2014 (1) TMI 1851 - AT - Income Tax

Addition of unrealized sales - assessee has accounted for 90% of the sales on Mercantile basis and remaining 10% on cash basis, which was in contravention of Sec. 145 - Held that - Whether the assessee has made any deviation from the usual practice followed by it in the earlier years with an intention to evade tax and found that there was no such change during the year under appeal and whatever retention money has not been shown in this year and realized in the subsequent year has been shown as sale proceeds in that year and offered for tax. He therefore was of the view that there was no need to disturb the method of accounting followed by assessee-company and also found no discrepancy in terms and conditions of purchase orders. CIT(A) has also analyzed the case laws relied by the AO and also that of assessee and found that reliance placed by AO on certain case laws was misplaced as they do not apply to the facts of assessee s case. On the other hand, he followed Hon ble Supreme Court decision in assessee s sister concern, namely Apollo Industrial Products P. Ltd for assessment year 1989-90 in which identical issue was decided in favour of assessee and against the revenue Disallowance u/s. 14A on account of interest and for administrative expenses - Held that - There was no increase in borrowing rather there was reduction in total debts. The law is now settled that no disallowance u/s. 14A can be made of interest expenses until there is finding of AO that borrowed funds were utilized by assessee to earn exempt income. Therefore we find no infirmity in the order passed by CIT(A) in deleting the addition made by AO out of interest payment u/s. 14A. As regards disallowance of ₹ 1,00,000/- out of administrative expenses made by AO u/s. 14A CIT(A) has restricted this disallowance to ₹ 50,000/- which also does not require any interference on our part as it appears to be reasonable in the facts of this case. This ground of revenue s appeal is also dismissed.

Summary

Issues:
1. Addition of unrealized sales amounting to Rs. 40,32,955
2. Disallowance of Rs. 27,36,668 under section 14A for interest and Rs. 1,00,000 for administrative expenses

Issue 1: Addition of Unrealized Sales

The first ground of appeal contested the addition of unrealized sales amounting to Rs. 40,32,955. The AO's observation was that the sum of unrealized sales formed part of the sale consideration for goods sold, retained for warranty conditions. The ITAT, in the first inning, directed the matter back to the CIT(A) for further analysis of the terms and conditions of contracts. The CIT(A) concluded that the retention of 10% of sales was due to specific terms in purchase orders and was part of the regular accounting method followed by the assessee. The CIT(A) also found no discrepancy in the terms of purchase orders and upheld the appellant's method of accounting. The CIT(A) dismissed the revenue's appeal on this issue.

Issue 2: Disallowance under Section 14A

The second ground of appeal concerned the disallowance of Rs. 27,36,668 under section 14A for interest and Rs. 1,00,000 for administrative expenses. The AO disallowed the amount based on lack of details regarding the source of investments in shares/mutual funds and utilization of borrowed funds. The ITAT directed the matter back to the CIT(A) for further consideration in light of various judicial pronouncements. The CIT(A) analyzed the financial summary of the assessee and found no nexus between borrowed funds and investment in shares/mutual funds for earning exempt income. The CIT(A) deleted the addition made by the AO for interest payment under section 14A and restricted the disallowance for administrative expenses to Rs. 50,000. The ITAT upheld the CIT(A)'s decision on this issue and dismissed the revenue's appeal.

In conclusion, the ITAT upheld the CIT(A)'s decisions on both issues, dismissing the revenue's appeal in its entirety. The judgments were based on detailed analysis of the facts, terms of contracts, accounting methods, and utilization of funds, in compliance with relevant legal provisions and judicial pronouncements.