2011 (9) TMI 805 - AT - Income Tax

Trading addition - AO drew monthly P&L a/c on the basis of information given by assessee to the bank for the purpose of availing of the credit facilities, and disallowed the losses incurred by the assessee in some of the months - Held that - The method of computation of P&L a/c by the AO cannot be approved as this is against the norms of any business or the guidelines issued by the ICAI. In the months where the AO has computed the profit, the same is in the range more than 50 to 79 per cent, which is not possible in any of trading/manufacturing activities. Therefore, CIT(A) was justified in deleting the addition made by the AO - Decided in favor of assessee. Cenvat credit - addition made for difference in Cenvat credit availed of Rs. 75,29,635 as mentioned in Form 3Cd report against cenvat credited to P/L A/c for Rs. 70,45,042 - Held that - It is undisputed that Credit of excise duty paid on purchases is available from excise duty to be paid on finished goods when the goods will be sold. In the year under consideration, excise duty paid on raw material is more than the excise duty collected on sales. Cenvat Credit available will be adjusted against the excise duty payable in the next year. It will not be liable to tax as it does not constitute income in the hands of the assessee. Miscellaneous adjustments viz liquidated damages on account of delayed supply made to Government, amount received less from the sales made to the public sector undertakings - Held that - In a case when some deductions are made either on account of liquidated damages or otherwise, the deductions so made will be allowable as business expenditure. In any case the amount which has not been paid by the purchaser cannot be treated as income. Traveling expense incurred on foreign travel expenses - Held that - In the absence of evidence to prove that the expenditure was incurred wholly and exclusively for the purpose of the business, the dis-allowance made by the AO in respect of foreign travel has to be upheld - Appeal is partly allowed.

Summary

Issues Involved:
1. Deletion of trading addition of Rs. 76,84,169.
2. Deletion of addition of Rs. 4,84,000 on account of Cenvat credit.
3. Deletion of addition of Rs. 1,38,066 on account of liquidated damages.
4. Deletion of addition of Rs. 3,45,546 on account of miscellaneous adjustments.
5. Deletion of addition of Rs. 97,000 on account of travelling expenses.

Issue-wise Detailed Analysis:

1. Deletion of Trading Addition of Rs. 76,84,169:
The AO issued summons under s. 131 to the Manager of State Bank of India to furnish a statement of stock for the financial year 2006-07. Based on the information provided, the AO computed a monthly trading account and found losses in June, December, and March. The AO disallowed these losses due to the lack of explanation from the assessee, resulting in an addition of Rs. 76,84,169. On appeal, the assessee argued that the AO failed to appreciate the manufacturing process and that profits/losses should be calculated annually, not monthly. The CIT(A) agreed, noting that monthly variations in profits are normal and that the AO's method was not justified. The Tribunal upheld the CIT(A)'s decision, stating that the AO's method of monthly P&L computation was against business norms and ICAI guidelines. The addition was deleted.

2. Deletion of Addition of Rs. 4,84,000 on Account of Cenvat Credit:
The AO noted a discrepancy between the Cenvat credit availed (Rs. 75,29,635) and the amount credited in the P&L account (Rs. 70,45,042), leading to an addition of Rs. 4,84,593. On appeal, the assessee explained that the difference was due to the excise duty paid on raw materials, which would be adjusted in the next financial year. The CIT(A) relied on the Supreme Court's decision in CIT v. Indo Nippon Chemicals Co. Ltd., which held that Modvat credit is not taxable income. The Tribunal agreed, stating that the Cenvat credit does not constitute income and will be adjusted against excise duty payable in the next year. The addition was deleted.

3. Deletion of Addition of Rs. 1,38,066 on Account of Liquidated Damages:
The AO disallowed the deduction of Rs. 1,38,066 for liquidated damages, considering it not allowable under s. 36(1)(vii) r/w s. 36(2). The assessee argued that these damages were due to delayed deliveries to Government undertakings and were a normal business expense. The CIT(A) agreed, noting that liquidated damages are part of normal business operations and thus allowable as business expenditure. The Tribunal upheld the CIT(A)'s decision, stating that such deductions are common in contract business and should be treated as business expenditure. The addition was deleted.

4. Deletion of Addition of Rs. 3,45,546 on Account of Miscellaneous Adjustments:
The AO disallowed Rs. 3,45,546 for miscellaneous adjustments, considering it not allowable under s. 36(1)(vii) r/w s. 36(2). The assessee argued that this amount represented less recovery of sale proceeds, which is normal in contract business. The CIT(A) agreed, noting that short recoveries are routine in contract business and should be allowable as expenses. The Tribunal upheld the CIT(A)'s decision, stating that such deductions are common and should be treated as business expenditure. The addition was deleted.

5. Deletion of Addition of Rs. 97,000 on Account of Travelling Expenses:
The AO disallowed Rs. 97,000 of the Rs. 4,07,063 incurred on foreign travel due to lack of supporting evidence. The assessee argued that the expenses were for business exploration, even though no transactions materialized during the year. The CIT(A) noted that partners are entitled to travel for business exploration and disallowed the AO's addition. The Tribunal, however, found that the assessee failed to provide evidence proving the business purpose of the travel. The Tribunal restored the AO's disallowance, upholding the addition of Rs. 97,000.

Conclusion:
The appeal filed by the Revenue is partly allowed. The Tribunal upheld the deletions made by the CIT(A) for the trading addition, Cenvat credit, liquidated damages, and miscellaneous adjustments. However, it restored the AO's addition for travelling expenses.