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TMI Blog2016 (4) TMI 1324X X X X Extracts X X X X X X X X Extracts X X X X ..... eting the impugned addition. - Decided in favor of assessee. Addition of notional income - Notional versus actual interest on delayed refund of security deposits placed with its associate enterprise - deposited in lieu of availing usages rights on industrial land for carrying out manufacturing activities. - The assessee did not pay any rent except this lumpsum refundable amount. - Held that:- he assessee has already received its security amount latest by 23-08- 2007 relevant for assessment year 2008-09 only and not to the impugned assessment year 2009-10. We hold in these facts that the deemed interest addition could not have been made in the impugned assessment year as no such interest accrues or arises in financial year 2008-09. We accept assessee’s arguments against this interest addition and reject those raised at Revenue’s behest. - Decided in favor of assessee. Restriction on depreciation claim - bifurcation of value of the land - AO observed in assessment order that the building/bungalow was very old. No deprecation is allowable on the plot land - Held that:- Both the lower authorities discuss the location factor of the land and dilapidated state of the bungalow/building in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... afresh adjudication as per law. We find that this crucial fact has missed the lower appellate authority's consideration in the order under challenge. The impugned penalty has got no legs to stand as of now in these facts and circumstances. This substantive ground is accordingly treated as allowed for statistical purposes. It shall however be open for the Assessing Officer to initiate penalty proceedings afresh as per law after finalizing consequential proceedings. This first substantive ground fails. 3. The Revenue's second substantive ground seeks to revive section 271(1)(c) penalty arising from excess claim of section 80HHC deduction amounting to ₹ 24,927/-. The assessee-company manufactures different kinds of castings. Its export turnover was of ₹ 67,84,192/- exclusive of sales tax and excise duty. The Assessing Officer reworked this deduction claim as ₹ 4,55,182/- in assessment order. The CIT(A) directed the Assessing Officer to re- compute this 80HHC deduction in the quantum lower appellate order. The Assessing Officer passed consequential order recalculating the impugned deduction as ₹ 4,27,743/- thereby disallowing excess figure between the former an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucts 322 ITR 158 holds that each and every disallowance does not necessarily result in imposition of concealment or furnishing of inaccurate particulars. We accordingly delete the impugned penalty arising on loss of ₹ 5,86,687/- on sale of mutual funds. Assessee's CO 120/Ahd/2012 succeeds. Assessment year 2008-09 Assessee's appeal ITA 857/Ahd/2012 and Revenue's cross appeal ITA 1213/Ahd/2012 7. Learned authorized representative files a tabulation chart of the relevant grounds raised in these cross appeals. The Revenue is fair enough in not disputing its correctness. It emerges therefrom that both these cross appeals raise three substantive grounds each. The assessee's first substantive ground challenges the lower appellate order partly confirming section 40A(2)(b) disallowance from ₹ 3,21,96,765/- to ₹ 1,81,24,570/-. The Revenue also raises its second substantive in cross appeal seeking to revive the entire disallowance. Both the ld. representatives reiterate their respective pleadings in the course of hearing. 8. We come to relevant facts. The Assessing Officer in the course of scrutiny found the assessee to have paid following remuneration to its managing di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the beginning of sec.40A(1) clearly indicate that if any other provisions exist somewhere on the statute book, they have to give way to clear the express provisions of sec.40A. 4.3 In view of the overriding provisions of sec.40A(2)(a), the payment of remuneration may though be authorized by the deed of partnership, may also be in accordance with the terms of deed, and may further be within the ceiling limit as fixed by cl.v of section 40(b), in respect of aggregate amount of remuneration payable to the partners, if the amount of remuneration paid to a particular partner(or partners) is excessive or unreasonable or, looking to the legitimate needs to the business of the assessee firm or the benefit derived by the firm, the same is unfair, the A.O. may allow a remuneration only to the extent it is reasonable and not excessive in his opinion. 4.4 The above discussion clearly reveals that the excessive directors remuneration can always be disallowed as per the provisions of sec.40A(2) of the I.T.Act. During the assessment proceedings as well as the appellate proceedings the appellant had submitted that the directors remuneration is approved by Board of Directors, the directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct facts, in view of above discussions disallowance against salary paid to Shri K.H. Jhaveri to the extent of ₹ 1,26,36,000/-(3,99,96,000 - 2,73,60,000) is confirmed. The appellant will get a relief of ₹ 1,40,99,171 (2,67,35,171 -1,26,36,000). 4.4 The A.O. has also disallowed remuneration of ₹ 54,61,570/- paid to Shri Abhishek K. Jhaveri. It is seen that Shri Abhishek Jhaveri was paid a salary of ₹ 18,00,000/- in the year 2005-06 which was increased to ₹ 60,00,000/- in the current year. Compared to F.Y.2005-06 both turnover and the gross profit of the appellant company had reduced substantially. Accordingly in my considered view there is no justification for increase in directors remuneration. In view of these facts, disallowance of ₹ 54,61,570/- made in respect of remuneration paid to Shri Abhishek K. Jhaveri is confirmed. 4.5 As a result of this appeal, directors remuneration to the extent of ₹ 2,91,60,000/-(2,73,60,000/- +18,00,000/-) is allowed. Disallowance made to the extent of ₹ 1,81,24,570/- is confirmed. The appellant will get a relief of ₹ 1,40,99,171/-. This ground of appeal is partly allowed." 11. Ld. auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (shares) incubator of ₹ 8,792/-, dividends (shares) PMS-2010 of ₹ 1,39,818/-, dividend income of ₹ 29,13,374/-, mutual funds dividend incubator of ₹ 1,06,955/- and Kotak Flexi Bond dividend of ₹ 5,28,530/-; respectively. The assessee did not disallow any figure to have been in relation with the same. It would plead not to have incurred any expenditure for earning the same. The Assessing Officer invoked rule 8D(2) of the Income Tax Rules to compute disallowance inter alia of direct expenditure on demat charges/managing fee of ₹ 16,59,770/-, proportionate interest of ₹ 1,28,561/- and administrative expenditure of ₹ 13,29,434/- under clauses (i) to (iii) thereto; respectively. 14. The CIT(A) upholds the impugned disallowance as below:- "5.2 I have carefully considered the rival submissions. I have also perused various case laws relied upon by the appellant. It is seen that the Id. A.R. contended that investments in the equity shares should not be considered for disallowance as per the provisions of sec.14A of the I.T. Act, since, income earned on the trading of shares is taxed under the head short term and long term capital gains. Aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready stands accepted. Ld. authorized representative draws our attention to assessee's P & L account demonstrating assessee's interest income in the impugned assessment year as ₹ 2,59,32,546/- with interest expenditure of ₹ 9,33,696/- resulting in net positive figure. A co-ordinate bench of the tribunal in ITA 1277/Kol/2011 DCIT vs. Trade Apartment Ltd. decided on 30-03- 2012 holds that such an interest disallowance is not to be made in absence of any net interest expenditure upon setting off interest credited to P & L account. Anther co-ordinate bench in ITA 2228/Ahd/2012 ITA vs. Karnavati Petro-chem. Ltd decided on 05-07- 2013 echoes the very principle. The Revenue is unable to draw any distinction on facts or law. This proportionate interest disallowance is accordingly deleted. 16. We come to administrative expenditure disallowance of ₹ 13,29,434/- (supra). Ld. authorized representative submits that both the authorities nowhere record satisfaction about correctness of assessee's books of account stating that it has not incurred any administrative expenditure as held by the case law (2015) 376 ITR 553 (Guj) PCIT vs. India Gelatine Chemical Ltd, (2015) 370 ITR 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in para 4.4 are erroneous and misleading. The number of companies and number of transactions mentioned in the order are not correct because one and the same company appearing in the data is counted as separate company and some transactions not falling in the relevant assessment year has been taken into calculation. Without prejudice to what has been stated above, even if the numbers are taken to be correct, the Ld. A.O. taking the said observation, as the basis for arriving at a conclusion that the profit earned on shares transactions is a business profit and not "Short Term / Long Term Capital gain" is grossly misplaced and erroneous. The Ld. A.O. has purposely not considered the fact that when the value involved in the transactions is large, the number of transactions also tend to be higher. Further in our case looking to the value involved, the number of transactions (117 as observed by Ld. A.O. in the order which is a combined total of purchase and sale and not single side transaction) is minimal or meager. Most importantly, the assessee has shown the shares held as Investment and no borrowed funds have been invested. The holding period in respect of long-term capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of capital gains be allowed as claimed and exemption of long term capital be allowed as claimed." 6.3 I have carefully considered the rival submissions. It is seen that the appellant was regularly engaged in share trading during the year under consideration as well as in the earlier years. Since, the appellant was regularly engaged in this business, the burden of proof to prove that investment has been made in shares in the capacity of investor is of the appellant. It was held by the Hon'ble Supreme court in the case of Associated Industrial Development co. Pvt. Ltd., reported at 82 ITR 586, that it is within the knowledge of the assessee who holds the share, to prove that a particular holding of share is investment or forms part of the stock-in-trade. The assessee will be in a position to produce evidence from its record as to whether it has maintained distinction between those shares which are its stock in trade and those which are held by way of investments. In the instant case the appellant has not filed any evidence to prove that the investments in share were made as investor or as a business adventure. Instead of filing specific evidences the appellant" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments. Hon'ble Karnataka high court in CIT vs. Kapoor Investments quotes Delhi high court decision in (2014) in 367 ITR 01 Radical Investments vs. ACIT to hold that shares investments made through portfolio management services do not amount to business activity. There is also no evidence apart from Assessing Officer's drawing inference only that the assessee has taken part in any adventure in the nature of share trading. The law on this issue is settled that capital gains or business income in case of share profit has to be decided keeping in mind an assessee's intention, frequency and magnitude of transactions, accounting treatment, holding period etc. We follow our above narration of facts and law to hold that both the lower authorities have erred in treating the assessee's capital gains in question as its business income. The Assessing Officer shall now pass a consequential order accordingly. Assessee's appeal ITA 857/Ahd/2012 is partly allowed. 20. We come to Revenue's cross appeal ITA 1213/Ahd/2012. Its first substantive ground seeks to revive addition of ₹ 4,73,74,171/- made on account of rejection of book result and re-estimation of additional business profit. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nished complete quantitative details of consumption of raw materials value- wise and quantity-wise. The fact of consumption details value-Wise was admitted by the A.O. in the assessment order itself. I find that consumption of quantitative details for the last three assessment years has been filed vide the assessees letter dated 22/7/2010 and the same is placed at page no.41 of the paper book. The A.O. during the assessment proceedings as well as during the remand proceedings could not find any specific defect in the quantitative details furnished by the appellant during the assessment proceedings as well as the remand proceedings. (d) The books of accounts are audited as per the provisions of the I.T Act and as per the provisions of Central Excise Act. These details were before the A.O. The A.O. could not find specific defect either in the audit report or in the books of accounts. (e) lt is also observed by the A.O. that the details of salary, wages and bonus paid has not been furnished. I find that the appellant has furnished copies of salary sheets during the assessment proceedings, which consist details like complete name of the employee, salary payable and recoveries like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant has furnished sufficient evidence to identify the vendors and customers. Sufficient evidences were also furnished in respect of transactions done during the year under consideration. If any other information was needed the same can be culled out from these details. The appellant has furnished sufficient information on record and if the A.O. was not satisfied with the genuineness of these purchase/sales, he could have conducted enquiries on the basis of facts available on record. The above facts clearly reveals that the appellant furnished all the basic details in respect of sundry debtors and creditors. The A.O. could not found specific defects in these details. The above discussions reveals that the appellant has furnished sufficient details to substantiate sales and purchase, sundry debtors and creditors, quantitative details of consumption of main raw materials and production and quantitative details of closing stock. The appellant has also furnished other details as required by the A.O. However, in spite of such a big labour the A.O. was not satisfied with the details furnished. However, the A.O. has not found any specific defect in the books of accounts or in the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d substantive ground seeks to restore closing stock adjustment of ₹ 47,41,915/- made u/s. 145A of the Act. The Assessing Officer invoked the impugned addition after finding the assessee as not to have added CENVAT value paid on raw material in its closing stock. The CIT(A) deletes the same as follows:- "9.2 I have carefully considered the rival submissions. I have also perused various case laws relied upon by the appellant. On this issue I am inclined to agree with the submissions of the id. A.R. for the following reasons:- (1) The appellant is following exclusive method of accounting. According to this method of accounting payment and receipt of CENVAT is a balance sheet item and it is not debited or credited in the P & L A/c. In this regard I am inclined to agree with the contention of the Id. A.R. that an amount of ₹ 47,41,915/- being CENVAT paid 6n raw material is revenue neutral. The appellant has rightly placed reliance on Indo Nippon Chemical Co. Ltd. (2003) 261 ITR 275 (SG). I have also perused the other case laws relied upon by the appellant and ratios of these case laws also support the case of the appellant. (2) The A.O. has not commented on the account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der that no such addition could be made on account of excise duty to closing stock unless a balancing deduction is allowed in P & L account. And also that if central excise duty is not due and payable, the same cannot be considered as cost to raw material as well as finished goods appearing in the closing stock. Ld. DR fails in pointing out any exception to this principle. We follow the same for upholding the lower appellate findings under challenge. This third substantive ground is also declined. Revenue's appeal ITA 1213/Ahd/2012 is dismissed. Assessment year 2009-10 Assessee's appeal ITA 2617/Ahd/2012 and Revenue's cross appeal 2921/Ahd/2012 26. We come to assessee's appeal. Its first substantive ground is against section 14A disallowance of ₹ 36,26,359/- made against assessee's dividend income of ₹ 37,51,097/-. The assessee filed its reply on 19-05-2011 not attributing any expenditure; direct, proportionate or administrative one. It however came out with administrative expenditure @ 0.5% of average value of investments coming to ₹ 1,20,708/-. The Assessing Officer sought to disallow proportionate and administrative expenditure. The assessee inter alia clarif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying out manufacturing activities. The assessee did not pay any rent except this lumpsum refundable amount. The Assessing Officer observed in assessment order that the same carried interest on repayment of ₹ 76,66,666/- during each financial year commencing from 01-04-2005 to 31-03-2006 and failure thereof would fetch interest @ 18% per annum. He was of the view that there was no evidence on record suggesting any modification in this crucial interest clause stipulated in the agreement. All this resulted in the impugned deemed interest addition of ₹ 41.40 lacs not shown in the books. 29. The CIT(A) partly accepts assessee's submissions as under:- "3.1 On this issue the appellant vide its letter dated 27.9.2012 submitted as under:- "4. Transaction with PASL Windtech Pvt. Ltd. At the outset, it is respectfully submitted that the addition of ₹ 41,40,000/- made by the Ld. A.O. by way of interest on Security Deposit of ₹ 2.30 crores is in clear ignorance of facts available on record. The brief facts on the point in question is that the appellant had taken three separate immovable industrial properties for its use from its sister concern company vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.30 crores has been received back through bank payments from PASL Windtech Pvt. Ltd. and there is no outstanding as on 31.03.2008. b) Our letter dated 22/07/2010 addressed to The Addl. Commissioner of Income Tax, Range-5, Ahmedabad in response to the scrutiny assessment questionnaire for A.Y. 2008-09 enclosing therewith three separate Security Deposit Accounts. Copy of the same is enclosed (Exhibit-L) (Page 163 to 169). As stated in para (a) above, one of those three accounts titled ''Ahmedabad Finvest - Sec. Dep (37B)" shows that the whole of the Security Deposit amount of ₹ 2.30 crores has been received back through bank payments from PASL Windtech Pvt. Ltd, and there is no outstanding as on 31.03.2008. c) Our letter dated 14/03/2011 addressed to The Assistant Commissioner of Income Tax (OSD), Ahmedabad in response to the Notice u/s. 142(1) for A.Y. 2009-10 enclosing therewith separate Security Deposit Accounts. Copy of the same is enclosed (Exhibit-M) (Page 170 to 172).Since in the previous year, in one of the three Security Deposit accounts being Security Deposit account for ₹ 2.30 crores there was not outstanding as on 31.03.2008, only other two accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e A.O. charged interest @18% on the entire security deposit of ₹ 2.3 crores and addition of ₹ 41,40,000/-(Rs.2,30,00,000/-- x 1) has been made in the income of the appellant. During the appellate proceedings the appellant contended that subsequent to the security deposit, as per mutual understanding between the parties i.e. the appellant and PASL Windtech Pvt. Ltd. no interest on security deposit was to be charged and refund of security deposit was to be made by PASL Windtech Pvt. Ltd. as per mutual convenience and against vacation of property. However, the appellant has failed to furnish any documentary evidences to substantiate this claim. In the absence of documentary evidences, I am not inclined to agree with the contentions of the appellant. The facts remains that the appellant is having operational agreement with its sister concern namely PASL Windtech Pvt. Ltd. and as per this agreement the appellant has given an interest free security deposit to this concern in lieu of use of property. As per clause-5 of this agreement the appellant was required to charge interest @18% in case M/s. PASL Windtech Pvt. Ltd. has failed to refund minimum security deposit of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternal infrastructural facilities at the Scheduled Premises for use of PASPL and shall also allow PASPL to install its machinery and other equipments to carry out manufacturing activities. 4. ASPL shall give to AFCPL an amount of ₹ 2.30 Crores (Rupees two crores thirty lacs) by way of refundable/ non-interest bearing Security Deposit. 5. AFCPL shall refund to PASPL, the entire amount of Security Deposit on or before 31.03.2008. However it shall be a condition that AFCPL repays to PASPL towards such refund of Security Deposit a minimum amount of ₹ 76,66,666/-(Rupees Seventy six lacs sixty six thousand six hundred sixty six) during each financial year commencing from the Financial Year 01.04.2005 to 31.03.2006. In the event of any delay in payment of such minimum amount fixed as above by AFCPL or any shortfall therein, AFCPL shall pay an interest @ 18% p.a. to PASPL on such minimum amount or shortfall therein. 6. Upon refund of the entire amount of Security Deposit by AFCPL to PASPL on or before the stipulated date i.e. 31.03.2008, PASPL shall vacate and hand over quiet, peaceful and vacant possession of the Scheduled/Premises to AFCPL. PASL shall have a right to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... security deposit despite the position of non-payment of rent. Ld. authorized representative fails to prove dilution of this clause by way of any subsequent modification. We also feel this alone is not end of the issue. The CIT(A)'s findings extracted hereinabove made it clear that the assessee has already received its security amount latest by 23-08- 2007 relevant for assessment year 2008-09 only and not to the impugned assessment year 2009-10. We hold in these facts that the deemed interest addition could not have been made in the impugned assessment year as no such interest accrues or arises in financial year 2008-09. We accept assessee's arguments against this interest addition and reject those raised at Revenue's behest. The assessee's second substantive ground succeeds. 32. The assessee's third substantive ground pleads that the CIT(A) has erred in not granting it deduction of ₹ 38,92,473/- being interest and other charges revenue in nature but provisionally capitalized. We find the lower appellate order to have extracted the Assessing Officer's findings in extempore. The assessee had taken a term loan along with cash credit facility during the year. The Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative first of all states that its act of capitalization is merely a book entry which is not final and the impugned deduction claim had to be adjudicated as per the provisions of the act as held by hon'ble apex court in case of Tuticorn Alkalies and Chemicals (1997) 141 CTR (SC) 387. He states that the CIT(A) ought to have decided the issue on merits since the fundamental question of the impugned interest sum whether capital or revenue expenditure has remained undecided in the above extracted portion. Ld. DR fails to rebut this factual position. We deem it appropriate in these facts and circumstances that the lower appellate authority needs to re-decide this issue afresh as per law on merits. This ground is accordingly remitted back to the CIT(A). 35. The assessee's next substantive ground assails the lower appellate findings restricting depreciation claim for its corporate building by bifurcating value of the land in question at ₹ 5 crores. The assessee had purchased the asset in question i.e. a property situated at RP No. 256 (old survey no. 55/07) of TPS No. 21 admeasuring 839 sq. mt. with bungalow constructed thereupon in area measuring 391 sq. yd. for ₹ 5.5 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of notional interest of ₹ 12,43,212/- and alleged excess payment on directors' remuneration. Ld. representatives invite our attention to assessee's appeal already dealing with all four grounds except no. 3 of notional interest. We appreciate this fair stand and reject these three substantive grounds. 39. This leaves us with the sole surviving issue on addition of notional interest of ₹ 12,43,212/-. The assessee had given interest free advances of ₹ 402.08 lacs to its sister concern M/s. PASL Windsolutions Ltd. Its case was that this indicated share application money invested in a sister concern as a matter of business expediency and not loan. The Assessing Officer took note of the fact that both these entities has treated the impugned advances as loans in their respective books of account. The statutory auditors had also agreed with this treatment. The Assessing Officer treated it as a case of diversion of interest bearing expense for making the impugned interest addition. 40. The CIT(A) reverses Assessing Officer's action as under:- "5.3 I have carefully considered rival submissions. I have also perused evidences furnished by the appellant and the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... records further reveals that the A.O. has not established nexus between interest bearing funds and interest free advances. It is held by Mumbai Tribunal in the case of Oceanic Investments Ltd. v/s. CIT (1997) 57 TTJ 549 that it is necessary to establish nexus between borrowed funds and the amount advanced, and in the absence of this finding the lower authorities were not justified in making the disallowance of interest. It was also held in the case of M/s. Jai singh's Sons & Co. Ltd. v/s. ITO (1977) 4 TTJ 1452 that interest expenses has to be allowed as the A.O. has not established nexus between interest bearing borrowings and interest free landings by the assessee company to the subsidiary company. Further reliance in this regard is placed on the following case laws. (i) Raj Vikas Quaries and Ind. P. Ltd. v/s. ACIT (1992) 42 TTJ 262 (ii) United Agencies V/s. ITO (1990) 37 TTJ 374 (And.) (iii) CIT v/s. Dhampur Sugar Mills Ltd. (2006) 148 Taxman 321 (All.) (iv) CIT v/s. Radico Khaitan Ltd. 274 ITR 354 (All.) In view of the above decisions, I hold that the A.O. was not justified in disallowing interest without establishing nexus between interest bearing funds and inter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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