2018 (8) TMI 2085 - AT - Income Tax

Bogus purchases - addition being 30% of purchases and allowing 70% of the purchase cost - HELD THAT - As decided in own case a.y. 2008-09 wherein on the identical facts and circumstances the order passed by the learned CIT (Appeals) was upheld wherein the deletion of the disallowance to the extent of 70% and confirmation of the disallowance to the extent of 30% was upheld. The Co-ordinate Bench has considered the decision of the Hon ble Bombay High Court also 2013 (1) TMI 88 - BOMBAY HIGH COURT as pressed before us by the learned Departmental Representative and the decision of the Hon ble Delhi High Court 2001 (3) TMI 68 - DELHI HIGH COURT as pressed by the learned DR. In that year the purchases from this party was also involved. In view of this, we do not find any reason to interfere with the order of the learned CIT (Appeals). Accordingly ground No. 1 of the appeal of the assessee and ground No. 2 of the appeal of the Revenue are dismissed. Interest expenditure - assessee submitted that the funds were utilized out of the recoveries made by the assessee from its business and, therefore, the borrowed funds were not used - main contention of the assessee is that assessee has accruals before investment made in the land - HELD THAT - The argument of the assessee is not accepted, because the profit accrues to the assessee at the end of the accounting year when the final accounts are made. It does not accrue on day-to-day basis. Further the assessee could not show the interest free funds available with him at the time of purchase of land and, therefore, we do not find any infirmity in the order of the learned CIT (Appeals) in confirming the addition of Rs.1,94,888/- on account of interest expenditure. Accordingly, ground No. 2 of the appeal of assessee is dismissed. Disallowance u/s14A read with Rule 8D(2)(3) - HELD THAT - As for assessment year 2008-09 the Co-ordinate Bench has deleted the disallowance on account of interest, but there is no reference of the disallowance with respect to the expenditure. As there is no claim by the assessee that no such expenditure has been incurred by the assessee, we do not find any merit in the appeal of the assessee with respect to the disallowance confirmed by the learned CIT (Appeals) of Rs.7,500/-. The disallowance is in accordance with the provisions of section 14A of the Act. Accordingly ground No. 3 of the appeal of the assessee is dismissed. Loss due to foreign exchange fluctuation - claim of the AO is that such loss is on account of contingent liability and is not allowable under section 37(1) - HELD THAT - As at the end of the year the assessee restated the advances received for foreign exchange for supply of goods from one party. The assessee maintains its books of account on mercantile basis. As on the last day of the account, such advances are required to be restated in terms of the accounting standard 11 issued by the ICAI and further compulsorily to be followed by the company, the assessee recorded the foreign exchange fluctuation, which resulted into loss. The loss was debited to the profit and loss account and claimed as deduction. The foreign exchange fluctuation is on account of advance received for supply of goods, which is revenue in nature and as it is a trade advance, therefore, according to us, no error can be found in the order of the learned CIT (Appeals) in allowing the claim of the assessee based on the decision of the Hon ble Supreme Court 2009 (4) TMI 4 - SUPREME COURT

Summary

Issues Involved:
1. Sustaining addition of Rs.9,82,800/- being 30% of purchases.
2. Disallowance of Rs.1,94,888/- on account of interest expenditure.
3. Disallowance of Rs.7,500/- under section 14A read with Rule 8D(2)(3).
4. Deletion of Rs.60,94,813/- on account of loss due to foreign exchange fluctuation.
5. Deletion of Rs.23,01,048/- related to interest on land purchase.
6. Deletion of Rs.1,50,000/- under section 14A.

Detailed Analysis:

1. Sustaining Addition of Rs.9,82,800/- Being 30% of Purchases:
The assessee's appeal contested the sustaining addition of Rs.9,82,800/-, which is 30% of purchases from M/s. Om Trading Company. The Assessing Officer (AO) had deemed these purchases bogus based on previous inquiries and the non-existence of the supplier at the given address. The CIT (Appeals) allowed 70% of the purchases as genuine, disallowing 30%. The ITAT upheld the CIT (Appeals)'s decision, referencing a similar case from the previous assessment year where 70% of the purchases were allowed, and 30% disallowed.

2. Disallowance of Rs.1,94,888/- on Account of Interest Expenditure:
The AO disallowed Rs.1,94,888/- as interest expenditure, asserting that the land purchased was not used for business purposes and should be capitalized. The CIT (Appeals) confirmed this, noting discrepancies in the assessee's fund utilization claims. The ITAT upheld the disallowance, rejecting the assessee's argument that internal accruals funded the purchase, as profits accrue at the end of the accounting year, not day-to-day.

3. Disallowance of Rs.7,500/- Under Section 14A Read with Rule 8D(2)(3):
The AO disallowed Rs.7,500/- under section 14A, related to investments in mutual funds, applying 0.5% of the expenditure. The CIT (Appeals) upheld this disallowance while deleting the interest component, following a previous year's decision. The ITAT affirmed the CIT (Appeals)'s decision, finding no merit in the assessee's claim that no such expenditure was incurred.

4. Deletion of Rs.60,94,813/- on Account of Loss Due to Foreign Exchange Fluctuation:
The AO disallowed Rs.60,94,813/- as a contingent liability not allowable under section 37(1), claiming it did not pertain to revenue transactions. The CIT (Appeals) deleted the disallowance, citing the Supreme Court's decision in CIT Vs. Woodward Governors India Pvt. Ltd. The ITAT upheld the CIT (Appeals)'s decision, recognizing the foreign exchange loss as a revenue transaction in line with accounting standards.

5. Deletion of Rs.23,01,048/- Related to Interest on Land Purchase:
The AO disallowed Rs.23,01,048/- as interest on land not put to use, applying a 12% rate. The CIT (Appeals) deleted this disallowance, referencing the ITAT's previous decisions in the assessee's favor for earlier years. The ITAT upheld the CIT (Appeals)'s decision, noting no change in facts and circumstances.

6. Deletion of Rs.1,50,000/- Under Section 14A:
The AO disallowed Rs.1,50,000/- under section 14A for investments in mutual funds. The CIT (Appeals) deleted this disallowance, following the ITAT's previous decisions in the assessee's favor. The ITAT affirmed the CIT (Appeals)'s decision, finding no error in the deletion based on consistent precedents.

Conclusion:
The ITAT dismissed both the assessee's and the Revenue's appeals, upholding the CIT (Appeals)'s decisions on all contested issues. The judgment reflects a thorough consideration of previous rulings and consistent application of legal principles and accounting standards.