2015 (3) TMI 927 - AT - Income Tax

Appeal Outcome: CENVAT Credit Upheld, ESIC Disallowance Reversed, Section 14A Remanded

The Tribunal partly allowed the Revenue's appeal and partly allowed the Assessee's cross-objection. Key outcomes included upholding the deletion of CENVAT ... Inclusion of CENVAT credit for valuing the closing stock - CIT(A) deleted the addition - Held that:- CIT(A) while deleting the addition has noted that if adjustment on account of CENVAT credit is made to the closing stock then corresponding adjustment will have to be made to the opening stock, purchases and sales and on the basis of statement annexed to the tax audit report, he has given a finding that there would be no impact on the final profit. CIT(A) has further relied on the decisions in the case of Bharat Bijlee vs. ACIT [2011 (3) TMI 1012 - ITAT MUMBAI] and Ashwin Shah vs. ACIT [2009 (12) TMI 708 - ITAT AHMEDABAD]. Before us, Revenue has not brought any material on record to controvert the findings of the CIT(A) nor has brought any contrary binding decision in its support. We therefore find no reason to interfere with the order of CIT(A) - Decided against revenue. Disallowance of employee’s contribution to ESIC - CIT(A) deleted disallowance - Held that:- In view of the undisputed fact that the Employees share of contribution of ESIC was paid after the prescribed due date, and following the decision of Hon'ble Gujarat High Court in the case of Gujarat State Road Transport Corporation (2014 (1) TMI 502 - GUJARAT HIGH COURT), and in the absence of any contrary binding decision, we are of the view that the AO was justified in disallowing the belated payments - Decided in favour of revenue. Disallowance made u/s. 14A r.w.r. 8D - Held that:- Considering the fact that the Assessee has stated that investments have been made in earlier years and the disallowance u/s. 14A is in excess of the tax free income. We therefore set aside the issue to the file of AO to re-examine the issue as relying on Joint Investments Pvt Ltd Versus Commissioner of Income Tax [2015 (3) TMI 155 - DELHI HIGH COURT] and thereafter decide the issue in accordance with law and after giving reasonable opportunity of hearing to the assessee. - Decided in favour of assessee for statistical purposes. Disallowance of travelling expenses - AO while disallowing the expenses has noted that the expenses were incurred on account of trip by cruise ship by director and his family. The aforesaid finding of AO has not been contorverted by ld. A.R. We find that CIT(A) while restricting the addition has noted that AO while disallowing the expenses had not even mentioned the countries visited by the directors nor had analyzed the expenses. At the same time, he also noted that assessee has failed to establish that the entire expenditure was wholly and exclusively incurred for the purpose of business - Held that:- Before us, ld AR has submitted that the disallowance in the year under consideration is on a higher side and be restricted to 25% as made by AO in subsequent years. On perusing the orders passed by AO u/s. 143(3) of subsequent years, we find that the issue of trip by cruise was not in those years and therefore we do not find force in the submission of ld. AR to restrict the disallowance at 25%. It is also a fact that against the partial relief given by ld. CIT(A), Revenue is not in appeal. Before us, Ld. AR has not brought any material to controvert the findings of CIT(A) and therefore we find no reason to interfere with his order and thus this ground is dismissed. - Decided against assessee. Issues Involved:1. Non-inclusion of CENVAT credit for valuing the closing stock.2. Disallowance of employee's contribution to ESIC.3. Disallowance made under Section 14A.4. Disallowance of medical expenses.5. Disallowance of travelling expenses.Detailed Analysis:1. Non-inclusion of CENVAT credit for valuing the closing stock:The Assessee did not include CENVAT credit in the valuation of closing stock, following an exclusive method of accounting for excise duty. The AO added Rs. 21,67,494/- to the income, which was deleted by CIT(A). CIT(A) reasoned that Section 145A does not necessitate adding CENVAT credit to the closing stock and that there would be no impact on profit irrespective of the accounting method. CIT(A) also noted that adjustments should be made to opening stock, purchases, and sales, which the AO did not do. The Tribunal upheld CIT(A)'s decision, noting that the Revenue did not provide contrary evidence.2. Disallowance of employee's contribution to ESIC:The AO disallowed Rs. 2,326/- for late deposit of employee's ESIC contributions, citing Section 2(24)(x). CIT(A) deleted the disallowance, referencing various decisions. However, the Tribunal reversed CIT(A)'s decision, citing the Gujarat High Court's ruling in Gujarat State Road Transport Corporation, which mandates disallowance for late deposits as per Section 36(1)(va).3. Disallowance made under Section 14A:The AO disallowed Rs. 1,39,240/- under Section 14A, following Rule 8D, despite the Assessee's claim of no borrowed funds used for investments. CIT(A) upheld the AO's decision. The Tribunal noted the Assessee's failure to demonstrate the availability of interest-free funds at the time of investment and cited the Calcutta High Court's decision in Dhanuka and Sons. The Tribunal also referenced the Delhi High Court's decision in Joint Investment Pvt. Ltd., which highlighted that disallowance should not exceed the tax-exempt income. The Tribunal remanded the issue to the AO for re-examination.4. Disallowance of medical expenses:CIT(A) confirmed the AO's disallowance of Rs. 2,33,994/- for medical expenses, deeming them not wholly and exclusively for business purposes. The Assessee did not press this ground during the Tribunal hearing, leading to its dismissal.5. Disallowance of travelling expenses:The AO disallowed Rs. 5,25,743/- for travel expenses deemed personal, incurred by the director and his family. CIT(A) reduced the disallowance to Rs. 3,68,020/-, acknowledging the potential business purpose but noting the Assessee's failure to quantify benefits. The Tribunal upheld CIT(A)'s decision, rejecting the Assessee's request to limit disallowance to 25% as done in subsequent years, due to lack of comparable circumstances.Conclusion:The Tribunal partly allowed the Revenue's appeal and partly allowed the Assessee's cross-objection for statistical purposes. The key rulings included upholding CIT(A)'s deletion of the CENVAT credit addition, reversing the deletion of ESIC disallowance, remanding the Section 14A disallowance for re-examination, dismissing the medical expense disallowance, and upholding the partial disallowance of travel expenses.