2023 (9) TMI 834 - AT - Income Tax

Deduction u/s 80-IB - whether the unit of Guwahati was new unit or was a result of splitting up of any other unit ? - HELD THAT - Turnover of Baddi and Guwahati units are increasing and there is no transfer of old machinery of Guwahati unit. Both the units are manufacturing different products and, therefore, their growth profits are not comparable. The cost of production of Guwahati unit is lower as compared to Baddi unit for certain verifiable reasons. AO had observed that books of account were not produced. Material on record shows that books of account were produced before the AO and without any justification books of a/c were rejected. Thus, there is no error in the findings of learned CIT(A). Ground is decided against the Revenue. Application of gross profit rate of Guwahati unit to Baddi unit - HELD THAT - A perusal of finding of learned CIT(A) shows that he mentions that he has himself verified the accounts and accordingly observed that there was error on the part of learned AO in rejecting the books of a/c without stating as to how and in what manner provisions of Section 145(3) were applicable. Thus, the application of gross profit rate of Guwahati unit to Baddi unit was rightly deleted by CIT(A) and the same requires no interference. The ground is decided against the Revenue. Disallowance u/s 40A(2)(a) - HELD THAT - CIT(A) has duly examined the facts which establish that there was no payments of excessive nature calling for disallowance u/s 40A(2)(a) - Apparently in the absence of any concrete evidences and evaluating the fair marketing value of the goods and services by learned AO, the ad hoc additions were made which have been deleted by the CIT(A) and the same require no interference. The ground is decided against the Revenue. Disallowance of various expenses - HELD THAT - CIT(A) has duly examined the facts which establish that there was no payments of excessive nature calling for disallowance u/s 40A(2)(a) - Apparently in the absence of any concrete evidences and evaluating the fair marketing value of the goods and services by AO, the ad hoc additions were made which have been deleted by the CIT(A) and the same require no interference. The ground is decided against the Revenue. Disallowance of non-business expenses - HELD THAT - As observed that nature of business of the assessee requires extensive research and development and the Ld. AO, without pointing out any discrepancy in the expenses incurred has disallowed the expenditure. It can also be appreciated that no deduction is claimed by assessee on these expenses incurred and without examining the business expediency the disallowance was made. The findings of learned CIT(A) require no interference. Ground is decided against the Revenue. Unexplained loans - HELD THAT - As considered all the evidences of assessee, including details of the advances recoverable in cash, to conclude that loans were raised for specific purpose and are secured loans. None of the advances is of the nature which is not related to business of the appellant or is given to any of his sister concern. Learned CIT(A) appreciated that it is no where stated by the Ld. AO as to which part of the loan was not used by the appellant for business purpose. Moreover, the findings of Tribunal in assessee s own case that the appellant s own fund are much more than the loan raised by the appellant, was also relied by learned CIT(A) to make the deletion and the same requires no interference. The ground is decided against the Revenue. Disallowance of 50% of the expenses incurred on promotion of Ozone Mission by concluding that assessee had purchased sales promotion material such as candles, incense sticks (Agarbatti) etc. from Ozone Mission, which is a trust, to promote products of the Trust rather than promoting its own product - Assessee had explained that the assessee does not get any benefit by making over payment to any entity as entire profit of the unit is exempt u/s 80-IB - HELD THAT - The Bench is of the considered view that the materials purchased by the assessee from Ozone Mission were having specific designs and logo which were not available in the open market. Thus justification of making the purchases has been duly considered by learned CIT(A). Learned AO does not dispute 50% of the expenses on promotion on the basis of being relevant to the business of assessee thus denying remaining 50% for the reason it also benefited Ozone Mission, which was supplying the promotional material is arbitrary. The finding of learned CIT(A) requires no interference. Disallowance being the balances outstanding of sundry creditors - HELD THAT - AO has questioned the existence and genuineness of the parties on the basis that there were no transactions during the year. The Bench is of the considered view that merely because creditors are stable for three years is no reason to make the addition, as the question of remission of liability has not been examined. The fact that there were opening balances itself justifies the existence and genuineness of the parties. Without any evidence that these parties are not business creditors or that parties had denied the transactions, the ground raised by the Revenue has no substance. Addition by disallowing 50% of the depreciation claimed by the assessee on the motor vehicles - HELD THAT - AO has observed that use of vehicles wholly and exclusively for the purpose of business has not been established to deny the depreciation, without being thoughtful, that the same may be a ground to deny the expenses for maintenance or petrol expenditure but as long the asset stands in the name of company depreciation, has to be allowed. Even if there was doubt with regard to use of the vehicle for personal purpose that also does not affect the claim of depreciation. Learned CIT(A) has duly dealt with the issue and the same requires no interference.

Summary

Issues Involved:
1. Deduction under Section 80-IB.
2. Rejection of books of accounts and application of gross profit rate.
3. Disallowance under Section 40A(2)(a).
4. Ad hoc disallowance of expenses.
5. Expenses related to M/s Ozone U.K. Limited.
6. Disallowance of research and development expenses.
7. Advances recoverable in cash and loans.
8. Unsecured loans and their confirmations.
9. Addition in capital account.
10. Disallowance of promotion expenses.
11. Disallowance of rent paid to sister concern.
12. Disallowance of purchase transactions with M/s Seagull Drugs (P) Ltd.
13. Disallowance of balances outstanding of sundry creditors.
14. Disallowance of depreciation on motor vehicles.

Summary of Judgment:

1. Deduction under Section 80-IB:
The CIT(A) allowed the deduction to the assessee following the Tribunal order in the assessee's own case for A.Y. 2003-04. It was observed that there was no change in business activities since A.Y. 2003-04. The Tribunal upheld that the Guwahati unit was newly set up with new machinery for production of Ayurvedic medicines.

2. Rejection of Books of Accounts and Application of Gross Profit Rate:
The AO's rejection of books of accounts was found unjustified by the CIT(A), who verified the accounts and observed no basis for the AO's application of gross profit rate from the Guwahati unit to the Baddi unit. The Tribunal upheld the CIT(A)'s decision.

3. Disallowance under Section 40A(2)(a):
The CIT(A) found no evidence of excessive payments calling for disallowance under Section 40A(2)(a). The Tribunal agreed, noting the absence of concrete evidence and the fair market value evaluation by the AO.

4. Ad Hoc Disallowance of Expenses:
The CIT(A) observed that the expenses were supported by vouchers and previously allowed. The AO's disallowance was based on earlier special audit findings without specific instances in the current year. The Tribunal upheld the CIT(A)'s decision.

5. Expenses Related to M/s Ozone U.K. Limited:
The CIT(A) noted that the AO did not provide specific instances of spending related to M/s Ozone U.K. Limited. The income was claimed exempt under Section 80-IB, justifying no addition. The Tribunal agreed with the CIT(A).

6. Disallowance of Research and Development Expenses:
The CIT(A) found no discrepancy in the R&D expenses and noted their necessity for the business. The Tribunal upheld the CIT(A)'s decision, citing the necessity of R&D for the business and lack of adverse material.

7. Advances Recoverable in Cash and Loans:
The CIT(A) concluded that loans were raised for specific purposes and were secured, with no advances unrelated to the business. The Tribunal upheld this finding.

8. Unsecured Loans and Their Confirmations:
The CIT(A) noted that no new loans were raised in the relevant year and that the balances were brought forward. The Tribunal agreed, referencing the CIT(A)'s factual findings.

9. Addition in Capital Account:
The CIT(A) confirmed the addition in the capital account based on payment confirmations from M/s Ozone Pharmaceuticals Ltd. The Tribunal upheld this decision.

10. Disallowance of Promotion Expenses:
The CIT(A) found the AO's disallowance of 50% of promotion expenses arbitrary and unsupported by evidence. The Tribunal upheld the CIT(A)'s decision.

11. Disallowance of Rent Paid to Sister Concern:
The CIT(A) deleted the addition, noting that the Revenue did not appeal this decision for A.Y. 2006-07. The Tribunal upheld the CIT(A)'s decision.

12. Disallowance of Purchase Transactions with M/s Seagull Drugs (P) Ltd.:
The CIT(A) deleted the addition, referencing the Tribunal's earlier decision that specific grade herbs required by the assessee justified the purchase prices. The Tribunal upheld this finding.

13. Disallowance of Balances Outstanding of Sundry Creditors:
The CIT(A) noted that the balances were from preceding years, justifying their existence and genuineness. The Tribunal agreed, finding no evidence to dispute the creditors' authenticity.

14. Disallowance of Depreciation on Motor Vehicles:
The CIT(A) found that the AO's disallowance was unjustified as the vehicles were assets of the company, and depreciation should be allowed regardless of personal use. The Tribunal upheld this decision.

Conclusion:
The Tribunal dismissed all three appeals of the Revenue, upholding the CIT(A)'s decisions on all grounds. The order was pronounced in open court on 30.08.2023.