2022 (1) TMI 705 - AT - Income Tax

Disallowance u/s 41(1) - bogus sundry creditors - HELD THAT - From the perusal of the orders of the lower authorities, it would be clear that on account of failure of the assessee to produce the confirmations from the said parties, addition was made. We need not delve into the aspect whether mere non-production of confirmation from the sundry creditors entails the addition or not as both sides had agreed to remand the matter to the file of the Assessing Officer for the purpose of verification of fact whether or not the payments were made to the sundry creditors in subsequent period through banking channels. Once, it is found that the sundry creditors were paid in subsequent year it would undoubtedly establish the genuineness nature of the sundry creditors. Therefore, this ground of appeal no.5 is remanded to the file of the Assessing Officer with a direction to verify the evidence of payment made to the sundry creditors in subsequent year, if found so, not to make any addition as bogus credits in the present assessment year. As a result, this ground of appeal no.5 raised by the is partly allowed for statistical purposes. Ad-hoc disallowance of 30% of the labour charges - Addition made doubting the genuineness of the expenditure - it is a case of the Assessing Officer that the labour payments are subject to provisions of TDS. For non-compliance of TDS provisions, made the disallowance u/s 40(a)(ia) of the Act and also invoked section 40A(3) - CIT-A reasoning of the Assessing Officer was turned down by the ld. CIT(A) by holding that the provisions of section 40A(3) have no application since no single payment exceeded ₹ 20,000/- in single day. Further, the ld. CIT(A) also ruled out the applicability of the provisions of section 40(a)(ia) - HELD THAT - In the present case, nothing is discernable from the perusal of the order of the ld. CIT(A) that the ld. CIT(A) had made an attempt to test the reality of the expenditure. Nor can be it said that he doubted the reality of the expenditure, it cannot be also said that the total labour charges incurred is excessive or unreasonable having regard to the fact that tender documents computed 30% of the contract value as a labour component and the actual charges only 33% of the contract value which is merely 10% excess. Thus, in any event, it cannot be said that the labour charges incurred are excessive or unreasonable. Therefore, the decision of the ld. CIT(A) making the ad-hoc disallowance of labour charges at 30% cannot be sustained in the eyes of law. Accordingly, this ground of appeal no.6 stands allowed. TDS u/s 194C - Addition of blasting charges u/s 40(a)(ia) - HELD THAT - We remit this ground of appeal to the file of the Assessing Officer to examine the applicability of second proviso to section 40(a)(ia) after due verification of the evidence. Thus, this ground of appea stands partly allowed for statistical purposes. Disallowance of interest u/s 36(1)((iii) towards proportionate interest cost attributable to interest free advance given to sister concern - HELD THAT - Law is settled to the extent when the mixed funds is used for the purpose of making the advance to sister concern on which no interest was charged, presumption should be drawn that interest free loan was made out of the free reserves. In such circumstances, no disallowance u/s 36(1)(iii) is required to be made. This proposition of law laid down initially by the Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein it has been held that in a situation where the assessee has mixed funds partly of interest free funds and partly interest bearing funds, presumption is to be drawn that investments or interest free loan is made out of the own funds and this decision of of Reliance Utilities Power Ltd. (supra) was affirmed by the Hon ble Supreme Court in the case of CIT vs. Reliance Industries Ltd., 2019 (1) TMI 757 - SUPREME COURT wherein it is held that presumption is drawn that the interest free loan is made out of own funds, the question of disallowance of proportionate interest of loans advanced to sister concern does not arise. The order of the ld. CIT(A) is based on proper appreciation of fact and law as laid down by the Hon ble Supreme Court (supra). Therefore, we do not find any reason to interfere with the order of the ld. CIT(A). Rejection of books of accounts - gross fall in the net profit rate for the current assessment year as compared to preceding year - HELD THAT - In the present case, the Assessing Officer considered it fit to estimate 8% of net of depreciation and interest without there being anything on record. This is nothing but a complete guess work without referring to any material on record for arriving at the same. For above reasons, we are of the considered opinion that the ld. CIT(A) is justified in holding that the rejection of book results is not just and proper. Accordingly, the ground of appeal no.1 raised by the Revenue stands dismissed. Addition towards negative stock of coal - assessee has made unaccounted purchase of coal on some dates and made addition of unexplained investment - CIT(A) accepted the alternative submissions of the assessee that if it is assumed that 1280 MT was purchased on 23.11.2011 and question of negative stock of 1070 MT would not arise on 23.11.2011 and addition, if any, is warranted out in respect of out of ₹ 40,96,000/- and in view of the fact that the additions made on account of labour charges can be telescoped against the addition of unexplained investment in purchase of stock then a question of addition does not arise - HELD THAT - From the order of the ld. CIT(A), it appears that the ld. CIT(A) had considered the additional evidence without giving an opportunity of being heard to the Assessing Officer. Therefore, this issue is remanding to the file of the Assessing Officer for fresh consideration in accordance with law. Thus, this ground of appeal no.3 raised by the Revenue is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of interest over loan given to sister concern.
2. Disallowance of labor charges under Section 40(a)(ia).
3. Disallowance under Section 41(1) for alleged bogus sundry creditors.
4. Rejection of book results and estimation of net profit.
5. Disallowance of blasting charges under Section 40(a)(ia).
6. Disallowance of interest on interest-free loans to sister concerns.
7. Addition for negative stock of coal.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Over Loan Given to Sister Concern:
The Assessing Officer (AO) disallowed interest of ?1,90,56,762 under Section 36(1)(iii) attributable to interest-free advances to a sister concern. The Commissioner of Income Tax (Appeals) [CIT(A)] granted relief, noting that interest-free funds exceeded borrowed funds, relying on the decision in CIT vs. Reliance Utilities & Power Ltd. The Tribunal upheld the CIT(A)'s decision, citing that the assessee's own funds were sufficient to cover the advances, thus no disallowance was warranted.

2. Disallowance of Labor Charges Under Section 40(a)(ia):
The AO disallowed ?15,16,16,600 in labor charges under Section 40(a)(ia) for non-compliance with TDS provisions. The CIT(A) found that payments were made in cash to laborers through group leaders, with individual payments not exceeding ?20,000 per day, thus Section 40(a)(ia) and Section 40A(3) were not applicable. However, the CIT(A) disallowed 30% of labor charges due to the failure to produce laborers for verification and inadequate vouchers. The Tribunal ruled that the ad-hoc disallowance was not justified as the genuineness of expenses was accepted, and the practice of self-made vouchers was common in the industry.

3. Disallowance Under Section 41(1) for Alleged Bogus Sundry Creditors:
The AO added ?94,59,495 under Section 41(1) for bogus sundry creditors due to non-submission of confirmations. The CIT(A) confirmed the addition. The Tribunal remanded the issue to the AO to verify the subsequent repayment of sundry creditors through banking channels, directing that if payments were verified, no addition should be made.

4. Rejection of Book Results and Estimation of Net Profit:
The AO rejected the book results due to a fall in net profit and lack of stock and wage registers, estimating net profit at 8% of gross receipts. The CIT(A) held that rejection was not justified, directing a 30% disallowance of labor charges instead. The Tribunal upheld the CIT(A)'s decision, noting that mere fall in net profit does not justify rejection of book results, and the AO's estimation was arbitrary without material evidence.

5. Disallowance of Blasting Charges Under Section 40(a)(ia):
The AO disallowed ?40,20,100 in blasting charges for non-deduction of TDS under Section 194C. The CIT(A) confirmed the addition. The Tribunal remanded the issue to the AO to verify if the payee had offered the receipt to tax, applying the second proviso to Section 40(a)(ia).

6. Disallowance of Interest on Interest-Free Loans to Sister Concerns:
The AO disallowed interest on loans to sister concerns, assuming they were given from borrowed funds. The CIT(A) found that the assessee’s own funds exceeded the advances, relying on CIT vs. Reliance Utilities & Power Ltd. The Tribunal upheld the CIT(A)'s decision, affirming that interest-free loans were presumed to be made from own funds.

7. Addition for Negative Stock of Coal:
The AO added ?75,30,700 for negative stock of coal, assuming unaccounted purchases. The CIT(A) accepted the explanation of typographical errors and deleted the addition. The Tribunal remanded the issue to the AO for fresh consideration, noting that the CIT(A) considered additional evidence without giving the AO an opportunity to respond.

Conclusion:
The Tribunal provided detailed directions for each issue, often remanding matters for further verification or rejecting arbitrary disallowances by the AO. The Tribunal emphasized the need for proper verification and adherence to legal principles, particularly regarding the use of own funds versus borrowed funds, and the genuineness of business expenses.