2018 (7) TMI 1544 - AT - Income Tax

Addition on account of payments in cash in violation of section 40A(3) - Held that - The disallowance stands upheld by the ld. CIT(A), again, on the aspect of serviceability of the banks at the places where the expenditure stands paid. The said finding remains unrebutted. As, however, we have remitted the matter back to the file of the ld. CIT(A) for AY 2007-08, it is only considered proper that, like-wise, it be done for this year so as to ensure consistency of decision at his end; the facts being largely the same. We decide accordingly. Disallowance in respect of provision for gratuity - Held that - The disallowance for both the years as well as its confirmation, is on the basis of section 40A(7) which bars deduction in respect of provision for gratuity expenditure. The assessee, though admitting the legal position, claims, albeit without any evidence, that the liability in respect of the impugned gratuity had, in fact, crystallized as at the year-end in-as-much as the relevant employee/s had superannuated during the relevant year/s. The assessee s case, even as confirmed by the ld. AR during hearing, continues to be the same, so that its claim remains wholly unsubstantiated before us as well. Accordingly, we have no hesitation in upholding the impugned disallowance. Needless to add, the assessee shall be entitled to deduction in its respect u/s. 37(1), of course subject to the satisfaction of the AO with regard to the genuineness of the assessee s claim, in the year of payment/s Disallowance of prior period expenses made - Held that - The assessee admittedly following mercantile method of accounting, with each year being an independent unit of assessment, we find no reason not to uphold the impugned disallowance, even as fairly conceded to by the ld. AR during hearing. So, however, we consider it as incumbent upon us to state that while finalizing the assessment for AY 2009-10, prior period expenditure to the extent the same relate to AY 2007-08, subject to his examination and verification, be allowed by the AO. The onus to furnish the relevant details, as well as press any claim/s in its respect, would however be on the assessee. Disallowance u/s. 40(a)(ia) - amounts qua which tax deducted at source (TDS) had been deposited by the due date of filing of the return of income u/s. 139(1) - Held that - We do not find anything wrong in the deletion as directed by the ld. CIT(A). We must though add that the AO shall verify that the assessee does not get a double deduction in respect of the amount/s deleted by the ld. CIT(A), i.e., in the year of payment, in-as-much as sec. 40(a)(ia) only introduces a timing difference. The amendment to section 40(a)(ia) being subsequent in time, it may well be that the assessee had, in terms of the provision as it stood for the relevant years, claimed and been allowed deduction for the year/s when the TDS stands deposited to the credit of the Central Government. The onus to satisfy the AO in this regard, i.e., that there is no double deduction qua the amount deleted by the ld. CIT(A), being ₹ 744.32 lacs and ₹ 1058.44 lacs for AYs 2007-08 and 2009-10 respectively, would be on the assessee. The returns for the respective years having been ostensibly furnished in the following years, i.e., the previous years relevant to AY 2008-09 and AY 2010- 11 respectively, all that is required, for the purpose, is to see if the assessee had made any claim qua the said sum for these years, i.e., with reference to its disallowance for the relevant years. Addition credited to the suspense account - inferred by the AO as an unexplained liability and, accordingly, added as income - Held that - The subject matter of the assessee s Gd. 6 for AY 2009-10 being the same, the same stands also confirmed at the impugned amount of ₹ 27,100. We may though add that the latter sum of ₹ 27,100 should not include in whole or in part, the former sum of ₹ 21,750, else, to that extent, it would be a case of a double addition. We say so as it could well be that the excess credit as on 31.03.2007 continues to obtain (to whatever extent) as on 31.03.2009 as well, in which case it would amount to a double addition. The onus however to show that it is so would be on the assessee Addition on outstanding purchases - Held that - explained that of the sum of ₹ 85.99 cr. outstanding at the year-end, ₹ 66.10 cr. represented the opening balance from the earlier years. Of the balance ₹ 19.89 cr., ₹ 19.85 cr. represented provisions in respect of bills payable, salary payable, etc., leaving a balance of ₹ 4.05 lacs, which was accordingly confirmed as unexplained credit. Very clearly, the assessee has no explanation for this sum, which represents neither an opening balance nor a provision was during the year. The confirmation of the addition to this extent is accordingly confirmed. Addition in respect of interest on FDRs - Held that - The assessee is maintaining its accounts, disclosing business income, on mercantile basis. Section 145 obliges an assessee to maintain books either on cash or mercantile basis, so that hybrid system of accounting is impermissible w.e.f. AY 1997-98. The assessee has, we are sorry to state, at no stage, i.e., during the audit u/s. 142(2A); the assessment proceedings; the remand proceedings the ld. CIT(A) calling for a remand report on quite a few issues, as well as in the appellate proceedings, made any effort to call for the relevant details, i.e., the interest accrued on its different FDRs as outstanding as at the relevant/s year-end. The Revenue is under the circumstances constrained to make an estimate of the interest accrued, and which is in our view quite reasonable as, clearly, the maturity period is apparently beyond 45 days. This is as a maturity period of upto 45 days yield a turnover much higher (i.e., at 8 times the average holding) than that obtains. We therefore have little hesitation in confirming the said addition. Non-allowance of the credit for TDS - Held that - Though the AO has taken care to deduct the interest credited in accounts for the relevant years, the interest accrued for f.y. 2006-07 and f.y. 2008- 09 (corresponding to AYs. 2007-08 and 2009-10) may stand receive and, accordingly, credited in accounts during f.y. 2007-08 (AY 2008-09) or f.y. 2009- 10 and beyond (i.e., AY 2010-11 and/or subsequent years). The matter accordingly is restored back to the file of the AO to allow the assessee an opportunity to present its case in this regard, even as, we may clarify, that in principle we find no infirmity in the Revenues claim or the addition as made by the AO. Disallowance of depreciation - Held that - audit report u/s. 142(2A) carried a disqualification in that the bills for addition to fixed assets were not produced for verification. Further, that the depreciation had been charged in excess by ₹ 1500. The AO accordingly called upon the assessee to produce the bills for the additions to the fixed assets during the year (to machinery and furniture and fixture). The same being not produced, he worked out the depreciation as per the relevant provision at ₹ 82,325 and, accordingly, made a disallowance for 83,825 (Rs.82325 1500). The same stood confirmed in appeal in the absence of any improvement in its case by the assessee. The position continues to be the same before us. Accordingly, we have no hesitation in confirming the same. Disallowance of claim for service-tax - Held that - Revenue authorities have drawn the presumption of non-payment on the basis of non- production of the relevant challans. Even if the same are not forthcoming, if there is no outstanding liability to service tax, as otherwise there would be a demand raised by the concerned Department, and the assessee s accounts reflect the payment thereof, the presumption would be that the same has been paid. And therefore, could be allowed on that basis. The AO could verify the payment/s with reference to the date/s of payment, from the concerned department. The position, we may though clarify, would be different where the excess service tax stands collected, and credited to the income account, in which case there is admittedly no question of payment thereof, so that the same stands rightly accounted as income. The burden to prove its claim/s, it may be clarified, would be on the assessee, and which it may do at the time of the AO giving appeal effect to this order, for which he shall allow the assessee a reasonable opportunity. Disallowance u/s. 40(a)(ia) on the short deduction of tax at source - Held that - there has been a short deduction of tax at source, i.e., at the rate of 3%, no disallowance u/s. 40(a)(ia) is called for in-as- much as the tax deducted at source is on the entire sum of ₹ 1000. At the same time, the same cannot be allowed to be used as a bogey, so that an actual non- deduction, i.e., in the absence of any confusion, is sought to be impressed with the character of a short deduction, as where there has been no deduction (on ₹ 400, going by our example). The orders by the authorities are silent on this aspect. What, for example is the nature of the confusion, i.e., the different sections under which the tax was actually deducted, and ought to have been. Further, the assessee s accounts and TDS returns would itself bear this out. The ld. CIT(A) has, however, issued a finding of it being a case of short deduction. No contradicting material, contesting the same, has been brought on record or to our notice by the ld. CIT-DR Disallowance of depreciation on fixed assets - Held that - The assessee failing to produce the bills/vouchers in respect of addition to the fixed assets during the year, the AO worked out the depreciation thereon as per the applicable rates and period, at ₹ 25,97,261. The assessee having made a claim for depreciation at ₹ 120.17 lacs, he effected a disallowance for the balance ₹ 94.20 lacs. In appeal, it was clarified by the assessee that the AO s working fails to take into account the depreciation on the opening value of the different block of assets. The same was worked at ₹ 87.96 lacs, so that the ld. CIT(A) allowed relief to the assessee to that extent. We find no infirmity in the impugned order Deletion of disallowance on account of employee s share paid to be deposited to the Employees Provident Fund confirmed - amount of employees share, payable to be deposited to Employees Provident Fund, if deposited before the due date of filing of the return of income u/s 139(1) of the Income Tax Act then the same cannot be liable for the disallowance.

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act.
2. Disallowance of provision for gratuity under Section 40A(7).
3. Disallowance of prior period expenses.
4. Disallowance under Section 40(a)(ia) for non-deduction or late deposit of TDS.
5. Addition of unexplained liabilities credited to the suspense account.
6. Addition of unexplained creditors.
7. Addition of interest on Fixed Deposit Receipts (FDRs).
8. Disallowance of depreciation.
9. Disallowance of service tax claim.
10. Disallowance of employee's share to Employee Provident Fund under Section 36(1)(va).

Detailed Analysis:

1. Disallowance under Section 40A(3):
The assessee challenged the confirmation of disallowance of ?19,43,106 made on account of cash payments in violation of Section 40A(3). The assessee's claim that the payments were made in areas not serviced by banks was rebutted by the AO, citing the presence of several bank branches. The CIT(A) partially allowed the appeal, providing relief for ?4,62,311 but upheld the disallowance for the remaining amount. The Tribunal found no clear finding from the CIT(A) regarding the genuineness of the expenditure and restored the matter back to the CIT(A) for a decision on merits.

2. Disallowance of Provision for Gratuity:
The disallowance of ?80,000 and ?3,70,015 for AY 2007-08 and 2009-10 respectively was upheld. The assessee admitted the legal position under Section 40A(7) but claimed the liability had crystallized due to employee superannuation, which remained unsubstantiated. The Tribunal upheld the disallowance but allowed the assessee to claim deduction under Section 37(1) in the year of payment, subject to AO's satisfaction.

3. Disallowance of Prior Period Expenses:
The disallowance of ?87,12,283 and ?77,77,664 for AY 2007-08 and 2009-10 respectively was upheld. The Tribunal noted the assessee's mercantile accounting method and independent assessment years. However, it directed the AO to allow prior period expenses related to AY 2007-08 during the assessment for AY 2009-10, subject to verification.

4. Disallowance under Section 40(a)(ia):
The disallowance for non-deduction or late deposit of TDS was partially confirmed. The CIT(A) allowed deductions for amounts where TDS was deposited by the due date of filing the return under Section 139(1). The Tribunal upheld this, noting that the amendments to Section 40(a)(ia) are retrospective, but directed the AO to ensure no double deduction occurs.

5. Addition of Unexplained Liabilities:
The addition of ?21,750 and ?27,100 credited to the suspense account for AY 2007-08 and 2009-10 respectively was confirmed. The Tribunal noted the assessee's concession and directed verification to avoid double addition.

6. Addition of Unexplained Creditors:
The addition of ?4,04,540 for AY 2007-08 was confirmed. The Tribunal noted the assessee's failure to explain the sum, which was neither an opening balance nor a provision during the year.

7. Addition of Interest on FDRs:
The addition of ?256.62 lacs and ?432.72 lacs for AY 2007-08 and 2009-10 respectively was confirmed. The Tribunal noted the assessee's mercantile accounting method and failure to provide details. It directed the AO to allow TDS credit and avoid double addition.

8. Disallowance of Depreciation:
The disallowance of ?83,825 for AY 2007-08 was confirmed due to the assessee's failure to produce bills for additions to fixed assets. The Tribunal upheld the disallowance, noting no improvement in the assessee's case.

9. Disallowance of Service Tax Claim:
The disallowance of ?3,25,000 for AY 2009-10 was confirmed. The Tribunal noted the assessee's failure to provide evidence of payment and directed verification of payments from the concerned department.

10. Disallowance of Employee's Share to Employee Provident Fund:
The disallowance under Section 36(1)(va) was contested by the Revenue. The Tribunal noted conflicting judicial opinions but followed the predominant view allowing deduction if the amount is deposited by the due date of filing the return under Section 139(1). The AO was directed to verify the payment.

Conclusion:
The Tribunal partly allowed the assessee's appeals and the Revenue's appeals for statistical purposes. The issues were remanded back to the CIT(A) and AO for further verification and decision on merits, ensuring consistency and adherence to legal provisions.