2021 (10) TMI 1487 - AT - Income Tax

Excess depreciation and assessment adjustments in plant machinery, bogus purchase additions, incentive deduction and exempt income disallowance deleted

Excess depreciation claimed on inflated plant and machinery was rejected where Form 10CCB reporting matched only incentive-claiming units, and physical ... Excess claim of depreciation on the inflated plant & machinery - recorded discrepancies in survey - CIT(A) deleted addition - We note that in this case in respect of unit No.1 the total value of plant & machinery as per form 10CCB was more than total value of machinery taken at the time of survey after providing depreciation of 20% which has resulted into this difference. HELD THAT:- We find reasoning in the contentions of the assessee that form 10CCB is filed in respect of those units for which the profit is claimed under section 80IC/section 80IB of the Act and not the other units where no such claim was made. In unit No.2 the assessee has not claimed any deduction u/s 80IC/section 80IB and therefore value of machinery was reported as nil in Form 10CCB. However, the unit was functional and operational and there was plant & machinery. So upon the physical inventory being taken by the survey team, the plant & machinery was bound to be there which was used in the manufacturing process of the unit. CIT(A) has given a correct findings and passed reasoned order by deleting the addition by holding that the assessee has not doubted the genuineness of the books of accounts or rejected the books of accounts u/s 145(3) - CIT(A) also recorded that purported statements recorded during the course of survey which were not backed up by any corroborative evidences. Decided against revenue. Estimation of income - bogus purchases - CIT(A) partly deleting the addition to the extent of 88% thereby sustaining 12% of the bogus purchases - HELD THAT:- We are of the opinion that CIT(A) has rightly directed the AO to add a profit margin on the said bogus purchases which could not be proved by the assessee before the AO as the addition of entire purchases would lead to unrealistic and impracticable profits in the hands of the assessee. No merit in the contention of the DR that profit rate can be applied to a trading company and not manufacturing company. Moreover, the assessee is a very big company who is filed return of income of Rs. 16,88,64,927/- and to book bogus purchases of such a small quantum seems to be not correct. The assessee has purchased the goods which were paid by account payee cheque and supported by necessary bills vouchers, deliver challans etc. We note that the AO has not brought any evidence on record to back the statements given during the course of survey as the statements in itself have no evidentiary value unless other corroborating evidences are brought on record. Decided against revenue. Disallowance of 80IB/section 80IC in respect of Pantnagar Unit No.1 - Assessee argued value of pre-used machinery is less than 20% of the total machinery - CIT(A) allowed the appeal of the assessee - HELD THAT:- We find that the AO has not brought anything on record to corroborate that statement as recorded during the course of survey whereas the assessee has filed all purchase bills, total value of plant & machinery and also the fact that there was no pre used plant & machinery transferred from other units to Pantnagar Unit No.1 and therefore there is a merit in the contention of the assessee that the conditions as envisaged by section 80IB/section 80IC are duly satisfied and there is no violation of the same. We note that Ld. CIT(A) after taking into consideration of all these facts and evidences has allowed the claim of the assessee under section 80IB/section 80IC whereas the AO has relied heavily on the finding of survey team without giving any finding on the various evidences filed during the course of assessment proceedings by the assessee. We also find merit in the contention of the assessee that once the claim of deduction under section 80IB/section 80IC is allowed in financial year the same can not be disturbed in the subsequent year unless there is change in facts. Decided against revenue. Addition u/s 14A read with Rule 8D - CIT(A) allowed the appeal of the assessee on the ground that assessee's own funds were far more than the investments in share and securities - HELD THAT:- We note that assessee's own funds in the current year are Rs. 70,128.05 lakhs whereas the investments in the exempt income yielding security are Rs. 9,063.06 lakhs. Thus the Ld. CIT(A) has rightly deleted the disallowance by following the decision of HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] The Ld. CIT(A) also noted that assessee has made investments in various foreign companies that dividends whereof are taxable and therefore liable to be excluded while computing disallowance under section 14A read with rule 8D. Issues: (i) Whether additions for excess/short plant and machinery and corresponding disallowance of depreciation could be sustained where survey-recorded discrepancies were not supported by corroborative documentary evidence; (ii) Whether purchases found to be from bogus/accommodation parties should be added fully to income or only to the extent of a profit element; (iii) Whether deduction under section 80IB/80IC can be denied where pre-used/inter-unit transferred machinery allegedly exceeds 20% of total machinery; (iv) Whether disallowance under section 14A read with Rule 8D and consequential adjustment under section 115JB could be sustained.Issue (i): Addition for excess/short plant and machinery and disallowance of depreciation based on survey findings.Analysis: The material before the authority included audited books, Form 10CCB filings, and yearwise asset details showing additions, deletions and WDV; the assessing officer relied primarily on physical inventory values recorded during a 2015 survey and statements recorded under section 133A. No corroborative documentary evidence was produced by the AO to rebut the books or to validate valuation methodology; statements alone were not supported by independent evidence. Consideration was also given to practical difficulties of comparing audited yearbook values for an earlier assessment year with a physical survey many years later.Conclusion: Addition and disallowance are deleted in favour of the assessee.Issue (ii): Treatment of purchases from parties characterized as bogus or accommodation entries.Analysis: The AO added the full purchase amounts as income, while the appellate authority applied a profit rate (12%) to reflect the profit element based on relevant case law. The assessee produced invoices, bank payments and delivery documents; the AO did not adduce corroborative evidence to convert recorded statements into conclusive proof of entire purchases being sham. Consideration was given to the nature of the assessee's business, the quantum of disputed purchases relative to overall turnover, and precedents allowing addition of profit element where full addition would yield unrealistic results.Conclusion: Addition limited to profit element (12%) is upheld; appeal on this point is allowed in favour of the assessee.Issue (iii): Eligibility for deduction under section 80IB/80IC where pre-used machinery allegedly exceeds 20% of total machinery.Analysis: The assessee's initial claim for deduction in the first year was allowed and supported by purchase bills and asset schedules. The AO's reliance on survey statements to disallow later-year deductions lacked corroborative material showing a change in facts. Documentary records filed by the assessee detailing additions, deletions and WDV were not effectively impugned by the AO.Conclusion: Disallowance under section 80IB/80IC is deleted; deduction is allowed in favour of the assessee.Issue (iv): Disallowance under section 14A read with Rule 8D and consequential adjustment under section 115JB.Analysis: The assessee's own funds substantially exceeded investments in exempt-yielding assets and investments included foreign subsidiaries whose dividends were taxable; these facts were relied upon to exclude the investments from section 14A applicability and to follow jurisdictional precedent invalidating the disallowance computation.Conclusion: Disallowance under section 14A read with Rule 8D and consequent adjustment under section 115JB are deleted in favour of the assessee.Final Conclusion: The appellate outcomes cumulatively uphold the assessee's position on the disputed machinery valuation and depreciation, limit additions for alleged bogus purchases to the profit element, confirm entitlement to section 80IB/80IC deductions where supported by books and documentary evidence, and delete the section 14A/Rule 8D disallowance and its consequential effect under section 115JB; the Revenue appeals are dismissed.Ratio Decidendi: Additions based solely on statements recorded during survey or on post-facto physical inventory require independent corroborative documentary evidence and reliable valuation methodology; absent such corroboration, audited books, supporting invoices and yearwise asset records prevail for tax assessment purposes.