2014 (12) TMI 675 - AT - Income Tax

Undervaluation of closing stock of sugar Facts on record properly verified or not Held that - As decided in assessee s own case decided in The Commissioner of Income Tax And Another Versus The Dhampur Sugar Mills Ltd 2013 (10) TMI 16 - ALLAHABAD HIGH COURT wherein it has been held that change in method of accounting adopted from 1991-92 to 1997-98 was more scientific and did not result any evasion of payment of tax - no addition can be made for undervaluation of closing stock - Since the method of accounting has been consistently followed by the assessee, CIT(A) has rightly deleted the addition made on account of undervaluation of closing stock the order of the CIT(A) is upheld Decided against revenue. Allowability of expenses u/s 14A r.w. Rule 8D - Facts on record properly verified or not Whether the assessee has already added back in the computation of income for the relevant assessment year Held that - As decided in assessee s own case for the earlier assessment year, it has been rightly held that the investment was an old investment made in 1993 in the subsidiaries for acquiring their shares and such investment was made out of own funds of the assessee - the entire borrowed funds, on which interest was paid, were used for business purposes and no portion was used for making investment - The amount of interest expenditure cannot be considered for proportional disallowance under rule 8D of the rules - CIT(A) has not made any disallowance on account of other expenditures as per sub-rule (2)(iii) of rule 8D thus, the order of the CIT(A) is modified and the AO is directed to compute the disallowance at 0.5% of the average value of investment on account of other expenditures Decided partly in favour of revenue. Disallowance of balance written off deleted Held that - CIT(A) rightly held that ₹ 35.63 lakhs were accounted for in earlier years as income and the Revenue has not brought anything on record to dispute these facts - once there is a compliance of provisions of section 36(2) of the Act, the same should be allowed as bad debt on its written off - assessee is entitled for the loss on its written off in the books of account either in the form of bad debt or in the form of business loss thus, the order of the CIT(A) is upheld Decided against revenue. Disallowance of trial run expenses deleted Held that - As decided in assessee s own case decided in The Commissioner of Income Tax And Another Versus The Dhampur Sugar Mills Ltd 2013 (10) TMI 16 - ALLAHABAD HIGH COURT wherein it has been held that pre-operational expenses in trial run were revenue expenses and not capital expenses thus, the order of the CIT(A) is upheld Decided against revenue. Disallowance of proportionate interest deleted Held that - As decided in assessee s own case for the earlier assessment year, it has been held that CIT(A) rightly deleted the disallowance of proportionate interest made by the AO - nothing has been brought on record by the revenue that these advances were given during the impugned AY, the advances on which proportionate disallowance was made are considered to be old advances, on which no disallowance made in earlier years the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition on account of undervaluation of closing stock of sugar.
2. Allowance of expenses under section 14A of the Income Tax Act read with Rule 8D.
3. Disallowance of balance written off.
4. Disallowance of trial run expenses.
5. Disallowance of proportionate interest.

Detailed Analysis:

1. Deletion of Addition on Account of Undervaluation of Closing Stock of Sugar:
The Tribunal upheld the deletion of Rs. 53,55,83,509/- made by the CIT(A) for undervaluation of closing stock of sugar. The Tribunal referenced its own decision and the jurisdictional High Court's judgment in the assessee's case for the assessment year 2008-09, which held that the change in the method of accounting was scientific and did not result in tax evasion. The consistent method of accounting justified the deletion of the addition.

2. Allowance of Expenses under Section 14A of the Income Tax Act Read with Rule 8D:
The Tribunal examined the issue of disallowance under section 14A read with Rule 8D. It was noted that the investment in question was made in 1993 out of surplus funds, and no borrowed funds were used. The Tribunal confirmed the CIT(A)'s deletion of disallowance of Rs. 1,70,46,929/-, except for 0.5% of the average value of investment as per Rule 8D(2)(iii). The CIT(A) had not made any disallowance under this sub-rule, which was modified by the Tribunal to include the 0.5% disallowance.

3. Disallowance of Balance Written Off:
The Tribunal upheld the CIT(A)'s deletion of Rs. 35,62,653/- written off as balances from M/s Vasulinga Sugar and Gen. Mills. The CIT(A) noted that these amounts were accounted as income in previous years and were written off due to the closure of the factory in Nepal. The Tribunal agreed that the amount should be allowed as a bad debt under section 36(1)(vii) or as a business loss under section 28 of the Act.

4. Disallowance of Trial Run Expenses:
The Tribunal upheld the CIT(A)'s deletion of Rs. 3,35,06,424/- on account of trial run expenses. The Tribunal referenced the jurisdictional High Court's judgment in the assessee's own case, which classified pre-operational trial run expenses as revenue expenses, not capital expenses.

5. Disallowance of Proportionate Interest:
The Tribunal upheld the CIT(A)'s deletion of Rs. 1,48,03,212/- on account of disallowance of proportionate interest. The Tribunal referred to its own decision in the assessee's case for the assessment year 2008-09, where it was established that the loans were advanced in earlier years for promoting the business of the subsidiary, and no disallowance was made in those years. Therefore, no disallowance could be made in the impugned assessment year.

Conclusion:
The Tribunal partly allowed the Revenue's appeal for statistical purposes, confirming the CIT(A)'s decisions on the aforementioned issues, with a modification to include a 0.5% disallowance under Rule 8D(2)(iii). The order was pronounced in the open court.