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TMI Blog2016 (10) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... ct in the facts and circumstances of the case. 3.1. The brief facts of this issue is that the assessee is engaged in the business of manufacture of tyre, rubber machinery, bulk transporters, blowers, cement machinery etc. The ld AO observed that the assessee had claimed exempt income towards dividend of Rs. 32,09,476/- and was accordingly asked to explain as to why the disallowance u/s 14A should not be made as per Rule 8D of the Rules for expenses incurred in earning the income claimed as exempt from taxation. The assessee replied before the ld AO that it had made short term investments in mutual funds and the same were also sold out before the end of the previous year and accordingly there was neither opening balance nor closing balance of investments in the audited financial statements. The assessee taking strength from its financial statements submitted that the borrowed funds outstanding as on 31.3.2006 consists of deferred sales tax loans, which is interest free funds. Hence the assessee does not have any interest bearing funds, which could have been utilized for making investments. All the investments in mutual funds were made out of surplus funds lying in the current accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eleting the disallowance u/s. 14A entirely though there is provision in section 14A & 14A(3) to determine the amount of expenditure incurred in relation to the earning of exempt income, even if the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income." 3.2. The Ld DR argued that though initially the ld AO proceeded to invoke the provisions of Rule 8D , on hearing the submissions of the assessee sought to drop the same , but proceeded to make disallowance u/s 14A of the Act by taking into account the interest expenditure and disallowing the same on the proportion of exempt income to the total income. This was done in view of the fact that the provisions of section 14A of the Act were brought in the statute with retrospective effect from 1.4.1962. In response to this, the ld AR vehemently relied on the order of the ld CITA. 3.3. We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. We find that the ld AO had resorted to make disallowance u/s 14A of the Act on a notional basis b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount 28,79,386 14,39,693 1,44,381 44,63,460 35,17,809 2. Mangalam Cement Works 47,13,930 20,95,482 05.04.07 13.04.07 14.04.07 17.04.07 20.04.07 21.04.07 29.04.07 30.04.07 30.04.07 Total 14,11,362 19,06,056 19,77,682 84,02,407 90,11,277 16,39,858 6,08,870 85,48,535 6,05,217 2,91,11,264 2,86,39,334 3. ACC, Wadi 85,67,625 43,22,302 20.04.07 24.04.07 30.04.07 30.04.07 30.04.07 30.04.07 30.04.07 Total 10,79,770 39,59,155 89,86,083 32,960 13,497 20,58,491 81,000 1,62,10,956 TOTAL 76,43,331 3,93,00,474 The ld AO observed that on perusal of the above, it transpired that the assessee company has shown manufacturing goods much more than the value of closing work-in-progress shown as at 31.03.2007. In this context, he further observed that the assessee manufactured various items such as bulker tanks, transit mixer, blower, casti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee. 4.2. The assessee submitted before the ld CITA that on receipt of the information requisitioned on 9.12.2009, the ld AO required the assessee to furnish information with regard to invoices raised on the customers in April 2007, whose orders were under execution on March 31, 2007. The said statement was also submitted subsequent to 9.12.2009. On receipt of the said information, the ld AO then required the assessee to reconcile the value of closing WIP with the total cost incurred on executions of the orders leading to sales executed in April, 07. At this stage the assessee requested the ld AO to grant sufficient time to furnish the required information because the relevant information was to be obtained from Nagpur where the stock records were maintained. The ld AO however, expressed his inability to grant time as assessment was getting barred by limitation on December 31, 2009. In the circumstances, when the ld AO was not granting sufficient time to furnish the evidences in support of its working, the AR expressed his inability to furnish the required information in the prescribed format. The impugned order was passed on 18.12.2009. The assessee submits that it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of WIP was made by considering the difference of Rs. 3,98,00,474/- only. The AO considered the difference of Rs. 3,98,00,474/- as the correct value of the WIP. From this amount, he reduced the gross profit amounting to Rs. 1,27,361/- which was calculated by him by adopting the GP rate at 0.32%. Thereafter, the AO arrived on the value of WIP at Rs. 3,96,73,113/- i.e. (Rs.3,98,00,474 - Rs. 1,27,361). Since, the appellant had disclosed the value of WIP at Rs. 2,28,16,020/-, he made addition of differential amount of Rs. 1,68,57,093/- i.e. (Rs.3,96,73,l13 - Rs. 2,28,16,020). However, in the course of appellate proceedings as well as the remand proceedings, the appellant proved that not only there was arithmetical mistake of Rs. 42,42,000/- in working out the difference as mentioned above, but there was also mistake in the GP rate adopted by the AO to make the addition. The correct GP rate as per the audited accounts was 32% and not 0.32% as adopted by the AO. If the aforesaid mistakes are taken into account then even on the basis of opinion formed by the AO and methodology adopted by him, the addition should have been of Rs. 13,63,742/- only whereas he made addition of Rs. 1,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any costs or without consuming any further materials. However, before drawing such inference the AO did not bring on record any material on the basis of which he could hold that in April, 2007 either the appellant did not carry on manufacturing or processing of the WIP or that no- further materials were consumed and the material as in its existing state as on 31.03.2007, itself got sold. From the details of sales effected as set out in the order, it is observed that the sales to 3 parties were effected mostly in the 3rd & 4th week of April 2007. In the circumstances, apparently it could not be held by the AO that by 31.03.2007 itself the production of the machines was complete and the appellant had no obligation to incur further expenses or that the appellant did not further consume materials for production of the machineries till its dispatch. On the contrary, the appellant placed on record documentary evidences which showed that even after 31.03.2007 the appellant continued with manufacturing process of these machines and for that purpose raw-materials were issued for production. Besides the appellant also incurred production over-heads to complete the manufacture of machine. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin which the appellant actually disclosed in the audited accounts for AY 2007-08 was 31.52%. The appellant in its submissions had given comparative working of the gross profit margin which it earned on sale of machines to Mangalam Cement Works, ACC Wadi and Birla Tyres. In its working of gross profit margin the appellant took into account the value of WIP as on 31.03.2007, cost of materials consumed post 31.03.2007; over-heads incurred in April 2007 and the basic invoice value of goods sold. From the comparative figures made available by the appellant, it appeared that the net invoice value of machines supplied to 3 parties, amounted to Rs. 5,59,48,965/- whereas the total cost of production in relation thereto was Rs. 3,63,21,256/-; giving gross profit margin of Rs.l,96,21,710/-. In percentage terms; gross profit which the assessee disclosed worked out to 35.07%. In the remand report the AO admitted that since the WIP as on 31.03.2007 was sold by the assessee in FY 2007-08 the appropriate gross profit rate that needed to be considered in arriving at the value of WIP was G.P. rate for the FY 2007-08 which as per assessment records for AY 2008-09 was 36%. The G.P. rate disclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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