2022 (10) TMI 763 - AT - Income Tax

Disallowance u/s.14A r.w.r.8D - AR submitted has sufficient cash profits available with the assessee for making investment in shares - HELD THAT - We find substance in the claim of the Ld. AR that now when the assessee company had not received any exempt dividend income during the year under consideration, therefore, no disallowance u/s.14A of the Act was warranted in its case. Alternatively, there is substance in the claim of the Ld. AR that now when the interest free funds available with the assessee were in excess of the exempt income yielding investments, therefore, no disallowance of any part of the interest expenditure could have been made in its hands. Our aforesaid view that when interest free funds and interest-bearing funds are available, then, a presumption would arise that the interest free advances have been given out of interest free funds is supported by the judgment of the Hon ble Supreme Court in the case of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT Rejection of the books of accounts u/s.145(3) - GP estimation - CIT(Appeals) vacating the addition made by the A.O by substituting the yield of 85% in the SMS division of the assessee company, by that as was adopted by his predecessor i.e at 89% while framing the block assessment in the case of the assessee for A.Y. 2006- 07 to A.Y.2011-12 and A.Y.2012-13 - HELD THAT - As held by the CIT(Appeals) and, rightly so, the books of account of the assessee could not have been validly rejected by the A.O u/s.145(3) of the Act for the reason that the profit of the assessee had witnessed a decline as in comparison to the preceding years - We concur with the view taken by the CIT(Appeals) that now when no irregularity or defect had been pointed out by the A.O in the books of account of the assessee, bills and vouchers and other documentary evidences pertaining to the year under consideration, therefore, there was no justification for him to have rejected its books of account u/s.145(3) of the Act, for the standalone reason that its GP rate had witnessed a decline as in comparison to the preceding years. Also, as observed by the CIT(Appeals) and, rightly so, as the assessee company being an excisable unit was regularly filing its excise and VAT returns, therefore, rejection of its duly audited books of account without pointing out any defect or irregularity by the A.O does not merit acceptance. We are of the considered view that now when the adoption of yield in the SMS division at 89% by the A.O during the year under consideration i.e A.Y 2013-14 was in itself based on the view that was taken by his predecessor while framing the block assessment in its case for A.Y.2006-07 to A.Y.2011-12 and A.Y.2012-13, which had been vacated by the CIT(Appeals) and the same thereafter had been upheld by the Tribunal 2021 (11) TMI 708 - ITAT RAIPUR therefore, there remains no basis for sustaining the aforesaid view of the A.O during the year under consideration. CIT(Appeals), who in our considered view had rightly vacated the rejection of the books of accounts of the assessee by the A.O u/s.145(3) of the Act, as well as had rightly set-aside the adoption of yield in SMS division of the assessee company at 89% as against that disclosed by the assessee company on the basis of its duly audited books of accounts for the year under consideration at 85%. Thus, the Grounds of appeal No.(s) 1 2 raised by the revenue are dismissed.

Issues Involved
1. Incriminating seized material indicating unaccounted production by suppressing yield.
2. Deletion of addition of Rs. 3,64,59,167/- due to unreliable books of accounts.
3. Deletion of disallowance of Rs. 10,44,025/- under Section 14A r.w.r. 8D despite no tax-free income.
4. General right to amend or alter grounds of appeal.

Issue-wise Detailed Analysis

1. Incriminating Seized Material Indicating Unaccounted Production by Suppressing Yield

The department contended that the CIT(Appeals) erred in not appreciating the existence of incriminating seized material showing unaccounted production by suppressing yield in the SMS division. The A.O. observed that the assessee's yield percentage was 85%, lower than the 89% average yield adopted during the block period assessments for A.Ys. 2006-07 to 2012-13. The A.O. rejected the books of account under Section 145(3) due to this discrepancy. However, the CIT(Appeals) found that the A.O. did not point out any irregularity or defect in the books of accounts, bills, vouchers, and other records maintained by the assessee. The CIT(Appeals) held that the A.O.'s reliance on the 89% yield from previous assessments was unjustified as each year must be considered independently. The Tribunal concurred with the CIT(Appeals), noting that the A.O.'s adoption of the 89% yield was not based on any seized material establishing unaccounted production and sales.

2. Deletion of Addition of Rs. 3,64,59,167/- Due to Unreliable Books of Accounts

The A.O. made an addition of Rs. 3,64,59,167/- by adopting an 89% yield, rejecting the assessee's disclosed yield of 85%. The CIT(Appeals) vacated this addition, observing that the A.O. could not reject the books of account solely based on a decline in the GP rate without pointing out specific defects. The CIT(Appeals) noted multiple reasons for the decline in GP rate, including increased power costs and raw material prices, and a challenging phase in the iron and steel sector. The Tribunal upheld the CIT(Appeals)'s decision, emphasizing that the A.O. had no basis for adopting the 89% yield, especially since the same was vacated in previous assessments and upheld by the Tribunal in the case of a similarly placed group entity.

3. Deletion of Disallowance of Rs. 10,44,025/- Under Section 14A r.w.r. 8D Despite No Tax-Free Income

The A.O. disallowed Rs. 10,44,025/- under Section 14A r.w.r. 8D, arguing that the assessee had made substantial investments from interest-bearing funds. The CIT(Appeals) vacated this disallowance, observing that the assessee did not earn any exempt income during the year and had sufficient interest-free funds for the investments. The Tribunal agreed with the CIT(Appeals), citing the Supreme Court's judgment in CIT Vs. Chettinad Logistics Pvt. Ltd. and other precedents, holding that no disallowance under Section 14A is warranted in the absence of exempt income. The Tribunal also noted that the interest-free funds exceeded the investments, supporting the presumption that investments were made from interest-free funds.

4. General Right to Amend or Alter Grounds of Appeal

The appellant reserved the right to add, amend, or alter the grounds of appeal. However, this ground was dismissed as not pressed.

Conclusion

The Tribunal dismissed the revenue's appeal, upholding the CIT(Appeals)'s decisions on all grounds. The CIT(Appeals) correctly vacated the addition for suppressed yield and the disallowance under Section 14A, finding no defects in the assessee's books of account and noting the absence of exempt income, respectively. The Tribunal's decision was pronounced under rule 34(4) of the Appellate Tribunal Rules, 1963.

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