2018 (9) TMI 704 - AT - Income Tax

Addition made on account of personal and unverifiable expenses - Held that - Assessee has produced bills in support of foreign travel expenses incurred by it. Further it is observed that foreign travel has been undertaken by Directors or other officials alone, and A.O. has not been able to establish any infirmity/discrepancy in evidences filed by assessee. CIT(A) categorically observed that assessee provided Ledger account of telephone expenses which contained telephone numbers and mobile numbers of assessee, having installed, either at factory, or offices, or mobiles, used by directors/senior officers. Regarding local travel expenses, CIT (A) categorically observed that Ledger account does not indicate any personal expenditure. In respect of vehicle running expenditure and depreciation is concerned, it has been observed by CIT (A) that assessee itself has made suo moto disallowance on account of perquisite value for use of vehicles for personal reasons in the computation of income. Disallowance being restricted under section 36 (1) (iii) - Held that - Having regard to balance sheet of assessee for year under consideration, assessee had sufficient funds of its own, and therefore presumption by Ld.AO without any supportive documents/evidences is unacceptable. Referring ratio held by Hon ble Supreme Court in case of Hero Cycles Pvt.Ltd Vs.CIT 2015 (11) TMI 1314 - SUPREME COURT OF INDIA , we do not find any infirmity in the decision of Ld. CIT (A). However at this juncture we direct Ld.AO to allow the netting of interest. Accordingly, this ground raised by revenue stands dismissed. Disallowance on account of under valuation of closing stock - Held that - CIT(A) categorically observed mistake in valuation of closing stock adopted by AO by using FIFO method. It is observed that Ld.AO has not granted adjustment of opening stock and slow moving items, which has been held to be unjustified by plethora of decisions. On the basis of the above detailed observations by Ld. CIT (A), we do not find any infirmity in deleting addition made by Ld.AO. Ld.AO is directed to value closing stock after eliminating opening stock for the year, slow moving & obsolete items at cost price or market price whichever is lower. - Decided against revenue

Summary

Issues Involved:
1. Addition of personal and unverifiable expenses.
2. Disallowance under section 36(1)(iii) of the Income Tax Act.
3. Under-valuation of closing stock.
4. Treatment of opening stock for the subsequent assessment year.

Detailed Analysis:

1. Addition of Personal and Unverifiable Expenses:
The Revenue appealed against the deletion of ?4,89,587/- on account of personal and unverifiable expenses. The Assessing Officer (AO) disallowed these expenses due to lack of logbooks for vehicles and insufficient details for telephone and travel expenses. However, the assessee argued that all expenses were business-related and supported by bills and vouchers. The Tribunal noted that the AO did not find any discrepancies in the provided documents. The CIT(A) observed that the expenses were for business purposes and the assessee had already made a suo moto disallowance for personal use. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this ground.

2. Disallowance under Section 36(1)(iii) of the Income Tax Act:
The Revenue contested the CIT(A)'s restriction of disallowance to ?10,47,260/- from ?16,37,392/-. The AO argued that the borrowed funds were not entirely used for business purposes. The assessee countered that the secured loans were used for business operations, supported by detailed submissions. The Tribunal found that the assessee had sufficient own funds to cover investments and relied on the Supreme Court's decision in Hero Cycles Pvt. Ltd Vs. CIT, which emphasized that the business expenditure should be viewed from the perspective of a prudent businessman. The Tribunal upheld the CIT(A)'s decision and directed the AO to allow netting of interest.

3. Under-valuation of Closing Stock:
The Revenue challenged the deletion of ?2,25,40,280/- added by the AO for under-valuation of closing stock. The AO claimed the assessee changed its valuation method without proper disclosure. The assessee maintained that the valuation was consistent with past practices and only slow-moving and obsolete items were valued at 20% of cost. The Tribunal noted that the AO did not provide evidence that the market price was higher than the cost. The CIT(A) observed that the AO's method of valuing the entire stock using FIFO without adjusting the opening stock was unjustified. The Tribunal upheld the CIT(A)'s decision, directing the AO to value the closing stock appropriately.

4. Treatment of Opening Stock for the Subsequent Assessment Year:
The assessee appealed for the treatment of closing stock of ?5,37,04,497/- from AY 2011-12 as the opening stock for AY 2012-13. The CIT(A) had dismissed this issue as infructuous. The Tribunal, having decided the closing stock issue for AY 2011-12, directed the AO to compute the opening stock for AY 2012-13 after considering the confirmed disallowance of ?9,82,594/-.

Conclusion:
For AY 2011-12, both the assessee's and Revenue's appeals were dismissed. For AY 2012-13, the assessee's appeal was allowed for statistical purposes. The Tribunal's order was pronounced on 06th September 2018.