[aaykarbhavan] Judgments, and other information, C AClub India

IT : Where additional ground of grievance against Assessing Officer's order was not raised before Commissioner (Appeals) raising of same before Tribunal was not sustainable

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[2013] 34 taxmann.com 220 (Agra - Trib.)

IN THE ITAT AGRA BENCH

Farrukhabad Investment India Ltd.

v.

Assistant Commissioner of Income-tax, 2(1), Farrukhabad*

BHAVNESH SAINI, JUDICIAL MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER

IT APPEAL NO. 207 (AGRA) OF 2005
[ASSESSMENT YEAR 1997-98]

SEPTEMBER  7, 2012 

Section 254, read with section 246A, of the Income-tax Act, 1961 - Appellate Tribunal - Powers of [Power to admit additional ground] - Assessment year 1997-98 - Assessee filed a miscellaneous application for admission of additional ground before Tribunal against Assessing Officer's order which was not raised before Commissioner (Appeals) - However, Tribunal passed its final order, neither admitting application of assessee nor dismissing it - Assessee again filed appeal before Tribunal for admission of additional ground - Whether, where additional ground of grievance against Assessing Officer's order was not raised before Commissioner (Appeals) and cross-appeals before Tribunal were dismissed in final order, raising of additional ground before Tribunal was not sustainable -Held, yes [Para 4] [In favour of revenue]

FACTS

 

■		The Assessing Officer passed an ex parte assessment order by making certain additions. Thereafter, considering the totality of the facts, he passed a rectification order in which he did not allow carry forward of loss computed by the assessee and determined the income at NIL.
■		On first appeal, the Commissioner (Appeals) partly allowed the assessee's appeal by deleting certain additions.
■		On cross-appeals before the Tribunal, the assessee also filed a miscellaneous application for admission of an additional ground regarding disallowance of carry forward of loss in rectification order by Assessing Officer resulting into NIL income.
■		However, the Tribunal dismissed both the appeals of revenue and assessee by an order dated 29-8-2008.
■		The assessee further filed an appeal before the Tribunal on ground that the miscellaneous application moved for admission of additional ground was neither admitted nor dismissed by the Tribunal in its final order. Therefore, it was a mistake on record.
■		The revenue contended that when final order had been passed by Tribunal, it would amount to disposal of additional ground.
■		However, the appeal of the assessee was allowed for hearing for limited purpose of disposal of application filed by the assessee for admission of additional ground.

HELD

 

■		It is not in dispute that the appeal of the assessee has been dismissed by the Tribunal vide order dated 29-8-2008. The additional ground so raised clearly spell out that the assessee has shown grievance in the additional ground against the assessment order passed by the Assessing Officer in disallowing the loss and estimating the income at nil. The assessee had not shown any grievance against the impugned order of the Commissioner (Appeals). Section 246A provides, the appeals would be maintainable before the Commissioner (Appeals) when the assessee was aggrieved against the order passed by the Assessing Officer.
■		Therefore, if the assessee was having any grievance against the order of the Assessing Officer, he should have preferred appeal before the Commissioner (Appeals) under section 246A. No direct appeal against the assessment order is provided under the Act before the Tribunal. According to section 253, if the assessee is aggrieved against the order of the Commissioner (Appeals), he should have preferred the appeals before the ITAT. Thus, no direct appeal is provided under the scheme of the IT Act from the assessment order to the Appellate Tribunal. In the additional ground of appeal so raised, the assessee has not shown any grievance against the order of the Commissioner (Appeals). No reasons have been explained why the above additional ground showing grievance against the order of the Assessing Officer was not raised before the Commissioner (Appeals). It is, therefore, clear that the above additional ground is not arising out of the impugned order passed by the Commissioner (Appeals). Since, it is admitted fact that the appeal of the assessee and the Revenue have reached finality on dismissal of respective appeals by the Tribunal, therefore, such additional ground could not be raised at this stage, otherwise it would amount to interfere with the order of the Tribunal dated 29-8-2008.
■		It is well settled law that all interim applications shall have to be decided before passing of the final order. In the aforesaid case, both the cross-appeals have already been decided finally, therefore, no interim application raising additional ground could be entertained at this stage. The Tribunal had become functus officio after passing the final order in this case on 29-8-2008 and as such has no jurisdiction to entertain application for admission of additional ground after disposal of the main appeal. Even with regard to the estimation of income at Nil by the Assessing Officer, the Assessing Officer had referred to the order passed under section 154 for taking such a view against the assessee.
■		Therefore, it is a different order which had to be taken care of before taking any step in the matter. Therefore, it is a factual matter to be considered on merits only after deliberations and further probing into the matter, which is not permissible at this stage.
■		Further, for seeking relief in computation of income, the assessee could have availed to remedies under section 154 but it appears that the assessee did not take any step deliberately before the Assessing Officer as per section 154. It may also be noted here that the Tribunal had not admitted the additional ground of appeal above, before finally deciding the appeals.
■		Therefore, the request of the assessee could not be considered legally at this stage. Considering the above discussion in the light of the fact that the appeal of the assessee has already been dismissed on merits, it is not inclined to admit the additional ground of appeal so raised above. In the result, the application for admission of additional ground is dismissed. [Para 4]

Anurag Sinha for the Appellant. Waseem Arshad for the Respondent.

ORDER

 

Bhavnesh Saini, Judicial Member - This appeal by the assessee is directed against the order of ld. CIT(A)-II, Agra dated 29.03.2005 for the assessment year 2007-08.

2. Before proceeding further, it would be relevant to mention that the present appeal has been re-fixed by the office as per directions issued in M.A. No. 109/Agra/2008 dated 30.11.2010 for limited purpose of disposal of application of the assessee filed for admission of additional ground. The background of this case had been that the AO passed exparte assessment order u/s. 144/147 of the IT Act dated 17.02.2004. The AO made the following additions:

(i) Interest disallowed	Rs. 1,18,21,350/-
(ii) Commission disallowed	Rs. 38,14,947/-
(iii) Investment in hotel building	Rs. 1,74,04,718/-

The AO thereafter noted that considering the totality of the facts, the loss claimed by the assessee is ignored. This resulted into addition of Rs.4,59,81,800/-, i.e., residue loss after order u/s. 154 dated 25.10.1999. Accordingly, the assessment is made at Nil income. The assessee preferred appeal before the ld. CIT(A), which was decided vide order dated 29.03.2005 and the appeal of the assessee was partly allowed reducing the addition of interest to Rs.11,82,135/-. The addition of Rs.38,14,947/- on commission was confirmed. The addition on account of investment in hotel building in a sum of Rs.1,74,04,718/- was deleted. The assessee as well as the Revenue preferred appeals before the ITAT, Agra in ITA No. 207/Agra/2005 and 258/Agra/2005 and vide order dated 29.08.2008, the Tribunal dismissed both the appeals of the assessee as well as the Revenue. The assessee filed M.A. No. 109/Agra/2009 before the Tribunal in appeal of the assessee in ITA No. 207/Agra/2005 stating therein that the assessee requested for admission of the additional ground vide letter filed before the Tribunal on 29.05.2007 in which following additional ground was raised:

"Because the Assessing Officer has erred in disallowing the loss and estimating the income at "nil" without any material on record."

The assessee's M.A. was considered by the Tribunal. The assessee submitted that the Tribunal neither rejected the application to raise the additional ground nor granted and appeal of the assessee has been disposed of. Therefore, there is mistake on record. The ld. DR, however, contended that when the order has been passed by the Tribunal, it would amount to disposal of the additional ground. The Tribunal, however, allowed the M.A. of the assessee vide order dated 30.11.2010. The findings given in paras 3, 4 & 5 of this order are reproduced as under:

3. We have carefully considered the rival submissions and perused the material on record. We have also gone through the application, which has been filed by the assessee on 29.05.2007 before the Registry and the order of this Tribunal dated 29.08.2008. We noted that in this application, the assessee has requested the Bench to permit it to raise the following additional ground of appeal:

"Because the Assessing Officer has erred in disallowing the loss and estimating the income at "Nil" without any material on record."

4. We noted that even though the Tribunal has passed the order dated 29.08.2008 disposing of the appeal of the assessee but did not pass any order on the application moved by the assessee for permission to raise additional ground in appeal. The original application, although available on file, but the Tribunal neither admitted the application nor dismissed the same. Thus, in our opinion, there has been a mistake apparent on record in the order of this Tribunal dated 29.08.2008. We, therefore, recall the order of this Tribunal dated 29.08.2008 only for the purpose of disposing of the application of the assessee filed by him before the Registry on 29.05.2007 requesting the Tribunal to grant permission to the assessee to raise the following additional ground:

"Because the Assessing Officer has erred in disallowing the loss and estimating the income at "Nil" without any material on record."

5. Thus, the miscellaneous application filed by the assessee is allowed.

The office accordingly re-fixed the appeal of the assessee in ITA No. 207/Agra/2005 for hearing for limited purpose of disposal of application of assessee for admission of additional ground above.

3. The ld. counsel for the assessee submitted that the AO instead of allowing carry forward loss as computed, determined the income as Nil. Due to inadvertence, no specific ground was raised in respect of determination of income at Nil. He had submitted that no reasons have been given by the AO in the assessment order for disallowance of resultant loss, which has been done purely on adhoc basis. He had, therefore, submitted that the assessee may be allowed to raise the above additional ground. The ld. counsel for the assessee, however, could not explain whether this additional ground was argued before the Tribunal at the time of original hearing because he was not the counsel in this case at that time. The ld. counsel for the assessee also could not explain as to how interim application could be agitated after disposal of appeal of the assessee in ITA No. 207/Agra/2005 vide order dated 29.08.2008. The ld. DR has submitted that since the appeal of the assessee has already been disposed of, therefore, the assessee cannot be permitted to raise additional ground of appeal. Therefore, the application of the assessee is not maintainable.

4. We have considered the rival submissions and the material on record. It is not in dispute that the appeal of the assessee has been dismissed by the Tribunal in ITA No. 207/Agra/2005 vide order dated 29.08.2008. The additional ground so raised clearly spell out that the assessee has shown grievance in the additional ground against the assessment order passed by the AO in disallowing the loss and estimating the income at nil. The assessee has not shown any grievance against the impugned order of the ld. CIT(A). Section 246A provides, the appeals would be maintainable before the ld. CIT(A) when the assessee was aggrieved against the order passed by the Assessing Officer. Therefore, if the assessee was having any grievance against the order of the AO, he should have preferred appeal before the ld. CIT(A) u/s. 246A of the IT Act. No direct appeal against the assessment order is provided under the Act before the Tribunal. According to section 253, if the assessee is aggrieved against the order of the Commissioner (Appeals), he should have preferred the appeals before the ITAT. Thus, no direct appeal is provided under the scheme of the IT Act from the assessment order to the Appellate Tribunal. In the additional ground of appeal so raised, the assessee has not shown any grievance against the order of the ld. CIT(A). No reasons have been explained why the above additional ground showing grievance against the order of the AO was not raised before the ld. CIT(A). It is, therefore, clear that the above additional ground is not arising out of the impugned order passed by the ld. CIT(A). Since, it is admitted fact that the appeal of the assessee and the Revenue have reached finality on dismissal of respective appeals by the Tribunal, therefore, such additional ground could not be raised at this stage, otherwise it would amount to interfere with the order of the Tribunal dated 29.08.2008. It is well settled law that all interim applications shall have to be decided before passing of the final order. In the aforesaid case, both the cross appeals have already been decided finally, therefore, no interim application raising additional ground could be entertained at this stage. The Tribunal has become functus officio after passing the final order in this case on 29.08.2008 and as such has no jurisdiction to entertain application for admission of additional ground after disposal of the main appeal. Even with regard to the estimation of income at Nil by the AO, the AO has referred to the order passed u/s. 154 dated 25.10.1999 for taking such a view against the assessee. Therefore, it is a different order dated 25.10.1999, which has to be taken care of before taking any step in the matter. Therefore, it is a factual matter to be considered on merits only after deliberations and further probing into the matter, which is not permissible at this stage. Further, for seeking relief in computation of income, the assessee could have availed to remedies u/s. 154 of the IT Act, but it appears that the assessee did not take any step deliberately before the AO as per section 154 of the IT Act. It may also be noted here that the Tribunal has not admitted the additional ground of appeal above, before finally deciding the appeals. Therefore, the request of the assessee could not be considered legally at this stage. Considering the above discussion in the light of the fact that the appeal of the assessee has already been dismissed on merits, we are not inclined to admit the additional ground of appeal so raised above. In the result, the application for admission of additional ground is dismissed.

5. In the result, the appeal of the assessee to the above extent also is dismissed.

ISHA

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Sec 41(1) provides for taxing the cessation of a liability earlier allowed. The section begins "where an allowance or deduction has been made in the assessment for any year". Thus, before invoking the deeming provisions of sec 41(1), the first requisite condition to be satisfied is that the assessee should have got deduction or benefit of allowance in respect of loss, expenditure or "trading liability" incurred by it and subsequently during any previous year, the assessee should have received any amount in respect of such loss, expenditure or trading liability by way of remission or cessation thereof. The remission would become income only if the assessee has claimed deduction in respect of expenditure or trading liability. The scope of sec 41(1) is to bring to tax any loss, expenditure or trading liability allowed in an earlier assessment but which is recouped by remission or cessation of such liability in a later year.
Sec 41(1) is concerned with only trading liability and not with any other type of liability. Every liability standing in the balance sheet cannot be presumed to be a trading liability. A grant of loan cannot be termed as a trading transaction and it cannot also be construed in the course of business unless it is utilised for business purposes (e.g., working capital loan) or is a trading liability. It is a well-established principle of law that every deposit of money would not constitute a trading receipt like sales tax and excise duty collected from customers but not deposited with the Government authorities. Therefore, the amount referable to the loans obtained by the assessee towards non-business purposes or for purchase of capital asset would not constitute a trading receipt [pls see para 22 & 24, at pgs 334 & 335 of the decision namely, Iskraemeco Regent Ltd v.CIT (2011) 331 ITR 337 (Mad)]. Similarly, the Delhi High Court in the case of CIT v. Phool Chand Jiwan Ram (1987) 131 ITR 37 (Del) held that only "trading debts" which are allowed as deduction in earlier years can only be treated as a trading liability. In other words, a trading transaction will alone lead to a trading liability and not otherwise.
The expression "trading liability" has not been defined in the Income tax Act but a liability created for purchase of stock-in-trade on credit or a current trading transaction or a liability, which is awaiting adjustment by way of supply of goods or services, or a trade debt is certainly a trading liability which is quite different from a mere loan on capital account. This difference is generally overlooked by the A.Os.  As per the accounting parlance and legal parlance a "trading liability" would always mean the following –
a)      liability created for purchase of stock-in-trade on credit or a trade debt;
b)      a liability, which is awaiting adjustment by way of supply of goods or services;
c)      borrowings for working capital
d)      sales tax collected in the course of business;
e)      receipt of compensation for loss of stock -in- trade;
f)       recoupment of debt / loss allowed as bad debts  under sec 41(4) / business loss;
g)      remission / cessation of liability in respect of a trading transaction;
h)      remission in respect of unclaimed wages or bonus claimed in the return of income;
i)        unclaimed insurance premium;
j)        unclaimed excise duty liability, sales tax or purchase tax liability;
k)      refund of excise duty and sales tax;
l)        refund of electricity charges as grant / concession in power rates
m)   sums obtained as rebates;
n)      write back of excess provision;
o)      amounts earlier allowed as bad debts and later realised;
p)      unclaimed deposits received from customers in the course of trading operations credited to profit and loss account;
q)      monies kept for disbursement to meet business expenses;
r)       amounts received in the course of carrying on a trading;
The Courts have held that sec 41(1) creates a legal fiction and hence has to be strictly complied with if any addition to the income is sought to be made by the Revenue.
...
Unless an allowance or deduction had been made in an earlier year in respect of loss, expenditure or "trading liability", there can be no addition under sec 41(1) [pls see CIT v. Compaq Electric Ltd (2012) 204 Taxman 58 (Karn) (Mag), CIT v. Tosha International Ltd (2011) 331 ITR 440 (Del) [approved in CIT v. Tosha International (2009) 319 ITR (St.) 7 (SC)], Narayanan Chettiar Industries v. ITO (2005) 277 ITR 426 (Mad), CIT v. Chetan Chemicals Pvt Ltd (2004) 267 ITR 770 (Guj), Mahindra and Mahindra Ltd v. CIT (2003) 261 ITR 501, 510 (Bom), CIT v. Bhawan VA Path Nirman (Bohra) & Co (2002) 258 ITR 440 (Raj), Polyflex (India) Pvt Ltd. v. CIT (2002) 257 ITR 343 (SC), CIT v. Nathubhai Desabhai (1981) 130 ITR 238 (MP), CIT v. Usha Ranjan Bhadra (1980) 126 ITR 44 (Gau), Steel & General Mills Co Ltd v. CIT (1974) 96 ITR 438 (Del), Tirunelveli Motor Bus Service Co. Pvt Ltd. v. CIT (1970) 78 ITR 55 (SC) [on sec 10(2A) of the 1922 Act corresponding to sec 41 of the 1961 Act].

In these decisions, it has been held that the burden of proof is on the Revenue to prove that allowance or deduction was given in earlier year to the assessee before invoking the provisions of sec 41(1).
In the case of CIT v. Usha Ranjan Bhadra (supra), the Gauhati High Court following the Supreme Court decision of Tirunelveli Motor Bus Service Co. P. Ltd. v. CIT (supra) held that there was no complete rebate of interest in the settlement; interest was also taken into consideration while allowing the settlement at R1,65,000 and how much remission was given on account of interest would be a mere conjecture.
...
It would not be possible to identify conclusively the particular item for which remission was granted and how much for each item. Therefore, no addition could be made as deemed profit under sec 10(2A) Act [corresponding to sec 41 of the 1961 Act] of the 1922 Act.
Further, in the case of CIT v. Bhawan VA Path Nirman (Bohra) & Co (supra), the Court relying on the decision of Tirunelveli Motor Bus Service Co. P. Ltd. (supra), held that sec 41(1) deems what is not an income as income under specified circumstances. The threshold requirement is that an amount, which has ceased to be a liability or has been remitted during the year, should have been allowed as a deduction in computation of the assessee's income in order that it may be brought to tax. Where the assessee's profit was merely estimated disallowing the expenses claimed, the assumption that the particular amount had been allowed in computation of income does not follow. The decision was rendered in the context of refund of sales tax. In this case, the practice was to estimate the taxable income by applying the net profit rate subject to appropriation towards depreciation and interest on borrowed money. In A.Y. 1995-96 the assessee credited in its profit & loss account an amount of refund of sales tax from the Sales Tax Department on account of excess payment in earlier years. The Court held that the amount could not be brought to tax as deemed profit under sec 41(1): since, firstly, there was no reference to any specific assessment year in which the amount of sales tax in question was considered as allowable expense; and, secondly, when an assessment had been made on estimate basis, it could not be discerned what particular item of expense or trading liability had been considered and allowed as a deduction or has been rejected as not allowable.
...
Neither the A.O. nor any other officer had traced the earlier assessment year in which the amount of sales tax was considered and allowed as a deduction. The A.O. had merely relied on the practice of subjecting the assessee to tax on income estimated by adopting a net profit rate and concluded that since in some past years, to which the amount related, the amount must be deemed to have been part of the consideration in the estimate arrived at by applying the net profit. The very foundation for invoking sec 41(1) was not laid. The refund of sales tax could not be brought to tax as deemed profit under sec 41(1) merely on the inferences to be drawn by the method of estimating income adopted in the previous years.
But what is generally observed that in the tax assessments that the Revenue authorities attempt to tax waiver of loan/advance either under sec 41(1) or under sec 28(iv) of the Income tax Act by relying on the decisions in the case of CIT v. T. V. Sundaram Iyengar & Sons Ltd (1996) 222 ITR 344 (SC) and Solid Containers Ltd v. DCIT (2009) 308 ITR 417(Bom). What the Revenue authorities fail to appreciate is that in the case of CIT v. T. V. Sundaram Iyengar & Sons (supra) unclaimed deposits received from customers were not claimed by them, the claim became barred by limitation and the unclaimed balances were transferred to the profit & loss account. It is in this particular situation the Supreme Court held that the unclaimed deposits received in the course of trading transaction constitute "trade surplus" though they did not have such a character at the time of receipt, but the lapse of time made it so.
...
In Solid Containers Ltd v. DCIT (supra), loans were taken for business purpose and thus waiver of loan was considered as business income following the decision in CIT v. T. V. Sundaram Iyengar & Sons Ltd (supra) but simultaneously the Court pointed out to the distinction between a loan agreement and a trade debt in Mahindra & Mahindra Ltd. v. CIT  (supra) wherein it was also held where transaction involves purchase of capital asset, i.e., plant and machinery, waiver of loan amount for purchase of capital asset would not constitute a business receipt. These decisions could not, therefore, be applicable to a loan transaction, which is on capital account or where the loan is held to be for non-business purposes. 
The tax authorities shall appreciate that in CCE v. Srikumar Agencies [2009] 1 SCC 469, the Hon'ble Supreme Court has clearly stated that a judgment cannot be read as a statute and has to be made applicable to the facts and consideration of each case and the ratio laid down therein will have to be applied to the facts and circumstances of each case. However, the A.Os generally commit a grave error in mechanically applying the above decisions without appreciating the factual scenario that the loan had neither been obtained for business purposes nor in the course of trading transactions.
Further, the tax authorities shall also keep in mind the proposal in clause (xiii) of sec 33 of the Direct Taxes Code Bill, 2010 which seeks to legalise the revenue's view. The present sec 41(1) is enacted in clause (xii) in sec 33 of the Direct Taxes Code Bill, 2010 proposing liability only on such amount which has been allowed as a deduction as under the present law.
...
Sec 33(2)(xiii) as proposed, would tax waiver of a loan which does not have a revenue character. Thus, where the principal amount of loan is waived, it cannot be termed as a "trading liability" or a receipt in the course of trading operations.  Waiver of loan would always be on capital account, especially when loans are for non-business purposes or for financing capital assets / investments and not for working capital requirements.
In so far as applicability of sec 36(1)(iii) of the Act is concerned, the assessee can take an argument that sec 36 (1)(iii) speaks about other deductions. The said provision deals with the amount of interest paid in respect of capital borrowed for the purpose of business. Thus where the loan is not borrowed for the purpose of business, sec 41(1) will have no relevance. Further sec 37(1) of the Act contemplates three conditions which are cumulative in nature. Expenditure to be deductible under sec 37(1) - (a) should be laid out fully and exclusively for the purpose of business, (b) should not be in the nature of capital expenditure or for personal purpose, and (c) should not be of such nature described in secs 30 to 36. When the transaction between the assessee and the lender is a pure loan transaction; the same can never be termed as a "trading transaction" inasmuch as if the loan is obtained for non-business purposes or purchase of a capital asset.
The assessee may also refer to the decision of CIT v. Ponni Sugars and Chemicals Ltd (2008) 306 ITR 392 (SC), wherein the Hon'ble Supreme Court held that in order to find out the character of the receipt in the hands of the assessee, the purpose of the grant will have to  be seen.
...
By applying the purpose test, it was held that the object of the grant will have to be seen. Therefore, by applying the principle laid down by the Hon'ble Supreme Court the object of the transaction namely, the loan transaction is for non-business purpose as against the running of the regular business such a receipt would be a capital receipt. Remission or cessation of liability has to be read in relation to trading liability only and the waiver of the impugned principal portion of loan / dues cannot be considered as trading liability.
Whether principal amount of loan waived can be also taxed as "income" under sec 2(24) of the Act, one may rely on the decision of Logitronics Pvt Ltd. v. CIT (2011) 333 ITR 386 (Del) wherein the Delhi High Court at pgs 393 & 402 of the report 333 ITR held as under:
"Under sec 4 of the Act, the charge of income-tax is upon the "total income of the previous year". The term "income" is defined under sec 2(24) of the Act. In general, all receipts of revenue nature, unless specifically exempted are chargeable to tax. Loan taken is not normally a kind of receipt which will be treated as income. However, when a part of that loan is waived by the creditor, some benefit accrues to the assessee. The question is what would be the character of waiver of part of loan at the hands of the assessee? Waiver definitely gives some benefit to the assessee. Whether it is to be treated as capital receipt? If it is so, then only capital gains tax would be chargeable under sec 45 of the Act. Or else, whether remission of loan is no income at all? [Para 10, pg 393]
In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken.
...
If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if this loan was for trading purpose and was  treated as such from the very beginning in the books of account, as per  T.V. Sundaram Iyengar and Sons Ltd. [1996] 222 ITR 344 (SC), the waiver  thereof may result in the income more so when it was transferred to the  profit and loss account."
Now, let us examine whether waiver of loan amount can be taxed as income under sec 41(1) or sec 28(iv) of the Act and in this connection, it is worthwhile to point out the decision of Mahindra & Mahindra Ltd v. CIT (2003) 261 ITR 501 (Bom). In this case, the assessee imported some capital assets financed by loan from the seller. Interest on such loan was capitalised so there was no claim for deduction under sec 36(1)(iii) or sec 37(1). The loan including interest was subsequently waived by the lender. The Hon'ble Bombay High Court had to consider the issues, viz., (i) where interest on borrowing is capitalised, it gets allowed as deduction by way of depreciation, (ii) if interest is waived in such a case, sec 41(1) would have no application. In such case, such amount so waived goes to reduce the book value of assets? Or would it be taxable as a benefit under sec 28(iv)? The Hon'ble Bombay High Court considered all these issues and held that the assessee had not claimed any deduction in respect of expenditure or trading liability. That the assessee had paid interest @ 6% over a period of 10 years and the assessee never got deduction under sec 36(1) (iii) or sec 37 in respect of the same.
The Hon'ble High Court held that waiver of loan will not attract liability under sec 41(1) because waiver of loan liability was for purchase of a capital asset and not stock-in-trade; nor will the benefit of such waiver be liable to tax under sec 28(iv) because in order that an amount to be taxed under sec 28(iv), (a) it should come from business and (b) it should arise in kind. Sec 41(1) applies only where the assessee has obtained a deduction in respect of loss / expenditure or trading liability. [Pls also see CIT v. Chetan Chemicals (P) Ltd (2004) 267 ITR 770 (Guj) (loan amount for which no deduction was allowed to the assessee, is a windfall and cannot be made liable to tax, whether the assessee is in money lending or not, since neither sec 28(iv) nor 41(1) would possibly apply to what is a capital receipt or a windfall), Indersons Leathers (P) Ltd v. Addl. CIT (2007) 295 ITR (AT) 295 (Asr), Helios Food Improvers Pvt Ltd v. DCIT (2007) 14 SOT 546 (Mum), Coastal Corpn Ltd v. JCIT (2008) 307 ITR (AT) 78 (Vishakhapatnam), Cipla Investments Ltd v. ITO (2009) 33 SOT 317 (Mum), DCIT v. Allied Leathers Finishers Pvt Ltd (2009) 32 SOT 549(Luck),Smartalk Pvt Ltd v. ITO (2009) 313 ITR (AT) 96 (Mum) (provisions of sec 10(3) could not be invoked for charging any income to tax as sec 10 deals with only such incomes, which are not to be included in the total income of the assessee), CIT v. Goyal M. G. Gases Ltd (2010) 321 ITR 437 (Del), Accelerated Freeze & Drying Co Ltd v. DCIT (2010) 1 ITR (Trib) 226 (Coch) (Term loan was waived by bank and the waiver was not considered as income chargeable to tax under sec 41(1)), CIT v. Tosha International Ltd (2011) 331 ITR 440 (Del) [approved in CIT v. ..Tosha International (2009) 319 ITR (St.) 7 (SC)], CIT v. Softworks Computers (P) Ltd (2013) 354 ITR 16 (Bom) [advance given for purchase of office waived], CIT v. Xylon Holdings (P) Ltd. (2012) 211 Taxman 108 (Mag)/ 26 taxmann.com 333 (Bom), Shri Kansara Modular Ltd. V. ACIT (2012) 32 taxmann.com 217(Jodh), Smt. M.R. Banu v. DCIT (2012) 15 ITR (Trib.) 662 (Chen), Bombay Gas Co Ltd. V. Addl. CIT (2012) 54 SOT 13 (Mum), CIT v. Compaq Electric Ltd (2011) 16 taxmann.com 385 / (2012) 204 Taxman 58 (Kar) (Mag) Logitronics Pvt Ltd v. CIT (2011) 333 ITR 445 (Del)].
In so far as applicability of sec 28(iv) is concerned it would not be applicable to a "money transaction". Sec 28(iv) provides for chargeability of profits and gains of business or profession with relation to the value of any benefit or perquisite arising out of business or the exercise of profession and therefore the same would not include the money transaction. Since in the present case on hand, the transaction involved being a loan transaction, and therefore being a transaction of money, sec 28(iv) of the Act has no application. Further, in order to invoke the provisions of sec 28(iv), the value of any benefit or perquisite, whether convertible into money or not, there must be a nexus between the business of the assessee and the benefit which the assessee has derived.  Further, a combined reading  of sec 41(1) of the Act read with sec 28(iv) would show  that the words "whether no cash or any other manner as mentioned in  sec 41(1)" has not been incorporated under sec 28(iv) which is indicative of the fact that sec 28(iv) does not cover a cash transaction [pls see CIT v. G. Venkataram (1978) 111 ITR 444 (Mad), CIT v.  Alchemic Pvt Ltd. [1981] 130 ITR 168, 173 (Guj), CIT v. P. Ganesa Chettiar [1982] 133 ITR 103 (Mad), CIT v. A. V. M. Ltd. [1984] 146 ITR 355 (Mad), Ravinder Singh v. CIT (1994) 205 ITR 353 (SC), CIT v. Mafatlal Gangabhai & Co. (P) Ltd. [1996] 219 ITR 644 (SC), Mahindra & Mahindra Ltd v. CIT (2003) 261 ITR 501, 509 (Bom), CIT v. Chetan Chemicals Pvt Ltd (2004) 267 ITR 770, 773 (Guj), Helios Food Improvers P Ltd v. DCIT (2007) 14 SOT 546 (Mum), DCIT v.  Garden Silk Mills Ltd. [2010] 320 ITR 720 (Guj), CIT v. Jindal Equipments & Leasing & Consultancy Services Ltd (2010) 325 ITR 87 (Del), Iskraemeco Regent Ltd v. CIT (2011) 331 ITR 317 (Mad), Logitronics Pvt Ltd v. CIT (2011) 333 ITR 386 (Del), Rollatainers Ltd v. CIT (2011) 339 ITR 54 (Del), Shri Kansara Modular Ltd. v. ACIT (2012) 32 taxmann.com 217 (Jodh) and ACIT v. Spel Semiconductor Ltd (2013) TS 228 (Chen ITAT)].
With regard to applicability of sec 28(iv) vs. sec 41(1), the assessee may also rely on the decision of CIT v. Shri Vardhman Overseas Ltd (2012) 343 ITR 408 (Del), wherein it was held as under:
"……… while sec 28(iv) would apply generally to all benefits or perquisites which arise to the assessee from the business carried on by him, the benefit which he obtains by way of remission or cessation of a trading liability in a later year, in respect of which he has obtained a deduction in an earlier year in computing the business income, should be governed by sec 41(1) which is the specific provision governing the factual situation and not by sec 28(iv). This way there would be no conflict between the two provisions and both will be given effect to. [last part of para 23 of the report]"
There are other decisions namely, CIT v. Saden Vikas India Ltd (2010) 320 ITR 538 (Del) [advance received by Premier Automobiles Ltd from customers against orders was considered taxable under sec 41(1)], PIC (Gujarat) Ltd v. DCIT (2011) 8 ITR (Trib) 417 (Ahd) [deposits received from dealers for making available deep freezers for distribution of assessee's products being ice cream cannot be exigible to tax so long as the deposit is continued without being transferred to profit & loss account] and Logitronics Pvt Ltd v. CIT (2011) 333 ITR 386 (Del) [distinction made between loans borrowed for purchase of capital asset namely,  plant & machinery, dyes and tools, etc., and other borrowings as for working capital and investment. The Court overruled the Tribunal's ruling that loans taken for buying long-term investments in shares are on capital account and thus could not be treated as on trading account] which merit attention.
Whether sec 41(1) would apply to forfeiture of debentures due to non-payment of call money?
In Prism Cement Ltd v. JCIT (2006) 285 ITR (AT) 43 (Mum), the assessee issued debentures to raise capital. Due to non-payment of call money by some debenture holders, the amounts already paid by them were forfeited. It was held that the amounts forfeited were capital receipt and not taxable under sec 41(1).
Whether sec 41(1) would apply to lapsed losses?
In the case of The Mula Pravara Electric Co-op. Society Ltd v. DCIT (2013) TS-238 (Pune ITAT),it was held that remission of trading liability cannot be taxed under sec 41(1) to the extent of lapsed business loss; if expenditure results into loss but such loss cannot be set off under sec 72 of the Act, in such a situation, sec 41(1) cannot be invoked. The intention of the Parliament in creating fiction is not to put any extra burden of tax on the assessee but to take away the benefit which is enjoyed by the assessee by reducing the tax liability under the charging provisions of the Act.
Whether sec 41(1) would apply to lapsed losses?
The Madras High Court has in the case of CIT v. N. Rudrappan (1983) 147 ITR 355 (Mad)held that if on retirement of the assessee as partner from a firm, his share in accumulated losses of the firm is forgiven, the amount so forgiven could hardly be regarded as a benefit or remission given to the assessee in respect of any loss incurred by him for which any allowance / deduction has been granted earlier within the meaning of sec 41(1) of the Act. Further, from A.Y. 1993-94, the provisions of sec 10(2A) of the Act provide that in the case of a person being a partner of a firm which is separately assessed as such, his share of profit shall not be included in computing the total income. A partnership firm is separately assessed to tax as such and accordingly, any loss or profit in the hands of the partner is neither allowable as deduction nor eligible for set off against its taxable income. Thus write-off of share of losses in the said partnership firm cannot be taxable under sec 41(1)/sec 28(iv).
With regard to applicability of sec 28(iv) vs. sec 41(1), the assessee may also rely on the decision of CIT v. Shri Vardhman Overseas Ltd (2012) 343 ITR 408 (Del), wherein it was held as under:
"……… while sec 28(iv) would apply generally to all benefits or perquisites which arise to the assessee from the business carried on by him, the benefit which he obtains by way of remission or cessation of a trading liability in a later year, in respect of which he has obtained a deduction in an earlier year in computing the business income, should be governed by sec 41(1) which is the specific provision governing the factual situation and not by sec 28(iv). This way there would be no conflict between the two provisions and both will be given effect to. [last part of para 23 of the report]"

2013-TIOL-547-ITAT-AHM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A' AHMADABAD

ITA No.1329/Ahd/2012
Assessment Year: 2009-10

RIDDHI STEEL & TUBES PVT LTD
83/84, PIPLAJ PIRANA ROAD
ASLALI, PIPLAJ, VILLAGE KAMOD
AHMEDABAD
PAN NOP:AACCR01755J

Vs

ASSTT COMMISSIONER OF INCOME TAX
RANGE-5, AHMEDABAD

Mukul Kr Shrawat, JM and T R Meena, AM

Dated: April 12, 2013

Appellant Rep by: Shri Tushar P Hemani, AR
Respondent Rep by: Shri Shelley Jindal, CIT-DR

Income Tax - Sections 69B, 251, 253 - Whether appellate authorities under the I-T Act can entertain a new claim which was raised, but not made before the AO by way of revised return - Whether stock statement furnished to bank for obtaining credit facility is sacrosanct - Whether any addition on the basis of such statement can be made without pointing out any defect in regular audited books of account of the assessee.

Assessee Company engaged in manufacturing of steel, filed its ROI. During the course of assessment proceedings the AO observed that the assessee had wrongly claimed lesser depreciation; however the AO could not allow the claim of the assessee for correct depreciation on the ground of non-filing of the revised return. Beside this the AO also made addition under section 69-B on the ground that the stock statement furnished to bank did not match with the book's stock. The CIT(A) affirmed the order of the AO. On appeal before the Tribunal, the AR pointed out several judgments for contesting the issues.

After hearing the parties the ITAT held that,

++ we agree with the arguments made by the Ld. Counsel that the Supreme Court decision in the case of Goetze (supra) bars only AO but not the Appellate Authorities to entertain fresh / new claim made before AO without filing revised return of income. Therefore, we accept the claim as made by the Assessee and direct the Assessing Officer to allow the differential depreciation amount of Rs.7,62,206/- after verifying the claim as made in the Tax Audit Report in Form No.3CD;

++ the Assessee is covered by the Gujarat High Court decisions in the case of Arrow Exim Pvt. Ltd and Meico Bonds Pvt. Ltd. It is seen that Hon'ble the Gujarat High Court in the case of Arrow Exim Pvt. Ltd. has confirmed the order of ITAT and CIT(A) in deleting addition made u/s 69B of the Act under identical circumstances of the case after making observations that (a) the stock statement showing inflated quantity and value of stock was furnished to the banking authorities to avail more credit facilities; (b) the stocks were hypothecated and not pledged and (c) the books of accounts are not found to be defective or non-genuine by the AO. (d) The assessee explained the difference either on account of inflated valuation of stock or excess quantity shown to bank. We further find that Hon'ble the Gujarat High Court in the case of Meico Bonds Pvt. Ltd. has also confirmed the order of ITAT in deleting the addition made on account of understatement and undervaluation of stock after making observations that (a) the assessee had been contending that the valuation supplied to the Bank did not reflect the accurate or the correct picture; (b) the statement was drawn on the basis of estimation and such estimate is based on higher side to borrow higher loan and (c) the closing stock reflected in the books maintained for income-tax reflects the correct picture. Hon'ble Gujarat High Court in the case of Meico Bonds Pvt. Ltd has further strengthened the view taken in Arrow Exim Pvt. Ltd.

Assessee's appeal allowed

ORDER

Per: T R Meena:

This is an appeal at the behest of the assessee which has emanated from the order of CIT(A)-XI, Ahmedabad, dated 25.05.2012 for A.Y. 2009-10. The effective grounds of appeal are as under:

1. The ld. CIT(A) has erred in law and on facts of the case in confirming the action of ld. AO in making disallowance of an expenditure amounting to Rs.1,93, 150/- u/s 40(a)(ia) of the Act purely on guess work and without appreciating the facts that no such expenditure was debited to Profit & Loss account and consequently there was no violation of TDS provisions.

2. The ld. CIT(A) has erred in law and on the facts of the case in not maintaining the ground raised with regard to differential amount of depreciation of Rs.7,62,206/- after holding that the same was not disallowed by the ld. AO and therefore the Appellant cannot have any grievance against the assessment order.

3. The ld. CIT(A) ought to have appreciated the facts that the ld. AO has dealt with the issue with regard to claim of the Appellant to allow depreciation at Rs.86,01,248/-as given in the Tax Audit Report as against Rs.78,39,042/- shown in the Return of Income, however, the ld. AO has not allowed the differential amount of Rs.7,62,206/- as deduction while computing assessable income, and therefore, the Appellant can have grievances against such action of the ld. AO.

4. The action of ld. CIT(A) in not adjudicating the ground on merits in as much as law is patently bad, untenable and illegal in the eyes of law.

5. Both the lower authorities have failed to allow / grant legitimate deduction with regard to differential depreciation of Rs.7,62,206/-, which ought to have been allowed to the Appellant.

6. The ld. CIT(A) has erred in law and on the facts of the case in confirming the action of ld. AO in making huge addition of Rs. 10,39,75,306/-u/s 69B of the Act.

7. The ld. CIT(A) has further erred in law in erroneously holding that Bank Manager had inspected godown of the appellant on 25/04/2009. Firstly there is no such inspection report of any physical verification and secondly even as per the CIT(A) the said alleged inspection of stock took place on 26/04/2009 whereas the addition is made for the so called discrepancy of stock as on 31/03/2009.

8. Alternatively and without prejudice to above, the Appellant has explained stock worth of 2654 M.T. out of alleged unexplained stock of 3319.037 M.T. and therefore addition to that extent may be deleted.

9. Ld. CIT(A) has erred in not following and respecting the decision of Hon'ble Jurisdiction High Court in the case of Arrow Exim Ltd (230 CTR 293) which was directly covering the issue in favour of the appellant. The artificial and hyper technical distinctions given by the ld. CIT(A) for not following the decision of the Hon'ble Jurisdictional High Court is nothing but an attempt not to follow binding decision which amount to contemptuous defiance of the law of the land which is not permissible under any circumstances and should not be allowed to be perpetuated.

10. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.

11. The ld. CIT(A) has erred in law and on the facts of the case in onfirming the action of ld. AO in charging interest u/s 234A/B/C of the Act.

12. The ld. CIT(A) has erred in law and on the facts of the case in confirming the action of ld. AO in initiating penalty proceedings u/s 271(1)(c) of the Act.

2. Ground No.1 challenged in the grounds of appeal is regarding disallowance of expenditure of Rs.1,93,150/- u/s 40(a)(ia) of the Act. During the course of assessment proceedings, the assessing officer was of the view that the Assessee has made provisions of Rs.49,255/- on account of TDS payable on Contractor, whereas the assessee could produce challan of Rs.45,392/- only. Accordingly, the assessing officer worked out expenditure amounting to Rs.1,93,150/-on reverse working mechanism i.e (Rs.3,863/2%) and disallowed the same u/s 40(a)(ia) of the Act for non-deposition of tax deducted at source.

3. The CIT(A) also sustained the disallowance made by the assessing officer after holding the assessee could not furnish the details of account in which excess provisions of TDS payable amounting to Rs.3,863/- was made.

4. Now the assessee is before us against the said action of the assessing officer. The ld. Counsel submitted that both the lower authorities have failed to appreciate that the Assessee had made excessive provisions by Rs.3,863/- on account of TDS payable on contractors payment, and it was not a case that the Assessee has failed to deduct tax at source or deducted tax at source but not deposited with the Government Treasury account, inasmuch as it was also not the case of AO that on certain expenditure, tax had not been deducted and / or paid. Ld. Counsel further drew our attention to pg. nos.17 to 21 @ 18 of P/B, para 6 and pg. nos.140 to 147 of P/Bregarding details of entire amount of expenditure of various expenditure including contract payment and deduction of tax at source thereon, and it was argued that the Assessee has duly deducted tax at source and deposited the same in due time on entire amount of all the expenditure including contract payment wherever applicable. It was further argued that even Tax Auditor has categorically stated that the Assessee has complied with the provisions of Chapter XVII-B of the Act. The Ld. Counsel finallyargued that both the lower authorities have failed to bring on record such expenditure on which tax has not been deducted or deposited as per scheme of the Act, and in absence of which no disallowance can be made u/s 40(a)(ia) of the Act.

5. Ld. DR has relied upon the orders of the CIT(A) and AO.

6. We have heard both the sides and gone through the orders of both the lower authorities. It is seen that the assessing officer has made disallowance of expenditure u/s40(a)(ia) of the Act only on the basis of reversal of entries made regarding provision for TDS payable on contractors payment. The assessing officer has not brought on record any such instance of expenditure, on which tax is not deducted or deducted but not paid so, and in the absence of which disallowance cannot be made u/s 40(a)(ia) of the Act. Further Ld. Counsel has drawn our attention to pg. nos.140-147 of P/B and submitted that on each and every expenditure for contractor's payment, tax has been deducted at source and paid wherever it is applicable. We are of the firm view that if the expenditure has been subject matter of tax deduction at source and if the compliance to the Chapter XVII-B has been made then no disallowance can be made u/s 40(a)(ia) of the Act on presumption basis. Therefore, in the interest of justice, we set aside this issue to the file of Assessing Officer and direct him to verify the details as furnished by the Assessee on pg. nos.140-147 of P/B and find out as to whether tax has been deducted at source on the expenditure as contented by the ld. Counsel or not, and if the compliance has been made then no disallowance should be made u/s 40(a)(ia) of the Act on presumptive basis.

7. Ground nos. 2 to 5 challenged in the Grounds of Appeal are regarding disallowance of differential depreciation amounting to Rs.7,62,206/-. The Assessee in the Return of Income has inadvertently claimed depreciation at Rs.78,39,042/-, however, the same was rightly quantified at Rs.86,01,248/- in the Tax Audit Report in Form No.3CD. During the course of the assessment proceedings, upon realization when the assessee claimed the differential depreciation, the assessing officer did not allow differential depreciation amounting to Rs.7,62,206/- after holding that the said fresh claim was not claimed in the revised return of income, and therefore, in view of Goetze India Ltd. 157 Taxman 1 (SC) = (2006-TIOL-198-SC-IT), it cannot be allowed.

8. The CIT(A) has not adjudicated this issue on the ground that since AO has not made addition of Rs.7,62,206/-, the assessee cannot be said to be aggrieved against the order of AO, and therefore, the same is not maintainable as per provisions of S.246A of the Act.

9. The ld. Counsel argued that the Assessee had already made a claim of depreciation in the return of income and it was only a matter of quantification of amount of depreciation, and therefore, it was not a fresh / new claim before AO. It was further argued that even if it is treated as a fresh / new claim, then also, the Supreme Court decision in the case of Goetze (supra) bars only AO to entertain any fresh / new claim without filing revised return of income.However the Appellate Authorities are not barred to allow the same, and accordingly reliance was placed on various authorities including Goetze (supra) itself. The Ld. Counsel further argued that CIT(A) while dismissing this ground on the technical ground failed to appreciate that grievances cannot be restricted only to addition / disallowance made by AO, instead it can also have grievance against the action of AO in not allowing any claim made by the Assessee, and therefore, the CIT(A) ought to have adjudicated the ground on merits and ought to have allowed the claim made by the Assessee.

10. Ld. DR has relied upon order of both the lower authorities.

11. We have heard the Counsels of both sides and gone through the orders of AO and CIT(A). We agree with the arguments made by the Ld. Counsel that the Supreme Court decision in the case of Goetze (supra) bars only AO but not the Appellate Authorities to entertain fresh / new claim made before AO without filing revised return of income. Therefore, we accept the claim as made by the Assessee and direct the Assessing Officer to allow the differential depreciation amount of Rs.7,62,206/- after verifying the claim as made in the Tax Audit Report in Form No.3CD.

12. Ground nos.6 to 10 challenged in the grounds of appeal are regarding making addition of Rs.10,39,75,306/- u/s 69B of the Act. The AO has made addition on account of difference between stock declared to the Canara Bank and stock reflected as closing stock as at 31st March, 2009, details given on pg. no.8 para 9.2 of the assessment order, is summarized as under :

Particulars	Quantity (MT)	Amount (Rs.)
Raw Material
As per Statement furnished to Bank	4854.782	14,68,86,248
As per Books	1735.745	5,70,72,922
Difference added by AO (A)	3119.037	8,98,13,326
Finished Goods
As per Statement furnished to Bank	694.918	2,40,19,071
As per Books	253.271	98,57,091
Difference added by AO (B)	441.647	1,41,61,980
Total (A+B)		10,39,75,306

13. The CIT(A) has sustained the addition made by the AO after holding that (a) the discrepancy in stock were never explained by the Assessee with the help of books of account, bills, vouchers etc.; (b) stock hypothecated to Canara Bank were physically verified by the banker on 25/04/2009 and (c) the difference in stock was detected at the end of year i.e on 31st March, 2009. The CIT(A) has further held that the Assessee could not prove any linkage of purchase of 2654 M.T. of steel vide bills dated 31/03/2009 with the inventory of stocks as on 31/03/2009 furnished to the Canara bank, and accordingly, CIT(A) has rejected the contention of the assessee that stock of 2645 M.T. for which bills were raised by SAIL on 31/03/2009 were included in the stock statement furnished to the Canara Bank.

14(i). The Ld. Counsel at the first place argued before us that the entire issue is covered by the Gujarat High Court decisions in the case of CIT vs. Meico Bonds Pvt. Ltd. bearing Tax Appeal No.2041 of 2010 (pg.nos.1-4 of P/B) and CIT vs. Arrow Exim Pvt. Ltd. 230 CTR 293 (Guj). The Ld. Counsel has further relied upon CIT vs. Veerdip Rollers (P) Ltd. - 323 ITR 341 (Guj.); CIT vs. Khan & Sirohi Rolling Mills – 200 CTR 595 (All.) and CIT vs. N. Swamy - 241 ITR 363 (Mad.). After placing reliance on these decisions, it was submitted that the Hon'ble Courts, after making following observations, has held that merely relying on statement given to a bank, addition cannot be made in the hands of the assessee and onus is on revenue to prove that the assessee has undisclosed income :

(a) The stock is inflated in the statement furnished to the bank to avail larger credit facilities;

(b) The inflated stock was hypothecated and not pledged;

(c) The assessee has maintained stock register;

(d) The assessee books of accounts are not found to be defective or nongenuine by AO.

14(ii). The Ld. Counsel further submitted that the stock detail has been inflated in the statement furnished to bank to avail larger credit facilities, which is not denied by AO; admittedly, the stock was hypothecated and not pledged; Quantitative details (month wise) of raw materials, finished goods and semifinished goods has been placed on records before both the lower authorities (Pgs.17 to 22 @ 18 & 20 of P/B)(Pg.75 of P/B being part of Company's Audit Report); admittedly, AO has not pointed out any defects in the books of accounts maintained by the Assessee and has accepted the same, and accordingly relying on the decisions cited above, it was argued that no addition can be made merely relying on the statement furnished to the bank without brining on record any evidentiary proof to establish that the assessee had undisclosed income.

14(iii). Ld. Counsel further submitted that the assessee has been subjected to tax audit and tax auditor has qualified the report in any manner which is at pages 35-54 of the Paper book filed before us. It was further submitted that the assessee is subjected to excise and VAT and none of these authorities have taken any action against assessee for the alleged stock discrepancy.

14(iv). The Counsel further submitted that most importantly, there was an Excise Revenue Audit wherein the excise department, after detailed scrutiny of the books of accounts, stock registers, excise records, has accepted the books of accounts and other record maintained by the assessee to be true, correct and without any discrepancies in so far as inventory is concerned. Such report was placed on record at pages 165-166 of the paper book.

14(v). The Counsel while drawing attention to page 10 of the assessment order submitted that if the addition as suggested by the assessing officer is made, the book result viz. GP and NP as also the stock turnover ratio would show highly abnormal picture compared to other comparable years. Ld. Counsel, upon direction from the Bench, placed on record a statement containing these three ratios from A.Y. 2006-07 to A.Y. 2012-13 to substantiate his argument.

14(vi). The Ld. Counsel further, drawing attention to the letter furnished on 05/12/2011 to the AO enclosed on pg. nos.17 to 22 of P/B, argued that the Assessee had submitted quantitative details (month wise) in respect of Raw Materials, Finished Goods and Semi-finished goods to prove that entire stock register was maintained and the stock recorded in the books of account was correct, which has not been controverted by the AO.

14(vii). Insofar as the contention of CIT(A) that the bank manager has inspected the assessee's godown on 25/04/2009 and verified the stock declared to the Bank, the Ld. Counsel has argued that the said inspection report was for the "Godown" and not for the physical verification of "stock" and even inspection of stock on 25/04/2009 can never be taken as physical verification of stock as at 31/03/2009. No one would be in a position to take physical verification of stock on 25/04/2009 for the stock lying on 31/03/2009. At page no. 217 of the paper book, the total value of goods shown 17.09 crore. Thereafter, margin @ 30% at Rs. 5.12 crore had been reduced and net value had been calculated Rs.11.96 crore and sanction limit was shown Rs.10 crore till 04.05.2009 whereas this loan was sanctioned by the Bank at Rs.11.03 crore as on 31.03.2009.

14(viii). The Ld. Counsel further explained the difference to the extent of 2654 MT out of total difference of 3119.037 MT by submitting that the Assessee had received 2654 MT stock on 07/04/2009 which was very well recorded in R.G.23 A register in April 2009 (Pgs. 210 to 214 of P/B), since the invoices of the same were dated 31/03/2009, the same was included in the stock statement furnished to Canara bank for showing the stock position as on 31/03/2009.However the same was not accounted for in the books of accounts upto 31/03/2009.The Ld. Counsel to further support his argument drew out attention to pg. no.220 of P/B and submitted that the bank manager while preparing inspection report on 25/04/2009 has also noted that the Assessee had received 2654 MT stock which has been included in the stock statement for the month of March, 2009.

14(ix). Insofar as the balance difference of 465.037 MT stock (3119.037 MT – 2654 MT) is concerned, Ld. Counsel further submitted that during the course of hearing, the stock statement was furnished purely on estimated basis and taking into account the requirement of margin of 30%. By drawing attention to pg. nos.68 read with 217, the ld. Counsel submitted that the Assessee had already borrowed an amount of Rs.11.03 Crores from Canara Bank as at 31/03/2009, and therefore, making upward adjustment of 30% thereon for margin required to be maintained by the Bank, the value of stock was worked out at Rs.17.09 Crores on estimated basis (Pg. no.217 of P/B) so as to fulfill the requirements of the loan agreement entered into with Canara Bank. Accordingly, the Ld. Counsel closed his argument by submitting that the stock statement was furnished on estimated basis taking into account the borrowed amount as of 31/03/2009 and requirement to maintain 30% margin over and above the borrowed amount.

15. Ld. CIT DR supported the orders of the lower authorities. He further put emphasis of the order of CIT(A) more particularly paras6.2 to 6.7. He thus submitted that lower authorities have passed proper order requiring no interference at all. He further relied upon CIT vs. Chemmeens, 207 ITR 909 (Ker.), wherein the ITAT deleted the addition on the basis of inconsistency of earlier year not on merit e.g. the assessee inflates the stock for getting higher margin of credit.

16(i) We have at length heard both the sides. We agree with the arguments of the Ld. Counsel of the Assessee that the case of the Assessee is covered by the Gujarat High Court decisions in the case of Arrow Exim Pvt. Ltd.(supra) and Meico Bonds Pvt. Ltd.(supra). It is seen that Hon'ble the Gujarat High Court in the case of Arrow Exim Pvt. Ltd. (supra) has confirmed the order of ITAT and CIT(A) in deleting addition made u/s 69B of the Act under identical circumstances of the case after making observations that (a) the stock statement showing inflated quantity and value of stock was furnished to the banking authorities to avail more credit facilities; (b) the stocks were hypothecated and not pledged and (c) the books of accounts are not found to be defective or non-genuine by the AO. (d) The assessee explained the difference either on account of inflated valuation of stock or excess quantity shown to bank. We further find that Hon'ble the Gujarat High Court in the case of Meico Bonds Pvt. Ltd. (supra) has also confirmed the order of ITAT in deleting the addition made on account of understatement and undervaluation of stock after making observations that (a) the assessee had been contending that the valuation supplied to the Bank did not reflect the accurate or the correct picture; (b) the statement was drawn on the basis of estimation and such estimate is based on higher side to borrow higher loan and (c) the closing stock reflected in the books maintained for income-tax reflects the correct picture. Hon'ble Gujarat High Court in the case of Meico Bonds Pvt. Ltd. (supra) has further strengthened the view taken in Arrow Exim Pvt. Ltd. (supra).

16(ii) This view is further supported by Hon'ble Allahabad High Court's decision in the case of Khan & Sirohi Rolling Mills (supra), wherein also, the Hon'ble Court did not find any error in the order of Tribunal in accepting that (a) the assesse inflated the value of the stocks in the bank declaration to obtain a number of drafts from the bank; (b) there was actually no verification of the stock made by any bank official; (c) the stocks were only hypothecated and not pledged; (d) the income – tax officer could not point out any defect in the trading accounts of the assessee and (e) the books of accounts maintained by the assessee has also been accepted by the Central Excise Department as well as by the Sales Tax Department could not be disbelieved.

16(iii) On perusal of the decisions as referred above, it is gathered that Hon'ble Courts have laid down that additions cannot be made on account of difference arising in the quantity and value of stock shown in the books of accounts and the statement furnished to the banking authorities, admittedly to avail higher credit facilities. Courts have laid down the following guidelines while dealing with the issue:

(a) The stock in quantity and value is inflated on estimate basis in the statement furnished to the banking authorities to avail higher financial credits ;

(b) The inflated and estimated stock is hypothecated and not pledged;

(c) No actual physical verification of stock is carried out by the officer of banking authorities during the year or as on date of valuation of stock;

(d) The assessee has maintained stock register;

(e) The assessee's books of accounts are not found to be defective or nongenuine by AO;

(f) The books of accounts maintained by the assessee are accepted by the Central Excise and / or Sales Tax Department.

Applying these tests to the facts of the present case, the following conclusions emerge:

Applying test (a), we find that the stock details have been inflated purely on estimate basis in the statement furnished to bank to avail larger credit facilities.This aspect is duly supported by the fact that the Assessee had already borrowed an amount of Rs.11.03 Crores from Canara Bank as at 31/03/2009, and therefore, by making upward adjustment of 30% thereon for margin required to be maintained as per the loan agreement entered with the Bank, the value of stock was estimated and inflated to Rs.17.09 Croresso as to justify the amount already drawn from the Bank.

Applying test (b), we further find that in the present case, stock is only hypothecated with the bank and not pledged. Unlike pledge, under hypothecation, the stock is not kept in lock and key of the bank. Therefore the submission of the assessee that the figure of closing stock was estimated and inflated with a view to meet the margin requirements of the bank can be accepted.

Applying test (c), we also find that there was no physical verification of stock by the Bank authorities as on 31/03/2009. A perusal of CIT(A) order reveals that he has placed a great reliance on the godown visit of Bank Manager on 25/04/2009. However, the said reliance is completely misplaced in as much as firstly, this is not even the case of the assessing officer who made the addition. Secondly the said visit took place on 25/04/2009 i.e. much after the close of the year under consideration. Thirdly, the said visit was only a godown visit and not physical verification and counting of stock. Fourthly and most importantly, in the very inspection report the Bank Manager himself notes that in so far as 3000 tonnes of coil is concerned, the same was included in the stock of Month of March, 2009. Because of this inclusion, stock position of March shows increase. This aspect is conveniently overlooked and ignored by the CIT(A).

Applying test (d),We further find that the assessee has maintained stock register giving complete quantitative details including month-wise details of Raw Materials, Finished Goods and Semi-finished goods. In fact these details have been placed on record before the AO (Pg. Nos.17 to 22 @ 18 & 20 of P/B), which is not controverted by the AO and books of accounts of the assessee has not been found to be defective or non-genuine by AO.

Applying test (e),We further find that the assessee has been subjected to statutory audit under the Companies Act, 1956, also subjected to tax audit under the Income Tax Act, and none of these auditors have qualified their reports in any manner whatsoever. In fact the assessee has been filing regular returns since last 8 years and has been consistently following method of accounting as prescribed u/s 145 and valuing closing stock and inventories as prescribed u/s 145A of the Act. No such practices have been questioned or doubted or found to be erroneous by the AO.

Applying test (f), we find that the assessee is subjected to excise and VAT and none of these authorities have noticed or for that matter taken any action against assessee for the alleged stock discrepancy. In fact on perusal of pg. nos.165-166 of paper book placed before us, we find Excise Audit Report for the period Jan'2009 to Dec'2009 which was carried out by Excise Revenue Audit team wherein the excise department, after detailed scrutiny of the books of accounts, stock registers, excise records, has accepted the books of accounts and other record maintained by the assessee to be true, correct and except few discrepancies in so far as inventory is concerned. We find that the period of audit covers 31st March, 2009. If the assessee has in fact purchased and stored such unaccounted stock allegedly shown to the bank, it is impossible not to leave a single trail more so when the assessee is a manufacturer and not a trader. It is not possible to acquire unaccounted stock, carry out manufacturing activities, consume energy, remove the finished stock and sale away the same in the market. We therefore find considerable force in the submission of the counsel for the assessee that the books of accounts are found to be genuine and recorded appropriately and no such kind of discrepancies were found to be noted in the Excise Audit Report which could remotely suggest that the Assessee has invested in unexplained stock which is not recorded in books of accounts.

16(iv). If the discrepancies of stock at 3119.037 & 441.647 MT valued Rs.10.39 crore accepted as suppressed stock than same is to be included in closing stock of A.Y. 09-10 & opening stock of A.Y. 10-11 which would be again give distorted position of accounting result for A.Y. 10-11. The ld. AO had not brought on record any evidence of purchase and sale made outside the book in A.Y. 09-10. Therefore, the entire set of facts of the case falls within the parameters / guidelines framed by Hon'ble the High Courts, and we are of the view that merely relying on the statement furnished to the banking authorities to avail larger credit facilities, addition cannot be made on account of difference between the quantity and value of stock shown in the books of accounts and the statement furnished to the banking authorities.

16(v). Independent of these tests, we also find that the assessee has also explained the difference to the extent of 2654 MT out of total difference of 3119.037 MT. We find that the Assessee had received 2654 MT stock on 07/04/2009 which was recorded in R.G.23 A register on 7thApril 2009 (Pgs. 210 to 214 of P/B),and since the invoices of the same were dated 31/03/2009, the same was included in the stock statement furnished to Canara bank for showing the stock position as on 31/03/2009 though these purchases were accounted for in the books of accounts after 31/03/2009. As regards the remaining difference of 465.037 MT, as held earlier, the same was purely on inflated estimate basis so as to fulfill margin requirements of the Bank. Hence, we accept the contention of Ld. Counsel that the stock statement was furnished to the Canara bank on estimated basis to avail larger credit facilities.

16(vi) There is another angle which is required to be considered while deciding this issue and that is the effect in the financial statements on account of addition made by AO. To verify the same, during the course of hearing, we called for the actual financial ratios for 7 years and for the current year under appeal after giving effect to the addition made by the AO, which would show results as under :

Parameters	AY 2006-07	AY 2007-08	AY 2008-09	Results as shown by the Assessee AY 2009-10
Gross Profit	26332662	27814168	37648224	47326840
Turnover	304229927	395692659	506977341	610575238
Percentage	8.66%	7.03%	7.43%	7.75%
Net Profit	2100700	4611189	6242279	7797575
Turnover	304229927	395692659	506977341	610575238
Percentage	0.69%	1.17%	1.23%	1.28%
Stock-intrade	34717925	36842936	51938382	68641931
Turnover	304229927	395692659	506977341	610575238
Percentage	11.41%	9.31%	10.24%	11.24%

 

Parameters	After including addition of Rs.10.40 crs. AY 2009-10	AY 2010-11	AY 2011-12	AY 2012-13
Gross Profit	151301876	61967833	91443364	137825226
Turnover	610575238	890096455	1196543944	1475315486
Percentage	24.78%	6.96%	7.64%	9.34%
Net Profit	111772611	13737397	17686422	17025992
Turnover	610575238	890096455	1196543944	1475315486
Percentage	18.31%	1.54%	1.48%	1.15%
Stock-intrade	172616967	112963244	128033129	174150936
Turnover	610575238	890096455	1196543944	1475315486
Percentage	28.27%	12.69%	10.70%	11.80%

16(vii) Going through the financial ratios furnished by Ld. Counsel from A.Ys.2006-07 to 2012-13 it is seen that the Gross Profit ratio is ranging from 6.96% to 9.34%, whereas, after including the addition made for the current year, the Gross Profit ratio would show 24.78% as against actual ratio of 7.75% for the current year under appeal. Similarly Net Profit ratio is ranging from 0.69% to 1.54% and after including the addition made for the current year, the Net Profit ratio would show 18.31% as against actual ratio of 1.28% for the current year under appeal. In the same way, Stock-in-trade ratio is ranging from 9.31% to 12.69% and after including the addition made for the current year, the same would show 28.27% as against actual ratio of 11.24% for the current year under appeal.

Hence, after including the addition made by the AO, the financial statement would completely be distorted and will not show the correct, true and fair view, which is on more factor which substantiates our finding that the figure of stock was inflated, adhoc and estimated purely for showing to the bank without there being any actual stock acquired by the assessee. Therefore in any which way, the addition made by the assessing officer is not justified and the same is hereby directed to be deleted.

17. Ground no.11 is consequential to the above finding. The A.O. is directed to take decision as per law.

18. Ground no.12 is pre-mature. Therefore, no adjudication is required.

19. In the result, the assessee's appeal is partly allowed.

(This Order pronounced in open Court on 12.4.2013)

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer

In a startling revelation, the CBDT has reported that 97 per cent of Income Tax demand arrears, quantified over Rs 4.66 lakh crore, is "difficult" to be recovered.

The total arrears amount to be recovered, stuck because of a variety of reasons like litigation, companies in liquidation, sick companies and untraceable taxpayers, is Rs 4.82 lakh crore.

Alarmed by the "precarious" situation, the apex body of the I-T department has initiated a slew of measures to collect these taxes including attachment of bank accounts of defaulters and arrest of 'wilful' evaders under tax laws.
"Attention is drawn to the precarious situation arising out of comparison of total arrear demand outstanding and demand difficult to recover.

The situation is alarming and leaves only 3 per cent of the demand in the recoverable arena.

"Even more alarming is the situation that less than 5 per cent, Rs 2,39,95 crore, of the total arrear demand outstanding (Rs 4.82 crore) could be collected during the 2012-13 fiscal," the Central Board of Direct Taxes (CBDT) said in a recent communication to its top officers.

"The situation is surely not pleasant but the board and the I-T department are geared to pursue these cases vigorously.

The Parliamentary Standing Committee on Finance have time and again urged the Finance Ministry to minimise this revenue loss sector and steps are being taken. The results will soon show," a senior official who did not want to be named said.

The CBDT fears such huge arrears could "swamp" the I-T department and hence it has decided to track each one of the defaulting assessees and entities diligently to obtain the due taxes.

The board has tasked the special I-T recovery cell, created in 2010, to obtain more and more electronic data on people and assessees whose assets and properties are not traceable or have reported zero assets, from the Financial Intelligence Unit (suspicious transaction reports), CIBIL, National Stock Exchange, Registrar of Companies and get classified data on the financial transactions of evaders and defaulters.

The I-T, on the instructions of the board in this regard, has also started a Demand Management Fortnight to sort out more and more cases and get more revenue in the light of the fact that the government has asked the department to collect over Rs 6.68 lakh crore in direct taxes during 2013-14, up from Rs 5.65 lakh crore in the previous fiscal.

 

Tightening its noose on those who do not pay taxes, the Income Tax Department has started sending letters around 12 lakh assessees who are high spenders but do not file returns, a top finance ministry official said.

"The I-T department has started follow up of around 12 lakh assessees who have not filed their returns despite being high spenders," the official told PTI.

The department had earlier issued letters to 1.75 lakh high priority assessees for not filing tax returns.

Finance Minister P Chidambaram had met top I-T officials yesterday to discuss ways to augment revenue collection and widen the tax base.

The tax department has prepared a list of non-filers based on their information records.

The department has set up a compliance management cell to monitor return filing and tax payment of the target segment.

The 1.75 lakh letters which were sent earlier, contained the summary of the information of financial transaction(s) along with a customised response sheet.

The finance ministry officials had verified the record of annual information return (AIR), Central Information Branch (CIB) and TDS/TCS returns.

Besides, they had also verified data available with the Financial Intelligence Unit (FIU).

These letters were a part of the exercise to augment revenue undertaken by Chidambaram after he assumed charge of the Finance Ministry in August last year.

Many assessees have started filing returns after receiving letters from the tax department.

The government plans to collect over Rs 6.68 lakh crore from direct taxes in the current fiscal, up from Rs 5.65 lakh crore in the previous fiscal.

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