2022 (2) TMI 337 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions on Disallowances

A.C.I.T., Circle-1, Jamnagar Versus M/s. Senor Metals Pvt. Ltd.

A.C.I.T., Circle-1, Jamnagar Versus M/s. Senor Metals Pvt. Ltd. - TMI Issues Involved:1. Disallowance of loss incurred on hedging of copper scrap imports.2. Disallowance of raw material consumption treating it as suppressed income.3. Disallowance of stamp duty expenses.4. Disallowance under Section 40(a)(ia) for non-deduction of TDS on payments to clearing and forwarding agents.5. Disallowance of store and spare expenses.6. Disallowance on account of late deposit of employee’s contribution towards PF.Issue-wise Detailed Analysis:1. Disallowance of Loss Incurred on Hedging of Copper Scrap Imports:The Revenue contested the deletion of the addition made towards the set-off of forward trading loss of Rs. 1,52,76,370/- against the income, considering it as speculative loss. The assessee, a private limited company engaged in manufacturing copper and copper alloys, entered into forward sales contracts to hedge against the risk of copper scrap price fluctuations. The AO disallowed the loss, considering it speculative under Section 43(5) of the Income Tax Act. The CIT(A) deleted the addition, stating that the transactions were genuine hedging activities and not speculative, as they fell within the exceptions of Section 43(5). The Tribunal upheld the CIT(A)'s decision, noting that the transactions were indeed for safeguarding the raw material (copper and zinc) used in the assessee's business.2. Disallowance of Raw Material Consumption Treating it as Suppressed Income:The AO observed an abnormal decrease in the yield of finished products and disallowed Rs. 2,02,64,920/- as suppressed income. The assessee explained the decrease due to factors like product mix changes, higher impurities in imported materials, and R&D activities. The CIT(A) deleted the addition, highlighting that the assessee maintained proper quantitative records, which were audited and inspected by excise and VAT authorities without any defects. The Tribunal agreed with the CIT(A), noting that the AO did not find any defects in the records and that the fall in yield was justified by the assessee's explanations.3. Disallowance of Stamp Duty Expenses:The AO disallowed Rs. 4,22,800/- claimed under legal and professional fees, considering it not revenue in nature. The CIT(A) deleted the addition, stating that the expenses were related to the renewal of existing loans and did not create any enduring benefit or relate to the purchase of fixed assets. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were incurred wholly and exclusively for business purposes.4. Disallowance under Section 40(a)(ia) for Non-deduction of TDS on Payments to Clearing and Forwarding Agents:The AO disallowed Rs. 32,60,146/- for non-deduction of TDS on reimbursement payments to clearing and forwarding agents. The CIT(A) deleted the addition, observing that the reimbursements did not involve any profit element and were not liable for TDS. The Tribunal upheld the CIT(A)'s decision, relying on the Gujarat High Court's ruling in CIT vs. Gujarat Narmada Valley Fertilizers Co Ltd, which held that no TDS is required on reimbursements without profit elements.5. Disallowance of Store and Spare Expenses:The AO made an ad-hoc disallowance of Rs. 15,08,905/- due to an abnormal increase in store consumption expenses. The CIT(A) deleted the addition, noting that the expenses were supported by third-party evidence and justified by the increase in production and exports. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were properly documented and justified.6. Disallowance on Account of Late Deposit of Employee’s Contribution towards PF:The AO disallowed Rs. 36,715/- for late deposit of employee's PF contribution. The CIT(A) deleted the addition, noting that the payment was made within the grace period allowed under the relevant Act. The Tribunal upheld the CIT(A)'s decision, finding no mistake in the facts and law.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletions of the various disallowances made by the AO. The decisions were based on proper documentation, compliance with relevant laws, and justified business practices by the assessee.