IN THE INCOME TAX APPELLATE TRIBUNAL
`A' BENCH AHMEDABAD
(BEFORE SHRI A. MOHAN ALANKAMONY, AM AND
SHRI KUL BHARAT, JM)
ITA No.164/Ahd/2009
A. Y.: 2004-05
Bhagawati Flour Miling Vs The Income Tax
Pvt. Ltd., Officer,
309, Century Market, Ward 1 (2)
Prem Darwaja, Ahmedabad
Ahmedabad
P.A. No. AAACB 7721 L
(Appellant) (Respondent)
Appellant by Shri S.N. Divatia, AR
Respondent Shri B. Kulshreshtha, Sr.
by DR
Date of hearing: 07-06-2012
Date of pronouncement: 13-07-2012
ORDER
PER A. MOHAN ALANKAMONY: The assessee has
filed this appeal aggrieved by the order of the learned
CIT(A)-VI, Ahmedabad in appeal No. CIT(A)-VI/Ward 1
ITA No.164//Ahd/2009 (AY 2004-05) 2
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
(2)/75/07-08 for assessment year 2004-05 dated 16-10-2008
passed u/s 143 (3) read with section 250 of the IT Act.
2. The assessee has raised five grounds in its appeal.
However the learned AR has pressed only grounds No.2.1
and 3.1 of the appeal. Therefore, the grounds not pressed by
the learned AR are dismissed as not pressed. The relevant
ground No.3.1 and 2.1 are reproduced herein below for our
consideration:
"3.1 The Ld. CIT(A) has grievously erred in law and/or
on facts in upholding the rejection of books of account
of the appellant.
2.1 The Ld. CIT(A) has grievously erred in law and/or
on facts in confirming the following
additions/disallowances:
(a) Suppressed production Rs.13,21,439/-
(b) Out of int. expenses Rs. 54,367/-
(c) Out of electric expenses Rs.1,98,107/-."
2.1 The assessee is a firm engaged in the business of
manufacturing of the products such as maida, soji, atta and
reva etc. filed its return of income on 01-11-2004 declaring
total income of Rs.23,91,973/- along with tax audit report in
Form No.3CD as per the provisions of section 44AB of the
ITA No.164//Ahd/2009 (AY 2004-05) 3
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
Act. Although, the return was processed initially u/s 143(1) of
the Act, the case was taken up for scrutiny and the
assessment order was passed on 22-12-2006 u/s 143(3) of
the Act wherein certain additions were made. The assessee
carried the matter before the Ld.CIT(A), however the
Ld.CIT(A) confirmed the order of the Ld.AO. Now the
assessee is in appeal before us.
3. Ground No.3.1: Upholding rejection of books of
account by the learned CIT(A) and Ground No.2.1 (a):
Confirmation of addition of Rs.13,21,439/- made on
account of suppressed production:-
On verification of stock register maintained by the
assessee it was noticed by the ld.AO that;
(i) Quantity of raw materials consumed and
production of different items in a particular day were not
recorded on the same day but were recorded in the
morning of the subsequent day. Thus it was apparent
that the assessee had adjusted the production made
with the quantity of raw materials consumed according
to its convenience.
ITA No.164//Ahd/2009 (AY 2004-05) 4
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
(ii) Wheat cleaned in a day was not consumed for
production on the same day. This shows that the
assessee was adding production of refraction along
with other products on each day which was not related
to the quantity of wheat consumed on that particular
day. Therefore, the amount of refraction was added to
other items on fixed percentage basis.
(iii) Method adopted by the assessee for weighing
wheat after reducing weight of bardan of 1 kg in case of
100 kg jute bardan and in case of 50 kg jute bardan
was also not proper because weight of different bardan
could vary. This variation, even though small, but when
considering large quantity of wheat purchased, could
make a big difference.
(iv) In normal circumstances, production of maida
should be 64% to 65% which in the case of the
assessee appeared to be a maximum of 60% only.
(v) On the other hand, production of bran was on
higher side which is 26% to 28% when whole atta is not
produced and up to 24% t0 25% when whole atta is
produced. Thus, assessee's production of the main
item which was of higher value had been suppressed.
ITA No.164//Ahd/2009 (AY 2004-05) 5
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
(vi) Due to the above mentioned reasons, the records
maintained by the assessee for stock of raw materials,
production, sales, closing stock etc were found to be
adjusted and not on the basis of actual day to day
production and therefore cannot be relied upon.
4. The learned AO for the above mentioned reasons
rejected the books of accounts of the assessee and made
addition on account of suppression of production amounting
to Rs.13,21,439/- with the following observations:
"As has been discussed in the above para that
production of maida shown by the assessee is 60%
which in normal condition should have been 64 to 65%.
On the other hand production of bran in the case of
assessee exceeds by 4 to 5%. Hence, production of
maida in the case of assessee company is taking at
64% which comes to 171740.86 Quintal as against
production of 168445.50 Quintal shown by the
assessee. Value of the excess production of maida is
computed at Rs.13,21,439/- after reducing the value of
equal amount of bran from the value of maida
produced. This amount of Rs.13,21,439/- is added to
the total income of the assessee as suppressed
production of maida."
ITA No.164//Ahd/2009 (AY 2004-05) 6
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
5. The assessee carried the matter before the learned
CIT(A). The learned CIT(A) endorsing the view of the
learned AO, confirmed the addition made by the learned AO
with respect to suppression of production of maida for
Rs.13,21,439/- by rejecting the books of accounts.
6. The learned AR vigorously argued before us stating
that the assessee was following the same method of
accounting year after year for the last twenty five years and
the same was also accepted by the department year after
year. Further the assessee had maintained all the necessary
books of account along with stock records etc. However, the
learned AO without taking note of the actual facts being
recorded in the books of accounts went ahead to make the
additions on the basis of mere surmises and conjectures. It
was, therefore, prayed that the order of the revenue
authorities may be set aside.
7. The learned DR argued in support of the revenue and
relied upon the orders of both the learned AO and the
learned CIT(A) and prayed that the same may be sustained.
ITA No.164//Ahd/2009 (AY 2004-05) 7
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
8. We have heard the rival submissions and carefully
perused the materials placed before us. It is pertinent to note
that the assessee was following the same method of
accounting for the last twenty five years and the same was
not disputed by the Revenue on any earlier occasion.
However the revenue has rejected the books of accounts for
the relevant assessment year, without recording any fresh
facts contrary to the facts of the earlier years, and made
addition with respect to suppression of production, based on
certain norms prevalent in the industry. With respect to the
nature of activities of the assessee various factors need to
be considered. The discrepancy pointed out by the Revenue
could result due to various factors such as the nature of
machinery utilized by the assessee, the aging factor of the
machinery, the produce procured by the assessee from
various regions which are of various varieties etc. Further,
the revenue has not pinpointed any discrepancy on the
physical quantitative recording of facts in the books of
accounts. In these circumstances, we are of the
considered view that rejection of the books of account
by the revenue is not warranted and addition made
thereof for suppression of production for Rs.13,21,439/-
ITA No.164//Ahd/2009 (AY 2004-05) 8
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
is also not justified. Therefore, we hereby delete the
addition made by the learned AO which was further
sustained by the learned CIT(A) with respect to
suppression of production for Rs.13,21,439/-. Grounds
No.3.1 and 2.1(a) raised by the assessee are accordingly
allowed in its favour.
9. Ground No.2.1 (b): Confirming addition of
Rs.54,367/- made on account of interest expenses:-
During the course of assessment proceedings it was
noticed by the learned AO that the assessee had paid
interest @15% and thus suffered expenditure of
Rs.19,60,926/- for the loans received by it. It was further
observed by the learned AO that the assessee had made
advances to M/s. T. N. Associates @ 12%. On being queried
as to why the assessee had advanced loan at a lower rate of
interest than the interest expenses incurred by it for
procuring such funds, the assessee came out with the
following reasons:
"We have taken loan from various depositors at 15%
interest p.a. which is normal prevailing market rate. The
cost of bank loan is also similar to the said rate.
ITA No.164//Ahd/2009 (AY 2004-05) 9
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
Moreover in case of bank loan, we have to mortgage
our properties and we have also comply with other legal
procedures. During the year under review, assessee
company advanced its surplus fund to T. N. Associates
and earned interest on surplus fund. Copy of bank
statement is already submitted to your honour in which
your honour has accepted that whenever loan was
given to M/s. T. N. Associates, there was a credit
balance. Instead of loosing interest, we earned interest
at 12% and also paid tax on it. We would not have
earned any income if we had not granted loan to that
party. Moreover, we cannot repay the deposits because
whenever we need more fund, we might not get it, since
depositor's shall not keep the balance idle in their bank
accounts. More over there is no nexus between the
fund borrowed and fund advanced."
10. After due consideration, the learned AO rejected the
contention of the assessee and made addition of Rs.54,367/-
being the amount of lower rate of interest charged to M/s. T.
N. Associates. The learned CIT(A) concurred with the view
of the learned AO on this issue and confirmed the addition
of Rs.54,367/- due to the following reasons:
"Due consideration have been given to the submission
made by the assessee which is however not fully
acceptable since the assessee has advanced loans to
M/s. T.N. Associates out of funds obtained at a higher
rate of interest. Therefore, interest expenses
ITA No.164//Ahd/2009 (AY 2004-05) 10
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
proportionate to the amount of loan given to M/s. T. N.
Associates at a lower rate are disallowed which comes
to Rs.54,367/-.
Keeping in view the aforesaid facts and circumstances,
it is abundantly clear that whereas the appellant pays
interest @15% on the loans received by it, the interest
charged by the appellant on the loans given to it is
@12% with the result, as the appellant has advanced
loan to M/s. T. N. Associates out of the funds obtained
by the appellant on a higher rage of interest; the
Assessing Officer has rightly disallowed the sum of
Rs.54,367/- (i.e. interest expenses proportionate to the
amount of loan given to M/s. T. N. Associates at a lower
rate). In the given facts and circumstances, the action
of the Assessing Officer on this ground is hereby
confirmed. Hence the appeal is dismissed on this
ground."
11. The learned AR reiterated what was submitted before
the learned AO and the learned CIT(A) while the learned DR
supported the orders of the revenue.
12. Having heard both the sides, we also do not find any
reasons as to why the assessee had extended loan to M/s.
T. N. Associates at a lower rate of interest than the rate of
interest paid by it for securing such funds. The rate of
interest of 15% is quite nominal when it comes to private
ITA No.164//Ahd/2009 (AY 2004-05) 11
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
borrowings and the assessee should not have had any
difficulty in receiving such interest from open market or from
known parties. Further, it is quite relevant to note that the
assessee has suffered interest @15% from its borrowing
and the same fund is advanced charging lesser interest
@12%. The assessee further has not come out with any
cash flow or fund management statements to substantiate its
claim that interim surplus of cash is advanced to earn
interest to minimize expenditure on account of interest.
Considering the facts and circumstance of the case, we do
not have any hesitation to concur with the view of the
revenue on this issue. Ground No.2.1 (b) of the appeal of
the assessee is accordingly dismissed.
13. Ground No.2.1(c): Confirming addition of
Rs.1,98,107/- made on account of electricity expenses:-
It was observed by the learned AO that the assessee
had incurred expenditure of Rs.2,47,634/- (Rs.67,500/- +
Rs.1,79,864/- sic 1,80,134) towards cable charged paid to
GEB. The learned AO was of the view that this expenditure
is "differed revenue expenditure" and, therefore, allowed
deduction of one fifth of the expenditure claimed amounting
ITA No.164//Ahd/2009 (AY 2004-05) 12
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
to Rs.49,527/- for the relevant assessment year and
disallowed the balance portion of Rs.1,98,107/-. The learned
CIT(A) concurred with the view of the learned AO and
confirmed the addition.
14. Having heard both sides on this issue, we are not in
agreement with the view taken by the revenue. The learned
AO has arbitrarily allowed deduction of one fifth of the
expenses for the relevant assessment year considering the
expenditure incurred for cable charges to be in the nature of
differed revenue expenses. The amount paid towards cable
charges to the Electricity Department is not refundable and it
is onetime payment. Non-payment of cable charges to the
Electricity Department will lead to disconnection of electricity
supply to the assessee firm's factory and that will disrupt the
business of the assessee. Further it is pertinent to note that
the onetime payment for cable charges has neither resulted
in creation of an asset to the appellant firm nor the amount is
refundable. Therefore, the amount spent by the assessee
towards onetime payment for cable charges will amount to
be revenue expenditure in nature and is allowable for
deduction for the year in which it is incurred. Therefore,
ground No.2.1(c) of the appeal is allowed in its favour
and the addition made by the learned AO for
ITA No.164//Ahd/2009 (AY 2004-05) 13
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
Rs.1,98,107/- which is further confirmed by the learned
CIT(A) is hereby deleted.
15. In the result, grounds No.3.1, 2.1 (a) and 2.1 (c) are
allowed in favour of the assessee and ground No.2.1 (b) is
dismissed.
16. In the result, the appeal of the assessee is partly
allowed as indicated above.
Order pronounced in the open Court on 13-07-
2012
Sd/- Sd/-
(KUL BHARAT) (A. MOHAN ALANKAMONY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Lakshmikant Deka/-
ITA No.164//Ahd/2009 (AY 2004-05) 14
Bhagwati Flour Milling P. Ltd. Vs ITO, W-1(2), Ahmedabad
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad
1. Date of dictation: 09-07-2012
2. Date on which the typed draft is placed before the
Dictating Member: 10-07-12 other Member:
3. Date on which approved draft comes to the Sr. P.
S./P.S.:
4. Date on which the fair order is placed before the
Dictating Member for pronouncement:
5. Date on which the fair order comes back to the Sr.
P.S./P.S.:
6. Date on which the file goes to the Bench Clerk:
7. Date on which the file goes to the Head Clerk:
8. The date on which the file goes to the
Assistant Registrar for signature on the order:
9. Date of Despatch of the Order:
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