Madanlal Mangilal Kankani, Sangli V. Joint Commissioner of Income-tax, Range - 1, Sangli

ITA 744/PUN/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 9866 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 29-08-2019
• Assessment Year: 2008-2009
• Appeal Filed On: 24-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ARISES OUT OF PASSED
• Keywords: Gross profit estimation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH SMC, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT . / ITA NO. 744/PUN/2018 / ASSESSMENT YEAR : 2008-09 SHRI MADANLAL MANGILAL KANKANI, PROP. OF M/S. BHARAT LIGHT HOUSE, THEATRE ROAD, SANGLI PAN : ABIPK8384N VS. JCIT, RANGE-1, SANGLI (APPELLANT) (RESPONDENT) / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDER PASSE D BY THE CIT(A)-1, KOLHAPUR ON 09-04-2018 IN RELATION TO THE ASSESSMENT YEAR 2008-09. 2. THE FIRST GROUND IS AGAINST THE CONFIRMATION OF ADDITION OF RS.4,25,115/- ON ACCOUNT OF LOW GROSS PROFIT RATE. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSE E WAS SUBJECTED TO SURVEY U/S.133A OF THE ACT ON 17-01-2008 . DURING THE COURSE OF THE SURVEY, THE AUTHORITIES APPLIED GRO SS APPELLANT BY SHRI KISHOR PHADKE RESPONDENT BY SHRI V.K. SINGH DATE OF HEARING 02-01-2020 DATE OF PRONOUNCEMENT 03-01-2020 ITA NO.744/PUN/2018 SHRI MADANLAL MANGILAL KANKANI 2 PROFIT RATE OF 3.84% FOR WORKING OUT THE STOCK-IN-TRADE AS P ER BOOKS OF ACCOUNT AT RS.12,51,734/- . PHYSICAL INVENTORY O N THE DATE OF SURVEY WAS FOUND AT RS.33,57,007/-. THE ASSE SSEE OFFERED THE DIFFERENTIAL EXCESS STOCK SO CALCULATED AT RS.21,05,273/- IN THE RETURN OF INCOME. DURING THE COURS E OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER (AO) OBSER VED THAT THE GP RATE OF 3.84% AS APPLIED ON THE PRE-SURVEY SALES WAS ON LOWER SIDE. HE DETERMINED THE GP RATE AT 6.23% (WITHOUT CONSIDERING THE AMOUNT OF EXCESS STOCK SURRENDERED ) ON THE BASIS OF AVERAGE PROFIT RATE OF LAST THREE YEARS. APPLYING SUCH PROFIT RATE ON THE SALES MADE UP TO THE DATE OF SURVEY , HE MADE AN ADDITION OF RS.6,26,404/- ON ACCOUNT OF LOWER GP . THE LD. CIT(A) DIRECTED TO APPLY THE AVERAGE GP RATE OF LAS T TWO YEARS, WHICH RESULTED IN REDUCTION IN THE ADDITION TO RS.4,25,115/-, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 4. I HAVE HEARD BOTH THE SIDES AND PERUSED THE RELEVAN T MATERIAL ON RECORD. IT IS SEEN THAT IT WAS ON THE BASIS OF 3. 84% GP RATE THAT THE EXCESS STOCK WAS FOUND AT RS.21,05,273/-, WHICH THE ASSESSEE DULY OFFERED AND CREDITED TO ITS TRADING ACCOUNT. IN OTHER WORDS, THE EXCESS STOCK OF RS.21.05 LAKH ITA NO.744/PUN/2018 SHRI MADANLAL MANGILAL KANKANI 3 WAS DETERMINED ON THE BASIS OF GP RATE OF 3.84%. IF I GO WITH THE VIEW POINT OF THE AO THAT THE GP RATE OF 3.84% ON PRE- SURVEY SALES WAS ON LOWER SIDE AND THE SAME SHOULD HAVE BEEN HIGHER, THEN IT WOULD LEAD TO CORRESPONDING INCREASE IN THE VALUE OF CLOSING STOCK AS ON THE DATE OF SURVEY AS PER BOOKS OF ACCOUNT, WITH THE EFFECT OF LOWER EXCESS STOCK WHEN COMPAR ED WITH THE PHYSICAL STOCK. ONCE THE AMOUNT OF SURRENDER HAS BEEN WORKED OUT BY APPLYING THE GP RATE OF 3.84%, THERE IS NO SCOPE FOR FURTHER INCREASE IN THE GP RATE BECAUSE THE PAR ALLEL INCREASE IN THE GP RATE WOULD RESULT IN REDUCTION IN THE AMOUN T OF EXCESS STOCK FOUND AT THE TIME OF SURVEY. I, THEREFO RE, ORDER TO DELETE THE ADDITION OF RS.4,25,115/-. 5. THE ONLY OTHER ISSUE RAISED IN THIS APPEAL IS AGAINST THE CONFIRMATION OF DISALLOWANCE OF INTEREST OF RS.77,039/-. 6. THE FACTS APROPOS THIS GROUND ARE THAT THE AO FOUND THA T THE ASSESSEE ADVANCED A SUM OF RS.10,30,034/- TO THE PERSONS COVERED U/S.40A(2)(B) OF THE ACT ON WHICH NO INTEREST WAS CHARGED. APPLYING 15% RATE OF INTEREST, HE WORKED OUT THE DISALLOWANCE AT RS.96,299/-. THE LD. CIT(A) REDUCED THE RATE OF INTEREST TO 12%, WHICH BROUGHT DOWN THE AMOUNT OF ITA NO.744/PUN/2018 SHRI MADANLAL MANGILAL KANKANI 4 DISALLOWANCE TO RS.77,039/-. THE ASSESSEE IS AGGRIEVED B Y THE CONFIRMATION OF THE ADDITION. 7. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD, IT IS SEEN FROM THE ASSESSEES BALANCE SHEET AS AT THE END OF THE YEAR, A COPY OF WHICH HAS BEEN PLA CED AT PAGE 31 OF THE PAPER BOOK, THAT HIS CAPITAL STOOD AT RS.34,06,121/-. AS AGAINST THAT, THE ASSESSEE GAVE INTERE ST FREE LOANS TO ITS RELATIVES AT RS.10,30,034/-. IN OTHER WORDS, TH E AMOUNT OF LOANS GIVEN TO THE RELATIVES WAS MUCH LESSER THAN THE CAPITAL AVAILABLE WITH THE ASSESSEE. THE HON'BLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM) , HAS HELD THAT WHERE AN ASSESSEE POSSESSED SUFFICIENT INTEREST FREE FUNDS OF ITS OWN WHICH WE RE GENERATED IN THE COURSE OF RELEVANT FINANCIAL YEAR, APART FR OM SUBSTANTIAL SHAREHOLDERS FUNDS, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST FREE FUNDS AND, THEREFOR E, NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS. I N REACHING THIS CONCLUSION, THE HONBLE HIGH COURT RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF EAST ITA NO.744/PUN/2018 SHRI MADANLAL MANGILAL KANKANI 5 INDIA PHARMACEUTICAL WORKS LTD. VS. CIT (1997) 224 ITR 627 (SC). SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE DEHI HIGH COURT IN CIT VS. TIN BOX COMPANY (2003) 260 ITR 637 (DEL), HOLDING THAT WHEN THE CAPITAL AND INTEREST FREE UNSECURED LOAN WITH THE ASSESSEE FAR EXCEEDED THE INTEREST FREE LOAN ADVAN CED TO THE SISTER CONCERN, DISALLOWANCE OF PART OF INTEREST OUT OF TOTAL INTEREST PAID BY THE ASSESSEE TO THE BANK WAS NOT JUSTIFIED . AS THE ASSESSEES CAPITAL IN THE INSTANT CASE IS FAR IN EXCESS OF THE AMOUNT OF LOANS AND ADVANCES GIVEN TO THE PERSONS COV ERED U/S 40A(2)(B) OF THE ACT, I AM SATISFIED THAT THE DISALLOWANC E MADE BY THE AO HAS BEEN WRONGLY SUSTAINED PARTIALLY IN THE FIRST APPEAL TO THIS EXTENT. I, THEREFORE, ORDER TO DELETE THE ADDITION. 8. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 03 RD JANUARY, 2020. SD/- (R.S.SYAL) / VICE PRESIDENT PUNE; DATED : 03 RD JANUARY, 2020 ITA NO.744/PUN/2018 SHRI MADANLAL MANGILAL KANKANI 6 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. ( ) / THE CIT (APPEALS)-1, KOLHAPUR 4. THE PR. CIT-1, KOLHAPUR 5. , , SMC / DR SMC, ITAT, PUNE; 6. / GUARD FILE. // TRUE COPY // / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 02-01-2020 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 02-01-2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER -- JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. -- JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *