The Commissioner Of Income Tax vs M/S Lalsons Enterprises
2010 Latest Caselaw 2243 Del

              THE HIGH COURT OF DELHI AT NEW DELHI

%                                     Judgment delivered on: 28.04.2010


+            ITA 235/2005


THE COMMISSIONER OF INCOME TAX                                   ... Appellant


                                      - versus -


M/S LALSONS ENTERPRISES                                        ... Respondent

Advocates who appeared in this case:

For the Appellant       : Ms P.L. Bansal
For the Respondent      : Mr Ajay Vohra, Ms Kavita Bansal and Mr Sriram Krishna

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE V.K. JAIN

1. Whether Reporters of local papers may be allowed to see the judgment ?

2. To be referred to the Reporter or not ?

3. Whether the judgment should be reported in Digest ?

BADAR DURREZ AHMED, J (ORAL)

1. The Revenue is aggrieved by the order dated 27.03.2003 passed

by the Income Tax Appellate Tribunal in ITA 2144/Del/2002 relating to the

assessment year 1998-99. The Revenue proposed the following four

questions which, according to it, are substantial questions of law and require

determination of this Court:-

"A) Whether the ITAT was correct in law in holding that CIT had illegally assumed jurisdiction u/s 263 of the Income Tax Act?

B) Whether the ITAT was correct in law in holding that interest income of Rs17,01,974/- is eligible for deduction u/S 80 HHC of the Act?

C) Whether the ITAT was correct in law in holding that interest of Rs18,53,916/- paid to the Bank was not to be disallowed on the ground that the assessee had diverted its funds to M/s Damas Jewels?

D) Whether the ITAT was correct in law in holding that the finding of the CIT on account of addition for excess stock amounting to Rs9,59,425/- and on account of shortage of stock amounting to Rs88,26,126/- is not sustainable?"

2. Question „B‟ was common to several other appeals. The said

question was ultimately decided by virtue of a common judgment passed by

a Division Bench of this Court in ITA 166/2000 titled „CIT v Shri Ram

Honda Power Equipments on 12.01.2007. The said decision has since been

reported in 289 ITR, 475 (Del). Consequently, this Court noted in its order

dated 04.04.2007 that question „B‟ as proposed by the Revenue had already

been answered and the matter was, thereafter, listed for admission with

regard to questions „A‟, „C‟ and „D‟. The matter has been taken up from

time to time. We have now heard counsel for the parties on the proposed

questions A, C and D.

3. Proposed question „C‟ pertains to the issue of interest of

Rs18,53,916/-, which was paid by the assessee to the bank and had been

disallowed by the Commissioner of Income Tax in proceedings under

Section 263 of the Income Tax Act, 1961 (hereinafter referred to as „the said

Act‟) on the ground that the assessee had diverted these borrowed funds to

Damas Jewels and Lal Jewels. The plea of the assessee was that while it is

true that the assessee had borrowed funds from the bank and had paid

interest on the said funds, no loans were extended to M/s Damas Jewels and

that there were only mutual advances made by the assessee as well as Damas

Jewels in the normal course of business for the purposes of business.

Therefore, there was no question of disallowance of the interest paid to the

bank in respect of the funds borrowed by the assessee. Insofar as Lal Jewels

is concerned, the learned counsel for the assessee pointed out that there may

have been mutual loan transactions but, the interest payable by the assessee

was much greater than the interest due from Lal Jewels and, therefore, there

could be no disallowance on this count. The learned counsel for the assessee

respondent drew our attention to paragraphs 5, 7 and 8 of the impugned

order to indicate the stand taken by the respondent assessee before the

Tribunal. It was pointed out that the assessee had a business relationship

with Damas Jewels inasmuch as the assessee purchased pure gold from the

said concern and also got jewellery fabricated from Damas Jewels against

payment for making charges. The learned counsel drew our attention to the

fact that a copy of the ledger accounts of Damas Jewels as appearing in the

books of the assessee was placed before the Tribunal in the paper book at

pages 142-156, which would go to indicate that the amounts advanced from

time to time were in the course of business and that there was no practice

between Damas Jewels and the assessee for paying/charging interest on the

inter-party outstanding balances. With regard to the transactions with Lal

Jewels, it was submitted that the assessee had been advancing funds and/or

receiving funds from the said Lal Jewels intermittently during the year in

question and on which no interest was charged by either party. He

submitted that the non-charging of interest was on account of commercial

expediency. It was submitted that the interest, if payable, to Lal Jewels

would be Rs4,59,502/- as against the interest receivable from Lal Jewels to

the tune of Rs64,150/-. Since the interest payable would be much higher

than the interest receivable, there was no question of making any

disallowance on the interest paid by the assessee on the funds received from

the bank.

4. The Income Tax Appellate Tribunal considered the arguments

advanced by the assessee as well as on behalf of the Revenue and came to

the conclusion that the assessee had been advancing funds to Damas Jewels

from time to time and had also been receiving funds from the said party.

The Tribunal particularly noted that the departmental representative did not

controvert the submission that no interest was being charged by either party.

The Tribunal observed that the business relationship between the said

assessee and the parties was not disputed or doubted and the fact that the

advances had been made in the course of business was borne out from the

record. Thus, the Tribunal on the basis of the facts determined by it came to

the conclusion that there was no ground for the disallowance of the interest

amount. We are of the view that the findings of the Tribunal are pure

findings of fact. The Tribunal has examined the accounts of the parties in

detail and the same had been placed before the Tribunal as mentioned above

at pages 142-156 of the paper book before the Tribunal. The learned

counsel for the Revenue sought to support the decision of the Commissioner

by taking us through the order passed by the Commissioner of Income Tax,

however, we feel that the Tribunal, being the final fact finding authority, has

the final say in the matter. No perversity was pointed out by the learned

counsel for the Revenue in the findings arrived at by the Tribunal.

Consequently, proposed question „C‟ does not arise for the consideration of

this Court inasmuch as it is not a substantial question of law.

5. With regard to the proposed question „D‟, we find that it

comprises of two parts: One part deals with the excess stock amounting to

Rs9,59,425/- and the other part pertains to the alleged shortage of stock

amounting to Rs88,26,126/-. The Commissioner of Income Tax, on the

basis of the said alleged excess stock and shortage of stock had made

additions, which the Tribunal has deleted. The alleged excess of stock of

Rs9,59,425/- was in connection with the alleged excess of stock of

diamonds, whereas the alleged shortage of stock of Rs88,26,126/- was in

connection with the alleged shortage of stock of silver, silver moulds and

precious stones.

6. With regard to the excess stock of diamonds, the Commissioner

of Income Tax had taken the closing stock of diamonds in the year in

question to be Rs 19,58,332/- as against the closing stock as valued by the

assessee to the extent of Rs 29,17,757/-, which resulted in difference of

Rs9,79,225/-. According to the Commissioner of Income Tax this so called

excess of stock of Rs 9,79,225/- was funded out of the non-disclosed income

of the assessee and, therefore, the same was to be added to the assessable

income of the assessee in question.

7. The Income Tax Appellate Tribunal noted that the difference in

the closing stock, which has been indicated by the Commissioner of Income

Tax, arose on account of two circumstances. The first circumstance being

that the assessee had shown the closing stock in respect of the assessment

year 1997-98 as Rs 8,12,000/-. However, the Commissioner of Income Tax,

for the assessment year 1997-98, had reduced the closing stock to

Rs41,43,150/- and consequently there was a difference in the opening stock

pertaining to the assessment year 1998-99. The second difference arose

because the rate adopted for the valuation of diamonds in the closing stock

was different from the rate given by the assessee, though there was no

difference in quantitative terms.

8. Insofar as the first difference is concerned, the lowering of the

valuation of the closing stock for the assessment year 1997-98 has been set-

aside by the Tribunal and the same has been accepted by this Court by virtue

of the order dated 17.03.2008 in ITA 2/2005. Consequently, we find that

there was no material before the Commissioner to employ a lower rate for

diamonds in the closing stock. In any event the assessee had disclosed a

higher valuation of stock, which would ultimately lead to a higher profit.

Consequently, the Tribunal came to the conclusion that no further addition

was called for since the assessee had also disclosed a higher valuation of the

closing stock and thereby higher profit when there was no difference in the

quantitative tally. This, also, is a pure finding of fact and, in such finding,

we find no perversity.

9. With regard to the shortage of stock of silver, silver moulds and

precious stones, the Tribunal noted that the Commissioner of Income Tax

had not examined the relevant material submitted by the assessee in reply to

the notice and during the course of hearing before him. The Tribunal

specifically held that it was wrong on the part of the Commissioner to

observe that purchase worth Rs1,13,33,251/- was neither made by the

assessee nor declared by it. It was specifically mentioned that the assessee

had shown sales to the extent of Rs36,41,22,261.98 in the Profit and Loss

Account for the period ended on 31.03.1998 and the details of the sales also

clearly included the sale of silver worth Rs1,41,77,590/-. Consequently, the

Tribunal held that the observation of the Commissioner that there was no

sale of the purchased silver in the year in question was without any basis.

The Tribunal also noted that the closing stock of Rs40,48,860/- as disclosed

by the assessee in respect of the assessment year 1997-98 had not been

accepted by the Commissioner of Income Tax, however, the view taken by

the Commissioner of Income Tax for the said assessment year 1997-98 had

been rejected by the Tribunal and, consequently, the addition was found to

be unwarranted. Resultantly, the Tribunal held that the addition of

Rs88,26,126/- could not have been made by the Commissioner. This

conclusion of the Tribunal is also based purely on facts. No perversity has

been pointed out by the learned counsel for the Revenue. Obviously, no

question of law, what we speak of a substantial question of law, can arise for

our consideration. In this view of the matter, even proposed question „D‟

does not require any further consideration of this Court.

10. This leaves us with the proposed question „A‟. However, we feel

that in the view of our decision with regard to proposed questions „C‟ and

„D‟, proposed question „A‟ would be of academic interest and would,

consequently not be a substantial question of law arising in this case.

11. The appeal is accordingly disposed of.

BADAR DURREZ AHMED, J

V.K. JAIN, J

APRIL 28, 2010 Ag