Kln Textiles & Jewels P. Ltd.,, ... vs Assessee

Kalanikethan Fashions P. Ltd., vs. Dy. Commissioner of Income- (Formerly KLN Textiles & tax, Circle - 2(2), Hyderabad Jewels P. Ltd.), Hyderabad.

PAN - AACK7146G (Appellant) (Respondent)

Assessee by : Shri M.V.R. Prasad Revenue by : Shri Ramakrishna Bandi

Date of hearing 18-05-2015 Date of pronouncement 30-06-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by assessee is directed against the order dated 08/07/2013 of ld. CIT(A)-III, Hyderabad for the AY 2007-08

2. Assessee has raised 5 grounds as per the revised grounds of appeal. Ground Nos. 1 & 5 being general in nature do not require any specific adjudication. Ld. AR at the outset submitted that on assessee's instruction he would not like to press ground No. 4, accordingly, ground No. 4 is dismissed as not pressed. Therefore, the only surviving issue as raised in ground Nos. 2 & 3 relates to disallowance of an amount of Rs. 28,80,338 towards repayment of gold loan to SBI. Assessee has also raised the following additional ground:

2 ITA No. 1301 /Hyd/2013 Kalanikethan Fashions P. Ltd.

"Alternatively the amount of Rs. 43,32,189 is allowable in the hands of the appellant company as it is the cost of the loan of Rs. 98,54,661 to the appellant company."

As the additional ground raised by assessee is also ancillary and incidental to the issue raised in ground Nos. 2 & 3, the same will be decided along with ground Nos. 2 & 3.

3. Briefly the facts as emanating from record are, assessee a company, as stated by AO, was formed on01/04/2006 by merger of three partnership firms, viz., KLN Readymades, KLN Silks and Sarees and KLN Jewels. Of course, assessee has stated before us that the company was actually incorporated on 23/12/2005. Be that as it may, AO in course of assessment proceeding, noticed that assessee has debited an amount of Rs. 44,71,150 towards interest payment on gold loan taken from SBI, Visakhaptna. When enquired on the issue, it was stated by assessee that earlier partnership firm KLN Jewels borrowed 15 kg. gold from SBI under Gold Metal Scheme. The gold was taken from the bank on different dates between 08/09/04 and 10/08/05. It was further observed that, though, at the time when gold loan was taken was valued at Rs. 92,12,000 and with additional incidental expenditure, such as sales tax, the total value came to Rs. 98,54,661, but, when the company closed the said gold loan account on 15/03/07, it paid a total amount of Rs. 1,41,86,851 and the differential amount of Rs. 43,32,190 was debited to P& A/c as interest on Gold Metal account. AO observed that liability incurred by assessee pertained to the period from the date of taking gold loan to the date of closure of the loan amount i.e. almost two years and six months, which according to AO, is against mercantile system of accounting. He further observed that even if the firm has not closed the gold loan account, they are aware of appreciation or depreciation of gold and was bound to claim such difference in respective years in same manner as foreign exchange fluctuation are being debited in the case of foreign currency transactions. AO also observed that firm has valued the gold rate incorrectly, which has resulted in increasing 3 ITA No. 1301 /Hyd/2013 Kalanikethan Fashions P. Ltd.

interest burden. AO observed that assessee is not correct in taking over the unbooked liability of partnership firm , hence, he proposed to disallow the interest attributable to the period prior to 31/03/2006. Though, assessee objected to such disallowance, AO did not find any merit in the same. He noted that assessee company was formed only on 01/04/06, hence, loans relating to prior period of the firm could not be claimed as deduction at the hands of the company in the current AY. AO observed that though it may be a fact that under the Companies Act, assessee may take up discharge of such liabilities of firm, but, under the provisions of Income-tax Act, income of assessee has to be computed each year separately. AO observed, even assuming that the liability is allowable, but, since it partakes the character of prior period expenditure, it is not allowable in the impugned AY as interest pertains to about 2 ½ years, hence, cannot be allowed in a single year considering the fact that assessee follows mercantile system of accounting. AO observed, as the expenditure pertains to the firm, the firm could have claimed such expenditure in the respective AY. Only because the firm failed to claim such expenditure, assessee cannot get the benefit of such deduction. He further observed that assessee even did not furnish copy of gold metal loan account and loan agreement. Accordingly, AO worked out the disallowance of interest prior to the period 01/04/2006 as under:

Amount paid on settlement of gold loan a/c as per (Rs. ) Bank certificate 1,41,96,851

Opening value of 15 kg gold as on 01/04/06 at the Rate of Rs. 849 per gram 1,27,35,000 Company liability 14,51,851 Liability claimed 43,32,189 Difference 28,80,338 ===========

Hence, the said difference amount is added back to income of assessee. Being aggrieved of such disallowance, assessee preferred 4 ITA No. 1301 /Hyd/2013 Kalanikethan Fashions P. Ltd.

appeal before ld. CIT(A). Ld. CIT(A) sustained the disallowance by observing as under:

"5.2 I have considered carefully the facts and evidence and I find that the facts provided by the AO are not controverted at all. There is no doubt about the fact that the terms and conditions of the gold metal account were very clear to the appellant and the liability of interest had been ascertained every year. The value of gold at the end of the year was known and it was clear to the appellant that the difference in value had to be debited as interest on charges to be paid to the bank. I agree with the AO that as per the mercantile system of accounting the liability pertaining to an earlier year cannot be debited in the current year. Therefore, I find no hesitation in confirming the addition."

4. Ld. AR submitted before us, the partnership firm M/s KLN Jewellery, which obtained gold loan of Rs. 98,54,661 from SBI, Vizag, amalgamated with assessee company on 31/03/06. He submitted, as per the deed of amalgamation, assessee company took over all assets and liabilities of M/s KLN Jewellery, therefore, assessee has to discharge the gold metal loan taken by the firm. Ld. AR submitted, though the value of the gold metal loan when the loan obtained was Rs. 98,54,661, but, at the time of closure of the account, assessee had to pay an amount of Rs. 1,41,86,850 due to appreciation in the value of gold. Therefore, the rate cutting difference amounting to Rs. 43,32,189 being the cost of loan to assessee is an allowable deduction. Ld. AR submitted, loan was obtained not in cash, but, by way of gold and it was used for making ornaments in which assessee and predecessor firm dealt. The business of predecessor firm got merged with assessee and was continued, therefore, the amount of Rs. 43,32,189 being on trade account is allowable deduction. Ld. AR submitted, as loan was discharged in PY relevant to AY under dispute, assessee has correctly claimed the deduction. He, therefore, submitted, part disallowance made amounting to Rs. 28,80,338 needs to be deleted. Ld. AR submitted, purpose of loan is to be seen which is of equal importance. In support of such contention, ld. AR relied upon the following decisions:

5 ITA No. 1301 /Hyd/2013 Kalanikethan Fashions P. Ltd.

1. Mahindra Inter trade LtdVs. DCIT, [2011] 133 ITD 597 (Mum.)

2. United Phosphorus Ltd. Vs. JCIT, [2002] 81 ITD 553 (Ahd.)

5. Ld. DR, on the other hand, strongly supporting the reasoning of AO and ld. CIT(A) submitted, deduction claimed by assessee is not at all allowable as it is not interest, but, an extra cost incurred by assessee on account of appreciation of gold value on the date of repayment. Therefore, the excess payment/loss arising on that account cannot be taken to P&L A/c. Ld. DR submitted, only because it is termed as current account, it cannot be linked to the trading account of assessee. Ld. DR submitted, assessee neither during assessment stage nor before ld. CIT(A) brought relevant materials like agreement with bank to the notice of the department, hence, it cannot be allowed to produce such evidences at this belated stage. Ld. DR submitted, loan taken by erstwhile firm is like foreign exchange loan and repayment depends upon the fluctuation of foreign exchange. Therefore, deduction cannot be claimed by assessee on trading account as it relates to capital field.

6. We have heard the parties and perused the orders of revenue authorities as well as other materials on record. We have also carefully examined the decisions relied upon by the parties. At the outset we may put it on record that though assessee before the departmental authorities as well as even before us stated that deduction claimed of Rs. 43,32,189 relates to interest on gold loan account but, on perusal of the gold loan agreement with SBI, it is clear that excess amount paid by assessee to the bank, which is claimed as deduction does not relate to interest but repayment of principal only. When this was pointed out, ld. AR also accepted the factual position. Further, it needs to be mentioned, as far as the nature and character of the expenditure is concerned, there cannot be 6 ITA No. 1301 /Hyd/2013 Kalanikethan Fashions P. Ltd.

any dispute or doubt that it is revenue, since the AO himself has allowed a part of the expenditure. Keeping in view the aforesaid factual position, the issue has to be dealt with. Undisputedly, M/s KLN Jewellery has taken gold loan of Rs.98,54,661 from SBI, Vizag which was not in terms of cash but in terms of gold. It is also a fact that assessee utilized the said gold for making ornaments for its trading activity. However, M/s KLN Jewellery amalgamated with assessee company on 31/03/06 and as per the terms of agreement assessee took over not only the business of firm as a going concern but also all the assets and liabilities of erstwhile firm including the liability relating to gold loan. Though, at the time of availing gold loan, the value was Rs. . 98,54,661, but, when the account was closed, assessee had to pay an amount of Rs. 1,41,86,851 due to appreciation in the value of gold. Assessee claims the excess amount paid as finance charges on the loan availed. The issue to be decided is whether deduction claimed can be allowed as a revenue expenditure. There is no doubt to the fact loan as per the scheme was not in terms of cash but in terms of gold. Therefore, the gold obtained under the loan scheme form part of the stock-in-trade of the erstwhile firm and was converted into ornaments for trading purpose. Therefore, the purpose of loan is for the working capital for conducting business. When assessee took over assets and liabilities of erstwhile firm along with the loan, cost incurred by assessee at the time of closure of account on account of appreciation of gold value is an allowable expenditure since it is linked to the trading activity. In other words, the amount incurred by assessee is part of cost of loan to assessee. It is to be noted that one of the reason on which AO has disallowed the deduction claimed is since assessee is following mercantile system of accounting, the expenditure incurred for prior period cannot be allowed. In this regard, we are of the view that though the amount has been termed as interest but it is not interest in strict sense of the term. As far as interest payment is concerned, definitely they have accrued to assessee in the respective AYs.

7 ITA No. 1301 /Hyd/2013 Kalanikethan Fashions P. Ltd.

However, as far as the repayment of principal amount is concerned, as per the terms of the agreement with bank it has to be on the basis of value of gold as on the date of repayment. Therefore, the liability on that account cannot be an ascertained liability, which could be said to have accrued to the firm in the respective AYs when the loan continued. As the payment has to be made by assessee company on the basis of market value of the gold on the date of closure of account, excess expenditure incurred on such date of payment, in our view, is allowable expenditure. The decisions relied upon by ld. AR also support this view. In view of the aforesaid, we allow the claim of assessee by deleting the addition of Rs. 28,80,338.

7. In the result, appeal of the assessee is allowed.

Pronounced in the open court on 30 th June, 2015.

Sd/- Sd/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 30 th June, 2015 kv

Copy to:-

1) Kalanikethan Fashions P. Ltd., 8-2-293/82/A/1149, Jubilee Hills Road No. 59, Hyderabad - 500 033

2) DCIT, Range 2(2), IT Towers, AC Guards, Hyd.

3) CIT(A)I-II, Hyderabad

4) CIT-II, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.

8 ITA No. 1301 /Hyd/2013 Kalanikethan Fashions P. Ltd.

Description Date Intls 1. Draft dictated on Sr.P.S. 2. Draft placed befor e auth or Sr.P.S Draft pr opose d & placed bef ore the secon d AM 3 Mem ber 4 Draft discussed/appr oved b y second Mem ber VP 5 Appro ved Draft com es to the Sr.P.S./PS Sr.P.S. 6. Kept for pro nou ncem ent on Sr.P S. 7. File sent to the Bench Clerk Sr.P.S. 8 Date on which file go es to the Head Cle rk 9 Date of Dispatch of or der