2013 (9) TMI 46 - AT - Income Tax

Unexplained income - Discrepancy in stock - Held that - in the peculiar facts and circumstances of the case, in the facts as it stand, the ground raised by the assessee deserves to be rejected. Even when the arguments advanced on behalf of the assessee are accepted for the moment, it is seen that the figures do not reconcile even then. Thus the assessee despite being given more than sufficient opportunity has not been able to explain the discrepancy in stock. No new document or evidence has been brought to the notice of the Bench, nor has the assessee been able to show how the document has been wrongly considered. As such neither on facts nor on law the assessee s explanation is acceptable, as the alleged practice on which reliance is being placed that larger stock shown to the bank for the purpose of getting higher loan or overdraft. The said practice cannot be given judicial notice - Following decision of Coimbatore Spinning & Weaving Co. Ltd. v. CIT 1973 (3) TMI 27 - MADRAS High Court , Ramanlal Kacharulal Tejmal v. CIT 1982 (7) TMI 24 - BOMBAY High Court and Dhansiram Agarwalla v. CIT 1992 (11) TMI 55 - GAUHATI High Court - Decided against assesee. Expenses in relation to income not forming part of total income section 14A Constitutional validity of section 14A - Held that - no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1) - The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis - The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid - The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution - the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition due to difference in stock as per books of account and stock statement submitted to the bank.
2. Disallowance of interest incurred for the appellant's business.

Issue 1: Addition due to Difference in Stock

The primary issue was the addition of Rs. 2,60,020 made by the Assessing Officer (AO) due to a discrepancy between the stock as per the books of account and the stock statement submitted to the bank. The assessee argued that the difference was due to goods in transit and cash sales, which were not reflected correctly. The AO rejected this explanation due to the absence of a stock book and added the difference to the total income. The Commissioner of Income-tax (Appeals) upheld this addition, noting that the assessee failed to produce the stock register and that the explanations provided were not reliable. The Tribunal also found the explanations unconvincing and upheld the addition, citing that the figures did not reconcile even after considering the assessee's arguments. The Tribunal referenced several cases, including Coimbatore Spinning & Weaving Co. Ltd. v. CIT and Ramanlal Kacharulal Tejmal v. CIT, to support the decision that the practice of showing larger stock to obtain higher loans cannot be judicially recognized.

Issue 2: Disallowance of Interest

The second issue was the disallowance of Rs. 94,244 attributed to investments resulting in exempt income. The Commissioner of Income-tax (Appeals) confirmed this disallowance, stating that the investments were not made out of the assessee's own funds. The assessee referenced the decision of the Tribunal in Deputy CIT v. Bush Tea & P. Ltd., suggesting that disallowance should be limited to one percent of the total exempt income, a practice consistently followed by the Kolkata Benches. The Tribunal agreed with this argument and restricted the disallowance to one percent of the total exempt income, following the Mumbai High Court's judgment in Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT, which stated that rule 8D would apply prospectively from the assessment year 2008-09.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the addition of Rs. 2,60,020 due to the discrepancy in stock but restricted the disallowance of interest to one percent of the total exempt income. The order was pronounced in the open court on August 9, 2011.