2017 (5) TMI 418 - AT - Income Tax

Unexplained cash credit u/s.68 - Held that - We noticed that assessee has provided copy of I.T. return, bank account no. etc of the parties who had contributed towards share capital of the assessee-company. The assessee had received total share capital of ₹ 2,73,51,600/- and the Assessing Officer made an addition of ₹ 21,72,700/- u/s.68 of the Act in the case of the assessee on the basis of cash deposited in the bank account of 13 parties as stated above in this order. We find that Ld.AO has not conducted any enquiry to find out the source of above stated cash deposit in the bank account of the parties and Assessing Officer has also not initiated any proceedings to verify the source of cash deposit. Accordingly no further proceedings has been initiated to tax the unexplained cash deposit if any in the hand of the shareholders. Therefore, after considering the detailed findings of Ld.CIT(A), we do not find any reason to interfere in the order of Ld.CIT(A). - Decided in favour of assessee Interest attributable to the funds utilized for acquiring the capital assets - disallowance u/sec.36(1)(iii) - Held that - Assessing Officer has stated that interest attributable to the funds utilized for acquiring fixed assets has not been capitalized by the assessee and he further held that assessee has also not proved the fund flow statement. We further noticed that the Ld.CIT(A) held that the Assessing Officer had not identified capital borrowed for acquiring capital assets. We observed after perusal of the records that assessee had not furnished necessary break-up with the fund flow statement for reconciliation of funds used in acquiring capital assets. Therefore, we do not incline with the decision of Ld.CIT(A) and in the interest of justice we restore this matter to the file of the Assessing Officer to decide a fresh after examination of the relevant details furnished by the assessee and after providing due opportunity to the assessee. Undervaluation of closing stock - assessee has not included in the value of closing stock amount of tax, duty and cess etc. actually paid or incurred by the assessee to bring the goods to the place of its location - Held that - As noticed the contentions of the Ld.Counsel that the assessee was paying excise duty at concessional rate and it has not claimed benefit of CENVAT credit. We have considered the contentions of the Ld.Counsel that CENVAT benefit was not available to the assessee therefore enhancement in the value of closing stock on account of CENVAT was not warranted. We have also considered the findings of Ld.CIT(A) and the decision of the Hon ble High Court of Gujarat in the case of Voltamp Transformers Ltd. v/s. CIT (2008 (4) TMI 518 - Gujarat High Court) that assessee was following exclusive method of accounting and the CENVAT was not debited or credited to the Profit and Loss account. Therefore, we uphold the order of Ld.CIT(A) on this issue.

Summary

Issues Involved:
1. Deletion of addition on account of unexplained cash credit under Section 68 of the Income Tax Act.
2. Deletion of disallowance of interest under the proviso to Section 36(1)(iii) of the Income Tax Act.
3. Deletion of addition on account of adjustment in the value of closing stock under Section 145A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Unexplained Cash Credit under Section 68:
The Assessing Officer (AO) observed that the assessee introduced a credit of ?2,73,51,600 in the form of share capital, contributed by close relatives or HUF of the assessee-company. The AO noted cash deposits in the bank accounts of 13 parties before issuing cheques towards the share capital and treated ?21,72,700 as unexplained credit under Section 68 due to the assessee's failure to explain the source of these cash deposits.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the appellant provided confirmations, ledger accounts, IT returns, and bank statements of the share allottees. The CIT(A) held that these documents established the identity, genuineness, and creditworthiness of the creditors, thus discharging the onus under Section 68. It was also noted that the AO did not challenge the identity of the persons and that any unexplained cash deposits should be taxed in the hands of the shareholders, not the appellant company.

2. Disallowance of Interest under Section 36(1)(iii):
The AO disallowed ?10,43,063 as interest attributable to funds used for acquiring fixed assets, arguing that these funds were not capitalized by the assessee. The AO did not accept the assessee's explanation that the assets were financed by interest-free funds.

The CIT(A) deleted the addition, stating that the AO did not identify the capital borrowed for acquiring the capital work-in-progress. The CIT(A) emphasized that the conditions for capitalizing interest under the proviso to Section 36(1)(iii) were not met, as the AO failed to pinpoint the borrowed capital. The CIT(A) also noted that capitalization of interest on a proportionate basis is not provided for under the provisions of Section 36(1)(iii).

3. Adjustment in the Value of Closing Stock under Section 145A:
The AO observed that the assessee did not include tax, duty, and cess in the value of closing stock and worked out an addition of ?41,97,900 to the closing stock value.

The CIT(A) deleted the addition, noting that the assessee consistently followed its accounting policy for valuation of closing stock in previous and succeeding years. The CIT(A) referred to case laws, including the Gujarat High Court's decision in Voltamp Transformers Ltd. v. CIT, which limited the AO's power to change the valuation method. The CIT(A) also noted that the assessee was not entitled to CENVAT credit due to paying excise duty at a concessional rate and that primary raw materials and major stores were purchased from entities exempt from excise duty.

Conclusion:
The tribunal upheld the CIT(A)'s deletion of the addition under Section 68 and the adjustment in the value of closing stock under Section 145A, agreeing with the CIT(A)'s findings and the legal precedents cited. However, the tribunal restored the issue of disallowance of interest under Section 36(1)(iii) to the AO for fresh examination, as the assessee had not furnished the necessary break-up and fund flow statement for reconciliation of funds used in acquiring capital assets.

Final Order:
The appeal of the Revenue was partly allowed, with the issue of disallowance of interest under Section 36(1)(iii) remanded to the AO for reconsideration. The tribunal pronounced the order on 4th May 2017 at Ahmedabad.