TaxTMI 
TaxTMI 
2016 (4) TMI 1324
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....(1)(c) and in the first assessment year followed by section 143(3) of the Income Tax Act, 1961; in short "the Act" in the remaining two assessment years; respectively. We heard all these cases together for the sake of convenience and brevity. We proceed assessment year-wise in order to avoid repetition. Assessment year 2004-05 Revenue's appeal 1961/Ahd/2012 and Assessee's CO 120/Ahd/2012 2. The Revenue raises two substantive grounds in its appeal inter alia challenging the lower appellate order deleting the impugned penalties imposed by the Assessing Officer u/s. 271(1)(c) of the Act qua disallowance of excess claim of deprecation on moulding boxes, furnace, new additions and the one pertaining to excess claim of section 80HHC deduction. The relevant figure of depreciation disallowance turns out to be Rs. 53,96,114/- as per the lower appellate order. The Assessing Officer completed best judgment assessment on 19-12-2006 invoking the above stated disallowance. The CIT(A) in his order dated 27-02-2007 granted part relief to the assessee by directing the Assessing Officer to allow the impugned deprecation claim after due verification. Both parties inform us that a co-ordinate bench....
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....,858/-. The Assessing Officer in assessment order quoted its failure in responding to his queries seeking application of section 94(7), scrip/date-wise details of mutual funds purchases and sales, dividend earned thereupon along with supportive documents and record-date. He would accordingly disallow the entire sum. The assessee filed appeal. The CIT(A) directed the Assessing Officer to allow loss of Rs. 2,64,171/- leaving behind the remaining disallowance figure in question of Rs. 5,86,687/- to be notional in nature. 6. Heard both sides. Case file perused. It is an admitted fact that the present instance is of notional versus actual loss and not a case of no loss at all. It's a question of head of loss rather. It further emerges that the assessee had placed on record all the relevant particulars/derails pertaining to its loss claim arising from sale of mutual funds in question in quantum proceedings wherein a part of the impugned claim already stands accepted (supra). We observe in these facts and circumstances that this one is a case of mere part disallowance of loss claimed on sale of mutual funds rather than that of a case involving concealment and furnishing of inaccurate par....
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....impugned remuneration to be unreasonable. He thereafter proceeded on inflation benchmark @ 10% each year since assessment year 2004-05 and arrived at appropriate salary figures of Rs. 1,32,96,429/- and Rs. 5,40,000/- @ 140% and 120% of Rs. 94,97,494/- and Rs. 4,50,000/- as paid s/sh K.H. Javeri and Abhishek Javeri; respectively thereby disallowing the impugned gross sum of Rs. 3,21,96,741/- u/s. 40A(2)(b) of the Act. 10. The CIT(A) partly confirms Assessing Officer's action as under:- "4.2 I have carefully considered the rival submissions. I have also perused the case laws relied upon by the appellant. It is seen that directors remuneration has been disallowed as per the provisions of sec. 40A(2) of the I.T. Act. In view of this at the outset would like to discuss the provisions of sec.40A(2) of the I.T.Act and its applicability in the case of the appellant. The provisions of sec.40A starts with non obstante clause and have overriding effect over the provisions of any other section of Income-tax Act, 1961. It was held by the Hon'ble Supreme Court in Shri Sajjan Mills Ltd. vs CIT (1985) 156 ITR 585(SC). Further Hon'ble Gujarat High court in CIT vs Bharat Vijay Mills Ltd. ....
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....span of four years the remuneration had increased by 277%. In the corresponding period the turnover of the appellant company had increased from Rs. 53.99 crores to Rs. 88.46 crores. This way the turnover had increased by 163%. The appellant company had declared gross profit of Rs. 17.91 crores in the F.Y.2003-04 which has increased to Rs. 39.01 crores in the F.Y.2007-08. This way the increase in gross profit is 217%. The above facts indicate that between F.Y.2003-04 to the F.Y.2007-08 both turnover and gross profit of the appellant company had increased but the increase in turnover and gross profit is far less compared to increase in directors remuneration. On an average the turnover and the gross profit of the appellant company from the year 03-04 to 07-08 has increased by 190%(163 + 217 / 2). In my considered view it will be reasonable if allowable remuneration is increased by 190%. This will be in a step with the better performance of the appellant company. In view of this remuneration paid to Shri K.H. Jhaveri to the extent of Rs. 2,73,60,000(1,44,00,000 x 1.90%) is allowed. Although the A.O. has taken remuneration paid to Shri K.H. Javeri in the F.Y.2003-04 at Rs. 94,97,449/- ....
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....crease. We find this approach to be entirely unsustainable. Assessee's remunerations in preceding assessment years already stand accepted. There is no justification to draw the clock back to financial year 2003-04 in such a case. We further do not notice comparison of the impugned remuneration vis-a-vis market rate either in assessment or in the lower appellate order so as to point out any excessiveness element. Hon'ble jurisdictional high court in its decision hereinabove has already held that section 40A(2)(b) disallowance is not to be invoked when the payees already stand assessed at maximum rate. The Central Board of Direct Taxes has also issued a circular on 06-07-1968 directing the assessing authority not to invoke the impugned disallowance in absence of any tax evasion being noticed. We quote all this reasoning for accepting assessee's arguments against the impugned section 40A(2)(b) disallowance. The Revenue's corresponding ground is rejected. The Assessing Officer is directed to delete the entire disallowance sum of Rs. 3,21,96,741/-. 13. The assessee's second substantive ground challenges correctness of section 14A r.w. Rule 8D disallowance of Rs. 31,17,765/-. Its exempt....
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....ll be exempt. 5.3 The appellant has also contended that expenditure against demat account and Kotak Securities Ltd., should not.be taken as direct expenditure for investment in equity since part of this expenditure pertains to investments in shares, profits from which are taxed under the head Short Term Capital Gain. I do not agree with the contentions of the appellant since provisions of Rule 8D does not make such distinction. 5.4 The appellant has also raised other trivial issues which cannot be accepted in view of the express provisions of sec.14A r.w. Rule 8D of the I.T. Act. I have also perused various case laws cited by the appellant but the ratio of these case laws will not apply in the year under consideration since provisions of Rule 8D are applicable for the A.Y.2008-09. 5.5 Since the A.O. had scrupulously followed provisions of rule 8D, accordingly, I do not have any hesitation in agreeing with the contentions of the Id. A.O. In view of above, disallowance of Rs. 31,17,765/- made by the A.O. u/s.14A of the I.T. Act is confirmed. This ground of appeal is dismissed." 15. Heard both sides. Relevant records perused. There is no dispute about the fact that the above st....
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....ct that it had treated the same in its books as capital asset/investments and not stock in trade. It stated to have taken delivery in all of its transactions. The Assessing Officer again went by section 73 of the act for treating the impugned share profits as assessee's business income. 18. The CIT(A) rejects assessee's corresponding argument as under:- "6.2 During the appellate proceedings on this issue the appellant submitted as under:- "4 Treatment of Profit and gains in respect of shares: The Ld. A.O. has in para 4 of the Assessment Order, reproduced the information about the purchase / sale of shares furnished by us and based on the same has made observations in para 4.4 (i), (ii) and (iii) regarding the number of companies in which shares transactions have been made, the number of transactions and has commented about volume of transactions being in crores of rupees and profit earned being also in crores, saying that the magnitude of transaction is very high. The Ld. A.O. has further stated that the profit earned on sale and purchase of shares was not capital gain but it was business profit earned in trading activities of shares. The observations made by the Ld. A.O....
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....stment and not otherwise and therefore the profit was rightly computed and treated as capital gains by us in the return of income tax as filed. The nature and period of holding and past history of the appellant clearly justifies its stand that profit on sale of shares through whatever mode was chargeable only as capital gain. It be so held now. It is very important to note that whole of investment in Shares / Mutual Funds etc. are done out of our own unutilized fund and investment done was not out of borrowed funds hence provisions of Speculation /Business income is not applicable. Your appellant in this regard relies on the following decisions of the Ahmedabad Tribunal which has considered in detail, the issue involved and held that profit in such cases of investment in shares has to be treated as capital gain. It be so held now and the short term and long term capital gain be directed to be accepted as declared. In view of entirety of above submissions , the addition of Rs. 2,43,55,894/- made by Ld. A.O. treating the capital gains as business income be deleted and the deductions of Rs. 16,59,770/- towards Demat Charges and Management Fees claimed in computation of capital g....
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....f the A.O. is confirmed. The addition of Rs. 2,43,55,894/- is confirmed." 19. The assessee reiterates its status as a manufacturing entity. There is no dispute about non-usages of borrowed funds for purchasing shares in question. The assessee has always been treated as an investor in regular assessments framed in preceding assessment years. It states that PMS services have also been availed for the purpose of maintaining/managing of the share investment in question. Page 601 of the paper book reveals all details of assessee's short term capital gains of Rs. 1,61,40,608.19/-. The same arise from scrips of 21 entities. Column 6 thereof denotes holding period thereof exceeding time span of minimum 100 days on most of the occasions. Long term capital gain figures are of Rs. 82,15,286/- from only three scrips held for almost more than 400 days on most of the occasions. Page 614 is assessee's balance sheet treating the relevant shares and mutual funds as investments. The assessee had its disposal capital amount of Rs. 7.99 crores and reserves of Rs. 115 crores. It has engaged Portfolio Management Services for effective management of its investments. Hon'ble Karnataka high court in CIT v....
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....ice of the scrap increased by Rs. 4,513/- per Ton compared to the price prevailing in the immediately preceding year. The price increase of MS Scrap during the year under consideration is around 19.5%. (b) The evidences furnished for increase in the price of scrap remained uncontroverted. It is also a matter of record that the appellant has declared a turnover of Rs. 88.46 crores during the year under consideration. The turnover declared by the appellant for the immediately preceding year i.e. A.Y.2007-08 is Rs. 138.99 crores. This way turnover declared by the appellant during the current year is lower by 36% as compared to immediately preceding year. In view of the facts I am inclined to agree with the contention of the appellant that due to lower turnover the production capacities installed could not be utilized optimally and the overhead expenses per unit of the turnover was more. In my considered view the appellant has given a plausible explanation for reduction in gross profit (c) Perusal of evidences filed during the assessment as well as the appellate proceedings reveals that the appellant has furnished complete quantitative details of consumption of raw materials value-....
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..... The appellant has also taken due care to furnish PA Nos of these persons. In my considered view these details are sufficient to establish the genuineness of the payment and the identity of the recipient. In view of these facts I am not in agreement with the observations of Id. A.O. on this matter. (g) The A.O. has also observed that the appellant has not furnished information in respect of purchases and information in respect of creditors in the prescribed proforma. The apparent objection of the Id. A.O. is that the details furnished by the appellant do not give sufficient details in respect of transactions done during the year under consideration with these persons. However, the details furnished by the appellant vide his letter dated 22.7.2010, clearly indicate the opening balance, the debit and credit during the year under consideration and the closing balance at the end of the accounting year against each and every debtor and creditor. Secondly, the complete name and address of these customers and vendors have been furnished by the appellant vide his letter dated 31/7/2010. In my considered view the appellant has furnished sufficient evidence to identify the vendors and cus....
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....n 19.5% increase, there has been decline in total turnover, all relevant details already stood furnished before the assessing authority itself, relevant books of account stand audited under the Income Tax as well as Central Excise law without any infirmity being pointed out therein. Ld. authorized representative invited our attention to page 664 of the paper book comprising of Assessing Officer's remand report to contend due compliance of the principles of natural justice in the lower appellate proceedings. Pages 555 and 556 reveal that assessee had responded to all of the scrutiny show cause notices. The Revenue does not point out either any mis- reading of evidence or perversity in the lower appellate findings under challenge. We do not find any error in the CIT(A)'s action under challenge deleting the impugned addition. Revenue's first substantive ground fails. 23. The Revenue's next substantive ground challenges the lower appellate order partly deleting section 40A(2)(b) disallowance as already adjudicated in assessee's favour hereinabove. This ground is accordingly rejected. 24. The Revenue's third substantive ground seeks to restore closing stock adjustment of Rs. 47,41,915....
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....of closing stock, not taking into consideration the similar valuation of opening stock. As per the ratio of this case, enhancing the value of closing stock without giving corresponding effect to the valuation of opening stock is not proper. 9.3 In view of the above facts, I am not convinced about the maintainability of addition of Rs. 47,41,915/- in valuation of closing stock. The A.O. is directed to delete addition of Rs. 47,41,915/-. This ground of appeal is allowed." 25. The Revenue strongly seeks to restore Assessing Officer's findings. Ld. authorized representative points out that the assessee follows exclusive method of accounting meaning thereby that if the impugned addition is restored, it would be again a revenue neutral action as held in the lower appellate findings. He quotes hon'ble jurisdictional high court decision in Tax Appeal No. 436 and 437/2011 CIT vs. Bell Granito Ceramica dated 13-06-2012 following its earlier judgment ACIT vs. Narmada Chemator Petro-chemicals Ltd. (2010) 233 CTR 265 (Guj) rejecting Revenue's substantial question framed in challenging tribunal's order that no such addition could be made on account of excise duty to closing stock unless a bal....
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....and find that the authorities have nowhere rejected assessee's books before invoking the same @ 0.5% of the average value of investments. We follow our discussion as in preceding assessment year and reverse this limb of disallowance as well. This first substantive ground succeeds. 28. The assessee's second substantive ground raises issue of notional versus actual interest on delayed refund of security deposits placed with its associate enterprise M/s. PASL Windtech. The Revenue also raises its first substantive ground in cross appeal as a corresponding plea that the CIT(A) has erred in deleting the impugned addition made on account of this notional interest of Rs. 41.40 lacs in directing the Assessing Officer to recomputed interest on day to day basis. The Assessing Officer records in assessment order that the assessee's books demonstrated a sum of Rs. 4.84 crore as payable from its associate enterprise. The same arose from its security deposited to the latter entity in lieu of availing usages rights on industrial land for carrying out manufacturing activities. The assessee did not pay any rent except this lumpsum refundable amount. The Assessing Officer observed in assessment ord....
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....r letter dated 20.12.2011 (ExIiibit-J) (Page 155). The Ld. A.O. has made the addition of interest without considering the above fact and also without considering the fact on record that the Security Deposit of Rs. 2.30 crores has been repaid to the appellant by PASL Windtech Pvt. Ltd., untruthfully saying that in absence of bifurcated Security Deposit accounts, it cannot be known whether the amount refunded pertains to the agreement dated 26.12.2003. We wish to say that separate Security Deposit accounts were furnished and the same were on record as stated below. a) Our letter dated 20/01/2010 addressed to Deputy Commissioner of Income Tax, Circle-5, Ahmedabad in response to the scrutiny assessment questionnaire for A.Y. 2008-09 enclosing therewith three separate Security Deposit Accounts. Copy of the same is enclosed (Exhibit - K) (Page 159 to 162). One of those three accounts titled "Ahmedabad Finvest -Sec. Dep (37B)" shows that the whole of the Security Deposit amount of Rs. 2.30 crores has been received back through bank payments from PASL Windtech Pvt. Ltd. and there is no outstanding as on 31.03.2008. b) Our letter dated 22/07/2010 addressed to The Addl. Commissioner ....
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....rity deposit of Rs. 2.3 crores to M/s. PASL Windtch Pvt. Ltd. (formerly Ahmedabad Finvest Co. Pvt. Ltd.). As per clause-5 of this agreement M/s. AFCPL was required to refund minimum of security deposit of Rs. 76,66,666/- during each financial year commencing from F.Y. 1.4.2005 to 31.3.2006. In the agreement it was also provided that in the event of any delay in repayment of such minimum amount fixed or any shortfall therein, AFCPL shall pay an interest at the rate of 18% per annum to PASPL on such minimum amount or shortfall therein. The facts available on record conclusively proves that M/s. AFCPL has not refunded the minimum security deposit of Rs. 76,66,666/- as mandated by the agreement dated 26.12.2003. As per the express provisions of the agreement dated 26.12.2003 the appellant was duty bound to charge interest on any shortfall as mentioned above. However, the appellant has not charged interest on the shortfall of refund of security. Accordingly the A.O. charged interest @18% on the entire security deposit of Rs. 2.3 crores and addition of Rs. 41,40,000/-(Rs.2,30,00,000/-- x 1) has been made in the income of the appellant. During the appellate proceedings the appellant conte....
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....e.' The A.O. is directed to work out interest @ 18% on the day to day balance of this security deposit account and work out the disallowance accordingly. Disallowance worked out as per this methodology is confirmed. This ground of appeal is partly allowed." This leaves both the parties aggrieved. 30. We have heard both the ld. representatives. Paper book pages 108 to 110 contain assessee's agreement dated 26-12-2003 executed with its associate enterprise involving the following terms and conditions:- "NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY DECLARED BY AND BETWEEN THE PARTIES HERETO AS HEREINAFTER MENTIONED: 1. AFCPL agrees to give the Scheduled Premises to PASPL for its use and PASPL agrees to take the Scheduled for its use in accordance with the terms and conditions of this agreement. 2. PASPL agrees that it shall use the Scheduled Premises for its industrial/commercial purposes only. 3. AFCPL shall provide electricity power and other internal infrastructural facilities at the Scheduled Premises for use of PASPL and shall also allow PASPL to install its machinery and other equipments to carry out manufacturing activities. 4. ASPL shall give to AFCPL an amou....
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....paid any rent except furnishing the impugned interest free security deposit to be refunded upon vacation of premises. He refers to clause 4 of the agreement having expressed stipulation of interest free deposits. Ld. departmental representative builds Revenue's case upon clause 5 of the agreement. We have given our thoughtful consideration to rival submissions. The sum in question is Rs. 2.3 crores furnished as interest free deposit as a security in lieu of availing usages rights for carrying out assessee's manufacturing activities. There is no rent paid. Clause 5 contains stipulation on refund payment of Rs. 76,66,666/- from financial year commencing 04-01-2006 to 31-03-2006 and its failure invites 18% interest. We are of the opinion that this interest clause is over and above clause 4 of the agreement relied upon by the assessee. We reject assessee's corresponding plea in view of the fact that both parties have agreed for part payment of the security deposit despite the position of non-payment of rent. Ld. authorized representative fails to prove dilution of this clause by way of any subsequent modification. We also feel this alone is not end of the issue. The CIT(A)'s findings e....
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....has capitalized interest in its books of accounts of Rs. 38,92,473/- as per the provisions of proviso to sec.36(1)(iii) and claimed depreciation on this capitalization as per the provisions of the I.T. Act. The details of such capitalization has been given by the appellant vide its letter dated 16.12.2011 and the same has been reproduced by the A.O. on page no.29 & 30 of the assessment order. The A.O. had merely accepted the book version of the appellant and A.O. has also not made any addition in respect of this item in the computation of income. These facts clearly indicate that the appellant is not aggrieved by the assessment order on this issue and accordingly as per the provisions of sec.246 of Income-tax Act, 1961 the appellant cannot agitate this issue in appeal. In view of these facts, I am inclined to agree with the contentions of Ld. A.O, This ground of appeal is dismissed." 34. Ld. authorized representative first of all states that its act of capitalization is merely a book entry which is not final and the impugned deduction claim had to be adjudicated as per the provisions of the act as held by hon'ble apex court in case of Tuticorn Alkalies and Chemicals (1997) 141 CTR....
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....s. 1,33,39,000/- as partly confirmed in the lower appellate proceedings. The Revenue's fourth substantive ground also raises a corresponding plea seeking to revive the entire disallowance figure. Both the ld. representatives agree that facts in the impugned assessment year relevant to this issue are identical to that already decided in assessee's favour in preceding assessment year hereinabove. We follow the said reasoning herein as well and delete the entire disallowance. The assessee succeeds and Revenue fails in their respective grounds. Assessee appeal ITA 2617/Ahd/2012 is partly accepted. 38. We come to department appeal ITA 2921/Ahd/2012 raising four substantive grounds seeking to revive additions inter alia made on assessee's transaction with M/s PASL Windtech of Rs. 41.40 lacs, section 145A addition on valuation of closing stock of Rs. 2,31,36,464/-, addition on account of notional interest of Rs. 12,43,212/- and alleged excess payment on directors' remuneration. Ld. representatives invite our attention to assessee's appeal already dealing with all four grounds except no. 3 of notional interest. We appreciate this fair stand and reject these three substantive grounds. 39.....
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....CIT v/s. Arunkumar Gupta (2003) 78 TTJ 288 5.5 The assessing officer also observed that the appellant had not proved a business nexus of this advance and disallowed the notional interest on this advance. The facts available on record conclusively establish that the advance of Rs. 4,02 crores were given to sister concern namely M/s. PASL Wind Solution Pvt. Ltd. towards capital investment and against this advance shares were allotted in the month of February, 2011. In my considered view, making investment in sister concern cannot be termed as non-business activity. Reliance in this regard is made on S A Builders vs CIT 288 ITR 1 (S.C), wherein it was held that interest on business advance to sister concern cannot be disallowed u/s.36(1)(iii) of the I.T. Act. In view of above, I am not inclined to agree with this argument of Ld. A.O. 5.6 Perusal of records further reveals that the A.O. has not established nexus between interest bearing funds and interest free advances. It is held by Mumbai Tribunal in the case of Oceanic Investments Ltd. v/s. CIT (1997) 57 TTJ 549 that it is necessary to establish nexus between borrowed funds and the amount advanced, and in the absence of this fin....