2011 (7) TMI 1147 - AT - Income Tax

Issues Involved:
1. Disallowance of expenses under Section 40(a)(ia) of the Income-tax Act.
2. Disallowance of interest under Section 43B.
3. Disallowance of labor charges under Section 40(a)(ia).
4. Capitalization of interest under Section 36(1)(iii).
5. Reduction of claim under Section 80IC.
6. Disallowance of inward freight charges under Section 40(a)(ia).
7. Levy of interest under Sections 234B, 234C, and 234D.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses under Section 40(a)(ia):
The assessee claimed a deduction of Rs. 22,91,170 towards freight outward expenses. The AO disallowed this amount as the assessee failed to deduct tax at source under Section 194C. The CIT(A) upheld the AO's decision, noting that the assessee was responsible for engaging transporters and reimbursing freight charges to distributors, making it liable to deduct TDS. The Tribunal confirmed this view, emphasizing the statutory responsibility of the assessee to deduct tax at source, thereby dismissing the assessee's appeal on this ground.

2. Disallowance of Interest under Section 43B:
The AO disallowed Rs. 3,70,836 of interest claimed by the assessee, as it was not paid to the bank within the stipulated period and was converted into a loan account. The CIT(A) upheld this disallowance. The Tribunal remanded the matter back to the CIT(A) for verification of the bank statement from 1.4.2006 to the due date of filing the return, treating the ground as allowed for statistical purposes.

3. Disallowance of Labor Charges under Section 40(a)(ia):
The assessee did not press this ground during the hearing. Consequently, the Tribunal dismissed this ground as not pressed.

4. Capitalization of Interest under Section 36(1)(iii):
The AO capitalized Rs. 5,82,625 of interest in the hands of the Baddi unit, asserting that funds were diverted from the Dera Bassi unit to the Baddi unit, which was non-taxable. The CIT(A) upheld this decision, noting that the funds diverted included interest-bearing funds. The Tribunal confirmed this view, stating that the funds transferred had a cost, and interest on these funds needed to be allocated and capitalized in the hands of the Baddi unit.

5. Reduction of Claim under Section 80IC:
The AO allocated common expenses on a pro-rata basis between the Dera Bassi and Baddi units, reducing the claim under Section 80IC from Rs. 35,92,729 to Rs. 4,66,595. The CIT(A) upheld this allocation, noting the significant difference in net profit rates between the two units. The Tribunal confirmed this decision, emphasizing the need for proper allocation of common expenses to reflect true profits.

6. Disallowance of Inward Freight Charges under Section 40(a)(ia):
The AO disallowed Rs. 6,05,187 of inward freight charges, as the aggregate payments exceeded Rs. 50,000, attracting the provisions of Section 194C. The CIT(A) confirmed this disallowance, and the Tribunal upheld the CIT(A)'s decision, noting that the assessee failed to contradict the AO's findings.

7. Levy of Interest under Sections 234B, 234C, and 234D:
The CIT(A) confirmed the levy of interest under these sections, referring to relevant judgments. The Tribunal agreed with this decision, noting that the levy of interest is consequential and mandatory, thereby dismissing this ground.

Conclusion:
The appeal filed by the assessee was partly allowed, with specific grounds being dismissed, others confirmed, and one remanded for further verification. The Tribunal's decision emphasized compliance with statutory provisions and proper allocation of expenses to reflect true profits.

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