2019 (7) TMI 1025 - AT - Income Tax

Disallowance u/s.40A(3) - payment in Cash - Assessee made payments to transporters in violation of the provisions of section 40A(3) - AR canvasseda view that since the transporters were representing the assessee in supplying the goods, they assumed the character of agents - HELD THAT - Such a contention is a farfetchedpr oposition. Delivering goods by a transporter on behalf of the assessee to customers is one thing, which is entirely different from paying freight by the assessee to such transporter. Further,exception carved out in the Rule applies where the payment is made by the assessee to his agent for making further payment in cash and not for the self consumption by the agent. Since no principal-agent relation exists between the assessee and transporters to whom the assessee made payments in violation of section 40A(3) of the Act, it is held that the assessee cannot get shelter of clause (k) of Rule 6DD. We, therefore, uphold the impugned order on this score. Addition u/s.14A read with Rule 8D - no exempt income discovered - HELD THAT - The Hon'ble Delhi High Court in Cheminvest Ltd. vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT has held that if there is no exempt income, there can be no question of making any disallowance u/s14A of the Act. Similar view has been taken in CIT vs. Holcim India P. Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT . No contrary decision has been brought to our notice by the ld. DR. In view of the fact that the assessee did not earn any exempt dividend income during the year, we hold that no disallowance can be sustained u/s 14A of the Act. We, therefore,overturn the impugned order to this extent. This ground is, thus,allowed. Rejection of books of account - addition of extra profit on sale of goods manufactured outside the books of account and unexplained investment in such outside production - HELD THAT - Valuation of stock given by the assessee in its balance sheet is as per the regular method of stock valuation followed by the assessee. It, therefore, transpires that the difference in the amounts of stocks as per bank and annual accounts has arisen because of valuation and not quantitative details and further the value declared in the annual accounts is not fallacious and is as per the regular method of valuation. Once the value reflected by the assessee in its annual accounts has been accepted by the AO, in our considered opinion, no addition can be made simply on the ground that the assessee declared high ervalue to the banks. See CIT Vs. Acrow India Ltd. 2006 (11) TMI 118 - BOMBAY HIGH COURT . Excess manufacturing out side the books of account on the basis of certain ratio given by the assessee of some raw materials to final product - As seen that the assessee submitted that it was just a standard in a particular situation which varied from situation to situation. We also concur with the contention of the assessee that there cannot be any yard stick of ratio of raw material to output. Variation arises in such standard ratio because of several reasons, such as, quality of products required, normal wastage, abnormal wastage, disruption in manufacturing process, seasonal reasons, at al. The thing which is pertinent to note is that if the AO was coming to the conclusion of the assessee having manufactured goods outside the books of accounts, there should have been some material to substantiate the same. The assessee has maintained proper stock registers and is subjected to excise duty. There is nothing on record that the Excise Department or Sales-tax Department, for that purpose, did not accept the figures of manufacturing or sales as tendered by the assessee. In case of Excise duty levy, movement of goods is strictly monitored. No manufacturer can remove the manufactured goods without paying excise duty, for which entries in necessary registers are made. Here is a case in which the assessee has maintained all the requisite registers.Simply because consumption of electricity varied from month to month or did not match with the manufacturing shown by the assessee, cannot be a reason to infer that the assessee was engaged in carrying out manufacturing activity outside books of account. We are of the considered opinion that the ld. CIT(A) was justified in overturning the view point of the AO in rejecting the books of account. Once the books of accounts are held to be properly maintained, there cannot be any question of making addition on the basis of suppressed production or undisclosed investment. We, therefore, affirm the opinion of the ld. first appellate authority in deleting both the additions above. - Appeal of the Revenue is dismissed and that of the assessee is partly allowed.

Summary

Issues:
1. Disallowance under section 40A(3) of the Income-tax Act, 1961.
2. Disallowance under section 14A read with Rule 8D.
3. Rejection of books of account and addition on account of extra profit on sale of goods manufactured outside the books of account.

Issue 1: Disallowance under section 40A(3) of the Income-tax Act, 1961:
The case involved disallowance amounting to ?28,18,584 made by the Assessing Officer under section 40A(3) of the Act. The assessee contended that the payment was covered under Rule 6DD(k) of the Income-tax Rules, 1962. However, it was found that the relationship between the assessee and the transporters did not meet the criteria of principal and agent as per Rule 6DD(k). The Tribunal upheld the disallowance, stating that the transporters were not agents of the assessee, and the payment made in violation of section 40A(3) could not be sheltered under Rule 6DD(k).

Issue 2: Disallowance under section 14A read with Rule 8D:
The AO computed a disallowance of ?12,71,000 under section 14A read with Rule 8D(2)(iii) as the assessee made investments in shares but did not earn any exempt income during the year. The Tribunal referred to relevant case laws and held that if there is no exempt income, no disallowance can be made under section 14A. Therefore, the disallowance was overturned, and the ground raised by the assessee was allowed.

Issue 3: Rejection of books of account and addition on account of extra profit on sale of goods manufactured outside the books of account:
The AO rejected the books of account based on discrepancies in stock declarations and variations in power consumption. The AO alleged that the assessee had manufactured goods outside the books of account, leading to extra profit and unexplained investments. However, the Tribunal found that the valuation differences in stock declarations were due to valuation methods and not quantity discrepancies. Regarding manufacturing outside the books, the Tribunal noted that the assessee maintained proper records and was subject to excise duty, indicating no intentional concealment. The Tribunal referred to precedents and concluded that the books of account were properly maintained, overturning the additions made by the AO.

In conclusion, the Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, addressing all issues comprehensively in the judgment delivered on 19th July 2019.