Shri Krunal Vasantray Babariya, Dhoraji V. The Asst. Comm. Of Income Tax, Circle-2 (1), Rajkot

ITA 46/RJT/2020

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 4761 (ITAT-RAJKOT)
• Duration Of Justice: 3 year(s) 9 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 10-09-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 27-02-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRIASHISHKUMARPANDEY; FORTHEREVENUETOTHISDISREGARDMETHODADOPTEDBYTHE
• Assessee Lawyers: SHRIKULDEEPK.ADESARA
• Keywords: Search and seizure

Judgement Text

आयकरअपीलीयअधिकरण , राजकोटनयायपीी INTHEINCOMETAXAPPELLATETRIBUNAL, RAJKOTBENCH,RAJKOT (ConductedthroughE-Court) BEFORESHRIWASEEMAHMED,ACCOUNTANTMEMBER And SHRITRSENTHILKUMAR,JUDICIALMEMBER आयकरअपीलसं ./ITANo.46/Rjt/2020 धििाधरणणवध / Asstt.Year:2016-2017 KrunalVasantrayBabariya, NationalExportIndustries, UpletaRoad, Dhoraji, Gujarat-360410. PAN:AGTPB2925Q Vs.AssistantCommissioner IncomeTax-2(1), Rajkot. (Applicant)(Respondent) Assesseeby:ShriKuldeepK.Adesara,A.R Revenueby:ShriAshishKumarPandey,Sr.DR सुिणाईकीतारीख/DateofHearing:11/09/2023 घोवणाकीतारीख/DateofPronouncement:08/12/2023 आदेश/ORDER PERWASEEMAHMED,ACCOUNTANTMEMBER: Thecaptionedappealhasbeenfiledattheinstanceoftheassesseeagainst theorderoftheLd.CommissionerofIncomeTax(Appeal),Rajkot-2,arisinginthe matteroforderpassedunderSection143(3)oftheIncomeTaxAct,1961(here- in-afterreferredtoas"theAct")relevanttotheAssessmentYear2016-17. 2.TheinterconnectedissueraisedbytheassesseevidegroundNos.1to5of hisappealisthatthelearnedCIT(A)erredinconfirmingtheadditiononaccount ofvaluationofthestockintrade. ITANo.46/Rjt/2020 A.Y.2016-17 2 3.Thefactsinbriefarethattheassessee,anindividual,isderivingincome frombusinessandIncomefromothersources.Theassesseeintheyearunder considerationhasshownclosingstockintradeatRs.13,27,989/-only.Duringthe assessmentproceedings,theassesseeclaimedthestockwastobevaluedbased onFIFOmethodatRs.16,96,924/-only. 4.However,theAOfoundthattheassesseehasnotfurnishedevidencein supportofmethodofvaluation,thereforetheAOrejectedtheclaimofthe assessee.TheAOthereaftervaluedthestockintradeatRs.20,52,032/-on weightedaveragecostmethod.Thus,thedifferencebeingtheamountofRs. 7,24,043/-(Rs.20,52,032–13,27,989/-)wasaddedtothetotalincomeofthe assesseeonaccountofundervaluationofclosingstock. 5.TheaggrievedassesseepreferredanappealbeforethelearnedCIT(A)and submittedthathehasbeenfollowingFIFOmethodforseveralyearsforthe valuationofstockintrade.Themethodconsistentlyappliedcannotbechanged merelyforthereasonthechangedmethodwillgenerateincreasedincome.Asper theFIFO,thevalueofstockisatRs.16,96,924/-andthedifferenceamountofRs. 368935/-(Rs.16,96,924-Rs.13,27,989)arisingduetopricevariationasprice persharewasnottakenasperFIFOmethod,hencetherewasnointentionof suppressionofstock.Theassesseeaccordinglyprayedthattheadditionmadefor Rs.7,24,043/-bytheAOmerelybychangingthemethodshouldbedeleted.The learnedCIT(A)afterconsideringthefactsintotalityconfirmedtheadditionmade bytheAObyobservingasunder: Ihaveconsideredthedetailedwrittensubmissionontheissueandalsotheappellant argumentmadeduringtheappellateproceeding.TheAppellantassuchcouldnotprove beforetheappealauthoritythathehasrightlyfollowedFIFOmethodforarrivingtovalue ofaclosingstockbecausebyFIFOmethodthevaluationcomestoRs.16,96,924/- whereasinthebooksofaccountstheassesseeisshowingclosingstockatavalueofRs. 13,27,989/-.Moreover,beforetheAOtheappellantcouldnotprovethatinpastmany yearstheFIFOhasbeenconsistentlyfollowedbytheassessee.Therefore,Iupheldthe actionoftheAssessingOfficertobringtotaxundervaluationoftheclosingstockat Rs.7,24,043/-arrivedatbyadoptingweightandaveragemethod.Thegroundofappealon thisissueisaccordinglydismissed. ITANo.46/Rjt/2020 A.Y.2016-17 3 6.BeingaggrievedbytheorderofthelearnedCIT(A),theassesseeisin appealbeforeus. 7.ThelearnedARbeforeusfiledapaperbookrunningfrompages1to213, synopsisofargumentshaving17pagesandsubmittedthattheassesseehasbeen followingFIFOmethodforthevaluationofthestockconsistently.Therefore,there wasnovalidreasonfortherevenuetothisdisregardmethodadoptedbythe assesseeforthevaluationofclosingstockanduseweightedaveragemethod. 8.Ontheotherhand,thelearnedDRcontendedthattherewasno consistencyadoptedbytheassesseeforvaluationoftheclosingstock.The learnedDRvehementlysupportedtheorderoftheauthoritiesbelow. 9.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Beforewegointothecontroversytodecidewhat shouldbethemethodofvaluationofclosingstockfortheyearindispute,wefind itpertinenttonotethatanyadjustmentintheclosingstockfortheyearindispute wouldbetaxneutral.Itisforthereasonthattheclosingstockofoneyear becomestheopeningstockofsubsequentyear,meaningtherebyifweincrease theclosingstockoftheyearindispute,certainlytheincomeisgoingtoincrease oftheassesseebutsimultaneouslytheincreasedvalueofclosingstockwill becometheopeningstockofthenextyearwhichwillcertainlyresultreductionin theincomeoftheassesseeintheyearsinwhichsuchopeningstockwouldbe sold-out.However,theassesseeisnotexpectedtovaluethestockaccordingto hisunderstanding.Assuchwhateverthebasehasbeenadoptedbytheassessee forthevaluationofthestock,thesameshouldbecontinuedforalltheupcoming yearsuntilandunlessthesituationwarrantsotherwise. 9.1Bethatasitmaybe,wefindthattheyearindisputebeforeusisthe assessmentyear2016-17andifwegiveanyfindingquathevaluationofclosing ITANo.46/Rjt/2020 A.Y.2016-17 4 stock,thesameisgoingtohaveabearingontheopeningstockofthenextyear andlikewiseinalltheassessmentyearsuntilandunlessthevalueofclosingstock issold-out.Inotherwords,weareafraidtoholdtochangeanyvaluingofthe closingstockinthegivencaseasitwillhavecascadingeffectonthenextvarious assessmentyearsandtherewillnotbeanyextrataxburdenontheassessee excepttotheextentthattheincomeofoneyearwillbecometheincomeof anotheryear. 9.2However,whatisimportantisthisthatnoneoftheauthoritiesbelow,the AOorld.CIT-Ahasgivenanyfindingtochangetheopeningstockoftheassessee ofthenextyearonaccountofchangeinthevaluationofclosingstockfortheyear underconsideration.Thus,insuchasituation,ifweconfirmtheorderofthe authoritiesbelow,thatwillleadtothedoubleadditionwhichisnotdesirableunder theprovisionsoflaw.Accordingly,wearenotinclinedtoupholdtheorderofthe authoritiesbelow.Hence,wesetasidethefindingofthelearnedCIT-Aanddirect theAOtodeletetheadditionmadebyhim.Hencethegroundofappealofthe assesseeisherebyallowed. 10.ThenextissueraisedbytheassesseeisthatthelearnedCIT(A)erredin confirmingthedisallowanceofinterestexpenditureundersection36(1)(iii)ofthe Act. 11.TheAOduringtheassessmentproceedingsobservedthattheassesseehas madeaninvestmentintheequitysharesofM/sSynnovaGears&Transmission PvtLtd.Thefundforsuchinvestmentwasoutoftheborrowingsourcedfromthe firmnamely“NationalExportIndustries”inwhichassesseeisapartner.The assesseeonimpugnedborrowingsincurredinterestexpenseofRs.13,45,351/- andclaimedthesameasbusinessexpensesundersection36(1)(iii)oftheAct. Theassesseeclaimedthattheinvestmentwasmadeforbusinesspurposes thereforeinterestcostontheborrowingshouldbeallowed.Theassesseeinthis ITANo.46/Rjt/2020 A.Y.2016-17 5 regardalsoreliedonthejudgmentofHon’bleSupremecourtinthecaseofSA BuildersLtdvs.CITreportedin288ITR1. 12.TheAOdisagreedwiththecontentionoftheassesseeonthereasoning thatinvestmentinthesharesofaprivatecompanyisgoingtogeneratedividend incomewhichcannotbetreatedasbusinessactivityoftheassessee.Accordingly, theinterestcostincurredcannotbeheldforthepurposesofthebusiness.TheAO alsofoundthatthefactsinthecaseofSABuildersLtdvs.CIT(supra)are differentfromthefactsofthepresentcase.Therefore,theprincipleslaiddownin saidcasecannotbeappliedinthecaseoftheassessee.Hence,theAOmadethe disallowanceofinterestexpenseofRs.13,45,351/-andaddedtothetotalincome oftheassessee. 13.Onappealbytheassessee,thelearnedCIT(A)alsoconfirmedthefindingof theAObyobservingasunder: Ihavecarefullygonethroughdetailedwrittensubmissionsuprathroughthevariouscase lawsoftheApexcourtrelieduponbytheappellantsupraanditisfoundthatsameare clearlydistinguishableonfactsoftheassessee'scase.Intheassessee'scaseassesseehas notadvancedmoneybywayofloanassuchassesseehasinvestedintheequityofshares ofaprivatecompany.Assesseedonothavedeepinterestinacompanywhereinvestment intheformofsharecapitalhasbeenmadebytheassesseeasitisevidentfromthefact thatassesseeismerelyholding8.45%ofsharesintheequityofprivatecompanySynnova Gears&TransmissionPvt.Ltd.,thus,bynostretchofevidencecommercialexpediency couldbeestablished.InlightofthisfactIupheldtheactionoftheAssessingOfficerto disallowinterestexpenditureofRs.13,45,351/-undersection36(1)(iii)bytreatingitas incurredfornonbusinesspurpose.Thegroundofappealonthisaccordinglydismissed. 14.BeingaggrievedbytheorderofthelearnedCIT(A),theassesseeisin appealbeforeus. 15.ThelearnedARbeforeuscontendedthatthedisallowancewithrespectto thedividendincomehastobemadeundertheprovisionsofsection14AoftheAct andthesamecannotbemadeundertheprovisionsofsection36(1)(iii)oftheAct. 16.Ontheotherhand,thelearnedDRvehementlysupportedtheorderofthe authoritiesbelow. ITANo.46/Rjt/2020 A.Y.2016-17 6 17.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Fromtheprecedingdiscussion,wenotethatthe assesseehasborrowedfundsfromthepartnershipfirmwhichwasutilizedfor makingtheinvestmentinaprivatelimitedcompany.Thecontroversyarisesfor ouradjudicationwhetherinterestcostincurredontheborrowedfundusedforthe purposeoftheinvestmentiseligiblefordeductionundersection36(1)(iii)ofthe Act.Theprovisionsofsection36(1)(iii)oftheActmandatethedeductionofthe interestexpensesonthecapitalborrowedifitisusedforthepurposeofthe business.Inthepresentcasewhatwefindisthisthatthemoneyhasbeenused forthepurposeofinvestmentinaprivatelimitedcompany.Undeniably,the assesseeisengagedinthebusinessofmakinginvestmentsinsecurities. Therefore,theassesseehasmadeinvestmentoutoftheborrowedfundina businessasset.Accordingly,weareoftheviewthatsuchaninterestexpense cannotbedisallowedasdeductiontotheassesseeundertheprovisionsofsection 36(1)(iii)oftheAct.Assuchwhentheassesseegeneratesanyexemptedincome, thenifanydisallowanceofinterestiswarrantedthatwillbemadeunderthe provisionsofsection14AoftheAct.Assuch,theprovisionsofsection14Aread withrule8DofIncomeTaxRulescannotbeadoptedwhiledecidingtheissue undertheprovisionsofsection36(1)(iii)oftheAct.Thus,wedonotfindany reasontoupholdtheorderofauthoritiesbelow.Hence,thegroundofappealof theassesseeisherebyalloweddismissed. 18.Intheresult,theappealoftheassesseeisherebyallowed. OrderpronouncedintheCourton08/12/2023atAhmedabad. Sd/-Sd/- (TRSENTHILKUMAR)(WASEEMAHMED) JUDICIALMEMBERACCOUNTANTMEMBER (TrueCopy) Ahmedabad;Dated08/12/2023 Manish,Sr.PS