2015 (5) TMI 673 - AT - Income Tax

Disallowance expenditure under section 40A(3) - assessee has paid cash for purchase of land to certain persons - Held that - It is not doubted that in the agreement to sell it was agreed that sale deed would be executed, i.e., registered on or before March 28, 2010 and the assessee was required to make full payment before that date. Later on, it was found that March 28, 2010 fell on Sunday, naturally nobody would like to leave the land deal, therefore, the assessee paid cash on that date. We are not impressed by the contention that the assessee should have made the payment before that date. When a particular agreement provides for a payment on or before a particular date, it is not necessary that just to meet the technical requirement of Income-tax provisions, payment should be made earlier. Payment has been made on March 28, 2010 which falls on a Sunday and is squarely covered by the exception provided under rule 6DD(j) which has been extracted by the Assessing Officer above. Further, the sale deed was also executed on March 30, 2010. Therefore, in our opinion, the cash payment would covered by the exception under rule 6DD(j) and accordingly we set aside the order of the learned Commissioner of Income-tax (Appeals) and delete this addition. - Decided in favour of assessee. Disallowance u/s 36(1)(iii) - no interest charged on advance given to sister concern - Held that - The Assessing Officer has fairly restricted the disallowance at ₹ 4,79,230 which was amount of interest claimed by the assessee. The proportionate disallowance is totally in consonance with the decision of the of CIT v. Abhishek Industries Ltd. 2006 (8) TMI 123 - PUNJAB AND HARYANA High Court) wherein held that the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest, therefore, we find nothing wrong with the order of the learned Commissioner of Income-tax (Appeals) and confirm the same. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of expenditure under Section 40A(3) of the Income-tax Act, 1961.
2. Disallowance of proportionate interest under Section 36(1)(iii) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure under Section 40A(3):

The assessee contested the confirmation of an addition of Rs. 39,62,500 made by the Assessing Officer (AO) by disallowing expenditure under Section 40A(3) of the Income-tax Act, 1961. The AO observed that the assessee paid cash for the purchase of land and required an explanation for such payment. The assessee argued that the payments fell under exceptions provided in clauses (j) and (k) of Rule 6DD of the Income-tax Rules, 1962, which allow for cash payments under certain conditions, such as when banks are closed due to holidays or strikes.

The assessee made a payment of Rs. 37,50,000 on March 28, 2010, which was a Sunday, and argued that the payment was necessary to honor the agreement to sell, which stipulated the payment date. The AO disallowed the payment, stating that the assessee had ample time to make the payment before the due date and did not demonstrate any exceptional circumstances necessitating the cash payment on a Sunday.

On appeal, the Commissioner of Income-tax (Appeals) upheld the AO's decision. However, the Tribunal found merit in the assessee's argument, noting that the payment date was fixed in the agreement and the payment was made on a Sunday to honor the agreement. The Tribunal concluded that the payment was covered by the exception under Rule 6DD(j) and deleted the addition.

2. Disallowance of Proportionate Interest under Section 36(1)(iii):

The AO noticed that the assessee had given advances totaling Rs. 88,50,000 to a sister concern, M/s. P. P. Constructions, without charging interest. The AO applied the provisions of Section 36(1)(iii) and calculated a proportionate disallowance of Rs. 9,58,256 but restricted the disallowance to Rs. 4,79,230, which was the amount of interest claimed by the assessee.

The Commissioner of Income-tax (Appeals) confirmed the disallowance, citing the decision of the Punjab and Haryana High Court in CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 (P&H), which supports the disallowance of interest on borrowed funds diverted to sister concerns without interest.

The Tribunal upheld the disallowance, agreeing that the assessee had diverted interest-bearing funds to the sister concern, and the principles laid down in the Abhishek Industries case were applicable. The Tribunal found the AO's calculation of the disallowance at 12% to be fair and confirmed the disallowance of Rs. 4,79,230.

Conclusion:

The Tribunal allowed the appeal in part, deleting the addition under Section 40A(3) but confirming the disallowance under Section 36(1)(iii). The order was pronounced in the open court on January 12, 2015.