The ACIT, Circle-5, Ahmedabad V. Patel Alloy Steel Pvt.Ltd., Ahmedabad

ITA 2921/AHD/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1805 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 25-02-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 31-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R P MAURYA
• Keywords: Rejection of books of accounts; Capital asset; Business income; Depreciation; Principle of natural justice; Maximum Marginal Rate; Earning of tax free income; Proportionate interest; Notional interest; Onus to prove; Revenue expenditure
• Section: 143(3); 142(1); 80HHC; 14A; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH BEFORE: S H RI N.K. BILLAIYA , ACCOUNTANT MEMBER AND SHR I S. S. GODARA , JUDICIAL MEMBER THE ACIT, CIRCLE - 5, AHMEDABAD (APPELLANT) VS M/S. PATEL ALLOY STEEL PVT. LTD., 297/300, PHASE - II, GIDC, VATVA, AHMEDABAD - 382445 PAN: AABCP2984J (RESPONDENT /CROSS OBJECTOR ) M/S. PATEL ALLOY STEEL PVT. LTD., 297/300, PHASE - II, GIDC, VATVA, AHMEDABAD - 382445 PAN: AABCP2984J (APPELLANT /RESPONDENT ) VS THE ACIT, CIRCLE - 5, AHMEDABAD (RESPONDENT /APPELLANT ) I T A NO . 1961 & CO 2 1 0 / A HD/20 12 A SSESSMENT YEAR 200 4 - 05 ITA NO S . 857 & 1213 /AHD/20 12 ASSESSM ENT YEAR 200 8 - 09 ITA NO. 2617 & 2 921 /AHD/20 12 ASSESSMENT Y EAR 200 9 - 10 I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 2 M/S. PATEL ALLOY STEEL PVT. LTD., 297/300, PHASE - II, GIDC, VATVA, AHMEDABAD - 382445 PAN: AABCP2984J (APPELLANT /RESPONDENT ) VS THE ACIT, CIRCLE - 5, AHMEDABAD (RESPONDENT /APPELLANT ) REVENUE BY : S H RI R.P. MAURYA , SR. D . R. ASSESSEE BY: S H RI S.N. SOPARKAR WITH SHRI PARIN SHAH , A.R. DATE OF HEARING : 25 - 02 - 2 016 DATE OF PRONOUNCEMENT : 08 - 04 - 2 016 / ORDER P ER : S. S. GODARA , JUDICIAL MEMBER : - THIS IS A BATCH OF SIX CASES. FIRST ASSESSMENT YEAR 2004 - 05 INVOLVES REVENUE S APPEAL ITA 1961/AHD/2012 AND ASSESSEE S CO NO. 120/AHD/2012 THEREIN. SECOND ASSESSMENT YEAR 2008 - 09 COMPRISES OF ASSESSEE S APPEAL ITA NO. 857/AHD/2012 AND REVENUE S CROSS APPEAL NO. 1213/AHD/2012. LAST ASSESSMENT YEAR 2009 - 10 CONTAINS ASSESSEE S APPEAL ITA NO. 2617/AHD/2012 AND REVENUE S APPEAL NO. 2921/AHD/2012. THESE CASE S ARISE FROM SEPARATE ORDERS OF THE CIT(A) - XI, AHM EDABAD DATED 25 - 06 - 2012, 12 - 03 - 2012 AND 17 - 10 - 2012 IN APPEAL NOS. CIT(A) - XI/4/ACIT CIR. 5/11 - 12, CIT(A) - XI/195/ADDL. CIR.R - 5/10 - 11 AND CIT(A) - XI/376/ADDL. CIT. I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 3 R - 5/11 - 12 ; ASSESSMENT YEAR - WISE. R ELEVANT PROCEEDINGS ARE U/S. 271(1)(C) AND IN THE FIRST ASS ESSMENT YEAR FOLLOWED BY SECTION 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT IN THE REMAINING TWO ASSESSMENT YEARS; RESPECTIVELY. WE HEARD ALL THESE CASES TOGETHER FOR THE SAKE OF CONVENIENCE AND BREVITY. WE PROCEED ASSESSMENT YEAR - WISE IN OR DER TO AVOID REPETITION. ASSESSMENT YEAR 2004 - 05 REVENUE S APPEAL 1961/AHD/2012 AND ASSESSEE S CO 120/AHD/2012 2 . THE REVENUE RAISES TWO SUBSTANTIVE GROUNDS IN ITS APPEAL INTER ALIA CHALLENGING THE LOWER APPELLATE ORDER DELETING THE IMPUGNED PENALTIES IMPOSED BY TH E ASSESSING OFFICER U/S. 271(1)(C) OF THE ACT QUA DISALLOWANCE OF EXCESS CLAIM OF DEPRECATION ON MOULDING BOXES, FURNACE, NEW ADDITIONS AND THE ONE PERTAINING TO EXCESS CLAIM OF SECTION 80HHC DEDUCTION. THE RELEVANT FIGURE OF DEPRECIATION DIS ALLOWANCE TURNS OUT TO BE RS. 53,96,114/ - AS PER THE LOWER APPELLATE ORDER. T HE ASSESSING OFFICER COMPLETED BEST JUDGMENT ASSESSMENT ON 19 - 12 - 2006 INVOKING THE ABOVE STATED DISALLOWANCE. THE CIT(A) IN HIS ORDER DATED 27 - 02 - 2007 GRANTED PART RELIEF TO THE ASSESSEE BY DIRECTING THE ASSESSING OFFICER TO ALLOW THE IMPUGNED DEPRECATION CLAIM AFTER DUE VERIFICATION. BOTH PARTIES INFORM US THAT A CO - ORDINATE BENCH OF THE TRIBUNAL IN REVENUE S APPEAL ITA 1901/AHD/2007 DECIDED ON 28 - 07 - 2011 HAS RESTORED THE QUANT UM I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 4 ISSUE BACK TO THE ASSESSING AUTHORITY FOR AFRESH ADJUDICATION AS PER LAW. WE FIND THAT THIS CRUCIAL FACT HAS MISSED THE LOWER APPELLATE AUTHORITY S CONSIDERATION IN THE ORD ER UNDER CHALLENGE. T HE IMPUGNED PENALTY HAS GOT NO LEGS TO STAND AS OF NOW IN THESE FACTS AND CIRCUMSTANCES . THIS SUBS TANTI V E GROUND IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES . IT SHALL HOWEVER BE OPEN FOR THE ASSESSING OFFICER TO INITIATE PENA LTY PROCEEDINGS AFRESH AS PER LA W AFTER FINALIZ ING CONSEQUENTIAL PROCEE DINGS. THIS FIRST SUBSTANTIVE GROUND FAILS. 3 . THE REVENUE S SECOND SUBSTANTIVE GROUND SEEKS TO REVIVE SECTION 271(1)(C) PENALTY ARISING FROM EXCESS CLAIM OF SECTION 80HHC DEDUCTION AMOUNTING TO RS. 24,927/ - . THE ASSESSEE - COMPANY MANUFACTURES DIFFERENT KINDS OF CASTINGS. ITS EXPORT TURNOVER WAS OF RS. 67,84,192/ - EXCLUSIVE OF SA LES TAX AND EXCISE DUTY. THE ASSESSING OFFICER REWORKED THIS DEDUCTION CLAI M AS RS. 4,55,182/ - IN ASSESSMENT ORDER . THE CIT(A) DIRECTED THE ASSESSING OFFICER TO RE - COMPUTE THIS 80HHC DEDUCTION IN THE QUANTUM LOWER APPELLATE ORDER. THE ASSESSING OFFICER PASSED CONSEQUENTIAL ORDER RECALCULATING THE IMPUGNED DEDUCTION AS RS. 4,27,743/ - THEREBY DISALLOWING EXCESS FIGURE BETWEEN THE FORMER AND LATTER COMPUTATION AMOUNTING TO RS. 24, 927/ - . HE FURTHER IMPOSED THE IMPUGNED PENALTY QUA THE SAME WHICH STANDS DELETED IN THE LOWER APPELLATE ORDER. 4 . WE HAVE HEARD BOTH THE PARTIES. IT HAS COME ON RECORD THAT THE IMPUGNED PENALTY HAS ARISEN FROM THE ABOVE STATED EXCESS I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 5 DEPRECIATION CLAI M WORKED OUT BY THE ASSESSING OFFICER HIMSELF IN ORIGINAL SCRUTINY AND THE ONE COMPUTED IN CONSEQUENTIAL ORDER IN FURTHERANCE TO THE CIT(A ) S DIRECTIONS. WE OBSERVE IN THESE FAC TS AND CIRCUMSTANCES THAT ERROR IN THIS RE - COMPUTATION OF SECTION 80HHC DEDUC TION IS NEITHER CONCEALMENT NOR AN INSTANCE OF FURNISHING OF INACCURATE PARTICULARS OF INCOME U/S. 271(1)(C) . WE UPHOLD CIT(A) S ORDER UNDER CHALLENGE IN THESE FACTS AND CIRCUMSTANCES ON BOTH COUNTS. REVENUE S APPEAL ITA 1961/AHD/2012 IS DISMISSED. 5 . THIS LEAVES US WITH ASSESSEE S CO NO. 120/AHD/2012 RAISING SOLE SUBSTANTIVE GROUND OF PENALTY ON LOSS DISALLOWANCE OF RS. 5,86,687/ - CLAIMED ON INVESTMENT IN MUTUAL FUNDS BY TREATING IT AS NOTIONAL INSTEAD OF AN ACTU AL ONE. THE ASSESSEE CLAIMED THIS LOSS TO BE OF RS. 8,50,858/ - . THE ASSESSI NG OFFICER IN ASSESSMENT ORDER QUOTED ITS FAILURE IN RESPONDING TO HIS QUERIES SEEKING APPLICATION OF SECTION 94(7), SCRIP/DATE - WISE DETAILS OF MUTUAL FUNDS PURCHASES AND SALES, DIVIDEND EARNED THEREUPON ALONG WITH SU PPORTIVE DOCUMENTS A ND RECORD - DATE. HE WOULD ACCORD IN G LY DISALLOW THE ENTIRE SUM. THE ASSESSEE FILED APPEAL. THE CIT(A) DIRECTED THE ASSESSING OFFICER TO ALLOW LOSS OF RS. 2,64,171/ - LEAVING BEHIND THE REMAINING DISA LLOWANCE FIGURE IN QUESTION OF R S. 5, 86,687/ - TO BE NOTIONAL IN NATURE. 6 . HEARD BOTH SIDES. CASE FILE PERUSED. IT IS AN ADMITTED FACT THAT THE PRESENT INSTANCE IS OF NOTIONAL VERSUS ACTUAL LOSS AND NOT A CASE OF NO LOSS AT ALL. IT S A QUESTION OF HEAD OF LOSS RATHER. IT FURTHER I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 6 EMERG ES THAT THE ASSESSEE HAD PLACED ON RECORD ALL THE RELEVANT PARTICULARS/DERAILS PERTAINING TO ITS LOSS CLAIM ARISING FROM SALE OF MUTUAL FUNDS IN QUESTION IN QUANTUM PROCEEDINGS WHEREIN A PART OF THE IMPUGNED CLAIM ALREADY STANDS ACCEPTED (SUPRA). WE OBS ERVE IN THESE FACTS AND CIRCUMSTANCES THAT THIS ONE IS A CASE OF MERE PART DISALLOWANCE OF LOSS CLAIME D ON SALE OF MUTUAL FUNDS RATHER THAN THAT OF A CASE INVOLVING CONCEALMENT AND FURNISHING OF INACCURATE PARTICULAR S OF INCOME FALLING U/S. 271(1)(C) PENAL PROVISION. HON BLE APEX COURT IN CIT VS. RELIANCE PETRO - PRODUCTS 322 ITR 158 HOLDS THAT EACH AND EVERY DISALLOWANCE DOES NOT NECESSARILY RESULT IN I MPOSITION OF CONCEALMENT OR FURNISHING OF INACCURATE PARTICULARS . WE ACCORDINGLY DELETE THE IMPUGNED PENA LTY ARISING ON LOSS OF RS. 5,86,687/ - ON SALE OF MUTUAL FUNDS. ASSESSEE S CO 120/AHD/2012 SUCCEEDS. ASSESSMENT YEAR 2008 - 09 ASSESSEE S APPEAL ITA 857/AHD/2012 AND REVENUE S CROSS APPEAL ITA 1213/AHD/2012 7 . LEARNED AUTHORIZED REPRESENTATIVE FILES A TABU LATION CHART OF THE RELEVANT GROUNDS RAISED IN THESE CROSS APPEALS. THE REVENUE IS FAIR ENOUGH IN NOT DISPUTING ITS CORRECTNESS . IT EMERGES THEREFROM THAT BOTH THESE CROSS APPEALS RAISE THREE SUBSTANTIVE GROUNDS EACH. THE ASSESSEE S FIRST SUBSTANTIVE GR OUND CHALLENGES THE LOWER APPELLATE ORDER PARTLY CONFIRMING SECTION 40A(2)(B) DISALLOWANCE FROM RS. 3,21,96,765/ - TO RS. 1,81,24,570/ - . THE REVENUE ALSO RAISES ITS I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 7 SECOND SUBSTANTIVE IN CROSS APPEAL SEEKING TO REVIVE THE ENTIRE DISALLOWANCE. BOTH THE LD . REPRESENTATIVES REITERATE THEIR RESPECTIVE PLEADINGS IN THE COURSE OF HEARING. 8 . WE COME TO RELEVANT FACTS. THE ASSESSING OFFICER IN THE COURSE OF SCRUTINY FOUND THE ASSESSEE TO HAVE PAID FOLLOWING REMUNE RA T I ON TO ITS MANAGING DIRECTOR, DIRECTOR AND EXECUTIVE DIRECTOR HAVING EXPERIENCE OF 36, 14 AND 7 YEARS AS UNDER : - NAME AND ADDRESS QUALIFI CATION EXPERI ENCE (IN YEARS) NATURE OF SERVICES AMOUNT PAID 2007 - 08 2006 - 07 2005 - 06 2004 - 05 2003 - 04 SH. K.H. JAVERI B.E. (ELEC.) 36 MANAGING DIRECTOR 40031600 32565315 30000000 20921780 9497449 SMT. ANJANA K. JAVERI B.COM 14 DIRECTOR 1800000 1800000 1800000 1800000 1342697 SH. ABHISHEK K. JAVERI B.E. (MECH) 7 EXECUTIVE DIRECTOR 6001570 5746575 450000 9 . THE ASSESSING OFFIC ER TOOK COGNIZANCE OF THE ABOVE STATED EXTRA - ORDINARY INCREASE IN FIRST AND THIRD REMUNERATION. THE ASSESSEE FILED ITS RESPONSE ON 29 - 09 - 2010 QUOTING ITS BOARD S DECISION AS PER THE COMPANIES ACT. THE ASSESSING OFFICER OBSERVED THAT THE IMPUGNED REMUNERAT IONS HAD BEEN ENHANCED @ 421% AND 133% FROM ASSESSMENT YEAR 2004 - 05 TO THE IMPUGNED ASSESSMENT YEAR I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 8 WITHOUT ANY QUALITATIVE IMPROVEMENT IN PAYEES ELIGIBILITY AND THEIR SERVICES RENDERED. HE TOOK INTO ACCOUNT ALL THESE FACTORS TO HOLD THE IMPUGNED REMUNER ATION TO BE U NREASONABLE. HE THEREAFTER PROCEEDED ON INFLATION BENCHMARK @ 10% EACH YEAR SINCE ASSESSMENT YEAR 2004 - 05 AND ARRIVED AT APPROPRIATE SALARY FIGURES OF RS. 1,32,96,429/ - AND RS. 5,40,000/ - @ 140% AND 120% OF RS. 94,97,494/ - AND RS. 4,50,000/ - A S PAID S/SH K.H. JAVERI AND ABHISHEK JAVERI; RESPECTIVELY THEREBY DISALLOWING THE IMPUGNED GROSS SUM OF RS. 3,21,96,741/ - U/S. 40A(2)(B) OF THE ACT. 10 . THE CIT(A) PARTLY CONFIRMS ASSESSING OFFICER S ACTION AS UNDER: - 4.2 I HAVE CAREFULLY CONSIDERE D THE RIVAL SUBMISSIONS. I HAVE ALSO PER USED THE CASE LAWS RELIED UPON BY THE APPELLANT. IT IS SEEN THAT DIRECTORS REMUNERATION HAS BEEN DISALLOWED AS PER THE P ROVISIONS OF SEC. 40A(2) OF THE I .T. ACT . IN VIEW OF THIS AT THE OUTSET WOULD LIKE TO DISCUS S THE PROVISIONS OF SEC.40A(2) OF THE I.T.ACT AND ITS APPLICABILITY IN THE CASE OF THE APPELLANT. THE PROVISIONS OF SEC.40A STARTS WITH NON OBSTANTE CLAUSE AND HAVE OVERRIDING EFFECT OVER THE PROVISIONS OF ANY OTHER SECTION OF INCOME - TAX ACT, 1961. IT WAS HELD BY THE HON'BLE SUPREME COURT IN SHRI SAJJAN MILLS LTD. VS CIT (1985) 156 ITR 585(SC). FURTHER HON'BLE GUJARAT HIGH COURT IN CIT VS BHARAT VIJAY MILLS LTD. 1988 REPORTED AT 128 ITR 633 (GUJ.) HAS HELD THAT PROVISIONS OF SEC.40A HAVE BEEN DECLARED TO BE OF OVERRIDING NATURE. THE NON OBSTANTE CLAUSE AT THE BEGINNING OF SEC.40A(1) CLEARLY INDICATE THAT IF ANY OTHER PROVISIONS EXIST SOMEWHERE ON THE STATUTE BOOK, THEY HAVE TO GIVE WAY TO CLEAR THE EXPRESS PROVISIONS OF SEC.40A. 4.3 IN VIEW OF THE OVERRIDI NG PROVISIONS OF SEC.40A(2)(A), THE PAYMENT OF REMUNERATION MAY THOUGH BE AUTHORIZED BY THE DEED OF PARTNERSHIP, MAY ALSO BE IN ACCORDANCE WITH THE TERMS OF DEED, AND MAY FURTHER BE WITHIN THE CEILING LIMIT AS FIXED BY CL.V OF SECTION 40(B), IN RESPECT OF AGGREGATE AMOUNT OF REMUNERATION PAYABLE TO THE I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 9 PARTNERS, IF THE AMOUNT OF REMUNERATION PAID TO A PARTICULAR PARTNER(OR PARTNERS) IS EXCESSIVE OR UNREASONABLE OR, LOOKING TO THE LEGITIMATE NEEDS TO THE BUSINESS OF THE ASSESSEE FIRM OR THE BENEFIT DERIVED B Y THE FIRM, THE SAME IS UNFAIR, THE A.O. MAY ALLOW A REMUNERATION ONLY TO THE EXTENT IT IS REASONABLE AND NOT EXCESSIVE IN HIS OPINION. 4.4 THE ABOVE DISCUSSION CLEARLY REVEALS THAT THE EXCESSIVE DIRECTORS REMUNERATION CAN ALWAYS BE DISALLOWED AS PER THE PROVISIONS OF SEC.40A(2) OF THE I.T.ACT. DURING THE ASSESSMENT PROCEEDINGS AS WELL AS THE APPELLATE PROCEEDINGS THE APPELLANT HAD SUBMITTED THAT THE DIRECTORS REMUNERATION IS APPROVED BY BOARD OF DIRECTORS, THE DIRECTORS ARE QUALIFIED ENGINEERS AND THE BU SINESS OF THE COMPANY IS INCREASED AS A RESULT OF THE SERVICE RENDERED BY THE DIRECTORS. AS FAR AS RELIANCE PLACED ON THE BOARD OF DIRECTOR'S RESOLUTION IS CONCERNED, ! AM NOT INCLINED TO BE CONVINCED AS THE RESOLUTION OF BOARD OF DIRECTORS IS AN INTERNAL MATTER AND MEETING OF BOARD OF DIRECTORS IS DOMINATED AND CONTROLLED BY SHRI K.H. JHAVERI AND SHRI ABHISHEK K. JHAVERI. AS FAR AS THE UTILITY OF DIRECTORS SERVICES TO THE APPELLANT COMPANY, I AM INCLINED TO AGREE WITH THE CONTENTIONS OF ID. A.R. THAT THE REMUNERATION TO THE DIRECTORS BE ALLOWED KEEPING IN VIEW THE INCREASE IN TURNOVER AND PROFITABILITY OF COMPANY. HOWEVER, THE REMUNERATION PAID TO THE DIRECTORS APPEARS TO BE EXCESSIVE AND IN MY CONSIDERED VIEW THE SAME NEEDS TO BE RESTRICTED AS PER THE PR OVISIONS OF SEC.40A(2) OF THE I.T. ACT. IT IS SEEN THAT DURING THE CURRENT ASSESSMENT YEAR THE REMUNERATION OF RS. 3.99 CRORES IS PAID TO SHRI K.H. JHAVERI. ANNUAL REMUNERATION FOR SHRI K.H. JHAVERI WAS RS. 1.44 CRORES FOR THE A.Y.2004 - 05. THIS WAY IN A SPAN OF FOUR YEARS THE REMUNERATION HAD INCREASED BY 277%. IN THE CORRESPONDING PERIOD THE TURNOVER OF THE APPELLANT COMPANY HAD INCREASED FROM RS. 53.99 CRORES TO RS. 88.46 CRORES. THIS WAY THE TURNOVER HAD INCREASED BY 163%. THE APPELLANT COMPANY HAD DECLARED GROSS PROFIT OF RS. 17.91 CRORES IN THE F.Y.2003 - 04 WHICH HAS INCREASED TO RS. 39.01 CRORES IN THE F.Y.2007 - 08. THIS WAY THE INCREASE IN GROSS PROFIT IS 217%. THE ABOVE FACTS INDICATE THAT BETWEEN F.Y.2003 - 04 TO THE F.Y.2007 - 08 BOTH TURNOVE R AND GROSS PROFIT OF THE APPELLANT COMPANY HAD INCREASED BUT THE INCREASE IN TURNOVER AND GROSS PROFIT IS FAR LESS COMPARED TO INCREASE IN DIRECTORS REMUNERATION. ON AN AVERAGE THE TURNOVER AND THE GROSS PROFIT OF THE APPELLANT COMPANY FROM THE YEAR 03 - 04 TO 07 - 08 HAS INCREASED BY 190%(163 + 217 / 2). IN MY CONSIDERED VIEW IT WILL BE REASONABLE IF ALLOWABLE REMUNERATION IS INCREASED BY 190%. THIS WILL BE IN A STEP WITH THE BETTER I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 10 PERFORMANCE OF THE APPELLANT COMPANY. IN VIEW OF THIS REMUNERATION P AID TO SHRI K.H. JHAVERI TO THE EXTENT OF RS. 2,73,60,000(1,44,00,000 X 1.90%) IS ALLOWED. ALTHOUGH THE A.O. HAS TAKEN REMUNERATION PAID TO SHRI K.H. JAVERI IN T HE F.Y.2003 - 04 AT RS. 94,97,449/ - WHICH IS APPARENTLY WRONG. IN VIEW OF THIS THE SALARY PAID T O SHRI K.H. JHAVERI IS ALLOWED KEEPING IN VIEW THE CORRECT FACTS, IN VIEW OF ABOVE DISCUSSIONS DISALLOWANCE AGAINST SALARY PAID TO SHRI K.H. JHAVERI TO THE EXTENT OF RS. 1,26,36,000/ - (3,99,96,000 - 2,73,60,000) IS CONFIRMED. THE APPELLANT WILL GET A RELIEF OF RS. 1,40,99,171 (2,67,35,171 - 1,26,36,000). 4.4 THE A.O. HAS ALSO DISALLOWE D REMUNERATION OF RS. 54,61,570/ - PAID TO SHRI ABHISHEK K. JHAVERI. IT IS SEEN THAT SHRI ABHISHEK JHAVERI WAS PAID A SALARY OF RS. 18,00,000/ - IN THE YEAR 2005 - 06 WHIC H WAS IN CREASED TO RS.60,00,000/ - IN THE CURRENT YEAR. COMPARED TO F.Y.2005 - 06 BOTH TURNOVER AND THE GROSS PROFIT OF THE APPELLANT COMPANY HAD REDUCED SUBSTANTIALLY. ACCORDINGLY IN MY CONSIDERED VIEW THERE IS NO JUSTIFICATION FOR INCREASE IN DIRECTORS REMUNERATION . IN VIEW OF THESE FACTS , DISALLOWANCE OF RS. 54,61,570/ - MADE IN RESPECT OF REMUNERATION PAID TO SHRI ABHISHEK K. JHAVERI IS CONFIRMED. 4.5 AS A RESULT OF THIS APPEAL, DIRECTORS REMUNERATION TO THE EXTENT OF RS.2,91,60,000/ - (2,73,60,000/ - +18,00,000/ - ) IS ALLOWED. DISALLOWANCE MADE TO THE EXTENT OF RS.1,81,24,570/ - IS CONFIRMED. THE APPELLANT WILL GET A RELIEF OF RS. 1,40,99,171/ - . THIS GROUND OF APPEAL IS PARTLY ALLOWED. 11 . LD. AUTHORIZED REPRESENTATIVE STATES THAT THE THERE IS NO DISPUTE ABOUT GEN UINENESS OF THE IMPUGNED REMUNERATIONS. IT S A QUESTION OF EXCESSIVE ELEMENT THERE IN. IT IS SUBMITTED THAT ASSES SEE S PAYEES/DIRECTOR HAVE ALREADY PAID TAXES THEREUPO N AT THE MAXIMUM MARGINAL RATE. THE ASSESSEE EXPLAINS THAT THE IMPUGNED BENCHMARKING HAS BEEN DRAWN W.E.F. FINANCIAL YEAR 2003 - 04 AND NOT FROM PREC EDING ASSESSMENT YEAR. AND THAT NO COMPARABLE INSTANCE HAS BEEN QUOTED AS WELL IN THE LOWER ORDER EXCEPT FOLLOWING INFLATION I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 11 RATE @ 10% (SUPRA). CASE LAW OF (2014) 45 TAXMAN.COM 478 (GUJ) CIT VS . INDU NISAAN OXO CHEMICAL INDUSTRIES LTD. UPHOLDING TRIBUNAL S FINDING THAT WHERE THE COMPANY LAW BOARD HAS ALREADY AUTHORIZED SUCH REMUNERATION AND RECIPIENT PAID TAXES AT MAXIMUM RATE DOES NOT RESULT IN SECTION 40A(2)(B) DISALLOWANCE ; IS CITED IN SUPPOR T. LD. DR REPRESENTING REVENUE PRAYS FOR RESTORATION OF THE ENTIRE DISALLOWANCE FIGURE. 12 . WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT THE ASSESSING OFFICER HAS COMPARED THE IMPUGNED REMUNERATION WITH T HAT PAID IN FY 2003 - 04. HE GIVES ANNUAL 10% INCREASE. WE FIND THIS APPROACH TO BE ENTI RELY UNSUSTAINABLE. A SSESSEE S REMUNERATIONS IN PRECEDING ASSESSMENT YEARS ALREADY STAND ACCEPTED. THERE IS NO JUSTIFICATION TO DRAW THE CLOCK BACK TO FINANCIAL YEAR 2003 - 04 IN SUCH A CASE. WE FURTHER DO NOT NOTICE COMPARISON OF THE IMPUGNED REMUNERATION VIS - A - VIS MARKET RATE EITHER IN ASSESSMENT OR IN THE LOWER APPELLATE ORDER SO AS TO POINT OUT ANY EXCESSIVENESS ELEMENT. HON BLE JURISDICTIONAL HIGH COURT IN ITS D ECISION HEREINABOVE HAS ALREADY HELD THAT SECTION 40A(2)(B) DISALLOWANCE IS NOT TO BE INVOKED WHEN THE PAYEES ALREADY STAND ASSESSED AT MAXIMUM RATE. T HE CENTRAL BOARD OF DIRECT TAXES HAS ALSO ISSUED A CIRCULAR ON 06 - 07 - 1968 DIRECTING THE ASSESSING AUTHOR ITY NOT TO INVOKE THE IMPUGNED DISALLOWANCE IN ABS ENCE OF ANY TAX EVASION BEING NOTICED . WE QUOTE ALL THIS REASONING FOR ACCEPTING ASSESSEE S ARGUMENTS AGAINST THE IMPUGNED SECTION 40A(2)(B) DISALLOWANCE. THE REVENUE S CORRESPONDING GROUND IS REJECTED . THE I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 12 ASSESSING OFFICER IS DIRECTED TO DELETE THE ENTIRE DISALLOWANCE SUM OF RS. 3,21,96,741/ - . 13 . THE ASSESSEE S SECOND SUBSTANTIVE GROUND CHALLENGES CORRECTNESS OF SECTION 14A R.W. RULE 8D DISALLOWANCE OF RS. 31 ,17,765/ - . ITS EXEMPT INCOME FROM DIVIDE ND PMS - 2010 IS OF RS. 4,29,693/ - , DIVIDEND (SHARES) INCUBATOR OF RS. 8,792/ - , DIVIDENDS (SHARES) PMS - 2010 OF RS. 1,39,818/ - , DIVIDEND INCOME OF RS. 29,13,374/ - , MUTUAL FUNDS DIVIDEND INCUBATOR OF RS. 1,06,955/ - AND KOTAK FLEXI BOND DIVIDEND OF RS. 5,28,530 / - ; RESPECTIVELY. THE ASSESSEE DID NOT DISALLOW ANY FIGURE TO HAVE BEEN IN RELATION WITH THE SAME. IT WOULD PLEAD NOT TO HAVE INCURRED ANY EXPENDITUR E FOR EARNING THE SAME . THE ASSESSING OFFICER INVOKED RULE 8D (2) OF THE INCOME TAX RULES TO COMPUTE D ISALLOWANCE INTER A LIA OF DIRECT EXPENDITURE ON DEMAT CHARGES/MANAGING FEE OF RS. 16,59,770/ - , PROPORTIONATE INTEREST OF RS. 1,28,561/ - AND ADMINISTRATIVE EXPENDITURE OF RS. 13,29,434/ - UNDER CLAUSES ( I ) TO ( III ) THERETO; RESPECTIVELY. 14 . THE CIT(A) UPHOLDS THE IMPUGNED DISALLOWANCE AS BELOW: - 5.2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. I HAVE ALSO PERUSED VARIOUS CASE LAWS RELIED UPON BY THE APPELLANT. IT IS SEEN THAT THE ID. A.R. CONTENDED THAT INVESTMENTS IN THE EQUITY SHARES SHOULD NO T BE CONSIDERED FOR DISALLOWANCE AS PER THE PROVISIONS OF SEC.14A OF THE I.T. ACT, SINCE, INCOME EARNED ON THE TRADING OF SHARES IS TAXED UNDER THE HEAD SHORT TERM AND LONG TERM CAPITAL GAINS. AFTER TAKING THE ENTIRETY AND FACTS IN VIEW, I AM NOT IN AGREEM ENT WITH THE CONTENTIONS OF THE ID. A.R. PROVISIONS OF SEC.14A R.W. RULE 8D DOES NOT MAKE ANY EXCEPTIONS FOR INVESTMENTS IN I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 13 SHARES INCOME FROM WHICH IS TAXED AS LONG TERM CAPITAL GAIN OR SHORT TERM CAPITAL GAIN. IN MY CONSIDERED VIEW THE SUBMISSIONS MADE B Y THE APPELLANT IS INCORRECT SINCE THE LTCG ARE EXEMPT AS PER THE PROVISIONS OF SEC.10(38) OF THE L.T. ACT. AND EXPENDITURE INCURRED FOR MAKING INVESTMENTS MADE IN THE SHARE INCOME FROM WHICH IS EXEMPTED AS PER THE PROVISIONS OF SEC. 10(38), NEEDS TO BE DI SALLOWED U/S.14A. AS FAR AS INVESTMENTS IN SHARES WHICH RESULTED IN SHORT TERM CAPITAL GAIN IS CONCERNED, IN MY CONSIDERED VIEW, MOST OF THESE SHARES ARE HELD FOR SHORT TIME. MOST OF THESE SHARES ARE GENERALLY PURCHASED AND SOLD DURING THE YEAR ITSELF. FEW OF THESE SHARES WILL APPEAR IN OPENING STOCK AND CLOSING STOCK. THIS WAY INCLUSION OF THESE SHARES IN THE OPENING STOCK AND CLOSING STOCK WILL NOT MAKE MUCH DIFFERENCE IN THE 14A DISALLOWANCE. IN MY CONSIDERED VIEW THESE INVESTMENTS WILL ALSO QUALIFY FOR DISALLOWANCE AS PER THE PROVISIONS OF RULE 8D, AS DIVIDEND INCOME FROM THESE SHARES WILL BE EXEMPT. 5.3 THE APPELLANT HAS ALSO CONTENDED THAT EXPENDITURE AGAINST DEMAT ACCOUNT AND KOTAK SECURITIES LTD., SHOULD NOT.BE TAKEN AS DIRECT EXPENDITURE FOR INVES TMENT IN EQUITY SINCE PART OF THIS EXPENDITURE P ERTAINS TO INVESTMENTS IN SHARES, PROFITS FROM WHICH ARE TAXED UNDER THE HEAD SHORT TERM CAPITAL GAIN. I DO NOT AGREE WITH THE CONTENTIONS OF THE APPELLANT SINCE PROVISIONS OF RULE 8D DOES NOT MAKE SUCH DISTI NCTION. 5.4 THE APPELLANT HAS ALSO RAISED OTHER TRIVIAL ISSUES WHICH CANNOT BE ACCEPTED IN VIEW OF THE EXPRESS PROVISIONS OF SEC.14A R.W. RULE 8D OF THE I.T. ACT. I HAVE ALSO PERUSED VARIOUS CASE LAWS CITED BY THE APPELLANT BUT THE RATIO OF THESE CASE LA WS WILL NOT APPLY IN THE YEAR UNDER CONSIDERATION SINCE PROVISIONS OF RULE 8D ARE APPLICABLE FOR THE A.Y.2008 - 09. 5.5 SINCE THE A.O. HAD SCRUPULOUSLY FOLLOWED PROVISIONS OF RULE 8D, ACCORDINGLY, I DO NOT HAVE ANY HESITATION IN AGREEING WITH THE CONTENTIO NS OF THE ID. A.O. IN VIEW OF ABOV E, DISALLOWANCE OF RS.31,17,765/ - MADE BY THE A.O. U/S.14A OF THE I.T. ACT IS CONFIRMED. THIS GROUND OF APPEAL IS DISMISSED. 15 . HEARD BOTH SIDES. RELEVANT RECORDS PERUSED. THERE IS NO DISPUTE ABOUT THE FACT THAT THE A BOVE STATED DIRECT EXPENDITURE I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 14 ALREADY STANDS ACCEPTED . LD. AUTHORIZED REPRESENTATIVE DRAWS OUR ATTENTION TO ASSESSEE S P & L ACCOUNT DEMONSTRATING ASSESSEE S INTEREST INCOME IN THE IMPUGNED ASSESSMENT YEAR AS RS. 2,59,32,546/ - WITH INTEREST EXPENDITURE OF RS. 9,33,696/ - RESULTING IN NET POSITIVE FIGURE. A CO - ORDINATE BENCH OF THE TRIBUNAL IN ITA 1277/KOL/2011 DCIT VS. TRADE APARTMENT LTD. DECIDED ON 30 - 03 - 2012 HOLDS THAT SUCH AN INTEREST DISALLOWANCE IS NOT TO BE MADE IN ABSENCE OF ANY NET INTEREST EXPE NDITURE UPON SETTING OFF INTEREST CREDITED TO P & L ACCOUNT. ANTHER CO - ORDINATE BENCH IN ITA 2228/AHD/2012 ITA VS. KARNAVATI PETRO - CHEM. LTD DECIDED ON 05 - 07 - 2013 ECHOES THE VERY PRINCIPLE. THE REVENUE IS UNABLE TO DRAW ANY DISTINCTION ON FACTS OR LAW. THIS PROPORTIONATE INTEREST DISALLOWANCE IS ACCORDINGLY DELETED. 16 . WE COME TO ADMINISTRATIVE EXPENDITURE DISALLOWANCE OF RS. 13,29,434/ - (SUPRA). LD. AUTHORIZED REPRESENTATIVE SUBMITS THAT BOTH THE AUTHORITIES NOWHERE RECORD SATISFACTION ABOUT CORRE CTNESS OF ASSESSEE S BOOKS OF ACCOUNT STATING THAT IT HAS NOT INCURRED ANY ADMINISTRATIVE EXPENDITURE AS HELD BY THE CASE LAW (2015) 376 ITR 553 (GUJ) PCIT VS. INDIA GELATINE CHEMICAL LTD, (2015) 370 ITR 338(DEL) CIT VS. TAIKISHA ENGINEERING INDIA LTD. WE FIND FROM PARA 5.2 OF THE ASSESSMENT ORDER THAT THE ASSESSING OFFICER DOES NOT RECORD ANY SATISFACTION AS CONTEMPLATED U/S. 14(2) OF THE ACT THAT ASSESSEE S BOOKS OF ACCOUNT S NOT ATTRIBUTING ANY ADMINISTRATIVE EXPENDITURE IN RELATION TO ITS EXEMPT INCOM E ARE NOT CORRECT. THIS VERY FACTUAL POSITION CONTINUES IN THE LOWER APPELLATE ORDER AS WELL. I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 15 WE ACCEPT ASSESSEE S ARGUMENTS AS PER THE ABOVE STATED CASE LAW AND DELETE THIS LIMB OF SECTION 14A R.W. RULE 8D DISALLOWANCE AS WELL. THIS SUBSTANTIVE GROUND IS PARTLY ACCEPTED. 17 . WE ARE NOW LEFT WITH ASSESSEE S THIRD AND FINAL SUBSTAN TIVE GROUND CHALLENGING ACTION OF BOTH THE LOWER AUTHORITIES IN TREATING ITS SHARE PROFITS OF RS. 2,43,55,894/ - AS BUSINESS INCOME IN STEAD OF CAPITAL GAINS. IT SEEKS TO ALL OW GROSS DEDUCTION SUM OF RS. 16,59,770/ - ON ACCOUNT OF DEMAT CHARGES AND MANAGEMENT FEE IN THE ALTERNATIVE. THE ASSESSING OFFICER OBSERVED THAT ASSESSEE S BUSINESS INCLUDED SALE/PURCHASE OF SHARES. HE INFERRED IT TO HAVE CARRIED ON SPECULATIVE BUSINESS THEREOF . A ND SOUGHT TO TREAT SHARE PROFIT HEREINABOVE AS BUSINESS INCOME. THE ASSESSEE INVITED HIS ATTENTION TOWARDS THE FACT THAT IT HAD TREATED THE SAME IN ITS BOOKS AS CAPITAL ASSET/INVESTMENTS AND NOT STOCK IN TRADE. IT STATED TO HAVE TAKEN DELIVER Y IN ALL OF ITS TRANSACTIONS . THE ASSESSING OFFICER AGAIN WENT BY SECTION 73 OF THE ACT FOR TREATING THE IMPUGNED SHARE PROFITS AS ASSESSEE S BUSINESS INCOME. 18 . THE CIT(A) REJECTS ASSESSEE S CORRESPONDING ARGUMENT AS UNDER: - 6.2 DURING THE APPELL ATE PROCEEDINGS ON THIS ISSUE THE APPELLANT SUBMITTED AS UNDER: - '4 TREATMENT OF PROFIT AND GAINS IN RESPECT OF SHARES: THE LD. A.O. HAS IN PARA 4 OF THE ASSESSMENT ORDER, REPRODUCED THE INFORMATION ABOUT THE PURCHASE / SALE OF SHARES FURNISHED BY US AND BASED ON THE SAME HAS MADE OBSERVATIONS IN PARA 4.4 (I), (II) AND I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 16 (III) REGARDING THE NUMBER OF COMPANIES IN WHICH SHARES TRANSACTIONS HAVE BEEN MADE, THE NUMBER OF TRANSACTIONS AND HAS COMMENTED ABOUT VOLUME OF TRANSACTIONS BEING IN CRORES OF RUPEES AND PROFIT EARNED BEING ALSO IN CRORES, SAYING THAT THE MAGNITUDE OF TRANSACTION IS VERY HIGH. THE LD. A.O. HAS FURTHER STATED THAT THE PROFIT EARNED ON SALE AND PURCHASE OF SHARES WAS NOT CAPITAL GAIN BUT IT WAS BUSINESS PROFIT EARNED IN TRADING ACTIVITIES OF SHARES. THE OBSERVATIONS MADE BY THE LD. A.O. IN PARA 4.4 ARE ERRONEOUS AND MISLEADING. THE NUMBER OF COMPANIES AND NUMBER OF TRANSACTIONS MENTIONED IN THE ORDER ARE NOT CORRECT BECAUSE ONE AND THE SAME COMPANY APPEARING IN THE DATA IS COUNTED AS SEPARAT E COMPANY AND SOME TRANSACTIONS NOT FALLING IN THE RELEVANT ASSESSMENT YEAR HAS BEEN TAKEN INTO CALCULATION. WITHOUT PREJUDICE TO WHAT HAS BEEN STATED ABOVE, EVEN IF THE NUMBERS ARE TAKEN TO BE CORRECT, THE LD. A.O. TAKING THE SAID OBSERVATION, AS THE BASI S FOR ARRIVING AT A CONCLUSION THAT THE PROFIT EARNED ON SHARES TRANSACTIONS IS A BUSINESS PROFIT AND NOT 'SHORT TERM / LONG TERM CAPITAL GAIN' IS GROSSLY MISPLACED AND ERRONEOUS. THE LD. A.O. HAS PURPOSELY NOT CONSIDERED THE FACT THAT WHEN THE VALUE INVOL VED IN THE TRANSACTIONS IS LARGE, THE NUMBER OF TRANSACTIONS ALSO TEND TO BE HIGHER. FURTHER IN OUR CASE LOOKING TO THE VALUE INVOLVED, THE NUMBER OF TRANSACTIONS (117 AS OBSERVED BY LD. A.O. IN THE ORDER WHICH IS A COMBINED TOTAL OF PURCHASE AND SALE AND NOT SINGLE SIDE TRANSA CTION) IS MINIMAL OR MEAGER. MOST IMPORTANTLY, THE ASSESSEE HAS SHOWN THE SHARES HELD AS INVESTMENT AND NO BORROWED FUNDS HAVE BEEN INVESTED. THE HOLDING PERIOD IN RESPECT OF LONG - TERM CAPITAL GAIN IS QUIT LO NG AND INTENTION WAS NO T TO TRADE THEREIN. THE INTENTION WAS TO MAKE INVESTMENT AND TO REALISE T HE INCOME AND SIZABLE DIVIDEND. THIS WAS CONSISTENTLY SO HELD AND ALSO ACCEPTED IN THE PAST. THE AO FAILED TO BRING ANY NEW FACTS IN THE YEAR UNDER APPEAL FOR HIS ERRONEOUS VIEW TO T REAT THE CAPITAL GAIN AS BUSINESS INCOME. IT BE SO HELD NOW AND BOTH LONG - TERM AND SHORT - TERM CAPITAL GAIN (WHICH IS ALSO HELD FOR MORE THAN SEVERAL MONTHS) BE HELD AS CAPITAL GAIN AS DECL ARED. STATEMENT OF HOLDING IS ENCLOSED ALREADY GIVEN TO AO WITH LET TER DT:31/07/2010 SCRIP WISE AGAIN ENCLOSED ANNEXURE - 5 PAGE FURTHER, THE LD. A.O. HAS ALSO IGNORED THE FACT THAT A PORTION OF THE SHARES TRANSACTIONS AR E THOSE WHICH WERE DONE BY PORT FOLIO I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 17 MANAGERS VIZ. K OTAK SECURITIES LTD. UNDER PORT FOLIO MANAGEMENT SCH EMES (PMS) AND THE COMPANY HAS NOT D ONE THOSE TRANSACTIONS BY ITSELF SINCE IT HAS NO CONTROL OVER THE SAME. THE COMPANY HAD INVESTED FUNDS IN PMS WITH THE FUND MANAGERS AND PAID MANAGEMENT FEES AND THEY HAVE EFFECTED THE TRANSACTIONS WHERE NUMBER OF TRANSA CTIONS ARE IN NO WAY UNDER COMPANY'S CONTROL. THE FACT OF OUR HAVING INVESTED FUNDS IN PMS ITSELF PROVES THAT THE SHARES WERE HELD AS INVESTMENT AND NOT OTHERWISE AND THEREFORE THE PROFIT WAS RIGHTLY COMPUTED AND TREATED AS CAPITAL GAINS BY US IN THE RETUR N OF INCOME TAX AS FILED. THE NATURE AND PERIOD OF HOLDING AND PAST HISTORY OF THE APPELLANT CLEARLY JUSTIFIES ITS STAND THAT PROFIT ON SALE OF SHARES THROUGH WHATEVER MODE WAS CHARGEABLE ONLY AS CAPITAL GAIN. IT BE SO HELD NOW. I T IS VERY IMPORTANT TO NO TE THAT WHOLE OF INVESTMENT IN SHARES / MUTUAL FUNDS ETC. ARE DONE OUT OF OUR OWN UNUTILIZED FUND AND INVESTMENT DONE WAS NOT OUT OF BORROWED FUNDS HENCE PROVISIONS OF SPECULATION /BUSINESS INCOME IS NOT APPLICABLE. YOUR APPELLANT IN THIS REGARD RELIES O N THE FOLLOWING DECISIONS OF THE AHMEDABAD TRIBUNAL WHICH HAS CONSIDERED IN DETAIL, THE ISSUE INVOLVED AND HELD THAT PROFIT IN SUCH CASES OF INVESTMENT IN SHARES HAS TO BE TREATED AS CAPITAL GAIN. IT BE SO HELD NOW AND THE SHORT TERM AND LONG TERM CAPITAL GAIN BE DIRECTED TO BE ACCEPTED AS DECLARED. IN VIEW OF ENTIRETY OF ABOVE SUBMISSIONS , THE ADDITION OF RS.2,43,55,894/ - MADE BY LD. A.O. TREATING THE CAPITAL GAINS AS BUSINESS INCOME BE DELETED AND THE DEDUCTIONS OF RS. 16,59,770/ - TOWARDS DEMAT CHARGES AND MANAGEMENT FEES CLAIMED IN COMPUTATION OF CAPITAL GAINS BE ALLOWED AS CLAIMED AND EXEMPTION OF LONG TERM CAPITAL BE ALLOWED AS CLAIMED.' 6.3 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IT IS SEEN THAT THE APPELLANT WAS REGULARLY ENGAGED I N SHARE TRADING DURING THE YEAR U NDER CONSIDERATION AS WELL AS IN THE EARLIER YEA RS. SINCE, THE APPELLANT WAS REGULARLY ENGAGED IN THIS BUSINESS, THE BURDEN OF PROOF TO PROVE THAT INVESTMENT HAS BEEN MADE IN SHARES IN THE CAPACITY OF INVESTOR IS OF THE APPELLANT. IT WAS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF ASSOCIATED INDUSTRIAL DEVELOPMENT CO. PVT. LTD., REPORTED AT 82 ITR 586, THAT IT IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARE, TO PROVE THAT A PARTICULAR HOLDING I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 18 OF SHARE IS INVESTMENT OR FORMS PART OF THE STOCK - IN - TRADE. THE ASSESSEE WILL BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORD AS TO WHETHER IT HAS MAINTAINED DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOCK IN TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTM ENTS. IN THE INSTANT CASE THE APPELLANT HAS NOT FILED ANY EVIDENCE TO PROVE THAT THE INVESTMENTS IN SHARE WERE MADE AS INVESTOR OR AS A BUSINESS ADVENTURE. INSTEAD OF FILING SPECIFIC EVIDENCES THE APPELLANT'' - HAS SUBMITTED A GENERAL REPLY. IN MY CONSIDERE D VIEW THIS ISSUE CANNOT BE DECIDED BY GENERALITY. THIS WAY THE APPELLANT HAS FAILED TO DISCHARGE ITS ONUS TO PROVE THAT THE SHARE TRANSACTIONS WERE UNDERTAKEN BY HIM AS AN INVESTOR. 6.4 IN THE ABSENCE OF ANY COGENT EVIDENCE, \ DO NOT HAVE ANY OTHER OPTIO N BUT TO AGREE WITH THE FINDINGS OF THE ID. A.O. I HOLD THAT THE APPELLANT WAS ENGAGED IN THE BUSINESS OF SHARE TR ADING FOR THE FOLLOWING REASONS : - 1) THE APPELLANT HAS REGUL ARLY UNDERTAKEN SHARE TRANSACTIONS IN THE YEAR UNDER CONSIDERATION AS WEL L AS IN THE EARLIER YEARS. 2) ALTHOUGH THE APPELLANT HAS GIVEN A GENERAL STATEMENT THAT INVESTMENTS IN SHARE HAS BEEN REFLECTED IN BALANCE SHEET UNDER THE HEAD INVESTMENTS. HOWEVER, THE APPELLANT HAS NOT FILED SUCH EVIDENCE BEFORE ME DURING THE APPELLATE PROCEEDINGS. I N THE ABSENCE OF COGENT EVIDENCE THIS STATEMENT CANNOT BE ACCEPTED. 3) THE NUMBER OF TRANSACTIONS DURING THE YEAR IS 117 WHICH CANNOT BE SAID AS AN ISOLATED OR STRAY TRANSACTION. THIS INDICATE THAT THE APPELLANT WAS REGULARLY UNDERTAKING THESE TRANSACTIONS T O EARN PROFIT. 4) THE VOLUME OF TRANSACTIONS ARE ALSO LARGE. THE VOLUME RUNS INTO CRORES OF RUPEES. 6.5 IN VIEW OF ABOVE, THE ACTION OF THE A.O. IS CONFIRMED. THE ADDITION OF RS.2,43,55,894/ - IS CONFIRMED. I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 19 19 . THE ASSESSEE REITERATES ITS STATUS AS A MA NUFACTURING ENTITY. THERE IS NO DISPUTE ABOUT NON - USAGES OF BORROWED FUNDS FOR PURCHASING SHARES IN QUESTION. THE ASSESSEE HAS ALWAYS BEEN TREATED AS AN INVESTOR IN REGULAR ASSESSMENTS FRAMED IN PRECEDING ASSESSMENT YEARS. IT STATES THAT PMS SERVICES HA VE ALSO BEEN AVAILED FOR THE PURPOSE OF MAINTAINING/MANAGING OF THE SHARE INVESTMENT IN QUESTION. PAGE 601 OF THE PAPER BOOK REVEALS ALL DETAILS OF ASSESSEE S SHORT TERM CAPITAL GAINS OF RS. 1,61,40,608.19/ - . THE SAME ARISE FROM SCRIPS OF 21 ENTITIES. C OLUMN 6 THEREOF DENOTES HOLDING PERIOD THEREOF EXCEEDING TIME SPAN OF MINIMUM 100 DAYS ON MOST OF THE OCCASIONS. LONG TERM CAPITAL GAIN FIGURES ARE OF RS. 82,15,286/ - FROM ONLY THREE SCRIP S HELD FOR ALMOST MORE THAN 400 DAYS ON MOST OF THE OCCASIONS. PAG E 614 IS ASSESSEE S BALANCE SHEET TREATING THE RELEVANT SHARES AND MUTUAL FUNDS AS INVESTMENTS. THE ASSESSEE HAD ITS DISPOSAL CAPITAL AMOUNT OF RS. 7.99 CRORES AND RE SERVES OF RS. 115 CRORES. IT HAS ENGAGED PORTFOLIO MANAGEMENT SERVICES FOR EFFECTIVE MA NAGEMENT OF ITS INVESTMENTS. HON BLE KARNATAKA HIGH COURT IN CIT VS. KAPOOR INVESTMENTS QUOTES DELHI HIGH COURT DECISION IN (2014) IN 367 ITR 01 RADICAL INVESTMENTS VS. ACIT TO HOLD THAT SHARES INVESTMENTS MADE THROUGH PORTFOLIO MANAGEME NT SERVICES DO NO T AMOUNT TO BUSINESS ACTIVITY . THERE IS ALSO NO EVIDENCE APART FROM ASSESSING OFFICER S DRAWING INFERENCE ONLY THAT THE ASSESSEE HAS TAKEN PART IN ANY ADVENTURE IN THE NATURE OF SHARE TRADING. THE LAW ON THIS ISSUE IS SETTLED THAT CAPITAL GAINS OR BUSINE SS INCOME IN CASE OF SHARE PROFIT HAS TO BE DECIDED KEEPING IN MIND AN ASSESSEE S INTENTION, FREQUENCY AND MAGNITUDE OF I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 20 TRANSACTIONS , ACCOUNTING TREATMENT, HOLDING PERIOD ETC. WE FOLLOW OUR ABOVE NARRATION OF FACTS AND LAW TO HOLD THAT BOTH THE LOWER AUTH ORITIES HAVE ERRED IN TREATING THE ASSESSEE S CAPITAL GAINS IN QUESTION AS ITS BUSINESS INCOME. THE ASSESSING OFFICER SHALL NOW PASS A CONSEQUENTIAL ORDER ACCORDINGLY. ASSESSEE S APPEAL ITA 857/AHD/2012 IS PARTLY ALLOWED. 20 . WE COME TO REVENUE S CROS S APPEAL ITA 1213/AHD/2012. ITS FIRST SUBSTANTIVE GROUND SEEKS TO REVIVE ADDITION OF RS. 4,73,74,171/ - MADE ON ACCOUNT OF REJECTION OF BOOK RESULT AND RE - ESTIMATION OF ADDITIONAL BUSINESS PROFIT. THE ASSESSEE HAD DECLARED TURN O VER OF RS. 88,46,70,599/ - W ITH GP OF 44.1% IN THE RELEVANT PREVIOUS YEAR AS COMPARED TO THE CORRESPONDING FIGURES OF R S. 138, 99, 52, 564 WITH GP @ 49.46% IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. THE ASSESSING OFFICER SOUGHT FOR REASONS OF THIS GP COMING DOWN. THE ASSESSEE AT TRIBUTED THE SAME TO DRASTIC REDUCTION IN ITS SALES, FIXED COST REMAINING CONSTANT AND INCREASE IN ITS ROW MATERIAL COST. THE ASSESSING OFFICER ASKED FOR RAW MATERIAL RATIO CONSUMPTION IN THE THREE IMME DIATE PRECEDING ASSESSMENT YEAR . HE QUOTED LACK OF S UCH DETAILS FILED AT ASSESSEE S BEHEST TO REJECT ITS BOOKS OF ACCOUNT U/S. 145A OF THE ACT THEREBY RE - ESTIMATING GROSS PROFITS @ 49.46% RESULTING IN THE IMPUGNED ADDITION OF RS. 4,73,74,171/ - BEING MADE IN THE ASSESSMENT ORDER. 21 . THE CIT(A) ACCEPTS AS SESSEE S ARGUMENTS ON THIS ISSUE AS UNDER: - I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 21 3.3 AFTER CAREFUL CONSIDERATION OF VARIOUS EVIDENCES AVAILABLE ON RECORD I AM NOT INCLINED TO AGREE WITH THE OBSERVATIONS OF ID. A.O. FOR THE FOLLOWING REASONS: - (A)IT IS SEEN THAT THE MAIN RAW MATERIAL CONSU MED BY THE APPELLANT IS IRON SCRAP. TO BE PRECISE EVERY METRIC TON OF FINISHED GOODS SOLD, 983.7 KGS OF MS SCRAP IS CONSUMED. THE FACTS AVAILABLE ON RECORD INDICATES THAT THE PRICE OF THE SCRAP INCREASED BY RS. 4,513/ - PER TON COMPARED TO THE PRICE PREVAIL ING IN THE IMMEDIATELY PRECEDING YEAR. THE PRICE INCREASE OF MS SCRAP DURING THE YEAR UNDER CONSIDERATION IS AROUND 19.5%. (B)THE EVIDENCES FURNISHED FOR INCREASE IN THE PRICE OF SCRAP REMAINED UNCONTROVERTED. IT IS ALSO A MATTER OF RECORD THAT THE APPELL ANT HAS DECLARED A TURNOVER OF RS.88.46 CRORES DURING THE YEAR UNDER CONSIDERATION. THE TURNOVER DECLARED BY THE APPELLANT FOR THE IMMEDIATELY PRECEDING YEAR I.E. A.Y.2007 - 08 IS RS. 138.99 CRORES. THIS WAY TURNOVER DECLARED BY THE APPELLANT DURING THE CURR ENT YEAR IS LOWER BY 36% AS COMPARED TO IMMEDIATELY PRECEDING YEAR. IN VIEW OF THE FACTS I AM INCLINED TO AGREE WITH THE CONTENTION OF THE APPELLANT THAT DUE TO LOWER TURNOVER THE PRODUCTION CAPACITIES INSTALLED COULD NOT BE UTILIZED OPTIMALLY AND THE OVER HEAD EXPENSES PER UNIT OF THE TURNOVER WAS MORE. IN MY CONSIDERED VIEW THE APPELLANT HAS GIVEN A PLAUSIBLE EXPLANATION FOR REDUCTION IN GROSS PROFIT (C) PERUSAL OF EVIDENCES FILED DURING THE ASSESSMENT AS WELL AS THE APPELLATE PROCEEDINGS REVEALS THAT THE APPELLANT HAS FURNISHED COMPLETE QUANTITATIVE DETAILS OF CONSUMPTION OF RAW MATERIALS VALUE - WISE AND QUANTITY - WISE. THE FACT OF CONSUMPTION DETAILS VALUE - WISE WAS ADMITTED BY THE A.O. IN THE ASSESSMENT ORDER ITSELF. I FIND THAT CONSUMPTION OF QUANTITATIVE DETAILS FOR THE LAST THREE ASSESSMENT YEARS HAS BEEN FILED VIDE THE ASSESSEES LETTER DATED 22/7/2010 AND THE SAME IS PLACED AT PAGE NO.41 OF THE PAPER BOOK. THE A.O. DURING THE ASSESSMENT PROCEEDINGS AS WELL AS DURING THE REMAND PROCEEDINGS COULD NOT FIND ANY SPECIFIC DEFECT IN THE QUANTITATIVE DETAILS FURNISHED BY THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS AS WELL AS THE REMAND PROCEEDINGS. (D)THE BOOKS OF ACCOUNTS ARE AUDITED AS PER THE PROVISIONS OF THE I.T ACT AND AS PER THE PROVISIONS OF CENTRAL EXCISE ACT. THESE DETAILS I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 22 WERE BEFORE THE A.O. THE A.O. COULD NOT FIND SPECIFIC DEFECT EITHER IN THE AUDIT REPORT OR IN THE BOOKS OF ACCOUNTS. (E)LT IS ALSO OBSERVED BY THE A.O. THAT THE DETAILS OF SALARY, WAGES AND BONUS PAID HAS NOT BEEN FURNISHED. I F IND THAT THE APPELLANT HAS FURNISHED COPIES OF SALARY SHEETS DURING THE ASSESSMENT PROCEEDINGS, WHICH CONSIST DETAILS LIKE COMPLETE NAME OF THE EMPLOYEE, SALARY PAYABLE AND RECOVERIES LIKE ESI, PF, RECOVERY AGAINST ADVANCE LOAN, INCOME - TAX ETC. THESE SALAR IES ARE DULY RECEIVED BY THE EMPLOYEES. IN ADDITION TO THESE DETAILS OF BONUS AND EX - GRATIA PAYMENT WAS ALSO FURNISHED. THE APPELLANT HAS ALSO FURNISHED DETAILS OF PAYMENT TO LABOUR CONTRACTORS. THESE DETAILS CONSIST OF COMPLETE NAMES OF THE CONTRACTOR ALO NGWITH ITS PA NO. AND THE TOTAL PAYMENTS MADE. IN MY CONSIDERED VIEW THE APPELLANT HAS FURNISHED SUFFICIENT DETAILS WHICH CAN EXPLAIN THE GENUINENESS OF THE PAYMENTS. THE ONUS WAS ON THE A.O. TO FIND DEFECT IN THESE DETAILS. THE A.O. HAS FAILED TO FIND ANY SPECIFIC DEFECTS IN THESE DETAILS. (F)THE A.O. OBSERVED THAT THE APPELLANT HAS NOT FURNISHED DETAILS IN RESPECT OF CARRIAGE INWARDS. THE DETAILS FILED DOES NOT CONTAIN INFORMATION ABOUT RECIPIENTS OF THIS EXPENDITURE AND FOR WANT OF SUCH DETAILS A.O. COU LD NOT EXAMINE THE GENUINENESS OF THESE PAYMENTS. PERUSAL OF DETAILS FILED BY THE APPELLANT DURING ASSESSMENT PROCEEDINGS REVEALS THAT EXPENDITURE UNDER THE HEAD CARRIAGE INWARD WAS PAID TO MAINLY TO 9 PERSONS. THE APPELLANT HAS FURNISHED COMPLETE NAME AND ADDRESS OF THESE PERSONS ALONGWITH THEIR PA NOS AND THE DETAILS OF PAYMENTS. IN MY CONSIDERED VIEW THESE DETAILS ARE GOOD ENOUGH TO IDENTIFY PERSONS TO WHOM CARRIAGE INWARD WAS PAID. THE APPELLANT HAS ALSO TAKEN DUE CARE TO FURNISH PA NOS OF THESE PERSONS . IN MY CONSIDERED VIEW THESE DETAILS ARE SUFFICIENT TO ESTABLISH THE GENUINENESS OF THE PAYMENT AND THE IDENTITY OF THE RECIPIENT. IN VIEW OF THESE FACTS I AM NOT IN AGREEMENT WITH THE OBSERVATIONS OF ID. A.O. ON THIS MATTER. (G)THE A.O. HAS ALSO OBSERVE D THAT THE APPELLANT HAS NOT FURNISHED INFORMATION IN RESPECT OF PURCHASES AND INFORMATION IN RESPECT OF CREDITORS IN THE PRESCRIBED PROFORMA. THE APPARENT OBJECTION OF THE ID. A.O. IS THAT THE DETAILS FURNISHED BY THE APPELLANT DO NOT GIVE SUFFICIENT DE TAILS IN RESPECT OF TRANSACTIONS DONE DURING THE YEAR UNDER CONSIDERATION WITH THESE PERSONS. HOWEVER, THE DETAILS FURNISHED BY THE APPELLANT VIDE HIS LETTER DATED 22.7.2010, CLEARLY I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 23 INDICATE THE OPENING BALANCE, THE DEBIT AND CREDIT DURING THE YEAR UNDER CONSIDERATION AND THE CLOSING BALANCE AT THE END OF THE ACCOUNTING YEAR AGAINST EACH AND EVERY DEBTOR AND CREDITOR. SECONDLY, THE COMPLETE NAME AND ADDRESS OF THESE CUSTOMERS AND VENDORS HAVE BEEN FURNISHED BY THE APPELLANT VIDE HIS LETTER DATED 31/7/2010. IN MY CONSIDERED VIEW THE APPELLANT HAS FURNISHED SUFFICIENT EVIDENCE TO IDENTIFY THE VENDORS AND CUSTOMERS. SUFFICIENT EVIDENCES WERE ALSO FURNISHED IN RESPECT OF TRANSACTIONS DONE DURING THE YEAR UNDER CONSIDERATION. IF ANY OTHER INFO RMATION WAS NEEDED THE SAME CAN BE CULLED OUT FROM THESE DETAILS. THE APPELLANT HAS FURNISHED SUFFICIENT INFORMATION ON RECORD AND IF THE A.O. WAS NOT SATISFIED WITH THE GENUI NENESS OF THESE PURCHASE/SALES, HE COULD HAVE CONDUCTED ENQUIRIES ON THE BASIS O F FACTS AVAILABLE ON RECORD. THE ABOVE FACTS CLEARLY REVEALS THAT THE APPELLANT FURNISHED ALL THE BASIC DETAILS IN RESPECT OF SUNDRY DEBTORS AND CREDITORS. THE A.O. COULD NOT FOUND SPECIFIC DEFECTS IN THESE DETAILS. THE ABOVE DISCUSSIONS REVEALS THAT THE APPELLANT HAS FURNISHED SUFFICIENT DETAILS TO SUBSTANTIATE SALES AND PURCHASE, SUNDRY DEBTORS AND CREDITORS, QUANTITATIVE DETAILS OF CONSUMPTION OF MAIN RAW MATERIALS AND PRODUCTION AND QUANTITATIVE DETAILS OF CLOSING STOCK. THE APPELLANT HAS ALSO FURNISH ED OTHER DETAILS AS REQUIRED BY THE A.O. HOWEVER, IN SPITE OF SUCH A BIG LABOUR THE A.O. WAS NOT SATISFIED WITH THE DETAILS FURNISHED. HOWEVER, THE A.O. HAS NOT FOUND ANY SPECIFIC DEFECT IN THE BOOKS OF ACCOUNTS OR IN THE DETAILS FURNISHED BY THE APPELLANT . THE A.O. HAS NOT CONDUCTED ANY ENQUIRIES INDEPENDENTLY TO VERIFY THE TRUTHFULNESS OF THE DETAILS FURNISHED BY THE APPELLANT. THE IMPORTANT POINT, TO BE NOTED HERE IS THAT THE A.O. HAS NOT FOUND ANY SPECIFIC DEFECT IN THE BOOKS OF ACCOUNTS OF THE APPELLAN T. IT IS AN ESTABLISHED PROPOSITION OF LAW THAT THE BOOKS OF ACCOUNTS CANNOT BE REJECTED WITHOUT FINDING SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNTS. THE RELIANCE IN THIS REGARD IS PLACED ON CIT VS VIKRAM PLASTIC 239 ITR 161 (GUJ). IT IS ALSO HELD BY THE HO N'BLE ALLAHABAD HIGH COURT IN THE CASE OF RAMLAKHAN VS CIT 1981 TAX LR/NOC 86 (ALLHD) THAT MERE FAILURE OF MAINTAINING A SPECIFIC TYPE OF ACCOUNT BOOK WHERE THE ASSESSEE MAINTAINED OTHER ACCOUNT BOOKS WHICH WERE VERIFIABLE C ANNOT BE A BASE FOR REJECTION OF BOOKS OF ACCOUNTS. I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 24 IN VIEW OF ABOVE FACTS, I AM INCLINED TO AGREE WITH THE CONTENTIONS OF LD. A.R. ACCORDING LY, ADDITION OF RS. 4,73,74,171/ - FOR LOW G.P. IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. 22 . THE REVENUE STRONGLY SEEKS TO RESTORE THE ENTI RE SUM OF THE IMPUGNED ADDITIONS MADE AFTER REJECTION OF ASSESSEE S BOOKS. THE ASSESSEE SUPPORT CIT(A) S ORDER. IT HAS INTER ALIA COME ON RECORD THAT ASSESSEE S RAW MATERIAL CONSUMPTION COST OF SCRAP ITEMS HAS SEEN 19.5% INCREASE, THERE HAS BEEN DECLINE IN TOTAL TURNOVER, ALL RELEVANT DETAILS ALREADY STOOD FURNISHED BEFORE THE ASSESSING AUTHORITY ITSELF, RELEVANT BOOKS OF ACCOUNT STAND AUDITED UNDER THE INCOME TAX AS WELL AS CENTRAL EXCISE LAW WITHOUT ANY INFIRMITY BEING POINTED OUT THEREIN. LD. AUTHORI ZED REPRESENTATIVE INVITED OUR ATTENTION TO PAGE 664 OF THE PAPER BOOK COMPRISING OF ASSESSING OFFICER S REMAND REPORT TO CONTEND DUE COMPLIANCE OF THE PRINCIPLES OF NATURAL JUSTICE IN THE LOWER APPELLATE PROCEEDINGS. PAGES 555 AND 5 56 REVEAL THAT ASSESS EE HAD RESPONDED TO ALL OF THE SCRUTINY SHOW CAUSE NOTICES. THE REVENUE DOES NOT POINT OUT EITHER ANY MIS - READING OF EVIDENCE OR PERVERSITY IN THE LOWER APPELLATE FINDINGS UNDER CHALLENGE. WE DO NOT FIND ANY ERROR IN THE CIT(A) S ACTION UNDER CHALLENGE D ELETING THE IMP UGNED ADDITION . REVENUE S FIRST SUBSTANTIVE GROUND FAILS . 23 . THE REVENUE S NEXT SUBSTANTIVE GROUND CHALLENGES THE LOWER APPELLATE ORDER PARTLY DELETING SECT ION 40A(2)(B) DISALLOWANCE AS ALREADY ADJUDICATED IN ASSESSEE S FAVOUR HEREINABOVE . THIS GROUND IS ACCO RDINGLY REJECTED . I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 25 24 . THE REVENUE S THIRD SUBS TA NTI VE GROUND SEEK S TO RESTO RE CLOSING STOCK ADJUSTMENT OF R S. 47,41,915/ - MADE U/S. 145A OF THE ACT. THE ASSESSING OFFICER INVOKED THE IMPUGNED ADDITION AFTER FINDING THE ASSESSEE A S NOT TO HAVE ADDED CENVAT VALUE PAID ON RAW MATERIAL IN ITS CLOSING STOCK. THE CIT(A) DELETES THE SAME AS FOLLOWS: - 9.2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. I HAVE ALSO PERUSED VARIOUS CASE LAWS RELIED UPON BY THE APPELLANT. ON THIS ISSUE I AM INCLINED TO AGREE WITH THE SUBMISSIONS OF THE ID. A.R. FOR THE FOLLOWING REASONS : - (1) THE APPELLANT IS FOLLOWING EXCLUSIVE METHOD OF ACCOUNTING. ACCORDING TO THIS METHOD OF ACCOUNTING PAYMENT AND RECEIPT OF CENVAT IS A BALANCE SHEET ITEM AND IT IS NOT DEBITED OR CREDITED IN THE P & L A/C. IN THIS REGARD I AM INCLINED TO AGREE WITH THE CONTENTION OF THE ID. A.R. THAT A N AMOUNT OF RS. 47,41,915/ - BEING CENVAT PAID 6N RAW MATERIAL IS REVENUE NEUTRAL. THE APPELLANT HAS RIGHTLY PLACED RELIANCE ON INDO NI PPON CHEMICAL CO. LTD. (2003) 261 ITR 275 (SG). I HAVE ALSO PERUSED THE OTHER CASE LAWS RELIED UPON BY THE APPELLANT AND RATIOS OF THESE CASE LAWS ALSO SUPPORT THE CASE OF THE APPELLANT. (2) THE A.O. HAS NOT COMMENTED ON THE ACCOUNTING POLICIES FOLLOWED B Y THE APPELLANT. THE POLICY OF VALUATION OF CLOSING STOCK CONSISTENTLY FOLLOWED BY THE APPELLANT IN THE PREVIOUS YEARS AS WELL AS IN THE SUCCEEDING YEARS. THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF VOLTAMP TRANSFORMERS LTD. V/S. CIT (2008) REPORTED ON 2 17 CTR 254 HAS HELD THAT A.O. HAS GOT VERY LIMITED POWERS TO CHANGE VALUATION OF CLOSING STOCK. THE A.O. CANNOT CHANGE METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE WITHOUT VALID REASONS. (3) HON'BLE SUPREME COURT IN THE CASE OF CHAINRUP SAMPATR AM (1 953) REPORTED ON 24 ITR 481 HAS CLEARLY HELD I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 26 THAT PROFITS DOES NOT ARISE OUT OF VALUATION OF CLOSING STOCK AND SITUS OF ITS ARISING OR ACCRUING WHERE THE VALUATION IS MADE AND VALUATION OF UNSOLD STOCK IS NECESSARY PART OF THE PROCESS OF DETERMINING TRADING RESULTS BUT IT CAN IN NO SENSE BE REGARDED AS SOURCE OF SUCH PROFIT. (4) IT IS CLEARLY HELD IN THE CASE OF CIT V/S. AHMEDABAD NEW COTTON MILLS REPORTED AT 4 STC 245 THAT WHEN THE OPENING AND CLOSING STOCK OF BUSINESS ARE BOTH UNDERVALUED, IF TH E METHOD OF ALTERATION OF BOTH VALUATION IS NOT ADOPTED, IT IS PERFECTLY PLAIN THAT PROFITS WHICH IS BROUGHT FORWARD IS NOT REAL ONE. IN SUCH CASES, THE REAL PROFITS OF A PARTICULAR YEAR CANNOT BE ASCERTAINED BY MERELY RAISING VALUE OF CLOSING STOCK, NOT T AKING INTO CONSIDERATION THE SIMILAR VALUATION OF OPENING STOCK. AS PER THE RATIO OF THIS CASE, ENHANCING THE VALUE OF CLOSING STOCK WITHOUT GIVING CORRESPONDING EFFECT TO THE VALUATION OF OPENING STOCK IS NOT PROPER. 9.3 IN VIEW OF THE ABOVE FACTS, I AM NOT CONVINCED ABOUT THE MAINTAINABILITY OF ADDITION OF RS. 47,41,915/ - IN VALUATION OF CLOSING STOCK. THE A.O. IS DIRECTED TO DELETE ADDITION OF RS. 47,41,915/ - . THIS GROUND OF APPEAL IS ALLOWED. 25 . THE REVENUE STRONGLY SEEKS TO RESTORE ASSESSING OFFI CER S FINDINGS. LD. AUTH ORIZ ED REPRESENTATIVE POINTS OUT THAT THE ASSESSEE FOLLOWS EXCLUSIVE METHOD OF ACCOUNTING MEANING THEREBY THAT IF THE IMPUGNED ADDITION IS RESTORED, IT WOULD BE AGAIN A REVENUE NEUTRAL ACTION AS HELD IN THE LOWER APPELLATE FINDINGS . HE QUOTES HON BLE JURISDICTIONAL HIGH COURT DECISION IN TAX APPEAL NO. 436 AND 437/2011 CIT VS. BELL GRANITO CERAMICA D ATED 13 - 06 - 2012 FOLLOWING ITS EARLIER JUDGMENT ACIT VS. NARMADA CHEMATOR PETRO - CHEMICALS LTD. (2010) 233 CTR 265 (GUJ) REJECTING REVEN UE S SUBSTANTIAL QUESTION FRAMED IN CHAL LENGING TRIBUNAL S ORDER THAT NO SUCH ADDITION COULD BE MADE ON ACCOUNT OF EXCISE DUTY TO CLOSING STOCK UNLESS A BALANCING I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 27 DEDUCTION IS ALLOWED IN P & L ACCOUNT. AND ALSO THAT IF CENTRAL EXCISE DUTY IS NOT DUE AN D PAYABLE, THE SAME CANNOT BE CONSIDERED AS COS T TO RAW MATERIAL AS WELL AS FINISHED GOODS APPEARING IN THE CLOSING STOCK. LD. DR FAILS IN POINTING OUT ANY EXCEPTION TO THIS PRINCIPLE . WE FOLLOW THE SAME FOR UPHOLDING THE LOWER APPELLATE FINDINGS UNDER CHALLENGE. THIS THIRD SUBSTAN T I VE GROUND IS ALSO DECLINED. REVENUE S APPEAL ITA 1213/AHD/2012 IS DISMISSED. ASSESSMENT YEAR 2009 - 10 ASSESSEE S APPEAL ITA 2617/AHD/2012 AND REVENUE S CROSS APPEAL 2921/AHD/2012 26 . WE COME TO ASS ESSEE S APPEAL. ITS FIRS T SUBSTAN T I VE GROUND IS AGAINST SECTION 14A DISALLOWANCE OF RS. 36,26,359/ - MADE AGAINST ASSESSEE S DIVIDEND INCOME OF RS. 37,51,097/ - . THE ASSESSEE FILED ITS REPLY ON 19 - 05 - 2011 NOT ATTRIBUTING ANY EXPENDITURE; DIRECT, PROPORTIONATE OR ADMINISTRATIVE ONE . IT HOWEVER CAME OUT WITH ADMINISTRATIVE EXPENDITURE @ 0.5% OF AVERAGE VALUE OF INVESTMENTS COMING TO RS. 1,20,708/ - . THE ASSESSING OFFICER SOUGHT TO DISALLOW PROPORTIONATE AND ADMINISTRATIVE EXPENDITURE. THE ASSESSEE INTER ALIA CLARIFIED THAT ITS EXEM PT INCOME YIELDING INVESTMENTS HAD COME DOWN FROM RS. 35,02,51,195/ - AS ON 31 - 03 - 2008 TO RS. 21,81,75,831/ - AS ON 31 - 03 - 2009, ITS SURPLUS FDS DERIVING INTEREST INCOME READ A FIGURE OF RS. 25.36 CRORES ON THE LATTER DATE INSTEAD OF RS. 17.9 CRORES ON THE FO RMER DATE AND ALSO THAT ITS INTEREST INCOME IN THE RELEVANT PREVIOUS YEAR WAS RS. 1.97 CRORES AGAINST INTEREST EXPENDITURE OF RS. 1.67 CRORES. THE ASSESSING OFFICER MECHANICALLY I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 28 APPLIED RULE 8D(2)(II) AND (III) TO DISALLOW PROPORTIONATE INTEREST DISALLOWA NCE OF RS. 20,78,960/ - AND ADMINISTRATIVE EXPENDITURE OF RS. 12,47,399/ - ; RESPECTIVELY AGGREGATING TO RS. 33 ,26,359/ - . THE CIT(A) UPHOLDS THE SAME. 27 . WE HAVE HEAD BOTH THE PARTIES WHO REITERATE THEIR RESPECTIVE STANDS AGAINST AND IN SUPPORT OF THE IM PUGNED DIS ALLOWANCE. THERE IS NO DISPUTE THAT THE ASSESSEE S P & L ACCOUNT PAGE 17 SCHEDULE 13 REVEALS NET INTEREST POSITIVE INCOME IN VIEW OF INTEREST INCOME AND INTEREST EXPENDITURE READING FIGURES OF RS. 1.97 C RORES AND RS. 1.67 CRORES RESPECTIVELY . W E QUOTE OUR DISCUSSION IN CORRESPONDING ADJUDICATION IN PRECEDING ASSESSMENT YEAR HEREINABOVE AND HOLD THAT THE IMPUGNED PRO0PORITONATE DISALLOWANCE IS NOT SUSTAINABLE IN CASE OF NET POSITIVE INTEREST INCOME. THE SAME STANDS DELETED. WE COME TO ADMINISTR ATIVE EXPENDITURE AND FIND THAT TH E AUTHORITIES HAVE NOWHERE REJE CTED ASSESSEE S BOOKS BEFORE INVOKING THE SAME @ 0.5% OF THE AVERAGE VALUE OF INVESTMENTS. WE FOLLOW OUR DISCUSSION AS IN PRECEDING ASSESSMENT YEAR AND REVERSE THIS LIMB OF DISALLOWANCE AS W ELL. THIS FIRST SUBSTANTIVE GROUND SUCCEEDS. 28 . THE ASSESSEE S SECOND SUBSTANTIVE GROUND RAISES ISSUE OF NOTIONAL VERSUS ACTUAL INTEREST ON DELAYED REFUND OF SECURITY DEPOSITS PLACED WITH ITS ASSOCIATE ENTERPRISE M/S. PASL WINDTECH. THE REVENUE ALSO RAISES ITS FIRST SUBSTANTIVE GROUND IN CROSS APPEAL AS A CORRESPONDING PLEA THAT THE CIT(A) HAS ERRED IN DELETING THE IMPUGNED ADDITION MADE ON ACCOUNT OF THIS NOTIONAL INTEREST OF RS. I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 29 41.40 LACS IN DIRECTING THE ASSESSING OFFICER TO RECOMPUTED INTEREST O N DAY TO DAY BASIS. THE ASSESSING OFFICER RECORDS IN ASSESSMENT ORDER THAT THE ASSESSEE S BOOKS DEMON STRATED A SUM OF RS. 4.84 CRORE AS PAYABLE FROM ITS ASSOCIATE ENTERPRISE. THE SAME AROSE FROM ITS SECURITY DEPOSITED TO THE LATTER ENTITY IN LIEU OF AVAI LING USAGES RIGHTS ON INDUSTRIAL LAND FOR CARRYING OUT MANUFACTURING ACTIVITIES. THE ASSESSEE DID NOT PAY ANY RENT EXCEPT THIS LUMPSUM REFUNDABLE AMOUNT. THE ASSESSING OFFICER OBSERVED IN ASSESSMENT ORDER THAT THE SAME CARRIED INTEREST ON REPAYMENT OF RS .76,66,666/ - DURING EACH FINANCIAL YEAR COMMENCING FROM 01 - 04 - 2005 TO 31 - 03 - 2006 AND FAILURE THEREOF WOULD FETCH INTEREST @ 18% PER ANNUM. HE WAS OF THE VIEW THAT THERE WAS NO EVIDENCE ON RECORD SUGGESTING ANY MODIFICATION IN THIS CRUCIAL INTEREST CLAUSE STIPULATED IN THE AGREEMENT. ALL THIS RESULTED IN THE IMPUGN ED DEEMED INTEREST ADDITION OF R S. 41.40 LACS NOT SHOWN IN THE BOOKS. 29 . THE CIT(A) PARTLY ACCEPTS ASSESSEE S SUBMISSIONS AS UNDER: - 3.1 ON THIS ISSUE THE APPELLANT VIDE ITS LETTER DATED 27.9.2012 SUBMITTED AS UNDER: - '4. TRANSACTION WITH PASL WINDTECH PVT. LTD. AT THE OUTSET, IT IS RESPECTFULLY SUBMITTED THAT THE ADDITION OF RS.41,40,000/ - MADE BY THE LD. A.O. BY WAY OF INTEREST ON SECURITY DEPOSIT OF RS.2.30 CRORES IS IN CLEAR IGNORANC E OF FACTS AVAILABLE ON RECORD. THE BRIEF FACTS ON THE POINT IN QUESTION IS THAT THE APPELLANT HAD TAKEN THREE SEPARATE IMMOVABLE INDUSTRIAL PROPERTIES FOR ITS USE FROM ITS SISTER CONCERN COMPANY VIZ., PASL WINDTECH PVT. LTD. (FORMERLY AHMEDABAD FINVEST C OMPANY PVT. LTD.) PURSUANT TO THREE SEPARATE AGREEMENTS AND AS PER THE TERMS AND CONDITIONS THEREOF, SECURITY I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 30 DEPOSITS WERE GIVEN TO PASL WINDTECH PVT. LTD. OUT OF THREE AGREEMENTS, IN ONE AGREEMENT DATED 26.12.2003 IN RESPECT OF THE PROPERTY PLOT NO. 37 - B , PHASE - I, G1DC, VATVA, AHMEDABAD - 382 445, THE SECURITY DEPOSIT OF RS.2.30 CRORES WAS GIVEN BY THE APPELLANT TO PASL WINDLECH L LTD. IN TERMS OF THE AGREEMENT. THE SECURITY DEPOSITS ARE INTEREST FREE AS THE COMPANY IS 'ALSO NOT PAYING ANY RENT FOR THE PREM ISES /ASSETS USED BY IT. THE ADDITION OF INTEREST ON SECURITY DEPOSIT MADE BY THE LD. A.O. AND CHALLENGED BY US IN APPEAL PERTAINS TO THE SAID AGREEMENT DATED 26.12.2003 (EXHIBIT - 1) (PAGE 150 TO 154). WE WISH TO SUBMIT THAT THOUGH THERE WAS A CLAUSE (CLAUS E 5) IN THE AGREEMENT DATED 26.12.2003 PROVIDING FOR REFUND OF A MINIMUM AMOUNT OF SECURITY DEPOSIT DURING EACH FINANCIAL YEAR, SUBSEQUENTLY AS PER THE MUTUAL UNDERSTANDING BETWEEN THE PARTIES I.E. THE APPELLANT AND PASL WINDTECH PVT . LTD. NO INTEREST ON S ECURITY DEPOSIT WAS TO BE CHARGED AND REFUND OF SECURITY DEPOSIT WAS TO BE MADE BY PASL WINDTECH PVT. LTD. AS PER MUTUAL CONVENIENCE UPON AND AGAINST VACATING OF THE PROPERTY. IN VIEW OF THE ABOVE NO INTEREST WAS CHARGED ON THE SECURITY DEPOSIT. THE ABOVE WAS CONVEYED TO THE LD. A.O. VIDE OUR LETTER DATED 20.12.2011 (EXIIIBIT - J) (PAGE 155). THE LD. A.O. HAS MADE THE ADDITION OF INTEREST WITHOUT CONSIDERING THE ABOVE FACT AND ALSO WITHOUT CONSIDERING THE FACT ON RECORD THAT THE SECURITY D EPOSIT OF RS.2.30 C RORES HAS BE EN REPAID TO THE APPELLANT BY PASL WINDTECH PVT. LTD., UNTRUTHFULLY SAYING THAT IN ABSENCE OF BIFURCATED SE CURITY DEPOSIT ACCOUNTS, IT CAN NOT BE KNOWN WHETHER THE AMOUNT REFUNDED PERTAINS TO THE AGREEMENT DATED 26.12.2003. WE WISH TO SAY THAT SEPARATE SECURITY DEPOSIT ACCOUNTS WERE FURNISHED AND THE SAME WERE ON RECORD AS STATED BELOW. A) OUR LETTER DATED 20/01/2010 ADDRESSED TO DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 5, AHMEDABAD IN RESPONSE TO THE SCRUTINY ASSESSMENT QUESTIONNAIRE FOR A.Y. 2008 - 09 ENCLOSING THEREWITH THREE SEPARATE SECURITY DEPOSIT ACCOUNTS. COPY OF THE SAME IS ENCLOSED (EXHIBIT - K) (PAGE 159 TO 162). ONE OF THOSE THREE ACCOUNTS TITLED 'AHMEDABAD FINVEST - SEC. DEP (37B)' SHOWS THAT THE WHOLE OF THE SECURITY DEPOSIT AMOUNT OF RS.2.30 CRORES HAS BEEN RECEIVED BACK THROUGH BANK PAYMENTS FROM PASL WINDTECH PVT. LTD. AND THERE IS NO OUTSTANDING AS ON 31.03.2008. I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 31 B) OUR LETTER DATED 22/07/2010 ADDRESSED TO THE ADDL. COMMISSIONER OF INCOME TAX, RANGE - 5, AHMEDABAD IN RESPONSE TO TH E SCRUTINY ASSESSMENT QUESTIONNAIRE FOR A.Y. 2008 - 09 ENCLOSING THEREWITH THREE SEPARATE SECURITY DEPOSIT ACCOUNTS. COPY O F THE SAME IS ENCLOSED (EXHIBIT - L) (PAGE 163 TO 169). AS STATED IN PARA (A) ABOVE, ONE OF THOSE THREE ACCOUNTS TITLED ''AHMEDABAD FINVE ST - SEC. DEP (37B) SHOWS THAT THE WHOLE OF THE SECURITY DEPOSIT AMOUNT OF RS.2.30 CRORES HAS BEEN RECEIVED BACK THROUGH BANK PAYMENTS FROM PASL WINDTECH P VT. LTD, AND THERE IS NO OUTSTANDING AS ON 31.03.2008. C) OUR LETTER DATED 14/03/2011 ADDRESSED TO T HE ASSISTANT COMMISSIONER OF INCOME TAX (OSD), AHMEDABAD IN RESPONSE TO THE NOTICE U/S. 142(1) FOR A.Y. 2009 - 10 ENCLOSING THEREWITH SEPARATE SECURITY DEPOSIT ACCOUNTS. COPY OF THE SAME IS ENCLOSED (EXHIBIT - M) (PAGE 170 TO 172).SINCE IN THE PREVIOUS YEAR, IN ONE OF THE THREE SECURITY DEPOSIT ACCOUNTS BEING SECURITY DEPOSIT ACCOUNT FOR RS.2.30 CRORES THERE WAS NOT OUTSTANDING AS ON 31.03.2008, ONLY OTHER TWO ACCOUNTS WERE ENCLOSED TO THE ABOVE LETTER. HENCE, THE SEPARATE SECURITY DEPOSIT ACCOUNTS WERE ALREAD Y FURNISHED AND WERE ON RECORD, WHICH WAS ALSO EXPLAINED TO THE LD. A.O. AT THE TIME OF HEARINGS. THE COMBINED SECURITY DEPOSIT ACCOUNT, AS IS NAMED BY THE LD. A.O. IN THE ASSESSMENT ORDER WAS FURNISHED ONLY SUBSEQUENTLY WHEN THE LD. A.O. VIDE HIS LETTER D ATED 09.11.2011 - PARA 4 (C) (III) ASKED FOR SECURITY DEPOSIT ACCOUNT FROM THE BEGINNING . IN OTHER WORDS WHEN LD. A.O. ASKED FOR SECURITY DEPOSIT ACCOUNT FROM THE BEGINNING, SEPARATE SECURITY DEPOSIT ACCOUNTS WERE ALREADY ON RECORD AS STATED ABOVE. IN VIEW OF THE ABOVE, IT IS SUBMITTED WITH UTMOST RESPECT, THAT IT WAS UNTRUTHFUL ON THE PART OF LD. A.O. TO SAY THAT SEPARATE SECURITY DEPOSIT ACCOUNTS WERE NOT FURNISHED BY THE ASSESSEE AND UNDER THAT GUISE MAKING UNJUST ADDITION OF INTEREST TO THE DETRIMENT OF THE ASSESSEE. AS THE SECURITY DEPOSIT OF RS.2.30 CRORES IN RESPECT OF PROPERTY AT PLOT NO. 37B WAS TOTALLY RECEIVED BACK, QUESTION OF OUR CLAIMING INTEREST ON 'NIL' DEPOSIT DOES NOT ARISE. THE LAW DOES NOT AUTHORIZE TAXING NOTIONAL INCOME. THE ADDITION BE ING PATENTLY WRONG, DESERVES TO BE DELETED. THE SAME BE DELETED NOW.' 3.2 I HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE FACTS AVAILABLE ON RECORD INDICATE THAT AS PER AGREEMENT DATED 26.12.2003 THE APPELLANT WAS REQUIRED TO GIVE REFUNDABLE NON - INT EREST BEARING I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 32 SECURITY DEPOSIT OF RS. 2. 3 CRORES TO M/S. PASL WINDTC H PVT. LTD. (FORMERLY AHMEDABAD FINVEST CO. PVT. LTD.). AS PER CLAUSE - 5 OF THIS AGREEMENT M/S. AFCPL WAS REQUIRED TO REFUND MINIMUM OF SECURITY DEPOSIT OF RS. 76,66 ,666/ - DURING EACH FINAN CIAL YE AR COMMENCING FROM F.Y. 1.4.2005 TO 31.3.2006. IN THE AGREEMENT IT WAS ALSO PROVIDED THAT IN THE EVENT OF ANY DELAY IN REPAYMENT OF SUCH MINIMUM AMOUNT FIXED OR ANY SHORTFALL THEREIN, AFCPL SHALL PAY AN INTEREST AT THE RATE OF 18% PER ANNUM TO PASPL ON SUCH MINIMUM AMOUNT OR SHORTFALL THEREIN. THE FACTS AVAILABLE ON RECORD CONCLUSIVELY PROVES THAT M/S. AFCPL HAS NOT REFUNDED THE MINIMUM SECURITY DEPOSIT OF RS. 76,66,666/ - AS MANDATED BY THE AGREEMENT DATED 26.12.2003. AS PER THE EXPRESS PROVI SIONS OF THE AGREEMENT DATED 26. 12.2003 THE APPELLANT WAS DUTY BOUND TO CHARGE INTEREST ON ANY SHORTFALL AS MENTIONED ABOVE. HOWEVER, THE APPELLANT HAS NOT CHARGED INTEREST ON THE SHORTFALL OF REFUND OF SECURITY. ACCORDINGLY THE A.O. CHARGED INTEREST @18% ON THE E NTIRE SECURITY DEPOSIT OF RS. 2.3 CRORES AND ADDITION OF RS. 41,40,000/ - (RS.2,30,00,000/ -- X 1) HAS BEEN MADE IN THE INCOME OF THE APPELLANT. DURING THE APPELLATE PROCEEDINGS THE APPELLANT CONTENDED THAT SUBSEQUENT TO THE SECURITY DEPOSIT, AS PER MUTUAL UN DERSTANDING BETWEEN THE PARTIES I.E. THE APPELLANT AND PASL WINDTECH PVT. LTD. NO INTEREST ON SECURITY DEPOSIT WAS TO BE CHARGED AND REFUND OF SECURITY DEPOSIT WAS TO BE MADE BY PASL WINDTECH PVT. LTD. AS PER MUTUAL CONVENIENCE AND AGAINST VACATION OF PROP ERTY. HOWEVER, THE APPELLANT HAS FAILED TO FURNISH ANY DOCUMENTARY EVIDENCES TO SUBSTANTIATE THIS CLAIM. IN THE ABSENCE OF DOCUMENTARY EVIDENCES, I AM NOT INCLINED TO AGREE WITH THE CONTENTIONS OF THE APPELLANT. THE FACTS REMAINS THAT THE APPELLANT IS HAVI NG OPERATIONAL AGREEMENT WITH ITS SISTER CONCERN NAMELY PASL WINDTECH PVT. LTD. AND AS PER THIS AGREEMENT THE APPELLANT HAS GIVEN AN INTEREST FREE SECURITY DEPOSIT TO THIS CONCERN IN LIEU OF USE OF PROPERTY. AS PER CLAUSE - 5 OF THIS AGREEMENT THE APPELLANT WAS REQUIRED TO CHARGE INTEREST @18% IN CASE M/S. PASL WINDTECH PVT. LTD. HAS FAILED TO REFUND MINIMUM SECURITY DEPOSIT OF RS.76,66,666/ - EVERY YEAR. SINCE M/S. PASL WINDTECH PVT. LTD. WHICH IS A SISTER CONCERN HAS FAILED TO REFUND MINIMUM OF SECURITY DEPO SIT, ACCORDINGLY, AS PER THE EXPRESS PROVISIONS OF THIS ACT, THE APPELLANT WAS REQUIRED TO CHARGE INTEREST AT THE RATE OF 18% ON THE SECURITY DEPOSIT GIVEN TO M/S. PASL WINDTECH PVT. LTD. TO THIS EXTENT, I AGREE WITH THE CONTENTIONS OF THE LD. A.O. 3.3 TH E FACTS AVAILABLE ON RECORD FURTHER REVEALS THAT SECURITY DEPOSIT OF RS.2.3 CRORES WAS REFUNDED BY M/S. PASL - WINDTECH PVT. I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 33 LTD.(AFCPL) TO THE APPELLANT DURING THE YEAR UNDER CONSIDERATION IN THE FOLLOWING MANNER: - SR.NO. DATE DOCUMENT NO. AMOUNT RS. 1. 16.4.2007 BRD 7800036 1,00,00,000 2. 26.4.2007 BRD 7800045 30,00,000 3. 23.8.2007 BRD 7800345 1,00,00,000 TOTAL 2,30,00,000 SINCE THE BULK OF SECURITY DEPOSIT WAS REFUNDED IN THE MONTH OF APRIL, 200 / AND THE REST OF THE SEC URITY DEPOSIT WAS REFUNDED IN THE MONTH OF AUGUST, 2007. ACCORDINGLY, I HOLD THAT INTEREST FREE SECURITY WAS NOT OUTSTANDING THROUGHOUT THE YEAR DURING YEAR UNDER CONSIDERATION. SINCE THE ENTIRE SECURITY DEPOSIT OF RS.2.3 CRORES WAS REFUNDED TO THE APPELLA NT IN THE CURRENT PREVIOUS YEAR AND AS ON 31.3.2008 I.E. AT THE CLOSE OF THE CURRENT PREVIOUS YEAR, THE BALANCE IN THE SECURITY ACCOUNT WAS ZERO, ACCORDINGLY, 'THE QUESTION OF CHARGING OF INTEREST ON THIS SECURITY DEPOSIT FOR THE ENTIRE YEAR DOES NOT ARISE .' THE A.O. IS DIRECTED TO WORK OUT IN TEREST @ 18% ON THE DAY TO DAY BALANCE OF THIS SECURITY DEPOSIT ACCOUNT AND WORK OUT THE DISALLOWANCE ACCORDINGLY. DISALLOWANCE WORKED OUT AS PER THIS METHODOLOGY IS CONFIRMED. THIS GROUND OF APPEAL IS PARTLY ALLOWED. THIS LEAVES BOTH THE PARTIES AGGRIEVED. 30 . WE HAVE HEARD BOTH THE LD. REPRESENTATIVES. P APER BOOK PAGES 108 TO 110 CONTAIN ASSESSEE S AGREEMENT DATED 26 - 12 - 2003 EXECUTED WITH ITS ASSOCIATE ENTERPRISE INVOLVING THE FOLLOWING TERMS AND CONDITIONS: - I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 34 NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY DECLARED BY AND BETWEEN THE PARTIES HERETO AS HEREINAFTER MENTIONED: 1. AFCPL AGREES TO GIVE TH E SCHEDULED PREMISES TO PAS PL FOR ITS USE AND PASPL AGREES TO TAKE THE SCHEDULED FOR ITS USE IN ACCORDANCE WITH THE TERMS AND CONDITIONS OF THIS AGREEMENT. 2. PASPL AGREES THAT IT SHALL USE THE SCHEDULED PREMISES FOR ITS INDU STRIAL/COMMERCIAL PURPOSES ONLY . 3. AFCPL SHALL PROVIDE ELECTRICITY POWER AND OTHER INTERNAL INFRASTRUCTURAL FACILITIES AT THE SCHEDULED PR EMISES FOR USE OF PASPL AND SHALL ALSO ALLOW PASPL TO INSTALL ITS MACHINERY AND OTHER EQUIPMENTS TO CARRY OUT MANUFACTURING ACTIVITIES. 4. ASPL SHALL GIVE TO AFCPL AN AM OUNT OF RS. 2.30 CRORES (RUPEES TWO CRORES THIRTY LACS) BY WAY OF REFUNDABLE/ NON - INTE REST BEARING SECURITY DEPOSIT. 5. AFCPL SHALL REFUND TO PASPL, THE ENTIRE AMOUNT OF SECURIT Y DEPOSIT ON OR BEFORE 31.03.2008. HOWEVER IT SH ALL BE A CONDITION THAT AFCPL REPAYS TO PASPL TOWARDS SUCH REFUND OF SECURITY DEPOSIT A MINIMUM AMOUNT OF RS. 76, 66,666/ - (RUPEES SEVENTY SIX LACS SIXTY SIX THOUSAND SIX HUNDRED SIXTY SIX) DURING EACH FINANCIAL YEAR COMMENCING FROM THE FINANCIAL YEAR 01.04.2005 TO 31.03.2006. IN THE EVENT OF ANY DELAY IN PAYMENT OF SUCH MINIMUM AMOUNT FIXED AS ABOVE BY AFCPL OR ANY SH ORTFALL THEREIN, AFCPL SHALL PAY AN INTEREST @ 18% P.A. TO PASPL ON SUCH MINIMUM AMOUNT OR SHORTFALL THEREIN. 6. UPON REFUND OF THE ENTIRE AMOUNT OF SECURITY DEPOSIT BY AFCPL TO PASPL ON OR BEFORE THE STIPULATED DATE I.E. 31.03.2008, PASPL SHALL VACATE AND HAND OVER QUIET, PEACEFUL AND VACANT POSSESSION OF THE SCHEDULED/PREMISES TO AFCPL. PASL SHALL H AVE A RIGHT TO BUY OUT THE SCHEDULED PREMISES AT THE PREVAILING GIDC RATE IF THE ENTIRE AMOUNT OF SECURITY DEPOSIT IS NOT REFUNDED TO IT BY AFCPL BY THE ST IPULATED DATE I.E. 31.03.2008. 7. NOTWITHSTANDING ANYTHING CONTAINED HEREIN, AFCPL - SHALL HAVE LIBERTY TO REFUND THE ENTIRE AMOUNT OF SECURITY DEPOSIT TO PASPL PREMATURELY AT ANY POINT OF TIME DURING THE TENOR OF THIS I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 35 AGREEMENT WITHOUT ASSIGNING ANY REASONS THEREFOR AND THEREUPON PASPL SHALL VACATE THE SCHEDULED PREMISES WITHIN NINE MONTHS FROM THE DATE OF SUCH PREMATURE REFUND OF THE ENTIRE AMOUNT OF SECURITY DEPOSIT. 8. PASPL AGREES THAT IT SHALL HAVE NO R IGHTS OR INTERESTS OVER AND ABOVE THE RIGHTS AND INTERESTS OF AFCPL IN THE SCHEDULED PREMISES AND THAT THE RIGHTS OF PASPL AS A USER OF THE SCHEDULED PREMISES SHALL IPSO FACTO, WITHOUT ANY FURTHER ACT BEING DON E BY ANY PERSON, TERMINATE AND CEASE ABSOLUTEL Y ON CANCELLATION OF THIS AGREEMENT. 9. PASPL SHALL NOT SUB - LET THE SCHEDULED PREMISES TO ANY PERSON EXCEPT WITH THE EXPRESS PERMISSION IN WRITING FROM AFCPL ALLOWING IT TO DO SO . 10. PASPL SHALL USE THE SCHEDULED PREMISES ONLY FOR ITS BUSINESS/INDUSTRIAL/ COMMERCIAL PURPOSES AND NOT FOR ANY OTHER USE OR ANY IL LEGAL OR UNLAWFUL ACTIVITY. 11. PASPL SHALL NOT DO ANY ACT OR OMISSION WHICH LEADS TO OR IS LIKELY TO LEAD TO DAMAGE OR DETERIORATION OR DESTRUCTION OF THE SCHEDULED PREMIS ES. 31 . LD. AUTHORIZED REP RESE NT AT IVE INTER ALIA SUBMITS THAT THE ASSESSEE HAS NOT PAID ANY RENT EXCEPT FURNISHING THE IMPUGNED INTEREST FREE SECURITY DEPOSIT TO BE REFUNDED UPON VACATION OF PREMISES. HE REFERS TO CLA USE 4 OF THE AGREEMENT HAVING EXPRE SSED STIPULATION OF INTEREST FREE DEPOSITS. LD. DEPARTMENTAL REPRESENTATIVE BUILDS REVENUE S CASE UPON CLAUSE 5 OF THE AGREEMENT. WE HAVE GIVEN OUR THO UGHTFUL CONSIDERATION TO RIVAL SUBMISSIONS . T HE SUM IN QUESTION IS RS. 2.3 CRORES FURNISHED AS INTEREST FREE DEPOSIT AS A SECURITY IN LIEU OF AVAILING USAGES RIGHTS FOR CARRYING OUT ASSESSEE S MANUFACTURING ACTIVITIES. THERE I S NO RENT PAID. C LAUSE 5 CONTAINS I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 36 STIPULATION ON REFUND PAYMENT OF RS. 76,66,666/ - FROM FINANCIAL YEAR COMMENCING 04 - 01 - 2006 TO 31 - 03 - 2006 AND ITS FAILURE INVITES 18% INTEREST . WE ARE OF THE OPINION THAT THIS INTEREST CLAUSE IS OVER AND ABOVE CLAUSE 4 OF THE AGREEMENT RELIED UPO N BY THE ASSESSEE. W E REJECT AS S ESSEE S CORRESPOND ING PLEA IN VIEW OF THE FA CT THAT BOTH PARTIES HAVE AGRE ED FOR PART PAYMENT OF THE SECURITY DEPOSIT DESPITE THE POSITION OF NON - PAYMENT O F RENT. LD. AUTHORIZED REPRESENTATIVE FAILS TO PROVE DILUTION OF THIS CLAUSE BY WAY OF ANY SUBSEQUENT MODIFICATION . WE ALSO FEEL THIS ALONE IS NOT END OF THE ISSUE. THE C IT(A) S FINDINGS EXTRACTED HEREINABOVE MADE IT CLEAR THAT THE ASSESSEE HAS ALREADY RECEIVED ITS SECURITY AMOUNT LATEST BY 23 - 08 - 2007 RELEVANT FOR ASSESSM ENT YEAR 2008 - 09 ONLY AND NOT TO THE IMPUGNED ASSESSMENT YEAR 2009 - 10. WE HOLD IN THESE FACTS THAT THE DEEM ED INTEREST ADDITION COULD NOT HAVE BEEN MADE IN THE IMPUGNED ASSESSMENT YEAR AS NO SUCH INTEREST ACCRUES OR AR ISES IN FINANCIAL YEAR 2008 - 09. WE ACCEPT ASSESSEE S ARGUMENTS AGAINST THIS INTEREST ADDITION AND REJECT THOSE RAISED AT REVENUE S BEHEST. THE ASSESSEE S SECOND SUBSTANTIVE GROUND SUCCEEDS. 32 . THE ASSESSEE S THIRD SUBSTANTIVE GROUND PLEADS THAT THE CIT(A) HAS ERRED IN NOT GRANTING IT DEDUCTION OF RS. 38,92,473/ - BEING INTEREST AND OTHER CHARGES REVENUE IN NATURE BUT PROVISIONALLY CAPITAL IZED. WE FIND TH E LOWER APPELLATE ORDER TO HAVE EXTRACTED THE ASSESSING OFFICER S FINDINGS IN EXTEMPORE. THE ASSESSEE HAD TAKEN A TERM LOAN ALONG WITH CASH CREDIT FACILITY DURING THE YEAR. THE ASSESSING OFFICER SOUGHT FOR ITS SANCTION LETTER, BANK STOCK STATEMENT AND ASKED THE I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 37 ASSESSEE TO EXPLAIN AS TO WHETHER INCREASE IN SEC URED LOAN FROM RS. 75,008/ - TO R S. 23.44 CRORES WAS FOR CAPITAL OR REVENUE PURPOSES. DETAILS OF LOAN UTILIZATION WERE ALSO SOUGHT. THE ASSESSEE FILED ITS RESPONSE ON 09 - 12 - 2011 STA TING THEREIN THAT IT HAD LEVERAGED CREDIT FACILITY AGAINST ITS FIXED DEPOSIT. IT PRODUCED A TABULATION CHART OF 8 QUARTER FROM 29 - 08 - 2008 TO 14 - 09 - 2010 ALONG WITH DETAILS OF BORROWED BUYERS CREDIT AS WELL AS INTEREST ON FIXED DEPOSIT. THE ASSESSEE EXPLAI NED IF IT WOULD HAVE UTILIZED BUYERS CREDIT OF R S. 5,11,64,728/ - OUT OF ITS FIXED DEPOSIT INSTEAD OF THE FORMER OPTION, THIS WOULD RESULT IN INTEREST ON FD LOSS OF RS. 102, 68, 063 WHEREAS ITS PRESENT ARRANGEMENT CAUSED GAIN OF RS. 01,09,71, 641. ITS FURT HER CASE WAS THAT IT HAD CAPITALIZED INTEREST FIGURE OF RS. 38,92,473/ - AS MATTER OF ABUNDANT CAUTION DESPITE HAVING NO SUCH REQUIREMENT. THE ASSESSING OFFICER OBSERVED IN ASSESSMENT ORDER THAT THE ASSESSEE HAD ON THE ONE HAND CAPITALIZED INTEREST IN BOOK S OF ACCOUNT AS PER SECTION 36(1)(III) PROVISO AND CLAIMED DEPRECIATION THEREUPON AND ON OTHER HAND IT HAD CLAIMED THE VERY SUM AS REVENUE EXPENDITURE . HE ACCORDINGLY DISALLOWED THIS INTEREST FIGURE. 33 . THE CIT(A) REJECTS ASSESSEE S CORRESPONDING GROUND AS UNDER: - 7.2 I HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE FACTS AVAILABLE ON RECORD INDICATE THAT THE APPELLANT HAS CAPITALIZED INTEREST IN ITS BOOKS OF ACCOUNTS OF RS. 38,92,473/ - AS PER THE PROVISIONS OF PROVISO TO SEC.36(1)(III) AND CLAIME D DEPRECIATION ON THIS CAPITALIZATION AS PER THE PROVISIONS OF THE I.T. ACT. THE DETAILS OF SUCH CAPITALIZATION HAS BEEN GIVEN BY THE APPELLANT VIDE ITS LETTER DATED 16.12.2011 AND THE SAME HAS BEEN REPRODUCED BY THE A.O. ON PAGE NO.29 & 30 OF THE ASSESSME NT ORDER. THE A.O. HAD MERELY ACCEPTED THE BOOK VERSION OF THE APPELLANT AND A.O. HAS ALSO NOT I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 38 MADE ANY ADDITION IN RESPECT OF THIS ITEM IN THE COMPUTATION OF INCOME. THESE FACTS CLEARLY INDICATE THAT THE APPELLANT IS NOT AGGRIEVED BY THE ASSESSMENT ORDER ON THIS ISSUE AND ACCORDINGLY AS PER THE PROVISIONS OF SEC.246 OF INCOME - TAX ACT, 1961 THE APPELLANT CANNOT AGITATE THIS ISSUE IN APPEAL. IN VIEW OF THESE FACTS, I AM INCLINED TO AGREE WITH THE CONTENTIONS OF LD. A.O, THIS GROUND OF APPEAL IS DISMISSED. 34 . LD. AUTHORIZED REPRESENTATIVE FIRST OF ALL STATES THAT ITS ACT OF CAPITALIZATION IS MERELY A BOOK ENTRY WHICH IS NOT FINAL AND THE IMPUGNED DEDUCTION CLAIM HAD TO BE ADJUDICATED AS PER THE PROVISIONS OF THE ACT AS HELD BY HON BLE APEX COURT IN CASE OF TUTICORN ALKALIES AND CHEMICALS (1997) 141 CTR (SC) 387. HE STATES THAT THE CIT(A) OUGHT TO HAVE DECIDED THE ISSUE ON MERITS SINCE THE FUNDAMENTAL QUESTION OF THE IMPUGNED INTEREST SUM WHETHER CAPITAL OR REVENUE EXPENDITURE HAS REMAINED UNDECIDED IN THE ABOVE EXTRACTED PORTION. LD. DR FAILS TO REBUT THIS FACTUAL POSITION. WE DEEM IT APPROPRIATE IN THESE FAC TS AND CIRCUMSTANCES THAT THE LOWER APPELLATE AUTHORITY NEEDS TO RE - DECIDE THIS ISSUE AFRESH AS PER LAW ON MERITS. THIS GROUND IS ACCORDINGLY REMITT ED BACK TO THE CIT(A). 35 . THE ASSESSEE S NEXT SUBSTANTIVE GROUND ASSAILS THE LOWER APPELLATE FINDINGS RESTRICTING DEPRECIATION CLAIM FOR ITS CORPORATE BUILDING BY BIFURCATING VALUE OF THE LAND IN QUESTION AT RS. 5 CRORES. THE ASSESSEE HAD PURCHASED THE ASSET IN QUESTION I.E. A PROPERTY SITUATED AT RP NO. 256 (OLD SURVEY NO. 55/07) OF TPS NO. 21 ADMEASURING 839 SQ. MT. WITH BUNGALOW CONSTRUCTED THEREUPON IN AREA MEASURING 391 SQ. YD. FOR RS. 5.5 CRORES. IT INCLUDED ALL RELEVANT EXPENSES AND CAPITALIZED T HIS CONSIDERATION TO RS. 5,93,47,940/ - I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 39 THEREBY RAISING THE IMPUGNED DEPRECATION CLAIM AFTER TAKING THIS ASSET AS ITS CORPORATE OFFICE. THE ASSESSING OFFICER OBSERVED IN ASSESSMENT ORDER THAT THE BUILDING/BUNGALOW WAS VERY OLD. NO DEPRECATION IS ALLOWABLE ON THE PLOT LAND. HE ACCORDINGLY ARRIVED AT LANDS COST AS RS. 5 CRORES OUT OF RS. 5.5 CRORES FOR INVOKING THE IMPUGNED DEPRECIATION DISALLOWANCE @10% COMING TO RS. 50 LACS. THE CIT(A) UPHOLDS THE SAME IN LOWER APPELLATE FINDINGS. 36 . HEARD BOTH SIDES . THERE IS NO DISPUTE THAT ASSESS EE S PURCHASED DEED FORMING PAG ES 86 TO 96 OF THE PAPER BOOK DOES NOT ASSIGN SEPARATE VALUES OF THE LAND AND BUIL DING SITUATED IN VA S TRAPUR LOCALITY. THE CIT(A) RECORDS THAT THE ASSESSEE HAD DEMOLISHED ITS CONSTRUCTED PO RTION IN QUESTION IN JAN, 2010 RELEVANT FOR THE IMMEDIATELY SUCCEEDING ASSESSMENT YEAR. LD. AR RAISES STRONG ARGUMENTS AGAINST THE IMPUGNED VALUATION OF LAND AND BUILDING TO THE TUNE OF RS. 5 CRORES AND 50 LACS; R E SPE C T I VELY. BOTH THE LOWER AUTHORITIES D ISCUSS THE LOCATION FACTOR OF THE LAND AND DILAPIDATED STATE OF THE BUNGALOW/BUILDING IN QUESTION IN ARRIVING AT THE IMPUGNED VALUE. THERE IS NO MATERIAL PLACED ON RECORD DISPELLING THE SAME. WE FIND NO REASON TO INTERFERE WITH THE LOWER APPELLATE ORDER IN THESE PECULIAR FACTS AND CIRCUMSTANCES . THIS GROUND FAILS . 37 . THE ASSESSEE S LAST AN D FINAL SUBSTANTIVE GROUND CHALLENGES SECTION 40A(2)(B) DISALLOWANCE OF RS. 1,33,39,000/ - AS PARTLY CONFIRMED IN THE LOWER APPELLATE PROCEEDINGS. THE REVENUE S FOUR TH SUBST A N TIVE GROUND ALSO RAISES A CORRESPONDING PLEA SEEKING TO I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 40 REVIVE THE ENTIRE DISALLOWANCE FIGURE. BOTH THE LD. REPRESENTATIVES AGREE THAT FACTS IN THE IMPUGNED ASSESSMENT YEAR RELEVANT TO THIS ISSUE ARE IDENTICAL TO THAT ALREADY DECIDED IN ASSESSEE S FAVOUR IN PRECEDING ASSESSMENT YEAR HEREINABOVE. WE FOLLOW THE SAID REASONING HEREIN AS WELL AND DELETE THE ENTIRE DISALLOWANCE . THE ASSESSEE SUCCEEDS AND REVENUE FAILS I N THEIR RESPECTIVE GROUNDS. ASSESSEE APPEAL ITA 2617/AHD/2012 IS PARTLY ACCEPTE D. 38 . WE COME TO DEPARTMENT APPEAL ITA 2921/AHD/2012 RAISING FOUR SUBSTANTIVE GROUNDS SEEKING TO REVIVE ADDITIONS INTER ALIA MADE ON ASSESSEE S TRANSACTION WITH M/S PASL WINDTECH OF RS. 41.40 LACS, SECTION 145A ADDITION ON VALUATION OF CLOSING STOCK OF RS. 2,31,36,464/ - , ADDITION ON ACCOUNT OF NOTIONAL INTEREST OF RS. 12,43,212/ - AND ALLEGED EXCESS PAYMENT ON DIRE CTORS REMUNERATION. L D. REPRESENTATIVES INVITE OUR AT TENTION TO ASSESSEE S APPEAL ALREADY DEALING WITH ALL FOUR GROUNDS EXCEPT NO. 3 OF NOTI ONAL INTEREST. WE APPRECIATE THIS FAIR STAND AND REJECT THESE THREE SUBSTANTIVE GROUNDS. 39 . THIS LEAVES US WITH THE SOLE SURVIVING ISSUE ON ADDITION OF NOTIONAL INTEREST OF RS. 12,43,212/ - . THE ASSESSEE HAD GIVEN INTEREST FREE ADVANCES OF RS. 402.08 LA CS TO ITS SISTER CONCERN M/S. PASL WINDSOLUTIONS LTD. ITS CASE WAS THAT THIS INDICATED SHARE APPLICATION MONEY INVESTED IN A SISTER CONCERN AS A MATTER OF BUSINESS EXPEDIENCY AND NOT LOAN. THE ASSESSING OFFICER TOOK NOTE OF THE FACT THAT BOTH THESE ENTIT IES HAS TREATED THE IMPUGNED ADVANCES AS LOANS IN THEIR RESPECTIVE BOOKS OF ACCOUNT. THE STATUTORY AUDITORS HAD ALSO I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 41 AGREED WITH THIS TREATMENT. THE ASSESSING OFFICER TREATED IT AS A CASE OF DIVERSION OF INTEREST BEARING EXPENSE FOR MAKING THE IMPUGNED I NTEREST ADDITION. 40 . THE CIT(A) REVERSES ASSESSING OFFICER S ACTION AS UNDER: - 5.3 I HAVE CAREFULLY CONSIDERED RIVAL SUBMISSIONS. I HAVE ALSO PERUSED EVIDENCES FURNISHED BY THE APPELLANT AND THE CASE LAWS RELIED UPON BY THE ID. A.R. IT IS SEEN THAT IN TEREST EXPENSES OF RS.12,43,212/ - WAS DISALLOWED U/S.36(1)(III) OF IT. ACT. AS PER THE PROVISIONS OF SECTION 3G(1)(III), TO CLAIM INTEREST EXPENSES, FOLLOWING CONDITIONS SHOULD BE FULFILLED. (I) THE ASSESSEE MUST HAVE BORROWED MONEY (II) THE INT EREST SHOULD HAVE BEEN PAYABLE (III) BORROWING SHOULD BE MADE FOR THE PURPOSE OF BUSINESS. IN MY CONSIDERED VIEW, APPELLANT HAS FULFILLED ALL THE ABOVE CONDITIONS AND ACCORDINGLY IT IS ENTITLED TO CLAIM DEDUCTION U/S.36(1)(III) OF IT. ACT AGAINST INTER EST PAYMENT. PERUSAL OF THE ASSESSME NT ORDER REVEALS THAT THE A.O, H AS NOT CHALLENGED BASIC ENABLING CONDITIONS AS LAID DOWN U/S.36(1)(III) FOR THE ALLOWANCE OF INTEREST. SINCE THE ENABLING CONDITIONS FOR ALLOWANCE OF INTEREST U/S.36(1)(III) ARE FULFILLED, ACCORDINGLY IN MY CONSIDERED VIEW DISALLOWANCE OF INTEREST IS UNWARRANTED. 5.4 THE ONLY OBSERVATION MADE BY THE A.O. IS THAT THE ASSESSEE HAS NOT CHARGED INTEREST ON INTEREST FREE ADVANCE OF RS.4,02,08,100/ - . HOWEVER, THE ACTION OF THE A.O. IS NOT TENABL E AS NON CHARGING OF INTEREST ON INTEREST FREE ADVANCE CANNOT BE A REASON FOR DISALLOWANCE OF INTEREST. IT IS WELL SETTLED PRINCIPLE OF LAW THAT NON CHARGING OF INTEREST ON INTEREST FREE ADVANCES GIVEN BY THE ASSESSEE CANNOT BY ITSELF, BE SUFFICIENT GROUND FOR DISALLOWING INTEREST PAID BY THE APPELLANT ON LOANS TAKEN BY IT. RELIANCE IN THIS REGARD IS PLACED ON FOLLOWING DECISIONS: (I) MEENAKSHI SYNTHETIC PVT. LTD. V/S. ACIT (2003) 84 ITD 56 (II) ACIT V/S. ARUNKUMAR GUPTA (2003) 78 TTJ 288 I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 42 5.5 TH E ASSESSING OFFICER ALSO OBSERVED THAT THE APPELLANT HAD NOT PROVED A BUSINESS NEXUS OF THIS ADVANCE AND DISALLOWED THE NOTIONAL INTEREST ON THIS ADVANCE. THE FACTS AVAILABLE ON RECORD CONCLUSIVELY ESTABLISH THAT THE ADVANCE OF RS. 4,02 CRORES WERE GIVEN T O SISTER CONCERN NAMELY M/S. PASL WIND SOLUTION PVT. LTD. TOWARDS CAPITAL INVESTMENT AND AGAINST THIS ADVANCE SHARES WERE ALLOTTED IN THE MONTH OF FEBRU ARY, 2011. IN MY CONSIDERED VIE W, MAKING INVESTMENT IN SISTER CONCERN CANNOT BE TERMED AS NON - BUSINESS A CTIVITY. RELIANCE IN THIS REGARD IS MADE ON S A BUILDERS VS CIT 288 ITR 1 (S.C), WHEREIN IT WAS HELD THAT INTEREST ON BUSINESS ADVANCE TO SISTER CONCERN CANNOT BE DISALLOWED U/S.36(1)(III) OF THE I.T. ACT. IN VIEW OF ABOVE, I AM NOT INCLINED TO AGREE WITH THIS ARGUMENT OF LD. A.O. 5.6 PERUSAL OF RECORDS FURTHER REVEALS THAT THE A.O. HAS NOT ESTABLISHED NEXUS BETWEEN INTEREST BEARING FUNDS AND INTEREST FREE ADVANCES. IT IS HELD BY MUMBAI TRIBUNAL IN THE CASE OF OCEANIC INVESTMENTS LTD. V/S. CIT (1997) 57 TT J 549 THAT IT IS NECESSARY TO ESTABLISH NEXUS BETWEEN BORROWED FUNDS AND THE AMOUNT ADVANCED, AND IN THE ABSENCE OF THIS FINDING THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN MAKING THE DISALLOWANCE OF INTEREST. IT WAS ALSO HELD IN THE CASE OF M/S. JAI SINGH 'S SONS & CO. LTD. V/S. ITO (1977) 4 TTJ 1452 THAT INTEREST EXPENSES HAS TO BE ALLOWED AS THE A.O. HAS NOT ESTABLISHED NEXUS BETWEEN INTEREST BEARING BORROWINGS AND INTEREST FREE LANDINGS BY THE ASSESSEE COMPANY TO THE SUBSIDIARY COMPANY. FURTHER RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING CASE LAWS. (I) RAJ VIKAS QUARIES AND IND. P. LTD. V/S. ACIT (1992) 42 TTJ 262 (II) UNITED AGENCIES V/S. ITO (1990) 37 TTJ 374 (AND.) (III) CIT V/S. DHAMPUR SUGAR MILLS LTD. (2006) 148 TAXMAN 321 (ALL.) (IV ) CI T V/S. RADICO KHAITAN LTD. 274 ITR 354 (ALL.) IN VIEW OF THE ABOVE DECISIONS, I HOLD THAT THE A.O. WAS NOT JUSTIFIED IN DISALLOWING INTEREST WITHOUT ESTABLISHING NEXUS BETWEEN INTEREST BEARING FUNDS AND INTEREST FREE FUNDS. 5.7 IT IS WELL SETTLED LAW THAT BURDEN IS ON THE REVENUE TO PROVE THAT ANY PART OF BORROWED FUNDS WAS DIVERTED TO NON BUSINESS USE. RELIANCE IN THIS REGARD IS PLAC ED ON THE FOLLOWING CASE LAWS: I) SHHADIRAM & SONS V/S. DCIT 92 ITD 22 II) MODIPON LTD. V/S. LTO 22 TTJ 108 III) J CIT V/S. STERISHEETS LTD. 106 TTJ 460 I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 43 IT IS NOTICED THAT THE A.O. HAD MISERABLY FAILED TO DISCHARGE HIS ONUS AND FAILED TO PROVE THAT PART OF INTEREST B EARING FUND WAS DIVERTED AS NON INTEREST BEARING FUNDS. 5.8 IT IS SEEN THAT APPELLANT HAS GOT HUGE INTE REST FREE FUNDS OF RS.142.86 CRORES (SHARE CAPITAL OF RS 79.99 CRORES AND RESERVE AND SURPLUS OF RS. 134.86 CRORES) AT THE BEGINNING OF THE ACCOUNTING YEAR I.E. 1.4. 2008. APART FROM THIS, DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAD MADE A PROFIT MORE THAN RS. 44 CRORES, WHICH IS ALSO NON INTEREST BEARING. THE A.O. HAS MENTIONED THAT APPELLANT HAS MADE INTEREST FREE LOANS AND ADVANCES OF RS. 4.02 CRORE TO SISGER CONCERN. THUS, INTEREST FREE ADVANCES MADE IS MUCH BELOW THE INTEREST FREE FUNDS AVAIL ABLE WITH THE APPELLANT IN THE FORM OF SHARE CAPITAL, RESERVE AND SURPLUS AND THE CURRENT YEAR PROFIT. IT IS HELD BY HON'BLE MUMBAI HIGH COURT IN RELIANCE UTILITIES AND POWER LTD. 313 ITR 340 THAT IF FUNDS ARE AVAILABLE, BOTH INTEREST FREE AND INTEREST BEA RING, THEN A PRE - ASSUMPTION ARISE THAT INVESTMENTS ARE MADE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE ASSESSEE. IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET INVESTMENT, NO DISALLOWANCE OF INTEREST IS WARRANTED. RESPECTFULLY FOLLOWING THE RATIO OF HON'BLE MUMBAI HIGH COURT DECISION IN THE CASE OF RELIANCE UTILITIES & POWER LTD., I AM INCLINED TO AGREE WITH THE CONTENTIONS OF THE ID. A.R. 5.9 IN VIEW OF THE ABOVE, I AM INCLINED TO AGREE WITH THE CONTENTIONS OF THE ID. A.R. ACCORDINGLY, DISALLOWANCE OF RS.12,43,212/ - MADE BY THE A.O. U/S. 36(1)(III) IS ORDERED TO BE DELETED. TH IS GROUND OF APPEAL IS ALLOWED. 41 . WE HAVE HEARD BOTH THE PARTIES. SUFFICE TO SAY, IT HAS COME ON RECORD THAT ASSESSEE HAD AVAILABLE AT ITS DISPOSAL INTERE ST FREE FUNDS OF RS. 170 CRORES (APPROX) TURNING OUT TO BE MUCH MORE THAN IMPUGNED ADVANCES OF RS. 402.8 LACS. WE QUOTE DECISION OF HON BLE BOMBAY HIGH COURT IN RELIANCE UTILITIES AND POWER (SUPRA) DRAWING PRESUMPTION OF UTILIZATION OF INTEREST FREE FUNDS IN SUCH FACTUAL BACKDROP. HON BLE JURISDICTIONAL HIGH COURT IN (2013) 354 ITR 222 (GUJ) CIT V S. RAGHUVI R SYNTHETIC NEGATES APPLICATION OF INTEREST DISALLOWANCE IN CASE OF SUFFICIENT INTEREST FREE FUNDS. WE HOLD THAT I.T.A NO S .1961,857,1213,2617,2921 & CO 21 0 /AH D/2012 A.Y. 2004 - 05, 08 - 09 & 09 - 10 PAGE NO ACIT VS. M/S. PATEL ALLOY STEEL PVT. LTD 44 THE CIT(A) HAS RIGHTLY DELETED THE I MPUGNED INTEREST DISALLOWANCE. THIS RENDERS ASSESSEE S ALTERNATIVE PLEA OF HAVING ADVANCED THE IMPUGNED MONEY FOR GETTING ALLOTTED SHARES OF ITS ASSOCIATE ENTERPRISE AND HAVING RECEIVED THE SAME IN SUCCEEDING ASSESSMENT YEAR; AS BECOME INFRUCTUOU S . THE R EVENUE S CORRESPONDING GROUND AS WELL AS ITS APPEAL ITA 2921/ AHD/2012 FAIL. 42 . THE ASSESSEE S CO NO. 210/AHD/2012 SUCCEEDS. ITS APPEALS ITA 857/AHD/2012 AND 2617/AHD/2012 ARE PARTLY ALLOWED. REVENUE S APPEAL ITA NOS. 1961 , 1213 AND 2921/AHD/2012 ARE DISMISSED. ORDER PR ONOUNCED IN THE OPEN C OURT ON 08 - 04 - 201 6 SD/ - SD/ - ( N.K. BILLAIYA ) ( S. S. GODARA ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD : DATED 08 /04 /2016 AK / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,