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2017 (8) TMI 607 - AT - Income TaxDisallow the claim of deduction u/s 80IA - non filing of audit report in Form 10CCB before the due date of filing of return - mandatory requirement of filing of Audit Report - Held that - Admittedly, in support of claim of deduction under section 80IA, the audit report in prescribed Form 10CCB has been filed by the assessee company during the course of assessment proceedings. The Hon ble Supreme Court in CIT v. G.M. Knitting Industries (P) Ltd. (2015 (11) TMI 397 - SUPREME COURT) dismissed the appeal of Revenue and confirmed the view taken by Madras High Court in case of CIT v. AKS Alloys (P.) Ltd. 2011 (12) TMI 39 - MADRAS HIGH COURT holding that Even though necessary certificate in Form 10CCB along with return of income had not been filed but same was filed before final order of the assessment was made, the assessee was entitled to claim deduction under section 80-IB. In light of the above, we agree with the contention of the ld AR that while filing of the audit report is mandatory, the further condition that it should be filed with the return of income is directory in nature and so long as the audit report has been filed during the course of assessment proceedings, substantial compliance has been made. In the result, ground no. 1 of the assessee s appeal is allowed. Cash payments in violation of provisions of section 40A(3) - Held that - In the present case, the assessee company has hired the services of transport agency, it thus incurs a liability and owe payment to such transport agency for availing its services. It can either make payment through account payee cheque or bank draft or in cash. Where it makes payment in cash, it is hit by provisions of section 40A(3). The payment to a truck driver is thus a payment to and on behalf of the transport agency and is not a payment to the truck driver in his individual capacity as the assessee has availed the services of the transport agency to transport its goods and not that of the truck driver simpliciter. Therefore, where the payment is made to the agent of the payer, Rule 6DD comes to the rescue and not otherwise. The truck drivers are not the agent of the assessee company and thus not covered under the exception carved out in Rule 6DD. Given the current provisions in section 40A(3) read with Rule 6DD, in the instant case, the payments to individual transport agencies exceed the threshold of ₹ 35,000 and thus rightly disallowed by the AO - Decided against assessee Addition u/s 14A - disallowance expenditure incurred in relation to earning exempt income in accordance with Rule 8D - Held that - CIT(A) accepted that no disallowance is to be made out of the interest expenses but has wrongly confirmed the disallowance out of administrative expenses at ₹ 13,414/- as against ₹ 1,487/- disallowed by AO. Therefore, even if order of Ld. CIT(A) is upheld, the disallowance be directed to be restricted at ₹ 1,487/- as against ₹ 13,414/- incorrectly mentioned by the Ld. CIT(A). After hearing both the parties, disallowance of administrative expenses is restricted to ₹ 1,487. In the result, the ground is partly allowed. Rejection of method of valuation of stock - identification of stock - defective stock identification - Held that - As find that the defective stock has been referred to by the assessee as a stock which is not of best quality, is slow moving and has got accumulated at the end of the year and which is determined based on physical verification. It is thus a stock which is identifiable and not a dead stock but a slow moving stock in the sense that it takes longer to dispose it off and the fact that it has been disposed off subsequently at a particular value. The onus is thus on the assessee to demonstrate the position of defective stock and movement (sale) thereof over the past years. Where through such movement of stock, it can be demonstrated that the trend of defective stock throws a percentage of 25% or 50% of specified goods as defective, the same can then be accepted as a reliable and robust basis to help determination of relevant trend for identification of defective stocks. As we have held above, the assessee has to demonstrate through facts of the instant year that such a trend percentage of defective stock can be applied for the year under consideration taking into consideration the position of opening stock, purchases, sale and closing stock. There is however nothing on record to suggest that the assessee has discharged this initial onus placed on it. In the result, we are setting aside the matter to the file of the ld CIT(A) to examine the matter afresh as per law after providing appropriate opportunity to the assessee. In the result, the ground of the revenue is allowed for statistical purposes.
Issues Involved:
1. Disallowance of deduction u/s 80IA(1) due to non-compliance with e-filing requirements. 2. Disallowance u/s 40A(3) for cash payments exceeding the prescribed limit. 3. Disallowance u/s 14A read with Rule 8D for expenses related to exempt income. 4. Valuation of defective stock and its impact on closing stock. Issue-wise Detailed Analysis: 1. Disallowance of Deduction u/s 80IA(1): The assessee claimed a deduction of ?13,04,887/- under section 80IA for income from wind mill turbines. The AO disallowed the claim because the audit report in Form 10CCB was not e-filed by the due date. The CIT(A) upheld this disallowance, citing non-compliance with the mandatory e-filing requirement. The assessee argued that the requirement to e-file the audit report was a procedural one and that substantial compliance was achieved by filing the report during the assessment proceedings. The Tribunal, referencing Supreme Court and High Court rulings, agreed that while obtaining the audit report is mandatory, filing it with the return is directory. Hence, the Tribunal allowed the deduction, considering the audit report was filed during assessment proceedings. 2. Disallowance u/s 40A(3): The AO disallowed ?2,97,115/- under section 40A(3) for cash payments exceeding ?35,000/- in a day. The assessee contended that payments were made to individual truck drivers, not exceeding the limit per person. The CIT(A) confirmed the disallowance, noting no evidence supporting the claim that payments were advances adjusted later. The Tribunal held that payments to truck drivers should be considered payments to the transport agency and thus aggregated. Since the payments exceeded the threshold, the disallowance was upheld. 3. Disallowance u/s 14A read with Rule 8D: The AO disallowed ?14,901/- for expenses related to exempt dividend income. The CIT(A) accepted that no interest expenses were attributable but confirmed ?13,414/- as administrative expenses. The Tribunal corrected this, noting the AO's disallowance was ?1,487/- for administrative expenses, and restricted the disallowance to this amount. 4. Valuation of Defective Stock: The AO rejected the assessee's method of valuing 25% of stock as defective at 50% of its value, enhancing the closing stock by ?73,28,633/-. The CIT(A) partly upheld this, directing to treat 25% of stock as defective, based on past practices and physical verification. The Tribunal noted inconsistencies in the percentage of defective stock over the years and the lack of specific basis for the current year's estimation. It set aside the matter for fresh examination by the CIT(A), emphasizing the need for a robust basis for identifying defective stock. Conclusion: - The appeal on deduction u/s 80IA was allowed, recognizing substantial compliance with procedural requirements. - The disallowance u/s 40A(3) was upheld, considering payments to transport agencies. - The disallowance u/s 14A was corrected to ?1,487/-. - The valuation of defective stock was remanded for re-examination, requiring a consistent and factual basis. Order: The appeal of the assessee is partly allowed, and the appeal of the revenue is allowed for statistical purposes. The order was pronounced in the open court on 09/08/2017.
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