2014 (1) TMI 1352 - AT - Income Tax

Sharing of common pool expenses - Held that - Decision in Ahuja Platinum Properties(P) Ltd. Versus JCIT & ACIT 2014 (1) TMI 743 - ITAT MUMBAI followed - 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 - The cost is recovered in proportion to the construction/development cost incurred by each of the group companies - No case for invocation of section 40A(2)(a) of the Act is made out - It cannot be said that the payment was not for purpose of business or was excessive or unreasonable - Decided against Revenue. Interest paid by the assessee to sister concern - Held that - There has been no factual examination of the matter by the ld. CIT(A) for the current year - The rate of interest, is subject to market fluctuations over time - The rates in the instant case are increasing with reference to the rate of 19.5% for A.Y. 2003-04, being at 21.25% for A.Y. 2005-06, declining marginally to 20.50% for A.Y. 2007-08 - There is no basis to the finding of the brokerage rate at 3%, which again cannot be considered as constant in a free and competitive market - In the regime of declining interest rates, the same ought to be much lower - The reliance by the ld. CIT(A) on the order by his predecessor for A.Y. 2003-04 is thus completely misplaced - The interest rates are subject to variation over time, so that a finding in its respect would need to precede a factual examination and determination - The issue has been restored for fresh adjudication. Disallowance u/s. 40A(2)(a) in respect of purchase of building material from associate concerns - Held that - No material had been brought on record by the Revenue to prove the claim by the Assessing Officer that the rate charged by the associate concern, M/s. Topaim Properties Pvt. Ltd., was on the higher side - Decision in Ahuja Platinum Properties(P) Ltd. Versus JCIT & ACIT 2014 (1) TMI 743 - ITAT MUMBAI followed - Decided against Revenue. Disallowance u/s 36(1)(iii) of the Act Relatable Interest The CIT(A) has paased the order having been influenced by the year-end balances, also adopted by the A.O. in the instant case which may not be indicative of the correct fund availment obtaining during the year - It is the average outstanding during the year and not the year-end balance that is relevant - Interest, would depend on the resource actually utilized - The interest incurred, a part of which is disallowed for diversion for non-business purposes, is only in terms of its average utilization - As funds are generally raised only for business purposes, the assessee would need to establish non utilization of interest-free funds for business purposes as at the beginning of the year - The issue has been restored for fresh adjudication.

Issues Involved:
1. Sharing of common pool expenses
2. Disallowance of interest paid to a sister concern
3. Disallowance u/s 40A(2)(a) for purchase of building material from associate concerns
4. Disallowance u/s 36(1)(iii) on account of interest-free advances to sister concerns
5. Addition on account of cessation of liability u/s 41(1)

Issue-wise Detailed Analysis:

1. Sharing of common pool expenses:
The assessee claimed reimbursement of administrative/consultancy charges to two group concerns. The Assessing Officer (A.O.) found the claim unacceptable due to the lack of evidence for the basis of allotment of expenditure. The A.O. disallowed 30% of the claimed expenditure. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim, relying on previous decisions for earlier years, stating that the expenses were proportionally recovered based on construction/development costs. The Tribunal upheld the CIT(A)'s order, finding no reason to deviate from the decision for A.Y. 2003-04, as the facts and circumstances remained the same.

2. Disallowance of interest paid to a sister concern:
The A.O. disallowed interest paid to Ahuja Properties Ltd., considering it excessive under section 40A(2)(a). The CIT(A) deleted the disallowance, following the order of his predecessor for A.Y. 2003-04. The Tribunal noted that the interest rate and brokerage were subject to market fluctuations and required factual examination. The Tribunal restored the issue back to the CIT(A) for fresh adjudication, emphasizing the need for definite findings of fact regarding the prevailing interest rate and brokerage.

3. Disallowance u/s 40A(2)(a) for purchase of building material from associate concerns:
The A.O. disallowed purchases from associate concerns, claiming the rates were higher. The Tribunal found no material evidence from the Revenue to support this claim and noted that the assessee had returned unused stock at the same rates. The Tribunal confirmed the invalidity of invoking section 40A(2)(a) for the current year, as the facts were the same as in A.Y. 2003-04.

4. Disallowance u/s 36(1)(iii) on account of interest-free advances to sister concerns:
The A.O. disallowed interest on advances given to sister concerns on an interest-free basis, as the assessee had availed interest-bearing loans. The CIT(A) restricted the disallowance to transactions during the year and allowed relief against interest-free credits. The Tribunal noted the need to establish the availability of sufficient interest-free funds and restored the issue to the CIT(A) for fresh adjudication. The interest rate to be applied should be the actual rate suffered by the assessee, subject to reasonableness for the current year.

5. Addition on account of cessation of liability u/s 41(1):
The assessee disputed an addition of Rs. 2,35,211/- on account of cessation of liability. The CIT(A) omitted to decide this issue. The Tribunal restored the matter to the CIT(A) for fresh adjudication in accordance with the law, after hearing both sides.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on sharing common pool expenses and disallowance for purchase of building material from associate concerns. It restored the issues of disallowance of interest paid to a sister concern, disallowance on account of interest-free advances, and addition on account of cessation of liability to the CIT(A) for fresh adjudication. The Revenue's appeals were partly allowed for statistical purposes, and the assessee's cross-objection was allowed for statistical purposes.

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