TaxTMI 
TaxTMI 
2013 (5) TMI 634
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....aw and on facts in confirming the action of AO in disallowing a sum of Rs.6,01,340/- u/s 40A(2)(b) of the Act." 2.1.1 Brief facts regarding this issue till the decision of Ld. CIT(A) are as per para 3.5.2 of the order of Ld. CIT(A) and the same is reproduced below: "3.5.2 As regards the disallowance of Rs.6,01,340/- on account of difference in purchase price, it is stated that the perusal of the details of purchase shows that in April and May 928.465 MT was purchased from the specified persons at the rate of Rs.62,400/-, During these two months nothing was purchased from other parties. It is seen that in the month of July 64.225 tons was purchased from the specified persona and in October 53.75 tons was purchased from the specified persons both at the rate of Rs.63,600/- whereas during these months and in the intervening months a large quantity was purchased from the other parties all at the rate of Rs.62997 to 63069/-. Similarly, in the month of January 58.495 tons was purchased from specified persons at the rate of Rs.63,311/- whereas 236.885 ton was purchased from other parties at the rate of Rs.62,488/-. It is seen that during the entire year from June to March the highest ra....
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....) in para 3.5.2 of his order that during April-May, 928.465MT was purchased by the assessee from specified persons @ Rs.62400/- per MT and during these two months, nothing was purchased form other parties, part from these two purchases in April-May, there was purchase of 64.225 MT in the month of July and 53.750 MT in Oct and both these purchases were @ Rs.63600/- per MT. Thereafter, he has noted that large quantities were purchased by the assessee form other parties @ Rs.62997 and Rs.63069 during these months i.e. July and Oct. When we consider the price paid by the assessee to the related parties for purchase during July-Oct after deducting Rs.500/- per MT being the price difference received back, we find that the price paid by the assessee is Rs.63100/- per MT to the related parties whereas price paid to others is also very close i.e. Rs.62997/- to Rs.63069/- per MT and hence, in our considered opinion, for such a small difference in price, no addition is justified because such small difference can be because of various reasons such as better quality, timely supply, extra credit period etc. Because of the smallness of the amount, we do not consider it appropriate to go into thes....
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....f by the assessee in the present year and the same should be allowed. 2.2.4 Ld. D.R. supported the orders of authorities below. 2.2.5 We have considered the rival submissions and we find that the disallowance was confirmed by Ld. CIT(A) on this basis that the tax of earlier years debited but not paid by the assessee during the present year and therefore, this is not allowable u/s 43B. We do not find any merit in this logic of Ld. CIT(A) in the facts of the present case because in the present case, the claim of the assess is not this that any sales tax liability of earlier years is accounted for by the assessee in the present year and therefore, should be allowed even if not paid. The case of the assessee is this that at the time of closing its books of account for the assessment year 2000-01, the assessee has worked out sales tax refunds at Rs.80.99 lacs and included the same in the income on mercantile basis and the tax was paid on the same in that year. It was also submitted by the assessee before Ld. CIT(A) that the assessment of sales tax for the assessment year 2000-01 was finalized during the current year and the Sales Tax Department refunded only Rs.79.15 lacs and therefor....
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....essee. The differences in respect of Kanpur det & ch is Rs.20,046/-, in respect of Nishit Pvt. Ltd. the difference is Rs.1,89,271/-, in respect of Radha Kishan Industries the difference is Rs.94,261/- and in case of Rihit Soap the difference is Rs.8,800/- . The AO asked the assessee to explain the difference. Since the assessee did not reply the AO added these differences in the balances as unexplained credit balance." 2.4.2 Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) but without success and now, the assessee is in further appeal before us. 2.4.3 It was submitted by the Ld. A.R. that it was explained before ld. CIT(A) that these difference is on account of Kasar and discount. He submitted that Section 41(1) is not applicable in the facts of the present case because the assessee is showing extra credit balance in the balance sheet and hence, this addition should be deleted. Ld. D.R. supported the orders of authorities below. 2.4.4 We have considered the rival submissions and perused the material on record. We find that regarding these differences, no explanation was furnished by the assessee before the A.O. as noted by him on page 11 of the assess....
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.... Rs.1.83 lacs but the A.O. was not satisfied. The A.O. was of the view that assessee's explanation is not acceptable because if the assessee has sufficient funds then why he has not first discharged its liability instead of giving interest free loan to the director. While taking this view, the A.O. has referred to various judgements. Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) who has deleted this disallowance by following the Tribunal decision rendered in the case of Torrent Financers as reported in 73 TTJ 624 (Ahd.). Now, the revenue is in appeal before us. 3.1.2 Ld. D.R. supported the assessment order. He submitted that the judgment of Hon'ble Apex Court rendered in the case of S A Builders as reported in 288 ITR 01, is not applicable in the present case because there is no commercial expediency in the present case. He also submitt4ed that assessee could not establish the nexus of interest free funds available with the assessee and interest free loan provided by the assessee to the director and hence, order of Ld. CIT(A) should be reversed and that of the A.O. should be restored. He also placed reliance on the judgement of Hon'ble Punjab & Harya....
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....ssee and interest bearing borrowed funds of the assessee. 3.1.4 Now, we have to examine as to whether interest free funds available with the assessee were enough to cover interest free advances given by the assessee. We find that interest free funds available with the assessee as on 31.03.2004 were Rs.39.85 lacs being share capital and Rs.136.18 lacs being reserve and surplus total Rs176.03 lacs. Hence, interest free advances given by the assessee of Rs.504 lacs is much in excess of interest free funds available with the assessee. But one more fact is important. We find that details of total interest payment and bank charges as per Schedule 'O' of Rs.51,96,860/- which includes bank charges Rs.2,4,476/-, bank interest Rs.47,18,581/-, processing charges Rs.40,100/- credit card chares Rs.3,440/- and other interest of Rs.1,94,263/-. We also find that as per the assessment order, the A.O. is doubting about allowability of interest payment on unsecured loans and regarding bank interest and other expenses such as bank charges, processing fee charges and credit card charges are not at all connected with the interest payment on borrowed funds and, therefore, not disallowable on account of ....
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....ee stated before the AO that both these persons are qualified persons and doing their business in proprietary firms. Tarachand Shah is the proprietor of Jayco Chemicals and Fenil B. Shah is the proprietor of J.B. Chemicals. The assessee also mentioned the concerned conditions of the payment of commission. The assessee stated that these persons are looking after the affairs of the company and hence they were eligible for the payment of commission. The AO did not accept this explanation and stated that both these persons were doing their own business as well looking after the company business. The assessee has not explained as to how both these persons are managing their affairs with their own business as well as company's business. The AO stated that it appears that these two persons were doing business but for the Income-tax purposes they were maintaining three sets of accounts one for the company and two as individual concerns. The AO further stated that even after being asked the assessee failed to file proof of services rendered. He therefore relied on the decision of Hon'ble Supreme Court in the case of Laxmirattan Cotton Mills [73 ITR 634] and in the case of Lachminarayan Mada....
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.... the paper book. Regarding this argument of the A.O. that both these persons i.e. Shri Fenil B Shah and Shri Tarachand were fully occupied with the business of their respective proprietary concerns and with the work of the assessee, he submitted that it is not necessary that these persons have to be physically present and work. He also submitted that a person can employ other persons to get the work done and in support of this contention, reliance was placed on a judgement of Hon'ble Bombay High Court rendered in the case of CIT Vs Hind Business Agents as reported 48 ITR 615 (Bby.). He also submitted that since it is established that services are rendered , the expenditure were incurred wholly and exclusively for the purpose of business and hence, no disallowance out of commission expenditure should be made and in this regard reliance was also placed on the following judicial pronouncements:- i) 86 ITR 11 Aluminium Corporations of India Ltd., vs CIT ii) 72 ITR 612 J K Woodwool Manufacturers Vs CIT iii) Swastik Textile Co. Pvt. Ltd. 150 ITR 155 (Guj.) iv) Voltamp Transformers Pvt. Ltd. 129 ITR 105 (Guj.) 3.2.5 He also submitted that the same commission had been paid in last 4-5....
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....chand Shah the appellant has stated that he has also been paid commission earlier and the department has accepted the same. It has been argued by the appellant that Tarachand Shah looks after the entire indenting sale of soda ash for Nirma Ltd. He, as a proprietor of Jayco Chemicals has been handling the sales of indenting. It has been argued by the appellant that the facts of the case of Laxmirattan Cotton Mills [76 ITR 34] relied upon by the AO are entirely different in that case. From time to time the constitution of Harilal Kailashpath Firm was changed. The dispute arose and the services were of doubtful nature. It has also been argued by the appellant that the facts of the case of Laxminayran Madanlal [86 ITR 439] relied upon by the AO are also different. In that case the selling agency firm had four major partners' three of whom were wives of the partners of the assessee firm and the fourth a major son of one of them. In that case the ITAT had found that on the day the selling agency agreement was executed i.e. 26.3.62 the selling agency firm had not even come into existence because it had come into existence only later on from 13.4.62. In that case the ladies had no prior bu....
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....e material then it would have in turn made a contract with some other party to purchase the material. The assessee has not explained as to what action it took against such party, if any for not supplying any material to it because of which it could not supply material to above mentioned two parties. The assessee has also not filed any claim of evidence of damage or rate difference made by it against the parties from whom it intended to purchase the material. In view of these reasons the AO disallowed this claim of Rs.15 lacs." 3.2.7 From the above para of the order of Ld. CIT(A), we find that he has dealt with all the objections of the A.O. in the assessment order and he has also considered the judgements which have been followed by the A.O. Ld. CIT(A) has examined the assessment order on this issue in great detail. We find that the main objection of the A.O. was this that the assessee has not brought on record the evidence regarding services actually rendered by these two persons. In this regard, we find that a clear finding is given by Ld. CIT(A) in above para of his order that the assessee has brought on record the confirmation of various parties in which they have clearly stat....
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.... Co. Pvt. Ltd. (supra). We find that this judgement is not applicable in the present case because the facts are different. In that case, the dispute was regarding payment of remuneration to Managing Director and Dy. Managing Director and it was held that in the absence of the evidence relating to the duties of MD and Dy MD, services rendered by them enhanced the profits of the assessee, such payment is not allowable. The findings recorded by the ITO and confirmed by the Tribunal have to be accepted. In the present case, enough evidence has been furnished in the form of confirmation/certificate of the concerned parties regarding rendering of services by these two persons and there has not been any dispute by the revenue regarding benefits derived by the assessee company and legitimate business needs of the assessee company and hence, this judgement of Hon'ble Apex Court does not render any help to the revenue in the present case. 3.2.8 In the light of above discussion, we find that Ld. CIT(A) has discussed and distinguished all the judgements relied upon by the A.O. and we have also seen that none of the objections raised by the A.O. is valid and, therefore, in our considered opini....
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....orted the order of Ld. CIT(A). He also submitted that two parties i.e. Porso Corporation and Steel trading Co. had placed confirmed orders for 4000 bags and 2000 bags of caustic soda flex and the assessee could not procure the same and, therefore, could not fulfill the contract. He submitted that under these facts, the negotiated rate difference was paid to these two parties to safeguard the vicarious large liability out of commercial expediency. Reliance has been placed on various judgements as under:- i) National Steel & General Mills Pvt. Ltd. 188 ITR 571 ii) Sakal Papers Pvt. Ltd. Vs CIT 114 ITR 256 (Bby) iii) CIT Vs Kahnoo Paper Products 226 ITR 270 (M.P.) 3.3.3 He also submitted that the relevant debit notes raised by these two parties are available on page 261-262 and 267-268. He also submitted that although the payment to these two persons were booked as rate difference expenses but in fact it is in the nature of note for liquidated damages paid to these parties for breach of contract regarding price of material and these are negotiated damages and hence allowable as revenue expenditure. 3.3.4 We have considered the rival submissions, perused the material on record and....
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....es. But in our considered opinion, this is not relevant because even if the assessee has not made corresponding purchases then also, the assessee has to fulfill its contract regarding sale and had to bear the loss. Many a times, a businessman does not cover the sales by affecting purchases in anticipation of fall in prices but if the price goes up as against anticipation of falling in price, the assessee is caught on a wrong foot and has to bear losses because of higher purchase price but lower sale price already effected. Regarding sale at lower price, this is stated by the A.O. in his order that assessee has not filed any evidence that what he has done to effect supply of material to these two parties, but the A.O. has not doubted regarding sale of material to these two parties and failure of assessee to fulfill the sale contract and in the absence of this, the disallowance made by the A.O. is not sustainable. We, therefore, decline to interfere in the order of Ld. CIT(A) on this issue also. 3.4 In the result, this appeal of the revenue is partly allowed. 4. Now, we take up the assessee's appeal for the assessment year 2005-06 i.e. I.T.A.No. 1791/Ahd/2008. 4.1 Ground No.1 is a....
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.... in law and on facts in confirming the action of AO in disallowing a sum of Rs.9,85,378/- being Bad debts debited to Profit & Loss A/c. The same amount has been offered as income in A.Y. 2007-08. 3.1 Without prejudice to above ground regarding allowability of Bad Debts of Rs. 9,85,378/-, if the Hon'ble IT AT confirm the action of disallowance of Bad Debts, necessary guidelines should be given for deduction of Rs. 9,85,378/- from income of AY 07-08 in which the same has been offered as income and paid taxes accordingly." 4.3.1 It was submitted by the Ld. A.R. that income on this account is offered in assessment year 2007-08 and hence, either this disallowance is to be deleted in the present year or the direction may be given to the A.O. to exclude this income in assessment year 2007-08 when the same is offered. Ld. D.R. supported the orders of authorities below. 4.3.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. W e find that the assessee has made a claim of bad debt of Rs.9,85,378/- in respect of insurance claim not received for the financial year 2002-03 Rs.5,97,030/- and Rs.3,88,348/- for financi....
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....hich is reproduced below for he sake of ready reference:- "3.3 I have considered the submission made by the appellant and observation of the AO. Since the facts in the current year are same as in A.Y.2004-05, therefore the decision of last year's appellate order is squarely applicable and no disallowance can be made as there is commercial expediency in giving the loan/advances to the directors. Hence, following the decision of A.Y.2004-05 in Appeal No. CAS-1/258/06-07 dated 8.1.2008, this disallowance is deleted and the ground of appeal is allowed." 5.1.3 From the above para of the order of Ld. CIT(A), we find that a clear finding is given by him that the facts in the present year are the same as in assessment year 2004-05. While deciding this issue in assessment year 2004-05, we have held that to the extent of available amount of interest free funds, no disallowance can be made out of interest on the basis of interest free advances given by the assessee and even if some disallowance is to be made, the same should not exceed the actual interest debited by the assessee in the P & L account. In that year, the disallowance on the basis of available own funds or interest fee funds as....
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.... the appellant and observation of the AO. The appellant has been visiting China as per record. The argument that sometimes the meeting with Chinese people are held in Singapore/Auckland appears possible. However, no reason has been given for the visit of the two cities. Hence expenditure pertaining to Smt. Janki Shah is not wholly and exclusively for the purpose of business. She is the wife of director. Hence the same is fully disallowed amounting to Rs.1.55,580/-. With respect to Mr. Fenil B. Shah also ticket and medical insurance is fully allowed but since the detail of use of foreign exchange is not fully explained 50% of that amounts to Rs.57,862/- is disallowed. Hence the disallowance made by the AO is partly confirmed as above and this ground of appeal is partly allowed." 5.2.3 From the above para of the order of Ld. CIT(A), we find that out of total disallowance of Rs.3,11,160/- made by the A.O., Ld. CIT(A) has confirmed the disallowance of Rs.1,55,580/- in respect of the expenditure incurred by Smt. Janki and has also confirmed disallowance of Rs.57,862/- in respect of 50% expenditure incurred by Shri Fenil B Shah on account of foreign exchange but deleted the balance disa....