2024 (9) TMI 338 - AT - Income Tax

Increase in cost of material consumed - increase in the cost of purchase and materials as compared to earlier year - HELD THAT - Increase in ratio of cost of material consumed, viz-a-viz, revenue has been stated to be on account of higher exchange rate, on which the assessee has purchased goods as compared to earlier years. For instance, average exchange rate of INR/USD prevailing during the earlier year, i.e., AY 2015-16 was INR 61 per USD. Materials amounting to Rs. USD 1000 were purchased with a total cost of Rs. 61,000/-. During the relevant assessment year 2016-17, the average exchange rate increased to Rs. 65.50 per USD, i.e., the cost of material amounting to USD 1000 was Rs. 65,500/-. This has to increase of 7% of actual increase. This fact has not been disputed at all and has been explained before the AO and CIT(A). It has also been further stated that overall profitability of the assessee has improved from (-) 3.45% to (-) 2.49% in this year. Once, the assessee has submitted the details of increase for manufacturing and other expenses, statements showing change in the forex rate, details of increase in ratio of expense, revenue in comparison with the preceding year and details on gross profit and net profit for the last three years, then without any such defect, addition cannot be made. Accordingly, we do not find any reason to deviate from the finding of the CIT(A) and the same is upheld. Consequently, ground no. 1 raised by the Revenue was dismissed. Disallowance on account of commission expenses - AO has made addition simply on the ground that there is 73% increase in commission expenses paid to the selling agents/dealers as against increase in revenue of 39.72%, accordingly, he has treated 33% of the commissions as excessive - HELD THAT - We are unable to appreciate the approach of the AO who made ad-hoc disallowance of commission simply on the basis that the increase in commission does not correspond with the increase of revenue. At least, he should have brought something on record to reject the explanation of the assessee as incorporated above. If the assessee has given the reason, as to why commission expenses are increased, then such an ad-hoc disallowance without finding any defect in such submissions, such ad-hoc disallowance cannot be made. Thus, the aforesaid finding of the CIT(A) without any proper adverse materials on record to show that the commission expenses incurred by the assessee were not genuine, such an addition cannot be sustained. Accordingly, order of learned CIT(A) deleting the addition is upheld. Ground no. 2 is dismissed. Disallowance u/s 40(a)(ia) - AO has made the disallowance assuming that payments have been made to the non-resident foreign exchange - assessee has already offered disallowance of 30% for non-deduction of tax in the return of income - HELD THAT - Once the commission has been paid to the resident payees which AO himself has misconstrued as if payment made to non- resident, apart from that, once the fact that the assessee has already made a disallowance of 30% in the computation of income, there was no reason for making any disallowance. Accordingly, order of learned CIT(A) is upheld. Ground raised by the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition on account of increase in cost of material consumed.
2. Deletion of addition on account of increase in commission expenses.
3. Deletion of disallowance of expenses on which TDS has not been deducted.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Increase in Cost of Material Consumed:

The Assessing Officer (AO) observed a significant increase in the cost of material consumed by the assessee, from Rs. 70,28,15,113/- to Rs. 1,06,08,91,844/- and made an addition of Rs. 7,88,64,219/- due to unexplained increase. The AO rejected the assessee's explanation that the increase was due to a rise in the forex rate and increased cost of material purchased, citing insufficient evidence. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, noting that the AO made the addition on an ad-hoc basis without proper factual verification and did not question the genuineness of the expenses. The CIT(A) emphasized that the AO did not provide an opportunity for the assessee to explain the increase and did not find any defect in the books of account. The Tribunal upheld the CIT(A)'s decision, stating that the AO did not find any discrepancies in the purchases or sales and that the increase in cost was due to higher exchange rates, which was not disputed.

2. Deletion of Addition on Account of Increase in Commission Expenses:

The AO made an ad-hoc disallowance of Rs. 3,54,58,395/- on account of commission expenses, citing a disproportionate increase in commission expenses compared to revenue. The AO did not find any defect in the details provided by the assessee. The CIT(A) deleted the addition, noting that the AO made the addition without proper justification and without issuing a show cause notice to the assessee. The CIT(A) found that the AO did not doubt the genuineness of the expenses and did not provide any material evidence to support the disallowance. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO should have provided a valid reason for rejecting the assessee's explanation and that an ad-hoc disallowance without finding any defect in the submissions was not justified.

3. Deletion of Disallowance of Expenses on Which TDS Has Not Been Deducted:

The AO made a disallowance of Rs. 1,07,33,756/- under section 40(a)(ia) of the Income-tax Act, assuming that the payments were made to non-residents. The CIT(A) deleted the addition, noting that the payments were made to resident payees and that the AO had misconstrued the facts. The CIT(A) also noted that the assessee had already made a disallowance of 30% in the computation of income. The Tribunal upheld the CIT(A)'s decision, stating that there was no reason for making any further disallowance since the payments were made to resident payees and the assessee had already made the necessary disallowance.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the additions and disallowances made by the AO. The Tribunal emphasized the need for proper factual verification and justification before making any additions or disallowances and criticized the AO for making ad-hoc disallowances without proper evidence or reasoning.