2019 (11) TMI 638 - AT - Income Tax

Addition of discrepancy in stock - assessee himself has accepted the discrepancy in stock during the course of survey and surrender the excess stock. Surrender was made when confronted with the documentary evidence and discrepancy - HELD THAT - No physical discrepancy was found/ detected by the survey team and excess value of stock was merely because of difference in valuation of closing stock. Survey team took the valuation applying MRP- GP% whereas as per assessee, since as per normal trade practice sales are generally made after giving discounts @ 30% to 60%, stock was valued at MRP-Discounts-GP%. This discrepancy in valuation method was duly elucidated before the Assessing Officer vide submission dated 25.02.2013 by the Assessee. The statement showing valuation of closing stock at actual sale price supported by relevant invoices to prove assessee s claim of overvaluation of stock by the survey team. It is undisputed fact that per unit consumption of inputs say, raw material, electricity, diesel etc. is directly proportional to the no. of cores in the wire i.e. as the no. of cores increases per unit consumption of input increases. A six core cable is nearly equal to six single core cables. The assessee demonstrated the conversion of 5 variety of multiple core wire, which constitute 91% of total production by the assessee, into single core wires which shows that production in meters per unit of electricity consumed has increased in the subject year through a table before the AO. The assessee also showed the comparative chart in respect of production of multiple core cable has increased in the subject year as compared to previous years and also demonstrated total production of wires in meters, if the same is converted to single core wires further substantiating assessee s claim that per unit production has increased in subject year to the Assessing Officer. Thus, there is no need to interfere with the findings of the CIT(A). Ground No. 1 of the Revenue s appeal is dismissed. Interest free advance to two sister concern without charging any interest - HELD THAT - Advance of ₹ 77 lakhs considered by the Assessing Officer for making the disallowance, was not from interest bearing borrowed funds, but was made out of own funds built up from the interest free funds i.e. capital and Interest free sundry deposits available with the assessee amounting to ₹ 2.64 crores (1.34 1.30). This emerges from the records produced before the Assessing Officer. Therefore, when there is no expenditure of interest in respect of interest free funds of ₹ 2.64 crores which are more than the amount advanced, there is no justification for charging interest and that too @ 12% on the sum of ₹ 77 lakh. These factual aspects were ignored by the AO. Thus, the CIT(A) rightly deleted this addition. There is no need to interfere with the findings of the CIT(A). Ground No. 2 of the Revenue s appeal is dismissed. Disallowance of damages u/s 37 - HELD THAT - From the perusal of the records it can be seen that due to some unfavorable market conditions specifically shortage of material, unreasonable prices of inputs, delayed payment by railways etc. the assessee could not make the supplies on time to Railways that is the only reason that railways deducted liquidated damages out of payment due to the assessee. Thus, the breach of contract is squarely within the meaning of expression 'commercial expediency' when, seen from the perspective of the assessee's business. Thus it is settled law that only those payments which have been made for infringement of law shall not be allowed as revenue expenditure. Since, the said payment/deduction was not towards any offence or infringement of law therefore the disallowing the same is not tenable on part of the AO. CIT(A) rightly deleted this addition. Ground No. 3 of the Revenue s appeal is dismissed.

Summary

Issues Involved:
1. Deletion of addition of ?2,60,87,240/- due to discrepancy in stock valuation.
2. Deletion of addition of ?9,24,000/- related to interest-free advance to sister concern.
3. Deletion of addition of ?34,79,124/- on account of disallowance of damages under Section 37.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?2,60,87,240/- Due to Discrepancy in Stock Valuation:
The CIT(A) deleted the addition made by the Assessing Officer (AO) of ?2,60,87,240/- based on the alleged excess stock found during a survey. The AO's addition was based on a difference in stock valuation methods: the survey team used MRP minus GP%, while the assessee used MRP minus discounts minus GP%. The assessee demonstrated that the survey team’s method overvalued the stock by ?50,02,024/-. The CIT(A) found that no physical discrepancy in stock was detected during the survey, and the AO’s reliance on power consumption as a basis for estimating production was flawed, as power constituted only 0.69% of the total production cost. The CIT(A) accepted the assessee’s detailed explanations and supporting documents, concluding that the AO's addition was based on surmises and conjectures without tangible evidence. The Tribunal upheld the CIT(A)’s decision, dismissing the Revenue’s appeal on this ground.

2. Deletion of Addition of ?9,24,000/- Related to Interest-Free Advance to Sister Concern:
The CIT(A) deleted the addition of ?9,24,000/- made by the AO for interest-free advance to the sister concern, M/s N.C. Cables Ltd. The AO had incorrectly considered the advance as ?77,00,000/-, while the actual debit balance was ?34,79,169/-, arising only after 15.03.2010. The CIT(A) accepted that the advance was made out of the assessee’s own funds, not from interest-bearing borrowed funds. The Tribunal noted that the assessee had sufficient interest-free funds amounting to ?2.64 crores, more than the amount advanced, and thus, there was no justification for charging interest. The CIT(A)’s findings were upheld, and the Revenue’s appeal on this ground was dismissed.

3. Deletion of Addition of ?34,79,124/- on Account of Disallowance of Damages Under Section 37:
The CIT(A) deleted the addition of ?34,79,124/- made by the AO on account of disallowance of damages under Section 37. The AO had disallowed the deduction of ?28,00,410/- and ?6,78,714/- deducted by Indian Railways due to delayed supplies, treating them as penalties. The CIT(A) found that these deductions were compensatory in nature, arising from commercial expediency and not for any infringement of law. The Tribunal agreed with the CIT(A), noting that such payments were not penalties for infraction of law but compensations for breach of contract, allowable as revenue expenditure. The Revenue’s appeal on this ground was dismissed.

Conclusion:
The Tribunal upheld the CIT(A)’s order, dismissing the Revenue’s appeal on all grounds. The additions made by the AO were found to be based on incorrect assumptions and without proper evidence, and the CIT(A)’s detailed findings were supported by the Tribunal.