The DCIT, Central Circle-2(4), Ahmedabad V. M/s. Zaveri & Co, Ahmedabad

ITA 669/AHD/2007

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80479 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 year(s) 8 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 13-10-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 12-02-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income
• Section: 14A; 10B; 145; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH AHMEDABAD , BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER. ITA.NO.470 & 669/AHD/2007 (ASSESSMENT YEAR:2004-05) M/S. ZAVERI & CO., SWAGAT BUILDING, C.G. ROAD, AHMEDABAD. APPELLANT VS. ASSTT. COMMISSIONER OF INCOME TAX,CENTRAL CIRCLE-2(4), AHMEDABAD. RESPONDENT AND ASSTT. COMMISSIONER OF INCOME TAX,CENTRAL CIRCLE-2(4), AHMEDABAD. APPELLANT VS. M/S. ZAVERI & CO., SWAGAT BUILDING, C.G. ROAD, AHMEDABAD. RESPONDENT PAN: AAAFZ0785D I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 2 / BY REVENUE :SHRI SUBHASH BAINS, CIT D.R. / BY ASSESSEE : SHRI M. K. PATEL WITH SHRI JAYESH C. CHAREDALAL,A.R. /DATE OF HEARING :13.10.2014 !'# /DATE OF PRONOUNCEMENT :31.10.2014 ORDER PER SHAILENDRA KUMAR YADAV, JM: THESE CROSS APPEALS ARE ARISING OUT FORM THE ORDER OF LD. CIT(A)-III, AHMEDABAD, DATED 27.11.2006 FOR THE ASS ESSMENT YEAR 2004-05. SO, THEY ARE BEING DISPOSED OF BY WAY OF THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. IN ITA NO. 470/AHD/2007, ASSESSEE HAS RAISED FOL LOWING GROUNDS: 1. THAT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) III, AHMADABAD OUGHT TO HAVE DELETED THE ENTIRE ADDITION OF RS. 7,15,982/- MADE BY THE LEARN ED ASSESSING OFFICER ON THE GROUND OF ALLEGED UNDISCLOSURE OF EXCESS STOCK OF ORNAMENTS INSTEAD O F GRANTING ONLY PARTIAL RELIEF OF RS.2,75,343/-. 2. THE ADDITION RETAINED RS.4,20,639/- BE DELETED T HE SAME BEING UNWARRANTED OF FACT, BAD IN LAW AND AGAINST EVIDENCE AND EXPLANATION OF THE APPELLANT. I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 3 2.1. IN ITA NO. 669/AHD/2007, REVENUE HAS RAISED FO LLOWING GROUNDS: 1. THE LD. CIT(APPEAL) ERRED IN LAW AND ON FACTS I N PARTIALLY DELETING ADDITION OF RS. 2,95,243/- MADE ON ACCOUNT OF DIFFERENCE IN VALUATION OF STOCK FOUND DURING SEARCH. 2. THE LD. CIT(APPEAL) ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS. 2,29,45,449/- MADE ON ACCOUNT OF INTEREST LOADING CHARGES. 3. THE LD. CIT(APPEAL) ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS. 61,467/- MADE ON ACCOUNT O F DISALLOWANCE OF INTEREST. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER ON THE ABOVE POINTS 3. THE ASSESSEE IS A MANUFACTURER AND TRADER OF JEW ELLERY, BULLION, SILVER ARTICLES AND OF SHARES/SECURITIES W AS SUBJECTED TO ACTION U/S. 132 OF THE ACT, AT ITS BUSINESS PREMISE S ON 18/12/2003. ITS PARTNERS WERE ALSO SEARCHED. IN I TS RETURN OF INCOME FOR A.Y. 04-05, LOSS OF RS.41,28,52,779/- WA S DECLARED. IN THE ASSESSMENT PROCEEDINGS, ASSESSING OFFICER NO TED THAT DIFFERENCE WAS FOUND IN THE STOCK AS PER BOOKS OF A CCOUNT AND AS PHYSICALLY INVENTORISED AT TIME OF SEARCH, FOR WHIC H THE PARTNER SHRI ZAVERILAL OFFERED THE INCOME OF RS.75 LACS FOR TAXATION, DETAILS OF WHICH ARE AS UNDER: ORNAMENTS RS.48.49 LAKH DIAMONDS RS. 28 LAKH I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 4 FOR ANY ERROR RS.1.11 LAKH RS. 75 LAKH. 3.1 THE VALUE OF NET DIFFERENCE OF 8949.7 GMS OF GO LD ORNAMENTS WAS OFFERED @ RS. 543/- PER GRAM WHICH IS THE AVERA GE OF THE OPENING STOCK AND PURCHASES MADE DURING THE YEAR. THE ASSESSING OFFICER FELT THAT THE VALUE SHOULD HAVE B EEN TAKEN AT RS. 623/- PER GRAM (I.E. AS PER ANNEXURE TF OF VALU ATION REPORT) AND SO THE DIFFERENCE OF RS.80/- PER GRAM FOR 8949. 7 GM. I.E. RS. 7,15,982/- AMOUNTED TO UNDER DISCLOSURE OF EXCESS S TOCK OF GOLD ORNAMENTS. THE ASSESSING OFFICER REJECTED THE CONT ENTIONS, THAT AVERAGE VALUE WAS THE MOST APPROXIMATE METHOD OF VA LUING. THE ASSESSING OFFICER FELT THAT SINCE THERE WAS NO EVID ENCE OF THE DATE OF ACQUISITION OF THE ORNAMENTS, THE PREVAILING MAR KET RATE, ON DATE OF SEARCH WAS APPROPRIATE AND ADDITION OF RS.7 ,15,982/- WAS MADE. 3.2 MATTER WAS CARRIED BEFORE THE FIRST APPELLATE A UTHORITY WHEREIN VARIOUS CONTENTIONS WERE RAISED ON BEHALF O F THE ASSESSEE AND HAVING CONSIDERED THE SAME CIT(A) FOUN D THAT METHOD ADOPTED FOR ARRIVING AT COST WAS BEING CONSI STENTLY FOLLOWED AND ACCEPTED. THE DECISION OF THE ITAT, D ELHI IN CASE OF R.P. BAKSHI WAS APPLICABLE TO THE FACTS OF THE ASSE SSEES CASE, WHEREIN IT WAS HELD AS UNDER: THE ASSESSEE FIRM HAS ADOPTED THE METHOD OF STOCK VALUATION BY TAKING COST ARRIVED BY AVERAGING YEARL Y COST OF PURCHASE INCLUDING OPENING STOCK. IN SUPPORT OF TH E SAME, IT HAS CITED THE DECISION OF ITAT DELHI BENCH IN TH E CASE OF R.P. BAKSHI VS. INCOME-TAX OFFICER REPORTED IN 39 T TJ (DEL) 202. THE ARGUMENTS OF THE ASSESSEE FIRM TO VALUE T HE I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 5 DISCLOSED STOCK AT AVERAGE PURCHASE PRICE DURING TH E YEAR ARE THEREFORE NOT ACCEPTABLE. 3.3 CIT(A) FURTHER OBSERVED THAT WHILE AVERAGE RATE ADOPTED BY THE ASSESSEE WAS RS. 543/- GM., TILL THE DATE OF SE ARCH, AVERAGE RATE ACTUALLY WORKED OUT TO RS.590/- PER GRAM FOR T HE PREVIOUS YEAR AND TOTAL PURCHASES OF 46526 KG. OF GOLD. THE BULK OF PURCHASES HAD BEEN THROUGH/FROM STC/MMTC/LCS. IN OTHER WORDS, THE RATE OF LANDED GOLD WITH REFERENCE TO IT S PAYMENT WHEN MADE, WAS KNOWN BEFORE HAND. HENCE, CIT(A) THOUGHT IT APPROPRIATE TO ADOPT THE RATE AT RS. 590/- PER GM. IN STEAD OF RS.543/- ON UNDISCLOSED STOCK. THIS WORKS OUT TO 4 3 PER GM. ADDITIONAL AS SUCH ADDITION MADE BY ASSESSING OFFIC ER WAS RESTRICTED TO RS.4,20,639/- AND ASSESSEE WAS GRANTE D RELIEF OF RS.2,95,343/-. 3.4 BOTH THE PARTIES ARE BEFORE US ON THIS GROUND. THE STAND OF ASSESSEE HAS BEEN THAT THE REASONS FOR DISCREPANCY IN STOCK FOUND/ENTERED IN BOOKS, WAS DUE TO RECORDING OF INC ORRECT GROSS/NET WEIGHT AND THE ESTIMATES TAKEN AS ALSO TH E TREATMENT OF ROUGH DIAMONDS (VILANDI) AS CUT/FINISHED ONES. NEVERTHELESS THE ASSESSEE OFFER/SURRENDER WAS MADE U/S. 132(4). THE VALUE WAS WORKED OUT BY TAKING AVERAGE OF OPENING STOCK A ND PURCHASES FROM 1/4/2003 TILL 17/12/2003. THIS HAS BEEN THE REGULAR METHOD ADOPTED AND HAS BEEN ACCEPTED BY ASS ESSING OFFICER IN THE CURRENT YEAR AS WELL AS IN EARLIER A SSESSMENT YEARS. SO, HE REQUESTED TO DELETE THE ADDITION OF RS.4,20, 639/-. ON THE OTHER HAND, LD. D.R. SUPPORTED THE ORDER OF ASSESSI NG OFFICER. I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 6 3.5 AFTER GOING THROUGH THE RIVAL SUBMISSIONS AND M ATERIAL ON RECORD. WE ARE NOT INCLINED TO INTERFERE WITH THE FINDING OF CIT(A). THE METHOD ADOPTED FOR ARRIVING AT COST WAS BEING C ONSISTENTLY FOLLOWED AND ACCEPTED VIDE AVERAGE RATE ADOPTED BY THE ASSESSEE WAS RS.543/- GM. TILL THE DATE OF SEARCH, AVERAGE R ATE ACTUALLY WORKED OUT RS.590/- PER GM. FOR PREVIOUS YEAR, ON T OTAL PURCHASES OF 46526 KG. OF GOLD. PURCHASES ARE MAIN LY FROM STC/MMTC. THE RATE OF LANDED GOLD WITH REFERENCE T O ITS PAYMENT WHEN MADE WAS KNOWN TO THE ASSESSEE. UNDER THESE CIRCUMSTANCES, CIT(A) PREFERRED TO ADOPT THE RATE O F RS. 590/- PER GM. IN STEAD OF RS.543/- ON UNDISCLOSED STOCKS. AC CORDINGLY, CIT(A) RIGHTLY ALLOWED PARTIAL RELIEF OF RS. 2,95,3 43/- AND THUS, RESTRICTED THE ADDITION MADE BY THE ASSESSING OFFIC ER TO RS. 4,20,639/-. THIS REASONED FINDING OF CIT(A) NEED N O INTERFERENCE FROM OUR SIDE. THIS TAKE CARE OF GROUND RAISED BY ASSESSEE AS WELL AS REVENUE IN ITS APPEAL. 4. NEXT ISSUE IN REVENUES APPEAL IS WITH REGARD TO ADDITION OF RS.2,29,45,449/- MADE ON ACCOUNT OF INTEREST LOADI NG CHARGES. ASSESSING OFFICER OBSERVED THAT ASSESSEE PURCHASED GOLD AGAINST LC FOR WHICH FDRS. WERE PURCHASED. VIDE LETTER DATE D 30/08/2005, ASSESSING OFFICER INQUIRED AS TO WHY TH E PURCHASE PRICE OF BULLION BE NOT TREATED AS INFLATED AND WHY THE INTEREST ON FDR NOT BE CONSIDERED FOR THE FULL PERIOD OF ONE YE AR AND/OR PURCHASES BE NOT REDUCED BY INTEREST RECEIVABLE FOR PERIOD OF ONE YEAR FROM DATE OF DEPOSIT. ASSESSING OFFICER CONSI DERED THE REPLY ON BEHALF OF THE ASSESSEE DATED 24/11/2005 AND OBSE RVED THAT I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 7 BULLION PURCHASED AT HIGHER RATE ON L/C WAS SOLD AT A LESSER PRICE, AND THEREBY INCURRED LOSS AS UNDER: SALES PURCHASES GROS S LOSS 2318,35,94,155 2404,06,00,896 RS.85,70,06,141/ - THE ASSESSING OFFICER FELT THAT THE ASSESSEE FIRM H AS PROBABLY INFLATED THE PURCHASE PRICE BY THE INTEREST COMPONE NT INVOLVED THEREIN. STAND OF ASSESSEE HAS BEEN THAT PURCHASE PRICE PAID BY IT TO THE GOVERNMENT NOMINEE/AGENCIES, I.E. MMTC AN D STC WAS A COMPOSITE FIGURE, NOT CAPABLE OF BEING SEGREGATED INTO INTEREST COMPONENT AND COST. IT WAS AGREED UPON A LUMP SUM BASIS. THERE WAS NO INHERENT OR EXPLICIT UNDERSTANDING, AG REEMENTS OR TERMS SETTLED OR INTEREST, LEAVE APART THE RATE AND QUANTUM OF INTEREST. THE SALES TAX WAS RECOVERED BY STC/MMTC ON THE SALE PRICE MENTIONED IN THE INVOICE. THE BONAFIDES OF T HE TRANSACTIONS WERE NOT DOUBTED AND SINCE THESE WERE GENUINELY ENT ERED IN THE ORDINARY COURSE OF BUSINESS (AND NOT VIOLATIVE OF A NY LEGAL PROVISIONS/RBI GUIDELINES, ETC.) THE EXPENDITURE DE BITED AS PURCHASE PRICE WAS TO BE ALLOWED AS SUCH. IT WAS C ONTENDED THAT INVOICE PRICE (AS PER BILLS OF STC/MMTC) COULD NOT BE ARTIFICIALLY OR HYPOTHETICALLY BIFURCATED INTO COST AND INTER EST SIMPLY BECAUSE THE INVOICE/PURCHASE PRICE WAS TO BE PAID A FTER A CERTAIN PERIOD OF TIME. MOREOVER, THE INVOICE/PURCHASE PRI CE WAS INDEPENDENT OF THE INTERNATIONAL PRICE OF BULLION D UE TO PURCHASES BEING MADE AGAINST L/C. THE INVOICE/PURC HASE PRICE WAS ALSO NOT LINKED TO THE INVESTMENT IN FDRS. AFT ER CONSIDERING THE OBJECTION ON BEHALF OF THE ASSESSEE, ASSESSING OFFICER OBSERVED THAT ASSESSEE REPEATEDLY MADE BULLION PURC HASE AT RATE I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 8 HIGHER THAN THE INTERNATIONAL BULLION SPOT RATES AN D SOLD THE SAME, REPEATEDLY BELOW THE PURCHASE PRICE. IT SIMP LY EVADES LOGIC NOT TO CONCLUDE THAT THE INVOICE PRICE IS LO ADED WITH INTEREST COMPONENT. ASSESSING OFFICER CONCEDED THA T INTEREST COMPONENT CANNOT BE DERIVED FROM THE SALE INVOICE B UT HE DID NOT RULE OUT THE COMPONENT OF INTEREST IN IT. THE DIFF ICULTY IN QUANTIFYING/BIFURCATING THE INTEREST COMPONENT IN T HE PURCHASE PRICE DID NOT DETER HIM FOR COMPUTING/QUANTIFYING I T. FOR DOING SO, HE NOTED THE DAILY RATES OF LIBOR FROM A WEBSIT E IN UNITED KINGDOM AND APPLIED IT TO THE NET PURCHASE PRICE (W ORKED OUT BY HIM AT RS.23,30,96,62,826/-) FROM THE DETAILS OBTAI NED FROM ASSESSEE (OF THE PURCHASE VALUE, CUSTOM DUTY, SALE TAX, SERVICE CHARGE ETC.). BY APPLYING LIBOR RATES ON THE NET P URCHASE VALUE, THE ASSESSING OFFICER WORKED OUT INTEREST LOADING A T RS.34,96,44,992/-. ASSESSING OFFICER THEN NOTED TH E QUANTUM OF INTEREST EARNED ON FDR (PURCHASE BY THE APPELLANT F OR OBTAINING LCS) IN THE PERIOD RELEVANT TO A.Y. 2004-05/2005-06 ON THE BASIS OF INTEREST EARNED ON FDRS. IN THE PREVIOUS YEARS RELEVANT TO A.Y. 2004-05/2005-06, ASSESSING OFFICER NOTED THAT THE EXPENSES INCURRED ON ACCOUNT OF INTEREST LOADING OF RS.34,96 ,44,942/- ALSO PERTAINS TO INTEREST INCOME SHOWN OF RS.84,50,73,57 2/- IN A.Y. 05-06. THE GROSS LOSS SHOWN RS.85,70,06,141/- THER EFORE DOES NOT GIVE THE CORRECT TRADING RESULT OF THE BULLION TRANSACTION AS PER BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE. THE EXPENSES ON ACCOUNT OF LIBOR INTEREST LOADING ARE THEREFORE REQUIRED TO BE DEDUCTED PROPORTIONATELY IN THE RATIO OF 44:84 FOR THE A.Y. 2004- 05 & A.Y. 05-06 RESPECTIVELY. I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 9 4.1 AS PER ASSESSING OFFICER EXPENSES WERE INCURRED BY ASSESSEE PROBABLY TO ACHIEVE A HIGHER TURNOVER, GRE ATER BARGAINING POWER UNIT BANK / AGENCIES / GREATER MAR KET REPUTATION / OTHER CONSIDERATIONS BENEFICIAL TO ASS ESSEES BUSINESS. ASSESSING OFFICER ALLOCATED THESE EXPENSE S IN THE PROPORTION OF 44:84 TO TWO ASSESSMENT YEARS. ASSESS ING OFFICER HAD NOTED THE INTEREST EARNED AS RS. 44,36,47,595/- FOR A.Y. 2004-05 AND RS.84,50,73,572/- FOR A.Y. 05-06 AND HE NCE THE PROPORTION 44:84. THE APPORTIONMENT OF THE EXPENSES OF RS.3,49,64,494/- WAS ALSO MADE BY HIM ACCORDINGLY I .E. RS.1,20,19,045/- AND RS.2,29,45,449/-. ACCORDING T O ASSESSING OFFICER THE EXPENSES ATTRIBUTABLE TO EARNING OF INT EREST ON BANK FDRS.(RS.3,49,64,494/-) WERE ALLOWABLE IN THE PROPO RTION OF 44:84 IN A.Y. 04-05 AND 05-06 I.E. RS.1,20,19,045/- AND RS.2,29,45,449/- RESPECTIVELY. THEREFORE, HE DISAL LOWED THE AMOUNT OF RS.2,29,45,449/- IN RESPECT OF A.Y. 2004- 05. 4.2 IN PRESENT APPELLANT PROCEEDING, ASSESSEE REFER RED TO HIS REPLY/EXPLANATION FILED BEFORE THE ASSESSING OFFICE R WHO FILED VARIOUS LETTERS DATED 20/09/2005, 30/09/2004 AND SO ON. INTER ALIA SUBMITTED THAT ASSESSEE HAD ACTED WITHIN THE L EGAL FRAME WORK ESPECIALLY THE GUIDELINES OF RBI IMPORT/EXPORT POLICY OF GOVERNMENT OF INDIA AND DEALT ONLY WITH/THROUGH THE APPROVED NOMINEES I.E. MMTC AND STC. IT HAD FOLLOWED THE ES TABLISHED ACCOUNTING PRINCIPLES. THE TRANSACTIONS RELATING T O PURCHASE/SALE OF GOLD WERE ALL REAL AND GENUINE. A SSESSEE FILED CERTIFICATES OF STC, UTI BANK, ICICI BANK, INDUSTRI AL BANK TO ESTABLISH THAT THE IMPORT OF GOLD IN F.Y. 2003-04 A ND 2004-05 I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 10 WAS ALLOWED THROUGH NOMINATED AGENCIES NAMELY, MMTC , HHEC, STC FOR SUPPLY TO NON-EXPORTERS WITHOUT ANY EXPORT OBLIGATIONS. 4.3 THE CHRONOLOGY/SEQUENCE OF EVENTS IN THE PURCHA SE OF GOLD FROM STC/MMTC WAS EXPLAINED AS FOLLOWS : (A) ZAVERI & CO. (BUYER INDIAN PARTY) APPROACHES ST C- AHMEDABAD FOR PURCHASE OF GOLD. (B) STC-AHMEDABAD PLACES ORDER WITH FOREIGN SUPPL IER AT DUBAI, U.A.E. OR OTHER COUNTRIES. (C) THE BUYER INDIAN PARTY MAKES ADVANCE PAYMENT T O STC-A AHMADABAD. (D) STC- AHMEDABAD OPENS A LETTER OF CREDIT (L/C) W ITH INDIAN BANK FOR THE REQUIRED AMOUNT.(AFTER 30-09-2003). P RIOR TO 30-09-2003 BUYER INDIAN PARTY OPENS L/C ON REQUEST AND ON AUTHORITY OF STC. (E) STC- AHMEDABAD MAKES FDR OF THIS ADVANCE PAYMEN T RECEIVED. THIS FDR IS PLEDGED BY STC- AHMEDABAD FO R OPENING LETTER OF CREDIT WITH L/C OPENING BANK. THE FDR WILL BE FOR A TERM OF ONE YEAR. UPTO 30-09-2003 TH E FDR IS PLACED BY INDIAN PARTY. (F) THE FOREIGN SUPPLIER SHIPS THE GOLD TO STC- AHM EDABAD THROUGH AIR CARGO. (G) GOLD CONSIGNMENT ARRIVES AT AHMEDABAD AIRPORT. (H) STC- AHMEDABAD AUTHORISES BUYER-PRIVATE PARTY TO COLLECT THE GOLD FROM CONCERNED AIRLINES. (I) STC- AHMEDABAD ARRANGES TO PAY THE CUSTOMS DUT Y. (J) BUYER-PRIVATE PARTY TAKES DELIVERY OF GOLD. I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 11 (K) AS PER TERMS AND CONDITIONS OF L/C, THEPAYMENT TO FOREIGN SUPPLIER IS TO BE MADE BY STC- AHMADABAD. (L) THE STC- AHMEDABAD IS REQUIRED TO PAY A HIGHER PURCHASE PRICE (AS COMPARED TO THE INTERNATIONAL GOLD RATE P REVAILING ON DATE OF SHIPMENT) TO THE FOREIGN SUPPLIER DUE TO THE CREDIT ALLOWED TO STC- AHMEDABAD. THE FOREIGN SUPPL IER ISSUES INVOICE IN THE NAME OF STC- AHMEDABAD. 4.4 APART FROM THE AFOREMENTIONED CHORONOLOGY, THE OTHER EVIDENCE, FOR PROVING THAT GOODS WERE PURCHASED FRO M STC/MMTC ONLY AND NOT THE FOREIGN PARTY, WERE (A) SALES INVOICE ISSUED TO US BY STC, (B) DELIVERY ORDER ISSUED BY STC. (C) CUSTOMS DUTY PAYMENT BY STC AND CHALLAN (BILL O F ENTRY) IN THE NAME OF STC. (D) SALES TAX CHARGED BY STC IN THE SALE BILL. (E) LETTER OF AUTHORITY GIVEN TO PARTY BY STC TO OP EN L/C AND MAKE PAYMENT TO SUPPLIER (OF STC) DIRECTLY. WITHOU T SUCH LETTER OF AUTHORITY, PAYMENTS TO SUPPLIER OF STC WA S NOT POSSIBLE AND THE PAYMENT WAS MADE ONLY ON REQUEST O F STC AND FOR CONVENIENCE OF STC. (F) THE FDRS ARE PLACED BY PARTY AS MARGIN MONEY FO R ENABLING THEM TO OPEN L/C AS PER LETTER OF AUTHORIT Y OF STC, (G) AS PER THE TERMS WITH STC PARTY GOT CREDIT OF 3 65 DAYS HENCE PARTY HAD TO MAKE PAYMENT ONLY THEN AND HENCE THE MONEY REALISED BY PARTY FROM SALES IS DEPOSITED IN FDR AS MARGIN MONEY TO OPEN L/C, FOR DISCHARGE OF THEIR LI ABILITY TO PAY PURCHASE CONSIDERATION AT A FUTURE DATE. I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 12 ACCORDINGLY PURCHASE PRICE DEBITED IS AS PER THE IN VOICE OF MMTC/STC WHICH WERE GOVERNMENT UNDERTAKINGS. HENCE THE SALE PRICE OF BULLION SOLD BY MMTC/STC TO US, IN TU RN BECOMES OUR PURCHASE PRICE AND CAN'T BE SAID TO BE INFLATED . 13. ASSESSEE ALSO DISPUTED THE A.O.'S PROPOSAL TO T AX INTEREST OF THE FULL TERM OF FDR IN THE CURRENT YEAR. THIS PREP ONEMENT WAS AGITATED ON THE FOLLOWING GROUNDS : (A) INTEREST ACCRUES ON THE BASIS OF EFFLUX OF TIME I.E. IT KEEPS ON ACCRUING ON EACH DAY, AND NOT IN ADVANCE O N THE DATE OF MAKING THE FDR. SECTION 4 OF THE INCOME TAX ACT PERMITS THE LEVY OF TAX ONLY ON THE INCOME CHARGEABLE TO TAX DURING THE 'PREVIOUS YEAR'. SECTION 3 DEFINES THE TERM 'PREVIOUS YEAR'. ACCORDINGLY THE PERIOD OF FINANCIAL YEAR I.E. APRIL TO MARCH IS THE PREVIOUS YEAR. THUS FOR I.T.A.Y. 2004- 05 THE 'PREVIOUS YEAR' IS THE 12 MONTH ' PERIOD FROM 01- 04-2003 TO 31-03-2004. SECTION 5 PROVIDES FOR THE 'SCOPE OF TOTAL INCOME'. SECTION 5(1) READS AS UNDER : '5 (1) SUBJECT TO THE PROVISIONS OF THIS ACT, THE T OTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH (A)IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON : OR (B) ACCURES OR ARISES OR IS DEEMED TO ACCURE OR ARI SE TO HIM IN INDIA DURING SUCH YEAR : OR (C) ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING S UCH YEAR: I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 13 PROVIDED THAT, IN THE CASE OF A PERSON NOT ORDINARI LY RESIDENT IN INDIA WITHIN THE MEANING OF SUB-SECTIO N(6)* OF SECTION 6, THE INCOME WHICH ACCRUES OF ARISES OF HIM OUTSIDE INDIA SHALL NOT BE SO INCLUDED UNLESS IT IS DERIVED FROM A BUSINESS CONTROLLED IN OR A PROFESSI ON SET UP IN INDIA.' THUS IF ANY INCOME HAS EITHER : (I) ACCRUED OR (II) ARISEN OR (III) RECEIVED DURING THE PREVIOUS YEAR, THEN ONLY IT WILL BE CHAR GEABLE TO TAX. THE 'ACCRUAL' OF INCOME WILL BE DETERMINED BY THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE AS PROVIDED BY SECTION 145 OF THE INCOME TAX ACT. ASSESSED CLAIMS TO HAVE BEEN CONSISTENTLY FOLLOWING 'MERCANTILE METHOD OF ACCOUNTING'. UNDER THE SAID METHOD THE INTEREST UPTO 31-03-2004 CAN ONLY ACCRUE FOR PREVIOUS YEAR 2003-04 (I.T.A.Y. 2004-05). ACCORDING LY IN ASSESSEES CASE INTEREST ON FDR UPTO 31-03-2004 HAS ONLY ACCRUED FOR I.T.A.Y. 2004-05. WE HAVE SHOWN AS INCO ME THE INTEREST ACCRUED UPTO 31-03-2004. ASSESSEE RELIED ON THE FOLLOWING CIRCULARS ISSUED B Y CBDT. (A) INTEREST ON REINVESTMENT DEPOSIT SCHEMES, RECUR RING DEPOSIT SCHEMES, CASH CERTIFICATES, ETC. --ACCRUAL OF INTEREST DEPARTMENTAL CIRCULAR, -'SEVERAL BANKS ARE ACCEPTIN G DEPOSITS UNDER THE REINVESTMENT DEPOSIT SCHEMES, RE CURRING DEPOSIT SCHEMES, CASH CERTIFICATES AND SIMILAR SCHE MES. THESE SCHEMES HAVE BEEN EVOLVED TO PROVIDE THE PUBL IC WITH AN ATTRACTIVE MEDIUM OF INVESTMENT AND SIMULTANEOUS LY MOBILISE SAVINGS. I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 14 UNDER THESE SCHEMES, A DEPOSITOR INVESTS A SUM OF M ONEY FOR A CERTAIN PERIOD OF YEARS AND AT THE END OF THE CONTRACTED PERIOD, A LUMP SUM PAYMENT IS MADE TO HIM. THIS LUM P SUM AMOUNT COMPRISES OF THE PRINCIPAL AMOUNT AND TH E INTEREST EARNED THEREON, NORMALLY, THE INTEREST IS CREDITED TO THE DEPOSITOR'S ACCOUNT AT PERIODICAL INTERVALS, BU T HE IS NOT ENTITLED TO COLLECT SUCH INTEREST UNLESS HE DECIDES TO TERMINATE THE DEPOSIT. IT HE DECIDES TO TERMINATE T HE DEPOSIT, HE IS ENTITLED TO RECEIVE BACK THE PRINCIPAL AMOUNT PLUS INTEREST THEREON ALTHOUGH AT A REDUCED RATE. THE QUESTION FOR CONSIDERATION IS WHETHER THE INTER EST AT THE STIPULATED, RATE EARNED ON THE PRINCIPAL AMOUNT CAN BE SAID TO HAVE ACCRUED ANNUALLY AND IF SO WHETHER A DEPOSI TOR IS' ENTITLED TO CLAIM THE BENEFIT OF DEDUCATIONS UNDER SECTION SOL OF THE INCOME-TAX ACT. 1961, IN RESPECT OF SUCH INTEREST WHICH HAS ACCRUED. GOVERNMENT HAS DECIDED THAT INTEREST FOR EACH YEAR CALCULATED AT THE STIPULATED RATE WILL BE TAXED AS INCOME ACCRUED IN THAT YEAR. THE BENEFIT OF DEDUCTIONS UND ER SECTION SOL OF THE INCOME TAX ACT, 1961, WILL BE AV AILABLE ON SUCH INTEREST.' (CIRCULAR NO. 243, DATED 22ND JU NE, 1978). (B) INTEREST ON CUMULATIVE DEPOSIT SCHEMES OF GOVER NMENT UNDERTAKINGS-TAXABILITY-DEPARTMENTAL CIRCULAR.- ' T HE ISSUE REGARDING TAXABILITY OF INTEREST ON CUMULATIVE DEPO SIT SCHEMES ANNOUNCED BY GOVERNMENT UNDERTAKINGS HAS BE EN CONSIDERED BY THE BOARD. THE POINT FOR CONSIDERATIO N IS WHETHER INTEREST ON CUMULATIVE DEPOSIT SCHEME WOULD BE TAXABLE ON ACCRUAL BASIS FOR EACH YEAR DURING WHICH THE DEPOSIT IS MADE OR ON RECEIPT BASIS IN THE YEAR OF RECEIVING THE TOTAL INTEREST. THE CENTRAL GOVERNMENT HAS DECIDED THAT THE INTERES T ON CUMULATIVE DEPOSIT SCHEMES OF GOVERNMENT UNDERTAKIN GS SHOULD BE TAXED ON ACCRUAL BASIS ANNUALLY. THE GOVERNMENT UNDERTAKINGS WILL INTIMATE THE ACCRU ED INTEREST TO THE DEPOSITORS SO AS TO ENABLE THEM TO DISCLOSE IT IN THEIR RETURNS OF INCOME FILED BEFO RE THE I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 15 INCOME-TAX AUTHORITIES.' CIRCULAR NO.371, DATED 21S T NOVEMBER, 1983.) BOTH THESE CIRCULARS ARE SQUARELY APPLICABLE TO FAC TS OF OUR CASE. THESE CIRCULARS CLEARLY LAY DOWN THAT INTERES T FOR EACH PREVIOUS YEAR HAS TO BE CALCULATED, WHICH IS TO BE INCLUDED IN TOTAL INCOME. IN VIEW OF THE ABOVE INTEREST FOR FULL TERM OF DEPO SIT IS INTEREST ACCRUING AFTER 31-03-2004 CANNOT BE BROUGH T TO TAX IN I.T.A.Y. 2004-05. (C) THE PROPOSAL OF A.O. ABOUT PURCHASES TO BE REDU CED BY INTEREST FOR FULL TIME WAS ALSO CONTESTED AS FOLL OWS : PLEASE NOTE THAT THE PURCHASES CANNOT BE REDUCED BY INTEREST ACCRUING ON FDR. BOTH THE TRANSACTIONS ARE SEPERATE. THE TRANSACTION OF PURCHASE ENDS AS SOON AS THE BUL LION IS DELIVERED TO US. THE INTEREST RECOVERED FROM FDR IS A SEPERATE TRANS ACTION. THE TRANSACTION OF PURCHASE OF BULLION IS NOT THE G ENESIS OF FDR INTEREST. THE FDR INTEREST IS EARNED OUT OF MARGIN MONEY- FDR FOR OPENING L/C. FURTHER IT MAY BE NOTED THAT INTEREST WHICH IS GOIN G TO ACCRUE AFTER 31-03-2004 CANNOT AT ALL BE CONSIDERED FOR ANY PURPOSE WHILE DETERMINING INCOME OF I.T.A.Y. 2004-0 5. HENCE PURCHASE PRICE CANNOT BE REDUCED BY INTEREST AT ALL, LEAVE ASIDE THE INTEREST ACCRUING AFTER THE END OF PREVIOUS YEAR ENDED 31-03-2004. (D) MOREOVER, THERE IS OVERALL PROFITS IF THE S UM EFFECT OF LOSS ARISING FROM PURCHASES/SALES OF GOLD IS CONSIDERED IN RELATION TO THE EARNING OF INTEREST, SEEN AS UNDER : TOTAL PURCHASES FROM MMTC/SRC/OTTY TOTAL SALES AMOUNT GROSS LOSS 1 INTEREST UPTO MARCH, INTEREST AFTER MARCH, NET SURPLUS I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 16 , AMOUNT 04 A.Y. 04-05 04 A.Y. 05-06 39948KGS 24040600896 23183594 755 - 85,70,06 141 44,36,47 595 845073 572 431715 026 4.5 CIT(A) HAVING CONSIDERED THE CONTENTIONS RAISED BY ABOVE LETTERS AND ARGUMENTS ADVANCED IN THE APPELLATE PRO CEEDING OBSERVED THAT ASSESSEE PURCHASED GOLD FROM MMTC AND STC WITHIN THE LEGAL FRAMEWORK LAID DOWN BY THE RBI, TH E IMPORT- EXPORT POLICY ETC. IT PURCHASED FDRS, FROM OUT OF SALE PROCEEDS AND BANK OVERDRAFTS FOR PLACING THEM AS MARGIN MONE Y AGAINST THE OPENING OF LCS. THE PURCHASES PRICE OF GOLD AG AINST LCS, WHICH WERE FOR A TERM OF 365 DAYS, WAS HIGHER THAN THE PRICE OF SPOT PURCHASES. SINCE THE PURCHASES WERE MADE AGAI NST THE LCS, THE PURCHASE PRICE HAD TO BE PAID ACCORDINGLY. THE PURCHASED GOLD WAS HOWEVER SOLD AT SPOT PRICES I.E. AGAINST I MMEDIATE PAYMENT. THIS RESULTED IN A TRADING LOSS. THE PUR CHASES/SALES HAVE NOT BEEN DISPUTED AND NO DISCREPANCY WAS FOUND IN THE CLAIM OF TRADING LOSS, ALSO. THE APPLICABILITY AND APPROPRIATENESS OF LIBOR IN THE FACTS AND CIRCUMSTANCES OF THE ASSE SSEE, HAD NOT BEEN ESTABLISHED BY THE ASSESSING OFFICER. MOREOV ER, HIS ATTEMPT TO SEGREGATE COST AND INTEREST COMPONENT IN THE PURCHASE PRICE, DESPITE HIS OWN CONFUSION (EXPRESSE D IN PARA 9 OF THIS ORDER), WAS CONTRARY TO THE FACTS AND JUDICIAL DECISION IN THIS REGARD. CIT(A) FOUND NO INFIRMITY IN ACCOUNTING OF INTEREST ON FDR, ON THE ACCRUAL BASIS, A SYSTEM CONSISTENTLY FO LLOWED BY THE APPELLANT. I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 17 4.6 ASSESSING OFFICER INITIALLY PROCEEDED TO BRING TO TAX THE INTEREST INCOME ON ALL FDRS IN THE YEAR IN WHICH TH EY WERE PURCHASED BUT REALIZED THAT THE CIRCULARS OF THE CB DT, THE INCOME TAX ACT, AND ACCOUNTING PRACTICES DID NOT AL LOW FOR IT. SIMILARLY HIS ATTEMPT TO SEGREGATE THE PURCHASE PRI CE, DIDNT FRUCTIFY, NOT BEING APPROVED BY THE CITED CASE LAWS AND FACTUAL POSITION. HENCE HE RESTORED TO LIBOR (LONDON INTER BANK OFFERED RATE). AFTER APPORTIONING IN RATIO OF 44:84 HE ALL OWED THE AMOUNT OF RS.12019045 AS EXPENSES IN A.Y. 2004-05 AND HELD THAT RS.2,29,45,449/- PERTAINED TO INTEREST INCOME ACCRU ED IN A.Y. 2005-06 (AND HENCE ALLOWABLE IN A.Y. 2005-06). THI S HAS TURNED OUT TO BE A HYPOTHETICAL EXERCISE IN FUTILITY. THU S ON A HOLISTIC CONSIDERATION OF ALL THE FACTS, AFOREMENTIONED CONT ENTIONS, DETAILS ON RECORD, THE JUDICIAL DECISIONS CITED AND LEGAL P OSITION OBTAINED SO FAR, IT IS HELD THAT THE ADDITION OF RS.2,29,45, 449/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST LOADI NG COULD NOT BE UPHELD. ACCORDINGLY, ADDITION OF RS.2,29,45,449/- WAS DELETED BY CIT(A). 4.7 THIS REASONED FINDING OF THE CIT(A) NEED NOT IN TERFERENCE FROM OUR SIDE. WE FIND THAT ASSESSEE ENGAGED IN BU SINESS OF TRADING OF BULLION. HE PURCHASED BULLION MAINLY FR OM GOVERNMENT CORPORATION LIKE STATE TRADING CORPORATI ON OF INDIA (STC) AND MAINLY METAL TRADING CORPORATION OF INDIA (MMTC). THERE ARE VARIOUS CORRESPONDENCE BETWEEN ASSESSING OFFICER AND ASSESSEE ON POINT OF VARIOUS QUERIES OF ASSESSING O FFICER. THE CHRONOLOGY OF EVENTS IN PURCHASE OF BULLION FROM ST C AS UNDER AND SAME IS APPLICABLE TO MMTC: I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 18 (A) ZAVERI & CO. (BUYER INDIAN PARTY) APPROACHES ST C- AHMEDABAD FOR PURCHASE OF GOLD. (B) STC-AHMEDABAD PLACES ORDER WITH FOREIGN SUPPLIE R AT DUBAI, U.A.E. OR OTHER COUNTRIES. (C) THE BUYER INDIAN PARTY MAKES ADVANCE PAYMENT T O STC-A AHMADABAD. (D) STC- AHMEDABAD OPENS A LETTER OF CREDIT (L/C) W ITH INDIAN BANK FOR THE REQUIRED AMOUNT.(AFTER 30-09-2003). P RIOR TO 30-09-2003 BUYER INDIAN PARTY OPENS L/C ON REQUEST AND ON AUTHORITY OF STC. (E) STC- AHMEDABAD MAKES FDR OF THIS ADVANCE PAYMEN T RECEIVED. THIS FDR IS PLEDGED BY STC- AHMEDABAD FO R OPENING LETTER OF CREDIT WITH L/C OPENING BANK. THE FDR WILL BE FOR A TERM OF ONE YEAR. UPTO 30-09-2003 TH E FDR IS PLACED BY INDIAN PARTY. (F) THE FOREIGN SUPPLIER SHIPS THE GOLD TO STC- AHM EDABAD THROUGH AIR CARGO. (G) GOLD CONSIGNMENT ARRIVES AT AHMEDABAD AIRPORT. (H) STC- AHMEDABAD AUTHORISES BUYER-PRIVATE PARTY TO COLLECT THE GOLD FROM CONCERNED AIRLINES. (I) STC- AHMEDABAD ARRANGES TO PAY THE CUSTOMS DUT Y. (J) BUYER-PRIVATE PARTY TAKES DELIVERY OF GOLD. (K) AS PER TERMS AND CONDITIONS OF L/C, THEPAYMENT TO FOREIGN SUPPLIER IS TO BE MADE BY STC- AHMADABAD. (L) THE STC- AHMEDABAD IS REQUIRED TO PAY A HIGHER PURCHASE PRICE (AS COMPARED TO THE INTERNATIONAL GOLD RATE P REVAILING ON DATE OF SHIPMENT) TO THE FOREIGN SUPPLIER DUE TO THE CREDIT ALLOWED TO STC- AHMEDABAD. THE FOREIGN SUPPL IER ISSUES INVOICE IN THE NAME OF STC- AHMEDABAD. I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 19 AS PER IMPORT EXPORT POLICY OF GOVERNMENT OF INDIA PREVAILING AT RELEVANT TIME IMPORT OF BULLION FOR TRADING PURPOSE S INTO INDIA WAS PERMITTED ONLY TO THE GOVERNMENT NOMINATED AGEN CIES LIKE STC, MMTC, BANKS ETC. PRIVATE PARTIES LIKE THE ASSE SSEE WERE NOT ALLOWED TO IMPORT THE BULLION. 4.8 ASSESSEE PURCHASED THE BULLION FROM STC, MMTC E TC. AS PER POLICY LAID DOWN BY RESERVE BANK OF INDIA, UPTO 30 TH SEPTEMBER, 2003 THE PAYMENT OF BULLION IMPORTED BY STC, MMTC WAS MADE BY OPENING LETTER OF CREDIT IN THE NAME OF FOREIGN SUPPLIER. THIS L/C WAS OPENED BY THE ASSESSEE AT T HE BEHEST AND UNDER AUTHORITY OF STC, MMTC, SINCE THE ASSESSEE HA D TO MAKE THE PAYMENT FOR ITS PURCHASES TO STC/MMTC. HOWEVER THE RESERVE BANK OF INDIA AMENDED ITS POLICY AND WITH E FFECT FROM 1 ST OCTOBER, 2003 AND HENCE THE ASSESSEE MADE THE PAYME NT DIRECTLY TO STC / MMTC AND NOT THROUGH THE L/C IN THE NAME O F FOREIGN SUPPLIER OF STC / MMTC. ASSESSEE WAS PURCHASING THE BULLION FROM STC /MMTC ON A CREDIT OF 365 DAYS. ASSESSEE W AS SELLING THE BULLION ON SPOT PAYMENT BASIS. THIS RESULTED IN PURCHASE PRICE AT HIGHER AMOUNT THAN THE SALE PRICE. THE SAL E BILLS ISSUED BY STC / MMTC WERE FOR A TOTAL PRICE I.E. THERE WAS NO SEGREGATION OF ANY SORT LIKE SPOT PRICE, INTEREST E TC. THE INVOICES WERE FOR A COMPOSITE AMOUNT. AS PER THE MERCANTILE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE THE ENTIRE PURC HASE PRICE AS PER THE SALE BILL OF STC / MMTC WAS TREATED AS EXPE NDITURE AND DEBITED TO PURCHASES. THE SALES PRICE AS PER THE SA LES BILLS ISSUED BY THE ASSESSEE WAS TREATED AS INCOME AND CREDITED TO SALES I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 20 ACCOUNT. L/C WERE OPENED BY ASSESSEE (UPTO 30-09-20 03) BY PUTTING MARGIN MONEY, BY WAY OF FIXED DEPOSITS WITH THE CONCERNED BANK. THE ASSESSEE EARNED INTEREST ON FDR . THE BANK FDR INTEREST INCOME ON MARGIN MONEY WAS SHOWN ON AC CRUAL BASIS UPTO 31 ST MARCH, 2004 AS INCOME OF I.T.A.Y. 2004-05. IN SPITE OF THESE SUBMISSIONS ON BEHALF OF ASSESSEE AS SESSING OFFICER MADE DISALLOWANCE OF RS. 2,29,45,449/- BY MAKING A HYPOTHETICAL EXERCISE WHICH IS BASED ON PRESUMPTIONS AND CONJECT URES. ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING ADDIT ION OF RS. 2,29,45,449/- BY DISALLOWING THE PRESUMED AMOUNT OF INTEREST LOADING CHARGES INCLUDED IN THE PURCHASES OF BULLIO N ON ACCOUNT OF CREDIT PERIOD OF 365 DAYS. ASSESSING OFFICER HA S PRESUMED THAT THE PURCHASES FROM STC/MMTC ARE INCLUSIVE OF INTERE ST AND ASSUMED THIS FIGURE OF INTEREST ON THE BASIS OF IRR ELEVANT DATA COMPILED BY HIM. HE FURTHER MADE ASSUMPTION THAT 9 0% OF THIS ASSUMED INTEREST IS FOR BULLION TURNOVER AND REMAIN ING 10% FOR EARNING BANK FDR INTEREST. ASSESSING OFFICER HAS AP PORTIONED THE 10% ASSUMED AMOUNT IN TWO ASSESSMENT YEARS I.E. I.T .A.Y. 2004- 05 AND 2005-06 IN THE PROPORTION OF INTEREST ACCRUA L OF BANK FDR AS WELL AS THAT RECEIVABLE FROM STC / MMTC, WHI CH IS NOT JUSTIFIED. IN VIEW OF ALL, CIT(A) WAS JUSTIFIED IN DELETING ADDITION OF RS.2,29,45,449/- MADE BY A.O. ON ACCOUNT OF INTERES T LOADING, WE UPHOLD THE SAME. 5. REGARDING ADDITION OF RS.61,467/- MADE ON ACCOUN T OF DISALLOWANCE OF THE INTEREST. ASSESSING OFFICER NOT ED LOAN/ADVANCE OF RS.51.11 CRORE TO M/S. ZAVERI & CO. EXPORTS AS ON 31.03.2004. THE ASSESSING OFFICER NOTED THAT EX PLANATION OF I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 21 THE SOURCE OF THIS ADVANCE AS THE ASSESSEE FIRM HA S CONTENDED THAT THE PARTNERS HAVE WITHDRAWN THE AMOUNT FROM TH E FIRM OF M/S. ZAVERI & CO. EXPORTS WHICH IS SHOWN IN THE BAL ANCE-SHEET AS ADVANCE RS.51,11,94,315/-. ASSESSING OFFICER AS CERTAINED THAT THE ASSESSEE HAD TO UTILIZE ITS OVERDRAFTS FAC ILITY TO ENABLE THE WITHDRAWAL OF PATNERS AND INCURRED EXPENSES ON INTE REST OF RS.61,416/-. THIS INTEREST EXPENSE WAS DISALLOWED U/S. 14A AS THE ASSESSING OFFICER FELT THAT OVERDRAFT HAS BEEN UTILIZED TO EARN EXEMPTED INCOME U/S. 10A, 10B IN CASE OF M/S. ZAVER I & CO. EXPORTS. 5.1 MATTER WAS CARRIED BEFORE THE CIT(A), WHEREIN I T WAS ARGUED THAT EXPENSES ON BORROWINGS FOR PART REFUND TO PART NERS, OF THEIR OWN CAPITAL, WAS A BUSINESS RELATED EXPENSE AND ALL OWABLE. FURTHER NO INCOME HAS BEEN CLAIMED AS EXEMPT BY ASS ESSEE AND SO PROVISIONS OF SECTION 14A WERE NOT APPLICABLE. NO INCOME U/S. 10A/10B WAS EARNED BY ASSESSEE. THE INTEREST INCUR RED ON OVERDRAFT WAS IN BUSINESS INTEREST OF ASSESSEE ONLY AND HENCE WAS ALLOWABLE EVEN U/S. 36(1)(III) OF THE ACT. HAV ING CONSIDERED THE SUBMISSION MADE ON BEHALF OF ASSESSEE CIT(A) HA D ALLOWED THE CLAIM OF ASSESSEE. SAME HAS BEEN OPPOSED BEFOR E US ON BEHALF OF REVENUE INTER ALIA SUBMITTING THAT CIT(A) ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS.61,467/- MA DE ON ACCOUNT OF DISALLOWANCE OF INTEREST. ACCORDINGLY, LD. D.R. REQUESTED TO SET ASIDE THE ORDER OF CIT(A) ON THE ISSUE AND RESTORE THAT OF ASSESSING OFFICER. ON THE OTHER HAND, LD. A.R. SUP PORTED THE ORDER OF CIT(A) ON THE ISSUE. I.T.A. NOS. 470 & 669/AHD/2007 A.Y. 04-05 (M/S. ZAVERI & CO. VS. ACIT) PAGE 22 6. AFTER GOING THROUGH THE RIVAL SUBMISSIONS AND MA TERIAL ON RECORD, WE FIND THAT ASSESSEE HAD NOT CLAIMED ANY E XEMPT INCOME AND PROVISIONS OF SECTION 14A ARE NOT APPLICABLE BE ING REFUND OF CAPITAL OF PARTNERS WAS DURING THE COURSE OF BUSINE SS AND INTEREST INCURRED AND DOING SO WAS ALLOWABLE BUSINESS EXPEND ITURE. IN THIS SITUATION, DISALLOWANCE WAS NOT JUSTIFIED AND SAME HAS BEEN RIGHTLY DECIDED BY CIT(A), WHICH NEEDS NO INTERFERE NCE FROM OUR SIDE. 7. AS A RESULT, APPEAL FILED BY ASSESSEE AS WELL AS REVENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS THE 31 ST DAY OF OCTOBER, 2014. SD/- SD/- (ANIL CHATURVEDI) (SHAILENDRA KUMAR YAD AV) ACCOUNTANT MEMBER JUDICIAL MEMBER TRUE COPY S.K.SINHA $ $ $ $ &' &' &' &' ('# ('# ('# ('# / COPY OF ORDER FORWARDED TO:- 1. / REVENUE 2. / ASSESSEE 3. -- . / CONCERNED CIT 4. .- / CIT (A) 5. '23 &, , / DR, ITAT, AHMEDABAD 6. 367 89 / GUARD FILE. BY ORDER / $ , :/ - , <