2014 (4) TMI 781 - AT - Income Tax

Deletion of disallowance of finance charges Held that - The proportionate disallowance was made by the AO because he was of the opinion that the assessee had incurred direct expenses of Rs.3.57 Crores against which there existed a closing stock of Rs.1.38 Crores and proportionate and accordingly disallowance had to be made - the assessee had claimed that interest was utilised by it for carrying out of its business -AO has not given any finding as to how the said claim of the assessee was incorrect - Assessee was following the same practice, writing its books of accounts as per the Accounting Standards, in earlier years and AO had never pointed out any defect in that practice - It is true that the AO can deviate from the stand taken in earlier years, but for doing so, he has to give cogent reasons which are not present in the particular case - the FAA was correct in holding that the basis for calculating WIP at 42% was not clear - expenses can be capitalised in certain conditions, but if AO wants to capitalise any expenses he has to clearly mention the facts leading to his conclusion - Assessee has never capitalied expenditure Decided against Revenue. Deletion of disallowance u/s 69B of the Act Unexplained investment Held that - The assessee had hired a premises and paid Rs.20 lakhs to SG, that AO had gathered information from SG but did not inform the assessee about the result of his inquiry - AO has to confront the assessee with the information that he collects behind the back of the assessee and uses against it - the AO has violated the basic principle of natural justice and only on this basis ground of appeal taken by him can be dismissed - the FAA has held that transaction was with the SM it is not known whether assessee had hired any other premises besides the SG thus, the matter is required to be remitted back to the FAA for fresh consideration Decided in favour of Revenue. Deletion on account of service tax Held that - The assessee was not routing the transactions of ST through the P&L A/c. and that it was dealing with ST only in the balance sheet - FAA has given a finding of fact that the basis for making addition was incorrect the order of the FAA is upheld Decided against Revenue. Disallowance of cash expenses on estimate basis Held that - FAA rightly mentioned that the AO had not verified even a single bill or voucher that could be treated as bogus - He made a lump sum addition on ad hoc basis the approach has been rightly rejected by the FAA - But, while granting relief, FAA restricted the disallowance to 20% - the FAA has also not identified the bills/vouchers that could be disallowed - FAA could have directed the AO to furnish a remand report in this regard or could have directed the assessee to filed further details of payments of wages and food but, FAA choose not take any of those steps and held that there was possibility of expenses being personal/ non-professional in nature - In absence of any detail it could not be held that as to which expenditure could be termed as non-professional expenditure thus, the order of the FAA is reversed Decided in favour of Assessee. Possibility of incurring of expenditure cannot take place of evidences and tax liability cannot be fastened to an assessee on the basis of some possibility.Therefore, we are not able to persuade ourselves to confirm the order of the FAA.Reversing the order of the FAA, we decide effective ground of appeal in favour of the assessee. Disallowance of adhoc expenses 20% of wages and conveyance Held that - FAA was correct in holding that disallowance should not be made for the material purchased -FAA has restricted the disallowance to 20% of wages and conveyance expenditure - But no reason has been given for sustaining the partial disallowance - without pointing out the mistakes in the books of accounts or in the vouchers/bills maintained by the assessee, no addition could be made under any head of expenditure - AO had two occasions to pass a reasoned order or bringing the relevant facts on record - But, he did not apply his mind the order of the FAA is reversed Decided in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of finance charges.
2. Unexplained investment under Section 69B.
3. Addition on account of service tax under Section 43B.
4. Disallowance of cash expenses.
5. Ad hoc disallowance of wages and conveyance.

Issue-Wise Detailed Analysis:

1. Disallowance of Finance Charges:
The Assessing Officer (AO) disallowed finance charges of Rs. 11,48,496, arguing that 42% of the episodes produced were kept as work in progress (WIP) and not sold, thus finance charges should be capitalized. The assessee contended that the finance charges were fully laid out for business purposes and should not be capitalized. The First Appellate Authority (FAA) agreed with the assessee, noting that the AO did not provide reasons for deviating from past practices or for considering WIP as a capital asset. The tribunal upheld the FAA's decision, stating that the AO failed to provide cogent reasons for the disallowance and did not address the ownership of the serials.

2. Unexplained Investment Under Section 69B:
The AO made an addition of Rs. 1,00,000 for unexplained investment, based on discrepancies in payments to M/s. Studio Gold (SG). The FAA found that the AO did not cross-verify the transactions and that the discrepancy was due to an entry error by Studio Magnum (SM), not SG. The tribunal noted that the AO violated natural justice by not confronting the assessee with the inquiry results and remanded the matter to the FAA for fresh adjudication.

3. Addition on Account of Service Tax Under Section 43B:
The AO added Rs. 2,09,24,075 to the assessee's income, claiming that service tax (ST) receipts were not credited to the profit and loss (P&L) account. The FAA found that the AO's remand report was incomplete and that the assessee did not route ST through the P&L account. The tribunal confirmed the FAA's decision, agreeing that the addition was based on incorrect assumptions and that the assessee's treatment of ST was appropriate.

4. Disallowance of Cash Expenses:
The AO disallowed 80% of cash expenses, citing a lack of evidence and the possibility of personal or non-professional expenses. The FAA reduced the disallowance to 20%, noting that the AO did not verify any vouchers or identify any specific expenses as non-business-related. The tribunal found that the AO's disallowance was arbitrary and lacked proper reasoning. It reversed the FAA's partial disallowance, ruling in favor of the assessee.

5. Ad Hoc Disallowance of Wages and Conveyance:
The AO disallowed 20% of wages and conveyance expenses, arguing that the expenses were not adequately supported by vouchers. The FAA upheld the partial disallowance, stating that some expenses were likely personal or non-professional. The tribunal disagreed, noting that the AO did not provide specific reasons for the disallowance and that the FAA did not justify the 20% figure. The tribunal reversed the FAA's decision, ruling in favor of the assessee.

Conclusion:
The tribunal dismissed the appeals filed by the AO for AY 2006-07 and partly allowed the appeal for AY 2007-08. The appeals filed by the assessee for both assessment years were allowed. The tribunal emphasized the need for the AO to provide clear and cogent reasons for any disallowances and to adhere to principles of natural justice.