2015 (8) TMI 1086 - AT - Income Tax

Disallowance under the head foreign travelling expenses - Held that - The assessee had furnished the details about the encashment/ surrender of foreign exchange before both the lower authorities. The Assessing Officer or the first appellate authority had not doubted the foreign tours undertaken by the employees of the assessee-company. After considering the material on record and the judgment of Krishnonics Ltd. 2007 (12) TMI 406 - ITAT AHMEDABAD we are of the opinion that the addition upheld by the first appellate authority was not based on facts available on the record. The assessee had filed all the details before the Assessing Officer. - Decided in favour of assessee. Disallowance of diminution in value of inventories of work-in-progress - Held that - There was no change in the method of valuing the stock and therefore the assessee was not required to report the change in the return about valuing the stock. It is a fact that because of the recession, the assessee could not export the goods or sell the goods in the local market. Considering the peculiar circumstances it revalued the inventory. In our opinion the Assessing Officer/first appellate authority should have made further enquires in this regard. We find that in the case of Alfa Laval India Ltd. v. Deputy CIT 2003 (9) TMI 43 - BOMBAY High Court had held that in the subsequent assessment year the goods in question were sold at the lesser price than shown in the closing stock. We find that the Assessing Officer had not carried out any exercise in this regard. In our opinion, in the interest of justice, the matter should be restored back to the file of the Assessing Officer for fresh adjudication. - Decided in favour of assessee for statistical purposes. Disallowance made under section 14A - FAA deleted addition - Held that - Assessing Officer had invoked the provisions of section 14A of the Act without understanding the real nature of the transactions. The assessee had not shown any income under the head exempt income under Chapter III of the Act for which it had claimed incurring of expenditure. Until and unless both these conditions are fulfilled provisions of section 14A cannot and should not be invoked. The first appellate authority had given a categorical finding of fact in this regard. Secondly, the Assessing Officer has not found any evidence that the interest expenses incurred by the assessee were not for wholly and exclusively for the business of the assessee. Order of the first appellate authority on both the counts-deletion of section 14A disallowance and allowing the interest expenditure under section 37 has to be upheld - Decided in favour of assessee Addition under the head cessation of liability, under section 41 - FAA deleted addition - Held that - As per the taxation jurisprudence the very first condition for invoking section 41(1) of the Act is that an allowance or deduction ought to have been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee. The Assessing Officer has not discussed as to when the deduction was allowed. On the contrary the records reveal that no allowance or deduction had been made in the assessment of the assessee in any earlier year. Consequently, there was no question of invoking section 41(1). So, in our opinion the order of the first appellate authority does not suffer from any legal infirmity. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of foreign traveling expenses.
2. Disallowance of diminution in value of inventories of work-in-progress.
3. Disallowance under section 14A of the Income-tax Act, 1961.
4. Addition under the head cessation of liability under section 41 of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Disallowance of Foreign Traveling Expenses:
The assessee challenged the disallowance of Rs. 5,87,765 out of the total Rs. 8,52,235 foreign traveling expenses made by the Assessing Officer (AO). The AO disallowed the amount as the assessee did not provide sufficient clarification for these expenses. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision due to lack of evidence. However, upon review, the tribunal found that the assessee had provided details about the encashment/surrender of foreign exchange and that the foreign tours were not doubted by the authorities. Therefore, the tribunal reversed the CIT(A)'s decision and allowed the expenses, deciding the issue in favor of the assessee.

2. Disallowance of Diminution in Value of Inventories of Work-in-Progress:
The assessee claimed a diminution in the value of work-in-progress amounting to Rs. 1,95,00,000 due to technical revaluation and global recession impacts. The AO rejected this claim, stating that the assessee deviated from the correct valuation method and presented a distorted picture. The CIT(A) upheld the AO's decision, noting the lack of satisfactory explanation and safeguards by the assessee. However, the tribunal found that the assessee had provided detailed explanations and reconciliations and referenced the case of Alfa Laval India Ltd., where the Bombay High Court allowed similar claims. The tribunal restored the matter to the AO for fresh adjudication to verify the correctness of the figures and the realized value of the inventory. This issue was decided in favor of the assessee, in part.

3. Disallowance under Section 14A of the Income-tax Act, 1961:
The AO disallowed Rs. 26,44,597 under section 14A, attributing it to interest on borrowed funds used for investments in sister concerns, which did not generate taxable income. The CIT(A) reversed the AO's decision, stating that the disallowance was based on mere presumption without evidence of exempt income or expenditure claimed for such income. The tribunal upheld the CIT(A)'s decision, noting that the AO did not understand the transaction's nature and failed to prove that the interest expenses were not wholly and exclusively for business purposes. Thus, the tribunal decided this issue against the AO.

4. Addition under the Head Cessation of Liability under Section 41 of the Income-tax Act, 1961:
The AO added Rs. 54,56,353 under section 41, considering the outstanding balances of sundry creditors as ceased liabilities. The CIT(A) deleted this addition, arguing that mere outstanding balances for several years do not automatically invoke section 41(1) without evidence of cessation or remission. The tribunal agreed with the CIT(A), stating that the AO failed to prove the cessation of liability and did not discuss any prior deduction or allowance. Consequently, the tribunal confirmed the CIT(A)'s decision, deciding this issue against the AO.

Conclusion:
The appeal filed by the assessee was partly allowed, and the appeal of the Assessing Officer was dismissed. The order was pronounced in the open court on March 11, 2015.