2016 (4) TMI 385 - AT - Income Tax

Disallowance of manufacturing expenses under the head Manufacturing material and chemicals - Held that - AO has doubted the genuineness of the transactions recorded in the books of accounts in support of expenditure claimed under the head Manufacturing Material and Chemical Expenses nor any adverse or incriminating materials have been placed on record by the A.O. so as to show that the purchases are bogus. The AO has also not doubted the authenticity of the books of accounts which was produced before him during the assessment proceedings. In fact the AO., has not doubted the genuineness of the books of accounts and the authenticity of the transactions recorded therein. Moreover, AO has also not recorded any justification for arriving at a figure of ₹ 25 lacs for ad-hoc disallowance under this head. Thus, the AO has also failed to specify any specific items of expenditure comprising total ad-hoc disallowance of ₹ 25 Lacs as above. It was also found that that as per record that the AO did not issue any show cause notice in this regard while making this addition and to that extent agree that it amounts to breach of principles of natural justice. In view of above discussions, we find that there was no no justification for adhoc disallowance of ₹ 25 lacs under the head Manufacturing Material and Chemical Expenses , hence, the same was rightly deleted by the Ld. CIT(A). - Decided in favour of assessee Disallowance of accrued interest not paid in respect of secured / unsecured loans taken from various institutions of UP Government - CIT(A) allowed the claim - Held that - CIT(A) has rightly held that the UP State Government itself and also its institutions namely UP Sahakari Chini Mill Sangh Limited and Sakkar Vikash Nikdhi are not covered by the definition of Public Financial Institutions / State Finance Institutions/ State Industrial Finance Institutions as defined u/s. 4A(2) of the Companies Act, 1956 and therefore provisions of section 43B(d) of the I.T. Act are not attracted in this case. Accordingly, disallowance made on this account was rightly deleted by the Ld. CIT(A). - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition of ?25,00,000/- on account of disallowance of manufacturing expenses.
2. Deletion of addition of ?6,30,57,609/- on account of disallowance of accrued interest not paid.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?25,00,000/- on Account of Disallowance of Manufacturing Expenses:

The Department raised an issue regarding the deletion of an addition of ?25,00,000/- made by the Assessing Officer (AO) on account of disallowance of manufacturing expenses under the head "Manufacturing material and chemicals." The AO observed that the assessee had claimed ?1,01,78,326/- under this head, which was more than double the expenses of the previous year (?50,27,813/-). The AO made an ad-hoc disallowance of ?25,00,000/- due to the lack of proper explanation for the increase.

The assessee provided detailed explanations and comparative figures showing the increase in expenses, particularly highlighting a significant rise in the cost of Sulphur and an increase in the quantity of cane crushed and sugar produced. The assessee argued that the books of accounts were regularly maintained and audited, and the AO did not doubt the genuineness of the transactions or the authenticity of the books of accounts.

The Commissioner of Income Tax (Appeals) [CIT(A)] found that the increase in expenses was justified due to the rise in the price of Sulphur and the increased production. The CIT(A) also noted that the AO did not specify any specific items of expenditure for the ad-hoc disallowance and failed to issue a show-cause notice, breaching the principles of natural justice. The Tribunal upheld the CIT(A)'s decision, finding no justification for the ad-hoc disallowance and dismissed the ground raised by the Revenue.

2. Deletion of Addition of ?6,30,57,609/- on Account of Disallowance of Accrued Interest Not Paid:

The Department challenged the deletion of an addition of ?6,30,57,609/- made by the AO on account of disallowance of accrued interest not paid in respect of secured/unsecured loans taken from various institutions of the UP Government. The AO observed that the interest accrued on these loans should have been paid before the due date for filing the return under Section 43B(d) of the Income Tax Act, 1961. Since the assessee did not furnish proof of payment, the AO disallowed the interest.

The assessee argued that the loans were from the UP Government and its institutions, which are not covered by the definition of Public Financial Institutions/State Financial Corporation/State Industrial Investment Corporation under Section 4A(2) of the Companies Act, 1956. Therefore, Section 43B(d) did not apply. The CIT(A) agreed, noting that the UP Government and its institutions were not mentioned in the list of such institutions, and the tax auditor did not mention the interest as disallowable under Section 43B(d).

The Tribunal found that the CIT(A) rightly deleted the disallowance, as the UP Government and its institutions were not covered by Section 43B(d). The Tribunal also noted that the issue was covered by a previous ITAT decision in the assessee's favor for the assessment year 2007-08. The Tribunal upheld the CIT(A)'s decision and dismissed the ground raised by the Revenue.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The deletion of the additions made by the AO was found to be justified based on the explanations and evidence provided by the assessee and the legal provisions applicable.