2010 (6) TMI 655 - AT - Income Tax

Method of accounting - Estimation of profit, Cash credits, Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings, Remission or cessation of trading liability

Summary

Issues Involved:
1. Disallowance under section 40A(2)(b) of the Income-tax Act.
2. Addition on account of low net profit and rejection of book results.
3. Under valuation of work-in-progress/semi-finished goods and stock in transit.
4. Disallowance of depreciation.
5. Addition on account of sundry creditors.

Issue-wise Detailed Analysis:

1. Disallowance under section 40A(2)(b) of the Income-tax Act:
The revenue challenged the deletion of an addition of Rs. 8,65,314 made by the Assessing Officer (AO) under section 40A(2)(b) for payments to specified persons. The AO disallowed 10% of the expenditure due to lack of tenders for minimum price. The CIT(A) deleted the addition, stating the disallowance was ad hoc and lacked evidence of excessiveness compared to the fair market value. The Tribunal upheld CIT(A)'s decision, noting the AO did not establish that payments were excessive or unreasonable.

2. Addition on account of low net profit and rejection of book results:
The AO rejected the book results and made an addition of Rs. 10 lakhs due to alleged undervaluation of semi-finished goods and lack of day-to-day quantitative records. The CIT(A) deleted the addition, noting the AO did not point out specific defects and the addition was ad hoc. The Tribunal upheld CIT(A)'s decision, emphasizing that the AO failed to provide a basis for the addition and did not dispute the maintenance of books in earlier years.

3. Under valuation of work-in-progress/semi-finished goods and stock in transit:
The AO made an addition of Rs. 5 lakhs for alleged under valuation of work-in-progress. The CIT(A) confirmed the addition, noting the assessee admitted under valuation of Rs. 1,51,855 but did not provide other details. The Tribunal modified the addition to Rs. 1,51,855, stating the ad hoc addition of Rs. 5 lakhs was unjustified without adequate details.

4. Disallowance of depreciation:
The AO allowed depreciation before calculating deduction under section 80-IB, following the ITAT Special Bench decision in Vahid Paper Converters. The CIT(A) upheld the AO's decision. The Tribunal set aside the CIT(A)'s order, directing reconsideration of the issue in light of the judgments in National Dairy Development Board and Kandla Port Trust, which addressed the treatment of depreciation not claimed in earlier years.

5. Addition on account of sundry creditors:
The AO added Rs. 97,391 for unexplained sundry creditors. The CIT(A) deleted the addition, stating the AO did not specify the section under which the addition was made and failed to prove cessation of liabilities. The Tribunal upheld CIT(A)'s decision, noting the liabilities were acknowledged in the balance sheet and there was no remission or cessation of liabilities.

Separate Judgments:
The judgment was delivered by a bench comprising Bhavnesh Saini and A.N. Pahuja, JJ., without separate judgments from each judge.

Conclusion:
The Tribunal dismissed the departmental appeals and partly allowed the assessee's appeals, providing detailed reasoning for each issue, emphasizing the need for specific evidence and proper application of legal provisions.