2015 (11) TMI 1210 - AT - Income Tax

Addition u/s. 40A(2)(b) - whether in view of the specific instances pointed out by the AO in the assessment order, the interest paid by the assessee @ 15% to four related persons was excessive - Held that - We are unable to accept the contention of the ld.counsel for the assessee that on short-term deposits, the assessee had paid at a lower rate of interest. The ld.CIT(A) deleted the addition on the basis that the Tribunal has allowed the interest even @18% and @ 24% respectively. We are of the view that the AO has to point out not merely on the basis of inter se payment of interest, but the prevalent market rate. As per provisions of section 40A(2)(a) of the Act, the disallowance can be made where the assessee incurs any expenditure in respect of payment has been or is to be made to any person referred to in clause (b) of this subsection, and the AO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. In the given case, the AO has not given any finding in respect of fair market rate of interest paid by the assessee. Under these facts, we do not see any reason to interfere with the order of the ld.CIT(A), same is hereby upheld. - Decided against revenue. Valuation of opening stock and closing stock of V- 6 Type SB/12-5 Water Pump and V-6 Type SB/12-6 Water Pump - contention of the assessee is that the difference in the opening and closing stock was due to change in the material utilized for manufacturing of the pump and, therefore, naturally cost of manufacture would decrease - Held that - The Assessing Officer has simply compared the valuation of items in the opening stock and closing stock without appreciating the difference in the quality of raw material used in the manufacture of submersible pumps which was changed from gun metal to stainless steel. It shows that the Assessing Officer has not taken into consideration the full facts with regard to valuation of stock. Under the circumstances, the addition made by the AO towards under-valuation of two items of water pumps is hereby deleted. - Decided against revenue. Development agreement addition - Held that - The appellant was entitled to development charges only on the construction cost as per the resolution of the society from time to time, it has no relevance with the collections from the members. AO was not justified in holding the development charges at 10% of the total receipts from the Members as well as making addition of the entire difference to the total income of the appellant in this year and hence, both the additions are hereby deleted. - Decided against revenue.

Issues Involved:
1. Deletion of addition made under Section 40A(2)(b) of the Income Tax Act, 1961.
2. Deletion of addition made due to undervaluation of closing stock.
3. Deletion of addition made on account of profit from Suryarath scheme.
4. Deletion of addition made as development charges from Suryarath scheme.
5. Applicability of Section 45(4) of the Income Tax Act, 1961 on the death of a partner.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 40A(2)(b):
The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 3,19,859/- made by the AO under Section 40A(2)(b) for excessive interest paid to related parties. The AO found that the assessee paid 15% interest to related parties compared to 12% to non-related parties. The CIT(A) deleted the addition, citing that higher interest rates of 18% and 24% had been previously allowed by the Tribunal. However, the Tribunal noted that the AO failed to provide evidence of the fair market rate of interest. Thus, the Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's appeal on this ground.

2. Deletion of Addition due to Undervaluation of Closing Stock:
The Revenue argued that the CIT(A) wrongly deleted the Rs. 4,92,000/- addition for undervaluation of closing stock. The AO noted discrepancies in the valuation of opening and closing stock of certain water pumps. The CIT(A) accepted the assessee's explanation that the difference was due to a change in the material used for manufacturing, resulting in a lower cost. The Tribunal found that the CIT(A)'s factual findings were not contradicted by the Revenue and upheld the deletion of the addition.

3. Deletion of Addition on Account of Profit from Suryarath Scheme:
The AO added Rs. 61,33,566/- to the assessee's income, asserting that M/s. Maniar Developers, the assessee, was the actual developer of the Suryarath scheme and not merely a contractor. The CIT(A) found that the development agreement did not transfer ownership to the assessee and that the assessee acted as an agent for the Society. The CIT(A) also noted that no development work was carried out in the relevant year. The Tribunal upheld the CIT(A)'s findings, noting that the Revenue failed to provide contrary evidence.

4. Deletion of Addition as Development Charges from Suryarath Scheme:
The AO alternatively contended that the assessee should have shown development charges of Rs. 12,15,933/- for the year. The CIT(A) found that the AO's calculation was incorrect as it included contributions for land and other expenses, not just construction. The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee had already disclosed appropriate development charges in previous years.

5. Applicability of Section 45(4) on the Death of a Partner:
The assessee's cross-objection raised the issue of the applicability of Section 45(4) upon the death of a partner. However, the assessee chose not to press this issue, and the cross-objection was dismissed as not pressed.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletions of the various additions made by the AO. The cross-objection by the assessee was also dismissed as not pressed. The Tribunal's decision was pronounced on October 9, 2015, in Ahmedabad.

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