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Facts
The assessee, engaged in manufacturing and sale of hosiery goods, appealed against an order confirming certain disallowances made by the Assessing Officer (AO) and upheld by the CIT(A). The AO's assessment was based on a survey and subsequent special audit, which revealed discrepancies.
Held
The Tribunal held that the disallowance for non-deduction of TDS on contractual payments should be restored to the AO for the assessee to prove their case regarding the payee offering income to tax. The disallowance of refreshment expenses was deleted. The disallowance for cash payments under Section 40A(3) was restricted to 20% as directed by the CIT(A). The addition for closing stock valuation was deleted as it was a matter of valuation. The disallowance of interest under Section 36(1)(iii) was deleted due to lack of evidence of diversion of funds for non-business purposes.
Key Issues
The key issues were disallowances related to TDS, refreshment expenses, cash payments, closing stock valuation, and interest on borrowed funds.
Sections Cited
143(3), 133A, 142(2A), 40(a)(ia), 40A(3), 69C, 36(1)(iii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, CHANDIGARH
Before: HON’BLE SHRI RAJPAL YADAV & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
(िनधा�रणवष� / Assessment Year: 2006-07) M/s Mdgill International Clothing Ltd. ACIT, Circle III, बनाम/ Modgill House, Guru Vihar Ludhiana. Vs. Rahon Road, Ludhiana. �थायीलेखासं./जीआइआरसं./PAN/GIR No. AADCM-6602-N (अपीलाथ�/Appellant) (��थ� / Respondent) : अपीलाथ�कीओरसे/ Appellant by : Sh. Rishab Singla (Adv.). – Ld. AR ��थ�कीओरसे/Respondent by : Dr. Ranjit Kaur (Addl. CIT) – Ld. Sr.DR सुनवाईकीतारीख/Date of Hearing : 27-03-2025 घोषणाकीतारीख /Date of Pronouncement : 21-04-2025 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2006-07 arises out of an order of learned Commissioner of Income Tax (Appeals)-1, Ludhiana [CIT(A)] dated 22-02-2016 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 13-08-2009. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. The assessee is stated to be engaged in manufacturing and sale of hosiery goods.
The assessee was subjected to survey u/s 133A on 01-12-2005 wherein certain discrepancies were found. Considering the nature and complexity of material as impounded during survey, special audit was carried out u/s 142(2A) on the basis of which the assessment has been framed. The grievance of the assessee is – (i) Disallowance u/s 40(a)(ia) for want of TDS on contractual payments; (ii) Disallowance of refreshment expense; (iii) Disallowance u/s 40A(3); (iv) Addition of valuation of closing stock; (v) Disallowance of interest u/s 36(1)(iii).
Disallowance u/s 40(a)(ia) The assessee made contractual payment to M/s Olympian Textile Processor Ltd. but defaulted in deducting tax at source. The Ld. AO made disallowance for Rs.6.34 Lacs which was confirmed by Ld. CIT(A). The only prayer of Ld. AR is that the payee has offered this income to tax and the assessee is in a position to avail the benefit of second proviso to Sec.40(a)(ia). Accepting the same, this issue stand restored back to Ld. AO with a direction to the assessee to plead and prove its case. The corresponding grounds stand allowed for statistical purposes.
Disallowance of Refreshment Expenses The Ld. AO, after telescoping disallowance made u/s 40A(3), disallowed refreshment expenses of Rs.4.78 Lacs since the same were without any supporting bills and vouchers. The Ld. AO invoked the provisions of Sec.69C to make this disallowance which was confirmed by Ld. CIT(A). We find that this expenditure is business expenditure which could not be disallowed u/s 69C. The assessee has turnover of Rs.2.85 Crores and this claim is a reasonable claim. Therefore, we delete this addition.
Disallowance u/s 40A(3) It was noted by Ld. AO that the assessee incurred expenditure of Rs.32.8 Lacs as refreshment and freight / octroi expenses. The same was paid in cash in violation of Sec.40A(3). The Ld. CIT(A), considering extant statutory provisions, directed Ld. AO to restrict the disallowance to the extent of 20%. Before us, there is no new material to controvert the findings of lower authorities. Therefore, no interference is required on this issue.
Addition of valuation of Closing Stock for Rs.50.59 lacs The special auditor valued the closing stock at Rs.198 Lacs whereas the assessee valued the stock at Rs.146.45 Lacs. The assessee contended that wastage and rejected goods were not considered while valuing the stock. Further, the financial results were accepted by special auditor. Itwas reported by special auditor that theassesseemaintained quantitative details properly. The assessee valued the stock on the basis of lower of cost price or market price whereas the special auditor valued the stock at average sale price method. The said method was not as per accepted accounting principles. The assessee’s submissions were subjected to remand proceedings wherein the assessee reconciled the profit difference. The Ld. AO accepted the claim of the assessee except for valuation of raw material. Considering the same, Ld. CIT(A) partially allowed the claim of the assessee. It is quite discernible that no discrepancy has been found in the quantitative details as maintained by the assessee. The difference is only in valuation. The assessee has valued to stock more scientifically on the basis of accepted accounting principles whereas special auditor has applied average rates which is not recognized method of valuation. In our opinion, this is only a matter of valuation and therefore, no such addition could be made in the hands of the assessee. By deleting the impugned addition, we allow the corresponding grounds of assessee’s appeal.
Disallowance of interest u/s 36(1)(iii) The Ld. AO madeestimated interest disallowance u/s 36(1)(iii) @25% of interest payment of Rs.12.96 Lacs. The cash available at the time of survey was less than the cash in hand as per books of accounts. The assessee borrowed funds and paid interest. The Ld. AO alleged that the assessee diverted borrowed funds for non-business purposes. Accordingly, estimated interest was disallowed by following the decision of jurisdictional High Court in Abhishek Industries Ltd. (286 ITR 1). The Ld. CIT(A) confirmed the disallowance against which the assessee is in further appeal before us. We find that this addition is more on presumptions and assumptions. No diversion of fund for non-business purposes has been established by Ld. AO. Further the cited decision has already been considered by Hon’ble Apex Court in the case of Hero Cycles Pvt. Ltd. (379 ITR 347) while taking a view favoring the assessee. Therefore, this disallowance could not be sustained in law. We order so.
The appeal stands partly allowed.
Order pronounced on 21-04-2025.