TaxTMI 
TaxTMI 
2016 (4) TMI 1324
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....ear-wise. Relevant proceedings are u/s. 271(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....
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....l one. The assessee claimed this loss to be of Rs. 8,50,858/-. 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 ca....
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....n enhanced @ 421% and 133% from assessment year 2004-05 to the impugned assessment year without any qualitative improvement in payees' eligibility and their services rendered. He took into account all these factors to hold the 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 ....
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....ions of sec.40A(2) of the I.T. Act. It is seen that during the current assessment year the remuneration of Rs. 3.99 crores is paid to Shri K.H. Jhaveri. Annual remuneration for Shri K.H. Jhaveri was Rs. 1.44 crores for the A.Y.2004-05. This way in a 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 o....
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.... prays for restoration of the entire disallowance figure. 12. We have given our thoughtful consideration to rival contentions. There is no dispute that the Assessing Officer has compared the impugned remuneration with that paid in FY 2003-04. He gives annual 10% increase. 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 ....
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..... This way inclusion of these shares in the opening stock and closing stock will not make much difference in the 14A disallowance. In my considered view these investments will also qualify for disallowance as per the provisions of Rule 8D, as dividend income from these shares will 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 hes....
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....nd management fee in the alternative. The Assessing Officer observed that assessee's business included sale/purchase of shares. He inferred it to have carried on speculative business thereof. And sought to treat share profit hereinabove as business income. The assessee invited his attention towards the fact 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 ....
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....hose transactions by itself since it has no control over the same. The company had invested funds in PMS with the Fund Managers and paid Management Fees and they have effected the transactions where number of transactions are in no way under Company's control. The fact of our having invested funds in PMS itself proves that the shares were held as investment 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. I....
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.... proceedings. In the absence of cogent evidence this statement cannot be accepted. 3) The number of transactions during the year is 117 which cannot be said as an isolated or stray transaction. This indicate that the appellant was regularly undertaking these transactions to earn profit. 4) The volume of transactions are also large. The volume runs into crores of rupees. 6.5 In view of above, the action of 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 f....
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....ts assessee's arguments on this issue as under:- "3.3 After careful consideration of various evidences available on record I am not inclined to agree with the observations of Id. A.O. for the following reasons:- (a) It is seen that the main raw material consumed by the appellant is iron scrap. To be precise every Metric Ton of finished goods sold, 983.7 kgs of MS Scrap is consumed. The facts available on record indicates that the price 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 appell....
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....s expenditure and for want of such details A.O. could not examine the genuineness of these payments. Perusal of details filed by the appellant during assessment proceedings reveals that expenditure under the head carriage inward was paid to mainly to 9 persons. The appellant has furnished complete name and address of these persons alongwith their PA Nos and the details of payments. In my considered view these details are good enough to identify persons to whom carriage inward was paid. 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 fur....
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....ifiable cannot be a base for rejection of books of accounts. In view of above facts, I am inclined to agree with the contentions of Ld. A.R. Accordingly, addition of Rs. 4,73,74,171/- for low G.P. is deleted. This ground of appeal is allowed." 22. The Revenue strongly seeks to restore the entire sum of the impugned additions made after rejection of assessee's books. The assessee support CIT(A)'s order. It has inter alia come on record that assessee's raw material consumption cost of scrap items has seen 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 pe....
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....of unsold stock is necessary part of the process of determining trading results but it can in no sense be regarded as source of such profit. (4) It is clearly held in the case of CIT v/s. Ahmedabad New Cotton Mills reported at 4 STC 245 that when the opening and closing stock of business are both undervalued, if the method of alteration of both valuation is not adopted, it is perfectly plain that profits which is brought forward is not real one. In such cases, the real profits of a particular year cannot be ascertained by merely raising value 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....
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....pective stands against and in support of the impugned disallowance. There is no dispute that the assessee's P & L account page 17 schedule 13 reveals net interest positive income in view of interest income and interest expenditure reading figures of Rs. 1.97 crores and Rs. 1.67 crores respectively. We quote our discussion in corresponding adjudication in preceding assessment year hereinabove and hold that the impugned pro0poritonate disallowance is not sustainable in case of net positive interest income. The same stands deleted. We come to administrative expenditure 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 ....
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.... We wish to submit that though there was a clause (clause 5) in the agreement dated 26.12.2003 providing for refund of a minimum amount of Security Deposit during each financial year, subsequently as per the mutual understanding between the parties i.e. the appellant and PASL Windtech Pvt. Ltd. no interest on Security Deposit was to be charged and refund of Security Deposit was to be made by PASL Windtech Pvt. Ltd. as per mutual convenience upon and against vacating of the property. In view of the above no interest was charged on the Security Deposit. The above was conveyed to the Ld. A.O. vide our 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. ....
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....ccounts were not furnished by the assessee and under that guise making unjust addition of interest to the detriment of the assessee. As the Security Deposit of Rs. 2.30 crores in respect of property at Plot No. 37B was totally received back, question of our claiming interest on 'NIL' deposit does not arise. The law does not authorize taxing notional income. The addition being patently wrong, deserves to be deleted. The same be deleted now." 3.2 I have carefully considered the rival contentions. The facts available on record indicate that as per agreement dated 26.12.2003 the appellant was required to give refundable non-interest bearing security 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 shor....
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.... 26.4.2007 BRD 7800045 30,00,000 3. 23.8.2007 BRD 7800345 1,00,00,000 Total 2,30,00,000 Since the bulk of security deposit was refunded in the month of April, 200 / and the rest of the security deposit was refunded in the month of August, 2007. Accordingly, I hold that interest free security was not outstanding throughout the year during year under consideration. Since the entire security deposit of Rs. 2.3 crores was refunded to the appellant in the current previous year and as on 31.3.2008 i.e. at the close of the current previous year, the balance in the security account was zero, accordingly, 'the question of charging of interest on this security deposit for the entire year does not arise.' 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....
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.... Deposit. 8. PASPL agrees that it shall have no rights or interests over and above the rights and interests of AFCPL in the Scheduled Premises and that the rights of PASPL as a user of the Scheduled Premises shall ipso facto, without any further act being done by any person, terminate and cease absolutely on cancellation of this agreement. 9. PASPL shall not sub-let the Scheduled Premises to any person except with the express permission in writing from AFCPL allowing it to do so. 10. PASPL shall use the Scheduled Premises only for its business/industrial/commercial purposes and not for any other use or any illegal or unlawful activity. 11. PASPL shall not do any act or omission which leads to or is likely to lead to damage or deterioration or destruction of the Scheduled Premises." 31. Ld. authorized representative inter alia submits that the assessee has not 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 a....
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.... The assessee explained if it would have utilized buyers credit of Rs. 5,11,64,728/- out of its fixed deposit instead of the former option, this would result in interest on FD loss of Rs. 102, 68, 063 whereas its present arrangement caused gain of Rs. 01,09,71, 641. Its further case was that it had capitalized interest figure of Rs. 38,92,473/- as matter of abundant caution despite having no such requirement. The Assessing Officer observed in assessment order that the assessee had on the one hand capitalized interest in books of account as per section 36(1)(iii) proviso and claimed depreciation thereupon and on other hand it had claimed the very sum as revenue expenditure. He accordingly disallowed this interest figure. 33. The CIT(A) rejects assessee's corresponding ground as under:- "7.2 I have carefully considered the rival contentions. The facts available on record indicate that the appellant 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....
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....sides. There is no dispute that assessee's purchased deed forming pages 86 to 96 of the paper book does not assign separate values of the land and building situated in Vastrapur locality. The CIT(A) records that the assessee had demolished its constructed portion in question in Jan, 2010 relevant for the immediately succeeding assessment year. Ld. AR raises strong arguments against the impugned valuation of land and building to the tune of Rs. 5 crores and 50 lacs; respectively. Both the lower authorities discuss the location factor of the land and dilapidated state of the bungalow/building in question in arriving at the impugned value. There is no material placed on record dispelling the same. We find no reason to interfere with the lower appellate order in these peculiar facts and circumstances. This ground fails. 37. The assessee's last and final substantive ground challenges section 40A(2)(b) disallowance of Rs. 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 y....
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....erest payment. Perusal of the assessment order reveals that the A.O, has not challenged basic enabling conditions as laid down u/s.36(1)(iii) for the allowance of interest. Since the enabling conditions for allowance of interest u/s.36(1)(iii) are fulfilled, accordingly in my considered view disallowance of interest is unwarranted. 5.4 The only observation made by the A.O. is that the assessee has not charged interest on interest free advance of Rs. 4,02,08,100/-. However, the action of the A.O. is not tenable as non charging of interest on interest free advance cannot be a reason for disallowance of interest. It is well settled principle of law that non charging of interest on interest free advances given by the assessee cannot by itself, be sufficient ground for disallowing interest paid by the appellant on loans taken by it. Reliance in this regard is placed on following decisions: (i) Meenakshi Synthetic Pvt. Ltd. v/s. ACIT (2003) 84 ITD 56 (ii) ACIT 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 adva....
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....und was diverted as non interest bearing funds. 5.8 It is seen that appellant has got huge interest free funds of Rs. 142.86 crores (share capital of Rs. 79.99 crores and Reserve and Surplus of Rs. 134.86 Crores) at the beginning of the accounting year i.e. 1.4.2008. Apart from this, during the year under consideration, the appellant had made a profit more than Rs. 44 crores, which is also non interest bearing. The A.O. has mentioned that appellant has made interest free loans and advances of Rs. 4.02 crore to sisger concern. Thus, interest free advances made is much below the interest free funds available with the appellant in the form of share capital, Reserve and Surplus and the current year profit. It is held by Hon'ble Mumbai High Court in Reliance Utilities and Power Ltd. 313 ITR 340 that if funds are available, both interest free and interest bearing, then a pre-assumption arise that investments are made out of interest free funds generated or available with the assessee. If the interest free funds were sufficient to meet investment, no disallowance of interest is warranted. Respectfully following the ratio of Hon'ble Mumbai High Court decision in the case o....