The Principal Commissioner Of Income Tax-3, Ludhiana v. M/S Malwa Industries Ltd., Ludhiana

ITA No. 209 of 2015 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 209 of 2015 (O&M) Date of Decision: 26.8.2015 The Principal Commissioner of Income Tax-3, Ludhiana ....Appellant. Versus M/s Malwa Industries Ltd., Ludhiana ...Respondent. CORAM:-HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MR. JUSTICE RAMENDRA JAIN. PRESENT: Mr. Rajesh Katoch, Advocate for the appellant. AJAY KUMAR MITTAL, J. 1.This appeal has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 (in short “the Act”) against theorder dated 10.9.2014 (Annexure-3) passed by the Income Tax AppellateTribunal, Chandigarh Bench “A”, Chandigarh (hereinafter referred to as“the Tribunal”) in ITA No. 714/CHD/2012, for the assessment year 2007-08, claiming the following substantial questions of law:- i)Whether on the facts and in the circumstancesof the case, the Hon'ble ITAT ChandigarhBench is justified in upholding the decision ofLd. CIT(A); deleting the addition ofRs.2,90,652/- made u/s 36 (1)(iii) withoutappreciating the fact that the assessee company has debited huge amount to profit andloss account on account of interest expenditure.On the other hand he is advancing interest freeloan to its subsidiary company? ii) Whether on the facts and circumstances of thecase the Hon'ble ITAT Chandigarh Bench isjustified in upholding the decision of Ld. CIT(A);deleting the addition of Rs.2,77,318/- made u/s40A(2)(b) as the assessee has inflated thepurchases made from M/s Malwa CottonSpinning Mills Ltd.? iii) Whether on the facts and circumstances of thecase the Hon'ble ITAT Chandigarh Bench isjustified in upholding the decision of Ld. CIT(A);deleting the addition of Rs.22,41,628/- onaccount of bank changes without appreciatingthat the assessee company has made additionin fixed assets during the A.Y. Underconsideration? iv) Whether on the facts and circumstances of thecase the Hon'ble ITAT Chandigarh Bench isjustified in upholding the decision of Ld. CIT(A);deleting the addition of Rs.3,06,251/- expensesincurred on account of building repair withoutappreciating the fact that whether the expensesare of recurring nature or it is making addition tothe fixed assets? 2.Briefly stated, the facts necessary for adjudication of theinstant appeal as narrated therein may be noticed. The assessee isengaged in the business of manufacturing and sale of denim fabrics andfiled its return of income on 31.10.2007 for the assessment year 2007-08at a total income of ` 5,68,74,300/-. The assessee paid the tax underSection 115JB of the Act. The case was selected for scrutiny and noticewas issued to the assessee. The Assessing Officer framed theassessment under Section 143(3) of the Act vide order dated 18.12.2009(Annexure-1) by making the following additions:- i)Addition amounting to ` 2,90,652/- underSection 36(1)(iii) of the Act;Section 36(1)(iii) of the Act; ii)Disallowance made under Section 40A(2)(b) ofthe Act amounting to ` 2,77,318/-;the Act amounting to ` 2,77,318/-; iii)Disallowance of bank charges amounting to` 22,41,628/-; and` 22,41,628/-; and iv)Disallowance of expenses incurred on accountof building repair and maintenance amountingto ` 3,06,251/-.of building repair and maintenance amountingto ` 3,06,251/-. 3.Feeling aggrieved, the assessee filed an appeal before theCommissioner of Income Tax (Appeals) [for brevity “the CIT(A)”] whovide order dated 27.4.2012 (Annexure-2) allowed the appeal and deletedthe additions made by the Assessing Officer. Being dissatisfied with theorder of the CIT(A), the revenue filed an appeal before the Tribunal. TheTribunal vide order dated 10.9.2014 (Annexure-3) dismissed the appealand directed the Assessing Officer to adopt the book profits as per theprofit and loss account and not to make addition on account ofdisallowance worked out under Sections 36(1)(iii), 40A(2)(b) of the Act, iv)Disallowance of expenses incurred on accountof building repair and maintenance amountingto ` 3,06,251/-.of building repair and maintenance amountingto ` 3,06,251/-. 3.Feeling aggrieved, the assessee filed an appeal before theCommissioner of Income Tax (Appeals) [for brevity “the CIT(A)”] whovide order dated 27.4.2012 (Annexure-2) allowed the appeal and deletedthe additions made by the Assessing Officer. Being dissatisfied with theorder of the CIT(A), the revenue filed an appeal before the Tribunal. TheTribunal vide order dated 10.9.2014 (Annexure-3) dismissed the appealand directed the Assessing Officer to adopt the book profits as per theprofit and loss account and not to make addition on account ofdisallowance worked out under Sections 36(1)(iii), 40A(2)(b) of the Act, bank charges and expenses incurred on account of building repair andmaintenance. Hence, the present appeal by the revenue. 4.Learned counsel for the revenue submitted that the CIT(A)has wrongly deleted the addition of ` 2,90,652/- made under Section 36(1)(iii) of the Act as the assessee had debited huge amount to profit andloss account on account of interest expenditure and is advancing interestfree loan to its subsidiary company. It was further submitted that theaddition of ` 2,77,318/- made under Section 40A(2)(b) of the Act waswrongly deleted as the assessee has inflated the purchases made fromM/s Malwa Cotton Spinning Mills Ltd. According to the learned counsel,additions of ` 22,41,628/- on account of bank charges and ` 3,06,251/-as expenses incurred on account of building repair were deleted by theCIT(A) without appreciating that the assessee had made addition in fixedassets and the expenses were of recurring nature. 5.After hearing learned counsel for the revenue, we do notfind any merit in the said submissions. The CIT(A) while deleting theaddition of ` 2,90,652/- made by the Assessing Officer under Section 36(1)(iii) of the Act had relied upon the earlier order passed by the Tribunalin the case of the assessee for earlier and subsequent years on accountof the same reasons. The CIT(A) had noticed as under:- “4.3. I have carefully considered the appellant'ssubmission. Appellant has claimed that the advanceswere given to subsidiary company for businesspurpose. The appellant has relied on the judgmentsof Hon'ble Supreme Court in the case S.A. BuildersLtd. v. Commissioner of Income Tax reported in 288ITR 1. It is seen that similar addition had been made in appellant's case during the assessment years2005-06 and 2006-07 and the addition was deleted byCIT(A) following the decision of the Hon'ble SupremeCourt in the case S.A. Builders Ltd. Vs. Commissionerof Income Tax. The order of the CIT(A) has beenupheld by the Hon'ble ITAT for both the assessmentyears in ITA No. 696/Chandi/2008 for assessmentyear 2005-06 and ITA No. 1169/Chandi/2009 forassessment year 2006-07. Similar addition made inthe case of appellant for A.Y. 2008-09 has also beendeleted by me vide my order dated 07.03.2012.Respectfully following the decision of the Hon'bleITAT, the addition made by the Ld. AO ofRs.2,90,652/- on this account is deleted. This groundof appeal is accordingly allowed.” 6.The Tribunal had affirmed the aforesaid deletion. It was notshown that the findings in the case of the assessee on the basis of whichthe matter had been decided in its favour has been displaced by anyhigher court. 7.Further, the CIT(A) while deleting the addition made by theAssessing Officer amounting to ` 2,77,318/- under Section 40A(2)(b) ofthe Act had recorded that the assessee had submitted date-wise anditem-wise detail of material purchased from related concern and outsideindependent parties during the relevant period which showed that therewas wide fluctuations of price during these months. After consideringthe entire material, the CIT(A) concluded that payments made to M/sMalwa Cotton Spinning Mills- a sister concern of the assessee for the 6.The Tribunal had affirmed the aforesaid deletion. It was notshown that the findings in the case of the assessee on the basis of whichthe matter had been decided in its favour has been displaced by anyhigher court. 7.Further, the CIT(A) while deleting the addition made by theAssessing Officer amounting to ` 2,77,318/- under Section 40A(2)(b) ofthe Act had recorded that the assessee had submitted date-wise anditem-wise detail of material purchased from related concern and outsideindependent parties during the relevant period which showed that therewas wide fluctuations of price during these months. After consideringthe entire material, the CIT(A) concluded that payments made to M/sMalwa Cotton Spinning Mills- a sister concern of the assessee for the purchase of comber waste and flat waste could not be held to beexcessive or unreasonable. The findings recorded by the CIT(A) readthus:- “5.3. I have carefully considered the contention of theLd. Counsel for the appellant and perused therelevant details. The appellant has submitted date-wise and item-wise detail of material purchased fromrelated concern and outside independent parties inthe month of August 2006, September 2006,November 2006, January 2007, February 2007 andMarch 2007. It is seen that there are wide fluctuationsof price over the months. It is also seen that on thedate when material was purchased from MalwaCotton Spg. Mills Limited the rates of same itempurchased from outside parties were matching andcomparable. In this regard it is seen from theassessment order that during the assessmentproceedings, the appellant had explained that thecompany had purchased two kinds of waste i.e. cottoncomber waste and flat waste from M/s Malwa CottonSpinning Mills Ltd. and from outside parties.Appellant had further explained that cotton comberwaste is fine waste and is more expensive than flatwaste and variation in average price during the monthis because purchase piece of cotton comber wasteand fine waste have been taken together. To see ifthe company has made excess payment it would be important to compare the item wise prices. Asmentioned in the assessment order details for suchpurchases made on specific dates of the month ofNovember 2006 from related concern and fromparties other than the sister concerns were dulyproduced before the A.O. and it was contended thaton the date on which flat waste was purchased fromM/s Malwa Cotton Spinning Mills Ltd., the rates ofsame item purchased from outside parties was higher.However, the AO did not accept this explanation andthis evidence and observed that the assessee hasinflated the purchases made from M/s Malwa CottonSpinning Mills Ltd. In my opinion the AssessingOfficer was not justified in observing as above. Iagree with the Ld. counsel that the method adoptedby the A.O. for comparing the rates of purchasesmade from the sister concerns is not correct method.In view of the fact that there are fluctuations in price ofwaste on day to day basis, the correct method is tocompare the rates of purchases made by theappellant from sister concerns at a particular point oftime by comparing the same with the rates given forthe similar goods to other outside parties at the samepoint of time. As mentioned above the relevant detailswere duly produced at the time of assessmentproceedings but the AO chose to ignore the evidence.As submitted by the appellant, date wise and item- wise detail of material purchased from related concernand outside independent parties in the month ofNovember 2006, January 2007, February 2007 andMarch 2007 payment made to M/s Malwa CottonSpinning Mills for purchase of Comber Waste and FlatWaste was neither excessive nor unreasonable. Keeping in view the above position, the additionmade by the Ld. AO of Rs.2,77,318/- on this accountis deleted. This ground of appeal is accordinglyallowed.” wise detail of material purchased from related concernand outside independent parties in the month ofNovember 2006, January 2007, February 2007 andMarch 2007 payment made to M/s Malwa CottonSpinning Mills for purchase of Comber Waste and FlatWaste was neither excessive nor unreasonable. Keeping in view the above position, the additionmade by the Ld. AO of Rs.2,77,318/- on this accountis deleted. This ground of appeal is accordinglyallowed.” 8.The aforesaid findings were upheld by the Tribunal. Noillegality or perversity could be demonstrated in the concurrent findingsrecorded by the CIT(A) and the Tribunal which may call for interferenceby this Court. Thus, no legal issue arises in this regard. 9.Taking up next issue, the addition of ` 22,41,628/- made bythe Assessing Officer on account of bank charges debited to the profitand loss account was deleted by the CIT(A) by observing that the saidamount was incurred by the assessee on account of processing feespaid to the bank to process the working capital facility to meet day to dayrequirement of funds which was recurring in nature. These facilitieswere held to be of yearly duration and its benefit accrued during theyear. Further, similar addition was deleted by the Tribunal in the earlierand subsequent years as well. The CIT (A) observed as follows:- “6.3. I have carefully considered the appellant'ssubmission and perused the assessment order.These expenses have been incurred by the appellanton account of processing fees paid by the appellant to bank to process the working capital facility to meetday to day requirement of funds which is recurring innature. Further as clarified in the written submissionsthe fund based and non fund based working capitalfacilities sanctioned by the banks had been utilized bythe appellant to meet the day-to-day requirement offunds for business. The working capital facilities aregenerally for a period of one year and such chargesare levied by the bank every year. As pointed out bythe AR of the appellant, it is seen that similar additionhad been made during the Asstt. Years 2005-06 and2006-07 and the addition was deleted by CIT(A). Theorder of the CIT(A) has been upheld by the Hon'bleITAT for both the Asstt. Years in ITA No. 696/Chandi/2008 for Asstt. Year 2005-06 and ITA No.1169/Chandi/2009 for Asstt. Year 2006-07. Similaraddition made in the case of appellant for A.Y. 2008-09 has also been deleted by me vide my order dated07.03.2012. Respectfully following the decision of theHon'ble ITAT, the addition made by the Ld. AO ofRs.222,41,628/- on this account is deleted. Thisground of appeal is accordingly allowed.” 10.The Tribunal had affirmed the said deletion. Again, learnedcounsel for the revenue was not able to displace the reasoning and thefindings of fact recorded by the CIT(A) and the Tribunal so as to raiseany law point. 11.Lastly, while deleting the addition of ` 3,06,251/- made by ITA No. 209 of 2015 the Assessing Officer on account of building repair and maintenanceexpenses, the CIT(A) had held as under:- 10.The Tribunal had affirmed the said deletion. Again, learnedcounsel for the revenue was not able to displace the reasoning and thefindings of fact recorded by the CIT(A) and the Tribunal so as to raiseany law point. 11.Lastly, while deleting the addition of ` 3,06,251/- made by ITA No. 209 of 2015 the Assessing Officer on account of building repair and maintenanceexpenses, the CIT(A) had held as under:- “7.3. I have carefully considered the appellant'ssubmission. The fact remains that expenditure ofRs.1,25,030/- and Rs.1,81,221/- had been incurred onrepair of road and boundary wall of factory buildingrespectively. The AO has not doubted thegenuineness of these expenses. It is not the AOscase that the expenses were bogus. It is also not theAOs case that the expenses were not incurredtowards road and boundary wall. The only issueraised by the AO in the assessment order is whetherthese expenses are of revenue or capital in nature.Perusal of the written submission show that theappellant had commenced its Mfg. activities infinancial year 1997-98 and the factory building wasalready in existence. The expenditure towardsmaintenance of an existing asset is purely revenue innature. Moreover, looking into the nature andquantum of expenses it can reasonably be inferredthat these expenses were towards repair andmaintenance and were revenue in nature. Theaddition made on this account is therefore deleted.This ground of appeal is accordingly allowed.” 12.The Tribunal also recorded that the genuineness of theexpenses amounting to ` 3,06,251/- (i.e. ` 1,25,030/- and ` 1,81,221/-)was not in doubt. The said expenses were incurred for maintenance of ITA No. 209 of 2015 -11- road and boundary wall as the factory building of the assessee wasalready in existence and had started its manufacturing activities in thefinancial year 1997-98. Keeping in view the quantum of expenditure, itwas held to be revenue in nature. The CIT(A) and the Tribunal hadrightly decided the issue which does not involve interpretation of anyprovisions of law. 13.In view of the above, no substantial question of law arises inthis appeal. Accordingly, the instant appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE August 26, 2015gbs (RAMENDRA JAIN) JUDGE