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2013 (2) TMI 92 - AT - Income TaxDisallowance of interest - Nexus of the borrowed funds with that of advance given for non-business purpose - Assessee is in the business of export of readymade garments and films - Advances given to the family members free of interest Held that - As concluded from the fact of the case most of the interest amounts are either for the foreign bills discounted or packing credit availed. Amount cannot be related to the advances made by assessee to his family members out of his personal finances. Interest statements which clearly indicate that the Bank interest paid and claimed is only towards business purpose in the business of export undertaken. In favour of assessee Disallowance of education expenses of assessee s son Revenue or personal expenditure - Nexus between the business of assessee and the expenditure incurred on education of assessee s son Held that - This expenditure is person expenditure of assessee which he is claiming as business expenditure. We further notice that the stipend received abroad during his stay was not offered as income in assessee s hands. The claim of the expenditure as business expenditure cannot be allowed on the facts of the case. In favour of revenue Addition on account of personal drawings - Assessee is living with his father in tenanted premises and most of the expenditure was borne by the father Held that - There is no need for making any addition on this account. The personal drawings debited to capital accounts are to the extent of Rs.6,46,763/- which comprises of cash withdrawals to an extent of Rs.4,76,177/- and credit expenses of Rs.1,70,586/-. Considering the fact that no estimation was made on account of drawings in previous years or in subsequent years and on considering that the amount claimed is a reasonable. In favour of assessee Addition for non-receipt of confirmation from various suppliers Held that - As seen from the orders, just because some confirmations have not been received from the parties, AO disallowed the entire amount under various heads. Assessee furnished lot of details to both AO as well as to the CIT (A) and CIT (A) did not admit any additional evidence on the reason that sufficient opportunity was given to assessee. This issue requires examination by AO afresh. Remand back to AO
Issues Involved:
1. Disallowance of interest income. 2. Claim of education expenses of assessee's son. 3. Addition on account of personal drawings. 4. Disallowance of expenditure and claim of education expenses for A.Y. 2004-05. 5. Additions for non-receipt of confirmation from suppliers and AIR information for A.Y. 2005-06. 6. Levy of penalty under section 221(1). Issue-wise Detailed Analysis: 1. Disallowance of Interest Income: The assessee claimed Rs. 22,46,118/- as interest expenditure related to the business of export. The AO disallowed Rs. 8,73,127/- on the grounds that the assessee had advanced interest-free loans. The CIT (A) upheld this disallowance citing the rationale from previous cases. However, the Tribunal found that the assessee had sufficient proprietary capital and interest-free loans from family members, and the interest claimed was solely for business purposes such as packing credit and bill discounting. The Tribunal concluded there was no nexus between borrowed funds and interest-free advances, thus directing the AO to delete the disallowance. 2. Claim of Education Expenses of Assessee's Son: The AO disallowed Rs. 8,25,375/- claimed as educational expenses for the assessee's son, stating it was a personal expense. The CIT (A) upheld this disallowance, noting the lack of a business proposition and the absence of a general policy for sponsoring employees. The Tribunal agreed, emphasizing that the expenditure had no nexus with the business and was a personal expense, thus rejecting the assessee's claim. 3. Addition on Account of Personal Drawings: The AO estimated personal drawings at Rs. 25,000/- per month, resulting in an addition of Rs. 3 lakhs. The CIT (A) reduced this to Rs. 20,000/- per month. The Tribunal found that the personal drawings debited to the capital account were reasonable and that no such estimation was made in previous or subsequent years. Consequently, the Tribunal deleted the addition. 4. Disallowance of Expenditure and Claim of Education Expenses for A.Y. 2004-05: The assessee raised two grounds: disallowance of expenditure and claim of educational expenses. The Tribunal dismissed the first ground as it was not seriously argued. For the second ground, the Tribunal upheld the AO's and CIT (A)'s order, rejecting the claim of educational expenses for the same reasons as in the previous year. 5. Additions for Non-receipt of Confirmation from Suppliers and AIR Information for A.Y. 2005-06: The AO made additions due to non-receipt of confirmations from suppliers and discrepancies in AIR information. The CIT (A) confirmed these additions. The Tribunal noted that the assessee had provided reconciliation statements and confirmations, which were not considered by the authorities. The Tribunal set aside the orders of the AO and CIT (A), directing the AO to re-examine the issue afresh and give the assessee a fair opportunity to explain. 6. Levy of Penalty under Section 221(1): The AO levied a penalty of Rs. 57,600/- for non-compliance with the tax demand, which the CIT (A) confirmed. The Tribunal found that the demand was significantly higher than the tax on the income offered by the assessee and that 50% of the demand was stayed after adjustment of tax refunds. The Tribunal deemed the penalty premature and harsh, canceling it but allowing the AO to reconsider it after implementing the ITAT order. Conclusion: - The appeal in ITA No. 2445/Mum/2009 is partly allowed. - The appeal in ITA No. 2971/Mum/2010 is dismissed. - The appeal in ITA No. 2446/Mum/2009 is allowed for statistical purposes. - The appeal in ITA No. 2970/Mum/2010 is allowed.
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