ACIT, Chandigarh V. M/s Khandalia Oil & General Mills Pvt. Ltd., Chandigarh

ITA 775/CHANDI/2012

• Counselvise Citation: 77521514 RSA 2012
• Duration Of Justice: 3 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 27-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Assessee Lawyers: ANIL KHANNA
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Earning of tax free income; Proportionate interest; Additional evidence; Commercial expediency
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.775/CHD/2012 (ASSESSMENT YEAR : 2008-09) THE A.C.I.T., VS. M/S KHANDELIA OIL & GENERAL CIRCLE 1(1), MILLS PVT. LTD., PLOT NO.23, CHANDIGARH. INDUSTRIAL AREA, PHASE-II, CHANDIGARH. PAN: AAACK6655N AND ITA NO.778/CHD/2012 (ASSESSMENT YEAR : 2008-09) M/S KHANDELIA OIL & GENERAL VS. THE ADDL.CIT, MILLS PVT. LTD., PLOT NO.23, RANGE 1, INDUSTRIAL AREA, PHASE-II, CHANDIGARH. CHANDIGARH. PAN: AAACK6655N (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ANIL KHANNA DEPARTMENT BY : SHRI MANJIT SINGH, DR DATE OF HEARING : 09.09.2015 DATE OF PRONOUNCEMENT : 06.11.2015 O R D E R PER RANO JAIN, A.M . : BOTH THE CROSS APPEALS ARE DIRECTED AGAINST THE ORD ER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS), CHAND IGARH DATED 21.5.2012 FOR ASSESSMENT YEAR 2008-09. 2 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE REA D AS UNDER : 1. THE LD. CIT(A) ERRED IN DELETING THE ADDITION O F RS. 24,63,106/- MADE ON ACCOUNT OF INTEREST PAID ON UNSECURED LOANS U/S 40 A(2)(B). 2. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITIO N OF RS. 53,23,839/- ON ACCOUNT OF DIVERSION OF FUNDS TO THE SISTER CONCERNS U/ 36 (I) (III) OR 37 OF THE INCOME TAX AC T,1961. 3. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITIO NS OF RS.3,09,55,904/- MADE ON ACCOUNT OF SUPPRESSION OF SALES AND BY NOT APPRECIATING THE FACTS BROUGHT BY THE A. O. ON RECORD. 4. THE APPELLANT CRAVES TO ADD OR AMEND ANY GROUND/ GROUNDS OF APPEAL BEFORE THE APPEAL IS HEARD OR DISPOSED OF F. 5. IT IS PRAYED THAT THE ORDER OF THE LD. CIT(A ) BE CANCELLED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 3. THE GROUND NO.1 RELATES TO ADDITION OF RS.24,63,106/- MADE BY THE ASSESSING OFFICER UNDER SECTION 40A(2)(B) OF THE INCOME TAX ACT, 1961 (IN SHORT TH E ACT). 4. BRIEFLY, THE FACTS OF THE CASE ARE THAT OUT OF THE TOTAL INTEREST ON LOAN, THE ASSESSEE HAD PAID INTEREST OF RS.1,23,15,529/- ON UNSECURED LOANS TO PERSONS COVE RED UNDER SECTION 40A(2)(B) OF THE ACT. THE RATE OF I NTEREST PAID WAS @ 15% PER ANNUM. WHEN THE ASSESSING OFFICER AS KED THE ASSESSEE TO JUSTIFY THE REASONABLENESS OF INTEREST PAYMENT @ 15%, IT WAS SUBMITTED THAT THE INTEREST PAID TO THE BANKS ON BORROWINGS WAS @ 10.5%, WHEN THE BANK LOANS WERE AG AINST 3 CHARGE ON THE PROPERTY AND THE OPPORTUNITY COST ON THESE LOANS WAS MUCH MORE THAN 15%. IT WAS ALSO SUBMITT ED THAT THE LOANS WERE CONTINUING FROM EARLIER YEARS AND WE RE INSTANTLY AVAILABLE. THE ASSESSING OFFICER DID NO T FIND HIMSELF IN AGREEMENT WITH THE SUBMISSIONS OF THE AS SESSEE AND RESTRICTING THE CLAIM OF INTEREST TO A RATE OF 12%, MADE A DISALLOWANCE OF RS.24,63,106/-. 5. BEFORE THE LEARNED CIT (APPEALS), THE SUBMISSIO NS MADE BEFORE THE ASSESSING OFFICER WERE REITERATED B Y THE ASSESSEE. AFTER CONSIDERING THE REPLY OF THE ASSE SSEE THE OPINION OF THE LEARNED CIT (APPEALS) WAS THAT THE P AYMENT OF INTEREST @ 15% WAS NOT UNREASONABLE. BASED ON THI S, THE LEARNED CIT (APPEALS) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 6. THE LEARNED D.R. WHILE ARGUING BEFORE US RELIED UPON THE ORDER OF THE ASSESSING OFFICER. THE LEARNED C OUNSEL FOR THE ASSESSEE RELIED UPON PARA 3.2 OF THE ORDER OF T HE LEARNED CIT (APPEALS) AND FURTHER DREW OUR ATTENTION TO PAG E 32 OF THE PAPER BOOK FILED BY HIM TO EMPHASIZE THE FACT THAT THE RATE OF INTEREST CHARGED BY THE MARKET COMMITTEE WAS 18%. IN VIEW OF THIS, IT WAS PRAYED THAT THE RATE OF INTEREST CH ARGED BY THE ASSESSEE AT 15% MAY BE HELD TO BE REASONABLE. 7. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BO TH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIE S BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. SECTI ON 40A(2)(B) OF THE ACT IS MEANT TO COVER CASES WHERE INTEREST P AID TO THE 4 RELATED PARTIES AS DEFINED IN THIS SECTION IS IN EX CESS OF THE INTEREST PAID TO UNRELATED PARTIES. THE UNDISPUTE D FACT IS THAT THE ASSESSEE HAS PAID 15% INTEREST ON UNSECURE D LOAN TO PERSONS COVERED UNDER SECTION 40A(2)(B) OF THE ACT. THIS IS ALSO UNDISPUTED THAT THE RATE OF BANK LOANS ARE AT AROUND 10.5% BUT THIS IS ALSO A FACT THAT THE LOANS FROM B ANKS ARE TAKEN AGAINST THE CHARGE ON THE PROPERTY AND THERE ARE OTHER OPPORTUNITY COSTS INVOLVED IN RAISING THE LOANS FRO M THE BANKS, WHICH ARE NOT THERE IN THE CASES OF THESE UN SECURED LOANS AND THE LOANS FROM THESE RELATED PERSONS ARE INSTANTLY AVAILABLE ALSO. FURTHER, SINCE THE RATE OF INTERES T CHARGED BY MARKET COMMITTEE ITSELF IS 18%, WE ARE IN AGREEMENT WITH THE FINDINGS RECORDED BY THE LEARNED CIT (APPEALS) THAT THE RATE OF INTEREST AT 15% IS QUITE REASONABLE. SINCE THE BO RROWINGS FROM PRIVATE PARTIES ARE ALWAYS AT HIGHER RATE OF I NTEREST THAN THE BANKS AND THESE MARKET COMMITTEES. IN VIEW OF THIS, ORDER OF THE LEARNED CIT (APPEALS) IN THIS REGARD I S CONFIRMED. THE GROUND OF APPEAL RAISED BY THE REVENUE IS DISMI SSED. 8. THE GROUND OF APPEAL NO.2 RAISED BY THE REVENUE RELATES TO ADDITION OF RS.53,23,839/- MADE BY THE A SSESSING OFFICER UNDER SECTION 36(1)(III) OF THE ACT. 9. THE BRIEF FACTS OF THE CASE ARE THAT THERE WAS SOME OUTSTANDING BALANCE IN THE NAME OF M/S KHANDELIA UD YOG PVT. LTD., A SISTER CONCERN OF THE ASSESSEE. RELYING ON THE JUDGMENT OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. M/S ABHISHEK INDUSTRIES LTD., 286 ITR 1 (P&H), THE ASSESSING OFFICER DISALLOWED PROPORTIONA TE INTEREST 5 @ 12% ON THE DEBIT BALANCE OF VARIOUS BRANCHES OF M /S KHANDELIA UDYOG PVT. LTD. FURTHER, THE ASSESSING OFFICER NOTICED THAT THERE WAS A DEBIT BALANCE OUTSTANDING IN THE NAME OF M/S GAURI SHANKER & CO., CHANDIGARH. IT W AS NOTED THAT SALES HAD BEEN MADE TO THE SISTER CONCERN DURI NG THE YEAR BUT THE RECOVERY HAD NOT BEEN MADE IN TIMELY M ANNER AND DEBIT BALANCE WAS OUTSTANDING THROUGHOUT THE YE AR. IN THIS WAY, HE PROPORTIONALLY DISALLOWED THE INTEREST @ 12% ON THE DEBIT BALANCE OF M/S GAURI SHANKER & CO. ALSO. 10. BEFORE THE LEARNED CIT (APPEALS), THE SUBMISSI ON OF THE ASSESSEE WAS THAT THESE TRANSACTIONS ARE ALL IN THE COURSE OF BUSINESS CONSIDERING THE COMMERCIAL EXPEDIENCY. THE ASSESSEE COMPANY HAS MADE SALES AND PURCHASES FROM THESE CONCERNS. FURTHER THE ASSESSEE HAD ENOUGH OWN FUND S TO LEND TO THESE CONCERNS AND HAS NOT USED ANY BORROWED FUN DS FOR THIS PURPOSE. IT WAS ALSO SUBMITTED BEFORE THE LEA RNED CIT (APPEALS) THAT SIMILAR ISSUE HAD COME UP IN APPEAL BEFORE THE I.T.A.T., CHANDIGARH BENCH IN ASSESSEES OWN CASE F OR ASSESSMENT YEAR 2006-07 IN ITA NO.937/CHD/2009, DAT ED 30.4.2010 AND THE GROUND WAS ALLOWED IN FAVOUR OF THE ASSESSEE. RELYING ON THE SAID ORDER OF THE I.T.A.T ., CHANDIGARH BENCH, THE LEARNED CIT (APPEALS) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 11. THE LEARNED D.R. RELIED UPON THE ORDER OF THE ASSESSING OFFICER, WHILE THE LEARNED COUNSEL FOR TH E ASSESSEE RELIED UPON THE ORDER OF THE LEARNED CIT (APPEALS) AND ALSO OF 6 THE I.T.A.T., CHANDIGARH BENCH IN ASSESSEES OWN CA SE FOR ASSESSMENT YEAR 2006-07 (SUPRA). 12. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF B OTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIE S BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. FROM THE PERUSAL OF THE ORDER OF THE I.T.A.T., CHANDIGARH BE NCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 (SU PRA), WE SEE THAT THE ADDITIONS IN THAT YEAR WERE ALSO MADE ON ACCOUNT OF PROPORTIONATE INTEREST ON THE ADVANCES MADE TO T HE SISTER CONCERN M/S GAURI SHANKER & CO., CHANDIGARH AND TRANSACTIONS WITH SOME OTHER PARTIES TO WHOM SALES WERE MADE. SINCE IN THIS YEAR ALSO THE TRANSACTION HAS BEEN MADE WITH M/S GAURI SHANKER & CO., CHANDIGARH AND THE FA CTS HAVE NOT BEEN DISTINGUISHED BY ANY OF THE LOWER AUTHORIT IES AND EVEN BEFORE US, THE LEARNED D.R. COULD NOT CONTROVE RT THE FINDINGS GIVEN BY THE LEARNED CIT (APPEALS). WITH REGARD TO M/S KHANDELIA UDYOG PVT. LTD., IN THE PAPER BOOK FI LED BY THE ASSESSEE DETAILED LEDGER ACCOUNT OF THE SAID PARTY HAS BEEN FILED AND ON PERUSAL OF WHICH, WE FIND THAT THE REG ULAR SALES AND PURCHASES ARE BEING MADE FROM THIS PARTY THROUG H OUT THE YEAR. THEREFORE, THE PROPOSITION LAID DOWN BY THE I.T.A.T., CHANDIGARH BENCH M/S GAURI SHANKER & CO., CHANDIGAR H CAN ALSO BE APPLIED TO M/S KHANDELIA UDYOG PVT. LTD. IN VIEW OF THIS, WE UPHOLD THE ORDER OF THE LEARNED CIT (APPEA LS) IN THIS REGARD. THE GROUND OF APPEAL RAISED BY THE REVENU E IS DISMISSED. 7 13. THE GROUND OF APPEAL NO.3 RAISED BY THE REVENU E IS AGAINST THE ADDITION OF RS.3,09,55,904/- MADE BY TH E ASSESSING OFFICER ON ACCOUNT OF SUPPRESSION OF SALE S. 14. THE ASSESSING OFFICER NOTED THAT DURING THE YE AR THE ASSESSEE HAS MADE SUBSTANTIAL PORTION OF THE SALES I.E. 38.42% TO ITS SISTER CONCERNS, WHICH WERE AT A VERY LOW RA TE AS COMPARED TO THE SALES MADE TO INDEPENDENT PARTIES. IN REPLY, THE ASSESSEE STATED THAT THE SISTER CONCERNS M/S GAURI SHANKAR & CO. AND ALSO KHANDELIA UDYOG PVT. LTD. WE RE RETURNING THEIR INCOME IN THE HIGHEST TAX RATE SLAB . THEREFORE, THERE WAS NO NEED FOR ASSESSEE TO MAKE S ALES TO THEM AT LOWER RATES. FURTHER, IT WAS ARGUED THAT T HESE CONCERNS WERE GIVEN TRADE DISCOUNTS, THEREFORE, PRO VISIONS OF SECTION 40A(2) OF THE ACT ARE NOT APPLICABLE TO THE SAME. RELIANCE WAS PLACED ON THE ORDER OF THE CHANDIGARH BENCH OF I.T.A.T. IN ASSESSEES CASE FOR ASSESSMENT YEAR 200 6-07. THE ASSESSING OFFICER MADE A DETAILED ANALYSIS, WHEREBY THE SALES MADE TO SISTER CONCERNS AND INDEPENDENT PARTIES WER E COMPARED AND EXAMINED BILL-WISE. A FEW EXAMPLES A S CONFRONTED TO THE ASSESSEE ARE ALSO REPRODUCED IN P ARA 5.3 OF HIS ORDER. REJECTING ALL OTHER CONTENTION OF THE ASSESSEE, AVERAGE PERCENTAGE WAS CALCULATED ON THE BASIS OF S AMPLES BILLS AS CONFRONTED TO THE ASSESSEE AND IT WAS CONC LUDED THAT AVERAGE SUPPRESSION IN THE SALES VOLUME IS TO THE T UNE OF 4.34%. SINCE THE ASSESSEE HAD MADE SALE AMOUNTING TO RS.71,32,69,682/-, AN AMOUNT OF RS.3,09,55,904/- WA S ADDED TO THE INCOME, BEING 4.34% OF RS.71,32,69,682/-. 8 15. BEFORE THE LEARNED CIT (APPEALS), REPLY GIVEN TO THE ASSESSING OFFICER WAS REITERATED. IN ADDITION, IT WAS STATED THAT THE CONTENTION OF THE ASSESSING OFFICER AS REG ARDS NO DIFFERENCE DUE TO LOCATION, IT WAS STATED THAT THE LOSS IS INCURRED IN THE CHANDIGARH UNIT, WHILE THE RATES CO MPARED BY THE ASSESSING OFFICER ARE THAT OF SRI GANGA NAGAR U NIT. FURTHER, IT WAS ALSO SUBMITTED THAT BOOKING OF FREI GHT EXPENSES HAS NO RELATION WITH THE RATE OF PRODUCT A S THE EDIBLE OIL BEING VOLATILE ITEM THE RATE VARIES ON THE BAS IS OF DEMAND AND SUPPLY AND RATES OF THE PRODUCT OF THE COMPETIT ION IN THE MARKET AT THAT TIME AT A PARTICULAR LOCATION. AGR EEING WITH THE SAID SUBMISSION, THE LEARNED CIT (APPEALS) DELE TED THE ADDITION MADE BY THE ASSESSING OFFICER. 16. AGGRIEVED BY THE SAME, THE REVENUE HAS COME IN APPEAL BEFORE US. 17. THE LEARNED D.R. RELIED UPON THE ORDER OF THE ASSESSING OFFICER, WHILE THE LEARNED COUNSEL FOR TH E ASSESSEE RELIED UPON THE ORDER OF THE LEARNED CIT (APPEALS). 18. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF B OTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIE S BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. THE LEARNED CIT (APPEALS) HAS GIVEN A DETAILED FINDING WITH REGARD TO THIS ISSUE WHICH READS AS UNDER : 5.3 I HAVE CONSIDERED THE SUBMISSION OF THE LD. CO UNSEL FOR THE APPELLANT AND HAVE GONE THROUGH THE DETAILED CAL CULATION MADE BY THE ASSESSING OFFICER. THE BASIC POINT IS TH AT AN 9 ASSESSEE CANNOT BE EXPECTED, MUCH LESS BE COMPELLED , TO MAKE PROFIT IN EVERY TRANSACTION OF SALE HE MAKES. HOWEVER, IF THE TRANSACTION IS WITH A RELATED PARTY AND THE TRA NSACTION RESULTS IN A LOSS, THE ONUS WILL BE ON THE ASSESSEE TO ESTABLISH THAT IT WAS A BONAFIDE TRANSACTION AND WAS NOT ENTE RED INTO WITH THE MOTIVE OF BENEFITTING THE RELATED PARTY. IN THE ABSENCE OF SUCH EVIDENCE BEING LED BY THE ASSESSEE, THE REVENUE WILL BE ENTITLED TO DISALLOW/IGNORE THE LOSS WHILE COMPUTING THE TAXABL E INCOME. HOWEVER, IF THE SALES TO THE RELATED PARTY RESULT I N A PROFIT TO THE ASSESSEE, EVEN THOUGH THE SALES ARE MADE AT A RATE, LOWER THAN AT WHICH THE SALES ARE MADE TO OTHER PARTIES, THE REVENUE CANNOT BRING TO TAX THE NOTIONAL PROFIT WHICH THE A SSESSEE WOULD OR COULD HAVE EARNED, HAD THE SALES BEEN MADE AT TH E RATES CHARGED FROM UNRELATED PARTIES. HAVING SAID THAT, I MAY ADD THAT THE APPELLANT HAS CITED MANY COGENT REASONS LIK E HUGE VOLUME OF SALES TO THESE CONCERNS ETC. TO JUSTIFY T HE SALES TO THE SISTER CONCERNS AT LOWER RATES. IT MAY ALSO BE NOTE D HERE THAT THE ASSESSING OFFICER, WHILE CALCULATING THE SO CALL ED SUPPRESSED SALES, HAS TAKEN INTO ACCOUNT THE SALES MADE TO M/S GAURI SHANKER 86 CO., WHICH IS AN INDEPENDENT A ND UNRELATED ENTITY. IT MAY BE CLARIFIED THAT WHILE TH E ADDITION FOR INFLATED PURCHASES IN RESPECT OF PURCHASES MADE FROM SISTER CONCERNS COULD BE MADE U/S 40A(2)(A), BUT THERE IS NO CORRESPONDING PROVISION IN RESPECT OF SALES MADE TO SISTER CONCERNS. THE DEPARTMENT CANNOT COMPEL A PERSON TO MAKE PROFIT OUT OF EVERY TRANSACTION SINCE THE DEPARTMENT DOES NOT HAVE ANY AUTHORITY TO ASK A PERSON TO MAXIMIZE ITS PROFITS. IF THE ASSESSEE CHOOSES TO GIVE DISCOUNT TO SOMEONE, HE IS FREE TO DO IT. THE ONLY CRITERIA /CONDITION IS THAT THE TRANS ACTION (SALE) SHOULD NOT RESULT IN LOSS. THIS PRINCIPLE WAS ENUMER ATED BY THE HON'BLE SUPREME COURT IN THE CASE OF M/S CALCUTTA D ISCOUNT COMPANY LTD. (91 ITR 8), IN WHICH THEIR LORDSHIPS H AVE HELD THAT WHEN A TRADER TRANSFERS HIS GOODS TO ANOTHER T RADER AT A PRICE WHICH IS LESS THAN THE MARKET PRICE, SO LONG AS THE TRANSACTION IS BONAFIDE, THE REVENUE AUTHORITIES CA NNOT CONSIDER THE MARKET PRICE IGNORING THE REAL PRICE F ETCHED TO COMPUTE PROFITS FROM THE TRANSACTION. IT WAS ALSO HE LD BY THE 10 APEX COURT IN THIS CASE THAT AN ASSESSEE WAS AT LIBER TY TO ARRANGE HIS AFFAIRS SO AS TO MINIMISE HIS TAX BURDEN . IN THE INSTANT CASE, THE PERSONS TO WHOM SALES ARE MADE AT LOWER RATES ARE TAX PAYERS IN THE HIGHEST MARGINAL TAX BRACKET A ND SO IT CAN NOT EVEN BE VIEWED AS A SCHEME FOR TAX REDUCTION. I N VIEW OF THIS DISCUSSION, IT IS HELD THAT THE ASSESSING OFFI CER WAS NOT JUSTIFIED IN MAKING ADDITION OF RS. 3,09,55,904/- ON AC COUNT OF SALES MADE TO ASSOCIATED CONCERNS AT LOWER RATE AND THE SAME IS DELETED. GROUND OF APPEAL NO. 4 IS ALLOWED. 19. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF T HE LEARNED CIT (APPEALS) IN THIS REGARD. BEFORE US, AT PAPER BOOK PAGE 124 A CHART EXPLAINING IN DETAIL THE REAS ONS FOR VARIATION WAS FILED. IN FACT, THE ASSESSING OFFIC ER HAS TRIED TO BRING THE PROVISION OF DOMESTIC TRANSFER PRICING IN THIS CASE, WHERE THE INTERNAL COMPARABLES ARE USED. WE MUST MENTION THAT THE SAID PROVISIONS ARE NOT APPLICABLE IN THE YEAR UNDER CONSIDERATION. WE SEE FROM THE PERUSAL OF THE DET AILED REASONING GIVEN BY THE ASSESSEE FOR THE DIFFERENCE IN RATES, THAT THERE IS NO SUPPRESSION OF SALES BY THE ASSESS EE. THIS GROUND OF REVENUE IS DISMISSED. 20. THE GROUND NOS.4 AND 5 RAISED BY THE REVENUE A RE GENERAL IN NATURE, HENCE NEED NO ADJUDICATION. 21. THE RESULT OF THE REVENUE IS DISMISSED. ITA NO.578/CHD/201 : 22. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE R EAD AS UNDER : 11 1. AS PER THE FACTS AND CIRCUMSTANCE OF THE CASE AND AS PER THE PROVISIONS OF LAW, THE LEARNED COMMISSIONER OF INCOM E TAX (APPEALS) HAS ERRED UPHOLDING THE ADDITION OF RS. 1,58,424 MADE BY THE ASSESSING OFFICER U/S 14A. THE DISALLOWANCE MADE BE DELETED. 2. AS PER FACTS AND CIRCUMSTANCES OF THE CASE AND PROVISIONS OF LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO TREAT THE DISALLOWANCE OF INTE REST U/S 36(1)(III) AS PART OF ACTUAL COST AND DEPRECIATION BE ALLOWED ON THE SAME. 3. AS PER FACTS AND CIRCUMSTANCES OF THE CASE AND PROVISIONS OF LAW, THE LEARNED COMMISSIONER OF INCO ME TAX (APPEALS) HAS ERRED IN SUSTAINING THE ADDITION O F RS.61,53,868/- ON ACCOUNT OF UNDER VALUATION OF CLO SING STOCK. THE ADDITION MADE BE DELETED. 4. AS PER FACTS AND CIRCUMSTANCES OF THE CASE AND PROVISIONS OF LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN MAKING DISALLOWANCE OF RS. 18,72,420 OUT OF THE COMMISSION EXPENSES U/S 37(1) AS HAVING NOT BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PU RPOSES OF BUSINESS. THE DISALLOWANCE BE DELETED. 5. THE ASSESSEE CRAVES PERMISSION TO ADD OR AMEN D THE ABOVE GROUNDS AT THE TIME OF HEARING. 23. THE GROUND NO.1 RELATES TO DISALLOWANCE OF RS.1,58,424/- MADE BY THE ASSESSING OFFICER INVOKIN G THE PROVISION OF SECTION 14A OF THE ACT. 24. BRIEFLY, THE FACTS ARE THAT DURING THE YEAR, T HE ASSESSEE MADE INVESTMENTS OF RS.66,62,696 IN SHARES AND MUTUAL FUNDS. ON A QUERY RAISED BY THE ASSESSING OFFICER, 12 THE ASSESSEE SUBMITTED THAT DURING THE YEAR IT HAS EARNED EXEMPT INCOME AMOUNTING TO RS.6,614/- ONLY AND IT H AD INCURRED EXPENDITURE IN RELATION TO EXEMPT INCOME A MOUNTING TO RS.24,288/- ONLY. HOWEVER, THE ASSESSING OFFIC ER REJECTING THE CONTENTION OF THE ASSESSEE, INVOKING THE PROVIS IONS OF RULE 8-D OF INCOME TAX RULES MADE DISALLOWANCE OF AN AMO UNT OF RS.1,58,424/-. THE LEARNED CIT (APPEALS) CONFIRME D THE DISALLOWANCE SO MADE BY THE ASSESSING OFFICER, AFTE R CONSIDERING THE DETAILED SUBMISSION MADE BY THE ASS ESSEE. 25. THE LEARNED COUNSEL FOR THE ASSESSEE DURING TH E COURSE OF HEARING TOOK US TO THE VARIOUS PAGES OF T HE PAPER BOOK FILED BY THE ASSESSEE. IT WAS SHOWN TO US FR OM THE PERUSAL OF PAGE 15, THAT THE INVESTMENTS DURING THE YEAR WERE STARTED FROM 23.11.2007. FURTHER, AT PAPER BOOK P AGE 59, A CASH FLOW STATEMENT WAS ATTACHED, WHICH SHOWED THAT CASH FLOW FROM THE OPERATION OF THE ASSESSEE WERE TO THE TUNE OF RS.4,74,33,029/- WHILE THE PURCHASE OF INVESTMENTS WERE AMOUNTING TO RS.66,61,556/-. THIS WAS SHOWN TO US TO EMPHASIZE THE FACT THAT NO INTEREST BEARING FUNDS W ERE UTILIZED FOR THE PURPOSES OF INVESTMENTS. IN THIS VIEW, IT WAS PRAYED THAT THE INTEREST PART DISALLOWED BY THE ASS ESSING OFFICER UNDER RULE 8D MAY BE DELETED. ON THE EXPE NSES PART OF THE DISALLOWANCE, IT WAS SUBMITTED THAT ALL ALON G THE CONTENTION OF THE ASSESSEE BEFORE THE LOWER AUTHORI TIES WAS THAT IT HAD INCURRED EXPENSES AMOUNTING TO RS.24,28 8/- FOR EARNING EXEMPT INCOME AND WITHOUT RECORDING HIS SAT ISFACTION ON HOW THE ESTIMATION SO MADE BY THE ASSESSEE WAS W RONG, THE 13 ASSESSING OFFICER STRAIGHTAWAY MADE COMPUTATION AS PER RULE 8D. RELIANCE WAS PLACED ON THE JUDGMENT OF HON'BL E JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. D EEPAK MITTAL. 36CCH 51 (2013) (P&H). 26. THE LEARNED D.R. RELIED UPON THE ORDER OF THE LOWER AUTHORITIES. HIS SUBMISSION WAS THAT IT IS A CASE OF MIXED FUNDS BEING USED, THEREFORE, IT CANNOT BE SAID THAT INTEREST BEARING FUNDS WERE NOT USED FOR THE PURPOSES OF INV ESTMENTS. RULE 8D IS APPLICABLE DURING THE RELEVANT ASSESSMEN T YEAR. THEREFORE, THE ASSESSING OFFICER WAS RIGHT IN INVOK ING THE SAID DISALLOWANCE AND LEARNED CIT (APPEALS) HAS RIGHTLY CONFIRMED THE SAME. 27. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF B OTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIE S BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. FROM THE PERUSAL OF THE LEDGER ACCOUNT OF INVESTMENTS AS WEL L AS THE CASH FLOW STATEMENT FILED BY THE ASSESSEE, AS STATE D HEREINABOVE, WE OBSERVE THAT THE AMOUNT OF INVESTME NTS IS MINISCULE IN COMPARISON TO THE OWNED FUNDS ASSESSEE HAD. THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE FIRM USED INTEREST BEARING FUNDS FOR THE PURPOSES OF MAKING INVESTMENTS. THE CONTENTION OF THE LEARNED D.R. A S REGARDS AVAILABILITY OF MIXED FUNDS IS ALSO NOT TENABLE IN VIEW OF THE LATEST JUDGMENT OF THE HON'BLE JURISDICTIONAL PUNJA B & HARYANA HIGH COURT IN THE CASE OF BRIGHT ENTERPRIS ES PVT. LTD. VS. CIT, ITA 224 OF 2013 (O&M) DATED 27.7.2015 , WHEREBY IT HAS BEEN HELD IN VERY CLEAR TERMS THAT IN CASE O F AVAILABILITY 14 OF MIXED FUNDS PRESUMPTION TO THE EFFECT THAT INVES TMENTS ARE MADE OUT OF OWNED FUNDS HAS TO BE TAKEN, AS THE MON EY HAS NOT COLOUR. MOREOVER IN THE PRESENT CASE, THE LEA RNED COUNSEL FOR THE ASSESSEE HAS BEEN ABLE TO DEMONSTRA TE THAT AT THE TIME OF MAKING INVESTMENTS, THE ASSESSEE WAS HA VING HUGE AMOUNT OF OWNED FUNDS. IN VIEW OF THIS, THE ASSES SING OFFICER CANNOT MAKE DISALLOWANCE OF INTEREST FOR THE PURPOS ES OF SECTION 14A OF THE ACT AS PER RULE 8D. AS REGARDS THE EXPENDITURE PART OF THE DISALLOWANCE, WE AGREE WITH THE SUBMISSION OF THE ASSESSEE THAT NOWHERE IN HIS ORDE R THE ASSESSING OFFICER HAS RECORDED ANY SATISFACTION DIR ECTLY OR INDIRECTLY TO THE EFFECT WHY THE AMOUNT OF EXPENDIT URE INCURRED FOR EARNING EXEMPT INCOME AS STATED BY ASS ESSEE IS NOT CORRECT. AS PER THE PROPOSITION LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF DEEPAK MITTAL (SUPRA), IN THE ABSENCE OF SUCH SATISFACTION, NO DI SALLOWANCE OF EXPENSES CAN BE MADE UNDER SECTION 14A OF THE AC T AS PER RULE 8D. THE GROUND OF APPEAL RAISED BY THE ASSES SEE IS ALLOWED. 28. THE LEARNED COUNSEL FOR THE ASSESSEE PREFERRED NOT TO PRESS GROUND NO.2 OF THE APPEAL. THEREFORE, TH E GROUND NO.2 IS DISMISSED AS BEING NOT PRESSED. 29. THE GROUND NO.3 RAISED BY THE ASSESSEE IS AGAI NST THE ADDITION OF RS.61,53,868/- MADE BY THE ASSESSIN G OFFICER ON ACCOUNT OF UNDERVALUATION OF STOCK 15 30. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SING OFFICER DURING THE ASSESSMENT PROCEEDINGS NOTICED T HAT THE ASSESSEE WAS VALUING RAW MATERIAL AND PACKING MATER IAL AT COST AND THE FINISHED GOODS AT ESTIMATED COST OR NE T REALIZABLE VALUE, WHICHEVER WAS LOWER. HE ALSO FOUND THAT THE ASSESSEE WAS NOT FOLLOWING ANY SYSTEMATIC METHOD FOR VALUATI ON OF CLOSING STOCK, WHICH SHOULD HAVE BEEN AS PER THE F IFO METHOD. HE ALSO NOTICED THAT A LARGE NUMBER OF EX PENSES LIKE, PACKAGING, FREIGHT, FAXES, ETC. HAVE NOT BEEN LOADED TO THE CLOSING STOCK. AFTER EXAMINING THE SAMPLE OF P URCHASE AND SALE BILLS, THE ASSESSING OFFICER CONCLUDED THA T THERE IS AN AVERAGE UNDERVALUATION OF STOCK @ 11.76% AND THI S WAY, HE MADE AN ADDITION OF RS.61,53,868/-. 31. BEFORE THE LEARNED CIT (APPEALS), THE ASSESSEE MADE DETAILED SUBMISSIONS AND TRIED TO FIND OUT THE FALL ACY IN THE METHOD ADOPTED BY THE ASSESSING OFFICER TO CALCULAT E THE UNDERVALUATION OF STOCK. THE CONTENTION OF THE ASS ESSEE WAS THAT THE ASSESSING OFFICER HAD ON THE BASIS OF ARBI TRARY AND ILLOGICAL ASSUMPTIONS HAD CALCULATED VALUATION OF S TOCK WHILE THE ASSESSEE HAS BEEN ADOPTING THE SAME METHOD CONS ISTENTLY OVER THE PAST MANY YEARS, WHICH HAS BEEN ALL ALONG ACCEPTED BY THE DEPARTMENT. FURTHER, EXPLANATION OF EACH AN D EVERY COMPONENT OF RAW MATERIAL AND FINISHED GOODS WAS SU BMITTED BEFORE THE LEARNED CIT (APPEALS). REJECTING ALL T HE CONTENTION OF THE ASSESSEE, THE LEARNED CIT (APPEALS) HELD THA T THE ASSESSEE HAD NOT FOLLOWED ANY METHOD FOR THE PURPOS ES OF VALUATION OF CLOSING STOCK WHICH SHOULD HAVE BEEN V ALUED AS 16 PER FIFO METHOD. FURTHER, HE OBSERVED THAT THE AS SESSEE HAS NOT BEEN ABLE TO EXPLAIN AS TO HOW THE ASSESSING OF FICER WAS NOT RIGHT IN OBSERVING THAT THE ASSESSEE HAD VALUED THE CLOSING STOCK OF MUSTARD SEED @ RS.2472 PER QTL. AS AGAINST RS.2638 PER QTL. AS PER THE PURCHASE BILLS IN THE M ONTH OF MARCH, 2008. FURTHER REFERRING TO THE DETAILED WO RKING DONE BY THE ASSESSING OFFICER, THE LEARNED CIT (APPEALS) CONFIRMED THE ADDITION. 32. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATE D THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES AND F URTHER TO EXPLAIN THE DISCREPANCY AS IN THE VALUATION OF STOC K BY THE ASSESSEE AND THAT OF THE ASSESSING OFFICER, HE FILE D A DETAILED CHART OF EACH AND EVERY ITEM OF RAW MATERIAL AND FI NISHED GOODS PURCHASED BY IT. IT WAS STATED BEFORE US HA T THE ASSESSEE HAS BEEN ADOPTING THE SAME METHOD OF VALUI NG THE STOCK CONSISTENTLY IN THE LAST MANY YEARS AND THERE IS NO LAW, WHICH PROVIDES TO VALUE THE STOCK MANDATORILY AS PE R FIFO METHOD. FURTHER, THE OBSERVATION OF THE LEARNED C IT (APPEALS) THAT THE ASSESSEE HAD NOT BEEN ABLE TO CO NTROVERT THE VARIATION IN MUSTARD SEED @ RS.2472 PER QTL. TA KEN BY THE ASSESSING OFFICER AS AGAINST RS.2638/- PER QTL. TAK EN BY THE ASSESSEE. IT WAS SUBMITTED THAT THE ASSESSING OFF ICER HIMSELF MENTIONED THAT THE STOCK SHOULD BE VALUED AS PER FI FO METHOD, WHILE HE HAS TAKEN THE AVERAGE OF THE RATES OF LAST THREE BILLS AND CONCLUDED THE UNDERVALUATION. FURT HER, CERTAIN PAGES OF THE PAPER BOOK WERE REFERRED TO SH OW THAT THE EXPENSES HAVE BEEN PROPERLY LOADED IN THE VALUATION OF CLOSING 17 STOCK. IN THIS WAY, IT WAS PRAYED THAT THERE BEIN G NO ERROR IN THE METHOD FOLLOWED BY THE ASSESSEE TO VALUE THE CL OSING STOCK, THE ADDITION MADE BY THE ASSESSING OFFICER B E DELETED. 33. THE LEARNED D.R. RELIED UPON THE ORDERS OF THE ASSESSING OFFICER AS WELL AS OF THE LEARNED CIT (AP PEALS). 34. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF B OTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIE S BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. FIRST OF ALL, THE PREMISES UPON WHICH THE ISSUE WAS INITIATED BY THE ASSESSING OFFICER, THAT THE ASSESSEE SHOULD FOLLOW FIFO SYSTE M OF ACCOUNTING FOR VALUING CLOSING STOCK ITSELF IS NOT CORRECT. NOWHERE IN THE INCOME TAX ANY SUCH METHOD IS PRESCR IBED. ONLY REQUIREMENT IS TO ADOPT A GENERALLY ACCEPTED A CCOUNTING POLICY ON A CONSISTENT BASIS. THE ASSESSEE HAS BE EN FOLLOWING THE PRACTICE OF STOCK VALUATION CONSISTENTLY, WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT IN EARLIER YEARS ALSO. WE ALSO OBSERVE A CONTRADICTION IN THE STAND OF THE ASSESSI NG OFFICER. HE HIMSELF MANDATES TO FOLLOW THE FIFO METHOD. HO WEVER, HE HIMSELF TAKES AN AVERAGE OF THE LAST FEW BILLS FOR VALUING THE STOCK OF RAW MATERIAL. FURTHER, HE TAKES THE BILL OF OIL DATED 6.3.2008 AND NOT OF 31.3.2008. WE HAVE PERUSED TH E DETAILS FILED BY THE ASSESSEE, WHEREBY IT IS SEEN THAT ALL RELEVANT EXPENSES HAVE BEEN CONSIDERED FOR VALUING STOCK. THEREFORE, THE OBSERVATION OF THE ASSESSING OFFICER THAT EXPEN SES HAVE NOT BEEN LOADED IS ALSO NOT CORRECT. FURTHER, THE DIFFERENCE WORKED OUT IN RESPECT OF OIL, HAS BEEN APPLIED TO A LL CATEGORIES OF STOCK I.E. OIL CAKES, DE-OILED CAKES, STOCK IN P ROCESS ETC. 18 THIS ALL SHOWS THE LACK-LUSTER APPROACH, WHICH HAS BEEN ADOPTED BY THE ASSESSING OFFICER FOR WORKING OUT TH E DIFFERENCE IN VALUATION OF STOCK. ON THE OTHER H AND, THE ASSESSEE HAS FILED BEFORE THE LOWER AUTHORITIES ALL DETAILS PERTAINING TO BASIS OF VALUATION OF STOCK OF VARIOU S ITEMS. THESE BASIS HAVE BEEN EXPLAINED TO US DURING THE CO URSE OF HEARING IN GREAT DETAIL. WE DO NOT FIND ANY IRREG ULARITY IN THE SAME. IN VIEW OF THIS, THE ADDITION MADE BY THE A SSESSING OFFICER IS HEREBY DELETED. 35. THE GROUND NO.4 RAISED BY THE ASSESSEE IS AGAI NST THE DISALLOWANCE OF RS.18,72,420/- MADE BY THE ASS ESSING OFFICER ON ACCOUNT OF COMMISSION EXPENSES. 36. THE BRIEF FACTS OF THE CASE ARE THAT DURING TH E RELEVANT ASSESSMENT YEAR, THE ASSESSEE PAID COMMISS ION TO THE FOLLOWING PERSONS : (I) SHRI ANIL RASTOGI, DELHI RS.7,79,011/- (II) SHRI YOGESH HUF, DELHI RS.3,74,977/- (III) SHRI YOGEH TRADING CO., PARWANOO. RS.7,18,432/- RS.18,72,420/- 37. THE ASSESSING OFFICER OBSERVED THAT THE PERSON S MENTIONED AT SR.NO.(II) AND (III) ARE ALSO COVERED UNDER SECTION 40A(2)(B) OF THE ACT. THE ASSESSEE COULD NOT FIND ANY DETAILS OF SERVICES RENDERED BY THESE PERSONS. FURTHER, I T WAS ALSO OBSERVED BY THE ASSESSING OFFICER THAT SINCE THE AS SESSEE HAS NOT MADE ANY SUBSTANTIAL SALE IN DELHI, THE PAYMENT OF COMMISSION TO SHRI ANIL RASTOGI WAS NOT JUSTIFIED. IN THIS 19 WAY, HE DISALLOWED THE TOTAL AMOUNT OF RS.18,72,420 /- BEING COMMISSION EXPENSES CLAIMED BY THE ASSESSEE. 38. BEFORE THE LEARNED CIT (APPEALS), IT WAS CLARI FIED THAT THE PAYMENT OF COMMISSION TO SHRI ANIL RASTOGI WAS ON ACCOUNT OF SALE MADE IN THE TERRITORY OF WEST BENGA L, THE ADDRESS OF SHRI ANIL RASTOGI MAY BE OF DELHI. THE CONFIRMATIONS FROM THE COMMISSION AGENTS WERE ALSO FILED BEFORE THE LEARNED CIT (APPEALS). HOWEVER, THE LE ARNED CIT (APPEALS) DID NOT FILED HIMSELF IN AGREEMENT WITH T HE ASSESSEE. STATING THAT THE CONFIRMATIONS WERE ADDITIONAL EVID ENCES AND SINCE THE ASSESSEE HAS NOT GIVEN ANY PLAUSIBLE REAS ON FOR NOT FILING THE SAME DURING THE COURSE OF ASSESSMENT PRO CEEDINGS, HE CONFIRMED THE DISALLOWANCE. 39. THE LEARNED COUNSEL FOR THE ASSESSEE PRAYED BE FORE US THAT THE LEARNED CIT (APPEALS) MAY BE DIRECTED T O ADMIT THE ADDITIONAL EVIDENCES. WHILE LEARNED D.R. OPPOSED THE SAID STANCE OF THE LEARNED COUNSEL FOR THE ASSESSEE. 40. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF B OTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIE S BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. WE O BSERVE FROM THE ORDER OF THE LOWER AUTHORITIES THAT THE DISALLO WANCE ON ACCOUNT OF COMMISSION PAID TO SHRI ANIL RASTOGI ON THE BASIS THAT HIS ADDRESS IS IN DELHI, WHILE THE ASSESSEE HA S NOT MADE ANY SALE IN DELHI IS NOT CORRECT. IT MAY BE THAT THE ADDRESS IS OF DELHI, BUT SHRI ANIL RASTOGI MUST BE OPERATIN G IN WEST BENGAL ALSO. THIS ISSUE HAS NOT BEEN DEALT WITH B Y THE LOWER 20 AUTHORITIES IN RIGHT PERSPECTIVE. FURTHER, THE CO NFIRMATIONS FILED BY THE ASSESSEE BEFORE THE LEARNED CIT (APPEA LS) WERE NOT ADMITTED. IN THE INTEREST OF JUSTICE, WE RESTORE THE ISSUE BACK TO THE FILE OF THE LEARNED CIT (APPEALS) TO CO NSIDER AFRESH. THE ASSESSEE IS AT LIBERTY TO PRODUCE EVI DENCE AND MATERIAL TO DEFEND ITS CASE. IT MAY BE GIVEN PROP ER OPPORTUNITY OF BEING HEARD. 41. THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 42. IN THE RESULT, THE APPEAL OF THE REVENUE IN IT A NO.775/|CHD/2012 IS DISMISSED AND THE APPEAL OF THE ASSESSEE IN ITA NO.778/CHD/2012 IS PARTLY ALLOWED, ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF NOVEMBER, 2015. SD/- SD/- (BHAVNESH SAINI) (RANO JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 6 TH NOVEMBER, 2015 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH 21