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2013 (5) TMI 634 - AT - Income TaxDisallowance u/s 40A(2)(b) - transaction with related parties - Held that - The average rate of purchase from specified persons is only Rs.62076.37 as against Rs.62809.90 from other persons. There is no finding given by CIT(A) that there is any defect in this contention of the assessee. He has decided the issue on the basis of month-wise details. Regarding month-wise details also, it is noted by CIT(A) that during April-May, 928.465MT was purchased by the assessee from specified persons @ Rs.62400/- per MT and during these two months, nothing was purchased form other parties, part from these two purchases in April-May, there was purchase of 64.225 MT in the month of July and 53.750 MT in Oct and both these purchases were @ Rs.63600/- per MT. Thereafter, he has noted that large quantities were purchased by the assessee form other parties @ Rs.62997 and Rs.63069 during these months i.e. July and Oct. Considering the price paid by the assessee to the related parties for purchase during July-Oct after deducting Rs.500/- per MT being the price difference received back, the price paid by the assessee is Rs.63100/- per MT to the related parties whereas price paid to others is also very close i.e. Rs.62997/- to Rs.63069/- per MT and hence, for such a small difference in price, no addition is justified because such small difference can be because of various reasons such as better quality, timely supply, extra credit period etc. In addition to this, there was purchase of 58.495 MT from related parties in the month of Jan @ Rs.63311/- MT. After deducting R.500/- per MT being rate difference received back by the assessee, the effective price comes to Rs.62811/- per MT. The purchase from others during this period was at Rs.62488/- and hence, price difference is Rs.323/- per MT. For this purchase of 58.495 MT @ Rs.323/- per MT, amount of excess price paid works out to Rs.18,894/-. Thus confirm this disallowance to this extent and the balance disallowance is deleted. This ground is partly allowed. Bad debts - Disallowance of short provision of sales tax debited to P & L A/c - whether the said amount ought to have been allowed u/s 43B on payment basis - held that - The case of the assessee is this that at the time of closing its books of account for the assessment year 2000-01, the assessee has worked out sales tax refunds at Rs.80.99 lacs and included the same in the income on mercantile basis and the tax was paid on the same in that year. It was also submitted by the assessee before CIT(A) that the assessment of sales tax for the assessment year 2000-01 was finalized during the current year and the Sales Tax Department refunded only Rs.79.15 lacs and therefore, the same is written off in the present year. Thus this claim of the assessee is akin to claim of write off of bad debts and therefore, the same is allowable in the year of write off and this is not the case of the revenue that there is no actual write off in the present year. In favour of assessee. Disallowance of foreign travel expenditure - Held that - As assessee could not establish that this expenditure was incurred for business purposes no reason to interfere in the order of CIT(A) in conforming disallowance - against assessee. Addition on alleged difference in balances as per the books of accounts of the appellant and the other parties - Held that - Regarding these differences, no explanation was furnished by the assessee before the A.O but as noted by CIT(A) that assessee has filed reconciliation statement during appellate proceedings and as per the assessee, the difference arisen out of kasar and discount not accounted for by either of the parties. Thus in the interest of justice, this matter should go back to the file of the A.O. for a fresh decision after examining reconciliation statement submitted by the assessee - in favour of assessee for statistical purposes. Addition made on account of disallowance of interest payment - Held that - The amount disallowed by the A.O. shows that the disallowance is on account of interest paid on unsecured loans and not on account of bank interest. It means, the A.O. has accepted that bank interest paid was for those funds which were used by the assessee for business purposes. Once it is accepted by the A.O. that funds borrowed from bank has been used for business purposes, the disallowance made by the A.O. should not exceed this amount of net interest debited to P & L account. The same is only Rs.1,94,263/- and hence, this disallowance cannot exceed this amount. Therefore, uphold the disallowance to this extent of Rs.1,94,263/-and decline to interfere in the order of CIT(A) for deleting the balance disallowance. This ground of the revenue is partly disallowed. Disallowance of payments of commission - CIT(A) deleted the addition - Held that - As enough evidence has been furnished in the form of confirmation/certificate of the concerned parties regarding rendering of services by these two persons and there has not been any dispute by the revenue regarding benefits derived by the assessee company and legitimate business needs of the assessee company & CIT(A) has discussed and distinguished all the judgements relied upon by the A.O. and have also seen that none of the objections raised by the A.O. is valid and, therefore no interference is called for in the order of CIT(A) on this issue. This ground of the revenue is rejected. Disallowance of payments of rate difference - CIT(A) deleted the addition - Held that - Even if the assessee has not made corresponding purchases then also, the assessee has to fulfill its contract regarding sale and had to bear the loss. Many a times, a businessman does not cover the sales by affecting purchases in anticipation of fall in prices but if the price goes up as against anticipation of falling in price, the assessee is caught on a wrong foot and has to bear losses because of higher purchase price but lower sale price already effected. Regarding sale at lower price, this is stated by the A.O. in his order that assessee has not filed any evidence that what he has done to effect supply of material to these two parties, but the A.O. has not doubted regarding sale of material to these two parties and failure of assessee to fulfill the sale contract and in the absence of this, the disallowance made by the A.O. is not sustainable. Therefore, decline to interfere in the order of CIT(A) on this issue also.
Issues Involved:
1. Disallowance under Section 40A(2)(b) of the Income Tax Act. 2. Disallowance of short provision of sales tax. 3. Disallowance of foreign travel expenditure. 4. Addition due to differences in balances with parties. 5. Disallowance of interest payment. 6. Disallowance of commission payments. 7. Disallowance of rate difference payments. 8. Disallowance of bad debts. 9. Penalty proceedings under Section 271(1)(c). Issue-wise Detailed Analysis: 1. Disallowance under Section 40A(2)(b) of the Income Tax Act: The assessee's appeal for the assessment year 2004-05 involved disallowance of Rs.6,01,340/- due to excess price paid to sister concerns. The Tribunal found that the average rate paid to specified persons was lower compared to others, and minor differences in price could be attributed to factors like quality and timely supply. Consequently, the disallowance was reduced to Rs.18,894/- for a small portion of the transactions. 2. Disallowance of Short Provision of Sales Tax: The assessee claimed Rs.1,84,647/- as a short provision of sales tax. The Tribunal accepted the assessee's argument that the amount was written off due to short recovery from the Sales Tax Department, akin to bad debts, and allowed the claim. 3. Disallowance of Foreign Travel Expenditure: The disallowance of Rs.3,30,388/- for foreign travel expenses incurred by a director was confirmed as the assessee failed to prove the business purpose of the expenditure. 4. Addition Due to Differences in Balances with Parties: The addition of Rs.3,12,378/- due to differences in balances with parties was remanded to the Assessing Officer (AO) for fresh examination of the reconciliation statement provided by the assessee. 5. Disallowance of Interest Payment: The revenue's appeal for the assessment year 2004-05 involved disallowance of Rs.63,23,887/- for interest payment on unsecured loans while advancing interest-free loans to a director. The Tribunal found no direct nexus between borrowed funds and interest-free advances. However, it confirmed a disallowance of Rs.1,94,263/- based on net interest debited to the Profit & Loss account. 6. Disallowance of Commission Payments: The revenue's appeal contested the deletion of Rs.63,61,788/- disallowed for commission payments to directors. The Tribunal upheld the CIT(A)'s decision, finding that the assessee provided sufficient evidence of services rendered by the directors, distinguishing the case from precedents cited by the AO. 7. Disallowance of Rate Difference Payments: The revenue's appeal also contested the deletion of Rs.15,00,000/- disallowed for rate difference payments to two parties. The Tribunal upheld the CIT(A)'s decision, finding that the payments were made to avoid greater losses and maintain business relations, supported by written agreements. 8. Disallowance of Bad Debts: For the assessment year 2005-06, the assessee claimed Rs.9,85,378/- as bad debts for insurance claims not received. The Tribunal upheld the disallowance as the amount was neither considered as income in earlier years nor substantiated with evidence of being offered as income in subsequent years. However, it directed the AO to verify if the amount was offered as income in assessment year 2007-08 to avoid double taxation. 9. Penalty Proceedings Under Section 271(1)(c): The revenue's penalty appeals for both assessment years were dismissed. The Tribunal found that the disallowances did not warrant penalties as the explanations provided by the assessee were bona fide and the issues were debatable. Conclusion: The cross appeals of the assessee and the revenue in quantum proceedings for assessment years 2004-05 and 2005-06 were partly allowed. The appeals of the revenue in penalty proceedings for both years were dismissed. The Tribunal provided detailed justifications for each issue, considering the evidence and arguments presented by both parties.
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