2019 (2) TMI 1463 - AT - Income Tax

ITAT rules for assessee in complex tax case involving trade creditors, interest disallowance, depreciation, and stock valuation.

The ITAT ruled in favor of the assessee in a tax case concerning various issues such as the transfer of trade creditors to partners' capital accounts, ... Revision u/s 263 - lack of enquiry - HELD THAT:-Difference of opinion-there is no lack of enquiry and the AO made the enquiries and completed the assessment, substitution of the Commissioner’s view and the suspicion of the Pr.CIT cannot be a case for revision u/s 263 of the Act. The revision u/s 263 cannot be taken up for difference of opinion. Therefore, we hold that there is no error in the order passed by the AO which requires revision u/s 263. Section 41(1) - Cessation or remission of liability - trade creditors transferred to capital accounts of the partners of the firm - Entries made in the books of accounts unilaterally - HELD THAT:- AO examined the purchases and sales and accepted the purchases and sales. From the scrutiny of the partners capital accounts, trade creditors account, we understand that the assessee has unilaterally transferred the sums to the partners capital accounts and there was no cessation or remission of the liability. The same fact is established as per the account copies placed in the paper book in page no.47 to 49 of the paper book - tax the trade creditors balances u/s 41(1), the cessation or remission of the liability has to be allowed by the trade creditor but not by the beneficiary assessee and the entries made in the books of accounts are immaterial. There must be consent form the creditor to waive the liability. This view is upheld by the Hon’ble Apex court in the case of Commissioner of Income tax Vs Sugauli Sugar Works (P.) Ltd [1999 (2) TMI 5 - SUPREME COURT]. In the instant case, the assessee has transferred the trade credit balances to the capital accounts without any confirmation from the trade creditor for cessation or remission of liability, hence, it is incorrect to hold that the said sum required to be brought to tax u/s 41(1) of the Act. As per the material placed before us by the assessee and discussed in the preceding paragraphs clearly establish that the AO has made reasonable and sufficient enquiries during the course of assessment proceedings. Thus, there is no error in the order passed by the AO and the Ld.Pr.CIT has incorrectly invoked the jurisdiction u/s 263 of the Act. Suspicion- Mismatch of signatures of the trade creditors in the confirmation letters for the impugned A.Y. as well as in the subsequent A.Y. - HELD THAT:- Merely on the suspicion it is unjustified to hold that the credit is not bonafide. Since the issue was verified by the AO at the time of assessment, the purchases and sales were accepted and the payments were made through bank cheques, which the AO has verified all the facts during the course of assessment, we find no error in the assessment order which caused prejudice to the department. Therefore, we hold that there is no case for jurisdiction u/s 263 on this issue. Accordingly, we set aside the order of the Pr.CIT and allow the appeal of the assessee. Section 36(1)(iii)- Interest on borrowed capital- Interest free funds- Disallowance of interest on borrowed capital for construction of building at Vijayarai Village and Koppal Karnataka - HELD THAT:- There is no doubt that the assessee is having interest free funds in the form of partners capital accounts, trade creditors, reserves and surpluses and the assessee has utilized the non-interest bearing funds efficiently and charged the interest reasonably and the issue was verified by the AO. Therefore, we find no error in the assessment order which caused prejudice to the interest of the revenue. Accordingly, we set aside the order of the Ld.Pr.CIT and allow the appeal of the assessee. Depreciation of land on residential apartment - HELD THAT:- AO called for the details of the additions to fixed assets along with the original bills and also called for the details of the depreciation which was furnished by the assessee. As per the original sale bill, there is no allocation of cost to the land and super structure separately. The assessee got undivided share of land in apartment complex. The sale consideration consists of land cost as well as the cost of construction. Normally in apartments, the sale of apartment is fixed on the basis of plinth area - verification of the sale deed, the AO allowed the depreciation on the apartment on composite cost without separately allocating the cost of land and cost of building. Since the AO examined the issue and allowed the depreciation though it is prejudicial to the extent of the depreciation on land, having verified the issue at the time of assessment, there is no error in the assessment order made by the AO, thus, the case is beyond jurisdiction u/s 263. Valuation of the closing stock - HELD THAT:- The assessee collects the human hair domestically as well as from the temples and grades the same according to the quality. The assessee submitted before the AO, the closing stock and its valuation, grade wise. The price of the human hair ranges from ₹ 14 to ₹ 4640/- per kg. The price of each grade is different depending on the quality. The assessee has valued the closing stock at ₹ 4,854/- per kg and the waste was valued at ₹ 14 per kg and the average price came to ₹ 553/- per kg. Except making observation that the AO has not verified the closing stock, the Pr.CIT did not make out a case that there is an error in the assessment order which caused prejudice to the department. Since the issue has been examined by the AO and satisfied regarding the valuation closing stock at the time of assessment we find no error in the assessment order which calls for revision u/s 263 of the Act. - Assessee appeal allowed. Issues Involved:1. Transfer of trade creditors to partners' capital accounts and applicability of Section 41(1).2. Mismatch of signatures of trade creditors in confirmation letters.3. Disallowance of interest on borrowed capital for construction of buildings.4. Interest charged on loans to M/s Madhulatha Enterprises.5. Depreciation on residential apartments including land value.6. Valuation of closing stock.Issue-wise Detailed Analysis:1. Transfer of Trade Creditors to Partners' Capital Accounts and Applicability of Section 41(1):The assessee transferred Rs. 6,52,39,273 from trade creditors to partners' capital accounts, claiming it was for better bank loan facilities, with no cessation of liability. The Pr.CIT viewed this as cessation of liability under Section 41(1). However, the ITAT found that the AO had examined the issue during assessment, where the assessee provided sufficient evidence showing the amounts were retransferred to creditors in subsequent years. The ITAT concluded that there was no cessation of liability as per the Apex Court ruling in Commissioner of Income Tax Vs. Sugauli Sugar Works (P.) Ltd. Thus, the AO's order was not erroneous, and the Pr.CIT's revision was quashed.2. Mismatch of Signatures of Trade Creditors in Confirmation Letters:The Pr.CIT noted a mismatch in signatures of trade creditors from Kolkata in confirmation letters. The AO had verified the genuineness of creditors during assessment, accepting purchases and sales as genuine. The ITAT held that mere suspicion without tangible evidence does not justify revision under Section 263. The AO's verification was deemed adequate, and the Pr.CIT's revision on this ground was set aside.3. Disallowance of Interest on Borrowed Capital for Construction of Buildings:The Pr.CIT argued for disallowance of interest on borrowed capital used for constructing buildings at Vijayarai Village and Koppal, Karnataka. The ITAT found that the AO had scrutinized the balance sheet, profit & loss account, and other details, concluding that non-interest bearing funds were used for construction. The ITAT ruled that there was no nexus between interest-bearing funds and construction, thus no disallowance under Section 36(1)(iii) was warranted. The Pr.CIT's revision was quashed.4. Interest Charged on Loans to M/s Madhulatha Enterprises:The Pr.CIT observed that the interest collected from M/s Madhulatha Enterprises was lower than the bank lending rate. The ITAT found that the AO had verified that interest-free funds were used for the advance, and the interest rate of 6% was reasonable. The AO's decision was upheld, and the Pr.CIT's revision was set aside.5. Depreciation on Residential Apartments Including Land Value:The Pr.CIT noted that depreciation was claimed on a composite cost of Rs. 90.65 lakhs without separating land value. The ITAT found that the AO had verified the original purchase deed, which did not allocate costs separately for land and building. The AO allowed depreciation on the composite cost, which the ITAT deemed correct. The Pr.CIT's revision was quashed.6. Valuation of Closing Stock:The Pr.CIT questioned the valuation of closing stock, noting a discrepancy between the purchase rate and the declared value. The ITAT found that the AO had called for and verified detailed information on the valuation of closing stock, including grades and prices. The ITAT concluded that the AO's acceptance of the valuation was justified, and the Pr.CIT's revision was set aside.Conclusion:The ITAT concluded that the AO had conducted reasonable and sufficient inquiries during the assessment, and the Pr.CIT's revisions under Section 263 were based on inadequate grounds. The ITAT quashed the Pr.CIT's order and allowed the appeal of the assessee.