2017 (8) TMI 324 - AT - Income Tax

Disallowance u/s 14A - reopening of assessment - recording of satisfaction - AO observed that, assessee is maintaining composite account and therefore the common faculties and resources have been used, it cannot be said that the assessee has not incurred any expenditure for earning exempt income. - Held that - On perusal of the order of the AY 2008-09 which is at page No. 163 of paper book submitted by the assessee shows that no assessment was made in case of the assessee for AY 2008-09 u/s 143(3) of the Act. The assessee s return of income was accepted u/s 143(1) of the Act and further it was reopened u/s 147 and ld Assessing Officer made disallowance in that order only with respect to reasons for which the reopening was initiated. In view of this it is correct for ld CIT(A) to hold that as no disallowance has been made in AY 2008-09 no disallowance can be made in this year too. With respect to the finding of the ld CIT(A) regarding consistency to be followed relying upon the decision of Hon ble Supreme Court in case of Radha Swami Satsang Vs. CIT 1991 (11) TMI 2 - SUPREME Court we are reminded of the decision of the Hon ble Supreme Court in case of Distributors of (Baroda) Pvt Ltd. Vs. Union of India (1985 (7) TMI 1 - SUPREME Court) wherein it has been held that to perpetuate an error is heroism to rectify it is the compulsion of judicial conscience. However, as on the issue of improper satisfaction recorded by the Assessing Officer we direct the ld Assessing Officer to delete the disallowance u/s 14A Valuation of closing stock of inventory - Held that - As not controverted that in the next year the assessee has shown higher income because of the valuation and the tax rate in both the years are not same. The revenue also could not dispute with cogent evidence/ finding that value of the material was not nil but higher than that. In view of this we confirm the finding of the ld CIT(A) in deleting the disallowance on account of valuation of closing stock of inventory as at 31.03.2009.

Summary

Issues Involved:
1. Deletion of disallowance under Section 14A of the Income Tax Act, 1961.
2. Deletion of addition on account of valuation of closing stock.

Detailed Analysis:

Issue 1: Deletion of Disallowance under Section 14A of the Income Tax Act, 1961

Facts:
The assessee, a company engaged in manufacturing and supplying auto electric parts, earned a dividend income of ?34,62,184/- but did not disallow any sum under Section 14A. The Assessing Officer (AO) invoked Rule 8D of the Income Tax Rules and disallowed ?4,30,148/-, claiming the assessee used common infrastructure and personnel for earning both taxable and exempt income.

Arguments:
- Revenue: The AO argued that the assessee maintained composite accounts and used common resources for earning both types of income, justifying the disallowance under Rule 8D.
- Assessee: The assessee claimed no expenditure was incurred for earning the exempt income as the dividend was directly credited to the bank account. They cited several judicial precedents supporting their stance.

Tribunal’s Findings:
- The Tribunal noted that the AO's satisfaction was vague and not based on specific scrutiny of the assessee's accounts.
- The AO failed to demonstrate which common facilities were used or what specific expenditure was incurred.
- The Tribunal found that the AO's satisfaction did not meet the requirements under Section 14A(2) and was not objective or specific.
- The Tribunal upheld the CIT(A)'s deletion of the disallowance, although it disagreed with the CIT(A)'s reasoning regarding consistency with the previous year’s assessment.

Conclusion:
The Tribunal directed the AO to delete the disallowance of ?4,30,148/- under Section 14A, dismissing the revenue's appeal on this ground.

Issue 2: Deletion of Addition on Account of Valuation of Closing Stock

Facts:
The assessee valued certain raw materials at nil in the closing stock, claiming they were obsolete and rusty. The AO added ?1,46,65,041/- to the assessee's income, arguing that these materials were reused shortly thereafter, indicating they were not worthless.

Arguments:
- Revenue: The AO contended that the materials could not be valued at nil since they were reused shortly after the valuation date.
- Assessee: The assessee justified the nil valuation due to rust and lack of immediate use, supported by subsequent job work expenses and consistent accounting practices. They argued the issue was revenue-neutral as the materials were later used without additional cost, leading to higher profits in subsequent years.

Tribunal’s Findings:
- The Tribunal agreed with the CIT(A) that the assessee provided sufficient evidence for the nil valuation, including job work expenses and lack of export orders.
- The Tribunal noted that the valuation method was consistent and accepted by the Excise Department.
- The Tribunal found the addition unsustainable as the revenue could not prove the materials had a higher value than nil.

Conclusion:
The Tribunal confirmed the CIT(A)'s deletion of the addition of ?1,46,65,041/- on account of the valuation of closing stock, dismissing the revenue's appeal on this ground.

Final Decision:
The appeal of the revenue was dismissed in its entirety. The Tribunal upheld the CIT(A)'s orders on both grounds, concluding that the disallowance under Section 14A and the addition on account of closing stock valuation were rightly deleted. The order was pronounced in the open court on 19/04/2017.