ITO 7(2)(4), MUMBAI V. SWAL CORPORATION LTD, MUMBAI

ITA 3846/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2955 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2009-2010
• Appeal Filed On: 29-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Fair market value

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI E BENCH, MUMBAI BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER. ITA NO.3846/MUM/2014 (ASSESSMENT YEAR:2009-10) INCOME TAX OFFICER-7(2)(4), R.NO. 618, M.K. ROAD MUMBAI-400020 APPELLANT VS. M/S SWAL CORPORATION LTD., 132-A,167, READY MONEY TERRAXE, DR. ANNIE BESANT ROAD, WORLI MUMBAI -400 018 RESPONDENT PAN: AAFCS9111A /BY APPELLANT : SHRI VACHASPATI TRIPATHI, D.R. /BY RESPONDENT : SHRI KIRIT KAMDAR, A.R. /DATE OF HEARING : 06.06.2016 /DATE OF PRONOUNCEMENT : 24.06.2016 ORDER PER SHAILENDRA KUMAR YADAV, J.M: THIS APPEAL HAS BEEN FILED BY REVENUE AGAINST THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-13, ITA NO.3846/MUM/14 A.Y. 09-10 [ITO VS. M/S. SWAL CORPORATION LTD.] PAGE 2 MUMBAI, DATED 18.03.2013 FOR A.Y. 2009-10 ON FOLLOW ING GROUNDS. I) THE LEARNED CIT (A) HAS ERRED ON FACT AND IN LA W IN DIRECTING THE ASSESSING OFFICER TO DELETE ADDITION MADE UNDER SECTION 40A (2) (B) WITHOUT APPRECIATING THE FACT THAT THE ASSESSE HAD INCURRED UNUSUALLY HIGH AND EXCESSIVE PAYMENTS TO ITS HOLDING COMPANY FOR PURCHASES MADE AND HAS THEREBY SUFFERED LOSS. II) THE LEARNED CIT (A) HAS ERRED ON FACTS AND IN L AW IN HOLDING THAT PRIOR PERIOD EXPENDITURE DISALLOWED BY THE ASSESSING OFFICER CRYSTALLIZED DURING THE YEAR WITHOUT APPRECIATING THE FACT THAT THE ASSESSE FAILED TO PROVE THAT THESE EXPENSES COULD NOT BE PROVIDED IN THE YEAR TO WHICH THEY RELATE. III) THE LEARNED CIT (A) HAS ERRED ON FACTS AND IN LAW IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PRIOR PERIOD EXPENDITURE WITHOUT APPRECIATING THE FACT THAT IN THE MERCANTIL E SYSTEM, THE ASSESSE IS REQUIRED TO CLAIM EXPENDITURE ON PAYABLE BASIS AND WHERE SUCH PROVISIONS ARE NOT MADE, TO PROVE THAT THE EVENT REQUIRING THE PAYMENTS OF SUCH EXPENDITURE OCCURRED IN LATER PERIOD. 3. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE HAS E -FILLED ITS RETURN OF INCOME ON 28/09/2009 DECLARING TOTAL INCOME AT NIL. THE CASE WAS SELECTED FOR SCRUTINY AND SUBS EQUENTLY, NOTICES U/S 143 (2) AND 142 (1) OF THE ACT WERE ISS UED AND SERVED TO THE ASSESSEE. THE ASSESSEE COMPANY IS IN THE BUSINESS OF MANUFACTURING OF FERTILIZERS AND AGROCH EMICALS AND ALSO TRADING IN PESTICIDES. FIRST ISSUE IS WIT H REGARDS TO DISALLOWANCE U/S. 40A(2)(B) OF THE ACT OF RS. 1,70, 11,301/-. ASSESSING OFFICER (VIDE PARA 5.6 OF ASSESSMENT ORDE R) ITA NO.3846/MUM/14 A.Y. 09-10 [ITO VS. M/S. SWAL CORPORATION LTD.] PAGE 3 DISALLOWED THE PURCHASES MADE BY THE ASSESSE U/S 40A(2)(B) OF THE ACT AT RS. 1,70,11,301 HOLDING THA T : THE PURCHASES FROM M/S UNITED PHOSPHORUS LTD WERE HIGHL Y INFLATED THEREBY CAUSING LOSS TO THE ASSESSE IN THE TRADING ACTIVITY. IN FACT NO BENEFIT HAS BEEN DERIVED BY TH E ASSESSEE BY TRANSACTING WITH M/S UNITED PHOSPHOROUS LTD AND BY MAKING UNUSUALLY HIGH AND EXCESSIVE PAYMENTS FOR PURCHASES MADE FROM THIS PARTY THE ASSESSE HAS INCU RRED LOSS. FURTHER, NO EXPLANATION HAS BEEN OFFERED BY T HE ASSESSE TO EXPLAIN THE LOSS. CONSIDERING THE FACTS OF THE CASE THE PURCHASES MADE FROM M/S UNITED PHOSPHORUS LTD ARE TREATED TO BE AT AN EXCESSIVE AN UNREASONABLE R ATE AND 1% OF THE PURCHASES MADE ARE DISALLOWED U/S 40A (2) (B) OF THE ACT. SUCH DISALLOWANCE WORKS OUT TO RS.1,70,11, 301/-. 2.1 AGGRIEVED FROM THE ORDER OF THE LD. ASSESSING O FFICER, THE ASSESSE FILED AN APPEAL BEFORE THE CIT (A) WHO DELETED THE ADDITION MADE BY ASSESSING OFFICER U/S 40A(2)(B ) OF THE ACT, VIDE PARA 4.5 OF THE ORDER OF CIT (A) WHICH RE ADS AS UNDER: 4.5 AS IT IS UNDERSTOOD THAT DISALLOWANCE UNDER SE CTION 40A (2) (B) OF THE ACT CAN ONLY BE MADE WHEN IT IS FOUND THAT EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVIN G REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVI CES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEG ITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFORM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE CANNOT BE ALLOWED AS DEDUCTION. HERE INSTANT CASE THE ASSESSING OFFICER HAS NOT BROUGHT ANY COMPARABLE RATE OF FERTILIZERS SOLD BY ITA NO.3846/MUM/14 A.Y. 09-10 [ITO VS. M/S. SWAL CORPORATION LTD.] PAGE 4 M/S UNITED PHOSPHORUS LTD TO OTHERS AT LOWER RATE A ND PROVING THAT APPELLANT HAVE MADE PURCHASES FROM THE SAID COMPANY AT AN EXCESSIVE RATE AND THUS LIABLE F OR DISALLOWANCE UNDER SECTION 40A (2) (B). AS IN THE C ASE OF APPELLANT ENTIRE PURCHASES ARE MADE FROM M/S UNITED PHOSPHORUS LTD, ONLY, THIS WAS REQUIRED ON THE PART OF ASSESSING OFFICER TO PROVE THAT PURCHASES OF THESE VERY FERTILIZERS HAVE BEEN MADE BY THE APPELLANT AT EXCE SSIVE RATES WHEN SAME WAS AVAILABLE IN THE MARKET AT LESS ER RATE. AS THIS BASIC EXERCISE HAS NOT BEEN UNDERTAKE N BY THE ASSESSING OFFICER, I AM IN AGREEMENT WITH THE APPELLANT THAT IN ABSENCE OF THE SAME DISALLOWANCE UNDER THIS SECTION CANNOT BE MADE. IT IS ALTOGETHER A DIFFERENT REASON THAT ASSESSING OFFICER HAS WORKED OUT PROFIT AND LOSS ACCOUNT OF DIFFERENT SEGMENTS, WHIC H HOWEVER BEING FAULTY DUE TO INCLUSION OF EXCISE DUT Y, AGAIN CANNOT BE RELIED UPON WITH AND THUS ARE OF NO HELP TO A.O. TO PROVE THAT APPELLANT HAVE PURCHASED THE FERTILIZERS AT A RATE HIGHER THAN THE RATE OF SALE OF THESE ITEMS. IN VIEW OF THIS, THE ESTIMATED DISALLOWANCE AT THE RATE OF 1% ON THE PURCHASES MADE, AN AMOUNT RS. 1,70,11,301/- DISALLOWED UNDER SECTION 40A (2) (B) OF THE I.T. ACT BEING NOT SUSTAINABLE ARE DELETED HEREWITH . THE GROUND NUMBER 2 IS ALLOWED. 2.2 AGGRIEVED FROM THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US ON THIS ISSUE INTER ALIA SUBMITTED THAT CIT(A) WAS NOT JUSTIFIED IN DELETING THAT ADDITION IN QUESTION. SO, SAME SHOULD BE SET ASIDE AND ORDER OF ASSESSING OFFICER ON THIS ISSUE BE RESTORE D. ON THE OTHER HAND, LD. AUTHORIZED REPRESENTATIVE SUPPORTED THE ORDER OF CIT(A) ON THE ISSUE. 2.3 WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. THE LD. DEPART MENTAL REPRESENTATIVE HAS ARGUED THAT THE PURCHASES FROM M /S UNITED PHOSPHORUS LTD WERE HIGHLY INFLATED THEREBY ITA NO.3846/MUM/14 A.Y. 09-10 [ITO VS. M/S. SWAL CORPORATION LTD.] PAGE 5 CAUSING LOSS TO THE ASSESSE AS THE ASSESSE HAS MADE EXCESSIVE PAYMENTS FOR PURCHASES, THEREFORE ORDER O F THE ASSESSING OFFICER SHOULD BE RESTORED. ON THE OTHER HAND THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS EXPLAINED THAT LD. ASSESSING OFFICER DID NOT BRING ON RECORD OR ESTABLISH THE COMPARABLE PRICE FOR THE SAME PURC HASES FROM THIRD PARTY SO THAT IT COULD BE CONCLUDED THAT PRICE CHARGED FOR PURCHASES WAS EXCESSIVE AND HIGHER. JUS T TO SAY THAT EXCESSIVE PAYMENTS WERE MADE FOR PURCHASES DOES NOT WORK UNLESS THE COMPARABLE PRICE FOR THE SIMILA R GOODS FROM THIRD PARTY IS DEMONSTRATED. SECTION 40A(2)(B ) OF THE ACT CLEARLY SAYS THAT THE ASSESSING OFFICER SHOULD DISALLOW THE EXPENDITURE IF THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS. IN THE INSTANT CASE THE ASSESSING OFFICER F AILED TO WORK OUT THE FAIR MARKET VALUE OF THE GOODS. HENCE IN THE INSTANT CASE THE ASSESSING OFFICER HAS NOT BROUGHT ANY COMPARABLE RATE OF FERTILIZERS SOLD BY M/S UNITED PHOSPHORUS LTD TO OTHERS AT LOWER RATE AND PROVING THAT APPELLANT HAVE MADE PURCHASES FROM THE SAID COMPANY AT AN EXCESSIVE RATE. THE LD. ASSESSING OFFICER DID E STIMATE ONLY AND DID THE GUESS WORK. IN VIEW OF ABOVE DISCU SSION, WE DO NOT HESITATE TO UPHOLD THE ORDER OF THE CIT ( A). SAME IS DISMISSED. 3. NEXT ISSUE IS WITH REGARDS TO PRIOR PERIOD EXPEN SES OF RS.14,60,099/-. THE PRIOR PERIOD EXPENSES DISALLOW ED BY ASSESSING OFFICER HOLDING THAT: SINCE THE ASSESSEE IS ITA NO.3846/MUM/14 A.Y. 09-10 [ITO VS. M/S. SWAL CORPORATION LTD.] PAGE 6 FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, PRIOR PE RIOD EXPENSES CLAIMED BY THE ASSESSEE IS NOT ALLOWABLE. IT WAS ALSO OBSERVED THAT THE ASSESSEE HAS NOT MADE ANY PR OVISION FOR THE ABOVE EXPENSES IN EARLIER YEARS. ACCORDINGL Y, THE PRIOR PERIOD EXPENSES OF RS. 14,60,099/- WAS DISALL OWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 3.1 AGGRIEVED FROM THE ORDER OF ASSESSING OFFICER, ASSESSEE FILED AN APPEAL BEFORE THE CIT(A), WHO HAS DELETED THE SAID ADDITION ( VIDE PARA 7.1) BY OBSERVING AS UNDER: 7.1 I HAVE CONSIDERED THAT THE APPELLANT HAVE STA TED THAT THEY ARE DETENTION CHARGES (DEMURREAGE CHARGES PAID FOR IMPORTS PERTAINS TO EARLIER YEARS) AN AMOU NT RS. 2,70,445/- THEN VAT AUDIT FEE ( VAT AUDIT FEE PAID TO AUDITORS FOR VAT AUDIT PERTAINS TO EARLIER YEARS) A N AMOUNT OF RS. 1,12,106/- AND EXCISE ON FINISHED GOO DS RETURN OF AN AMOUNT OF RS. 10,77,546/- IN ALL TOTAL RS.14,60,099/-. THE APPELLANT HAVE STATED THAT THES E EXPENSES WERE DEBITED DURING THE PERIOD RELEVANT TO ASSESSMENT YEAR 2009-10, THE SUBJECT MATTER OF THIS APPEAL FOR THE REASON THAT THE ACCRUAL/LIABILITY OF AFORESAID EXPENSES GOT CRYSTALLIZED THEN ONLY. THEN APPELLANT HAVE RELIED UPON DECISIONS GIVEN IN THE C ASE OF CIT VERSUS JAGATJEET INDUSTRIES LTD, GIVEN BY HONOR ABLE HIGH COURT OF DELHI AND NAGRI MILLS CO LTD GIVEN BY HONORABLE HIGH COURT OF BOMBAY. I HAVE GONE THROUGH THE SAME AND HAVING FOUND THAT THESE ARE THE EXPENS ES THOUGH PERTAINING TO PRIOR PERIOD TO THE PREVIOUS Y EAR RELEVANT TO THE ASSESSMENT YEAR 2009-10, IT IS NOT DISPUTED THAT THE LIABILITIES GOT ACCRUED AND CRYST ALLIZED ONLY IN THE FINANCIAL YEAR RELEVANT TO ASSESSMENT Y EAR 2009-10. IT IS NOT THE CASE THAT THESE LIABILITIES PERTAINING TO THE RESPECTIVE FINANCIAL YEARS GOT CRYSTALLIZED AND THUS WERE ASCERTAINED BUT NOT CLAI MED BY THE APPELLANT IN THOSE ASSESSMENT YEARS, AND HAD BEEN CLAIMED IN THE ASSESSMENT YEAR 2009-10 WITHOUT ITA NO.3846/MUM/14 A.Y. 09-10 [ITO VS. M/S. SWAL CORPORATION LTD.] PAGE 7 ANY REASON. I FIND THAT THE PLEA OF THE APPELLANT I N THIS REGARD FOR THESE AMOUNTS DEBITED UNDER VARIOUS HEAD S IS DIRECTLY COVERED BY THE DECISION GIVEN BY THE HONOR ABLE BOMBAY HIGH COURT IN THE CASE OF NAGRI MILLS CO LTD , CITED AND RELIED UPON BY THE APPELLANT ALSO. IN VIE W OF THIS, DISALLOWANCES MADE OF AN AMOUNT RS. 14,60,099 /- BEING NOT SUSTAINABLE IS DELETED HEREWITH. THE GROU ND NUMBER 5 IS ALLOWED. 3.2 AGGRIEVED FROM THE ORDER OF CIT(A), REVENUE IS IN APPEAL BEFORE US INTER ALIA STATED THAT ORDER OF CI T(A) IS NOT JUSTIFIED ON THE ISSUE. ACCORDINGLY, SAME SHOULD B E SET ASIDE. ON THE OTHER HAND, LD. AUTHORIZED REPRESENT ATIVE SUPPORTED THE ORDER OF CIT(A) ON THE ISSUE. 4. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. REVENUE AUTHOR ITIES HAVE STATED THAT SINCE THE ASSESSEE IS FOLLOWING TH E MERCANTILE SYSTEM OF ACCOUNTING, THEREFORE PRIOR PE RIOD EXPENSES CLAIMED BY THE ASSESSEE IS NOT ALLOWABLE AND ALSO ARGUED THAT THE ASSESSEE HAS NOT MADE ANY PROVISION FOR THE ABOVE EXPENSES IN EARLIER YEARS. ON THE OTHER H AND THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE STAT ED THAT THESE EXPENSES THOUGH PERTAINING TO PRIOR PERIOD T O THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2009- 10, BUT THE LIABILITIES GOT ACCRUED AND CRYSTALLIZED ONLY IN THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2009-10 . IN THIS CASE THE LIABILITY BECAME KNOWN FOR THE FIRST TIME WHEN SUCH CLAIM WAS MADE BY THE ASSESSEE THEREFORE THE S AME IS ALLOWABLE IN THE YEAR IN WHICH THE LIABILITY GOT CR YSTALLIZED. ITA NO.3846/MUM/14 A.Y. 09-10 [ITO VS. M/S. SWAL CORPORATION LTD.] PAGE 8 IN FACT AND CIRCUMSTANCES, WE ARE NOT INCLINED TO I NTERFERE IN THE ORDER OF CIT(A). SAME IS UPHELD. 5. IN THE RESULT, APPEAL OF REVENUE IS DISMISSED AS DISCUSSED ABOVE. PRONOUNCED IN THE OPEN COURT ON THIS THE 24 TH DAY OF JUNE, 2016. SD/- SD/- ( RAJESH KUMAR ) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI: DATED 24/06/2016 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- 1. / REVENUE 2. / ASSESSEE 3. %&%'( ) / CONCERNED CIT 4. )- / CIT (A) 5.-./00'(, '( , %& / DR, ITAT, MUMBAI 6./4567 / GUARD FILE. BY ORDER / , / % , '( , %&