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2016 (10) TMI 313 - AT - Income TaxDisallowance u/s 14A - Held that - The facts stated remain undisputed and hence the same are not reiterated for the sake of brevity. We find that the ld AO had resorted to make disallowance u/s 14A of the Act on a notional basis by assuming that the borrowed funds were utilized for making investments. But from the aforesaid facts, we find that it is clearly established that the investments were purely made only out of surplus funds lying in the current account at the instance of the bankers. The disallowance of interest on notional basis is contemplated only in Rule 8D(2)(ii) which is admittedly not applicable for the year under appeal. Hence there cannot be disallowance of any interest u/s 14A of the Act. The basic premise of the ld AO that the borrowed funds were utilized for making investments and correspondingly disallowance u/s 14A of the Act is to be made, stands defeated in view of the aforesaid finding. Hence we find no infirmity in the order of the ld CIT-A in this regard. Addition made on account of valuation of closing stock of work in progress - Held that - We find that the ld CITA had given categorical findings with regard to the treatment given by the assessee in the valuation of closing stock of work in progress as on 31.3.2007. The ld DR was not able to controvert any of the findings given by the ld CITA before us. Under these circumstances, we do not find it necessary to interfere with the order of the ld CITA in this regard. Accordingly, the ground raised by the revenue is dismissed.
Issues Involved:
1. Deletion of disallowance under Section 14A of the Income Tax Act, 1961. 2. Deletion of addition made on account of valuation of closing stock of work-in-progress (WIP). Issue-wise Detailed Analysis: 1. Deletion of Disallowance under Section 14A: The first issue pertains to whether the CIT(A) was justified in deleting the disallowance under Section 14A of the Income Tax Act. The assessee, engaged in the manufacture of various machinery, had claimed exempt income from dividends amounting to ?32,09,476/-. The Assessing Officer (AO) observed that the assessee had incurred interest expenditure on borrowed funds and disallowed ?10,02,330/- under Section 14A by applying a proportionate interest expense method. The assessee contended that the investments were made from surplus funds and not borrowed funds, and no expenditure was incurred for earning the dividend income. The CIT(A) observed that the net interest expense was only ?3,87,000/- and not ?3,87,00,000/- as assumed by the AO. The CIT(A) concluded that the borrowed funds were not used for making investments and thus deleted the disallowance under Section 14A. The Tribunal upheld the CIT(A)'s order, noting that the AO's disallowance was based on a notional basis and the investments were made from surplus funds. The Tribunal found no infirmity in the CIT(A)'s decision and dismissed the revenue's appeal on this ground. 2. Deletion of Addition on Account of Valuation of Closing Stock of Work-in-Progress (WIP): The second issue involves whether the CIT(A) was justified in deleting the addition made on account of the valuation of closing stock of WIP amounting to ?1,68,57,093/-. The AO observed discrepancies in the value of WIP shown in the balance sheet and the sales made in April 2007. The AO concluded that the value of WIP was suppressed and made an addition based on the difference between the sales value and the disclosed WIP. The assessee argued that sufficient time was not granted to furnish the required information and that the AO's addition was based on incorrect assumptions and arithmetical mistakes. The CIT(A) found that the AO had made errors in calculating the gross profit margin and the difference in WIP. The CIT(A) also noted that the AO did not consider the further manufacturing process and value addition done after 31.03.2007. The CIT(A) concluded that the AO's methodology and assumptions were incorrect and that the assessee had provided sufficient evidence to substantiate the value of WIP. The CIT(A) directed the deletion of the addition made by the AO. The Tribunal upheld the CIT(A)'s order, finding no reason to interfere with the detailed findings and conclusions. The Tribunal dismissed the revenue's appeal on this ground as well. Conclusion: In conclusion, the appeal by the revenue was dismissed on both grounds. The Tribunal upheld the CIT(A)'s decision to delete the disallowance under Section 14A and the addition made on account of the valuation of closing stock of WIP, finding no infirmity or errors in the CIT(A)'s detailed analysis and conclusions.
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