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2018 (3) TMI 1625 - AT - Income TaxDisallowances u/s. 40A(2)(a) - purchase of gold ornaments and gold bullion by assessee from sister concerns at higher rate - estimation of GP at 2.75% as against GP of 2.22% declared by assessee - Disallowances u/s. 14A r.w. Rule 8D - valuation of stock - Held that - there are fictitious transactions between assessee and other group concerns to inflate the turnover. The Commissioner of Income Tax (Appeals) while estimating GP at the rate of 2.75% has taken cue from the decision of the Tribunal in the case of M/s. Rajmal Lakhichand (2015 (1) TMI 1393 - ITAT PUNE). - Thus following the decision of the Hon ble ITAT in the case of Rajmal Lakhichand the adoption of G.P. rate of 2.75% as against the G.P. rate of 2.22% disclosed by the appellant will be fair and meet the ends of justice. Decided partly in favor of assessee.
Issues Involved:
1. Disallowance under Section 40A(2)(a) 2. Disallowance under Section 14A 3. Addition on account of under-valuation of closing stock 4. Disallowance of interest and depreciation on house property 5. Disallowance of expenditure relating to Khar Flats 6. Addition of Godown Rent Detailed Analysis: 1. Disallowance under Section 40A(2)(a): The Assessing Officer (AO) disallowed Rs. 8,15,19,070/- under Section 40A(2)(a) for purchases made from sister concerns at allegedly higher rates. The Commissioner of Income Tax (Appeals) [CIT(A)] rejected this disallowance and instead estimated a Gross Profit (GP) rate of 2.75% to cover deficiencies in transactions with sister concerns. The Tribunal noted that similar issues had been adjudicated in the case of the assessee's sister concern, M/s. Rajmal Lakhichand, where a GP rate of 1.20% was adopted. The Tribunal found the CIT(A)’s GP estimation of 2.75% to be on the higher side and adjusted it to 2.35%, leading to a partial allowance of the assessee's appeal and dismissal of the Revenue's appeal on this issue. 2. Disallowance under Section 14A: The AO disallowed Rs. 9,24,259/- under Section 14A read with Rule 8D, arguing that the assessee diverted interest-bearing funds into shares of sister concerns to avoid taxes. The CIT(A) deleted this disallowance, referencing the Delhi High Court decision in Commissioner of Income Tax Vs. Holcim India Pvt. Ltd. and other cases. The Tribunal upheld the CIT(A)’s decision, noting that the assessee did not receive any exempt income from these investments during the relevant year, aligning with precedents that no disallowance under Section 14A is warranted in such cases. 3. Addition on Account of Under-Valuation of Closing Stock: The AO added Rs. 54,87,702/- for under-valuation of closing stock, contending that the assessee should have used local Jalgaon rates instead of Bombay Bullion Association rates. The CIT(A) upheld this addition. However, the Tribunal found that the assessee consistently used Bombay Bullion Association rates in previous and subsequent years without objection from the AO. Thus, it set aside the CIT(A)'s findings and allowed the assessee's appeal on this ground. 4. Disallowance of Interest and Depreciation on House Property: The AO disallowed interest and depreciation related to flats at Khar, Mumbai, arguing that the flats were in the names of directors, not the assessee. The CIT(A) upheld this disallowance. The Tribunal, referencing its earlier decisions, held that the flats were business assets used for business purposes, allowing the assessee to claim related expenses. Consequently, the Tribunal allowed the assessee's appeal on this issue. 5. Disallowance of Expenditure Relating to Khar Flats: The AO disallowed Rs. 7,61,579/- in expenditures related to the Khar flats, which the CIT(A) upheld. The Tribunal, consistent with its findings on interest and depreciation for these flats, allowed the assessee's appeal, recognizing the flats as business assets. 6. Addition of Godown Rent: The AO added Rs. 1,22,484/- as Godown Rent, which was not specifically addressed in the Tribunal's decision. However, given the overall context and consistent rulings in favor of the assessee on related issues, it can be inferred that this addition was not upheld. Conclusion: The Tribunal partly allowed the assessee's appeal, reducing the GP rate adjustment and allowing claims related to closing stock valuation, interest, depreciation, and expenditures on Khar flats. The Tribunal dismissed the Revenue's appeal, upholding the deletion of disallowances under Section 14A and rejecting the application of Section 40A(2)(a) for purchases from sister concerns.
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