2015 (7) TMI 608 - AT - Income Tax

Increase in stock - Disallowance made on account of bifurcation of expenses by application of Rule 8D - CIT(A) deleted addition - Held that - The formula adopted by the AO is non-scientific and irrational. We find from the facts of the case that while completing the assessment the AO has made an addition of ₹ 51,12,814/- on account of increase in closing stock. The above addition on account of increase in stock is neither permitted under the principle of accountancy nor under the law. Closing stock is always valued under the settled principle of law and accountancy i.e, cost or market value whichever is lower. The auditor of assessee has already certified the value of closing of assessee in his audit report and the said value has been taken in trading and profit and loss account in arriving at the gross profit of the business of the assessee. The increase or decrease in closing stock as compared with the last year cannot be a basis for making any addition under the above head and assessed income is at ₹ 62,91,510/- and the addition on account of increase in closing stock is ₹ 51,12,814/- and if this addition is deleted then the assessed income will stand at ₹ 11,78,696/- and the returned income of assessee was at ₹ 20,28,108/-. Ld. counsel for the assessee strongly raised that the formula adopted by the AO is unscientific and CIT(A) did not accept the said formula but for argument sake if the formula accepted then the net profit as per the above formula will be much lesser then the returned income of assessee and in that case there will be a revenue loss to the government. Total expenditure incurred for manufacture of tea out of green leaf purchased by assessee as per calculation of the AO is erroneous, hence profit on tea manufacture out of our own leaf is also erroneous. And the formula adopted by the AO gives distorted figures for profit made out of the assessee s own leaf and bought leaf. In the field of agriculture particularly in produce of green tea leaf there is no mechanism to divide the profit as agriculture and nonagriculture i.e. while after giving deep thought to the point and after taking expert opinion on this subject the government introduce Rule 8 of IT Rules for arriving the income and dividing the same at 60 40 ratio for agriculture and non-agriculture income and assessee also applied the same in its computation from long paste years and it was accepted by the Department. CIT(A) has rightly deleted the addition and we confirm the same. - Decided against revenue. Rebate u/s 33AB of the Act - AO did not allow the rebate in view of the fact that there was a loss after determination of composite income of the assessee - CIT(A) allowed the rebate - Held that - We find that assessee in its return income claimed deduction of ₹ 12 lakhs u/s 33AB of the act and assessee filed a receipt dated 1809.2008 evidencing deposit of ₹ 12 lakh with NABARD in Tea Development Scheme in 2007. In view of this, CIT(A) directed the AO to allow the rebate to the assessee. We find no infirmity in the order of CIT(A) and same is confirmed. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of disallowance made by the Assessing Officer (AO) on account of bifurcation of expenses by application of Rule 8D of the I.T. Rules, 1962, and increase in value of stock.
2. Granting of rebate under Section 33AB of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance on Account of Bifurcation of Expenses and Increase in Value of Stock:

The first issue in the appeal of Revenue concerns the deletion of disallowance made by the AO on account of bifurcation of expenses and an increase in the value of stock. The AO had applied Rule 8 of the Income Tax Rules, 1962, to compute the income from the sale of tea grown and manufactured, which led to an increase in stock by Rs. 51,12,814/-. The AO's method involved categorizing expenses into 100% agriculture expenditure, mixed expenditure, and 100% manufacturing expenditure, and then dividing the mixed expenditure in a 60:40 ratio between agriculture and manufacturing expenses.

The CIT(A) deleted this addition, stating that the AO's computation was not justified as it did not point out any specific defect in the assessee's method, which had been consistently followed and accepted by the Department in previous years. The CIT(A) also noted that the increase in stock was not warranted under the principles of accountancy or law, as the closing stock should be valued at cost or market value, whichever is lower.

The Tribunal upheld the CIT(A)'s decision, finding that the AO's formula was non-scientific and irrational. The Tribunal emphasized that Rule 8(1) of the IT Rules does not provide a formula for mixed or composite income but states that income from tea grown, manufactured, and sold should be computed as business income, with 40% deemed taxable. The Tribunal noted that the AO's method led to absurd results and was not tenable. Therefore, the deletion of the addition by the CIT(A) was confirmed.

2. Granting of Rebate under Section 33AB of the Income-tax Act, 1961:

The second issue involves the CIT(A)'s decision to grant a rebate of Rs. 12,00,000/- under Section 33AB of the Income-tax Act. The AO had denied this rebate, arguing that there was a loss after determining the composite income of the assessee. However, the CIT(A) allowed the rebate based on the assessee's submission of a receipt evidencing a deposit of Rs. 12 lakh with NABARD under the Tea Development Scheme.

The Tribunal found no infirmity in the CIT(A)'s order and confirmed the granting of the rebate, as the assessee had complied with the requirements of Section 33AB by making the necessary deposit.

Similar Issues in Other Appeals:

The Revenue raised similar issues in ITA No.2284/K/2013 and ITA No.1420/K/2014 for the assessment years 2010-11 and 2011-12, respectively. Both parties conceded that the facts and circumstances were identical to those in ITA No.278/Kol/2013 for AY 2009-10. Therefore, the Tribunal took a consistent view and confirmed the CIT(A)'s orders in these appeals as well, dismissing the Revenue's appeals.

Conclusion:

In conclusion, the Tribunal dismissed all three appeals of the Revenue, confirming the CIT(A)'s decisions on both the deletion of the disallowance related to the bifurcation of expenses and the increase in the value of stock, as well as the granting of the rebate under Section 33AB of the Income-tax Act. The order was pronounced in the open court on 10.07.2015.