2014 (5) TMI 1075 - AT - Income Tax

Valuation on account of impurities - Held that - No interference is required in the order of the CIT(A) because he has allowed relief considering the trade practices, whereby the value of Gold in the ornaments manufactured, has been adjusted on account of impurities, alloy mixing, soldering joints, etc., whereas the Assessing Officer had adopted the rate of pure Gold. Nothing has been brought on record by the Revenue to establish any error in the approach of the CIT(A) in reducing the valuation on account of impurities, etc.. Accordingly, the action of the CIT(A) is hereby affirmed and the Revenue fails in its Ground of Appeal No.1. Addition on account of interest expenditure by invoking section 40A(2)(b) - Held that - Though the Assessing Officer was justified in examining the interest paid to M/s Gajara Finance within the prescription of section 40A(2) of the Act, so however, factually it is evident that the Assessing Officer failed to demonstrate as to how the payment of interest to M/s Gajara Finance @ 15% was excessive or unreasonable having regard to the market rate of interest, which was a condition precedent for making a disallowance in terms of section 40A(2)(a) of the Act. In this case, assessee pointed out before the CIT(A) that the loans raised from M/s Thane Janta Sahakari Bank Ltd. and ICICI Bank were on account of a cash credit facility and fo7r acquisition of car respectively. Both the loans were secured against assets and on the contrary, borrowing from M/s Gajara Finance was unsecured and this aspect clearly showed that the terms and conditions of the two borrowings were not similar. In-fact, this aspect also justifies the interest paid to M/s Gajara Finance at a rate higher than that paid to the banks. This aspect of the matter has not been controverted by the learned Departmental Representative before us, and continues to hold the field. Therefore, considering the aforesaid aspects and in view of the discussion of the CIT(A) which we have extracted above, Revenue has to fail on this Ground. Disallowance out of interest expenditure by invoking section 40A(2)(b) - Held that - The recipient organization to whom assessee has made the impugned payments. In order the CIT(A) has brought out the intended benefits, which the assessee was looking for, in return for incurring the expenditure. In our considered opinion, the decision of the CIT(A) does not require any interference inasmuch as he has factually brought out that considering the larger context of business expediency, the said expenditure has been incurred wholly and exclusively for the purposes of business. The order of the CIT(A) is hereby affirmed in the absence of any cogent material and reasoning with the Revenue to controvert the same. Thus, on this Ground also Revenue fails.

Summary

Issues Involved:
1. Deletion of addition on account of undervaluation of stock of gold.
2. Deletion of addition on account of investment not recorded in the books.
3. Deletion of addition made under section 40A(2)(b) of the Income-tax Act, 1961.
4. Disallowance out of interest expenditure under section 40A(2)(b) for the assessment year 2009-10.
5. Deletion of addition of membership fee payment for the assessment year 2009-10.

Detailed Analysis:

1. Deletion of Addition on Account of Undervaluation of Stock of Gold:
The Revenue challenged the deletion of an addition of Rs. 2,65,200/- made by the Assessing Officer (AO) due to undervaluation of stock of gold. The AO noted discrepancies in the gold stock declared during a survey and the gold stock recorded in the books. The AO reworked the cost of 5100 grams of gold, leading to the addition. The CIT(A) deleted the addition, considering the trade practices of allowing deductions for impurities, alloy mixing, and soldering joints. The Tribunal upheld the CIT(A)'s decision, noting that the AO had adopted the rate of pure gold without considering these factors. The Revenue failed to establish any error in the CIT(A)'s approach.

2. Deletion of Addition on Account of Investment Not Recorded in the Books:
The Revenue was aggrieved by the deletion of an addition of Rs. 2,75,000/- made by the AO for errors and omissions, and minor stock difference in silver and diamond. This amount was surrendered as additional income during the survey but was not offered in the return. The CIT(A) deleted the addition, noting that the disclosure was made without reference to any specific document or investment. The Tribunal affirmed this decision, stating that the AO did not provide any credible evidence to support the addition.

3. Deletion of Addition Made Under Section 40A(2)(b) of the Income-tax Act, 1961:
The AO disallowed Rs. 7,09,881/- as interest expenditure paid to M/s Gajara Finance, a related party, deeming it excessive compared to interest paid to banks. The CIT(A) deleted the addition, noting that the loan from M/s Gajara Finance was unsecured, justifying a higher interest rate. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not demonstrate how the interest rate was excessive or unreasonable compared to market rates.

4. Disallowance Out of Interest Expenditure Under Section 40A(2)(b) for the Assessment Year 2009-10:
For the assessment year 2009-10, the Revenue's appeal included a similar issue of disallowance of Rs. 20,03,823/- under section 40A(2)(b). The Tribunal applied its earlier decision from the assessment year 2008-09, dismissing the Revenue's appeal on this ground.

5. Deletion of Addition of Membership Fee Payment for the Assessment Year 2009-10:
The AO disallowed Rs. 4,00,000/- paid as membership fee to M/s Jain International Trade Organization, questioning its business purpose. The CIT(A) deleted the addition, highlighting the organization's objectives to promote business activities and the benefits expected by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure was incurred wholly and exclusively for business purposes, and the Revenue failed to provide contrary evidence.

Conclusion:
Both appeals by the Revenue for the assessment years 2008-09 and 2009-10 were dismissed. The Tribunal affirmed the CIT(A)'s decisions on all grounds, emphasizing the lack of credible evidence from the Revenue to support their claims. The order was pronounced in the open Court on 22nd May, 2014.