The Assitant Commissioner of Income Tax, Gandhidham Circle, , Gandhidham-Kutch V. M/s. Friends Salt Works & Alied Industries, Gandhidham-Kutch

ITA 365/RJT/2017

AI Insights

The case involves the Income Tax Department (Revenue) appealing against the order of the CIT(A) which had deleted the disallowances made by the Assessing Officer on interest expenses and handling/washing losses claimed by M/s. Friends Salt Works & Allied Industries for the Assessment Year 2013-14. The Assessing Officer had disallowed these claims based on the grounds that the interest-free advances were made from interest-bearing funds and that the claimed losses were excessive and not genuine. The CIT(A) reversed these disallowances, leading to the Revenue's appeal to the Tribunal.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 138171 (ITAT-RAJKOT)
• Duration Of Justice: 7 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-12-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 14-09-2022
• Assessment Year: misc
• Appeal Filed On: 01-12-2015
• Other Referred Cases: S. A. Builders vs. CIT (288 ITR Page 1), Hero Cycle Pvt. Ltd. (2015) 63 taxmann.com 308 (SC), Kalathia Engineering and Gujarat Narmada Valley Fertilizers
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Set aside
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT (CONDUCTED THROUGH E-COURT AT AHMEDABAD) BEFORE SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER & SHRI T. R. SENTHIL KUMAR, JUDICIAL MEMBER I.T.A. No.365/Rjt/2017 (Assessment Year: 2013-14) ACIT Gandhidham Circle, Gandhidham-Kutch Vs.M/s. Friends Salt Works & Allied Industries, Maitri Bhavan, Plot No. 18, Sector-8, Gandhidham, Kutch [PAN No.AAAFF2067N] (Appellant) .. (Respondent) Appellant by : Shri Shramdeep Sinha, CIT DR Respondent by : Shri K. C. Thacker, A.R. Date of Hearing 15/09/2022 Date of Pronouncement 14/12/2022 O R D E R PER T.R. SENTHIL KUMAR, JUDICIAL MEMBER: This appeal is filed by the Revenue against the order dated 16.08.2017 passed by the Commissioner of Income Tax (Appeals)-12, Ahmedabad (in short “CIT(A)”) relating to the Assessment Year 2013- 14 against the assessment order dated 15.03.2016 passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). 2. The brief facts of the case is the assessee is a company engaged in the business of manufacturing and trading of salt and other commodities namely Agro Commodities, iron ore under salt Division, providing warehousing facility and storage facility (tank terminals) - 2 - ITA No.365/Rjt/2017 ACIT vs. M/s. Friends Salt Works & Allied Industries Asst.Year – 2013-14 under terminal division at Gandhidham. For the Assessment Year 2013-14 assessee filed its Return of Income declaring total income of Rs. 3,60,14,870/-. The assessment was taken up for scrutiny and made various disallowances. We are concerned about two disallowances namely interest expenditure of Rs. 18,52,869/- and handling/washing loss of common salt amounting to Rs. 2,97,83,295/-. On verification of the Profit & Loss Account the Assessing Officer noticed that the assessee has paid interest of Rs. 4,73,87,880/- on secured and unsecured loan. On further verification the assessee has given loans and advances of Rs. 44,66,89,118/- on which no interest have been charged. Therefore, a show-cause notice was issued, why the corresponding interest should not be treated as expenses incurred for non-business purposes and why the same should not be disallowed under Section 36(1)(iii) of the Act. The assessee submitted that it had huge funds of Rs. 386,79,94,702/- available as on 31.03.2013, on which no interest is payable, as against interest free advances given to related parties of Rs. 30,14,89,078/-. Similar advances were given early in years also. However, the Assessing Officer has not accepted the explanation offered by the assessee and made a disallowance of Rs. 18,52,869/- out of the interest paid on the ground that the assessee did not discharge onus of proving nexus of non-interest bearing fund utilized for giving interest free advances. The Second disallowance namely washing/handling loss on salt manufacturing and trading. The Assessing Officer asked the assessee to explain why handling/spillage/wastage loss of 3,26,261 Mts. which worked out to - 3 - ITA No.365/Rjt/2017 ACIT vs. M/s. Friends Salt Works & Allied Industries Asst.Year – 2013-14 47.30 % on the production of salt by the assessee should not be disallowed being not genuine claim. The assessee filed “Washery Loss Assessment Report” issued by M/s. Gupta & Associates (Assessors) Pvt. Ltd. in the case of M/s. Kutch Salt & Allied Industries Ltd. wherein the percentage of loss in washery process ranges between 22.16% to 25.198%. The assessee also submitted a Project Report prepared by Central Salt and Marine Chemical Research Institute in November, 2015 on assessment of washing loss in salt washery, showing washing loss more or less the result shown by Kutch Salt & Allied Industries Ltd. The Assessing Officer, however, fixed at 10% loss on washing and handling loss and the balance 37.30% equal to 2,49,686 Mt. is held to be excess claim of handling/spillage/wastage loss of salt manufacture and valued Rs. 119.283 per Mt. and disallowed a sum of Rs. 2,97,93,295/- and demanded tax thereon. 3. Aggrieved against the same the assessee filed an appeal before Commissioner of Income Tax (Appeals). The CIT(A) held that the Ld. AO has not appreciated the specific plea of the assessee that sizable interest free funds were available with the assessee. The Assessing Officer has neither established nor even attempted to show any direct nexus between any interest bearing loan taken on interest free advances given by the assessee. Thus, the Assessing Officer simply jump to the conclusion that “it is established” that the advances are out of interest bearing funds, because interest free funds are blocked in fixed assets, which reasoning is not only supported on facts. Then the Assessing Officer failed to verify the nexus between the interest - 4 - ITA No.365/Rjt/2017 ACIT vs. M/s. Friends Salt Works & Allied Industries Asst.Year – 2013-14 bearing funds and interest free advances before making disallowance under Section 36(1)(iii) of the Act. Thus, relying upon the Supreme Court judgment in the case of S. A. Builders vs. CIT (288 ITR Page 1) and Hero Cycle Pvt. Ltd. (2015) 63 taxmann.com 308 (SC) and Gujarat High Court decisions in Kalathia Engineering and Gujarat Narmada Valley Fertilizers deleted the disallowance of Rs. 18,52,869/- made by the Assessing Officer. 3.1 Similarly on the disallowance on washing/handling loss on salt, the Ld. CIT(A) held that the Assessing Officer did not appreciate the facts and circumstances of the case. The stock, whether opening stock, production or purchase, remains lying in the open heaps and will suffer loss on account of weather effects, during rains and while washing, which has to be regularly done to remove the dirt settling on the heaps of salt. Further, in this particular case, since export of salt forms major part of the quantity of the salt manufactured by the assessee, the mechanical washery process is used to ensure that the impurities namely calcium and magnesium contents are minimized. Thus, unwashed purchased salt also undergo washery process. Therefore, it would not be correct on the conclusion of the Assessing Officer, that there cannot be washing loss in respect of the purchases of previous year’s stock. Further, the Assessing Officer also not kept in view of the facts emerging from monthly reports filed with by the Salt Department, which used to make surprise checks on the salt stock maintained by the assessee. Thus, the Assessing Officer has not taken into account the comparable losses demonstrated by the - 5 - ITA No.365/Rjt/2017 ACIT vs. M/s. Friends Salt Works & Allied Industries Asst.Year – 2013-14 assessee by export authorities. Further when the Assessing Officer has not rejected the accounts based on which the assessee has filed the Return of Income, for this reasons the Ld. CIT(A) held that there is no merit in the disallowance made by the Assessing Officer and therefore, deleted the addition of Rs. 2,97,83,295/- made by the Assessing Officer. 4. Aggrieved against the same the Revenue is in appeal before us raising the following grounds of appeal: “1. The Ld. CIT(A) has erred in law and facts in deleting the addition on account of disallowance of interest expenses amounting to Rs.18,52,896/-. 2. The Ld. CIT(A) has erred in law and facts in deleting the addition on account of disallowance of genuineness of handling/washing loss of common salt amounting to Rs.2,97,83,295/-. It is therefore, prayed that the order of Ld. CIT(A) be set aside and that of AO be restored to the above extent.” 5. The Ld. CIT D.R. Shri Shramdeep Sinha appearing for the Revenue supported the order of the Assessing Officer and supporting the Grounds of Appeal, requested to sustain the additions made by the Assessing Officer. 6. Per contra, Shri K. C. Thacker Ld. A.R. appearing for the assessee reiterated the submissions made before the Ld. CIT(A) and supported the order of the CIT(A) and thereby pleaded to dismiss the Revenue appeal. 7. We are given our thoughtful consideration and perused the materials available on record including the Paper Book filed by the - 6 - ITA No.365/Rjt/2017 ACIT vs. M/s. Friends Salt Works & Allied Industries Asst.Year – 2013-14 assessee. It is seen that the Assessing Officer has made disallowance of interest applying rate of interest at 12% which is arbitrary. The assessee has capital of Rs. 138.50 crores on which interest is not paid, interest free unsecured loans of Rs. 17.60 crores and sundry creditors of Rs. 71.76 crores against the average interest free advances of Rs. 1.54 crores, thus the total interest free funds available with the assessee works out to 227.86 crores. Further the assessee has sizable interest free funds were available with it. However, the Ld. Assessing Officer has not established the direct nexus between any interest bearing loan taken by the assessee and interest free advances given by the assessee. It is clearly noticeable from the Balance Sheet extracts filed by the assessee that the borrowed funds appeared to have been deployed in fixed assets, closing stock and trade receivables for which primarily the funds have been borrowed and the advances prima facie appeared to have been made, out of interest free funds available with the assessee. Therefore, following the Apex Court judgment in the case of S. A. Builders and Hero Cycles Pvt. Ltd. the finding arrived by the CIT(A) does not require any interference. Thus, the ground raised by the Revenue has no merits and the same is rejected. 8. Regarding the disallowance of washing and handling loss of salt manufacturing of Rs. 2,97,83,295/-, the Assessing Officer’s finding that the shortage @ 43.7 % is highly excessive and determined 10% disallowance without any scientific basis or without any evidence from any expert’s opinion. The Assessing Officer also failed to note the assessee’s major salt manufacture were being exported. The - 7 - ITA No.365/Rjt/2017 ACIT vs. M/s. Friends Salt Works & Allied Industries Asst.Year – 2013-14 mechanical washery process used by the assessee to ensure that the impurities namely calcium and magnesium contents are minimized, which has resultant in higher percentage wastage of salt. The Assessing officer also has not given due credit to the “Washery Loss Assessment Report” filed by the assessee in the case of M/s. Kutch Salt & Allied Industries Ltd. wherein the loss in washery process ranges from 22.16 % to 25.198 % has determined by the expert body. Furthermore, the Ld. D.R. could not produce any documentary evidence to substantiate the disallowance made by the Assessing Officer and also the findings made by the Ld. CIT(A). In the absence of the same, the findings arrived by the CIT(A) does not require any interference, therefore, the grounds raised by the Revenue does not hold merit and the same is hereby rejected. 9. In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the Court on 14.12.2022 at Ahmedabad. Sd/- (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER Ahmedabad, dated 14/12/2022 Tanmay, Sr. PS TRUE COPY आदेश क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आय ु त / Concerned CIT 4. आयकर आय ु त)अपील (/ The CIT(A)- 5. वभागीय त न ध ,आयकर अपील(य अ धकरण,राजोकट/DR,ITAT, Ahmedabad, 6. गाड. फाईल /Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार Dy./Asstt.Registrar) आयकर अपील य अ धकरण, राजोकट / ITAT, Rajkot