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2016 (10) TMI 921 - AT - Income TaxDisallowance of trading losses - non maintenance of day to day stock register - Held that - Being the first year of operation, there are certain inherent challenges in terms of procurement and supply of milk and related products as well as pricing thereof given the market dynamics which have been encountered by the assessee and duly explained in the instant year which has resulted in manufacturing/ trading losses which have been reduced in the subsequent years once the operations have been stabilized. Further the assessee has submitted quantitative details of milk procured and the subsequent sale of milk and milk products and the AO should have considered the revised quantitative tally duly submitted by the assessee during the course of assessment proceedings. Further the processing and handling loss is as per the industry standard and other direct expenses not challenged by the AO are duly supported by the books of accounts. In light of above, we are of the view that the AO was not right in rejecting the books of accounts and disallowing the whole of the manufacturing/trading loss - Decided in favour of assessee Disallowance of Telephone expenses and staff welfare expenses and travelling expenses - Held that - Considering the submission of assessee that it has paid FBT on telephone, staff welfare and travelling expenses and when the same have been considered for the purposes of Fringe Benefit Tax (FBT), the same are provided by the employer to its employees as part of its employment/contractual relationship and the same have been incurred wholly and exclusively for the purpose of business and has relied on the CBDT Circular No.8/2005 dated 29/8/2005 we agree with the contention of the assessee and in any case, these are adhoc disallowances.- Decided in favour of assessee
Issues Involved:
1. Disallowance of trading losses of ?62,77,969 under Section 145(3) of the IT Act, 1961. 2. Partial disallowance of telephone expenses, staff welfare expenses of ?8,966, and traveling expenses of ?3,021. Issue-Wise Detailed Analysis: 1. Disallowance of Trading Losses: The assessee, engaged in the business of procuring and selling milk, reported a net loss of ?1,54,14,140 for the year. The AO rejected the books of accounts under Section 145(3) due to the non-maintenance of a day-to-day stock register, leading to the disallowance of a manufacturing/trading loss of ?62,77,969. The CIT(A) upheld this decision. The assessee argued that the first year of operations involved challenges such as untrained staff, higher procurement costs due to competition, and lower sales realization due to market dynamics. The assessee provided detailed submissions to counter the AO's findings, including: - Complete details of milk purchases and sample vouchers. - Quantitative records and tallies submitted on 14.10.2008 and revised on 10.11.2008. - Justifications for cash payments to milk vendors as per Rule 6DD of the IT Rules. - Practical aspects of cash collections from retail booths and kirana shops. The Tribunal noted that the AO disregarded the revised quantitative tally without valid reasons and unjustifiably disallowed the entire manufacturing loss despite the industry-standard processing and handling loss of 2.95%. The Tribunal found the AO’s actions arbitrary and unsupported by comparable cases or logical reasoning. The Tribunal cited several judgments supporting the view that arbitrary disallowances without proper basis are unjustified. Conclusion: The Tribunal allowed the assessee's appeal on this ground, ruling that the AO was not justified in rejecting the books of accounts and disallowing the entire manufacturing/trading loss. 2. Partial Disallowance of Expenses: The assessee contended that telephone, staff welfare, and traveling expenses were considered for Fringe Benefit Tax (FBT) purposes and were incurred wholly for business purposes as per CBDT Circular No. 8/2005. Conclusion: The Tribunal agreed with the assessee, finding the disallowances to be ad hoc and unjustified. The Tribunal deleted the disallowances, allowing the assessee's appeal on this ground. Final Order: The Tribunal allowed the appeal filed by the assessee, pronouncing the order in the open court on 05/10/2016.
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