2018 (10) TMI 1291 - AT - Income Tax

Addition on account of sale of scrap out of books - unexplained sale - CIT(A) restricted the addition to ₹ 8,08,420/- out of total addition of ₹ 48,04,151/- made by the AO - Held that - Once it is an undisputed fact that one of the Director has admitted in his statement that assessee company was indulged in unaccounted sale of scarp generated in the manufacturing process in cash in the assessment years 2010-11 to 2012-13; and manufacturing process of the Manesar unit continued to be the same for all the three years, then in our opinion CIT(A) has rightly held that if scrap has been generated and sold during the assessment year 2012-13 in the earlier years, then same should be there in the assessment year 2012-13 also. He has elaborately discussed and explained meticulously based on seized material how estimate of scrap sale can be made where no material is found. Such an action of CIT(A) is justified, because it is matter of record that in all the years assessee has been generated unaccounted cash from the scrap sales outside books, then based on same ratio such unaccounted cash has to be treated as unexplained. Thus, we do not find any infirmity in the order of the Ld. CIT (A) and the same is affirmed. Disallowance u/s 14A - sufficiency of own funds - Held that - In wake of availability of such huge surplus fund, which is far more than the investment made by the assessee, we direct that no disallowance of interest can be made. With regard to indirect expenses, we find that assessee has not discharged its prima facie onus as to why no expenditure is attributable for earning of such a huge exempt income and it is only when assessee discharges his onus, then AO has to record his satisfaction having regard to the accounts maintained by the assessee and on the claim made by the assessee. Thus, we hold that in so far as disallowance of indirect expenditure is concerned the same has rightly been confirmed by the CIT (A) and to this extent order of the Ld. CIT(A) is confirmed. - decided against revenue.

Summary

Issues:
1. Revenue's appeal challenging addition on account of sale of scrap
2. Maintainability of Revenue's appeal based on tax effect
3. Assessee's appeal on addition of unaccounted scrap sale and disallowance under section 14A

Revenue's Appeal:
The Revenue challenged the addition of ?8,08,420 on account of sale of scrap outside the books. However, the Tribunal found the appeal not maintainable as the tax effect was less than ?20 lakhs, as per a recent CBDT circular. The appeal was dismissed without delving into the merits of the case, as the circular applied to pending appeals as well.

Assessee's Appeal - Unaccounted Scrap Sale:
The assessee's appeal contested the addition of ?8,08,420 for unaccounted scrap sale. The AO estimated the sale of scrap at ?48,04,151 based on seized documents. The CIT(A) partially allowed relief by restricting the addition to ?8,08,420, considering 3.55% of unaccounted scrap of the Manesar unit. The assessee argued that internal inquiry led to the recovery of approximately ?8 lakhs from employees involved in unreported scrap sales. The Tribunal upheld the CIT(A)'s decision, stating that the estimation of unaccounted scrap sales was justified based on seized documents and admissions.

Assessee's Appeal - Disallowance under Section 14A:
Regarding the disallowance of ?5,11,464 under section 14A, the assessee earned dividend income but did not offer any disallowance. The AO applied rule 8D to compute the disallowance, which was upheld by the CIT(A). The assessee contended that no interest disallowance should be made as investments were from reserves and surplus, citing a Delhi High Court case. The Tribunal found that no interest disallowance could be made due to the surplus funds. However, the disallowance of indirect expenses under rule 8D(2)(iii) was upheld as the assessee failed to prove why no expenditure was attributable to earning exempt income.

In conclusion, the Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal. The decision was pronounced on October 22, 2018.