2017 (3) TMI 956 - AT - Income Tax

Rejection of books of accounts - trading addition - Held that - Effectively, the price at which the goods have been sold during the year has been accepted by the Revenue and the same cannot, therefore, be a basis for upholding the rejection of books of accounts. Secondly, regarding the under valuation of the sub-standard stock, the assessee has submitted that the same has been valued at a realizable value at which such stock has been sold in the subsequent F.Y. 2011-12 as demonstrated through actual sales invoices and the results of the subsequent financial year have been accepted by the Revenue. Further, it is noted that the assessee is in the same line of business over the years and is following the same method of accounting in respect of valuation of its stock as well as accounting for purchase and sales and its books of accounts have all along been accepted by the Revenue for the previous and the subsequent years. In light of above, we do not see a justifiable reason for rejection of books of accounts as maintained by the assessee. Hence, the action of the Ld. Assessing Officer in rejecting the books of accounts cannot be sustained. In light of above, the trading addition of ₹ 13,09,166/- as upheld by the Ld. CIT(A) on account of rejection of books of accounts is hereby deleted. In the result, ground no.1 of the assessee is allowed. Addition u/s 40(a)(ia) - Held that - We hereby delete the disallowance under section 40(a)(ia) as no amount remained payable as on 31st March. In the result, the ground no. 2 of assessee is allowed. Interest free advances to two family members with whom the assessee did not have any business connection - Held that - We have gone through the order of Ld. CIT(A) who has held that the assessee has given interest free advances to two family members with whom the assessee did not have any business connection. The assessee has not been able to controvert the said findings of the ld CIT(A). In light of above, the test of commercial expediency having not been satisfied, we confirm the order of Ld. CIT(A). In the result, ground taken by the assessee is dismissed.

Issues Involved:
1. Rejection of books of accounts and estimation of gross profit rate.
2. Disallowance of interest paid without deduction of tax at source under section 40(a)(ia).
3. Disallowance of interest expense on advances paid assuming notional interest income.

Detailed Analysis:

1. Rejection of Books of Accounts and Estimation of Gross Profit Rate:

The assessee, engaged in manufacturing DPC Copper wire and aluminum wire, faced scrutiny from the Assessing Officer (AO) due to a decline in the gross profit ratio from previous years. The AO identified defects in the books, leading to their rejection under section 145(3) of the IT Act. The CIT(A) supported the AO's findings, citing undervaluation of closing stock, sales at prices lower than material cost, and improper maintenance of stock records.

The assessee argued that the valuation of sub-standard stock was based on expected selling rates, supported by subsequent sales invoices. The fluctuation in copper prices and the pricing method adopted by suppliers were also highlighted. The assessee maintained that all records were properly kept as required by excise regulations.

The Tribunal noted that the turnover figures were accepted under VAT/CST assessments, and no discrepancies were found in the excise audit. Given the fluctuating copper prices and consistent accounting methods over the years, the Tribunal found no justifiable reason for rejecting the books of accounts. Consequently, the trading addition of ?13,09,166/- was deleted, allowing the assessee's appeal on this ground.

2. Disallowance of Interest Paid without Deduction of Tax at Source under Section 40(a)(ia):

The assessee paid ?4,98,414/- as interest to Reliance Capital Ltd. without deducting tax at source. The CIT(A) upheld the disallowance, stating that the relevant amendments to section 40(a)(ia) and section 201 did not apply to the assessment year in question.

The assessee contended that the interest was paid in monthly installments, with no amount payable at the end of the financial year, thus falling outside the scope of section 40(a)(ia). The Tribunal referred to the Special Bench decision in Merilyn Shipping & Transport and subsequent judicial interpretations, which supported the view that section 40(a)(ia) applies only to amounts payable and not to amounts already paid.

Following the precedent set by the Coordinate Bench in Siyaram Export India (P) Ltd., the Tribunal deleted the disallowance, allowing the assessee's appeal on this ground.

3. Disallowance of Interest Expense on Advances Paid Assuming Notional Interest Income:

The AO disallowed interest expenses, assuming notional interest income on interest-free advances given to family members. The CIT(A) upheld the disallowance, noting the lack of business connection and commercial expediency.

The assessee argued that the advances were given for urgent requirements and highlighted interest-free loans received from other sources. The Tribunal found no evidence to establish the business purpose of the advances or any nexus with interest-free loans received. Consequently, the Tribunal confirmed the disallowance, dismissing the assessee's appeal on this ground.

Conclusion:

The Tribunal allowed the appeal partly, deleting the trading addition and disallowance under section 40(a)(ia), but upheld the disallowance of interest expense on advances. The order was pronounced on 17/03/2017.

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