2021 (11) TMI 41 - AT - Income Tax

Addition of profits on account of circular transaction - assessee has made purchases and sales from one M/s. Balaji Electronics Pvt. Ltd. and at the end of the year the amounts of purchases and the amounts of sales made from this party is almost equal - AO was of the view that in the sale and purchase bill shown the description of the material only as electronic goods and the manner of the creation of the circular activity is also doubtful - HELD THAT - Assessing Officer could not show any legal bar of making purchases and sales from the same party. Further Balaji Electronics Pvt. Ltd. in response to notice under Section 133(6) of the Act has confirmed the transactions. Further, for assessment year 1998-99 it is shown that the assessee accepted the GP ratio of 1.09% only for the reason that in that case the transaction with the circular trading parties resulted into profit of just 0.53%. In the present case, the Assessing Officer has made a profit of 1.5% whereas the assessee has itself shown the profit of 2.28%. Therefore, the estimate of the profit made by the Assessing Officer is far less than the income of such circular income disclosed by the assessee. In view of this, we do not find any reason to disturb the order of the ld. CIT (Appeals). Accordingly, the order of the ld. CIT (Appeals) deleting the addition confirmed. Disallowance of deduction u/s 80IB - deduction with respect to its software unit at Goa - HELD THAT - As survey team took the action one year after the operations stopped at those units where the software was manufactured/developed. The signatory to the Excise record of the assessee was the same employee whose statement was used by the assessing officer. It is also a fact that the deduction under those sections were already allowed to the assessee u/s 143 (3) of the income tax act by the learned assessing officer after completely examining all these details. In view of this, we do not find any reason to interfere with the order of the learned CIT A deleting disallowance made by ld AO u/s 80IB of the act. No evidences were produced before us that there was no manufacturing facility available at those plants, the details submitted by the assessee with respect to the manpower available at those units was also not denied, the learned assessing officer has also categorically accepted after verification of the excise records that it matched with the books of accounts of the assessee and there is a production according to those records. In view of these overwhelming evidences, we confirm the order of the learned CIT appeal and dismiss ground number 2 of the appeal of the AO. Disallowance of expenditure on research and element expenditure - AO made the disallowance for the reason that according to him there was no research and development facility existing at Solan - HELD THAT - Assessee has shown the correspondence exchanged between the appellant and Department of science and technology government of India and further there is an evidence in the form of meeting with the Ministry of science on the projects undertaken by the appellant in the minutes of the meetings cannot be said to be merely a paperwork and general research. In fact the assessee is also having recognition letter from the Ministry of science with respect to the research and development activity of the assessee. In fact himself has allowed part of the expenditure therefore it cannot be said that there is no research and activities carried out by the assessee it may not be fruitful. However, for this reason disallowance of expenditure cannot be made. Further in the original assessment proceedings u/s 143 (3) of the act the learned assessing officer after proper examination has allowed the complete claim of these expenditure. It is not also the claim of the AO that these expenditure are found to be bogus and have not been at all incurred by the assessee. In view of this, we confirm the order of the learned CIT appeal in deleting the above disallowance. Disallowance of travelling expenditure - family members of the directors have travelled abroad with them and therefore all the visits of the family members cannot be attributed bullion exclusively for the purpose of business - unexplained foreign expenditure - HELD THAT - AO has failed to bring on record any specific instance of the company s fund being used in funding the tour of the family members of the directors. The disallowances also made on ad hoc basis. In the original assessment proceedings u/s 143 (3) of the act no such disallowances were made despite verification of the complete details at the time. In absence of any definite finding by the learned assessing officer, naturally the disallowance made by the learned assessing officer is merely on conjectures and surmises which cannot be upheld and rightly deleted by the learned CIT A . Addition of advances given to the subsidiary company as written off by the assessee - HELD THAT - Subsidiary company was engaged in the business of paging services and the loan and advances given to that company become not recoverable because of the usual losses suffered by that particular company. The fact was also noted that the entire capital of that particular subsidiary company was eroded by the accumulated losses by more than 2.5 times of itself capital. Thus, it was a bona fide decision of the assessee company to write of the above amount under the head of its finance business and claim it as a business loss. Merely because the subsidiary company has not shown the cessation of the liability, the claim of the assessee cannot be disallowed. CIT A after considering the various judicial pronouncements has allowed the claim of the assessee on both the above account. Before us, the revenue could not show that there were an incriminating evidences available with the revenue during the course of search with respect to the above claim of the assessee or the loss incurred by the assessee has not arise and during the course of the finance business of the assessee. Late deposit of employees contribution towards the respectively provident fund and ESIC account in view of the provisions of Section 2 (24) (x) read with Section 36 (1) (v) - HELD THAT - We uphold the order of the learned CIT A in deleting the disallowance of late payment of employee s contribution of provident fund according to the respective due dates prescribed Under the respective law but paid before the due date of filing of the return of income. Disallowance of expenses on ad hoc basis due to the non-production of the books of accounts - CIT-A deleted the disallowance - HELD THAT - Before us, the learned DR could not produce any material to show that the disallowance made by the learned assessing officer was based on any particular incident of or instances of expenditure debited by the assessee that are not incurred wholly and exclusively for the purposes of the business. Appeal of the learned assessing officer for assessment year 2004 05 wherein similar disallowances were made out of the total expenditure incurred by the assessee is deleted by us confirming the order of the learned CIT A. Adoption of the profit rate of 1.09% of circular trading transactions - assessee is aggrieved by the order of the learned CIT A wherein he has upheld the addition to the extent of ₹ one point to 09% of the profit. - HELD THAT - We e find that identical issue is involved in the appeal of the assessee for assessment year 2005 06 wherein we have confirmed the order of the learned and CIT A because of the reason that overall profit in circular trading transaction entered into by the assessee has resulted into loss. In earlier years in assessee s own case i.e. AYs 98 99 and 99 2000 the gross profit rate of one point to 09% on circular trading has been upheld by the learned CIT A not been challenged by the assessee before the higher forum. Therefore we find no reason to deviate from that order and accordingly we confirm the order of the learned and CIT A upholding the addition to the extent of profit at the rate of 1.09% on circular trading transactions entered into by the assessee. Thus, the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Profit on circular transactions
2. Disallowance of deduction under Section 80IB
3. Disallowance of expenditure on Research & Development
4. Disallowance of travelling expenses
5. Write-off of advances to group companies
6. Unverified expenditure
7. Late deposit of employees' contributions to PF and ESI

Issue-wise Detailed Analysis:

1. Profit on Circular Transactions:
The Assessing Officer (AO) added profits on circular transactions, estimating a 1.5% profit rate. The CIT(A) reduced this to 1.09%, referencing prior years where similar rates were accepted. The Tribunal upheld the CIT(A)’s decision, noting that the assessee disclosed higher profits than the AO’s estimates and confirmed transactions under Section 133(6) of the Act. The Tribunal found no legal bar on such transactions and confirmed the deletion of the addition.

2. Disallowance of Deduction under Section 80IB:
The AO disallowed the deduction, citing no manufacturing activities at Solan and Goa units based on employee statements and lack of infrastructure. The CIT(A) allowed the deduction, emphasizing excise records, sales to public sector undertakings, and the closure of units before the survey. The Tribunal upheld this, noting the AO's failure to consider excise records and other corroborative evidence, confirming the CIT(A)’s deletion of the disallowance.

3. Disallowance of Expenditure on Research & Development:
The AO disallowed part of the R&D expenditure, questioning the existence of the R&D facility. The CIT(A) allowed the expenditure, referencing the Gurgaon center not covered in the survey, and various correspondences and recognitions from the Ministry of Science. The Tribunal confirmed this, noting the AO's partial allowance of the expenditure and the absence of evidence against the R&D activities.

4. Disallowance of Travelling Expenses:
The AO disallowed ?5,00,000/- for alleged travel expenses of directors' family members. The CIT(A) deleted this, citing no specific instances or evidence from the AO. The Tribunal upheld this deletion, noting the ad-hoc nature of the disallowance and lack of concrete evidence.

5. Write-off of Advances to Group Companies:
The AO disallowed the write-off of advances to a subsidiary, citing the subsidiary’s non-recognition of the liability cessation. The CIT(A) allowed the write-off, emphasizing no incriminating search material and the bona fide business decision due to the subsidiary’s financial condition. The Tribunal upheld this, confirming the CIT(A)’s reasoning and the absence of contrary evidence.

6. Unverified Expenditure:
The AO made an ad-hoc disallowance of ?1.5 crores due to non-production of books. The CIT(A) deleted this, noting no such disallowance in previous assessments and the absence of incriminating evidence. The Tribunal confirmed this, highlighting the audited nature of the books and lack of specific defects pointed out by the AO.

7. Late Deposit of Employees' Contributions to PF and ESI:
The AO disallowed late deposits of PF and ESI contributions. The CIT(A) deleted this, directing the AO to verify if payments were made before the due date of filing returns, in line with judicial precedents. The Tribunal upheld this, referencing the Delhi High Court’s decision in Pro Interactive Services Pvt. Ltd., confirming the CIT(A)’s direction for verification.

Separate Judgments:
The Tribunal consistently upheld the CIT(A)’s decisions across multiple assessment years (2002-03 to 2008-09), confirming the deletion of various disallowances and additions made by the AO. The Tribunal emphasized the importance of corroborative evidence, proper verification, and adherence to judicial precedents in its judgments.