2012 (3) TMI 657 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of payment u/s 40(a)(i) due to non-deduction of tax at source on usance interest.
2. Inclusion of unutilized Modvat credit in the value of closing stock.
3. Treatment of prior period expenses.
4. Imposition of penalty u/s 271(1)(c).

Summary:

1. Disallowance of Payment u/s 40(a)(i):
The primary issue was whether the payment of usance interest could be considered as "interest" within the meaning of Sec. 2(28A) of the Income Tax Act, 1961. The Tribunal concluded that usance interest is indeed "interest" as per Sec. 2(28A) and is deemed to have accrued in India u/s 9(1)(v)(b). The assessee's argument that usance interest was part of the purchase price was rejected, referencing the Gujarat High Court's decision in CIT v. Vijay Ship Breaking Corpn. The Tribunal remanded the issue to the AO to consider the applicability of the DTAA between India and the supplier's countries. The plea of bona fide belief was also rejected, stating the assessee should have sought an appropriate certificate u/s 195.

2. Inclusion of Unutilized Modvat Credit:
The AO added unutilized Modvat credit of Rs. 2,51,713 to the closing stock value. The CIT(A) upheld this addition but allowed for a corresponding adjustment to the opening stock. The Tribunal sustained this view, directing the AO to make the necessary adjustments as per the Bombay High Court's decision in CIT v. Mahalaxmi Glass Works (P.) Ltd.

3. Treatment of Prior Period Expenses:
The AO disallowed prior period expenses of Rs. 32,00,939, which was upheld by the CIT(A). However, the CIT(A) directed the AO to allow these expenses in the relevant year if the assessee could establish their relation to that year. The Tribunal noted that similar directions had been upheld in the assessee's own case for earlier years and found no reason to interfere with the CIT(A)'s order.

4. Imposition of Penalty u/s 271(1)(c):
The AO imposed a penalty based on several disallowances, including prior period expenses and unexplained expenses u/s 69C. The Tribunal noted that the disallowance u/s 69C was already deleted in quantum proceedings, and the prior period expenses were allowed in the relevant year. For the disallowance of write-off of leasehold premium and provision for gratuity, it was observed that these were debatable issues and fully disclosed by the assessee. Citing the Supreme Court's decision in CIT v. Reliance Petroproducts (P) Ltd, the Tribunal upheld the CIT(A)'s decision to delete the penalty.

Conclusion:
- The appeal by the assessee (ITA No. 7019/Mum/2006) is partly allowed for statistical purposes.
- The appeals by the Revenue (ITA No. 1199/Mum/2007 and ITA No. 1198/Mum/2007) are dismissed.