2013 (4) TMI 40 - AT - Income Tax

Addition on account of fall in GP rate - absence of stock register as demanded by the AO - Held that - As the assessee was in a position to substantiate its sales as also the purchases. Rather, the undisputed fact was that the month-wise quantitative details of the manufactured article was kept by the assessee. The assessee was subject to Excise Duty, hence under obligation to maintain such records. It has also been noted that stock records for each segment, i.e. sizing, texturising, TFO and weaving activity has also been maintained by the assessee. Thus as held by several Courts that the absence of stock register as demanded by the AO, per se would not lead to an inference that rest of the accounts of the assessee were also false or incomplete. The absence of the stock register should be coupled with the other facts to demonstrate that there was falsity in the book result, then only the AO is empowered to apply an estimation to determine the profit of the assessee. On the contrary, the assessee has informed that the slight fall in the GP was because of hike in the rate of payment of salary and wages as also there was hike in the cost of the material. Comparative figures were on record to substantiate the hike in the expenses. Therefore CIT(A) has rightly held that the assessee was able to substantially explain the fall in GP rate in manufacturing activity. On this count, no addition is required in the hands of the assessee - against revenue. Invocation of the provisions of section 40A(2)(b) - increase in lease-rent - Held that - While applying the provisions of section 40A(2)(b), CIT(A) has not examined the lease agreement, if any, as also the reason for increase in lease-rent from Rs.35.83 lacs to Rs.59.19 lacs. Only this much was stated that 52 water jet-looms. were utilized. There was a mention of a contract on the basis of which the lease-rent was paid, but that fact remained uninvestigated. From the tone and tenor of the arguments of both the sides, it was noticed that the Revenue as also the Assessee both remained unsatisfied as expressed from both the sides that before invocation of section 40A(2)(b), certain information were required to be collected and in the absence of those information it was not fair on the part of the CIT(A) to assess an amount by holding that the increase in the lease-rent was not justified. Thus restore this issue back to the file of CIT(A) for de novo adjudication - in favour of assessee for statistical purposes only. Disallowance of depreciation on the machinery under TUF Scheme - CIT(A)restricted it to 50% - Held that - As decided in assessee s case for AYs 2004-05 & 2006-07 that the assessee is entitled for depreciation on plant & machinery purchased under TUF Scheme @ 50%.

Summary

Issues involved:
1. Disallowance u/s.40A(2) of the Act
2. Disallowance of Depreciation
3. Miscellaneous issues regarding interest u/s.234B and u/s.234C of the Act

Detailed Analysis:
1. Disallowance u/s.40A(2) of the Act:
The appeal involved a dispute regarding the disallowance under section 40A(2)(b) of the Income Tax Act. The Assessing Officer (AO) had disallowed an amount due to an increase in lease rent paid to a related party. The Commissioner of Income-tax (Appeals) (CIT(A)) partially allowed the appeal, restricting the disallowance to the increased lease rent amount. The CIT(A) found the increase in lease rent unjustified and covered by section 40A(2)(b). However, the Tribunal noted discrepancies in the AO's application of section 40A(2)(b) and directed a fresh examination by the CIT(A) with proper investigation and opportunity for both parties.

2. Disallowance of Depreciation:
Another issue raised was the disallowance of depreciation on machinery under the TUF Scheme. The Tribunal referred to previous orders in the assessee's favor, allowing depreciation at 50% for similar cases. Following precedent, the Tribunal directed the allowance of depreciation at the same rate for the relevant assessment year.

3. Miscellaneous Issues:
The Tribunal also addressed miscellaneous issues related to interest under sections 234B and 234C of the Act. The Tribunal found in favor of the assessee based on legal precedents and allowed the appeals partially for statistical purposes.

In summary, the judgment involved detailed analysis of the disallowance under section 40A(2)(b) of the Act, depreciation on machinery under the TUF Scheme, and miscellaneous issues related to interest. The Tribunal provided a comprehensive review of the facts, legal arguments, and precedents to arrive at its decision, ensuring a fair and thorough examination of each issue raised in the appeals.