Liberty Phosphate Ltd.,, Baroda vs Assessee

Liberty Phosphate Ltd., Vs Asstt. CIT, Cir-1(2), Baroda. 74.75, GIDC, Nandesan, Dist. Baroda. (Appellant) (Respondent) PA No._AAACL 3600N

Appellant by Shri Sunil Talati, AR Respondent by Shri B. L. Yadav, Sr. DR

Date of hearing: 14/5/2015 Date of pronouncement: 15/5/2015

ORDER

PER Shri Rajpal Yadav, Judicial Member.

The assessee is in appeal before us against the order of ld.

CIT(A) dated 15th September, 2011 passed for AY 2003-04. The

grievance of the assessee is that ld. CIT(A) has erred in not

rectifying the mistake apparent from the record.

2. Brief facts of the case are that the assessee has filed its return

of income on 28.11.2003 declaring total income at NIL. Case of the ITA No.2684/Ahd/2011 2 Asst. Year 2003-04

assessee was taken for scrutiny and notice under section 143(2) was

issued and served upon the assessee. On scrutiny of the accounts it

revealed to the AO that assessee had given interest free loans and

advances of Rs.1,85,63,883/- to its group concerns/associate

concerns. The ld. AO has made a disallowance of interest

expenditure amounting to Rs.41,78,032/-. The AO has passed

assessment order under section 143(3) on 28.3.2006. The assessee

moved an application dated 22.2.2007 under section 154 before the

AO. It contended that out of total advances of Rs.1,85,63,883/- only

Rs.51,72,836/- represent interest free advances to group concerns

but the AO considered the entire amount that interest free advances

to sister concerns and made addition on account of interest

Rs.41,78,032/- instead of Rs.11,64,211/-. The ld. AO has passed

rectification order. He deleted the disallowance of Rs.30,13,821/- vide

order dated 13th March, 2007.

3. The assessee had challenged the assessment order dated

28.3.2006 passed under section 143(3) in an appeal before the

CIT(A) bearing No.CAB/1-78/06-07. This has been decided on 12th

July, 2007. In this appeal assessee had challenged disallowance of ITA No.2684/Ahd/2011 3 Asst. Year 2003-04

interest expenses under ground No.4, the amount under challenge

Rs.4178,032/-. The appeal was instituted on 28.4.2006 i.e. much

prior to the rectification order passed by AO. The ld. CIT(A) has

decided this issue as under :-

''12. I have considered the rival submissions. It is observed that the appellant itself has admitted at para (iii)(a) that ''only a some of Rs.51,72,836/- is the amount of advance not directly related to manufacturing business and granted by way of financial assistance to group concerns."'

It is noted that Rs.49,13,324/- being LC discounting charges and interest on development of Rs.64,30,074/- being bank charges is not interest is found to be reasonable. As regards the appellant's argument that its own interest free funds far in excess of the loans/advances made to the associate concerns during the year, it is observed that it has force particularly in view of the ITAT decision in the case of Torrent Financiers (supra). Under the circumstances, it is held that the interest in respect of Rs.51,72,836/- advanced towards financial assistance of group concerns and admittedly not directly related to the appellant's manufacturing business worked out on proportionate basis is clearly disallowable. As regards the interest in relation to the rest of the funds, the same is allowed in view of the fact of availability of own funds with the appellant. The Assessing Officer is directed to re-work the disallowance accordingly.''

4. The assessee moved an application under section 154 of the

Act before the ld. CIT(A) on 23.08.2007. It pleaded that ld. CIT(A) has

failed to consider the issue, whether any disallowance on account of

interest has to be made because assessee had advanced the money ITA No.2684/Ahd/2011 4 Asst. Year 2003-04

to sister concerns without charging interest out of interest free funds.

The ld. CIT(A) has rejected the application of the assessee vide

impugned order dated 15.09.2011. The ld. first appellate authority

has observed as under :-

''3. I have considered the matter. From my learned predecessor's order (para 12), it is difficult to infer that a mistake apparent from record has occurred as contended by the appellant. My learned predecessor acknowledged the decision by the ITAT, Ahmedabad in the case of Torrent Financiers, still it was held by him in the very next line that interest in respect of Rs.51,72,836/- advanced towards financial assistance to group concerns and admittedly not directly related to appellant's manufacturing business worked out on proportionate basis was clearly disallowable. The benefit of interest free funds was allowed by CIT(A)-I, Baroda, my learned predecessor in respect of rest of the funds. Due to this being not a case of prima facie mistake apparent from record, application u/s 154 is rejected.''

5. With the assistance of learned representatives we have gone

through the record carefully. There is no dispute with regard to the

proposition that the power of rectification under section 154 of the IT

Act can be exercised only when the mistake which is sought to be

rectified is an obvious and patent mistake which apparent from the

record and not a mistake which requires to be established by

arguments at a long drawn process on reasoning of points on which

there may conceivably be two opinions. The perusal of the order of

CIT(A) dated 12th July, 2007 passed on the quantum appeal of the ITA No.2684/Ahd/2011 5 Asst. Year 2003-04

assessee (extracted supra) we find an inherent contradiction. The ld.

first appellate authority has observed that as far as the argument of

the assessee that its own interest free funds are far in excess of the

loans/advances made to the associate concerns during the year is

concerned, it has a force in view of the ITAT's decision, but thereafter

all of a sudden, the ld. first appellate authority jumped to the second

fold of reasoning that the advances were not made for business

purposes. The first appellate authority, first accepted the contention

of assessee that if advances to the sister concerns were made out of

interest free funds then there is a merit in its contention that no

disallowance would be made but ld. CIT(A) did not conclude this point

ultimately in the order. The ld. CIT(A) has left it as it is. To our mind it

is an apparent mistake which ought to have been rectified. We remit

this issue to the file of CIT(A) with the direction that ld. first appellate

authority shall deal with this issue on merit and record a finding,

whether assessee has advanced the loans to sister concerns out of

interest free funds or not ?. The observation made by us will not

impair or injure the case of revenue and will not cause any prejudice

to the defence/explanation of the assessee.

ITA No.2684/Ahd/2011 6 Asst. Year 2003-04

6. The appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open Court on 15/5/2015

Sd/- Sd/-

(G. D. Agrawal) (Rajpal Yadav) Vice President Judicial Member

Mahata/-

Copy of the order forwarded to: 1. The Appellant 2. The Respondent 3. The CIT concerned 4. The CIT(A) concerned 5. The DR, ITAT, Ahmedabad 6. Guard File BY ORDER

Dy. Registrar, ITAT, Ahmedabad

1. Date of dictation: 14/5/2015

2. Date on which the typed draft is placed before the Dictating Member: 15/5/2015 other Member:

3. Date on which approved draft comes to the Sr. P. S./P.S.:

4. Date on which the fair order is placed before the Dictating Member for pronouncement: __________

5. Date on which the fair order comes back to the Sr. P.S./P.S.:

6. Date on which the file goes to the Bench Clerk:

7. Date on which the file goes to the Head Clerk:

8. The date on which the file goes to the Assistant Registrar for signature on the order:

9. Date of Despatch of the Order: