2015 (4) TMI 592 - AT - Income Tax

Disallowance on account of loss due to flood - CIT(A) allowed the claim - Held that - The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. We find that the ld.CIT(A) has observed that the assessee followed the principle and signed in the notified accounting standards. Therefore, the assessee claimed loss due to flood, on mercantile basis in the year in which the said loss (liability) had arisen. We also find that the AO has disallowed the claim on the basis that the extent of damages due to flood was not ascertainable in the assessment year under consideration. It is not in dispute that loss has occurred during the year under consideration, however the dispute is that the loss and quantification thereof are not ascertainable in the year under consideration. We do not agree with this reasoning of AO in rejecting the claim in view of the principle laid down by the Hon'ble Apex Court in the case of Bharat Earth Movers vs. CIT 2000 (8) TMI 4 - SUPREME Court - Decided against revenue. Disallowance u/s 14A - CIT(A) restricting the disallowance - Held that - CIT(A) has given a finding that the assessee has been able to establish this fact from its account that no portion of interest bearing-funds were utilized by the applicant in making the aforesaid investments and, therefore, the applicant has not really incurred any direct expenditure for earning the exempt income. This finding of ld.CIT(A) has not been controverted by the Revenue by placing any material contrary. Therefore, we no reason to interfere with the order of the ld.CIT(A) on this issue, same is hereby upheld. In respect of disallowance to 0.5% of value of investments amounting to ₹ 42,423/-, the ld.CIT-DR submitted that the order of the ld.CIT(A) is justified on this ground. We find that the assessee has not challenged the finding of the ld.CIT(A) by filing a cross-objection, therefore this finding of ld.CIT(A) is not interfered - Decided partly in favour of revenue. Late delivery charges debited by the assessee disallowed - CIT(A) allowed the claim - Held that - in this case, no remand report was sought for from the AO by the ld.CIT(A) before deleting the disallowance on the basis of evidence adduced by the assessee-company. The AO has categorically given a finding that no evidence was produced to prove that such late delivery charges have been crystallized during the year under consideration. We find that the ld.CIT(A) has also not given any finding as to what were the terms of agreement between the assessee and the customers. Thus we cannot approve the finding of the ld.CIT(A), therefore the order of the ld.CIT(A) on this issue is set aside and the issue is restored back to the file of ld.CIT(A) for decision afresh since the order passed by the ld.CIT(A) is not a speaking order - Decided in favour of revenue for statistical purposes. Disallowance u/s.40A(2)(a) - CIT(A) allowed the claim - Held that - The GP Margin of the firm for FY 04-05 was 18.71% and also during the period from April-July, 2006 it was 18.80%. On a matching basis the GP Margins earned by the appellant company have also shown increasing trend, as they improved from 15.69% in FY 2003-04 to 18.95% in FY 2005-06. Further, the GP Margin earned by the firm in case of third party sales (unrelated parties) in the period from April-July 2006 is 18.65% - i.e. within comparable range vis- -vis the overall GP Margin earned by the firm in the same period. By inference, it can be concluded that for related party sales also, the firm would have earned similar margin. The appellant has also explained by way of written submissions to the AO the commercial expediency for which it was incumbent on part of the firm to transfer large position of the semi-finished goods to the appellant company prior to the takeover date. Thus the addition made by the AO u/s.40(A)(2)(b) is correctly deleted. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of disallowance on account of loss due to flood.
2. Restriction of disallowance under Section 14A of the Income Tax Act.
3. Deletion of disallowance on account of late delivery charges.
4. Deletion of disallowance of expenditure covered under Section 40A(2)(a) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of disallowance on account of loss due to flood:
The first ground of appeal concerns the deletion of disallowance of Rs. 1,81,50,813/- made by the Assessing Officer (AO) on account of loss due to flood. The AO argued that the assessee was not sure about the exact quantum of loss suffered and that the loss was not ascertained by the surveyor of the Insurance Company. The AO disallowed the claim, considering it premature and aimed at reducing taxable profit. However, the CIT(A) allowed the claim, stating that the assessee followed mercantile system accounting and the prescribed accounting standards. The Tribunal upheld the CIT(A)'s decision, relying on the Supreme Court's judgment in Bharat Earth Movers vs. CIT, which allows deduction if a business liability has definitely arisen in the accounting year, even if it is to be quantified and discharged at a future date.

2. Restriction of disallowance under Section 14A of the Income Tax Act:
The second ground deals with the restriction of disallowance under Section 14A from Rs. 8,53,917/- to Rs. 42,423/-. The AO had applied Rule 8D to calculate the disallowance, but the CIT(A) restricted it, stating that Rule 8D applies only from AY 2008-09. The Tribunal agreed with the CIT(A), noting that the assessee demonstrated that no portion of interest-bearing funds was used for the investments that generated exempt income. The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to Rs. 42,423/-, which was not contested by the assessee.

3. Deletion of disallowance on account of late delivery charges:
The third ground concerns the deletion of disallowance of Rs. 5,08,11,590/- on account of late delivery charges. The AO disallowed the claim, stating that the invoices and contractual delivery dates pertained to earlier assessment years and that the assessee did not produce evidence to support the claim that the liabilities crystallized in the year under consideration. The CIT(A) deleted the disallowance, observing that the late delivery charges were an intrinsic part of the assessee's business and had crystallized during the year based on the final position conveyed by the marketing department. However, the Tribunal found that the CIT(A) did not provide a detailed explanation or seek a remand report from the AO. Consequently, the Tribunal set aside the CIT(A)'s order on this issue and remanded it back for a fresh decision.

4. Deletion of disallowance of expenditure covered under Section 40A(2)(a) of the Income Tax Act:
The fourth ground involves the deletion of disallowance of Rs. 30,73,341/- under Section 40A(2)(a). The AO claimed that the transactions were designed to benefit the Chairman's proprietary concern. The CIT(A) deleted the disallowance, noting that the assessee provided sufficient evidence to show that the transactions were conducted at arm's length and were commercially expedient. The Tribunal upheld the CIT(A)'s decision, as the Revenue did not provide any contrary evidence.

General Grounds:
Grounds 5 and 6 were general in nature and did not require independent adjudication.

Conclusion:
The appeal of the Revenue was partly allowed for statistical purposes, with the third ground remanded back to the CIT(A) for a fresh decision. The Tribunal upheld the CIT(A)'s decisions on the other grounds.