Jyotindra Brothers, Palanpur vs Assessee

ITO, M/s. Jyotindra Brothers, Ward-1, Vs Jyotindra Group Compound Palanpur Ahmedabad Highway, Palanpur PAN : AABFJ 6482 C

CO No. 05/Ahd/2012 (in ITA No.2936/Ahd/2011: AY 2008-09) M/s. Jyotindra Brothers, ITO, PAN : AABFJ 6482 C Vs Ward-1, Palanpur

अपीलाथ / अपीलाथ / (Appellant) ू यथ यथ / थ / (Respondent)

Revenue by : Shri Dinesh Singh, Sr. DR. Assessee(s) by : Shri S. N. Soparkar, AR

सुनवाई क$ तार&ख/ / Date of Hearing : 31/03/2015 घोषणा क$ तार&ख /Date of Pronouncement: 24/04/2015

आदे श/O R D E R

PER SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER:

This is an appeal filed by the Revenue and the Cross-Objection filed by the assessee, both against the order of the Commissioner of Income Tax (Appeals)-XX, Ahmedabad dated 12.09.2011 for Assessment Year 2008-09.

2. The brief facts of the case, as culled out from the records, are as under:-

ITA Nos. 2936/Ahd/2011 & CO No.5 /Ahd /2012 ITO vs. Jyotindra Brotehrs AY 2008-09

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3. The assessee is a partnership firm stated to be engaged in the business of dealing in Psyllium Seeds. The assessee filed its Return of Income for Assessment Year 2008-09 on 16.09.2008 declaring total income at Rs.1,19,530/-. The case was selected for scrutiny and thereafter, the assessment was framed u/s 143(3) of the Act vide order dated 24.12.2010 and the total income was determined at Rs 35,24,160/-. Aggrieved by the order of Assessing Officer, the assessee carried the matter before the Ld CIT(A) who vide order dated 12.09.2011 granted substantial relief to the assessee. Aggrieved by the aforesaid order of the Ld CIT(A), the Revenue is now in appeal before us and the assessee has also filed cross-objection.

4. The Grounds raised by the Revenue in its appeal read as under:-

1. The Ld. Commissioner of Income-Tax (Appeals)-XX, Ahmedabad has erred in law and on facts in deleting the addition of Rs.15,15,785/- made by the Assessing Officer, on account of rejecting the books results u/s 145(3), fall in Gross Profit / difference in sales.

2. The Ld. Commissioner of Income-Tax (Appeals)-XX, Ahmedabad has erred in law and on facts in deleting the disallowance of Rs.13,93,195/- made by the Assessing Officer on account of interest expenses.

3. On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XX, Ahmedabad ought to have upheld the order of the Assessing Officer.

4. It is therefore prayed that the order of the Ld. Commissioner of Income-

Tax (Appeals)-XX, Ahmedabad may be set-aside and that of the Assessing Officer be restored.

5. On the other hand, the assessee has taken following grounds in its Cross-objections:-

Ld. CIT (A) erred in confirming disallowance of Rs.4,95,651/- out of interest expenses claimed by holding that advances given to Swati Autolink Pvt Ltd were from interest bearing funds ignoring the fact that complete details of the availability of interest free funds in earlier year when advances were given were submitted and no disallowance from interest expenses was ITA Nos. 2936/Ahd/2011 & CO No.5 /Ahd /2012 ITO vs. Jyotindra Brotehrs AY 2008-09

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warranted. Ld. CIT(A) ought to have deleted such disallowance of interest expenses incurred for the purpose of business of the appellant.

6. First we take-up the Revenue's appeal.

7. The ground No.1 of the Revenue's appeal is with respect to the rejection of assessee's books result u/s 145(3) of the Income-tax Act.

8. During the course of assessment proceedings, on perusing the details of inwards and outwards of Ispaghula Seeds, the Assessing Officer noticed that the quantitative information with respect to inward and outward of Ispaghula shown by the assessee was not reconciled. He also noticed that the assessee's submission of loss due to infestation was not debited in the Profit and Loss account. He was, therefore, of the view that the assessee was not showing the true facts in the books of accounts. Further, the Assessing Officer noted that the assessee had not produced any evidence of infestation/loss or shortage. He accordingly considered the books of accounts of the assessee to be defective and rejected the book result of the assessee u/s 145(3) of the Income-tax Act. He was further of the view that the submission of the assessee of incurring of loss of Rs.14 lacs on account of infestation and which has resulted into fall in GP was not acceptable as according to him the fall in Gross Profit was also not explained by the assessee. He, therefore, after considering the difference in Gross Profit as compared to immediately preceding year, worked out the Gross Profit at Rs.9,76,201/- for the year under consideration and the difference in sales in the quantitative figures as worked out by him was Rs.15,15,785/-, was added to the income. Aggrieved by the order of the Assessing Officer, the assessee carried the matter before the CIT(A) who, after considering the submissions of the assessee, deleted the addition vide order dated 12.09.2011 by holding as under:-

ITA Nos. 2936/Ahd/2011 & CO No.5 /Ahd /2012 ITO vs. Jyotindra Brotehrs AY 2008-09

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4.2(i) The contentions of the learned AR in brief are that complete tally and reconciliation of purchases and sales of Isabghula seeds was furnished to the AO vide letter dated 27-1-2010; the books of accounts of the appellant are duly audited u/s 44AB; the reasons for fall in GP were explained in the letter dated 26-11-2010 submitted to the AO and therefore impugned addition was uncalled for, both on facts and in law.

4.3 I am inclined to accept the contentions of the learned AR. The impugned amount of Rs.15,15,785/- represented loss of 43,555 Kgs of Ispaghula seeds, duly accounted for in the audited account of the appellant. The basis on which the reconciliation of the seeds submitted by the appellant and the reasons for the fall in GP explained by the appellant were rejected by the AO, is not found logical. Therefore, I hold that the impugned addition is not sustainable. It is deleted. These grounds of appeal are allowed.

9. Aggrieved by the aforesaid order of the ld. CIT(A), the Revenue is now in appeal before us. Before us, Ld. Departmental Representative supported the order of the Assessing Officer. On the other hand, ld. Authorized Representative of the assessee reiterated the submissions made before the Assessing Officer and the ld. CIT(A) and supported the order of the ld. CIT(A). He also placed on record the extract of stock register at page Nos.37 to 40 of the paper-book in support of his contention that the stock records were reconciled.

10. We have heard the rival submissions and perused the material available on record. We find that the ld. CIT(A), while deleting the addition, has given a finding that the amount of loss of Rs.15,15,785/- represented loss of 43,555 Kgs of Ispaghula Seeds which have been duly accounted for in the audited accounts of the assessee and the assessee had also submitted the proper reconciliation and reasons for the fall in Gross Profit. Before us, the Revenue has not brought any material on record to controvert the findings of the ld. CIT(A). We, therefore, find no reason to interfere with the order of the CIT(A). Hence, this ground of appeal of the Revenue is dismissed.

ITA Nos. 2936/Ahd/2011 & CO No.5 /Ahd /2012 ITO vs. Jyotindra Brotehrs AY 2008-09

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11. Ground No.2 of the Revenue's appeal is with respect to the deletion of disallowance of Rs.13,93,195/- made by the Assessing Officer on account of interest expenses.

12. On perusing the Profit and Loss account of the assessee, the Assessing Officer noticed that the assessee had shown net interest income of Rs.11,81,410/-, after the set off interest expenses of Rs.24,88,291/-. He also noticed that the assessee has given Rs.4,35,50,183/- to Swati Autolink Pvt Ltd on which it had charged interest at the rate of 6.75%; but on the other hand the assessee was paying interest at 9%. The submission of the assessee that its weighted average interest cost was 4.91% as against which it had charged at 6.75% interest on M/s. Swati Autolink Pvt Ltd was not found acceptable to the Assessing Officer as the assessee had not furnished any cash flow statement to justify its claim of not advancing interest bearing funds to advancing amounts at lower interest. He, therefore, calculated the interest expenses at 2.25% on the loan of Rs.4,35,50,183/- granted to M/s. Swati Autolink Pvt Ltd and worked out disallowance of interest at Rs.9,79,880/-. The Assessing Officer also noticed that the assessee had given interest free loans aggregating to Rs.1,00,99,625/- to (i) Jyotindra Organics, (ii) Jyotindra Textiles, (iii) N.N. Industries, (iv) Swati Psyllium Pvt Ltd and (v) Swati Agrotech Pvt Ltd. He was also of the view that the assessee has utilized interest bearing funds for advancing non- interest bearing loans. He accordingly calculated the interest expenses at 9% on the amount advanced and worked out the interest expenses of Rs.9,08,966/- and thus made an aggregate disallowance of Rs.18,88,846/-. Aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld. CIT(A). The ld. CIT(A), after considering the submissions of the assessee, granted partial relief by holding as under:-

ITA Nos. 2936/Ahd/2011 & CO No.5 /Ahd /2012 ITO vs. Jyotindra Brotehrs AY 2008-09

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"5.3 While making the impugned disallowance, the AO observed that appellant had borrowed funds at the rate of 9% and advanced to M/s. Swati Autolink P.Ltd. at a lower rate of 6.75%. Accordingly, he calculated interest @ 2.25% on the loan advanced of Rs. 4,35,50,183/-; and worked out the addition of Rs.9,79,830/-. Further, the AO calculated interest at the rate of 9% on the interest free loans given to 5 other concerns totaling to Rs.

1,00,99,625/- and worked out the disallowance of Rs.9,08,966/-. Put together he made disallowance of Rs. 18,88,846/-.

5.4 The contentions of the learned AR in this regard in brief are as follow:

AO did not consider the detailed submission made by the appellant vide his letter dated 1-12-2010.; the advance given to Swati Autolink was reduced during the year; complete details of the availability of interest free funds in earlier year when advance was given were submitted vide the letter dated 1- 12-2010, and therefore, impugned disallowance is unwarranted. In support thereof he relied on the case laws reproduced above.

5.5 As seen from the details furnished, appellant was having non-interest bearing fund of Rs. 3,16,20,869/-. After deducting interest-free advances totaling to Rs. 1,00,99,6257-to the 5 concerns mentioned by the A.O. at para 4.1 of the assessment order, appellant was left with Rs. 2,15,21,244/- of non-interest bearing funds. Thus out of advance given to Swati Autolink of Rs. 4,35,50,183/- was out of interest-free funds, the sum of Rs. 2,15,21,244/, leaving the balance of Rs. 2,20,28,939/- advanced out of funds borrowed on interest @ 9%. The advance was given on interest @ 6.75%. Therefore, I consider it reasonable to work out the disallowance of interest @ 2.25% (9% minus 6.75%) on Rs.2,20,28,939/- which works out to Rs.4,95,651/-. Thus disallowance of interest of Rs.4,95,651/- is upheld. Balance disallowance of interest of Rs.13,93,195/- is deleted. Thus ground of appeal is partly allowed."

13. Aggrieved by the order of the ld. CIT(A) the Revenue is in appeal before us and the assessee has also filed Cross-objections for the partial disallowance. Before us, ld. Departmental Representative submitted that in the absence of cash flow statement, the Assessing Officer was justified in making the addition. He thus supported the order of the Assessing Officer.

14. The ld. Authorized Representative of the assessee, on the other hand, submitted that there was no question of disallowing any interest expenditure as the assessee has earned net interest income of Rs.11,81,410.

ITA Nos. 2936/Ahd/2011 & CO No.5 /Ahd /2012 ITO vs. Jyotindra Brotehrs AY 2008-09

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He further pointed to the statement which was placed at page no.46 of the paper-book and demonstrated that weighted average interest cost was 4.91% and it has charged interest from on M/s. Swati Autolink Pvt Ltd at 6.75% and thus, it has not advanced money to M/s. Swati Autolink Pvt Ltd at lesser rate than its cost of funds. He further submitted that when the assessee was having sufficient interest free funds, presumption would be that the amount has been advanced out of interest free funds and not borrowed funds and for which he placed reliance on the decision of Bombay High Court in the case of CIT vs. Reliance Utilities and Power Limited, reported in (2009) 313 ITR 340 (Bom) and Gujarat High Court in the case of CIT vs. Raghuvir Synthetics Ltd, reported in 354 ITR 322. He further submitted that the amount had been advanced in earlier years also but no disallowance was made in the earlier years and therefore, no disallowance can be made in the year under consideration and for which he placed reliance on the decision of Hon'ble Karnataka High Court in the case of CIT v. Sridev Enterprises, reported in (1991) 192 ITR 165 (Kar). He further submitted that no disallowance at all on account of interest was called for.

15. We have heard the rival submissions and perused the material available on record. It is undisputed fact that during the year under consideration, the assessee has earned net interest income of Rs.11,81,410/-. Before us, the ld. Authorized Representative also pointed out to the cost of fund, the rate at which it has lent and from the statement submitted by the ld. AR, it is seen that the amount which has been lent to M/s. Swati Autolink Pvt Ltd is at a higher rate than the weighted average cost of funds. Before us, it is also the assessee's submission that the amounts were advanced in earlier years also and no disallowance was made in the earlier years, for which reliance was placed on judgment of the Hon'ble Karnataka ITA Nos. 2936/Ahd/2011 & CO No.5 /Ahd /2012 ITO vs. Jyotindra Brotehrs AY 2008-09

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High Court in the case of Sridev Enterprises (supra). We find that the Hon'ble Karnataka High Court has held as under:-

"Held, that the amount due from N on the first day of the accounting year was the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status could not be different from its nature and status as on the last day of the previous year. Regarding past years, the assessee's claim for deduction were allowed in respect of the sums advanced during those years. This could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years was the very basis of the deductions permitted during the past years. It would not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject-matter of previous years' assessments."

Before us, the Revenue has not brought any material on record to controvert the above submissions made by the assessee nor has brought any contrary binding decisions in its support nor could point out any distinguishable features of the decisions cited by ld. AR. In view of the above facts, we are of the view that no disallowance on account of interest could be made in the present case. We, therefore, direct the Assessing Officer to delete the disallowance made on account of interest expenses. Thus, this ground of the Revenue is dismissed and Cross-objection filed by the assessee is allowed.

16. In the combined result, the appeal of the Revenue is dismissed and Cross-objection filed by the assessee is allowed.

Order pronounced in the Court on 24th April, 2015 at Ahmedabad.

Sd/- Sd/-

(RAJPAL YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 24/04/2015 *Biju T, PS ITA Nos. 2936/Ahd/2011 & CO No.5 /Ahd /2012 ITO vs. Jyotindra Brotehrs AY 2008-09

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आदे श क$ ूितिल,प अमे,षत/Copy षत of the Order forwarded to : 1. अपीलाथ / The Appellant 2. ू यथ / The Respondent. 3. संबंिधत आयकर आयु. / Concerned CIT 4. आयकर आयु.(अपील) / The CIT(A)-XX, Ahmedabad 5.

,वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड फाईल / Guard file.

आदे शानुसार/ BY ORDER,

//TRUE COPY// उप/ उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपीलीय अिधकरण, अिधकरण, अहमदाबाद / ITAT, Ahmedabad