2013 (9) TMI 676 - AT - Income Tax

Disallowance of shortage of stock - shortage is being claimed on year to year basis - Held that - the assessee s claim of shortages of closing stock cannot be accepted as except for putting forth the same explanation to us as before the authorities below, we find that the assessee has failed to bring on record any evidence to establish that such shortages had in fact occurred at all - Decided against assessee. Disallowance of expenditure - sales promotion expenses - Held that - no details and supporting evidences have been produced to establish the expenses claimed for which the assessee has failed to discharge the onus upon it. Even before us, no details or supporting evidences have been filed to establish that the expenses on sales promotion claimed have in fact been spent. Further, interestingly, we also find that while the turnover in the immediately succeeding year relevant to the assessment year 2006-07 has increased to ₹ 181 crores, the sales promotion expenses claimed have reduced by more than 50 per cent. to ₹ 19.70 lakhs. In this factual situation of the expenses claimed under this head in the preceding and succeeding years, we are of the considered view that the sales promotion expenses claimed in this year is excessive and in the absence of the assessee filing the details and supporting evidences of having incurred sales promotion expenses as claimed, the Assessing Officer was both reasonable and justified in disallowing only ₹ 10 lakhs out of sales promotion expenses in the relevant period and therefore sustain the same - Decided against assessee. Unexplained income - difference in sales - Held that - AO has recorded that Karnataka Lokayukta in its report on the mining scam alleged malpractices on the part of the officials of the assessee-company. From the submissions made by the assessee, a Government of Karnataka Undertaking, it can be inferred that the sales of C-ore to Kalyani Steels Ltd. are supported by invoices raised, entries in the books of account audited by chartered accountants. The system of accounting followed by the assessee is the mercantile system as per the provision of section 145 of the Act and we find that no fault has been found therein nor has it been rejected. Nowhere in the order of assessment or the material on record do we find anything to establish that there were any realisation on account of sales beyond what is recorded in the books of account. As per the Income-tax Act, 1961 profits from business are to be computed under section 28 of the Act as per the accounting policies mandated by section 145 of the Act which in the assessee s case is the mercantile system. The scope of total income is also defined under section 5 of the Act. The Income-tax Act, 1961 is very clear that what is to be taxed is the real income of an assessee and not notional or hypothetical income and it does not permit an Assessing Officer to compute income without any evidence. There is no finding by the Assessing Officer that the assessee has sold its C-ore at a price less than that agreed to in the contract entered into with M/s. Kalyani Steels Ltd or that it has realised from M/s. Kalyani Steels Ltd. additional amounts on such sales which it had not recorded in its books. The assessee is legally bound to abide with the terms of the contractual obligations arising out of its agreement to sell C-ore to M/s. Kalyani Steels Ltd. and the contract entered into being legal and valid, it cannot be brushed aside. - no evidence of realization of unaccounted sale proceeds - no aditions - Decided in favour of assessee.

Issues Involved:

1. Nature of expenditure towards CAMPA payment: Revenue or Capital.
2. Disallowance of brought forward losses.
3. Addition on account of shortage in closing stock.
4. Disallowance of sales promotion expenses.
5. Disallowance of PF/ESI payments.
6. Addition on account of sales to Kalyani Steels Ltd. at rates below market rates.
7. Disallowance of interest on advance to Vijayanagar Ispat Ltd.
8. Charging of interest under sections 234A, 234B, and 234C.

Detailed Analysis:

1. Nature of Expenditure towards CAMPA Payment: Revenue or Capital

The primary issue was whether the payment of Rs. 5,02,59,000 towards CAMPA was a revenue expenditure or capital expenditure. The Assessing Officer (AO) treated it as a capital expenditure and allowed amortization over five years. The Commissioner of Income-tax (Appeals) [CIT(A)] enhanced the assessment by disallowing the amortized amount, treating the entire expenditure as capital in nature. The Tribunal, however, relied on the precedent set by the case of Ramgad Minerals and Mining P. Ltd. v. Asst. CIT, where such payments were considered revenue expenditures. Consequently, the Tribunal held that the entire expenditure should be allowed as a revenue expense for the assessment year 2004-05.

2. Disallowance of Brought Forward Losses

The AO disallowed the brought forward losses of Rs. 4,01,57,980 for the assessment year 2004-05, citing the belated filing of the loss return. The CIT(A) observed that the revised return was filed within the permissible time under section 139(5). The Tribunal upheld this view, allowing the brought forward losses to be carried forward and set off in subsequent years.

3. Addition on Account of Shortage in Closing Stock

The AO added Rs. 35,99,196 for the assessment year 2005-06 and Rs. 1,17,71,039 for the assessment year 2006-07 on account of shortages in closing stock, which the assessee claimed were due to natural causes. The CIT(A) sustained these additions. The Tribunal found no evidence to support the assessee's claims and upheld the additions, noting the recurring nature of such claims and the lack of corrective measures.

4. Disallowance of Sales Promotion Expenses

The AO disallowed Rs. 10,00,000 for the assessment year 2005-06 and Rs. 5,00,000 for the assessment year 2006-07 from sales promotion expenses, citing a significant increase without adequate explanation. The CIT(A) upheld these disallowances. The Tribunal agreed, noting the lack of supporting evidence and the excessive nature of the claims compared to previous and subsequent years.

5. Disallowance of PF/ESI Payments

The AO disallowed Rs. 13,64,392 for delayed remittances of PF/ESI. The Tribunal, referencing the decisions in CIT v. Alom Extrusions Ltd. and CIT v. Sabari Enterprises, held that payments made before the due date for filing the return are allowable deductions and deleted the disallowance.

6. Addition on Account of Sales to Kalyani Steels Ltd. at Rates Below Market Rates

The AO added Rs. 15,51,45,117 for the assessment year 2005-06 and Rs. 19,00,59,451 for the assessment year 2006-07, alleging sales to Kalyani Steels Ltd. were below market rates, causing a loss to the public exchequer. The CIT(A) deleted these additions, noting that the sales were as per contractual obligations. The Tribunal upheld the CIT(A)'s decision, emphasizing that only real income, not notional income, is taxable, and no evidence suggested the assessee realized more than recorded.

7. Disallowance of Interest on Advance to Vijayanagar Ispat Ltd.

The AO disallowed Rs. 6,00,000, attributing it to interest-free advances to Vijayanagar Ispat Ltd. The CIT(A) deleted this disallowance, noting the advance was made in an earlier period and no direct nexus was established. The Tribunal upheld this view, finding no reason to interfere with the CIT(A)'s decision.

8. Charging of Interest under Sections 234A, 234B, and 234C

The Tribunal held that the charging of interest under sections 234A, 234B, and 234C is consequential and mandatory, with no discretion for the AO. The AO was directed to recompute the interest chargeable while giving effect to the Tribunal's order.

Conclusion:

The Tribunal's decisions were based on detailed examination of facts, adherence to legal precedents, and ensuring that only real income is taxed. The appeals were disposed of with specific directions for each issue, ensuring a comprehensive and fair resolution.

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