2023 (5) TMI 1091 - AT - Income Tax

Trading addition in Baddi unit - assessee maintained complete books of accounts as as rejected by the Ld. AO u/s 145(3) - HELD THAT - Tribunal in its order for AY 2003-04 held that the assessee had maintained complete books which were produced before the statutory auditors as well as the Ld. AO. Therefore, the books of account could not have been rejected u/S145(3). no decline in GP rate as compared to the immediately preceding year. No justifiable reason has been brought on record to apply NP ratio on declared sales in Baddi unit. The impugned addition has rightly been deleted by the Ld. CIT(A). We, therefore, reject this ground of the Revenue. Disallowance of expenses debited to P L account - expenses are not verifiable for want of bills, vouchers etc. - HELD THAT - The assessee has stated that month wise details of expenses were furnished before the Ld. AO duly supported with vouchers which were examined by him and no defect was pointed out. Books of account were produced along with supporting vouchers and CIT(A) test checked them and disagreed with the Ld. AO that the assessee failed to establish the genuineness of expenses incurred for business purposes. We agree with the view of the Ld. CIT(A) that disallowance made on ad-hoc basis is not justified and therefore decline to interfere and reject this ground of the Revenue. Disallowance made out of R D expenses - real utility of expenses incurred on R D for assessee's own business is not verifiable and the products of the other concerns are developed by incurring such expenses - HELD THAT - We do not agree. The nature of assessee's business is such that R D expenditure is a must without which business cannot be run. It is the responsibility of the R D department to ensure continuous development in the products. It also ensures the quality of raw material so that the products may not be harmful in any manner. Research work being of utmost necessity of the business of the assessee and there being no adverse material on record to substantiate that R D expenses were incurred for purposes other than assessee's business, we sustain the findings of the CIT(A) and reject this ground of the Revenue. Refund accrued out of excise duty paid - Revenue's case is that under the accrual system of accounting followed by the assessee, the excise duty refund sanctioned by excise department was required to be credited in P L account which the assessee did not do - HELD THAT - AO incorrectly interpreted that the said amount was refundable by excise department to the assessee and should have been shown as income which was not done. In fact, the assessee was not entitled to refund of excise duty paid on the amount of purchases (input) and the assessee asserted that no such amount has so far been received by the assessee. We concur with the finding of the Ld. CIT(A) that the claim of the assessee is bonafide. Since similar claim in the preceding year was allowed, we do not find any reason for the impugned addition which has rightly been directed by the Ld. CIT(A) to be deleted. Accordingly, we reject this ground of the Revenue. Disallowance of wastage of Ayurvedic products - HELD THAT - No addition on account of wastage was made in the preceding AY 2003-04 or in the succeeding AY 2005-06 though similar claim of wastage was made in those years also. For AY 2006-07 as well no such addition was made. Assessee explained that due to hot mixtures filled in the tubes, the tubes get leaked which were of no use and not saleable in the market. We agree with the Ld. CIT(A) that wastage in such a manufacturing unit is normal feature. The impugned addition is not sustainable. We uphold the findings of the Ld. CIT(A) and decide this ground against the Revenue. Proportionate Interest paid to Bank and other disallowance - AO disallowed the entire claim of interest paid by him which included interest paid on secured and unsecured loans - HELD THAT - CIT(A) found that the allegation of transfer of loan obtained from NEDFI to OPL was factually incorrect as no specific instance of diverting funds to OPL was brought on record by the Ld. AO. The Ld. AO made the impugned disallowance on ad-hoc basis which cannot be sustained. We endorse the findings of the Ld. CIT(A) and decide this ground against the Revenue. Unsecured loans - assessee failed to discharge his onus of proving the genuineness of the transaction and creditworthiness of the lende - HELD THAT - We concur with the finding of the Ld. CIT(A) that addition cannot be made for the unsecured credit balances brought forward. For the new unsecured loan obtained by the assessee, confirmation was brought on record. The creditor confirmed having advanced the loan; copy of ITR and bank statement was filed in support. The impugned addition is totally unjustified and the Ld. CIT(A) has rightly deleted the same. The Revenue's ground is rejected. Disallowance out of sundry creditors - CIT-A deleted the addition - HELD THAT - CIT(A) examined the ledger accounts of the creditors and found that in many of the accounts balances are being forwarded from the previous year. In independent inquiry made by the AO directly, no incriminating evidence could be brought on record. All the parties replied. As astonishing to notice that the entire sum of sundry creditors appearing in the balance sheet has been added without even examining the outstanding balance brought forward from the earlier year. None of the creditor denied the balance appearing in the ledger account in the books of the assessee. The ad-hoc addition is without any basis. Expenses not relating to business - AO noticed from the details of fixed assets that the assessee incurred an expenditure towards furniture provided at the residence of one Shri Dipak Singh at Guwahati - CIT-A deleted addition - HELD THAT - The impugned disallowance is totally unwarranted. The Ld. AO picked up the amount from addition made to assets. We agree with the Ld. CIT(A) that the amount spent towards purchase of asset for use in a remote area by an employee of the assessee cannot be disallowed as personal expense of the assessee. Decided against revenue. Undisclosed income from sale of closing stock of preceding year - HELD THAT - CIT(A) agreed with the contention of the assessee that after the new print of magazine, the old magazine has no value and refuted the view of the Ld. AO that the value of unsold stock not declared of the earlier year was having any value which was to be shown as closing stock - If the closing stock of the preceding year is considered as the opening stock of AY 2004-05, that would result in lowering of the income declared by the assessee. We agree with the reasoning given by the Ld. CIT(A) and uphold his decision to delete the impugned addition and reject this ground of the Revenue. Deduction under section 80IB - AO Guwahati unit of the assessee is result of splitting of existing unit - HELD THAT - There is no dispute that the facts remain identical with those in the preceding AY 2003-04 and the issue of deduction claimed by the assessee under section 80IB of the Act is fully covered by the decision of the Tribunal for the AY 2003-04. CIT(A) directed the Ld. AO to allow deduction to the assessee under section 80IB of the Act in view of the facts, evidences found on record - we endorse his decision on the issue and decide this ground of the Revenue against it. Disallowance of various expenses - HELD THAT - CIT(A) observed that no disallowance can be made as the Ld. AO has failed to indicate any instances where the expenditure is proved to be either bogus and/or of non-business in nature - order-sheet notings nowhere suggested that AO specially called for books of account to be produced for verification of expenditure along with the supporting documents. Findings and observations of the Ld. CIT(A) that ad-hoc disallowance of expenditure is not sustainable confirmed - Decided against revenue. Disallowance of interest paid to banks - CIT-A deleted the addition - HELD THAT - As in the absence of direct nexus established by the Ld. AO between the money borrowed for the purpose of business and diversion thereof for giving interest free loan to sister concern, disallowance out of interest paid to bank and other concerns cannot be made. CIT(A) has rightly deleted the impugned ad-hoc disallowance.

Summary

Issues Involved:

1. Trading addition-profit from Baddi Unit
2. Disallowance of expenses debited to P&L account
3. Disallowance made out of R&D expenses
4. Refund accrued out of excise duty paid
5. Wastage
6. Proportionate interest paid to Bank and others disallowed
7. Unsecured loans
8. Disallowance out of sundry creditors
9. Expenses not relating to business
10. Undisclosed income from sale of closing stock of preceding year
11. Deduction under section 80IB of the Act

Summary:

Issue 1: Trading addition-profit from Baddi Unit

The AO invoked section 145(3) of the Act, rejecting the books of account due to discrepancies and applied a NP ratio of 7.67%. The CIT(A) deleted the addition, noting that the AO failed to substantiate claims of discrepancies or provide specific instances of unrecorded sales or expenses. The Tribunal upheld the CIT(A)'s decision, noting that the assessee maintained complete books and there was no decline in GP rate compared to the preceding year.

Issue 2: Disallowance of expenses debited to P&L account

The AO disallowed Rs. 28,81,913/- due to unverifiable expenses. The CIT(A) deleted the disallowance, observing that the assessee produced complete books and vouchers, which were examined with no defects found. The Tribunal agreed, noting that disallowance on an ad-hoc basis is not justified.

Issue 3: Disallowance made out of R&D expenses

The AO disallowed Rs. 40,62,606/- due to unverifiable R&D expenses. The CIT(A) deleted the disallowance, finding that the expenses were necessary for business and properly documented. The Tribunal upheld this, noting the necessity of R&D for the business and lack of evidence to the contrary.

Issue 4: Refund accrued out of excise duty paid

The AO added Rs. 42,81,469/- as excise duty refund. The CIT(A) deleted the addition, noting that the amount was not refundable and was correctly debited as manufacturing expenses. The Tribunal agreed, noting the AO's misinterpretation of facts.

Issue 5: Wastage

The AO added Rs. 13,43,584/- for wastage. The CIT(A) deleted the addition, noting that wastage was normal and properly recorded. The Tribunal upheld this, noting the consistency in treatment of wastage in previous years.

Issue 6: Proportionate interest paid to Bank and others disallowed

The AO disallowed Rs. 48,99,034/- for interest on loans allegedly diverted to a sister concern. The CIT(A) deleted the disallowance, noting no evidence of fund diversion. The Tribunal agreed, noting the ad-hoc nature of the disallowance.

Issue 7: Unsecured loans

The AO added Rs. 34,33,200/- for unsecured loans due to lack of verification. The CIT(A) deleted the addition, noting proper documentation and confirmations. The Tribunal upheld this, noting the unjustified nature of the addition.

Issue 8: Disallowance out of sundry creditors

The AO added Rs. 1,02,56,704/- for sundry creditors due to lack of verification. The CIT(A) deleted the addition, noting proper documentation and confirmations. The Tribunal agreed, noting the ad-hoc nature of the addition.

Issue 9: Expenses not relating to business

The AO disallowed Rs. 28,950/- for furniture expenses. The CIT(A) deleted the disallowance, noting the expense was for business purposes. The Tribunal upheld this, noting the unjustified nature of the disallowance.

Issue 10: Undisclosed income from sale of closing stock of preceding year

The AO added Rs. 11,70,847/- for undisclosed income from sale of closing stock. The CIT(A) deleted the addition, noting the lack of value for old magazines. The Tribunal agreed, noting the correct treatment of stock.

Issue 11: Deduction under section 80IB of the Act

The AO disallowed Rs. 1,21,84,143/- under section 80IB, citing non-fulfillment of conditions. The CIT(A) allowed the deduction, noting compliance with conditions and Tribunal's decision for AY 2003-04. The Tribunal upheld this, noting the consistency in facts and legal precedent.

Conclusion:

The Tribunal dismissed the Revenue's appeals for AY 2004-05, 2006-07, and 2009-10, upholding the CIT(A)'s decisions on all issues.