2003 (5) TMI 193 - AT - Income Tax

Business income, Business disallowance - Cash payment exceeding prescribed limit, Assessment - Additions to income

Summary

Issues Involved:
1. Sustenance of addition of Rs. 80,575 out of total addition of Rs. 5,29,475 for alleged diversion of profits to sister concern.
2. Addition of Rs. 1,30,410 out of installation and commissioning expenses.
3. Disallowance of Rs. 44,068 under Section 40A(3) of the IT Act.
4. Deletion of addition of Rs. 10,72,650 for difference in stock hypothecated with bank and stock shown in books of account.
5. Deletion of addition of Rs. 4,48,900 out of Rs. 5,29,475 for alleged diversion of profits to sister concern.

Issue-wise Detailed Analysis:

1. Sustenance of Addition of Rs. 80,575 out of Total Addition of Rs. 5,29,475 for Alleged Diversion of Profits to Sister Concern:
The AO noticed sales of D.G. sets to the sister concern at rates lower than those charged to Government Departments, leading to an addition of Rs. 5,29,475 for profit diversion. The assessee contended that sales to the sister concern were at market prices, devoid of certain components, and without guarantee or installation charges. The CIT(A) reduced the addition to Rs. 80,575, considering the profit earned by the sister concern. The Tribunal found that the AO's comparison was flawed as the D.G. sets sold to the sister concern lacked certain components and services provided to Government Departments. The Tribunal also noted that both entities were separately assessed and the sister concern had paid tax on the profit earned. Thus, the Tribunal deleted the addition of Rs. 80,575, concluding that there was no diversion of profit.

2. Addition of Rs. 1,30,410 out of Installation and Commissioning Expenses:
The AO disallowed Rs. 1,30,410 out of installation and commissioning expenses, comparing the current year's expenses to the previous year's, allowing only a 30% increase. The assessee argued that all expenses were fully vouched and verifiable, and the AO had not pointed out any specific defects. The Tribunal agreed with the assessee, noting that the AO's disallowance was based on conjecture without any specific evidence of unvouched or unreasonable expenses. Consequently, the Tribunal deleted the addition of Rs. 1,30,410.

3. Disallowance of Rs. 44,068 under Section 40A(3) of the IT Act:
The AO disallowed Rs. 44,068 for cash purchases from the sister concern, considering it hit by Section 40A(3). The assessee argued that the transaction was covered under exceptions provided by Rule 6DD(J) and CBDT Circular No. 220, and furnished a certificate from the sister concern. The Tribunal found that the payment was genuine and covered under the exceptions for cash payments due to specific discounts. Therefore, the Tribunal deleted the addition of Rs. 44,068.

4. Deletion of Addition of Rs. 10,72,650 for Difference in Stock Hypothecated with Bank and Stock Shown in Books of Account:
The AO added Rs. 10,72,650 for discrepancies between the stock hypothecated with the bank and the stock shown in the books. The assessee explained that the stock statements to the bank included incomplete D.G. sets and components. The CIT(A) deleted the addition after verifying the assessee's explanations, bills, and vouchers. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not pointed out any specific discrepancies in the excise records or purchases and sales. Thus, the Tribunal found no merit in the Department's appeal and upheld the deletion.

5. Deletion of Addition of Rs. 4,48,900 out of Rs. 5,29,475 for Alleged Diversion of Profits to Sister Concern:
The Department's appeal contested the deletion of Rs. 4,48,900 out of the total addition of Rs. 5,29,475 for alleged profit diversion to the sister concern. The Tribunal had already addressed this issue in the assessee's appeal, deleting the entire addition of Rs. 5,29,475. Consequently, the Tribunal found no merit in the Department's appeal on this ground.

Conclusion:
The Tribunal allowed the assessee's appeal, deleting the additions of Rs. 80,575, Rs. 1,30,410, and Rs. 44,068, and upheld the CIT(A)'s deletion of Rs. 10,72,650 and Rs. 4,48,900. The Department's appeal was dismissed.