TaxTMI 
TaxTMI 
2013 (9) TMI 535
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....earned CIT(A) erred in confirming the action of the assessing officer in disallowing the deduction of Rs.2,47,57,900 under section 80IA of the Act on the ground that demand charges, time use charges and other charges should not be considered by the Company for determining the transfer value of power. 3. The learned CIT(A) erred in confirming the action of the assessing officer in making an addition of Rs.84,11,949 on account of adjustments under section 145A of the Act, to the opening stock of raw material. 4. The learned CIT(A) erred in confirming the action of the assessing officer in making an addition of Rs.128,82,787 under section 145A of the Act, being difference between excise duty in closing stock of raw material and unutilized Modvat/Cenvat credit as at the year end on purchase. 5. The learned CIT(A) erred in confirming the action of the assessing officer in making an addition of Rs.17,93,339 to the Book Profits under section 115JB of the Act, being loss on account of dividend stripping disallowed by the Company under section 94(7) of the Act, treating the same as expenditure incurred for earning exempt income. 6. The learned CIT(A) erred in confirming the action of th....
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....n the meetings of shareholders. The result passed by the Director of the family members of Shri Amichand Shah. Nothing has been brought out as to what extra Shri Praful A. Shah had performed which made him entitled to allow him extra payments/commission to which Mr. Bhensania and other Senior Directors were not entitled. Thus, he held the expenditure of Rs.93 lacs was not incurred wholly and exclusively for the business purposes. 5. Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A) who had confirmed the order. The operative portion is as under: "2.4 I have considered the submission made by the appellant and observation of the A.O. This issue in the case of Shri Praful A. Shah has already been decided in the appellate order of A.Y.2003-04 in Appeal No.CAS-I/81/05-06 dated 16/10/2006. Since the facts in the current year are same as in the last year, therefore, the last year's order is followed and the disallowance made by the AO in respect of commission paid to Praful A. Shah is confirmed. As regards fee paid to Shri Alok Shah the appellant has not given any evidence regarding services having been rendered except saying that Shri Alok Shah ....
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.... Rs.9,91,77,642/- on generation of power. The appellant had generated the power and utilized / transferred the same to its other units. The appellant had charged the transfer value while applying the rate per unit Rs.5.40 and claimed it's as market value. As per tariff chart of GEB, the rate has been classified in the following categories: Energy charge @ Rs. 4.10 Demand charge @ Rs. 0.40 Time use charges @ Rs.0.75 Other charges @ Rs. 0.19 Rebate (-) @ Rs. 0.02 Net @ Rs. 5.40 The ld. A.O. gave show cause notice on 15.12.2006 on notional sale value which includes demand charge and energy charge which was replied by the appellant. He observed that the demand charge is penalty charged by the GEB in case the consumer does not use the 85% of energy as he agreed to use. This agreement is compulsory for industries. Time use charge is a charge against the supply of energy during peak hours. Due to shortage of energy the GEB encourage the industries to minimize the use of energy during peak hours. So, it is again one type of penalty. Other charge as stated by the assessee that in case he takes energy from GEB than he has to deposit some amount. By using the self energy this need ....
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....pted the rate of transfer at the same rate as GEB supplies power to its customers. The AO has stated that the power supplied by GEB consists of four factors three of which are not applicable to the assessee. Only energy charge of Rs.4.1 is applicable which consists of cost of energy supplied. The demand charge consists of additional charge if the customer does not use the energy as per the installed energy metre. The time used charge is levied by the GEB for peak power use of energy and other charges are notional charges which are also not applicable to the assessee. The contention of the AO is correct. The appellant is generating energy in its own power plant and hence the concept of demand charge as levied by GEB does not exist in the case of the appellant. There is nothing like minimum use of energy which the appellant wants its other units to use, failing which it will suffer loss. Similarly, there is nothing like peak hour use of energy in the case of its own captive plant. Therefore I agree with the AO that these three charges are not applicable in the case of the assessee. In the case of West Coast Paper (supra) these three charges were not under discussions and hence the de....
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....uired by the other unit. Electricity is neither goods nor services. Further, rates charged by GEB is not a landmark. In any case, if General Unit was to purchase electricity from GEB, it would have paid Rs.5.40 paise per unit, therefore, it cannot be said that the electricity sold by CCP Unit to General Unit was at a price which is more than market rate. In fact, the market price is what the GEB charges,. The Ld. A.R. further submitted that similar issue had arose before the ITAT, Ahmedabad Bench-B in ITA No.3594/Ahd/20078 and others in the case of Alembic Limited, decided on 6-6-2008. In this case it has been decided by the Tribunal following the decision of the ITAT Delhi Bench in the case of ACIT vs. Jindal Steel & Power Ltd., (2007) 16 SOT 509 (Del) that the market rate postulated by section 80IA (viii) shall be the price at which the assesses purchases electricity from the Electricity Board. In this regard, we refer to para- 32 of the judgment as under:- "We have heard the parties and considered the rival submissions. The controversy in question is squarely decided by the Tribunal, Delhi Bench, in the case of Jindal Steel & Power Ltd. (supra) and Mumbai Bench in the case of W....
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.... Further, the addition also had been made of Rs.84,11,949/- on opening stock. 13. Being aggrieved by the order of the A.O., the assessee carried the matter before CIT(A) who had dismissed the assessee's appeal by relying upon the Co-ordinate Mumbai Bench decision in case of West Coast Paper Mills Ltd. vs. ACIT [286 ITR AT 0252], wherein it was held that opening stock is to be taken as closing stock of preceding year. The sum and substance of Section 45A can be achieved by the adding taxes in the closing stock of the earlier year and by doing so, there is bound to be tax effect in the year of change. Therefore, he confirmed the addition of Rs.84,11,949/-. On remaining addition, the ld. CIT(A) observed as under: "4.6 As regards addition of Rs.1,28,82,787/- being the net effect of excise duty in the closing stock of raw material, it is stated that as stated by the AO the decision of Indo Nippon Chemicals supra of Supreme Court is not applicable as the Supreme Court refrained from discussing this issue since the A.Y. was 1998-99 and section 145A was inserted from A.Y. 1999-2000. Coming to the merit of addition, it is seen that as per the settled position of law the assessee is requir....
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....ing addition of Rs.17,93,339/-. The A.O. observed that the appellant had declared book profit of Rs.2784.34 lacs for the year under consideration. The appellant had incurred loss of Rs. 17.93 lacs u/s. 94(7) of the IT Act. The appellant had also earned dividend on these securities of Rs. 20.05 lacs and had been reduced from the book profit as exempt income u/s. 10 of the IT Act. On this issue, the A.O. gave reasonable opportunity of being heard. The appellant's reply was considered and observed by the A.O. that this loss is related to the earning of the dividend as per provision of clause (2) of Section 115JB and expenditure related to exempt income are to be added back to the net profit for computing book profit. The A.O. relied upon following cases: i. 37 ITR 66 SC Indian Molasses Co. Pvt Ltd. ii. 62 ITR 638 SC Nainital Bank Limited iii. 191 ITR 667 SC Attar Singh Gurmukh Singh iv. 103 ITR 706 Orissa Sajowanlal Jaiswal The ld. A.O. after discussing the whole issue on page nos. 23 to 25 held that loss claimed on stripping of the dividend is expenditure directly related to the earning of dividend which is exempted u/s. 10 of the IT Act. Thus, he made addition of Rs. 17,93,339....
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....n'ble Supreme Court has held that sometimes the expenditure need not be same as physical delivery of payment. In the case of Nainital Bank Ltd. (supra)the Hon'ble Supreme Court stated that if there are cross claims one by the assessee with money or property and if there are cross claims one by the assessee against a stranger and other by the stranger against the assessee and as a result of accounting the balance due only is paid. The amount which is debited against the assessee in the settlement of accounts may appropriately be termed as expenditure. Further in the case of Attar Singh (supra) the Hon'ble Supreme Court stated that the expenditure incurred by the assessee in respect of which payment is made means that all outgoings are brought under the word expenditure. The expenditure of purchase in stock in trade is one of such outgoing. The payments made for purchases would also be covered by the word expenditure. Therefore reading this case along with the decision of Hon'ble Supreme Court in the case of Nainital bank Ltd. the net of purchase and sale can also be treated as expenditure if the transaction appears to be composite. In the present case it is clear that the legislatur....
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....end was tax free. The assessee had made use of the provisions of Section 10(33) of the Act and such use could not be said to be "abuse of law". Even assuming that the transaction was pre-planned, there was nothing to impeach the genuineness of the transaction. In the case of assessment before April 1, 2002 i.e. before the insertion of Section 94(7) losses pertaining to exempted income could not be disallowed. However, after April 1, 2002, such losses to the extent of the dividend received by the assessee could be ignored by the Assessing Officer in view of the Section 94(7). Applying Section 94(7) of cases for assessment order filing after April 1, 2002, the loss to be ignored would be only to the extent of the dividend received and not the entire loss. In other words, loss over and above, the amount received would still be allowed from which it followed that Parliament had not treated the dividend stripping transaction as sham or bogus. After April 1, 2002, losses over and above, the dividend received would not be ignored u/s. 94(7). Thus, the ld. Counsel for the appellant has requested that the adjustment made by the A.O. is not justified. At the outset, ld. CIT D.R. vehemently r....
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....ked the appellant to give details of investment with proof of availability of fund on the date of investment. The appellant neither gave these details during the assessment proceedings nor appellate proceedings. The appellant had borrowed funds which were interest bearing. Therefore it can be said that if there were surplus funds then the appellant could have reduced its interest burden and by not doing so it is very clear that the interest bearing funds are in fact utilized for the purpose investment and therefore the disallowance of interest for earning of dividend income u/s.14A is in order. As regards the calculation of interest is concerned it seems that the disallowance should be much less and not Rs.19,20,000/- since the funds used were only Rs.160 lacs. The AO however may verify this calculation and disallow the interest pertaining to the funds invested only for the period of investment till the sale proceeds were received. Subject to these remarks the disallowance of interest made by the AO is confirmed u/s 14A and for section 115JB. Since this expenditure has been incurred in relation to earning of exempt income, therefore the disallowance under clause (f) of section 115J....
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.... liability which is violation of Accounting Standard - 6 issued by ICAI. It is a colourable device of the appellant. There is no statute in the IT Act that the appellant can change the method of depreciation. The appellant relied upon Apollo Tyres (supra) before the A.O., but, he did not found applicable in case of the appellant, as this judgment was delivered in context of Section 115J and Section 115JA. The ld. A.O. had relied in case of Essorpe Mills Ltd. as reported in 265 ITR 637 on method of accounting. The appellant is to prepare the account as per Parts II & III of Schedule VI of the Companies Act. Accordingly, the A.O. made addition of Rs. 16,28,11,000/- u/s. 115JB. 25. Being aggrieved by the order of the A.O., the assessee carried the matter before CIT(A) who had confirmed the addition by observing that there was no concrete and bonafide reasons for changing the method for SLM to WDV method. The appellant had made this change for one division not others. It was for reducing the tax liability and was found colorable device as held by the Hon'ble Apex Court in case of McDowell & Co. 154 ITR 148. Thechange of depreciation was not as per law. The appellant had not declaredpr....
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....t-put of the assets or legal or other restrictions. The Management had decided to change the method of depreciation on the basis of technological environment, frequent change in the project demand to bring realistic value of the assets. The WDV method adopted on other two divisions, risk of obsolescence of assets. Thus, the appellant had claimed the additional depreciation as per AS-3 during the year under consideration. This change is applicable in case of profit calculated u/s. 115JB which is permissible as per sub-section 2 of section 115JB. He further relied upon in case of DCIT vs. Farmson Pharmaceuticals (2011) 55 DTR 364 (Guj) 115J. He further relied in case of Kinetic Motor 262 ITR 330 (Bom), wherein, Hon'ble Bombay High Court held that the appellant had followed the SLM under Companies Law but it changed the SLM to WDV method for calculating income u/s. 115J of the IT Act. The Hon'ble Court held that it was not in dispute that under the Companies Act, both the SLM and WDV methods are recognized, therefore, once amount on depreciation actually debited to the profit and loss account was certified by the Auditors. It was not permissible for the Assessing Officer to make book ....
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....Since at the time of hearing, the ld. Counsel did not seriously argue this ground, the same is dismissed. 31. Effective grounds of assessee's appeal & C.O. and Revenue's appeal for A.Y. 05-06 are as under: "1. On the facts and circumstances of the case, the CIT(A) erred in confirming disallowance of commissions paid to the CMD Shri Praful A. Shah Rs.85 lacs and to another Director Shri Alok A. Shah Rs.3 lacs. 2. On the facts and circumstances of the case, the CIT(A) erred in holding that any addition is warranted for the alleged under- valuation of work-in-progress in a sum of Rs.1,15,63,596/-. 3. The learned CIT(A) erred in confirming the action of the assessing officer in making an addition of Rs.52,730/- to the Book Profits under section 115JB of the Act, being loss on account of dividend stripping disallowed by the Company under section 94(7) of the Act, treating the same as expenditure incurred for earning exempt income." "1. On the facts and in the circumstances of the case, the CIT(A) should have realized that when the Assessing Officer made very big additions in the assessment order and unabsorbed depreciation which was computed by the assessee in its return of income ....
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.... 86 ITR 673 (All.) Ld. A.O. also analyzed the position on following points: i. Sundery Debtors figure does not match with the balance sheet of corresponding Company. ii. Huge difference between stock declared in the books of accounts and stock statement submitted to banks for securing work in capital. iii. Non furnishing of quantitative details for readymade garments. iv. No proper disclosure of the person covered u/s. 40A(2)(b). v. Inter-group transactions. vi. Non furnishing of separate trading accounts. vii. Transfer to General reserve. The ld. A.O. rejected the books of account u/s. 145 (3) of the I.T. Act. But the Ld. A.O. made addition in the head of G.P. at Rs. 31,31,87,129/-. Therefore, no separate addition was made under the head work-in-progress. 34. Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A), who had confirmed the addition by giving detailed findings from page no.12 to 83 of his order and held as under: "The Assessing Officer has not even once doubted or made any adverse remarks with reference to the yield of yarn/grey cloth of the appellant company. This would mean that the Assessing Officer has fully accepted the ....
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....e furnished goods and W.I.P. shown in the annual accounts as on 31.03.2005 with statement submitted to the Bank. The company had shown closing stock as on 31st March, 2005, at Rs. 75 crore as against closing stock on 25th March, 2005 at Rs. 53.3 crore. The appellant had submitted complete quantity information for the garments in annual accounts. The appellant also relied upon various case laws before the CIT(A). Further, he relied upon Co-ordinate 'D' Bench, Ahmedabad decision in ITA No. 268/Ahd/2009 for A.Y. 05-06 in case of Archna Dyeing & Printing Mills Pvt. Ltd., wherein similar addition of Rs.1,82,338/- was made by the A.O. which were reduced to 50% by the Co- ordinate Bench by analyzing the work-in-progress of the meterage cloth. From the side of the Revenue, ld.CIT D.R. relied on the order of the CIT(A). 36. We have heard the rival contentions and perused the material on record. It is admitted fact that the assessee had shown more closing stock on 31.03.2005 compared to bank statement submitted on 25th March, 2005. As per working made by the A.O. in assessment order, the minimum requirement of work-in-progress has been calculated at Rs. 1,19,06,250/-. Ld. Counsel had not co....
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....e not directly or indirectly supports the arguments of the assessee as the issues/discrepancies noticed in the instant case are different. In view of the above discussion and to sum up all discrepancies pointed out above, it can be said that the books of accounts are not reliable. Hence the books result shown by the assessee is rejected as per Provision u/s.145(3) of the I.T. Act. The gross profit is determined in the manner prescribed u/s.144 of the I.T. Act. Now coming over to the determination of gross profit during the year under consideration. There is a decline in the gross profit ratio from the previous year by 8.33%. The reply of the assessee given in support of the decline of GP is considered but the facts and arguments advanced by the assessee in its submission is not satisfactorily supported. A number of discrepancies as narrate in detail in above paras are found in the books of accounts of the assessee. Taking into consideration all the discussion made above and to be fair and reasonable, this office is taking a considerable view and take 5% of the GP ratio for working of gross profit. The difference of Rs.31,31,87,129/- (5% of net turnover of Rs.626.37 crores), is cons....