Decision on cash purchase directly from growers and applicability of rule 8D

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH: ‘C’ NEW DELHI

BEFORE SHRI S.V.MEHROTRA, ACCOUNTANT MEMBER

AND

SMT. DIVA SINGH, JUDICIAL MEMBER

I.T.A .No.-4325/Del/2012

(ASSESSMENT YEAR.-2008-09)

ACIT,

Circle-12(1),

New Delhi.

(APPELLANT)

Vs

M/s Hind Industries Ltd.,

A-1, Phase-I,

Okhla Industrial Area,

New Delhi.

PAN-AAAH0870N

 (RESPONDENT)

Appellant by: Sh.R.S. Gill, CIT DR

Respondent by: Sh. M.P. Rastogi, Adv.

ORDER

PER DIVA SINGH, JM

This is an appeal filed by the revenue against the order dated 18.05.2012 of CIT (A)-XV, New Delhi pertaining to 2008-09 assessment year on the following grounds:-

“1. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the disallowance of Rs.63,24,59,802/- made by the AO on account of cash purchases u/s 40A(3).

2. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the disallowance of Rs.69,58,866/- on account of interest u/s 14A read with Rule 8D.

3. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.”

2. It was a common stand of the parties before the Bench that as far as ground no-1 is concerned, it is a continuing issue over the years and the said issue is more or less settled by the orders of the Tribunal in assessee’s case. The facts and circumstances remained identical as there is no change. However, Ld. CIT DR placed reliance on the assessment order. The relevant facts of the case are that the assessee company is engaged in the business of export of processed meat products and made cash purchases as in the earlier years. In the year under consideration, the facts are found discussed in page no-2 to 5 of the assessment order in para 4 wherein the AO makes a reference to the facts in 2003-04 to 2007-08 assessment years. For ready-reference they are reproduced for ready reference:-

“The issue of cash purchases was also examined in the preceding years. While during the course of the assessment proceedings for the assessee had categorically submitted that the raw materials i.e carcass had been purchased through agents, as also the assessee took the plea that the purchases of raw materials i.e carcass was made directly from the growers/ farmers/ villagers. In the case of the assessee for Assessment Year 2003-04, 2004-05, 2005-06, 2006- 07 & 2007-08 the Assessing Officer invoked the provisions of section 40A(3) and disallowed 20% of the cash purchases by holding that the cash purchases had been made through agents known to the assessee in big towns with adequate banking facilities. Therefore, the Assessing Officer held that the case of the assessee did not fall under the exclusionary conditions of Rule 6DD (f). The issue of cash purchases was also examined during the assessment proceedings for Assessment Year 2004-05, 2005-06, 2006-07 & 2007-08. For Assessment year 2004-05, 2005-06, 2006-07 & 2007-08, as already stated above, the assessee took the plea that the purchases had been made directly form the growers/ farmers. Villagers and so it was argued, by the assessee, that its case was covered by Rule 6DD(f) and

that the provisions of section 40A(3) were not applicable in its case.

The Assessing Officer while completing the assessment for Assessment year 2004-05, 2005-06, 2006-07 & 2007-08 gave the finding that the names and addresses of the alleged suppliers were not available with the assessee and the claims of the assessee were thus unverifiable. Thus the Assessing Officer came to the conclusion that the purchases remained unverifiable and the claim that the purchases were made directly from the farmer/ grower/ villager was found to be unacceptable by the Assessing Officer.”

3. Taking into consideration, the explanation offered by the assessee and the past position, the AO made an addition of Rs.63,24,59,802/- observing as under:-

“I have gone through the appellant’s submissions and have also perused the ITAT’s order dated 13.08.2010 for assessment year 2007-08 and my predecessor’s order dated 04.03.2010, where both the authorities by relying on ITAT’s order for assessment year 2005- 06 and 2006-07 in appellant’s own case, have held that the amount paid to the MD as commission is an allowable expense and doesn’t come within the ambit of Section 36(1)(ii).

Since in the year under consideration, there are no change in facts as were existing in assessment year 2005-06, 2006-07 and 2007-08, accordingly relying on ITAT’s order for those year, I am also of the view that the payment of commission to the MD Sh. Sirrajuddin Qureshi, is an allowable expenditure and hence addition made by the AO, deserves to be deleted.”

4. The assessee agitated the issue before the CIT(A) who deleted the addition on the following ground:-

“7. I have gone through the appellant’s submission and have also perused the ITAT’s order dated 13.08.2010 for assessment year 2007- 08 and my predecessor’s order dated 04.03.2010, where both the authorities by relying on ITAT’s own order for assessment year 2005- 06 and 2006-07 in appellant’s own case, have held that the cash payments made by the appellant for purchases made, falls within the clauses (f) and (i) of Rule 6DD, hence no disallowance can be made under Section 40A(3).

Since in the year under consideration, there are no change in facts as were existing in assessment year 2005-06, 2006-07 & 2007- 08, accordingly relying on ITAT’s order for those years, I am also of the view that the payment made during the year for cash purchases doesn’t fall within the ambit of Section 40A(3) and thus the addition of Rs.63,24,59,802 deserves to be deleted.”

5. Aggrieved by this the Revenue is in appeal before the Tribunal.

6. In the above circumstances, Ld. DR relies upon the AO. The Ld. AR filed a compilation of the orders of the Tribunal’s in assessee’s own case wherein Coordinate Benches vide a) order dated 26.09.2008 in ITA No-1822/Del/2007 for 2003-04 assessment year; b) order dated 23.12.2008 in ITA No.-1302/Del/2008 for 2004-05 assessment year; c) order dated 16.10.2009 in ITA Nos-3453 & 3454/Del/2009 for 2005-06 & 2006-07 assessment years; and d) order dated 13.08.2010 in ITA No-2608/Del/2010 for 2007-08 assessment year have considered the issue on identical facts and circumstances to delete the addition made.

7. A perusal of the impugned order as well as the assessment order shows that these orders have been taken into consideration by the CIT(A) and the AO is also aware of the past history. The findings of the CIT(A) we have extracted in the earlier part of this order. The reasoning of the AO for making the additions also has been extracted in the earlier part of this order. Considering the same and the past history on the issue on identical facts and circumstances which has not been disputed by the Revenue, we find no infirmity in the impugned order. Since there is no change in facts and circumstances and looking at the peculiar nature of assessee’s business, respectfully following the orders of the Coordinate Benches, ground no-1 raised by the revenue is dismissed.

8. Qua the 2nd issue agitated by the revenue, a perusal of the impugned order at para 5 would show that the AO had applied Rule 8D in order to make the addition of Rs.78,96,366/-. Apart from other arguments advanced on behalf of the assessee, he has specifically taken note of the order of the Delhi Bench of the Tribunal in the case of Cheminvest Ltd. Vs ITO 317 ITR 86 wherein it has been held that disallowance u/s 14A could be made in a year in which no exempt income has been yielded or received by the assessee. In appeal before the First Appellate Authority, taking into consideration, the submissions advanced on behalf of the assessee, the CIT(A) deleted the sum of Rs.69,58,866/- and restricted the disallowance to 9,37,500/- on account of administrative and other charges by applying the formula of 0.5% on the average investment of Rs.18.75 crore.

9. Aggrieved by this the revenue is in appeal before the Tribunal whereas Ld. CIT DR submitted that the issue has go back to the file of the AO in order to work out the disallowance in alignment with the judgements of the Jurisdictional High Court in the case of Maxop Investment. Ld. AR objected to the restoring of the issue while doing so, attention was invited to the arguments advanced before the CIT(A) to show that no disallowance could be made u/s 14A as the assessee had ot incurred any expenditure as the investments were made in the FYs 1995-96, 1996-97, 1997-98 in which years the assessee had sufficient share capital and reserves in surplus. The loans taken from IFCI and other banks etc., in those years

were towards fixed assets and towards working capital which was being monitored by the bank as the assessee was required to file monthly stock statements with the banking authorities.

10. We have heard the rival submissions and perused the material available on record. Considering the arguments advanced before the Bench at the time of hearing, the appeal was listed for clarification to show what arguments were advanced by the assessee before the AO. In response thereto, Ld. AR filed a letter dated 14.12.2010 addressed to the AO stating that no interest relates to the investment in equity shares of Hind Agro Industries. The share capital of reserves surplus of the company amounted to Rs.59,05,87,952/- and the total investment in equity shares stood at Rs.18.75 crore. It was submitted that it had been canvassed that the investment has been made out of the non-interest bearing capital. The loan

from IFCI and banks were taken and duly utilized towards the fixed assets plant and machinery etc and the working capital loan stood utilized towards stock and other running expenses. No part of the loan was ever utilized for purchases of equity shares. Inviting attention to the next page of the written submission, it was submitted that the same chart which has been reproduced in the impugned order by the CIT(A) has been placed by the assessee before the AO. Documents were attached pertaining to the IFCI loan showing how funds were to be utilized which were all placed with the AO along with terms and conditions by which the said funds were bound. Inviting attention to the assessment order, it was submitted that the AO has only recorded in para 5.2 that the assessee has submitted that they

have not incurred any expenditure for earning the dividend income. Thereafter, considering the position of retrospective effect of the amendment inserted in section 14A by the Finance Act, 2001 with retrospective effect from 01.04.1962 without considering all the facts of the case he proceeded to make a disallowance. The CIT(A) considering the facts has come to a correct finding and the disallowance of Rs.9,37,500/- confirmed by him has not been agitated by the assessee.

11. In the above mentioned peculiar facts and circumstances, it is necessary to set out how the issue is considered by the CIT(A), the following paras 9 & 10 reproduced here under for ready reference:-

“9. I have gone through the above submissions of the appellant and have also perused the financial statements of the appellant’s business for the year under consideration as well as for the years 1995-96, 1996- 97 and 1997-98 iun which investments are made. The main plea of the appellant is that no disallowance under Section 14A be made as they have not incurred any expenditure. The investments of Rs.18,75,00,000 was made long back in financial year’s 1995-96, 1996-97, 1997-98 and in those years they had sufficient Share Capital and Reserves and Surplus as under and thus no interest disallowance is warranted. Further the loan taken from the IFCI and other banks etc. were towards fixed assets and towards working capital, which is being monitored by banks as they have to file monthly stock statements with the banking authorities.

The above plea of the appellant has duly been examined and from the perusal of financial statements for assessment years 1996-97, 1997- 98 and 1998-99 following facts emerge :-

Particulars              A.Y.1996-97       A.Y.1997-98         A.Y.1998-99

Share Capital

Opening Balance       5,20,65,500       5,20,73,000          7,92,59,978

Addition during the year 7,500             2,71,86,978        8,742

Reserve and Surplus

Opening Balance          17,42,54,751           24,23,80,243        32,62,36,756

Add-Transferred from P and L 6,8125,492    8,38,56,513      6,11,30,970

___________ _____________ __________

29,44,53,243 40,54,96,734 46,66,36,446

___________ _____________ __________

Less-Investment in HAIL

Opening Balance -- 3,00,00,000 12,37,00,000

Addition during the year 3,00,00,000 9,37,00,000 6,38,00,000

__________ __________ ___________

Total 3,00,00,000 12,37,00,000 18,75,00,000

__________ ___________ ___________

Surplus of share capital and reserves 26,44,53,243 28,17,96,734 27,91,36,446

Secured Loan from IFCI for fixed assets 5,79,40,466 22,21,55,466 22,17,80,466

Less Fixed Assets

Opening Balance 9,36,45,425 11,79,23,306 12,50,45,604

Addition during the year and CWIP 2,42,77,881 20,61,95,697 27,22,38,409

___________ __________ ___________

11,79,23,306 32,41,19,003 39,72,84,013

___________ __________ ___________

Secured loans from other banks

For working capital 18,37,22,539 15,26,46,066 13,11,79,245

Less utilization

Inventories 17,77,83,329 17,70,65,337 18,78,37,497

Sundry Debtors 11,09,74,873 11,15,07,791 7,82,54,847

___________ ___________ __________

Total of utilization 28,87,58,202 28,85,73,128 26,60,92,344

___________ ___________ __________

(a) It is a fact that investments were made by the appellant in its own subsidiary company to the tune of Rs.3,00,00,000 in assessment year 1996-97 and in that year Share Capital and Reserves were to the tune of Rs.29.44 crore. Thus in my view, there were sufficient funds to make an investment of Rs.3.00 crore, especially in the light of the facts that in assessment year 1996-97 fixed assets (Rs. 11.79 crore) and debtors and stocks (Rs. 28.87 crore) far exceeds the secured loan (Rs.5.79 crore) raised from IFCI towards fixed assets and working capital loans (Rs.18.37 crore) raised from other banking institutions. (b) From the perusal of the above chart, it is also seen that in assessment year 1997-98 when further investment of Rs.9.37 crore was made, in that year Share Capital and Reserves were to the tune of Rs.40.54 crore, whereas, as against the secured loan of Rs.22.21 crore from IFCI the fixed assets rose to the extent of Rs.32.41 crore and as against working capital limit of Rs.15.26 crore the debtors and stock were to the tune of Rs.28.85 crore.

When we compare the figure of secured loan, debtors, fixed assets of assessment year 1997-98 into those of assessment year 1996- 97, it is seen that there is comparative increase of secured loan and decrease of working capital loan on one hand whereas on the other hand there is a huge increase in appellant’s fixed assets and with no change in debtors and stock, this shows that appellant’s profit and share capital are used to fund the fixed assets.

Therefore in a scenario when Share Capital and Reserves are used to acquire fixed assets, than in such a situation in my opinion there is sufficient material to come to the conclusion that appellant has substantial own funds to make investments of Rs.9.37 crore in assessment year 1997-98.

(c) Similarly in the assessment year 1998-99, when the further investment of Rs.6.38 crore were made, it is seen that the appellant had share capital and General Reserves to the extent of Rs.46.66 crore. Whereas with no increase in Secured loans as compared to the assessment year 1997-98 the fixed assets rose by further Rs.5.31 crore. This also shows that when own funds are used to finance the fixed assets, in such a scenario there is sufficient availability of own funds with the appellant to make investments of Rs.18,75,00,000 in the their subsidiary company.

10. During the year under consideration the AO has made the disallowance under Section 14A read with Rule 8D, amounting to Rs.78,96,366 (comprising of proportionate interest Rs.69,58,866 and on account of administrative and other charges Rs.9,37,500). As discussed above, I have already given by finding above the availability of sufficient own funds to make investments and also in view of the facts that loan raised by IFCI are utilized in acquiring fixed assets and working capital/Packing credit/bill discounting facilities raised by the appellant from other banking institutions are being utilized towards working capital requirements (as evident from the monthly stock statements filed with the banking authorities) therefore keeping in view all the facts and evidences on record, I hold that the AO is not correct in adding a sum of Rs.69,58,866 under section 14A read with Rule 8 on account of proportionate interest disallowing. However with regard to the disallowance of Rs.9,37,500 on account of administrative and other charges, since from assessment year 2008-09, the applicability of Rule 8D is mandatory, accordingly by applying the formula of 0.5% on the average investment (Rs.18,75,00,000), a disallowance of Rs.9,37,500 stands confirmed.”

12. In the above-mentioned peculiar facts and circumstances which have been considered by the CIT(A) which were also placed before the AO by the assessee wherein no infirmity on facts has been pointed out by the department, we find no reason to upset the finding arrived at in the impugned order. Being satisfied with the reasoning and finding, the ground raised by the department is dismissed as no rebuttal on facts has been referred to by the department as to how the principles laid down in the judgement of the Jurisdictional High Court in the case of Maxop Investment has not been considered.

13. In the result, the appeal of the revenue is partly allowed for statistical purposes.

The order is pronounced in the open court on 22nd of March 2013.

Sd/- Sd/-

(S.V.MEHROTRA) (DIVA SINGH)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 22/03/2013

*Amit Kumar*

Copy forwarded to:

1. Appellant

2. Respondent

3. CIT

4. CIT(Appeals)

5. DR: ITAT

ASSISTANT REGISTRAR

ITAT, NEW DELHI