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2015 (10) TMI 2468 - ITAT KOLKATA

2015 (10) TMI 2468 - ITAT KOLKATA - TMI - Addition u/s 41 - increase in the capital reserve on waiver of loans - Held that:- The correlation of the loans borrowed by the assessee and the purpose for which they were borrowed and the loans waived to the assessee has to be established by the assessee. In the absence of correlation it is not possible to decide the purpose for which the loan has been availed by the assessee. It is only when the purpose of the loan is ascertained it can be decided as .....

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the revenue is concerned it is quite clear that from the order of the CIT(A) that the interest which was waived was not claimed as an expenditure by the assessee in the past and therefore the addition of the said sum u/s 41(1) of the Act cannot be sustained. In so far as the applicability of the provision of section 28(iv) of the Act is concerned the benefit in question was not received in kind and therefore the addition on the above said provision cannot be sustained. The decision referred to b .....

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ined by the CIT(A) deserves to be deleted. It is clear from the evidence that identity, capacity and genuineness of the transaction of the receipt of share application money of the assessee has been clearly established. In fact the additional evidence in the form of confirmation from the share applicant ought to have admitted by the CIT(A) as additional evidence and in the light of the enquiry carried out by the AO which clearly established the receipt of share application money as genuine, the .....

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about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided u/s.145(1) of the Act or accounting standards as notified under Section 145(2) of the Act have not been regularly followed by the Assessee. The AO has to compute income from business accounting to the books of accounts of the Assessee. It is only when the book results are rejected the question of estimation of income arises for consideration. The AO has to specifically point out the .....

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he AO has done this on the basis of a report of an expert. As to whether the report of the expert can be applied to all manufacturers of oil from oil cake and as to whether these are ideal quantity of consumption, is not spelt out in the order of the AO. The entries in the regular books of accounts which are duly audited have not been shown to be suffering from any infirmities. The past history of consumption of Hexane compares favourably with the consumption in the past and the AO has nothing t .....

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DER Per Shri N.V.Vasudevan, JM ITA No.86/Kol/2013 is an appeal by the assessee while ITA No.284/Kol/2013 is an appeal by the revenue. Both these appeals are directed against the order dated 08.11.2012 of CIT(A)-VIII, Kolkata relating to A.Y.2009-10. ITA No.86/Kol/2013 (Assessee s appeal) : 2. Ground Nos. 1 and 2 raised by the assessee in this appeal and the grounds of appeal raised by the revenue in its appeal can be conveniently taken together. The assessee is a company engaged in the business .....

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accordingly, the amount of loans together with interest so waived has been treated as capital reserve brought to the balance sheet. The assessee furnished the party-wise details of loans and the interest waived, which was as under : Name of the loan creditor Balance as on 01.04.2008 Amount waived Balance as on 31.03.2009 Deepak Vegpro P Ltd (secured loan) 45000,000 31500,000 13500,000 KN Ravindra Kumar (HUF) 1250,000 1000,000 250,000 Shree Hari Industries 1685,145 1348,117 337,028 Versa Trading .....

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erns 1,70,09,882 1,41,94,613 28,15,269 Unsecured loans from others 9,49,55,478 2,41,13,612 7,08,41,886 Secure loan Deepak Vegpro P Ltd 4,50,00,000 1,35,00,000 3,15,00,000 Interesst accrued & Due 7,09,96,285 0 7,09,96,285 Total 17,61,53,420 The above difference of ₹ 17,61,53,420 was mainly due to the waiver of loans and their interest. In other words, the waiver of loans together with interest (which was considered as capital reserve by the assessee) was out of the above difference of & .....

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t obtained by the assessee consequent to waiver of principal amount by the banks and other creditors. The AO was of the view that the amount of waive of loan and interest due thereon was taxable u/s 41(1) of the Act r.w.s.28(i) & (iv) of the Act as remission or cessation of liability which profit arising in the course of business. AO accordingly added a sum of ₹ 14,58,61,553/- to the total income of the assessee. 4. On appeal by the assessee the CIT(A) held that in so far as the waiver .....

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income provision of section 41(1) of the Act were not attracted. CIT(A) also held that the income in question cannot be added u/s 28(iv) of the Act for the reasons that the benefit was in terms of money and the provision of section 28(iv) of the Act will apply only when the benefit or perquisite is received in kind. 5. The following observations of the CIT(A) in this regard are as follows : I have carefully considered the submission of the appellant along with the supporting evidences/details f .....

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as under :- (i)It is not in dispute that the appellant has written off in books of accounts interest of ₹ 7,09,96,285/- As per the ld AR the appellant has not been allowed deduction of this interest in view of provision of section 43B of the Act. The AO in his report has submitted that this plea was not raised during the assessment proceeding year and for this reason the applicability of section 28(iv) of the Act was not considered during the assessment proceeding. The AO has submitted tha .....

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in the case of Mahindra & Mahindra Ltd. V CIT (2003) 261 ITR502 and Hon ble Delhi High Court decision in the case of Ravinder Singh v CIT (1994) 205 ITR 353, has held as under :- That section 28(iv) of the Act speaks about the benefit or perquisite received in kind and has no application to any transaction which involves money. The transaction in question being a loan transaction having no application with respect to section 28(iv) of the Income-tax Act, the sum in question was not income w .....

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India and 450 lacs. From IDBI Bank in the year 1996-97 under project finance scheme. However, neither the sanction letter nor any other evidence to support the contention that these loans were taken for the acquisition of capital asset was filed. Similarly no evidence was produced to sustain the claim that the loan return of during the year were the same loan which were taken in the financial year 1996-97. Since the appellant has not discharged onus cast on it either before the AO or before me .....

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ny income exigible to tax u/s 28(iv) or 41(1). On the other hand, if the loan was taken for a trading purpose and was treated as such from the very beginning in the books of account, its waiver would result in income more so when it was transferred to the P&L A/c in view of Sundaram Iyengar 222 ITR 344(SC). In view of above discussed legal and factual position I am of the view that the AO was justified in adding ₹ 7,48,65,268/- to the income. Accordingly the addition of ₹ 7,48,65 .....

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meco Regent Ltd. Vs CIT 331 ITR 317(Mad). His submission was that the Hon ble Madras High Court in the aforesaid decision has held that the provision of section 41(1) of the Act can be applied only when the borrowing is by a financial institution for which money was an item of trading transactions and in respect of all other businesses borrowings should be considered only on capital account. His submission was that in the light of the judicial pronouncement it was unnecessary to go into the ques .....

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in the course of business. This observation in our view cannot be read in isolation and out of context. The Hon ble Madras High Court in the aforesaid decision found that the undisputed fact prevailing in that case was that the assessee obtained loan for the purpose of investment in its capital asset. It is only on this basis that the Hon ble Madras High Court held that the provision of section 41(1)of the Act or section 28(iv) of the Act are not attracted. The Hon ble Supreme Court in the case .....

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es its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, .....

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principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning. 9. Section 41(1) enacts a statutory fiction and the operation of such fiction should be limited to the language of the section. In Mahindra & Mahindra Ltd. vs. CIT 261 ITR 501 (Bom) followed in CIT vs. Tosha International Ltd. 331 ITR 440 (Del) it was held that amount of loan and i .....

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nd after waiver, was taken to P&L a/c. Thus, even if s. 28(iv) was not applicable, s. 41(1) was clearly applicable. 10. We are therefore of the view that it was necessary for the assessee to establish the purpose of the loans in question had been borrowed. 11. We have perused the documents filed by the assessee in support of its contentions that the amount of loan that was waived by the creditors was for meeting the capital requirements. At the time of hearing it was noticed that the evidenc .....

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nt that these loans were meant for meeting capital expenditure. It is however seen that the loan amount waived was by one Depak Vegpro Private Limited. When this was pointed out by the ld. Counsel for the assessee it was submitted that IDBI had assigned the loans to M/S.Deepak Vegpro Pvt.Ltd. A copy of the assignment agreement is placed at pages 15 to 31 of assessee s paper book no.2. This does not correlate with the loan borrowed by the assessee from IDBI, as a person referred to therein is Str .....

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ssee. It is only when the purpose of the loan is ascertained it can be decided as to whether the provision of section 41(1) of the Act will be attracted or not. We therefore set aside the order of the CIT(A) in so far as the addition of ₹ 7,48,65,268/- sustained by the CIT(A) and remand the issue to the AO for fresh consideration in the light of the observations made above. The assessee is at liberty to file the required documents to substantiate its case regarding non applicability of the .....

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d therefore the addition on the above said provision cannot be sustained. The decision referred to by the CIT(A) in the impugned order on this issue clearly support the conclusion arrived at by the CIT(A). We therefore do not find any ground to interfere. Consequently the appeal filed by the revenue is dismissed. 14. Ground No.4,5 and 6 raised by the assessee are in relation to addition of ₹ 2 crores made by the assessee on account of unexplained share application money. The facts in this .....

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of the assessee. 15. Before the CIT(A) the assessee pointed out that a sum of ₹ 2 crores had been given as share application money by one M/s. Saurabh Agrotech (P) Ltd who is assessed at Alwar, Rajasthan and also gave the assessment particulars of the share applicant. The CIT(A) called for remand report from the AO on the information provided by the assessee. The AO of the assessee thereupon had written a letter to ACIT, Circle-1 Alwar assessing the share applicant. The ACIT, Circle-1, Alw .....

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e AO by observing that the assessee had not filed the required documents to explain the credit entry satisfactorily. Aggrieved by the order of the CIT(A) the assessee has raised ground nos. 4,5 and 6 before the Tribunal. 17. We have heard the rival submissions. In our view and in the light of the letter of the AO to Saurabjh Agrotech (P) Ltd., a copy of which is placed at pages 32 to 39 of the assessee s paper book No.2, the additions sustained by the CIT(A) deserves to be deleted. It is clear f .....

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that the addition sustained by the CIT(A) in this regard should be deleted. Ground Nos.4 to 6 raised by the assessee are accordingly allowed. 18. Ground nos. 7 and 8 raised by the assessee read as follows :- 7. That the learned Commissioner of Income Tax (Appeals) has erred in law in confirming the disallowance of ₹ 76,07.212 on account of alleged excess consumption of Hexane in Solvent Extraction Plant made by the Assessing Officer despite the fact that the learned Assessing Officer neit .....

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e aforesaid grounds of appeal raised by the assessee are concerned the facts are that the assessee is in the business of manufacturing of agro products. Hexane is a chemical which is used in the manufacturing process by the assessee. The consumption of hexane by the assessee during the previsous year was 3,46,753 lts. The cost of 1 lt is ₹ 37.71 and the total cost incurred by the assessee on use of hexane claims as an expenditure in the Profit and loss account at ₹ 96,08,526/-. The A .....

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nsumed in extraction of oil has to be 1.5 lts. Maximum and the consumption shown by the assessee was excessive. In this regard AO relied on the report of Prof. P.J.Rao, Department of Chemical Engineering , Andhra University, Visakhapatnam who has opined that the consumption of hexane can be a maximum of 1.5 lts. Per MT of oil cake consumption. The AO based on the report of the expert came to the conclusion that the consumption of the hexane shown by the assessee is excessive. The AO thereafter m .....

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own by the assessee s technical and production expertise. The production register, purchase and sales vouchers, stock registers and receipts are not produced before me despite repeated reminders. Therefore, the excess losses/consumption of hexane is determined as under: Oil cake consumed during the FY 2008-09 : 48,149 MT Probably consumption/loss of hexane @ 1.5 lt/MT : 72,223.50 litres Total consumption/loss of hexane claimed by assessee: 3,46,753.00 litres Excess consumption/loss of the hexane .....

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x Act are separately initiated. 21. On appeal by the assessee the CIT(A) confirmed order of the AO. The CIT(A) s observations are as follows :- After carefully considering the Remand Report of the AO and the rejoinder of the appellant to such report of the AO and perusing the entire facts of the case, this ground of appeal of the appellant regarding the disallowance on account of excess claim of consumption of Hexane in solvent extraction plant is decided against the appellant for the following .....

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on the report of expert and working out the excess consumption of Hexane amounting to ₹ 76,07,212/-. Accordingly, the addition of Rs/.76,07,212/- made by the AO is confirmed. 22. Aggrieved by the order of the CIT(A), the Assessee has raised the aforesaid grounds of appeal before the Tribunal. 23. Before us the contention of the ld. Counsel for the assessee was that the books of accounts have not been rejected by the AO u/s.145 of the Act and therefore the impugned addition cannot be susta .....

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R, on the other hand, relied on the orders of the AO and CIT(A). 24. We have given a careful consideration to the rival submissions. The provisions of Sec.145 of the Act, reads as follows: 145. Method of accounting.-(1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed .....

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with the standards notified under sub-section (2),] the Assessing Officer may make an assessment in the manner provided in section 144. The AO did not reject the book results before resorting to an estimation of income. For rejecting the book results, the provisions of Sec.145(3) of the Act requires that the Assessing Officer should be not be satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided u/s.145(1) of the Act or accoun .....

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