Gujarat Paraffins Pvt.Ltd.,, ... vs Assessee

Date of hearing : 10-03-2015 Date of pronouncement : 20-03-2015 I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 2 ITO vs. Gujarat Paraffins Pvt. Ltd

आदे श/ORDER

PER : ANIL CHATURVEDI, ACCOUNTANT MEMBER:-

This is the Revenue's appeal and Assessee's CO against the order of Ld. CIT(A)-VIII, Ahmedabad dated 01-07-2011 for A.Y. 2008-09.

2. The relevant facts as culled out from the material on record are as under.

3. Assessee is a company stated to be engaged in the business of manufacturing of paraffin wax. The assessee electronically filed its return of income for A.Y. 2008-09 on 29-09-2008 declaring total income at Rs. 51,96,160/-. The case was selected for scrutiny and thereafter the assessment was framed u/s. 143(3) vide order dated 29-11-2010 and the total income was determined at Rs. 83,36,020/-. Aggrieved by the order of AO, Assessee carried the matter before CIT(A) who vide order dated 01- 07-2011 granted partial relief to the asssessee. Aggrieved by the aforesaid order of CIT(A), Revenue is now in appeal before us and Assessee has also filed cross objection. The grounds raised by the Revenue reads as under:

"1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 21,67,494/- on the ground that the assessee did not include CENVAT credit for valuing the closing stock as per the provisions of Section 145A.

2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 2,326/- being employee's contribution to provident fund though the same had not been deposited within the time limit prescribed in the ESI Act. The Ld. CIT(A) did not I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 3 ITO vs. Gujarat Paraffins Pvt. Ltd

appreciate the fact that employee's contribution was not covered u/s. 43B but it was covered under the provisions of section 36(1)(va) r.w.s. 2(24)(x)."

On the other hand, the grounds raised by the Assessee in its CO read as under:-

"1 The learned CIT(A) has erred in confirming the disallowance of Rs.l,39,210/-made by the AO u/s. 14A r.w,r. 8D on the ground that on introduction of Rule 8D w.e.f. A.Y.2008-09, there is no legal obligation on part of the AO to consider the nexus between the utilisation of borrowed funds in investment yielding taxable income. In view of elaborate submissions filed and the legal position laid down by various courts of law including the Hon'ble Apex Court in the case of CIT vs. Walfort Share & Stock Brokers (P.) Ltd, 326 ITR 1 (SC) the provisions of Section 14A are not attracted in case of the appellant in absence of any proximate cause for disallowance. Accordingly, the Id. CIT(A) ought to have deleted the impugned addition of Rs.1,39,210/-.

2. The learned CIT(A) has erred in confirming the addition on account of disallowance of medical expenses of Rs.2,33,994/- on the ground that the same has not been incurred wholly and exclusively for the purpose of business. In view of facts of the case and submissions filed, the Id. CIT(A) ought to have deleted the impugned addition of the.2,33,994/-.

3. The learned CIT(A) has erred in partly confirming the addition on account of disallowance of travelling to the extent of Rs.3,68,020/- out of total addition of Rs.5,25,743/- made by the AO on the ground that the appellant has not been able to establish that the entire expenditure was wholly and exclusively incurred for the purpose of business. In view of facts of the case and submissions filed coupled with legal position as laid down by various courts of law, the Id. CIT(A) ought to have deleted the entire addition of Rs.5,25,743/- instead of deleting only 30% of the total disallowance made by the AO."

We first take up Revenue's appeal in ITA No. 2335/Ahd/2011 I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 4 ITO vs. Gujarat Paraffins Pvt. Ltd

First ground is with respect to non-inclusion of CENVAT credit for valuing the closing stock.

4. During the course of assessment proceedings, AO noticed that Assessee had not included the CENVAT credit for valuing the closing stock. The assessee was asked to show cause as to why the closing stock not be valued as per the provisions of section 145A to which assessee inter alia submitted that it does not include the excise as its expenses as it follows exclusive method of accounting for excise duty. The submissions of the assessee were not found acceptable to the AO. He was of the view that assessee was required to follow inclusive method of accounting for Excise duty. He accordingly considered the CENVAT amount of Rs. 21,67,494/- as part of closing stock and added to the income. Aggrieved by the order of AO, Assessee carried the matter before CIT(A) who after considering the submissions of the assessee deleted the addition made by the AO by holding as under:-

"6.3. I have gone through the assessment order, provision of Section 145A and contention of the AR of appellant. Section 145A does not require to add to the value of closing stock, balance in CENVAT credit account which is basically in nature of advance recoverable in cash or kind. Further, I agree with AR of the appellant that there would be no impact on Profit or Loss irrespective of the method followed. Further, on perusal of a statement showing computation of profit under Exclusive and Inclusive method as per the Guidance note on Tax Audit issued by the ICAI, it is transpired that there is no impact on the final profit. The appellant has vide form NO 3CD also demonstrated that there would be no impact on the profit irrespective of the method of valuation followed. Even the Explanation to Section 145A does not imply that CENVAT credit ('a right arising as a result of such payment') should be included as there would be increase in profit. It only implies that such payment on purchases inventory should be included. But as can be seen from the computation I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 5 ITO vs. Gujarat Paraffins Pvt. Ltd

reproduced by the appellant on the basis of guidelines of ICAI, after including such cost in purchase, the same has to be deducted from cost of goods sold as it in facts reduces the cost. Further, as per provision of Section 145A, adjustment of duty tax cess etc. is not required to be made only in closing stock but also in Opening Stock Purchases and sales also which the AO has not done. Therefore, his own action is not in conformity with provision of Section 145A on which he has relied. Further, during the course of hearing, the AR also made an alternate argument that the closing stock would be opening stock in the succeeding year which would again reduce the profit in A Y 2009-10. Therefore, there would be no loss to revenue as such even if such amount is added in closing stock for A Y 2008-

09. Relying on the factual submission made by the assessee and ratio established in Bharat Bijlee Limited Vs Additional CIT (ITA NO.6410/MUM/2008(A.Y.2005-06), Ashwin A Shah V ACIT [2010] 1 ITR (Trib.) 356 (Ahd) and Assistant CIT Vs Time Packaging Limited [2008] 26 SOT 216 (Mum) and alternate argument put forth by the AR of the appellant, I direct AO to delete the said addition of Rs 21,67,694 being closing balance of CENVAT credit to the value of closing stock."

5. Aggrieved by the aforesaid order of CIT(A), Revenue is now in appeal before us.

6. Before us, Ld DR submitted that assessee should have included CENVAT credit to its closing stock as required under the provisions of section 145A. He thus supported the order of AO. Ld. AR on the other hand reiterated the submissions made before CIT(A) and further submitted that assessee was following exclusive method for account of taxes and duties and it was consistently following the same method of accounting for the purpose of valuation of closing stock. He further submitted that if the assessee includes the excise duty to the closing stock then corresponding addition will have to be made to the opening stock, purchases and consumption and thus there would be no impact to the Profit and Loss I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 6 ITO vs. Gujarat Paraffins Pvt. Ltd

account. He also relied on the decisions cited before CIT(A) and thus supported the order of CIT(A).

7. We have heard the rival submissions and perused the material on record. The issue in the present case is about the inclusion of CENVAT credit to the value of closing stock. We find that CIT(A) while deleting the addition has noted that if adjustment on account of CENVAT credit is made to the closing stock then corresponding adjustment will have to be made to the opening stock, purchases and sales and on the basis of statement annexed to the tax audit report, he has given a finding that there would be no impact on the final profit. CIT(A) has further relied on the decisions in the case of Bharat Bijlee vs. ACIT and decision of Ahmedabad Tribunal in the case of Ashwin Shah vs. ACIT. Before us, Revenue has not brought any material on record to controvert the findings of the CIT(A) nor has brought any contrary binding decision in its support. We therefore find no reason to interfere with the order of CIT(A) and thus this ground of Revenue is dismissed.

Ground No. 2 is with respect to deleting of disallowance of employee's contribution to ESIC.

8. During the course of assessment proceedings and on perusing the tax audit report, AO noticed that Assessee had not deposited the Employee's contribution of ESIC for the month of September, 2007 and October, 2007 aggregating to Rs. 2,326/- in time to the credit of the respective fund. He therefore considering the provisions of section 2(24)(x) held that the amount of belated contribution cannot be allowed as I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 7 ITO vs. Gujarat Paraffins Pvt. Ltd

deduction. He accordingly disallowed the aggregate amount for Rs. 2,326/-.

9. Aggrieved by the order of AO, Assessee carried the matter before CIT(A) who after considering the submissions of the assessee and following the decision in the case of Dynamic Industries Ltd ITA No. 1545/Ahd/2005 dated 23-03-2009, decision in the case of Gujarat Container Ltd ITA No. 2609/Ahd/2008 dated 03-03-2009 and other decisions, deleted the addition. Aggrieved by the order of CIT(A), Revenue is now in appeal before us.

10. Before us, Ld. DR at the outset submitted that the belated payment of employee's contribution of PF and ESI is covered in favour of the Revenue by the decision of Hon'ble Gujarat High Court in the case of Gujarat State Road Transport Corporation 366 ITR 170. He thus supported the order of AO. Ld. AR on the other hand reiterated the submission made before CIT(A).

11. We have heard the rival submissions and perused the material on record. In the present case, it is an admitted fact that the amount of Employees contribution towards ESIC for September and October, 2007 has been deposited beyond the due dates prescribed under the relevant Act. The Hon'ble Gujarat High Court in the case of Gujarat State Road Transport Corporation in ITA No 637/AHD/20I3 has concluded that where sum received by Assessee from any of his employees as contribution to Provident Fund and/or ESI Fund was not credited by Assessee to employee's account in relevant fund or funds on or before due date as per I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 8 ITO vs. Gujarat Paraffins Pvt. Ltd

explanation to s. 36(1)(va), the Assessee shall not be entitled to deduction thereof.

12. In view of the undisputed fact that the Employees share of contribution of ESIC was paid after the prescribed due date, and following the decision of Hon'ble Gujarat High Court in the case of Gujarat State Road Transport Corporation (supra), and in the absence of any contrary binding decision, we are of the view that the AO was justified in disallowing the belated payments and thus this ground of Revenue is allowed.

13. In the result, Revenue's appeal is partly allowed.

Now we take up CO No. 231/Ahd/2011 for A.Y. 2008-09

First ground is with respect to disallowance made u/s. 14A.

14. During the course of assessment proceedings and on perusing the Profit and Loss account, AO noticed that assessee has earned dividend income of Rs. 7,285/- and had also incurred interest expenses of Rs. 26,12,418/-. The assessee was asked to show cause as to why no disallowance be made u/s. 14A of the Act to which assessee inter alia submitted that the investments of the assessee was Rs. 16,11,210/- against which the total Reserves and Surpluses were in excess of Rs. 1.39 crore, no borrowed funds were invested in shares and it had not incurred any expense to earn the dividend income. The submission of the assessee was not found acceptable to the AO. He therefore following the criteria laid down in Rule 8D of the Income Tax Act, 1962 worked out the disallowance and determined the total amount of disallowance of Rs. 1,39,240/- u/s. I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 9 ITO vs. Gujarat Paraffins Pvt. Ltd

14A. Aggrieved by the order of AO, Assessee carried the matter before CIT(A) who confirmed the order of AO by holding as under:-

"3.2 I have gone through assessment order Provision of Section 14A, Rule 8D and submission of the AR of the appellant. The contentions and arguments raised by the AR of the appellant hold good only where the disallowance u/s 14A is in respect of period prior to A Y 2008-09 and not in respect of A Y 2008-09 and subsequent years. Wef 24/03/2007, Rule 8D has been inserted to compute the disallowance of financial and administrative expenses u/s 14A on estimated basis. Rule 8D lays down the formulae to compute the financial expenses deemed to have been incurred to earn exempt income. It is a legal fiction created to disallow financial expenses in case the same can not be segregated in to the one which represents the expenses incurred to earn taxable income and the one which represents the expenses incurred to earn exempt income. Therefore, in my view, there is no legal obligation on part of the AO to consider the nexus between utilization of borrowed funds in investment yielding taxable income . Therefore, I uphold the action of the AO to disallow Rs.139,210 out of financial expenses u/s 14A r.w. Rule 8D.

15. Aggrieved by the order of CIT(A), Assessee is now in appeal before us.

16. Before us, Ld. AR reiterated the submissions made before CIT(A). He further submitted that no borrowed funds have been used by the assessee for making investments, the investments were made in earlier years, the interest free funds are in excess of investments and further the dividend income earned by the assessee is of Rs. 7,283/- against which the disallowance worked out u/s. 14A of Rs. 1,39,210/- is far in excess of the income earned. He therefore relying on the various decisions cited before CIT(A) submitted that no disallowance u/s. 14A is called for in the present case.

I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 10 ITO vs. Gujarat Paraffins Pvt. Ltd

17. We have heard the rival submissions and perused the material on record. The issue in the present case is about disallowance u/s. 14A. Before us, assessee has submitted that the dividend which has been earned are from old investments made in earlier years, no fresh investment has been made during the year under consideration and the interest free funds are far in excess of investments. Before us apart from making oral submissions, no material has been placed on record by the assessee to demonstrate as to the availability of interest free funds in the year of investments. In the case of Dhanuka and Sons vs. CIT 239 ITR 319 (Cal), the Hon'ble Culcutta High Court has held that the mere fact that the shares were old ones and not acquired recently was immaterial and it was for the assessee to show the source of acquisition of those shares by producing of materials that those purchasers were acquired from the funds available in the hands of the assessee at the relevant point of time without taking the benefit of any loan. The relevant observation of Hon'ble High Court is as under:-

"In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. Mr. Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new share has been acquired and thus, the loan that was taken and for which the interest is payable by the assessee was not for acquisition of those old shares and, therefore, the authorities below erred in law in giving benefit of proportionate deduction.

In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 11 ITO vs. Gujarat Paraffins Pvt. Ltd

taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant Assessment Year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assesses, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment."

18. It is also a fact that assessee has earned a dividend income at Rs. 7,285/- and against which the disallowance u/s. 14A has been worked out at Rs. 1,39,240/-. Subsequent to the hearing and while dictating the order, we have also come across recent decision of Hon'ble Delhi High Court in the case of Joint Investment Pvt. Ltd vs. CIT ITA No. 117 of 2015 decided on 25-02-2015 wherein the hon'ble High Court has held as under:

"9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs. 2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the ClT(A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs. 52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire lax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure 'incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case."

I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 12 ITO vs. Gujarat Paraffins Pvt. Ltd

19. Considering the fact that the Assessee has stated that investments have been made in earlier years and the disallowance u/s. 14A is in excess of the tax free income and in view of the aforesaid decisions, we are of the view that the matter needs re-examination at the end of AO. We therefore set aside the issue to the file of AO to re-examine the issue in the light of the above cited decisions and thereafter decide the issue in accordance with law and after giving reasonable opportunity of hearing to the assessee. The assessee is also directed to furnish all the required details called for by the AO promptly. In the result, this ground of assessee is allowed for statistical purposes.

Ground No. 2 was not pressed and therefore the same is dismissed as not pressed.

Ground No. 3 is with respect to disallowance of travelling expenses of Rs. 3,68,020/-

20. During the course of assessment proceedings, AO noticed that assessee has incurred travelling expenses of Rs. 8,21,392/-. From the details of expenses furnished by the assessee, he noticed that the major parts of the expenses incurred by the director and his family for a trip on cruise ship. In the absence of any satisfactory explanation with respect to the expenses, AO concluded that the expenses to be personal in nature and therefore disallowed the expenses of Rs. 5,25,743/- I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 13 ITO vs. Gujarat Paraffins Pvt. Ltd

21. Aggrieved by the order of AO, Assessee carried the matter before CIT(A) who after considering the submissions of the assessee granted partial relief to the assessee by holding as under:-

"5.I have considered the findings of the AO, facts of the case, submission by AR and judicial pronouncements relied by him. It is pertinent here to note that the AO has stated that the said expenditure was in respect of pleasure trip made by director and his family. On perusal of the details provided to me, it is transpired that the bills are in name of Mr.Anilkumar Jhajharia and Mrs.Meenaxiben Jhajharia , who, both were whole time Directors of the Company. The AR also drew my attention to Form no 3CD where in a payment in respect of remuneration was shown to be made. Therefore, it is proved that they were also employees of the company apart from being related to same family. Further, it is also pertinent here to that the AO has not even mentioned which country they toured. He also did not bifurcate and analyses the expenses in respect of traveling though ledger account and bills were provided to him and grossly summed up all the expenses incurred in respect of foreign travel. Therefore, it was erroneous on part of the AO to hold that said expense was entirely personal in nature. It is pertinent here to note that just because it was a foreign travel does not itself establish that the entire expense on foreign travel was personal in the nature. Therefore, AO has not proved that the said foreign trip was 'pleasure trip". I agree with the contentions of the AR that international travel in the modern era represents a combination of business meetings and social get-together. This has necessitated spouses to accompany husbands' who are senior executives on travel abroad. Often, some or most of the expenses of the wives are borne by the company. Many a times a pleasure trip actually provides an opportunity to liason and create a business opportunity. Having said that it is also true that the appellant has not been able to quantify the benefits accrued to the appellant company as a result of such trip. Therefore, there was also failure on the part of the appellant to establish that the entire expenditure was wholly and exclusively incurred for the purpose of business Therefore, in view of my above observation, in interest of natural justice, I direct AO to restrict such disallowance to 70% of amount of disallowance made by him vide his order dated 29/11/2010 (70% of Rs. 525,743/-). As such addition of Rs. 368020/- is confirmed."

I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 14 ITO vs. Gujarat Paraffins Pvt. Ltd

22. Aggrieved by the order of CIT(A), Assessee is now in appeal before us.

23. Before us, Ld. AR reiterated the submissions made before AO and CIT(A) and submitted that the addition upheld by CIT(A) be deleted. In the alternate he submitted that the disallowance which has been upheld by CIT(A) works out to 45% of expenses and that in subsequent years, the AO has worked out disallowance at 25% of travelling expenses. He also placed on record the assessment orders framed u/s. 143(3) for A.Y. 2010- 11, 2011-12 and 2012-03. He therefore submitted that the disallowance at the most be restricted to 25%. Ld. DR on the other hand supported the order of AO.

24. We have heard the rival submissions and perused the material on record. We find that AO while disallowing the expenses has noted that the expenses were incurred on account of trip by cruise ship by director and his family. The aforesaid finding of AO has not been contorverted by ld. A.R. We find that CIT(A) while restricting the addition has noted that AO while disallowing the expenses had not even mentioned the countries visited by the directors nor had analyzed the expenses. At the same time, he also noted that assessee has failed to establish that the entire expenditure was wholly and exclusively incurred for the purpose of business. Before us, ld AR has submitted that the disallowance in the year under consideration is on a higher side and be restricted to 25% as made by AO in subsequent years. On perusing the orders passed by AO u/s. 143(3) of subsequent years, we find that the issue of trip by cruise was not in those years and therefore we do not find force in the submission of ld. AR to restrict the disallowance at 25%. It is also a fact that against the I.T.A No. 2335/Ahd/2011 & CO No 231/Ahd/2011 A.Y. 2008-09 Page No 15 ITO vs. Gujarat Paraffins Pvt. Ltd

partial relief given by ld. CIT(A), Revenue is not in appeal. Before us, Ld. AR has not brought any material to controvert the findings of CIT(A) and therefore we find no reason to interfere with his order and thus this ground is dismissed.

25. In the result, CO filed by Assessee is partly allowed for statistical purposes.

26 In the combined result, appeal filed by Revenue is partly allowed and the CO is partly allowed for statistical purposes.

Order pronounced in open court on the date mentioned hereinabove at caption page

Sd/- Sd/-

(MUKUL KR. SHRAWAT) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 20/03/2015 ak

आदे श क ूितिल प अमे षत / Copy of Order Forwarded to:-

1. Assessee

2. Revenue

3. Concerned CIT

4. CIT (A)

5. DR, ITAT, Ahmedabad

6. Guard file.

By order/आदे श से,

उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद