M/s.Tolin Rubbers P.Ltd, Aluva V. ADCIT, Aluva

ITA 350/COCH/2013

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69061 (ITAT-COCHIN)
• Duration Of Justice: 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2013
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 11-09-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 30-05-2013
• Court: TRIBUNAL
• Department Lawyers: LATHA V KUMARJR
• Keywords: Notional interest
• Section: 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NO. 350/COCH/2013 ASSESSMENT YEAR : 2007-08 M/S. TOLIN RUBBERS (P) LTD., RUBBER JUNCTION, MATTOOR, KALADY. [PAN:AABCT 4322L] VS. ADDITIONAL COMMISSIONER OF INCOME-TAX, ALUVA RANGE, ALUVA. (ASSESSEE -APPELLANT) (REVENUE-RESPONDEN T) ASSESSEE BY SHRI SANTHOSH P. ABRAHAM, ADV. REVENUE BY SMT. LATHA V. KUMAR,JR. DR DATE OF HEARING 11/09/2013 DATE OF PRONOUNCEMENT 13/11/2013 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 19-03-2013 PASSED BY THE LD. CIT(A)-II, KOCHI AND IT RELATES T O THE ASSESSMENT YEAR 2007-08. 2. THE GROUNDS URGED BY THE ASSESSEE GIVE RISE TO T HE FOLLOWING ISSUES: (A) DISALLOWANCE MADE U/S. 40(A)(IA) OF THE ACT IN RESPECT OF LABOUR CHARGES. (B) DISALLOWANCE MADE U/S. 40A(2) IN RESPECT OF CU RING CHARGES. (C) DISALLOWANCE OF ESTIMATED INTEREST U/S. 40A(2) . 3. THE FACTS RELATING TO THE CASE ARE STATED IN BRI EF. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PROCURED TREAD RUBBER AND OTHER ALLIED ACTIVITIES. IT FILED ITS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATI ON DISCLOSING A TOTAL INCOME OF RS.21,86,910/-. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS PAID LABOUR CONTRACT CHARGES OF RS. 1,53,578/-, ON WHICH THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE THE ASSE SSEE EXPLAINED THAT IT PAID WAGES OF RS.1,33,936/- DIRECTLY TO THE WORKERS AND ALSO PAID SERVICE CHARGES OF RS. 19,642/- TO I.T.A. NO 350 /COCH/2013 2 THE LABOUR CONTRACTOR. THE ASSESSING OFFICER DID N OT AGREE WITH THE SAID EXPLANATIONS AND HELD THAT THE ABOVE SAID PAYMENT IS CONTRACT PA YMENT FOR SUPPLY OF LABOUR ATTRACTING DEDUCTION OF TAX AT SOURCE U/S. 194C OF THE ACT. SINCE THE ASSESSEE DID NOT DEDUCT TAX THEREON, THE ASSESSING OFFICER DISALLOWE D THE SUM OF RS.1,53,578/- BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. 3.1 THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS PAID CURING CHARGES TO THE ASSOCIATE ENTERPRISES OF THE ASSESSEE. CURING CHAR GES WERE PAID AT THE RATE OF RS.4.85 PER KG., TO AN ASSOCIATE CONCERN NAMED M/S TOJA TYR E & TREADS PVT. LTD. THE ASSESSEE ALSO PAID CURING CHARGES AT THE RATE OF RS. 6/- PER KG TO ANOTHER ASSOCIATE CONCERN NAMED M/S TOLIN TYRES PVT. LTD. WHEN ASKED ABOUT T HE DIFFERENCE IN RATES FOR SAME TYPE OF WORK, THE ASSESSEE EXPLAINED THAT M/S. TOLI N TYRES PVT. LTD. IS A NEW UNIT ESTABLISHED WITH NEW MACHINES AND INFRASTRUCTURE, W HEREAS THE OTHER CONCERN IS 16 YEARS OLD CONCERN. IT WAS ALSO SUBMITTED THAT M/S. TOJA TYRE & TREADS PVT. LTD. WAS UNABLE TO MEET THE REQUIREMENTS OF THE ASSESSEE AND HENCE THE ASSESSEE WAS CONSTRAINED TO ENTRUST THE WORK TO M/S. TOLIN TYRES PVT. LTD. AT A HIGHER RATE. 3.2 THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE WAS HAVING CLOSING STOCK VALUE OF RS. 82.30 LAKHS. HENCE THE ASSESSING OFFICER TOOK THE VIEW THAT THE EXPLANATION OF THE ASSESSEE THAT HIGHER COST WAS PAID TO MEET THE DEMA ND WAS NOT CORRECT. THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAS PAID HIGHER RATE ONLY TO FAVOUR M/S. TOLIN TYRES PVT. LTD. ACCORDINGLY, THE ASSESSING OFFICER CONSIDERED THAT THE RATE OF RS.6/- PER KG PAID TO M/S TOLIN TYRES PVT LTD IS EXCESS BY RS.1.25 PER KG . ACCORDINGLY HE DISALLOWED THE SUM OF RS.17,19,062/- CALCULATED AT THE RATE OF RS. 1.2 5 PER KG FOR 1375250 KGS OF RUBBER PROCESSED BY M/S. TOLIN TYRES PVT. LTD. 3.3. THE ASSESSING OFFICER ALSO NOTICED THAT THE AS SESSEE HAS PAID INTEREST OF RS.14,07,958/- TO M/S. TOLIN TYRES PVT. LTD. ON CRE DIT PURCHASES MADE FROM IT. THE ASSESSING OFFICER NOTICED THAT ANOTHER ASSOCIATE CO NCERN M/S. TOJA TYRE & TREADS PVT. LTD. OWED MONEY TO THE ASSESSEE, BUT THE ASSESSEE D ID NOT COLLECT INTEREST FROM THE SAID CONCERN. ACCORDINGLY, THE ASSESSING OFFICER C ALCULATED THE INTEREST DUE FROM M/S. I.T.A. NO 350 /COCH/2013 3 TOJA TYRE & TREADS PVT. LTD. BY ADOPTING THE RATE O F INTEREST AT 18%, WHICH WORKED OUT TO RS.18,21,872/- AND ADDED THE SAME. 4. AGGRIEVED, THE ASSESSEE CHALLENGED ALL THESE ADD ITIONS BEFORE THE LD. CIT(A) BUT COULD NOT SUCCEED. HENCE, THE ASSESSEE HAS FILED TH IS APPEAL BEFORE US. 5. THE FIRST ISSUE RELATES TO THE DISALLOWANCE OF L ABOUR CHARGE U/S. 40(A)(IA) OF THE ACT. BEFORE US, THE LD. DR POINTED OUT THAT THE AS SESSEE DID NOT CONTEST THIS ISSUE BEFORE THE LD. CIT(A) AND ACCORDINGLY SUBMITTED THA T THE ASSESSEE IS NOT ENTITLED TO URGE THE SAME BEFORE THE TRIBUNAL. ON GOING THROUG H THE GROUNDS OF APPEAL FILED BY THE ASSESSEE BEFORE THE LD. CIT(A) AND THE ORDER OF THE LD. CIT(A), WE FIND THAT THE ASSESSEE HAS NOT CONTESTED THIS ISSUE BEFORE THE FI RST APPELLATE AUTHORITY. BEFORE US ALSO, THE ASSESSEE HAS NOT ADDUCED ANY REASONS FOR NOT CONTESTING THE SAME BEFORE THE LD. CIT(A). UNDER THESE CIRCUMSTANCES, WE ARE OF T HE VIEW THAT THE ASSESSEE CANNOT RAISE THE SAME BEFORE US SINCE THE IMPUGNED ISSUE I S NOT A LEGAL ISSUE. WE FIND SUPPORT IN THIS REGARD FROM THE DECISION OF HONBLE JURISDI CTIONAL KERALA HIGH COURT IN THE CASE OF P.R. NARAHARI RAO VS. CIT (299 ITR 400). ACCORDINGL Y, WE DISMISS THE GROUNDS RELATING TO THIS ISSUE. 6. THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF CU RING CHARGES, MADE U/S. 40A(2) OF THE ACT. THE ASSESSING OFFICER HAS DISALLOWED THE CURING CHARGES PAID TO M/S. TOLIN TYRES PVT. LTD., AN ASSOCIATE CONCERN OF THE ASSESS EE, ON NOTICING THAT THE PAYMENT MADE TO THAT CONCERN IS EXCESSIVE BY RS.1.25 PER KG , WHEN COMPARED WITH THE PAYMENT MADE TO ANOTHER ASSOCIATE CONCERN. THE ASSESSING OF FICER HAS TAKEN THE QUANTITY OF RUBBER PROCESSED BY M/S. TOLIN TYRES PVT. LTD AT 13 75250 KGS., AND ACCORDINGLY CALCULATED THE DISALLOWANCE. BEFORE US, THE ASSESS EE HAS FILED AN ADDITIONAL GROUND, WHEREIN IT IS MENTIONED THAT THE QUANTITY OF RUBBER PROCESSED BY M/S. TOLIN TYRES PVT. LTD. WAS ONLY 425300 KGS, DURING THE YEAR UNDER CON SIDERATION AND NOT 1375250 KGS, AS CONSIDERED BY THE AO. INVITING OUR ATTENTION TO P AGE 3 OF THE ASSESSMENT ORDER, THE LD. AR POINTED OUT THAT THE ASSESSING OFFICER HAS N OTED THE QUANTUM OF RUBBER PROCESSED BY M/S. TOLIN TYRES PVT. LTD. AT 478300 K GS ONLY. HOWEVER, WHILE COMPUTING I.T.A. NO 350 /COCH/2013 4 THE DISALLOWANCE IN PAGE 4 OF THE ASSESSMENT ORDER, HE HAS TAKEN THE QUANTITY AS 1375250 KGS. THE LD. AR SUBMITTED THAT THE CORRECT QUANTITY OF RUBBER PROCESSED BY M/S. TOLIN TYRES PVT. LTD., DURING THE YEAR UNDER C ONSIDERATION WAS ONLY 425300 KGS. 6.1 THE LD. AR FURTHER SUBMITTED THAT THE CONCE RN, M/S. TOLIN TYRES LTD, IS A NEW UNIT HAVING NEW MACHINES AND HENCE, THE RUBBER PROC ESSED BY THEM GAVE HIGHER QUALITY. THE ASSESSEE, WHILE NEGOTIATING THE RATES WITH THE SAID CONCERN, OFFERED THE RATE OF RS. 4.85 PER KG, ONLY, BUT M/S. TOLIN TYRES PVT. LTD. DID NOT ACCEPT THE SAME ON THE GROUND THAT IT HAS MADE HEAVY INVESTMENT IN PUR CHASE OF MACHINERIES AND HIGHER COST OF CONVERSION. THE LD A.R FURTHER SUBMITTED T HAT THE ASSESSEE WAS HAVING GOOD DEMAND FOR ITS PRODUCTS AND THE OTHER CONCERN M/S T OJA TYRES & TREADS LTD WAS NOT ABLE TO MEET THE REQUIREMENTS OF THE ASSESSEE. HENC E THE ASSESSEE WAS CONSTRAINED TO AGREE WITH THE RATE QUOTED BY M/S. TOLIN TYRES PVT. LTD. HOWEVER, LD D.R STRONGLY DISPUTED THE SUBMISSIONS MADE BY LD A.R. 6.2 WE NOTICE THAT THE ASSESSEE HAS NOT SUBSTAN TIATED ITS CLAIM WITH ANY MATERIAL, I.E., THE ASSESSEE COULD NOT PRODUCE ANY MATERIAL T O PROVE THAT THE QUALITY OF RUBBER PROCESSED BY M/S. TOLIN TYRES PVT. LTD. WAS BETTER THAN THAT OF M/S TOJA TYRE & TREADS PVT. LTD. FURTHER THE CLAIM THAT M/S TOJA TYRES & TREADS PVT LTD WAS NOT IN A POSITION TO MEET THE DEMAND OF THE ASSESSEE WAS ALSO NOT PRO VED. THE TAX AUTHORITIES HAVE GIVEN A FINDING THAT THE ASSESSEE WAS HAVING HUGE S TOCK OF CLOSING STOCK AND ACCORDINGLY HELD THAT THIS FACT CONTRADICTS THE EXP LANATION OFFERED BY THE ASSESSEE IN THIS REGARD. THOUGH THE ASSESSEE HAS SUBMITTED TH AT THE CLOSING STOCK VALUE CONSISTED OF OTHER ITEMS OF STOCK, YET NO BREAK UP WAS FURNIS HED BEFORE US TO SUPPORT ITS CONTENTIONS. THE ASSESSEE HAS ALSO FAILED TO SHOW T HAT THE OTHER UNRELATED UNITS, WHICH ARE HAVING SIMILAR MACHINERIES LIKE THAT OF M/S. TO LIN TYRES PVT. LTD WERE ALSO CHARGING RS. 6 PER KG FOR SIMILAR KIND OF PROCESSING. UNDER THESE CIRCUMSTANCES, IN OUR VIEW, THE LD. CIT(A) WAS JUSTIFIED IN NOT ACCEPTING ORAL EXPL ANATIONS OF THE ASSESSEE. IN THE ADDITIONAL GROUND, THE ASSESSEE IS DISPUTING THE QU ANTITY ADOPTED BY THE AO FOR COMPUTING THE DISALLOWANCE. THE ASSESSEE HAS ALSO POINTED OUT THE CONTRADICTION FROM THE ASSESSMENT ORDER ITSELF. HENCE IN OUR VIEW, TH ERE IS MERIT IN THE SAID CONTENTIONS OF I.T.A. NO 350 /COCH/2013 5 THE ASSESSEE. HOWEVER, THIS MATTER REQUIRES VERIFIC ATION AT THE END OF THE AO. ACCORDINGLY, WE MODIFY THE ORDER OF LD CIT(A) ON TH IS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO COMPUTE THE DISALLOWANCE ON THE ACTUAL QUANTITY OF RUBBER PROCESSED BY M/S TOLIN TYRES PVT LTD DURING THE YEAR UNDER CONSIDERATION. 7. THE NEXT ISSUE RELATES TO THE ASSESSMENT OF INTE REST INCOME ON THE OUTSTANDING BALANCE OF M/S TOJA TYRE & TREADS PVT. LTD. AS STA TED EARLIER, THE ASSESSEE PAID INTEREST ON THE CREDIT BALANCE OUTSTANDING IN THE N AME OF M/S. TOLIN TYRES PVT. LTD. BUT IT DID NOT COLLECT INTEREST ON THE DEBIT BALANCE ST ANDING IN THE NAME OF M/S TOJA TYRE & TREADS PVT. LTD. HENCE, THE ASSESSING OFFICER CALC ULATED THE INTEREST AT THE RATE OF 18% ON THE RUNNING ACCOUNT OF M/S TOJA TYRE & TREADS PV T. LTD. AND ASSESSED THE SAME. BEFORE THE TAX AUTHORITIES, THE ASSESSEE SUBMITTED THAT M/S TOJA TYRE & TREADS PVT. LTD. HAS PURCHASED RUBBER COMPOUND FROM IT AND FURTHER T HERE WAS NO AGREEMENT TO COLLECT INTEREST ON THE OUTSTANDING BALANCE. HOWEVER THE S AID EXPLANATION OF THE ASSESSEE DID NOT FIND FAVOUR WITH THE LD. CIT(A) AND ACCORDINGLY HE CONFIRMED THE ORDER. 7.1 HOWEVER, WE FIND MERIT IN THE CONTENTIONS O F THE ASSESSEE. IN OUR VIEW, THE PAYMENT AND COLLECTION OF INTEREST IS REGULATED BY THE TERMS OF CONTRACT BETWEEN THE PARTIES. UNLESS IT IS PROVED THAT THERE EXISTED A CONTRACT TO PAY/COLLECT INTEREST, IN OUR VIEW, THE DEPARTMENT IS NOT ENTITLED TO FIX NOTIONA L INTEREST AND ASSESS THE SAME. FURTHER, IT IS NOT THE CASE OF THE DEPARTMENT THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING FUNDS TO THE SAID CONCERN. ON THE CONTRARY , THE ASSESSEE HAS SUBMITTED THAT M/S TOJA TYRE & TREADS PVT LTD HAS PURCHASED RUBBER COMPOUND FROM THE ASSESSEE AND HENCE THE OUTSTANDING BALANCE RELATES TO TRADING TR ANSACTION. WE FIND SUPPORT FOR OUR VIEW FROM THE DECISION RENDERED BY HONBLE GAUHATI HIGH COURT IN THE CASE OF HIGHWAYS CONSTRUCTION CO. P. LTD VS. CIT (199 ITR 702). ACC ORDINGLY, WE ARE UNABLE TO AGREE WITH THE VIEW TAKEN BY THE LD. CIT(A) ON THIS ISSUE . ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DIRECT THE ASSE SSING OFFICER TO DELETE THE ASSESSMENT OF NOTIONAL INTEREST MADE U/S. 40A(2) OF THE ACT. I.T.A. NO 350 /COCH/2013 6 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESS EE IS PARTLY ALLOWED. PRONOUNCED ACCORDINGLY ON 13-11-20 13. SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 13TH NOVEMBER, 2013 GJ COPY TO: 1. M/S. TOLIN RUBBERS (P) LTD., RUBBER JUNCTION, MA TTOOR, KALADY. 2. THE ADDITIONAL COMMISSIONER OF INCOME-TAX, ALUVA RANGE, ALUVA. 3 THE COMMISSIONER OF INCOME-TAX(APPEALS)-II, KOCHI . 4.THE COMMISSIONER OF INCOME-TAX,KOCHI 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN