2012 (12) TMI 249 - AT - Income Tax

Addition made u/s.40A(2)(b) of the Act interest to sister concerns - Held that - The A.O. made hypotheticated calculation in assessment order without any base and material. The addition was made on presumption. In both years, there is no nexus between the borrowed fund and interest free loan. The assessee did not take substantial interest in the business of the specified person or the specified person has a substantial interest in the business of the assessee. The A.O. has not brought on record any evidence regarding the assessee has substantial interest in M/s. Yuletide Industries Private Ltd. and M/s Covenent Investment Co. Ltd. and vice versa. Further interest free loan given to alleged sister concern were part consideration of service rendered by both the companies. - In favor of assessee Disallowance on account of adjustment of Excise Duty on purchase, sales and closing stock u/s 145A of the Act The claim of decrease in profit Held that - . In Section 145A, there is an amendment w.e.f. 01.04.1999 in Subclause b of Section 145A. - Adjustment to include the amount to any tax, duty, cess or fee (whatever name called), actually paid or incurred by the assessee to bring goods to the place of its location and condition as on date of valuation is required to adjust as per law by the A.O. Therefore, the A.O. is directed to make suitable adjustment as per law after giving the opportunity of being heard to the assessee. - Accordingly, this issue is set aside to the A.O - appeals are partly allowed and decided for statistical purpose.

Summary

Issues Involved:
1. Disallowance under Section 40A(2)(b) of the IT Act for interest-free advances.
2. Adjustment of Excise Duty on closing stock under Section 145A of the IT Act.

Detailed Analysis:

1. Disallowance under Section 40A(2)(b) of the IT Act:

Transactions with M/s. Baroda Intermediates Pvt. Ltd. (BIPL):
- The assessee company had a service contract with BIPL, where it provided raw materials and paid service charges of Rs. 1,75,000/- per month. The assessee also gave an interest-free deposit of Rs. 50 lakhs to BIPL.
- The Assessing Officer (A.O.) argued that the interest-free deposit should be considered in evaluating the reasonableness of the service charges under Section 40A(2)(a) r.w.s. 40A(2)(b). The A.O. disallowed Rs. 5,25,000/- as excessive payment.
- The CIT(A) held that the transactions were not with specified persons under Section 40A(2)(b) because the shareholding did not meet the "substantial interest" threshold. The CIT(A) also found the payments reasonable and beneficial for the assessee's business, thus deleting the disallowance.

Transactions with M/s. Yuletide Industries Pvt. Ltd. (YIPL):
- The assessee had a similar arrangement with YIPL, with a deposit of Rs. 45 lakhs and service charges of Rs. 27 lakhs. The A.O. calculated a disallowance of Rs. 1,50,853/- based on notional interest and service charges.
- The CIT(A) again ruled that Section 40A(2)(b) did not apply as the shareholding did not meet the "substantial interest" criteria. The CIT(A) found the payments reasonable and beneficial, deleting the disallowance.

Tribunal's Decision:
- The Tribunal upheld the CIT(A)'s decision, noting that the A.O.'s calculations were hypothetical and lacked substantial evidence. There was no nexus between borrowed funds and interest-free loans, and no substantial interest in the business of the specified persons. The Tribunal confirmed the deletion of disallowances for both years.

2. Adjustment of Excise Duty on closing stock under Section 145A of the IT Act:

Assessment Year 2005-06:
- The A.O. made adjustments for excise duty not accounted for in the Profit & Loss Account, leading to a disallowance of Rs. 4,59,676/-.
- The CIT(A) referred to the Madras High Court decision in English Electric Co of India Ltd., which held that excise duty should not be included in the value of unsold finished goods. The CIT(A) deleted the addition.

Tribunal's Decision:
- The Tribunal acknowledged the amendment in Section 145A effective from 01.04.1999, requiring adjustments for taxes, duties, etc., to bring goods to their location and condition as of the valuation date. The Tribunal directed the A.O. to make suitable adjustments as per law after providing the assessee an opportunity to be heard.

Conclusion:
- The Tribunal dismissed the revenue's appeals concerning disallowances under Section 40A(2)(b) for both assessment years, confirming the CIT(A)'s deletion of the additions.
- The Tribunal set aside the issue of excise duty adjustment to the A.O. for re-evaluation as per the amended Section 145A, allowing the appeals for statistical purposes.