2016 (10) TMI 717 - AT - Income Tax

Tribunal decision: Disallowance upheld, borrowed funds considered, under-valuation ruled in favor.

The Tribunal upheld the disallowance of commission payment to a sister concern, carriage inward expenses, port expenses, legal and professional charges, ... Disallowance under section 40(a)(ia) - tax deduction at source (TDS) applicability - reimbursement versus payment for services - remand for verification of deductee's tax compliance - disallowance under section 36(1)(iii) for interest on diverted funds - admission of additional evidence under Rule 46A - treatment of undervaluation of closing stock in audited books versus bank stock statementsDisallowance under section 40(a)(ia) - tax deduction at source (TDS) applicability - reimbursement versus payment for services - Validity of disallowance of commission paid to sister concern M/s Macleod Fuels Pvt. Ltd. - HELD THAT: - The Tribunal found that the assessee failed to establish the nature and specific services rendered by the payee. The Assessing Officer's finding that there was no evidence of services and that TDS was not correctly applied was upheld. Reliance was placed on precedent where the onus lies on the assessee to prove that payments were for genuine services. In absence of such proof, the disallowance confirmed by the CIT(A) was sustained. [Paras 8]Disallowance of the commission payment to M/s Macleod Fuels Pvt. Ltd. upheld; assessee's ground dismissed.Disallowance under section 40(a)(ia) - tax deduction at source (TDS) applicability - remand for verification of deductee's tax compliance - Disallowance of carriage inward expenses paid to Vikas Enterprises for failure to deduct TDS - HELD THAT: - The Tribunal noted the proviso to section 40(a)(ia) (as interpreted in CIT v. Ansal Land Mark Township) renders the payer not an assessee in default if the payee has disclosed the receipt and paid tax. In the interest of natural justice the Tribunal set aside the matter to the AO to verify whether the payee included the receipts in its return and paid tax; if so, disallowance shall not be made. The matter was therefore remitted for factual verification rather than finally adjudicated on merits. [Paras 12]Issue remitted to the AO for verification of whether the payee included the receipts in its return and paid tax; ground allowed for statistical purposes.Disallowance under section 40(a)(ia) - reimbursement versus payment for services - remand for verification of deductee's tax compliance - Disallowance of port expenses paid to M/s Bhatia International Ltd. on account of non-deduction of TDS - HELD THAT: - The Tribunal observed inconsistent pleas by the assessee (treating the amount as part of purchase before AO, as reimbursement before CIT(A), and seeking remand before the Tribunal). Applying the principle in Ansal Land Mark Township, the Tribunal set aside the issue to the AO to verify whether payees had disclosed receipts and paid tax; if so, disallowance under section 40(a)(ia) should not be made. The Tribunal did not decide the matter on merits but remitted it for factual verification. [Paras 17]Matter remitted to the AO for verification of payees' tax compliance; ground allowed for statistical purposes.Disallowance under section 40(a)(ia) - tax deduction at source (TDS) applicability - remand for verification of deductee's tax compliance - Disallowance of professional charges paid to Sri Subhas Mitra for failure to deduct TDS - HELD THAT: - Following the reasoning applied to similar TDS-related disallowances and relying on the Delhi High Court decision in Ansal Land Mark Township, the Tribunal declined to decide the claim on merits and remitted the issue to the AO to verify whether the recipient had disclosed the receipts and paid tax. If so, disallowance under section 40(a)(ia) would not be warranted. [Paras 19]Issue remitted to the AO for verification of payee's tax compliance; ground allowed for statistical purposes.Disallowance under section 36(1)(iii) for interest on diverted funds - admission of additional evidence under Rule 46A - Correct quantum of disallowance of interest under section 36(1)(iii) on account of loans advanced as interest-free to related parties - HELD THAT: - The Tribunal examined the components of interest claimed and held that not all interest elements were relevant to the diversion issue (excluding interest on car loan, sales tax and LC credit). It determined that interest eligible for consideration for disallowance amounted to specified components (interest to bank and interest on unsecured loans) and directed the AO to consider Rs. 16,93,807 (combined interest items specified) for disallowance. The Tribunal therefore allowed the assessee's appeal partly. The Revenue's contention regarding improper admission of evidence before CIT(A) was dismissed as the CIT(A) had considered material available to the AO. [Paras 24, 26]Disallowance under section 36(1)(iii) restricted to the interest components specified by the Tribunal; assessee's ground partly allowed and Revenue's challenge on admission of evidence dismissed.Treatment of undervaluation of closing stock in audited books versus bank stock statements - Validity of addition on account of alleged undervaluation of closing stock - HELD THAT: - The Tribunal observed there was no material defect in the assessee's books or method of valuation; the discrepancy arose from higher estimated values furnished to the bank for credit facilities. Relying on precedent that inflated statements to banks do not justify additions where books and audits are regular, the Tribunal upheld the CIT(A)'s deletion of the addition. [Paras 30]Addition on account of undervaluation of closing stock deleted; Revenue's ground dismissed.Final Conclusion: The Tribunal upheld the disallowance of commission to the sister concern for lack of proof of services; remitted the TDS-related disallowance issues (carriage, port expenses, professional charges) to the AO for verification of whether the payees disclosed receipts and paid tax (in light of the retrospective operation of the proviso to section 40(a)(ia)); partially allowed the interest disallowance by specifying interest components to be considered by the AO; and upheld deletion of the addition for undervaluation of closing stock. Revenue's challenge to admission of evidence before the CIT(A) was dismissed. Issues Involved:1. Disallowance of payment of commission to a sister concern.2. Disallowance of carriage inward expenses due to non-deduction of TDS.3. Disallowance of port expenses due to non-deduction of TDS.4. Disallowance of legal and professional charges due to non-deduction of TDS.5. Disallowance of interest on borrowed funds under Section 36(1)(iii).6. Admissibility of additional evidence under Rule 46A.7. Under-valuation of closing stock.Detailed Analysis:1. Disallowance of Payment of Commission to Sister Concern:The assessee was disallowed a commission payment of Rs. 8,29,500 to M/s Macleod Fuels Pvt. Ltd. (MFPL) by the AO, as there was no agreement or evidence of services rendered, and TDS was deducted at 2% instead of 10%. The CIT(A) upheld this disallowance, noting the lack of evidence and the relationship between the entities. The Tribunal found no justification for the services rendered and upheld the CIT(A)'s decision, referencing the Gujarat High Court decision in Gujarat Insecticides Ltd. v. Deputy Commissioner of Income-tax.2. Disallowance of Carriage Inward Expenses:The AO disallowed Rs. 6,99,508 paid to Vikas Enterprises for carriage inward expenses due to non-deduction of TDS. The CIT(A) upheld this decision, applying Section 194C. The Tribunal, referencing the Delhi High Court decision in CIT v. Ansal Land Mark Township (P) Ltd., remitted the matter back to the AO to verify if the payee included the receipts in their income tax return and paid taxes, which would negate the disallowance under Section 40(a)(ia).3. Disallowance of Port Expenses:The AO disallowed Rs. 45,50,580 paid to M/s Bhatia International Ltd. for port expenses due to non-deduction of TDS. The CIT(A) upheld this, noting the payments were for services beyond purchases. The Tribunal, following the same rationale as in the carriage inward expenses, remitted the matter back to the AO for verification under the guidelines of the Delhi High Court decision.4. Disallowance of Legal and Professional Charges:The AO disallowed Rs. 30,000 paid to Subash Mitra for legal and professional charges due to non-deduction of TDS. The CIT(A) upheld this, rejecting the reimbursement claim. The Tribunal, consistent with its approach in the previous issues, remitted the matter back to the AO for verification in light of the Delhi High Court decision.5. Disallowance of Interest on Borrowed Funds:The AO disallowed Rs. 20,56,654 under Section 36(1)(iii) for interest on borrowed funds used to give interest-free loans to relatives and sister concerns. The CIT(A) partially allowed relief, reducing the disallowance to Rs. 2,63,663, noting the lack of nexus between the borrowed funds and interest-free loans. The Tribunal directed the AO to consider only the interest on unsecured loans and bank loans, amounting to Rs. 16,93,807, for disallowance.6. Admissibility of Additional Evidence:The Revenue contested the CIT(A)'s acceptance of additional evidence under Rule 46A. The Tribunal found that the CIT(A) considered only the material available during the assessment, dismissing the Revenue's grounds.7. Under-valuation of Closing Stock:The AO added Rs. 56,15,283 to the assessee's income for under-valuation of closing stock, based on discrepancies between the stock reported to the bank and in the books. The CIT(A) deleted the addition, accepting the assessee's explanation of valuation at cost for accounts and current value for bank reporting. The Tribunal upheld this decision, referencing the Gujarat High Court judgment in JCIT vs. Riddhi Steel And Tubes (P) Ltd., which supported the assessee's method of stock valuation.Conclusion:- Assessee's appeal is partly allowed for statistical purposes.- Revenue's appeal is dismissed.