ito Vs. Mahaluxmi Cotton Mills (P) Ltd. - Court Judgment

Excerpt:
the revenue has filed this appeal against the order of commissioner (appeals), rohtak, dated 2-11-1998, for the assessment year 1995-96, on the following effective grounds : "1. on the facts and in the circumstances of the case, the learned commissioner (appeals) has erred in deleting the addition of rs. 48,950 made on account of variation in purchase price.2. the learned commissioner (appeals) has also erred in deleting the addition made on account of disallowance out of interest of rs. 3,88,089." first, we shall take up ground no. 1 of the instant appeal filed by the revenue, relating to deletion of addition of rs. 48,950 on account of variation in purchase price.the relevant and material facts for the disposal of this ground of appeal are ,that the assessing officer made an addition.....

Judgment:
The revenue has filed this appeal against the order of Commissioner (Appeals), Rohtak, dated 2-11-1998, for the assessment year 1995-96, on the following effective grounds : "1. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 48,950 made on account of variation in purchase price.

2. The learned Commissioner (Appeals) has also erred in deleting the addition made on account of disallowance out of interest of Rs. 3,88,089." First, we shall take up ground No. 1 of the instant appeal filed by the revenue, relating to deletion of addition of Rs. 48,950 on account of variation in purchase price.

The relevant and material facts for the disposal of this ground of appeal are ,that the assessing officer made an addition of Rs. 58,950 under section 40A(2)(b) of the Income Tax Act on the basis that the purchase from the sister-concern M/s Vijay Luxmi Oil and General Mills had been made at a higher rate when compared with the average sale rate of Narma as per the report of the Market Committee as on the relevant dates. The assessing officer, while framing the assessment was of the opinion that the rate paid by the assessee to the sister-concern M/s Vijay Luxmi Oil & General Mills on 15-3-1995 and 21-3-1995, was excessive and the disallowance under section 40A(2)(b) was worked out on the average rate of the Market Committee in the following manner Aggrieved, the assessee went in appeal before the Commissioner (Appeals) and contended before him that there was a patent mistake in assuming prevailing rate as the rate of medium quality Narma (which is the raw material for producing cotton and cotton seeds) on the respective dates. It was submitted that a perusal of the Market Committee report itself shows that there is always a heavy variation in the price of Narma on the same date as well as on different dates even within a short period of time. Heavy variation in the rate occurs on the same day on account of quality of the Narma and prevailing market sentiments. The learned authorised representative for the assessee submitted before the Commissioner (Appeals) that the Narma is an agricultural commodity and the measure of its quality is just by way of human estimate. It was argued that there was no evidence on record to prove that assessing officer's allegation that purchases were effected at higher prices and it can as well be contended that the highest price mentioned in the report of the Market Committee should have been taken as prevailing on the relevant date. After considering these submissions of the learned authorised representative for the assessee, the Commissioner (Appeals) deleted the impugned addition by making the following observations.

"I have carefully considered the facts on record. It is judicially accepted that wherever two options are possible, then the option favourable to the assessee is to be followed. For example, in law itself, as assessee is entitled to value its stock at cost or market price whichever is lower. In the present case, the assessing officer has ignored the transactions entered into with the same sister-concern on 26-10- 1994, and 1-11-1994, where even as per his own working, a lower rate was paid to the sister-concern. To my mind, the addition has been made without appreciating the realities of a higher volatile market and even the average purchase price of the seller i.e., M/s Viay Luxmi Oil & General Mills which was submitted during the assessment proceedings, has not been considered while making the addition. In my considered opinion, impugned addition of Rs. 48,930 cannot be sustained and the same is deleted." Before us, learned Departmental Representative for the revenue strongly defending the order of the assessing officer and assailing the order of the Commissioner (Appeals), submitted that in view of the detailed reasoning given in the order of the assessing officer, the assessing officer has rightly made the impugned addition under section 40A(2)(b).

Whereas, on the other hand, learned authorised representative for the assessee, placing strong reliance on the reasoning given in the order of the Commissioner (Appeals), and reiterating the submissions which he made before the Commissioner (Appeals), contended before us that in this case, firstly the purposes from M/s Vijay Luxmi Oil & General Mills do not fall under the category of section 40A(2)(b) and secondly, the conditions required to be followed while making the addition under section 40A(2)(b) also did not exist in the case of the assessee because out of these purchases made by the assessee even presuming at a lower rate, neither the assessee as a purchaser nor seller derived any benefit out of the same and. so these transactions do not come under the mischief of section 40A(2)(b). He also contended that in this case, the assessing officer has not brought on record any material to show as to at what price, the assessee has sold these goods nor he has alleged any collusiveness on the part of the assessee and as these being normal business transactions where the prices fluctuated and so, in these normal business transactions, the Commissioner (Appeals) in his detailed order has rightly deleted the impugned addition made by the assessing officer.

We have considered the rival submissions, perused the records and carefully gone through the orders of the tax authorities below. In view of the detailed and well reasoned order of the Commissioner (Appeals) coupled with the convincing arguments advanced by learned authorised representative for the assessee, we are of the opinion that the well reasoned and well discussed order of Commissioner (Appeals) deleting the impugned addition does not merit any interference from our side and accordingly the same is upheld, and the ground No. 1 of the appeal filed by the revenue is rejected.

Now, we shall take up ground No. 2 of the appeal filed by the revenue relating to deletion of addition on account if disallowance out of interest of Rs.3,88,089.

The relevant and material facts for the disposal of this ground of appeal are that the sister-concern M/s Vijay Luxmi Oil & General Mills got its Narma ginned and pressed from the assessee-company on job work basis. Apart from the job work charges, the assessee also made certain payments to M/s Vijay Luxmi Oil & General Mills. Separate accounts of M/s Vijay Luxmi Oil & General Mills were maintained incorporating therein the trading transactions and financial transactions separately and these were furnished during the assessment proceedings. It was the assessee's claim that interest had been charged from the sister-concern on the financial transactions and no interest was chargeable on trading transactions on account of contractual obligations. It was also explained that the rate of interest as decided by Kacha Ahartian Association is only directory and not mandatory. Actual charging of interest depends upon the contractual obligation between the buyer and seller. List of such persons along with their confirmations to whom interest was paid at rate lower than the rate of Kacha Ahartian Association was also filed before the assessing officer. During the assessment proceedings, it was also explained that out of the total 19353 bales ginned/pressed by the assessee, the share of sister concern was 9515 bales. Out of the total job charges of Rs. 16,77,613 those received from M/s Vijay Luxmi Oil & General Mills constituted the major chunk at Rs. 12,43,813. However, all the abovesaid detailed arguments were unable to persuade the learned assessing officer who was of the opinion that the interest of Rs. 3,88,089 should have been charged from M/s Vijay Luxmi Oil & General Mills even in respect of trading transactions and impugned addition was accordingly made.

On appeal, learned counsel for the assessee argued before the Commissioner (Appeals) that claim of interest under section 36(iii) of the Act can be restricted only if it is proved with conclusive evidence that any interest bearing borrowed funds were utilised for purposes other than those of business. On behalf of the assessee, reliance has been placed on the ratio decidendi laid down in CIT v. Kishin Chand Chellaram (1977) 109 ITR 569 (Bom), D&H Secheron Electrodes (P) Ltd. v.CIT (1983) 142 ITR 528 (MP), Shahibag Enterpreneures (P) Ltd. v. Income Tax Officer (1994) 50 ITD 113 (Ahd), Premier Brass & Metal Works (P) Ltd. v. Assistant Commissioner (1994) 51 ITD 114 (Bom), and Gopal Timbers v. Income Tax Officer (1995) 81 Taxman 36 (Chd)(Mag). The learned authorised representative has vehemently argued that a claim of interest can never be restricted on account of non-charging of interest from trade debtors. It is also submitted that opening debit balance in the account of M/s Vijay Luxmi Oil & General Mills was at Rs. 17,81,136 which proves that no fresh funds raised during the year were ev(,In indirectly passed on to the sister concern, during the year under review. It was contended that no interest has ever been disallowed on the said debit balance in the earlier year and Commissioner (Appeals)'s attention was drawn to the principle of consistency exposited in the decision of the Hon'ble Karnataka High Court in the case of CIT v.Sridev Enterprises (1991) 59 Taxman 439 (Kar). The Commissioner (Appeals) after considering these submissions of the assessee and perusing the facts of the cases deleted the impugned addition made by the assessing officer by making the following observations : "I have given my anxious consideration to the facts on record and find sufficient force in the arguments preferred on behalf of the appellant.

The only conditions which are required to be satisfied by the assessee to enable it to claim interest under section 36(iii) of the Act are as under : (c) The assessee must have paid interest on the said amount and claimed it as a deduction.

The perusal of the interest account reveals that the assessee has paid interest either to the commission agents from whom the raw material was purchased or to the Bank on cash credit limits. Interest has been charged from the sister concern M/s Vijay Luxmi Oil & General Mills on those payments which were made to them by drawing cheques on Bank account. Interest has not been charged from the sister concern on trading transactions and to my mind the learned assessing officer was not justified in restricting the claim of interest. In my opinion this issue also deserves to be determined in favour of the appellant following the principle of consistency laid down in Dhansiram Aggarwala v. CIT (1996) 217 ITR 4 (Gau) and CIT v. Godawari Corporation Ltd. (1985) 156 ITR 835 (MP). The impugned addition of Rs. 3,88,089 is deleted." Before us, learned Departmental Representative for the revenue placed strong reliance on the reasoning given in the order of the assessing officer and submitted that the Commissioner (Appeals) has wrongly deleted the disallowance of interest of Rs. 3,88,089 made by the assessing officer. On the other hand, learned authorised representative for the assessee reiterating the submissions which he made before the Commissioner (Appeals), submitted before us that in view of the reasoning given in the order of Commissioner (Appeals), the Commissioner (Appeals) has rightly deleted the impugned addition. In addition thereto, learned authorised representative for the assessee contended that the assessing officer in his entire order has not been able to establish any nexus between the interest bearing borrowed funds and the interest free funds advanced. He also contended that neither in the past nor in the succeeding yeas any disallowance has been made except in the year under consideration. He further contended that even in the entire order of the assessing officer, there is no discussion as to how he arrived at the figure of Rs. 3,88,089. Learned Departmental Representative for the revenue, was not able to controvert these submissions made by the learned authorised representative for the assessee. Learned authorised representative for the assessee in support of his contention submitted that the learned Commissioner (Appeals) has rightly deleted the impugned addition and has placed reliance on the decision of Tribunal Chandigarh Bench in the case of Gopal Timbers v.Income Tax Officer (supra), and the decision of Tribunal Chandigarh Bench in the case of Assistant Commissioner v. M/s Sidhartha Polysters (P) Ltd. in ITA No. 20/Chandi/1996; assessment year 1992-93 delivered on 1-5-2002.

We have considered the rival submissions, perused the records and carefully gone through the orders of the tax authorities below. Learned Departmental Representative for the revenue did not succeed before us in controverting the observations made in the order of the Commissioner (Appeals) and was also not successful in convincing the Bench that the order of the Commissioner (Appeals) either suffered from any illegality or infirmity or from drawing wrong conclusions on the basis of the existing facts of the case. Hence, we are also of the opinion that the well reasoned and well discussed order of the Commissioner (Appeals) does not call for any interference from our side. Accordingly, the order of the Commissioner (Appeals) in this regard is upheld and the ground No. 2 of the appeal filed by the revenue is rejected.