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2014 (1) TMI 743 - AT - Income TaxDisallowance u/s 36(1)(iii) of the Act Relatable Interest Interest free advances made to sister concern Held that - The total interest free funds available with the assessee was about 12.88 crores, the total interest free funds advanced to the sister concern and others were only ₹ 4.16 crores Prima facie, interest free funds available were much more than the interest free advances given by the assessee - there is no basis for the Assessing Officer to presume that interest bearing funds were advanced to the sister concern as interest free loans Relying upon CIT vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY the presumption should be that the interest free funds were used to give the interest free loans to the sister concern order of the CIT(A) set aside Decided in favour of Assessee and against Revenue. Disallowance made for reversal enteries Explanation of the Appellant not appreciated Held that - The submissions of the assessee require examination by the Assessing Officer in the light of what transpired in the assessment for assessment year 2004-05 in respect of the reversal entry shown in that year - As far as this assessment year is concerned these expenses were connected with the business of the assessee and had to be allowed as deduction - The estimate of expenses to be incurred for the project Ashirward had to be allowed as deduction because the income from the said project was declared by the assessee in the previous year also, the assessee had an obligation to pay ₹ 15 lacs to the land owners and also provide alternate accommodation to the tenants of the property which was to be developed by the assessee - These expenses were legitimate business expenses which are to be allowed as deduction - these expenses were ultimately not to be incurred by the Assessee Thus, if the above expenses are allowed as deduction the reversal entry, if it is not properly explained will be income of AY 04-05 order of the CIT(A) set aside and the matter remitted back to the AO to examine on the relevant reversal entries in AY 04-05. Disallowance made out of site expenses Expenses made on ad-hoc basis Proper justification not made by AO Held that - The complete details of expenses with supporting documents like bills vouchers were submitted before the Assessing Officer and no deficiency has been pointed out by the Assessing Officer except general remarks - the disallowance of 5% of the site expenses and sundry expenses would be fair and reasonable Decided partly in favour of Assessee. Deletion made u/s 40A(2)(b) of the Act Excessive payments made Held that - The Group concerns have entered into MOU for creation of common pool company to function on no profit no loss basis in providing administrative and managerial requirement of the constituent members - Amount to be reimbursed in the proportion to the construction cost incurred by each of the constituent member - In scrutiny assessment made in the case of M/s. Jayagopal Consultancy Services Private Limited u/s. 143(3) it was accepted by the AO in that M/s. Jaygopal Consultancy Services Private Limited was functioning on no loss no profit basis and no commercial activity was carried out by it except for incurring expenses on behalf of the group companies as a pool company - Relying upon Glaxo Smithkline Asea (P) Ltd., ACIT, Delhi ITAT C Bench 2005 (8) TMI 301 - ITAT DELHI-C Thus, it cannot be said that the payment was not for purpose of business or was excessive or unreasonable order of the CIT(A) upheld - Decided against Revenue. Deletion made u/s 40A(2)(b) of the Act Purchase of marble from sister concern Held that - The cost of marble and laying depends upon the quality of marble and this was demonstrated on by the Assessee by showing that for different project in the assessee company, the rate per sq. ft. varied from ₹ 280/- per sq. ft. to 315/- per sq. ft. The rate also varied for outside parties and the range was between ₹ 150 per sq. ft. to ₹ 700/- per sq. ft. No material brought on record by AO proving that rate charged by Topaim was on higher side Thus, the order of the CIT(A) for disallowance made u/s 40A(2)(b) upheld - The cost of purchase of marbles from Topaim was part of opening and closing WIP - No addition could be made on presumption without the AO proving that the same was not forming part of WIP - the assessee already sold back the said unused marbles in A.Y 2006- 07 - the marbles formed part of closing WIP in the books of the assessee company Thus, the order of the CIT(A) upheld Decided against Revenue. Deletion made u/s 40A(2)(b) f the Act Excessive Interest paid Held that - Loans borrowed from outsiders were in majority of case at the rate of interest including brokerage ranging 18% to 27% - Thus, average rate of interest worked out to more than 18% - Ahuja Properties borrowed funds from outsiders and has paid interest ranging from 15% to 21% - it has incurred expenses for maintaining the loans and after reducing the payment of interest to outsiders, has shown some profit earning on financing business and offered the same for tax and paid tax The decision in CIT vs Amrit Soap C. 2008 (11) TMI 71 - PUNJAB AND HARYANA HIGH COURT followed - The Assessee is a loss making company and hence, there is no avoidance of tax - In such circumstances no disallowance can be made by invoking the provisions of Sec.40A(2)(b) of the Act Decided against Revenue. Deletion made on account of Fitness equipment and door cameras Construction cost to be bear by Assessee Held that - The expenditure was incurred by the Assessee in the course of its business - The AO has not doubted the genuineness of expenses - Fitness equipment and door camera part and parcel of construction work - These expense are wholly and exclusively for the purpose of business Thus, they were rightly directed to be allowed as deduction by the CIT(A) Order of the CIT(A) upheld Decided against Revenue.
Issues Involved:
1. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961. 2. Disallowance of expenses due to "reversal" entries. 3. Ad-hoc disallowance of site expenses. 4. Disallowance under Section 40(A)(2)(b) for excessive payments to sister concerns. 5. Disallowance of expenses on fitness equipment and door cameras. Issue-wise Detailed Analysis: 1. Disallowance of Interest Expenses: The assessee contested the disallowance of Rs. 52,02,322/- as relatable interest under Section 36(1)(iii) due to interest-free advances to sister concerns. The revenue also appealed against the CIT(A)'s decision to restrict the disallowance. The Tribunal noted that the assessee had sufficient interest-free funds amounting to Rs. 12.88 crores, which exceeded the interest-free advances of Rs. 4.16 crores. Citing the Bombay High Court decision in CIT vs. Reliance Utilities and Power Ltd., it was held that if interest-free funds are available, it can be presumed that such funds were used for interest-free loans. Consequently, the disallowance sustained by the CIT(A) was deleted, and the revenue's appeal was dismissed. 2. Disallowance of Expenses Due to "Reversal" Entries: The assessee challenged the disallowance of Rs. 58,50,296/- on the grounds that they represented "reversal" entries. The Tribunal noted that the expenses related to completed projects and were legitimate business expenses. However, it was directed that the Assessing Officer (AO) should re-examine these expenses in light of the assessment for the subsequent year (AY 2004-05) to ensure that the expenses were not ultimately reversed. The case was remanded back to the AO for further examination. 3. Ad-hoc Disallowance of Site Expenses: The AO disallowed Rs. 3,95,054/- on an ad-hoc basis due to lack of supporting documents for site expenses. The Tribunal found that the assessee had submitted complete details and supporting documents. It was held that no adhoc disallowance can be made without specific defects or findings of inflated expenses. The Tribunal reduced the disallowance to 5% of the site expenses, partly allowing the assessee's appeal. 4. Disallowance Under Section 40(A)(2)(b): - Excessive Payments to Jaygopal Consultancy Services Pvt. Ltd.: The revenue's appeal against the deletion of Rs. 23,90,747/- disallowed under Section 40(A)(2)(b) was dismissed. The Tribunal upheld the CIT(A)'s finding that the payments were reimbursements on a no-profit-no-loss basis and were reasonable. - Purchase of Marble from Topaim Properties Pvt. Ltd.: The AO had disallowed Rs. 96,78,967/- for excessive payments for marble. The Tribunal found that the rates varied based on marble quality and that the AO's estimation was arbitrary. The CIT(A)'s deletion of the disallowance was upheld. - Excessive Interest Paid to Ahuja Properties: The AO disallowed Rs. 32,83,710/- for excessive interest paid to a sister concern. The Tribunal noted that the interest rates paid to outsiders were comparable and that the assessee had not engaged in tax avoidance. The CIT(A)'s deletion of the disallowance was upheld. 5. Disallowance of Expenses on Fitness Equipment and Door Cameras: The AO disallowed Rs. 5,22,696/- for fitness equipment and door cameras, stating that they were not part of construction costs. The Tribunal found that these expenses were part of the construction work and were wholly and exclusively for business purposes. The CIT(A)'s deletion of the disallowance was upheld. Conclusion: The assessee's appeal was partly allowed, and the revenue's appeal was dismissed. The Tribunal directed re-examination of the "reversal" entries and upheld the CIT(A)'s decisions on other disallowances.
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