TMI Blog2018 (11) TMI 1845X X X X Extracts X X X X X X X X Extracts X X X X ..... ied on by the assessee, moreover, the AO has to pass draft assessment order as per provision and was accordingly passed by him. The accompanying notices along with the draft assessment order are only procedural mistakes, it cannot tantamount to passing of final assessment order. Accordingly ground raised by the assessee is dismissed. ALP adjustment towards interest on advances - HELD THAT:- From the above ledger extract, it is clear that the assessee has given advance to its AE on 19/06/2013, 1807/2013 and 30/09/2013 and received back on 20/11/2013, 04/12/2013 and 05/12/2013. In the result, assessee has received more than that it has advanced. In our view, the advances given by the assessee to its AE are falls within the ambit of international transaction. But, assessee has taken conscious decision to advance without charging any interest. But, since, it falls within the definition of international transaction, the provision will attract accordingly. At the same time, we notice that TPO has charged interest for the whole year by Bench marking @ 14.45%. We find it to be a bit harsh on the assessee. As per the above ledger summary, it is clear that assessee has given loan for ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit by showing this additional turnover as other deduction. In our considered view, it is not additional or real income and also not a deduction in real sense. Hence, the same is deleted. Accordingly ground raised by the assessee is allowed. Addition on the basis of statement recorded at the time of search - HELD THAT:- In the given case, AO has not brought on record any incriminating material or cogent material in support of the above addition. Merely relying on the declaration given by the MD is not proper, since the same was withdrawn by the assessee subsequently.Hence, the addition cannot be sustained in the absence of any cogent material on record. Therefore, ground raised by the assessee is allowed. Disallowance of interest expenses on sham transactions - HELD THAT:- As decided in own case [ 2018 (4) TMI 1742 - ITAT HYDERABAD] in our view, AO has not made any disallowance in purchases even though he satisfied himself that these are sham transactions. Further, he proceeded to disallow interest on purchases, which is not proper, even though, he proceeded to disallow the interest with improper data and improper method. Therefore, the disallowance made by the AO on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , a search and seizure operation u/s 132 of the Income-tax Act, 1961 was conducted in the business premises of the assessee on 13/12/2013. The assessee filed its original return of income belatedly u/s 139(4) of the Act on 18/05/2015 declaring a total income of ₹ 30,48,17,060/- comprising of business income of ₹ 24,71,83,826/- and income from other sources ₹ 5,76,33,234/-. The assessee however computed deemed total income u/s 115JB of the Act, 1961 amounting to ₹ 36,10,93,608/- and paid taxes accordingly. In the return of income, at col.5 of schedule BP, the assessee had claimed ₹ 60 crores as other exempt receipt credited to P A/c. The return filed u/s 139(4) of the Act was selected for scrutiny under the compulsory guidelines issued by the CBDT and also under CASS. Accordingly, notice u/s 143(2) dated 18/05/2015 was issued and served on the assessee. Subsequently, the assessee filed a revised return of income on 31/03/2016, which was treated as invalid by the AO on the ground that the original return of income u/s 139(4) was filed after the due date. 2.1 A reference was made to the Transfer Pricing Officer (TPO) for determination of arm s length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee provided the AE with advances during the year under consideration for ₹ 20,58,50,500/-. The above mentioned advances were provided in the nature of working capital advance on account of business and commercial expediency. The assessee has received back advances of ₹ 22,98,08769/- during the year itself. Further, the assessee is not charging interest on advances given to Non-AE. Hence, the transaction relating to advances to AE is within Arm's Length Price and no ALP adjustment is required to be made. 2. Corporate guarantee given to AE: The assessee has also provided corporate guarantee to the AE for availing banking facilities from UCO Bank, Singapore, amount outstanding at ₹ 30,14,04,500/-. This corporate guarantee to the AE for availing banking facilities from UCO Bank, Singapore, amount outstanding at ₹ 30,14,04,500/-. This corporate guarantee was given by the assessee on account of commercial business expediency and has not incurred any cost for providing such corporate guarantee. As the transaction did not result in any income, expense or interest as envisaged under section 92 of the Income-tax Act,1961, in the opinion of assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-resident direct investor as well as loan extended to the subsidiaries/associates abroad has to be reported in a prescribed form. The advance from India and Indian currency has been subsequently converted into the currency of the geographic location of the AE the PLR of the Indian Banks ought to be applied as the external CUP. Thus the outbound loans are effectively Rupee loans. In case of a rupee sourced lending transaction, the lender in order to maximize its profits would try to benchmark its returns with the domestic interest rate rather than Libor. The ideal interest rate on outbound intra-group loans would be that interest rate which would have been charged by independent parties dealing in similar circumstances and during the same period of time. RBI does not permit Indian entities to lend loans to any entity other than their wholly owned subsidiaries and therefore there is no uncontrolled transaction available. Further the interest rate expected by the lender is equivalent to the opportunity cost of such funds. As a hypothetical CUP would be where the Indian entity invests in bank deposits, stocks, mutual funds or real estate, the corresponding return would still be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carries no risk of default) is equivalent to a risky loan with a loan guarantee. The same can be illustrated as under: Risk free loan == risky loan + loan guarantee As can be seen from the above equation, the guarantee given by the taxpayer made a risky loan into a risk free loan to the banker. When one of the associated enterprises (guarantor) provides guarantee, the banks take into account the credit rating of such enterprise before lending the money to the other associated enterprise (borrower). As a result of which, the borrower not only benefited by way of loan but also saves cost as the same are provided at a lesser rate of interest. Had there been no guarantee, the borrower either may not obtain a loan or even if obtained, at a much higher rate of interest in line with its own credit rating. The level of guarantee will be influenced by the interest saved by the borrower and the risk assumed by the guarantor. Therefore, the guarantor incurs cost on one side and the borrower saves cost on the other side. 2.10 The TPO after considering the submissions of the assessee, referring to the provisions of section 92B by the Finance Act, 2012 and OECD guidelines, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see company admitted income of ₹ 60 crores on the day of search in a statement dated 13/12/2013 recorded u/s 132(4) that he voluntarily came forward to disclose the additional undisclosed income of ₹ 60 crores to buy peace with the department and to avoid protracted litigation. The AO also observed that the assessee company through various statements recorded, which were extracted by the AO in his order, affirmed time and again the admission of undisclosed income at ₹ 60 crores for the FY 2013-14. Since the assessee failed to furnish any reply against the show cause notice given by the AO in respect of the transactions with the parties for ₹ 60 crores, the AO made the addition. 2.2 When the assessee objected before the DRP, the DRP confirmed the addition. 3. As regards disallowance of proportionate amount interest (being the finance cost) of ₹ 22,19,36,623/-, the AO held that the trading transactions between the assessee and the entities are mere paper transactions, non genuine sham. Since the transactions held in diversion of funds to the extent of such sham transactions, the interest expenditure incurred by the assessee company is proportiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use letter, the assessee vide its letter dated 29/11/2016 stated that in the fourth quarter of the FY 2013-14 the company has got loss an amount of ₹ 13.23 crores in the regular course of business operations and there was a cancellation of work order agreement with the one of its customer which resulted into losses and the loss was incurred was in the regular course of business. The AO held that since the assessee failed to furnish evidences to substantiate its claim for the said loss, the same had to disallow and accordingly, he disallowed ₹ 13.23 crores. 5.1 When the assessee objected the same before the DRP, the DRP confirmed the addition made by the AO. 6. The AO has passed the final order accordingly on 29/11/2017, against which, the assessee is in appeal before us raising the following grounds of appeal: Each of the grounds of appeal is mutually exclusive of, independent and without prejudice to other. Based on the facts and the circumstances of the case and in law, the learned -Assessing Officer (AO), learned Transfer Pricing Officer (TPO) and the Honourable Dispute Resolution Panel (DRP) - 1. Erred in not issuing Draft Assessment order as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng adjustment u/s. 92CA(3) of the Act for ₹ 39,18,258/- in respect of transaction of Corporate Guarantee provided to DCO Bank, Singapore on behalf of loan to BS Resource Pte Limited, Singapore by charging rate of 1.30% on Outstanding amount of ₹ 30,14,04,500/- on hypothetical and notional basis without there being any material on record. 4.1 Erred in making the ALP adjustment u/s. 92CA(3) of the Act for ₹ 39,18,258/ - in respect of Corporate Guarantee without issuing any show cause notice and without allowing an opportunity of being heard to the assessee. 4.2 Erred in treating the transaction relating to corporate guarantee as international transaction u/s.92B of the Act without appreciating that such an assistance or accommodation do not have any bearing on Assessee's profits, income, losses or assets, and, therefore, will be outside the ambit of 'international transaction' under section 92B(1). 4.3 Erred in not appreciating the fact that corporate guarantee was given by Appellant as a procedural compliance for availing the loan by its subsidiary and for the overall benefit of the group. It was provided as a part of the parental obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplying no benefit is derived in the form of low interest rates. 4.9 Erred in calculating the guarantee fee on the entire amount of the guarantee instead of restricting the amount to the extent of the withdrawal of guaranteed amount by the AEs. 4.10 Without prejudice, ought to have applied reasonable percentage of fee of corporate guarantee instead of 1.3% which is very high and unreasonable. Corporate Tax Matters: 5. Erred in making disallowance of ₹ 60,00,00,000/- by denying the deduction claimed by the assessee in the return of income for the year under consideration. 5.1 Erred in making the addition of ₹ 60,00,00,000/- by disallowing deduction claimed by the assessee without issuing any show cause notice proposing the addition. 5.2 Erred in not appreciating the fact that the return filed by the company consists of ₹ 60 Crores included in gross receipts as additional revenue and later the assessee has withdrawn the same due to non identification of any discrepancies. From the above, it is clear that net income of ₹ 30.48 Crores is result of books of account and after withdrawal/reduction of an amount of ₹ 60 Crores be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in disallowing of Proportionate amount of Interest (being the finance cost) of ₹ 22,19,36,623/- by concluding that the purchases with various parties such as Vedika Steels Private Limited, SB Metals Pvt Ltd, Adarsh Global Traders and services Private Limited, Resource Metals Minerals Private Limited United Mineral Resources Private Limited are Paper transactions and non-genuine. DRP Directions are not followed: 7.1 Erred in not following the directions of DRP in para 2.8 wherein the honourable DRP has directed to compute the interest after examining payments and receipts with the alleged parties in the cash flow / fund flow statement. 7.2 Erred in calculating disallowance by considering only purchases without taking into account the receipts. The action of the AO is against the directions of DRP. 7.3 Ought to have considered the interest calculation submitted by the assessee wherein the receipts and payments from the alleged parties were considered and the interest disallowance was calculated. Transactions are audited 7.4 Erred in not appreciating the fact that the transaction relating to purchases and sales are entered into during the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to decide, how the funds should have been utilized. 7.13 Erred in calculating the disallowance of interest expenditure on the basis of proportion of the purchases without considering the ageing of debtors and creditors. The period of transaction between purchase and sale with the parties is very short which shows that no interest bearing funds were used. 7.14 Without prejudice, the Ld. AO has taken two divergent views on the issue that: 7.14.1 The entire trading activity between the alleged companies as sham and in disallowing interest allegedly relating to bogus purchases. 7.14.2 Accepted the profit arrived at basing on the entire sales Turnover admitted in P L a/ c by the assessee. 7.15 Erred in not appreciating the fact that the assessee has purchased with the above alleged parties and sold to the outside party and accordingly profit arrived is offered to tax. 7.15.1 Erred in disallowing the proportionate expenditure of interest without appreciating the fact that the said sales related to purchases are offered as income and hence the entire purchases cannot be treated as bogus. 7.15.2 Erred in making proportionate disallowance of interest wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Infratech Limited. 9 Erred in making addition of ₹ 13,23,00,000/- alleging that the assessee has claimed loss in fourth quarter merely on suspicion and surmises which is against the principles of natural justice. 9.1 Erred in not appreciating the fact that the assessee has not claimed any loss, as alleged, in the profit and loss account for the year under consideration. Hence, no disallowance can be made. 9.2 Erred in not following the provisions of the Act, wherein there are no provisions as to separately assess quarter wise results. 9.3 Erred in not appreciating the fact that during the year the assessee has made expenditure on project which was cancelled and the same was part of business of the assessee. Hence, the same cannot be disallowed for the year under consideration. 9.4 Erred in disallowing the amount of ₹ 13,23,00,000/ - on mere suspicion basis, without finding any corroborative material to support the disallowance/ disproving the assessee claim, if any. 9.5 Erred in not appreciating the fact that company had entered into agreement for business expediency and the expenditure incurred has direct nexus with the company. 9.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C(1), the AO has no right to pass final order pursuant to the recommendations made by the TPO. Accordingly, the order passed by the AO, thus, lacks jurisdiction. 9.1 In the light of the above, in the present case, the AO has passed the Draft Assessment but sent demand notice and penalty notices along with the draft assessment order. Since the facts are not identical to the facts of the case laws relied on by the assessee, moreover, the AO has to pass draft assessment order as per provision and was accordingly passed by him. The accompanying notices along with the draft assessment order are only procedural mistakes, it cannot tantamount to passing of final assessment order. Accordingly ground raised by the assessee is dismissed. 10. Ground No. 2 was not pressed by the ld. AR. 11. As regards Ground No. 3 relating to ALP adjustment of ₹ 2,97,45,397/- towards interest on advances of ₹ 20,58,50,500/-, ld. AR of the assessee submitted as under: a. The TPO has calculated the interest for whole year without considering the date of giving and receiving advances (Page 384 of Paperbook - Ledger Extract of Advances). b. There was no mutual agreement between asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,769/- from its AE during the year for which AE has not charged any interest. There is an excess amount of ₹ 2,39,58,269/- received by the assessee and the same is outstanding as on 31.03.2014 for which AE has not charged any interest. Hence, the transaction is within ALP. f. Without prejudice to the above, even if Transfer pricing proceedings are attracted, we would like to submit that the above said transaction is within ALP due to following: 1. As per the provisions of section 92C of the act, the ALP of the transaction has to be computed by applying anyone of the method contained in the Act. 2. Comparable Uncontrolled Cost method is the most appropriate method. As per Rule10B(1) of the Income Tax rules, price charged or paid for comparable uncontrolled transaction is compared with price charged or paid for transaction with AE and accordingly ALP adjustment is made. 3. In the present case, the assessee has not charged interest in respect of transactions with Non-AE. The assessee has Trade Payables of ₹ 4,07,28,66,450/- for which no interest is charged by the concerned parties. The assessee has trade receivables of ₹ 6, 77,56,83,287/- in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e received back Cumulative balance No. of days 19/06/2013 470,88,000 - 470,88,000 - 18/07/2013 298,75,000 - 769,63,000 30 days 30/09/2013 1257,40,000 - 20,27,03,000 43 days 20/11/2013 - 8,83,92,2002 11,43,10,998 51 days 04/12/2013 - 248,39,012 8,94,71,986 14 days 05/12/2013 - 11,65,77,755 (271,05,769) 1 day 03/02/2014 31,47,500 - (239,58,269) 59 days From the above ledger extract, it is clear that the assessee has given advance to its AE on 19/06/2013, 1807/2013 and 30/09/2013 and received back on 20/11/2013, 04/12/2013 and 05/12/2013. In the result, assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee fee percentage, say 0.20%. He relied on the following cases: 1. Bharati Airtel Ltd. Vs. ACIT, ITA No. 5816/Del/2012 2. Aban Offshore Ltd. vs. DCIT, ITA No. 585/Mds/2015 3. Videocon Industries Ltd. Vs. ACIT, ITA No. 6145/Mum/2012/ 55 Taxmann.com 263 4. Manugraph India Ltd., Vs. DCIT, [2016] 69 Taxmann.com 400 (Mum. Trib) 5. Rusabh Diamonds Vs. ACIT, 68 Taxmann.com 141 ( Mum. Trib) 6. Asian Paints Ltd. Vs. ACIT, ITA No. 7801/Mum/2010 7. Lanco Infratech Ltd. Vs. DCIT, ITA No. 450/hyd/2016 8. Aster Pvt. Ltd., Vs. DCIT, ITA No. 220/Hyd/2015. He further, submitted that this issue is covered by the decision of the coordinate bench of this Tribunal in assessee s own case for AY 2013-14 in ITA No. 2186/Hyd/2017 vide order dated 27/04/2018. He submitted that in the above decision, the bench has adjudicated the rate at 0.53%. He prayed that in the Singapore where the AE company is incorporated, the banks are charging interest rate @ 0.15% on bank Guarantee, therefore, the same may be adopted. 15. The ld. DR on the other hand relied on the orders of revenue authorities. 16. Considered the rival submissions and perused the material on record. We find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement with the assessee that corporate guarantee is contingent liability, relevant consequence depends upon future event. However, the quantum of exposure should be on the basis of actual exposure. In this case, it is not clear from the document submitted before us the actual exposure. Therefore, we find it appropriate to remit this issue back to the file of TPO/AO to determine the actual exposure of contingent liability for this AY and apply the rate of 0.53% as per the ratio of Glenmark Pharmaceuticals (supra) on the actual contingent liability. It is needless to say that assessee may be given proper opportunity of being heard. Accordingly, ground raised by the assessee is allowed for statistical purposes. Following the said decision, we remit this issue to the file of TPO/AO to decide the issue in line with the above directions given in AY 2013-14.The assessee made specific reference to the charging rate at Singapore @ 0.15%. We find that the assessee has a point since the Bench Marking is generally based on Bank rates when the banks are charging @ 0.15% on Bank Guarantee, the same should be adopted to Bench Mark. Therefore, the TPO is directed to collect the rates preva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the assessee. Further, during the ITAT Appellate proceedings for AY 2013-14 in the assessee's own case which is heard in ITA No 2186/H/2017, the Ld. DR has stated that the addition of ₹ 60 Crores was made in respect of discrepancies in finance cost for alleged purchases with group companies. The relevant extract of the above findings is as under: 17.7 Further, ld. DR tried to apply the above decision of Shri Jagdish H. Patel i.e. 8% of total purchases of two A Ys i.e. 2013-14 2014-15 which comes to ₹ 58.09 CT01'es. He submitted that against the above, AO has already made the disallowance of ₹ 60 crores in AY 2014-15. We find there is no relevance for this submission in this AY and moreover, AO has not made any disallowance in purchases in A Y 2013-14. Herein, it is submitted that the Hon'ble ITAT Hyderabad, in ITA No 2186/H/2017 have already deleted the addition made in respect of finance cost on alleged purchases from group companies vide Para 17.8. Once the very basis of the addition has been deleted by the Hon'ble ITAT for which the additional income was offered, once again addition made on the basis of same discrepan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of H.M. Keshiparekh Co. Ltd. (supra) that the principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on the ground of commercial expediency, simply because it takes place sometime after the close of accounting year. It was held that in examining any transaction and situation of this nature, the Court would have more regard to the reality and specialty of the situation rather than pure theoretical or doctrinaire aspect of it. 47. A some what similar issue again arose before the Hon'ble Bombay lligh Court in the case of CIT v. Shivsagar Estates (AGP) [1993] 204 ITR 1. In the said case, the assessee had leased a plot on rent and had made certain advances on interest to M under an agreement. M was to construct the Hotel on the said plot which he was unable to do. A fresh agreement, therefore, was entered into between the assessee and M subsequently under which the assessee waived rent and interest and received back the plot. In these facts and circumstances, the doctrine of real income was held to be applicable by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 2 (SC).The Hon'ble High Court has held as under: 12. On both counts, the Tribunal has in a detailed discussion of more than 40 paragraphs found that there is no substance in the objections of the Revenue. If the Revenue is trying to show that the relevant transactions were sham and not real, then it has to bring in satisfactory material. The Tribunal found in paras 37 to 40 of the impugned order that the income which was earlier disclosed was not as such because the Agreements were terminable or could have been cancelled. Once they were cancelled, the properties have reverted back to the assessee. They are duly reflected in the balance sheet and as assets of the assessee. There were revised accounts and which were also scrutinized. They were found to be in order and meeting the accounting practice adopted. Therefore, the accounting policy also could not have been faulted. In para 42 of the impugned order, the Tribunal held that income could not have really accrued because of the fact that these Agreements were cancelled. Then the issue of their cancellation has been gone into, and in extensive details. The correct legal principles were applied and a finding of fact is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ergul village and report the factual position. Accordingly, Sri Y. Prasad visited the lands at Sy.No. 664 721 of Nadergul village and submitted his report on 23.09.2011. As per the report of Inspector, the lands in Sy.No.664 721 of Nadergul village are agricultural lands wherein is agricultural activity is being carried out even on the date of inspection. Some of the lands in these survey No. are barren lands and a village by name Rangannaguda is situated in this survey no. No trace of any development work was found to have taken by taken place in these survey Nos. 15. Not only that A.O. has summoned the VRO and his statement was extracted in paras 5 and 6 of the order which also indicate that the so-called land sold to M/s. New Cyberabad City Projects Ltd., is in fact owned by various agriculturists and they are conducting agricultural operations and as per VIW records, neither assessee nor M/s. New Cyberabad City Projects l.td., or any of its associates are owners of the lands. AO. also made an attempt to trace the trail of money received by assessee company and the outflows are to various individuals and also to various group concerns. However, except analyzing the flo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e seen from the above, the Hon'ble jurisdictional ITAT has held that if the entry in the books of account of the assessee does not arrive at taxable income as per the provisions of Income Tax Act, 1961, then the return income of the assessee is to be accepted. (a) Judgment of Hon'ble Supreme Court in the case of CIT Vs Hind Construction Limited [19721 83 ITR 211 (SC) (b) Judgment of Hon'ble Supreme Court in the case of Sanjeev Woollen Mills Vs CIT [2005] 279 ITR 434 In view of the above, it is requested that the Hon'ble ITAT to kindly consider the same in favour of the assessee and delete the additions made in the assessment order. 17. The Ld. DR, on the other hand relied on the orders of revenue authorities. 18. Considered the rival submissions and perused the material on record. We notice that assessee has declared ₹ 60 crores as additional income subsequent to the search conducted on 13/12/2013. Accordingly, assessee drafted its balance sheet and P L account by making addition of ₹ 60 crores in the turn over of the company by which the book profit also increased by ₹ 60 crores. As per the book result, the turnover stood at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts or evidences found by it which could support the above said statement recorded. It is submitted that the assessee company had offered to disclose additional income during the course of search assuming that there are certain discrepancies in the books of account of the company. However, on verification of the books, no discrepancies were noticed in the books and therefore, no additional income was offered in the return of income filed for AY 2014-15. However, the assessing officer without appreciating the above facts added the amount of ₹ 60 Crores to the returned income merely on the basis of statement recorded during search proceedings without bringing any corroborative material on record. Fact remains that the books of accounts of the assessee company have been accepted by the assessing officer and also, the AO has made certain addition towards interest disallowance. Further, no incriminating material was found during the course of the search proceedings on basis of which the AO can conclude that there was any undisclosed income. It is submitted that the assessing officer, while making the above addition, has referred to the certain transactions with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leted the addition made in respect of finance cost on alleged purchases from group companies vide Para 17.8. Once the very basis of the addition has been deleted by the Hon ble IT AT for which the additional income was offered, once again addition made on the basis of same discrepancies, which were later found to do not exist; addition so made is not correct and hence it is requested to kindly delete the same. It is submitted that making addition to the income of the assessee relying merely on the statement recorded without there being any corroborative evidence on record is against the basic; provisions of Income Tax Act, 1961. The assessing officer ought to have appreciated the fact that only Real Income can be taxed under Income Tax Act, 1961. The AO during the complete post-search assessment proceedings has not been able to establish any undisclosed investment/ expenditure of the assessee. Being so, making addition by merely basing on statement recorded is not only incorrect but against the law governing Income Tax in India. In this regard, reliance is placed on the following: (i) CBDT Circular in F No 286/2/2003-IT(Inv) dated 10.03.2003 which states as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequently the same were withdrawn once the search proceedings are over. The AO has to keep the evidence or cogent material to the extent of additional income declared by the assessee. The same view was given in CBDT Circular No. 286/2/2003-IT(Inv.), dt. 10/03/2003. At the time of completing assessment, it is the duty of AO to make the addition based on incriminating material found during the search and not confined to rely on the declaration of the assessee. 21.1 In the given case, AO has not brought on record any incriminating material or cogent material in support of the above addition. Merely relying on the declaration given by the MD is not proper, since the same was withdrawn by the assessee subsequently. In this connection, we refer to the decision of the Hon ble High Court of Telengana and AP in the case of Gajjam Chinna Yellappa Vs. ITO, (ITTA Nos. 268, 273 308 of 2003 and others), dated 6th November, 2014 wherein the Hon ble Court held as under: 11. In 1. T. T. A. No. 112 of 2003 (see CIT v. Naresh Kumar Agarwal [2014] 369 ITR 171/[2015] 53 taxmann.com 306 CAP) this court dealt with the very aspect and held that a retracted statement cannot constitute the sole ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls Traders Pvt. Ltd., M/s United Mineral Resource P. Ltd., M/s SB Metals P. Ltd. and M/s Vedika Steels P. Ltd. AO has verified few transactions entered with these concerns and found certain discrepancies like non-existence of LR or way bills, uses of improper vehicles to transport, no physical movements of goods and no VAT details or seal/stamps on the seized invoices. AO came to the conclusion that the transactions entered with all related concerns were sham transactions. 17.1 However, we noticed that AO has not rejected any purchases or made any enquiry to find the fair market value of transactions in line with the provisions of section 40A. Instead of rejecting the turnover, he proceeded to disallow only the associated financial cost. He disallowed the interest cost in proportion to the purchases with related and unrelated parties. 17.2 However, DRP remitted this issue of disallowance of interest back to the AO to recalculate the interest properly and by following cash flow on day to day basis. 17.3 AO recalculated the interest, after DRP s direction, on the basis of calculating no. of days of each purchase transaction and date of year end i.e. 31/03/2013. In our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of consolidated outstanding. In our view, the assessee has made margin of 2.34 crores in this transaction and it is enough to cover the interest cost on these transactions. Even otherwise, as explained earlier, when AO accepted the turnover without disallowing any purchases, he cannot disallow only interest cost. 17.5 Coming to AO s observation that assessee has diverted funds to other related concerns for making huge investment, we find in the consolidated statement submitted by the assessee that the peak credit outstanding with these concerns are ₹ 24.31 crores on 06/08/2012. In order to find out the diversion of funds, there will be huge outstanding with these concerns for considerable period of time. In this case, these are regular business transactions and there is no such huge outstanding with these concerns. 17.6 Coming to ld. DR s submission, he relied on the case law of Hon ble Gujarat High Court in ITA No. 410 of 2017 in the case of Sri Jagadish H. Patel, in which, it was found that assessee made bogus purchases to the extent of ₹ 5.66 crores. Accordingly, AO disallowed 100% purchases. However, ld. CIT(A) has reduced to 25% and ITAT at 8%. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is needless to say that assessee may be given proper opportunity of being heard. Therefore, ground raised by the assessee is allowed for statistical purposes. As the issue is similar in this AY, following the decision in AY 2013-14, we remit this back to the file of AO to decide the issue in line with the directions given in AY 2013-14. This ground is allowed for statistical purposes. 24. As regards ground No. 9 relating to the addition of ₹ 13,23,00,000/- towards loss incurred on 4th quarter, the assessee in its written submissions, stated as under: It is submitted that the assessing officer has made an addition of ₹ 13.23 Crores to the income of the assessing being the disallowance of loss incurred in 4th quarter i.e., between 01.01.2014 to 31.03.2014. In this regard, it is submitted that the assessing officer has made the above addition merely on the basis of suspicion and surmises. The assessing officer ought to have appreciated the fact that the assessee had filed its return of income for the year under consideration based on the book profits for the complete financial year i.e. FY 2013-14. The assessing officer has accepted the books of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany and accepted the returned profit, on the other hand, the assessing officer has made addition of ₹ 13.23 Crores on the basis of suspicion and surmises. The action of the assessing officer is not only self-contradictory but also against the provisions of Income Tax Act, 1961. In this regard, reliance is placed on the judgement of (a) CIT Vs Pact Securities Financial Services Limited [2015] 61 taxmann.com 192 (AP Telengana) In view of the above, it is requested that the Hon'ble ITAT to kindly consider the same in favour of the assessee and delete the additions made in the assessment order. 25. Ld. DR, on the other hand relied on the orders of revenue authorities. 26. Considered the rival submissions and perused the material on record. We observe that AO called for the IV Quarter results and noticed that assessee has incurred loss to the extent of ₹ 13.23 crores during this quarter. He asked for the explanation to substantiate the loss incurred during this quarter. Assessee could not substantiate the same to the satisfaction of AO and accordingly, he made addition. 26.1 We notice that AO has not found any misstatement or any wrong cla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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