ADDL. C.I.T. RG.-1, KALYAN V. VGN JEWELLARY PRIVATE LTD., KALYAN

ITA 2550/MUM/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62211 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-04-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 12-04-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 01-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M RAJAN
• Assessee Lawyers: H N MOTIWALLA
• Keywords: Earning of tax free income; Proportionate interest
• Section: 40A(3); 14A; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F,MUMBAI BEFORE SHRI B. RAMAKOTAIAH (AM) & SHRI VIJAY PAL RAO (JM) I.T.A. NO.2550/MUM/2011 (A.Y. 2007-08) ADDL. COMMR. OF INCOME-TAX, RANGE -1, 2 ND FLOOR, RANI MANSION, MURBAD ROAD, KALYAN. VS. M/S. V.G.N. JEWELLERY PVT. LTD., MADHUBAN CO-O. HSG. SOCIETY, SUBHASH TEKDI, PUNE LINK ROAD, KALYAN (E). PAN: AABCV1957E. APPELLANT RESPONDENT DEPARTMENT BY SHRI M. RAJAN . ASSESSEE BY SHRI H.N. MOTIWALLA . DATE OF HEARING 12-04-2012 DATE OF PRONOUNCEMENT 20-04-2012 O R D E R PER B. RAMAKOTAIAH, AM : THIS IS A REVENUES APPEAL AGAINST THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-I, THANE, DAT ED 31-12- 2010. 2. THE REVENUE HAS RAISED THE FOLLOWING THREE GROUN DS WHICH ARE MATERIAL FOR THE ISSUE IN APPEAL: ITA NO.2550/MUM/2011 VGN JEWELLERY P.LTD. 2 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A)-I, THANE ERRED IN HOLDING THAT NET INVESTMENT IN SHARES OF RS.2,04,76,323 BE CONSIDERED FOR DISALLOWANCE OF INTEREST U/S.14A AS AGAINST CLOSING STOCK OF SHARES OF RS.2,04,03,093 HELD BY THE ASSESSEE. HE FURTHER ERRED IN DIRECTING THE AO TO DISALLOW THE PROPORTIONATE INTEREST TO THE EXTENT OF RS.13,33,460 AS SUBMITTED BY THE ASSESSEE OVERLOOKING THE FACT THAT THERE WAS NO JUSTIFICATION FOR THE SAME. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A)-I, THANE ERRED IN DELETING THE DISALLOWANCE U/S. 40A(3) INSPITE OF THE FACT THAT THE ASSESSEE HAD MADE CASH PURCHASES WHICH WERE NOT COVERED BY RULE 6DD. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A)-I, THANE ERRED IN HOLDING THAT REJECTION OF ACCOUNTS AND ESTIMATION OF INCOME BY THE AO IS UNJUSTIFIED WITHOUT APPRECIATING THE FACT THAT THERE WAS INCONSISTENCY IN THE VALUATION OF STOCK. 3. WE HAVE HEARD THE LD. DR AND THE LD. COUNSEL FOR THE ASSESSEE IN DETAIL. GROUND NO. 1 IS WITH REFERENCE TO DISALLOWANCE MADE BY THE AO OUT OF INTEREST CLAIMED INVOKING THE PROVISIONS OF SEC. 14A. THE AO NOTICED THAT THE ASSESSEE HAS INVE STED MONEY IN SHARES AND HE WAS OF THE OPINION THAT BORROWED FUND S WERE UTILISED IN INVESTING IN SHARES. THE SUBMISSION OF THE ASSESSEE WAS THAT THE NET INVESTMENT IN SHARES WAS OF RS. 1,04,76,323/-, ITA NO.2550/MUM/2011 VGN JEWELLERY P.LTD. 3 WHEREAS THE AO FOUND THAT CLOSING STOCK WAS RS.2,0 4,03,093/- AS ON 31-3-2007 AND THAT SHOULD BE CONSIDERED FOR DISALLOWANCE. THE ASSESSEE, VIDE LETTER DATED 15-12-2009, AGREED FOR DISALLOWANCE OF INTEREST AT RS.13,33,460/- BEFORE T HE AO. HOWEVER, AO MADE DISALLOWANCE OF RS.24,05,171/-. T HE CIT(A), AFTER CONSIDERING THE SUBMISSIONS AND ANALYZING THE ISSUE, CAME TO A CONCLUSION THAT ONLY AN AMOUNT OF RS.8,22,000/ - SHOULD BE CONSIDERED FOR DISALLOWANCE, WHEREAS THE ASSESSEE A GREED FOR DISALLOWANCE OF RS.13,33,460/-. THEREFORE, HE AFFIR MED THE ABOVE DISALLOWANCE TO THAT EXTENT. THE REVENUE IS AGGRIE VED. 4. THE LD. DR SUBMITTED THAT INTEREST SHOULD BE DIS ALLOWED ON THE BASIS OF THE INVESTMENT MADE AT THE END OF THE YEAR AND SUPPORTED THE ORDER OF AO. THE LD. COUNSEL FOR THE ASSESSEE, HOWEVER, SUBMITTED THAT INTEREST SHOULD HAVE BEEN C ONSIDERED AS PER THE PROVISIONS OF SEC. 36(1)(III), AND THE PROV ISIONS OF SEC. 14A ARE NOT APPLICABLE AND THERE IS NO NEED FOR DISALLO WANCE OF ANY AMOUNT U/S.14A AS THE ASSESSEE HAS NOT RECEIVED ANY EXEMPT INCOME. SINCE THE ASSESSEE VOLUNTARILY AGREED FOR D ISALLOWANCE, IT WAS SUBMITTED THAT THE ASSESSEE HAS NOT COME IN APP EAL BUT THE REVENUES GROUND SHOULD BE REJECTED AS THERE IS NO NEED FOR ANY DISALLOWANCE U/S.14A. ITA NO.2550/MUM/2011 VGN JEWELLERY P.LTD. 4 5. WE HAVE CONSIDERED THE ISSUE. ON EXAMINATION, IT IS FOUND THAT THE ASSESSEE MADE INVESTMENTS IN SHARES AS PAR T OF ITS ACTIVITIES AND THE AO DID NOT ESTABLISH ANY NEXUS W ITH THE BORROWED FUNDS TO THE INVESTMENTS. HE INVOKED THE P ROVISIONS OF SEC. 14A EVEN WHEN ASSESSEE HAS NO EXEMPT INCOME. H OWEVER, THE CIT(A) AFFIRMED THE DISALLOWANCE TO THE EXTENT OF R S.13,33,460/- AS ACCEPTED BY THE ASSESSEE. CONSIDERING THE FACTS OF THE CASE, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER O F THE CIT(A). ACCORDINGLY, THE GROUND IS REJECTED. 6. GROUND NO. 2 PERTAINS TO DISALLOWANCE ON ACCOUNT OF CASH PURCHASES U/S.40A(3). THE ASSESSEE IS IN THE BUSINE SS OF GOLD JEWELLERY/ TRADE. IT PURCHASES OLD GOLD FROM THE C USTOMERS AND AFTER MAKING NEW ORNAMENTS SELLS TO THEM. IN THIS P ROCESS, THE ASSESSEE PREPARES PURCHASE INVOICES AND SALE INVOIC ES. THE AO ANALYSED THE PURCHASE INVOICES ON THIS ACCOUNT AND FOUND THAT OUT OF THE TOTAL PURCHASES OF RS.5.59 CRORES THE AS SESSEE PURCHASED IN CASH ABOVE 50 GMS. OF GOLD PAID IN CA SH TO THE EXTENT OF RS.2.45 CRORES AND LESS THAN 50 GMS. TO T HE EXTENT OF RS.1.07 CRORES. CONSIDERING THAT 33% OF THE TRANSAC TIONS ARE EXCHANGE TRANSACTIONS, HE DISALLOWED AN AMOUNT OF ITA NO.2550/MUM/2011 VGN JEWELLERY P.LTD. 5 RS.47,39,738/- U/S.40A(3). THE CIT(A), AFTER EXAMIN ING THE FACTS, DELETED THE ADDITION BY GIVING THE FOLLOWING FINDIN G : 6.5 IN VIEW OF THE ABOVE, I COME TO THE CONCLUSION THAT, THE APPELLANT HAS MADE PURCHASES OF OLD ORNAMENTS FROM THOSE CUSTOMERS TO WHOM SALE OF NEW ORNAMENTS HAS BEEN MADE. IN THIS CONNECTION, COPY OF SALE BILLS ALONG WITH FULL DETAILS FOR THE WHOLE YEAR WERE PRODUCED FOR PERUSAL. IT IS FURTHER ELUCIDATED THAT, TWO INVOICES ARE PREPARED WHEN A CUSTOMER COMES FOR PURCHASES OF NEW JEWELLERY ON EXCHANGE OF OLD JEWELLERY, ONE FOR SALE, WHICH GIVES THE DETAILS OF QUANTITY AND SALE AMOUNT AND THE OTHER BILL BEARS THE DETAILS OF QUANTITY AND VALUE OF OLD GOD EXCHANGED. THE PURCHASE VALUE OF OLD ORNAMENTS SOLD IS MENTIONED IN THE SALE BILL AS CASH PAID TO THE PARTY AND THE BALANCE AMOUNT IS RECEIVED FROM THE CUSTOMERS. FROM A PERUSAL OF THE DETAILS, I FIND THAT, SALE VALUE IS ALWAYS HIGHER THAN THE PURCHASE VALUE. THIS IS THE SYSTEM FOLLOWED IN THE JEWELLERY MARKET, THE AR HAS STATED. I, THEREFORE, TAKE A VIEW THAT, PURCHASE OF OLD ORNAMENTS AGAINST SALE OF NEW ORNAMENTS WITH BOOK ADJUSTMENT IS SQUARELY COVERED BY RULE 6DD. ACCORDINGLY, I HOLD THAT, THE ADDITION THROUGH DISALLOWANCE U/S.40A(3) IS UNWARRANTED AND UNJUSTIFIED. ACCORDINGLY, I DIRECT THE AO TO DELETE THE ADDITION. AFTER CONSIDERING THE RIVAL ARGUMENTS AND EXAMINING THE ORDERS OF THE AO AND CIT(A), WE DO NOT SEE ANY REASON TO INTE RFERE WITH THE FINDING OF THE CIT(A). THE AO HIMSELF DID NOT RULE OUT THAT PURCHASES AND SALES IN CASH ARE WITH REFERENCE TO E XCHANGE OF OLD ITA NO.2550/MUM/2011 VGN JEWELLERY P.LTD. 6 GOLD WITH NEW ORNAMENTS. HOWEVER, HE CONSIDERED SUC H TRANSACTIONS AT 1/3 RD OF THE TOTAL TRANSACTIONS ARBITRARILY, WHEREAS THE CIT(A), AFTER EXAMINING THE COPIES OF SALE BILL S WITH FULL DETAILS FOR THE WHOLE YEAR, GAVE A FINDING THAT PURCHASE OF OLD ORNAMENTS AGAINST SALE OF NEW ORNAMENTS WITH BOOK ADJUSTMENT WAS SQUARELY COVERED BY RULE 6DD. IN VIEW OF THE SPECIF IC FINDING OF THE CIT(A), WHICH WAS NOT CONTROVERTED BEFORE US, WE AFFIRM THE ORDER OF THE CIT(A). ACCORDINGLY, THE GROUND IS REJ ECTED. 7. GROUND NO. 3 PERTAINS TO THE ISSUE OF GROSS PROF IT ADDITION INVOKING THE PROVISIONS OF SEC. 145. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE CLOSING STOCK WAS NOT VALUED CORRECTLY AND THE ASSESSEE ACCEPTED AN ADDITION OF RS.11,95,359/- ON ACCOUNT OF UNDER-VALUATION OF CLOSING STOCK, BY FURNISHING RE- VALUATION OF CLOSING STOCK. OBJECTIONS WITH REFEREN CE TO VALUATION WERE DEALT WITH BY THE CIT(A) WHO CONFIRMED THE ADD ITION. IN ADDITION TO THE ABOVE, THE AO ALSO NOTICED THAT THE ASSESSEES GROSS PROFIT WAS NOT COMPARABLE WITH SIMILAR TRADE AND HE HAS QUOTED SOME RATIOS AT PAGE 17 OF HIS ORDER TO COME TO THE CONCLUSION THAT IN SIMILAR TRADE THE BOOK RESULTS V ARIED FROM 3.79% TO 7.49%, WHEREAS THE ASSESSEE HAS OFFERED ON LY 0.7%. ITA NO.2550/MUM/2011 VGN JEWELLERY P.LTD. 7 THEREFORE, HE MADE AN ESTIMATION OF NET PROFIT ON T HE BASIS OF COMPARABLE CASES AT 3.79% OF THE TURNOVER THUS MAKI NG AN ADDITION OF RS.1,21,94,136/-. IT WAS THE CONTENTION OF THE ASSESSEE BEFORE THE CIT(A) THAT THERE IS NO NEED FO R REJECTION OF THE BOOKS OF ACCOUNT AS THE ASSESSEES PURCHASES AND SA LES ARE ACCEPTED AND FURTHER THE COMPARABLE CASES ARE NOT C OMPARABLE AT ALL. WHEREAS THE TURNOVERS ARE VERY SMALL IN THOSE CASES, ASSESSEE HAS AN TURNOVER OF MORE THAN RS.32.17 CROR ES. IT WAS FURTHER CONTENDED THAT THE PROVISIONS OF SEC. 145 C ANNOT BE INVOKED ON THE FACTS OF THE CASE AND RELIED ON VARI OUS PRINCIPLES ESTABLISHED IN THIS REGARD. OBJECTIONS OF THE ASSES SEE WERE EXTRACTED IN THE CIT(A)S ORDER AND AFTER CONSIDERI NG THE SAME, THE CIT(A) DELETED THE ESTIMATION OF INCOME BY OBSERVIN G AS UNDER : 8.5 FROM THE ABOVE DISCUSSION AND DECISIONS, I COME TO THE CONCLUSION THAT, COMPARISON OF RESULTS OF OTHER CASES, WHOSE TOTAL TURNOVER IS FAR LESS IS NOT FAIR AND JUST. I ALSO FIND FROM THE COPY OF SUBMISSION MADE TO THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT, THE STOCK HAS BEEN TALLIED AND NO DEFECT EXCEPT UNDER VALUATION OF CLOSING STOCK HAS BEEN UNEARTHED BY THE AO. FALL IN NP RATIO, IN THE ABSENCE OF ANY COGENT REASONS COULD NOT BY ITSELF, HAVE BEEN A GROUND TO HOLD THAT, PROPER INCOME OF THE APPELLANT CANNOT BE DEDUCTED FROM THE ACCOUNTS MAINTAINED AND CONSEQUENTLY COULD NOT HAVE BEEN A GROUND TO REJECT THE ACCOUNTS U/S. 145(3) OF THE ACT. THE FAL L IN NP RATIO COULD BE FOR VARIOUS REASONS SUCH AS ITA NO.2550/MUM/2011 VGN JEWELLERY P.LTD. 8 PAYMENT OF INTEREST ON LOANS ETC. I, THEREFORE, HOLD THAT, ESTIMATION OF INCOME AT RS.1,21,94,136/- @ 3.79% IS UNWARRANTED AND UNJUSTIFIED. ACCORDINGLY, I DIRECT THE AO TO DELETE THE ADDITION. THE GROUND IS ALLOWED. 8. AFTER CONSIDERING THE RIVAL ARGUMENTS AND EXAMIN ING THE ORDERS OF THE AUTHORITIES BELOW, WE ARE OF THE OPIN ION THAT THERE IS NO NEED TO REJECT THE BOOKS OF ACCOUNT. IN FACT, TH E AO EXAMINED THE VARIOUS BOOKS AND STATEMENTS AND PASSED A DET AILED ORDER ON OTHER ISSUES. THE ASSESSMENT ORDER ALSO INDICATE S THAT THE AO HAS EXAMINED THE BOOKS OF ACCOUNT AND THE ASSESSEE FURNISHED ALL THE DETAILS AS REQUIRED BY THE AO. EXCEPT VARIATIO N IN THE VALUATION OF STOCK, THERE ARE NO OTHER DISCREPANCIE S FOUND AND CERTAINLY THERE ARE NO REASONS TO REJECT THE BOOKS OF ACCOUNT AND ESTIMATE THE INCOME. THE COMPARABLE CASES LISTED BY THE AO ARE ALSO NOT COMPARABLE AS FOUND OUT BY THE CIT(A). IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT THE REVENUE HAS NOT MADE OUT ANY CASE FOR ESTIMATION OF INCOME AT 3.79% ON THE T URNOVER. THEREFORE, WE UPHOLD THE ORDER OF THE CIT(A) ON THI S ISSUE 9. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED . ITA NO.2550/MUM/2011 VGN JEWELLERY P.LTD. 9 ORDER PRONOUNCED ON THE 20TH DAY OF APRIL, 2012. SD/- SD/- (VIJAY PAL RAO) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 20TH APRIL , 2012. NG: COPY TO : 1. DEPARTMENT. 2.ASSESSEE. 3 CIT(A)-I, THANE. 4 CIT-II, THANE. 5.DR,F BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, A SST. REGISTRAR, ITAT, MUMBAI. ITA NO.2550/MUM/2011 VGN JEWELLERY P.LTD. 10 DETAILS DATE INITIAL S DESIG NATIO N 1. DRAFT DICTATED ON 12-04- 2012 SR.PS / 2. DRAFT PLACED BEFORE AUTHOR 13-04- 2012 SR.PS / 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/A M 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/A M 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS / 6. KEPT FOR PRONOUNCEMENT ON SR.PS / 7. FILE SENT TO THE BENCH CLERK SR.PS / 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO THE AR 10 . DATE OF DISPATCH OF ORDER