9911796707
TMI Blog2025 (3) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... his obligation to show ( provided the assessee has filed all documents and evidences, as required by the assessing officer, to explain the interest free funds) that any part of interest-bearing loans have been diverted for non-business purposes. We find that the issue of disallowance u/s.36 (1) (iii) out of the claim of interest, arose in the assessment proceedings, on account of the report of the Special Auditor, who had only mentioned that the assessee has taken loans from Banks/Financial institutions and has paid interest.When the Spl. Auditor was able to provide such information/ledger accounts from the books of account, obviously he had scanned through the entire ledger meticulously and thoroughly. However, while he could find the accounts listed by him, his discerning eye failed him to find accounts reflecting huge interest-free receipts by assessee from sister concerns, despite there being ledger accounts of sister concerns, reflecting interest free funds provided to the assessee. As noticed that as a matter of fact, considering the amount due to these two parties in trading accounts, interest payable to them worked out to more Rs. 62,46,112/-, than the interest disallowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in valuation of closing stock on FIFO basis - CIT(A) deleted addition partly - HELD THAT:- while the assessee submitted before the assessing officer that the valuation is based on the average cost price of opening stock plus purchases, the same could not be substantiated by the assessee, in a proper way. Moreover, ld CIT(A) noticed that the method of valuation for the year under reference adopted is not consistent with the method adopted for preceding and the subsequent years. Even by assessee's own submission, the valuation for the year under reference would need to be revised upwards by Rs. 24 per,mt. though it is also submitted by the assessee that such an action is uncalled for in view of the fact that in subsequent year also, the tax rate is same. Therefore, ld CIT(A) made an addition of Rs. 50,63,472/- @ of Rs. 24 per,mt. The ld CIT(A) noticed that this addition is obviously called for, so as to, maintain the consistency, as also the matching principle. Thus, out of the total addition of Rs. 4,46,25,539/-, on account of valuation of closing stock, an amount of Rs. 50,63,472/- was upheld while the balance amount of Rs. 3,95,62,067/- ( Rs. 4,46,25,539- Rs. 50,63,472) was d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in turn arise out of separate assessment orders passed by the assessing officer under sections 153A(1)(b)/ 143(3) of the Income Tax Act 1961 ( hereinafter referred to as the 'Act'). 2. Since, the issues involved in all the appeals of Revenue and Assessee, and cross objections of the assessee, are common and identical; therefore, these appeals and cross objections, have been heard together and are being disposed of by this consolidated order. 3. At the outset Learned Counsel for the assessee, informs the Bench that assessee does not wish to press appeal in ITA No.155/RJT/2016, for assessment year 2012-13, therefore we dismiss this appeal of the assessee, as not pressed. 4. Learned Counsel for the assessee, also informs the Bench that assessee, does not wish to press cross objection No. 177/Ahd/2016, for assessment year 2011- 12, therefore, we dismiss the cross objection of the assessee, as not pressed. 5. Now we have to adjudicate only two revenue`s appeals in IT(SS) No.135/Ahd/2016, for assessment year 2011-12 and in IT(SS) No. 136/Ahd/2016, for assessment year 2012-13, and assessee`s cross objection No.178/Ahd/2016, for assessment year 2012-13. 6. Although, appeals filed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow for ready reference, as follows: (1) Ground No.1 :The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 68,13,140/-, being disallowance of interest u/s 36(1)(iii) of the Act, though the assessee had made interest free advance out of interest bearing funds.[This ground No.1 is in Revenue's appeal in ITA No.135/Ahd/2016 for A.Y. 2011-12, This ground No.1 is in ITA No. 136/Ahd/2016 of Revenue's appeal for A.Y.2012-13 is at Rs. 2,18,04,979/-] The assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012-13, has pressed the following ground of appeal: "The learned CIT(A) has erred in law and on facts in confirming the disallowance made by the assessing officer of Rs. 44,40,000/- out of the interest claim" 11. Brief facts of the issue in dispute are stated as under. During the assessment proceedings, the assessing officer called for to ascertain the quantum of secured loan used for business purpose of the concern. On verification of Accounts, it was noticed by the assessing officer that the assessee- firm has taken loan from banks on hypothecation of stock -in- trade and personal properties of partners. The firm has paid interest on such l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged. The details of the same are given by the assessing officer in the assessment order in table format, in para No.7.The assessing officer noticed that assessee has not given any specific reply on the points raised above. The assessee has simply stated that the interest free advances have been made out of the interest free capital and surplus funds. However, looking to the capital and reserved surplus of the assessee and the investment in fixed assets, it was found by the assessing officer that no interest free funds were available with the assessee for giving interest free advances to the group concerns. Therefore, as per assessing officer, disallowance u/s 36(1)(iii) of the I.T. Act, 1961, is warranted. In respect of loans and advance given to M/s Maharaja Salt Works Co. Pvt. Ltd. it was submitted by the assessee that the assessee -firm has given advance of Rs. 2,05,00,000/- for the purchase of salt to the company. However, the said party failed to supply salt and the assessee has filed civil suit in the Civil Court, Gandhidham. As this is business advance against the purchase of goods, it should not be considered as interest free loans and advances. However, in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leted by the ld. CIT(A). 16. Aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us. 17. Shri Sanjay Punglia, Ld. CIT(DR), for the Revenue, has vehemently argued that assessee, during the course of assessment proceedings, has not established, the availability of interest free funds, and assessee has not proved the commercial expediency. The learned DR for the revenue, relied on various decisions listed by the assessing officer, in his assessment order and submitted that assessee does not have interest free funds and never established the commercial expediency. The learned DR thus reiterated that the assessee has not discharged the onus of proving that interest free advances have gone out for interest free funds of the assessee. The learned DR for the revenue, relied on the following decisions: (i) Decision of Hon'ble Allahabad High Court in the case of CIT v. Sahu Enterprise (P.) Ltd. reported in (2013) 352 ITR 8 (Allahabad). (ii). Decicion of Hon'ble ITAT, Hyderabad in the case of Sushee Hi Tech Constructions (P.) Ltd. v. DCIT reported in (2013) 33 taxman.com 236 (Hyd.). (iii) Decicion of Hon'ble ITAT, Chandigarh in the case of ACIT v. Spray Engineeri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... editors, therefore, these sundry creditors should not be part of the interest free funds. Therefore, ld. DR contended that since the assessee has mislead the figures, therefore, addition made by the assessing officer may be sustained. 20. On the other hand, Learned Counsel for the assessee, Shri K. C. Thacker, vehemently argued that assessee, has huge funds of Rs. 28,34,76,940/-, available, as on 31-03-2011, on which no interest is payable, as against interest-free advances given to parties of Rs. 4,35,00,000/-. This included Rs. 2,15,00,000/- given to Maharaja Salt Works, as advance for purchase of salt. The said party failed to supply salt. Therefore, a civil suit is filed against Maharaja Salt Works for recovery. Thus, the advance was given for commercial consideration for the purpose of business. There was also no instance of relationship attracting section 40A(2)(b) of the Act. The assessee also furnished the bank accounts, as per books, statement of accounts, from the banks and accounts of these concerns, as called for by the assessing officer. The assessee had also supplied detailed statement showing secured loans, interest-free funds advances etc. by letter filed on 20-11- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various decisions which are not applicable to the facts of the assessee`s case. The assessing officer has admittedly not established nexus between capital borrowed and interest-free advances, despite of having lot of information and documents before him, and has ignored the substantial interest-free funds available to the assessee. These aspects have been considered in several judicial pronouncements. The ld. Counsel for the assessee, relied on the following binding judgments of the Jurisdictional High Court of Gujarat and others, which are mentioned below: (i). ACIT. v. Gujarat Narmada Valley Fertilizers Co. Ltd. (20 14)222 Taxman 28 (Mag)/42 taxmann.com 579 (Guj.)(HC) (ii). CIT. v. Amod Stamping (P.) Ltd. (2014) 223 Taxman 256 (Guj.)(HC) (iii). CIT v. Rajendra Brothers (2014)52 taxmann.com 334/(2015) 228 Taxman 348(Mag.) (Guj.)(HC) (iv). CIT v. Shree Rama Multi Tech Ltd. (2013) 219 Taxman 162 (Mag.) (Guj.)(HC) (v). CIT v. R.L. Kalthia Engineering & Automobiles (P.) Ltd. (2013) 215 Taxman 9 (Mag.) (Guj.)(HC) (vi). CIT v. Mahanagar Gas Ltd. (2014) 221 Taxman 80 (Mag.) / 42 taxmann.com 40 (Bom.)(HC) (vii). Reliance Industries.v. Addl. ACIT (2014) 159 TTJ 349/55 SOT 8 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession, Provided...... Explanation.-........," 24.The above provision mandates that payment of interest on loans borrowed for business purpose shall be allowed. Therefore, the assessing officer is obliged to allow the payment of interest on loans taken for business purpose. If, however, the Assessing Officer seeks to make disallowance of interest by invoking the provision of section 36 (1) (iii) of the Act, it is for the assessing officer to establish that interest is paid on the loans, not used for business or that it is diverted for non-business purpose, provided the assessee has submitted all the details before the assessing officer for this purpose, as and when called by the assessing officer, then burden shifts on the assessing officer to explain the assessee that based on the documents and evidences interest bearing funds were used by the assessee for giving interest free advances for non-business purposes. In the assessee`s case under consideration, the assessee submitted details and documents and explained before the assessing officer that had enough interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. We find that instead, the assessing officer made unverified and wrong statement that "no interest-free funds were available with the assessee" and irrelevant statement that "the assessee has also not furnished any details or evidence to establish that impugned advances were given for business expediency". The assessing officer has failed to realize that the obligation to establish business expediency would arise on the part of the assessee only when the assessing officer has discharged his obligation to show ( provided the assessee has filed all documents and evidences, as required by the assessing officer, to explain the interest free funds) that any part of interest-bearing loans have been diverted for non-business purposes. In this regard, reliance is placed upon the judgment of Hon'ble Delhi High Court, reported in (2011) 331 ITR 0502, wherein it was held as follows: "12. In the instant case, from the orders of the CIT (A) and that of Tribunal, as reproduced above, in paras 3 and 6, we note that the assessee was maintaining a bank account with mixed common funds in which all deposits and withdrawals were made. There was no specific instance noted by the assessing off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing only such accounts (of interest-free advances) by the Spl. Auditor, again failed him to notice the accounts of other sister concerns providing huge interest-free funds to assessee, like: (i) Friends & Friends Shipping Pvt. Ltd., (ii) Friends Salt Works and Allied Industries and (iii) Kandla Agro & Chemicals Pvt. Ltd. Therefore, ld Counsel argued that assessee have sufficient interest-free funds that the assessee has used for interest-free advances. Even before the CIT (A), assessee mentioned that assessee has huge interest free funds received from sister concerns. The assessee submitted ledger accounts of these three sister concerns, Friends & Friends Shipping Pvt. Ltd., Friends Salt Works and Allied Industries and Kandla Agro & Chemicals Pvt. Ltd., with corresponding bankbooks to corroborate the transactions in the ledger accounts and working of interest that would have been payable at the rate of 12% (applied by the assessing officer) but not actually paid. This would make it amply clear that the Group as a whole followed a policy not charge interest when funds are made available to sister concerns, as these advances are out of interest free funds. 27. We find that l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also it is he who knows to what extent the benefit ensures to him. Reliance in this regard may be placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Dhanrajgiri Raja Narasingirji, reported in 91 ITR 544 (SC), wherein it was held that "it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur the expenditure. 29. We find that assessee pleaded before the assessing that advances are out of interest-free funds available with the assessee and filed copy of accounts of parties and bank statements and subsequently also pleaded business expediency. The ld CIT(A) noted that all the business concerns of the group are assessed at the maximum marginal rate and therefore question of inference of any tax avoidance does not arise. It is also stated that the different concerns of the group have interdependent business operations and business activity of one concern cannot be carried out without availing services from other concerns. In this background, the requirements of business fund by each concern have to be examined. If one concern of the group faces urgent requirement of fund and the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits......" 30. During the course of hearing, based on the audited balance-sheets for respective years, the ld. Counsel has also submitted the following position of interest-free funds from year to year to buttress the argument that the assessing, in the face of submissions made, and easily verifiable from the records available with him and produced before him, clearly erred in not appreciating the argument canvassed before him that the interest free advances have been made clearly out of interest-free funds available with the assessee and that there really remained nothing further to be established. The assessing has ignored this fact and has taken recourse to section 36(1)(iii) by making disallowance in all connected group cases. Therefore, we find that judgements on which ld DR for the revenue has relied, are distinguishable on facts and do not apply to the assessee under c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the interest-bearing loans are deployed for the purposes for which the funds are borrowed and also there is manifest business expediency, and assessing officer has not demonstrated the personal or non-business or purely charitable use by the recipient. For that reliance is placed on the judgement of the jurisdictional High Court of Gujarat in the case of RL Kalthia Engineering & Automobiles (P.) Ltd,[2013] 33 taxmann.com 14 (Gujarat), wherein it was held as follows: "6. It is well established proposition that when the Revenue fails to establish any nexus between the borrowed funds and the funds diverted/lent, any denial of allowances of interest under Section 36[1](iii) is not permissible. In the instant case, as both the authorities have held concurrently on the basis of material available that sufficient amount of interest-free funds were available with the assessee-respondent and therefore also, there is no justification in interfering with the decision of both these authorities. Resultantly, the question of law proposed is answered accordingly." 32. Deployment of fund available with one concern of the group, whether or not interest bearing, to other sister concern, to meet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue, since it is the businessman who is being benefited from the services rendered and also it is he who knows to what extent the benefit ensures to him. Based on these facts and circumstances, we allow the ground pressed by the assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012-13. 34. In the result, summarized ground No.1 (ground No.1 in ITA No.135/Ahd/2016 for A.Y. 2011-12, and ground No.1 is in ITA No. 136/Ahd/2016 for A.Y.2012-13 at Rs. 2,18,04,979/-), of the revenue, is dismissed and ground pressed by the assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012-13, is allowed. 35. The summaries and concise ground No.2 is reproduced below: "(2) Ground No.2:The Ld. CIT(A) has erred in law and on facts in detecting the addition on account of disallowance of under valuation of stock of repressed Doc and salt at Rs. 3,95,62,067/-, though there were some errors in valuation of closing stock on FIFO basis.[This ground No.2 is in Revenue's appeal in ITA No.135/Ahd/2016 for A.Y. 2011-12]" 36. Succinct facts qua ground No.2 are that during the assessment proceedings, the assessing officer noticed the some discrepancy was pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing officer and added to the total income of the assessee. Similarly, the assessing officer has also rejected the explanation of the assessee about the valuation of stock of Rapeseeds DOC, by reiterating the contents of the show-cause notice and insisting that while Rapeseeds DOC valuation should have been at average purchase rate, therefore, assessing officer worked out under valuation of Rapeseeds DOC at Rs. 84, 51,120/-. Therefore, the assessing officer has rejected the explanation of the assessee about the valuation of stock by reiterating the contents of the show-cause notice and insisting that while Rapeseeds DOC valuation should have been at average purchase rate, the salt valuation should have been at the rates of purchases made during the Month of February and March, and thus makes the respective addition of Rs. 84,51,120/- and Rs. 3,61,74,419/-, holding that there is under - valuation of closing stock. Therefore, assessing officer made total addition on account of undervaluation of closing stock at Rs. 4,46,25,539/- ( Rs. 84,51,120 + Rs. 3,61,74,419). 39. On appeal, the learned CIT (A) deleted the addition partly. The ld CIT(A) observed that there is some adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, learned Counsel for the assessee submitted that the valuation of closing stock in respect of Rapeseeds DOC and salt, made by the assessing officer, is itself wrong, because assessing officer does not give impact to the opening stock of the assessee and hence the assessing officer, has worked one side only, that is, to value the closing stock, however, does not give the effect of his evolution in the next year in the opening stock. Moreover, the income tax rates for the current year under consideration and in the subsequent year, are same, therefore, there is no escapement of income, by the assessee, that is, there is no loss to the revenue. The ld Counsel pointed out that the valuation of Rapeseeds DOC adopted by the assessing officer is representing the market value and the assessee on the other hand, is valuing the closing stock at "cost or market price", whichever is lower, which is correct valuation method, therefore, even addition sustained by the ld. CIT(A) to the tune of Rs. 50,63,472/-, may be deleted. 42. We have heard the Learned Counsel appearing on behalf of the respective parties at length. Though facts have been discussed in detail in the foregoing paragraphs, how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... salt valuation should have been at the rates of purchases made during the month of February and March, and thus makes the respective addition of Rs. 84,51,120/- and Rs. 3,61,74,419/-, holding that there is under - valuation of closing stock. 43. We find that during the appellate proceedings, the assessee pointed out that the valuation of Rapeseeds DOC adopted by the assessing officer is representing the market value and the assessee on the other hand, is valuing the closing stock at "cost or market price", whichever is lower. The ld CIT(A) observed that neither Special Auditor has made any adverse comment nor has the assessing officer made any addition with regard to valuation of closing stock either for assessment year preceding or succeeding the year under reference. When the assessee's submission is to the effect that the valuation method is consistently followed, picking up an intervening year and making addition on account of valuation of closing stock without any corresponding action in preceding or subsequent years, does not make a sound decision. 44. We note that assessing officer has also not based his decision of making the addition by changing the valuation of clos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accountant stock were valued @Rs.383.54 PMT instead of Rs. 407.43 PMT as worked out under FIFO Method. It may be submitted that there is no revenue implication as tax rate of both the years are same." 47.The ld CIT(A) observed the valuation done by the assessing officer and after perusal of the statements of valuation of closing stock, substantiating the valuation adopted, and the note to the statement, the ld CIT(A) was of the view that obviously there is some adjustment to the valuation of closing stock adopted by the assessee, which is necessary, notwithstanding the fact that the assessing officer himself has not given effect to valuation adopted by him, in the opening stock of next year. This is for the reason that while the assessee submitted before the assessing officer that the valuation is based on the average cost price of opening stock plus purchases, the same could not be substantiated by the assessee, in a proper way. Moreover, ld CIT(A) noticed that the method of valuation for the year under reference adopted is not consistent with the method adopted for preceding and the subsequent years. Even by assessee's own submission, the valuation for the year under re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y had opening stock and purchases, aggregate quantity of which came to 8,34,887.338 Mt. After considering the sales and closing stock aggregating to 8,16,795.595 Mt; the shortage came to 18,091.743 Mt. Thus, on the turnover of the total quantity of 8,34,887.338 Mt. the shortage of 18,091.743 Mt. works out to 2.17% only which could not be considered high considering the particular facts and circumstances of this line of business. It may also be submitted that the shortages cannot be expected to be at a fixed level and are necessarily variable on account of various factors including the natural forces like heavy rains, cyclones etc. The specific circumstances of the case are explained below. In the salt business the stock in trade of salt is not kept in well defined sheltered or protected area in packed and stacked bardans with fixed quantity The salt is kept in big heaps on open land. Such stock has to be regularly washed to remove the dust that would settle in course of time, and in the process the salt would also get washed away. The stock would also reduce heavily in monsoon due to rains. Due to these reasons the stock of salt is reduced. It may also be mentioned here that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition made by the assessing officer. The ld CIT(A) observed that the stock of salt is kept in open and obviously there are spillages and wastages on account of loading, unloading wind, washing, rain and even inaccuracy in quantification of purchase and sale, a reasonable claim of wastage/spillage is bound to be there and cannot be disputed without any adverse material brought on record. Hence, ld. CIT(A) deleted the addition. 54. Learned DR for the revenue argued that during the year, the assessee has claimed handling/spillage/wastage loss of 18,092 M.T and when the assessee was asked to provide explanation on such claim, no satisfactory written explanation and evidences were provided by the assessee. Therefore, assessing officer, has rightly made the addition. 55. On the other hand, learned Counsel for the assessee pleaded that on a total turnover of 8.16 lacs MT, a shortage/handling loss of 18,092 MT, works out only to 2.17% and which is quite reasonable and incidental to the business of the assessee. The ld Counsel further submitted that the salt is kept in heaps in open areas and the spillage/wastage is a necessary aspect of assessee's business. Moreover, the quantity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the team of Special Auditors twice and that thereafter query was raised by the Special Auditors. The loss as claimed is genuine, is forming part of the audited accounts, is arrived at on the basis quantities of purchase/sale and being genuine, needs to be allowed. The assessing officer however, observing that there is no documentary evidence or stock details in respect of such loss, the same cannot be allowed. Thus, the assessing officer made the addition of Rs. 1,35,69,000/-[ @Rs.750 per mt.x18,092 MT). 57.Before, the ld. CIT(A), the assessee reiterated the submissions made before the assessing officer. Additionally, it was submitted by the assessee that the loss of Rs. 2.17% claimed during the year under reference is not less as compared to the preceding year, no such disallowance is made or contemplated by the assessing officer in any of the preceding years. Additionally, it was submitted that even during the course of the search, no discrepancy with regard to the stock of salt was found. Besides, no any of the purchases or sales have been doubted by the assessing officer. The books of accounts have been audited with complete quantitative tally for purchase and sale of salt and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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