2013 (9) TMI 83 - AT - Income Tax

Limitation of 198 days in filing the appeal before ITAT - condonation of delay Held that - The delay has occurred on account of sufficient reasons because retification application has been filed in the mean time and assessee waited for the disposal of the same - Hence the delay of 198 days deserves to be condoned Decided in favor of Assessee. Ground to be raised in appeal are only those which have been raised in rectification application - disallowance made u/s 40A(3) read with Rule 6DD Held that - Contention of the Revenue is not legally tenable - The delay has occurred in filing the appeal itself and at this stage, the Tribunal is only considering whether there was sufficient cause for the delay. The question of considering the various grounds urged in the appeal would arise only if the delay is condoned and the appeal is admitted - Hence, the Tribunal is not obliged to look into the grounds urged in the appeal before admitting the appeal for hearing. Even otherwise, the statute permits dissecting of the grounds of appeal in the matter of condoning delay in filing the appeal. Disallowance made u/s 40A(3) of the Act Disallowance is made in respect of purchase of rice - The assessing officer noticed that the assessee had purchased rice by paying cash in excess of Rs.20,000/- in violation of provisions of sec.40A(3) of the Act Held that - The payments of less than Rs.20,000/- made during the course of a day to a single person is not hit by the said provisions. However, as per the amended provisions, the said provisions shall apply only if the aggregate amount of payments made to single party in a day exceeds Rs.20,000/-. For example, if the value of a bill is Rs.1,00,000/- and an assessee makes five payments of Rs.20,000/- each during the course of a day, then the said payments shall not be hit by the provisions of sec. 40A(3) as applicable to the year under consideration. However, under the amended provisions, they would be hit. However, if an assessee makes payment of Rs.20,000/- in a day and he so makes payments in five days, then such splitting up of payments would not be hit even by amended provisions. Retrospective application of amendment in section 40A(3) - Disallowance of 20% as per earlier provision and 100% as per the amended provision of section 40A(3) of Income Tax Act - Ld CIT(A), though held that the amendment is retrospective in operation, however, has restricted to disallowance only to 20% of the expenditure as per the old provisions Held that - An amendment cannot have retrospective operation in part. Since the amendment only debars splitting up of payments made to a person during the course of a day and did not debar splitting up in toto and since there is significant variance in the rate of disallowance, the amendment brought out by Finance Act, 2008 can only be considered as substantive in nature and shall have prospective operation only. TDS on freight - who is liable for TDS supplier of buyer (Assessee) of the goods - Held that - If the supplier takes the responsibility to deliver the goods to the doorsteps of the assessee, then it can be inferred that the contract exists between the lorry owners and the supplier. In that case, even if the assessee makes payment of freight charges, it would be considered as payment made to the concerned supplier. On the other hand, if the assessee is responsible to take delivery from the doorsteps of the supplier, then it can be inferred that the contract exists between the assessee and the lorry owners. In that kind of situation, even if the supplier engages the lorry, it has to be construed that the supplier is acting as the agent of the assessee in the process of booking of lorry for the purpose of transportation of the goods to the assessee - matter remanded back for reconsideration. Disallowance of interest paid to partners - Assessee paid interest of Rs. 92,668/- to one of the partners, Smt. Durgadevi, since she was having credit balance in her capital account Held that - As per partnership deed itself interest was payable to partners only when there was a credit balance in the capital account. It is imperative that when interest is payable on credit balance to a partner, interest was also be payable by a partner on the debit balance. It is undisputed fact that there was a net debit balance in the capital account of partners on account of substantial withdrawls by two partners and therefore, in the least, no interest can be debited and charged to the P&L account to reduce taxable income. Interest, if any, payable to one partner has to come from other two partners having debit balance - Assessing Officer was fully justified in disallowing the claim of interest of Rs. 92,668/- on capital - The same is accordingly confirmed Decided against the Assessee. Addition of actual or notional interest Held that - Assessee has paid interest of Rs. 59,441/- to a bank - Ld. CIT(A) was justified in confirming the addition to the extent of Rs.59,441/- and not the notional interest calculated at the rate of 12% amounting to Rs. 1,99,264/-

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Disallowance made under section 40A(3) in respect of purchase of rice.
3. Disallowance made under section 40A(3) in respect of freight charges.
4. Disallowance made under section 40(a)(ia) in respect of freight charges for non-deduction of tax at source.
5. Disallowance of interest on capital - Rs.92,668/-.
6. Disallowance of interest expenses - Rs.59,441/-.
7. Disallowance of loss on sale of car - Rs.24,076/- (dismissed as not pressed).

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal was barred by a limitation of 198 days. The assessee filed a petition to condone the delay, stating that the delay was due to pursuing a rectification petition before the first appellate authority. The Tribunal found the reasons sufficient and condoned the delay, admitting the appeal. The Tribunal clarified that it is not legally tenable to condone the delay for only one issue when the delay pertains to the filing of the appeal itself.

2. Disallowance under Section 40A(3) for Purchase of Rice:
The assessing officer disallowed 20% of the payments made in cash exceeding Rs.20,000/- for the purchase of rice, amounting to Rs.1,04,66,883/-. The assessee contended that rice is an agricultural produce covered by Rule 6DD(e) exceptions and that purchases were made through agents covered by Rule 6DD(k). The Tribunal found that payments were made to dealers and not to cultivators or growers, failing the conditions of Rule 6DD(e). The Tribunal also found no merit in the contention that purchases were through agents, as the dealers acted independently. The Tribunal held that genuine purchases are still subject to disallowance under section 40A(3) and that the amendment by Finance Act 2008, effective from 1.4.2009, is not retrospective. The issue was remanded to the assessing officer for fresh examination.

3. Disallowance under Section 40A(3) for Freight Charges:
The Tribunal noted that the principles discussed for section 40A(3) regarding purchases apply to freight charges as well. The issue was remanded to the assessing officer for fresh examination in light of the Tribunal's discussions.

4. Disallowance under Section 40(a)(ia) for Freight Charges:
The assessee argued that there was no privity of contract with lorry owners as they were engaged by rice suppliers. The Tribunal held that the nature of the contract should be determined based on the agreement terms between the supplier and the assessee. The issue was remanded to the assessing officer to ascertain the responsibility for delivery and the applicability of section 40(a)(ia) based on the agreement terms.

5. Disallowance of Interest on Capital - Rs.92,668/-:
The assessing officer disallowed interest paid to a partner due to a net debit balance in the aggregate capital account of all partners. The Tribunal upheld the disallowance, agreeing with the CIT(A) that interest should only be payable on credit balances and that the partnership deed supported this view.

6. Disallowance of Interest Expenses - Rs.59,441/-:
The assessing officer computed notional interest on the net debit balance in partners' capital accounts but the CIT(A) restricted the addition to the actual interest paid to the bank. The Tribunal upheld the CIT(A)'s decision, agreeing that the interest paid to the bank could not be allowed as a business expenditure due to the net debit balance in partners' capital accounts.

7. Disallowance of Loss on Sale of Car - Rs.24,076/-:
The ground relating to the disallowance of loss on the sale of the car was dismissed as not pressed by the assessee.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remanded to the assessing officer for fresh examination based on the Tribunal's detailed discussions. The Tribunal's decision was pronounced on 22.3.2013.