2012 (9) TMI 1025 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition out of repair expenses treated as capital expenditure.
2. Deletion of addition on account of fall in gross profit.
3. Deletion of addition u/s 40(a)(ia) on account of non-deduction of TDS on ocean freight expenses.
4. Deletion of addition on account of under valuation of closing stock u/s 145A.

Summary:

1. Deletion of Addition out of Repair Expenses Treated as Capital Expenditure:
The Revenue challenged the deletion of Rs. 29,52,263/- out of repair expenses treated as capital expenditure. The Assessing Officer (AO) had allowed only 25% of the claimed expenses as revenue expenditure, adding the remaining amount to the assessee's income. The CIT(A) found that the expenses were for repairs and replacements, not capital in nature, and improved yield and productivity without creating new assets or enduring benefits. The Tribunal upheld the CIT(A)'s decision, noting the AO's failure to identify specific items as capital expenditure and confirming that the expenses were necessary due to the nature of the business and the age of the machinery.

2. Deletion of Addition on Account of Fall in Gross Profit:
The Revenue contested the deletion of Rs. 44,68,426/- added due to a fall in gross profit (GP). The AO had estimated the GP rate at 24% due to a significant decline from the previous year's 50.70% to 3.96%. The CIT(A) accepted the assessee's explanations, including lower production levels, change in product mix, and increased excise duty, and found no defects in the maintenance of accounts. The Tribunal partially upheld the Revenue's appeal, restricting the GP addition to 10%, directing the AO to recalculate the income accordingly.

3. Deletion of Addition u/s 40(a)(ia) on Account of Non-Deduction of TDS on Ocean Freight Expenses:
The Revenue appealed against the deletion of Rs. 3,71,878/- added u/s 40(a)(ia) for non-deduction of TDS on ocean freight expenses. The CIT(A) relied on Circular No. 723, which states that provisions of section 172 override section 194C, and no TDS is required for payments to non-resident shipping companies. The Tribunal upheld the CIT(A)'s decision, confirming that the payments were reimbursements to non-resident shipping agents and not subject to TDS u/s 194C.

4. Deletion of Addition on Account of Under Valuation of Closing Stock u/s 145A:
The Revenue challenged the deletion of Rs. 1,49,882/- added for under valuation of closing stock without including excise duty as required u/s 145A. The CIT(A) relied on the Supreme Court decision in CIT v. Indo Nippon Chemicals Co. Ltd. and other precedents. The Tribunal set aside this issue, remitting it back to the AO to recalculate the closing stock as per section 145A, considering the amendment effective from 1-4-1999.

Conclusion:
The Tribunal partly allowed the Revenue's appeal for statistical purposes, upholding some findings of the CIT(A) while remanding others for recalculation.