Brief of the Case
In the case of Shree Hari Agro Industries Ltd. Vs. DCIT, the Kolkata Tribunal on the issue of disallowance of alleged excess consumption claim of chemical ‘Hexane’ held that The AO has to compute income from business according to the books of accounts of the Assessee. It is only when the book results are rejected the question of estimation of income arises for consideration. The AO has to specifically point out the defects in the books or incomplete and incorrectness in the books of accounts and call upon the Assessee as to why the books of accounts should not be rejected.
Fact of the Case
The two separate appeals filed by the Revenue and the assessee are dealt with in the present case. The assessee company was engaged in the business of manufacturing of agro products. During the assessment proceedings, the A.O. noted that there is an increase in the sum of capital reserve in the balance sheet as compared to last year figure. The Assessee explained that the increase in the capital reserve was because of waiver of loans which the Assessee had obtained for the purpose of its business, by the creditors owing to financial crisis which the Assessee faced. The waiver of loan comprises the two components i.e, interest on loan and the principal of loan which was sought to be taxed u/s 41(1) of the Act r.w.s.28(i) & (iv) of the Act as remission or cessation of liability which profit arising in the course of business. AO accordingly added a sum of Rs.14,58,61,553/- to the total income of the assessee. On an appeal CIT(A) found that the provision of Section 28(iv) not applicable on the interest portion of Rs.7,09,96,285/- and the sum in question was not income within the purview of section 2(24) of the Act. Further Rs.7,48,65,268/- being the principal amount of loan waived was added since the assessee did not discharge the onus to prove the purpose of loan i.e, whether being for project finance or for day to day working of the company. Aggrieved by the relief granted by the CIT(A) the revenue filed appeal before Tribunal. Aggrieved by the order of CIT(A) upholding the addition on account of waiver of principal amount of the loan the assesee is in appeal before Tribunal.
Beside the above the another important ground of appeal by the assessee was against the confirmation of disallowance of Rs.76,07,212/- by the CIT(A) on account of alleged excess consumption of Hexane in Solvent Extraction Plant. The consumption of hexane by the assessee during the previous year was 3,46,753 lts. The AO found that the hexane chemical was used in the process of manufacture of oil from oil cake. The consumption of oil cake in the process of oil extraction by the assessee during the previous year was 48,149 MT. The consumption of hexane with reference to oil cake consumption was 7.20 lts which worked out as 3,46,753/ 48,149= 7.20 In this regard AO relied on the report of Prof. P.J.Rao, Department of Chemical Engineering , Andhra University, Visakhapatnam who has opined that the consumption of hexane can be a maximum of 1.5 lts. per MT of oil cake consumption. The AO based on the report of the expert came to the conclusion that the consumption of the hexane shown by the assessee is excessive. The AO thereafter made addition of Rs.76,07,212/-. On an appeal the CIT(A) confirmed the order of the AO.
Contention of the Assessee
The ld. Counsel for the assessee placed reliance on the decision of the Hon’ble Madras High Court in the case of Iskraemeco Regent Ltd. Vs CIT 331 ITR 317(Mad). His submission was that the Hon’ble Madras High Court in the aforesaid decision has held that the provision of section 41(1) of the Act can be applied only when the borrowing is by a financial institution for which money was an item of trading transactions and in respect of all other businesses borrowings should be considered only on capital account. He submitted that in the light of judicial pronouncement, it was unnecessary to go into the question as to whether the principal amount waived was in respect of loan borrowed for meeting the capital requirements or for meeting the revenue expenditure.
The Ld. Counsel of the assessee contented that the books of accounts have not been rejected by the AO u/s.145 of the Act and therefore the impugned addition cannot be sustained. His next submission was that the identity of Prof. P.J.Rao is not clear and the assessee did not have opportunity of cross examination of Prof. P.J.Rao. It was also submitted that consumption of hexane during the previous year compares favourbly with the past history and there was no reason to ignore the past history in assessee’s own case.
Contention of the Revenue
The Ld. DR relied upon the order of the AO and CIT(A).
Held by the Tribunal
The Kolkata Tribunal relied upon the decision of Hon’ble Supreme Court in the case of Sun Engineering Works Pvt. Ltd. 198 ITR 287 (SC), wherein it was held that “It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning.” Therefore considering the aforesaid principal laid down by the Supreme court, the Tribunal observed that Hon’ble Madras High Court in the aforesaid decision found that the undisputed fact prevailing in that case was that the assessee obtained loan for the purpose of investment in its capital asset. It is only on this basis that the Hon’ble Madras High Court held that the provisions of section 41(1) of the Act or section 28(iv) of the Act are not attracted. Therefore, the Tribunal was of the view that it was necessary for the assessee to establish the purpose of the loans in question had been borrowed. On perusal of the copy of the loan sanctioning letter filed by the assessee in support of his contention that the amount of loan that was waived by the creditors was for meeting the capital requirements, the Tribunal held that It is no doubt true that that these loans refer to project finances thereby it can be said that these loans were meant for meeting capital expenditure. It is however seen that the loan amount waived was by one Depak Vegpro Private Limited. When this was pointed out by the ld. Counsel for the assessee it was submitted that IDBI had assigned the loans to M/S.Deepak Vegpro Pvt.Ltd. A copy of the assignment agreement is placed at pages 15 to 31 of assessee’s paper book no.2. This does not correlate with the loan borrowed by the assessee from IDBI, as a person referred to therein is Stressed Assets Stabilisation Fund which is stated to be a trust formed by IDBI, to whom IDBI is stated to have assigned the loan given by it to the assessee. The tribunal was of the view that the correlation of the loans borrowed by the assessee and the purpose for which they were borrowed and the loans waived at Rs.7,48,65,268 to the assessee has to be established by the assessee. It is only when the purpose of the loan is ascertained it can be decided as to whether the provision of section 41(1) of the Act will be attracted or not. Therefore the order of the CIT(A), in so far as the addition of Rs. 7,48,65,268/- sustained by the CIT(A), was set aside and the issue was remanded back to the AO for fresh consideration with the liberty to the assessee to file the required documents to substantiate its case regarding non applicability of the provision of section 41(1) of the Act or section 28(iv) of the Act. In so far as the appeal of the revenue was concerned it was quite clear from the order of the CIT(A) that the interest which was waived was not claimed as an expenditure by the assessee in the past and therefore the addition of the said sum u/s 41(1) of the Act cannot be sustained. In so far as the applicability of the provision of section 28(iv) of the Act was concerned the benefit in question was not received in kind and therefore the addition on the above said provision cannot be sustained. The decision referred to by the CIT(A) in the impugned order on this issue clearly support the conclusion arrived at by the CIT(A). Therefore, the tribunal did not find any ground to interfere. Consequently the appeal filed by the revenue was dismissed.
On an appeal related to disallowance of Rs.76,07,212/- the Tribunal held that for rejecting the book results, the provisions of Sec.145(3) of the Act requires that the Assessing Officer should not be satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided u/s.145(1) of the Act or accounting standards as notified under Section 145(2) of the Act have not been regularly followed by the Assessee. The AO has to compute income from business according to the books of accounts of the Assessee. It is only when the book results are rejected the question of estimation of income arises for consideration. The AO has to specifically point out the defects in the books or incomplete and incorrectness in the books of accounts and call upon the Assessee as to why the books of accounts should not be rejected. The above principle is applicable even when the AO doubts the correctness of the claim of expenditure made in the Profit and Loss Account. The AO has not doubted the purchase of Hexane. He has indulged in a guess work regarding the quantity of Hexane that is to be consumed in the process of manufacture of oil from oil cake. The AO has done this on the basis of a report of an expert. As to whether the report of the expert can be applied to all manufacturers of oil from oil cake and as to whether these are ideal quantity of consumption, is not spelt out in the order of the AO. The entries in the regular books of accounts which are duly audited have not been shown to be suffering from any infirmities. The past history of consumption of Hexane compares favourably with the consumption in the past and the AO has nothing to say about the past history. No such addition has been made in the past. In such circumstances, the tribunal was of the view that the addition made by the AO and confirmed by the CIT(A) was without any basis and cannot be sustained.