2018 (1) TMI 803 - AT - Income Tax

Addition u/s 68 on account of low yield percentage and impractical rate of burning loss - Held that - As explained by the assessee that yield depends on various factors and it cannot be constant. The assessee has maintained quantitative records of raw material consumed and finished product produced. The books of account were subject to tax audit which was produced before the Assessing Officer. The assessee has explained the reasons for variation in percentage of burning loss and consumption pattern. The observation o f the CIT(A) that there is no finding by the Assessing Officer that the accounts were not correct and complete or income could not be deduced from the accounts maintained by the assessee was not controverted by DR. No reason to interfere with the order of the CIT(A), which is hereby confirmed and ground of appeal of revenue is dismissed. Addition on account of commission paid on purchase - Held that - The copies of bills which were furnished before the CIT(A), were not furnished before the Assessing Officer to take a view that the commission payment was actually paid to them. As regards to the findings of the Assessing Officer that most of the parties were relatives to the assessee, CIT(A) was of the view that AO has not properly enquired into the matter to prove that commission payment made to the parties, ultimately flown to the assessee. Looking into the facts and circumstances of the case, we set aside the order of the CIT(A) and restore the matter back to the file of the Assessing Officer to re-adjudicate the payment of commission after conducting a thorough enquiry into the matter. Disallowance u/s. 40A(3) - Held that - We find that the freight payment is an advance which is subsequently reimbursed to the assessee company. Hence, the provisions of section 40A(3) are not applicable in this case. Hence, we confirm the order of the CIT(A) and dismiss this ground of appeal of the revenue. Addition on account of under valuation of closing stock - Held that - In the instant case, the appellant has valued the inventory at cost being lower than the net realizable value. It is equally settled that the A.O does not have the power to recompute the cost using any other method in disregard to the method adopted by the appellant which is not only recognised but also consistently followed by the appellant. It is not the case of the A.O that the appellant has undervalued the cost to reduce the value of closing stock. As the valuation has been made as per the prescribed norms, there is no merit in the addition made by the AO. Hence, the additions are deleted.

Issues Involved:
1. Deletion of addition made under Section 68 of the Income Tax Act on account of low yield percentage and impractical rate of burning loss.
2. Deletion of addition made on account of commission paid on purchase.
3. Deletion of disallowance made under Section 40A(3) of the Income Tax Act.
4. Deletion of addition on account of undervaluation of closing stock.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 68:
The Assessing Officer (AO) disallowed ?83,78,135/- due to low yield percentage and impractical rate of burning loss. The AO observed discrepancies in the yield of finished goods and burning loss compared to previous years, and fluctuations in electricity and furnace oil consumption. The assessee argued that yield depends on various factors, including the quality of raw materials, and that burning loss within 2.5% to 4% is considered reasonable in the trade. The CIT(A) noted that the assessee maintained quantitative records and the books were audited without any material defects found. The CIT(A) concluded that the AO's addition was speculative and lacked evidentiary value, as there was no suppression of production or sales. The Tribunal upheld the CIT(A)'s decision, confirming that the AO did not provide sufficient grounds to reject the books of accounts.

2. Deletion of Addition on Account of Commission Paid:
The AO disallowed ?50,62,705/- claimed as commission paid, doubting the genuineness due to lack of detailed substantiation and the relationship of recipients to the company's directors. The CIT(A) found that TDS was deducted and payments were made through banking channels, and recipients had declared the commission as income in their tax returns. The Tribunal noted that the AO did not properly investigate the matter and restored the issue to the AO for thorough re-examination, directing the assessee to provide all necessary documentation.

3. Deletion of Disallowance under Section 40A(3):
The AO disallowed ?3,32,885/- for freight payments exceeding ?20,000/- in a day. The assessee argued that these were advance payments for freight, subsequently reimbursed, and not current year expenses. The CIT(A) accepted this explanation, noting that the payments did not exceed the limit in a single transaction and were advances. The Tribunal confirmed the CIT(A)'s decision, stating that Section 40A(3) was not applicable as the payments were advances reimbursed later.

4. Deletion of Addition on Account of Undervaluation of Closing Stock:
The AO added ?27,05,756/- for undervaluation of closing stock, arguing that the assessee did not include excise duty in the valuation. The assessee maintained that the closing stock was valued at cost or market price, whichever was lower, as per regular practice. The CIT(A) held that the liability for excise duty arises on production, not sale, and thus, the omission was revenue-neutral. The CIT(A) also noted that the valuation method was consistent and in line with accounting standards. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere with the valuation method used by the assessee.

Conclusion:
The appeal of the revenue was partly allowed for statistical purposes, with the Tribunal confirming the CIT(A)'s decisions on most issues but remanding the issue of commission payments back to the AO for further examination.

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