The issue under consideration is whether disallowance made against the foreign expense incurred for the foreign travelling of the officer is justified in law?
ITAT states that, the assessee had debited a sum on account of foreign travelling expenses for Europe visit and a sum on account of foreign travel for travelling to London. The assessee was asked to justify the business nexus of these foreign trips for the purpose of allowability by the ld. AO. The assessee submitted the ledger account alongwith copy of invoices issued by the travel agent. The ld. AO observed that all the three persons travelled to the same location i.e. Bombay to London during Europe visit. The ld. AO observed that assessee could not produce any other evidences to substantiate the business nexus by proving the purpose of visit by its Directors to these foreign countries and benefits derived by the assessee company thereon pursuant to such visits. Accordingly, AO disallowed a sum towards foreign travel expenses as not meant for the purpose of business of the assessee in the assessment. ITAT find that the assessee had stated before the ld. CIT(A) that these foreign trips were undertaken after due approval of the Board and were clearly for the purpose of business. It was pleaded that assessee company was having substantial export business in United Kingdom and further the assessee wanted to promote the sale of Soya – DOC- Hypro, which was a new variety of DOC (DE Oiled Cake) developed specially for the European market and introduced for the first time during the F.Y.2009-10 by the assessee. The assessee further pleaded that the turnover of Soya DOC Hypro have gone up substantially from F.Yrs 2009-10 to 2010-11 which was possible only as a result of these foreign visits wherein the Directors were able to promote the product of the assessee company in the European market. ITAT find that the ld. CIT(A) after verifying the Board resolution and appreciating the fact that turnover has substantially increased during the year under consideration pursuant to the said foreign visits observed that assessee had duly established the business nexus thereon and accordingly, deleted the disallowance made by the ld. AO. It is not in dispute that Soya DOC Hypro was a new variety of DE oiled cake developed specially for the European market by the assessee and the same has been launched for the first time during the F.Y.2009-10. Hence, this product required to be promoted in the European market for which the Directors of the assessee company had visited the relevant foreign country. It is also not in dispute that the turnover has substantially increased during the year as compared to the earlier year. This goes to prove that the benefits derived by the assessee pursuant to such foreign receipts by its Directors stands established by the business nexus. Hence, ITAT do not find any infirmity in the action of the ld. CIT(A) granting relief to the assessee. Accordingly, the appeal filed by the revenue is dismissed.
FULL TEXT OF THE ITAT JUDGEMENT
These cross appeals in ITA No.1631/Mum/2016, 1731/Mum/2017 and 2634/Mum/2017 for A.Y.2011-12 & 2012-13 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-13, Mumbai in appeal No.CIT(A)-13/DCIT-7(1)(2)/506/2015-16, CIT(A)-13/DCIT-7(1)(2)/572/2015-16 respectively dated 22/01/2016 & 13/01/2017 respectively (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 20/10/2014 & 19/03/2015 by the ld. Dy. Commissioner of Income Tax – 6(3) & 7(1)(2), Mumbai (hereinafter referred to as ld. AO).
ITA No.1631/Mum/2016 (A.Y.2011-12) – Assessee Appeal
2. The ground Nos. 1 & 2 raised by the assessee was with regard to the action of the ld. CIT(A) confirming the disallowance for rent expenditure of Rs.15 lakhs and society maintenance charges of Rs.65,039/- and Rs.1,69,374/- paid to Mrs. Chitra Agarwal by invoking provisions of Section 37 as well as Section 40A(2)(b) of the Act.
3. We have heard rival submissions. We find that the ld. AR stated that this issue is covered in favour of the assessee by the orders passed in assessee’s own case in earlier years by the ld AO. Per contra, the ld. DR argued that no evidence was produced by the assessee for rent paid to Mrs. Chitra Agarwal in respect of flats owned by her and no records of usage by the company executives were produced by the assessee. Hence, the ld. DR argued that business nexus was not proved by the assessee warranting allowability of the same as revenue expenditure. The primary facts as stated in the orders of the lower authorities are not in dispute and hence, the same are not reiterated herein for the sake of brevity. The nature of payment made by the assessee are not in dispute. We find that the ld. AR placed on record the copy of the assessment orders in assessee’s own case for A.Yrs 2006-07 to 2010-11 passed u/s.143(3) of the Act on various dates wherein similar payments of rent and society maintenance charges were made by the assessee to the persons specified u/s. 40A(2)(b) of the Act. We find that no disallowance was made by the ld. AO in any of the above mentioned assessment orders in respect of the subject mentioned payments either u/s.37 or u/s. 40A(2)(b) of the Act. Both the parties agreed that there is no change in the facts and circumstances of the case with regard to the subject mentioned issue during the year under consideration. Hence, there is no need for the revenue to take a divergent stand during this year alone. Following the principle of consistency as approved by the decision of the Hon’ble Supreme Court in the case of Radhasaomi Satsang vs CIT reported in 193 ITR 321, we direct the ld. AO to delete the disallowance made on account of rent payment and society maintenance charges. Accordingly, the ground Nos.1 & 2 raised by the assessee are allowed.
4. The ground No.3 raised by the assessee is with regard to determination of net profit of Bhilai Unit by adopting 5% of turnover thereon. We find that the ld. AR fairly stated that he is agreeable for adoption of 5% net profit in respect of its Bhilai Unit and hence, this ground raised by the assessee is dismissed.
5. The ground No.4 raised by the assessee is challenging the disallowance made u/s. 40A(2)(b) of the Act in respect of Bhilai Unit amounting to Rs.46,896/-. Since we have already held that the net profit of Bhilai unit should be determined at 5%, there cannot be any further disallowance / addition towards business expenditure or business income to the said estimated net profit. Accordingly, the ground No.5 raised by the assessee is allowed.
6. The ground No.5 raised by the assessee is challenging the action of the ld. CIT(A) confirming the disallowance of Rs.4,93,454/- made u/s.14A of the Act.
6.1. We have heard rival submissions. We find that the assessee had earned exempt income of Rs.1,575/- and had voluntarily disallowed a sum of Rs.1,40,392/- u/s.14A of the Act in the return of income. The ld. CIT(A) observed that no working for the same was given for arriving at the said disallowance by the assessee. The ld. AO applied computation mechanism provided in Rule 8D(2) of the rules and made disallowance of Rs.3,53,062/- over and above the voluntary disallowance of Rs.1,40,392/-made by the assessee. This action of the ld.AO was upheld by ld.CIT(A). We find that the law is now very well settled that the disallowance u/s.14A of the Act should be restricted only to the extent of exempt income. Reliance in this regard is placed on the decision of Hon’ble Delhi High Court in the case of Joint Investment Pvt. Ltd., reported in 372 ITR 694. The relevant operative portion of the said judgement is reproduced herein:-
“9. In the present case, the AO has not firstly disclosed why the appellant/assessee’s claim for attributing Rs.2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee’s claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO – an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs.52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.”
6.2. Respectfully following the aforesaid decision, we direct the ld. AO to restrict the disallowance only to the extent of Rs.1,575/- being the exempt income. Accordingly, the ground No.5 raised by the assessee is partly allowed.
7. The ground No.6 raised by the assessee is general in nature and does not require any specific adjudication.
8. In the result, the appeal of the assessee for A.Y.2011-12 in ITA No.1631/Mum/2016 is partly allowed.
ITA No.2674/Mum/2016 (A.Y.2011-12) Revenue Appeal
9. The ground Nos.2 & 3 raised by the revenue are with regard to deletion of disallowance of salary paid to Mr. Sandeep Agarwal and Mrs. Chitra Agarwal by the assessee by invoking provisions of Section 40A(2)(b) of the Act. We find that similar payments were made by the assessee in earlier years and no disallowance was made by the ld. AO while framing scrutiny assessments as is evident from assessment orders for A.Yrs 2006-07 to 2011-12 placed on record by the ld. AR. Following the principle of consistency as approved by the decision of the Hon’ble Supreme Court in the case of Radhasaomi Satsang vs CIT reported in 193 ITR 321, we direct the ld. AO to delete the disallowance made on account of salary payments to Mr Sandeep Agarwal and Mrs Chitra Agarwal. Accordingly, the ground Nos. 2 & 3 raised by the revenue are allowed.
10. The ground No.5 raised by the revenue is challenging the action of the ld. CIT(A) deleting the addition made on account of disallowance of interest expenses, raw material purchases and VAT reimbursement pertaining to Bhilai Unit. We find that we have already held in ground No.3 of assessee appeal that in respect of Bhilai unit, net profit thereon would be estimated at 5% of the turnover. Once net profit is estimated as a percentage of turnover, there cannot be any further addition towards any regular business expenditure. Accordingly, the ground No.5 raised by the revenue is dismissed.
11. The ground No.4 raised by the revenue is challenging the action of the ld. CIT(A) deleting the addition made on account of disallowance of foreign expenses of Rs.8.64 Lakhs. We find that the ld. AO observed that the assessee had debited a sum of Rs.6,94,068/- on account of foreign travelling expenses of Shri Amit Agarwal for Europe visit and a sum of Rs.1,70,511/- on account of foreign travel of Shri Sandeep Agarwal and Mrs. Chitra Agarwal for travelling to London. The assessee was asked to justify the business nexus of these foreign trips for the purpose of allowability by the ld. AO. The assessee submitted the ledger account alongwith copy of invoices issued by the travel agent. The ld. AO observed that all the three persons travelled to the same location i.e. Bombay to London during Europe visit. The ld. AO observed that assessee could not produce any other evidences to substantiate the business nexus by proving the purpose of visit by its Directors to these foreign countries and benefits derived by the assessee company thereon pursuant to such visits. Accordingly, he disallowed a sum of Rs.8,64,579/- towards foreign travel expenses as not meant for the purpose of business of the assessee in the assessment. We find that the assessee had stated before the ld. CIT(A) that these foreign trips were undertaken after due approval of the Board and were clearly for the purpose of business. It was pleaded that assessee company was having substantial export business in United Kingdom and further the assessee wanted to promote the sale of Soya – DOC- Hypro, which was a new variety of DOC (DE Oiled Cake) developed specially for the European market and introduced for the first time during the F.Y.2009-10 by the assessee. The assessee further pleaded that the turnover of Soya DOC Hypro have gone up substantially from Rs.44.50 Crores to Rs.126.15 Crores from F.Yrs 2009-10 to 2010-11 which was possible only as a result of these foreign visits wherein the Directors were able to promote the product of the assessee company in the European market. We find that the ld. CIT(A) after verifying the Board resolution and appreciating the fact that turnover has substantially increased during the year under consideration pursuant to the said foreign visits observed that assessee had duly established the business nexus thereon and accordingly, deleted the disallowance made by the ld. AO. It is not in dispute that Soya DOC Hypro was a new variety of DE oiled cake developed specially for the European market by the assessee and the same has been launched for the first time during the F.Y.2009-10. Hence, this product required to be promoted in the European market for which the Directors of the assessee company had visited the relevant foreign country. It is also not in dispute that the turnover has substantially increased from Rs.44.50 Crores to Rs.126.15 Crores during the year as compared to the earlier year. This goes to prove that the benefits derived by the assessee pursuant to such foreign receipts by its Directors stands established by the business nexus. Hence, we do not find any infirmity in the action of the ld. CIT(A) granting relief to the assessee. Accordingly, the ground No.4 raised by the revenue is dismissed.
12. The ground No.1 raised by the revenue is challenging the action of the ld. CIT(A) in deleting the addition made on account of disallowance of rate difference of Rs.18,00,41,709/- in the facts and circumstances of the case.
12.1. The brief facts of this issue are that the assessee company is engaged in the business of (a) solvent extraction business having its factory located at Devas-MP and corporate office at Indore-MP. (b) Hotel business operated in the name of Welcome hotel – Rama International at Aurangabad (c) Tobacco Processing Unit at Bhilai-Tedessara and is maintaining regular books of accounts including cash book, bank book, journal, ledger, stock records and other records required to be maintained under the statute and the same are audited as per the provisions of the applicable statutes. On account of disputes amongst the shareholders and director of the Company, Mr. Sunil Agarwal, the erstwhile Director of the Company who had resigned as a Director with effect from 14/01/2000, had filed a case against the Company and its directors before the Company Law Board, Principal Bench-Delhi and based on certain complaints made by Mr. Sunil Agarwal to various statutory authorities including senior officials of the Income Tax Dept, a special audit u/s. 142 (2A) of IT Act, was conducted and the report in respect of the same was submitted by the Auditors, to the office of ld AO on 25/08/2014 and accordingly the assessment proceedings were getting time barred on 24/10/2014.
12.2. The ld. AO observed from the Special Audit report u/s.142(2A) of the Act that the assessee had debited Rs.18,00,41,709/- towards rate difference through debit note received from Mauria Merchandise division of Mauria Udyog Limited (MUL). The observation made by the Special Auditor in this regard was as under:-
“The company Laxmi Solvex, a division of Laxmi Venture India Ltd has credit Rs.18,00,41,709.54 to Maurya Merchandise ledger account during the year by debiting to purchase Soya DOC account by journal entry. The said amount of Rs. 18,00,41,709.54 has been earlier transferred to Maurya Merchandise’s ledger account from various parties to whom payments have been made. The company has produced debit note of Maurya Merchandise for purchase rate difference of Rs.18,00,41,709.54. It was informed to us that the said debit note is on account of purchase rate difference on purchase of Soya DOC made during the year. We are unable to comment on purchase rate difference of Rs. 18,00,41,709.54 charged by Maurya Merchandise in absence of market price of Soya DOC for the Financial Year 2010-11.”
12.3. The ld. AO asked the assessee to justify the expenses debited on this account vide notice dated 15/09/2014. The assessee submitted vide letter dated 01/10/2014 its submissions by enclosing copies of debit notes issued by MUL alongwith the statement of the rate difference and agreement dated 05/06/2010 between MUL and the assessee. The assessee further submitted before the ld. AO as under:-
a. The assessee had purchased soya seed of about 2.94 Lacs metric tons of the value Rs.456 Crores and sold soya seed of 2.16 Lacs metric tons of value Rs.381 Crores. The assessee contended that soya trade being very volatile and the price was based on commodity demand supply on hourly basis at NCEDEX/MCX, purchase invoice are made on provisional price and final price is determined at the end of the day. The difference in price is adjusted based on debit note raised for each month.
b. The assessee further submitted its submission vide letter dated 13/10/2014.The assessee stated that the trading arrangement with MUL was way out and solution for short term funding, made available to it on an urgent basis by using the DOC stock in the intervening period for sale in domestic market and raising funds for procurement of seeds for maximizing the volume of business. The assessee stated that it used to sell cargo of DOC to MUL when DOC production was ready and loaded on truck. The sale of cargo facilitated it to realize the amount urgently, which in turn were utilized for the payment towards fresh seed procurement. It further added that by the time the vessel is berthed and ready for stuffing and loading container, the assessee repurchased the cargo from MUL.
12.4. The assessee vide letter dated 17/10/2014 gave the profit and loss account of trading in DE Oiled Cake (DOC) with MUL and others. The ld AO had disallowed the claim of deduction towards rate difference in the sum of Rs.18,00,41,709/- by observing as under:-
“(1) The assessee failed to furnish trading account of delivery based transactions and non delivery based transaction with MUL.
(2) The assessee failed to establish that the nature of expenses debited through debit note.
(3) The assessee failed to adduce any evidence to establish the correctness of the rate difference.
(4) The assessee failed to establish that the genuineness of the expenses debited through debit note.
(5) The assessee failed to establish how there could be rate difference in view of agreement with MUL.
(6) The assessee failed to establish how the loss on account of rate difference is its expenses inspite of the specific provision in their agreement according to which all losses were to be borne by MUL and not assessee.
(7) The assessee failed to establish that it was entitled to 25% service on transaction with MUL and under such circumstance how there was huge expenses on account of rate difference.
(8) Mere submission of debit note is not sufficient to explain the correctness and genuineness of the expenses.
(9) The onus was on the assessee to establish its claim which it failed to do. Therefore the claim of the expenses of Rs 18,00,41,709.54 cannot be entertained and thus disallowed. Penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars of income is initiated separately. –
j) Without prejudice to the above, such arrangement of buy back of goods was nothing but a tool to raise finance (as admitted by the assessee in its submission filed vide letter dated 13.10.2014) on which interest has been paid in the guise of rate difference. The assessee received such finance whenever DOC is sold to MUL. Total sale of DOC during the year was 381.42 Cr throughout the year on which the assessee paid interest of Rs 18 Cr approximately in form of rate difference. The assessee did not deduct TDS on such amount. Therefore interest paid in the guise of rate difference shall not be an allowable deduction u/s 40(a)(ia). Penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars of income is initiated separately.”
12.5. Before arriving at the aforesaid conclusion, the ld. AO had also analysed the agreement dated 05/06/2010 entered into by the assessee with MUL. The ld. AO observed that as per the said agreement Laxmi Solvex, a division of the assessee-company shall procure soya seeds from the market as per specifications provided by MUL. The seeds so delivered shall be accepted by MUL, which shall not raise any claim in that regard. The assessee shall intimate the prices on the basis of NCDEX / MCX. The assessee shall process the soya seed within the agreed period and shall also safeguard and insure them. The assessee shall be entitled to a service charge of 25% of the profit. In this context, it can be seen that there cannot be any concept of rate difference as it cannot simply arise, the assessee being entitled to a fixed 25% service charge.
12.6. The assessee made a detailed written submission before the ld. CIT(A) as under:-
Ground No. -3:
Disallowance of Rs. 18,00,41,709/- in respect of DOC Trading Purchase price difference on DOC trading transaction with Mauria Merchandise a div. of Mauria Udyoq Ltd (MUL).
7.1 The Ld. A.O. disallowed the above amount of Rs. 18,00,41,709/- for lack of clarity and as per premeditated mindset and therefore has chosen to make disallowance with Two sets of Reasoning termed in the assessment order as an alternative stands, which indicates Doubts in the mind of A.O. on account of Two Opinion, spelt out by the Ld. A.O.
7.2. In the assessment order at Para 4.3(a to i) L’d A.O has chosen to state that the amount included in purchase of DOC towards rate difference is not correct and genuine.
7.3 Again at Para 4.3 (i) the L’d. A.O. has chosen to disallow the said amount, on account of non deduction of TDS treating it as Interest expenditure and therefore disallowed the amount of Rs. 18,00,41,700/-u/s. 40 (a)(ia) of IT Act.
7.4 The Ld. A.O. ought to have given an opportunity to the appellant while making disallowance under separate provisions of the Act, [Section 40(a)(ia)] as against the claim made by the appellant of the above expenditure in its ROI [U/s. 37] and therefore the disallowance is illegal and unjust therefore the same be directed to be deleted.
7.5 The L’d. A.O. ought to have considered that, assuming the said amount of debit notes of Rs. 18,00,41,709/- is towards the interest payments by the appellant Company, then
a) MUL ought to have given Business advance/Loan to the appellant Company to the extent of Rs. 100 crores for the whole year, considering the interest rate @ 18% , or (100 crores X 18% = 18 crores) OR
b) MUL ought to have given Business advance/Loan to the appellant Company to the extent of Rs. 150 crores for the whole year, considering the interest rate @ 12% (150 crores X 12% = 18 crores)
7.6 Whereas, contrary to above , MUL has not given any amount by way of Business advance/Loan to the appellant, as a matter of fact the audited accounts of the appellant shows that the appellant company has to receive the amount which was due from MUL and not payable.
7.7 The Ld. A.O. ought to have .considered following facts related to the nature of Business arrangements with MUL, which indeed are independent of each other and not related to each other.
i) The agreement between the appellant (LVIL) and Mauria Udyog Ltd. (MUL) refers to the terms & conditions of trading transaction of DOC at Commodity Exchange MCX/MCDEX and
ii) ) The debit notes of difference in rates relates to DOC trading transaction between LVIL & MUL, which are other then, the MCDEX transactions.
7.8 The Ld. A.O. ought to have considered that the agreement between MUL & LVIL is not at all relevant /related to the Debit Notes for rate difference as the A.R. in his submission No. 6 dated 13.10.2014 had clearly brought out that DOC trading with MUL does not include any transaction done at commodity exchange /MCX-NCDX.
7.9 As a matter of fact it is common knowledge that DOC is not at all dealt with at MCX-NCDX.
7.10 The Ld. A.O. while making disallowance under this head has placed reliance on one of the factor amongst several others, is the comments made by the Auditors in their report U/s. 142 (2A) of IT Act which states “we are unable to comment on purchase rate difference of Rs. 18,00,41,709/~ charged by Mauria Merchandise, in absence of Market price of Soya DOC for Financial Year 2010-11”.
7.11. The Ld. A.O. ought to have considered the details furnished by the appellant of Statement of difference in rate qua each invoice, placed on record which substantiated the market price of DOC, prevailing during Financial Year 2010-11, based on the published rate by the statutory authority for Soya/DOC trade “gOPAl^duly supported by monthly debit notes issued by MUL and the abstracts of ledger account of MUL. The same is annexed herewith.
(Annexure – 15 to 17)
7.11 The A.O ought to have considered the modus oprandi of DOC transaction between the appellant and MUL as was being explainece in the letter of the A.R of the Appellant marked as the submission No. 6 dated 13-10-2014, which is as under.
“During the year the Company has carried out trading transaction of DOC with M/s. Mauria Udyog Ltd.(MUL)
We have already placed on record the copy of Extracts of Ledger account of M/s. Mauria Udyog Ltd. as appearing in the Books of M/s. Laxmi Solvex.
On the perusal of the Extracts of Ledger account, your honour would observe that the Company has done Sales as well as purchase of DOC with M/s. Mauria Udyog Ltd.
The trading transaction has been undertaken by MUL primarily to understand and to get exposure of the soya processing and the Domestic and international Trade Practice in Soya Processed Products (DOC and Soya Oil etc).
Messrs MUL is a recognized Export House, engaged in the business of Merchant Exports and Exports of Engineering products manufactured by them. MUL has very strong business presence with customers located at Iran-Iraq and European countries.
MUL envisaged very strong synergy in taking up pursuing of dealing in processed soya products (DOC-Hypro DOC etc.) for Iran-Iraq and European Market, alongwith their existing Engineering Products Exports business.
Whilst MUL desired to get exposure to the business related to processed soya products, M/s. Laxmi Solvex, found it more beneficial to pursue sale and purchase of processed soya product entailing the raising of liquid funds urgently required for making market payment towards Soya Seed Purchases, pending the ultimate sale and dispatch of goods to the foreign buyer resulting in maximizing of the volume of solvent extraction and exports of DOC with available limited funds and other resources as explained below.
Therefore, by way of summing up the explanation for Trading Transaction between LVIL and MUL of processed soya products we explain below:-
The Flowchart stated below explains the prevailing Trade Practice followed at various stages in processed soya product trade.
On the Perusal of above Flow Chart of production of DOC at Solvent Extraction Plant and Loading of DOC on vessel for Exports it would be observed that the period of cycle from loading of goods at Factory, Loading on Rail-Rack and loading on vessel at pod, even if there is no waiting, it takes minimum 10 to 12 days. However during season time due to heavy demand of Railway-Racks in Malva region and due to heavy ship movement at Kandla Port at time it takes 19 to 27 days, by the time the Bill of Lading (proof of shipment of goods) and other documents are available for submissions and negotiations at Bank against L. C. for discounting.
The trading arrangement of LVIL with MUL was way out and solution for toe Short Term funding, made available to LVIL on an Urgent basis, by using the DOC stock in the intervening period for sale in Domestic Market and raising funds for procurement of seed for maximizing the volume of business.
Pursuant to the Trading operations between LVIL & MUL, the cargo of DOC was sold by LVIL to MUL when the DOC production was ready (duly packed) and loaded on Truck or the DOC lying at CHA warehouse at Kandla Port. The sale of cargo facilitated LVIL to realize the amount urgently towards sales proceeds from MUL, which in turn were utilized for payment towards fresh seed procurement.
By the time the vessel is Birthed and ready for stuffing and loading in container LVIL re-purchased the cargo from MUL.
The sale and purchase of cargo was done at a prevailing market price and the ownership of goods was transferred back and forth by Deliver/ Notes issued and recorded by CHA. The sales and purchase Invoices and Delivery notes issued by CHA for purchase and sale of DOC have been monitored and verified periodically by the Stock Auditors on behalf of the Bankers of LVIL.
LVIL had made payments to MUL towards purchase of DOC out of the realization of proceeds from Discounting of L.C. documents with Bank/payments received towards exports sales.
Thus the trading operations with MUL facilitated LVIL for expanding its volume of procurement of Seed, crushing of Seed and additional DOC production and exports sales within the limited available Funds & Credit facilities from Bank.
We are enclosing herewith the certificate of Chartered Accountant certifying the profit earned by the Company resulting out of trading operations of DOC for last FIVE years
Your honour would appreciate that the DOC trading operations for F.Y. 2010-11 resulted in gross profit of Rs.44.50 Lacs.
Lastly, we confirm and state that, the DOC trading transaction with MUL does not include any transaction done at Commodity Stock Exchange – MCX/NCDX.
The Ld. A.O. instead of understanding the modus operandi as per the above submission has drawn the conclusion that the said trading of DOC cargo between LVIL & MUL was pursued with the objective of raising finance and the debit notes amount relates to interest payable. Whereas, as a matter of fact, the transaction between MUL & LVIL relates to REGULAR Purchase and sale transaction of DOC, based on the customary practice followed in Soya Industry of entailing higher volume of business and consequent higher profitability. The said facts has also been explained by the appellant vide above submission and also duly supported by the statement of profit made in DOC trading. The Certificate of Chartered Accountants confirming the profitability from the Trading activities are attached.
The Ld. A.O. ought to have considered the submissions made by the A.R of the Appellant marked as No.8 vide letter dated 17/10/2014 of A.R placed on record and submitted in compliance of details desired by Ld. A.O. depicting the trading operations pursued by the appellant for the entire financial year 2010-11 which tabulated the aggregate quantity & value of DOC traded and also the specific details/bifurcation of quantity & value of DOC traded with MUL.
The Id. A.O. ought to have considered, the Memorandum P & L Account of Trading Activity for the F.Y. 2010-11 (relevant to A.Y. 20 11-12) of Soya DOC, depicting the aggregate volume of Trading Activity with bifurcation of volume of transaction with M/s. Mauria Udyog Limited (MUL) and others.
The Ld. A.O. ought to have considered, that the figures stated in the Memorandum P & L Account are derived from the Audited Financial Statements of LVIL for above years and the same has been duly reconciled. Also the Ld. A.O. ought to have considered that on the perusal of the said statements, it is observed that the Trading Operations of M/s. Laxmi Solvex Div. of LVIL has resulted into profit for the F.Y. 2010-11, similarly even if one was to consider the Trading Operations with MUL, it also has resulted into the profit for the year even after considering the rate difference allowed to the MUL.
The Ld. A.O. ought to have considered that, the appellant Company, have ensued Trading Operations of DOC Soya consistently for past several years and the operating results of the Trading Operations have been included in the Business Income offered for Tax in the Return of Income for all the years.
The Ld. A.O. ought to have considered the complete and entire submission No. 6 placed on record vide letter dated 13.10.2014 of A.R. in compliance of the details desired by the A.O., instead of following the illegal practice of “Pick & Choose what suits the most”, as the submission made by the A.R. of the appellant marked as No.6 dated 13-10-14 clearly brought out the following:
The Sale and Purchase of Cargo was done at a prevailing market price and the ownership of goods were transferred back and forth by Delivery Notes issued and recorded by CM A and these documents have been monitored by the stock Auditors on behalf of the Bankers
The ld. AO ought to have considered the evidence provided along with submission made by the A.R of the appellant marked as Submission No. 6 dt. 13.10.2014 being the confirmation in the form of Delivery Note issued by the clearing House Agent which adequately confirmed the contention of appellant that entire transaction of DOC between LVIL & MUL were en actual delivery and there were no transactions of DOC trading, without delivery of goods / DOC.
The ld. A.O. ought to have considered and relied upon all the submissions placed on record and the fact that the A.O. did not examine and relied upon the submissions made during assessment proceedings indicates and confirms the contention of the appellant that the Ld. A.O had a time constrains and therefore completed the assessment proceedings under that limitations.
The ld. AO ought to have considered, before completion of the assessment proceedings, the Submission by the A.R of the appellant marked as Submission No. 8 dated 17.10.2014 placed on record during the course of assessment proceedings. As a matter of fact the submission dated 17.10.2014 brought out the details desired by Ld. A.O. relating to profitability of trading activity of DOC, Qt & value of DOC trading as stated below:
(a) Comparative details of trading activities of DOC with Mauria Udyog Ltd. and “others” for the year ended 31.03.2011 and for the preceding yearended on 31-03-2010.
(b) The Statement depicted quantity and value of opening stock, purchases, sales, closing stock and grass profit in respect of trading activities of Soya DOC with Mauria Udyog Ltd. and “others” for the year ended 31.03.2011 and for the preceding year ended on 31-03-10. : The statement depicted the bifurcation of Qt & value of DOC traded with MUL & others for the year ended 31 .03.201 1 and for the preceding year ended on 31-03-2010.
9. The ld. AO ought to have considered the discussion which took place with the ld. AR of the appellant during the hearing held on 17th October, 2014 when after taking on record the submission made by the A.R. of the appellant marked as submission No.8 dated 17/10/2014 the same was reconciled with the value & quantity stated in the Audited Accounts / Tax Audit Report for the F.Y. 2010-11 submitted along with the ROI and lying in assessment records of A.O. The reconciliation brought out adequate clarity that the quantity purchased being more than the quantity sold during the year and the balance quantity out of the purchases made, were lying in closing stock which also was reconciled with quantity & value of closing stock stated in Audited Statement of Accounts for the year ended on 31-3-14.
The submission made by the A.R of the appellant marked as Submission No. 8 dt 17.10.2014 clearly brought out that the statement annexed to the submission, contained aggregate volume of trading of DOC with bifurcation of the trading with MUL and “others” with comparative figures of year F.Y. 2009-10, and the figures stated in the statement are and reconciled with Audited Accounts, and the trading activity of DOC has resulted in profits.
10. The Ld. A.O. ought to have considered the fact that the appellant has not any trading activity in Soya-Seed and submission made by the appellant marked as the submission No. 8 dated 17,10.2014 out adequate clarity that the trading transaction pursued by LVIL entire F.Y. 2010-11 related to DOC trading only and not soya
11. The Ld. AO ought to have considered the submission made by the A.R of the appellant marked as Submission No. 6 dated 13.10.2014, which -: the following (a) Note on sales & marketing of DOC and (b) Note transaction of sale & purchase of DOC with MUL.
a. The annexed notes to the submission made by the A.R of the appellant marked as submission No.-6 dated 13.10.2014 placed on record brought out clarity on business profile of MUL and the reasons and basis of trading transaction between MUL & LVIL which reads as under:
b. “The trading transaction has been undertaken by MUL primarily to understand and to get exposure of the soya processing and the Domestic and International Trade Practice in Soya Processed Products (DOC and Soya Oil etc.)
c. Messrs MUL is a recognized Export House, engaged in the business of Merchant Exports and Exports of Engineering products manufactured by MUL has very strong business presence with customers located at Iran-Iraq and European countries.
d. MUL envisaged very Strong Synergy in taking up pursuing of dealing in processed So/a products (DOC-Hypro DOC etc.) for Iran-lraq and European Market, along with their existing Engineering Products Exports business.
e. Whilst MUL desired to get exposure to the business related to processed Soya products, M/s. Laxmi Solvex, found it more beneficial to pursue Safe and Purchase of processed Soya product entailing the raising of liquid funds urgently required for making market payment towards Soya Seed purchases, pending the ultimate sale & dispatch of goods to the foreign Buyer resulting in maximizing of the volume of Solvent Extraction and Export of DOC with available limited Funds and other resources.
f. The Ld. A.O. though chose to rely upon the submission made by the A.R of the appellant marked as submission No. 6 dated 13.10.2014, when he opted to make additions on alternate ground [refer Para-J Page-9 of the assessment order] “such arrangement of buy back of goods was nothing but a tool to raise finance as admitted by the assessee in its submission filed vide letter dated 13.10.2014 on which interest has been paid in guise of rate difference”. However the Ld. A. O. completely ignored to give cognizance to the other contents of the same submissions as brought out in preceding Para’s without any confrontation or basis for the same.
12. The Ld. A.O. ought to have realized that the A.R. of the appellant submitted the details of Names & Address of Creditors & Debtors (including Name & Address of MUL) for the first time vide the submission by the A.R of the appellant marked as Submission No. 5 dated 7.10.2014, whereas at Para (b) of Page-5 of the assessment order, it is brought out erroneously that the MUL did not comply with the Notice U/s. 133 (6) dated 1.10.2014.
13. The Ld. A.O. ought to have considered the copy of ledger extracts of the Account of MUL in the books of LVIL along with submission made by the A.R of the appellant marked as submission made by the A.R of the appellant marked as Submission No.8 dated 17,10.2014, which contained complete details of transactions between MUL & LVIL for F.Y. 2010-11.
14. The Ld. A.O. ought to have considered the fact that , the DOC is not dealt with at MCX/NCDX and therefore the difference in rates of purchase of DOC by LVIL from MUL did not relate to any transaction of DOC purchase on NCDX / MCX and accordingly, the terms and conditions referred in the assessment order at Para (c) Page-5-6-7 & 8 [assuming for argument sake thought not acceptable on account of the veracity with facts] are not at all relevant, the Note explaining the submission No. 6 dated 13.10.2014 conforms the contention of LVIL that “DOC trading transaction with does not include any transaction done at commodity stock exchange – MCX/NCDX.
15. The Ld. A.O. ought to have considered (a) the details of trading account of MUL & others which were delivery based & that there were No paper transaction of DOC trading, which were without actual delivery of goods, the documents evidence in the delivery of the goods have been disregarded, (b) The copies of Debit Notes, working of rate of difference, the working of rate difference in each invoice, the complete Ledger Extracts of MUL A/c in the books of LVIL, all these documents brought out clarity and established the nature of expenses debited through Debit Note, and the correctness of the rate difference as per the statement of rate difference charged in each invoice (c) the ledger account giving complete transaction and the confirmation of balance provided and other verification carried out while conducting the Special Audit u/s.142(2A) established the genuineness of the expenses debited (d) the non-relevance of agreement between MUL & LVIL for MCX/NCDX transaction , so far it related to debit notes of rate difference (e) it is evident and established that despite considering the rate difference amount the DOC trading resulted in profit and therefore it is incorrect to consider that there is loss on account of rate difference, (f) the 25% service charge on transaction value is distorted understanding of the clause of the agreement between LVIL and MUL, it talks of the 25% service charge on the profits and secondly the agreement refers to the transaction with MUL on MCX & NCDX, whereas the transaction DOC trading, considered by Ld. AO ‘is not referred/covered by the said agreement, (g) the entire explanation vide Submission No. 6 dated 13.10.2014, & Submission No.8 dated 17.10.2014 including complete quantity tally & reconciliation of the trading, the invoice vice details of rate difference all these composite details, very well established with documentary evidence the correctness & genuineness of the expenses debited as per the debit notes of rate difference.
The Ld. A.O. has made additions & disallowance on account of discount allowed of Rs. 18,00,41,709/-, based on pre-meditated assumptions, conclusions and surmises and therefore the same is not sustainable and accordingly the same may be directed to be deleted.”
12.7. The ld. CIT(A) granted relief to the assessee by observing as under:-
5.3 Decision – I have carefully considered the AO’s order and the appellant’s submissions. Before proceeding further, it would be essential to understand the two business activities involved herein, viz. crushing of soya seeds and trading of DOC. Soya seeds – which are quoted on MCX / NCDEX (and whose prices fluctuate dynamically) – are purchased and crushed in industrial units. DOC (which is always soya DOC) is a byproduct of the crushing process and is in turn traded separately as a commercial item. It is quoted dynamically by SOPA. DOC is usually used as chicken-feed in European and American markets and is hence exported. Chicken-feed in the Indian market usually consists of cheaper alternatives such as gram. On receipt of soya seeds at the factory, there are subjected to crushing. The entire process of crushing lasts about a week. The resultant DOC is packed and dispatched for stuffing on ships. This entire process lasts about three weeks as the DOC has to be loaded onto trucks, transported to ports, unloaded from the trucks and loaded onto the ship. DOC (which is a finished product in its own right) is usually traded all along the three-week period – till it is stuffed – on the basis of the consignment documents provided by the CHA. This trade in turn provides finance for purchase of further soya seeds which are quickly crushed in a week to commence another three-week cycle of dispatch and eventual trading of DOC. These twin businesses of crushing of soya seeds and trading of DOC are hence peculiarly interdependent.
5.3.1 The appellant crushes soya seeds on behalf of MUL as well as on its own behalf. Insofar as DOC trading is concerned, it is carried out with regard to the DOC arising from the crushing of its own soya seeds, apart from the general trading of DOC emanating from other crushing units. The trade in DOC is hence carried out with several parties, MUL being just one of them.
5.3.2 According to the appellant, the final year-end debit note (which was preceded by monthly notes) indicates the difference in its DOC trading account with MUL, the total of such trade during the relevant previous year being Rs. 381.42 crores. According to the appellant, the AO has applied facts relating to the soya seeds crushing business to the DOC trading business and has come up with erroneous conclusions. It would be hence instructive to deal with all the objections of the AO in seriatum, as they appear in his order, since he has finally based his addition thereon.
188.8.131.52. The AO has commenced his exercise by quoting from the Special Audit report, whose exact words are as follows: “We are unable to comment on the purchase rate difference of Rs. 18,00,41,709.54 charged by Maurya Merchandise in the absence of the market price of Soya DOC for the financial year 2010-11”. In my considered opinion, this comment simply indicates the absence of data for purposes of comparability. Thus, the AO could have obtained the said data from SOPA and actually carried out that exercise himself. In other words, this comment by itself does not lead to any conclusion of wrongdoing on part of the appellant.
5 3 2.2 According to the AO, the appellant had contended that soya trade was very volatile and that the price fluctuates every hour on MCX / NCDEX. The purchases are made on a provisional basis and that the final price is determined at the end of the day. In my opinion, it is clear that the appellant was referring to the trade in soya seeds, whereby soya seeds are purchased for the purposes of crushing and not to the trade in DOC. It would hence be incorrect to take this allusion in the context of DOC, it having never been & quoted on MCX/NCDEX.
184.108.40.206 According to the AO, the appellant had failed to provide the details of the DOC trade done on the basis of actual delivery. It is by now clear that DOC trading is not done on the basis of actual delivery. As the ownership of goods loaded onto trucks changes hands on the basis of endorsement on documents issued by the CHA, this could be more accurately termed as being a case of ‘constructive delivery’. Hence, in my considered opinion, failure of the appellant to furnish the details of actual delivery-based DOC trading is really no failure as the trade itself is carried out on the basis of constructive delivery.
220.127.116.11 According to the AO, the appellant had repurchased soya seeds once they were ready to ship. In my opinion, he is clearly in error as the appellant has all along dealt and even repurchased DOC if required, but never soya seeds.
18.104.22.168 While the appellant speaks of DOC in one submission, it speaks of soya seeds in another, thus completely contradicting itself, In my considered opinion, there is no contradiction here, as both these lines of business activities are distinct and separate
22.214.171.124 According to the AO, as per the debit note, MUL was a manufacturer of LPG cylinders, valves and regulators. As such it was not connected with either “trading of soya seeds or with DOC”. According to the appellant, the debit note briefly mentions the manufacturing activities of MUL. Its trading activity -carried out by its trading division viz. Maurya Merchandise – was simply not mentioned on the debit note. This by itself cannot be proof that MUL was not engaged in crushing (not trading) of soya seeds or in trading of DOC. After careful consideration, I am inclined to agree with the appellant.
126.96.36.199 According to the AO, there was no response to the notice under section 133(6) of the Act issued to MUL on 1st October 2014. Here, the appellant has come with a serious counter filing a copy of its letter 7lh October 2014, wherein it had provided the name and address of MUL. Thus, it was contended that the AO could possibly not have sent any notice under section 133(6) of the Act, in the absence of its address, which was provided to the AO only later. In my opinion, even if this counter were to be disregarded for a moment, the AO had neither brought this to the appellant’s notice nor had he insisted on production of MUL. In these circumstances, after due consideration, I am inclined to disregard this observation of the AO.
188.8.131.52 According to the AO, it is not possible for MUL to issue a debit note, since the agreement between MUL and the appellant was so structured that the appellant was to get a 25% service charge and all losses were to be on account of MUL. To my mind, this observation is irrelevant as the AO has lost sight of the fact that the agreement in question was for crushing of soya seeds while the debit note in question was raised for trading of DOC.
184.108.40.206 To conclude, according to the AO, the appellant had failed to establish its claim on account of the debit note, due to which he had summarily added the entire amount of Rs. 18 crores mentioned therein.
5.3.3 From the discussion in the above paragraphs, it would become clear the debit note in question arose on account of trading transactions of DOC with MUL. It did not arise either as a result of crushing of soya seeds or pursuant to the agreement with MUL. In fact, there has never been any agreement for trading in DOC, it being simply a case of purchase and sale. On the other hand, it is the AO who has clearly confused the crushing of soya seeds and the underlying agreement with trading in DOC. After careful consideration, I am inclined to reject the arguments of the AO and his conclusion, finding it lacking in foundation.
5.3.4 Coming to the alternate ground of the AO of violation of provisions of section 40(a)(ia) of the Act, once more his logic is seen to be flawed. He has inferred an element of interest of Rs. 18 crores by way of the debit note, relying on the argument of the appellant that DOC trading met the needs of the appellant of short-term funding. The debit note simply reflects the difference in the running account of purchase and sale of DOC. In any case, there can possibly not be any interest of Rs. 18 crores paid on a principal amount of Rs. 18 crores. His act of alternatively invoking the provisions section 40(a)(ia) of the Act is hence held to be unsustainable.
5.3.5 In view of the detailed discussion in the preceding subparagraphs, the entire addition of Rs. 18,00,41,709/- on account of difference by way of the debit note is hereby deleted. Ground no. 3 is accordingly allowed.
12.8. Aggrieved, the revenue is in appeal before us.
12.9. We have heard rival submissions and perused the materials available on record. From the facts narrated above, we find that the assessee had entered into an agreement with MUL on 05/06/2010. The preamble to the said agreement and the relevant clauses which drives the operation of the said understanding are as under:
A. MUL is a company engaged in the business of Manufacturing and Export of Engineering products and dealing in commodities including exports of merchandise.
B. Laxmi Solvex has a solvent extraction plant (hereinafter referred as “Processing Unit”) at Gram Durgapura, AB Road, Dewas, M.P. having an installed capacity to crush 1500 MT per day and refinery capacity of 300 MT per day capable of converting soya seed into crude-oil and soya meal.
C. Laxmi Solvex has represented to MUL that they have inhouse expertise of dealing in Soya and Other comoodities and also had during the lean season carried out the required maintenance and upkeep of the soya Processing Unit and possess the required trained and skilled manpower and is ready to operate the Processing Unit at full capacity during the entire season for the F.Y. 2010-11.
D. Laxmi Solvex has four silos having a capacity to store 3500 MT each, (i.e., 3500 x 4 = 14000 MT) of Soybean Seed and storage space of approximately 8000 MT of Soyabean in its Processing Unit. It also has an open space inside the Processing Unit premises which can be utilized to store Soyabean Seed / Soyabean De-Oiled Cake (DOC)and Oil tank / containers to store Soyabean Oil.
E. Laxmi Solvex is looking for a Business tie up to increase its volume of business/ profitability and to utilize the in house infrastructure of trained staff for Soya and Commodities and Metal Business and operate its soya Processing Unit to its full capacity and MUL having dealt with Laxmi Soivex successfully for past few years for the trading and exports of Soya seed Commodities Metals etc. and Soya products and with aview to explore profit potential of Soya Business have tied up large business commitment with Over Seas customer for exports of Soya seed Commodities & Metals and Soya products for this purpose MUL has proposed to Laxmi Solvex and parties hereto have mutually agreed to persue the Soya Seed and Soya products business and also to deal with Metals & commodities at mandi, MCDEX and MCX to heigh the risk of future market of the commodities (DOC and Oil).
F. MUL and Laxmi Solvex have had mutual discussions for the .modalities and procedures for the aforesaid purpose have been mutually discussed and agreed , upon by and between MUL and Laxmi Solvex, which they wish to record as under:
NOW IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS:
1. This Agreement shall be in force for a period from 1-4-2010. However, the liabilities and obligations of the Parties on account of transactions undertaken during the said period shall continue till the transaction is not concluded in totality with actual payment/delivery in accordance with the provisions of this Agreement.
2. Laxmi Solvex shall for the consideration stated in the Annexure appended below , procure Soya Seeds Commodities & MetaSs etc. from the mandis /traders / brokers, as per the quality specifications provided by MUL .The Soya seeds Commodities & Metal delivered shall be acceptable to MUL on as-is-where is basis and shall not raise any claim “on Laxmi Solvex of whatsoever nature or form. Laxmi Solvex undertakes to assist and provide all necessary help to MUL in obtaining the Mandi license and in resolving other Mandi related issues.
3. Laxmi Solvex shall intimate the value of the goods taking the rates from NCDEX / MCX (Spot) or any other reference rate as decided mutually and advise MUL on a weekly basis.
4. Laxmi Solvex has represented that it shall at its Processing Unit process Soya Seeds to extract Soyabean Oil (Hereinafter also referred as “Oil) and Soyabean De-Oiled Cake (hereinafter also referred as “DOC) Laxmi Solvex shall process the Soyabeen seed within the ayieed peiiuu1 uf lecelpt of Soya Seeds in the Processing Unit.
5. The Parties agree that since the Soyabean Seed as well as Oil and DOC shall be stored and processed at the Processing Unit 01 Laxmi Solvex. and Laxmi Solvex having de facto possession shall be responsible for the safeguarding of the Stock.
6. Notwithstanding the above, Laxmi Solvex shall procure adequate insurance coverage for the Oil and DOC in the Processing Unit. Laxmi Solvex shall furnish a copy of the insurance policy taken for the Oil and DOC in the Processing Unit. “
7. Laxmi Solvex agrees that if due to any unforeseen circumstance or otherwise, the Soya Seeds and/or Oil and/or DOC are required to be sold or advised by MUL to be sold in the market. The cost of sale shall be in account of MUL. The sale proceeds over and above the total outstanding shall be credited to MUL. Similarly any loss due to such sale shall be to the account of MUL.
8. Laxmi Solvex shall be entitled to hedge the proportionate quantity of Soya Seeds/Oil/DOC and other commodities & metals to recoup the amount from mandi / NCDEX / MCX and any losses due to such sale and cost of selling the goods shall MUL.
Laxmi Solvex also entitled to pay the margin, settle the amount \ quantity \ quality of material on account of MUL and the final loss / gain shall be settled/pay/receive through account.
9. MUL representative(s) shall supervise the entire process from the time the quantity of Soya seed requisitioned by Laxmi Solvex, to the entire process of procurement, receipt of seed, storage of seed and processing of seed stocking, crushing and other incidentals. The parties agree that crushing of seeds shall be the sole responsibility of Laxmi Solvex.
12.10. We find that the ld. DR pointed out that Point No.2 and Point No.9 of the aforesaid agreement assumed vital importance wherein it had been categorically agreed between the parties that there cannot be any loss or claim that would fall on the assessee pursuant to this agreement. But from the close reading of the said agreement, we find that the same has been entered into only for Soya bean crushing as is evident from the preamble to the agreement reproduced hereinabove. The De-Oiled Cake (DOC) is the only by- product which emanates out of the Soya bean crushing. We find from the reading of Clause-2 of the said agreement that assessee shall not entertain any claim whatsoever, in respect of Soya seeds commodities and metals (soyabean) from MUL. The said clause nowhere prohibited entertaining any claim by the assessee from MUL in respect of DOC trading. We find that the ld. DR placed heavy reliance that the rate difference of Rs.18,00,41,709.54 had fallen on the assessee to be absorbed as an expenditure pursuant to the aforesaid Clause No.2 of the said agreement. In our considered opinion, we find that the said Clause No.2 nowhere mentioned about DOC trading and accordingly assessee had to entertain claim towards rate difference in respect of DOC trading in sum of Rs.18,00,41,709.54. We find from the perusal of the debit notes raised every month on the assessee towards rate difference which are enclosed in pages 1-12 of the paper book, the same were raised by MUL on the assessee only towards sale of DOC and not soya bean. The said debit notes are also supported by the detailed workings on day to day basis duly representing the sale of DOC in quantity as well as rate and the rate difference thereon on each date. These documents are enclosed in pages 14 to 17 of the paper book filed before us. Hence, we categorically hold that reliance placed by the Revenue on Clause-2 of the said agreement basing which no claim shall be raised by MUL on the assessee deserves to be dismissed.
12.10.1. We find that the entire modus operandi of the said business has been explained in detail, which fact is not disputed by both the parties before us. We also find that the ld. AO had drawn an adverse inference against the assessee by observing that notice u/s.133(6) of the Act sent to MUL was not responded by MUL. We find that the entire modus operandi on DOC trading has been elaborated in para 5.2.2. of the order of the ld. CIT(A) as submitted by the assessee thereon. The rates for DOC trading have been determined by SOPA (Soyabean Processors Association of India) a non-profit organization, which is dedicated to the progress and welfare of the soya sector. We also find that the ld. CIT(A) in para 5.3 of his order had explained the manufacturing process of crushing of soya seeds and way in which the resultant by- product i.e. DOC is traded within the available time gap of three weeks which is also capable of raising finance to the assessee. The ld. CIT(A) had given a categorical finding that crushing of soya seeds and trading of DOC are independent twin businesses. With regard to comments made by the Special Auditor, the ld. AR stated that the rates were indeed available in SOPA for the DOC trading but the Special Auditor was not willing to verify the same and accordingly, he was non-committal in his Special Audit Report regarding the same.
12.10.2. In the instant case, we find that the ld. CIT(A) should have asked for a remand report from the ld. AO so that the ld. AO could have understood the business model and the Modus Operandi of DOC trading business of the assessee and the said goods being available as security for earning finance for the assessee within a time gap of three weeks. Since the ld. CIT(A) had not asked for a remand report or not given proper opportunity for the ld. AO to understand the entire facts of the case, we find that the principles of natural justice have been grossly violated in the instant case. Hence, we deem it fit and appropriate, in the interest of justice and fair play, to remand this issue to the file of the ld. AO for denovo adjudication in accordance with law. The assessee is at liberty to furnish further evidences, if any, in support of its contentions. Accordingly, the ground No.1 raised by the revenue is allowed for statistical purposes.
13. In the result, appeal of the revenue for A.Y.2011-12 in ITA No.2674/Mum/2016 is partly allowed for statistical purposes.
ITA No.1731/Mum/2017 (A.Y.2012-13) Assessee Appeal
14. The ground No. I & II raised by the assessee for A.Y.2012-13 are similar to ground Nos.1 & 2 raised by the assessee for A.Y.2011-12 and the decision rendered hereinabove for A.Y.2011-12 by us would apply with equal force for A.Y.2012-13 also except with variance in figures.
15. Ground No.III raised by the assessee is similar to ground No.3 raised by the assessee for A.Y.2011-12 and the decision rendered hereinabove for A.Y.2011-12 by us would apply with equal force for A.Y.2012-13 also except with variance in figures.
16. In the result, appeal of the assessee for A.Y.2012-13 is partly allowed.
17. TO SUM UP
|ITA No.||Appeal of||AY||Result|
|2674/Mum/2016||Revenue||2011-12||Partly Allowed for statistical purposes|
Order pronounced in the open court on this 11/12/2019.