Akar Granites Pvt Ltd., CHENNAI V. DCIT, CHENNAI

ITA 290/CHNY/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77231 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 10-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GURU BHASHYAM IRS
• Assessee Lawyers: V S JAYAKUMAR
• Keywords: Unexplained investment; Notional interest
• Section: 69; 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . . . , . . !'# , $ #% & BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENTAND SHRI S.S. GODARA, JUDICIAL MEMBER ./ ITA NO. 290(MDS)/2014 $ ' (' / ASSESSMENT YEAR : 2007-08 M/S AKAR GRANITES PVT. LTD., NO.2, MANIKODI SRINIVASAN NAGAR, MAIN ROAD, PERUNGUDI, CHENNAI - 600 096. PAN : AAFCA 4561 C V. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(1), CHENNAI - 600 034. (*+/ APPELLANT) (-.*+/ RESPONDENT) *+ / / APPELLANT BY : SHRI V.S. JAYAKUMAR, ADVOCATE -.*+ / / RESPONDENT BY : SHRI GURU BHASHYAM, IRS, JCIT 0 / 12 / DATE OF HEARING : 22 ND APRIL, 2014 3'( / 12 / DATE OF PRONOUNCEMENT : 23 RD APRIL, 2014 / O R D E R PER DR.O.K.NARAYANAN, VICE-PRESIDENT THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVA NT ASSESSMENT YEAR IS 2007-08. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) ( CENTRAL)-I - - I.T.A. NO. 290/MDS/14 2 AT CHENNAI, PASSED ON 27.12.2013. THE APPEAL ARISE S OUT OF THE ASSESSMENT COMPLETED UNDER SECTION 143(3) OF THE IN COME-TAX ACT, 1961. 2. THE FIRST ISSUE RAISED BY THE ASSESSEE IN THE PR ESENT APPEAL IS AGAINST THE ADDITION OF ` 29,89,837/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE COMMISSIONER OF INCOME TAX (APPEALS) UNDER SECTION 69 OF THE INCOME-TAX AC T, 1961. THIS ADDITION HAS BEEN MADE BY THE ASSESSING OFFICE R ON THE GROUND OF THE DIFFERENCE IN THE CLOSING STOCK VALUE BETWEEN BOOKS OF ACCOUNTS AND STATEMENT SUBMITTED TO BANK. THE ASSESSEE HAD ADMITTED A CLOSING STOCK OF FINISHED G OODS FOR ` 15,30,473/- AS ON 31 ST MARCH, 2007. THE ASSESSEE-COMPANY HAD OBTAINED LOANS FROM INDIAN OVERSEAS BANK ON HYP OTHECATION OF THE STOCK OF FINISHED GOODS AND DEBTORS. AS PER THE STOCK STATEMENT AS ON 31.3.2007, FURNISHED BY THE ASSESSE E TO THE BANKERS, THE VALUE OF THE STOCK WAS ` 45,20,310/-. THE BANK HAS ALLOWED THE ASSESSEE-COMPANY TO BORROW UPTO ` 33,90,232/- ON THE STRENGTH OF THE ABOVE STOCK STATEMENT. BUT, AT THE SAME TIME, THE STOCK REFLECTED IN PROFIT & LOSS ACCOUNT SUBMITTED BEFORE THE REVENUE AUTHORITIES WAS ` 15,30,473/-. THE - - I.T.A. NO. 290/MDS/14 3 ASSESSING OFFICER TOOK THIS DIFFERENCE OF ` 29,89,837/- AS UNACCOUNTED INVESTMENT IN STOCK AND ADDED THE SAID AMOUNT UNDER SECTION 69. ACCORDING TO THE ASSESSING OFFIC ER, THIS DIFFERENTIAL AMOUNT OF STOCK WAS IN THE NATURE OF U NEXPLAINED INVESTMENT. THE ASSESSEE HAD EXPLAINED BEFORE THE ASSESSING OFFICER THAT THE STOCK VALUE WAS INFLATED BEFORE TH E BANK AUTHORITIES TO ENSURE SUFFICIENT AMOUNT OF LOAN AND THERE WAS NO UNACCOUNTED STOCK OR UNACCOUNTED INVESTMENT IN THE HANDS OF THE ASSESSEE. THE ASSESSEE ALSO RELIED ON THE JUDG MENT OF HONBLE MADRAS HIGH COURT RENDERED IN THE CASE OF C IT V. PADMAVATHY COTTON MILLS (236 ITR 340). THE ASSESSI NG OFFICER DID NOT ACCEPT THE EXPLANATION OFFERED BY THE ASSES SEE AND ALSO DISTINGUISHED THE FACTS OF THE PRESENT CASE FROM TH AT OF THE FACTS CONSIDERED BY THE HONBLE HIGH COURT IN THE CASE OF CIT V. PADMAVATHY COTTON MILLS (236 ITR 340). AS ALREADY STATED, THE ASSESSING OFFICER MADE THE ADDITION OF ` 29,89,837/-. 3. IN FIRST APPEAL, THE COMMISSIONER OF INCOME TAX (APPEALS) VERBATIM REPRODUCED THE RELEVANT PORTION FROM THE ASSESSMENT ORDER AND CONFIRMED THE ADDITION MADE BY THE ASSESSING AUTHORITY. HE ALSO RELIED ON THE JUDGMEN T OF HONBLE - - I.T.A. NO. 290/MDS/14 4 KARNATAKA HIGH COURT RENDERED IN THE CASE OF RECON MACHINE TOOLS P. LTD. V. CIT (286 ITR 637) AND THE JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT RENDERED IN THE CASE OF B.T. STEELS LTD. V. CIT (328 ITR 471), WHERE THE HONBLE HIGH COURTS HAVE UPHELD THE ADDITION ON THE GROUND OF DISCREPAN CY IN STOCK STATEMENT GIVEN TO THE BANK AND THAT DECLARED IN TH E ACCOUNTS. 4. WE HEARD SHRI V.S. JAYAKUMAR, THE LEARNED COUNSE L APPEARING FOR THE ASSESSEE AND SHRI GURU BHASHYAM, THE LEARNED JOINT COMMISSIONER OF INCOME TAX APPEARING FOR THE REVENUE. 5. WE HEARD BOTH SIDES IN DETAIL AND EXAMINED THE F ACTS OF THE CASE IN DETAIL. IT IS TRUE THAT THERE WAS A DI FFERENCE IN THE STOCK VALUE BETWEEN THE STATEMENT FURNISHED BEFORE THE BANK AND AS PER THE ACCOUNTS MAINTAINED BY THE ASSESSEE. THE DIFFERENCE WORKS OUT TO ` 29,89,837/-. THE REASONS POINTED OUT BY THE ASSESSEE TO JUSTIFY THIS STOCK DIFFERENCE HA VE BEEN FULLY REJECTED BY THE LOWER AUTHORITIES WITHOUT ANY APPLI CATION OF MIND. 6. ONE OF THE MOST IMPORTANT PRINCIPLES TO BE BORNE IN MIND WHILE EXAMINING THIS ISSUE IS THAT THE CLOSING STOC K REPORTED - - I.T.A. NO. 290/MDS/14 5 BEFORE THE REVENUE AUTHORITIES IN THE FINAL ACCOUNT S OF THE ASSESSEE IS VALUED AT COST OR MARKET VALUE, WHICHEV ER IS LESS. IN THE PRESENT CASE, THE ASSESSEE HAS VALUED IT AT COS T, WHEREAS, USUALLY THE STOCK VALUE COMPUTED FOR BANK LOAN PURP OSES IS BASED ON MARKET VALUE. EVEN THOUGH THE DOUBLE STAN DARD ADOPTED BY THE ASSESSEE IS UNDESIRABLE, IT DOES NOT IPSO FACTO LEAD TO AN IRREFUTABLE CONCLUSION THAT THE ASSESSEE HAD INDULGED IN UNEXPLAINED STOCK. THE REALITIES OF THE BUSINES S HAVE TO BE CONSIDERED BY THE REVENUE AUTHORITIES IN A REASONAB LE MANNER. 7. IN THE PRESENT CASE, THE ASSESSING OFFICER HAS T REATED ENTIRE DIFFERENCE OF ` 29,89,837/- AS UNEXPLAINED INVESTMENT IN THE HANDS OF THE ASSESSEE. EVEN THOUGH THERE COULD BE AN UNDERSTATEMENT OF STOCK VALUE BEFORE THE REVENUE AU THORITIES, WHEN THE ISSUE IS CONSIDERED IN THE LIGHT OF THE ST OCK VALUE DECLARED BEFORE THE BANK AUTHORITIES, IT IS NOT A P ROPER VIEW TO HOLD THAT THE ENTIRE DIFFERENCE REPRESENTED UNACCOU NTED PURCHASES. EVEN IF THE CLOSING STOCK DECLARED BEFO RE THE REVENUE AUTHORITIES IS NOT ACCEPTED AS TRUE STOCK O F THE ASSESSEE, STILL, THE ENTIRE DIFFERENCE CANNOT BE TR EATED AS UNEXPLAINED INVESTMENT. - - I.T.A. NO. 290/MDS/14 6 8. LIKEWISE, THE LOWER AUTHORITIES HAVE NOT BEEN SU CCESSFUL IN DISTINGUISHING THE FACTS OF THE PRESENT CASE FRO M THE FACTS OF THE CASE CONSIDERED BY THE HONBLE MADRAS HIGH COUR T RENDERED IN THE CASE OF CIT V. PADMAVATHY COTTON MILLS (236 ITR 340). FURTHER, THE COMMISSIONER OF INCOME TAX (APPEALS) H AS NOT BEEN JUSTIFIED IN IGNORING THE ABOVE SAID JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT AND RELYING ON THE JUDGME NT OF HONBLE KARNAKATA HIGH COURT AND THAT OF HONBLE PUNJAB AND HARYANA HIGH COURT. WHAT IS BINDING IS THE JUDGMENT OF HON 'BLE JURISDICTIONAL HIGH COURT. 9. THEREFORE, WHILE HOLDING THE ASSESSEE RESPONSIBL E FOR THE DIFFERENCE IN CLOSING STOCK VALUE, WE DO NOT APPROV E THE APPROACH OF THE LOWER AUTHORITIES IN TREATING THE E NTIRE DIFFERENCE AS UNEXPLAINED INVESTMENT LIABLE TO BE ADDED UNDER SECTION 69 OF THE INCOME-TAX ACT, 1961. 10. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, AN AMENDMENT IS CALLED FOR IN THE QUANTUM OF ADDITION MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE COMMISSIONER OF INCOME TAX (APPEALS). AT THE COST OF REPETITION, WE HOLD THAT THE ENTIRE - - I.T.A. NO. 290/MDS/14 7 DIFFERENCE OF COST OF ` 29,89,837/- CANNOT BE TREATED AS UNEXPLAINED INVESTMENT. THE REASONS POINTED OUT BY THE ASSESSEE ARE ALSO CONVINCING. TAKING ALL THE ASPEC TS INTO CONSIDERATION, AND TO BE FAIR AND REASONABLE IN THE MATTER, WE HOLD THAT A LUMP SUM ADDITION IS JUSTIFIED IN THE P RESENT CASE AND THAT TOO TO A REASONABLE EXTENT. ACCORDINGLY, WE R E-FIX THE ADDITION TO A LUMP SUM AMOUNT OF ` 5 LAKHS. THE ADDITION OF ` 29,89,837/- IS THUS REDUCED TO ` 5 LAKHS. 11. THE NEXT ISSUE RAISED BY THE ASSESSEE IN THE PR ESENT APPEAL IS THAT THE LOWER AUTHORITIES HAVE GONE WRON G IN ADDING ` 1,12,412/- TOWARDS NOTIONAL INTEREST ON THE GROUND THAT THE ASSESSEE-COMPANY HAS DIVERTED ITS FUNDS FOR NON-BUS INESS PURPOSES. 12. THE AMOUNT STATED BY THE ASSESSING OFFICER AS D IVERTED FOR THE BENEFIT OF THE DIRECTOR OF THE ASSESSEE-COM PANY AND NOT FOR THE BUSINESS PURPOSE IS ` 22,48,259/-. OUT OF THE ABOVE, AN AMOUNT OF ` 16,25,000/- REPRESENTED SECURITY DEPOSIT GIVEN BY THE COMPANY TO ITS DIRECTOR FOR OFFERING HIS PROPER TY AS SECURITY TO INDIAN OVERSEAS BANK FOR OBTAINING CASH CREDIT FACI LITY. THE CASH - - I.T.A. NO. 290/MDS/14 8 CREDIT FACILITY WAS OBTAINED FOR THE PURPOSE OF BUS INESS CARRIED ON BY THE ASSESSEE-COMPANY. BANK LOAN IS NOT AVAILABL E WITHOUT SUFFICIENT SECURITY. THE ASSESSEE-COMPANY DID NOT HAVE ITS OWN PROPERTY TO OFFER AS SECURITY FOR OBTAINING LOAN FA CILITY FROM BANK. IT WAS IN SUCH CIRCUMSTANCES, THE ASSESSEE-COMPANY HAS OFFERED THE PROPERTY OWNED BY ITS DIRECTOR AS SECUR ITY TO THE BANK. THERE IS A CLOSE NEXUS BETWEEN THE BANK LOAN AVAILED FOR BUSINESS PURPOSE AND THE DIRECTORS PROPERTY OFFERE D AS SECURITY. IN THE LIGHT OF THE SAID NEXUS, WHEN THE ASSESSEE-C OMPANY IS PAYING SECURITY DEPOSIT TO THE DIRECTOR, IT IS NOT POSSIBLE TO TAKE A VIEW THAT THE SECURITY DEPOSIT DID NOT HAVE ANY CON NECTION WITH THE BUSINESS CARRIED ON BY THE ASSESSEE-COMPANY. I T IS TO BE SEEN THAT THE SECURITY DEPOSIT HAS BEEN PAID TO THE DIRECTOR FOR OBTAINING THE BANK LOAN. THEREFORE, IT IS NOT POSS IBLE TO HOLD THAT THE SECURITY DEPOSIT PAID TO THE DIRECTOR WAS FOR T HE PURPOSES OTHER THAN BUSINESS. NECESSARILY IT HAS TO BE HELD AS INCURRED FOR BUSINESS PURPOSE OF THE ASSESSEE. 13. ANOTHER CONSTITUENT AMOUNT IS ` 1,38,000/- GIVEN BY THE ASSESSEE-COMPANY AS ADVANCE FOR TAKING A HOUSE PROP ERTY ON RENT, FOR USING AS THE RESIDENCE OF THE MANAGING DI RECTOR OF THE - - I.T.A. NO. 290/MDS/14 9 ASSESSEE-COMPANY. WHEN IT IS THE DUTY OF THE COMPA NY TO PROVIDE ACCOMMODATION FOR THE MANAGING DIRECTOR, AS PER THE TERMS OF EMPLOYMENT CONTRACT, THE RENT ADVANCE GIVE N BY THE ASSESSEE-COMPANY HAS TO BE CONSIDERED AS INCURRED F OR THE PURPOSE OF BUSINESS. 14. OUT OF THE TOTAL AMOUNT OF ` 22,48,259/-, WE FIND THAT THE ABOVE DISCUSSED TWO AMOUNTS ARE BUSINESS RELATED AN D CANNOT BE CONSIDERED AS DIVERSION OF FUNDS. 15. THE BALANCE AMOUNT PAID TO THE DIRECTOR IS ` 4,85,259/-. THIS AMOUNT COULD BE, TO A CERTAIN EXTENT, IN THE N ATURE OF INTEREST FOR THE ADVANCE TO THE DIRECTOR, WHICH WOU LD JUSTIFY PARTLY THE ARGUMENT OF THE LOWER AUTHORITIES. 16. THEREFORE, WE ARE OF THE CONSIDERED OPINION THA T A MAJOR PORTION OF THE AMOUNT OF ` 22,48,259/- CANNOT BE TREATED AS INTEREST-FREE DIVERSION OF FUNDS. THEREFORE, THERE IS NO JUSTIFICATION IN ESTIMATING ANY NOTIONAL INTEREST T O THAT EXTENT. 17. IN THE PRESENT CASE, THE AMOUNT OF ADDITION ON ACCOUNT OF NOTIONAL INTEREST MADE BY THE ASSESSING AUTHORITY I S ` 1,12,412/-. - - I.T.A. NO. 290/MDS/14 10 FOR THE REASON ALREADY STATED ABOVE, THIS MUCH ADDI TION IS NOT JUSTIFIED. TO BE FAIR AND REASONABLE, WE MODIFY TH E ADDITION AGAINST DIVERSION OF BORROWED FUNDS, TO A LUMP SUM OF ` 25,000/-. THE ADDITION OF ` 1,12,412/- IS REDUCED TO ` 25,000/-. 18. THE ASSESSING AUTHORITY IS DIRECTED TO MODIFY T HE ASSESSMENT ON THE ABOVE LINE. 19. THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLO WED. ORDER PRONOUNCED ON WEDNESDAY, THE 23 RD OF APRIL, 2014 AT CHENNAI. SD/- SD/- (S.S. GODARA) (DR. O.K. NARAYANAN) ( . . !'#) ( . . . ) $ #% /JUDICIAL MEMBER /VICE-PRESIDENT /CHENNAI, 5# /DATED, THE 23 RD APRIL, 2014. KRI. - - I.T.A. NO. 290/MDS/14 11 #6 / -$178 98(1 /COPY TO: 1. *+ /APPELLANT 2. -.*+ /RESPONDENT 3. 0 :1 () /CIT(A), CENTRAL-I, CHENNAI 4. 0 :1 /CIT, CHENNAI-I, CHENNAI 5. 8;! -$1$ /DR 6. !' < /GF.