2016 (3) TMI 1340 - AT - Income Tax

Disallowance of alleged inflated purchases of birds inflated and unproved expenses and alleged undervaluation of closing stock - Held that - CIT(A) found that proper records of mortality has not been maintained to substantiate its claim of closing stock - the concrete evidence has not been furnished to disallow the ad-hoc addition towards unexplained expenses. Similarly the basis for addition on account of undervaluation of closing stock is February and March purchases which invariably pertains to chicks less than 45 days old remaining unsold. The assessee has not offered any specific explanation on this aspect except mortality factor. CIT(A) has given partial relief after examining the remand report and the submissions of the assessee and restricted the disallowance to 5, 00, 000/- resulting in GP addition of 5, 00, 000/-. We find no infirmity in the process of reasoning in arriving at the aforesaid findings of the CIT(A) - decided against assessee Addition u/s 36(1)(iii) - assessee transferred a shed valuing to his brother s account at the end of the year and shown the amount as a debtor without charging any interest - scope of amendment - Held that - The contention of the assessee that the shed was constructed with a view to expand existing business remains uncontroverted. Section 36(1)(iii) as relevant for assessment year 2001-02 provides that the amount of interest paid in respect of capital borrowed for the purpose of business or profession. The interest paid for loan utilized whether in capital field or in revenue field is irrelevant consideration. A proviso to section 36(1)(iii) has been inserted by the Finance Act 2003 w.e.f. 01.04.2004 whereby any amount of interest paid in respect of capital borrowed for acquisition of assets for expansion of existing business or profession upto the date on which such capital asset is first put to use shall not be allowed as deduction. The assessee has incurred the expenditure relevant to assessment year 2001-02 when such proviso was not present in the statute. Therefore we find no justification in the action of the Revenue in resorting to the disallowance of interest expenses - Decided in favour of assessee Unexplained loan from brother - no proper evidence of availability of loan amount with brother has been brought on record - no records of sale proceeds of crop has been furnished in support of source of amount granted as loan - Held that - No substance in the premise taken by the CIT(A) in sustaining the addition. The assessee has furnished the confirmation letter as well as 7/12 extracts concerning the agricultural land showing the agricultural activity. This in our view is plausible and reasonable evidence to support the source in the hands of the lender. It is common knowledge that the agricultural produce are sold in cash. The impugned loan is very small having regard to the agricultural land available for cultivation. Thus bonafides of loan of 75, 000/- received from agriculturist brother deserves to be accepted - Decided in favour of assessee

Summary

Issues Involved:
1. Sustenance of ad-hoc disallowance of ?5,00,000 out of alleged inflated purchases, expenses, and undervaluation of closing stock.
2. Addition of ?2,66,982 under section 36(1)(iii) of the Income-tax Act.
3. Addition of ?75,000 under section 68 of the Income-tax Act.
4. Compliance with the directions of the Hon'ble ITAT in the previous appeal.
5. Levy of interest under sections 234A, 234B, and 234C of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Sustenance of Ad-hoc Disallowance of ?5,00,000:
The assessee, engaged in poultry farming, contested the ad-hoc disallowance of ?5,00,000 out of alleged inflated purchases, expenses, and undervaluation of closing stock. The Assessing Officer (AO) initially disallowed ?17,30,861, including inflated purchases of ?8,50,861, unproved expenses of ?6,50,000, and undervaluation of closing stock of ?2,30,000. The CIT(A) reduced this disallowance to ?5,00,000 after considering the remand report and submissions from the assessee, who argued that proper records were maintained and audited. The CIT(A) noted discrepancies in the stock records and missing purchase bills but acknowledged the mortality factor in poultry farming. The Tribunal found no infirmity in the CIT(A)'s reasoning and upheld the ad-hoc disallowance of ?5,00,000, dismissing Ground No.1.

2. Addition of ?2,66,982 under Section 36(1)(iii):
The AO added ?2,66,982 under section 36(1)(iii) for interest on borrowed funds used for constructing a shed transferred to the assessee's brother. The assessee argued that the shed was initially intended for business expansion, but due to unfavorable conditions, it was transferred to avoid maintenance costs. The CIT(A) upheld the addition, citing insufficient interest-free funds. However, the Tribunal noted that the relevant assessment year was 2001-02, before the proviso to section 36(1)(iii) was introduced in 2004, which disallows interest on capital borrowed for asset acquisition until the asset is put to use. The Tribunal found no justification for the disallowance and allowed Ground No.2, deleting the addition.

3. Addition of ?75,000 under Section 68:
The AO added ?75,000 under section 68, questioning the source of funds from the assessee's brother, Shri Sunil Bharati. The assessee provided a confirmation letter and 7/12 extracts showing agricultural income from crops like pomegranates and soybeans. The CIT(A) rejected this evidence, citing lack of sale proceeds records. The Tribunal found the provided evidence plausible and reasonable, considering the small loan amount and agricultural activity. The Tribunal allowed Ground No.3, deleting the addition.

4. Compliance with ITAT Directions:
The assessee argued that the CIT(A) failed to comply with the ITAT's directions in a previous appeal. The Tribunal did not find specific details warranting separate adjudication and did not address this ground further.

5. Levy of Interest under Sections 234A, 234B, and 234C:
The assessee contested the levy of interest under sections 234A, 234B, and 234C. The Tribunal did not find specific details warranting separate adjudication and did not address this ground further.

Conclusion:
The appeal was partly allowed, with the Tribunal upholding the ad-hoc disallowance of ?5,00,000, deleting the addition of ?2,66,982 under section 36(1)(iii), and deleting the addition of ?75,000 under section 68. The grounds regarding compliance with ITAT directions and interest levy were not separately adjudicated. The order was pronounced on March 31, 2016.