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2015 (4) TMI 143 - AT - Income TaxDisallowance of Interest - CIT(A) deleted the addition - assessee filed its return of income in the status of AOP - Held that - As decided in CIT vs. Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY , if there are mixed fund then presumption should be there that any investment or withdrawal is out of interest free own funds. In the present case, it is seen that on 01/04/2007 there was net credit balance of members of AOP to the extent of ₹ 313.98 lacs and as on 31/03/2008 also, there is net credit balance of all the members taken together to the extent of 366.27 lac. Even the net transaction during the year is also in positive to the extent of ₹ 292.66 lacs. Thus presumption has to be there that even excess withdrawal by some members was out of credit balance of other members in their capital. Under these facts, no disallowance out of interest expenditure is justified. - Decided against revenue. Disallowance of Freight Inward & Outward expenses - CIT(A) restricted addition - Held that - From the comparative figures of sales and purchase of the present year and preceding year, it is seen that there is decline in both sales and purchases. It is also seen that there is decline in the expenses incurred on account of freight outward but there is increase in the expenses for freight inward to the extent of ₹ 4.17 lac as against ₹ 2.45 lac in the preceding year. The Assessing Officer has noted that the assessee could not explain the increase. These expenses are not supported by proper bills and vouchers also. Thus disallowance made by the Assessing Officer at ₹ 1,00,000/- out of freight inward expenses is reasonable and, therefore, CIT(A) was not justified in reducing the same to ₹ 50,000/-. - Decided in favour of revenue Shop repair & maintenance expense - Held that - in the absence of any specific finding of the Assessing Officer pointing out some expenses of capital nature or non business nature, such ad hoc disallowance is not justified. The CIT(A) has also upheld the disallowance of ₹ 4,00,000/- merely on the basis that 20 times increase in repair & maintenance is not properly explained by the assessee before the Assessing Officer but we are not satisfied with this logic of CIT(A) because the increase or decrease in repair expenses is not dependent on turnover. For wear and tear in so many years, many a times, repairing takes place in one year and the expenses may be like this i.e. 20 times of the preceding year. In the absence of any specific finding to show that any expenditure was of capital nature or of non business nature, such ad hoc disallowance is not justified. Therefore, we delete the entire disallowance out of shop repair & maintenance expenses. -Decided in favour of assessee.
Issues Involved:
1. Disallowance of Interest Expense 2. Disallowance of Freight Inward & Outward Expenses 3. Disallowance of Shop Repair & Maintenance Expenses Detailed Analysis: 1. Disallowance of Interest Expense The Revenue contested the deletion of a disallowance amounting to Rs. 57,75,444/- out of interest expenses by the CIT(A). The Assessing Officer (AO) had noted that there were negative balances in the members' accounts of the Association of Persons (AOP) and disallowed the interest computed on excess withdrawals. The AO argued that the Memorandum of Association did not explicitly state that no interest would be charged on negative balances. The CIT(A) deleted this disallowance, leading to the Revenue's appeal. The tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court judgment in CIT vs. Reliance Utilities & Power Ltd., which established that if there are mixed funds, the presumption should be that withdrawals are from interest-free own funds. The tribunal noted that the AOP had a net credit balance at the beginning and end of the year, indicating that excess withdrawals by some members were covered by the credit balances of other members. Therefore, the disallowance of interest expenditure was not justified. 2. Disallowance of Freight Inward & Outward Expenses The AO made an ad hoc disallowance of Rs. 1,00,000/- out of freight inward and outward expenses, citing the lack of supporting bills and vouchers. The CIT(A) reduced this disallowance to Rs. 50,000/-, which was contested by both the Revenue and the assessee. The tribunal examined the comparative figures of sales and purchases for the current and preceding years and noted that there was a significant increase in freight inward expenses without adequate explanation from the assessee. Given the lack of proper documentation, the tribunal found the AO's disallowance of Rs. 1,00,000/- to be reasonable and reversed the CIT(A)'s reduction of the disallowance. 3. Disallowance of Shop Repair & Maintenance Expenses The AO disallowed 10% of the shop repair and maintenance expenses amounting to Rs. 6,34,245/-, citing an unexplained increase in these expenses compared to the preceding year. The CIT(A) reduced this disallowance to Rs. 4,00,000/-. The tribunal noted that the AO did not provide specific findings to show that any expenses were of a capital or non-business nature. The tribunal emphasized that the increase in repair expenses could be due to accumulated wear and tear over the years and that such ad hoc disallowances were not justified without specific evidence. Consequently, the tribunal deleted the entire disallowance upheld by the CIT(A). Conclusion: - The tribunal upheld the CIT(A)'s deletion of the disallowance of Rs. 57,75,444/- out of interest expenses. - The tribunal restored the AO's disallowance of Rs. 1,00,000/- out of freight inward expenses, reversing the CIT(A)'s reduction. - The tribunal deleted the entire disallowance of Rs. 4,00,000/- out of shop repair and maintenance expenses upheld by the CIT(A). Result: The appeal of the Revenue and the Cross Objection of the assessee were both partly allowed. The tribunal's order was pronounced in the open court.
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