DCIT, Ludhiana V. M/s National Yarn Agency, Ludhiana

ITA 12/CHANDI/2012

• Counselvise Citation: 1221514 RSA 2012
• Duration Of Justice: 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 05-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K SAINI
• Keywords: Capital asset; Business income; Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A CHANDIGARH BEFORE SHRI H.L.KARWA, VICE PRESIDENT AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO.12/CHD/2012 ASSESSMENT YEAR: 2008-09 DCIT, CIRCLE-II, V M/S NATIONAL YARN AGENCY, LUDHIANA. 87, MADHOPURI-1, LUDHIANA. PAN: AABFN-0886A (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI N.K.SAINI RESPONDENT BY : SHRI VINEET KRISHAN DATE OF HEARING : 15.2.2012 DATE OF PRONOUNCEMENT : 28.2.2012 ORDER PER MEHAR SINGH, AM THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF CIT(A) DATED 18.10.2011, RELATING TO ASSESSMENT YEAR 2008-09. 2. IN THIS APPEAL, THE REVENUE HAS RAISED THE FOLLO WING GROUNDS OF APPEAL: 1. THAT THE LD. CIT(A) ERRED IN LAW IN DELETING TH E ADDITION OF RS.23,18,797/- MADE BY THE AO ON INFLATED PURCHASES FROM THE SISTER CONCERNS AS DISCUSSED BY HER AS PER PARA 3(5) OF THE ASSESSMENT ORDER. 2. THAT THE LD. CIT(A) HAS ERRED IN LAW IN DELETING ADDITION OF RS.2,44,126/- U/S 36(1)(III), IGNORING THEREBY THE RELIANCE PLACED BY THE AO ON THE DECISION OF HON'BLE PUNJAB & HARYANA 2 HIGH COURT IN THE CASE OF CIT V ABHISHEK INDUSTRIES LTD. REPORTED IN 286 ITR 1. 3. THE ORDER OF THE LD. CIT(A) BE SET ASIDE AND THAT OF AO BE RESTORED. 4. THAT THE ASSESSEE CRAVES LEAVE TO ADD OR AMEND ANY GROUND OF APPEAL BEFORE IT IS FINALLY DISPOSED OFF. 3. IN GROUND NO.1, THE REVENUE CONTENDED THAT CIT(A ) ERRED IN DELETING ADDITION OF RS.23,18,797/- MADE B Y THE AO ON INFLATED PURCHASES FROM SISTER CONCERNS, AS DISCUSSED BY THE AO IN PARA 3.5 OF THE ASSESSMENT ORDER. 4. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS, FACTS OF THE CASE AND THE RELEVANT REC ORD. THE FACTS OF THE CASE ARE THAT THE ASSESSEE FIRM DE ALS IN VARIOUS TYPES OF YARNS, WHICH DIFFER IN QUALITIES, DIFFERENCE, COUNTS, DIFFERENT VARIETIES AND MARKET RATES. THIS FACT IS APPARENT FROM THE MONTHWISE-STOCK STATEMENT. AO PICKED 6 BILLS OF ACRYLIC YARN, 9 BI LLS OF P.V.CONE YARN AND 6 BILLS OF POLYESTER YARN OUT OF VARIOUS PURCHASE BILLS AND FORMED BASIS FOR AN ADDI TION OF RS.23,18,797/-, BY INVOKING PROVISIONS OF SECTIO N 40(A)(2)(B) OF THE ACT. THE ASSESSEE FILED A DETAI LED REPLY DATED 20.12.2010 ALONGWITH INVOICES, COMPARAT IVE CHART TO JUSTIFY THE PURCHASES. SIMILARLY, A COMPA RATIVE CHART WAS ALSO FILED TO SHOW THAT YARN WAS SOLD TO DIFFERENT BUYERS AT MARKET PRICE AND THERE WAS NO DIVERGENT VARIATION IN TERMS OF SALE PRICE, EXCEPT THE 3 GROSS PROFIT. THE AO DID NOT ACCEPT THE EXPLANATIO N OF THE ASSESSEE AND MADE THE ADDITION. 5. THE CIT(A) ALSO CONSIDERED THE REMAND REPORT FRO M THE AO AS WELL AS VARIOUS DECISIONS RELIED UPON BY THE CONTENDING PARTIES. THE FINDINGS OF THE CIT(A) ARE CONTAINED IN PARA 6 OF THE APPELLATE ORDER, WHICH A RE DETAILED AND WELL REASONED. THE SAME ARE REPRODUCE D HEREUNDER: 6. I HAVE CONSIDERED THE BASIS OF ADDITION MADE BY THE AO, THE ARGUMENTS OF THE AR AND THE REMAND REPORT OF TH E AO. FIRST OF ALL THE MOST IMPORTANT ASPECT TO BE DECIDED IS T HAT WHETHER THE PRODUCT COMPARED BY THE AO ARE COMPARABLE OR NO T. THE MAIN LOGIC OF THE AO . IN CONCLUDING THAT THE YARNS OF DIFFERENT TYPE ARE IDENTICAL WITH REFERENCE TO THE QUALITY, I S THAT THE ASSESSEE IN HIS STOCK REGISTER HAD RECORDED THESE P RODUCTS TOGETHER UNDER ONE HEADING. THE AO HAS NOT EXAMINED THE INVOICES IN DETAIL TO UNDERSTAND THE DIFFERENCE IN DESCRIPTION OF THE PRODUCTS, THE AR ON THE OTHER HAND BROUGHT ON R ECORD COPIES OF INVOICES OF YARNS COMPARED BY THE AO TO H IGHLIGHT THAT THE PRODUCTS COMPARED THOUGH OF A GENERIC DESC RIPTION 'YARNS' BUT DIFFER SUBSTANTIALLY IN QUALITY ABASED UPON THEIR COUNT AS WELL AS OTHER ATTRIBUTES. I DO NOT AGREE W ITH THE LOGIC OF THE AO AS BUNCHING OF PRODUCTS IN THE STOCK REGI STER CAN NOT BE THE CONCLUSIVE BASIS TO COME TO THE CONCLUSION T HAT THE PRODUCTS IN QUESTION WERE IDENTICAL. THE PERUSAL OF COPIES OF INVOICES CLEARLY SHOW THAT THE YARN IN QUESTION HAS BEEN DESCRIBED IN DETAIL SO AS TO CLEARLY SUGGEST THE D IFFERENCE IN VARIOUS PRODUCTS. AS SUCH THE BASIC PREMISE OF THE AO IN COMPARING THE PURCHASES MADE FROM SISTER CONCERN W ITH INDEPENDENT PARTIES IS FLAWED FUNDAMENTALLY ON THIS ACCOUNT. FURTHER THE AR HAS PROVIDED COMPLETE COMPARATIVE CH ART OF PRODUCTS PURCHASE FROM SISTER CONCERN AND FURTHER S OLD ON PROFIT BY IT AND ALSO THE PRODUCTS THAT IT PURCHASE D FROM SISTER 4 CONCERN HAVE BEEN PURCHASED BY THE SAID SISTER CONC ERN AT LOWER RATE AND SOLD INDEPENDENTLY TO OTHER CONCERNS AT RATES SIMILAR TO THE ONE CHARGED FROM ASSESSEE CONCERN. I AM QUITE SATISFIED THAT THE FACTUAL DATA SUBMITTED BY THE AR BEFORE THE AO AND DURING THE APPELLATE PROCEEDINGS HAD NOT BEE N CORRECTLY APPRECIATED. IT IS FURTHER IMPORTANT TO A PPRECIATE THAT BOTH THE CONCERNS I.E. THE ASSESSEE AS WELL AS THE SISTER CONCERNS FALL IN THE HIGHEST TAX BRACKET AND THEREF ORE THERE IS NO LOGICAL REASON FOR MANIPULATING THE PURCHASE PRI CE SO AS TO REDUCE PROFIT IN ONE CONCERN AND INCREASE IN THE OT HER. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T V/S SIYA RAM GARG (HUF) 237 ITR 321 HAS CLEARLY HELD THE VIE W OF THE TRIBUNAL TO BE CORRECT WHEREIN THE HON'BLE TRIBUNAL HAD DELETED THE DISALLOWANCE U/S 40A(2) IN RESPECT OF P URCHASES MADE BY THE ASSESSEE FROM ITS SISTER CONCERN HOLDIN G THAT THERE WAS NO REASON FOR THE ASSESSEE TO SHOW THE PURCHASE MADE FROM SISTER CONCERN AT HIGHER RATES SINCE THE LATTER WAS TAXED AT THE SAME RATE AT WHICH THE ASSESSEE WAS BEING TAXED. IT THEREFORE BECOMES ABUNDANTLY CLEAR THAT THE ASSESSEE HAD NO P URPOSE IN EFFECTING THE ALLEGED MANIPULATION IN PURCHASE PRIC E AND FACTUALLY ALSO NO SUCH INFLATION OF PURCHASE PRICES HAS BEEN PROVED BY THE AO. AS SUCH THE ADDITION MADE BY THE AO IS DELETED. 6. HAVING REGARD TO THE FINDINGS OF THE LD. CIT(A) , WE DO NOT FIND ANY INFIRMITY THEREIN, AND, THE SAME AR E UPHELD. THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 7. IN GROUND NO.2, THE REVENUE CONTENDED THAT CIT(A ) ERRED IN DELETING THE ADDITION OF RS.2,44,126/- U/S 36(1)(III) IGNORING THE RATIO OF THE DECISION OF TH E HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T V ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P&H). 5 8. WE HAVE CAREFULLY PERUSED THE FACTS OF THE CASE, RELEVANT RECORD AND THE CASE LAWS RELIED UPON BY TH E ASSESSEE. THE OBSERVATIONS OF THE AO, AS CONTAINED IN ASSESSMENT ORDER, ARE REPRODUCED HEREUNDER : ON PERUSAL OF THE ORDER REPORT IT IS OBSERVED THAT ASS ESSEE IS CARRYING ON WORK OF CAPITAL NATURE AT RS. 1627509/- .IN THE FORM OF BUILDING UNDER CONSTRUCTION WHICH SHOWN IN THE B LOCK OF ASSETS. THE ASSESSEE WAS SHOWCAUSED ON THE SAME VID E ORDER SHEET ENTRY ON DATED 07.12.2010. THE ASSESSEE IN HIS REPLY DATE 09.12.2010 STATED THAT:- 'DETAILS OF CAPITAL WORK IN PROGRESS A COPY OF INVOICES REGARDING CAPITAL WORK IN PROGRESS WITH AN AMOUNT IN EXCESS OF RS. 10,000/- DURING THE YEAR HAVE ALREADY BEEN FILED BY WAY OF SUBMISSIONS ON 21.10.2010 AND PL ACED ON RECORD. ' THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 (2006) (P&H) HAS SPECIFICALLY HELD THAT: ' ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A COMMON KITTY. THE MONIES RECEIVED AS SHARE CAPITAL, AS TER M LOAN, AS WORKING CAPITAL LOAN, AS SALE PROCEEDS, ETC. DO NOT HAVE ANY DIFFERENT COLOUR. WHATEVER ARE THE RECEIPTS IN THE BUSINESS THAT HAVE THE COLOUR OF BUSINESS RECEIPTS AND HAVE NO SEPARATE IDENTIFICATION. SOURCES HAVE NO CO NCERN WHATSOEVER. .... ONCE IT IS BORN OUT FROM THE RECORD THAT THE ASSESS EE HAD BORROWED CERTAIN FUNDS ON WHICH LIABILITY TO PA Y TAX IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUN TS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTHERS WITH OUT CARRYING ANY INTEREST AND WITHOUT ANY BUSINESS PURP OSE, THE INTEREST TO THE EXTENT THE ADVANCE HAD BEEN MAD E WITHOUT CARRYING ANY INTEREST IS TO BE DISALLOWED U NDER SECTION 36(L)(III) OF THE ACT...' THUS INTEREST @15% IS 6 CALCULATED ON AN AMOUNT OF RS. 16,27,509/- WHICH C OMES OUT TO RS. 2,44,1267- IS BEING ADDED BACK TO THE INC OME OF THE ASSESSEE U/S 36(I)(III) OF THE IT ACT,1961. 9. THE AO APPLIED THE RATIO OF THE DECISION IN THE CASE OF ABHISHEK INDUSTRIES (SUPRA) AND DISALLOWED THE INTEREST U/S 36(1)(III) OF THE ACT. 10. BEFORE THE CIT(A), THE ASSESSEE CONTENDED THAT IT CONSTRUCTED A GODOWN IN ORDER TO STOCK YARN AT RAHO N ROAD, LUDHIANA. EARLIER, ASSESSEE WAS USING RENTED GODOWN FOR STOCK. DURING THE YEAR, CONSTRUCTION ACTIVITY WAS CARRYING ON TO CONSTRUCT GODOWN AND EXPENSES INCURRED WERE DEBITED TO BUILDING UNDER CONSTRUCTION. IT WAS FURTHER SUBMITTED BEFORE THE CIT(A) THAT NO DEPRECIATION WAS CLAIMED ON THE SAID ASSET. THE ASSESSEE PLACED RELIANCE ON THE DECISIO N OF DY.CIT V CORE HEALTHCARE LTD. (2008) 167 TAXMAN 206 , WHICH PERTAINS TO THE ASSESSMENT YEAR 1992-93, 1993-94, 1995-96 AND 1997-98, AND CIT V ASSOCIATED FIBRE & RUBBER INDUSTRIES PVT.LTD. (1991) 102 TAXMA N 700 (S.C), WHICH PERTAINS TO ASSESSMENT YEAR 1972-7 3 AND 1974-75. HOWEVER, IT IS MENTIONED THAT THE APP EAL UNDER REFERENCE PERTAINS TO THE ASSESSMENT YEAR 2008-09 WHICH IS COVERED BY THE PROVISO TO SECTION 36(1)(III), WHICH WAS INTRODUCED BY THE FINANCE ACT , 2003 W.E.F. 1.4.2004. 11. WE HAVE CONSIDERED THE FACT-SITUATION OF THE CA SE, RIVAL SUBMISSIONS AND CASE LAWS RELIED UPON BY THE ASSESSEE. IT IS A CASE WHERE THE ASSESSEE HAS CLAI MED 7 EXPENSES BEFORE THE ASSET, I.E. GODOWN, WAS PUT TO USE. THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2008-09. THEREFORE, THE PROVISIONS OF SECTION 36(1)(III) AND PROVISO THEREUNDER IS APPLICABLE TO SUCH FACT-SITUA TION OF THE CASE. THE ASSESSEE PLACED RELIANCE ON THE A BOVE TWO DECISIONS. THESE CASE LAWS HELD THE FIELD PRIO R TO THE INSERTION OF PROVISO TO SECTION 36(1)(III) OF T HE ACT. HOWEVER, THE LATEST DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT AND APEX COURT, INTERPRET ED THE INSERTION OF THE SAID PROVISO, AS ALSO THE APPLICABILITY OF THE DECISION OF CORE HEALTHCARE LT D. (SUPRA) AND FOUND THAT THESE CASES ARE NOT APPLICAB LE AFTER THE AMENDMENT TO SECTION 36(1)(III) OF THE AC T. IN VIEW OF THE AMENDMENT BY WAY OF INSERTION OF PROVISO TO SECTION 36(1)(III) OF THE ACT, THE INTER EST ON MONEYS BORROWED FOR ACQUIRING A CAPITAL ASSET WOULD BE DISALLOWED, TILL SUCH ASSET IS PUT TO USE. IT MEANS THAT INTEREST ON SUCH BORROWED CAPITAL WOULD BE CAPITALIZED OR ADDED TO THE COST OF THE ASSET, RATHER THAN BE ELIGIBLE FOR TREATMENT AS A CHARGE ON CURRENT PROFIT. IN A NUTSHELL, SUCH INTEREST CANNOT BE CLAIMED AS REVENUE EXPENDITURE. SUCH A VIEW IS CONSISTENT WITH THE PRE-EXISTING LAW IN THE DEFINITION OF ACTUAL COST AS ENVISAGED IN EXPLANATION 8 TO SECTION 43(1) OF THE ACT. THE PRESENT LAW U/S 36(1)(III) AND PROVISO THEREUNDER CLEARLY STIPULATES THAT EXPANSION OF BUSINESS, IS NO LONGER A LEGITIMATE STATUTORY GROUND FOR THE CLAIM OF DEDUCTION OF INTEREST ON BORROWING FOR ACQUIRING ASSETS, AS INTEREST ON BORROWED CAPITAL WHETHER FOR NEW BUSINESS OR EXPANSION OF BUSINESS, WILL BE TREATED AS ADDING TO 8 THE COST OF ASSET AND WILL NOT BE A CHARGE ON PROFI T, TILL SUCH DATE, ON WHICH THE ASSET IS PUT TO USE. IN THIS CONTEXT, EXPLANATION 8 TO SECTION 43(1) OF THE ACT, BARRING INCLUSION OF ANY INTEREST AFTER AN ASSET IS PUT TO USE SHOULD BE CONSTRUED AS INDICATIVE OF THE LEGISLATIVE INTENT, TO TREAT INTE REST RELATING TO PERIOD TILL THE DATE OF USE AS CAPITAL EXPENDITURE. IT CAN COVER A CASE OF SUBSTANTIAL EXPANSION. THE HON'BLE SUPREME COURT, THEREFORE, POINTED OUT IN A NUMBER OF CASES, SUCH AS ACIT V ARVIND POLYCOT LTD. (2008) 299 ITR 12 (S.C), JCIT V UNITED PHOSPHOROUS LTD. (2008) 299 ITR 9 (S.C) AND DCIT V GUJRAT ALKALIES AND CHEMICALS LTD. (2008) 299 ITR 85 (S.C) HOLDING THAT ITS EARLIER DECISION IN DCIT V CORE HEALTHCARE LTD. (2008) 298 ITR 94 (S.C) CAN HAVE APPLICATION FOR PRE-AMENDED PERIOD FOR ASSESSMENT YEAR BEFORE ASSESSMENT YEAR 2004- 05. SINCE THE BORROWING RELATED TO THE PRE- AMENDMENT PERIOD IN THE CASE OF DCIT V CORE HEALTHCARE LTD.(SUPRA), THERE COULD BE NO DISALLOWANCE. CONSEQUENTLY, SUCH DECISION HAS NO APPLICATION FOR THE ASSESSMENT YEAR FALLING IN THE POST-AMENDMENT PERIOD. A SIMILAR ISSUE WAS ADJUDICATED BY THE HON'BLE JURISDICTIONAL HIGH COURT, IN CIT V VARDHMAN POLYTEX LTD. (2008) 299ITR 152 (P&H) (FB). IN AN ELABORATE JUDGEMENT AFTER EXAMINING AND APPRECIATING A NUMBER OF PRECEDENTS, THE HON'BLE HIGH COURT TOOK THE VIEW THAT INTEREST ON LOAN RAISED FOR RUNNING A BUSINESS FOR DAY-TO-DAY REQUIREMENT, WOULD BE DEDUCTIBLE AND NOT FOR CREATING SUBSTANTIAL ASSETS, WITH NEW CAPACITY ON A NEW LOCATION. 9 12. HAVING REGARD TO THE ABOVE LEGAL AND FACTUAL DISCUSSIONS, THIS GROUND OF APPEAL OF THE REVENUE I S ALLOWED. 13. GROUND NOS. 3 & 4 ARE GENERAL IN NATURE AND NEE D NO SEPARATE ADJUDICATION. 14. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH FEB.,2012. SD/- SD/- (H.L.KARWA) (MEHA R SINGH) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 28 TH FEB.,2012. POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), CIT,DR ASSISTANT REGISTRAR ITAT, CHANDIGARH