Tribunal limits scrap sale addition, rules on Section 14A disallowance

The Tribunal dismissed the Revenue's appeal challenging the addition on account of scrap sale due to the tax effect being less than Rs. 20 lakhs as per a CBDT circular. The assessee's appeal regarding unaccounted scrap sale was partially allowed, limiting the addition to Rs. 8,08,420. The Tribunal upheld the estimation based on seized documents. Regarding disallowance under Section 14A, the Tribunal ruled out interest disallowance due to surplus funds but upheld indirect expenses disallowance. The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal on October 22, 2018.

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Issues:
1. Revenue's appeal challenging addition on account of sale of scrap
2. Maintainability of Revenue's appeal based on tax effect
3. Assessee's appeal on addition of unaccounted scrap sale and disallowance under section 14A

Revenue's Appeal:
The Revenue challenged the addition of Rs. 8,08,420 on account of sale of scrap outside the books. However, the Tribunal found the appeal not maintainable as the tax effect was less than Rs. 20 lakhs, as per a recent CBDT circular. The appeal was dismissed without delving into the merits of the case, as the circular applied to pending appeals as well.

Assessee's Appeal - Unaccounted Scrap Sale:
The assessee's appeal contested the addition of Rs. 8,08,420 for unaccounted scrap sale. The AO estimated the sale of scrap at Rs. 48,04,151 based on seized documents. The CIT(A) partially allowed relief by restricting the addition to Rs. 8,08,420, considering 3.55% of unaccounted scrap of the Manesar unit. The assessee argued that internal inquiry led to the recovery of approximately Rs. 8 lakhs from employees involved in unreported scrap sales. The Tribunal upheld the CIT(A)'s decision, stating that the estimation of unaccounted scrap sales was justified based on seized documents and admissions.

Assessee's Appeal - Disallowance under Section 14A:
Regarding the disallowance of Rs. 5,11,464 under section 14A, the assessee earned dividend income but did not offer any disallowance. The AO applied rule 8D to compute the disallowance, which was upheld by the CIT(A). The assessee contended that no interest disallowance should be made as investments were from reserves and surplus, citing a Delhi High Court case. The Tribunal found that no interest disallowance could be made due to the surplus funds. However, the disallowance of indirect expenses under rule 8D(2)(iii) was upheld as the assessee failed to prove why no expenditure was attributable to earning exempt income.

In conclusion, the Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal. The decision was pronounced on October 22, 2018.

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