ITO, Sunam HQ Sangrur V. M/s Shree Bhagwati Rice Mills, Khanouri

ITA 1279/CHANDI/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 5090 (ITAT-CHANDIGARH)
• Duration Of Justice: 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 31-08-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J K GARG
• Assessee Lawyers: DEEPAK ANAND
• Keywords: Notional interest; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCHB, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER ITA NOS. 1279/CHD/2017 (ASSESSMENT YEAR : 2011-12) THE ITO VS. M/S SHREE BHAGWATI RICE MILLS SUNAM (HQ, SANGRUR) MANDVI ROAD, KHANAURI PAN: ABHFS6958H CROSS OBJECTION NO. 65/CHD/2017 (IN ITA NOS. 1279/CHD/2017) (ASSESSMENT YEAR : 2011-12) M/S SHREE BHAGWATI RICE MILLS VS. THE ITO MANDVI ROAD, KHANAURI SUNAM (HQ, SANGRUR) (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. DEEPAK ANAND DEPARTMENT BY : SH. J.K. GARG DATE OF HEARING : 15.03.2018 DATE OF PRONOUNCEMENT : 27/03/2018 O R D E R PER DR.B.R.R.KUMAR, A.M . : THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE AN D CROSS OBJECTION FILED BY THE ASSESSEE ARE AGAINST THE ORDER OF LD. CIT(A), PATIALA DT. 08/06/2017. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN ALLOWING RELIEF OF RS. 3,81,409/- ON ACCOUNT OF DISALLOWANCE OF INTEREST MADE BY THE ASSESSING OFFICER WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS TAKEN INTEREST BEARING LOANS AND MADE INTEREST FREE ADVAN CES TO VARIOUS PARTIES. 2. WHETHER ON THE FACTS & CIRCUMSTANCES OF THE CASE, L D. CIT(A) WAS RIGHT IN HOLDING THAT ADDITION OF RS. 12,40,470/- ON ACCOUNT OF EXCESS CONSUMPTION OF PADDY HUSK CANNOT BE MADE WITHOUT REJECTING BOOKS O F ACCOUNTS OF THE ASSESSEE UNDER SECTION 145(3) OF THE I.T. ACT, 1961. FURTHER THE CIT(A) HAS ERRED IN APPRECIATING THE FACT THAT THE PADDY MILLED BY THE ASSESSEE IS DIRECTLY DEHUSKED THROUGH MECHANICAL PROCESS WITHOUT ANY AID FROM THE BOILER. 3. WHETHER ON THE FACTS & CIRCUMSTANCES OF THE CASE, L D. CIT(A) ERRED IN HOLDING THAT THE ASSESSING OFFICER HAS FAILED TO ST ATE THE REASONS FOR NON- ACCEPTANCE OF VALUATION MADE BY THE ASSESSEE BUT UN ABLE TO APPRECIATE THAT THE ASSESSEE HAD NOT VALUED ITS CLOSING STOCK ON TH E BASIS OF MARKET PRICE OR COST PRICE WHICHEVER IS LOWER AS FOLLOWED BY THE ASSESSE E IN PRECEDING YEARS. THE CIT(A) HAS ALSO ERRED IN HOLDING THAT THE ASSESSING OFFICER DID NOT GIVE ANY BASIS TO 2 ESTIMATE 15% OF ADJUSTMENT IN VALUE ON ACCOUNT OF O VERHEAD EXPENSES IN WEIGHTED AVERAGE COST OF RAW MATERIAL WHEREAS THE A SSESSING OFFICER HAS SPECIFICALLY POINTED OUT THAT THE ASSESSEE HAS NOT TAKEN INTO ACCOUNT ALL KIND OF EXPENSES E.G. DAMI, MARKET FEE ETC. WHILE VALUING I TS CLOSING STOCK OF RAW MATERIAL. 3. THE ONLY GROUND RAISED BY THE ASSESSEE ITS CROSS OBJECTION READS AS UNDER: 1. THAT THE LD. CIT(A) WAS NOT JUSTIFIED TO SUSTAIN TH E DISALLOWANCE OF INTEREST OF RS. 7,13,235/- WITHOUT CONSIDERING THE FACTS THAT OWN C APITAL WAS SUFFICIENT TO MAKE ADVANCES INTEREST FREE. 4. GROUND NO. 1OF THE REVENUE RELATES TO DELETION ON ACCOUNT OF INTEREST OF RS. 3,81,409/-. AND THE CROSS OBJECTION OF THE ASSE SSEE RELATES TO RS. 7,13,235/-. 5. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSING O FFICER HELD THAT THE ASSESSEE HAS GIVEN INTEREST FREE LOANS TO VARIOUS PEOPLE, AN D DISALLOWED THE INTEREST CLAIMED BY THE ASSESSEE ON THE PAYMENTS MADE TO THE BANKS ON THE LOANS RAISED. THE ASSESSING OFFICER HAS OBSERVED THAT IT WAS IMMATERIAL WHETHER THE ASSESSEE HAD FREE RESERVES AND MADE INTEREST FREE A DVANCES OUT OF THOSE RESERVES. THE ASSESSING OFFICER HELD THAT THE ENTIR E MONEY IN A BUSINESS ENTITY COMES IN A COMMON KITTY AND ONLY THE RELEVANT FACT WAS THAT THE ASSESSEE HAD RAISED INTEREST BEARING FUNDS AND HAS GIVEN INTERES T FREE ADVANCES AT THE SAME TIME. HE RELIED ON THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD. 286 ITR 1. THE ASS ESSING OFFICER THUS DISALLOWED RS. 10,94,644/- ON ACCOUNT OF THE INTEREST. THE ACTION OF THE ASSESSING OFFICER HAS BEEN MODIFI ED BY THE LD. CIT(A) TO THE EXTENT OF RS. 3,81,409/- AND HENCE THE APPEAL OF T HE REVENUE AND CROSS OBJECTION OF THE ASSESSEE. 6. BEFORE US, THE LD. DR RELIED ON THE ORDER OF THE CIT(A) TO THE EXTENT OF THE AMOUNT CONFIRMED AND ARGUED THAT THE DEEMED INTERES T ON OTHER CREDITORS NEEDS TO BE UPHELD. 3 7. LD. AR ARGUED THAT THE PARTIES TO WHOM INTEREST FREE ADVANCES WERE MADE OR THE TRADE DEBTORS FROM WHOM REGULAR PURCHAS ES WERE BEING MADE BY THE ASSESSEE AND THAT THE AMOUNT WAS PAID IN LIEU O F THE PURCHASES OR WAS ADJUSTED IN THE NEXT YEAR PURCHASES. IT WAS ARGUED THAT THE ADVANCES WERE MADE ON ACCOUNT OF COMMERCIAL EXPEDIENCY. THE LD. A R RELIED ON THE JUDGMENT OF SA BUILDERS VS. CIT 288 ITR 1(SUPREME C OURT). FURTHER THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS ITS OWN CAPITAL OF RS. 72,62,060/- AND IF THE INTEREST COMPONENT IS CALCULATED @12% IT WOULD ALSO AMOUNT TO RS. 8,71,440/-. LD. AR FURTHER RELIED ON THE JUDGMENTS IN CASE OF M/S MUNJAL SALES CORPORATION VS. CIT 215 CTR 105 FOR THE PROPOSITION THAT INTERE ST FREE LOAN IF LESS THAN THE OWN FUNDS, NO DISALLOWANCE IS CALLED FOR. SIMILARLY IN CASE OF TATA CHEMICAL LTD. VS. ACIT 138 ITD 458 MUMBAI ITAT HELD THAT THE ADDITION OF NOTIONAL INTEREST TOWARDS BORROWING IS NOT JUSTIFIED WHERE ASSESSEES OWN FUN D WERE SUFFICIENT TO COVER THE LOAN GIVEN TO CERTAIN PARTIES. 8. SINCE THE ASSESSEE HAS GIVEN ADVANCES FOR THE BU SINESS EXPEDIENCY AND ALSO KEEPING IN VIEW THE FACT ON RECORD THAT THE AS SESSEE HAS GOT SUFFICIENT OWN FUNDS IN THE FORM OF CAPITAL NO DISALLOWANCE IS CAL LED FOR. 9. AS A RESULT THE GROUNDS OF THE REVENUES APPEAL IS DISMISSED AND C.O. OF THE ASSESSEE IS TREATED AS ALLOWED. 10. GROUND NO. 2 OF THE REVENUE RELATES TO THE DELE TION OF RS. 12,40,470/- ON ACCOUNT OF EXCESS USAGE OF HUSK. THE ASSESSING OFFI CER HELD THAT THE ASSESSEE HAS USED AN EXCESS OF 3938 QUINTALS OF PADDY HUSK I N BOILER. 11. THE LD. CIT(A) HAS DELETED THE ADDITION . 12. BEFORE US THE LD. DR SUBMITTED THAT THE ASSESSE E HAS NOT MAINTAINED ANY DAY TO DAY RECORD OF PADDY HUSK UTILIZATION AND CON SUMPTION. THE ASSESSEE HAS 4 CONSUMED 13579 QUINTALS OF HUSK IN THE BOILERS. THE ASSESSEE HAS MILLED PADDY WEIGHING 18120 QUINTALS ON BEHALF OF PUNJAB AGRO. T HE PADDY MILLED BY THE ASSESSEE FOR STATE AGENCIES IS DIRECTLY DEHUSK THRO UGH MECHANICAL PROCESS WITHOUT ANY AID FROM THE BOILERS. THUS THE ASSESSEE HAS NOT USED ANY PADDY HUSK FOR PROCESSING OF GOVERNMENT PADDY. 13. LD. AR SUBMITTED THAT THE CONSUMPTION WAS IN FA CT LESS AND PROVIDED THE CHART OF CONSUMPTION LEVELS OF PADDY HUSK. IT SHOWS THE PERCENTAGE OF HUSK CONSUMED OF OWN PADDY MILLING WAS 22.24% FOR THE YE AR IN QUESTION AND 24.34% FOR THE YEAR 2010-11 SIMILARLY THE PERCENTAGE OF HU SK CONSUMED OF TOTAL PADDY MILLED IS 17.96% FOR THE CURRENT YEAR AND 20.15% FO R THE A.Y. 2010-11. HENCE THE CONSUMPTION @ 29% CALCULATED BY THE ASSESSING OFFIC ER WAS JUST AN ESTIMATE WITHOUT BRINGING ANY MATERIAL TO PROVE THE HIGHER C ONSUMPTION. 14. WE HAVE GONE THROUGH THE MATERIAL ON RECORD THE ASSESSING OFFICER HAS WORKED OUT THE EXCESS CONSUMPTION AT 29% OF PADDY H USK ON MERE ESTIMATE BASIS, HENCE WE DECLINE TO INTERFERE IN THE ORDER OF LD. CIT(A) IN DELETING THE ADDITION. 15. GROUND NO. 3 RELATES TO THE ADDITION ON ACCOUNT OF UNDER VALUATION OF STOCK. 16. THE ASSESSING OFFICER MADE ADDITION OF RS. 47,5 7,258/- ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK. THE ASSESSEE HAS VALUED CLOSING STOCK OF 4945 QUINTALS AT RS. 50,80,870/- IN RESPECT OF PR PADDY. SIMILAR IS THE CASE OF PADDY DP RICE, RICE BRAN , PADDY SARBATI, AND BARDANA KATTA. THE ASSESSING OFFICER HAS VALUED THE CLOSING STOCK AT WEIGHTED AVERAGE COST A ND A FURTHER BENEFIT OF 15% FOR OVERHEAD EXPENSES. THE VALUATION OF GOODS IS AR RIVED BY ADOPTING WEIGHED AVERAGE SALE PRICE. THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAS FAILED TO 5 SUBSTANTIATE THE JUSTIFICATION FOR CHANGE IN METHOD OF VALUATION OF STOCK AT MARKET RATE DURING THE YEAR IN CONTRAVENTION TO THE EARLIER PRACTICE. 17. BEFORE US THE LD. DR ARGUED THAT THE ACTION OF THE ASSESSING OFFICER IS CORRECT AND CHANGE IN VALUATION LEAD TO CHANGE IN T HE PROFITS FOR THE YEAR. 18. BEFORE US THE LD. AR ARGUED THAT THE ACTION OF THE ASSESSING OFFICER IN CHANGING THE VALUATION IS NOT ACCEPTABLE. IT WAS SU BMITTED THAT THE OLD STOCK VALUATION IN THE CASE OF BARDANA WAS ACCEPTED IN TH E EARLIER YEARS AND RELIED ON THE SUBMISSIONS MADE BEFORE THE LD. CIT(A) 19. WE HAVE HEARD LD. REPRESENTATIVES OF BOTH THE P ARTIES AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THAT WHILE THE C ASE LAWS FILED BY THE BOTH THE PARTIES DEAL WITH THE LEGAL ASPECTS OF THE VALUATIO N. IT IS AN ADMITTED FACT THAT THE ASEESEE HAS BEEN CONSISTENTLY FOLLOWING THE VAL UATION METHOD AT COST OR AT MARKET PRICE WHICHEVER IS LESS. THE ASSESSEE FOR TH E YEAR UNDER CONSIDERATION CHANGED THE METHOD TO MARKET PRICE WHERE AS THE A SSESSING OFFICER HAS APPLIED HIS OWN METHOD OF AVERAGE PRICE AND REVALUE D IN THE CLOSING STOCK. THE ASSESSEE HAS NOT GIVEN ANY JUSTIFICATION FOR CHANGE OF METHOD OF VALUATION. IN VIEW OF THIS THE MATTER IS RESTORED TO THE FILE OF THE ASSESSING OFFICER TO APPLY THE METHOD OF VALUATION OF CLOSING STOCK AS HAS BEEN AD OPTED BY THE ASSESSEE IN THE EARLIER ASSESSMENT YEARS. 20. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSE D AND THE CROSS OBJECTION OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (SANJAY GARG) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER 6 DATED : 27/03/2018 AG COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE DR