TaxTMI 
TaxTMI 
2011 (5) TMI 1016
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....interest after allowing four months credit period for each transaction with the holding company. 2.1.Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the I.T.Act, 1961 dated 18/03/2004 were that the assessee-company was established as a joint sector company in 1980 to manufacture pesticides. The promoters of the company, on one hand, were Gujarat Agro Industries Corporation Limited (A Government of Gujarat Enterprise) and, on the other hand, Gharda Chemicals Ltd., Bombay. Later on, in the year 1986 all the shares of Government were purchased by Gharda Chemicals Ltd., with the result the assessee-company had become a 100% subsidiary of M/s.Gharda Chemicals Ltd. The result of the said change was that the assessee-company had become a closely held company. Assessee's business is manufacturing of pesticides and intermediates. In respect of the above ground, the observation of the AO was that the assessee has obtained demand loan and working capital facility from Bank of Baroda. The assessee has debited interest and financial charges to the tune of Rs. 2,16,75,000/-. On the other hand, it was found by the AO that the amount receivable from Gharda....
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....s, it can be seen that against the sales effect5ed to the tune of Rs. 13.40 crores till early October 2000, the assessee company has received payment of Rs. 50.35 lacs only in the months of April & May 2000. Further, the sales realization for the entire year is too meager as compared to the quantum of sales. It would be pertinent to state here that the assessee company has borrowed funds towards working capital facilities. However, by effecting such huge sales on credit, and that too at the prevailing market rates, the assessee company has given an undue advantage to its holding company. It would be interesting to note that the total outstanding of GCL as at the end of the year is Rs. 8.33 crores, whereas the total borrowings, including demand loan and working capital facilities, are to the tune of Rs. 6.29 crores. Thus, if the assessee company had not resorted to such diversion of funds and had been regular in receiving payments against the sales effected to GCL, it would not be required to bear huge interest burden, which has a direct bearing on its profitability. Since, GCL is a holding company falling within the proviso of sec. 40A(2)(b), the entire interest payments cannot be ....
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....lso. It has also been admitted that total borrowings including demand loans and working capital facility from bank to the turn of Rs. 8.99 crores and had the fund been received from the holding company i.e. Garda Chemicals Ltd. the interest liability would have reduced. 4.3.1. Under the circumstances the Assessing Officer is directed to rework the interest disallowance after allowing for 4 months credit period for each transaction with the holding company as is the norm with other customers. The ground is thus partly allowed. 3. From the side of the assessee, ld.AR Mr. M.G.Patel appeared and his foremost argument was that the transaction with GCL was a commercial transaction and there was no element of grant of loan. His next plank of argument was that the assessee has granted such facility to other customers as it was a prevailing market practice. AR has placed a comparative chart of sales to demonstrate the outstanding balance with GCL and outstanding balances of others. He has emphasised that in comparison to the total turnover the percentage of outstanding balance on sale account from GCL was hardly 18.02%, as against that outstanding balances with other debto....
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....as purchasing certain raw-material from GCL which was its monopoly product. That the vehement contention was that in the like manner the assessee was also enjoying credit facility against purchases made from GCL. That it was not a case of mere purchase and sale as it has happened with other debtors or customers but the business relationship with GCL was on different terms being a holding company and in that capacity GCL has provided specialized services to assessee in the field of manufacturing and marketing. All these facts were narrated to ld.CIT(A) through written submissions which were placed before us on page Nos.138 to 190 of paper-book. From this discussion, it is evident that the assessee-company had a regular business transaction and it was not for any extraneous consideration. In the regular course of business purchases and sales have been made with the said concern and not with the intention to siphon out the borrowed funds. The factum of the case thus demonstrated that the assessee has taken a commercial decision keeping in mind the interest of its business and the other surrounding circumstances under which the assessee was getting facilities. Once it....
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.... GCL. It was found by the AO that the assessee had incurred Rs. 1.33 crores towards marketing expenses paid to GCL. As per AO, the claim of expenditure was unreasonable and without any supporting evidence. By invoking the provisions of section 40A(2)(b) of the Act and following the past history of the case disallowed the impugned amount of Rs. 1,33,99,935/. When the matter was carried before the first appellate authority, it was noted by ld.CIT(A) that the claim of the said expenditure was exactly at 10% of the total sales of Rs. 13.399 crores claimed to have been effected through the said holding company. The explanation of the assessee was that the impugned expenditure was in the nature of reimbursement but as per ld.CIT(A) it was difficult to believe that those expenses under several heads would have the exact percentage of the total amount expended. He has therefore affirmed the disallowance. 7. With this brief background, we have heard both the sides. For AY 1999-2000 in assessee's own case the ITAT Ahmedabad in ITA No.1438/Ahd/2007 order dated March-2010 held vide paragraph No.14 that the assessee had failed to prove any nexus between the payment to holding company a....
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...., sale and export of the products for which it has own marketing network. Learned Counsel for assessee did not dispute the above findings of the authorities below during the course of the argument. It is therefore, clear that assessee was doing the same marketing activities of its product which work was assigned to the holding company through the supplementary agreement. In the main agreement, no such payment was agreed for reimbursement of marketing expenses. Learned Counsel for assessee though referred to note on marketing commission PB-167, but no submissions are made as regards justifiability of the expenditure under the head sales promotion, travelling, conveyance, telephone, etc. and vehicle maintenance, because these are the common expenditure, which is to be spent by the holding company for its business also. Therefore, assessee was required to file sufficient evidence before the authorities below to claim that some services are rendered by the holding company for the assessee in this way to claim reimbursement of the expenditure but no such efforts have been made. Even no such evidences were filed before the Tribunal. It is also not explained as to why the 10% of the sales....
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.... also been noted that in the past for AYs 2000-01 the said disallowance were continuously made by the AO. In appeal, ld.CIT(A) has opined that considering several other factors the said payment of commission was not genuine. The ld.CIT(A) has given certain reasons such as the terms of payment as per the agreement stated to be on percentage basis on the sales, but contrary to that, payments were made in round figures. It has also been noted by the ld.CIT(A) that no details were furnished except credit notes issued. The action of the AO was affirmed and now the assessee is in appeal. 10. On hearing both the sides it is worth to mention at the outset itself that in assessee's own case for AY 2000-01 in ITA Nos.459 and 498/Ahd/2008 order dated 19/03/2010 vide paragraph No.5 the disallowance was confirmed; reproduced below:- "5. We have heard both the parties and gone through the facts of the case. We find that in the preceding year also disallowance of Rs. 5 lakhs on sales commission to Nipun Finvest Pvt.Ltd. was made and on appeal, the ld. CIT(A) dismissed the appeal of the assessee. In the year under consideration, as pointed out by the AO, though terms and conditions of ....
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.... provided any interest on the said inter-corporate deposit. Since the assessee had maintained accounts on mercantile basis, therefore as per AO it ought to have provided interest income and as per AO by applying the rate of interest at 17.25% on the said deposit calculated accrued interest of Rs. 38,81,250/- which was added in the total income of the assessee. The matter was carried before the first appellate authority. 12.2. The ld.CIT(A) has held that the assessee has unilaterally decided not to account for the interest on the ground that it was uncertain to recover the amount. As per ld.CIT(A) it was incorrect because out of the total inter-corporate of Rs. 3 crores placed with Nipun Investments Pvt.Ltd., the assessee has recovered Rs. 160 lacs in the past. Further, it was also noted by ld.CIT(A) that the assessee used to regularly credit sales commission to one of a sisterconcern of Nipun Investments Pvt.Ltd. According to him, there was a contradiction in the stand of the assessee. After discussing and distinguishing few case laws viz. Sarabhai Chemicals 257 ITR 355(Guj.) and Shiv Prakash Janak Raj 222 ITR 583(SC) the action of the AO was affirmed. 12.3. The argument o....
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....system of accounting and accordingly, had shown interest accrued on ICDs as its income until the AY 1999-2000 while there was no material before the lower authorities nor even before us, suggesting that recovery of principal amount or interest accrues thereon was doubtful, we are of the opinion that income had accrued to the assessee and that the aforesaid amount was not a sticky debt, having already been recovered. This view which we have taken finds support from the decision of the Hon'ble Delhi High Court in the case of Magnum Power generation Ltd. vs. Addl. CIT, 311 ITR 332 (Delhi). In these circumstances, especially when there is no material before us for taking a different view in the matter, we are not inclined to interfere. Therefore, ground no.6 in the appeal of the assessee is dismissed." 12.5. Respected Co-ordinate Bench has held that once the assessee had followed mercantile system of accounting consistently therefore should have shown interest on ICD and for this legal proposition followed a decision of Hon'ble Delhi High Court as cited supra. We respectfully follow the said decision and dismiss this ground. 13. Ground No.5 reads as under: 5. The Learned Commi....
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....allowability of expenditure/depreciation in the light of above directions. Ground No.5 is partly allowed." 13.3. On hearing the submissions of both the sides, we have found that in assessee's own case for AY 2000-01 in ITA No.459/Ahd/2008(supra), the Respected Coordinate Bench has held that the expenditure was not Revenue in nature therefore not to be allowed u/s.37 of I.T. Act. Relevant findings contained in paragraph No.26; reproduced below: "26. We have heard both the parties and gone through the facts of the case. At the outset, we find that reliance by the assessee on the decision of the ITAT in their own case for the AY 1998-99 is totally misplaced since in the AY 1998-99 expenditure was incurred on replacement of crates and steam injector system. The expenditure on ejector system was allowed, following the decision of the ITAT for the AY 199293 & 1993-94 while the issue of expenditure on crates had been restored to the file of the AO. In the instant case, the boiler in The processing plant was hitherto being run on oil fuel. In the year under consideration, the assessee incurred expenditure on imported Thermax Gas Burner assembly, Gas Burner-Gas Train, Control Pa....
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.... system. As held by the Hon'ble Apex Court in the case of Travancore Cochin Chemicals Ltd. vs. CIT 1977 CTR (SC) 148 : (1997)(sic-1977) 2 SCC 20, expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for the business. Further, in Lakshmiji Sugar Mills (P) Co. vs. CIT AIR 1972 SC 159 it has been held that bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure. Since the aforesaid replacement in the instant case amounts to bringing into existence a new asset & advantage, and thereby an enduring benefit for. the assessee, it is clear then that expenditure of the assessee here is not of revenue nature and thus, cannot be claimed as a deduction even under s.37 of the Act. In view thereof, especially when there is no material before us for taking a different view in the matter, we have no alternative but to uphold the findings of the Id. CIT(A). Therefore, ground no. 7 in the appeal of the assessee is dismissed." 13.4. Once a view has already been taken the expenditure was capital in nature therefore we have no reason to take any other view b....
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....ssee is allowed." 30. In the light of our aforesaid decision in the appeal for the AY 1999-2000 and undisputedly facts in the year under consideration being similar, we set aside the order of the ld. CIT(A) on this issue and accordingly, allow ground no.8 in the appeal of the assessee." 14.3. Following the past history of the case for the year under consideration as well, we hereby direct to allow the claim. This ground is, therefore, allowed. 15. Ground No.7 reads as under: 7. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in confirming disallowance of Rs. 1,64,666/- out of total expenditure of Rs. 32,93,318/- incurred under the head of Canteen expenses. Miscellaneous expenses and other expenses. 15.1.The observation of the AO was that under the head "miscellaneous expenses" and "staff welfare expenses" the assess has incurred a sum of Rs. 1.88 crores and 1.05 crores respectively. As per AO most of the expenditure was in cash hence, there was no check over the expenses. For want of check an amount of Rs. 4,11,085/- was disallowed. When the matter was carried before the first appellate authority the disallowance was restricted to Rs. 1,64,666/-....
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....be treated as allowed for statistical purposes. 19. Ground No.9 reads as under: 9. The learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming the action of the Assessing Officer in reducing the other income from the eligible profit for the purpose of computing deduction u/s.80IA of the I.T.Act, 1961. 19.1. The observation of the AO was that the assessee had claimed deduction u/s.80IA of the Act in respect of Unit-V and Unit-VI. It has also been observed that the assessee had shown total sales of Rs. 139.20 crores against the taxable profit of Rs. 1.12 crores. As per AO, the assessee had tried to manipulate the profit of Industrial Unit by apportioning cost of production. However, the claim of the assessee was that all the Units are integrated to each other so cannot be differentiated. In addition to the above observation, it was also observed by the AO that certain income were not related to manufacturing activity, such as, interest on investment, interest on deposit, miscellaneous income, profit on sale of fixed assets and interest from Nipun Finvest Pvt.Ltd. As per Annexure-B of the assessment order, the AO has cal....
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....kings unit-V & VI from any business carried on in these undertakings and thereafter, adjudicate the issue in accordance with law the light of our aforesaid observations and various judicial pronouncements, including those referred to above and after allowing sufficient opportunity to the assessee." 20.3.In the past, this issue had been discussed at length by the Respected Coordinate Benches and the law emerges that for the purpose of claiming deduction u/s.80IA, the assessee is required to establish that the eligible business profit are from Industrial Undertaking and, most importantly, the assessee has to establish that the said profit is derived from "the business activity of the Industrial Undertaking". In other words, the assessee has to establish a direct nexus between the "eligible profit" and "Industrial Undertaking". As far as the eligibility of income under the head "other sources" and under the head "interest income", the observation was that the assessee has to first establish the correct nature of the income. For example, interest paid by the customers for late payment of sale proceeds may form part of the eligible income subject to the affirmation of correct facts. ....
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....in not appreciating the fact that interest of Rs. 1,28,86,599/- was for huge debit balance which the assessee was not regularly and timely recovering. Regular and timely recovery of the debit balances had direct bearing on the assessee's profitability. 24.1. A view has already been taken in favour of the assessee while deciding Ground No.1 in Assessee's appeal hereinabove. Accordingly, these grounds of the Revenue are, therefore, dismissed. 25. Ground Nos.2 & 4 read as under: 2. The Learned CIT(A) has erred on facts and in law in directing re-computation of deduction u/s.80IA. 4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating the fact that the assessee was sympathetically manipulating the profits of separate units to maximize deduction u/s.80IA. The Ld.CIT(A) therefore also erred in directing the AO to exclude the profit from the trading activity while working out the eligible profit for deduction u/s.80IA. 25.1. These grounds have already been restored back with certain directions to re-compute the deduction u/s.80IA of the Act. Revenue is aggrieved by the restoration of the computation of the said deduction,....
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....69,565/- made by the Assessing Officer in respect of commission. 29.1. It was noticed by the AO that the assessee has paid commission to Nipun Finvest Pvt.Ltd. That issue was dealt with while deciding Ground No.3 hereinabove in assessee's appeal for AY 2001-02 and following a decision of the Tribunal in assessee's own case for AY 2000-01 affirmed the action of the AO. Accordingly, for this year as well, this ground of the assessee is dismissed. 39. Ground No.4 reads as under: 4. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of Rs. 3,38,400/- out of total sales promotion expenditure of Rs. 16,92,000/- made by the Assessing Officer after holding that the same is for nonbusiness purposes. 39.1. The issue of sales promotion expenses was raised by the AO on the ground that the assessee has claimed payment for purchase of dry-fruits, sweets, posters, calendars, etc. While deciding ground No.6 for AY 2001-02 hereinabove in assessee's appeal we have followed an earlier decision of this Tribunal for AY 2000-01 and directed to allow the claim. Therefore, this ground of the assessee is allowed. ....
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....,000/- incurred under the head of Canteen expenses. Miscellaneous expenses and other expenses. 43.1. It was noted by the AO that under the head "staff welfare expenses", the assessee has debited a sum of Rs. 1.16 crores. It was noted that the expenditure was incurred in cash. An adhoc disallowance of Rs. 4,19,300/- i.e. 5% of the total expenditure was disallowed. The matter was carried before the first appellate authority and the same was restricted to Rs. 1,86,600/-. Herein above in this order this issue was discussed in AY 2001-02 while deciding ground No.7 (vide paragraph No.17 of this order) and affirmed the part relief granted by first appellate authority. Respectfully following the same, we are not inclined to disturb the finding of CIT(A) hence in the like manner as already held, this ground of the assessee is dismissed. 44. Ground No.8 reads as under: 8. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming reduction of 90% of notional interest income of Rs. 31,50,000/- made by the Assessing Officer for working out claim u/s.80HHC while computing the income. 44.1. While computing the deduction u/s.80H....