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Income Tax Appellate Tribunal, ‘D’ BENCH : CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE]
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
Assessee in this appeal assails an order dated 11.11.2016 of ld. Commissioner of Income Tax (Appeals)-10, Chennai. Grounds raised by the assessee are on a disallowance of interest of ITA No. 385/Mds/2017. :- 2 -:
Rs.7,25,910/, addition for undervaluation of stock Rs.17,99,213/- and disallowance of Rs.3,45,000/- u/s.40(a)(ia) of the Act.
Facts apropos are that assessee an exporter of film and audio rights had filed a return of income for the impugned assessment year disclosing income of Rs.75,90,460/-. During the course of assessment proceedings, it was noticed by the ld. Assessing Officer that partners of the assessee firm had withdrawn money in excess of their capital contribution. As per the ld. Assessing Officer assessee had taken loans from outside parties and paid interest of Rs.7,25,910/- thereon. Since the partners had not paid interest on their withdrawals, ld. Assessing Officer was of the opinion that interest of Rs.7,25,910/- paid by the assessee to its loan creditors could not be allowed.
Ld. Assessing Officer also noted that assessee had acquired audio and video rights of various films. As per the ld. Assessing Officer valuation of the digital rights were not correctly valued.
Further, as per the ld. Assessing Officer closing stock of theatrical and digital rights were undervalued by Rs.17,99,213/-.
ITA No. 385/Mds/2017. :- 3 -:
Ld. Assessing Officer, also noted that assessee had made various payments without deducting TDS warranting disallowance u/s.40(a)(ia) of the Act.
Assessment was thereafter completed by making 5. disallowance of interest Rs.7,25,910/-, addition for undervaluation of stock Rs.17,99,213/- and disallowance of Rs.3,45,000/- u/s.40(a)(ia) of the Act.
Aggrieved, assessee moved in appeal before the ld. Commissioner of Income Tax (Appeals). Contention of the assessee viz-a-viz interest disallowance was that partners account had only credit balance in the aggregate. As per the assessee there was no nexus between loans availed by it and drawings made by the partners.
Viz-a-viz, addition for undervaluation of closing stock, 7. argument of the assessee was that valuation of theatrical rights had be done as per Rule 9A and 9B of the Income Tax Rules, 1962. As per the assessee for non theatrical rights it had adopted a valuation based on the aging of such rights.
ITA No. 385/Mds/2017. :- 4 -:
Viz-a-viz, disallowance made u/s.14A of the Act, one of the arguments of the assessee was that the recipients had paid taxes on such amount and therefore disallowance could not be made considering the amendment to Sec. 40(a)(ia) of the Act through Finance Act No.2012.
Ld. Commissioner of Income Tax (Appeals) after considering 9. the submissions held that disallowance of interest on account of overdrawing made by the partners was rightly done by the ld. Assessing Officer. As per the ld. Commissioner of Income Tax (Appeals) partners of the assessee firm had over drawn money from the firm without paying any interest, whereas assessee had paid interest on loans taken by it. In so far as issue regarding undervaluation of closing stock was concerned, ld. Commissioner of Income Tax (Appeals) directed the ld. Assessing Officer to examine the contentions of the assessee and recompute the value of the closing stock. Viz-a-viz disallowance u/s.40(a)(ia) of the Act, ld. Commissioner of Income Tax (Appeals) held that assessee could not produce any evidence to substantiate its contention that recipients had paid taxes on such amounts.
ITA No. 385/Mds/2017. :- 5 -:
Now before us, the ld. Authorised Representative strongly assailing the order of the ld. Commissioner of Income Tax (Appeals) submitted that detailed submissions made by the assessee on each of the issues, before the lower authorities were not properly considered.
As per the ld. Authorised Representative, there was no nexus between the amounts drawn by the assessee partners and interest bearing loans taken by the assessee. In so far as disallowance u/s. 40(a)(ia) of the Act was concerned, submission of the ld. Authorised Representative was that assessee was never given a chance to substantiate its contention that payee had paid taxes on such amounts.
Per contra, ld. Departmental Representative strongly 11.
supported the orders of the authorities below.
We have considered the rival contentions and perused the 12. orders of the authorities below. In so far as disallowance of interest is concerned, there is nothing on record which would show what was the amount borrowed by the assessee during the relevant previous year on which interest was paid by it. Ld. Assessing Officer had not examined the nexus between such borrowed amounts and drawings made by the partners of the assessee. No doubt, drawings made by ITA No. 385/Mds/2017. :- 6 -: partners in excess of his capital contribution can result in pro-rata disallowance of interest on loans borrowed by the assessee.
However, in our opinion the facts relating to this issue has not properly examined by the lower authorities.
Viz-a-viz under valuation of the theatrical and digital rights 13. of films, ld. Commissioner of Income Tax (Appeals) had set aside the order of the ld. Assessing Officer with the following comments:-
‘’5.3.2. It is clear from the AR's submission that the AO has not considered the stock valuation in all the items. The appellant's submission that the AO has not appreciated the facts correctly is prima facie acceptable. However, in spite of several opportunities given, the appellant could not submit quantitative analysis and stock valuation. As mentioned above under para 2.1., the appellant did not appear on both the occasions of final hearing posted by the CIT(A). Under the circumstance, the AO is directed to examine the appellant's submission as mentioned above and to re-compute the closing stock valuation as per the provisions of Section 145 and Section 145A of the Income Tax Act, 1961. In view of the above remarks, the appellant's ground on this issue is partly allowed’’.
In our opinion, ld. Commissioner of Income Tax (Appeals) having set aside the issue to the file of the ld. Assessing Officer for considering the submissions of the assessee, grievance raised by the assessee on this is ill convinced.
Viz-a-viz, disallowance u/s. 40(a)(ia) of the Act, assessee can definitely take refuge to second provision to Sec.40(a)(ia) of the ITA No. 385/Mds/2017. :- 7 -:
Act, if it can show that recipients had paid taxes on the amounts received by them from the assessee without deduction of tax.
Accordingly, we set aside the orders of the lower authorities below on the issues relating to disallowance of interest Rs.7,25,910/- and disallowance of Rs.3,45,000/- made u/s.40(a)(ia) of the Act and remit these back to the file of the ld. Assessing Officer for consideration afresh in accordance with law.
In the result, the appeal of the assessee is partly allowed 16. for statistical purpose.
Stay petition having become infructuous is dismissed. 17.
Order pronounced on Monday, the 27th day of November, 2017, at Chennai.