Case Law Details

Case Name : Gold Finch Jewellery Ltd. Vs D.C.I.T. (ITAT Ahmedabad)
Appeal Number : ITA Nos.1075-1076/AHD/2016
Date of Judgement/Order : 01/03/2019
Related Assessment Year : 2009-2010 & 2012-2013
Courts : All ITAT (7457) ITAT Ahmedabad (496)

Gold Finch Jewellery Ltd. Vs D.C.I.T. (ITAT Ahmedabad)

In the instant case, the depreciation claimed on the vehicles, i.e. cars and two-wheelers was disallowed by the AO on account of two reasons. Firstly, the assessee was not the owner of the assets, and secondly, the assessee failed to establish that the assets were used for the business. The learned CIT (A) subsequently confirmed the action of the AO.

Regarding the ownership of the assets, we note that the beneficial ownership vest with the assessee. It is because the payment was made for the purchase of the assets by the assessee though the assets were registered in the name of the directors of the company. Since this fact has not been doubted by any of the authorities below, therefore, we can safely presume that the assessee is the beneficial owner of the assets. In holding so we find support and guidance from the judgment of Hon’ble Supreme Court in the case of Mysore minerals Ltd. vs CIT reported in 239 ITR 775 wherein it was held as under:

“13. An overall view of the abovesaid authorities show that the very concept o f depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset, is utilizing the capital asset and thereby loosing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time. ”

The 2nd dispute relates whether the assets were used for the business. Indeed it is one of the pre-condition to claim the depreciation on the assets that it should be used for the business. The allegation of the authorities below is that the assessee failed to substantiate its case by filing the documentary evidence suggesting that these assets were used for the business. In this regard, we note that the assessee has claimed other expenses in connection with the vehicle as discussed above. These expenses are like interest on a car loan, petrol expenses, repair and maintenance expenses etc. The necessary details of such expenses are available in the financial statements placed on page 97 in the paper book. It is undisputed fact that these expenses have not been disallowed. Thus, it can be transpired that the Revenue has admitted these expenses incurred by the assessee for the business. Thus in our considered view, we find that the authorities below have made the addition on account of depreciation without the application of mind. Accordingly, we hold that the disallowance on account of depreciation made by the Revenue is not sustainable.

FULL TEXT OF THE ITAT JUDGEMENT

The captioned appeals have been filed at the instance of the Assessee against the separate order of the Commissioner of Income Tax (Appeals)- 2, Ahmedabad [CIT(A) in short] of dated 24/02/2016 and 26/02/2016 arising in the matter of assessment order passed under s.143(3)of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) dated 22/12/2011 and 02/03/2015 relevant to assessment Years 2009-10 & 2012-13 respectively.

2. Since the issues raised in both the appeals are common and related to the same assessee, therefore, we proceed to adjudicate the same through this common order for the sake of convenience and brevity.

3. First, we take ITA No.1075/Ahd/2016 for A.Y- 2009-10. The assessee has raised the following grounds of appeal.

1. The Ld.CIT (A) has erred in confirming the disallowance of Rs. 1,61,739/-made by the Assessing Officer out of depreciation on two wheeler vehicles and Car.

2. The Ld.CIT (A) has erred in confirming disallowance of Rs. 13,45,356/-made by the Assessing out of labour charges claimed by the Appellant.

3. The appellant craves leave to add, alter, amend or modify any of the grounds of appeal on or before the date of hearing of appeal.

4. The 1st issue raised by the assessee is that the learned CIT (A) erred in confirming the addition of Rs. 1,61,739/- on account of depreciation.

5. Briefly stated facts are that assessee is a limited company and engaged in the business of trading and manufacturing of gold and diamonds ornaments. The assessee has claimed depreciation in respect of certain vehicles which were registered in the name of Directors. The assessee claimed that it is the beneficial owner of the asset. The assessee further claimed that these assets were used only and exclusively for the business. Therefore, no adverse inference can be drawn against the assessee merely on the ground that these fixed assets were not registered in the name of the company.

5. However, the AO found that some of the two-wheelers were purchased in the assessment year 2005-06 in respect of which the depreciation was disallowed in the assessment order framed u/s 143(3)/147 of the Act vide dated 28/12/2010.

5.1    The assessee could not substantiate its claim that these vehicles were used for the business. Therefore the AO disallowed the depreciation of Rs. 1,61,739/-and added to the total income of the assessee.

5.2 Aggrieved assessee preferred an appeal to ld. CIT(A). The assessee before the ld. CIT (A) submitted that the ld. CIT-A decided the issue pertaining to the assessment year 2005-06 in favour of the assessee. Therefore, the AO erred in rejecting the claim of the assessee after having a reliance on the order of his predecessor pertaining to the assessment year 2005-06.

6. However, the ld. CIT (A) rejected the claim of the assessee by observing that there was no evidence available to demonstrate that the vehicle used for the business.

7. Being aggrieved by the order of ld. CIT (A) assessee is in appeal before us.

8. The ld. AR before us filed a paper book running from pages 1 to 136 and submitted that the assessee was the beneficial owner of the asset as the assessee made the payment for the acquision of such assets. Thus the benefit of depreciation cannot be denied merely on the ground that the ownership is in the name of Director/employee of the Company.

8.1   The ld. AR further submitted that the assessee had claimed interest on the car loan, insurance premium of the car, petrol expenses on the scooter and car and vehicle expenses which were not doubted by the Revenue.

8.2 The ld. AR further submitted that the Revenue had taken the contrary stand by allowing the expenses incurred in connection with the vehicle in full. Therefore, the depreciation in respect of such vehicle was disallowed on the basis of mere conjecture and surmises.

9. On the other hand ld. DR relied on the order of the authorities below.

10. We have heard the rival contentions and perused the materials available on record. In the instant case, the depreciation claimed on the vehicles, i.e. cars and two-wheelers was disallowed by the AO on account of two reasons. Firstly, the assessee was not the owner of the assets, and secondly, the assessee failed to establish that the assets were used for the business. The learned CIT (A) subsequently confirmed the action of the AO.

10.1 Regarding the ownership of the assets, we note that the beneficial ownership vest with the assessee. It is because the payment was made for the purchase of the assets by the assessee though the assets were registered in the name of the directors of the company. Since this fact has not been doubted by any of the authorities below, therefore, we can safely presume that the assessee is the beneficial owner of the assets. In holding so we find support and guidance from the judgment of Hon’ble Supreme Court in the case of Mysore minerals Ltd. vs CIT reported in 239 ITR 775 wherein it was held as under:

“13. An overall view of the abovesaid authorities show that the very concept o f depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset, is utilizing the capital asset and thereby loosing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time. ”

10.2 The 2nd dispute relates whether the assets were used for the business. Indeed it is one of the pre-condition to claim the depreciation on the assets that it should be used for the business. The allegation of the authorities below is that the assessee failed to substantiate its case by filing the documentary evidence suggesting that these assets were used for the business. In this regard, we note that the assessee has claimed other expenses in connection with the vehicle as discussed above. These expenses are like interest on a car loan, petrol expenses, repair and maintenance expenses etc. The necessary details of such expenses are available in the financial statements placed on page 97 in the paper book. It is undisputed fact that these expenses have not been disallowed. Thus, it can be transpired that the Revenue has admitted these expenses incurred by the assessee for the business. Thus in our considered view, we find that the authorities below have made the addition on account of depreciation without the application of mind. Accordingly, we hold that the disallowance on account of depreciation made by the Revenue is not sustainable.

10.3 It is also important to note that the AO also made similar disallowance in the earlier assessment year 2005-06, but the learned CIT (A) deleted the addition made by the AO. The learned DR has also not brought anything on record to demonstrate whether an appeal was preferred by the Revenue against the order of learned CIT-A. Thus in the absence of requisite information from the side of the learned DR, we hold that the Revenue did not challenge the order of the learned CIT-A for the assessment year 2005-06.

10.4 After considering the facts in totality as discussed above, we are not inclined to uphold the finding of the authorities below. Accordingly, we set aside the order of learned CIT-A, and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

11. The next issue raised by the assessee is that Ld. CIT (A) erred in confirming the disallowance of Rs. 13,45,356/- on account of labour charges.

12. The assessee in the year under consideration has claimed labour expenses of Rs. 19,29,390/- only. The assessee in support of labour expenses filed the copies of the bills issued by the labourer. However, the AO found that some of the bills filed by the assessee amounting to Rs. 13,45,356/- pertains to the Assessment Year 2006-07. Therefore, the same was disallowed and added to the total income of the assessee.

13. Aggrieved assessee preferred an appeal to Ld. CIT (A). The assessee before the Ld. CIT (A) submitted that it had received labour charges amounting to Rs. 42,00,303/- only against labour expenses of Rs. 19,20,390/- only.

13.1 The assessee before the ld. CIT (A) submitted that it is making the payment to labourers periodically against the work carried out by them. However, at the end of the year all the payment made to the labors are clubbed and against such payment, a single bill is issued by the labors. The assessee also submitted that the payment to the labourers had been made after deducting TDS and through account payee cheques.

13.2 All the details of the labourers were available with the AO during the assessment proceeding. Thus in case of any doubt the AO was empowered to verify the same by issuing notice u/s 131/133(6) of the Act.

13.3 There was an inadvertent error in mentioning the date on the bill issued by the labourers but these expenses were never claimed in the previous year 2006­07. Therefore the question of double deduction for labour expenses does not arise.

13.4 The assessee in support of his contentions has filed the fresh labour bills, the copy of account and confirmation from the laborers.

13.5 The Ld. CIT (A) called for the remand report on the additional evidence filed by the assessee, but there was no reply from the side of the AO. However, the ld. CIT (A) disregarded the contentions of the assessee by observing that the assessee failed to furnish the details for the movement of jewelry to the labourers for carrying out the necessary job work.

13.6 All the fresh bills issued by the labors were containing date as 31/03/2009.

13.7 The assessee has not deducted TDS in the manner as prescribed under the provision of law.

In view of the above the Ld. CIT (A) confirmed the order of the AO.

14. Being aggrieved by the order of Ld. CIT (A) assessee is in appeal before us.

15. The Ld. AR before us submitted that the AO made the disallowance without issuing a show cause notice to the assessee.

15.1 All the necessary details in the response to the labour expenses were duly furnished before the Ld. CIT (A). But the AO failed to find any defect on the documents filed during the assessment proceedings despite several reminders.

15.2 All the details of the labourers were available with the authorities below but none of them has issued any notice u/s. 133/133(6) of the Act.

15.3 There was no disallowance made by the Revenue on account of labour expenses pertaining to the assessment year 2008-09 and 2011-12.

16. On the other hand the Ld. DR submitted that the Ld. CIT (A) has co-terminus power; therefore, he can decide the issue in the absence of remand report from the AO.

16.1 The Ld. DR further submitted that the assessee failed to furnish the necessary evidence to demonstrate whether any job work was carried out on the jewelry.

16.2 The Ld. DR vehemently supported the order of the authorities below.

16.3 We have heard the rival contentions and perused the materials available on record. The assessee in the year under consideration has claimed Labour expenses amounting to Rs. 19,20,390/-. However, the AO found that the bills filed by the assessee in support of Labour expenses for Rs. 13,45,356/- pertain to the financial year 2006-07. Therefore, the same was disallowed and added to the total income of the assessee.

16.4 Subsequently, the learned CIT (A) also confirmed the action of the AO by observing that the assessee failed to furnish sufficient documentary evidence to demonstrate that there was an actual transfer of jewelry from the assessee to the laborers for carrying out the necessary work on such jewelry.

16.5 The assessee has filed revised bills of the current year which were raised by the laborers on the last day of the previous year.

16.6 The assessee has not deducted the TDS on the bills raised by the labors in the manner as provided under the provisions of law. Thus the ld. CIT (A) was of the view that the Labour expenses should also be disallowed on account of non-deduction of TDS under section 194C of the Act r.w.s. 40(a)(ia) of the Act.

16.7 From the preceding discussion we note that all the details of the laborers including the addresses and PAN were available with the authorities below. In case there is any doubt about the labour expenses claimed by the assessee, then the authorities below should have taken the confirmation from the respective parties. The authorities below were empowered to verify whether these labors have disclosed the receipt from the assessee in their respective income tax return or not. But we find that the authorities below have not exercised their power provided under the statute.

16.8 We also note that the assessee has deducted the TDS from the payment of the Labour charges to the laborers. In case the TDS has not been deducted in the manner as provided under the statute, then the Revenue is empowered to initiate the proceedings under chapter XVII of the TDS. However, the non-compliance on account of late deduction of the TDS provisions cannot be the basis of making the disallowance under the assessment framed under section 143(3) of the Act.

16.9 On perusal of the ledgers of the laborers we note that the payment was made by the assessee periodically after the deduction of TDS. Thus, the assessee cannot be penalized if the laborers have raised the bills at the end of the accounting year.

16.10 We also note that the assessee has shown huge turnover from the sale of jewelry amounting to Rs 98.89 crores and against such sale the assessee has claimed Labour expenses only for Rs. 19,20,390/- only which is constituting less than 1% of the turnover. As such the genuineness of the Labour expenses cannot be doubted considering the huge turnover of the assessee as discussed above.

In view of the above, we are not inclined to uphold the finding of the authorities below. Accordingly, we set aside the order of learned CIT (A) and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed.

17. Now coming to ITA No. 1076/Ahd/2016 for A.Y 2012-13. The assessee has raised the following grounds of appeal:

1. The Ld.CIT (A) has erred in confirming the disallowance of Rs. 1,84,600/- made by the Assessing Officer u/s.14A of the I.T. Act 1961 r.w.r 8D of the I.T. Rules 1962.

2. The Ld.CIT (A) has erred in confirming the disallowance of Rs. 8,70,000/- made by the Assessing Officer out of interest expenses on estimate basis.

3. The ”Ld.CIT(A) has erred in confirming disallowance made by the Assessing Officer for labour expenses of Rs. 7,03,801/- being 25% of the total labour expenses o f Rs. 28,15,202/-

The appellant craves leave to add, alter, amend or modify any of the grounds o f appeal on or before the date of hearing of appeal.

18. The first issue raised by the assessee is that Ld. CIT(A) erred in confirming the addition made by the AO for Rs. 1,84,600/- under the provision of section 14A r.w.r 8D of Income Tax Rule.

19. The AO during the assessment proceedings found that the assessee has made the investment in shares and securities. But the assessee failed to make any disallowance u/s 14A r.w.r 8D, therefore, the AO made the disallowance of Rs. 1,84,600/- u/s. 14A r.w.r 8D and added to the total income of the assessee.

20. Aggrieved assessee preferred an appeal to ld. CIT(A) who has confirmed the order of the AO.

21. Being aggrieved by the order of ld. CIT (A) assessee is in appeal before us.

22. The Ld. AR before us submitted that there was no exempt income earned by the assessee during the year under consideration. Therefore, there cannot be any disallowance under the provision of section 14A r.w.r 8D of Income Tax Rules 1963.

23. On the other hand Ld. DR vehemently supported the order of the authorities below.

24. We have heard the rival contentions and perused the materials available on record. At the outset, we note that there was no exempt income earned by the assessee in the year under consideration. Therefore, in our considered view there cannot be any disallowance under section 14A read with rule 8D of the Act in view of the judgement of Hon’ble Gujarat High Court in the case of CIT Vs Corrtech energy Pvt. Ltd. reported in 372 ITR 97 wherein it was held as under:

“4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010. Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that sub-section(1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed as under :

“7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application.”

5. We do not find any question of law arising, Tax Appeal is therefore dismissed.”

In view of the above, we hold that the disallowance under section 14A read with rule 8D of the income tax rule is not warranted.

24.1 We also note that the circular issued by the CBDT as relied on by the AO is not binding on the ITAT. As such we are bound to follow the judgment of Hon’ble jurisdictional High Court. Thus, we do not want to make any reference to the circular issued by the CBDT.

24.2 Accordingly, we set aside the order of learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

25. The second issue raised by the assessee is that Ld. CIT (A) erred in confirming the disallowance of Rs. 8,70,000/- on account of diversion of interest-bearing fund.

26. The AO during the assessment proceedings found that the assessee has diverted its fund amounting to Rs. 70,00,000/- as an advance for capital assets which was having an opening balance of Rs. 75,00,000/- only. Accordingly the AO was of the view that the assessee has diverted interest-bearing fund. Accordingly, the AO workedout the amount of interest on such advance proportionately amounting to Rs. 8,70,000/- and added to the total income of the assessee.

27. Aggrieved assessee preferred an appeal to Ld. CIT (A) who has confirmed the order of the AO.

28. Being aggrieved by the order of the Ld. CIT (A) assessee is in appeal before us.

29. The Ld. AR, before us at the outset submitted that own fund of assessee including the free reserve exceeds the amount of such advances. Therefore, there cannot be any disallowance on account of interest expenses.

30. On the other hand ld. DR vehemently supported the order of authorities below.

31. We have heard the rival contentions and perused the materials available on record. At the outset, we note that the own fund of the assessee exceeds the advances given without any interest. The necessary details of the own fund of the assessee and the advance without interest stands as under:

Net owned funds             : Rs. 13.33 Crores

Interest-free Advance      : Rs. 70 lacs

Therefore, we are of the view that no disallowance of interest expenses on account of diversion of the fund is warranted. In this regard, we find support and guidance from the judgement of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:-

“The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal”.

31.1 Similarly, we also rely on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:

“Where assessee’scapCIT (A)l, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A.”

31.2 Similarly, we also find support from the judgment of Hon’ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the headnote reads as under :

If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A”.

In view of the above proposition, we hold that no disallowance of interest expense claimed by the assessee can be made on account of investments as discussed above. Hence, we reverse the order of the authorities below. The AO is directed to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

32. The third issue raised by the assessee is that Ld. CIT (A) erred in deleting the addition on account of labor expenses amounting to Rs. 7,03,801/- being 25% of the total labor expenses of Rs. 28,15,202/-

33. We have heard the rival contentions and perused the materials available on record. At the outset, we note that in the similar facts and circumstances, we have deleted the addition made by the authorities below in ITA number 1075/A/16 vide paragraph number 16 of this order. Therefore, the same reasoning will also be applied for the impugned issue under consideration.

33.1 In addition to the above, we also note that the ad-hoc disallowance is not allowed when assessee has submitted all the supporting documents related to labour charges such as PAN, address, nature of work done and justification of the rate charged. The Revenue was expected to point out the specific defect in the details filed by the assessee before resorting to making the ad hoc disallowance. Accordingly, we direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

33.2 In the result the appeal of the assessee is allowed.

34. In the combined result both the appeals of the assessee are allowed.

Order pronounced in the Court on 01/03/2019 at Ahmedabad.

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