2020 (5) TMI 513 - AT - Income Tax

Rectification u/s 154 - addition being 20% of the bogus purchases - HELD THAT - AO as taken into consideration the material and the outcome of the enquiries received subsequent to conclusion of the assessment proceedings. It cannot be held that the action of the AO of rectifying the mistake do not emanate from the record of the AO available at the time of assessment. Ergo, it cannot be held to be a mistake apparent from the record rectifiable u/s 154. There are other provisions enshrined in the Act to bring the amounts to the tax fold which are based on the replies received for the queries raised during the assessment proceedings but such action cannot be resorted to under the provisions of Section 154. Hence, the action of the revenue is held to be legally void. As a result, the appeal of the revenue is dismissed. Capitalization of Repair Maintenance - Nature of expenses - revenue or capital expenses - HELD THAT - AO has given no reason for disallowance of ₹ 2,14,720/-. The bills have been short listed only an amount of ₹ 5,18,000/-. The short listed bills also consist of bills for repairs, replacement of parts, custom duty, flooring and plaster. Keeping in view the nature of the expenditure, it cannot be treated as capital expenditure. The repairs to machinery and replacement of membrane filters or expenses which are regularly incurred in the manufacturing process and cannot be treated as capital expenditure in nature. Hence, we decline to interfere with the order of the ld. CIT (A) on this issue. Regarding the disallowance which are related to these revenue expenditure which were disallowed by the Assessing Officer without bringing anything on record is also hence liable to be deleted. Disallowance on account of Coal purchases - The payments have not been disputed and there was no record of any amounts or kick back received from VCM to the assessee. Since, VCM and the assessee were not related concern as per the provisions of Income Tax Act, no passing of the profits could also be attributable. In the absence of any evidence as to non-supply of the material (coal) and in the absence of any evidence that the purported excess money paid has been received back by the assessee, the amount of addition made on the difference of the amount paid by the assessee to VCM and VCM to its suppliers cannot be brought to tax treated as unexplained expenditure as per the provisions of Section 69C. The appeal of the revenue on this ground is dismissed. Addition on account of Unverifiable purchases - Assessee has submitted the entire bills and the transport vouchers before the AO alongwith the details of the trucks. The bills of various companies from which the VCM procured the coal has also been submitted before the AO alongwith the weighmentslips. In the context of disallowance of 20% of purchases, we do not find any evidence gathered by the AO to resort to such action. As per the record, there is no reason to disallow mere 20% of the purchases, if the AO believes that the purchases were bogus. The action of AO without any evidences collected either by the way of enquiry of the movement of trucks or by brining on record any evidence regarding the non-purchase/receipt of the coal cannot be held to bevalid. Assessee has furnished al l the evidences regarding the placement of purchase order, contracts, purchases, transport and delivery of the coal from Mughalsarai (UP) to Bhiwadi (Raj.). Hence, the 20% disallowance on the said purchases made by the AO in the absence of any evidences contra brought on record cannot be upheld. The order of the ld. CIT (A) on this ground is hereby confirmed.- Appeals of the revenue are dismissed.

Summary

Issues Involved:
1. Scope of Section 154 for rectification of mistakes.
2. Capitalization of repair and maintenance expenses.
3. Disallowance of coal purchases under Section 69C.
4. Addition on account of unverifiable purchases.

Issue-Wise Detailed Analysis:

1. Scope of Section 154 for Rectification of Mistakes:

The primary issue was whether the Assessing Officer (AO) could rectify an assessment order under Section 154 by including additional information obtained post-assessment. The AO initially disallowed 20% of the purchases from M/s Vaibhav Coal Movers due to non-substantiation, later rectifying the order to disallow the entire purchase amount based on new bank statements. The CIT (A) deleted this addition, citing the AO's failure to provide an opportunity for the assessee to be heard, thus violating natural justice. The Tribunal upheld the CIT (A)'s decision, stating that the material considered by the AO was obtained after the assessment and did not constitute a "mistake apparent from the record" under Section 154. The Tribunal emphasized that Section 154 is not applicable for such rectifications and dismissed the revenue's appeal.

2. Capitalization of Repair and Maintenance Expenses:

The AO had capitalized certain repair and maintenance expenses, disallowing ?7,54,584/-. The CIT (A) deleted this disallowance, and the Tribunal upheld this decision. The Tribunal noted that the expenses included painting old machines, plastering, and replacing parts like Fuji filters, which are consumables in the production process. The Tribunal found no justification for treating these as capital expenses and confirmed that such repairs and replacements are regular manufacturing expenses, thus dismissing the revenue's appeal on this ground.

3. Disallowance of Coal Purchases under Section 69C:

The AO disallowed ?3,24,54,139/- under Section 69C, arguing that the assessee paid ?7,600/- per metric ton (PMT) for coal to M/s Vaibhav Coal Movers, which in turn bought it at ?4,000/- PMT. The AO suspected inflated purchases to reduce profits. However, the Tribunal found that the assessee had a valid contract with Vaibhav Coal Movers, including all associated costs like transportation and taxes. There was no evidence of non-supply of coal or any kickbacks received by the assessee. The Tribunal held that in the absence of evidence of non-supply or receipt of excess money by the assessee, the addition under Section 69C was unjustified and dismissed the revenue's appeal.

4. Addition on Account of Unverifiable Purchases:

The AO initially disallowed 20% of the purchases, amounting to ?87,95,051/-, due to non-compliance with notices issued under Section 133(6). This was later increased to the entire purchase amount of ?4,39,75,252/- under Section 154. The CIT (A) and Tribunal found this action beyond the scope of Section 154. The Tribunal further examined the 20% disallowance and found that the assessee had provided all necessary documentation, including bills, transport vouchers, and weighment slips. The AO had not gathered any evidence to justify the 20% disallowance. The Tribunal upheld the CIT (A)'s decision, confirming that the disallowance was baseless and dismissing the revenue's appeal.

Conclusion:

The Tribunal dismissed the revenue's appeals on all grounds, upholding the CIT (A)'s decisions. The key takeaways were the limitations of Section 154 for rectifications, the proper treatment of repair and maintenance expenses, the necessity of concrete evidence for disallowances under Section 69C, and the invalidity of arbitrary disallowances without supporting evidence.