2019 (4) TMI 1580 - AT - Income Tax

Adhoc disallowance of 10% of various expenses - HELD THAT - We find that the expenses have been disallowed purely on an adhoc basis and even the CIT(A) has returned a finding that the AO has no material to make the subject disallowance. In absence of any finding that the expenses are bogus or not incurred for the purposes of the assessee s business, the adhoc disallowance so made is directed to be deleted. In the result, the ground of appeal is allowed. Addition u/s 41(1) - HELD THAT - As on last day of the financial year i.e, 31.03.2012 relevant to impugned assessment year, the amount of ₹ 69,270 stood credited in the account of Shekhawati Courier Cargo. The act of square up of the said account with the trade debtor happened in subsequent financial year 2014-15 relevant to assessment year 2015-16. In absence of any finding that as on the close of the financial year, there is any benefit by way of remission or cessation of its freight liability, the amount cannot be brought to tax u/s 41(1) in the year under consideration. The Revenue is however free to take action as per law in the year the account was squared up. In the result, the ground of appeal is allowed. Disallowance of interest paid on service tax u/s 40(a)(ii) - assessee has paid interest on service tax - HELD THAT - On a plain reading of the above provisions, it provides that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. What it therefore provides is the rate or tax levied on the profits/gains of any business or profession. The interest on service tax is not a tax levied on the profits/gains of any business or profession. Thus, the very foundation of disallowance by invoking the provisions of section 40(a)(ii) is not satisfied in the instant case. Further, the decision relied upon by the ld CIT(A) is distinguishable as the said decision deals with case of interest on late deposit of TDS which was disallowed by the AO u/s 37(1) of the Act. Even where the provisions of section 37(1) are considered as implied invoked by the ld CIT(A) in the instant case, it is a settled position that the interest on account of delayed deposit of service tax is compensatory in nature and not in the nature of penalty and was, therefore, duly allowable under section 37(1) of the Act. The decision of the Coordinate Bench in case of Remfry Sagar Consultants 2012 (9) TMI 190 - ITAT DELHI which has laid down a similar proposition thus supports the case of the assessee. In the result, the ground of appeal is allowed.

Summary

Issues involved:
1. Adhoc disallowance of expenses sustained by the CIT(A)
2. Addition made under Section 41(1) of the Act
3. Disallowance of interest paid on service tax under Section 40(a)(ii) of the Act

Detailed Analysis:

1. Adhoc Disallowance of Expenses:
The assessee challenged the adhoc disallowance of 10% of various expenses sustained by the CIT(A) for routine operational expenses incurred during the Assessment Year 2012-13. The CIT(A) confirmed the disallowance to the extent of 10% without any concrete evidence provided by the Assessing Officer. The Tribunal found that the expenses were disallowed purely on an adhoc basis without any proof of being bogus or not incurred for business purposes. As a result, the adhoc disallowance was directed to be deleted, allowing the ground of appeal.

2. Addition under Section 41(1) of the Act:
The assessee contested the addition of ?69,270 made by the Assessing Officer under Section 41(1) of the Act. The dispute arose from the non-recovery of freight payment from a deceased consignee, leading to the adjustment of dues against freight payable. The CIT(A) upheld the addition based on ledger entries showing outstanding amounts. However, the Tribunal found that the account was squared up in a subsequent year, indicating no benefit by way of remission or cessation of liability in the relevant assessment year. Therefore, the addition under Section 41(1) was deemed unjustified, and the ground of appeal was allowed.

3. Disallowance of Interest Paid on Service Tax:
The assessee challenged the disallowance of interest paid on service tax under Section 40(a)(ii) of the Act. The Assessing Officer disallowed the claim, citing the provisions of the Act. However, the Tribunal noted that interest on service tax is compensatory and not a tax on profits or gains of business. The disallowance under Section 40(a)(ii) was found to be unfounded, and the Tribunal referred to relevant case law supporting the allowability of such interest payments. Consequently, the ground of appeal was allowed, and the appeal filed by the assessee was allowed in its entirety.

In conclusion, the Tribunal ruled in favor of the assessee on all grounds, directing the deletion of adhoc disallowances, unjustified additions, and disallowance of interest paid on service tax, thereby allowing the appeal filed by the assessee.