TaxTMI 
TaxTMI 
2018 (4) TMI 861
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....sessment proceedings, the Assessing Officer made additions/disallowances on various counts which inter alia includes : i. Addition u/s. 2(22)(e) Rs.10,16,06,967/-. ii. Disallowance of interest u/s. 36(1)(iii) Rs.3,08,889/-. iii. Disallowance u/s. 40A(2)(a) Rs.33,31,94,731/-. iv. Disallowance u/s. 14A Rs.6,21,87,068/-. v. Disallowance of Advertisement Expenses Rs.37,70,543/-. vi. Disallowance of Remuneration to partners Rs.17,50,000/-. vii. Disallowance of interest paid to partners Rs.38,61,612/-. Aggrieved by assessment order dated 26-09-2013, the assessee filed appeal before the Commissioner of Income Tax (Appeals). During the First Appellate Proceedings, the Commissioner of Income Tax (Appeals) apart from making GP addition of Rs. 5,65,54,895/- @1.20% on sales, confirmed, addition u/s. 2(22)(e) and disallowance of interest u/s. 36(1)(iii). Further, the Commissioner of Income Tax (Appeals) deleted disallowance u/s. 40A(2)(a), disallowance u/s. 14A, disallowance of advertisement expenses, disallowance of remuneration to partners, and disallowance of interest paid to partners. Against the findings of Commissione....
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....he paper book) for the assessment years 2009-10 and 2010-11 taking into consideration sale to third parties only. The ld. AR pointed that the GP for the assessment year 2009-10 from sales to third party is 0.41%, whereas in assessment year 2010-11 the GP from sale to third parties is 1.52%. 3.2 The ld. AR contended that the sales/purchases with sister concerns are made on cost to cost basis, therefore, there is no element of profit in such transactions. The ld. AR further pointed that for assessment year 2012-13 on turnover of Rs. 3110 crores, the assessee has declared GP of 0.55%. The Assessing Officer made addition of only 0.02%. In assessment year 2013-14 the assessee declared GP at 0.28% against the turnover of Rs. 3535 crores. The Assessing Officer accepted the GP declared by assessee. The ld. AR pointed that in view of the decision of Tribunal in assessment year 2009-10 and the trend of reducing GP with increase of turnover, the addition made by Commissioner of Income Tax (Appeals) in the assessment year under appeal is not justified. 3.3 In respect of ground No. 4 with regard to addition of Rs. 10,16,06,967/- u/s. 2(22)(e), the ld. AR submitted that the provision of se....
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.... show that the opening balance as on 01-04-2009 is Rs. 61,96,13,348/- as against the accumulated profits of the last year of Rs. 5,01,44,572/- (at page 300 of the paper book). The ld. AR to support this alternate argument placed reliance on the decision of Tribunal in the case of P. Satya Prasad Vs. Income Tax Officer reported as 141 ITD 403 (Visakhapatnam). 3.7 The ld. AR finally submitted that the assessee is a partnership firm and thus, is not a separate legal entity. The assessee cannot be a shareholder in any of the companies. For attracting the provisions of section 2(22)(e) it is necessary to be a registered shareholder holding 10% or more shares in any of the group companies. Hence, the provisions of section 2(22)(e) of the Act are not attracted. 3.8 In respect of ground No. 5 regarding disallowance of interest of Rs. 3,08,889/- u/s. 36(1)(iii), the ld. AR submitted that during the course of day-to-day business the assessee has provided funds to various unrelated parties. These parties have neither paid interest nor refunded the loans. Since, the loans have not been given by the assessee to related parties, therefore, disallowance of interest is not justified. 4. O....
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....isallowance on account of interest paid on gold deposit scheme to the partner without appreciating the fact that the assessee has paid excess interest to the partner, which has been deliberately adopted. This method of showing gold deposit as a capital of the partner is nothing but an arrangement and colourable device used to reduce taxable income. 6. On the facts and circumstances of the case and in law, the order of the Ld. CIT(A)-2, Nashik be cancelled on the above issues and that of the A.O. be restored. 7. The appellant craves leave to add, alter, modify, delete amend any of the grounds at any stage of appellate proceedings. 8. The appellant prays to file any of the additional evidence appropriate to the grounds taken in appeal." 6. The ld. DR submitted that a special audit was carried out in the case of assessee. During the course of audit it transpired that the assessee has entered into various transactions with its sister concerns. The assessee has inflated purchase price of gold ornaments from sister concerns. Accordingly, excess purchase price paid by assessee to its sister concerns amounting to Rs. 33,31,94,731/- was disallowed by Assessing ....
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....before allowing the set off of brought forward losses. The findings of Commissioner of Income Tax (Appeals) are not accepted for the reason that the unabsorbed carry forward depreciation becomes the part of current year depreciation under the provisions of section 32(2) of the Act. As per Chapter IV-D, the book profits are determined after deduction of depreciation. In the assessee‟s case, there would be loss after deduction of unabsorbed carry forward depreciation to the tune of Rs. 10,84,75,430/-, therefore, remuneration to the extent of Rs. 1,50,000/- would only be allowable. The ld. DR to support his submissions placed reliance on the decision of Vikas Oil Mills Vs. Income Tax Officer reported as 95 TTJ 1126 (Jaipur). 10. In respect of ground No. 5 relating to disallowance of interest paid on gold deposit scheme to the partners, the ld. DR submitted that the assessee has accepted gold deposit as capital of the partner and interest Rs. 58,58,221/- is paid on partner‟s capital. The ld. DR submitted that the partners have paid interest of Rs. 19,96,609/- to the depositors of gold deposit scheme as against interest of Rs. 58,58,221/- received on capital from assessee....
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....e on the decision of Special Bench of Tribunal in the case of Assistant Commissioner of Income Tax Vs. Vireet Investments (P) Ltd. reported as 188 TTJ 1 (Del) (SB) and Goyal Ishwarchand Kishorilal Vs. JCIT in ITA No. 422/PN/2013 for assessment year 2009-10 decided on 26-06-2014 submitted that where no exempt income has been earned, no disallowance u/s. 14A is warranted. 13. In respect of ground No. 3 relating to advertisement expenses, the ld. AR submitted that though the assessee has business outlet in Jalgaon but the assessee has customers coming from other cities as well such as Surat, Thane etc. The assessee has well established market in Jalgaon, therefore, no advertisement is required in the local area. The assessee intends to expand its business at other places, therefore, advertisements were made in other towns. The advertisement expenditure is debited for the group in Rajmal Lakhichand Jewels Pvt. Ltd. and the same is distributed to the other group concerns in proportion of turnover. In earlier years, advertisement expenditure has been incurred and the same was allocated to the group concerns in similar manner. The Assessing Officer never raised any objection or disallo....
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....ssailing deleting of addition u/s.40A(2) of the Act and substituting the addition on estimated GP by Commissioner of Income Tax(Appeal) are taken up together for adjudication. During the course of scrutiny assessment proceedings, the Assessing Officer made disallowance of Rs. 33,31,94,731/- u/s.40A(2)(a) of the Act in respect of purchase of gold ornaments and gold bullion by assessee from sister concerns at higher rate. The findings of the Assessing Officer were assailed by the assessee before the Commissioner of Income Tax (Appeal) and the First Appellate authority following the decision of Tribunal in assessee‟s own case for assessment year 2009-10 deleted the disallowance u/s.40A(2)(a) of the Act made by the Assessing Officer and estimated the addition by adopting GP at 0.90% on the total sale of Rs. 1961,54,11,702/- as per the audited accounts. 19. A perusal of the orders of Authorities below show that during the assessment year under consideration, the assessee had purchased gold bullion to the tune of Rs. 842 crores from sister concerns and to the tune of Rs. 65 crores from the third parties. Further, the assessee had purchased gold ornaments of Rs. 933.15 crores fro....
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....nts arrived at by the auditors and the A.O. applying Bombay Bullion Association purchase rates and the appellant applying Jalgaon local purchases rates." The Commissioner of Income Tax (Appeal) finally following the order of Tribunal in assessee‟s own case for assessment year 2009-10 discarded the addition made by Assessing Officer under section 40A(2)(a) and estimated GP @0.90% of the total sale as per audited accounts. 21. We find that identical disallowances u/s.40A(2)(a) was made by the Assessing Officer in assessee‟s own case in assessment year 2010-11. The Co-ordinate Bench of the Tribunal, after taking into consideration entire facts of the case concluded that the average price formula adopted by Assessing Officer and Commissioner of Income Tax (Appeal) is not correct. The Tribunal made the addition by estimating GP. The Commissioner of Income Tax (Appeal) in the impugned order has extracted the findings of the Tribunal on this issue. For the sake of brevity, we are not reproducing the same here. However, the gist of observations made by Tribunal on the issue in assessment year 2009-10 are as under: (a) The sale and purchase of gold bullion and gol....
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.... ornaments. Apart from difference in design, purity of gold, there is variation in the labour charges as well. Thus, method adopted by the Authorities below on account of lower price charge from sister concerns were rejected by the Tribunal. (g) For invoking the provisions of section 40A(2)(a), the Assessing Officer has to establish that the payments made to the related parties is not reasonable. Both the Authorities below have not considered the local conditions of the gold market. The average price method adopted by both the authorities is erroneous considering the market conditions of the bullion. Thus, the basis for computing excess payments made to sister concerns by assessee is faulty, therefore, provisions of section 40A(2)(b) cannot be applied. 22. The Co-ordinate Bench of the Tribunal after taking into consideration various facets of the transaction in sale/purchase of gold ornaments/bullion with related/unrelated parties concluded as under: "8.35 In the light of our above discussion, we are of the opinion that approach of both the authorities below is not correct for making high pitch additions in the hands of the assessee by invoking provisions of se....
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.... 0.90% on the total sale of Rs. 1961,54,11,702/- as per the audited accounts. The revised G.P. comes to Rs. 17,65,38,705 as against G.P. shown by the appellant at Rs. 11,99,83,810/-. After reducing the G.P. shown by the appellant at Rs. 11,99,83,810/-, the balance G.P. is to be added to the total income of the appellant which comes to Rs. 5,65,54,895/-. This covers the grounds on the addition made by invoking provisions of section 40A(2)(a) i.e. purchase of gold bullion and gold ornaments from the sister concerns by paying higher price. The other income shown by the appellant will remain unchanged. The other confirmed additions will not be affected." 24. The assessee has assailed the G.P. estimated by Commissioner of Income Tax (Appeal) being very much on the higher side. As against the addition of 0.07% made by the Tribunal in assessment year 2009-10, the Commissioner of Income Tax (Appeal) has enhanced G.P. rate by 0.30% (approximately). The assessee in the assessment year under appeal has disclosed G.P. @ 0.61%. Taking into consideration entirety of facts, we are of considered view that increase in G.P. rate by 0.09% would meet the ends of justice. Thus, G.P. is enhanced from....
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...., the provisions of section 2(22)(e) are not attracted. The Hon‟ble Supreme Court of India in the case of Gopal and sons (HUF) Vs. Commissioner of Income Tax reported as 391 ITR 1 has held that the provisions of section 2(22)(e) get attracted even in case of „beneficial shareholder‟. Here it would be relevant to refer to provisions of section 2(22)(e) and Explanation 3 to section 2(22)(e) of the Act. The same are reproduced here-in-below : "(22) dividend includes - (a) ............... (b) ............... (c) ............... (d) ............... (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987 , by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he ....
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....l owner in the sense of a beneficiary of a trust or otherwise at the same time. It is clear therefore that the moment there is a shareholder, who need not necessarily be a member of the Company on its register, who is the beneficial owner of shares, the Section gets attracted without more. To state, therefore, that two conditions have to be satisfied, namely, that the shareholder must first be a registered shareholder and thereafter, also be a beneficial owner is not only mutually contradictory but is plainly incorrect. Also, what is important is the addition, by way of amendment, of such beneficial owner holding not less than 10% of voting power. This is another indicator that the amendment speaks only of a beneficial shareholder who can compel the registered owner to vote in a particular way, as has been held in a catena of decisions starting from R. Mathalone vs. Bombay Life Assurance Co. Ltd., [1954] SCR 117." [Emphasized by us.] In view of Explanation 3 to section 2(22)(e) of the Act which has been elucidated by Hon‟ble Apex Court, we are of view that the provisions of section 2(22)(e) would be applicable to the assessee firm. 27. The second limb of argument of ....
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....nraj Jewellers Pvt. Ltd. The settled legal position qua the provisions of section 2(22)(e) of the Act is that the transactions in the current accounts are outside the purview of section 2(22)(e) of the Act. However, this is a peculiar case where the advances received by the assessee from the group concerns are substantially higher. It is repeatedly submitted by the assessee during the assessment/appellate proceedings that the payments received by the assessee from the group concerns constitutes trade advances on current account. The authorities below having considered the submissions of the assessee but have not rebutted the claim of the assessee in order to treat the excess payments received by the assessee as non-trade advances and not on current account. In our view, this is the case where certain questions are left unanswered which are vital for adjudication of the issue under consideration. The key question is whether the excess funds received by the assessee constitute trade advance or otherwise. The question as to why group companies paid advances much higher than the transactions, i.e. on account of purchases and sales is also unanswered. Ancillary to the same, there is ....
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....rom accumulated profits. The relevant extract of the observations of the Tribunal in para 15 of the order are as under: "Accordingly, the loan given by the company in the immediately preceding year, i.e., assessment year 2006-07, should have been assessed as deemed dividend in accordance with the provisions of sec. 2(22)(e) in that year. The deemed dividend so assessable in that year is liable to be deducted from the amount of "accumulated profits" for the purpose of computing the deemed dividend during the year under consideration." We further find that similar view has been taken by Ahmedabad Bench of the Tribunal in the case of M.B. Stock Holding (P) Ltd. Vs. Assistant Commissioner of Income Tax (supra). The Tribunal held that business profits of the company accrue only at the end of the year and therefore, the current year‟s business profits are not to be included in the accumulated profits for computation of deemed dividend. 29. In view of the facts of the case, we are of considered view that this issue needs revisit to the file of Assessing Officer. The Assessing Officer shall decide the issue de novo in the light of our above observations after affording....
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....anies. The assessee has not received any dividend from the said companies in the period relevant to the assessment years under appeal. This fact has not been re-butted by the Revenue. The Special Bench of the Tribunal in the case of ACIT Vs. Vireet Investment (P) Ltd.(supra) has held that no disallowance u/s.14A r.w. Rule 8D(2)(iii) can be made where no exempt income from investment is received during the year. In other words, only those investments are to be considered for computing average value of investments under Rule 8D(2)(iii) which yield exempt income during the year. Similar view has been taken by Pune Bench of the Tribunal in the case of Shri Goyal Ishwarchand Kishorilal Vs. JCIT in ITA No. 422/PN/2013 decided on 26.06.2014. The Tribunal after placing reliance on the decisions in the case of CIT Vs. Shivam Motors Pvt. Ltd. in ITA No.88/2014 decided on 05.05.2014 by Hon'ble Allahabad High Court and CIT Vs. Lakhani Marketing in ITA No.970/2008 decided on 02.09.2014 by the Hon'ble Punjab & Haryana High Court, held as under: "9.4 Since in the instant case the assessee has not received any dividend income out of the shares held as investment and since no disal....
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....ng Officer. Thus, we find no error in the order of Commissioner of Income Tax (Appeal) in deleting the disallowance made by the Assessing Officer on account of advertisement expenditure. In the result, ground No. 3 raised in appeal by the Department is dismissed. 34. In ground No. 4 of appeal, the Department has assailed deleting of disallowance of excess remuneration paid to partners. The Commissioner of Income Tax (Appeal) allowed the claim of assessee by observing as under: "12.1 The remuneration to partner is based on current year's "Book profits" and therefore it is to be deducted first before allowing the setoff of brought forward losses. The computation of Book Profit is as per section 40(b) while the setoff of brought forward losses is to be granted in terms of section 72. Therefore, while arriving at the business income, the deduction of section 40(b) is to be given first and then if at all there remains positive income, the brought forward losses are to be set off. The appellant had rightly claimed the deduction in the computation of income and therefore, the addition made on this score is deleted. The appellant gets a relief of Rs. 17,50,000/-." The findin....
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....tant case the Assessing Officer made addition of Rs. 18,92,421/- being the difference between the interest paid by the firm to the partner at Rs. 45,31,460/- and the interest paid by the partner Shri Ishwarlal I. Lalwani to the customers on GDS. According to the Assessing Officer, if the gold would have been directly routed through the firm, the firm would have saved Rs. 18,92,421/-. Although the firm has paid interest @9%, however, indirectly it has benefitted the partner and therefore this is a colourable device and the firm gave excess interest of Rs. 19,82,421/- to the partner. It is the submission of the Ld. Counsel for the assessee that since the assessee firm had given interest @9% on the gold deposit by the partner which is below the prescribed limit of 12% as per the partnership deed, therefore, there should not be any disallowance u/s.40A(2)(b). Further, according to the Ld. Counsel for the assessee, the assessee firm could receive additional gold deposit than what it could have received under its own gold deposit scheme on account of gold deposit scheme started by one of its partner. It is also the submission of the Ld. Counsel for the assessee that the firm would have p....