2018 (3) TMI 1625 - AT - Income Tax

Tribunal decision reduces GP rate adjustment, allows closing stock valuation claims, dismisses Revenue's appeal on disallowances.

Rajmal Lakhichand Jewellers Pvt. Ltd., Versus Jt. Commissioner of Income Tax, Range – 1, Jalgaon and Dy. Commissioner of Income Tax, Circle – 1, Jalgaon Versus Rajmal Lakhichand Jewellers Pvt. Ltd.

Rajmal Lakhichand Jewellers Pvt. Ltd., Versus Jt. Commissioner of Income Tax, Range – 1, Jalgaon and Dy. Commissioner of Income Tax, Circle – 1, Jalgaon ... Issues Involved:1. Disallowance under Section 40A(2)(a)2. Disallowance under Section 14A3. Addition on account of under-valuation of closing stock4. Disallowance of interest and depreciation on house property5. Disallowance of expenditure relating to Khar Flats6. Addition of Godown RentDetailed Analysis:1. Disallowance under Section 40A(2)(a):The Assessing Officer (AO) disallowed Rs. 8,15,19,070/- under Section 40A(2)(a) for purchases made from sister concerns at allegedly higher rates. The Commissioner of Income Tax (Appeals) [CIT(A)] rejected this disallowance and instead estimated a Gross Profit (GP) rate of 2.75% to cover deficiencies in transactions with sister concerns. The Tribunal noted that similar issues had been adjudicated in the case of the assessee's sister concern, M/s. Rajmal Lakhichand, where a GP rate of 1.20% was adopted. The Tribunal found the CIT(A)’s GP estimation of 2.75% to be on the higher side and adjusted it to 2.35%, leading to a partial allowance of the assessee's appeal and dismissal of the Revenue's appeal on this issue.2. Disallowance under Section 14A:The AO disallowed Rs. 9,24,259/- under Section 14A read with Rule 8D, arguing that the assessee diverted interest-bearing funds into shares of sister concerns to avoid taxes. The CIT(A) deleted this disallowance, referencing the Delhi High Court decision in Commissioner of Income Tax Vs. Holcim India Pvt. Ltd. and other cases. The Tribunal upheld the CIT(A)’s decision, noting that the assessee did not receive any exempt income from these investments during the relevant year, aligning with precedents that no disallowance under Section 14A is warranted in such cases.3. Addition on Account of Under-Valuation of Closing Stock:The AO added Rs. 54,87,702/- for under-valuation of closing stock, contending that the assessee should have used local Jalgaon rates instead of Bombay Bullion Association rates. The CIT(A) upheld this addition. However, the Tribunal found that the assessee consistently used Bombay Bullion Association rates in previous and subsequent years without objection from the AO. Thus, it set aside the CIT(A)'s findings and allowed the assessee's appeal on this ground.4. Disallowance of Interest and Depreciation on House Property:The AO disallowed interest and depreciation related to flats at Khar, Mumbai, arguing that the flats were in the names of directors, not the assessee. The CIT(A) upheld this disallowance. The Tribunal, referencing its earlier decisions, held that the flats were business assets used for business purposes, allowing the assessee to claim related expenses. Consequently, the Tribunal allowed the assessee's appeal on this issue.5. Disallowance of Expenditure Relating to Khar Flats:The AO disallowed Rs. 7,61,579/- in expenditures related to the Khar flats, which the CIT(A) upheld. The Tribunal, consistent with its findings on interest and depreciation for these flats, allowed the assessee's appeal, recognizing the flats as business assets.6. Addition of Godown Rent:The AO added Rs. 1,22,484/- as Godown Rent, which was not specifically addressed in the Tribunal's decision. However, given the overall context and consistent rulings in favor of the assessee on related issues, it can be inferred that this addition was not upheld.Conclusion:The Tribunal partly allowed the assessee's appeal, reducing the GP rate adjustment and allowing claims related to closing stock valuation, interest, depreciation, and expenditures on Khar flats. The Tribunal dismissed the Revenue's appeal, upholding the deletion of disallowances under Section 14A and rejecting the application of Section 40A(2)(a) for purchases from sister concerns.