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Income Tax Appellate Tribunal, ‘A’ BENCH, BENGALURU
O R D E R Per INTURI RAMA RAO, AM : These two cross appeals filed by the assessee-company as well as the revenue are directed against the order of the CIT(A)-1, Bangalore, dated 28/03/2014 for the assessment year 2006-07.
Brief facts of the case are as under: The assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and trading in all kinds of man-made filament yarns. Return of income for the assessment year 2006-07 was filed on 29/11/2006 declaring total income of Rs.23,28,840/-. After processing the said return of income, the case was selected for scrutiny assessment as per the guidelines issued by & 1056/Bang/2014 Page 2 of 14 the CBDT. Accordingly, notice u/s 143(2) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] was issued and the assessment was completed by the Asst. Commissioner of Income-tax, Circle 11(5), Bengaluru, vide order dated 30/12/2008 passed u/s 143(3) of the Act. While doing so, the Assessing Officer (AO) disallowed interest of Rs.3,37,893/- by holding that borrowed funds were diverted for non-business purposes in the form of loans to directors. Accordingly, the AO disallowed proportionate interest of Rs.3,37,893/-.
The AO also disallowed expenditure on account of purchase of wood of Rs.30,62,181/- by holding that purchase invoice only in the form of bill issued by the assessee-company by self-made vouchers. The AO also made addition on account of undervaluation of closing stock of Rs.32,60,000/-.
Being aggrieved, an appeal was preferred before the CIT(A), who vide impugned order, had confirmed the addition on account of disallowance of interest of Rs.3,37,893/- and also confirmed addition on account of undervaluation of closing stock of Rs.32,60,000/-. However, in respect of disallowance on account of purchase of wood, the CIT(A) had granted partial relief by directing the AO to allow 50% of the expenditure claimed of Rs.30,62,181/- as deduction.
Being aggrieved, the assessee is in appeal in challenging that part of the order of the CIT(A) which is against it and the revenue is also in appeal in CIT(A) to allow 50% of the expenditure incurred on wood.
ITA No.1034/Bang/2014:
Now, we shall take up the assessees appeal. The assessee raised the following grounds of appeal:
7. Ground Nos. 1, 2, 6 and 7 are general in nature and do not require any adjudication.
8. Ground No.3 challenges the finding of the CIT (A) confirming disallowance of interest of Rs.3,37,893/-. The AO made disallowance of & 1056/Bang/2014 Page 4 of 14 Rs.3,37,893/-by holding that the assessee company had diverted borrowed funds for non-business purposes in the form of loans to directors. This finding came to be confirmed by the CIT (A) rejecting the contention of the assessee company that amounts were provided to the directors to meet business expenditure of the assessee- company. Without prejudice to this argument, it was further contended that loans were granted to directors only out of non borrowed funds. The CIT(A) rejected the first contention of the assessee that loans were provided for business purpose by holding that no evidence was furnished in support of this condition. Similarly in respect of the contention that non-borrowed funds were utilized for the purpose of providing loans to the directors, the CIT (A) rejected the contention as no balance-sheet of the assessee company was furnished before him to verify this factual information.
9. Before us learned counsel for the assessee contested that no loans were provided to the directors out of borrowed funds of the company. In fact, amounts were provided to directors for various exigencies of the business. He further contended that borrowed funds represent bank overdraft facilities granted by bankers on the basis of stock inventory. Therefore, question of diverting working capital to personal needs of directors of the company does not arise. Learned counsel for the assessee further contended that in any event free funds of the assessee company far exceeded borrowed fund and therefore no disallowance of interest is called for.
10. We heard rival submissions and perused the material on record. The disallowance of interest u/s 36(1)(iii) can be made only in case borrowed funds were utilized for non-business purpose. The case the case of the assessee is that since loans were provided to directors of the company, he presumed that borrowed funds have been utilized for the purpose of loans to directors. The onus always lies on the assessee to prove that advances are made only for business purposes. In the present case, the assessee-company, except making a bald assertion that advances are made to directors only for business exigency, had not led any evidence to demonstrate this fact. However, & 1056/Bang/2014 Page 5 of 14 the other contention of the assessee-company that loans and advances are made out of free funds, merits consideration. In the balance sheet filed before us at page 147 of the paper book, we find that there is a share capital to the extent of Rs.2,14,46,989/- and there is net current assets, loans and advances of Rs.66,98,505/-. We find that there are no inventories as sundry debtors based on which banks have granted working capital facility. This clinches the issue that no borrowed funds have been utilized for business purpose. Therefore, we hold that this contention of the assessee-company also cannot be accepted.
This ground of appeal by the assessee is dismissed.
Next ground of appeal relates to disallowance of firewood expenditure. The AO disallowed a total expenditure of Rs.30,62,181/- incurred towards purchase of wood by holding that the expenditure is inflated and questioned the genuineness of expenditure as the expenditure is supported by self-made vouchers. The submissions made by the assessee-company during the course of assessment proceedings as well as before the CIT(A) are as under:
The CIT(A), after considering the submissions made, confirmed the addition to the extent of 50% and deleted entire addition on account of valuation of closing stock.
11.1 The learned counsel for the assessee contended that the addition was made by AO on mere surmises and conjectures. The fact that purchases are made from un-organized people/illiterates and the expenditure is supported by self-made vouchers, cannot go against the claim of the assessee. Learned counsel for the assessee relied on the decision of the Hon’ble Allahabad High Court in the case of Nisar Biri Sikka No. 1 v. CIT (174 taxman 51) in support of the proposition that self-made vouchers cannot be rejected by holding to be bogus. Therefore, he submitted that there is no basis for making addition of or confirming the addition and no addition can be made based on surmises and conjectures.
11.2 On the other hand learned DR placed reliance on the orders of the lower authorities.
11.3 We heard rival submissions and perused the material on record. In the present ground of appeal the issue relates to the allowance of firewood expenditure. Addition is made by the AO on the basis of self-made vouchers and the expenditures is on the higher side compared to earlier years. The fact that similar expenditure was allowed in earlier years goes to prove that the assessee incurred expenditure during this year also. The firewood was used for operation of boilers. The AO has not doubted working of the boilers or use of boilers. The assessee-company gave details of purchase of boilers installed during the previous year relevant to assessment year 2006-
07. The AO had not given reasons as to how this expenditure is & 1056/Bang/2014 Page 10 of 14 inflated. The findings should be supported by material brought on record by the AO. The AO had not brought any evidence in support of this finding. It is settled principle of law that no addition can be made based on conjectures and surmises. The fact that expenditure is supported by self-made vouchers would not militate against the assessee to claim the expenditure, unless and otherwise there is a material indicating that the expenditure claimed is bogus. In the present case, incurring of expenditure is beyond doubt. It is only the quantum of expenditure which can be perhaps be doubted by the AO. But the AO had not brought any evidence showing that expenditure is inflated. There is no allegation of violation of provisions of section 40A(3) of the Act in the present case. The assessee-company had also filed full name and addresses of the seller of firewood to the assessee- company. It is also open to the AO to examine those sellers. The AO chose not to confront this evidence with the sellers. In the circumstances, we do not find any reasons to confirm the addition. Therefore we direct the AO to allow the entire expenditure. This ground of appeal is allowed
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
The revenue raised the following grounds of appeal:
Ground Nos.1, 9 and 10 are general in nature and do not require any adjudication. Ground Nos.2 and 3 challenge the finding of the CIT(A) in allowing 50% of expenditure on purchase of firewood. For the reasons given in the assessee’s appeal, we hold that entire expenditure is allowable and therefore, these grounds of appeal filed by the revenue are dismissed.
15. Ground Nos.4, 7 and 8 challenge deletion of addition on account of under-valuation of closing stock. The finding of the CIT (A) is as under:
& 1056/Bang/2014 Page 14 of 14 The findings of the CIT (A) are based on the salutary principle that closing stock should be valued at the cost or market price whichever is less. As rightly held by the CIT(A), the AO had not detected in excess physical stock but only disputed with regard to the rate to be applied for the purpose of valuation of closing stock. Therefore we do not find any reason to interfere with the reasoning of the. CIT(A). Hence this ground of appeal is dismissed.
In the result, the appeal filed by the revenue is dismissed.