2019 (12) TMI 861 - AT - Income Tax

Addition on account of undisclosed sale of scrap - Addition sustained by the CIT(A) without admitting the additional evidence submitted by the assessee - HELD THAT - We find that as per RG-1, the assessee has shown various quantities of scrap with job workers. Therefore, there are entries in the RG-1 regarding the scrap with job workers and the AO has taken these quantities from the RG-1. It is not in dispute that in the Stock Register i.e. RG-1, the assessee has shown scrap with various job workers. However, complete details of job workers are not appearing in the stock register due to the format as provided under the excise rules. When the AO asked the assessee to explain the difference of the scrap of sale shown by the assessee in the books of accounts as well as the scrap shown in the RG-1, the assessee has initially explained the reasons for difference which is reproduced by the AO Excise Duty is leviable because of the reasons that the assessee is a manufacturer of the goods and not the job workers. On further show cause notice issued by the AO regarding partywise details of job work and other relevant materials on the issue, the assessee again filed the replies as well as details. We find that as per the assessment proceeding sheet, the AO has clearly stated that requisite details were filed by the assessee except against Query Nos. 9,25 26. The AO has then again asked the assessee to produce the relevant details regarding query Nos. 9,25, 26. The first query of the AO was about the details of excise duty paid on scrap and sale of scrap as per books of accounts. The second query was regarding furnishing the details of increase in purchase costs and decrease in the sale price. The second query was not related to scrap sale. As regards the first query, the details were produced by the assessee and the AO thereafter has not raised any further query and nothing is appearing in the proceeding sheet. However, the AO finally made the addition of the differential amount which assessee has claimed that the scrap remained with the job workers. When the assessee has produced all the relevant documentary evidence in support of the claim and also filed an application under Rule 46A of Income Tax Rules with the CIT(A) then rejecting the said application by the ld. CIT(A) only on the ground that the assessee has not produced the said evidence before the AO despite sufficient opportunities is not justified particularly when all the material was forwarded to the AO alongwith written submissions for the remand report. Once the AO was asked to submit the remand report then the evidence produced by the assessee was also required to be examined by the AO. In the case in hand, the AO has not submitted any remand report as pointed out by ld. CIT(A) while passing the impugned order. Therefore, non-furnishing of remand report cannot taken against the assessee rather it is a ground for taking adverse inference that the evidence produced by the assessee is not disputed by the AO. Accordingly, in view of the above facts and circumstances of the case, we set aside the orders of the authorities below qua this issue and consequently the addition made by the AO on account of unaccounted scrap sale is deleted. Disallowance u/s 14A - HELD THAT - It is clear from the details given by the AO that during the year under consideration there is a substantial reduction in the investment in the shares. There is a sale of shares of more than ₹ 2.00 crores during the year and therefore, it is clear that the source of investment made during the year is sale proceeds of the existing investment in the shares. Assessee has sold the shares of Oil India Ltd. and purchased the shares of ONGC. The sale proceeds of shares of Oil India Ltd are much more than the investment in shares of ONGC. Further as per funds available with the assessee, it is clear that assessee's own funds are many times more than the investment in shares. Therefore, in these undisputed facts, no disallowance is called for on account of interest expenditure. As regards the disallowance of indirect administrative expenditure, we find that there is churning in the investment portfolio during the year under consideration as the assessee has sold the shares of Oil India Ltd. and purchased the shares of ONGC. Therefore, there is a process of decision making at the highest level of management of the assessee for selling the shares of Oil India Ltd. and purchase of shares of ONGC. Hence the disallowance on account of indirect administrative expenditure being 5% of average investment is justified. Accordingly, the addition made by the AO u/s 14A is sustained to the extent of ₹ 1,07,094/-.

Summary

Issues Involved:
1. Non-admission of additional evidence by CIT(A).
2. Confirmation of addition on account of alleged undisclosed sale of scrap.
3. Confirmation of addition under Section 14A of the Income Tax Act for investments in shares and mutual funds.

Detailed Analysis:

Issue 1: Non-admission of Additional Evidence by CIT(A)
The assessee contested that the CIT(A) erred in not admitting additional evidence without considering the circumstances for filing the same. The assessee argued that the additional evidence was necessary to respond to the reasons given by the AO for making the addition, which was never raised during the assessment proceeding. The CIT(A) forwarded the written submission to the AO for a remand report, which was not submitted by the AO. The Tribunal found that rejecting the application for additional evidence under Rule 46A of Income Tax Rules was unjustified, especially when the AO was asked to submit a remand report but failed to do so. The Tribunal concluded that the non-furnishing of the remand report could not be held against the assessee and set aside the orders of the authorities below, deleting the addition made by the AO on account of unaccounted scrap sale.

Issue 2: Confirmation of Addition on Account of Alleged Undisclosed Sale of Scrap
The AO noted a discrepancy between the sale of scrap shown in the RG-1 stock register and the books of accounts, leading to an addition of ?1,66,18,640/- for alleged undisclosed sales. The assessee explained that the scrap generated during production by job workers remained with them and was accounted for in their books, which was a consistent practice. The Tribunal observed that the assessee provided sufficient documentary evidence, including confirmations and affidavits from job workers, showing that the scrap remained with them and was sold by them. The Tribunal referenced a similar issue in the assessee's case for the Assessment Year 2009-10, where the Tribunal and the Rajasthan High Court ruled in favor of the assessee. The Tribunal found that the AO's addition was not justified and deleted the addition.

Issue 3: Confirmation of Addition under Section 14A of the Income Tax Act
The AO made a disallowance under Section 14A on account of interest expenditure and indirect administrative expenditure, totaling ?2,74,358/-. The assessee argued that it had sufficient interest-free funds for investment and had not incurred any expenditure for earning exempt income. The Tribunal noted a substantial reduction in investment during the year and found that the source of new investments was the sale proceeds of existing investments. The Tribunal concluded that no disallowance was warranted for interest expenditure as the assessee's own funds were more than sufficient for the investments. However, the Tribunal upheld the disallowance of ?1,07,094/- for indirect administrative expenditure, considering the decision-making process involved in churning the investment portfolio.

Conclusion:
The appeal was partly allowed. The Tribunal deleted the addition made by the AO on account of unaccounted scrap sale and upheld the disallowance of indirect administrative expenditure under Section 14A to the extent of ?1,07,094/-.