2019 (7) TMI 1033 - AT - Income Tax

Disallowance of expenses made u/s.14A r.w.s. Rule 8D - HELD THAT - Earning of exempt income is not a criteria for making addition u/s.14A since it is a deeming provision. In our considered opinion the Hon ble Apex Court in the case of CIT Vs. Walfort Share Stock Brokers (P) Ltd. 2010 (7) TMI 15 - SUPREME COURT has made it clear that there has to be proximate relationship between exempt income and disallowance u/s.14A. In this backdrop we have examined the Schedule-11 of the Balance Sheet of the assessee and we find that there is no exempt income during the year in respect of the assessee. Thus we set aside the order of the Ld. CIT(Appeals) and direct deletion of disallowance made u/s.14A of the Act. Thus ground No.1 raised in appeal by the assessee is allowed. Bogus purchase of machinery and interest thereon on borrowed funds - HELD THAT - Assessee could have furnished additional evidences which could have demonstrated in a way that the assessee s transactions were genuine and therefore the acceptance of the addition made before the Assessing Officer was an ad-hoc one. However no such evidences were brought on record by the assessee. The entire scenario clearly reflects that the assessee knew that the transactions were not genuine and therefore in order to buy peace of mind it accepted the addition before the AO and therefore it in no circumstances can be termed as ad-doc acceptance of the addition. It is rather well planed action on the part of the assessee. That further the assessee with regard to the bogus purchases of machinery is only harping upon case laws but those judicial pronouncements have been decided based on specific evidences on record. In the instant case the assessee as clearly seen from the records has not brought in any evidences as to the fact of showing the genuineness of the transactions in respect of purchase of machinery. In view of the matter we find no infirmity with the findings of the Ld. CIT(Appeals) and the additions made on bogus purchases of machinery and interest thereon on borrowed funds are upheld. Thus ground No.2 raised in appeal by the assessee is dismissed. Nature of expenditure - expenditures in respect of professional fees paid which was in connection with the installation of a machinery or set up of new assets - revenue or capital in nature - HELD THAT - We have also given considerable thought to the findings arrived at by the Assessing Officer as well as by the Ld. CIT(Appeals). We observe in the findings of the AO on perusal of the detailed chart provided for installation of machinery all expenses are in the nature of capital expenditure. Therefore we reverse the findings of the Ld. CIT(Appeals) and uphold the order of the AO. The additions made by the Assessing Officer are therefore sustained. Thus ground No.1 of the Revenue s appeal is allowed. Addition u/s 40A(3) - HELD THAT - As perused the exceptions as contained therein and we find that the criteria for which the CIT(Appeals) has allowed the amount though it is in contravention to Section 40A(3) of the Act is not supported by any exceptions covered under Rule 6DD of the Income Tax Rules 1962. The legislature in its own wisdom has created the provision of Section 40A(3) of the Act and even though the objective is to curb black money transactions in additions to it Rule 6DD is also provided by the legislature stating specific exceptions under which payments can be made in contravention to Section 40A(3) of the Act. The payment made in pursuance to Consumer Dispute Redressal Forum order is not an exception under Rule 6DD. We reverse the findings of the CIT(Appeals) on the issue and uphold the findings of the Assessing Officer. The additions made by the Assessing Officer u/s.40A(3) of the Act is therefore sustained. Thus ground No.2 raised in appeal by the Revenue is allowed. Rejection of books of account - addition made by the Assessing Officer on account of extra profit on manufacturing sale and also deleting the addition made on account of unexplained investment towards extra production - HELD THAT - As decided in assessee s own case for assessment year 2009-10 Tribunal has accepted the findings of the Ld. CIT(Appeals) and deleted all the additions from the hands of the assessee.

Issues Involved:
1. Disallowance of expenses under Section 14A read with Rule 8D.
2. Addition on account of bogus purchase of machinery and interest thereon.
3. Deletion of disallowance of expenditures related to professional fees.
4. Deletion of addition made under Section 40A(3).
5. Rejection of books of accounts under Section 145(3) and related additions.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses under Section 14A read with Rule 8D:
The assessee argued that no exempt income was earned during the year, thus disallowance under Section 14A was not warranted. The assessee referred to Schedule-11 of the Balance Sheet to demonstrate the absence of exempt income. The Tribunal observed that the Hon'ble Apex Court in CIT Vs. Walfort Share & Stock Brokers (P) Ltd. held that a proximate cause between exempt income and disallowance is necessary for Section 14A to apply. Similarly, the Hon'ble Gujarat High Court in CIT Vs. Corrtech Energy P. Ltd. and the Hon'ble Delhi High Court in Cheminvest Ltd. Vs. CIT supported this view. Consequently, the Tribunal set aside the CIT(Appeals)'s order and directed the deletion of the disallowance under Section 14A, allowing the assessee's appeal on this ground.

2. Addition on Account of Bogus Purchase of Machinery and Interest Thereon:
The Assessing Officer (AO) noted the lack of evidence showing the machinery reached the assessee's site and added the entire amount of Rs. 36 lakhs to the income, disallowing interest of Rs. 80,787/- on borrowed funds. The CIT(Appeals) upheld the addition, citing the assessee's initial acceptance and failure to prove the genuineness of the purchase. During the hearing, the assessee argued that the acceptance was ad-hoc and relied on various judicial pronouncements. However, the Tribunal found no evidence to demonstrate the machinery's delivery or installation and concluded that the assessee's acceptance was not ad-hoc but a well-planned action. Thus, the Tribunal upheld the CIT(Appeals)'s findings, dismissing the assessee's appeal on this ground.

3. Deletion of Disallowance of Expenditures Related to Professional Fees:
The AO treated the expenses related to the installation of machinery and new asset setup as capital expenditure. The CIT(Appeals) reclassified these as revenue expenditure and deleted the addition. The Tribunal, after reviewing the detailed chart of expenses, concluded that these were indeed capital in nature and reversed the CIT(Appeals)'s decision, sustaining the AO's addition. Thus, the Revenue's appeal on this ground was allowed.

4. Deletion of Addition Made under Section 40A(3):
The CIT(Appeals) allowed cash payments of Rs. 1,50,000/- made under the Consumer Dispute Redressal Forum's order, despite them being in contravention of Section 40A(3). The Tribunal noted that Rule 6DD of the Income Tax Rules, 1962, lists exceptions to Section 40A(3), none of which covered payments made under such orders. Hence, the Tribunal reversed the CIT(Appeals)'s findings and upheld the AO's addition, allowing the Revenue's appeal on this ground.

5. Rejection of Books of Accounts under Section 145(3) and Related Additions:
The CIT(Appeals) had deleted the AO's additions related to extra profit on manufacturing sales and unexplained investment towards extra production, rejecting the application of Section 145(3). Both parties agreed that the facts and issues were similar to the assessee's case for the assessment year 2009-10, where the Tribunal had upheld the CIT(Appeals)'s deletion of such additions. Applying the same rationale, the Tribunal dismissed the Revenue's appeal on these grounds for the assessment year 2010-11.

Conclusion:
In the combined result, both the assessee's appeal and the Revenue's appeal were partly allowed. The Tribunal's order was pronounced on 19th July 2019.

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