2014 (8) TMI 798 - AT - Income Tax

Invocation of section 36(1)(iii) r.w. section 40A(2)(b) Offering to tax under certain misconception of law Advances and loans given out of own interest free funds or not Held that - The assessee after giving in writing to the AO regarding the reasons for payment of excess interest @21% to the specified persons has categorically stated that to buy peace of mind he wants to offer the interest paid over and above the bank rate for taxation - it is not a legal issue and is purely a factual issue - The AO had clearly brought on record the rate of interest paid to outside creditors at 9%, to the banks at 14.75% and 21% paid to the related parties - there is no question of any legal misconception which the assessee had foregone by way of concession - the assessee has also obtained loan from private parties and has paid interest @9% - The assessee itself has calculated the interest to be paid to the Directors and related parties @15.60% and offered the balance amount for taxation. It has sufficient interest free funds available which are far in excess of the loans advanced to persons covered u/s.40A(2)(b) - there is no question of disallowance of interest on account of interest free advances given to related parties - It is a reverse case wherein the assessee has obtained the loan from related parties by paying exorbitant rate of interest for which the AO disallowed the excess interest paid to the related parties by invoking the provisions of section 40A(2)(b) - Since the assessee itself has agreed for the addition of ₹ 33,37,059/- to tax being excess interest paid to the related parties covered u/s.40A(2)(b), therefore, the CIT(A) was fully justified in upholding the addition made by the AO Decided against Assessee. Expenses for earning exempt dividend income u/s 14A r.w. section 8D Held that - Similar disallowances were made in the assessment orders passed for earlier AYs of the assessee by the AO and nothing was brought to notice as to the outcome of disallowance made by the AO - the assessee itself had admitted that it has incurred certain expenses although the same is negligible which cannot be correctly ascertained and since certain additions were made during AY 2006-07 and 2008-09 by the AO u/s14A and nothing has been brought on record as to the outcome of the same including the quantum there was no infirmity in the order of the CIT(A) upholding the disallowance made u/s.14A r.w. Rule 8D Decided against Assessee. Ad-hoc disallowance confirmed Held that - Certain bills and vouchers were supported by only self-made vouchers and were not amenable for verification for which the AO made adhoc disallowances - similar disallowances were made in the preceding year and the assessee has not objected to the same - none of the parties has brought to notice regarding the amount of disallowance - the disallowance at 10% on adhoc basis appears to be on the higher side thus, the disallowance is restricted to 5% of the expenses Decided partly in favour of Assessee.

Issues Involved:
1. Disallowance of Interest under Section 40A(2)(b)
2. Disallowance under Section 14A read with Rule 8D
3. Ad-hoc Disallowance of Expenses
4. Levy of Interest under Sections 234A, 234B, and 234C

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 40A(2)(b):
The assessee, a Private Limited Company engaged in manufacturing oil engines and DG sets, filed its return of income declaring a total income of Rs. 3,00,26,240/-. During assessment, the AO observed that the assessee paid different interest rates to various creditors, including a higher rate of 21% to related parties under Section 40A(2)(b). The AO restricted the interest rate to 12% p.a., disallowing Rs. 33,37,059/-. The assessee argued that the higher rate was justified due to the lack of formalities and additional costs associated with bank loans. Despite this, the assessee offered the differential interest for taxation to maintain peace of mind. The CIT(A) upheld the AO's disallowance, noting that the assessee had itself offered the differential amount for taxation. The Tribunal found no merit in the assessee's grounds, emphasizing that the issue was factual and not legal, and upheld the disallowance since the assessee had agreed to it.

2. Disallowance under Section 14A read with Rule 8D:
The AO disallowed Rs. 92,410/- under Section 14A r.w. Rule 8D, as the assessee had earned exempt dividend income of Rs. 1,60,976/- but did not attribute any specific expenses to it. The assessee contended that the expenditure was negligible and could not be accurately ascertained. The CIT(A) upheld the AO's disallowance. The Tribunal noted that similar disallowances were made in previous years and upheld the CIT(A)'s order, finding no infirmity in the disallowance under Section 14A r.w. Rule 8D.

3. Ad-hoc Disallowance of Expenses:
The AO disallowed Rs. 1,24,257/- (10% of total expenses) on an ad-hoc basis, noting that certain expenses were supported only by self-made vouchers and were not fully verifiable. The CIT(A) upheld this disallowance. The Tribunal, considering the totality of the facts, found the 10% disallowance to be on the higher side and directed it to be restricted to 5% of the expenses, partly allowing the assessee's ground.

4. Levy of Interest under Sections 234A, 234B, and 234C:
The Tribunal held that the levy of interest under Sections 234A, 234B, and 234C is mandatory and consequential, dismissing the assessee's ground on this issue.

Conclusion:
The Tribunal partly allowed the appeal, upholding the disallowances under Sections 40A(2)(b) and 14A r.w. Rule 8D, reducing the ad-hoc disallowance of expenses to 5%, and confirming the mandatory nature of interest levies under Sections 234A, 234B, and 234C. The decision was pronounced in open court on 11-08-2014.

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