2016 (9) TMI 646 - AT - Income Tax

Appeal Outcome: Sales tax disallowance dismissed, interest to NBFCs under review, section 68 addition deleted, trading addition partially allowed.

M/s. Elcon Drugs and Formulations Ltd. Versus The Income Tax Officer, Ward 4 (2), Jaipur.

The appeal involved challenges regarding the disallowance of sales tax demand, interest paid to NBFCs, addition of amounts under section 68 of the IT Act, ... Non-deduction of tax in respect of interest paid to non-banking finance companies - Held that:- Since there are conflicting views of the Hon’ble High Courts, therefore, the view favourable to the assessee is being adopted by respectfully following the judgment of the Hon’ble Supreme Court in the case of CIT vs. Vegetable Products Ltd (1973 (1) TMI 1 - SUPREME Court ). The fact whether the amount was outstanding requires verification at the end of the AO hence the order of the ld. CIT (A) is set aside. The issue is restored to the file of the AO to verify whether any amount is payable on the last date of financial year in the balance sheet and in case he finds that no amount is payable on the last day of the financial year, he would delete the disallowance. Addition on trading advances - Held that:- We find that the advances are in the nature of trade advances. The AO has already rejected the books of account and made the addition on account of suppressed sales. The Hon’ble Jurisdictional High Court in the case of G.K. Contractor [2009 (1) TMI 840 - RAJASTHAN HIGH COURT] has held that when estimated profit is considered after rejecting assessee’s books of accounts by invoking the provisions of section 145(3) of the Act, no separate addition can be made even u/s 68 of the Act, even though the assessee has failed to discharge the onus of proof in explaining the amount shown in the books of accounts as ‘market outstanding’. Respectfully following the same, we direct the AO to delete the disallowance. Addition on sales estimation - Held that:- The assessee has not challenged rejection of books of accounts. The AO has made addition on the basis of the difference in sales. As per the material consumption, the AO estimated the sales at ₹ 1,56,09,536/- and as per books of accounts, the sales were reflected at ₹ 1,32,70,543/-. We find that there is no scientific reason for such estimation. The AO has not considered the past history. Therefore, after considering the totality of the facts and considering the past history of the assessee, we restrict the disallowance to the extent of ₹ 15,00,000/-. The AO is directed to restrict the addition to the extent of ₹ 15,00,000/-. This ground of the assessee is partly allowed. Issues Involved:1. Disallowance of sales tax demand2. Disallowance of interest paid to NBFCs3. Addition of amounts under section 68 of IT Act4. Rejection of books of accounts and trading additionIssue 1: Disallowance of Sales Tax DemandThe appeal contested the disallowance of a sum of Rs. 1,840 as sales tax demand by the ld. CIT (A). The assessee argued that the action was unjustified and against the facts of the case. However, the assessee later decided not to press this ground, leading to its dismissal.Issue 2: Disallowance of Interest Paid to NBFCsThe appeal challenged the disallowance of Rs. 4,36,455 for non-deduction of tax on interest paid to NBFCs under section 40(a)(ia) of the IT Act. The assessee contended that the entire expenditure was paid during the relevant year, with no outstanding amount at the year-end. The Tribunal noted conflicting views of High Courts on the issue and directed the AO to verify if any amount was payable at the end of the financial year, potentially leading to the deletion of the disallowance.Issue 3: Addition of Amounts under Section 68 of IT ActThe dispute involved the addition of Rs. 3,50,800 under section 68 for trading advances. The assessee argued that no evidence showed the money received belonged to them, especially since the AO had already rejected the books of accounts. Citing relevant case law, the Tribunal directed the AO to delete the disallowance.Issue 4: Rejection of Books of Accounts and Trading AdditionThe contention revolved around the rejection of books of accounts and a subsequent trading addition of Rs. 23,39,083 by estimating sales. The assessee argued that the addition was not justified, emphasizing the importance of considering past history. The Tribunal found the estimation lacking scientific reasoning and restricted the disallowance to Rs. 15,00,000, taking into account the past performance. Consequently, this ground of the assessee was partly allowed.In conclusion, the judgment addressed various issues related to the disallowance of sales tax demand, interest paid to NBFCs, addition of amounts under section 68, and rejection of books of accounts with a trading addition. The Tribunal provided detailed analysis and rulings on each issue, ensuring a comprehensive review of the facts and legal arguments presented by the parties involved.