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2015 (7) TMI 865 - ITAT HYDERABAD

2015 (7) TMI 865 - ITAT HYDERABAD - TMI - Disallowance of repayment of gold loan to SBI - Held that:- There is no doubt to the fact loan as per the scheme was not in terms of cash but in terms of gold. Therefore, the gold obtained under the loan scheme form part of the stock-in-trade of the erstwhile firm and was converted into ornaments for trading purpose. Therefore, the purpose of loan is for the working capital for conducting business. When assessee took over assets and liabilities of erstwh .....

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d. In this regard, we are of the view that though the amount has been termed as interest but it is not interest in strict sense of the term. As far as interest payment is concerned, definitely they have accrued to assessee in the respective AYs. However, as far as the repayment of principal amount is concerned, as per the terms of the agreement with bank it has to be on the basis of value of gold as on the date of repayment. Therefore, the liability on that account cannot be an ascertained liabi .....

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- Shri P.M. Jagtap and Shri Saktijit Dey, JJ. For the Petitioner : Shri M.V.R. Prasad For the Respondent : Shri Ramakrishna Bandi ORDER PER SAKTIJIT DEY, J.M.: This appeal by assessee is directed against the order dated 08/07/2013 of ld. CIT(A)-III, Hyderabad for the AY 2007-08 2. Assessee has raised 5 grounds as per the revised grounds of appeal. Ground Nos. 1 & 5 being general in nature do not require any specific adjudication. Ld. AR at the outset submitted that on assessee s instruction .....

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he additional ground raised by assessee is also ancillary and incidental to the issue raised in ground Nos. 2 & 3, the same will be decided along with ground Nos. 2 & 3. 3. Briefly the facts as emanating from record are, assessee a company, as stated by AO, was formed on01/04/2006 by merger of three partnership firms, viz., KLN Readymades, KLN Silks and Sarees and KLN Jewels. Of course, assessee has stated before us that the company was actually incorporated on 23/12/2005. Be that as it .....

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8377; 92,12,000 and with additional incidental expenditure, such as sales tax, the total value came to ₹ 98,54,661, but, when the company closed the said gold loan account on 15/03/07, it paid a total amount of ₹ 1,41,86,851 and the differential amount of ₹ 43,32,190 was debited to P& A/c as interest on Gold Metal account. AO observed that liability incurred by assessee pertained to the period from the date of taking gold loan to the date of closure of the loan amount i.e. .....

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ng interest burden. AO observed that assessee is not correct in taking over the unbooked liability of partnership firm , hence, he proposed to disallow the interest attributable to the period prior to 31/03/2006. Though, assessee objected to such disallowance, AO did not find any merit in the same. He noted that assessee company was formed only on 01/04/06, hence, loans relating to prior period of the firm could not be claimed as deduction at the hands of the company in the current AY. AO observ .....

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ct that assessee follows mercantile system of accounting. AO observed, as the expenditure pertains to the firm, the firm could have claimed such expenditure in the respective AY. Only because the firm failed to claim such expenditure, assessee cannot get the benefit of such deduction. He further observed that assessee even did not furnish copy of gold metal loan account and loan agreement. Accordingly, AO worked out the disallowance of interest prior to the period 01/04/2006 as under: Amount pai .....

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and evidence and I find that the facts provided by the AO are not controverted at all. There is no doubt about the fact that the terms and conditions of the gold metal account were very clear to the appellant and the liability of interest had been ascertained every year. The value of gold at the end of the year was known and it was clear to the appellant that the difference in value had to be debited as interest on charges to be paid to the bank. I agree with the AO that as per the mercantile s .....

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rge the gold metal loan taken by the firm. Ld. AR submitted, though the value of the gold metal loan when the loan obtained was ₹ 98,54,661, but, at the time of closure of the account, assessee had to pay an amount of ₹ 1,41,86,850 due to appreciation in the value of gold. Therefore, the rate cutting difference amounting to ₹ 43,32,189 being the cost of loan to assessee is an allowable deduction. Ld. AR submitted, loan was obtained not in cash, but, by way of gold and it was us .....

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be seen which is of equal importance. In support of such contention, ld. AR relied upon the following decisions: 1. Mahindra Inter trade LtdVs. DCIT, [2011] 133 ITD 597 (Mum.) 2. United Phosphorus Ltd. Vs. JCIT, [2002] 81 ITD 553 (Ahd.) 5. Ld. DR, on the other hand, strongly supporting the reasoning of AO and ld. CIT(A) submitted, deduction claimed by assessee is not at all allowable as it is not interest, but, an extra cost incurred by assessee on account of appreciation of gold value on the d .....

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by erstwhile firm is like foreign exchange loan and repayment depends upon the fluctuation of foreign exchange. Therefore, deduction cannot be claimed by assessee on trading account as it relates to capital field. 6. We have heard the parties and perused the orders of revenue authorities as well as other materials on record. We have also carefully examined the decisions relied upon by the parties. At the outset we may put it on record that though assessee before the departmental authorities as .....

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annot be any dispute or doubt that it is revenue, since the AO himself has allowed a part of the expenditure. Keeping in view the aforesaid factual position, the issue has to be dealt with. Undisputedly, M/s KLN Jewellery has taken gold loan of ₹ 98,54,661 from SBI, Vizag which was not in terms of cash but in terms of gold. It is also a fact that assessee utilized the said gold for making ornaments for its trading activity. However, M/s KLN Jewellery amalgamated with assessee company on 31 .....

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issue to be decided is whether deduction claimed can be allowed as a revenue expenditure. There is no doubt to the fact loan as per the scheme was not in terms of cash but in terms of gold. Therefore, the gold obtained under the loan scheme form part of the stock-in-trade of the erstwhile firm and was converted into ornaments for trading purpose. Therefore, the purpose of loan is for the working capital for conducting business. When assessee took over assets and liabilities of erstwhile firm alo .....

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