2012 (3) TMI 338 - AT - Income Tax

Disallowance of interest under section 36(1)(iii) deleted - Entitlement for enhanced deduction under section 80-IB Disallowance under section 40(a)(ia) - TDS under section 194C on payments made in lieu in contract with Amba Ply Chrome P. Ltd. - Held that - This is a contract for sale no TDS is required to be deducted by the appellant under section 194C of the Act. Therefore, this amount is not disallowable while computing the income of the assessee. The main purpose of the appellant was to buy the packing and printing material from the third party for the purpose of packing and no works contract was involved. The provisions of section 194C read with section 40(a)(ia) of the Act have been wrongly held to be applicable in the appellant s case. The addition made is, therefore, deleted

Issues Involved:
1. Rejection of account books under section 145(3).
2. Addition on account of unaccounted production and sale.
3. Addition on account of alleged capital employed in unaccounted production.
4. Deduction under section 80-IB.
5. Addition on the ground that certain expenses were of capital nature.
6. Disallowance of interest under section 36(1)(iii) on borrowed capital.
7. Disallowance under section 40(a)(ia) for failure to deduct TDS under section 194C.

Detailed Analysis:

1. Rejection of Account Books under Section 145(3):
The assessee's books of account were rejected by the Assessing Officer (AO) due to discrepancies, including uneven electricity consumption and lack of proper stock registers. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this, citing higher electricity consumption and lack of documentary evidence. The assessee argued that increased electricity consumption was due to the installation of new machinery and trial runs. The Tribunal found that the AO and CIT(A) failed to provide sufficient evidence to support the rejection of books based solely on electricity consumption. The Tribunal allowed the assessee's ground, stating that books of account cannot be rejected merely on the basis of higher electricity consumption without corroborative evidence.

2. Addition on Account of Unaccounted Production and Sale:
The AO added Rs. 74,62,190 for unaccounted production based on high electricity consumption. The CIT(A) reduced this amount but upheld the addition. The Tribunal found that both the AO and CIT(A) relied on surmises and conjectures without concrete evidence of unaccounted purchases or sales. The Tribunal allowed the assessee's ground, emphasizing that no addition can be made solely on the basis of higher electricity consumption without corroborative evidence.

3. Addition on Account of Alleged Capital Employed in Unaccounted Production:
The AO added Rs. 12,34,686 for alleged capital employed in unaccounted production. The CIT(A) upheld this addition. The Tribunal found that since the addition for unaccounted production was deleted, the related addition for capital employed also could not be sustained. The Tribunal allowed the assessee's ground.

4. Deduction under Section 80-IB:
The AO did not allow the deduction under section 80-IB on the total assessed income. The CIT(A) dismissed the assessee's claim, stating it was a new claim. The Tribunal found that since the entire assessed income was derived from the industrial undertaking, the assessee was entitled to the deduction under section 80-IB. The Tribunal allowed the assessee's ground, relying on the decision in CIT v. Allied Industries.

5. Addition on the Ground that Certain Expenses were of Capital Nature:
The AO disallowed Rs. 45,22,937, treating it as capital expenditure. The CIT(A) partly allowed the assessee's claim but upheld the balance. The Tribunal found that the expenses were related to the integrated manufacturing process and were of a revenue nature. The Tribunal allowed the assessee's ground, stating that the CIT(A) erred in treating these expenses as capital in nature.

6. Disallowance of Interest under Section 36(1)(iii) on Borrowed Capital:
The AO disallowed Rs. 15,61,828 as interest on borrowed capital used to acquire new assets. The CIT(A) deleted this addition. The Tribunal found that the CIT(A) relied on pre-amendment decisions and failed to consider the proviso to section 36(1)(iii). The Tribunal allowed the Revenue's ground, stating that interest on borrowed capital cannot be allowed unless the asset was put to use.

7. Disallowance under Section 40(a)(ia) for Failure to Deduct TDS under Section 194C:
The AO disallowed Rs. 18,74,947 for failure to deduct TDS on payments made to Amba Ply Chrome P. Ltd. The CIT(A) deleted this addition, stating it was a contract for sale, not a works contract. The Tribunal upheld the CIT(A)'s decision, relying on the decision of the Punjab and Haryana High Court in Deputy Chief Accounts Officer, Markfed, Khanna.

Conclusion:
The Tribunal partly allowed the assessee's appeal and partly allowed the Revenue's appeal, providing detailed reasons for each issue based on the facts and evidence presented.

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