2016 (5) TMI 1096 - AT - Income Tax

Rejection of books of account - addition made on account of undervaluation of closing stock - Held that - The books are rejected by the Assessing Officer solely on the basis of the fact that stock register has not been maintained by the assessee. The assessee is in the business of making sweets, etc. and he has given a plausible explanation as regards non-maintenance of stock register, without rebutting his explanation, the Assessing Officer has rejected the books. As regards inter branch transfer of stock, we are in agreement with the explanation of the assessee that since income of all the branches are assessed in the hands of the assessee, it does not make any difference as to which rate these stocks are transferred. Similarly, the expenses like packing material, consumables and air conditioning charged to Profit & Loss Account and not to trading account does not actually make any difference to the income taxable in the hands of the assessee, unless the Assessing Officer is able to bring on record any manipulation on G.P. rate of the assessee, which in this case, he has not been able to do. Rather, he has not even able to contradict the comparative G.P. rates as provided by the assessee even after taking into consideration these expenses as a part of trading account. Above all, the explanation of the assessee that all these expenses have nothing to do with the manufacturing of the products and are essentially a part of Profit & Loss Account, is also a correct explanation. Another glaring feature of the assessment order is that the Assessing Officer after rejecting the books of account preferred to make disallowance on account of these expenses only. We do not find this act of the Assessing Officer as per law. In a way he has accepted the books results shown by the assessee and had only disallowed the expenses. This shows the illusioned mind of the Assessing Officer - Decided against revenue Non- deduction of TDS under section 40(a)(ia) - Held that - The undisputed facts are that the assessee has got certain packing material printed. The raw material for printing was not supplied by the assessee. The definition of contract as provided under section 194C, clause (vi) of the Act was introduced in the Statute to be applicable w.e.f. 11.10.2009. In view of this, no addition under section 40(a)(ia) can be made in this regard.- Decided against revenue Addition under section 36(1)(iii) - Held that - No infirmity in the order of the learned CIT (Appeals) as it is a fact that the Assessing Officer has not doubted the genuineness of the agreements entered into with these two parties. The payments have been made in terms of the clauses of these agreements. The agreements have been entered into out of commercial expediency. Therefore, no addition under section 36(1(iii) of the Act can be made - Decided against revenue

Summary

Issues involved:
1. Rejection of books of account and addition on undervaluation of closing stock.
2. Deletion of addition on account of non-deduction of TDS under section 40(a)(ia) of the Act.
3. Deletion of addition under section 36(1)(iii) of the Act.

Detailed analysis:
1. The first issue pertains to the rejection of books of account and the subsequent addition made on account of undervaluation of closing stock. The Assessing Officer rejected the books due to the absence of a stock register, leading to the addition of expenses on fancy packs, generator, and consumables claimed in the Profit & Loss Account. The assessee contended that the books were maintained in the regular course of business, audited, and that non-maintenance of a stock register should not be the sole basis for rejection. The CIT (Appeals) upheld the assessee's arguments, stating that the rejection of books was unwarranted. Moreover, the addition made by the Assessing Officer was also disallowed as the GP rate was consistent with previous years, even after adjustments. The Tribunal concurred with the CIT (Appeals), emphasizing that the rejection of books solely based on the absence of a stock register was unjustified, and dismissed the Revenue's appeal.

2. The second issue revolves around the deletion of an addition under section 40(a)(ia) of the Act concerning non-deduction of TDS. The Assessing Officer disallowed an amount for non-deduction of TDS on purchases of packing material, citing a contract for work as the reason. The CIT (Appeals) ruled in favor of the assessee, stating that the printing of names on packing material did not constitute a contract. The Tribunal upheld the CIT (Appeals) decision, highlighting that the definition of contract under section 194C did not apply to the situation, thereby dismissing the Revenue's appeal on this ground.

3. The final issue pertains to the deletion of an addition under section 36(1)(iii) of the Act related to interest on loans and advances. The Assessing Officer made an addition based on proportionate interest on loans given by the assessee. However, the CIT (Appeals) allowed the assessee's contentions, noting that the loans were given out of commercial expediency. The Tribunal agreed with the CIT (Appeals), emphasizing that the transactions were supported by agreements and payments were made as per the terms, reflecting business expediency. Therefore, the addition under section 36(1)(iii) was deemed unwarranted, leading to the dismissal of the Revenue's appeal on this ground.

In conclusion, the Tribunal upheld the decisions of the CIT (Appeals) on all three issues, dismissing the Revenue's appeal in its entirety.