,543/- without appreciating the fact that the assessee does not have any business outlet at Surat and Thane for which the assessee has shown Advertisement expenses. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-2, Nashik has erred in deleting the disallowance of excess remuneration paid to partners without appreciating the fact that as per Chapter IV-D, the book profit is determined after d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd. Vs. Commissioner of Income Tax (Appeals) Anr. reported as 288 ITR 1. During the course of assessment proceedings, the Assessing Officer has recorded the fact that the assessee has diverted its interest bearing funds for investment in its sister concerns. There is a direct nexus of borrowings and investments made in subsidiary companies from borrowed funds. The assessee has not been able to show that the funds have been invested by assessee in subsidiary/group companies out of any business exigencies. The assessee has deliberated diverted its interest bearing funds for investment in the shares of sister concerns with the sole objective to avoid payment of tax. Thus, the diversion of interest bearing funds is a colourable device adopted by assessee to reduce its tax liability. 8. In respect of ground No. 3 relating to advertisement expenditure amounting to ₹ 37,70,543/- the ld. DR submitted that the assessee has purportedly incurred expenditure on advertisement in cities like Surat and Thane, where the assessee has no business outlet. Moreover, the expenditure has been incurred in respect of M/s. Rajmal Lakhichand Jewellers Pvt. Ltd., therefore, the expenditure is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee adopted Jalgaon rates for the transactions with its sister concerns, whereas the Assessing Officer compared the rate with the rate at Bombay Bullion exchange at the time of transaction. The ld. AR pointed that similar disallowance was made by Assessing Officer in assessee‟s case in assessment year 2009-10. The issue travelled up to the Tribunal. The Tribunal held that no disallowance u/s. 40A(2)(a) is warranted in the light of facts of the case. The nature and manner of transactions in the assessment year under appeal is identical to the transactions carried out by the assessee with its sister concerns in assessment year 2009-10. Thus, the findings of Tribunal in assessment year 2009-10 would apply in the assessment year 2010-11, as well. 12. In respect of disallowance made u/s. 14A the ld. AR submitted that the assessee has invested a sum of ₹ 1,00,44,00,800/- in shares of group companies. The details of investments made by assessee in group companies are as under : a. R.L. Gold Pvt. Ltd. Rs.10,54,19,900/-. b. Manvi Holdings Pvt. Ltd. Rs.15,22,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses and depreciation is governed by section 72 of the Act. The unabsorbed business losses are to be set off first and then the unabsorbed depreciation is to be considered. Therefore, the question of setting off of unabsorbed depreciation from book profits of the current year which are governed by section 40(b) does not arise. In support of his arguments, the ld. AR draws strengthen from the decision of Ahmedabad Bench of Tribunal in the case of M/s. Shree Yogeshwar Developers Vs. Income Tax Officer in ITA No. 1173/AHD/2014 for assessment year 2005-06 decided on 13-04-2017. 15. In respect of ground No. 5 relating to disallowance of interest paid to partners, the ld. AR submitted that the partners had accepted gold deposits on interest @ 6-9%. The partners handed over these deposits to the assessee firm for which the assessee is paying interest @ 9%. The Assessing Officer disallowed the excess interest paid to the partners. Similar disallowance was made by Assessing Officer in assessment year 2009-10. The Tribunal deleted disallowance by holding that it is immaterial as to what rate of interest the partner pays to the customers. As long as the interest paid to the partner on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer made disallowance of the same under the provisions of section 40A(2) (a) of the Act. 20. The case of the assessee is that assessee has purchased gold bullion and gold ornaments from sister concerns at Jalgaon rates. The details furnished by assessee before the Commissioner of Income Tax (Appeal) with regard to differences on comparison of Bombay rates and local rates in respect of gold bullion and gold ornaments are as under: Summary Actual purchase price Purchase price as per Jalgaon rate Excess amount paid Less amount paid New Ornaments 9,33,15,10,878 9,58,20,15,231 1,80,76,773 26,85,81,126 Bullion 8,42,16,13,900 8,55,01,42,600 2,14,52,300 14,99,81,000 Total 17,75,31,24,778 18,13,21,57,831 3,95,29,073 41,85,62,126 Net less paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 years by 11.5 times. The turnover of assessee increased from ₹ 82.55 crore in assessment year 2007-08 to ₹ 955.78 crores in assessment year 2009-10. (c) The books of account of the assessee do not reflect the correct picture of its true state of financial affairs, therefore, the same are to be rejected. (d) Both the Authorities below i.e. Assessing Officer/ Commissioner of Income Tax (Appeal) have failed to understand the trading transactions in gold bullion and gold ornaments in right perspective. The method of average price of the year is not correct method to determine reasonableness of the amount paid for purchasing gold bullion from sister concerns. There are certain instances where the assessee had paid lesser price as compared to the local market and Bombay market to the siste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 authorities below is not based on any scientific method. We therefore are of the opinion that adoption of GP rate of 1.20% as against 1.13% disclosed by the assessee will meet the ends of justice. We hold and direct accordingly. We accordingly set-aside the order of the Ld. CIT(A) and direct the AO to work out the GP @1.20% on the total sale of ₹ 955,78,81,767/- as per audited accounts. After reducing the GP declared by the assessee at ₹ 10,79,15,449/-, the balance GP is to be added to the total income of the assessee. This covers the grounds on the addition made by invoking provisions of section 40A(2) (b) i.e. purchase of bullion from the sister concerns/related entities by paying higher price as well as sale of the ornaments at lower price. Accordingly, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould meet the ends of justice. Thus, G.P. is enhanced from 0.61% to 0.70% of the total sale of ₹ 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 allowed and ground No. 1 raised in appeal by Department is dismissed. 25. In ground No.4, the assessee has assailed addition of ₹ 10,16,06,967/- u/s. 2(22)(e) of the Act. The ld. AR of assessee has made two fold submissions against invoking of provisions of section 2(22)(e) of the Act. The first contention of ld. AR is that the assessee is a partnership firm and thus cannot be a registered shareholder in the group companies. The second contention of ld. AR is that the provisions of section 2(22)(e) are not attracted as debit balances standing in the name of assessee is on account of business transactions. The assessee firm is regularly engaged in sale and purchase of gold bullion and gold ornaments from group comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... older, 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 have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the income of such concern;] Thus, from bare perusal of clause (e) and Explanation 3 it is unambiguously clear that provisions of section 2(22)(e) get attracted not only in the case of registered share holder bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance 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 Printing P. Ltd. (supra) has held that the amount advanced for business transactions do not fall within the definition of deemed dividend u/s. 2(22)(e) of the Act. However, the ratio of said case would not apply in the facts of the present case. In the instant case, the assessee has received advances from group companies which are being carried forward year after year. During ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r case where the advances received by the assessee from the group concerns are substantially higher. It is repeatedly submitted by the assessee during the assessment/appellate proceedings that the payments received by the assessee from the group concerns constitutes trade advances on current account. The authorities below having considered the submissions of the assessee 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006-07, should have been assessed as deemed dividend in accordance with the provisions of sec. 2(22)(e) in that year. The deemed dividend so assessable in that year is liable to be deducted from the amount of accumulated profits for the purpose of computing the deemed dividend during the year under consideration. We further find that similar view has been taken by Ahmedabad Bench 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 ..... 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 ACIT Vs. Vireet Investment (P) Ltd.(supra) has held that no disallowance u/s.14A r.w. Rule 8D(2)(iii) can be made where no exempt income from investment is received during the year. In other words, only those investments are to be considered for computing average value of investments under Rule 8D(2)(iii) which yield exempt income during the year. Similar view has been taken by Pune Bench of the Tribunal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result, ground No. 3 raised in appeal by the Department is dismissed. 34. In ground No. 4 of appeal, the Department has assailed deleting of disallowance of excess remuneration paid to partners. The Commissioner of Income Tax (Appeal) allowed the claim of assessee by observing as under: 12.1 The remuneration to partner is based on current year s Book profits and therefore it is to be deducted first before allowing the setoff of brought forward 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 ₹ 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 Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Ishwarlal I. Lalwani to the customers on GDS. According to the Assessing Officer, if the gold would have been directly routed through the firm, the firm would have saved ₹ 18,92,421/-. Although the firm has paid interest @9%, however, indirectly it has benefitted the partner and therefore this is a colourable device and the firm gave excess interest of ₹ 19,82,421/- to the partner. It is the submission of the Ld. Counsel for the assessee that since the assessee firm had given 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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