2014 (3) TMI 464 - AT - Income Tax

Deletion on account of shortage of stock Failure to make satisfactory explanation Held that - The findings of the CIT(A) upheld CIT(A) was of the view that there cannot be a straight jacket formula in case of such type of materials for determing the amount of shortage year to year - The percentage of the loss can vary from case to case, year to year and from place to place - The main criteria for the Assessing Officer are to establish that the loss/shortages claimed by the assessee is excessive and bogus which he has failed to do so - thus, in the absence of any direct link or remark by the Assesing Officer to prove the non-genuineness of the shortage claimed, the estimated disallowance is set aside - Revenue could not point out any defect or any error in the order of CIT(A) that loss cannot increase to 5% to 6% from 1 to 2% as declared in earlier years - Since revenue could not bring out any discrepancy thus, the CIT(A) has rightly deleted the addition Decided against Revenue. Restriction of disallowance u.s 14A of the Act r.w. Rule 8D of the Act Held that - The AO made disallowance of expenses related to exempted income by applying Rule 8D of the I. T. Rules, 1962 for the reasons that the assessee has not added back any expense qua exempted income - the CIT(A) has considered that the AO has not recorded any satisfaction or proved any link to extablish that borrowed funds were utilised for the purpose of investment in shares - thus, he has rightly restricted the addition Decided against Revenue.

Summary

Issues:
1. Addition made by AO on account of shortage of stock.
2. Disallowance of expenses related to exempted income under section 14A.

Issue 1: Addition made by AO on account of shortage of stock:
The appeal and cross objection arose from the order of CIT(A)-XII, Kolkata regarding the deletion of the addition made by the AO on account of shortage of stock declared by the assessee. The AO observed a shortage declared by the assessee at 4.42% of purchases and 5.02% of sales, leading to an addition of Rs.12.50 lacs. The CIT(A) considered losses in transit at port and other losses, concluding that the accumulative loss was 5 to 6%, and deleted the addition. The Tribunal found that the CIT(A) rightly deleted the addition as the revenue failed to establish any discrepancy in the explanation provided by the assessee. The Tribunal upheld the CIT(A)'s decision, confirming the deletion of the addition.

Issue 2: Disallowance of expenses related to exempted income under section 14A:
The second issue involved the disallowance of expenses related to exempted income under section 14A. The AO applied Rule 8D of the Income Tax Rules, 1962, for disallowance as the assessee had not added back any expenses related to exempted income. The CIT(A) restricted the disallowance at Rs.1,70,719, noting that the AO did not establish a link between borrowed funds and investment in shares. The Tribunal agreed with the CIT(A) that the AO did not record any satisfaction or prove a link between borrowed funds and investment, leading to the restriction of the disallowance. Consequently, the Tribunal dismissed the appeal of the revenue and the cross objection of the assessee, upholding the CIT(A)'s decision to restrict the disallowance under section 14A.

In conclusion, the Appellate Tribunal ITAT Kolkata addressed two main issues in this judgment. Firstly, it ruled on the addition made by the AO on account of shortage of stock, upholding the CIT(A)'s decision to delete the addition due to the lack of evidence provided by the revenue. Secondly, the Tribunal discussed the disallowance of expenses related to exempted income under section 14A, affirming the CIT(A)'s decision to restrict the disallowance based on the absence of a proven link between borrowed funds and investment in shares. The judgment was pronounced on 13.03.2014, dismissing both the appeal of the revenue and the cross objection of the assessee.