2019 (3) TMI 1597 - AT - Income Tax

Estimation of income - suppression of profit - non rejection of books of accounts - AO applying higher profit rate against the assessee - HELD THAT - AO in the assessment order has specifically noted that turnover of the assessee in the assessment year under appeal is higher as compared to earlier year but there is a substantial decrease in the export sales in assessment year under appeal as against exports made in proceeding assessment year. These were the relevant factors which should have been considered by the AO while applying higher profit rate against the assessee because the assessee claimed that there was a fall in export because the assessee s stock was not matching with the standards of the Foreign Buyers and that domestic sales have increased. Therefore there would not have been any reason for the assessee to suppress the profit. Since the books of account have not been rejected by the AO therefore there was no justification for him to apply higher profit rate. The entire history of the assessee has also not been considered in this regard and non-verification of the debtors by itself is no ground to apply higher profit rate because both situation work differently in I.T. Act. The replies filed by the assessee in detail show that details of the debtors were also provided to AO - assessee has agreed to produce books of account before AO we set aside the orders of the authorities below and restore this issue to the file of AO with direction - Appeal of assessee is allowed for statistical purposes. Addition on account of valuation of stock - assessee has been following weighted average method consistently for the last so many year - AO applied FIFO method - HELD THAT - The assessee rightly contended that in assessment year the export market of iron ore fines was in a bad shape. The assessee therefore rightly contended that Foreign buyers have insisted for best quality of iron ore fines and the stock of the assessee was not matching with the standards of the Foreign Buyers therefore the assessee could not sell the iron ore fines in domestic market and due to dust etc. the quantity of iron ore fine have deteriorated further. The explanation of assessee is supported by the fact that there is fall in export of iron ore fines in assessment year under appeal as compared to earlier years. However the assessee did not produce books of account and other details and production record because of the reasons that the Courier Company could not supply the same at Delhi within a reasonable period. Since on Ground No.4 the matter in issue have been restored to the file of AO for examination by directing the assessee to produce books of account and other details therefore in our view this issue also requires for reconsideration at the level of the AO - Appeal of assessee is allowed for statistical purposes. Addition u/s 14A - as per AO assessee has made sizeable investments which yields exempt income to assessee and the investment at the end of year in shares - HELD THAT - assessee made suo motu disallowance u/s 14A but assessing officer did not record any satisfaction as to how the disallowance made by the assessee was unreasonable or unsatisfactory. In the absence of any satisfaction recorded u/s 14A no disallowance could be made against assessee. Further assessee has own sufficient funds to make investment therefore there is a presumption in favour of the assessee that assessee has used own funds to make investment in shares. Therefore no addition u/s 14A of the nature could be made against the assessee. We accordingly set aside the orders of the authorities below and delete the entire addition. - Decided in favour of assessee.

Issues Involved:
1. Addition of ?13,01,09,000/- on account of estimation of income.
2. Addition of ?5,31,64,777/- on account of valuation of stock.
3. Addition of ?56,68,497/- under section 14A of the Income Tax Act, 1961.

Detailed Analysis:

1. Addition of ?13,01,09,000/- on account of estimation of income:
The assessee challenged the addition made by the assessing officer, who applied a higher profit rate of 3% against gross sales due to non-verification of debtors and non-production of books of account. The assessing officer's action was based on the substantial demand pending against the assessee and the issuance of various attachment notices to debtors. The assessee argued that the books of account were sent from Mumbai to Delhi through a courier but were not delivered on time, and hence, could not be produced before the assessing officer. The Tribunal found that the assessing officer did not reject the books of account under section 145(3) of the Income-Tax Act, 1961, and did not point out any infirmities in the records produced by the assessee. The Tribunal set aside the orders of the authorities below and restored the issue to the file of the assessing officer, directing the assessee to produce the books of account and other supporting documents for fresh examination.

2. Addition of ?5,31,64,777/- on account of valuation of stock:
The assessee contested the addition related to the valuation of stock, where the assessing officer applied the FIFO method instead of the weighted average method consistently followed by the assessee. The Tribunal noted that in the preceding assessment year 2008-2009, the addition made on the change of method was deleted by the Tribunal and confirmed by the Honorable Delhi High Court. The assessee argued that the export market for iron ore fines was in a bad shape, leading to a fall in export sales and deterioration in the quality of stock. The Tribunal acknowledged the explanation but noted that the books of account and production details were not produced due to delivery issues with the courier. The Tribunal restored the issue to the file of the assessing officer for reconsideration, directing the assessee to produce the necessary documents for examination.

3. Addition of ?56,68,497/- under section 14A of the Income Tax Act, 1961:
The assessee challenged the addition made under section 14A, arguing that it had sufficient own funds to make investments and had already made a suo motu disallowance of ?3,33,397/-. The Tribunal observed that the assessing officer did not record any satisfaction as to why the disallowance made by the assessee was unreasonable or unsatisfactory. Citing various judicial precedents, the Tribunal noted that no disallowance could be made in the absence of recorded satisfaction and that the presumption is in favor of the assessee using its own funds for investments. Consequently, the Tribunal set aside the orders of the authorities below and deleted the entire addition.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal setting aside the orders of the authorities below on the issues of estimation of income and valuation of stock, directing fresh examination by the assessing officer. The addition under section 14A was deleted in its entirety.

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