2014 (12) TMI 98 - AT - Income Tax

Disallowance u/s 14A Held that - As decided in assessee s own case for the earlier assessment year, it has been held that while working out the disallowance u/s. 14A of the Act, the net interest should be considered thus, the matter is remitted back to the AO to work out the disallowance on the basis of net interest Decided in favour of assessee. Disallowance out of interest payment Held that - The total amount of ₹ 4,87,53,200/- borrowed by the appellant on different dates and paid interest, the inadmissible rate of interest which requires to be added to appellants income comes to ₹ 32,31,486 in assessee s own case for the earlier assessment year, it has been held that the need of business is to be judged from the point of view of businessmen - The amount which the assessee may need for his business may not be available always to the assessee - the assessee has to avail the loan amount when it is available by keeping in view the future needs which may arise in the course of business - merely as because the assessee had sufficient own funds on the date of the borrowings it cannot be concluded that borrowings it cannot be concluded that borrowings were not for the purpose of business - CIT(A) was not justified in sustaining the disallowance and is to be set aside Decided in favour of assessee. Rate difference/commission paid to peta dealers Held that - CIT(A) rightly was of the view that the payment of ₹ 34,78,373/- is relatable to appellants sale of 623.02 crore bidi s - their exist a direct relationship between commission paid and the corresponding sales - once there existed an evidence that an amount of commission flowed from appellant to peta dealers through agents, a disallowance on the absence of commercial expediency was not required to be made - For establishing genuineness of a commission, what is required to be proved is whether it was actually paid, whether the payment was relatable to a genuine business transaction, whether the party to whom payment was made is identifiable, whether the payment was made using banking channels and necessary entries recorded in the books of a/c and whether requisite TDS if any, was made on the amounts of commission paid, whether the parties to whom commission was paid have in turn included the same in their books of accounts / return of income etc. the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Disallowance of interest payment under Section 36(1)(iii) of the Income Tax Act, 1961.
3. Addition on account of rate difference/commission paid to peta dealers.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The assessee appealed against the confirmation of disallowance of Rs. 5,14,632/- under Section 14A. The Tribunal noted that a similar issue was decided in ITA No.777/Ahd/2011 for AY 2007-08, where it was held that disallowance should be based on net interest, not gross interest. The Tribunal directed the Assessing Officer (AO) to work out the disallowance on the basis of net interest and restored the issue back to the AO for fresh decision. Thus, this ground of the assessee's appeal was allowed for statistical purposes.

2. Disallowance of interest payment under Section 36(1)(iii) of the Income Tax Act, 1961:
The assessee contested the confirmation of disallowance of Rs. 32,31,486/- out of interest payment. The CIT(A) had followed earlier orders for AYs 2007-08 and 2008-09, noting no material change in facts. It was observed that the AO disallowed interest far in excess of the interest paid to relatives and family members of the partners. The Tribunal, referencing the assessee's own case in ITA No.2325/Ahd/2012 for AY 2008-09 and the Hon'ble Jurisdictional High Court's decision, found that the borrowed funds were used for business purposes and the disallowance was not justified. Consequently, the Tribunal directed the deletion of the disallowance of Rs. 32,31,486/-. This ground of the assessee's appeal was allowed.

3. Addition on account of rate difference/commission paid to peta dealers:
The Revenue appealed against the deletion of Rs. 34,78,372/- added by the AO for rate difference/commission paid to peta dealers. The CIT(A) found that the commission paid was directly related to the sales and that the payments were made through banking channels with applicable tax deductions. The CIT(A) held that the AO had not provided evidence to indicate that the commission payments were ingenuine. The Tribunal upheld the CIT(A)'s findings, noting that the Revenue failed to provide contrary material. Thus, this ground of the Revenue's appeal was rejected.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, and the appeal of the Revenue was dismissed. The Tribunal directed the AO to reconsider the disallowance under Section 14A based on net interest and upheld the deletion of disallowance of interest payment and addition on account of commission paid to peta dealers.