2016 (1) TMI 532 - AT - Income Tax

Disallowance u/s 14A - Held that - The Hon ble Delhi High Court in CIT vs. Holcim India P. Ltd. (2014 (9) TMI 434 - DELHI HIGH COURT) has held that in the absence of any exempt income, there can be no disallowance u/s 14A. Recently, the Hon ble jurisdictional High Court in Joint Investment Pvt. Ltd. Vs. CIT (2015 (3) TMI 155 - DELHI HIGH COURT ) has held that disallowance u/s 14A cannot exceed the exempt income. In view of the fact that the assessee did not admittedly earn any exempt income during the year, there can be no question of making any disallowance u/s 14A of the Act in terms of the aforestated precedents from the Hon ble jurisdictional High Court. We, therefore, order for the deletion of the entire addition. - Decided in favour of assessee. Addition on account of lower scrap sale can be made as a percentage of turnover - Held that - Scrap is ordinarily considered with reference to production. It is further pertinent to note that percentage of scrap to production may not remain consistent over the years. The generation of scrap depends on various factors, such as, quality of raw material, age of machine, quality of work force, etc. If good raw material is used, naturally, it will lead to lower scrap and vice versa. The relevant factors discussed above ultimately find their reflection on the gross profit rate. If the gross profit rate of the assessee is better than that of the preceding year, but, the generation of scrap is less, there cannot be any separate addition for lower generation of scrap because this would show the higher economies availed by the assessee due to better performance or good quality of raw material etc. Adverting to the facts of the instant case, we find that the assessee declared GP rate of 9.77% in the year under consideration as against the last year s GP rate of 8.61%. These gross profit rates are available in the written submissions filed before the CIT(A), a copy of which is available on page 19 of second paper book. When the gross profit rate itself has registered an increase of over 1% in the current year, we fail to appreciate as to how any addition on account of lower scrap sale can be made as a percentage of turnover.- Decided in favour of assessee. Disallowance of interest in respect of balance payable to M/s Tobu India Ltd. - addition on u/s 40A(2)(b) - Held that - On a specific query to point out the balance of M/s Tobu India Ltd., in the assessee s account for the preceding year as reflected in the balance sheet, the ld. AR invited our attention towards annual accounts, a copy of which is available on pages 1-39 of the paper book. Details of Schedule of Loans and advances to Balance sheet is available on page 14 of the paper book and the name of M/s Tobu India Ltd., appears on page 15, which is part of Schedule 10. It can be observed that the closing balance of the sister concern in the Annual accounts for the year under consideration is ₹ 21,84,964/-, but, there is no corresponding figure of closing balance of this sister concern in the immediately preceding year, as such figure has been shown as Nil. As such, the entire basis on which the addition has been deleted by the ld. CIT(A), ceases to exist. We cannot countenance the impugned order on this line of reasoning which has not been shown to exist. Under such circumstances, we set aside the impugned order on this score and remit the matter to the file of CIT(A) for deciding this issue afresh, as per law, after taking note of the correct facts.

Summary

Issues:
1. Disallowance u/s 14A of the Act.
2. Addition of scrap sale amount.
3. Disallowance of interest payable to a specified person.

Issue 1: Disallowance u/s 14A of the Act:
The appeal involved cross appeals by the assessee and the Revenue regarding the disallowance u/s 14A of the Act. The AO computed disallowance based on Rule 8D despite the assessee not earning any exempt income during the year. Citing precedents, the Tribunal noted that in the absence of exempt income, no disallowance u/s 14A should be made. Relying on decisions by the Delhi High Court, the Tribunal ordered the deletion of the entire addition, allowing the assessee's appeal and rejecting the Revenue's appeal.

Issue 2: Addition of scrap sale amount:
The Revenue challenged the deletion of an addition related to scrap sale amount. The AO made the addition based on a drop in the scrap sale percentage compared to the previous year's turnover. However, the Tribunal found the AO's approach improper, emphasizing that scrap generation is linked to production factors and may vary due to raw material quality, machinery age, and workforce quality. Considering the increase in gross profit rate from the previous year, the Tribunal upheld the deletion of the addition by the CIT(A).

Issue 3: Disallowance of interest payable to a specified person:
The final ground for consideration was the disallowance of interest payable to a specified person. The AO disallowed a proportionate interest amount paid by the assessee on interest-bearing loans, alleging diversion of funds to a sister concern on an interest-free basis. The CIT(A) deleted the addition, noting the absence of a link between borrowed funds and advances to the sister concern. However, the Tribunal found discrepancies in the balance figures of the sister concern between the current and preceding years. Consequently, the Tribunal set aside the CIT(A)'s decision, remitting the matter for fresh consideration based on accurate facts.

In conclusion, the Tribunal allowed the assessee's appeal and partly allowed the Revenue's appeal for statistical purposes, emphasizing the importance of accurately establishing links between financial transactions and justifying disallowances under the Income Tax Act.