2014 (4) TMI 517 - AT - Income Tax

Disallowance Disallowance of interest under Rule 8D(2)(ii) - Held that - before making any disallowance u/s 14A, AO must record satisfaction having regard to accounts of Assessee that claim of Assessee that expenditure incurred is not related to income forming part of total income is incorrect - AO only discussed provisions of Sec. 14A(1) and has not made out any satisfaction No whisper which proves that AO was not satisfied with correctness of claim of Assessee in respect of expenditure which Assessee claims to have incurred in relation to income which does not form part of total income having regard to accounts of Assessee - AO instead of discharging his obligation, straightaway applied Rule 8D and made disallowance - Case of Assessee is covered by decision in case of Sesa Goa Ltd. vs. JCIT 2013 (9) TMI 233 - ITAT PANAJI - Delete disallowance made u/s 14A Decided in favour of Assessee. CIT(A) confirmed addition of Rs. 6,98,926/- made by AO on account of difference in creditor account in spite of providing reconciliation before AO Held that - details of deposit account kept by Assessee over period of time from 1999 to 2008 for by passing minimum Franchise payable to M/s. Hiralal Khodidas - It is fact that Assessee has debited sum of Rs. 6 lacs and Rs. 1 lac on 23.3.1999 and 31.3.2001 - If credit of these amounts is given by M/s. Hiralal Khodidas, there will be just negligible difference - In view of fact delete the addition Decided in favour of Assessee. Addition made on account of unpaid sundry creditors - CIT(A) confirmed disallowance amounting to Rs.2,52,064/- Held that - Assessee did not produce any evidence except relying on provisions of Sec. 41(1) that liability has not ceased and that until liability is not ceased, sum of Rs.2,52,064/- cannot be treated to be income of Assessee - Sum of Rs. 30 lacs included in Sundry Creditors as on 31.3.2009 has been paid by Assessee to M/s. Mayur Minerals - In view of this undisputed fact, confirm deletion of addition by CIT(A) to extent of Rs. 30 lacs - So far balance sum of Rs. 2,52,064/- is concerned, no evidence has been filed by Assessee whether these creditors still exist - Assessee has also not written off these creditors so that it may be treated as cessation of liability and made chargeable to tax u/s 41(1) - Assessee has not even given dates as well as addresses of these parties so that it can be ascertained whether Sundry Creditors are genuine or not No interfere with order of CIT(A) confirming addition of Rs.2,52,064/- - Confirm addition of Rs. 2,52,064/- as well as deletion of addition of Rs. 30 lacs Decided partly in favour of Assessee. Bad Debts written off pertaining to ex-staff and others Held that - not denied by Revenue that Rajendra S. Kakodkar was an employee of Assessee - Advances were given by Assessee during course of business - These advances have not been recovered by Assessee - Rajendra S. Kakodkar has left services of Assessee and is no more an employee of Assessee - Under these facts, Assessee has written off advance - So far as other advances are concerned, other advances were given by Assessee company during course of business for purpose of business of Assessee - Since advances could not be recovered, Assessee has written off these advances - Advances are under facts and circumstances of case, incidental to business of Assessee and are allowable u/s 29 as loss incidental to business Decided partly in favour of Assessee. Sustenance of addition on account of handling loss Held that - force in submission of ld. AR that ore which is to be transported from Colomba mine to Cuddegal plant had to travel about 36 kms. and it is quite natural that some loss is incurred during transit and during handling of ore - Cannot be said that there cannot be any loss - Assessee is maintaining regular books of accounts - Stock record has duly been maintained - There is no allegation that Assessee has sold iron ore outside books of accounts - Under these facts and circumstances of case, loss has to be accepted as being incidental to business Decided in favour of Assessee. Sustenance of addition of Rs.42,93,066/- by CIT(A) Held that - not denied by Revenue authorities that there has to be ground loss when iron ore has to be handled - It is also not denied that distance between Cuddegal to Capxem and Cuddegal to Maina and Capxem to Berth no. 9 and Maina to Berth no. 9 are different - Handling loss and loss in transit are bound to vary due to distance - No thumb rule can be laid down that ground loss has to be incurred at a particular percentage - AO himself has accepted ground loss @ 2.54% in respect of SFI unit as well as Greater Ferromet - Both AO as well as CIT(A) were not correct in appreciating facts of case and just allowing ground loss in respect of SFI unit at same percentage at which it has been incurred in respect of Greater Ferromet unit - Ground loss has to vary with distance - No allegation that Assessee has sold inventory of iron ore outside books of accounts - Set aside order of CIT(A) and delete addition made by AO Decided in favour of Assessee. Deletion of addition on account of loss due to forward booking of US and by way of contribution for construction of Usgao bridge Held that - It is a social obligation demanded by the local community which cannot be overlooked by the assessee. - no material or evidence was brought to our knowledge which may prove that the project belonged to the Assessee and it represents capital expenditure incurred by the Assessee. Decided against Revenue. Disallowance of expenses out of Community Development - CIT(A) deleted disallowance Held that - AO himself accepted, considering nature of business activity carried out by Assessee and obstacle from public, that incurrence of this expenditure cannot be ruled out but restricted allowance of this expenditure to 50% considering involvement of inflation of expenditure - Not denied that Assessee is maintaining regular books of accounts and accounts are being audited - Even though nature of expenses were clearly brought to notice of AO, Revenue did not bring any instance which may prove that expenses are person expenses, capital expenditure or have not been incurred for purpose of business - No interference is called for in order of CIT(A) - CIT(A) has rightly deleted disallowance Decided against Revenue. Consideration received under the head Capital Gains Held that - moment Assessee became partner in partnership firm, he got valuable right being partner of firm and this right tantamount to be capital asset in hands of Assessee - Relinquishing partnership right tantamount to transfer of a capital asset - Revenue itself has accepted consideration so received by other partner, Shri Thakur Dilip Singh to be capital receipt in his hand - Decision of Madras High Court in case of A.K. Shrafuddin vs. CIT, 1960 (2) TMI 49 - MADRAS HIGH COURT applicable to this case In said decision it was held that compensation received by one partner of partnership firm from another partner for relinquishing his right in partnership is compensation for loss of capital asset and is not a trading receipt - No interference is called for in order of CIT(A) - CIT(A) rightly treated consideration received under head Capital Gains - Confirm order of CIT(A) Decided against Revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Addition on account of difference in creditor account.
3. Addition due to unpaid sundry creditors.
4. Addition of bad debts written off.
5. Addition on account of handling loss.
6. Addition due to suppression of closing stock.
7. Deletion of addition on account of loss due to forward booking of US$.
8. Deletion of addition on account of contribution for construction of Usgao Bridge.
9. Deletion of addition on account of community development expenses.
10. Deletion of addition on account of income from the sale of mine.
11. Deletion of addition on account of unpaid sundry creditors.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The Assessee received dividend income exempt under the Income Tax Act and claimed no expenditure was incurred for earning this income. The AO applied Rule 8D and disallowed Rs.1,90,83,548/-. The CIT(A) confirmed this. The Tribunal noted that the AO did not record any satisfaction regarding the correctness of the Assessee's claim before applying Rule 8D. The Tribunal relied on the decision in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT and deleted the disallowance, emphasizing that the AO must record satisfaction about the incorrectness of the Assessee's claim before applying Rule 8D.

2. Addition on account of difference in creditor account:
The AO noted a difference of Rs.11,97,670/- in the creditor account of M/s. Hiralal Khodidas. The Assessee explained the difference, but the AO made a net addition of Rs.6,98,926/-. The CIT(A) confirmed this. The Tribunal deleted the addition, noting that if credit is given for certain amounts, the difference would be negligible.

3. Addition due to unpaid sundry creditors:
The AO added Rs.32,52,064/- for variation in sundry creditors. The CIT(A) deleted Rs.30,00,000/- but sustained Rs.2,52,064/-. The Tribunal confirmed the deletion of Rs.30,00,000/- and the addition of Rs.2,52,064/-, noting that no evidence was provided by the Assessee for the latter amount.

4. Addition of bad debts written off:
The AO disallowed Rs.19,63,996/- written off as bad debts, including Rs.15,10,000/- given to an ex-employee. The CIT(A) sustained the addition of Rs.15,10,000/- but deleted Rs.4,53,996/-. The Tribunal allowed the Assessee's appeal, treating the advances as business losses under Section 29 of the Act.

5. Addition on account of handling loss:
The AO added Rs.3,08,039/- for handling loss of 541 MT of iron ore. The CIT(A) confirmed this. The Tribunal deleted the addition, accepting the Assessee's explanation that handling loss is incidental to the business.

6. Addition due to suppression of closing stock:
The AO added Rs.42,93,066/- for suppression of closing stock due to ground loss. The CIT(A) confirmed this. The Tribunal deleted the addition, noting that the ground loss varies with distance and there was no allegation of unaccounted sales.

7. Deletion of addition on account of loss due to forward booking of US$:
The AO treated Rs.2,74,002/- loss due to forward booking of US$ as speculation loss. The CIT(A) deleted the disallowance, relying on the decision in CIT vs. Badri Das Gauridu Pvt. Ltd. The Tribunal confirmed the deletion.

8. Deletion of addition on account of contribution for construction of Usgao Bridge:
The AO disallowed Rs.35,15,625/- contributed for the construction of Usgao Bridge. The CIT(A) deleted the disallowance, treating it as revenue expenditure. The Tribunal confirmed the deletion, following the decision in Chowgule and Co. Ltd. vs. ACIT.

9. Deletion of addition on account of community development expenses:
The AO disallowed 50% of Rs.52,48,763/- claimed as community development expenses. The CIT(A) deleted the disallowance. The Tribunal confirmed the deletion, noting that the AO did not provide evidence of inflated expenses.

10. Deletion of addition on account of income from the sale of mine:
The AO treated Rs.12,60,00,000/- received on relinquishing partnership rights as business income. The CIT(A) treated it as capital gains. The Tribunal confirmed the CIT(A)'s decision, noting that the consideration was for relinquishing partnership rights, not for business activity.

11. Deletion of addition on account of unpaid sundry creditors:
The AO added Rs.30,00,000/- for unpaid sundry creditors. The CIT(A) deleted the addition. The Tribunal confirmed the deletion, noting that the payment was made through a cheque.

Conclusion:
The Tribunal allowed the Assessee's appeal partly and dismissed the Revenue's appeal, providing detailed reasons for each issue based on the facts and applicable legal principles.