2015 (7) TMI 847 - AT - Income Tax

Trading addition - CIT(a) deleted the addition - Held that - We find that there was no basis for the AO to adopt a G.P. rate of 15% when the fact remains that in the previous year it was only 12.03% which means that this year the profit rate is in any way is 14.25% which is more than the previous year. Further there was no basis for the AO to estimate the receipt at ₹ 4,12,50,000/- in the absence of any allegation that any receipts have been suppressed or there is any error in the profit rate declared by the assessee. In view of the above, the deletion of the addition made by the CIT(A) is correct and justified. - Decided against revenue. Undisclosed closing stock - AO has allowed shrinkage of 50% of the claim and for the rest of the fabric, valuing them on cost, has made an addition for the cost of shrinkage disallowed was to the tune of ₹ 74,500/- - CIT(a) deleted part addition confirming an addition of ₹ 74,500/- made by the AO on account of shrinkage - Held that - As during the course of assessment proceedings, the assessee vide letter dated 17.12.2009 had provided a copy of the printed chart for leading dyeing house i.e. Creative Dyeing & Printing Mills (P) Ltd. to compare the wastage claimed by the assessee. From the perusal of the said schedule of that company, the rate of shrinkage is much higher than the rate which was claimed by the assessee. The ld. AR pointed out that each processing unit has its own percentage of shrinkage but comparable costs can be considered to evaluate this fact. We find that without any basis, the AO has made the disallowance of 50% and he has not brought any kind of comparables to substantiate his disallowance whereas we find assessee has brought in similar company whose claim of shrinkage has been much higher. In the absence of any evidence to the contrary, the order of the AO to reject the claim of the shrinkage of the assessee amounts to arbitrariness. Therefore, we are of the considered view that the ld. CIT (A) erred in confirming the said disallowance without assigning any reason and it has to be deleted and we order accordingly - Decided in favour of assessee. Disallowance u/s 40A(3) - CIT(a) deleted the addition - Held that - AO has made addition of ₹ 49,566/- on the ground that the assessee has incurred expenses exceeding ₹ 20,000/- in cash to the extent of ₹ 2,47,828/- and so, 20% of the said sum i.e. ₹ 49,566/- was disallowed under section 40A(3) of the Act. We find that the AO has not held that the transactions with the two firms are not genuine. However, he made the disallowance because the cash transaction is hit by Section 40A(3) of the Act. However, we note that the ld. CIT (A) rightly points out that the AO does not mention the details of specific payments which in his opinion are hit by the provisions of section 40A(3) of the Act, i.e. the date of payments, bill number, mode of payment, amount of payment, name of the party etc. In the absence of these findings, the ld. CIT (A) rightly observed that the contention of the assessee is justified and the addition of ₹ 49,566/- made on this ground is deleted.- Decided in favour of assessee. Addition on account of income from other sources as receipts from insurance company - CIT(a) deleted the addition - Held that - Documents in the paper book are placed in paper book which are intimation to the Fire Department, copy of the insurance policy, report of the surveyor, correspondence with the insurance company, ledger account of the parties whose goods were destroyed in the fire. In the absence of any proof being adduced or basis to prove that the fire incident was fabricated to claim insurance, the ld. CIT (A), after taking note of the evidences produced by the assessee to establish the fire incident and the losses reflected by it, has rightly deleted the addition. All these evidence proves beyond any doubt about the genuineness of claim and as such the addition has been rightly deleted by the CIT(A)- Decided in favour of assessee. Disallowance of depreciation on machinery - Held that - The facts recorded by the AO are incomplete because he has not taken in to consideration subsequent letter from M/s Gopal Fabricators Pvt. Ltd. (the machine supplier). A letter dated 17th November, 2009, whereby the supplier has confirmed that the machines are sent for ready to use and it takes only 5 to 7 hours for their engineers to install and guide the assessee s employees to use the machine. The supplier has confirmed that this machine was started on 29th March, 2007 and has also given the name of the engineer who started this machine viz. Mr. John Mathew.Without contradicting the evidence adduced by the assessee, the AO cannot disbelieve the facts stated by the assessee without assigning any reasons. The observation of the AO in this regard are purely based on surmises and conjecture and stems from the letters answered by the supplier to the effect informing ignorance of the date of supply and who installed the machine. Thereafter, we find that the supplier has come forward with certain documents in their possession to correct themselves and bring evidence to prove the fact in issue and these evidences are on record. - Decided in favour of assessee. Disallowance on account of rent, invoking the provisions of section 40(a)(ia) - non deduction of TDS - Held that - Both AO and CIT(A) have ignored the fact that the liability to deduct TDS on payment of rent on machinery has been introduced by the Taxation Law Amendment Act, 2006 w.e.f. 13.7.2006 as is evident from the Circular No. 1/2007 dated 27.4.2007 issued by the Central Board of Direct Taxes. The payment of this rent by the assessee was for the period from 1st April, 2006 to 30th June, 2006 as is evident from the confirmation of the party filed with the AO placed in the paper book page no.24; and ₹ 90,000/- paid by cheque on 09.03.2007 also does not attract TDS because it did not cross the monetary limit of ₹ 1,20,000/- for the year under consideration, so the addition made by the AO and confirmed by the CIT (A) is not as per law. In view of the above, we set aside the impugned order and delete the addition of ₹ 1,90,000/- - Decided in favour of assessee. Disallowance of additional depreciation on account of new machinery purchased - Held that - the activity of processing done by the assessee was manufacturing . It was immaterial that the assessee was doing the job of processing also for outside customers too and was charging them on job work basis or on the basis of labour charges. We hold that it will still be qualified as carrying eligible business under s.32(1)(iia) of the Act. We hold that assessee is a manufacturer and eligible for deduction u/s 32(1)(iia) of the Act and so we allow the additional depreciation @20% - Decided in favour of assessee. Disallowance u/s. 68 - capital introduced by Sh. Pankaj Gupta, Partner of the assessee firm as unexplained credit - Held that - We find that before the AO, Mr. Pankaj Gupta (Partner) has led evidence in support of this amount of ₹ 11,00,000/-. This amount, according to him, was received from his father, Shri Om Prakash Gupta, who is an income tax payer for the last 30 years. To prove the identity, creditworthiness and genuineness of the transaction, the source i.e. Shri Om Prakash Gupta s confirmation affidavit, assessment order passed in his case and computation, balance sheet for the last 10 years were filed before the AO including the balance sheet of the firm, Jagan Nath Tea Co. from where this money has been paid by the father to his son. Copy of the purchase ledger, copy of bank account of M/s. Jagan Nath Tea Co. were also filed and he personally appeared before the AO. However, we find that the AO and the CIT(A) have simply ignored all these evidences and merely on surmises and conjectures without any basis has confirmed the addition. We find that the assessee firm having discharged its burden of proof, the onus was on the AO, thereafter to either accept the same or disprove the evidence produced by the assessee by cogent materials or the impugned addition is bad in the eyes of law and has to necessarily go. Thus we delete the addition of ₹ 11,00,000/- - Decided in favour of assessee. Disallowance of deduction under section 80IB - Held that - assessee in this regard has filed evidences before the AO in the form of Certificate of registration with the SSI to satisfy that the unit has started production before 31.03.2002. It also filed letter in December 2009 for claiming this deduction u/s 80IB along with various documents and registration certificate. The AO has not adjudicated this issue and the ld. CIT (A) has not allowed the deduction claimed u/s 80IB during appellate proceedings by stating that the claim was submitted before the AO at the fag end of the assessment proceedings. The assessee having made the claim has to prove that it is eligible as per section 80IB. There is no reason why the same has not been adjudicated and if the assessee fulfills all the conditions necessary to qualify for the claim prescribed u/s 80IB then the deduction needs to be allowed, so in view of the aforesaid facts and circumstances, it would be ideal if the issue is remitted back to the file of AO to examine the claim of the assessee afresh - Decided in favour of assessee for statistical purposes. Disallowance of credit of TDS claimed by the assessee along with the return of income - Held that - as the assessment order has been passed on last date of time barring limitation i.e. 31.12.2009, though the AO has mechanically directed to allow the credit for prepaid taxes, however, it has not been done and the ld. CIT (A) is also silent on this issue. So, it would be ideal for the issue be resolved by the AO himself, so we remit this issue also back to the file of the AO, to give credit to prepaid taxes in accordance to law.- Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of depreciation on machinery.
2. Disallowance of rent invoking Section 40(a)(ia) of the Act.
3. Disallowance of additional depreciation on new machinery.
4. Disallowance under Section 68 on account of capital introduced by a partner.
5. Denial of deduction under Section 80IB.
6. Addition on account of fabric shrinkage.
7. Addition due to difference in accounts with a supplier.
8. Non-allowance of TDS credit.
9. Interest levied under Sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Machinery:
The assessee claimed depreciation of Rs. 1,36,578 on machinery purchased on 26.03.2007 and installed on 28.03.2007. The AO disallowed the claim, doubting the usage of the machinery within the year. However, the supplier confirmed the installation and operation starting on 29.03.2007. The Tribunal found the AO's disallowance based on incomplete facts and allowed the depreciation claim, emphasizing the evidence provided by the assessee.

2. Disallowance of Rent Invoking Section 40(a)(ia):
The assessee paid Rs. 1,90,000 as rent for machinery from April to June 2006. The AO disallowed the amount for non-deduction of TDS under Section 194-I, which was introduced only from 13.07.2006. The Tribunal found the AO's application of Section 40(a)(ia) incorrect as the TDS provisions were not applicable during the period in question. The disallowance was deleted.

3. Disallowance of Additional Depreciation on New Machinery:
The assessee claimed additional depreciation of Rs. 9,96,715 on new machinery. The AO disallowed it, stating the assessee was not engaged in manufacturing. The Tribunal referred to Supreme Court judgments in Empire Industries Ltd. and Ujagar Prints, which held that textile dyeing amounts to manufacturing. The Tribunal allowed the additional depreciation, recognizing the assessee's activity as manufacturing.

4. Disallowance under Section 68 on Account of Capital Introduced by a Partner:
The AO added Rs. 11,00,000 introduced by a partner, Pankaj Gupta, as unexplained credit. The assessee provided confirmations from Pankaj Gupta and his father, Om Prakash Gupta, along with supporting documents. The Tribunal found the assessee had discharged its burden of proof, and the AO failed to disprove the evidence. The addition was deleted.

5. Denial of Deduction under Section 80IB:
The assessee claimed deduction under Section 80IB during assessment proceedings. The AO did not adjudicate the claim, and the CIT(A) rejected it for procedural reasons. The Tribunal remitted the issue back to the AO to examine the eligibility of the assessee for the deduction, emphasizing the need for a proper verification process.

6. Addition on Account of Fabric Shrinkage:
The AO made an addition of Rs. 2,36,009, including Rs. 74,500 for fabric shrinkage. The Tribunal found the AO's disallowance of 50% of the shrinkage claim arbitrary and without basis. The Tribunal deleted the addition, recognizing the normalcy of fabric shrinkage in the dyeing process.

7. Addition Due to Difference in Accounts with a Supplier:
The AO added Rs. 6,098 due to a difference in accounts with the supplier, M/s Tulsi Ram Ghanshyam Dass. The Tribunal noted the smallness of the amount and dismissed the issue as not pressed by the assessee.

8. Non-allowance of TDS Credit:
The assessee claimed TDS credit of Rs. 6,82,733, which was not allowed by the AO. The Tribunal remitted the issue back to the AO to verify and allow the TDS credit as per the law.

9. Interest Levied under Sections 234B and 234C:
The interest levied under Sections 234B and 234C was noted to be consequential and did not require separate adjudication.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes. The detailed analysis ensured that the legal principles and factual evidence were appropriately considered for each issue.