2011 (9) TMI 1018 - AT - Income Tax

Trading addition - disallowance of packing material expenses - determine the annual letting value ,obtain rent from the similarly placed property - disallowance of of packing material expenses - Addition of loading & unloading expenses - addition u/s 41(1)

Issues Involved:
1. Trading addition.
2. Applicability of Section 14A.
3. Determination of rental income.
4. Disallowance of packing material expenses.
5. Disallowance of loading and unloading expenses.
6. Addition under Section 41(1) for unverifiable sundry creditors.

Issue-wise Detailed Analysis:

1. Trading Addition:
The assessee and the Revenue contested the trading addition of Rs. 3.00 lacs confirmed by the CIT(A) against the Rs. 15.00 lacs made by the AO. The AO rejected the books of accounts due to various discrepancies, including variations in mustard oil yield, increased expenses despite falling sales, unverifiable closing stock, and royalty charges. The CIT(A) justified the trading addition but reduced it to Rs. 3.00 lacs. The Tribunal, referencing a similar case from the preceding year, deleted the trading addition, noting better trading results during the year. Thus, the assessee's ground was allowed, and the Revenue's ground was dismissed.

2. Applicability of Section 14A:
The assessee contested the disallowance of Rs. 11,26,190/- under Section 14A. The AO disallowed this amount, attributing it to investments yielding tax-exempt income. The CIT(A) upheld the AO's decision but directed a rework of the disallowance after examining the income and expenditure related to such investments. The Tribunal noted that the rental income from the building at Hanuman Nagar was taxable, thus not subject to Section 14A. However, investments in shares yielding exempt dividend income justified the application of Section 14A. The AO was directed to establish a nexus between borrowed funds and investment in shares before disallowing interest.

3. Determination of Rental Income:
The assessee challenged the CIT(A)'s direction to the AO to obtain rent from similarly placed properties. The AO had estimated the annual value of the property at Rs. 4,32,000/-, higher than the actual rent received. The CIT(A) directed the AO to rework the annual value based on comparable properties. The Tribunal upheld the CIT(A)'s direction but instructed the AO to follow principles laid down by the Delhi High Court, ensuring the annual letting value (ALV) is reasonable and not influenced by extraneous circumstances.

4. Disallowance of Packing Material Expenses:
The assessee contested the disallowance of Rs. 1.00 lac out of Rs. 6,30,218/- made by the AO. The AO found the packing material expenses higher than the preceding year despite lower turnover. The CIT(A) reduced the disallowance to Rs. 1.00 lac. The Tribunal, noting the expenses were fully vouched and justified by increased sales of packed oil, deleted the disallowance. Thus, the assessee's ground was allowed, and the Revenue's ground was dismissed.

5. Disallowance of Loading and Unloading Expenses:
The assessee contested the disallowance of Rs. 50,000/- out of Rs. 2,32,140/- made by the AO. The AO noted an abnormal increase in these expenses compared to the preceding year. The CIT(A) reduced the disallowance to Rs. 50,000/-. The Tribunal, acknowledging the expenses were supported by internal vouchers but not fully verifiable, restricted the disallowance to Rs. 70,000/-. Thus, the assessee's ground was dismissed, and the Revenue's ground was partly allowed.

6. Addition under Section 41(1) for Unverifiable Sundry Creditors:
The Revenue contested the deletion of Rs. 5,91,163/- added by the AO for unverifiable sundry creditors. The CIT(A) deleted the addition based on additional evidence not confronted to the AO. The Tribunal remanded the issue to the AO for fresh consideration, ensuring the additional evidence is examined.

Conclusion:
The Tribunal partly allowed the appeals of both the assessee and the Revenue, delivering a detailed judgment addressing each issue comprehensively. The order was pronounced on 23-09-2011.

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