2012 (12) TMI 663 - AT - Income Tax

Disallowance of Interest Held that - As AO has not given any finding that the interest free loans were given out of the borrowed funds on which interest was paid & has not examined the availability of surplus funds with the assessee which can justify interest free loans to the managing director no disallowance can be warranted - accepting the submission of the assessee that borrowed funds on which interest was paid had been utilized for the purpose of business of the assessee thus the disallowance directed to be deleted - in favour of assessee. Business Promotion and Tour and Travelling expenditure - disallowance for want of sufficient proof Held that - As foreign travel is a necessary incident of the business of the Assessee but at the same time the inability of the Assessee to produce bills and purpose of foreign travel calls for some disallowance - it would be just and fair to disallow 50% of the expenses claimed by the Assessee. Accordingly the disallowance is directed to be restricted to 50% of Rs.14, 74, 280/- - partly in favour of assessee.

Summary

Issues:
1. Disallowance of interest expenditure on specific loans.
2. Treatment of foreign business travel expenditure as personal expenditure.
3. Disallowance of business promotion and tour/travel expenditure due to lack of proof.

Issue 1: Disallowance of Interest Expenditure on Specific Loans:
The Assessing Officer disallowed interest expenditure claimed by the assessee on funds borrowed for business purposes, alleging that the borrowed funds were used to provide interest-free loans to the managing director. The assessee argued that the borrowed funds were utilized for business needs and not for interest-free loans. The Tribunal noted that the AO did not establish a nexus between the borrowed funds and the interest-free loans. It was held that the loans were borrowed for specific purposes and could not have been given as interest-free loans. Consequently, the disallowance of interest made by the revenue authorities was directed to be deleted.

Issue 2: Treatment of Foreign Business Travel Expenditure:
The AO disallowed foreign business travel expenditure due to insufficient proof of the purpose and necessity of such travel. The CIT(A) partially upheld the disallowance, citing lack of verifiable details and proper vouchers. The Tribunal observed that foreign travel was essential for the business of the assessee but noted the lack of specific details provided. Consequently, a 50% disallowance of the claimed expenses was deemed appropriate, directing the restriction of the disallowance to 50% of the total foreign travel expenditure.

Issue 3: Disallowance of Business Promotion and Tour/Travel Expenditure:
The AO disallowed a portion of the expenses claimed for business promotion and tour/travel due to the absence of original vouchers and proof. The CIT(A) upheld a partial disallowance, considering the lack of verifiable supporting evidence. The Tribunal found that the necessary details and explanations regarding the business purpose of these expenses were not provided. As a result, no further relief was granted, and the disallowance made by the CIT(A) was sustained.

In conclusion, the Tribunal partly allowed the appeal by the assessee, overturning the disallowance of interest expenditure on specific loans while restricting the disallowance of foreign business travel expenditure to 50% and upholding the disallowance of business promotion and tour/travel expenses due to insufficient proof and explanations provided.