Pratibha, Adv. for the Assessee. R. Premi, JCIT (DR)(ITAT), Bengaluru for the Revenue.

These are cross appeals filed by the assessee and Revenue and these are directed against the order of learned CIT(A)-5, Bengaluru, dated 31.07.2017, for Assessment Year 2009-10.

2. First, we take up the appeal of the assessee. The grounds raised are as under:

1. On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in upholding the disallowance of interest to the tune of Rs.92,82,222/-.

2. The learned Commissioner (A) ought to have appreciated that the interest was on the loans borrowed for the purpose of business and had no correlation to the purchase of coffee which is found in the closing stock.

3. The learned Commissioner (A) ought to have appreciated that the appellant had furnished all the details and evidence in this regard and in the circumstances the disallowance was opposed to law and liable to be deleted.

4. The learned Commissioner (A) erred in upholding the expenses to the extent of Rs. 1,11,77,323 / - alleging that the payments were otherwise than by an account payee cheque which stood not proved.

5. The learned Commissioner(A) ought to have appreciated that all the expenditure incurred were in the course of business and for the purpose of business for which the adequate evidence was let in by the appellant and consequently the disallowance was opposed law and liable to be deleted.

6. The learned Commissioner (A) ought to have appreciated the disallowance was made only on surmises alleging that the letters addressed to the parties were returned unserved without appreciating that the payments were through banking channels and supported by the bills for supplies which has been gone into the trading account of the appellant and in the circumstances the disallowance was unwarranted and accordingly liable to be deleted.

7. The learned Commissioner (A) having not given adequate opportunity to the appellant and evidence was also let in before the Commissioner (A), the learned Commissioner (A) ought to have appreciated the evidence furnished and ought to have refrained from upholding the disallowance.

8. Without prejudice, the additions are excessive, arbitrary and unreasonable and liable to be deleted in toto.

9. For these and other grounds that may be urged at the time of hearing of the appeal the appellant prays that the appeal may be allowed.

3. At the very outset, it was submitted by learned AR of the assessee that there was a delay of 10 days in filing of this appeal before the Tribunal and the assessee has moved an application for condonation of delay along with Affidavit of the MD of the assessee company in which it is submitted that the order of CIT(A) was already provided by the assessee to the concerned counsel for preparation of appeal papers. But in the meantime, the MD of the assessee company had to move out in connection with legal matter and therefore, the appeal could not be filed in time. It is also submitted in the Affidavit that he returned on 08.11.2017 and the appeal was filed before the Tribunal on 09.11.2017 and therefore, this small delay of 10 days should be condoned. Learned DR of the Revenue did not have serious objection about the condonation of this small delay and therefore, in the facts of the present vase as noted above, we condone the delay and admit the appeal of the assessee.

4. In the course of hearing of the appeal, it was submitted by learned AR of the assessee that the first issue involved is regarding disallowance of interest to the tune of Rs.92,82,222/-. He submitted that disallowance was made by the AO and confirmed by learned CIT(A) on this basis that in valuation of the inventory, the assessee should have taken into consideration the interest attributable to bringing the inventory to its present location and condition in accordance with explanation to section 145A(A) of the Income Tax Act, 1961 (hereinafter called ‘the Act’). He placed reliance on the Tribunal order rendered in the case of DLF Ltd., as reported in TS 5387 ITAT 2016 (Delhi). She submitted that interest attributable to inventory is allowable as per this judgment of the Tribunal. As against this, learned DR of the Revenue supported the orders of the authorities below.

5. We have considered the rival submissions. First of all, we reproduce relevant provisions of explanation of clause (a) of section 145A of the Act. The same reads as under:

145A. Method of accounting in certain cases.—Notwithstanding anything to the contrary contained in section 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be— (a) in accordance with the method of accounting regularly employed by the assessee;

(b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

Explanation. —For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment.

6. As per the above provisions, it is seen that it is provided therein that valuation of inventory should be in accordance with the method of accounting regularly employed by the assessee and is to be further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation and as per the explanation it is provided that for this purpose, any tax, duty, shares or fee by whatever name called under any law for the time being in force and it shall include all such payments notwithstanding any right arising as a consequence to such payment. Hence,it is seen that there is no such provision in this section to include interest cost in the value of inventory. Moreover the Tribunal order cited by learned AR of the assessee having been rendered in the case of DLF Ltd., (supra) supports the case of the assessee and therefore, respectfully following this Tribunal order and in view of the above discussion, we decide this issue in favour of the assessee and accordingly ground Nos.1 to 3 are allowed.

7. Thereafter, she submitted that as per ground No.4, the dispute is about disallowance of Rs.1,11,77,323/- and it was submitted by her that this disallowance was made by the AO on this basis that the AO issued notices to verify these transactions under section 133(6) of the Act and these notices were sent by the AO by Speed Post Acknowledgement Due (SPAD) to the 10 entities out of 28 entities on a Test Check Basis but these notices has been returned unserved and therefore, it was held by the AO that these transactions were not genuine and he disallowed the entire amount of such claim. At this juncture, the Bench wanted to see the quantitative reconciliation between the quantity of opening stock + purchase during the year with total of closing stock and sales during the year and the Bench observed that if these two quantities are tallied and the difference if any in these two quantities are explained/reconciled, then the entire amount of purchase cannot be said to be bogus and at the worst, it will be a case of inflating the purchase price for which the AO can make necessary enquiry to find out the normal purchase pricing of the same material in the relevant time. In reply, it was submitted by learned AR of the assessee that this exercise was not done and therefore,the matter may be restored to the file of the AO and if this is done, she will furnish full details in this regard and will also explain the difference in quantity if any and regarding pricing also, she will bring on record the necessary evidence. Learned DR of the Revenue although supported the order of CIT(A) but regarding this proposition, put forward by the Bench in respect of quantitative comparison as noted above and to examine the reasonableness of the price by making enquiries in the local market, she also submitted that the matter may be restored back for this purpose.

8. We have considered the rival submissions and in view of the above discussion, we set aside the order of CIT(A) on this issue and restore this matter back to the file of AO for a fresh decision with the direction that the assessee should furnish the comparison of quantity of opening stock + purchase and closing stock + sales and if there is no difference in such two quantities and difference, if any is explained/reconciled then quantity of purchase should be accepted and in case of unexplained difference in such two quantities, only such unexplained difference in quantity should held to be bogus claim. Regarding the pricing part also, the assessee should bring on record necessary details and evidences in support of the price paid by the assessee. The AO should also examine the reasonableness of such pricing and then pass necessary order as per law in the light of above discussion after providing reasonable opportunity of being heard to the assessee.

Accordingly, ground Nos.4 to 8 are allowed for statistical purposes.

9. In the result, appeal of the assessee stands allowed in the terms indicated above.

10. Now we take up appeal of the Revenue. The grounds raised by the Revenue in this appeal are as under:

1. The order of the commissioner of Income Tax (Appeals)-5, Bangalore is opposed to the law and on the facts and circumstances of the case.

2. Whether CIT (A) was right on facts and circumstances of the case in allowing relief to the assessee on the issue of purported commission paid in Foreign Currency simply on the ground that the assessee has deducted applicable TDS though nothing cogent has been brought on records that any services has been rendered by the alleged payees?

3. Whether CIT (A) was right on facts and circumstances of the case in allowing relief to the assessee on the issue of addition of Rs 1,51,67,569/- on Coffee purchases made in cash simply stating that the purchases have been made through Bank though nothing has been brought on record ? Moreover, even if there are purported payment through Bank, it cannot be said that purchases are genuine as during the assessment proceedings the assessee failed to utilize the opportunities offered to it and failed to substantiate its position and the assessee has failed to substantiate that it has fulfilled all the requirement as mandated by section 40A(3) of the Income Tax Act,1961?

4. Whether CIT (A) was right on facts and circumstances of the of the case and in the law in allowing relief to the assessee on the issue of addition made of Coffee purchases made in cash on the basis of purported new evidence produced before him by the assessee without affording the Assessing Officer any opportunity of examining the same and thus violating the provisions of Rule 46A of the Income Tax Rules,1962 ?

5. The appellant craves leave to add, amend the grounds of appeal on or before hearing of the appeal and further craves leave to delete any of the grounds on or before hearing of the appeal.

11. In the course of hearing, it was submitted by learned DR of the Revenue that ground No.1 is general. Regarding ground No.2, he supported the Assessment Order whereas learned AR of the assessee supported the order of learned CIT(A).

12. We have considered the rival submissions. We find that in para 5.5 of the Assessment Order, it is noted by the AO that the assessee company was asked to furnish supporting documents and evidences of the services as claimed to have been received from the various entities with invoices, bills, receipts, break-up of expenses, bank statements including names and list of clients to whom sales have been made including comparative statement of the new clients in the Assessment Year 2008-09 and 2009 - 10. It is further noted by the AO in para 6.5 of the Assessment Order that the assessee company only reiterated that services have been availed by the assessee company but did not furnish documents / evidences required by the AO. We also find that this issue was decided by learned CIT(A) as per para 6 of his order and the only basis of this decision is this that as per the assessee, all these transactions are genuine transactions which are routed through Bank by debit to assessee bank account and transferring the commission amount to the agent who are located both in India and abroad. There is no finding of the CIT(A) that the documents and evidences required by the AO as noted by him in paras 6.5 and 6.6 of the assessment order were submitted before the AO or before CIT(A). In the absence of required details and documents regarding receipt of services from the agents, it is not proper to delete the disallowance of commission payment.

Before us also, no such document was brought on record even by way of additional evidence and therefore, on this issue, we reverse the order of learned CIT(A) and restore that of the AO. Accordingly, ground No.2 of the appeal of the Revenue is allowed.

13. Regarding the next issue raised by the revenue in its appeal as per ground No.3 in respect of deletion of the disallowance of Rs.1,51,67,569/- made by the AO under section 40A(3) of the Act, learned DR of the Revenue supported the Assessment Order whereas learned AR of the assessee supported the order of learned CIT(A). She also submitted that on pages 1 and 2 of the Paper Book filed by the assessee in connection with the appeal of the revenue, the assessee has submitted a complete chart of various payments made by the assessee to these two parties in which assessee has given the details regarding mode of payment also and along with this detail, the assessee has submitted copy of invoice and bank statement from pages 3 to 103 of the Paper Book and as per the same, all payments are made by account payee cheques and section 40A (3) is not applicable.

14. She pointed out that on page 3 is the purchase invoice from M/s. Saramalai Estates Ltd., for Rs.3,73,500/- and payment against this invoice was made by way of cheque in April 2008 and the relevant entry is available in the copy of the Bank Statement of the assessee with Tamilnad Mercantile Bank Ltd., available on page 5 of the Paper Book as per which this payment of Rs.3,73,500/- is by way of cheque No.683626 and the corresponding bank statement of the supplier M/s. Saramalai Estates Ltd., is available on page 6 of the Paper Book and as per the same, the same amount was credited in their bank account on 30.04.2008. Hence, it should be accepted that this payment was made by account payee cheque and therefore section 40A (3) is not applicable. Regarding the next item, she submitted that the corresponding bill of Rs.3,64,500/- is available on page 7 of the Paper Book and the corresponding payment was made by way of cheque on 06.05.2008 and the Bank statement is available on page 9 of the Paper Book which is showing this payment by way of transfer to HDFC bank of the supplier and the corresponding bank statement of the supplier in HDFC Bank is available on page 10 of the Paper Book where the receipt of the payment is available of Rs.3,64,500/-. She submitted that in this manner, the assessee has brought on record all necessary evidences showing that all the payments made by the assessee company to these two suppliers were by way of cheques and therefore, none of these payments is hit by section 40A (3) of the Act.

15. We have considered the rival submissions. In view of these details available in the Paper Book filed by the assessee containing 103 pages, it is seen that details are made available as per which it is made clear that all these payments are made by account payee cheques and as per the certificate given in the Paper Book, all these documents were made available by the assessee before both AO and learned CIT(A) and therefore, there is no violation of Rule 46A of the Income Tax Rules, 1962, also, as alleged by Revenue in ground No.4 of this appeal. In view of this discussion, we find no reason to interfere in the order of learned CIT(A) on this issue and ground Nos.3 and 4 of the Revenue’s appeal are rejected.

16. Ground No.5 is general.

17. In the result, appeal of the Revenue is partly allowed.

18. In the combined result, the assessee’s appeal is allowed in the terms indicated above and the Revenue’s appeal is partly allowed.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/-

(BEENA PILLAI) (A.K. GARODIA)

Judicial Member Accountant Member

Bangalore,

Dated: 14th August, 2020.