2015 (11) TMI 1849 - AT - Income Tax

Tribunal dismisses Revenue's appeal, partially allows assessee's appeal, orders fresh examination of commission expenses.

The A.C.I.T., Circle 1 (1), Chandigarh Versus M/s Khandelia Oil & General Mills Pvt. Ltd.

The A.C.I.T., Circle 1 (1), Chandigarh Versus M/s Khandelia Oil & General Mills Pvt. Ltd. - TMI Issues Involved:1. Deletion of addition made on account of interest paid on unsecured loans under section 40A(2)(b).2. Deletion of addition made on account of diversion of funds to sister concerns under section 36(1)(iii) or 37.3. Deletion of addition made on account of suppression of sales.4. Disallowance made under section 14A.5. Treatment of disallowance of interest under section 36(1)(iii) as part of actual cost for depreciation purposes.6. Addition made on account of undervaluation of closing stock.7. Disallowance of commission expenses under section 37(1).Detailed Analysis:1. Addition of Interest Paid on Unsecured Loans under Section 40A(2)(b):The Assessing Officer (AO) disallowed Rs. 24,63,106/- from the interest paid on unsecured loans to related parties, arguing that the interest rate of 15% was excessive compared to the 10.5% rate for bank loans. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, accepting the assessee's argument that the unsecured loans were instantly available without the additional costs associated with bank loans. The Tribunal upheld the CIT(A)'s decision, noting that the 15% interest rate was reasonable given the 18% rate charged by the Market Committee and the higher rates typically associated with private loans.2. Addition on Account of Diversion of Funds to Sister Concerns:The AO disallowed Rs. 53,23,839/- as interest on debit balances of sister concerns, citing the judgment in CIT Vs. M/s Abhishek Industries Ltd. The CIT(A) deleted this addition, referencing a previous Tribunal decision in the assessee's favor for a similar issue in assessment year 2006-07. The Tribunal upheld the CIT(A)'s decision, noting that the transactions with sister concerns were in the course of business and the assessee had sufficient own funds.3. Addition on Account of Suppression of Sales:The AO added Rs. 3,09,55,904/- for alleged suppression of sales to sister concerns at lower rates. The CIT(A) deleted this addition, accepting the assessee's explanation that the sister concerns were in the highest tax bracket, negating any tax avoidance motive. The Tribunal upheld the CIT(A)'s decision, emphasizing that the department cannot compel an assessee to maximize profits and noting the lack of evidence for suppressed sales.4. Disallowance under Section 14A:The AO disallowed Rs. 1,58,424/- under section 14A for expenses related to exempt income, applying Rule 8D. The CIT(A) confirmed this disallowance. The Tribunal, however, deleted the disallowance, noting that the assessee had sufficient own funds for investments and the AO had not recorded any dissatisfaction with the assessee's expense estimation, as required by the jurisdictional High Court's ruling in CIT Vs. Deepak Mittal.5. Treatment of Disallowance of Interest under Section 36(1)(iii) as Part of Actual Cost:The assessee did not press this ground during the hearing, leading to its dismissal.6. Addition on Account of Undervaluation of Closing Stock:The AO added Rs. 61,53,868/- for undervaluation of closing stock, arguing that the assessee did not follow the FIFO method. The CIT(A) confirmed this addition. The Tribunal deleted the addition, stating that the FIFO method is not mandatory and the assessee had consistently followed an accepted accounting policy. The Tribunal also noted discrepancies in the AO's valuation method and found no error in the assessee's stock valuation.7. Disallowance of Commission Expenses under Section 37(1):The AO disallowed Rs. 18,72,420/- in commission expenses, questioning the services rendered and noting a lack of substantial sales in Delhi. The CIT(A) upheld the disallowance, not admitting the assessee's additional evidence. The Tribunal remanded the issue back to the CIT(A) for fresh consideration, allowing the assessee to present additional evidence.Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, directing a fresh examination of the commission expenses issue by the CIT(A).