The ACIT, Circle-5, Ahmedabad V. Prima Automation (I) Pvt.Ltd., Ahmedabad

ITA 971/AHD/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1525 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 24-05-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 03-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: G C PIPARA
• Keywords: Capital asset; Proportionate interest
• Section: 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH (BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI KUL BHARAT, JUDICIAL MEMBER ITA. NO: 971/AHD/2012 (ASSESSMENT YEAR: 2008-09) THE A.C.I.T. (OSD), CIRCLE-5, AHMEDABAD V/S PRIMA AUTOMATION (I) PVT. LTD. 504, SHAPATH COMPLEX, OPP RAJPATH CLUB, GANDHINAGAR-SARKHEJ HIGHWAY, AHMEDABAD (APPELLANT) (RESPONDENT) PAN: AABCP6889L APPELLANT BY : SHRI ALOK KUMAR, SR. D.R. RESPONDENT BY : SHRI G.C. PIPARA ( )/ ORDER DATE OF HEARING : 24-05-2016 DATE OF PRONOUNCEMENT : 24 -05-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A)- XI, AHMEDABAD DATED 23.02.2012 PERTAINING TO A.Y. 2 008-09. ITA NO . 971 /AHD/2012 . A.Y. 2008-0 9 2 2. THE EFFECTIVE GRIEVANCE OF THE REVENUE READ AS UNDE R:- 1. THE ID. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE DISALLOWANCE OF RS.1,05,560/-, BEING EXCESS PURCHASE SHOWN BY TH E ASSESSEE FROM M/S. TELE SWITCHGEARS. 2. THE ID. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DE LETING THE DISALLOWANCE OF RS. 1,00,000/-, BEING EXCESS CLAIM OF PURCHASE F ROM M/S. TRADEWELL. 3. THE ID. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DE LETING THE ADDITION OF RS.5,35,403/- WORKED OUT BY THE A.O. BY CAPITALIZAT ION OF INTEREST AS PER THE PROVISIONS OF SEC.36(L)(III) OF THE I.T. ACT. 4. THE ID. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DE LETING THE ADDITION OF RS.51,59,563/- U/S.145A OF THE ACT, BEING CENVAT PA ID ON RAW MATERIAL. 3. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING OF CONTROL PANEL & ELECTRICAL COMPONENTS FOLLOWING MERCANTILE SYSTEM O F ACCOUNTING. THE RETURN OF INCOME WAS FILED ON 30.09.2008 DECLARING TOTAL INCOME AT RS. 13,54,58,110/-. THE RETURN WAS SELECTED FOR SCRUTIN Y ASSESSMENT AND ACCORDINGLY STATUTORY NOTICES WERE ISSUED AND SERVE D UPON THE ASSESSEE. THE ASSESSMENT WAS MADE U/S. 143(3) OF TH E ACT VIDE ORDER DATED 12.11.2010 AND THE RETURNED INCOME OF RS. 13, 54,58,110/- WAS ASSESSED AT RS. 14,14,39,600/-. 4. ASSESSEE AGITATED THE IMPUGNED ADDITIONS BEFORE THE FIRST APPELLATE AUTHORITY AND SUCCESSFULLY EXPLAINED THE ERRORS IN THE ASSESSMENT ORDER. THE REVENUE IS IN APPEAL BEFORE US AGAINST T HE DELETION OF THE IMPUGNED ADDITIONS. 5. GROUND NOS. 1 & 2 ARE TAKEN TOGETHER RELATES TO THE DELETION OF THE ADDITION MADE ON ACCOUNT OF EXCESS PURCHASES OF RS. 1,05,560/- AND ITA NO . 971 /AHD/2012 . A.Y. 2008-0 9 3 RS. 1,00,000/- BEING PURCHASES FROM M/S. TELE SWITC HGEARS AND M/S. TRADEWELL RESPECTIVELY. 6. WHILE SCRUTINIZING THE RETURN OF INCOME AND EXAMINI NG THE STATEMENT OF ACCOUNTS, THE A.O FOUND DIFFERENCES IN THE PURCH ASES MADE FROM M/S. TELE SWITCHGEARS AND M/S. TRADEWELL. THE A.O. ISSUED NOTICES U/S. 133(6) OF THE ACT TO THE SUPPLIERS. THE ASSESSEE WA S ASKED TO EXPLAIN THE DIFFERENCE BETWEEN THE AMOUNT SHOWN BY THE RESP ECTIVE SUPPLIERS AND THE AMOUNT ENTERED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS. ASSESSEE EXPLAINED THE DIFFERENCE BY FILING NECESSA RY DOCUMENTS WHICH DID NOT FIND FAVOUR WITH THE A.O, THE SAME DOCUMENT ARY EVIDENCES WERE FILED BEFORE THE LD.CIT(A). AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS AND RELEVANT DOCUMENTARY EVIDENCES, THE LD. CIT(A) HELD AS UNDER:- 3.2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. I HAVE ALSO PERUSED VARIOUS EVIDENCES FURNISHED BY THE APPELLANT. IT IS SUBMITTED BY THE APPELLANT THAT PURCHASE OF RS. 5,14,232/- HAS BEEN MADE FROM M/S. TELE SWITCHGEARS VIDE THEIR BILL NO.N00729 DATED 29/10/2 007. THE APPELLANT HAS MADE TOTAL PAYMENT OF RS.17,76,424/- TO M/S. TE LE SWITCHGEARS VIDE CHEQUE NO.356681. DETAILS OF THIS PAYMENT REVEALS T HAT IT CONSIST A PAYMENT OF RS. 5,14,232/- AGAINST BILL NO.N00729. T HE APPELLANT IN THE REGULAR COURSE OF BUSINESS HAS ENTERED PURCHASES FR OM M/S. TELE SWITCHGEARS AMOUNTING TO RS. 5,14,232/- IN THE PURC HASE ACCOUNT, IN HIS BOOKS OF ACCOUNT. THE APPELLANT HAS ALSO FURNISHED COPY OF ITS ACCOUNT IN THE BOOKS OF M/S. TELE SWITCHGEARS WHEREIN SALES VI DE BILL NO.N00729 HAS BEEN RECORDED AT RS. 4,08,672/-. THE ABOVE FACTS CL EARLY REVEALS THAT THE PURCHASES FROM M/S, TELE SWITCHGEARS HAS BEEN ACCOU NTED FOR AT RS. 5,14,232/- IN THE REGULAR COURSE OF BUSINESS AND AG AINST A VALID BILL ISSUED BY M/S. TELE SWITCHGEARS. THE APPELLANT HAD ALREADY MADE PAYMENT AGAINST THIS PURCHASE THROUGH BANKING CHANNELS. IN THE FACE OF SUCH ITA NO . 971 /AHD/2012 . A.Y. 2008-0 9 4 CLINCHING EVIDENCES, I AM INCLINED TO AGREE WITH TH E CONTENTIONS OF THE APPELLANT THAT IT HAD CORRECTLY RECORDED THE PURCHA SES MADE FROM M/S. TELE SWITCHGEARS. IN VIEW OF THIS, DISALLOWANCE MAD E OF RS. 1,05,560/-- IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. 5.2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. I HAVE ALSO PERUSED VARIOUS EVIDENCES FILED BY THE APPELLANT. IT IS SEE N THAT THE APPELLANT HAS PURCHASED MODULAR CIRCUIT BREAKERS FOR A CONSIDERAT ION OF RS.1,45,448/- FROM M/S. TRADEWELL. THESE EQUIPMENTS WERE PURCHASE D VIDE M/S. TRADEWELL BILL NO.F/PUR/02 DATED 17/12/2007. THE RE TAIL INVOICE OF M/S. TRADEWELL ALSO INDICATE THE SAME PURCHASE. PAYMENT OF RS.1,45,448/- TO M/S. TRADEWELL WAS MADE VIDE CHEQUE NO.467551 DATED 28/3/2008. THIS CHEQUE WAS DULY CLEARED FROM THE BANK ACCOUNT OF TH E APPELLANT ON 28/3/2008. THE APPELLANT HAS ALSO PLACED COPY OF IT S PURCHASE REGISTER WHEREIN PURCHASE OF RS. 1,45,448/- IS RECORDED. SIN CE, THE PURCHASE OF RS. 1,45,448/- HAS BEEN MADE VIDE A VALID BILL AND PAYMENT HAS ALSO BEEN MADE OF RS. 1,45,448/- THROUGH BANKING CHANNELS, AC CORDINGLY, THE PURCHASES MADE BY THE APPELLANT APPEARS TO BE FOR A SUM OF RS. 1,45,448/- ONLY. IN THE FACE OF OVERWHELMING EVIDEN CES I AM INCLINED TO AGREE WITH THE CONTENTIONS OF THE ID. A.R. IN VIEW OF THIS, A.O. IS DIRECTED TO ALLOW DISALLOWANCE OF RS. 1,00,000/- MADE AGAINST E XCESS PURCHASES. THIS GROUND OF APPEAL IS ALLOWED. 7. THE LD. D.R. COULD NOT POINT OUT ANY ERROR IN THE A BOVE FACTUAL FINDINGS OF THE LD. CIT(A). 8. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE FAC TUAL FINDINGS OF THE FIRST APPELLATE AUTHORITY. WE FIND THAT THE FINDING S OF THE LD. CIT(A) ARE EMANATING FROM THE DIRECT NEXUS FILED DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS AND AS WELL AS THE PROCEEDIN GS BEFORE THE FIRST APPELLATE AUTHORITY. AS NO DEFECT IS POINTED OUT NOR IT HAS COME ITA NO . 971 /AHD/2012 . A.Y. 2008-0 9 5 TO OUR NOTICE, WE DECLINE TO INTERFERE. GROUND NOS. 1 & 2 ARE ACCORDINGLY DISMISSED. 9. GROUND NO. 3 RELATES TO THE DELETION OF THE ADDITION OF RS. 5,35,403/- WORKED OUT BY THE A.O. BY CAPITALIZATION OF INTEREST AS PER THE PROVISIONS OF THE ACT. 10. WHILE SCRUTINIZING THE RETURN, THE A.O NOTICED THAT THE ASSESSEE HAS CAPITAL WORK-IN-PROGRESS OF RS. 1,59,57,832/-. IT WAS FURTHER NOTICED THAT THERE WAS AN ADDITION TO THE FIXED ASS ETS BY RS. 1,63,35,629/-. THE A.O. WAS OF THE FIRM BELIEF THAT THE ACCRETION IN THE FIXED ASSETS IS OUT OF BORROWINGS. THE A.O. PROCEED ED BY COMPUTING THE PROPORTIONATE INTEREST AT RS. 5,35,403/- AND AD DED BACK THE SAME BY CAPITALIZING THE INTEREST. 11. ASSESSEE STRONGLY AGITATED THE ISSUE BEFORE THE LD. CIT(A). IT WAS STRONGLY CONTENDED THAT THE ACCRETION IN THE FIXED ASSETS IS OUT OF INTERNAL ACCRUALS AND NOT BORROWINGS. AFTER CONSID ERING THE FACTS AND THE SUBMISSIONS, THE LD. CIT(A) HELD AS UNDER:- 6.1 I HAVE CONSIDERED THE RIVAL SUBMISSIONS. I HAVE ALSO PURSUED THE VARIOUS CASE LAWS RELIED UPON BY THE APPELLANT. SIN CE, THE CAPITALISATION OF INTEREST HAS BEEN MADE AS PER THE PROVISIONS OF PRO VISO TO SEC.36(1)(III), IT WILL BE PERTINENT TO DISCUSS THE PROVISIONS OF THIS PROVISO. IT IS A SETTLED FACT THAT FOR MAKING DISALLOWANCE AS PER THE PROVISIONS OF PROVISO TO SEC. 36(1)(III), THE FOLLOWING CONDITIONS NEEDS TO BE SA TISFIED :- I) CAPITAL IS BORROWED FOR ACQUIRING CAPITAL ASSET, II) INTEREST IS PAID IN RESPECT OF CAPITAL BO RROWED. (III) THE ACQUISITION OF ASSET SHOULD BE FOR THE PU RPOSE OF EXPANSION OF EXISTING BUSINESS OR PROFESSION FOR IN TEREST LIABILITY MAY OR MAY NOT BE CAPITALIZED. ITA NO . 971 /AHD/2012 . A.Y. 2008-0 9 6 FOR CAPITALIZATION OF INTEREST, ALL THE ABOVE CONDI TIONS HAS TO BE FULFILLED. THE A.O. HAS TO BRING COGENT EVIDENCE ON RECORD TO PROVE THAT THE ABOVE MENTIONED CONDITIONS ARE FULFILLED. IN THE INSTANT CASE, THE A.O. HAD FAILED TO BRING ANY EVIDENCE ON RECORD TO PROVE THE FACT T HAT CAPITAL WAS BORROWED FOR ACQUIRING THE CAPITAL ASSET AND INTERE ST IS PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF ACQUISITION OF CAPITAL WORK-IN PROGRESS. SINCE THE CONDITIONS NO.(I) AND (II) AS MENTIONED A BOVE ARE NOT FULFILLED IN THE INSTANT CASE, ACCORDINGLY, I AM OF THE CONSIDER ED VIEW THAT INTEREST CANNOT BE CAPITALIZED AS PER THE PROVISIONS OF PROV ISO TO SEC.36(1)(III). THE A.O. HAS DISALLOWED INTEREST ON CAPITAL ASSETS PURC HASED AND PUT TO USE BY THE APPELLANT OF RS. 1,63,35,629/-. IN THIS CASE ALSO THE A.O. HAS FAILED TO BRING ANYTHING ON RECORD TO INDICATE THAT CAPITA L WAS RAISED TO PURCHASE THESE ASSETS. SINCE, THESE ASSETS WERE PURCHASED DU RING THE YEAR ONLY, ACCORDINGLY, AS PER THE PROVISIONS OF SEC.36(1)(III ) INTEREST PAID ON CAPITAL EMPLOYED ON THESE ASSETS ARE AN ALLOWABLE DEDUCTION . IT WILL ALSO BE PERTINENT TO NOTE HERE THAT THE A.O. HAS FAILED TO ESTABLISH DIRECT NEXUS OF INTEREST BEARING FUNDS BEING EMPLOYED TO PURCHASE T HE CAPITAL ASSETS. IN VIEW OF THESE FACTS, I AM INCLINED TO AGREE WITH TH E CONTENTIONS OF THE ID. A.R. CAPITALIZATION OF INTEREST OF RS. 5,35,403/- I S DELETED. THIS GROUND OF APPEAL IS ALLOWED. 12. BEFORE US, THE LD. D.R. COULD NOT BRING ANY COGENT EVIDENCE ON RECORD TO SHOW THAT THE ACCRETION IN THE CAPITAL AS SETS ARE OUT OF BORROWINGS. AS NO DIRECT NEXUS OF INTEREST BEARING FUNDS HAS BEEN ESTABLISHED TO PURCHASE THE CAPITAL ASSETS, WE DO N OT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). G ROUND NO. 3 IS ACCORDINGLY DISMISSED. ITA NO . 971 /AHD/2012 . A.Y. 2008-0 9 7 13. GROUND NO. 4 RELATES TO THE DELETION OF THE ADDITI ON OF RS. 51,59,563/- MADE U/S. 145A OF THE ACT ON ACCOUNT OF CENVAT PAID ON RAW MATERIAL. 14. ON PERUSAL OF THE TRADING AND PROFIT AND LOSS ACCO UNT OF THE ASSESSEE, THE A.O NOTICED THAT WHILE VALUING THE CL OSING STOCK AS ON 31.03.2008, THE ASSESSEE HAS NOT INCLUDED A SUM OF RS. 51,59,563/- BEING THE CENVAT PAID ON THE RAW MATERIAL LYING IN THE CLOSING STOCK . THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE SAME SHOU LD NOT BE ADDED TO THE VALUE OF THE CLOSING STOCK IN VIEW OF THE PR OVISIONS OF SECTION 145A OF THE ACT. ASSESSEE FILED A DETAILED REPLY EX PLAINING THAT IT IS MAINTAINING EXCLUSIVE SYSTEM OF ACCOUNTING IN SO FA R AS CENVAT IS CONCERNED. IT WAS EXPLAINED THAT THE CENVAT PAID ON PURCHASES IS DEBITED IN A SEPARATE ACCOUNT AND NOT CONSIDERED IN THE PURCHASES AND, THEREFORE, IT IS NOT CLAIMED AS EXPENDITURE. I T WAS FURTHER EXPLAINED THAT EVEN THE OPENING STOCK IS DEVOID OF CENVAT, THEREFORE, ANY ADJUSTMENTS MADE IN THE CLOSING STOCK WOULD AUT OMATICALLY REQUIRE AN ADJUSTMENT IN THE OPENING STOCK AND THE EXERCISE WILL BE REVENUE NEUTRAL. THIS EXPLANATION OF THE ASSESSEE WAS RUBBISHED BY T HE A.O. WHO WAS OF THE FIRM BELIEF THAT THE PROVISIONS OF SECTION 1 45A HAVE BEEN VIOLATED AND ACCORDINGLY MADE AN ADDITION OF RS. 51 ,59,563/-. 15. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) A ND REITERATED ITS CLAIM. AFTER CONSIDERING THE FACTS AND THE SUBM ISSIONS AND AFTER CONSIDERING THE VARIOUS JUDICIAL DECISIONS, THE LD. CIT(A) HELD AS UNDER:- ITA NO . 971 /AHD/2012 . A.Y. 2008-0 9 8 7.2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. I HAVE ALSO PERUSED VARIOUS CASE LAWS RELIED UPON BY THE APPELLANT. ON THIS ISSUE I AM INCLINED TO AGREE WITH THE SUBMISSIONS OF THE ID. A.R. FOR T HE FOLLOWING REASONS :- (1) THE APPELLANT IS FOLLOWING EXCLUSIVE METHOD OF ACCOUNTING. ACCORDING TO THIS METHOD OF ACCOUNTING PAYMENT AND RECEIPT OF CENVAT IS A BALANCE SHEET ITEM AND IT IS NOT DEBITE D OR CREDITED IN THE P & L A/C. IN THIS REGARD I AM INCLINED TO AGRE E WITH THE CONTENTION OF THE ID. A.R. THAT AN AMOUNT OF RS. 51 ,59,563/- BEING CENVAT PAID ON RAW MATERIAL IS REVENUE NEUTRAL. THE APPELLANT HAS ALSO PLACED RELIANCE ON INDO NIPPON CHEMICAL CO . LTD. (2003) 261 ITR 275 (SC). I HAVE ALSO PERUSED THE OTHER CAS E LAWS RELIED UPON BY THE APPELLANT AND RATIOS OF THESE CASE LAWS ALSO SUPPORT THE CASE OF THE APPELLANT. (2) THE A.O. HAS NOT COMMENTED ON THE ACCOUNTING PO LICIES FOLLOWED BY THE APPELLANT. THE POLICY OF VALUATION OF CLOSING STOCK CONSISTENTLY FOLLOWED BY THE APPELLANT IN THE PREVI OUS YEARS AS WELL AS IN THE SUCCEEDING YEARS. THE HON'BLE GUJARAT HIG H COURT IN THE CASE OF VOLTAMP TRANSFORMERS LTD. V/S. CIT (2008) R EPORTED ON 217 CTR 254 HAS HELD THAT A.O. HAS GOT VERY LIMITED POW ERS TO CHANGE VALUATION OF CLOSING STOCK. THE A.O. CANNOT CHANGE METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE WITHO UT VALID REASONS. (3) HON'BLE SUPREME COURT IN THE CASE OF CHAINRUP S AMPATRAM (1953) REPORTED ON 24 ITR 481 HAS CLEARLY HELD THAT PROFITS DOES NOT ARISE OUT OF VALUATION OF CLOSING STOCK AND SITUS O F ITS ARISING OR ACCRUING WHERE THE VALUATION IS MADE AND VALUATION OF UNSOLD STOCK IS NECESSARY PART OF THE PROCESS OF DETERMINING TRA DING RESULTS BUT IT CAN IN NO SENSE-BE REGARDED AS SOURCE OF SUCH PROFI T. (4) IT IS CLEARLY HELD IN THE CASE OF CIT V/S. AHME DABAD NEW COTTON MILLS REPORTED AT 4 ITC 245 THAT WHEN THE OPENING A ND CLOSING STOCK OF BUSINESS ARE BOTH UNDERVALUED, IF THE METHOD OF ALTERATION OF BOTH ITA NO . 971 /AHD/2012 . A.Y. 2008-0 9 9 VALUATION IS NOT ADOPTED, IT IS PERFECTLY PLAIN THA T PROFITS WHICH IS BROUGHT FORWARD IS NOT REAL ONE. IN SUCH CASES, THE REAL PROFITS OF A PARTICULAR YEAR CANNOT BE ASCERTAINED BY MERELY RAI SING VALUE OF CLOSING STOCK, NOT TAKING INTO CONSIDERATION THE SI MILAR VALUATION OF OPENING STOCK. AS PER THE RATIO OF THIS CASE, ENHAN CING THE VALUE OF CLOSING STOCK WITHOUT GIVING CORRESPONDING EFFECT T O THE VALUATION OF OPENING STOCK IS NOT PROPER. IN VIEW OF THE ABOVE FACTS, I AM NOT CONVINCED ABOU T THE MAINTAINABILITY OF ADDITION OF RS. 51,59,563/- IN VALUATION OF CLOSING STOCK. THE A.O. IS DIRECTED TO DELETE ADDITION OF RS. 51,59,563/-. THI S GROUND OF APPEAL IS ALLOWED. 16. THE LD. D.R. COULD NOT BRING ANY DISTINGUISHING DEC ISION IN FAVOUR OF THE REVENUE WHERE AS THE FINDINGS OF THE FIRST A PPELLATE AUTHORITY ARE BASED UPON THE DECISION OF THE HONBLE SUPREME COURT, HONBLE HIGH COURT OF GUJARAT. THEREFORE, NO INFERENCE IS C ALLED FOR. GROUND NO. 4 IS ACCORDINGLY DISMISSED. 17. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS D ISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 24- 05 - 2016. SD/- SD/- (KUL BHARAT) (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS)