2017 (4) TMI 757 - AT - Income Tax

Calculation of deduction u/s 80HHC - AO reduced expenditure incurred on stewardship and transport charges and also transportation charges disallowed from export turnover - Held that - AO reduced an amount of ₹ 1.65 crore from export turnover on the ground that this expenditure related to freight and insurance attributable to transport of goods beyond customs station whereas it is the contention of the assessee-company is that this expenditure was incurred within the premises of the customs station and therefore, it is not required to be reduced from export turnover. However, assessee-company has not filed any evidence in support of this contention. Learned AR of the assessee has not led any evidence on record in support of the contention that the expenditure was incurred as a clearing and forwarding charges within the customs station. It is a mere bald assertion and therefore, we are not unable to appreciate the submissions made by the assessee-company.- Decided against assessee Transport charges disallowed u/s 40(a)(ia) - contention of the assessee-company is that since the amount was disallowed under the provisions of section 40(a)(ia), the same should not form part of direct cost - Held that - This contention of the assessee-company does not hold good for the simple reason that on account of disallowance of transport expenditure, business profits have been inflated to that extent and the same was considered for exemption u/s 80-HHC and in order to maintain parity, the same requires to be reduced from the direct cost. Thus, we do not find any merit in the submission of the assessee-company. - Decided against assessee Addition on account of valuation of closing stock - Held that - No evidence was filed substantiating the explanation for discrepancy in valuation of the closing stock. Even before us, altogether different argument was advanced saying that domestic sales were not taken into consideration while valuating closing stock. It is altogether a new submission and does not emanate from the orders of the lower authorities and no evidence was filed even in respect of this argument. Hence, the ground of appeal cannot be accepted and dismissed as such.- Decided against assessee Eligibility for deduction u/s 10B - proof of manufacturing activities - Held that - the factual matrix of the process undertaken by the assessee, as narrated by him, even without doubting for a moment the veracity of the factual matrix of the process, as a result of the process undertaken by the assessee, it cannot be said that as a result of such process a new and different commercial product has come into existence which is known to the market. It cannot also be said that the original product i.e. ROM has lost its identity and will serve no purpose. As a result of the process undertaken by the assesseecompany, iron ore remains as iron ore only. Its primary and essential conditions still remain the same as it is continued to be known in the market as iron ore and as sold as iron ore only. There was no transformation taken place in the process. The process undertaken by the assessee is only to make it convenient to use and the end use of the first product i.e. ROM continues to be the same. Therefore, it cannot be said that the assessee-company is engaged in the activity of manufacturing qualify for deduction u/s 10B. - Decided against assessee Disallowance of transport expenditure - no TDS was made on this expenditure and the payment was made in cash - Held that - The assessee-company has not been able to prove genuineness of the expenditure incurred. Mere filing of ledger account, copy of expenditure depicting the name and address, truck number, does not absolve the assessee-company of proving the expenditure. It is settled principle of law that mere entry in books of account neither establishes accrual of income nor incurring of expenditure. It has to prove conclusively that the expenditure was actually incurred wholly and exclusively for the purpose of business. The very fact that the entire transport expenditure was incurred in cash and no TDS was deducted also leads one to suspect the genuineness of the expenditure. The assessee-company had made no effort to conclusively prove that this expenditure was incurred wholly and exclusively for business purpose. Entry in the books of account is self-made entry, no credence can be given unless and otherwise corroborated by independent evidence. Mere entry in the books of account alone does not enable assessee to claim deduction - Decided against assessee Disallowance of transport expenditure - only journal entries were being passed in the books of account without any supporting material - Held that - It is settled principle of law that no expenditure can be allowed on mere provision in the accounts unless and until it is established that liability has actually incurred wholly and exclusively for purpose of business of the assessee-company. In the present case, except making a provision in the books of account, assessee-company had failed to establish crystallisation of the liability but also actually the liability has been incurred. While making journal entry for alleged expenditure of transport in the name of Kavitha and Sandhya, assessee-company had not furnished details of transport when they incurred it for the purpose of transport of the material etc. A mere entry in the books of account does not enable the assessee-company to claim deduction. It is trite law that onus lies on the assessee to prove that claim is allowable as deduction.- Decided against assessee Disallowance of depreciation on machinery of crushing plant - no processing or manufacturing or production of material was carried on by the assessee-company and therefore machinery was not put to use - Held that - An asset is eligible for depreciation even if it is used in business though it is not employed in the course of manufacturing or production of an article within the strict meaning as used in general parlance and moreover keeping in view that depreciation on the same machinery was allowed in earlier years, we set aside the issue to the file of the AO to examine whether the machinery in question was put to use in course of carrying on business of the assessee and if so, allow admissible depreciation in accordance with law. Accordingly, these grounds of appeal are set aside to the file of the AO for de novo assessment. Validity of assessment u/s 143(3) r.w.s. 153A - Held that - The contention of the appellant cannot be accepted as it is amply clear that regular assessment proceedings for assessment year 2010-11 are still open before the AO. Therefore, the AO is empowered to make addition based on evidence gathered either as a result of search and seizure or otherwise. The additions need not be confined to the material seized as a result of search and seizure proceedings. Therefore, the contention of the appellant cannot be accepted. The mere fact that the AO mentioned wrong section in the assessment order does not invalidate the order in view of the specific provisions of section 292B - Decided against assessee Expenditure incurred by the assessee for purchase of iron ore which is used for exporting the same to outside India - Held that - Payments made for purchase of illegal iron ore cannot be allowed as a deduction as the payments were made in blatant violation of the provisions of MMDR Act and also opposed to public policy. The Explanation to section 37(1) is squarely applicable.- Decided against assessee Unexplained cash payment outside books of account - Held that - AO has found material suggesting that appellant made cash payment to various parties as per seized material A/OV/1 outside books of account. This information was put forth to the appellant and the appellant has not discharged the onus of proving that the payments were duly reflected in the books of account nor he could prove that no such payments were made. Failure to do so automatically entails the addition. Thus, even before us, appellant had made no efforts to demonstrate that cash payments, if any, made are duly disclosed in the books of account and made out of known sources of income, nor he could demonstrate that no such payments were made. Thus, we have no hesitation to uphold the addition.- Decided against assessee Addition on account of valuation of closing stock - Held that - No doubt it is trite law that stock can be valued at cost or market value whichever is less. While valuing closing stock at nil, appellant had not brought on record any evidence suggesting that realizable value of the closing stock lying at Belekeri Port is nil, nor the assessee-company brought on record any independent valuation from technical experts in the field. Thus, in absence of evidence on record, we are unable to appreciate the contention of the assessee - Decided against assessee

Summary

Issues Involved:
1. Calculation of deduction under Section 80HHC of the Income-tax Act.
2. Addition on account of undisclosed closing stock.
3. Disallowance of deduction under Section 10B of the Income-tax Act.
4. Disallowance of transportation expenses.
5. Disallowance of depreciation on machinery.
6. Jurisdiction of the Assessing Officer under Section 153A.
7. Disallowance of expenditure on illegal purchases of iron ore.
8. Addition on account of unexplained cash payments.
9. Valuation of closing stock.

Issue-wise Detailed Analysis:

1. Calculation of Deduction under Section 80HHC:
The AO reduced the deduction claimed under Section 80HHC by including transportation charges disallowed under Section 40(a)(ia) in the direct cost and reducing freight charges from the export turnover. The assessee contended that these charges should not be included as they were incurred within the customs station and should be reduced from both export and total turnover to maintain parity. However, the Tribunal dismissed the appeal, noting that the assessee failed to provide evidence supporting their claims.

2. Addition on Account of Undisclosed Closing Stock:
The AO made an addition of ?66 lakhs due to discrepancies in the valuation of the closing stock. The assessee argued that the balance was due to domestic sales, but failed to substantiate this claim with evidence. The Tribunal upheld the addition as the assessee could not provide sufficient proof.

3. Disallowance of Deduction under Section 10B:
The AO denied the deduction under Section 10B, asserting that the assessee was not engaged in manufacturing but merely trading iron ore. The assessee contended that their processes amounted to manufacturing, but the Tribunal, referencing various judicial precedents, concluded that the processes did not transform the iron ore into a new and distinct commercial product. Thus, the Tribunal upheld the disallowance of the deduction under Section 10B.

4. Disallowance of Transportation Expenses:
The AO disallowed transportation expenses of ?15,54,39,225 due to lack of TDS and substantial cash payments, suspecting the genuineness of the expenditure. The Tribunal upheld the disallowance, noting that the assessee failed to conclusively prove the genuineness of the expenses with independent corroborative evidence.

5. Disallowance of Depreciation on Machinery:
The AO disallowed depreciation on the machinery used in the crushing plant, arguing that no processing or manufacturing was conducted. The Tribunal set aside the issue to the AO for re-examination, noting that depreciation should be allowed if the machinery was used in the business, even if not in manufacturing.

6. Jurisdiction of the Assessing Officer under Section 153A:
The assessee challenged the jurisdiction of the AO under Section 153A, arguing that the assessment was based on information retrieved from a third party. The Tribunal dismissed this ground, stating that the AO is empowered to use information gathered during regular assessment proceedings, and the assessment order was valid under Section 292B.

7. Disallowance of Expenditure on Illegal Purchases of Iron Ore:
The AO disallowed expenditure on iron ore purchases from GJR, citing illegal mining activities. The Tribunal upheld the disallowance, referencing the MMDR Act and public policy considerations, concluding that expenditure incurred in violation of statutory provisions cannot be allowed as a deduction.

8. Addition on Account of Unexplained Cash Payments:
The AO made an addition of ?2,46,50,257 based on seized material indicating cash payments outside the books. The Tribunal upheld the addition, noting that the assessee failed to demonstrate that the payments were disclosed in the books or made from known sources.

9. Valuation of Closing Stock:
The AO added ?5,10,19,433 to the closing stock valuation, rejecting the assessee's valuation at nil due to a government ban on iron ore exports. The Tribunal upheld the addition, noting that the assessee failed to provide evidence supporting the nil valuation or an independent valuation from experts.

Conclusion:
The Tribunal upheld most of the AO's disallowances and additions, emphasizing the need for the assessee to provide substantial evidence to support their claims and deductions. The only partial relief granted was the remand of the issue of depreciation on machinery for re-examination by the AO.