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TMI Blog2024 (6) TMI 1217X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO. Therefore, in our view, the submission that the document was available with the AO, is incorrect. We expect the learned advocate to be fair while filing the certificate of certifying documents and making the submissions before us. In our view, the application should have been filed by the assessee for admission of the additional documents / evidences before the lower authority as well as before us, before assessee choses to rely upon the documents / evidences. With respect to the letter issued by HMBS certifying that the interest instalments were paid by the assessee, we are of the opinion that the AO is required to verify whether the interest certificate issued by HMBS is correct or not and further, the Assessing Officer is required to verify whether the amount received by HMBS was from banking channels or not. AO is also required to verify whether the amount allegedly deposited by the common partner of M/s. G.B. Bakers, was claimed by the said partner as expenditure in the books of accounts of M/s. G.B. Bakers or not. Since the statements of bank account was not available before the AO/ CIT(A), therefore, there was no question of examination of his bank statement and give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave decided that livestock is not a capital asset and therefore, there is no purpose to discuss whether what will be the cost of acquisition of newly born buffalo calves. As mentioned hereinabove, the normal business principles as applicable for the purpose of determining the profit and loss of the business are required to be applied even for the purposes of computing the profit on sale of newly born buffalo calves and thereafter, the income earned used to be taxed as business income . Having held that livestock is not a capital asset and is only a stock-in-trade, the logical fallout of the above conclusion is that the income of the assessee is required to be determined by applying the principle as applicable for determining the profit and loss of the business and is to be taxed as business income. Further Assessee is not entitled to indexation on the cost of purchase of the livestock, as there is no provision for grant of indexation of the livestock, being not a capital asset. Therefore, we reverse the finding of the ld.CIT(A) whereby he had wrongly held that livestock is a capital asset, and the income of the assessee is to be determined on the basis of treating the livestock as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture as the loan is taken for the purpose of business. The addition may be deleted. 3. Your appellant submits that it is not the case of the Assessing Officer or the CIT(A) that the loan from HMBS is not taken for the purpose of business, the case is that HMBS is claiming its income as exempt on the principals of mutuality has nothing to do with allowability of interest paid in the hands of your appellant. 2.1. The grounds raised by the assessee in ITA No.1288/Hyd/2017 for A.Y. 2013-14 reads as under : 1. Your Appellant submits that the CIT(A) erred in law and facts of the case in disallowing the interest paid of Rs. 21,34,193/- on loan taken from Hyderabad Mutual Benefit Society (HMBS) in the course of business for the purpose of business. 2. Your Appellant submits that it is member of HMBS, has not claimed the interest on principals of mutuality nor it is the case of your appellant that interest has to be allowed as per the principals of mutuality applicable to the Co-operative Societies Registration Act. Your Appellant submits that interest paid to HMBS is claimed as business expenditure as the loan is taken for the purpose of business. The addition may be deleted. 3. Your Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 14 for the sake of brevity. 3. The brief facts of the case are that assessee filed its return of income for A.Y. 2013-14 through e-filing on 31.03.2015 disclosing net taxable income of Rs. 1,71,81,860/-. Subsequently, the case has been selected for scrutiny through CASS. Accordingly, the case was taken up for scrutiny and notice u/s 143(2) of the Act was issued on 31.08.2015. The assessee furnished information as called for along with books of accounts. The Assessing Officer had examined the information furnished and found that though assessee claimed interest payment of Rs. 21,34,193/- to Hyderabad Mutual Benefit Society (HMBS) but the assessee has not shown the same in its Balance-Sheet either under unsecured loans or sundry creditors. Hence, the Assessing Officer disallowed the said interest and added the same to the returned income of the assessee. 3.1. Thereafter, Assessing Officer noticed that assessee had credited an amount of Rs. 14,29,31,592/- being the sale of livestock and debited Rs. 2,58,41,771/- towards cost of livestock. In this connection, Assessing Officer opined that livestock is not a capital asset and that it was no where mentioned in the IT Act that indexatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t amount of Rs. 13,34,104/- claimed towards interest on HMBS loan is disallowed and added to the total income. 7 Ground nos. 3 and 4 (CIT Order ) Disallowance of Rs. 13,34,000/- towards interest paid to Hyderabad Mutual Benefit Society (HMBS): 7.1 During the assessment proceedings, the Assessing Officer noticed that the assessee claimed interest payment of Rs. 13,34,000/- to Hyderabad Mutual Benefit Society (HMBS). The Assessing Officer contended that as per the mutuality applicable to co-operative societies Registration Act, the interest paid by the members of the society on the loans taken from the society is not deductible. This fact was also confirmed by the Chartered Accountant of the assessee in his letter dated 24.09.2014 addressed to the Hon ble Secretary, Hyderabad Mutual Benefit Society (HMBS). Therefore, the Assessing Officer disallowed Rs. 13,34,104/- claimed towards interest on HMBS loan. 7.2 Before me, the appellant submitted that it has paid interest payment to HMBS and was also submitted proof as per ledger account of interest on HMBS loan A/c. No.727 for the F.Y. 2011-12. The appellant submitted a confirmation letter from Hyderabad Mutual Benefit Society, the state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance-Sheet and therefore the expenditure incurred by the assessee was allowable expenditure in the hands of the assessee. 6.3. In support of his case, the ld.AR for the assessee filed written arguments. The relevant portion of written argument with respect to this ground reads as under : Grounds 1, 2 and 3: Interest paid to Hyderabad Mutual Benefit Society - Rs. 21,34,193/- The loan taken from HMBS by the appellant has been utilized for the purpose of business, which has not been disputed by the AO/CIT(A). Both the authorities erred in mentioning that the loan amount did not appear in the balance sheet. Further, the authorities have failed to appreciate that section 36/37 of the Income-tax Act provide the benefit of deduction when the expenditure is utilized for business purpose. The sections no-where mention that the expenditure incurred, for it to be deductible, must be taxable in another person's hand. In the facts of the present case, since the loan amount has been exclusively used for the purpose of business of the appellant, which fact has not been disputed by the lower authorities till now, and the amount appears on the liabilities side of the Balance sheet, said intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at pages 40 to 66 were not filed before Assessing Officer/ ld.CIT(A). Further, no application was filed for admission of those documents. 8. In rebuttal, ld.AR has submitted that the amount was paid by the assessee through one of its partners and for that purposes, he has drawn our attention to the statement of bank account of M/s. G.B. Bakers. 9. We have heard the rival submissions and perused the material on record. In the present case, we have asked the ld.AR for the assessee whether the assessee has filed the balance-sheet in the assessment year 2012-13 before us wherein the loan amount has been shown to have been received from Hyderabad Mutual Benefit Society. To that ld.AR for the assessee has shown his inability. Ld.AR relied upon ledger account of interest and the certificate from HMBS dt. 14.04.2017, issued by the authority. 9.1. From a perusal of the list of documents, we find the assessee had filed a certificate and ledger account certifying that the documents issued by HMBS were available with the Assessing Officer. However, the date of the document dt. 14.04.2017 which is subsequent to passing of the assessment order clearly shows that these documents are not availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the common partner with M/s. Super Diary Farms and M/s. G.B. Bakers. 4) The ld.CIT(A) shall call for the report from HMBS with respect to the fact that whether the loan interest payment was made by the assessee through banking channels or not. 5) As it is the case of the assessee before us that one of his partners, who is associated with M/s.G.B. Bakers had paid the loan interest amount to the HMBS, therefore, in that view of the matter, ld.CIT(A) shall verify from the record of HMBS whether the said amount was paid by the said person in cash or from the banking channel or not and further the ld.CIT(A) shall find out whether M/s. G.B. Bakers have claimed it as an allowable deduction while filing the return of income of the said G.B. Bakers. 10.1. With the above said directions, the matter is remanded back to the file of ld.CIT(A) to decide the issue afresh in accordance with law. Thus, grounds 1 to 3 in assessee s appeal for A.Y. 2012- 13 and 2013-14 are allowed for statistical purposes. 11. In the result, assessee s appeal for A.Y. 2012-13 is allowed for statistical purposes. ISSUE NO.2 Ld.CIT(A) cannot enhance without providing an opportunity of being heard. 12. Issue No.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 265 and Article 20(2) of Constitution of India and the principles of natural justice. 12.2. Per contra, the ld.DR has submitted that there was no enhancement by the ld.CIT(A) and therefore, the argument of the learned counsel for the assessee is without any merit. In this regard, ld.DR has filed the written submissions. The relevant portion of the written submissions are to the following effect : Capitalisation and enhancement 18 The A.R argued that capitalization of fodder cost of 1.82 crores and purchase cost of buffaloes of 2.58 crores is not correct, particularly without giving notice of enhancement. Notwithstanding the stand of the department that the livestock is stock in trade, support the decision of the CIT(A) with regard to the capitalization of expense. It is also submitted that the income directed to be determined by the CIT(A)is below the income assessed by the AO in the assessment order. The CIT(A) has not directed the AO to assess any new head of income, but only directed to capitalize the revenue expenditure claimed. 12.3 We have heard the rival submission and perused the material on record. Admittedly, in the present case, the ld.CIT(A) has made addition under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as Fixed Assets give rise to Capital Gain and cannot be treated as Business Income: It is humbly submitted that the Appellant is only in the business of selling dairy products and not in the business of buying and selling of livestock. This is evident from the following: 1. Live Stock(Buffalos) - Rs. 2,05,88,778/- shown under Fixed Assets in Balance sheet for A.Y.2013-14 - (Pg. 9 of PB) 2. Live Stock(Buffalos) - Rs. 1,63,46,483/- shown under Fixed Assets in Balance sheet for A.Y.20 10-11 - (Pg. 28 of PB) 3. Live Stock(Buffalos) - Rs. 2,43,21,483/- shown under Fixed Assets in, Balance sheet for A.Y.201 1-12 - (Pg. 31 of PB) 4. Year on Year table showing closing Fixed Assets of Live Stock for A.Y. 2010-11 2011-12 which matches with the figures in Balance-sheet - (Pg. 13 of PB) 5. Year on Year table showing closing Fixed Assets of Live Stock for A.Y. 2013-14 which matches with the figure in Balance-sheet - (Pg. 12 of PB) 6. Ledger Account of Live Stock - Asset a/c showing Opening Balance and additions during the year - (Pg. 22 of PB) Sale of Self-bred live stock is a capital receipt and not taxable: Further, Self-Bred livestock do not have any cost of acquisition and hence the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of India Discount Co. Limited reported in 75 ITR 191 and the decision in the case of Kedarnath Jute Mfg. Co. Ltd., reported in 82 ITR 363. In support of its case, the ld.DR has filed a detailed rejoinder / written submissions, which is to the following effect : 2 Assessee s A.R. in his written submissions argued that the firm (M/s. Super Diary Farm) is engaged in dairy business, selling milk and milk products. It purchases and sells buffalos for maintaining/increasing the milk supply. The buffalos, calves and bulls are considered as livestock in the Balance Sheet as part of fixed assets, therefore the profit on sale of buffaloes is taxable under the head income from capital gains under section 45 with indexation benefit where the livestock was held more than three years. It is also argued that income from sale of self-bred calves is exempt as there is no cost of acquisition following the decision of High Court of AP in the case of Sri Krishna Dairy Agricultural Farm Vs. CIT 169 ITR 291(AP). 3 The A.O in the assessment order held that livestock is not a capital asset and the provisions for working out the capital gains do not apply. There is no provision for indexation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivestock cannot be regarded as capital assests and therefore, they required to be valued as part of stock in trade of the assessee. Though, the Hon ble High Court was dealing with the poultry, which is maintained for eggs and chicks, the livestock in section 43(3) of the Act applies to other livestock like buffaloes, horses, goats, camels etc.. Dealing with horses, Hon ble ITAT Chennai Bench, held that activity of maintenance of horses in a systematic and organised manner over a period of time, though for earning income by letting out and sale of horses, income was business income and horses were to be treated as stock in trade . 6 The AR of the assessee argued that the firm accounts the livestock as part of fixed assets in the Balance Sheet, therefore capital asset. It is submitted in this regard that the accounting entries made by the assessee in the books do not determine the taxability of a transaction. Accounting entries do not over ride the legal effect of any transaction, legality of any transaction needs to be established independently. Reliance is placed on the decision of Hon ble Supreme Court in India Discount Co. Ltd. (75 ITR 191) (P 195) and on Kedarnath Jute Mfg. Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details on page 12 of Paper Book, it is clear that 1600 livestock was sold during the year, which included 692 Buffaloes, 413 young calves and 495 bulls. Observations on the stock register are as under. (i) Average cost of buffalo in opening stock is Rs. 35,407/- (1,45,17,233 /410). Assessee itself gave a value to the buffaloes in the opening stock, therefore, as per the assessee itself, milking buffaloes in opening stock are not self-bred. (ii) Generally male-buffalo (bull) have no value r very low sale value, which is can be seen from the fact that the assessee bought/added 20 bulls at zero to the sock during the year. However, as per stock register on page 12, average cost of a bull in opening stock is Rs. 23,968 and average cost of a bull in closing stock is Rs. 11,984/-. (iii) As per stock register, average rate per calf in opening stock is Rs. 16,408/- and average calf rate in the closing stock is Rs. 16,408/-. 12 Analysis of Stock appearing on page 12 is as under. OLD NEW Milking Young Bulls Milking Young Bulls Opening stock 410 20 20 875 450 Additions Purchases 500 0 20 New Born 225 125 Deletions Dead 55 20 Sale from op. stock 192 0 0 413 495 Sale from purchased 500 Closin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, even after taking the value of Rs. 11,984/-, the probable sale receipts on sale of bulls works out to Rs. 59,32,080/- and if Rs. 23,968 is taken, it works out to Rs. 1,18,64,160/-. 15 Young calves are valued at Rs. 16,408 in the opening stock and closing stock. A young calf cannot have a higher value than a milking buffalo. If Rs. 16,408 is taken as sale value of calf, the sale receipts works ut to Rs. 67,76,504/- and if Rs. 32,816/- (double rate) is taken, the receipts for 413 calves works out to Rs. 1,35,53,008/-. By no stretch of imagination 413 young calves and 495 bulls can fetch receipts of Rs. 8,63,58,527/-. Therefore, the alleged amount of Rs. 8,63,58,527/- claimed as exempt is a manipulated figure to get undue benefit. 16 Further, the argument of the assessee that the self-generated live stock does not have any cost is incorrect. In the case of V. Ramaswamy Mudaliar 196 ITR 939 (Mad), Hon ble High Court of Madras examined such claim and did not agree with such argument. Dealing with a case where a mare was kept in stud farm to enable bring forth colt and fillies, Court held that though the expenditure was incurred apparently on mare, it was really incurred for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision rendered by the jurisdictional High Court in the case of Sri Krishna Dairy and Agricultural Farm Vs. CIT reported in (1988) 169 ITR 291 (Andhra Pradesh High Court) and also on the decision of Hon ble Madhya Pradesh High Court in the case of DCIT vs Suniti Singh (2008) 299 ITR 183 (MP). Per contra, ld.DR relied upon the decision in the case of L.G. Balakrishnan Vs. CIT reported in 129 taxmann.com 854 and ACIT Vs. S. Pathy (HUF) reported in 100 ITD. 16.1. Before we examine the applicability of respective judgments cited before us, it is essential to look into the statutory scheme mentioned in Section 43(3) of the Income Tax Act, which is to the following effect : 43. Definitions of certain terms relevant to income from profits and gains of business or profession. - In sections 28 to 41 and in this section, unless the context otherwise re quires - (1) actual cost -------------------------- (2) paid means-------------------------- (3) plant includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession but does not include tea bushes or livestock [or buildings or furniture and fittings] [ Inserted by Act 32 of 2003 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the year under consideration is 2013-14. 20. The assessee in its books of accounts had mentioned under the head Assets the livestock also and estimated the value at Rs. 2,05,88,778.56. In our view, mere accounting entries in the books of accounts of the assessee do not correctly determine the nature of the asset. The nature of assets whether it is fixed asset like plant and machinery or stock-in-trade is required to be determined on the basis of the correct nature of the asset. Based on the correct nature of the asset, the taxability of the transaction is required to be determined. In the present case, the nature of the asset namely, livestock is not a fixed asset as mentioned hereinabove as it is so defined by the Income Tax Act and therefore, the finding of the ld.CIT(A) holding it to be a capital asset is contrary to law. 21. As we have held that livestock is not a capital asset, the next argument decided by the ld.CIT(A) at para 9.62 of his order that the buffalo calves born in the shed has zero cost of acquisition. In our view, as we have decided that livestock is not a capital asset and therefore, there is no purpose to discuss whether what will be the cost of acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted. However, in view of the finding given hereinabove that livestock is not a capital asset and the sale of it is required to be computed as business income, therefore, we deem it appropriate to remand this issue to the file of Assessing Officer to verify the contention of the assessee and decide the issue afresh in the light of our finding given hereinabove. Thus, ground no.5(a) is allowed for statistical purposes. Ground no 5(b) of the assessee s appeal for A.Y. 2013-14. 28. As we have decided that the livestock is not a capital asset, therefore the expenditure incurred by the assessee towards feeding and maintenance of the livestock cannot be held to be capital in nature and therefore, the Ld. CIT(A) has erred in concluding that the expenditure incurred for feeding and maintenance was also capital in nature. In fact, the expenditure incurred by the assessee for maintaining and feeding the livestock is required to be treated as a revenue expenditure and accordingly we reverse the order passed by the Ld. CIT(A) to that extent. In view, thereof, we allow the ground 5(b) of the assessee appeal. 29. With respect to the short-term capital gains declared by the assessee, in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X
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