I. Diversion of interest-bearing funds for commercial transactions is not disallowable if loans are for business purposes.
II. Estimation of melting gain is unwarranted if proper books of account are maintained and not rejected.
Issue I: Interest on Borrowed Capital – Commercial Expediency
Whether interest on borrowed capital can be disallowed under Section 36(1)(iii) of the Income-tax Act, 1961, when an assessee diverts interest-bearing funds to other concerns without charging interest, even if the loans were initially interest-bearing commercial transactions and the cessation of interest charges was due to non-payment and efforts to recover principal and interest.
Facts I:
- The assessee-company is engaged in the manufacturing and trading of ornaments.
- The assessee had extended loans to two other concerns.
- The Assessing Officer (AO) disallowed interest expenditure under Section 36(1)(iii), contending that the assessee had diverted interest-bearing funds to these two concerns without charging any interest.
- It was established that the assessee had been charging interest from these two concerns from Assessment Year 2013-14 till Assessment Year 2015-16 and had offered this interest to tax.
- The assessee stopped charging interest for the impugned Assessment Year (2016-17) solely due to non-payment of interest by the debtor parties.
- To recover both the principal and outstanding interest, the assessee had entered into a Joint Venture Agreement with these concerns.
Decision I:
The court held in favor of the assessee. It ruled that since the impugned loans/advances were given to the two concerns in the course of business and were commercial transactions, such commercial transactions could not be termed as a diversion of interest-bearing funds, and therefore, the provisions of Section 36(1)(iii) were not applicable for disallowance.
Key Takeaways I:
- Commercial Expediency: The crucial test for disallowance of interest under Section 36(1)(iii) on account of diversion of funds is whether the diversion was for non-business purposes. If the funds were advanced as part of a genuine commercial transaction for business expediency, even without charging interest in a specific year, the disallowance may not be justified.
- Initial Intent and History: The fact that the assessee had initially charged and offered interest on these loans in prior years indicates that the transactions were commercial in nature from the outset.
- Steps for Recovery: When a business loan becomes doubtful of recovery, and the lender takes steps (like entering a JV agreement) to recover the principal and outstanding interest, it demonstrates continued commercial intent rather than a diversion of funds for non-business purposes.
- No Blanket Disallowance: Simply because interest is not charged on an advance for a period does not automatically lead to disallowance of interest on borrowed funds, especially when the advance itself was a commercial transaction and efforts are being made to recover the amount.
Issue II: Method of Accounting – Estimation of Income
Whether the Assessing Officer is justified in making an addition by estimating “melting gain” at a higher percentage than that shown by the assessee, when the assessee has maintained proper books of account that have not been rejected by the AO.
Facts II:
- For Assessment Year 2016-17, the Assessing Officer (AO) made an addition to the assessee’s income.
- This addition was based on the estimation of “melting gain” at 4 percent of the metal issued, whereas the assessee had shown a melting gain of 1.70 percent in its books.
- It was noted that the assessee had maintained proper books of account.
- Critically, the Assessing Officer had not rejected these books of account.
Decision II:
The court held in favor of the assessee. It ruled that the Assessing Officer was not justified in making the addition by estimating the melting gain.
Key Takeaways II:
- Sanctity of Books of Account: If an assessee maintains proper books of account, and these books are not rejected by the Assessing Officer (i.e., no defects are found that warrant rejection under Section 145), the AO generally cannot arbitrarily estimate income or a component of income.
- Basis for Estimation: Estimation of income (or components like melting gain/loss) is typically resorted to when books of account are found to be unreliable, incomplete, or incorrect, leading to their rejection under Section 145(3).
- No Rejection, No Estimation: Without a valid rejection of books of account, the AO cannot substitute his/her own estimation for the figures recorded in the audited or regularly maintained books.
- Burden of Proof for Defects: The burden is on the AO to prove the defects in the books of account to warrant their rejection and subsequent estimation of income. Mere disagreement with a profit rate or a gain percentage, without pointing out specific flaws in accounting, is insufficient.
- Consequences of Accepting Books: By not rejecting the books, the AO implicitly accepts their reliability. Therefore, subsequent arbitrary estimations are not permissible.
IN THE ITAT PUNE BENCH ‘B’
Rajmal Lakhichand
v.
DCIT, Jalgaon
Ms. Astha Chandra, Judicial member
and R. K. PANDA, Vice president
and R. K. PANDA, Vice president
IT Appeal No.1205 (PUN) of 2023
[Assessment Year 2016-17]
[Assessment Year 2016-17]
APRIL 11, 2025
Nikhil Pathak, for the Assessee. Arvind Desai, Addl CIT-DR for the Revenue.
ORDER
R.K. Panda, Vice President. – This appeal filed by the assessee is directed against the order dated 20.09.2023 of the Ld. CIT(A) / NFAC, Delhi for assessment year 2016-17.
2. Facts of the case, in brief, are that the assessee company is engaged in the business of manufacturing of gold and silver ornaments and trading of ornaments on wholesale and retail basis and also trading of bullion and diamonds. The assessee is also engaged in manufacturing of electricity through wind mills. It filed its return of income on 29.11.2016 declaring total income of Rs.2,13,60,610/-. Subsequently, the assessee filed a revised return on 18.03.2017 declaring total income of Rs.2,43,54,370/-. The return was selected for complete scrutiny under CASS. Accordingly, statutory notices u/s 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) were issued and served on the assessee, in response to which the AR of the assessee appeared before the Assessing Officer and filed the requisite details from time to time.
3. During the course of assessment proceedings the Assessing Officer noted from the details submitted by the assessee that it has shown melting gain at 1.70%. The Assessing Officer compared the melting gain shown for the preceding four financial years which are as under:
| Financial Year | Melting gain percentage |
| 2012-13 | 6.83% |
| 2013-14 | 0.59% |
| 2014-15 | 7.98% |
| 2015-16 | 1.70% |
4. He, therefore, asked the assessee to justify the melting gain shown by it at 1.70%. Rejecting the various explanations given by the assessee, the Assessing Officer adopted the melting gain at 4% by observing as under:
“5.1 The submission of the assessee is considered very carefully. However, the submission of the assessee is not acceptable because of the following reasons-
| (i) | The reasons given by the AR are very generic and no concrete reasons have been given by the AR. |
| (ii) | It is true that the melting gain depends on the purity of old ornaments or gold given by the customers. However, the melting gain ratio shown by the assessee is less than its own melting gains shown for the previous years. |
| (iii) | The average value of the melting gains in the market is around 46%. |
| (iv) | The quantity old gold issued for the year under consideration is 163027.586 gms and quantity received is 165791.080 gms whereas for the FY 2014-15 the fine gold issued was 165161.924 gms and quantity of gold received was 178347.281. Therefore, the melting gain has reduced substantially. |
| (v) | It is seen that M/s. Rajmal Lakhichand Jewellers Pvt. Ltd. is separately assessed in this Circle. In this case, the assessee has shown 3.7% of melting gain. |
| (vi) | There is variation in monthly melting gain. After July-2015, the melting gain is reduced. |
| (vii) | It was not substantiated that lower price of goods is paid to yield lower melting gain. |
Therefore the considering the above reasons and the melting gain of AY 2015-16, the melting gain is adopted at 4%. The same is worked out as under –
| Metal issued | 163027.586 gms | |
| Received from Melting | 165791.080 gms | |
| Melting gain estimated @ 4% | 6521.103 | |
| Already shown | 2763.494 | |
| Difference | 3757.609 | |
| Rate adopted for calculation | Rs.2845 | |
| Difference | Rs.1,06,96,398/- |
5. He accordingly made addition of Rs.1,06,96,398/- to the total income of the assessee on account of melting gain.
6. Similarly, during the course of assessment proceedings, the Assessing Officer noted that the assessee has debited interest of Rs.6,93,54,058/- (Gross). The firm is assessed since long. The firm in earlier years used to charge interest @ 12% on the advances and to partners. There was system of charging interest @ 6% on trade debtors and provide interest @ 6% to trade creditors of related family concerns. However, the assessee has not charged any interest on advances and to the partners. He, therefore, asked the assessee to explain as to why interest of Rs.6,93,54,058/- debited to the Profit and Loss Account should not be disallowed.
7. The assessee explained the same by filing the following reply:
“We had not paid any interest to sundry creditors whose outstanding on 31.03.2016 was Rs. 885.94 Crores in the aggregate. The amount due from Debtors as on 31.03.2016 was Rs 296.41 Crores and interest free advances outstanding as on the date were Rs 114.63 Crores besides partners balances of Rs. 3.84 Crores. The amount due from debtors as on 31.03.2016 was Rs.296.41 Crores and interest free advances outstanding as on that date were Rs 114.63 Crores, besides partners balances of Rs. 3.84 Crores. Kindly note that amount of sundry creditors mentioned above of Rs. 885.94 Crores includes a sum of Rs. 429.19 Crores payable to Manvi Holdings Pvt. Ltd. Similarly the figures of advances given interest free of Rs. 114.63 Crores included a sum of Rs. 88.93 Crores given to Manvi Holdings Pvt Ltd. As the party is the same and the amount payable to the said party being much more than the amount receivable from it we could not have charged/paid any interest to the said party. Further in the subsequent year, we have merged both the accounts into one account, a copy of which is enclosed and therefore the question of charging interest to the said party does not arise Similarly in cases of advances of Rs 17.63 Crores and 6.99 Crore given to Ashoka Builders and Ashoka Engineering, we would like to state that we have entered into Joint Venture with the said parties and as such the transactions with the said party constitute business transactions and therefore no interest is charged on the same. As regards the partners accounts we have modified our deed by executing an agreement of modification by virtue of which no interest is payable chargeable to the partners and accordingly no interest is paid/ charged. A copy of the relevant modification agreement is enclosed. In any case the surplus interest free funds by way of Sundry Creditors available with us are more than the advances given without interest and hence the question of disallowance of interest does not arise…”
8. The Assessing Officer noted that the assessee has debited gross interest of Rs.6,93,54,038/-, the details of which are as under:
| 1. | Interest on gold deposit scheme- | Rs. 52,53,232/- |
| 2. | Banks- | Rs.2,16,99,167/- |
| 3. | Others- | Rs.3,31,77,113/- |
| 4. | Interest on TDS- | Rs. 30,22,145/- |
| 5. | Interest on LBT- | Rs.133/- |
6. Interest on VAT- Rs. 2,02,248/-
Out of this, interest of Rs.2,16,99,167/- paid to bank and interest of Rs.3,31,77,113/- paid to others is liable for considering for disallowance u/s 36(1)(iii) of the Income Tax Act, 1961.”
9. He analyzed the comparative position of Balance Sheet of the assessee for assessment years 2015-16 and 2016-17 and noted that increase in sundry creditors / availability of sundry creditors more than the debtors do not have impact on the loans advanced by the assessee. He noted that till assessment year 2015-16 the assessee had charged interest @ 12% on the advances / loans. However, the assessee has deviated from earlier precedent of charging the interest. He noted that M/s. Manvi Holdings Pvt. Ltd. is creditor having balance of Rs.429,19,06,669/-and loan of Rs.88,93,18,090/-. If both the accounts are amalgamated, then the sundry creditors will be Rs.797 crores. If the opening balance creditor at Rs.551.81 crores is considered, then there is an increase of Rs.245.19 crores in the sundry creditors. From the analysis of the closing stock and debts he noted that there is an increase in the closing stock and debts amounting to Rs.339.18 crores. Thus, the increase in sundry creditors is not related to the advances. He further noted that the assessee has given loans to the following persons:
| “1. | Ashoka Builders & Developers, Nashik | Rs.17,63,80,210/- |
| 2. | Ashoka Engg. Co., Nashik | Rs.6,99,36,741/- |
| Rs.24,63,16,951/- ———-“ |
10. He noted that the Joint Venture agreements with both the companies were prepared on 23.09.2015, therefore, the interest till date of agreement is required to be charged on the advances like practice in earlier years. He noted that the assessee has debit balances in partners’ accounts and other liabilities are shown as loan from bank. Under such circumstances, no interest free funds are available to the assessee. Since the assessee has taken huge loans from sister concern M/s. Manraj Motors Pvt. Ltd. and paid substantial interest to this concern, therefore, the advances given to the Ashok group, Nashik is out of borrowed funds only. He accordingly, held that the assessee has not used borrowed funds for business purposes. Therefore, he calculated the interest up to date of agreement at Rs.1,42,04,274/- and made addition of the same by invoking the provisions of section 36(1)(iii) of the Act.
11. Similarly, the Assessing Officer noted that even after entering into the Joint Venture agreement, no work is commenced and no work-in-progress or any sort of work is done. The huge advance was given as loan and the property to be developed do not have commensurate valuation. He further noted that no activity of construction is commenced and therefore, it can be stated that the borrowed funds are not utilized for the business purpose. He noted that mere entering into a Joint Venture agreement does not change the character of loan / advance given to the parties in earlier years. As such, the total interest on Rs.24,63,16,951/- comes to Rs.2,93,58,034/- which requires to be disallowed. However, as interest of Rs.1,42,04,274/- has been disallowed separately, he disallowed the balance amount of Rs.1,53,53,760/- and added the same to the total income of the assessee. The Assessing Officer accordingly disallowed interest u/s 36(1)(iii) at Rs.2,95,58,034/-.
12. In appeal, the Ld. CIT(A) / NFAC dismissed the appeal filed by the assessee.
13. Aggrieved with such order of Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds:
| 1. | Disallowance of Interest U/s. 36 (1) (iii)-Rs. 2,95,58,034. |
| 1.1 | The learned CIT(A) erred in confirming disallowance of Rs.2,95,58,034 out of interest paid. |
| On the facts and in the circumstances of the case, the said disallowance be cancelled. |
| 1.2 | The learned CIT(A) ought not to have confirmed the disallowance of Rs.2,95,58,034 out of interest paid when there is no nexus between the borrowed funds vis-a-vis interest free amounts paid to said parties under JV transaction. |
| 1.3 | The learned CIT(A) failed to appreciate that advances made to (i) Ashoka Builders and Developers and (ii) Ashoka Enngg. Co., were for the purpose of business only and as such no disallowance out of interest paid is called for. |
| 1.4 | The learned CIT(A) erred in confirming disallowance of interest of Rs.1,53,53,760 for the period subsequent to the execution of JV Agreement. |
| 1.5 | The learned CIT(A) also failed to appreciate that the appellant firm had adequate interest free funds and as such no disallowances out of interest paid could be justified. |
| 2. | Melting Gain addition ofRs.1,06,90,398 |
| 2.1 | The learned CIT(A) erred in confirming the addition of Rs.1,06,90,398 on the ground of alleged lower melting gain. |
| On the facts and in the circumstances of the case the addition of Rs.1,06,90,398 be cancelled. |
| 2.2 | The learned CIT(A) failed to appreciate that the addition on account of alleged lower melting gain could not be sustained in the absence of any material and without noticing any defect/discrepancy and without rejecting books of account. |
| 2.3 | The learned CIT(A) failed to appreciate that melting gain would depend upon the quality/type of ornaments purchased by the appellant company, which are bound to vary from item with respect to purity. |
| 24 | The addition made merely on the basis of preceding year’s results cannot be justified either on facts or in law |
| 2.5 | The addition of Rs.1,06,90,398 being the result of guess work and surmises deserves to be cancelled. |
| 3. | GENERAL |
| 3.1 | The learned CTT(A) erred in concluding that the decisions relied upon by the appellant were not applicable to the facts under consideration. |
| 3.2 | The appellant prays leave to adduce such further evidence to substantiate its case as the occasion may demand. |
| 3.3 | The appellant craves leave to add, amend, alter or delete any one or more of the grounds of appeals as may be required in the nature and circumstances of the case. |
14. The first issue raised in the grounds of appeal is regarding the disallowance of interest u/s 36(1)(iii) of Rs.2,95,58,034/-. The Ld. Counsel for the assessee submitted that the assessee had granted loan to the Ashok Group in financial year 2010-11 i.e. relevant to assessment year 2011-12. Till assessment year 2015-16, the assessee was charging interest and such interest was also offered to tax. However, the assessee had not received any interest on such loan for which from the assessment year 2016-17, the assessee did not charge any interest. He submitted that the Ashoka Group is not a related party and the advances so given are not non-business advance. He submitted that such advances were given five years back and only when the assessee saw the possibility of non receipt of interest, he did not charge any interest. Since it is a commercial transaction, it cannot change the colour of the advance merely because the assessee did not charge any interest.
15. Referring to the decision of the Hon’ble Delhi High Court in the case of CIT v. Vasisth Chay Vyapar Ltd. reported in ITR 440 (Delhi), he submitted that since the assessee was not getting any interest from the Ashok Group of companies since inception of advancing the loan but offering the notional interest to tax, therefore, as a prudent businessman the assessee did not charge any interest for the impugned assessment year. He submitted that the Hon’ble Supreme Court in the case of CIT v. Vasish Chay Vyapar Ltd. reported in 90[2019] 410 ITR 244 (SC) upheld the decision of the Hon’ble Delhi High Court in the case of CIT v. Vasisth Chay Vyapar Ltd. reported in (Delhi) by holding that when the recovery of principal is doubtful, interest does not accrue and accordingly, the order of the Tribunal was upheld.
16. He submitted that the Joint Venture agreement dated 23.09.2015 entered into to recover the principal plus interest shows to protect the interest of the assessee for recovery of principal and interest. Further, capital plus surplus fund is more than sufficient to cover the loans and advances given. Referring to the audited financial statements for financial years 2014-15 and 2015-16 i.e. relevant to assessment years 2015-16 and 2016-17, copies of which are placed at pages 6 to 71 of the paper book, he submitted that the partners capital as on 31.03.2016 is Rs.3,84,46,678/-. He accordingly submitted that the disallowance of interest made by the Assessing Officer and sustained by the Ld. CIT(A) / NFAC is not in accordance with law and has to be deleted.
17. The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC. He submitted that when the borrowed funds are utilized by paying huge interest and the assessee had advanced the loans to third parties without any commercial exigency, therefore, the Ld. CIT(A) / NFAC has rightly sustained the disallowance of interest made by the Assessing Officer u/s 36(1)(iii) of the Act. So far as the claim of the assessee that in the past years the assessee has not received interest for which he has not credited such interest during the year is concerned, the Ld. DR submitted that the assessee could have claimed the same as bad debt if the same was not received. So far as the decision of the Hon’ble Supreme Court in the case of CIT v. Vasish Chay Vyapar Ltd. (supra) is concerned, he submitted that in that case the assessee was a NBFC whereas the assessee in the instant case is not a NBFC, therefore, the said decision is not applicable to the facts of the present case. So far as the decision of the Hon’ble Supreme Court in the case of S.A. Builders is concerned, he submitted that the same also is not applicable to the facts of the present case.
18. The Ld. Counsel for the assessee in his rejoinder submitted that it is a business loan given during the course of business and therefore, the decision of the Hon’ble Supreme Court in the case of S.A. Builders is clearly applicable.
19. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case disallowed interest of Rs.2,95,58,034/- u/s 36(1)(iii) of the Act on the ground that the assessee has diverted the interest bearing funds to M/s. Ashoka Builders and Developers and Ashoka Engineering Co. without charging any interest. We find the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer. It is the submission of the Ld. Counsel for the assessee that the assessee had given such loan to M/s. Ashoka Builders and Developers and Ashoka Engineering Co. on interest which was a business loan and the assessee was charging interest from the said companies from assessment year 2013-14 till assessment year 2015-16 and such interest income was also offered to tax. Since the above two said companies failed to pay any interest for the above assessment years the assessee stopped charging interest from assessment year 2016-17. He submitted that merely because of non-charging of interest from the two companies which are not related to the assessee, cannot change the colour of such commercial transaction. It is also his submission that to recover the principal and interest the assessee has entered into a Joint Venture Agreement with the above two companies.
20. We find some force in the above arguments of the Ld. Counsel for the assessee. It is an admitted fact that the two concerns namely M/s. Ashoka Builders and Developers and Ashoka Engineering Co. are not related parties. It is also an admitted fact that the assessee was charging interest from the above concerns from assessment year 2013-14 till assessment year 2015-16 and was offering the same to tax although the above two concerns have failed to pay any interest to the assessee company. It is also an admitted fact that the assessee, during the assessment year 2016-17, did not charge any interest from the said companies on the ground that when the recovery of the principal is in doubt, there is no point in charging any interest from the said companies. We find merit in the arguments of the Ld. Counsel for the assessee that the assessee could have charged interest and could have claimed the same as bad debt. However, as a prudent businessman, the assessee has not recognized the interest on such doubtful debts. In our opinion, merely because the assessee has not recognized the interest income in respect of the outstanding amount from these two concerns, it cannot change the colour of such advance which is a commercial transaction. Since the impugned loans / advances were given to M/s. Ashoka Builders and Developers and Ashoka Engineering Co. in the course of business and are commercial transactions for which the assessee was charging interest from assessment year 2013-14 till 201516 and only because of non-payment of interest from the said parties, the assessee stopped charging interest for the impugned assessment year and to recover the principal and interest, the assessee has entered into a Joint Venture Agreement with the said concerns, therefore, such commercial transactions cannot be termed as diversion of interest bearing funds. In this view of the matter, we are of the considered opinion that the provisions of section 36(1)(iii) of the Act are not applicable to the facts of the present case. We, therefore, set aside the order of the Ld. CIT(A) / NFAC and direct the Assessing Officer to delete the addition. The first issue raised by the assessee in the grounds of appeal is accordingly allowed.
21. The second issue raised by the assessee in the grounds of appeal relates to the addition on account of melting charges.
22. After hearing both sides, we find the Assessing Officer in the instant case made addition of Rs.1,06,90,398/- by estimating the melting gain at 4% of metal issued as against 1.70% shown by the assessee by observing as under:
“5.1 The submission of the assessee is considered very carefully. However, the submission of the assessee is not acceptable because of the following reasons
| (i) | The reasons given by the AR are very generic and no concrete reasons have been given by the AR. |
| (ii) | It is true that the melting gain depends on the purity of old ornaments or gold given by the customers. However, the melting gain ratio shown by the assessee is less than its own melting gains shown for the previous years. |
| (iii) | The average value of the melting gains in the market is around 4-6% |
| (iv) | The quantity old gold issued for the year under consideration is 163027.586 gms and quantity received is 165791.080 gms whereas for the FY 2014-15 the fine gold issued was 165161.924 gms and quantity of gold received was 178347.281. Therefore, the melting gain has reduced substantially. |
| (v) | It is seen that M/s. Rajmal Lakhichand Jewellers Pvt. Ltd. is separately assessed in this Circle. In this case, the assessee has shown 3.7% of melting gain. |
| (vi) | There is variation in monthly melting gain. After July-2015, the melting gain is reduced. |
| (vii) | It was not substantiated that lower price of goods is paid to yield lower melting gain.” |
23. We find the Ld. CIT(A) upheld the same by observing as under:
“6. DISCUSSION ON ADDITION ON ACCOUNT OF MELTING GAIN: Ground no. 4, 5 and 6 are related to addition on account of melting gain. Assessee claimed it @ 1.7% this year while it was 6.93% in FY 2012-13, 0.59% in FY 13-14 and 7.98% in FY 2014-15 Appellant merely claimed that the recovery of gold from old jewellery varies from item to item depending on purity of the item. That is reasonable statement. But I feel that what is unreasonable is the massive fluctuation and difference. It seems improbable why in one year percentage would be 1.7%, ie, 17 kg gold out of 100 kg old jewellery issued for melting and in another year it would be 7.98%, i.e. 7.98 kg out of 100 kg of old jewellery, or, in other words, how the yield could be about 5 to 13 times higher in one year than in another year. Gold jewellery is generally 22 carat which contains 91.67% pure gold and rest impurity. Therefore, the rate of extraction yield should be in a close range and not show such wide fluctuation, i consider assessee’s claim to be unrealistic and unreasonable Appellant termed AO’s estimate of 4% to be guess work. But I find that it is the same percentage taken last year and very close to 3.7% yield shown by assessee firm’s sister concern Rajmal Lakhichand Jewellers Pvt Ltd. Accordingly, ground nos. 4, 5 and 6 are rejected and addition of Rs. 1,06,90,398/- is confirmed.”
24. We find an identical issue had come up before the Tribunal in assessee’s own case for assessment year 2017-18 and the Tribunal dismissed the appeal filed by the Revenue vide ITA No.62/PUN/2023, order dated 14.03.2023 by observing as under:
“4. At the outset of hearing, ld. Authorised Representative(ld.AR) of the assessee submitted that this issue is already covered by the decision ITAT Pune Bench in assessee’s own case for A.Y.2014-15 in ITA No.1702/PUN/2019 as under :
“2. Brief facts of the case are that the assessee is in the business of manufacturing of gold and silver ornaments and trading of ornaments. During the year, the Assessing Officer(AO) observed that the assessee has shown melting gain at 0.59%. For earlier years, the melting gain was as under:
On perusal of the books of account, it was noticed that the assessee has shown melting gain 0.59% as melting Gains. The comparison of the melting gains shown by the assessee for the last four financial years is tabulated as below:
| Financial Year | Melting gain percentage |
| 2010-11 | 9.07% |
| 2011-12 | 8.53% |
| 2012-13 | 6.83% |
| 2013-14 | 0.59% |
3. The AO asked the assessee to explain the reason for lower melting gain. However, the AO was not satisfied with the reply of the assessee. The AO in para 6 sub para 3 has held as under:
“3. Further, it is true that the melting gain depends on the purity of old ornaments or gold given by the customers. However, the melting gain ratio shown by the assessee is less than its own melting gains shown for the previous years.
4. The average value of the melting gains in the market is around 4-6%.
Therefore, considering the above reasons and the melting gains of AY 2013-14, the melting gains is adopted at 6%.”
4. Aggrieved by the addition, the assessee filed appeal before the ld.CIT(A). The ld.CIT(A) allowed this ground of the assessee. In para 8.3, the ld.CIT(A) has held as under:
“8.3 In this regard, in appellant’s own case, the Hon’ble ITAT, Pune in ITA No.532 & 663/PUN/2013 and ITA No. 607/PUN/2013 for assessment year 2009-10, dated 16/01/2015 has decided in favour of the appellant holding as under-
“8.38 we find force in the above argument of the Ld Counsel for the assessee. We have perused the month wise breakup of the melting gain declared by the assessee and fined that there is variation. We also find force in the argument of the Ld Counsel for the assessee that when assessee is maintaining the record showing the old ornaments issued for refining purpose on the weight basis, when there should have been no jurisdiction for rejecting the said record. The Ld (CIT(A) has mechanically approved the approach of the AO for holding that AO has correctly worked out the melting gain. We find that the AO has attached the chart to the assessment order being Annexure-3 for the period April 2008 to March 2009. We also find that AO has made break up for two periods i.e. 01.04.2008 and 28.11.2008 to 31.03.2009. How the period can be bifurcated for working out the yearly average is not known. We also find force in the contention of the Ld. Counsel for the assessee that when old ornaments are purchased from the third parties, the purity of the gold is determined by using Kasuati which is one stone. There is no other scientific method whereby it can be concluded that the gain estimated at the time of purchased of the old ornament (MOD) was perfect. Moreover, the assessee is consistently following the particular method and that method has never been questioned by the revenue. In our opinion, there is no justification to support the addition made by the AO and confirmed by the Ld. CIT(A) in respect of alleged suppression of the melting gain. We accordingly delete the said addition. In the result, respective grounds taken by the assessee are allowed.
Respectfully following the decision of Hon’ble ITAT Pune, wherein the facts of the case are squarely applicable in the case of the appellant, Therefore, I am of the considered view that the A.O. is not justified in making addition of Rs. 1,94,05,998/- on account low melting gain. Therefore, the addition of Rs.1,94,05,998/- made by the A.O. is deleted and the ground of appeal raised by the appellant is allowed.”
5. Aggrieved by the order of the ld.CIT(A), the Department has filed appeal before this Tribunal. The ld.Departmental Representative(ld.DR) for the Revenue vehemently relied on the order of the AO. The ld.Authorised Representative(ld.AR) for the assessee filed a paper book containing 166 pages. The ld.AR took us through the melting gain register which was at page no.47 of the paper book and explained that the assessee is properly maintaining melting gain / loss register. The ld.AR submitted that the AO has not pointed out any defect in the melting gain register or audited books of accounts. Therefore, the addition made by the AO was rightly deleted by the ld.CIT(A).
6. We have heard both the parities and perused the records. It is a fact that assessee purchases old ornaments. The purity depends on many factors. It is very difficult to generalise the purity. We have gone through the melting gain register which was submitted in the paper book. It is observed that assessee has maintained a proper register. The AO has not pointed out any defect in the said melting gain / loss register. The AO has also not pointed out any defect in the books of accounts maintained by the assessee. It is also a fact that the ITAT Pune Bench in assessee’s own case for earlier year has decided this issue in favour of assessee. Therefore, we are of the opinion that the ld.CIT(A) has rightly directed the AO to delete the addition following the ITAT Pune Bench’s decision for the A.Y. 2009-10, accordingly, grounds of appeal raised by the Revenue are dismissed.
7. In the result, appeal of the Revenue is dismissed.”
5. On the other hand, the ld.Departmental Representative(ld.DR) of the Revenue fairly accepted that the issue is covered in favour of the assessee.
6. We have heard both the parties and perused the records. No distinguishing facts raised by the ld.DR. The Revenue has not brought on record any facts to distinguish the ITAT order in assessee’s own case for earlier years.
6.1 In view of the above, we adopt the foregoing reasoning of assessee’s own case(supra) of ITAT Pune Bench for A.Y.2009-10, 2014-15, accordingly, grounds of appeal raised by the Revenue are dismissed.”
25. We find the Assessing Officer in para 4 of the order has mentioned as under:
“4…. Regular books of account have been maintained by the assessee for both the businesses and the same have been audited u/s 44AB of the Income Tax Act, 1961 by a Chartered Accountant. Books of account were produced and verified on test check basis…”
26. Since, admittedly the assessee in the instant case has maintained books of account which were not rejected by the Assessing Officer, therefore, respectfully following the decision of the Tribunal in assessee’s own case for assessment year 2017-18 and in absence of any contrary material brought to our notice, we set aside the order of the Ld. CIT(A) / NFAC and direct the Assessing Officer to delete the addition on account of melting charges. We accordingly set aside the order of the Ld. CIT(A) / NFAC and the grounds raised by the assessee are allowed.
27. In the result, the appeal filed by the assessee is allowed.