2016 (7) TMI 533 - AT - Income Tax

Addition on account of undisclosed sales of 258 liters injectable - CIT(A) deleted the addition - whether the data of cost audit report can be relied for the purpose of making the addition and without having any flaw in the audited financial data of assessee? - Held that - We find that AO has not brought anything on record in the financial audited accounts of assessee. The AO merely has relied on the cost audit report of assessee. In our considered view, AO before making the addition was to reconcile the data found from the cost audit report with the financial data of assessee and if he finds same difference then he should proceed for making the addition / disallowance. In the instant case, there is no defect in the financial year data of the assessee and therefore, the addition made by AO deserves to be deleted. Accordingly we are not inclined to interfere in the order of Ld. CIT(A). - Decided against revenue Addition on account of ad hoc cost allocation - CIT(A) deleted the addition - Held that - AO has made the addition on the basis of cost audit report where the product-wise detail for sale and manufacturing cost were not specified. However the AO has not pointed out any defect in the financial audit report furnished by assessee. The AO has made the addition merely on the ground of non-disclosure of the cost of the items manufactured and at the same time accepted the sale declared by the assessee. In our considered view, the addition made by AO is based on whimsical ground and therefore we find no reason to interfere in the order of Ld. CIT(A). - Decided against revenue Addition made on account of interest on the loan and advances given to the Directors of assessee-company - Held that - The interest free loan given to Directors was assumed by the AO as this money was advanced to directors out of interest bearing borrowed fund. Accordingly, AO disallowed the proportionate interest claimed by assessee. However, the Ld. CIT(A) has granted relief to assessee on the ground that there was no nexus between the money borrowed by assessee and loan advanced to the directors. Ld. CIT(A) also relied on co-ordinate bench in assessee s own case for AY 2001-02. We also find that the assessee s own funds are sufficient enough to advance the interest free loan to the directors. After considering the facts in totality we find no merit in the ground of appeal raised by Revenue. As such, we are not inclined to interfere in the order of Ld. CIT(A). - Decided against revenue

Summary

Issues:
1. Undisclosed sales of injectables
2. Ad-hoc cost allocation without nexus
3. Interest on loans and advances to directors

Undisclosed sales of injectables:
The Revenue appealed against the deletion of an addition made by the Assessing Officer regarding undisclosed sales of 258 liters of injectables. The AO based the addition on a cost audit report, claiming that the closing stock from the previous year was sold without being recorded in the books. The CIT(A) deleted the addition, emphasizing that the audited sales account reflected the sales of injectables, thus allowing the appeal. The ITAT upheld the CIT(A)'s decision, stating that the AO should have reconciled the data from the cost audit report with the financial data of the assessee before making the addition. As the financial data did not show any flaw, the addition was deemed unjustified, and the Revenue's appeal on this ground was dismissed.

Ad-hoc cost allocation without nexus:
The Revenue challenged the deletion of an addition made by the AO concerning ad-hoc cost allocation by the assessee without specifying product details in the cost audit report. The AO disallowed the cost allocation, considering it unsupported by evidence due to the lack of product-wise details. The CIT(A) deleted the addition, noting that the financial audit report did not reveal any defects and accepted the sales declared by the assessee. The ITAT agreed with the CIT(A), finding the AO's addition arbitrary and lacking merit. Consequently, the Revenue's appeal on this ground was dismissed.

Interest on loans and advances to directors:
The Revenue contested the deletion of an addition made by the AO regarding interest on loans and advances given to the directors of the assessee-company. The AO disallowed a proportionate interest amount, suspecting diversion of interest-bearing loans to interest-free director loans. The CIT(A) deleted the addition, citing lack of nexus between the borrowed money and the director's loan, supported by a previous ITAT judgment. The ITAT upheld the CIT(A)'s decision, emphasizing the availability of sufficient own funds to provide interest-free loans to directors. As a result, the Revenue's appeal on this ground was dismissed.