No penalty can be levied u/s 271(1)(c) for concealment of income on addition made u/s 41(1) in respect of sundry creditors appearing in Balance-sheet:

AO levied penalty u/s 271(1)(c) on addition made u/s 41(1) in respect of sundry creditors outstanding at the end of the year. Hon’ble ITAT observed that such liability duly appeared in the Balance-sheet of the assessee and hence, it couldn’t be said that the conclusively liability ceased to exist. It was held that although the addition was not in dispute, it didn’t amount to concealment of income and hence, penalty was not justified on such addition. Accordingly, penalty was deleted.

[CHRAG HARMANBHAI PATEL (HUF) Vs. ITO – ITA Nos.298 & 1323/Ahd/2012]

No addition can be made u/s 41(1) in respect of creditors outstanding at the end of the year:

AO found that there were certain outstanding creditors for goods at the end of the year and few of them were outstanding for over three years. AO issued notices u/s 133(6) to certain creditors which returned un-served and even the assessee couldn’t furnish confirmation of any of the creditors. Hence, AO concluded that the creditors no longer existed at the given places, the said outstanding sums were no more payable and the liability had ceased to exist. Accordingly, an addition was made in respect of such creditors u/s 41(1). The Hon’ble ITAT observed that the assessee had shown such creditors as its liability in the Balance-sheet and the same was in respect of purchases made by the assessee. The assessee had not written off the said amount and had acknowledged the liability to pay by reflecting the same in Balance-sheet. Even the Revenue had not brought anything on record to prove that the assessee had obtained any benefit either by way of remission or cessation of liabilities. In light of the aforesaid facts, the impugned addition was deleted by the Hon’ble ITAT.

[PURVIDEVI MAHENDRAKUMAR CHAUDHARY VS. ITO – ITA NOS.1426 & 1698/Ahd/2012]

No disallowance can be made u/s 36(1)(iii) in respect of interest if assessee has sufficient interest free funds:

AO found that the assessee had certain capital work-in-progress. He further observed that assessee’s total loss and miscellaneous expenses were far more than assessee’s share capital and accordingly, assessee’s net worth was negative. He therefore took a view that secured and unsecured loans might have been used for making payments for acquisition of assets. Accordingly, he made proportionate disallowance of interest u/s 36(1)(iii). Hon’ble ITAT observed that AO had disallowed interest u/s 36(1)(iii) without ascertaining the fact as to whether capital was borrowed for capital assets or not. Revenue also failed to prove the onus of establishing the nexus that interest bearing funds had been used for acquiring such capital assets. Further, such investment was made in preceding year when the assessee had interest free funds. Following the ratio laid down in the case of “Reliance Utilities and Power Ltd. – 313 ITR 340 (Mum)”, CIT(A) had held that the presumption will go in favour of the assessee that such investments were made out of interest free funds and accordingly, deleted the said disallowance. Revenue couldn’t controvert such findings of CIT(A) and accordingly, Hon’ble ITAT also upheld the order passed by CIT(A).

[ITO Vs. RAVIRAJ FOILS LTD. – ITA No. 2945/Ahd/2011]

Liquidated damages paid towards late delivery of goods are allowable as business expenditure:

AO disallowed certain liquidated damages incurred by the assessee paid towards late delivery of goods. Hon’ble ITAT observed that amount in respect of liquidated damages was deducted on account of delay in terms of purchase order. Delay in delivery had occurred due to delay in terms of purchase order, delay in approvals of drawings by the customers and performance tests of the equipment, etc. In light of such facts, it was held that amounts paid as damages towards late delivery of goods are allowable as business expenditure.

[ACIT Vs. MAZDA LTD. – ITA Nos.1106 & 1750/Ahd/2012]

If CIT(A) dismisses a ground after wrongly recording that the same is not pressed by assessee, ITAT can restore the matter for afresh consideration:

AO made an addition on account of water and service charges. Ld. CIT(A) recorded that the assessee had not pressed the said ground since the same was decided against the assessee in earlier years. Assessee preferred an appeal before ITAT and submitted that CIT(A) had wrongly recorded the same. ITAT observed that the DR had not brought anything on record to show the said issue was decided against the assessee in earlier years. Hence, ITAT restored the matter to the file of AO to decide the issue afresh after giving reasonable opportunity of being heard to the assessee alongwith certain directions. On Revenue’s appeal, Hon’ble High Court held that the order of ITAT required no interference and accordingly, revenue’s appeal was dismissed.

[CIT vs. Gujarat Alkalies & Chemicals Ltd. – Tax Appeal No. 816 of 2013]

Interest paid @ 18% on unsecured loans from parties covered u/s 40A(2)(b) is reasonable:

AO found that the assessee had paid interest @ 18% on unsecured loans obtained from persons covered u/s 40A(2)(b) as against interest @ 12% to other parties. Hence, he disallowed interest in excess of 12%. Hon’ble ITAT observed that the said loans from unsecured persons were received in earlier years and interest @ 18% on such loans was accepted in earlier years by the revenue. It was further observed that the parties to whom interest @ 18% was paid were falling in the highest tax bracket and hence, there was no loss to the revenue. Hon’ble ITAT was of the view that such unsecured loans were obtained to meet the business requirements and to ensure that the assessee’s movable and immovable assets remain free from any encumbrances. Further, such loans involve huge risks and are generally not required to be repaid at a short notice. In light of the above, it was held that interest @ 18% was reasonable.

[SOUTHERN INDIA BIDI WORKS PVT. LTD. Vs. ACIT – ITA Nos.1847/Ahd/2011 and 1113/Ahd/2012]

ITAT is bound to deal with judgment relied upon and cited by an assessee:

AO made addition in respect of bogus purchases/sales which was confirmed by CIT(A) as well as ITAT. On further appeal, Hon’ble High Court observed that ITAT, while dismissing assessee’s appeal, had neither considered nor dealt with the judgment in the case of “CIT vs. President Industries – 258 ITR 654” which was cited by the assesse and on which, assessee had placed heavy reliance. Hon’ble High Court held that whenever any decision has been relied upon and/or cited by any assessee, the concerned authority /ITAT is bound to consider and deal with the same and opine as to whether the same shall be applicable or not. Accordingly, the matter was remanded to ITAT with a direction to decide the issue after considering the decision in the case of CIT vs. President as relied upon by the assessee.

[Dattani And Co. vs. ITO – Tax Appeal No.847-849 of 2013]

No disallowance u/s 43B if amount is deposited within the grace period:

AO made disallowance u/s 43B in respect of employees’ contribution to PF considering the said payment to be belated since the same was deposited after the due date prescribed under the PF Act. The said disallowance was deleted by CIT(A) as well as ITAT consequent to which revenue preferred an appeal before the Hon’ble High Court. Hon’ble High Court observed that the ITAT had deleted the said disallowance on the count that the said assessee had deposited the said sum within the extended grace period under the PF Act. It was held that since the assessee was entitled to make the said payment under PF Act within the grace period and since the assessee had made the said payment within such grace period, it cannot be said that the assessee had not deposited the amount within the prescribed time limit. Accordingly, Revenue’s appeal was dismissed.

[CIT vs. Amoli Organics (P) Ltd. – Tax Appeal No.36 of 2008]

Registration u/s 12A cannot be denied merely on the count that no substantial activities have been carried out:

CIT rejected assessee-trust’s application for registration u/s 12A since he was not satisfied with the activities of the assessee and was of the opinion that no substantial charitable activities were carried out. ITAT quashed the said order and gave a direction to grant registration to the assessee u/s 12A. On Revenue’s appeal, Hon’ble High Court observed that the main object of the assessee was to promote, establish, run, support, maintain and advance the cause of education, to grant aid, or other assistance to all types of educational institutions including schools, colleges, universities and other institutions for the benefit of students. Revenue had neither doubted nor disputed the object and purpose of the assessee. Also it was first year after the establishment of the assessee-trust. Assessee was registered u/s 25 of the Companies Act. Total donation received by the assessee was merely Rs.7,103/- out of which scholarship was given to the tune of Rs.4,000/- approx. Hon’ble High Court thus held that ITAT was right in holding that looking to the magnitude of income during the under consideration, charitable activities carried out cannot be considered to be of low magnitude. ITAT had rightly directed to grant registration to the assessee u/s 12A. Accordingly, Hon’ble High Court upheld the order of ITAT and dismissed the Revenue’s appeal.

[CIT vs. Satvara Education Foundation – Tax Appeal No.907 of 2013]

Entire deduction u/s 80IB(10) cannot be denied merely on the counts that some of the units were not fully constructed before the prescribed date and that multiple approvals were obtained w.r.t different units:

AO denied deduction u/s 80IB(10) on the counts that the entire housing project was not completed within the prescribed time limit and there were multiple approvals w.r.t. different units. On appeal, CIT(A) allowed deduction u/s 80IB(10) w.r.t. those units of the said project which were approved and constructed prior to 31/03/08. The said order was confirmed by ITAT. On Revenue’s appeal, Hon’ble High Court observed that the said project was duly approved before the cut-off date being 01/04/04. It was w.r.t. 119 units and construction of most of units was completed before the prescribed dated i.e. 31/03/08. Assessee had fulfilled the conditions w.r.t. size of plot and built up area per unit. AO had not pointed out any condition prescribed u/s 80IB(10) which had been violated by the assessee. It was thus held merely because multiple approvals have been obtained, deduction u/s 80IB(10) cannot be denied. It was also held that though the entire project has not been completed before the prescribed date, deduction u/s 80IB(10) must be granted w.r.t. units which have been completed before the prescribed date. Revenue’s appeal was dismissed accordingly.

[CIT vs. B M And Brothers – Tax Appeal No.796 of 2013]

Unutilized MODVAT credit appearing in Balance-sheet doesn’t constitute income of an assessee:

Assessee had availed MODVAT credit paid at the time purchase of capital assets being plant and machineries. Part of such CENVAT credit was utilised by the assessee against sale of finished goods. AO found that the assessee had reduced the cost of plant and machineries to the extent of MODVAT credit for the purpose of claiming depreciation. AO was of the view that MODVAT received on purchase of plant and machineries, being capital in nature, cannot be allowed to be set-off against revenue receipts. According to AO, it was a kind of subsidy and incentive given by the Govt. and hence, it was to be treated as assessee’s income. Hon’ble ITAT held that the differential amount of MODVAT credit (after adjustment of current year’s utilization) appearing on asset side of Balance-sheet is a pre-paid expenditure and not chargeable to P&L account. It doesn’t constitute income of an assessee. Accordingly, CIT(A)’s order deleting the said addition was upheld by the Hon’ble ITAT.

[DCIT Vs. M/S. CAMPHOR & ALLIED PRODUCTS LTD. – ITA No.370/Ahd/2013]

No penalty can be levied on addition made in respect of bad debts claimed on the basis of a bona belief:

AO levied penalty on the addition made in respect of bad-debts. Hon’ble ITAT observed that the assessee had earlier sold factory shed but couldn’t recover entire sale proceeds and hence, the unrealized sum was claimed as bad-debts. AO was of the view that since the transaction as to sale of factory shed was not a trading transaction, loss on account of non-realization of such sale proceeds was a capital loss and hence, it wasn’t allowable as bad-debts. It was further observed that the claim of bad-debts was duly reflected in P&L a/c as well as return of income. It was not the case that the assessee had not disclosed the amount or had concealed the particulars of income. Assessee’s contention was that it was of bona fide view that since amount written off was out of amount that had already been offered to tax, it was eligible for the claim of bad-debts and such bona fide belief of the assessee had not been controverted by the Revenue by bringing any tangible material on record. Hence, relying on the decisions in the cases of “Price Waterhouse Coopers Pvt. Ltd. vs. CIT – 348 ITR 306 (SC)”, the penalty was deleted.

[M/S. POONAM PROTEINS PVT. LTD. Vs. ITO – ITA No.1626/Ahd/2010]

Process of obtaining rice from paddy is a manufacturing activity and assessee is eligible for claim of additional depreciation:

Assessee, engaged in the business of running rice mill, claimed additional depreciation on plant and machinery which came to be disallowed by AO since he was of the view that the assessee was not engaged in the manufacture/production of any article. Hon’ble ITAT held that the assessee rice is manufactured/produced after a cumbersome process applied on paddy and the commodity so manufactured cannot be regarded or used as the original commodity. Rather, rice is a distinct commodity than the raw material used (i.e. paddy) either considering the usage or marketability of the product. Hence, the assessee was rightly eligible for additional depreciation.

[M/S. VIJAYALAXMI RICE MILL Vs. ITO – ITA 2205/Ahd/2010]

No disallowance can be made u/s 43B in respect of late payment of PF and employees’ contribution if the same are deposited before due date of filing return of income:

AO made disallowance u/s 43B in respect of late payment of PF and Employee’s contribution to Provident Fund. Hon’ble ITAT observed that though the said payments were made late (i.e. within the grace period or minor delay of around six days), such payment were made before due date of filing return of income. Hon’ble ITAT, following the ratio laid down by the Hon’ble Apex Court in the case of “CIT vs. Alom Extrusion – 319 ITR 306 (SC)”, held that no such disallowance can be made u/s 43B since the said amounts were deposited before due date of filing return of income. The disallowance u/s 43B was deleted accordingly.

[DCIT Vs. V.K. PATEL & CO. – ITA No.330/Ahd/2013]

Penalty cannot be levied u/s 271(1)(c) by invoking Explanation 5 merely on account of late payment of tax and interest on additional income disclosed during search:

Assessee declared certain income as undisclosed income during the course of search on which AO levied penalty u/s 271(1)(c) by invoking Explanation 5 by not granting the immunity provided under clause 2 to Explanation 5. Hon’ble ITAT observed that the assessee had made a statement u/s 132(4) as to his undisclosed income. Assessee had also substantiated the manner in which such income was derived. Assessee had also paid tax on such income along with interest. The only count on which AO didn’t grant immunity from penalty was that the tax and interest were paid late and not at the time of filing return of income. Hon’ble ITAT, relying on the decision of the Hon’ble Apex Court in the case of “ACIT vs. Gebilal Kanhaialal HUF – 348 ITR 561 (SC)”, held that no time limit has been prescribed in law for payment of tax with interest for claiming immunity. Accordingly, the penalty was deleted.

[SHRI KAMLESH JAIN Vs. ACIT – ITA No.2525/Ahd/2010]

No proportionate disallowance of interest expenditure is called for in respect of interest free advances if an assessee has sufficient interest free funds:

AO found that the assessee had obtained funds from bank in form of working capital on which interest was paid and had advanced interest free loan to a related party. Hence, he disallowed proportionate interest expenditure. Hon’ble ITAT found that increase in the amount of reserves and surplus of the assessee for the given year was itself much more than the interest free loan advanced by the assessee. Further, Revenue had not brought any evidence on record to prove that interest bearing funds obtained by the assessee had been utilised for such interest free advances. Neither AO nor CIT(A) had established direct nexus between interest bearing funds and interest free advances. The Hon’ble ITAT, following the ratio laid down in the cases of “CIT Vs. Reliance Utilities and Power Ltd. – 313 ITR 340 (Bom)” and “CIT vs. Raghuvir Synthetics Ltd. – 354 ITR 222 (Guj)”, held that if an assessee has both, interest bearing funds as well as interest free funds, then it shall be presumed that interest free advances have been made out of interest free funds if the same are sufficient to meet such interest free advances.

[GUJARAT INSECTICIDES LTD. Vs. ACIT – ITA 556 & 675/Ahd/2013]

No disallowance u/s 40(a)(ia) in respect of payment to truck owners exceeding Rs.50,000/- for non-compliance of S.194C in absence of any contract:

AO made disallowance u/s 40(a)(ia) in respect of payments made to truck owners/parties exceeding Rs.50,000/- in aggregate on or after 01/10/04 without deducting tax at source u/s 194C. Hon’ble ITAT observed that there was no contract for carrying out such work of transportation between assessee and such truck owners/parties pursuant to which such payments were made. Even Revenue had not brought any cogent materials to establish that such payments were made pursuant to any such contract. Accordingly, revenue had not established that provisions of S.194C were applicable in assessee’s case. Hence, it was held that S.194C was not applicable in the given case and consequently, no disallowance is called for u/s 40(a)(ia).

[ACIT Vs. SHREE DHAIN AUTO TRANSPORT CORPORATION – ITA Nos.1 to 4/Ahd/2013]

Penalty u/s 271(1)(c) cannot be levied on disallowance made u/s 40(a)(ia) by invoking legal fiction:

AO levied penalty u/s 271(1)(c) on disallowance made u/s 40(a)(ia). Hon’ble ITAT observed that the assessee had paid interest to a fiancé company but had not deducted tax at source u/s 194A since he was under a bona fide belief that provisions of TDS were not applicable on payment of interest to NBFC. AO had not alleged that the said payment was non-genuine, bogus, excessive or unreasonable. Disallowance u/s 40(a)(ia) was made by merely invoking the legal fiction. It was thus held that disallowance u/s 40(a)(ia) will not attract penalty for furnishing inaccurate particulars of income. Accordingly, the penalty was deleted. Reliance was also placed on the decision of the Hon’ble Apex Court in the case of “CIT vs. Mother India Refrigeration Pvt. Ltd. – 155 ITR 711 (SC)” wherein in was held that legal fictions are created for some definite purpose and the same must be limited to that purpose and should not be extended beyond that legitimate filed.

[ITO Vs. VISHAL MADHUSUDHANBHAI CHOKSI – ITA No.62/Ahd/2013]

No addition can be made u/s 40A(2) unless AO finds out Fair Market Value of the concerned goods or services and compares the same with payment made by assessee to related parties:

AO made disallowance u/s 40A(2) of part of the job charges paid by the assessee to a person covered vide S.40A(2)(b) since he considered it to be excessive. Hon’ble ITAT found that the appellant had paid texturizing labour charges at 15/kg to its sister concerns whereas its own cost of production was Rs.9.71/kg. Hence, AO took a view that the assessee had made excess payment of Rs.5.29/kg (i.e. Rs.15 – Rs.9.71) and hence, he disallowed corresponding labour charges. For working out such a disallowance, AO firstly needs to compare payment made by assessee with “Fair Market Value” (FMV) of such goods or services and then, if payment is found to be excessive or unreasonable as compared to FMV, then disallowance can be made to the extent of excessive or unreasonable sum paid. In the given case, AO compared the payment of labour charges with “Cost of production” of the assessee and not the “FMV”. Further, Revenue couldn’t controvert the fact that if octroi, freight and cartage are added to cost of production, assessee’s average cost works out to Rs.15.02/kg. In light of the aforesaid facts, the addition made u/s 40A(2) was deleted.

[M/S. J.J. TEXTURISERS Vs. ITO – ITA No.978/Ahd/2010]

S.194C is not applicable while making payment is respect of purchase of standardized materials available in market:

AO made disallowance u/s 40(a)(ia) since he was of the view that the assessee had not deducted tax u/s 194C while making payments in respect of packing materials. Hon’ble ITAT found that the concerned payment was in respect of purchase of plastic trays, cups, spoon and plastic dishes, etc. and the said items did not carry the logo of the assesse. Further, the said purchases were of the standardized materials available in the market. It was thus held that such purchases cannot be considered as being a case of contract which would require deduction of tax u/s 194C. Consequentially, disallowance u/s 40(a)(ia) was deleted.

[RASRANJAN FOOD PRODUCTS PVT. LTD. Vs. ITO – ITA No.1794/Ahd/2010 & CO No.188/Ahd/2010]