2010 (2) TMI 926 - AT - Income Tax

Addition on account of suppression of job charges received by the assessee - Assessing Officer observed that on verification of books of account, various defects and discrepancies were noted - shortage of production is worked out on the basis of findings that production for the month of September, 2003 is accepted parameter and if the ratio of the consumption to production for this month is applied, there is a suppression of production for other months - Fallacy lies in comparing the consumption of electricity with production on monthly basis - Held that - if books of account are to be rejected and even if the income is estimated since almost same result are declared by the assessee, no further addition is called for particularly when the learned Commissioner of Income-tax (Appeals) has applied the gross profit rate of 17 per cent - cloth cannot be processed merely by using electricity, it also requires the consumption of various dyes and chemical and also use of manpower. For all these factors, no adverse finding is given by the Assessing Officer, consumption of intermediate and labour behind this is sufficient for the production achieved by the assessee, Considering all these factors, there is no case of addition as made out by the Assessing Officer, no justification for sustaining the addition as proposed by the Assessing Officer Disallowance of interest expenditure - AO observed that a sum of Rs. 40,00,677 was debited as interest in family members and concern specified under section 40A(2)(b) and the interest paid was more than the net income of the assessee - Assessing Officer held that the assessee had not given any evidence to prove that the deposits obtained from the family members were used for business purposes and not for creating assets - assessee has furnished a table explaining the date of receipt of deposits during the year and utilisation thereof - in respect of the amount borrowed earlier, it was held to be for the purpose of business and interest payable thereof was held as allowable expenditure - deposits received during the year for repayment of old business loan can be considered as amount borrowed for the purpose of business and hence, interest thereon is allowable under section 36(1)(iii) of the Act. Presumption of the Assessing Officer is that the deposits is taken for the purpose of placing fixed deposits is without any basis, no justification for upholding disallowance of interest Disallowance of expenses - AO disallowed various expenses like conveyance, auto fair, tea, coffee, cold drink, water expenses, etc - AO held that only self generated vouchers were prepared and no bills are provided in respect of such expenses - Commissioner of Income-tax (Appeals) upheld the disallowance being registration charges of car by treating the same as capital expenditure and in respect of other expenses, was held disallowable Held that - expenses as considered as the Assessing Officer are such in respect of which only self made vouchers can be prepared. The same cannot be of pucca bill, Since, the vouchers contained the details as to the persons in receipt of the amount and purposes for which the expenses are incurred, the same being in the course of business are allowable as such, order of the learned Commissioner of Income-tax (Appeals) needs no interference, appeal of the Revenue is dismissed

Summary

Issues Involved:

1. Deletion of addition on account of suppression of job charges.
2. Deletion of disallowance of interest expenditure.
3. Part deletion of disallowance out of various expenses.

Detailed Analysis:

1. Deletion of Addition on Account of Suppression of Job Charges:

The Revenue's appeal contested the deletion of Rs. 1,66,76,750 added due to alleged suppression of job charges. The Assessing Officer (AO) noted discrepancies in the production ratios and consumption of electricity and gas, leading to the conclusion that the assessee suppressed actual production and job charges. The AO benchmarked the production of September 2003 and calculated suppressed production for other months, leading to the addition.

The Commissioner of Income-tax (Appeals) (CIT(A)) disagreed with the AO's method, noting that the AO did not fully appreciate the reasons for low production in other months and the complexity of the dyeing and printing process. The CIT(A) observed that the AO's reliance on electricity consumption was flawed due to variations in production processes and the impact of external factors like strikes. The CIT(A) also noted that the excise authorities did not find any discrepancies in the production records. Consequently, the CIT(A) deleted the addition but estimated a higher gross profit rate of 17%, leading to a minor addition of Rs. 4.76 lakhs.

The Tribunal upheld the CIT(A)'s decision, emphasizing the complexity of the dyeing and printing process and the various factors affecting electricity consumption and production. The Tribunal found no justification for the AO's addition, noting that the gross profit rate declared by the assessee was comparable to the previous year.

2. Deletion of Disallowance of Interest Expenditure:

The AO disallowed Rs. 3,03,000 out of interest expenditure, arguing that the assessee did not prove that deposits from family members were used for business purposes. The AO noted that the assessee had substantial fixed deposits, implying that interest-bearing funds were not fully utilized for business.

The CIT(A) deleted the disallowance, noting that there was no nexus between the borrowed funds and the fixed deposits. The CIT(A) found that the fixed deposits were created through an auto-sweep account, and the AO's presumption was hypothetical.

The Tribunal upheld the CIT(A)'s decision, noting that the deposits received during the year were used to repay old business loans. Since the interest on the old loans was allowed as a business expense, the interest on the new deposits used for repayment was also allowable under section 36(1)(iii) of the Act.

3. Part Deletion of Disallowance Out of Various Expenses:

The AO disallowed Rs. 2,63,022 out of various expenses like conveyance, auto fare, and refreshments, citing the use of self-generated vouchers without proper bills. The CIT(A) upheld the disallowance of Rs. 28,500 for car registration charges as capital expenditure and allowed Rs. 20,000 out of other expenses.

The Tribunal upheld the CIT(A)'s decision, noting that the nature of the expenses justified the use of self-made vouchers. Since the vouchers contained details of the recipients and the purposes of the expenses, they were allowable as business expenses.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all issues, including the deletion of the addition on account of suppression of job charges, the deletion of disallowance of interest expenditure, and the partial deletion of disallowance out of various expenses.