2004 (3) TMI 356 - AT - Income Tax

Addition u/s 40A(2)(b) - purchases due to related concerns of directors - Disallowance of interest - Addition in various accounts on account of discrepancies in stock. The CIT(A) has confirmed this addition on the basis that the facts of purchases had been mentioned in the tax audit report but it seems he has not considered the main audit report as a whole. The addition could have been made in case the Department would have come to the conclusion that the transactions in question were sham or if it could be shown that the value of the goods purchased and as shown in the books was not the actual value and that the transactions were not bona fide. We agree that it is open to the tax authorities to discard the figures of transactions shown in the books of the account and disallow a part of price paid to the partners in respect of the purchases made from them. For the foregoing reasons, we accept this ground and delete the impugned addition. Disallowance of interest - We find that the proposition of law in this regard is well settled and there is no need to repeat all the decisions, time and again, that there must be established nexus between the interest-free advances and interest bearing loans by the Department and then and only then the interest can be disallowed. As we have already mentioned above, the Department has failed to establish such a nexus. Consequently, we allow this ground and delete the impugned disallowance. Addition in various accounts on account of discrepancies in stocks - In our considered opinion, the addition is not justified on peculiar facts when the purchases are fully vouched, the consumption has not been stated to be unreasonable because the AO has not disputed the consumption. With regard to the chemicals, the assessee s explanation that it had maintained aggregate stock register and it was not possible to maintain day-to-day stock of consumption but the purchases were fully vouched, and, the impugned addition is uncalled for. With regard to the explanation of the assessee that the empty tins were damaged and not considered in stock, the AO has not given any finding, rather has made the addition by rejecting the same, which cannot be sustained in the eyes of law unless some reasons are recorded for the disallowance. Again, the learned authorised representative has relied on various decisions but, as mentioned above, we are of the considered opinion that the impugned addition is uncalled for and hence deleted. In the result, the appeal filed by the assessee is allowed.

Summary

Issues involved:
Cross-appeals by assessee and Revenue against CIT(A) order for asst. yr. 1991-92.

Assessee's Appeal:
1. Addition u/s 40A(2)(b) of Rs. 1,37,785: AO added 3% of purchases due to related concerns of directors. Tribunal found no basis for higher price conclusion, deleted addition.
2. Disallowance of interest of Rs. 54,122: AO linked interest to interest-free advances, but no nexus established. Tribunal deleted disallowance.
3. Discrepancies in stocks of Rs. 2,38,000: AO added amounts for process loss without justification. Tribunal found purchases vouched, consumption reasonable, and deleted addition.
4. Disallowance of Rs. 14,200 (telephone) and Rs. 17,890 (vehicle maintenance): Deleted as no personal use in company's expenses.

Revenue's Appeal:
1. Deletion of Rs. 1 lakh addition for excess loss in consumption: AO rejected loss declared by assessee, but Tribunal found no discrepancy and upheld CIT(A)'s decision.

In conclusion, assessee's appeal allowed, Revenue's appeal dismissed.