Friends & Friends Shipping Pvt. Ltd., GANDHIDHAM V. The Asstt. Commr. Income Tax, Gandhidham Circle, GANDHIDHAM

CO 17/RJT/2016

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 4263 (ITAT-RAJKOT)
• Duration Of Justice: 5 year(s) 5 month(s) 29 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 19-05-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 20-11-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Search and seizure; Proportionate interest; Set aside
• Section: 132; 143(3); 153A; 143(1); 142(2A); 13; 153

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, राजकोट 瀈यायपीठ 瀈यायपीठ瀈यायपीठ 瀈यायपीठ, , , , राजकोट IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT (Conducted Through Virtual Court) ] ] BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No.226, 227 and 229/RJT/2016 WITH Cross Objection No.16, 17 and 19/RJT/2016 Assessment Year : 2006-07, 2007-08 and 2009-10 ACIT, Gandhidham Circle Gandhidham-Kutch. Vs M/s.Friends & Friends Shipping Pvt.Ltd. Maitri Bhavan, Plot NO.18 Sector 8, Gandhidham-Kutch. अपीलाथ / (Appellant) यथ / (Respondent) Assessee by : Shri K.C. Thacker, AR Revenue by : Shri Sanjeev Jain, CIT-DR स ु नवाई क तार ख/Date of Hearing : 18/05/2022 घोषणा क तार ख /Date of Pronouncement: 20/05/2022 आदेश/O R D E R PER T.R. SENTHIL KUMAR, JUDICIAL MEMBER: These are three appeals filed by the Revenue against common order of even dated 21.3.2016 passed by the ld.CIT(A)-12, Ahmedabad relating to the Asstt.Year 2006-07, 2007-08 and 2009- 10. The assessee has also filed Cross Objection bearing No.16, 17 and 19/RJT/2016 as against the respective appeals of the Revenue. They are disposed of by this consolidated order. 2. First we take up Revenue’s appeals in ITA No.226 and 227/RJT/2016. The following grounds are raised in these two appeals: ITA No.226/RJT/2016 : Asst.Year 2006-07 ITA No.227, 226 and 229/RJT/2016 With CO 2 “1) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of Handling charges for scrap sale of Rs.62,20,000/-. 2) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of Godown rent exp. of Rs.81,00,000/-. 3) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of Godown electricity exp. of Rs. 12,00,000/-. 4) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of Handling Shifting & Other charges of Rs.2,09,60,656/-. 5) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of disallowance of interest u/s.36(1)(iii) of Rs. 1,16,46,130/- though the assessee had made interest free advances out of interest bearing funds. 6) On facts and in circumstances of the case and in law, the Id. CIT(A) ought to have upheld the order of the A.O. 7) It is, therefore, prayed that the order of the CIT(A) be set aside and that of the A.O. be restored to the above extent.” ITA No.227/RJT/2016 : Asst.Year 2007-08 “1) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of Handling charges of Rs.12,00,000/-. 2) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of Godown rent exp. of Rs.12,00,000/-. 3) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of Handling Shifting & Other charges of Rs.95,97,214/-. 4) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of disallowance of interest u/s.36(1)(iii) of Rs.1,56,47,087/- though the assessee had made interest free advances out of interest bearing funds. 5) On facts and in circumstances of the case and in law, the Id. CIT(A) ought to have upheld the order of the A.O. 6) It is, therefore, prayed that the order of the CIT(A) be set aside and that of the A.O. be restored to the above extent. 3. Brief facts of the case is that the assessee is a private limited company engaged in the business of trading of goods and commodities, handling of goods and commodities at Kandla Port and having container freight station in the name of its proprietary ITA No.227, 226 and 229/RJT/2016 With CO 3 concern viz. “M/s. Friends Containers Terminal at Waluj, Aurangabad. A search and seizure action under section 132 of the Income Tax Act, 1961 ("the Act" for short) was carried out 15.6.2011 at the business premises of the assessee, and also at the residential premises of the partners of the “Friends Group”. Consequent upon the search action, the assessment proceedings were initiated by issuance of notice under section 153A of the Act on 2.1.2013. The search assessments have been completed after receipt of special audit report under section 142(2A) by making additions/disallowance on handling charges for scrap expenses, godown rent, godown electricity, handling shifting & other charges and disallowance of interest under section 36(1)(iii) of the Act and thereby assessed the total income at Rs.5,32,60,610/- for the A.Y.2006-07 and Rs.2,97,53,840/- for the Asst.Year 2007-08. Aggrieved against the same, the assessee filed appeals before the Ld.CIT(A). The assessee has taken legal ground challenging validity of 153A assessment on the ground that no incriminating material was found during the course of search, where assessments have been abated before the date of search completed. The details are as follows: Sr.No. A.Y. Order U/s. Date of order 1 2006-07 143(1) 28/03/2008 2 2007-08 143(1) 29/03/2009 3 2008-09 143(3) 27/12/2010 4. The assessee further submitted that during the course of assessment proceedings under section 153A, for making various additions/disallowances, the AO simply relied on the report and comments of Special Auditor, which in turn was based on the audited books of accounts which were being filed under section 13 of ITA No.227, 226 and 229/RJT/2016 With CO 4 the Act by the assessee. The AO nowhere relied upon any seized material during the course of search in the order passed under section 153A of the Act. In the absence of any seized material, the assessments under section 153A itself is invalid in law, and for this proposition, he relied upon the decision of Special Bench of the ITAT in the case of All Cargo Global, reported in 137 ITD 287 (Mum-SB), Delhi High Court judgment in the case of Kabul Chawla, reported in 61 taxmann.com 412 (Del), decision of Co-ordinate Bench of the ITAT in IT(SS)A.No.3/ Ahd/2014 in the case of Saumya Construction and the decisions in the other cases. The ld.CIT(A) observed that by following the above judgments he has considered similar issue in favour of another assessee viz. Arvind V. Joshi & Co. and accordingly held that in the present appeals, it was not in dispute that the assessment orders under appeal remained unabated as no proceedings before the AO on the date of search i.e. 15.6.2011 was pending. Further, Department could not produce any incriminating seized material in support of addition made by the AO for the above assessment years. It is therefore held that the additions made by the AO dehors any reference to or foundation in any incriminating seized materials are not sustainable for any of the assessment year under appeal, therefore, he deleted the impugned additions/disallowance and allowed the appeal in favour of the assessee. 5. Aggrieved against the same, the Revenue is in appeal before us without challenging jurisdictional issue, but only challenging merits of the case, wherein additions made by the AO. The Revenue has also not challenged jurisdictional issue by way of addition ground before the Tribunal. Thus, the Revenue grounds of appeal on merits of the case cannot be entertained. ITA No.227, 226 and 229/RJT/2016 With CO 5 6. It is an admitted fact that there is no seized material in the search conducted in the premises of the assessee on 15.6.2011 and the AO has not relied upon any incriminating material seized for the purpose of framing assessment under section 153A of the Act. The ld.CIT(A) has relied upon decision of Saumya Construction of the Co- ordinate Bench of the ITAT, which was confirmed by the Hon’ble jurisdictional High Court reported in 380 ITR 529 (Guj). with the following observations: “18. In this case, it is not the case of the appellant that any incriminating material in respect of the assessment year under consideration was found during the course of search. At the relevant time when the notice came to be issued under section 153A of the Act, the assessee filed its return of income. Much later, at the fag end of the period within which the order under section 153A of the Act was to be made, in other words, when the limit for framing the assessment as provided under section 153 was about to expire, the notice has been issued in the present case seeking to make the proposed addition of Rs.11,05,51,000/- on the basis of the material which was not found during the course of search, but on the basis of a statement of another person. In the opinion of this court, in a case like the present one, where an assessment has been framed earlier and no assessment or reassessment was pending on the date of initiation of search under section 132 or making of requisition under section 132A, while computing the total income of the assessee under section 153A of the Act, additions or disallowances can be made only on the basis of the incriminating material found during the search or requisition. In the present case, it is an admitted position that no incriminating material was found during the course of search, however, it is on the basis of some material collected by the Assessing Officer much subsequent to the search, that the impugned additions came to be made. On behalf of the appellant, it has been contended that if any incriminating material is found, notwithstanding that in relation to the year under consideration, no incriminating material is found, it would be permissible to make additions and disallowance in respect of all the six assessment years. In the opinion of this court, the said contention does not merit acceptance, inasmuch as, the assessment in respect of each of the six assessment years is a separate and distinct assessment. Under section 153A of the Act, an assessment has to be made in relation to the search or requisition, namely, in ITA No.227, 226 and 229/RJT/2016 With CO 6 relation to material disclosed during the search or requisition. If in relation to any assessment year, no incriminating material is found, no addition or disallowance can be made in relation to that assessment year in exercise of powers under section 153A of the Act and the earlier assessment shall have to be reiterated. In this regard, this court is in complete agreement with the view adopted by the Rajasthan High Court in the case of Jai Steel (India), Jodhpur (supra). Besides, as rightly pointed out by the learned counsel for the respondent, the controversy involved in the present case stands concluded by the decision of this court in the case of Jayaben Ratilal Sorathia (supra) wherein it has been held that while it cannot be disputed that considering section 153A of the Act, the Assessing Officer can reopen and/or assess the return with respect to six preceding years; however, there must be some incriminating material available with the Assessing Officer with respect to the sale transactions in the particular assessment year.” 6. Following the above ratio of Hon’ble jurisdictional High Court’s judgment as well as Delhi High Court judgments in the case of Kabul Chawla (supra), we hereby reject the ground of appeal of the Revenue are not entertained, and the appeals filed by the Revenue for the Asst.Year 2006-07 and 2007-08 are hereby dismissed. CO No.16 and 17/RJT/2016 (Assessee) 7. Admittedly, the above two Cross Objections filed by the assessee are merely in support of order of the ld.CIT(A) as the Revenue appeals are dismissed there is no grievance to the assessee and therefore the COs. are not pressed. Therefore, the COs are also dismissed. 8. Now we take ITA No.229/RJT/2016 (Revenue’s appeal – AY 2009-10) 9. The grounds raised in this appeal are as under: “1) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of Scrap Handling charges of Rs.3,59,000/-. ITA No.227, 226 and 229/RJT/2016 With CO 7 2) The ld.CIT(A) has erred in law and on facts in deleting the addition made on account of disallowance of interest u/s.36(1)(iii) of Rs. 1,85,46,964/- though the assessee had made interest free advances out of interest bearing funds. 3) On facts and in circumstances of the case and in law, the Id. CIT(A) ought to have upheld the order of the A.O. 4) It is, therefore, prayed that the order of the CIT(A) be set aside and that of the A.O. be restored to the above extent.” 10. Brief facts of the case is for the Asst.Year 2009-10 is that the Special Auditor has noted that the assessee has paid ground rent charges of Rs.1,50,000/- for scrap handling on 07-03-2009 for the month of April to June - 2008, Rs. 1,10,000/- for soya doc export expenses and Rs. 99,000/- for Rapeseed doc export expenses, the book entry of which was passed on 07-03-2009 which shows that the income to the extent of Rs. 3,59,000/- has been transferred to group company M/s. Arvind V. Joshi & Co. The AO, based on such observations called upon the assessee to give details of the godown rent and how these were utilized for business purpose, why the accounting entries were not passed and tax was not deducted on month to month basis, to furnish copy of agreement entered with M/s. Arvind V. Joshi & Co. and to prove the genuineness of the expenses with documentary evidence. In response, the assessee explained that the assessee have taken open space, at port, on hire from M/s. Arvind V. Joshi & Co. for which necessary invoicing was done by M/s. Arvind V. Joshi & Co. only on the last day of accounting year and for which the assessee, as a service recipient, don't have any reason to object for. Further, necessary tax as required were deducted and deposited in to the government A/c. It was further explained that as the appellant does not own any warehouse/ open space within the port area, it become necessary on their part to take such space on hire from available sources so that ITA No.227, 226 and 229/RJT/2016 With CO 8 the cargo handled by them, as imported by their customer (which attracts custom duty), can be stored there. As in this case the space was available with M/s. Arvind V. Joshi & Co., the assessee has taken such space for storing the scrap cargo of their customer. The assessee further also submitted that during the year under consideration they have received gross consideration of Rs. 5,48,63,663/- for handling of scrap cargo and one of the requirement of handling such cargo is that the assessee has to allow 30 days' free storage period within the port premises to their customer, charges of which is already factored in handling charges which is collected from their customer. It was also submitted that M/s. Arvind V. Joshi & Co. has collected ground rent charges from the assessee for providing the storage space within the port area, but by oversight the accountant has recorded these expenses as additional handling charges as can be seen from copy of invoices issued and also from the copy of ledger account from the books of M/s. Arvind V. Joshi & Co, the assessee also submitted commodity wise details in respect of the auditor's query and also furnished the relevant documents concerning the particular vessel as supporting evidence. The AO, however, has not accepted the assessee’s submission as the issue has been dealt with in the case of the assessee in A.Y. 2006-07 wherein the claim of payment of rent for open space to M/s. Arvind V. Joshi 85 Co., a group concern, has been found to "non - genuine". As the position of expenses and accounts are same as there in A.Y. 2006-07 the claim is rejected. Accordingly the AO disallowed the expense of Rs. 3,59,000/-. 11. Aggrieved against the same, the assessee filed appeal before the ld.CIT(A) who deleted the addition by observing as follows: ITA No.227, 226 and 229/RJT/2016 With CO 9 “10.1 I have given a very careful consideration to the material available and the rival contentions. The prime objection of the AO is that the expenditure is accounted on the last day though the services have been enjoyed during the whole period of the year. I do not think that the appellant's explanation that the expenditure was accounted when the invoice from the supplier was received can be brushed aside as has been done by the AO. It is also not the allegation of the AO that payment is not made or that the part of the payment is received back or that no services were enjoyed by the appellant. Merely because the accounting entry is passed on the last day of the accounting period after receiving the invoice can be no ground to consider whole or part of the expenditure non-genuine. Thus, I find the addition wholly without merit and therefore the same is deleted. The appellant would get relief of Rs.3,59,000/-. The related ground 3(i) succeeds. 12. We have heard rival submissions, it is not the case of the Department that the assessee has not paid the rent of Rs.3,59,000/- but paid on the last day of the first year. The ld.AO could not prove this as bogus expenditure, whereas the assessee has proved that it required open yard to place the imported goods of its customers for a period of 30 days, which is already collected from its customers as handling charges. In the facts of the above circumstances of the case, we do not find any infirmity in the order passed by the ld.CIT(A) and therefore confirm the same and dismiss the Ground No.1 raised by the Revenue. 13. As regards Ground No.2 relating to disallowance of interest u/s.36(1)(iii) of the Act. 14. Brief facts in this regard is that the Special Auditor in his observation opined that the assessee firm has taken loan on hypothecation of stock in trade, FD-OD, machinery and vehicles and that firm has paid interest processing charges and other charges of Rs.1,85,46,964/-. The Special Auditor further listed 6 parties and opined that with these 6 parties the assessee has no business transaction and therefore the interest-free advances, to them appear to be not for business purposes. The Ld. AO on this basis, issued a ITA No.227, 226 and 229/RJT/2016 With CO 10 show-cause notice to the assessee to explain why the proportionate interest should not be disallowed. The assessee replied that it had huge interest-free funds of Rs.22.61 crores and has made interest- free advances to the tune of only Rs.2.94 crores as at the year end and further that there is no relationship between the assessee and recipient of advances within the meaning of section 40A(2)(b) of the Act. The details as called for, being the copies of accounts of the parties concerned, the copies of bank statement etc. were produced before the AO. After considering the reply of the assessee, and without any further query, the AO in conclusion, tabulates the opening balance, transactions during the year, and closing balance as at the year end with regard to 5 out of these 6 parties and observes that capital is less than the fixed assets of the appellant and thus the interest-free advances made are out of interest-bearing funds. It is also the observation of the AO that the appellant has not established that the advances are for any business expediency or that any business interest is being served by these interest-free advances. After quoting from various judgments, the AO observes that "it is established beyond doubt that the advances were not made due to commercial expediency and for the purpose of business. The assessee has not proved the nexus that the non- interest bearing funds have been utilized for the purpose of giving non-interest bearing loans". The AO thus computes the hypothetically chargeable 12% interest from these 5 parties and makes a disallowance of Rs. 1,85,46,964/-., being the whole expenditure on interest claimed by the appellant. Similarly, the appellant, vide the same submission also pleaded that part of the advances are driven by business expediency and that part of such advances are to group concerns/holding company, from whom as a business policy in the whole group no interest is charged on mutual ITA No.227, 226 and 229/RJT/2016 With CO 11 basis, and that there is no relationship of section 40A(2)(b) with any of the parties, which however, did not find favour with the AO and thus, he made the addition of proportionate interest. 15. Aggrieved against the assessment order, the assessee filed an appeal before the ld.CIT(A). The assessee submitted before the ld.CIT(A) that the assessee-company had huge funds of Rs.22,61,18,071/- available as on 31.3.2009 on which no interest is payable; as against this interest-free advances given to the parties of Rs.2,93,83,500/-. There was also no instance of relationship attracting section 40A(2)(b) of the Act. The assessee also furnished details of statement showing secured loans, interest-free funds, advances etc. The ld.AO failed to consider that the advances given to the parties was for the purpose of commercial expediency, and therefore, the advances given to the third parties cannot be considered for disallowance under section 36(1)(iii) of the Act. Further, the advances given to the parties are also to the sister- concerns, and the sister concerns do not charge interest for mutual accommodation given. These factual submissions were being considered by the AO. However, the AO made disallowance at the rate of 12% and made disallowance of Rs.1,85,46,964/-, which deserves to be deleted. The ld.AR further relied upon various case laws more particularly – i) Reliance Utility and Powers Ltd., (2009) 313 ITR 340 (Bom); ii) RL Kalthia Engineering & Automobiles P.Ltd., (2013) 33 taxmann.com 14 (Guj); iii) SA Builders (2007) 158 taxman 74 (SC); iv) Hero Cycles P.Ltd., (2015) 63 taxamnn.com 308(SC) ITA No.227, 226 and 229/RJT/2016 With CO 12 16. After considering the above submissions, the ld.CIT(A) held that it was clearly noticeable from the balance-sheet extracted for all the assessment years under appeal that thematic average of interest free advance was far less than the available interest free funds, and the borrowed funds also appeared to have been deployed in closing stock, trade receivables and business assets for which primarily the funds have been borrowed. Accordingly, the ld.CIT(A) held that the advances prima facie appeared to have been made out of interest free funds available with the assessee; secondly, the AO has not discharged onus of establishing clear cut and direct nexus between the interest bearing loans and interest free advances so as to justify disallowance in the light of the ratio laid down in the case of Reliance Utility and Hero Cycles (supra) and no examination of the accounts of the recipients could yield such nexus, and therefore, as a matter fact, it was to be held that such a nexus did not exist warranting any disallowance under section 36(1)(iii) of the Act; thirdly, there was clear and self-evident mutuality and business expediency in sizable inter-se transactions between the assessee and recipients of funds, and further that there did not appear any noticeable personal or non-business use by recipients of the funds received interest free and thus, on fact of the case as also in view of the law as explained by the Supreme Court in SA Builders and Hero Cycles (supra), there was no case to invoke the provisions of section 36(1)(iii) of the Act for making any disallowance. Accordingly, the disallowance of Rs.1,85,46,964/- made by the AO was deleted. 17. The ld.DR appearing for the Revenue supported the order of the AO, but could not controvert the finding made by the CIT or the case laws relied upon by the assessee viz. of the jurisdictional High Court in the case of RL Kalthia Engineering & Automobiles P.Ltd., ITA No.227, 226 and 229/RJT/2016 With CO 13 and Reliance Utility and Powers Ltd. (supra) of the Bombay High Court as well as judgment in the case of SA Builders (supra) on the issue of business expediency. For the above reasons, we do not find any infirmity in the order passed by the ld.CIT(A), and thereby grounds raised by the Revenue is hereby rejected, and appeal of the Revenue is hereby dismissed. 18. Though Cross Objection No.19/RJT/2016 is filed by the assessee, which supported the order of the ld.CIT(A), as we dismissed the Revenue’s appeal, there is no grievance to the assessee, and therefore, the assessee has not pressed the present CO; thereby the CO filed by the assessee is also dismissed. 19. In the result, appeals of the Revenue and the Cross Objections filed by the assessee are dismissed. Order pronounced in the Court on 20 th May, 2022 at Ahmedabad. Sd/- Sd/- (WASEEM AHMED) ACCOUNTANT MEMBER (T.R. SENTHIL KUMAR) JUDICIAL MEMBER Ahmedabad, dated 20/05/2022