2011 (7) TMI 1243 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of consultancy charges u/s 40(a)(ia) of the IT Act.
2. Disallowance of interest on loans and advances.
3. Levy of penalty u/s 271(1)(b) of the IT Act.

Summary:

Issue 1: Disallowance of Consultancy Charges u/s 40(a)(ia)
The assessee challenged the disallowance of Rs. 2,83,942/- for consultancy charges paid to Super Consultancy Services without deducting TDS. The AO disallowed the payment citing failure to establish the genuineness of the transaction and the necessity of the consultancy services. The CIT(A) upheld the disallowance, noting that the assessee did not provide evidence of services rendered. The Tribunal found no justification to interfere with the authorities' orders, as the assessee failed to produce any test report or evidence of services rendered, and did not establish the identity of the payee. Thus, the disallowance was confirmed, and the appeal on this ground was dismissed.

Issue 2: Disallowance of Interest on Loans and Advances
The assessee contested the disallowance of Rs. 2,26,766/- interest on loans and advances given to three parties without charging interest. The AO disallowed the interest, stating the assessee did not explain the business exigency for interest-free loans. The CIT(A) upheld the disallowance. The Tribunal, however, noted that the amounts were opening balances from earlier years, and no disallowance was made in the preceding year. The Tribunal also observed that the assessee had sufficient interest-free funds to cover the loans. Citing the Karnataka High Court's decision in CIT vs Sridev Enterprises, the Tribunal held that no disallowance could be made on mere opening balances and deleted the addition. The appeal on this ground was allowed.

Issue 3: Levy of Penalty u/s 271(1)(b)
The assessee challenged the penalty of Rs. 20,000/- for non-compliance with statutory notices. The AO imposed the penalty for failure to attend proceedings and produce books of accounts. The CIT(A) confirmed the penalty, noting the assessee did not provide evidence of compliance or reasonable cause for non-compliance. The Tribunal upheld the penalty, stating the assessee failed to prove any reasonable cause for non-compliance and did not provide any substantial explanation during the penalty proceedings. The appeal on this ground was dismissed.

Conclusion:
The appeal in ITA No. 3121/Ahd/2010 was partly allowed, with the disallowance of interest being deleted, while the disallowance of consultancy charges was upheld. The appeal in ITA No. 3122/Ahd/2010 was dismissed, confirming the penalty u/s 271(1)(b).