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TMI Blog2025 (5) TMI 1394X X X X Extracts X X X X X X X X Extracts X X X X ..... n the provisions of section 2(22)(e) of the Act, the addition made is contrary to facts, bad in law and be deleted. 3. Because the CIT(A) has erred on facts and in law in passing an order under section 153(3)(ii) read with section 150(1) directing the AO to make similar additions on account of deemed dividend in A.Y. 2011-12 & A.Y. 2012-13 without giving the assessee any opportunity to elaborate his submissions and to further clarify his stand, the direction so given, be deleted. 4. Because the CIT(A) has erred on facts and in law in giving directions u/s.150 of the Act, 1961 for addition to be made under section 2(22)(e) of the Act, which amounts to enhancement of income and such enhancement of income is impermissible in view of the specific provisions of section 251(2) of the Income Tax Act, 1961. 5. Because the CIT(A) has erred on facts and in law in upholding the disallowance of Rs. 13,26,600/- under section 41(1) of the Act, payment outstanding be made to M/s. Scrap Tin Enterprises without appreciating the facts and circumstances of the case and without giving the assessee an opportunity to explain the same. 6. Because the CIT(A) has failed to appreciate the fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of law and be deleted. 14. Because without prejudice, if the addition is to be sustained, then the figure of closing stock for the year under consideration should ought to have been adopted as figure of opening stock of the subsequent year. 15. Because the CIT(A) has erred on facts and in law in upholding the disallowance of Rs. 2,23,561/- by invoking the provisions of section 14A, there being no tax free income, addition is contrary to facts, bad in law and be deleted. 16 Because there being no expenditure incurred for the purpose of earning tax free income nor there being any satisfaction recorded by the authorities below the disallowance made is bad in law and be deleted." 2. At the time of hearing, no one attended the proceedings on behalf of the assessee. It is seen from the records that vide order sheet entry dated 18.02.2025, this Tribunal had noted that the Ld. Counsel for the assessee Shri Rakesh Garg, Adv informed that the assessee is not in his contact and requested for withdrawal of his 'Vakalatnama'. Thereafter, a notice was issued to the assessee for fixing the date of hearing on 26.03.2025. On that date, no one attended the proceeding on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s thoroughly examined and deliberated after having given sufficient opportunity to the assessee. He submitted that in the absence of plausible explanation along with supporting evidences the lower authorities are justified in making and sustaining the additions. It is seen that the assessee through his Ld. AR has placed on record written submissions filed before Ld. CIT(A). For the sake of clarity, the written submissions of the assessee are reproduced as under:- "The present appeal has been filed against the order of the ACIT-I, Kanpur passed u/s 143(3) of the Act dated 27.03.2015. Return was filed declaring income of Rs. 13,20,260/- on 28.09.2012. Assessment has been framed under sec. 143(3) of the Income Tax Act on total income of Rs. 1,19,35,200/-. The assessee is carrying on business of edible oil. Besides business income, he draws salary from M/s R.K. Agro Oil (P) Ltd., and from M/s Ganpati Edible Oil (P) Ltd., income from house property and other sources. Return declaring total income of Rs. 13,20,260/- was e-filed on through acknowledgement no. 499539771280912. The said return was processed under section 143(1) of the Income tax Act, 1961 (herein after for short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and arbitrary. 5. The disallowances of Rs. 10,00,000/- made out of packing expenses without proper verification that the entire expenses claimed are certified by U.P. Government by charging tax @ 5% as per law. 6. That disallowances of Rs. 10,00,000/- out of packing expenses are unjust, illegal, arbitrary and in any case highly excessive. 7. That addition of Rs. 10,00,000/- out of freight expenses have been made without proper verification of the facts that the closing stock has been valued on the basis followed in earlier also i.e. at cost. 8. That without appreciating the facts that closing stock has been valued at cost without adding the freight as was done in the past and disallowed a sum of Rs. 10,00,000/- arbitrarily and is any case it is highly excessive. 10. That disallowances of Rs. 2,23,000/- made by invoking provisions of Sec. 14A of the Income tax Act, 1961 are contrary to law, unjust & arbitrary. 11. That the Id. Dy. Commissioner of Income Tax, while framing the assessment has wrongly worked out Rs. 2,23,561/- invoking provisions of section 14-A, is without any basis and without proper consideration of the explanation given by the assessee. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t No. being 1882000102444741." 4.1 The aforesaid submissions of the assessee was carefully examined and it was found that the Company M/s. R.K.Agro Pvt. Ltd. from which he had taken loan of Rs. 2,50,00,000/- is a company in which the assessee is a Director and deriving Salary income from there. Accordingly, assessee vide order sheet entry dated 31.12.2014 was called upon to furnish Tax audit report of M/s. R.K.Agro Pvt. Ltd along with shareholding pattern of the company. In compliance thereto, assessee through his written submissions dated 13.01.2015 furnished the share holding pattern of the company. A perusal of which revealed that assessee's share was 80.30% of total shares of the company as on 31.03.2011 and 31.03.2012. Meaning thereby, the assessee is substantial share holder in the company M/s. R.K.Agro Pvt Ltd. 4.2 Therefore, Keeping in view the provisions contained in Section 2(22)(e) of the I.T.Act, 1961, assessee vide order sheet entry dated 04.03.2015 was specifically required to show cause why provisions of section 2(22)(e) of the Act be not applied in respect of transactions from M/s. R.K.Agro Pvt. Ltd. In compliance to aforesaid show cause, assessee could not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company)] Explanation 1. The expression "accumulated profits" wherever it occurs in this clause, shall not include capital gains arising before the 1st day of April, 1946, or after the 32st day of March 1948, and before the 1st day of April, 1956. Explanation 2, - The expression "accumulated profits" in sub-clause (a), (b), {d) and (e), shall include all profits of the company up to the date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company upto the date of liquidation, [but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by the Government under any law for the time being in force, include any profits of the company prior to three successive previous years immediately preceding the previous year in which such acquisition took place]. Explanation 3, - for the purposes of this clause,(a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er than that of accumulated profits so the loan amount to the extent of accumulated: profits would be taxed as deemed dividend in the hands of the assessee. Therefore, a sum of Rs. 70,64,782/- is treated as Income of the assessee for the year as income from other sources. (Addition : Rs. 70,64,782/-) The assessee's submission as under: The assessee is a Director of the company M/s. R.K. Agro Oils Pvt. Ltd. The AO has applied the provisions of section 2(22)(e) of the I.T. Act, 1961. The assessee runs his separate business under the name and style of M/s. R.K. Agro Enterprises as sole proprietor. The regular business transactions have been carried on between M/s. R.K. Agro Enterprises and M/s. R.K. Agro Oils Pvt. Ltd. The same would be visible from the copy of account of both the concerns appearing in the books of each other. The assessee had made investment in shares of M/s Ganpati Edibles P. Ltd., amounting to Rs. 3,59,80,000/-. The aforesaid investment was made by him out of his internal accruals. The AO on examining the details of the investments made by the assessee noticed that the assessee had received funds from Messrs R.K. Agro Pvt. Ltd., a company in which the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion at the end of the year is that of debit of Rs. 3,82,76,399/-. It has been held by the several courts, that where regular transactions had been carried on between the assessee and the company, then the provisions of section 2(22)(e) of the Act could not be applicable. The AO does not dispute that regular trading transactions have been carried on between the assessee's proprietorship concern M/s. R.K. Agro Enterprises and M/s. R.K. Agro Oils Pvt. Ltd. Reference in this connection may be made to the following decisions: Sachidanand Pandit vs. ACIT 19 SOT 213. ITO vs. Larka Brothers 162 Taxmann 170 (Chd) ACIT vs. Nigam Chawla 28 SOT 503 (Del) Ashwani Enterprises vs. ACIT 121 TTJ 408 (Chennai) Copies of these decisions are attached. It is, therefore, prayed, that since the provisions of section 2(22)(e) are not applicable to the facts of the case, the addition made be deleted. Ground no. 4 relates to addition of Rs. 13,26,600/- u/s 41 1 of the Income Tax Act, 1961 The AO while dealing with the issue has held as under: 5. Further, from Schedule "A" of balance sheet relating to sundry creditors, it was seen that assessee has shown total creditors of Rs. 21,18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be treated as income for the year by giving following submission; "Regarding to show cause as to why the liabilities of Rs. 13,26,600/-, appearing in the Balance Sheet to be paid to M/s. Scraptin Enterprises, Kanpur, it is submitted that no doubt the cessation of liability is liable to be taxed u/s 41(1) of the I.T. Act, 1961, but the matter is still remains for proper consideration that the assessee is bound morally and following the social admasphier for carrying out the business, to carry such liability which are acceptable in future on moral ground. Though the liability of the assessee ceases after denial of the person concern become taxable yet the assessee is not in default on moral ground. In spite of all this above the matter may be decided on merit and in accordance with law." Therefore, after discussion as above, nothing remained to explain that the liability shown by the assessee in respect of M/s. Scraptin Enterprises amounting to Rs. 13,26,600/- is found bogus liability which is not payable by him. Hence, the same would be added to the total income of the assessee u/s 41(1) of the Act as cessation of liability. Since, the assessee has furnished inaccurate part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase the old material from the open market on cash basis. The purchases have been made from open market and not from any manufacturing concern or established firm or company. So the matter under consideration may be considered keeping in mew the above circumstances and decide the issue on merit." Further, during the course of examination of books of account, bills & vouchers, assessee could not furnish any evidence of making cash purchases of said packing material in the shape of cash vouchers etc. and same was pointed out to the A.R. as well as accountant of the assessee Shri Prakash Gupta. But they could not come out with the reason why said purchases have not been backed with any kind of supporting evidence. Therefore, keeping in view the above, and also the discussion made in para 5 above where it has been evidently established that the assessee had inflated bogus purchases by way of debiting cash amount in Packing expenses in earlier year also. | am of the view that genuineness of said cash expenditure is not open for verification. So, the claim cannot be accepted as such. Hence, in totality of facts and looking to the nature of business, a sum of Rs. 10,00,000/- would be di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al had concluded that the addition was unsustainable because it had been made 'on the basis of pure guess work" The Revenue moved the High Court under Section 256(2) of the Income-tax Act 1961, and the High Court called for a reference on the basis that the question was a question of law. We are unable to agree with the High Court. In the first place, the Tribunal has held that the addition had been made on the basis of pure guess work and this is a matter of fact in respect of which the Tribunal's conclusion is final. In the second place, there was no question of remanding the matter to the Assessing Officer for re-examination of the same question. It is not often that we interfere when the High Court calls for a reference under Section 256(2) but when, as here, the question is a pure question of fact, our interference is called for. The appeal is allowed. The order under challenge is set aside. No order as to costs." Reference in this connection may kindly be made to the decision of Paradise Holidays (Delhi High Court) order dated 28.04.2010 where in it has been held as under: 'The Assessing Officer has not pointed out any specific defect or discrepancy in the Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the above, the addition made be deleted. Ground no. 7 and 8 relate to addition of Rs. 10,00,000/- on account of freight expenses and valuation of closing stock: The AO while dealing with the issue has held as under: 7. It was also seen from the profit & loss account, that closing stock of Edible Oil had been disclosed at Rs. 4,84,31,121/-. Further, during the course of proceedings, it was found that the closing stock shown by the assessee was valued only by taking purchase rate of commodity. The assessee has not taken overhead expenses such as freight while valuing said commodities. Accordingly, assessee vide order sheet entry dated 04.03.2015 was specifically required to furnish valuation of closing stock with supporting documentary evidence. In response, assessee vide his written submissions dated 25.03.2015 furnished reworking of closing stock valuation by including freight expenses. For the convenience details are depicted in tabulation form; SI No Name of Commodity Name of Party Value (Rs.) Freight which should be included as per assessee.(Rs.) 1 Mustard Oil Ex. UP Purchase 1,85,76,099/- 2,26,546/- 2 Refined R.B. Oil R.K Agro Pvt Ltd and M/s. Ganpat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stocks have been valued as it was valued in the earlier years. The AO also noted that in purchases made from sister concern, no freight has been paid. It was explained during the assessment proceedings that the stock of both was in the same premises hence for paying freight from sister concern does not question arise. The AO concluded that the claim of freight expenses of Rs. 25,63,403/- debited under the head "freight expenses" was excessive and the closing stock should have been valued with freight. The AO has made an addition of Rs. 10,00,000/- on ad hoc basis to cover up leakages. The AO has failed to appreciate that the godown of both the concerns is in the same premise i.e. to say different godown in a large premises. On purchases made from sister concerns no freight has been made because the goods have been transferred from one godown to other godown. Since the assessee has not paid any freight on the purchases made from its sister concerns, question of adding freight in closing stock does not arise. Moreover, the AO without verifying the fact has made the aforesaid amount on adhoc basis to cover the possible leakages. In any case, the credit for Rs. 10,00,000/- if susta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is relatable to earning of income is to be only allowed as expenditure and it therefore follows that the expenses which are relatable to the earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial year or not. Further, Central Board of Direct taxes, in exercise of its power under section 119 of the Act has also clarified the matter vide circular no.5/2014 dated 11.02.2014 that Rule 8D read with 14A of the Act provides for disallowance of the expenditure even were tax payer in a particular year has not earned any income. The issue of exempt income for the year has been also clarified by the above mention circular as under, ".. the above position is further clarified by the usage of term 'includible' in the heading to section 14A of the Act and also the heading of Rule-8D of I T Rules 1962 which indicated that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the word 'income of the year' but "Income under the Act." This also indicated that for invoking disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of the proprietorship business named M/s. R.K. Enterprises. The entries of the relevant year were explained by filing copies of account duly confirmed but not properly discussed in para-8 of the assessment order. "Sec.14-A" deals with the expenditure incurred by the assessee and relation to the income which is not formed part of the total income. Here in the instant case the loan taken in earlier year was invested in business activities in that year and could not repaid, on which the assessee has paid interest. On this fact it can not be said that the assessee has claimed any expenditure in relation to the amount not formed part of the business activities. Thus the AO has arbitrarily invoked the provisions. What has been calculated and working made in para-8 of the assessment order has not been supplied to the assessee for rebuttal. Therefore the disallowance to the extent of Rs. 2,23,561/- is unjust, illegal and arbitrary. While making the disallowance, the AO has not recorded his satisfaction as contemplated in section 14A of the Act. The AO has to record first his satisfaction regarding the claim of the assessee that the assessee has not incurred any expenditure to earn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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