TaxTMI 
TaxTMI 
2025 (3) TMI 294
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....)"], which in turn arise out of separate assessment orders passed by the assessing officer under sections 153A(1)(b)/ 143(3) of the Income Tax Act 1961 ( hereinafter referred to as the 'Act'). 2. Since, the issues involved in all the appeals of Revenue and Assessee, and cross objections of the assessee, are common and identical; therefore, these appeals and cross objections, have been heard together and are being disposed of by this consolidated order. 3. At the outset Learned Counsel for the assessee, informs the Bench that assessee does not wish to press appeal in ITA No.155/RJT/2016, for assessment year 2012-13, therefore we dismiss this appeal of the assessee, as not pressed. 4. Learned Counsel for the assessee, also informs the Bench that assessee, does not wish to press cross objection No. 177/Ahd/2016, for assessment year 2011- 12, therefore, we dismiss the cross objection of the assessee, as not pressed. 5. Now we have to adjudicate only two revenue`s appeals in IT(SS) No.135/Ahd/2016, for assessment year 2011-12 and in IT(SS) No. 136/Ahd/2016, for assessment year 2012-13, and assessee`s cross objection No.178/Ahd/2016, for assessment year 2012-13. 6. Althoug....
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.... shall adjudicate them together, which are reproduced below for ready reference, as follows: (1) Ground No.1 :The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 68,13,140/-, being disallowance of interest u/s 36(1)(iii) of the Act, though the assessee had made interest free advance out of interest bearing funds.[This ground No.1 is in Revenue's appeal in ITA No.135/Ahd/2016 for A.Y. 2011-12, This ground No.1 is in ITA No. 136/Ahd/2016 of Revenue's appeal for A.Y.2012-13 is at Rs. 2,18,04,979/-] The assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012-13, has pressed the following ground of appeal: "The learned CIT(A) has erred in law and on facts in confirming the disallowance made by the assessing officer of Rs. 44,40,000/- out of the interest claim" 11. Brief facts of the issue in dispute are stated as under. During the assessment proceedings, the assessing officer called for to ascertain the quantum of secured loan used for business purpose of the concern. On verification of Accounts, it was noticed by the assessing officer that the assessee- firm has taken loan from banks on hypothecation of stock -in- trad....
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....me time, the assessee has given loans and advances against which no interest have been charged. The details of the same are given by the assessing officer in the assessment order in table format, in para No.7.The assessing officer noticed that assessee has not given any specific reply on the points raised above. The assessee has simply stated that the interest free advances have been made out of the interest free capital and surplus funds. However, looking to the capital and reserved surplus of the assessee and the investment in fixed assets, it was found by the assessing officer that no interest free funds were available with the assessee for giving interest free advances to the group concerns. Therefore, as per assessing officer, disallowance u/s 36(1)(iii) of the I.T. Act, 1961, is warranted. In respect of loans and advance given to M/s Maharaja Salt Works Co. Pvt. Ltd. it was submitted by the assessee that the assessee -firm has given advance of Rs. 2,05,00,000/- for the purchase of salt to the company. However, the said party failed to supply salt and the assessee has filed civil suit in the Civil Court, Gandhidham. As this is business advance against the purchase of goods, it....
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....able with the assessee, and therefore, following his decision in AY 2009-10, the ld CIT(A) held that no disallowance u/s. 36(1)(iii) needs to be upheld, therefore, the disallowance of Rs. 68,13,104/- was deleted by the ld. CIT(A). 16. Aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us. 17. Shri Sanjay Punglia, Ld. CIT(DR), for the Revenue, has vehemently argued that assessee, during the course of assessment proceedings, has not established, the availability of interest free funds, and assessee has not proved the commercial expediency. The learned DR for the revenue, relied on various decisions listed by the assessing officer, in his assessment order and submitted that assessee does not have interest free funds and never established the commercial expediency. The learned DR thus reiterated that the assessee has not discharged the onus of proving that interest free advances have gone out for interest free funds of the assessee. The learned DR for the revenue, relied on the following decisions: (i) Decision of Hon'ble Allahabad High Court in the case of CIT v. Sahu Enterprise (P.) Ltd. reported in (2013) 352 ITR 8 (Allahabad). (ii). De....
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.... the above chart, the assessee has used the sundry creditors, as a source of funds, which is not acceptable because the assessee purchases the goods from the sundry creditors, which forms part of the stock of the assessee, hance, no interest free funds available from sundry creditors, therefore, these sundry creditors should not be part of the interest free funds. Therefore, ld. DR contended that since the assessee has mislead the figures, therefore, addition made by the assessing officer may be sustained. 20. On the other hand, Learned Counsel for the assessee, Shri K. C. Thacker, vehemently argued that assessee, has huge funds of Rs. 28,34,76,940/-, available, as on 31-03-2011, on which no interest is payable, as against interest-free advances given to parties of Rs. 4,35,00,000/-. This included Rs. 2,15,00,000/- given to Maharaja Salt Works, as advance for purchase of salt. The said party failed to supply salt. Therefore, a civil suit is filed against Maharaja Salt Works for recovery. Thus, the advance was given for commercial consideration for the purpose of business. There was also no instance of relationship attracting section 40A(2)(b) of the Act. The assessee also furnis....
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....uring the year. Thus, it is clear that the capital borrowed for the purpose of business has been apparently used for the purpose of business. The assessing officer has disregarded huge interest-free funds of Rs. 28.34 Crores, during the year. The assessing officer has relied upon various decisions which are not applicable to the facts of the assessee`s case. The assessing officer has admittedly not established nexus between capital borrowed and interest-free advances, despite of having lot of information and documents before him, and has ignored the substantial interest-free funds available to the assessee. These aspects have been considered in several judicial pronouncements. The ld. Counsel for the assessee, relied on the following binding judgments of the Jurisdictional High Court of Gujarat and others, which are mentioned below: (i). ACIT. v. Gujarat Narmada Valley Fertilizers Co. Ltd. (20 14)222 Taxman 28 (Mag)/42 taxmann.com 579 (Guj.)(HC) (ii). CIT. v. Amod Stamping (P.) Ltd. (2014) 223 Taxman 256 (Guj.)(HC) (iii). CIT v. Rajendra Brothers (2014)52 taxmann.com 334/(2015) 228 Taxman 348(Mag.) (Guj.)(HC) (iv). CIT v. Shree Rama Multi Tech Lt....
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....sis), as follows: "Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (i) ......; (ia)........; (ib).......- (ii).......; (iia) [Ommited by the Finance Act,1999, w.e.f. 1-4-2000;] (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession, Provided...... Explanation.-........," 24.The above provision mandates that payment of interest on loans borrowed for business purpose shall be allowed. Therefore, the assessing officer is obliged to allow the payment of interest on loans taken for business purpose. If, however, the Assessing Officer seeks to make disallowance of interest by invoking the provision of section 36 (1) (iii) of the Act, it is for the assessing officer to establish that interest is paid on the loans, not used for business or that it is diverted for non-business purpose, provided the assessee has submitted all the details before the assessing officer for this purpose, as and when ca....
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.... about the income of the assessee for the year under consideration. For that we rely on the Judgment of Hon'ble Supreme Court in case of Sreelekha Bannerjee (491 ITR 122), wherein it was held that " ..... before the department rejects such evidence, it must either show an inherent weakness in the explanation or rebut it by putting to the assessee some information or evidence, which it has in possession ..." 25. We find that instead, the assessing officer made unverified and wrong statement that "no interest-free funds were available with the assessee" and irrelevant statement that "the assessee has also not furnished any details or evidence to establish that impugned advances were given for business expediency". The assessing officer has failed to realize that the obligation to establish business expediency would arise on the part of the assessee only when the assessing officer has discharged his obligation to show ( provided the assessee has filed all documents and evidences, as required by the assessing officer, to explain the interest free funds) that any part of interest-bearing loans have been diverted for non-business purposes. In this regard, reliance is placed upon t....
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....d parties. It would be noticed that as a matter of fact, considering the amount due to these two parties in trading accounts, interest payable to them worked out to more Rs. 62,46,112/-, than the interest disallowed by the assessing officer. Therefore, even on facts, the disallowance of Rs. 40,49,780/- is the result of lack of inquiry by the assessing officer. Further, scanning of the entire ledger and picking up and choosing only such accounts (of interest-free advances) by the Spl. Auditor, again failed him to notice the accounts of other sister concerns providing huge interest-free funds to assessee, like: (i) Friends & Friends Shipping Pvt. Ltd., (ii) Friends Salt Works and Allied Industries and (iii) Kandla Agro & Chemicals Pvt. Ltd. Therefore, ld Counsel argued that assessee have sufficient interest-free funds that the assessee has used for interest-free advances. Even before the CIT (A), assessee mentioned that assessee has huge interest free funds received from sister concerns. The assessee submitted ledger accounts of these three sister concerns, Friends & Friends Shipping Pvt. Ltd., Friends Salt Works and Allied Industries and Kandla Agro ....
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....idable. The assessing officer ought not to have questioned the commercial prudence of the transaction entered into by the assessee, businessman, when there was nothing on record to show that the transaction was not genuine. It is a settled principle of law that business or commercial expediency has to be judged from the perspective of the businessman and not of the Revenue, since it is the businessman who is being benefited from the services rendered and also it is he who knows to what extent the benefit ensures to him. Reliance in this regard may be placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Dhanrajgiri Raja Narasingirji, reported in 91 ITR 544 (SC), wherein it was held that "it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur the expenditure. 29. We find that assessee pleaded before the assessing that advances are out of interest-free funds available with the assessee and filed copy of accounts of parties and bank statements and subsequently also pleaded business expediency. The ld CIT(A) noted that all the business concerns of the group are assessed at the maximum....
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.... of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits......" 30. During the course of hearing, based on the audited balance-sheets for respective years, the ld. Counsel has also submitted the following position of interest-free funds from year to year to buttress the argument that the assessing, in the face of submissions made, and easily verifiable from the records available with him and produced before him, clearly erred in not appreciating the argument canvassed be....
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....ecisions cited by the assessing officer. In fact, short term advances to meet with urgent requirements of sister concerns with whom regular business is also transacted on daily basis, is squarely covered under the phrase "for the purpose of business" occurring in section 36(1)(iii) as well as 37(i) of the Act. Thus, there is no tax-avoidance angle also, there can be no justification for assessing officer to have made a disallowance when firstly advance is made out of interest free funds and secondly the interest-bearing loans are deployed for the purposes for which the funds are borrowed and also there is manifest business expediency, and assessing officer has not demonstrated the personal or non-business or purely charitable use by the recipient. For that reliance is placed on the judgement of the jurisdictional High Court of Gujarat in the case of RL Kalthia Engineering & Automobiles (P.) Ltd,[2013] 33 taxmann.com 14 (Gujarat), wherein it was held as follows: "6. It is well established proposition that when the Revenue fails to establish any nexus between the borrowed funds and the funds diverted/lent, any denial of allowances of interest under Section 36[1](iii) is not ....
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....ss point of view and have to be respected by the authorities no matter that it may appear, latter, that the expenditure incurred was unnecessary or avoidable. The assessing officer ought not to have questioned the commercial prudence of the transaction entered into by the assessee, businessman, when there was nothing on record to show that the transaction was not genuine. It is a settled principle of law that business or commercial expediency has to be judged from the perspective of the businessman and not of the Revenue, since it is the businessman who is being benefited from the services rendered and also it is he who knows to what extent the benefit ensures to him. Based on these facts and circumstances, we allow the ground pressed by the assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012-13. 34. In the result, summarized ground No.1 (ground No.1 in ITA No.135/Ahd/2016 for A.Y. 2011-12, and ground No.1 is in ITA No. 136/Ahd/2016 for A.Y.2012-13 at Rs. 2,18,04,979/-), of the revenue, is dismissed and ground pressed by the assessee, in his cross objection No.178/Ahd/2016, for assessment year 2012-13, is allowed. 35. The summaries and concise ground No....
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....ssee and observed that the assessee -firm has valued closing stock of salt weighing 210978.767 MT @ Rs. 383.54/- per MT, the most of the purchases of salt were made in the Month of February & March-2011 @ Rs. 555/- PMT. This clearly indicate that the assessee has undervaluation of closing stock of salt. The under valuation is Rs. 171.46/-PMT (Rs. 555- 383.54). The under valuation of closing stock, therefore, worked out of Rs. 3,61,74,419/- (Rs. 171.46 X 210978.767). Therefore, the amounting to Rs. 3,61,74,419/- was disallowed by the assessing officer and added to the total income of the assessee. Similarly, the assessing officer has also rejected the explanation of the assessee about the valuation of stock of Rapeseeds DOC, by reiterating the contents of the show-cause notice and insisting that while Rapeseeds DOC valuation should have been at average purchase rate, therefore, assessing officer worked out under valuation of Rapeseeds DOC at Rs. 84, 51,120/-. Therefore, the assessing officer has rejected the explanation of the assessee about the valuation of stock by reiterating the contents of the show-cause notice and insisting that while Rapeseeds DOC valuation should have been a....
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....on value, whichever is lower", that is why, assessing officer has rejected the explanation of the assessee about the valuation of stock in respect of Rapeseeds DOC and salt. The assessing officer rightly held that valuation of Rapeseeds DOC should have been at average purchase rate, and the salt valuation should have been at the rates of purchases made during the month of February and March. Therefore, ld DR contended that valuation made by the assessing officer, in respect of Rapeseeds DOC and salt should be upheld. 41. On the other hand, learned Counsel for the assessee submitted that the valuation of closing stock in respect of Rapeseeds DOC and salt, made by the assessing officer, is itself wrong, because assessing officer does not give impact to the opening stock of the assessee and hence the assessing officer, has worked one side only, that is, to value the closing stock, however, does not give the effect of his evolution in the next year in the opening stock. Moreover, the income tax rates for the current year under consideration and in the subsequent year, are same, therefore, there is no escapement of income, by the assessee, that is, there is no loss to the revenue. Th....
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....n average cost of opening stock and purchase made during the year. It was further submitted by the assessee that as such, but for the mistake by the accountant, the correct rate as per the method consistently followed is lower at Rs. 363 per,mt. and not Rs. 383 per,mt. as adopted by the assessee. However, assessing officer has rejected the explanation of the assessee about the valuation of stock by reiterating the contents of the show-cause notice and insisting that while Rapeseeds DOC valuation should have been at average purchase rate, the salt valuation should have been at the rates of purchases made during the month of February and March, and thus makes the respective addition of Rs. 84,51,120/- and Rs. 3,61,74,419/-, holding that there is under - valuation of closing stock. 43. We find that during the appellate proceedings, the assessee pointed out that the valuation of Rapeseeds DOC adopted by the assessing officer is representing the market value and the assessee on the other hand, is valuing the closing stock at "cost or market price", whichever is lower. The ld CIT(A) observed that neither Special Auditor has made any adverse comment nor has the assessing officer made a....
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....ssing officer or to ld CIT(A), and the average cost is arrived at on the basis of last of the purchases as comprised in the available closing stock. The audit note for the year under reference reads as under: "Method of valuation of stock of salt as followed in Assessment Year 2010-11 and 2012-13 is based on the average cost of the quantity of the last purchases of the year equaling the available quantity of closing stock i.e. on First in First out basis. However, in the year under consideration, due to bona fide calculation mistake as committed by the accountant stock were valued @Rs.383.54 PMT instead of Rs. 407.43 PMT as worked out under FIFO Method. It may be submitted that there is no revenue implication as tax rate of both the years are same." 47.The ld CIT(A) observed the valuation done by the assessing officer and after perusal of the statements of valuation of closing stock, substantiating the valuation adopted, and the note to the statement, the ld CIT(A) was of the view that obviously there is some adjustment to the valuation of closing stock adopted by the assessee, which is necessary, notwithstanding the fact that the assessing officer himself has not given....
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....es. However, no satisfactory written explanation and evidences were provided by the assessee. Therefore, assessing officer, issued a show-cause notice stating that why the handling/spillage/wastage loss of 18,092 M.T. may not be disallowed being non- genuine. 51. In response, to the notice of the assessing officer, the assessee submitted its reply before the assessing officer with documentary evidences, which is reproduced below: "The Assessee- firm submits that they are engaged in the business of trading of goods and commodity. During the year under consideration, they had opening stock and purchases, aggregate quantity of which came to 8,34,887.338 Mt. After considering the sales and closing stock aggregating to 8,16,795.595 Mt; the shortage came to 18,091.743 Mt. Thus, on the turnover of the total quantity of 8,34,887.338 Mt. the shortage of 18,091.743 Mt. works out to 2.17% only which could not be considered high considering the particular facts and circumstances of this line of business. It may also be submitted that the shortages cannot be expected to be at a fixed level and are necessarily variable on account of various factors including the natural forces like h....
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.... Salt trading of 18,092 MT. Further, the reply of the assessee in this regard is general nature. The assessee has claimed 18,092 MT of handling/Spillage/wastage loss. The value of such goods at closing rate comes to Rs. 750/- per MT; therefore, the claim of handling/Spillage/wastage loss work out to Rs. 1,35,69,000/-, ( 18,092 x Rs. 750), hence, the same was disallowed by the assessing officer and added to the total income of the assessee. 53. Aggrieved, by the addition made by the assessing officer, the assessee carried the matter in appeal before the learned CIT(A), who has deleted the addition made by the assessing officer. The ld CIT(A) observed that the stock of salt is kept in open and obviously there are spillages and wastages on account of loading, unloading wind, washing, rain and even inaccuracy in quantification of purchase and sale, a reasonable claim of wastage/spillage is bound to be there and cannot be disputed without any adverse material brought on record. Hence, ld. CIT(A) deleted the addition. 54. Learned DR for the revenue argued that during the year, the assessee has claimed handling/spillage/wastage loss of 18,092 M.T and when the assessee was asked to p....
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....alt is kept in heaps in open areas and the spillage/wastage is a necessary aspect of assessee's business. Moreover, the quantity in heap is arrived at only on the basis of physical measurement and experienced estimate, and it is impossible to physically weigh the quantity, the stock of salt, either at the time of purchase or at the time of sale or at the time of quantifying the same at the year end. It has been categorically submitted further by the assessee before the assessing officer that the position of stock in heap form and the watering/washing of the salt in such heap form was shown to the team of Special Auditors twice and that thereafter query was raised by the Special Auditors. The loss as claimed is genuine, is forming part of the audited accounts, is arrived at on the basis quantities of purchase/sale and being genuine, needs to be allowed. The assessing officer however, observing that there is no documentary evidence or stock details in respect of such loss, the same cannot be allowed. Thus, the assessing officer made the addition of Rs. 1,35,69,000/-[ @Rs.750 per mt.x18,092 MT). 57.Before, the ld. CIT(A), the assessee reiterated the submissions made before the ....