2018 (11) TMI 546 - AT - Income Tax

Disallowance of assessee s claim for depletion of closing stock - sales to related parties - assessee in the present case is a company which is mainly engaged in the business of trading and manufacturing of silk fabrics - Held that - As submitted on behalf of the assessee company before the authorities below as well as before us, the sale of these products was mainly made by the assessee company always to the related parties and therefore, there was no justifiable reason for the AO to reject the said evidence and as unreliable merely on the ground that the invoices were raised by the assessee company on the related parties. It is pertinent to note here that the said invoices raised by the assessee mainly on the related parties in the subsequent year were accepted by the AO himself and it therefore, constituted the relevant and reliable evidence to support and substantiate the net realizable value of closing stock as determined by the assessee company as on 31st March, 2011. We are of the view that the addition made by the AO by rejecting the claim of the assessee for depletion of closing stock was not sustainable and the Ld. CIT(A) was fully justified in deleting the same. CIT(A) giving relief to the assessee on this issue and dismiss ground no 1 of the revenue s appeal. Disallowance u/s 40(a)(ia) as well as section 37 - expenses on service charges for computer installed in its Kolkata office and maintenance of flats - Held that - The said expenditure thus was incurred by the assessee company wholly and exclusively for the purpose of its business and the same was not liable to be disallowed u/s 37 as rightly held by the CIT(A). As regards the disallowance of the said expenditure u/s 40(a)(ia), it is observed that the expenditure on account of maintenance of flats to the extent of ₹ 5,95,754/- was made by the assessee company on account of payment to Cooperative Housing Society for regular maintenance and for purchase of certain attempts and since no tax at source was deductable from the said payments, the same were outside the purview of section 40(a)(ia) as rightly held by the CIT(a) while restricting the disallowance of ₹ 8,96,169/- made by the AO to the extent of ₹ 2,10,415/- thereby allowing the relief of ₹ 6,85,754/-. We therefore, uphold the impugned order of the Ld. CIT(A) on this issue and dismiss ground no 2 of the revenue s appeal. Disallowance on account of irrecoverable advances written off - Held that - It is observed that both the amounts of ₹ 1,44,553/- and ₹ 2,61,230/- represented the advances given by the assessee company to its employees and the VAT receivable on input respectively and since the said amounts were pertaining to the ordinary course of the assessee s business, the loss suffered due to non-recovery of the same was the business loss, which in our opinion, was liable to be allowed as deduction as rightly held by the Ld. CIT(A). We, therefore, uphold the impugned order of the Ld. CIT(A) on this issue and dismiss ground no 3 of revenue s appeal.

Summary

Issues Involved:
1. Deletion of addition of ?27.18 crores on account of disallowance of assessee’s claim for depletion of closing stock.
2. Deletion of disallowance of ?8,96,169/- made by the AO under section 40(a)(ia) and section 37 of the Act.
3. Deletion of disallowance of ?4,05,783/- on account of irrecoverable advances written off.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?27.18 Crores on Account of Disallowance of Assessee’s Claim for Depletion of Closing Stock:

The assessee, a company engaged in trading and manufacturing silk fabrics, filed its income return declaring a loss. The valuation of closing stock was done based on the net realizable value (NRV), resulting in a depletion of ?27.18 crores. The AO rejected this valuation, arguing that the budget speech reducing import duty on raw silk from 30% to 5% was relevant for the next financial year, not the current one. The AO also found contradictions in the assessee's explanations and deemed the valuation improper.

The Ld. CIT(A) deleted the addition, stating:
- The auditor’s comments were not adverse and did not indicate any issues with purchase, sale, or stock.
- The valuation method was consistent with ICAI guidelines (AS-2), which allow inventory valuation at lower of cost or NRV.
- Sample invoices showed actual sale prices lower than the valuation, supporting the NRV.
- The principle of 'Consistency' was upheld as the method had been accepted in previous years.
- The reduction in import duty was relevant as it impacted the NRV of closing stock.
- The AO’s rejection was based on suspicion and not valid, as no defects were found in the books of accounts.

The Tribunal upheld the Ld. CIT(A)’s order, agreeing that the reduction in import duty had a direct impact on NRV and the valuation method was fair and reasonable. The sample invoices were considered reliable evidence, and the addition was deemed unsustainable.

2. Deletion of Disallowance of ?8,96,169/- Made by the AO Under Section 40(a)(ia) and Section 37 of the Act:

The AO disallowed ?8,96,169/- for failure to deduct tax at source and questioned the business expediency of the expenses. The Ld. CIT(A) sustained the disallowance to the extent of ?2,10,415/- under section 40(a)(ia) and deleted the remaining amount, stating:
- The expenditure of ?90,000/- on computer service charges was incurred after deducting tax at source.
- The expenditure of ?8,06,169/- for flat maintenance was for business purposes and not liable for disallowance under section 37.
- Payments to Cooperative Housing Society for regular maintenance were not subject to TDS, thus outside the purview of section 40(a)(ia).

The Tribunal upheld the Ld. CIT(A)’s order, agreeing that the expenses were incurred for business purposes and the disallowance under section 40(a)(ia) was appropriately restricted.

3. Deletion of Disallowance of ?4,05,783/- on Account of Irrecoverable Advances Written Off:

The AO disallowed the deduction of irrecoverable advances, stating they did not form part of the assessee’s income. The Ld. CIT(A) deleted the disallowance, finding that:
- ?1,44,553/- represented advances to employees who left the company.
- ?2,61,230/- represented VAT receivable deemed inadmissible by the authority.

The Tribunal upheld the Ld. CIT(A)’s order, agreeing that the loss was business-related and deductible.

Conclusion:
The Tribunal dismissed the revenue’s appeal, upholding the Ld. CIT(A)’s deletions of the additions and disallowances made by the AO, and pronounced the order in the open court on 28th September, 2018.