TMI Blog2018 (3) TMI 1625X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee by : Shri Sunil Pathak Revenue by : Shri Rajeev Kumar ORDER PER VIKAS AWASTHY, JM : ITA No. 672/PUN/2015 by the assessee and cross appeal by the Revenue in ITA No. 834/PUN/2015 are directed against the order of Commissioner of Income Tax (Appeals)-2, Nashik dated 27-03-2015 for the assessment year 2010-11. 2. The brief facts of the case as emanating from records are: The assessee company is one of the concerns of Rajmal Lakhichand group engaged in manufacturing and trading of gold, silver, diamond ornaments and bullion. The assessee is also engaged in generation of power through windmill. The assessee filed its return of income for the impugned assessment year on 01-10-2010 declaring total income as Nil. The case of the assessee was selected for scrutiny under CASS. Accordingly, statutory notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) was issued to the assessee on 23-09-2011. During the course of scrutiny assessment proceedings, the Assessing Officer made additions/disallowances on following counts : i. Disallowance u/s. 40A(2)(a) Rs.8,15,19,070/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to Karigars. The ld. AR pointed that the defects as pointed by Assessing Officer are not perse defects in maintenance of stock register and the books of assessee. The Commissioner of Income Tax (Appeals) rejected disallowance made u/s. 40A(2)(a) by Assessing Officer and instead estimated GP at 2.75% to cover up the deficiencies in transactions with sister concerns. The ld. AR further pointed that identical issue had come up before the Tribunal in the case of assessee‟s sister concern M/s. Rajmal Lakhichand in assessment year 2009-10 in ITA Nos. 532 663/PN/2013 decided on 16-01-2015. The Tribunal estimated GP of M/s. Rajmal Lakhichand at 1.20% instead of 1.13% declared by assessee. Thus, the Tribunal made addition of 0.07% in the GP declared by assessee. In the assessment year under appeal, the assessee had declared GP of 2.22%, the Commissioner of Income Tax (Appeals) estimated GP at 2.75% which is very much on higher side. The turnover of assessee in assessment year 2010-11 is ₹ 888.30 crores as compared to ₹ 473.23 crores in assessment year 2009-10. Since, the turnover in the assessment year under appeal is higher than the turnover in immediately precedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly supported the findings of Assessing Officer and the Commissioner of Income Tax (Appeals) on the issues raised by assessee in appeal. The ld. DR prayed for dismissing the appeal of assessee. 5. The Revenue in its appeal has assailed the findings of Commissioner of Income Tax (Appeals) by raising following grounds : 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-2, Nashik has erred in deleting the addition of ₹ 8,15,19,070/- made on account of Addition u/s. 40A(2) without appreciating the fact that the books of accounts are not reliable and special audit u/s 142(2A) was therefore carried out. The Ld. CIT(A) has relied on ITAT Pune's decision in the assessee's own case on the similar facts for AY. 2009-10. However, the basis of adoption of GP percentage has not been mentioned by the Hon'ble ITAT in the assessee's own case for A.Y. 2009-10. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)-2, Nashik has erred in deleting the addition of ₹ 9,24,259/- made on account of disallowance u/s 14A read with rule 8D. From the facts of the case, it can be seen that assessee has invested inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for investment in its sister concerns. There is a direct nexus of borrowings and investments made in subsidiary companies from borrowed funds. The assessee has not been able to show that the funds have been invested by assessee in subsidiary/group companies out of any business exigencies. The assessee has deliberated diverted its interest bearing funds for investment in the shares of sister concerns with the sole purpose of avoiding payment of tax. Thus, the diversion of interest bearing funds is a colourable device adopted by assessee to reduce its tax liability. 8. In respect of grounds raised by the Department in appeal, the ld. AR submitted that the Tribunal in the case of assessee‟s sister concerns M/s. Rajmal Lakhichand (supra) under identical set of facts has upheld the decision of Commissioner of Income Tax (Appeals) in deleting disallowance u/s. 40A(2)(a) and has thereafter estimated GP. The detailed submissions in this regard has already been made while addressing the arguments in respect of ground No. 3 of the appeal by assessee. 9. In respect of disallowance made u/s. 14A the ld. AR submitted that the assessee has invested a sum of ₹ 1,36,40,800/- in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ichand, for assessment year 2009-10 (supra) deleted the disallowance u/s.40A(2)(a) of the Act made by the Assessing Officer and made addition by estimating GP at 2.75% on the total sale of ₹ 888,30,42,858/- as per audited accounts. 13. A perusal of the orders of Authorities below show that during the assessment year under consideration, the assessee had purchased gold bullion to the tune of ₹ 250 crores from sister concerns and to the tune of ₹ 65 crores from the third parties. Further, the assessee had purchased gold ornaments of ₹ 283.99 crores from group concerns and ₹ 3.56 crores from unrelated parties. The Assessing Officer compared the assessee‟s purchase rates of gold bullion with the rates prevailing at the Bombay Bullion Market. The Assessing Officer on the basis of special audit report and by applying rates of Bombay Bullion Market came to the conclusion that the assessee had paid excessive or unreasonable payments to the tune of ₹ 8,15,19,070/- to its sister concerns. Thus, the Assessing Officer made disallowance of the same under the provisions of section 40A(2) (a) of the Act. 14. The case of the assessee is that assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income Tax (Appeal) finally following the order of Tribunal in assessee‟s group concerns M/s. Rajmal Lakhichand in assessment year 2009-10 discarded the addition made by Assessing Officer under section 40A(2)(a) and estimated GP @ 2.75% of the total sale as per audited accounts. 15. We find that identical disallowances u/s.40A(2)(b) was made in the case of M/s. Rajmal Lakhichand a flagship concern of the group in assessment year 2010-11. The Co-ordinate Bench of the Tribunal, after taking into consideration entire facts of the case concluded that the average price formula adopted by Assessing Officer and Commissioner of Income Tax (Appeal) is not correct. The Tribunal made the addition by estimating GP. The Commissioner of Income Tax (Appeal) in the impugned order has extracted the findings of the Tribunal on this issue. For the sake of brevity, we are not reproducing the same here. However, the gist of observations made by Tribunal on the issue in the case of M/s. Rajmal Lakhichand (supra) are as under: (a) The sale and purchase of gold bullion and gold ornaments within a group concerns are only paper transactions without involving any real transfer of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, method adopted by the Authorities below on account of lower price charge from sister concerns were rejected by the Tribunal. (g) For invoking the provisions of section 40A(2)(b), the Assessing Officer has to establish that the payments made to the related parties is not reasonable. Both the Authorities below have not considered the local conditions of the gold market. The average price method adopted by both the authorities is erroneous considering the market conditions of the bullion. Thus, the basis after computing excess payments made to sister concerns by assessee is faulty, therefore, provisions of section 40A(2)(b) cannot be applied. 16. The Co-ordinate Bench of the Tribunal after taking into consideration various facets of the transaction in sale/purchase of gold ornaments/bullion with related/unrelated parties concluded as under: 8.35 In the light of our above discussion, we are of the opinion that approach of both the authorities below is not correct for making high pitch additions in the hands of the assessee by invoking provisions of section 40A(2)(b) and for alleged selling of the ornaments to the related entities at a lower price. As per the financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Auditors and the A.O. have compared the prices at which the appellant have purchased gold from sister concerns and outside parties with the purchase rates prevailing at the close of the day at Bombay Bullion Association without considering the local Jalgaon rates and local market conditions. As held by the Hon'ble ITAT in the case of Rajmal Lakhichand, I am also of the view that the provisions of section 40A(2)(a) of the Act cannot be invoked in the facts and circumstances of this case as discussed above. However, the G. P. declared by the appellant at 2.22% cannot be accepted in view of the facts that almost all the purchase and sale transactions entered by the appellant with the sister concerns are fictitious. As held by the ITAT in the case of Rajmal Lakhichand, the possibility of purchasing the bullion and ornaments from the group concerns at a higher price can never be ruled out. Therefore, the appellant's books of account are not fully reliable and needs to be rejected. The appellant had disclosed the total sales at ₹ 888.30 crores on which the appellant had declared G.P. of ₹ 19.69 crores and the N.P. of ₹ 2.78 crores for the year under appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for assessment year 2009-10 (supra). Thus, in view of our above findings, the ground No. 3 raised in appeal by assessee is partly allowed and ground No. 1 raised in appeal by Department is dismissed. 19. The ground No. 4 of appeal by assessee is with respect to addition on account of under valuation of stock. The contention of ld. AR of assessee is that closing stock is valued by the assessee on cost or net realizable value, whichever is less. For the valuation of stock the assessee adopts closing rate quoted by Bombay Bullion Association. The assessee is consistently following this method of valuation of closing stock in the earlier assessment years as well as in the subsequent assessment years. No objection was ever raised by the Assessing Officer on the method of valuation or rates adopted for valuation either in the earlier assessment years or in the subsequent assessment years. A perusal of impugned order shows that the authorities below have not disputed the method of valuation but has raised objection to the adoption of Bombay Bullion Association rates for the valuation purpose of stock. As per the Revenue the assessee should have applied Jalgaon rates as the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld.CIT(A) not only upheld the action of the AO but he further enhanced the disallowance by ₹ 31,71,672/- being the interest on loan amount of ₹ 2,64,30,607/- diverted for non business purposes. The reasoning for such enhancement has already been reproduced in the findings given by the CIT(A). It is the submission of the Ld. Counsel for the assessee that since the flats have already entered into the block of asset and depreciation claimed in the original return has been allowed and the same has not been withdrawn, therefore, it is to be held that the flat at Khar is a business asset and utilized for the purpose of business. It is also his submission that in view of various decisions the flats need not to be registered in the name of the assessee company. 12. We find merit in the submission of the Ld. Counsel for the assessee. There is no dispute to the fact that the flats purchased at Khar has been shown in the asset side of the balance sheet and the loan obtained from bank in the name of the directors has been shown as liability in the liability side of the balance sheet. The Board of Directors vide resolution dated 10- 02-2006 have approved for the purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s entitled to depreciation in respect of the buses. 14. The Hon ble Supreme Court in the case of CIT Vs. Poddar Cement Pvt. Ltd. (Supra) has held that under the common law, owner means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income tax Act, 1961 having regard to the ground realities and further having regard to the object of the Income tax Act, namely, to tax the income , owner is a person who is entitled to receive income from the property in his own right. The Hon ble Delhi High court in the case of Addl.CIT Vs. Manjeet Engineering Industries (Supra) has held that when a partner brings his property to the partnership firm and the firm treats his property as belonging to the firm only, it has the effect of transferring the property to the firm. Document in writing and registration is not necessary. Following the above principles and considering the fact that the company has already shown the asset in the balance sheet of the assessee company and the loan obtained by the directors for purchase of the flats has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .88/2014 decided on 05.05.2014 by Hon'ble Allahabad High Court and CIT Vs. Lakhani Marketing in ITA No.970/2008 decided on 02.09.2014 by the Hon'ble Punjab Haryana High Court, held as under: 9.4 Since in the instant case the assessee has not received any dividend income out of the shares held as investment and since no disallowance u/s. 14A has been made in the preceding as well as succeeding assessment years, therefore, we agree with the contention of the Ld. Counsel for the assessee that no disallowance u/s.14A can be made under the facts and circumstances of the case. Accordingly, the order of the CIT(A) is set aside and the Assessing Officer is directed to delete the disallowance of ₹ 5,86,962/- made u/s.14A. Ground raised by the assessee is accordingly allowed. Thus, in view of the undisputed fact that the assessee has not received any tax free income from the investment made in group companies during the assessment year under appeal and decisions referred above, we hold that no disallowance u/s. 14A r.w.Rule 8D is called for. We do not see any infirmity in the findings of Commissioner of Income Tax (Appeal) in deleting the said disallowance. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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