2016 (10) TMI 245 - AT - Income Tax

Disallowance of interest paid u/s. 36(1)(iii) - whether entire expansion has been carried out from own funds and hence no part of interest is disallowable? - Held that - We find from the perusal of the audited accounts of the company that the assessee has received ₹ 1,25,00,000/- towards share capital during the previous year relevant to the assessment year 2005-06.and the capital WIP increased from ₹ 14,88,029 to ₹ 1,54,94,775 in the same year. We also noticed that there was increase of only ₹ 25,56,048/- in the WIP in the A. Y. 2006-07 and no increase in the capital WIP in the A. Y. 2007-08. It is evident from the above stated facts and circumstances that the assessee company has its own substantial funds in the form of share capital, reserves and surplus which were used for purchase of fixed assets. The lower authorities has not established that assessee company purchased the fixed assets out of the non-interest bearing funds. In view of above stated facts and findings the addition sustained by the Ld. CIT(A) is not justified, accordingly we allow this ground of appeal of the assessee. Addition on under invoicing of sale of scrap - Held that - Flat rate of ₹ 8000 per MT of scrap adopted by the Assessing Officer to compute the unaccounted income is not correct. He stated that the ratio of cash part of the consideration in sale of scrap has been found to be 15% as mentioned in the statement of the Managing Director recorded on 19-02-2008. The Ld. Commissioner of Income Tax(A) further stated that as per schedule 2 of the audited accounts of the assessee the total income from scrap sale is ₹ 20,66,760/- and he determined the unaccounted cash received @ 15% at ₹ 310014/-. The Ld. Commissioner of Income Tax (A) accordingly restricted the addition to ₹ 3,10,014/-. The Ld. counsel contended that the statement on the basis of which the addition was made not relevant to the year under consideration. On the other hand, the ld. Departmental representative relied on the order of the lower authorities. We have heard both the sides and perused the material on record. We find The Ld. Commissioner of Income Tax(A) has correctly sustained the addition up to ₹ 3,10,014/- out of the total addition of ₹ 14,96,000/- made by the assessing Officer on the basis of unaccounted cash received @ 15% on scrap sale after taking into account the prevailing practice in the business of the assessee. In view of the above stated facts and circumstances, we uphold the addition sustained in the order of the Ld. Commissioner of Income Tax(A). This ground of appeal of the assessee is rejected.

Summary

Issues:
1. Disallowance of interest paid under section 36(1)(iii) of the Income Tax Act.
2. Addition made on the plea of under-invoicing the sale of scrap.

Analysis:

Issue 1 - Disallowance of Interest Paid:
The assessing officer disallowed interest paid by the assessee under section 36(1)(iii) of the Income Tax Act, stating that the assessee failed to prove that fixed assets were purchased from non-interest bearing funds. The Commissioner of Income Tax(A) upheld this disallowance, emphasizing the obligation on the assessee to explain the utilization of borrowed capital for acquiring assets. The Commissioner found that the interest on term loans utilized for acquiring fixed assets needed to be capitalized. However, the assessee argued that additions to work-in-progress were made from company funds without any borrowings. The Tribunal observed that the company had substantial funds from share capital and reserves, used for asset purchase. As the authorities failed to prove otherwise, the Tribunal allowed the appeal, rejecting the addition of interest disallowance.

Issue 2 - Addition for Under-Invoicing of Scrap Sale:
The Assessing Officer alleged under-invoicing of scrap sale based on a statement recorded during a survey, determining unaccounted income. The Commissioner of Income Tax(A) corrected the calculation, reducing the addition to reflect a 15% cash part of the consideration in scrap sales. The Tribunal upheld the Commissioner's decision, considering the prevailing business practice and relevant evidence. The Tribunal rejected the assessee's argument that the statement was not relevant to the assessment year, affirming the addition based on the corrected calculation. Thus, the Tribunal upheld the addition related to under-invoicing of scrap sales.

In conclusion, the Tribunal partly allowed the appeal, rejecting the addition for under-invoicing of scrap sales but allowing the appeal regarding the disallowance of interest paid. The judgment highlights the importance of proper documentation and evidence in tax assessments and the need for accurate financial records to substantiate claims and refute allegations.