2015 (4) TMI 261 - AT - Income Tax

Disallowance u/s 14A - CIT(A) deleted part addition - Assessee has investment of ₹ 5,93,02,505/- in mutual funds, shares/share application money and earned dividend amounting to ₹ 45,371/-. The Assessee has not made any disallowance in the computation - AO applied Rule 8D for estimating the disallowance - Assessee claims that out of interest expenditure of ₹ 2.60 crores, ₹ 1.63 crores has been paid for availing of packing credit and this loan is availed only for export, ₹ 43 lacs are paid to VAT authorities, interest on overdrawn account, processing of loan for hotel and packing credit limits - Held that - As per CIT(A), Assessee has furnished the ledger account of interest paid to substantiate his claim. These facts have not been denied by the ld. DR even though he vehemently relied on the order of the AO. The investment has been reduced during the impugned assessment year from ₹ 6.30 crores to ₹ 5.93 crores. Out of the investment of ₹ 5.93 crores, sum of ₹ 1.80 crores constitutes share application money and ₹ 2.83 crores comprises of Bajaj Insurance, Aviva Insurance, ICICI Prudential, ING Vysya Life Insurance and investment in firm in which Assessee is not a partner which, in our opinion, does not fall within the ambit of Sec. 14A. Therefore, balance investment remains only ₹ 1.30 crores out of which disallowance @ 0.5% can be only of ₹ 65,000/- as per Rule 8D(2)(iii). CIT(A), therefore, reduced the disallowance to ₹ 65,000/-. In our opinion, there is no error in the order of CIT(A) reducing the disallowance to ₹ 65,000/- which may warrant our interference - Decided against revenue. Disallowance u/s 40(a)(i) - non deduction of TDS on destination sampling charges to the parties of Hongkong and Singapore - CIT(A) deleted the addition - Held that - Source of the income in the hands of the non-resident was outside India. Even the place of business which earned the income was also outside India. Since the technical fees was not deemed to accrue or arise in India at the time when the Assessee made the payment as there was no provision under Sec. 9(1), the income received by the non-resident as per the existing law at the time when the Assessee made the payment, in our opinion, was not taxable in India under the Income Tax Act. The legal position prevailing at the relevant time has to be considered when the payment was made by the Assessee to the non-resident party. Accordingly, we hold that the Assessee was not liable for deduction of tax u/s 195 of the Income Tax Act. Since the Assessee was not liable at that time to deduct the tax, the disallowance u/s 40(a)(i) cannot be made. We accordingly confirm the order of CIT(A) deleting the addition though on a different ground pleaded by the ld. AR. - Decided against revenue. Disallowance u/s 40(a)(i) - non deduction of TDS on demurrage paid - CIT(A) deleted the addition - Held that - It in the case on hand, there are no pleadings or material brought on record to show that the case is governed by occasional shipping within the meaning of section 172 of the Act, 1961 and said section applies. The AO in view of the decision in the case of CIT vs. Orient Goa Co. (P) Ltd., 325 ITR 554 correctly took the view that the Assessee is liable to deduct TDS on the demurrage if DTAA is not in existence and therefore, disallowed the said amount of ₹ 68,67,067/-. Circular dated 19-9-1995 issued by the CBDT cannot be considered in the facts and circumstances of the present case, in aid to the respondent-assessee. The learned Assessing Officer, in fact, has passed a legal, proper and reasoned order, holding that the provisions laid down under section 40(a)( i) of the 1961 Act apply to the case on hand. - Decided against assessee. Disallowance on account of cash purchases - CIT(A) deleted part addition - Held that - the quantitative details of opening stock, sales and closing stock as has been given in the Tax audit report has not been disputed by the AO. Sales have duly been accepted. Without making the purchases, in our opinion, the Assessee cannot make the sales. We are of the opinion that even the addition to the extent of 10% should have not been sustained by the CIT(A). In our opinion, it is a case where the whole of the addition made by the AO does not have any leg to stand. Since the Assessee has not come in appeal nor filed cross objection, we confirm the order of CIT(A) sustaining the addition to the extent of ₹ 6,02,808/- - Decided against revenue. Addition u/s 41(1) - CIT(A) deleted the addition - as per the details furnished by the Assessee it is seen that almost all the creditors are more than 4 years old and till date the Assessee has not paid the above liabilities as held by A0 - Held that - This is not a fit case which warrants our interference. The onus is on the AO to prove that the liability stands ceased or remitted. No legal enforcement cannot mean cessation of liability. We accordingly confirm the order of CIT(A). Thus, this ground stands dismissed. - Decided against revenue. Inguine sales - addition on the ground that the sales to sister concern at rate lower than the rate adopted for valuation of the closing stock is not genuine and therefore he added the difference between the two rates - CIT(A) deleted the addition - Held that - The addition has been made on account of undervaluation of the closing stock. It is not denied that the Revenue has accepted the sale. The Assessee has explained to the AO that the ore sold to the sister concern did not have screening and transport cost loaded on it while the closing stock was inclusive of the transport cost as well as screening cost as the iron ore which was in stock was screened ore. In our opinion, the AO has not appreciated the facts and once the sale of the goods has been accepted, how there can be addition on the basis of undervaluation of closing stock. We, therefore, hold that this is not a fit case which warrants our interference. We accordingly confirm the order of CIT(A) on this ground. - Decided against revenue. Disallowance of stacking and handling expenses and blending and screening charges paid to sister concern - CIT(A) deleted the addition - Held that - It is a fact that when ore is extracted from the mines in raw form it is known as Run of Mines. This block form needs to be crushed to arrive at the desired size, and as contended by the ld. AR, as per the market practice 10% positive tolerance limit is provided. If the size exceeds the tolerance limit, same is to be crushed to bring it within the desired size and tolerance limit. Raw ore contains various impurities which need to be removed before exporting. This process of removing the impurities is known as screening. M/s. Karishma Impex has charged at the same rate to M/s. Karishma Exports towards crushing and screening charges. It is not a case where the AO has applied the provisions of Sec. 40A(2). We, therefore, do not find any illegality or infirmity in the order of CIT(A) deleting the addition of ₹ 2,19,49,850/-.- Decided against revenue. Disallowance of charges incurred in cash for transportation of iron ore - as per AO the identity of the payees are not proved - CIT(A) deleted the addition - Held that - Assessee has incurred expenditure on transportation to the extent of ₹ 8.33 crores out of which only a sum of ₹ 13,93,640/- has been incurred in cash. It is not a case where the AO has invoked the provisions of Sec. 40A(3) i.e. in no case the expenditure incurred in cash does not exceed ₹ 20,000/-. CIT(A), we noted, has given a clear-cut finding of fact that on every voucher truck number is mentioned and the signature of the driver/cleaner has been obtained and the expenditure is clearly verifiable. Even we noted that the cash expenditure is only to the extent of 3.6% of the total expenses. CIT(A), in our opinion, has given a finding of fact. No cogent material or evidence was brought to our knowledge which may compel us to take a view different from the view taken by the CIT(A)- Decided against revenue. Disallowance of claim of commission - CIT(A) allowed the claim - Held that - . Payment has been made through banking channels, TDS has been deducted and there is no allegation of any back flow of money. Assessee has filed confirmation during the course of the assessment proceedings. Same was duly verified by the AO. The invoice raised by the agent gives details of the services rendered. Mr. Rane has also rendered services as commission agent to various parties and is acting in the same capacity since long. Under these facts and circumstances, we find that CIT(A) has correctly deleted the disallowance. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A.
2. Disallowance under Section 40(a)(i) for destination sampling charges.
3. Disallowance under Section 40(a)(i) for demurrage payments.
4. Disallowance of unproved cash purchases.
5. Disallowance under Section 41(1) for cessation of liability.
6. Addition for undervaluation of closing stock.
7. Disallowance of stacking and handling expenses and blending and screening charges.
8. Disallowance of transportation charges paid in cash.
9. Disallowance of commission payments.

Issue-wise Analysis:

1. Disallowance under Section 14A:
The AO disallowed Rs. 24,71,566/- under Section 14A read with Rule 8D, noting that the Assessee received dividend income exempt from tax but did not disallow any expenditure. The CIT(A) reduced the disallowance to Rs. 65,000/-. The Tribunal confirmed the CIT(A)'s order, noting that the Assessee's investments in mutual funds and shares were not entirely for earning exempt income and that the interest expenses were for business purposes.

2. Disallowance under Section 40(a)(i) for destination sampling charges:
The AO disallowed Rs. 28,87,983/- for non-deduction of TDS on payments made to foreign parties for destination sampling services, citing Explanation 2 to Section 9(1)(vii). The CIT(A) deleted the disallowance, stating that the services were rendered outside India and no part of the income was assessable in India. The Tribunal upheld the CIT(A)'s decision, noting that the retrospective amendment to Section 9(1) by the Finance Act, 2010, was not applicable at the time of payment.

3. Disallowance under Section 40(a)(i) for demurrage payments:
The AO disallowed Rs. 68,67,067/- for non-deduction of TDS on demurrage payments, relying on the decision in CIT vs. Orient Goa Pvt. Ltd. The CIT(A) deleted the disallowance, stating that the demurrage was a reduction in the sale price and not taxable in India. The Tribunal reversed the CIT(A)'s order, following the jurisdictional High Court's decision in CIT vs. Orient Goa Pvt. Ltd., and restored the AO's disallowance.

4. Disallowance of unproved cash purchases:
The AO disallowed Rs. 60,28,080/- for unproved cash purchases. The CIT(A) reduced the addition to Rs. 6,02,808/-, noting that the Assessee's books were audited, VAT was paid, and there was no evidence of non-genuine purchases. The Tribunal upheld the CIT(A)'s decision, noting that the Assessee's total purchases were Rs. 29.97 crores, and cash purchases were only 2%.

5. Disallowance under Section 41(1) for cessation of liability:
The AO added Rs. 3,07,61,558/- under Section 41(1), stating that the liabilities were more than four years old. The CIT(A) deleted the addition, noting that the AO had not investigated each creditor individually or proved cessation of liability. The Tribunal upheld the CIT(A)'s decision, citing the jurisdictional High Court's ruling that mere non-payment does not constitute cessation of liability.

6. Addition for undervaluation of closing stock:
The AO added Rs. 1,18,26,320/- for undervaluation of closing stock, stating that the Assessee sold stock to a sister concern at a lower rate. The CIT(A) deleted the addition, noting that the stock was sold, and the Assessee had explained the lower rate due to transportation and screening costs. The Tribunal upheld the CIT(A)'s decision, noting that the sale was accepted by the revenue.

7. Disallowance of stacking and handling expenses and blending and screening charges:
The AO disallowed Rs. 2,19,49,850/- for stacking and handling expenses and blending and screening charges paid to sister concerns. The CIT(A) deleted the disallowance, noting that the services were rendered, invoices were produced, books were audited, and the expenses were allowed in previous years. The Tribunal upheld the CIT(A)'s decision, noting that similar services were rendered in earlier years without disallowance.

8. Disallowance of transportation charges paid in cash:
The AO disallowed Rs. 30,93,640/- for transportation charges paid in cash, stating that the identity of the payees was not proved. The CIT(A) deleted the disallowance, noting that the Assessee maintained records, including truck numbers and driver signatures, and the cash payments were only 3.6% of total transportation expenses. The Tribunal upheld the CIT(A)'s decision, finding no cogent evidence to support the AO's disallowance.

9. Disallowance of commission payments:
The AO disallowed Rs. 53,21,905/- for commission payments, questioning the nature of services rendered. The CIT(A) deleted the disallowance, noting that the Assessee identified the parties, deducted TDS, and explained the services rendered. The Tribunal upheld the CIT(A)'s decision, noting that similar payments were allowed in previous years and to sister concerns.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on most issues, except for the disallowance of demurrage payments under Section 40(a)(i), which was restored based on the jurisdictional High Court's decision. The appeals by the Revenue were partly allowed.