2012 (10) TMI 748 - AT - Income Tax

Disallowance of Loss Held that - As the expenditure incurred has been inflated and vouchers were not produced, since the Assessing Officer has made ad-hoc disallowance and certain expenditure is inevitable while carrying on the manufacturing activity disallowance of expense is restricted to 50% i.e. Rs. 2.5 lakhs in the interest of justice - appeal of assessee is partly allowed. Disallowance of interest - Following the decision of Supreme Court in case of SA Builders Ltd. Vs. CIT(A),2006 (12) TMI 82 - SUPREME COURT Held that -since there was no business purpose and moreover, there was no business expediency in giving such loans/advances, interest-free to the group concerns, proportionate amount of interest attributable to such advances/loans, has to be disallowed from the claim of interest made by the assessee - issue restored to the file of the Assessing Officer to decide the same in the light of the decision of the ITAT, Mumbai Bench wherein it was held that if the own capital is sufficient to cover up the interest free advances,no disallowance is warranted. Finance charges - Outstanding amount or the provision for expense (and not the amount already paid) is liable for disallowance if TDS is not deducted. Sec 40(a)(ia) can apply only to expenditure which is payable as of 31st March and does not apply to expenditure which has been already paid during the year - issue restored to the file of the Assessing Officer to decide the same appeal allowed for statistical purposes. Disallowance of Freight inward and Factory expenditure Held that as the expenditure is likely to have been incurred for Business purpose disallowance to 50% is restricted - appeal is partly allowed. Consultancy charges Held that - Order of CIT(A) is confirmed in allowing claim of the assessee to the extent the TDS challans were furnished and proper deduction of tax at source had been made and has disallowed the balance on which assessee has not made TDS deduction - appeal of the assessee is dismissed. Water Charges Held that - As the assessee had not deducted tax at source on such payment as per the provisions of section 194C of the Act issue restored to the file of the AO to decide the same - allowed for statistical purposes. Disallowance on account of employee contribution u/s 36(i) - Issue remitted to the file of the Assessing Officer to verify the details as it has been submitted befor that the Assessing Officer has failed to consider the information furnished before him and the Assessing Officer shall decide same in accordance with law after providing an opportunity of hearing to the assessee - allowed for statistical purposes. Delayed payments - set aside this issue to the file of the Assessing Officer to verify the claim of the assessee that the amount disallowed u/s 40(a)(ia) for delayed payments of TDS now allowed as TDS was paid in the current year. The Assessing Officer shall allow deduction after verifying the disallowance made u/s 40(a)(ia) - appeal of the assessee is partly allowed for statistical purposes.

Issues Involved:

1. Disallowance of loss of Rs. 5,00,000/-
2. Disallowance of interest of Rs. 5,00,000/-
3. Disallowance under section 40(a)(ia) of Rs. 70,890/-
4. Disallowance of expenditure of Rs. 5,00,000/-
5. Disallowance of consultancy of Rs. 50,000/-
6. Disallowance of water charges of Rs. 1,01,400/-
7. Disallowance on account of employee contribution under section 36(i) read with section 2(24) of Rs. 19,720/-
8. Disallowance of deduction under section 40(a)(ia) of Rs. 11,81,109/-

Detailed Analysis:

1. Disallowance of Loss of Rs. 5,00,000/-:

The Assessing Officer (AO) disallowed Rs. 5,00,000/- from the manufacturing division's expenses, citing the absence of relevant books of accounts and vouchers. The AO noted that the gross profit before direct expenses was Rs. 2,73,93,546/-, but after deducting expenses like power and fuel, the division showed huge losses. The CIT(A) upheld the AO's decision, referencing case laws, and concluded that the assessee failed to produce vouchers, justifying the disallowance. The Tribunal, however, reduced the disallowance to Rs. 2.5 lakhs, acknowledging that some expenditure is inevitable in manufacturing activities.

2. Disallowance of Interest of Rs. 5,00,000/-:

The AO disallowed Rs. 5,00,000/- from the financial expenses claimed by the assessee, noting that the assessee had given interest-free loans to group companies without any business purpose, funded by borrowed money. The CIT(A) upheld this disallowance, citing the lack of business expediency. The Tribunal restored this issue to the AO to decide in light of the ITAT, Mumbai Bench decision, which held that if the own capital is sufficient to cover interest-free advances, no disallowance is warranted.

3. Disallowance under Section 40(a)(ia) of Rs. 70,890/-:

The AO disallowed Rs. 70,890/- under section 40(a)(ia) for non-deduction of tax at source on finance charges paid to APIDC Ltd. The CIT(A) confirmed this disallowance, referencing the ITAT Hyderabad decision that the provision applies to both payable and paid amounts. The Tribunal restored this issue to the AO to decide in light of the ITAT Vizag's decision in the case of Merlyn Shipping Transport & Others, which held that section 40(a)(ia) applies only to amounts payable as of 31st March.

4. Disallowance of Expenditure of Rs. 5,00,000/-:

The AO disallowed Rs. 5,00,000/- for unverifiable expenses incurred in cash towards freight inward and factory expenses, due to the absence of vouchers. The CIT(A) upheld this disallowance. The Tribunal reduced the disallowance to Rs. 2.5 lakhs, recognizing that some expenditure is likely to have been incurred.

5. Disallowance of Consultancy of Rs. 50,000/-:

The AO disallowed Rs. 50,000/- from consultancy charges for non-deduction of TDS. The CIT(A) allowed the claim to the extent TDS challans were furnished but disallowed the balance. The Tribunal upheld the CIT(A)'s decision, agreeing that proper TDS deduction was necessary.

6. Disallowance of Water Charges of Rs. 1,01,400/-:

The AO disallowed Rs. 1,01,400/- for non-deduction of TDS on transport charges paid to M/s Maruti Transport. The CIT(A) confirmed this disallowance. The Tribunal restored this issue to the AO to decide in light of the ITAT Vizag's decision in the case of Merlyn Shipping Transport & Others.

7. Disallowance on Account of Employee Contribution under Section 36(i) read with Section 2(24) of Rs. 19,720/-:

The AO disallowed Rs. 19,720/- for late remittance of employer's contribution to the provident fund. The CIT(A) upheld this disallowance. The Tribunal remitted this issue to the AO to verify the details and decide in accordance with the law, providing an opportunity for hearing to the assessee.

8. Disallowance of Deduction under Section 40(a)(ia) of Rs. 11,81,109/-:

The AO disallowed Rs. 11,81,109/- claimed as a deduction for TDS remitted during the year, due to the absence of proof of remittance. The CIT(A) directed the AO to allow the deduction after verifying the remittance. The Tribunal set aside this issue to the AO to verify the claim and apply the ITAT Vizag's decision in the case of Merlyn Shipping Transport & Others.

Conclusion:

The Tribunal partly allowed the appeal for statistical purposes, providing specific instructions for the AO to re-examine certain issues in light of relevant case laws and decisions.

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