Devesh Engineering Enterprises Private Limited, Hyd, Hyderabad V. DCIT, Circle-2(3), Hyd, Hyderabad

ITA 697/Hyd/2016

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6617 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Assessment Year: 2011-2012
• Appeal Filed On: 15-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 263; 271(1)(c); 143(3); 153A; 142(2A); 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) B EFORE SH RI SA TBEER SING H GODA RA, JU DI CIA L MEM BER AND SHR I L AXMI PR AS A D SAHU , AC COUNT ANT MEMBE R ITA No. 697/Hyd/2016 Assessment Years: 2011-12 Devesh Engineering Enterprises Pvt. Ltd., Hyderabad PAN – AABCT6576A Vs. Dy. Commissioner of Income-tax, Circle – 2(3), Hyderabad. (Appellant) (Respondent) Assessee by: Shri P. Murali Mohan Rao Revenue by: Smt. Matta Padma Date of hearing: 08/12/2021 Date of pronouncement: 10/12/2021 O R D E R PER L.P. SAHU, A.M.: This appeal filed by the assessee is directed against CIT(A) - 2 Hyderabad’s order dated 26/02/2016 for AY 2011-12 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act”, on the following grounds of appeal: 1. The ld. CIT(A) erred in dismissing the appeal, both on the facts and in law. ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 2 -: 2. The ld. CIT(A) erred in sustaining the disallowance of financial charges of Rs.5.97,25,109/- without properly appreciating the facts of the case. 3. The Ld. CIT(A) while dismissing the appeal, erred in not considering the paper book and submissions made by the assessee. 4. The Ld. CIT (Al erred in upholding the observations of AO that the assessee is a paper company merely on the basis of surmises and suspicions, and without having any cogent evidence. 5. The Ld CIT(A), ought to have followed the decisions of the CIT(A) & Hon'ble ITAT, Hyderabad in the assessee's own group case of M/s Global Forgings Ltd for the AY 2010-11, wherein the issue of financial charges has been decided in favour of the assessee. 6. The Ld. CIT(A) erred in sustaining the disallowance of financial charges even after submission of all the relevant documents regarding the LC's given and also the discounting of bills to the banks. 7. The Ld. CIT(A), while dismissing the appeal. ought to have appreciated that the decisions of Supreme Court relied on by him are all distinguishable on facts. 8. The Ld. CIT (Al while dismissing the appeal grossly erred in observing that the transaction through the Letter of Credit can be manipulated and that when the purchaser and seller join hands without real purchase, Letter of Credit can be generated. 9. The Ld. CIT (Al, while dismissing the appeal erred in observing that the assessee's case is a case where the apparent is not real. ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 3 -: 10. The Ld. CIT (Al, while dismissing the appeal erred in observing that if the entire facts and circumstances are considered, prudence will guide a person to arrive at a conclusion that no transaction on purchase and sale has taken place during the year under consideration in the assessee's case.” 2. Briefly the facts of the case are that the assessee company engaged in the business trading in steel, filed its return of income for the AY 2011-12 on 30/09/2011 admitting total income of Rs. 50,80,548/-. Subsequently, the case was selected for scrutiny and accordingly, statutory notices were issued to the assessee. 2.1 During the course of assessment proceedings, the AO observed from the P&L A/c that the assessee recorded sales of Rs. 1132,48,62,103/- as against the purchases of Rs. 1124,91,40,290/- and there was no opening and closing stock of the material in which the assessee supposed to have traded in. Further, he observed that the gross profit worked out to Rs. 7.57 crores i.e., 0.67 of the sales and debited selling and administrative expenses of Rs. 89,11,125/- and financial expenses of Rs. 5,97,25,105/- into P&L Account. Also, the profit before tax was shown at Rs. 31,06,976/- which worked out to a meager o.08% of the sales. 2.2 During the course of assessment proceedings, the AO asked the AR of the assessee to submit complete details of ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 4 -: the parties from whom the assessee purchased its material and also to whom it had sold. The AR of the assessee filed the said details, which were extracted by the AO in his order at pages 2 to 4. The AO accepted purchase and sales of the assessee, but, he did not agree with the financial expenses debited to P&L Account and accordingly, he made an addition by observing as under: “10. However, it is seen from the P&L a/c that the assessee debited an amount of Rs.5,97,25,109/- which includes Bank Charges of RSA,31,912/- and Financial Charges of Rs.5,74,33,615/- .It is further seen that the financial charges are incurred on account discounting of LCs issued by its clients various banks. The assessee discounted the LCs issued by its Clients and the bankers have given credit to the assessee after discounting charges. During the assessment proceedings, the AR Was requested to furnish the "details of Financial Charges and Receipts and Utilization of LC Proceeds during the period 01.04.2010 to 31.07.2010 for a random check. It is seen from the details furnished that the LC proceeds so credited to assessees' account have immediately been transferred to the other Companies accounts who are the group companies mentioned in the Para-8 above. The entire transactions are designed in such a way that the group companies have been used for financial exigency of other group companies. 11. As the facts of the assessee company narrated above clearly establish that it is a mere paper company which is not dealing in real trading activity as claimed, the financial charges of Rs. 5/97,25,109/- are hereby disallowed and added back to the Income already admitted. Income returned as per return of income Rs. 50,80,548/- ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 5 -: Add: Disallowance of financial charges as discussed above Rs. 5,97,25,109/- Assessed Income Rs. 6.48,05,657/- Assessed u/s.143(3) of the LT. Act. Issue Demand Notice / Challan and Penalty notice u/s 271(1)(c) accordingly. As per the instructions of CBDT, Scrutiny assessment u/s.143(3) of the Act has to be done in AST. As such/ the computation of tax was made in AST and arrived at a demand of Rs.2,93,55,750/- for which separate order has been taken and enclosed to this as it is part and parcel of scrutiny assessment u/s.143(3) of the Act. 3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A) and the CIT(A) after considering the submissions of the assessee confirmed the order of the AO relying on the following judgements: 1. CIT Vs. Durga Prasad [1971] 82 ITR 540 (SC) 2. Sumati Dayal [1995] 80 Taxman 89 (SC) 3. CIT Vs. P. Mohan Kala [2007] 291 ITR 273 (SC) 4. Aggrieved by the order of CIT(A), the assessee is in appeal before the ITAT. 5. Before us, at the outset, the ld. AR of the assessee submitted that the issue in dispute is squarely covered by the decision of the ITAT in the assessee’s own group cases, which are as under: 1. M/s Cosmos Forging Ltd., ITA No. 2/hyd/2017 2. M/s Global Forging Ltd., ITA No. 543/hyd/2014 3. DCIT Vs. Candid Industries, ITA No. 1205/Hyd/2017 ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 6 -: 5.1 The copies of the above cases are filed in paper book filed before the ITAT. 6. The ld. DR, on the other hand, besides relying on the orders of revenue authorities, submitted that the transactions undertaken by the assessee were in doubtful and, therefore, the lower authorities were justified in making disallowance of financial charges of Rs. 5,97,25,109/-. However, the ld. DR neither controverted the submissions of the ld. AR of the assessee nor brought any contrary decisions in this regard. 7. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. As submitted by the ld. AR, we find that the issue in dispute is squarely covered by the decisions of the coordinate bench of this Tribunal in the assessee’s own group cases quoted supra: 7.1 In the case of M/s Cosmos Forging Ltd., (supra) the coordinate bench has held as under: “9. Considered the rival submissions and perused the material on record. On perusal of the documents filed by the assessee, we are of the view that the assessee established the fact that it incurred the financial charges during the course of its business, which are genuine. Moreover, in its own case (formerly known as M/s Global Forgings Ltd. (supra), similar issue came up for consideration before the Tribunal and the Tribunal ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 7 -: dismissed the appeal of the revenue by holding as under: “15. We have heard the arguments of both the sides and also perused the relevant material on record. As can be seen from the impugned order of assessment, the Assessing Officer has not disputed the fact that the assessee has incurred the expenditure in question. The only reason for the disallowance made by the Assessing Officer was that the assessee has incurred the expenditure, while discounting the bills from outside parties and providing goods to its sister concerns on credit basis. In our view, the conclusion. drawn by the Assessing Officer is based on mere presumptions and surmises, rather than evidence. It is evident from the discussion made by the Id CIT(A) in the impugned order, extracted above, the expenditure incurred by the assessee is fully supported by evidence and also certified by banks and financial institutions. That being the case, there cannot be any reason to doubt the genuineness of the expenditure. In this view of the matter, there being no infirmity in the order of the learned CIT(A), we do not find any reason to interfere with the same. We accordingly reject the grounds of the Revenue in this appeal.” As the issue under consideration is materially identical to that of the said case, following the decision therein, we set aside the order of the CIT(A) and direct the AO to delete the disallowance of Rs. 7,66,83,299/- made towards bank charges. Accordingly, the grounds raised by the assessee are allowed.” 7.2 In the case of M/s Global Forging Ltd., (supra), the coordinate bench has held as under: ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 8 -: 7.3 In the case of DCIT Vs. Candid Industries (supra), the coordinate bench has held as under: “5. We have given our thoughtful consideration to the Revenue's sole substantive grievance that since the assessee is providing mere accommodation bills and subsequently discounting the same thereby lending its name to the group concerns, the impugned financial charges of Rs.5,05,73,510/- had been rightly disallowed in the Assessing Officer's assessment order dt.14-03- 2014. Case file suggests that the instant issue of the assessee being treated as mere name lender for its group concern is no more res integra. This tribunal's co-ordinate bench's decision dt.31-01-2017 in ITA Nos.1459 & 1460/Hyd/2014 pertaining to AYs.2006-07 & 2007-08 has dealt with the same as under: "2. As stated, the only issue for consideration is the disallowance of 50% of financial charges claimed by assessee. In AY.2006-07, assessee claimed financial ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 9 -: charges by way of LC discounting to an extent of Rs. 83,89,594/- under the head 'financial charges'. On the reason that assessee was diverting the funds obtained from this to advance as loans to sister concerns without interest, AO disallowed 50% of the charges as not pertaining to assessee's business. Similarly, in AY. 2007- 08, assessee has claimed an amount of Rs. 88,55,691/- towards 'financial charges'; out of which for the same reasons, 50% of the amount was disallowed. Even though assessee submitted that the entire funds obtained from the banks by way of LC discounting was used for paying creditors and no part of the amount was diverted towards advances to other concerns, Ld. CIT(A) did not accept as similar disallowance was considered by the CIT u/s. 263 in AY. 2008-09 and further he relied on the orders for AY. 2008-09. His order in AY. 2006-07 is as under: "5. I have carefully considered the submissions of the appellant, remand report of the AO and comments of Addl. CIT and the assessment order. The appellant's submissions that since identical issue was dealt in the A.Y.2008-09 and the amount of expenditure incurred towards the financial charges was allowed as business expenditure cannot be accepted since the assessment proceedings for each year are independent. The asst. order or the decision taken with respect to AY 2006-07 or AY 2007-08 should not have any impact or relation with the asst. order for the A.Y. 2008-09. Though the AO had not submitted detailed report regarding financial charges for AY. 2006-07, 2007-08 and 2008-09 as per the request of the CIT(Appeals)-II, Hyderabad, vide her letter dated 19-6-2012mentioned in para 303 of this order, the report of the AO dated 15-6-2014 is exhaustive and very much relevant and adequate on the issue of financial charges. Hence, I fully agree with the AO regarding the disallowance of 50% of the amount of financial charges debited i.e. Rs. 41,94,797, being interest related to the borrowed funds utilized for the purpose other than business and also agree with the ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 10 -: report of the AO dated 15- 6-2012. The case-law cited by the appellant are also different from the facts of the appellant and hence, the appellant submission cannot be accepted. Therefore, I confirm the addition". 2.1. Similar order was passed in AY. 2007-08 also. Hence, the present appeals. 3. For the sake of record, the grounds raised by assessee are extracted as under: "1. The learned CIT(A) erred in both facts and law while passing the order for the A.Y 2006-07. 2. The learned CIT(A) erred in confirming the disallowance towards interest Rs.41,94,797/- made by Asst. Commissioner of Income Tax, Circle 1(3), Hyderabad basing on suspicion and surmises which is not correct. 3. The learned CIT (A) erred in not appreciating the fact that the financial charges on discounting LC's was incurred for the business purpose only. 4. The learned CIT (A) erred in not considering the explanations and submissions made by the appellant company. 5. The learned CIT (A) erred in not considering the fact that the net proceeds of the discounted LCs were utilized for payment to the creditor parties only. 6. The learned CIT (A) ought to have appreciated the fact that special audit u/s 142(2A) was conducted in the case of assessee for the year under consideration and no adverse finding was made by the special auditor. Hence, no addition can be made to the income of the appellant. 7. The learned CIT (A) ought to have appreciated the orders of Hyderabad ITAT in the case of Bartronics ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 11 -: India Limited vs. ACIT 1(3) wherein it is held that no addition can be made to the income of the assessee if no adverse finding is made in the special audit conducted u/s 142(2A) of the Act. 8. The Assessee may add, alter, and substitute any other grounds to the Grounds of Appeal at any time before or at the time of hearing of Appeal". 3.1. Ld. Counsel referring to the Paper Books filed, submitted that assessee was contending that LC discounting charges are paid to the banks and was part of the business expenditure and no part of the amount was diverted as advance to sister concerns, the fact of which was not contradicted by the Revenue. It was further submitted that AO in the post search assessments u/s. 153A has allowed similar claims in AYs. 2004-05 & 2005-06. It was submitted that the claim in AY. 2005-06 was to an extent of Rs. 1,30,69,614/- and the same amount was allowed in the post search scrutiny assessments. Further, it is also submitted that in AY. 2008-09, AO has allowed the amount and even though 263 proceedings were initiated in that year also, the Ld. CIT did not take up any issue on disallowance of financial charges. Ld. Counsel referred to the orders in the AY. 2008- 09, wherein AO after detailed examination of the claim has disallowed only an amount of Rs. 3,07,808/- pertaining to discounting charges paid to M/s. DPJ Viniyog Pvt. Ltd., on the reason that assessee could not furnish any explanation. It was further submitted the Ld.CIT initiated proceedings u/s. 263 on the reason that 'MBB transactions' stated in the details pertain to third party and AO was wrong in allowing the expenditure. The ITAT vide its order dt. 26-03-2014 in ITA No. 1099/Hyd/2013 has considered that M/s. MBB transactions are not third party transactions but multi- branch bank transactions and on that basis, proceedings are held to be bad in law, thereby it was submitted that there was no disallowance of financial ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 12 -: charges in either earlier years or in later years and disallowance of 50% of financial charges on adhoc basis for the impugned years is not correct. 4. It was further submitted that the Co-ordinate Bench in the case of M/s. Bartronics India Ltd., in ITA No. 2188/Hyd/2011 dt. 31-05- 2012 held that when there is a special audit in the particular year and special auditor has not reported any disallowance, AO is not correct in disallowing the amount ignoring the special audit report. It was submitted that there was a special audit in AY. 2007-08 and so the disallowance in that year not recommended by the special auditor is also bad in law. It was fairly submitted that there is no special audit in AY. 2006-07 and the grounds pertaining to that, particularly Ground Nos. 6 & 7 does not apply. 5. Ld. DR, however, submitted that there is no res- judicata involved and each year has to be considered on its own. Since the AO and CIT(A) examined and confirmed the disallowance at 50%, the same is to be upheld. 6. We have considered the rival contentions and perused the documents placed on record. As far as the facts are concerned, it was submitted that financial charges arose only on discounting of LC's, which was incurred for the purpose of business. Even though AO has noted that assessee is diverting funds for interest free advances to sister concerns, no such nexus was established nor details of funds utilised for non- business purposes were placed on record by the AO. He has adhocly disallowed 50% of the amount without establishing that funds are diverted for non-business purposes. As seen from the contentions of assessee, it is the submission that these financial charges have arisen only because of discounting of the bills and funds are utilised for payment to the creditors. This contention of assessee was neither examined by the AO nor by the CIT(A), even though assessee is insisting on this. As seen ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 13 -: from the orders in earlier years and also in AY. 2008-09 and 2009-10, the financial charges are allowed as such in scrutiny proceedings, that too in post search proceedings in AYs. 2004-05 and 2005-06. This means that the financial charges are utilised for the purpose of business only. We are prima-facie satisfied that the financial charges cannot be disallowed. However, AO has not given any finding whether the funds are really diverted to sister concerns, out of the funds availed due to discounting of bills. Therefore, for the limited purpose of verification, the issue is restored to the file of the AO. In case assessee has not diverted any of the funds so obtained for advancing interest free to its sister concerns, no amount of financial charges should be disallowed. AO is directed to examine this aspect and if funds are not diverted as stated by assessee, allow the full claim of financial charges. Accordingly, the grounds on this issue are considered allowed for statistical purposes". 6. Learned departmental representative fails to dispute that the Assessing Officer's consequential computation dt.29-12- 2017 in said AY.2007-08 has duly accepted the assessee's identical financial charges claim. There is no distinction on facts forthcoming in the case file. We thus follow the judicial consistency in these facts and circumstances and uphold the CIT(A)'s order deleting financial charges disallowance.” 7.4 In the case of M/s Tejaswini Engg P. Ltd. and another in ITA Nos. 698/Hyd/2016 & 1095/Hyd/2019 vide order dated 12/07/2021, the coordinate bench has held as under: “2. We notice at the outset that apart from challenging correctness of 147/148 proceedings in latter appeal 195/Hyd/2019; both these two assessees’ seek to reverse the Assessing Officer as well as CIT(A)s’ identical action in disallowing the respective finance ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 14 -: charges of Rs.2,68,40,275 and Rs.25,86,702 respectively. Both the learned representatives informed us during the course of hearing that these two assessees are group entities belonging to M/s. Global Group. And that both the lower authorities have disallowed the foregoing financial charges involving varying sums after doubting genuineness thereof since involving ‘Global’ group’s business activities only. We notice in this factual backdrop that the issue of financial charges in M/s. Global Group entities’ loan is no more res integra. This tribunal’s co-ordinate bench order in assessee's very group concern’s appeals ITA Nos.406, 543 and 1269/Hyd/2014 (M/s. Global Forging Ltd.) has already decided that once the said assessee had filed all the relevant details pertaining to discounting of bills from outside party as well as providing goods to the sister concern(s) on credit basis, the same amply proved genuineness of its corresponding claim. This very reasoning has been reiterated mutatis mutandis in M/s. BP Ferrium Industries Pvt. Ltd. Vs. DCIT case; “Global group entity” in 1741/Hyd/2017 for Assessment Year 2011-12 dt.20.5.2021. Faced with this situation, we adopt judicial consistency in these twin group entities cases as well and delete the impugned financial charges disallowance of Rs.2,68,40,275 and Rs.25,86,702; appeal-wise respectively. The corresponding grounds to this effect stand accepted.” 7.5 As the issue in dispute is materially identical to the above cases, which are the assessee’s own group cases, following the decisions of the coordinate benches in the above cases, we set aside the order of the CIT(A) and direct the AO to delete the disallowance of financial charges of Rs. 5,97,25,109/-. Accordingly, the grounds raised by the assessee on this issue are allowed. ITA No. 697/Hyd/2016 D e v e s h E n g g . P v t . L t d . , Hyd. . :- 15 -: 8. In the result, appeal of the assessee is allowed in above terms. Pronounced in the open court on 10 th December, 2021. Sd/- Sd/- (S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 10 th December, 2021. kv Copy to : 1 Devesh Engg. Pvt. Ltd., C/o P. Murali & Co., CAs, 6-3-655/2/3, 1 st Floor, Somajiguda, Hyderabad – 82 2 DCIT, Circle - 2(3), Hyderabad 3 CIT(A) – 2, Hyderabad 4 PR. CIT – 2, Hyderabad 5 ITAT, DR, Hyderabad. 6 Guard File.