2015 (11) TMI 414 - HC - Income Tax

Trading addition - rejection of books of accounts - CIT(A) deleted the addition confirmed by ITAT - Held that - the manner in which the manufacturing activity should be carried out must be left to the assessee who is the best judge in such matters; in fact the assessee pointed out that how impractical it would be to stop the production process merely to verify the moisture content of the logs at the point of time when they are fed into the plant to satisfy the curiosity of the Assessing Officer or to comply with his unreasonable direction. It seems to us that the assessee has a valid point here. As regards the use of cotton stalks, the assessee had a technical problem when they got entangled in the machinery and for a temporary period, the assessee switched over to the use of eucalyptus wood but it could not be continued for long because it is costlier than the cotton stalks. Had the assessee continued to use eucalyptus wood in the place of cotton stalks, perhaps the gross profit rate would have been lower. It is also true that the Assessing Officer had not pointed out any suppression of sales or inflation of expenses. For these reasons, we are of the view that the Assessing Officer was not justified in not accepting the results of the MDF Division. - Decided against revenue. Addition on account of interest on interest free loans - Held that - The facts and circumstances relating to the disallownace of the interest of the year under appeal are identical with the earlier years. Therefore, in line with our decision for those years, the disallowance of the interest referable to the advance made to Novika Investment is deleted, while the disallowance of the interest referable to the advances made to other four sister concerns is sustained. The deletion of the disallownace of the interest referable to the advances made to Southern Synthetics Limited is sustained as in the earlier years. - Decided partly in favour of assessee. Disallowance of inauguration expenses - ITAT allowed the claim - Held that - The findings recorded by the CIT(A) as well as the Tribunal are pure findings of fact where they have recorded that the said expenditure was incurred exclusively for the purpose of assessee s business. The said findings have not been shown to be illegal or perverse in any manner by the learned counsel for the appellant, warranting interference by this Court. - Decided against revenue.

Summary

Issues Involved:
1. Trading addition of Rs. 74,96,376/-
2. Applicability of settled law regarding separate assessment years
3. Addition on account of interest on interest-free loans
4. Disallowance of inauguration expenses

Issue-wise Detailed Analysis:

1. Trading Addition of Rs. 74,96,376/-:

The assessee declared a gross profit of Rs. 10,65,51,163/- on total sales, which translated to a gross profit rate of 27.43%, higher than the previous years. However, the Assessing Officer (AO) found discrepancies in the stock values and invoked Section 145(2) of the Income Tax Act, estimating the gross profit rate at 48.88% for the MDF Division, resulting in an addition of Rs. 74,96,376/-. The CIT(A) deleted this addition, and the Tribunal affirmed this decision. The Tribunal noted that the overall gross profit rate showed a consistent or better trend and that the records maintained by the assessee were accepted by excise and sales tax authorities. The Tribunal also found no evidence of suppression of sales or inflation of expenses by the assessee. Thus, no error was found in the concurrent findings of the CIT(A) and the Tribunal.

2. Applicability of Settled Law Regarding Separate Assessment Years:

The second question was deemed general and not arising in the present context, as agreed upon by the counsel for both parties.

3. Addition on Account of Interest on Interest-Free Loans:

The AO disallowed Rs. 9,41,077/- as the assessee had given interest-free advances to sister concerns out of interest-bearing borrowings. The CIT(A) restricted the disallowance to Rs. 4,97,367/- and deleted the disallowance of Rs. 4,43,730/- related to Southern Synthetics Limited. The Tribunal further deleted the disallowance of Rs. 80,000/- related to Novika Investment, following its decision in earlier years, but sustained the disallowance for other sister concerns. The Tribunal found that the facts and circumstances were identical to earlier years and upheld the deletion of disallowance related to Southern Synthetics Limited. The findings were based on appreciation of material and evidence on record, and no error was pointed out by the revenue.

4. Disallowance of Inauguration Expenses:

The assessee claimed Rs. 8,33,593/- as inauguration expenses, out of which the AO disallowed Rs. 4,78,845/-. The CIT(A) deleted this disallowance, and the Tribunal concurred, holding that the expenditure was incurred wholly and exclusively for the purpose of the business. The Tribunal relied on judgments from the Bombay High Court and Calcutta High Court, affirming that such expenses are routine business expenditure. The findings by the CIT(A) and the Tribunal were pure findings of fact and were not shown to be illegal or perverse, warranting no interference by the Court.

Conclusion:

The appeals by the revenue were dismissed, and the substantial questions of law were answered accordingly. The findings of the CIT(A) and the Tribunal were upheld as they were based on proper appreciation of material and evidence on record.