2014 (9) TMI 159 - AT - Income Tax

Unexplained secured loans Claim of interest disallowed Held that - The primary onus is on the assessee to conclusively prove the source of the sum of money found credited in the books of accounts of the assessee - the AO had asked the assessee time and again to furnish all the details but that requirement was partially complied with by the assessee - although the amounts were carried forward from the past years but in the absence of any verification in the past as prescribed u/s.68, then the AO in any of the subsequent year, when an amount is found credited in their accounts, then the A.O. is entitled to invoke the inquiry as prescribed u/s.68 of IT Act - Furnishing of PAN can lead to an inquiry from the concerned officer having jurisdiction over the creditor, but the creditworthiness was required to be independently investigated to accept the loan u/s 68 of IT Act - in a situation when on one hand the assessee has furnished the documents which were required to be investigated by the AO and on the other hand the AO has not thoroughly investigated those parties who have advanced the loans the matter is to be remitted back to the AO for fresh adjudication Decided in favour of revenue. Interest expenses u/s 36(1)(iii) Held that - In the absence of any comparable instances the AO was not justified in presuming that the rate of interest was higher than the prevailing rate - for the purpose of the expansion of the business, the assessee was in need of the funds, and arranged the funds from private parties instead from banks and paid the interest @ 15% - the order of the CIT(A) is upheld Decided against Revenue. Rejection of books of accounts Held that - Without placing on record any substantive defect in the books of account it was not justifiable on the part of the AO to presume that there was suppression of production - the production was also subject to scrutiny by Excise Department - The production accounts were therefore also subject to audit by the department - The assessee has also furnished the comparative figures of the turnover, also the corresponding profits earned from the past years the order of the CIT(A) is upheld that in the absence of any particular defect in the books of accounts and in the absence of any material brought on record against the assessee, the AO was unjustified in estimating the percentage of the suppression of production Decided against Revenue. Inclusion of Excise Duty in valuation of closing stock as per section 145A Held that - After the introduction of Section 145A the method of accounting has been streamlined - provision inspite of anything contained in Section 145 of IT Act the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head profits and gains of business or profession shall be further adjusted to include the amount of any tax, duty, cess (by whatever name called) actually paid or incurred by the assessee as on the date of valuation - To appreciate the correct figures of Excise duty accounted for in the P&L A/c and as to whether it was transferred to the balance-sheet by the assessee, are not emerging from the facts of the case the matter is required to be remitted back to the AO for fresh adjudication Decided partly in favour of revenue. Commission expenses disallowed Held that - The commission was paid to the agents for procuring orders from outside and also getting payment on the sales which were executed through those agents - the TDS on commission was also deducted - this is not the case where payment of commission was made merely through account payee cheques but this is the case where the facts have revealed that the order have been procured and the sales were excluded through those commission agents, therefore, on payment of commission the TDS was deducted by the assessee Decided in favour of Assessee.

Issues Involved:
1. Deletion of addition on account of unexplained unsecured loans.
2. Deletion of disallowance of interest claimed on unexplained unsecured loans.
3. Deletion of addition made out of interest expenses under Section 36(1)(iii).
4. Deletion of addition on account of suppression of production.
5. Deletion of addition on account of inclusion of Excise Duty in valuation of closing stock under Section 145A.
6. Disallowance of commission expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Unexplained Unsecured Loans:
The AO noted unsecured loans of Rs. 3,78,91,165/- in the assessee's books and demanded details to verify the genuineness and creditworthiness of the creditors. The assessee provided Form No.15G and Form No.15H along with PAN information but failed to satisfy the AO, who invoked Section 68 and added Rs. 61,01,457/- to the income. The CIT(A) deleted this addition, stating that the assessee had sufficiently proved the identity, genuineness, and creditworthiness of the creditors through banking channels and PAN details. However, the Tribunal restored the issue to the AO for de novo consideration, emphasizing that the primary onus to prove the source of funds lies with the assessee, and mere furnishing of forms and PAN details is insufficient without thorough verification.

2. Deletion of Disallowance of Interest Claimed on Unexplained Unsecured Loans:
Since the issue of unsecured loans was restored for fresh consideration, the related disallowance of interest was also remanded back to the AO to be decided in conjunction with the primary issue.

3. Deletion of Addition Made Out of Interest Expenses Under Section 36(1)(iii):
The AO disallowed Rs. 1,60,070/- of interest on the grounds that the rate of 15% was excessive compared to the normal rate. The CIT(A) reversed this disallowance, noting that the rate was reasonable and comparable to bank rates. The Tribunal upheld the CIT(A)'s decision, stating that the AO's presumption of a higher rate without comparable instances was unjustified, and the interest paid was a business requirement.

4. Deletion of Addition on Account of Suppression of Production:
The AO suspected suppression of production due to low yield and lack of a stock register, adding Rs. 22,14,987/- to the income. The CIT(A) deleted this addition, highlighting that the books were audited by excise and statutory auditors without adverse comments. The Tribunal supported the CIT(A), stating that without substantive defects in the books or evidence of suppression, the AO's presumption was unjustified.

5. Deletion of Addition on Account of Inclusion of Excise Duty in Valuation of Closing Stock Under Section 145A:
The AO included Rs. 3,87,444/- of Excise Duty in the closing stock valuation, which the CIT(A) deleted, reasoning that the assessee followed an exclusion method of accounting, making the adjustment revenue-neutral. The Tribunal disagreed with the CIT(A), emphasizing that Section 145A requires inclusion of taxes in inventory valuation and restored the issue to the AO for fresh examination of the accounting treatment and Excise Duty component.

6. Disallowance of Commission Expenses:
The AO disallowed Rs. 7,78,582/- of commission expenses, doubting the justification and evidence of services rendered. The CIT(A) upheld the disallowance due to lack of "hard evidence." The Tribunal reversed this decision, noting that the commission was consistent with past years, TDS was deducted, and no related party transactions were involved. The Tribunal found the commission payments justified and allowed the expenses.

Conclusion:
The Tribunal's judgment involved a detailed examination of the primary onus on the assessee to prove the genuineness of transactions, the reasonableness of interest rates, the validity of production records, and the proper accounting treatment of Excise Duty. The Tribunal restored certain issues for fresh consideration by the AO while upholding the CIT(A)'s decisions on others, ensuring a thorough and fair reassessment of the disputed matters.

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