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Cosmos Forgings Limited v/s Dcit, Circle-2(3), Hyderabad

    ITA No. 2/Hyd of 2017

    Decided On, 19 September 2018

    At, Income Tax Appellate Tribunal Hyderabad


    For the Appellant: P. Murali Mohana Rao, Advocate. For the Respondent: J. Siri Kumar, Advocate.

Judgment Text

S. Rifaur Rahman, A.M:

1. This appeal filed by the assessee is directed against the order dated 30/06/2016 of CIT(A) - 9, Hyderabad for AY 2011-12.

2. Brief facts of the case are, the assessee company engaged, in the business of trading in steel, filed its return of income for the A.Y. 2011-12 on 30.09.2011 admitting total income of Rs. 42,62,570/- under normal provisions of Income Tax Act, 1961 ( in short 'the Act') and book profit under section 115JB of Rs. 28,.69,695/-., which was processed u/s 143 (1) of the Act. Subsequently, the case was selected for scrutiny and notice u/s 143(2) was issued, against which, the assessee filed the information as called for.

2.1 From the P&L A/c during the year under consideration, AO noticed that the assessee recorded sales of Rs. 1259,84,89,400/- as against the purchases of Rs. 1251,43,77,442/- and there is no opening stock nor closing stock of material in which the assessee supposed to have traded in. He noted that the gross profit of the assessee worked out to Rs. 8.41 crores i.e. 0.67% OF THE SALES. He also noticed that in P&L A/c the assessee debited selling and administrative expenses of Rs. 23,94,121/- and financial expenses of Rs. 7,66,83,929/-. The profit before tax was shown at Rs. 15,53,695/- which works to a meagre 0.01% of the sales.

2.2 The AO asked the AR of the assessee to submit the complete details of parties from whom the assessee purchased its material and also to whom it had sold. The details submitted by the assessee were extracted by the AO in his order at pages 2 & 3 of his order. After examining the said details, the AO observed that the assessee did its business with only few parties and majority of them are its group companies. Admittedly, the assessee is in the trading of steel and surprisingly, the assessee with such huge turnover, did not debit any expenditure on account of material handling charges or transport charges or labour charges or any other expenditure that is related to the actual delivery of the traded goods. When asked to explain, the AR of the assessee filed a note which was extracted by the AO at page 3 of his order and the same is reproduced below:

"The company makes bulk sales and purchases based on pre- orders from its customer basis. The purchases are made only after the company receives confirmed orders from its customers. Once the orders are received, the company makes enquires and procures the material from the lowest quoting party. Once the purchase party is firmed up, we raise our purchase order on our supplier and request the supplier to directly deliver the goods to our customer. We raise the invoices and the material is directly received by our customer without reaching our premises based on our instructions. As the material does not touch our premises at the points of purchase or sale, we do not have any loading, unloading, transportation charges which are borne by the supplier and the customer at their respective places and we do not book any such charges".

After considering the submissions of the AR of the assessee, the AO held that the facts of the assessee company clearly establish that it is a mere paper company which is not dealing in real trading activity as claimed, therefore, the financial charges claimed by the assessee of Rs. 7,66,83,929/- were disallowed.

3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A).

4. After considering the submissions of the assessee, which were extracted in his order at pages 8 to 13, the CIT(A) observed that the AO has discussed the issue elaborately as to how the assessee is not conducting any trading activity and hence, the financial charges of Rs. 7,66,83,299/- debited to the P&L Account are disallowed. The CIT(A) held that the assessee failed to rebut the conclusions of the AO with any cogent evidence and hence, the action of the AO is justified in disallowing the said amount of Rs. 7,66,83,299/-.

5. Aggrieved by the order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal:

"1. The Ld. CIT (A)-9 has erred in both in law and on facts in passing the appellate order upholding the Assessment order passed by the AO u/s 143(3) for the AY 2011-12.

2. The Ld. CIT (A)-9 ought to have appreciated the fact that the assessee is maintaining the books of accounts and the same are audited by a qualified Chartered Accountant under the provision of 44AD of the Income Tax Act, 1961.

3. The ld. CIT (A)-9 erred in not appreciating the fact that the assessee company incurred the expenditure exclusively for trading activity related to business activity only but not for any unrelated activity.

4. The Ld. CIT (A)-9 Hyderabad erred in disallowing a sum of Rs. 7,66,83,299/- towards bank charges (Bill Discounting).

5. The Ld. CIT (A)-9 erred that the company has not debited any expenditure related to the actual delivery of goods.

6. The Ld. CIT (A)-9 erred in treating the company as Paper Company on the ground that here is no trading activity done by the company.

7. The Ld. CIT (A)-9 erred in concluding that no business activity is conducted merely on the ground that no expenditure is incurred relating to the activity of delivery of traded goods.

8. The Ld. CIT (A)-9 ought to have appreciated the fact that the assessee is having proper ledger accounts in respect to each of the trade creditor.

9. The CIT (A)-9 ought to have appreciated the fact that the Letter of Credit proceeds were utilized for payment of various trade creditors."

10. The Ld. CIT (A)-9 ought to have appreciated the fact that the issue of disallowance of financial charges in the Assessee' 5 own case of M/s Global Forgings Ltd. by the AO for the AY 2011-12, was deleted by the honorable ITAT, Hyderabad vide order in ITA No. 1269/Hyd/2014.

11. The assessee may add, alter or modify or substitute any other point to the Grounds of appeal at any time before or at the ume of hearing of the appeal."

6. The assessee has raised 11 grounds of appeal, the sum and substance of which is against the disallowance of a sum of Rs. 7,66,83,299 towards bank charges (bill discounting).

7. Before us, ld. AR of the assessee submitted that the financial charges were incurred on a letter of credit granted by various financial institutions and the letter of credit proceeds were utilized for payments to various trade creditors and for these services, the amounts charged by the banks were shown under the head 'financial charges. He submitted that the assessee furnished the bank account copies and other evidences before the AO to accept the financial charges of Rs. 7,66,83,299/-. But, the AO rejected the submission and disallowed the said financial charges on the ground that the assessee was a mere paper company which was not dealing any real trading activity. He submitted that books of account, proper ledger accounts have been maintained with respect to each of the trade creditor. Letters of credit which are from reputed Banks/ Financial institutions regarding the amount of discounting charges have been filed. He submitted that these expenses on discounting charges, charged by the financial institutions was incurred in the normal course of business and they are verifiable.

7.1 He submitted the above issue of disallowance of financial charges is already covered in assessee's own case (formerly known as M/s Global Forgings Ltd.) for the AY 2010-11 wherein ITAT vide ITA No. 1269/Hyd/2014, order dated 26/11/2014, has dismissed the appeal of the revenue and upheld the order of CIT(A), who deleted the disallowance of financial charges. A copy of the said order is available on record. He submitted the following documents in the paper book, which were already filed before the revenue authorities:

1. Copy of auditor's report - pages 1 to 14.

2. Copy of tax audit report - pages 15 to 27

3. Statement showing details of financial charges, receipts and utilization of LC proceeds - pages 28-29

4. Copy of bank statements evidencing the payments of LC proceeds - pages 30-48

5. Copy of break up of purchases - at page 49

6. Copy of break up of sales - page 50

7. Details of financial charges - pages 60 to 62

8. The ld. DR, on the other hand, relied on the orders of revenue authorities.

9. Considered the rival submissions and perused the material on record. On perusal of the documents filed by the assessee, we are of the view that the assessee established the fact that it incurred the financial charges during the course of its business, which are genuine. Moreover, in its own case (formerly known as M/s Global Forgings Ltd. (supra), similar issue came up for consideration before the Tribunal and the Tribunal dismissed the appeal of the revenue by holding as under:

"15. We have heard the arguments of both the sides and also perused the relevant material on record. As can be seen from the impugned order of assessment, the Assessing Officer has not disputed the fact that the assessee has incurred the expenditure in question. The only reason for the disallowance made by the Assessing Officer was that the assessee has incurred the expenditure, while discounting the bills from outside parties and providing goods to its sister

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concerns on credit basis. In our view, the conclusion. drawn by the Assessing Officer is based on mere presumptions and surmises, rather than evidence. It is evident from the discussion made by the Id CIT(A) in the impugned order, extracted above, the expenditure incurred by the assessee is fully supported by evidence and also certified by banks and financial institutions. That being the case, there cannot be any reason to doubt the genuineness of the expenditure. In this view of the matter, there being no infirmity in the order of the learned CIT(A), we do not find any reason to interfere with the same. We accordingly reject the grounds of the Revenue in this appeal." As the issue under consideration is materially identical to that of the said case, following the decision therein, we set aside the order of the CIT(A) and direct the AO to delete the disallowance of Rs. 7,66,83,299/- made towards bank charges. Accordingly, the grounds raised by the assessee are allowed. 10. In the result, appeal of the assessee is allowed.