ASSISTANT COMMISSIONER OF INCOME TAX 4(3)(1), MUMBAI V. M/S.TAURIAN IRON AND STEEL COMPANY PRIVATE LIMITED , MUMBAI

ITA 5890/MUM/2017

AI Insights

The case involves the Income Tax Department appealing against the order of the Commissioner of Income-tax (Appeals) which had provided partial relief to the assessee, Taurian Iron & Steel Co. Pvt Ltd, in various additions made by the Assessing Officer for the assessment year 2011-12. The main issues revolved around the treatment of notional interest on share application money, additions under section 41(1) concerning trade creditors and advances from customers, and the disallowance of losses on forward exchange contracts. The Tribunal examined the submissions and evidence presented, including the nature of transactions and the timing of payments, and found that the CIT(A)'s decisions were justified based on the facts and circumstances of the case.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 108447 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 7 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 17-04-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 14-09-2017
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Bogus purchase; Depreciation; Transfer pricing; Notional interest
• Section: 14A

Judgement Text

1 ITA 5890/Mum/2017 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “J”, MUMBAI BEFORE AMIT SHUKLA (JUDICIAL MEMBER) AND MS. PADMAVATHY S. (ACCOUNTANT MEMBER) I.T.A. No.5890/Mum/2017 (Assessment year 2011-12) ACIT-4(3)(1), Mumbai Room No.649, 6 th Floor, Aayakar Bhawan, Mumbai-400 020 vs The Official Liquidator, Bombay High Court (M//s Taurian Iron & Steel Co. Pvt Ltd, 302A, Poonam Chambeers, A-Wing, 3 rd Floor, Dr. Annie Besant Road, Worli, Mumbai- 400 018 PAN : AAACT4814A APPELLANT RESPONDENT Assessee represented by None Department represented by Shri Vivek A Perampura Date of hearing 18-04-2023 Date of pronouncement -04-2023 O R D E R PER : MS PADMAVATHY S. (AM) This appeal of the Revenue is against order of the Commissioner of Income- tax (Appeals)-58, Mumbai [hereinafter „Ld.CIT(A)] dated 13/07/2017 for the assessment year 2011-12. 2 ITA 5890/Mum/2017 2. None appeared on behalf of the assessee despite issue of notice through RPAD. Therefore, the appeal was heard exparte qua the assessee and is disposed off after hearing the Ld.DR and on perusal of material available on record. 3. The Assessee is a company incorporated under the Companies‟ Act and is engaged in the business of trading and processing of iron ore (mining activity of iron ore on contract basis) and is also engaged in generation of wind power. For the assessment year 2011-12, the assessee filed the original return of income on 29/11/2011 declaring a total income of rs.32,31,14,760/-. The return was subsequently revised to Rs.30,66,47,370/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer during the course of hearing made a reference to the Transfer Pricing Officer (in short, TPO) for determination of arm‟s length price (ALP). The TPO passed an order making a transfer pricing adjustment towards notional interest of advances to AE for Rs.4,70,784/-. The Assessing Officer, besides TP adjustments, also made the following additions:- 1) Rent payable u/s 41(1) Rs. 1,79,33,604/- 2) Unexplained purchases Rs. 1,20,000/- 3) Disallowance of depreciation on car Rs. 22,34,428/- 4) Disallowance under section 14A Rs. 3,10,982/- 5) Advances from customers u/s 41(1) Rs.31,41,92,824/- Aggrieved, the Assessee filed appeal before the CIT(A). The Ld.CIT(A) gave partial relief to the assessee whereby the notional interest on advance to AE was revised to LIBOR (+) 150 bps. For addition made under section 41(1) towards creditors, the Ld.CIT(A) deleted the addition to the ex tent of rs.1,53,46,999/-. 3 ITA 5890/Mum/2017 With regard to the balance amount, the Ld.CIT(A) directed the Assessing Officer to verify the claim of the assessee that the advances have been subsequently written back an offered to tax. With regard to the bogus purchases, the Ld.CIT(A) confirmed the addition to the extent of Rs.60 lakhs and with regard to the balnce, directed the Assessing Officer to rectify the addition since the assessee has offered the balance amount to tax in A.Y. 2012-13. The addition on account of advances to customers under section 41(1, the Ld.CIT(A) gave partial relief to the assessee after examining of various details submitted. With regard to the disallowance of loss on forward contracts, the Ld.CIT(A) gave relief to the assessee on the ground that the losses are arising out of the excess settlement of the contracts. Aggrieved by the relief given by the Ld.CIT(A), the Revenue is in appeal raising the following grounds:- 1. "On the facts and in the circumstances of the case and in law, the Ld.CIT(A) hence erred in directing the AO that only the funds against which no shares have been allotted to the assessee be treated as funds on which the assessee could have earned income. 2. "On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in directing the AO to modify the notional interest charged on treatment u/ share application money as loans and advances ofRs.4, 70,784/-." 3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to delete the addition made u/s 41(1) of Rs.1,53,46,999/- towards trade creditors as assessee has not furnished any documentary evidence to establish that the said creditors were actually been paid subsequently." 4. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to delete the addition made u/s 41(1) of Rs. 26,93,52,341/- toward advance from customers." 5. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the / O to allow losses on forward exchange contract of Rs.l,39,72,500/-." 4 ITA 5890/Mum/2017 6. "The appellant craves leave to amend or alter any ground or add new ground which may be necessary.” Notional Interest on share application money: 4. During the Assessment Year, the assessee has remitted share application money towards subscription to the share capital of the wholly owned subsidiary company for USD 40,20,000. The Assessee was allotted shares of USD 40,80,000. The difference amount of USD 60,000 was remitted by the assessee subsequent to the receipt of share certificate and until the remittance, the amount was kept towards share application money under „loans and advances‟. The TPO has treated the share application money as loans and calculated interest @13%. The Ld.CIT(A) considering the similar facts for earlier assessment year 2008-09 wherein the Tribunal has held that no interest to be charged on the amount which shares have been allotted. The Ld.CIT(A) distinguished the said decision of the Tribunal for the reasons that the amount returned without allotment of shares have to be treated as „loans and advances‟ to AE and accordingly charged interest @LIBOR (+) 150 bps. We find no reason to interfere with the decision of the Ld.CIT(A). Accordingly, this ground of the Revenue is dismissed. Addition under section 41(1) of the I.T Act, 1961: 5. During the course of assessment proceedings, the Assessing Officer sought details of trade creditors where the credit amount is greater than Rs.5 lakhs. The Assessing Officer made the addition under section 41(1) for the reasons that the assessee has not provided the details. The assessee submitted before the Ld.CIT(A) that the Assessing Officer called for details pertaining to creditors whose outstanding is more than Rs.5 lakhs an not below Rs.5 lakhs for which the 5 ITA 5890/Mum/2017 Assessing Officer has made the addition. The assessee also submitted that the Assessing Officer has made the addition. The assessee also submitted that the assessee has discharged the liability towards creditors by actually making the payments subsequently. The Ld.CIT(A), after considering the submissions of the assessee has held that – “6.3 The submission made by the appellant has been examined. With respect to the submission made by the appellant that the Assessing Officer must arrive at a finding that the amounts under discussion are revenue in nature, have been claimed as expenditure / loss / trading liability in the books is concerned, it is seen that the amounts are reflected under the head ‘current liability’and represent amounts in respect of creditors for goods and miscellaneous revenue expenses. The details submitted by the appellant before me also confirm this finding. Further, this is also undisputed that these items on revenue account have already been claimed as deduction in the preceding years. The appellant has not cited any item of expense which has not been claimed as expenditure in current or earlier years. Hence, the objection of the appellant with respect to invocation of section 41(1) of the Act is not found tenable and is rejected. 6.4. However, it is imperative that the conditions mentioned in section 41(1) of the Act are satisfied before an item can be treated as income of the appellant under this provision. This would include either receipt of a benefit in any form including by the way of remission or cessation. A remission or cessation would also include amounts standing as credit which are never meant to be paid. 6.5 With respect to the amount of Rs.1,65,84,952/-, being credits below Rs.5 lakh which have been treated as income, it is seen that the entire amount represents the total current liability in the books of the appellant below Rs.5 lakh. The Assessing Officer has invoked section 41(1) in respect of the entire amount under the plea that no details have been submitted by the assessee, without analyzing whether the conditions of the section are satisfied or not. 6.6. The above amount can be broken into two components – Rs.12,37,951/- being provision for expenses and the remaining amount of Rs.,53,46,999/- being balance with creditors below Rs.5 lakh. With respect to the amount representing provision of expenses, it is seen that the entire amount represents trading expenditure which has been subsequently paid off in the subsequent period. As such, the appellant has not obtained any benefit an hence, the provisions of section 41(1) cannot be invoked with respect to these amounts. 6 ITA 5890/Mum/2017 6.7 The remaining amount of Rs.1,53,46,999/- represents sundry credits below Rs.5 lakh for which the appellant has filed detailed list containing the transaction during the year with respect to these creditors and the final payment details. It is seen that in most of the instances, the amounts have been paid by the appellant in the subsequent years and in some of the cases, the amounts have been written back and offered to tax. The appellant has produced bank account extract evidencing the factum of payments having been made with respect to these credits. With respect to the write off, the appellant has submitted that the amounts have been written off after a management discussion that they are no longer required to be paid and then, they have been offered for taxation. 6.8 Since in majority of the cases, the amounts have been paid to the creditors, there is no justification for invoking section 41(1) of the Act as no benefit has accrued to the appellant in respect of these amounts. In respect of other credits too, these have been offered to tax as an when it has become apparent that they do not represent any liability. In my view, the AO was not justified in invoking section 41(1) merely on the basis of non-submission of details specially when name and address of the creditors had already been furnished. The action of the Assessing Officer is not found justified and the addition of Rs.1,53,46,999/- is directed to be deleted. 6.9 With regard to the two creditors Utkal Minerals (Rs.7,12,730/-) and Shah Brothers (Rs.6,35,924/-), the appellant has filed their ledger accounts. It is seen that the last transaction in the case of Utkal Minerals is in 31 st October, 2010 and in case of Shah Brothers, is on 2/8/2010. After that there is no transaction. The appellant has subsequently proceeded to write off the outstanding amount in FY 2014-15. It is clear that the accounts of these two parties stood clear in Assessment Year 2011-12 itself and the amounts shown as credits against these parties were never required to be paid back. Hence, in respect of these two parties, the AO has correctly invoked the provisions of section 41(1) to bring the amount to tax. The addition under section 41(1) of the Act to the extent of Rs.13,48,654/- is sustained. 6.10 The assessee has submitted that the amount has been offered to tax in Assessment Year 2015-16 and hence, addition of this amount in this year will lead to double taxation in his case. Hence, it is clarified that if the amount is taxed in Assessment Year 2011-12 and the assessee does not escalate the dispute, the Assessing Officer should pass necessary rectification orders in Assessment Year 2015-16 to ensure that the appellant is not subjected to double taxation. The ground is decided accordingly.” 6. After hearing the Ld.DR and on perusal of materials on record, we notice that the assessee has made all the relevant submissions before the 7 ITA 5890/Mum/2017 Ld.CIT(A) which have been duly examined by the Ld.CIT(A) before giving relief. It is also noticed that the main reason for Assessing Officer to make the addition is that the assessee has not furnished the relevant details. It is also noticed that the assessee has furnished name, address and other relevant details before the Ld.CIT(A). Therefore, in our considered opinion, there is no justification for invoking the provisions of section 41(1) by the Assessing Officer and accordingly, we uphold the decision of the Ld.CIT(A) in deleting the addition made under section 41(1) of the Act. Addition made under section 41(1) of the Act towards advance from customers 7. During the assessment proceedings, the Assessing Officer noticed that the assessee has a total credit balance of Rs.32,20,89,738/- under the head ‘ Advance from Customers’. The assessee submitted before the Assessing Officer that these advances related to supply of commodities , since in most cases, the assessee used to take advance before supply of goods and these advances would get settled in subsequent years either through supply of goods or through returns or through adjustment of the amounts. The Assessing Officer concluded that the assessee had not written back or completed the accounts of the parties and accordingly made an addition to the extent ofRs.31,41,92,564/-. The Assessing Officer also observed that the amounts against many of these advances have been written back in the financial years 2014-15. Before the Ld.CIT(A), the assessee filed the details of nature of advances and the reason as to why these advances do not fall within the purview of section 41(1) of the Act. The Ld.CIT(A), after a thorough analysis of the party-wise details submitted by the assessee, confirmed the additions 8 ITA 5890/Mum/2017 with respect to certain parties and also deleted addition with respect to certain parties based on the fact that the assessee has subsequently adjusted the amount of advance against actual supply of materials. In the case where the additions are sustained by the Ld.CIT(A), the Ld.CIT(A) gave a direction to the Assessing Officer to rectify the amount in the subsequent assessment years in which the advances have been written back in order to avoid double taxation. From the perusal of records, we notice that the Ld.CIT(A) has taken into consideration the detailed submissions of the assessee with respect to each of the parties from whom the advances were received and has sustained / deleted the addition by giving a factual finding with respect to the advances received from each of the parties. He also noticed that the basis on which the Assessing Office has made the addition is that the assessee had no intention to pay back the mount and that the same has been written back in subsequent years. However, based on the perusal of records, we notice that the advances have been received by the assessee against supply of goods at a future period and the advances have been written back or returned, if subsequent supply does not take place. Given these, we are of the considered view that the Assessing Officer is not right in invoking the provisions of section 41(1) without going into the merits of the issue. We, therefore, see no reason to interfere with the decision of the Ld.CIT(A) in deleting the addition made under section 41(1) based on facts with respect to each of the parties and accordingly, this ground of the Revenue is dismissed. Disallowance of loss on forward exchange contract 8. The Assessing Officer disallowed the amount of Rs.1,39,72,500/- claimed as forward exchange loss by holding that the amount represents mark 9 ITA 5890/Mum/2017 to market los of future contracts which are open as on the closing date and have no been settled. Before the Ld.CIT(A), the assessee submitted that the loss have been incurred on actual submission of forward contracts and do not represent mark to market loss. The Assessing Officer has allowed these losses on actual settlement and as a matter of consistency, these losses should have been allowed for the year under consideration also. The Ld.CIT(A), after considering the submission of the assessee held that the losses need to be allowed if they represent actual losses on settlement of forward contracts and in this regard directed the Assessing Officer to examine the facts of the issue and if the losses represent losses arising out of actual settlement of forward contracts, then the same may be allowed. 9. The Ld.DR submitted before us that the forex loss arising on forward contracts is a contingent liability and accordingly, the Ld.CIT(A) is not correct in directing the Assessing Officer to allow the losses on forward contracts. 10. We heard the Ld.DR. In our considered opinion, the forex loss arising out of forward contracts which are settled is an ascertained liability and, therefore, should be allowed as a deduction and accordingly, we uphold the decision of the Ld.CIT(A). 10 ITA 5890/Mum/2017 11. In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on _____/04/2023. (AMIT SHUKLA) (PADMAVATHY S) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dt : April, 2023 Pavanan प्रतितिति अग्रेतििCopy of the Order forwarded to : 1. अिीिार्थी/The Appellant , 2. प्रतिवादी/ The Respondent. 3. आयकर आयुक्त CIT 4. तवभागीय प्रतितिति, आय.अिी.अति., मुबंई/DR, ITAT, Mumbai 6. गार्ड फाइि/Guard file. BY ORDER, //True Copy// Asstt. Registrar / Senior Private Secretary ITAT, Mumbai