2015 (8) TMI 167 - AT - Income Tax

Unexplained investment u/s 69 - entire addition made by the AO rests on the valuation report of the DVO, who estimated the value of property at ₹ 40.50 lac against the purchase price at ₹ 34,65,000/- - CIT(A) deleted addition - Held that - A mere DVO s report, which is nothing more than an estimate of the value of the property, cannot be a substitute for an evidence directly indicating unexplained investment. A fair market value determined by the DVO need not necessarily match with the actual price paid inasmuch as there can be several reasons for the sale of a property at a higher or lower price than its fair market value. Unless the AO brings on record some authentic material divulging the assessee having made investment over and above that declared in the registered sale deed, there can be no question of invoking the provisions of section 69 of the Act. Here is a case in which the assessee claimed to have purchased the property for a sum of ₹ 34.65 lac and the AO has made addition of ₹ 5.85 lac simply on the basis of difference between the DVO s report and apparent sale consideration. No attempt has been made for verifying the price from the seller of the property. CIT(A) correctly deleted the addition.- Decided against revenue. Unexplained expenditure u/s 69C - CIT(A) deleted addition - Held that - As regards the other amount of ₹ 3,81,999/-, we find that the assessee made a categorical claim before the authorities that this amount was spent on furniture and fixtures during renovation of building which was recorded in the books of account for the AY 2008-09. This fact has not been denied by the authorities that the assessee, in fact, recorded this amount of ₹ 3,81,999/- in his books of account of M/s NGK Trading Company. Once this amount has been duly recorded in the books of account of a subsequent year and there is no material to indicate that such furniture and fixture was purchased in the year in question, we countenance the action of the ld. CIT(A) in deleting the addition to this extent - Decided against revenue. Addition on account of the interest on loans - CIT(A) deleted addition - Loans advanced to sister concerns, namely, Exotic Fresh Produce Pvt. Ltd., and Narco Exports - Held that - The assessee charged interest on such advances to sister concerns at 11% against the payment of interest at 10% to 11% on loans and advances taken by him. As such, there can be no question of making any disallowance of interest towards the use of interest bearing funds for non-business purpose.- Decided in favour of assessee. Additional payment made by the assessee for purchase of shop at South City, Gurgaon, which was shown as Investment in the balance sheet of M/s NGK Trading Company - Held that - The case of the assessee is that the shop was acquired for carrying on business from this premises. There is no material on record manifesting the date from which such shop was actually put to use. Going by the proviso to section 36(1)(iii), any interest paid for the period up to the date of actual use of the shop, cannot be allowed as deduction. The AO is directed to ascertain the date from which the assessee took possession of this shop and then put it to use. Interest up to the date of putting such shop of South City-II, Gurgaon to use shall not be allowed as deduction, but, will be capitalized. In the absence of any material throwing light on the above issues, we set aside the impugned order and remit the matter to the file of AO for deciding this issue in conformity with our above observations.- Decided in favour of assessee by way of remand. Cash and bank balance which includes demand drafts in hand - Held that - The very fact that this much cash and bank balance is available with the assessee at the year end, can t be a ground for making any disallowance towards the interest paid on interest bearing loans taken by the assessee for the simple reason that retaining of amount in cash and bank balances does not in any manner indicates the diversion of funds for non-business purpose. It is for the assessee to decide as to how he has to conduct his business by keeping the borrowed funds in cash or otherwise. If loan is taken for business purpose and the loan is still in the possession of the assessee, the interest paid thereon has to be allowed as deduction.- Decided in favour of assessee. Repayment of old unsecured loans - Held that - The assessee repaid these loans taken earlier for business purpose on which he was paying interest @ 11.33%, as against fresh loans taken on interest @ 10% to 11% per annum. It is, therefore, self evident that there is no loss of revenue in the repayment of unsecured loans. Even otherwise, the repayment of business loans taken earlier out of the fresh interest bearing funds borrowed by the assessee, cannot be a reason for making any disallowance of interest paid on fresh funds taken as loan.- Decided in favour of assessee. Disallowance u/s 69B - Unaccounted investment in proprieties - Held that - t is obvious that the assessee instead of separately showing Investments in these four properties has withdrawn the amount from his capital account, which fact was stated before the AO and has remained un controverted. There is hardly any difference in showing investment in properties either by way of separate asset in the balance sheet or by reducing it from the capital account by means of withdrawals. Once an amount is withdrawn from capital account, which is utilized for making an investment, it cannot be brought within the purview of sections 69/69B in any manner.even after making the above investments, which are meant for non-business purpose, the assessee has still credit balance of his capital account in both the proprietorship concerns. It shows that these investments were made by the assessee for non-business purpose by withdrawing the amounts from his capital account and even after such withdrawals, there was some credit balance of his capital available with him. Under such circumstances, there can be no question of making any addition u/ss 69/69B - Decided in favour of assessee. Disallowance of foreign travel expenses - CIT(A) deleted addition - Held that - the assessee filed all relevant details with the AO about the foreign visits undertaken by him, meeting the suppliers of fruits and attending various conferences related to fruits in various countries. The assessee also furnished names of parties or companies with whom he interacted during his foreign visits. These findings recorded by the ld. CIT(A) have not been controverted by the ld. DR. Under such circumstances, we are of the considered opinion that there can be no basis for making any ad hoc disallowance towards foreign travel expenses - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition towards unexplained investment under Section 69.
2. Addition towards unexplained expenditure under Section 69C.
3. Disallowance of interest on loans.
4. Addition under Section 69B for unexplained investments.
5. Disallowance of foreign travel expenses.

Issue-wise Detailed Analysis:

1. Addition towards unexplained investment under Section 69:
The Assessing Officer (AO) added Rs. 5,85,000 as unexplained investment based on the difference between the property's purchase price (Rs. 34,65,000) and the valuation by the District Valuation Officer (DVO) (Rs. 40,50,000). The Tribunal observed that under Section 69, an addition can only be made if the investment is not recorded in the books of account and there is no satisfactory explanation. The AO relied solely on the DVO's report without any positive evidence of actual investment beyond the declared amount. The Tribunal upheld the CIT(A)'s deletion of the addition, noting that mere valuation differences do not substantiate unexplained investments.

2. Addition towards unexplained expenditure under Section 69C:
The AO added Rs. 3,81,999 for furniture and fixtures as unexplained expenditure. The assessee claimed this amount was spent in the subsequent financial year and recorded in the books of M/s NGK Trading Company. The Tribunal confirmed the CIT(A)'s deletion of the addition, as the expenditure was duly recorded in the books of the subsequent year and there was no evidence to suggest it was incurred in the year under consideration.

3. Disallowance of interest on loans:
The AO disallowed Rs. 16,25,945 as interest on loans, arguing that the assessee diverted funds for non-business purposes, such as advancing loans to sister concerns and purchasing a shop. The Tribunal found:
- The assessee charged 11% interest on loans to sister concerns, matching or exceeding the interest paid on borrowed funds.
- The shop purchase was for business purposes, and interest capitalization was required only until the asset was put to use, per Section 36(1)(iii).
- Retaining funds in cash and bank balances did not imply non-business use.
- Repayment of old unsecured loans with new loans did not justify disallowance.

The Tribunal remitted the issue of interest capitalization to the AO for verification of the shop's use date but otherwise upheld the CIT(A)'s deletion of the disallowance.

4. Addition under Section 69B for unexplained investments:
The AO added Rs. 84,48,290 for investments in properties not shown in the books. The assessee explained these were funded by withdrawals from the capital account. The Tribunal noted that reducing capital account balance for investments does not trigger Section 69B, especially when the capital account still had a credit balance post-investment. The Tribunal upheld the CIT(A)'s deletion of the addition.

5. Disallowance of foreign travel expenses:
The AO made an ad hoc 25% disallowance of foreign travel expenses (Rs. 3,98,689 out of Rs. 15.94 lac) due to lack of proof of business purpose. The Tribunal found the assessee provided detailed records of business-related foreign visits, including interactions with suppliers and attendance at industry conferences. The Tribunal upheld the CIT(A)'s deletion of the disallowance, as the AO's basis for an ad hoc disallowance was unfounded.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific remand instructions for the AO regarding interest capitalization related to the shop purchase. The Tribunal upheld the CIT(A)'s deletions on other grounds, emphasizing the need for positive evidence and proper accounting practices.