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TMI Blog2018 (3) TMI 1625X X X X Extracts X X X X X X X X Extracts X X X X ..... NAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM Assessee by : Shri Sunil Pathak Revenue by : Shri Rajeev Kumar ORDER PER VIKAS AWASTHY, JM : ITA No. 672/PUN/2015 by the assessee and cross appeal by the Revenue in ITA No. 834/PUN/2015 are directed against the order of Commissioner of Income Tax (Appeals)-2, Nashik dated 27-03-2015 for the assessment year 2010-11. 2. The brief facts of the case as emanating from records are: The assessee company is one of the concerns of Rajmal Lakhichand group engaged in manufacturing and trading of gold, silver, diamond ornaments and bullion. The assessee is also engaged in generation of power through windmill. The assessee filed its return of income for the impugned assessment year on 01-10-2010 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 scrutiny assessment proceedings, the Assessing Officer made additions/disallowances on following counts : i. Disallowance u/s. 40A(2)(a) Rs.8,15,19,070/-. ii. Disallowance u/s. 14A Rs.9, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted disallowance made u/s. 40A(2)(a) by Assessing Officer and instead estimated GP at 2.75% to cover up the deficiencies in transactions with sister concerns. The ld. AR further pointed that identical issue had come up before the Tribunal in the case of assessee‟s sister concern M/s. Rajmal Lakhichand in assessment year 2009-10 in ITA Nos. 532 & 663/PN/2013 decided on 16-01-2015. The Tribunal estimated GP of M/s. Rajmal Lakhichand 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 had declared GP of 2.22%, the Commissioner of Income Tax (Appeals) estimated GP at 2.75% which is very much on higher side. The turnover of assessee in assessment year 2010-11 is ₹ 888.30 crores as compared to ₹ 473.23 crores in assessment year 2009-10. Since, the turnover in the assessment year under appeal is higher than the turnover in immediately preceding assessment year, the GP would go down. Thus, the addition made by Commissioner of Income Tax (Appeals) is not justified. The ld. AR referred to P & L account (at page 14 of the paper book) for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal has assailed the findings of Commissioner of Income Tax (Appeals) by raising following grounds : "1. 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 ₹ 8,15,19,070/- made on account of Addition u/s. 40A(2) without appreciating the fact that the books of accounts are not reliable and special audit u/s 142(2A) was therefore carried out. The Ld. CIT(A) has relied on ITAT Pune's decision in the assessee's own case on the similar facts for AY. 2009-10. However, the basis of adoption of GP 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 ₹ 9,24,259/- made on account of disallowance u/s 14A read with rule 8D. 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 circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary/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 purpose of avoiding 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 grounds raised by the Department in appeal, the ld. AR submitted that the Tribunal in the case of assessee‟s sister concerns M/s. Rajmal Lakhichand (supra) under identical set of facts has upheld the decision of Commissioner of Income Tax (Appeals) in deleting disallowance u/s. 40A(2)(a) and has thereafter estimated GP. The detailed submissions in this regard has already been made while addressing the arguments in respect of ground No. 3 of the appeal by assessee. 9. In respect of disallowance made u/s. 14A the ld. AR submitted that the assessee has invested a sum of ₹ 1,36,40,800/- in shares of group companies. The details of investments made by assessee in group companies are as under : a. Manraj Housing Finance Ltd. Rs.21,90,800/-. b. R.L. Gold Pvt. Ltd. Rs.1,00,000/-. c. Manvi Holdings Pvt. Ltd. Rs.1,12,50,000/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tune of ₹ 65 crores from the third parties. Further, the assessee had purchased gold ornaments of ₹ 283.99 crores from group concerns and ₹ 3.56 crores 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 report and by applying rates of Bombay Bullion Market came to the conclusion that the assessee had paid excessive or unreasonable payments to the tune of ₹ 8,15,19,070/- to its sister concerns. Thus, the Assessing Officer made disallowance of the same under the provisions of section 40A(2) (a) of the Act. 14. 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 2,83,98,28,666 2,94,29,75,490 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. Rajmal Lakhichand (supra) 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 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 lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 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 orna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant had disclosed the total sales at ₹ 888.30 crores on which the appellant had declared G.P. of ₹ 19.69 crores and the N.P. of ₹ 2.78 crores for the year under appeal. The G.P. rate works out to 2.22% and the N.P. rate to 0.31%. Whereas the appellant had disclosed the total sales of ₹ 432.72 crores and the gross profit of ₹ 18.52 crores for the A.Y. 2009-10, and the N.P. was declared at ₹ 10.18 crores. The G. P. rate came to 4.28% and the N.P. rate to 2.35%. There is substantial increase in the turnover of the appellant during the year as compared to the last year. However, there is huge fall in G.P. and N.P in this year. The appellant continues to be engaged in the same business and the market conditions remain the same. The appellant has no convincing explanation for such steep fall of G.P. for the year. Thus, following the decision of the Hon'ble ITAT in the case of Rajmal Lakhichand, the adoption of G.P. rate of 2.75% as against the G.P. rate of 2.22% disclosed by the appellant will be fair and meet the ends of justice. Therefore, the A.O. is directed to work out the G.P at 2.75% on the total sale of ₹ 888,30,42,858/- as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction to the adoption of Bombay Bullion Association rates for the valuation purpose of stock. As per the Revenue the assessee should have applied Jalgaon rates as the assessee has its business at Jalgaon and most of customers of the assessee are located in and around Jalgaon. The fact that the assessee has been consistently valuing its closing stock as per rates quoted by Bombay Bullion Association in the earlier assessment years and subsequent assessment years has not been disputed by the Revenue. The Revenue has also not disputed that in the earlier assessment years or in subsequent assessment years no addition has been made by Assessing Officer for adopting Bombay Bullion Association rates for valuation of closing stock by assessee. It is only in the assessment year under appeal that the Assessing Officer deviated and applied Jalgaon rates instead of rates quoted by Bombay Bullion Association for valuation of closing stock. We do not find any merit in the reasoning given in the impugned order to disturb the method of valuation of closing stock. Accordingly, the findings of Commissioner of Income Tax (Appeals) on this issue are set aside and ground No. 4 raised in appeal by asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors has been shown as liability in the liability side of the balance sheet. The Board of Directors vide resolution dated 10- 02-2006 have approved for the purchase of the flats in the name of the 2 directors. Depreciation in the computation statement is as per Form No.3CD enclosed along with return of income. In the schedule of depreciation enclosed along with Form 3CD we find depreciation has been claimed at ₹ 2,18,73,103/- which includes the depreciation of ₹ 62,39,688/- on building/flats amounting to ₹ 5,98,28,719/- (page 35 of the paper book). The submission of the assessee before the CIT(A) that the assessee's claim for depreciation has been accepted for the A.Y. 2007-08 is also not disputed by the CIT(A). We find before CIT(A) the assessee has inter alia made following submissions : "It was only for the sake of convenience that the said flats were registered in the name of the Directors. The facts of the case clearly show that the company is the real owner of both the flats notwithstanding their registration in the names of directors. It is the defacto and beneficial ownership which is material and relevant. In the context of depreciation the courts ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and considering the fact that the company has already shown the asset in the balance sheet of the assessee company and the loan obtained by the directors for purchase of the flats has been shown as liability in the liability side of the balance sheet and the depreciation claimed by the assessee on such flat has not been rejected in the assessment completed u/s.143(3), therefore, disallowance of interest and the telephone/electricity expenses on account of flat at Khar, Mumbai in our opinion is not justified. In view of the above discussion, we are of the considered opinion that the CIT(A) was not justified in disallowing the interest expenditure and telephone and electricity expenditure relating to the flats at Mumbai. We accordingly set aside the order of the CIT(A) and the grounds raised by the assessee are allowed." The Revenue has not brought to our notice any material contrary to the findings of Tribunal with regard to real ownership of flats in question. Thus, in view of the findings of Co-ordinate Bench of Tribunal on this issue, ground Nos. 5 and 6 raised in appeal by assessee are allowed. 21. In result, the appeal of assessee is partly allowed in the terms aforesaid. 22. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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