2019 (10) TMI 630 - AT - Income Tax

Sale of scrap - Chargeability to tax - addition u/s 40A - HELD THAT - Assessee was undertaking development of certain project and sole activity being carried out by the assessee was construction activity. The same is evident from the fact that WIP stood at ₹ 12.93 Crores at year-end. It is also undisputed fact that the assessee was following project completion method of accounting to offer income under the project. Therefore, the scrap generated out of construction / development activity, in our considered opinion was inextricably linked with assessee s main activity and therefore, the same would rightly go on to reduce WIP. Therefore, this addition would not be sustainable in law. The assessee has rightly deducted the same from WIP. On the similar analogy, the disallowance made by Ld. AO u/s 40A(3) @20% of cash expenditure would not be separate item of addition but since no expenditure has been claimed by the assessee during the year, the same would go on to reduce WIP account. Therefore, Ld. AO is directed to reduce the said disallowance of ₹ 3 Lacs from WIP account. Additions u/s 69C - HELD THAT - Upon perusal of factual matrix, we find that total expenditure found to be incurred by the assessee was ₹ 37.67 Lacs. Out of this expenditure, the amount paid through cheques was ₹ 12.73 Lacs. The cash expenditure is stated to be made to the extent of ₹ 15 Lacs, for which the assessee has already been saddled with disallowance u/s 40A(3) @20%. This would leave unexplained balance of ₹ 9.94 Lacs. The same would stand confirmed in view of the fact that the source of the same remained unexplained. Hence, the addition to the extent of ₹ 9.94 Lacs stands confirmed. These grounds stand partly allowed.

Summary

Issues:
1. Taxability of amount received on sale of scrap
2. Addition under section 40A(3) of the Income Tax Act, 1961
3. Invocation of provisions of Section 69C of the Income Tax Act, 1961
4. Explanation of unexplained expenditure under Section 69C
5. Deletion of additions made under Section 69C
6. Levying of interest under sections 234A and 234B
7. Condonation of delay in filing the appeal

Analysis:

Taxability of Amount Received on Sale of Scrap:
The appellant contested the addition of ?10,00,000 received on the sale of scrap as taxable income. The Tribunal observed that the scrap generated was linked to the construction activity, reducing the Work-in-Progress (WIP) account. Therefore, the addition was deemed unsustainable, and the Tribunal directed to reduce it from the WIP account, allowing this ground of appeal.

Addition under Section 40A(3):
The appellant challenged the addition made under Section 40A(3) of ?3,00,000. As no expenditure was claimed during the year, the Tribunal directed to reduce this disallowance from the WIP account, partially allowing this ground of appeal.

Invocation of Provisions of Section 69C:
Regarding the additions made under Section 69C, the Tribunal found that out of total expenditure, the unexplained balance was ?9,94,000. Since the source of this amount remained unexplained, the addition was confirmed partially, allowing these grounds of appeal.

Levying of Interest under Sections 234A and 234B:
The Tribunal noted the levying of interest under sections 234A and 234B, stating that interest being mandatory and consequential did not require further adjudication.

Condonation of Delay in Filing the Appeal:
The Tribunal condoned the delay of 36 days in filing the appeal, considering the explanation provided by the assessee, and proceeded to dispose of the appeal on merits after hearing arguments from both parties.

Conclusion:
The appeal was partly allowed, directing adjustments in the tax calculations related to the sale of scrap, disallowance under Section 40A(3), and unexplained expenditure under Section 69C. The Tribunal pronounced the order on 14th October 2019.