TMI Blog2016 (4) TMI 1324X X X X Extracts X X X X X X X X Extracts X X X X ..... placed with its associate enterprise - deposited in lieu of availing usages rights on industrial land for carrying out manufacturing activities. - The assessee did not pay any rent except this lumpsum refundable amount. - Held that:- he assessee has already received its security amount latest by 23-08- 2007 relevant for assessment year 2008-09 only and not to the impugned assessment year 2009-10. We hold in these facts that the deemed interest addition could not have been made in the impugned assessment year as no such interest accrues or arises in financial year 2008-09. We accept assessee’s arguments against this interest addition and reject those raised at Revenue’s behest. - Decided in favor of assessee. Restriction on depreciation claim - bifurcation of value of the land - AO observed in assessment order that the building/bungalow was very old. No deprecation is allowable on the plot land - Held that:- 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 - Decided against the assessee. - ITA No. 1961 & CO 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as per law. We find that this crucial fact has missed the lower appellate authority s consideration in the order under challenge. The impugned penalty has got no legs to stand as of now in these facts and circumstances. This substantive ground is accordingly treated as allowed for statistical purposes. It shall however be open for the Assessing Officer to initiate penalty proceedings afresh as per law after finalizing consequential proceedings. This first substantive ground fails. 3. The Revenue s second substantive ground seeks to revive section 271(1)(c) penalty arising from excess claim of section 80HHC deduction amounting to ₹ 24,927/-. The assessee-company manufactures different kinds of castings. Its export turnover was of ₹ 67,84,192/- exclusive of sales tax and excise duty. The Assessing Officer reworked this deduction claim as ₹ 4,55,182/- in assessment order. The CIT(A) directed the Assessing Officer to re- compute this 80HHC deduction in the quantum lower appellate order. The Assessing Officer passed consequential order recalculating the impugned deduction as ₹ 4,27,743/- thereby disallowing excess figure between the former and latter comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 ITR 158 holds that each and every disallowance does not necessarily result in imposition of concealment or furnishing of inaccurate particulars. We accordingly delete the impugned penalty arising on loss of ₹ 5,86,687/- on sale of mutual funds. Assessee s CO 120/Ahd/2012 succeeds. Assessment year 2008-09 Assessee s appeal ITA 857/Ahd/2012 and Revenue s cross appeal ITA 1213/Ahd/2012 7. Learned authorized representative files a tabulation chart of the relevant grounds raised in these cross appeals. The Revenue is fair enough in not disputing its correctness. It emerges therefrom that both these cross appeals raise three substantive grounds each. The assessee s first substantive ground challenges the lower appellate order partly confirming section 40A(2)(b) disallowance from ₹ 3,21,96,765/- to ₹ 1,81,24,570/-. The Revenue also raises its second substantive in cross appeal seeking to revive the entire disallowance. Both the ld. representatives reiterate their respective pleadings in the course of hearing. 8. We come to relevant facts. The Assessing Officer in the course of scrutiny found the assessee to have paid following remuneration to its managing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant. 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 the provisions of any other section of Income-tax Act, 1961. It was held by the Hon'ble Supreme Court in Shri Sajjan Mills Ltd. vs CIT (1985) 156 ITR 585(SC). Further Hon'ble Gujarat High court in CIT vs Bharat Vijay Mills Ltd. 1988 reported at 128 ITR 633 (Guj.) has held that provisions of sec.40A have been declared to be of overriding nature. The non obstante clause at the beginning of sec.40A(1) clearly indicate that if any other provisions exist somewhere on the statute book, they have to give way to clear the express provisions of sec.40A. 4.3 In view of the overriding provisions of sec.40A(2)(a), the payment of remuneration may though be authorized by the deed of partnership, may also be in accordance with the terms of deed, and may further be within the ceiling limit as fixed by cl.v of section 40(b), in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 of the appellant company. In view of this remuneration paid to Shri K.H. Jhaveri to the extent of ₹ 2,73,60,000(1,44,00,000 x 1.90%) is allowed. Although the A.O. has taken remuneration paid to Shri K.H. Javeri in the F.Y.2003-04 at ₹ 94,97,449/- which is apparently wrong. In view of this the salary paid to Shri K.H. Jhaveri is allowed keeping in view the correct facts, in view of above discussions disallowance against salary paid to Shri K.H. Jhaveri to the extent of ₹ 1,26,36,000/-(3,99,96,000 - 2,73,60,000) is confirmed. The appellant will get a relief of ₹ 1,40,99,171 (2,67,35,171 -1,26,36,000). 4.4 The A.O. has also disallowed remuneration of ₹ 54,61,570/- paid to Shri Abhishek K. Jhaveri. It is seen that Shri Abhishek Jhaveri was paid a salary of ₹ 18,00,000/- in the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance 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 corresponding ground is rejected. The Assessing Officer is directed to delete the entire disallowance sum of ₹ 3,21,96,741/-. 13. The assessee s second substantive ground challenges correctness of section 14A r.w. Rule 8D disallowance of ₹ 31,17,765/-. Its exempt income from dividend PMS-2010 is of ₹ 4,29,693/-, dividend (shares) incubator of ₹ 8,792/-, dividends (shares) PMS-2010 of ₹ 1,39,818/-, dividend income of ₹ 29,13,374/-, mutual funds dividend incubator of ₹ 1,06,955/- and Kotak Flexi Bond dividend of ₹ 5,28,530/-; respectively. The assessee did not disallow any figure to have been in relation with the same. It would plead not to have incurred any expenditure for earning the same. The Assessing Officer invoked rule 8D( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised 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 hesitation in agreeing with the contentions of the Id. A.O. In view of above, disallowance of ₹ 31,17,765/- made by the A.O. u/s.14A of the I.T. Act is confirmed. This ground of appeal is dismissed. 15. Heard both sides. Relevant records perused. There is no dispute about the fact that the above stated direct expenditure already stands accepted. Ld. authorized representative draws our attention to assessee s P L account demonstrating assessee s interest income in the impugned assessment year as ₹ 2,59,32,546/- with interest expenditure of ₹ 9,33,696/- resulting in net positive figure. A co-ordinate bench of the tribunal in ITA 1277/Kol/2011 DCIT vs. Trade Apartment Ltd. decided on 30-03- 2012 holds that such an interest disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted 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 in crores of rupees and profit earned being also in crores, saying that the magnitude of transaction is very high. The Ld. A.O. has further stated that the profit earned on sale and purchase of shares was not capital gain but it was business profit earned in trading activities of shares. The observations made by the Ld. A.O. in para 4.4 are erroneous and misleading. The number of companies and number of transactions mentioned in the order are not correct because one and the same company appearing in the data is counted as separate company and some transactions not falling in the relevant assessment year has been taken into calculation. Without prejudice to what has been stated above, even if the numbers are taken to be correct, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. It be so held now and the short term and long term capital gain be directed to be accepted as declared. In view of entirety of above submissions , the addition of ₹ 2,43,55,894/- made by Ld. A.O. treating the capital gains as business income be deleted and the deductions of ₹ 16,59,770/- towards Demat Charges and Management Fees claimed in computation of capital gains be allowed as claimed and exemption of long term capital be allowed as claimed. 6.3 I have carefully considered the rival submissions. It is seen that the appellant was regularly engaged in share trading during the year under consideration as well as in the earlier years. Since, the appellant was regularly engaged in this business, the burden of proof to prove that investment h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MS 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 ₹ 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 figures are of ₹ 82,15,286/- from only three scrips held for almost more than 400 days on most of the occasions. Page 614 is assessee s balance sheet treating the relevant shares and mutual funds as investments. The assessee had its disposal capital amount of ₹ 7.99 crores and reserves of ₹ 115 crores. It has engaged Portfolio Management Services for effective management of its investments. Hon ble Karnataka high court in CIT vs. Kapoor Investments quotes Delhi high court decision in (2014) in 367 ITR 01 Radical Investments vs. ACIT to hold that shares investments made through portfolio management services do not amount to business activity. There is also no evidence apart from Assessing Officer s drawing inference only that the assessee has taken part in any adven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of record that the appellant has declared a turnover of ₹ 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 ₹ 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 appellant that due to lower turnover the production capacities installed could not be utilized optimally and the overhead expenses per unit of the turnover was more. In my considered view the appellant has given a plausible explanation for reduction in gross profit (c) Perusal of evidences filed during the assessment as well as the appellate proceedings reveals that the appellant has furnished complete quantitative details of consumption of raw materials value- wise and quantity-wise. The fact of consumption details value-Wise was admitted by the A.O. in the assessment order itself. I find that consumption of quantitative details for the last three assessment years has been filed vide the assessees letter dated 22/7/2010 and the same is placed at page no.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 furnished by the appellant vide his letter dated 22.7.2010, clearly indicate the opening balance, the debit and credit during the year under consideration and the closing balance at the end of the accounting year against each and every debtor and creditor. Secondly, the complete name and address of these customers and vendors have been furnished by the appellant vide his letter dated 31/7/2010. In my considered view the appellant has furnished sufficient evidence to identify the vendors and customers. Sufficient evidences were also furnished in respect of transactions done during the year under consideration. If any other information was needed the same can be culled out from these details. The appellant has furnished sufficient information on record and if the A.O. was not sat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 perversity in the lower appellate findings under challenge. We do not find any error in the CIT(A) s action under challenge deleting the impugned addition. Revenue s first substantive ground fails. 23. The Revenue s next substantive ground challenges the lower appellate order partly deleting section 40A(2)(b) disallowance as already adjudicated in assessee s favour hereinabove. This ground is accordingly rejected. 24. The Revenue s third substantive ground seeks to restore closing stock adjustment of ₹ 47,41,915/- made u/s. 145A of the Act. The Assessing Officer invoked the impugned addition after finding the assessee as not to have added CENVAT value paid on raw material in its closing stock. The CIT(A) deletes the same as follows:- 9.2 I have carefully considered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3 In view of the above facts, I am not convinced about the maintainability of addition of ₹ 47,41,915/- in valuation of closing stock. The A.O. is directed to delete addition of ₹ 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 of accounting meaning thereby that if the impugned addition is restored, it would be again a revenue neutral action as held in the lower appellate findings. He quotes hon ble jurisdictional high court decision in Tax Appeal No. 436 and 437/2011 CIT vs. Bell Granito Ceramica dated 13-06-2012 following its earlier judgment ACIT vs. Narmada Chemator Petro-chemicals Ltd. (2010) 233 CTR 265 (Guj) rejecting Revenue s substantial question framed in challenging tribunal s order that no such addition could be made on account of excise duty to closing stock unless a balancing deduction is allowed in P L account. And also that if central excise duty is not due and payable, the same cannot be considered as cost to raw material as well as finished goods appearing in the closing stock. Ld. DR fails i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceding 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 made on account of this notional interest of ₹ 41.40 lacs in directing the Assessing Officer to recomputed interest on day to day basis. The Assessing Officer records in assessment order that the assessee s books demonstrated a sum of ₹ 4.84 crore as payable from its associate enterprise. The same arose from its security deposited to the latter entity in lieu of availing usages rights on industrial land for carrying out manufacturing activities. The assessee did not pay any rent except this lumpsum refundable amount. The Assessing Officer observed in assessment order that the same carried interest on repayment of ₹ 76,66,666/- during each financial year commencing from 01-04-2005 to 31-03-2006 and failure thereof wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above fact and also without considering the fact on record that the Security Deposit of ₹ 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. a) Our letter dated 20/01/2010 addressed to Deputy Commissioner of Income Tax, Circle-5, Ahmedabad in response to the scrutiny assessment questionnaire for A.Y. 2008-09 enclosing therewith three separate Security Deposit Accounts. Copy of the same is enclosed (Exhibit - K) (Page 159 to 162). One of those three accounts titled Ahmedabad Finvest -Sec. Dep (37B) shows that the whole of the Security Deposit amount of ₹ 2.30 crores has been received back through bank payments from PASL Windtech Pvt. Ltd. and there is no outstanding as on 31.03.2008. b) Our letter dated 22/07/2010 addressed to The Addl. Commissioner of Income Tax, Range-5, Ahmedabad in response to the scrutiny assessment questionnaire for A.Y. 2008-09 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... medabad Finvest Co. Pvt. Ltd.). As per clause-5 of this agreement M/s. AFCPL was required to refund minimum of security deposit of ₹ 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 shortfall therein. The facts available on record conclusively proves that M/s. AFCPL has not refunded the minimum security deposit of ₹ 76,66,666/- as mandated by the agreement dated 26.12.2003. As per the express provisions of the agreement dated 26.12.2003 the appellant was duty bound to charge interest on any shortfall as mentioned above. However, the appellant has not charged interest on the shortfall of refund of security. Accordingly the A.O. charged interest @18% on the entire security deposit of ₹ 2.3 crores and addition of ₹ 41,40,000/-(Rs.2,30,00,000/-- x 1) has been made in the income of the appellant. During the appellate proceedings the appellant contended that subsequent to the security deposit, as per mutua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 110 contain assessee s agreement dated 26-12-2003 executed with its associate enterprise involving the following terms and conditions:- NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY DECLARED BY AND BETWEEN THE PARTIES HERETO AS HEREINAFTER MENTIONED: 1. AFCPL agrees to give the Scheduled Premises to PASPL for its use and PASPL agrees to take the Scheduled for its use in accordance with the terms and conditions of this agreement. 2. PASPL agrees that it shall use the Scheduled Premises for its industria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 agreement. We have given our thoughtful consideration to rival submissions. The sum in question is ₹ 2.3 crores furnished as interest free deposit as a security in lieu of availing usages rights for carrying out assessee s manufacturing activities. There is no rent paid. Clause 5 contains stipulation on refund payment of ₹ 76,66,666/- from financial year commencing 04-01-2006 to 31-03-2006 and its failure invites 18% interest. We are of the opinion that this interest clause is over and above clause 4 of the agreement relied upon by the assessee. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks 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 ₹ 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 its letter dated 16.12.2011 and the same has been reproduced by the A.O. on page no.29 30 of the assessment order. The A.O. had merely accepted the book version of the appellant and A.O. has also not made any addition in respect of this item in the computation of income. These facts clearly indicate that the appellant is not aggrieved by the assessment order on this issue and accordingly as per the provisions of sec.246 of Income-tax Act, 1961 the appellant cannot agitate this issue in appeal. In view of these facts, I a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities 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 ₹ 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 year relevant to this issue are identical to that already decided in assessee s favour in preceding assessment year hereinabove. We follow the said reasoning herein as well and delete the entire disallowance. The assessee succeeds and Revenue fails in their respective grounds. Assessee appeal ITA 2617/Ahd/2012 is partly accepted. 38. We come to department appeal ITA 2921/Ahd/2012 raising four substantive grounds seeking to revive additions inter alia made on assessee s transaction with M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 advance. The facts available on record conclusively establish that the advance of ₹ 4,02 crores were given to sister concern namely M/s. PASL Wind Solution Pvt. Ltd. towards capital investment and against this advance shares were allotted in the month of February, 2011. In my considered view, making investment in sister concern cannot be termed as non-business activity. Reliance in this regard is made on S A Builders vs CIT 288 ITR 1 (S.C), wherein it was held that interest on business advance to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 of Reliance Utilities Power Ltd., I am inclined to agree with the contentions of the Id. A.R. 5.9 In view of the above, I am inclined to agree with the contentions of the Id. A.R. Accordingly, disallowance of ₹ 12,43,212/- made by the A.O. u/s. 36(1)(iii) is ordered to be deleted. This ground of appeal is allowed. 41. We have heard both the parties. Suffice to say, it has come on record that assessee had available at its disposal interest free funds of ₹ 170 crores (approx) turning out to be much more ..... 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