2016 (8) TMI 1286 - AT - Income Tax

Disallowance of commission - Held that - The assessee has not been able to establish on evidence that the expenditure incurred on account of payment of commission in question is wholly and exclusively for the purpose of its business. Therefore, find no justification in the impugned order of the ld. CIT(Appeals) deleting the disallowance made by the Assessing Officer on account of commission and setting aside the same on this issue, restore that of the Assessing Officer.- Decided against assessee Addition of payment of salary made by the assessee-firm to its partners - Held that - Supplementary Partnership Deed filed by the assessee for the first time before the ld. CIT(Appeals) was relied upon by him to give relief to the assessee on this issue without giving any opportunity to the Assessing Officer to verify the same, which is in violation of Rule 46A of the Income Tax Rules. We therefore, set aside the impugned order of the ld. CIT(Appeals) on this issue and restore the matter to the file of the Assessing Officer for deciding the same afresh after verifying the Supplementary Partnership Deed. Ground No. 2 is accordingly treated as allowed for statistical purposes. Disallowance of interest - Held that - As evident from the relevant balance-sheet of the assessee, which have remained undisputed or uncontroverted by the ld. D.R., are sufficient to show that there was no diversion of borrowed funds by the assessee for non-business purpose and the disallowance made by the Assessing Officer on account of interest was unsustainable. In that view of the matter, we uphold the impugned order of the ld. CIT(Appeals) deleting the disallowance made by the Assessing Officer on account of interest Disallowance of 20% out of the business promotion expenses - Held that - As rightly observed by the ld. CIT(Appeals), no specific instance was pointed out by the Assessing Officer to show any unverifiable element involved in the expenses claimed by the assessee on business promotion and this position clearly evident from the order of the Assessing Officer is not disputed even by the ld. D.R. Therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) deleting the ad hoc disallowance of 20% made out of business promotion expenses without pointing out any specific defect in the claim of the assessee Addition under section 14A read with Rule 8D - Held that - Disallowance under section 14A cannot be made where there is no exempt income earned by the assessee during the relevant year and this position is duly supported by the various judicial pronouncements, thus no infirmity in the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue

Summary

Issues Involved:
1. Deletion of disallowance of commission.
2. Deletion of disallowance of remuneration paid to partners.
3. Deletion of disallowance of interest.
4. Deletion of disallowance of business promotion expenses.
5. Deletion of disallowance under section 14A read with Rule 8D.

Detailed Analysis:

1. Deletion of Disallowance of Commission:
The Revenue challenged the deletion of a ?2,50,000/- disallowance made by the Assessing Officer (AO) on account of commission paid to M/s. Rex Agro Pvt. Limited. The AO disallowed the commission due to lack of evidence proving the genuineness and details of sales made through the sister concern. The CIT(A) deleted the disallowance, citing that the commission was paid by account payee cheque, accounted for by M/s. Rex Agro Pvt. Ltd. in its income tax return, and tax deducted at source. The CIT(A) emphasized the principle of consistency as the commission payment was allowed in previous years. However, the Tribunal found that the assessee failed to establish the services rendered by M/s. Rex Agro Pvt. Limited and restored the AO's disallowance, emphasizing that the expenditure was not proven to be wholly and exclusively for business purposes.

2. Deletion of Disallowance of Remuneration Paid to Partners:
The AO disallowed ?2,40,000/- paid as remuneration to partners under section 40A(2)(b) due to the absence of a clause in the Partnership Deed. The assessee produced a supplementary deed before the CIT(A), who allowed the claim. The Tribunal noted that the supplementary deed was filed for the first time before the CIT(A) without giving the AO an opportunity to verify it, violating Rule 46A of the Income Tax Rules. The Tribunal set aside the CIT(A)'s order and restored the matter to the AO for fresh verification.

3. Deletion of Disallowance of Interest:
The AO disallowed ?29,16,399/- on account of interest, citing diversion of borrowed funds for non-business purposes, specifically interest-free advances to sister concerns. The CIT(A) deleted the disallowance, relying on the Calcutta High Court's decision in CIT vs. Britannia Industries Ltd., which supported the presumption that advances made from mixed accounts are from the assessee’s own funds. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had sufficient own funds to cover the advances and that borrowed funds were used for business purposes.

4. Deletion of Disallowance of Business Promotion Expenses:
The AO made a 20% ad hoc disallowance of business promotion expenses amounting to ?5,80,241/- due to lack of proper bills/vouchers. The CIT(A) deleted the disallowance, stating that the AO did not point out any specific defects. The Tribunal upheld the CIT(A)'s decision, finding no infirmity as the AO failed to provide specific instances of unverifiable expenses.

5. Deletion of Disallowance under Section 14A read with Rule 8D:
The AO disallowed ?1,18,942/- under section 14A read with Rule 8D, attributing it to expenses related to investments in shares, despite no dividend income being earned. The CIT(A) deleted the disallowance, referencing judicial pronouncements that disallowance under section 14A cannot be made in the absence of exempt income. The Tribunal upheld the CIT(A)'s decision, agreeing that no disallowance can be made when no exempt income is earned.

Conclusion:
The Tribunal partially allowed the Revenue's appeal, restoring the AO's disallowance of commission and remanding the issue of partner remuneration for fresh verification, while upholding the CIT(A)'s decisions on interest, business promotion expenses, and section 14A disallowance.