TMI Blog2013 (5) TMI 634X X X X Extracts X X X X X X X X Extracts X X X X ..... d back, the price paid by the assessee is Rs.63100/- per MT to the related parties whereas price paid to others is also very close i.e. Rs.62997/- to Rs.63069/- per MT and hence, for such a small difference in price, no addition is justified because such small difference can be because of various reasons such as better quality, timely supply, extra credit period etc. In addition to this, there was purchase of 58.495 MT from related parties in the month of Jan @ Rs.63311/- MT. After deducting R.500/- per MT being rate difference received back by the assessee, the effective price comes to Rs.62811/- per MT. The purchase from others during this period was at Rs.62488/- and hence, price difference is Rs.323/- per MT. For this purchase of 58.495 MT @ Rs.323/- per MT, amount of excess price paid works out to Rs.18,894/-. Thus confirm this disallowance to this extent and the balance disallowance is deleted. This ground is partly allowed. Bad debts - Disallowance of short provision of sales tax debited to P & L A/c - whether the said amount ought to have been allowed u/s 43B on payment basis - held that:- The case of the assessee is this that at the time of closing its books of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting the balance disallowance. This ground of the revenue is partly disallowed. Disallowance of payments of commission - CIT(A) deleted the addition - Held that:- As enough evidence has been furnished in the form of confirmation/certificate of the concerned parties regarding rendering of services by these two persons and there has not been any dispute by the revenue regarding benefits derived by the assessee company and legitimate business needs of the assessee company & CIT(A) has discussed and distinguished all the judgements relied upon by the A.O. and have also seen that none of the objections raised by the A.O. is valid and, therefore no interference is called for in the order of CIT(A) on this issue. This ground of the revenue is rejected. Disallowance of payments of rate difference - CIT(A) deleted the addition - Held that:- Even if the assessee has not made corresponding purchases then also, the assessee has to fulfill its contract regarding sale and had to bear the loss. Many a times, a businessman does not cover the sales by affecting purchases in anticipation of fall in prices but if the price goes up as against anticipation of falling in price, the assessee is ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.63,600/- whereas during these months and in the intervening months a large quantity was purchased from the other parties all at the rate of Rs.62997 to 63069/-. Similarly, in the month of January 58.495 tons was purchased from specified persons at the rate of Rs.63,311/- whereas 236.885 ton was purchased from other parties at the rate of Rs.62,488/-. It is seen that during the entire year from June to March the highest rate at which the purchases were made from other parties was Rs.63,0697- and the lowest rate was Rs.61,9097- whereas from the specified persons the rate was much higher from July to January. There was no purchase in February and March. Hence, it is clear that during these months the appellant has paid excess price to the sister concerns than the price which the sister concerns has charged from other parties. Hence this case is clear cut covered by the provisions of section 40A(2)(b). The appellant has paid excess price to the sister concerns than the price which the sister concern has charged from other parties. Hence the disallowance of Rs.6,01,3407- is confirmed." 2.1.2 It was submitted by the Ld. A.R. that the relevant details are available on pages 119-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - per MT to the related parties whereas price paid to others is also very close i.e. Rs.62997/- to Rs.63069/- per MT and hence, in our considered opinion, for such a small difference in price, no addition is justified because such small difference can be because of various reasons such as better quality, timely supply, extra credit period etc. Because of the smallness of the amount, we do not consider it appropriate to go into these details. In addition to this, there was purchase of 58.495 MT from related parties in the month of Jan @ Rs.63311/- MT. After deducting R.500/- per MT being rate difference received back by the assessee, the effective price comes to Rs.62811/- per MT. The purchase from others during this period was at Rs.62488/- and hence, price difference is Rs.323/- per MT. For this purchase of 58.495 MT @ Rs.323/- per MT, amount of excess price paid works out to Rs.18,894/-. We confirm this disallowance to this extent and the balance disallowance is deleted. This ground is partly allowed. 2.2 Ground No.2 is as under:- "2 The learned CIT(A) has erred in law and on facts in confirming the action of AO in disallowing a sum of Rs. 1,84,647/- being short provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of account for the assessment year 2000-01, the assessee has worked out sales tax refunds at Rs.80.99 lacs and included the same in the income on mercantile basis and the tax was paid on the same in that year. It was also submitted by the assessee before Ld. CIT(A) that the assessment of sales tax for the assessment year 2000-01 was finalized during the current year and the Sales Tax Department refunded only Rs.79.15 lacs and therefore, the same is written off in the present year. In our considered opinion, this claim of the assessee is akin to claim of write off of bad debts and therefore, the same is allowable in the year of write off and this is not the case of the revenue that there is no actual write off in the present year. As per the copy of the ledger account appearing on page 441 of the paper book, actual write off is effected in the books of account on 31.03.2004 and the closing balance of sales tax refund receivable account is 'nil' as on 31.03.2004. Hence, in our considered opinion, this disallowance is not justified and, therefore, we delete the same. This ground of the assessee is allowed. 2.3 Ground No.3 is as under:- "3 The learned CIT(A) has erred in law a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) is not applicable in the facts of the present case because the assessee is showing extra credit balance in the balance sheet and hence, this addition should be deleted. Ld. D.R. supported the orders of authorities below. 2.4.4 We have considered the rival submissions and perused the material on record. We find that regarding these differences, no explanation was furnished by the assessee before the A.O. as noted by him on page 11 of the assessment order. It is noted by Ld. CIT(A) that assessee has filed reconciliation statement during appellate proceedings and as per the assessee, the difference arisen out of kasar and discount not accounted for by either of the parties. In our considered opinion, in the interest of justice, this matter should go back to the file of the A.O. for a fresh decision after examining reconciliation statement submitted by the assessee before ld. CIT(A). Hence, we set aside the order of Ld. CIT(A) on this issue and restore the matter back to the file of the A.O. for afresh decision. The assessee should furnish reconciliation statement before the A.O. along with supporting evidences and thereafter, the A.O. should pass necessary order as per law after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eported in 288 ITR 01, is not applicable in the present case because there is no commercial expediency in the present case. He also submitt4ed that assessee could not establish the nexus of interest free funds available with the assessee and interest free loan provided by the assessee to the director and hence, order of Ld. CIT(A) should be reversed and that of the A.O. should be restored. He also placed reliance on the judgement of Hon'ble Punjab Haryana High Court rendered in the case of Abhishek Industries as reported in 286 ITR 01. As against this, Ld. A.R. supported the order of Ld. CIT(A). 3.1.3 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that regarding commercial expediency it was submitted that Director Shri Fenil B Shah has floated the assessee company and the company has taken loan of Rs.4 crores as CC limit and Rs.3 crores as bank guarantee limit from Rajkot Nagarik Sahkari Bank Ltd. and for this purpose, Shri Fenil B Shah placed personal FD for Rs.2.3 crores and funds of Rs.11.74 lacs as collateral security and in addition to this, he has given personal guarantee to the bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/-, processing charges Rs.40,100/- credit card chares Rs.3,440/- and other interest of Rs.1,94,263/-. We also find that as per the assessment order, the A.O. is doubting about allowability of interest payment on unsecured loans and regarding bank interest and other expenses such as bank charges, processing fee charges and credit card charges are not at all connected with the interest payment on borrowed funds and, therefore, not disallowable on account of interest free advances to the director of the company. Regarding the amount of interest paid on unsecured loan, we find that the assessee has incurred an amount of Rs.63.24 lacs on account of interest on unsecured loans but the assessee had earned interest income of Rs.61,37,022/- as per the details available on pages 165-166 of the paper book. When both are netted and after some other netting, the net debit of Rs.1,94,263/- is debited in Schedule 'O'. The amount disallowed by the A.O. shows that the disallowance is on account of interest paid on unsecured loans and not on account of bank interest. It means, the A.O. has accepted that bank interest paid was for those funds which were used by the assessee for business purposes. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness. The AO stated that it appears that these two persons were doing business but for the Income-tax purposes they were maintaining three sets of accounts one for the company and two as individual concerns. The AO further stated that even after being asked the assessee failed to file proof of services rendered. He therefore relied on the decision of Hon'ble Supreme Court in the case of Laxmirattan Cotton Mills [73 ITR 634] and in the case of Lachminarayan Madanalal [86 ITR 439] and disallowed the commission as not wholly and exclusively for the purpose of business." 3.2.2 Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) who has deleted this disallowance and now revenue is in appeal before us. 3.2.3 Ld. D.R. supported the assessment order. He also submitted that the relevant agreement for selling agency is available on pages 217-221 of the paper book and from the same, it can be seen that there is no signature of any witness on this agreement and, therefore, this agreement is not relevant. Regarding this submissions that the commission payment was allowed in earlier years, it was submitted that the principle of res- judicata is not applicable in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of business and hence, no disallowance out of commission expenditure should be made and in this regard reliance was also placed on the following judicial pronouncements:- i) 86 ITR 11 Aluminium Corporations of India Ltd., vs CIT ii) 72 ITR 612 J K Woodwool Manufacturers Vs CIT iii) Swastik Textile Co. Pvt. Ltd. 150 ITR 155 (Guj.) iv) Voltamp Transformers Pvt. Ltd. 129 ITR 105 (Guj.) 3.2.5 He also submitted that the same commission had been paid in last 4-5 yeas and was accepted by the department as such and in fact for Assessment year 2001-02 the assessment was completed u/s 143(3) of the Income tax Act, 1961. He submitted that a copy of this assessment order is available on pages 423-426 of the paper book. One more submission was made that alternatively, if disallowance is confirmed then this income should be excluded from the hands of both the persons who have been assessed for this commission income. 3.2.6 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgements cited by both the sides. We find that this issue has been decided by Ld. CIT(A) as per para 6.3 of his order and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 439] relied upon by the AO are also different. In that case the selling agency firm had four major partners' three of whom were wives of the partners of the assessee firm and the fourth a major son of one of them. In that case the ITAT had found that on the day the selling agency agreement was executed i.e. 26.3.62 the selling agency firm had not even come into existence because it had come into existence only later on from 13.4.62. In that case the ladies had no prior business experience and the only male adult was situated at a place quite distant from the place where the selling agency business was carried on. In view of these reasons the appellant has argued that the reliance by the AO on these two cases is not correct. The appellant has on the other hand relied on the decision of Supreme Court in the case of Aluminium Corporation of India (supra) to say that the expenditure must be for commercial expediency and the reasonableness of the expenditure has to be from the view point of businessman and not that of revenue. In this regard the appellant has also relied on the decision of Supreme Court in the case of J.K. Woolen Manufacturers (supra). It is also seen that the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been followed by the A.O. Ld. CIT(A) has examined the assessment order on this issue in great detail. We find that the main objection of the A.O. was this that the assessee has not brought on record the evidence regarding services actually rendered by these two persons. In this regard, we find that a clear finding is given by Ld. CIT(A) in above para of his order that the assessee has brought on record the confirmation of various parties in which they have clearly stated that they were having regular business dealings with the assessee company and its dealing was handled by Shri Fenil B Shah who was commission agent of the assessee company. Regarding commission paid to Shri Tarachand of Jayco Chemicals also, confirmation certificates of various parties are brought on record in which it has been certified that services were rendered by these persons. Regarding various judgements followed by the A.O. which are also cited before us by Ld. D.R., we find that these judgements are clearly distinguished by Ld. CIT(A) in his order and Ld. D.R. could not point out any specific mistake in the order of Ld. CIT(A) on this aspect i.e. regarding distinguishing of these judgements. Regardin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue regarding benefits derived by the assessee company and legitimate business needs of the assessee company and hence, this judgement of Hon'ble Apex Court does not render any help to the revenue in the present case. 3.2.8 In the light of above discussion, we find that Ld. CIT(A) has discussed and distinguished all the judgements relied upon by the A.O. and we have also seen that none of the objections raised by the A.O. is valid and, therefore, in our considered opinion, no interference is called for in the order of Ld. CIT(A) on this issue. This ground of the revenue is rejected. 3.3 Ground No.3 is as under:- "On the facts and circumstances of the case, the learned CIT(A) entered in deleting the addition of Rs.15,00,000/- made on account of disallowance of payments of rate difference." 3.3.1 Brief facts regarding this issue till the assessment stage are noted by Ld. CIT(A) in para 7.1 of his order which is reproduced below:- "7.1 This is regarding disallowance of payment of rate difference amounting to Rs.15 lacs to Shri Trading Co. and Parshwanath Corporation. In the assessment order the AO has stated that during the year under consideration the assessee has paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant debit notes raised by these two parties are available on page 261-262 and 267-268. He also submitted that although the payment to these two persons were booked as rate difference expenses but in fact it is in the nature of note for liquidated damages paid to these parties for breach of contract regarding price of material and these are negotiated damages and hence allowable as revenue expenditure. 3.3.4 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgements cited by the Ld. A.R. We find that this issue was decided by Ld. CIT(A) as per para 7.3 of his order which is reproduced below for the sake of ready reference:- "7.3 I have considered the submission made by the appellant and observation of the AO. The fact that the agreements were made with the two parties for supply of goods is evidenced by written agreements and is not disputed by the AO. The contention of the AO is that the appellant would have made corresponding purchase agreements and so in the absence of failure of that party to supply the material it should have charged the rate difference from that party The appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties, but the A.O. has not doubted regarding sale of material to these two parties and failure of assessee to fulfill the sale contract and in the absence of this, the disallowance made by the A.O. is not sustainable. We, therefore, decline to interfere in the order of Ld. CIT(A) on this issue also. 3.4 In the result, this appeal of the revenue is partly allowed. 4. Now, we take up the assessee's appeal for the assessment year 2005-06 i.e. I.T.A.No. 1791/Ahd/2008. 4.1 Ground No.1 is as under:- "1 The learned CIT(A) has erred in law and on facts in confirming the action of AO in disallowing a sum of Rs.49,742/- on account of Purchases from specified persons u/s 40A(2)(b) of the Act. (The A.O. disallowed Rs. 1,16,496/- on account of purchases from and Rs. 49,742/- on account of sales to specified persons aggregating to Rs. 1,66,239/-. However, the figures were mistakenly interchanged by The A.O. Actually, Rs. 49,742/- is on account of purchases and Rs. 1,16,496/- is on account of sales.) 4.1.1 On this issue, both the sides agreed that this issue is identical to ground No.1 of the assessee's appeal in assessment year 2004-05 and the same can be decided on similar lines. We f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year or the direction may be given to the A.O. to exclude this income in assessment year 2007-08 when the same is offered. Ld. D.R. supported the orders of authorities below. 4.3.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. W e find that the assessee has made a claim of bad debt of Rs.9,85,378/- in respect of insurance claim not received for the financial year 2002-03 Rs.5,97,030/- and Rs.3,88,348/- for financial year 2003-04; total Rs.9,85,378/-. The A.O. has stated that these insurance claims were pending also on 31.03.2005 and therefore, bad debt cannot be allowed. We also find that this amount was neither considered as income in any earlier year because by way of raising insurance claim, the expenditure is not claimed as expenditure and it is shown as insurance claim receivable and it is not a case of any income shown in the P L account on account of insurance claim. Moreover, the assessee has already received/offered this amount as income in assessment year 2007-08 as has been argued by Ld. A.R. but no evidence has been brought on record before us in support of this contention. We, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year are the same as in assessment year 2004-05. While deciding this issue in assessment year 2004-05, we have held that to the extent of available amount of interest free funds, no disallowance can be made out of interest on the basis of interest free advances given by the assessee and even if some disallowance is to be made, the same should not exceed the actual interest debited by the assessee in the P L account. In that year, the disallowance on the basis of available own funds or interest fee funds as compared to interest free advances given by the assessee was more than the actual amount of interest debited by the assessee in the P L account and, therefore, we confirmed this disallowance in that year to the extent of actual interest amount debited by the assessee in the P L account in respect of unsecured loans in that year. Now, we examine the acts of the present year. In the present year, the interest free advances given by the assessee were Rs.303.34 lacs to Shri Fenil B Shah, the Director of the assessee company. Now, we examine the availability of own funds and other interest free funds with the assessee. As per the balance sheet of the assessee company available o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance made by the AO is partly confirmed as above and this ground of appeal is partly allowed." 5.2.3 From the above para of the order of Ld. CIT(A), we find that out of total disallowance of Rs.3,11,160/- made by the A.O., Ld. CIT(A) has confirmed the disallowance of Rs.1,55,580/- in respect of the expenditure incurred by Smt. Janki and has also confirmed disallowance of Rs.57,862/- in respect of 50% expenditure incurred by Shri Fenil B Shah on account of foreign exchange but deleted the balance disallowance. Te A.O. has made disallowance in respect of expenses incurred by Shri Fenil B Shah for his visit to Singapore and Auckland on this basis that the assessee does not have any business connection with both these paces. Ld. CIT(A) has not given any finding about the business purpose of the assessee company for the visit of Shri Fenil B Shah to these two places. Hence, in our considered opinion, Ld. CIT(A) was not justified in deleting this part disallowance on this issue and we reverse the order of L. CIT(A) and restore that of the A.O. On this issue this ground of the revenue is allowed. 5.2.4 In the result, the appeal of the revenue is partly allowed. 6. Now, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 2005-06, the addition has been confirmed in respect of bad debts of Rs.9,85,378/- but this amount is already declared by the assessee as income in assessment year 2007-08 and, therefore, in our considered opinion, this was a debatable issue as to whether bad debt can be allowed in the present year as bad debt or as business loss and hence, penalty is not justified for this disallowance also. The 2nd disallowance confirmed in this year is in respect of foreign travel expenses and for the same reasons as given by us for assessment year 2004-05, penalty is not justified for this disallowance in assessment year 2005-06 also. Hence, it is seen that penalty in the present case in both the years is not justified even in respect of those additions which are confirmed by us because of the facts of the present case and hence, we decline to interfere in the order of Ld. CIT(A) in both these years as per which he has deleted the entire penalty in both these years. 6.1.4 In the result, both these appeals of the revenue in penalty proceedings are dismissed. 7. In the combined result, cross appeals of the assessee and the revenue in quantum proceedings for assessment year 2004-05 an ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
