2013 (9) TMI 594 - AT - Income Tax

Disallowance of Interest because the money borrowed is being used in the non-business purpose Held that - The nature of business shown by the assessee is transfer of parcels and cash from one place to another. If for certain unavoidable circumstances like delay in transportation on account of cancellation of trains or other problems not in the control of the assessee, the assessee was not able to make delivery of the cash then cash lying with it, is utilized for delivery back and to fulfill its commitment. The assessee is himself to judge about the requirement of cash in his line of his business. Even otherwise cash balance is fully covered by partners capital and, therefore, there is no reason to disallow a part of interest payment - Assessee discharges the onus then for making disallowances it is for the AO to produce evidence to show that money borrowed was utilized for nonbusiness purposes - There is no material on record to show that money borrowed was utilized for non-business purposes the disallowance of interest cannot be upheld Decided against the Revenue.

Summary

Issues:
1. Addition of unaccounted cash
2. Disallowed interest deduction
3. Disallowed office expenses

Analysis:

Issue 1: Addition of Unaccounted Cash
The appeal by the Revenue challenged the deletion of the addition of Rs.15,80,000 made by the AO on account of unaccounted cash. The AO had seized an amount of Rs.15,00,000 belonging to the assessee firm during a search operation. The AO contended that the cash was unexplained and lacked evidence of transfer. However, the CIT(A) deleted the addition based on evidence found during the search, employee statements, and the cash book entries. The Tribunal upheld this decision, citing a similar case where cash entries were accepted based on cash book records. The Tribunal emphasized the importance of corroborative evidence in such cases, leading to the dismissal of the Revenue's appeal.

Issue 2: Disallowed Interest Deduction
The second ground of appeal concerned the deletion of the addition of Rs.2,39,400 disallowed by the AO as interest paid on borrowed money. The AO argued that the borrowed funds were not utilized for business purposes as the cash remained idle. However, the CIT(A) overturned this decision, stating that maintaining a cash balance did not imply non-business use of borrowed funds. The Tribunal agreed with the CIT(A), highlighting that the cash balance was necessary for business operations and fully covered by partners' capital. The Tribunal stressed that interest disallowance requires evidence of non-business use of borrowed funds, which was lacking in this case, leading to the rejection of the Revenue's ground.

Issue 3: Disallowed Office Expenses
The third and fourth grounds related to the disallowance of office expenses by the AO, which the CIT(A) restricted to 10% of the total claims. The AO disallowed specific amounts under office and stationery expenses, alleging non-business related expenditure. The CIT(A) upheld the disallowance but limited it to 10% of the claimed amounts. The Tribunal found the CIT(A)'s estimate reasonable and upheld the decision, rejecting the Revenue's grounds. Therefore, the appeal by the Revenue was dismissed, and the CO filed by the assessee was withdrawn and dismissed accordingly.

In conclusion, the Tribunal affirmed the CIT(A)'s decisions on all issues, emphasizing the importance of substantiating claims with evidence and maintaining the reasonableness of estimates in tax matters.