2014 (7) TMI 1028 - AT - Income Tax

Rejection of books of accounts Held that - The shareholders of the company appointed new auditors who submitted audit report on 01.09.2009 and the assessment was completed on 31.12.2010 without considering the same - it is mandatory to file return in time as prescribed in section 139 (1) of the Act as provided in Fourth Proviso to section 10 (B)(1) of the Act - This appears to be a reasonable cause to file return in haste and on the basis of unaudited results and statement of accounts - it is not a case of non-maintenance or not keeping stock register but it is case of not having stock register being maintained according to certain standard of compliance required by the auditors - the issue of rejection of books of accounts is remitted back to the AO with a direction that the qualifications mentioned in the audit report Decided in favour of Assessee. Gross Profit rate to be applied @ 28.39% or 12.55% - Held that - The AO has not properly verified and examined the explanation of assessee pertaining to decline in GP rates at Bhiwadi and Delhi unit - neither the AO nor the CIT (A) attempted to examine the veracity of reasons submitted by the assessee for decline in GP rate AO as well as the CIT (A) made and confirmed the addition mainly on the reason that books of accounts stood rejected - As the issue of rejection of books to the file of the AO for fresh and de novo adjudication - the issue of GP rate is also remitted back to the AO for fresh adjudication Decided in favour of Assessee. Managerial remuneration and salary to director s relatives Held that - The managerial remuneration which could be paid by the assessee per managerial person comes to ₹ 1,25,000/- monthly or say ₹ 15 lacs per annum - the amount paid is only ₹ 12,96,000 - this is well within the limit as prescribed in the Companies Act, 1956 - CIT (A) was not justified in sustaining the same - the salary can be paid to relative of the directors were up to ₹ 20,000/- per month or ₹ 2,40,000/- per annum - the salary paid was only ₹ 2,40,000/-, therefore, the payment was also within the limits of Companies Act, 1956 which does not require any approval from Board or Central Government Decided in favour of Assessee. Foreign exchange fluctuation loss - Held that - The issue is covered by the judgment CIT vs. Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT - Loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Act - Under the mercantile system of accounting, what is due is brought into credit before it is actually received, it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed Decided in favour of Assessee. Disallowance of VAT written off Profits chargeable to tax under s. 41(1) - Held that - Following the decision in ITO vs. Binayak Hi Tech Engg. Ltd. 2012 (5) TMI 331 - ITAT, Kolkata - Refund arises pursuant to the decision of the commercial tax authority who has to adjudicate the claim After the claim of refund is made by the assessee in the prescribed form, the Commercial Tax Department has to accept or reject the claim No benefit has accrued to the assessee during the relevant year as the claim was not adjudicated by the commercial tax authority Therefore, refund receivable by the assessee is not chargeable to tax - the refund of VAT receivable by the assessee is not chargeable to tax u/s 41(1) until the claim of refund is adjudicated by the commercial tax authority Decided in favour of Assessee. Exemption u/s 10B Held that - As decided in assessee s own case for the earlier assessment year, it has been held that, drawback received by the assessee under a scheme to encourage export was not profit and gains derived from industrial undertaking and therefore, not entitled for deduction u/s 80IB - the assessee has been allowed claim u/s 10B but with certain observations in the earlier orders - the claim of the assessee is allowed on the same conditions Decided in favour of Assessee.

Issues Involved:
1. Rejection of books of accounts.
2. Addition to gross profit rate.
3. Disallowance of managerial remuneration and salary to relatives of the director.
4. Disallowance of foreign exchange fluctuation loss.
5. Disallowance of VAT written off.
6. Denial of exemption under section 10B.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts:
The assessee's books of accounts were rejected by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the delay in auditing was due to disputes among the directors and the appointment of new auditors. The books were prepared in compliance with section 145 of the Income-tax Act, 1961, despite the auditors' technical observations. The Tribunal set aside the issue to the AO for re-examination, directing consideration of whether the qualifications in the audit report were procedural and did not affect the taxable income.

2. Addition to Gross Profit Rate:
The AO made additions by applying gross profit rates of 28.39% for the Bhiwadi unit and 12.55% for the Delhi unit, which were confirmed by the CIT(A). The assessee explained the decline in gross profit due to factors like exchange rate fluctuations and increased purchase prices. The Tribunal noted that the AO did not properly verify these explanations and set aside the issue to the AO for a fresh examination, considering the reasons for the decline in gross profit.

3. Disallowance of Managerial Remuneration and Salary to Relatives of Director:
The AO disallowed managerial remuneration of Rs. 12,96,000 and salary to relatives of the director amounting to Rs. 2,40,000, based on the auditor's report. The Tribunal found that the remuneration was within the limits prescribed by the Companies Act, 1956, and did not require approval from the Board or Central Government. Therefore, the disallowance was not justified, and the Tribunal allowed this ground of the assessee's appeal.

4. Disallowance of Foreign Exchange Fluctuation Loss:
The AO disallowed a foreign exchange fluctuation loss of Rs. 43,01,660, which was confirmed by the CIT(A). The Tribunal referred to the Supreme Court's judgment in CIT vs. Woodward Governor India Pvt. Ltd., which held that loss due to foreign exchange fluctuation is an item of expenditure under section 37(1) of the Income-tax Act, 1961. Respectfully following this judgment, the Tribunal allowed this ground of the assessee's appeal.

5. Disallowance of VAT Written Off:
The AO disallowed an amount of Rs. 84,478 on account of VAT written off, stating it was a statutory payment and not allowable. The Tribunal referred to the ITAT judgment in ITO vs. Binayak Hi-Tech Engg. Ltd., which held that VAT refund receivable is not chargeable to tax under section 41(1) until adjudicated by the commercial tax authority. Following this decision, the Tribunal allowed this ground of the assessee's appeal.

6. Denial of Exemption Under Section 10B:
The AO denied the exemption under section 10B, which was confirmed by the CIT(A). The assessee argued that it fulfilled all conditions for exemption, and such deduction was allowed in previous years. The Tribunal noted that the claim under section 10B was allowed in earlier years with certain observations. Therefore, the Tribunal directed the AO to allow the claim on the same conditions as in previous years.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, with directions for fresh examination and adjudication by the AO on several issues. The Tribunal provided detailed reasons and referenced relevant legal precedents to support its decisions on each issue.

← Previous Next →