2015 (4) TMI 585 - AT - Income Tax

Addition on account of inventory mis-match w.r.t stock statement submitted to bank - Dis-allowance of Interest u/s 40A(2)(a) - Interest paid on unsecured loans in excess of fair market rate i.e. bank rate - Held that - In a given case, an assessee may satisfactorily explain the difference in the stock figure/s furnished to the bank and that disclosed by its final accounts, in which case no case for addition would arise. Why, in the instant case the assessee has even failed to show that the same, i.e., the stock as disclosed, actually matches with that reflected by its books. Reliance on case law would thus be of little moment; our decision being based on firm findings of fact, based on the material on record, as it ought to be. It would, therefore, all depend on the facts of the case - the question to be decided is whether the excess stock is inferable in the facts and circumstances of the case and, two, if the assessee has been able to satisfactorily explain the same, i.e., in case of a difference, the answers to which in the present case are yes and no respectively. We decide accordingly, and the assessee fails. The bank rate is not strictly comparable, and some leverage would have to be allowed between the interest rate to the bank and that to the private parties, which is on an unsecured basis, even though in the instant case the same stands given by related parties to their own concerns, so that it serves a common purpose or mutual interest. That is, the said rate yet cannot form a suitable basis to arrive at the fair market value of the interest rate for unsecured loans. In our view, on the balance, a premium of 25% (on the bank rate) would be more than adequate. Accordingly, the excess interest rate be worked out by applying a factor of 1.25 to the average bank interest rate, i.e., for term finance, as obtaining for the relevant years. A bank rate of 12% p.a. (say) would accordingly yield an excess interest rate of 6% p.a. (21 - 12 x 1.25). We decide accordingly, and the assessee gets part relief. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Understatement of stock of copper under process for A.Y. 2007-08.
2. Disallowance of interest under section 40A(2)(a) for A.Y. 2007-08 and A.Y. 2008-09.

Issue-wise Detailed Analysis:

1. Understatement of Stock of Copper Under Process for A.Y. 2007-08:

The first issue pertains to the understatement of stock of copper under process by the assessee, a manufacturer, trader, and processor of copper-based chemicals. The discrepancy was identified by comparing the closing stock disclosed in the balance sheet with that furnished to the bank. The book figure of copper scrap as on 31.03.2007 was 3.0 MT, whereas the figure provided to the bank was 5.7 MT. The assessee explained that the figure supplied to the bank was tentative and provisional, supported by the fact that the valuation of copper in the inventory submitted to the bank was lower than its actual cost. However, the Assessing Officer (AO) did not accept this explanation, stating that the assessee maintained a day-to-day stock register for excise duty purposes, and thus, the stock statement furnished to the bank could not be provisional. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the assessee failed to produce the excise records, which were crucial to its case. Consequently, the addition for the excess stock of 2.7 MT of copper, valued at Rs. 319 per kg, amounting to Rs. 8,61,300, was confirmed.

Upon hearing the parties and reviewing the material on record, the Tribunal noted that the assessee's explanation that the stock statement to the bank was a formality and provisional was not credible. The assessee relied on its books of account but failed to produce the stock registers maintained for excise purposes. The Tribunal observed that the assessee's failure to produce these records contradicted its own explanation. Additionally, the Tribunal found that the assessee's claim of reflecting a higher stock to the bank to avail higher credit was factually incorrect, as the bank statements showed a credit balance, and the assessee had sufficient margin without manipulating stock figures. The Tribunal concluded that the assessee had not satisfactorily explained the discrepancy and upheld the addition.

2. Disallowance of Interest under Section 40A(2)(a) for A.Y. 2007-08 and A.Y. 2008-09:

The second issue involved the disallowance of interest paid on unsecured loans to persons covered under section 40A(2)(b) at 21% p.a. (18% p.a. to one party), which was considered excessive compared to the fair market rate of 12% p.a. The excessive interest, calculated at the difference of 9% p.a. or 6% p.a., was disallowed and confirmed by the CIT(A).

The assessee argued that the loans were taken in the past at the same interest rate, which had not been challenged by the Department previously. However, the Tribunal noted that there was no evidence that the Revenue had accepted this rate in the past. The Tribunal also observed that interest rates vary over time, and the prevailing rate should be considered. The assessee's contention that the excessive payment did not benefit the payees was dismissed, as the excess payment itself indicated a benefit. The Tribunal concluded that neither party provided sufficient material to determine the fair market rate conclusively. However, considering the unsecured nature of the loans and the relationship between the parties, the Tribunal deemed a premium of 25% over the bank rate as reasonable. Therefore, the excess interest rate was to be calculated by applying a factor of 1.25 to the average bank interest rate for the relevant years, granting partial relief to the assessee.

Conclusion:

In summary, the Tribunal upheld the addition for the understatement of stock of copper under process for A.Y. 2007-08, as the assessee failed to provide satisfactory evidence to support its claims. For the disallowance of interest under section 40A(2)(a), the Tribunal provided partial relief by allowing a premium of 25% over the bank rate for calculating the excess interest rate. The assessee's appeals were partly allowed.