2013 (8) TMI 948 - AT - Income Tax

Disallowance of interest - Held that - Once interest is paid in respect of funds used for purposes of business there is no question of its disallowance under Section 36(1)(iii) of the Act and there would not be a necessity to see as to whether the funds advanced to sister concern are out of interest-bearing borrowings or not. Disallowance of expenditure paid towards stamp duty on and in respect of the merger - Held that - The income-tax authorities have disallowed the expenditure on the ground that it was in the nature of capital expenditure. On this aspect, we find that there is no material to hold that the expenditure is not in the nature of capital expenditure. Admittedly the expenditure was incurred by way of stamp duty paid on land owned Trinity Thermal Pvt. Ltd. which had since merged with the assessee in terms of an amalgamation scheme. The orders of the authorities below in this regard are affirmed as assessee has not made out any credible argument against the orders of the authorities below holding the impugned expenditure to be capital in nature. Thus, assessee fails on this Ground. Depreciation on buildings - Held that - ere was no evidence to show that the building was complete and put to use during the year under consideration. The CIT(A) has also denied the claim primarily basing on the contents of the Director s report of the assessee company which indicated that the building was still under construction as on 31.03.2008. The CIT(A) further noticed from the Director s report an averment that the company would start installation of equipments in the building from October, 2008. There is no material brought on record to negate the findings of the Assessing Officer as well as the CIT(A) and for that reason we are unable to interfere with the conclusion drawn. Disallowance of Telephone Expenses on the ground that the same was for personal use Disallowance on the basis of ITS data - Held that - We restore the matter back to the file of the Assessing Officer who shall allow a reasonable opportunity to the assessee to reconcile the ITS data and thereafter he shall examine the impugned addition afresh as per law. Ad-hoc disallowance of Welfare Expenses - Held that - Notably, both the authorities below have launched into a statistical exercise to arrive at a disallowance out of staff welfare expenses, when there is no iota of material or evidence to say or pint-point any expenditure of non-business nature. Nevertheless, we also find that the explanation rendered by the assessee with regard to the increase in the expenditure on account of regrouping of expenses, incurrence of expenditure for entire period as compared to for a lesser period in the preceding year, increase in turnover etc. have not been faulted at all. Considering the explanation furnished as also the absence of any material to doubt the genuineness of the expenditure claimed, we find no reasons to uphold the impugned disallowance.

Summary

Issues Involved:

1. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act.
2. Disallowance of expenditure on stamp duty as capital expenditure.
3. Disallowance of depreciation on buildings.
4. Disallowance of telephone expenses for personal use.
5. Disallowance based on ITS data.
6. Ad-hoc disallowance of welfare expenses.

Detailed Analysis:

1. Disallowance of Interest Expenditure:
The first issue pertains to the disallowance of interest expenditure amounting to Rs. 29,36,965/- under Section 36(1)(iii) of the Income Tax Act. The assessee, a company engaged in manufacturing automotive components, had advanced interest-free loans to sister concerns while incurring substantial interest on borrowings. The Assessing Officer (AO) disallowed the interest, attributing it to the diversion of interest-bearing funds for non-business purposes. The assessee argued that the advances were for business purposes or, alternatively, covered by interest-free funds available from share capital and reserves, invoking the judgment of the Hon'ble Bombay High Court in CIT vs. Reliance Utilities & Power Ltd. The Tribunal concluded that since the interest-free funds were sufficient to cover the advances, the disallowance was unwarranted, and directed the AO to delete the addition.

2. Disallowance of Expenditure on Stamp Duty:
The second issue relates to the disallowance of Rs. 3,55,200/- paid towards stamp duty on the merger of Trinity Thermal Pvt. Ltd. with Trinity Die Forgers Ltd. The income-tax authorities treated the expenditure as capital in nature. The Tribunal affirmed the authorities' decision, finding no material to contest that the expenditure was indeed capital in nature.

3. Disallowance of Depreciation on Buildings:
The third issue involves the disallowance of depreciation amounting to Rs. 13,57,651/- on a new building. The AO denied the claim, citing a lack of evidence that the building was complete and put to use during the year. The CIT(A) supported this view, referencing the Director's report indicating the building was still under construction. The Tribunal upheld the disallowance, agreeing with the lower authorities that the building was not put to use during the year under consideration.

4. Disallowance of Telephone Expenses:
The fourth issue concerns the disallowance of Rs. 1,00,000/- out of telephone expenses for personal use. The AO initially disallowed Rs. 5,00,000/- but the CIT(A) reduced it to Rs. 1,00,000/-. The Tribunal affirmed the CIT(A)'s decision, noting the absence of records to verify the business-related expenditure.

5. Disallowance Based on ITS Data:
The fifth issue pertains to a disallowance of Rs. 3,70,255/- based on ITS data. The AO found discrepancies in the transactions reported by the assessee. The assessee argued that it needed more time to reconcile the data. The Tribunal restored the matter to the AO, directing a fresh examination after allowing the assessee a reasonable opportunity to reconcile the data.

6. Ad-hoc Disallowance of Welfare Expenses:
The sixth issue involves an ad-hoc disallowance of Rs. 6,52,530/- out of welfare expenses. The AO found the increase in welfare expenses from the previous year to be abnormal and disallowed 10% of the total expenditure. The assessee explained that the increase was due to regrouping of expenses and increased expenditure on facilities and safety gear. The Tribunal found the explanation reasonable and directed the AO to delete the disallowance, noting the absence of any evidence suggesting non-business expenditure.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal directing the deletion of certain disallowances while upholding others. The order was pronounced in open Court on 28th August, 2013.