2016 (1) TMI 223 - HC - Income Tax

Tuition fee refunded by cash disallowed being not verifiable - assessee is running an institute providing coaching for IIT entrance examination - Held that - Admittedly even the AO is satisfied about majority of the payments which has not been doubted and on random basis the AO found that out of 175 payments, eleven payments were doubted but he chose to add entire amount in assessment year 2005-06 and @ 20% in the assessment year 2008-09. On further additional evidence having been led before the CIT(A) both the appellate authorities further analysed the evidence and came to the conclusion that addition if required, could be only to the extent of ₹ 60,200/- (ITAT). Both the appellate authorities have considered confirmations/certificates/receipts and other material and once the entire material had been considered, we see no reason to interfere. Even the AO found fault in few cases only and was satisfied in majority of cases. For the assessment year 2008-09, on the same facts and circumstances though the AO in this year disallowed ad hoc amount @ 20% of the amount paid in cash at ₹ 18,19,487/- which was on ad hoc basis, but CIT(A) after analysing the material available and placed on record by the assessee, came to the conclusion that the disallowance is required to be made only to the extent of ₹ 2,50,000/-. This was also upheld by the Tribunal on a further appeal by both the sides. Therefore, when both the appellate authorities have upheld ad hoc addition, therefore, in our view, when estimate has been made even by the AO, it was partly modified by the first appellate authority and upheld by the Tribunal, is also based on appreciation of evidence and is thus a finding of fact and no substantial question of law can be said to arise in this year as well. - Decided against revenue Disallowance of interest - ITAT deleted the addition - Held that - when there was no agreement to charge interest from the persons, to whom the assessee advanced short term loan/advance, the AO could not disallow part of the interest. It is also an admitted fact, as observed by the Tribunal, that the AO .vas not able to pin pointedly come to a definite conclusion that how interest bearing loans had been diverted towards interest free advances and since the AO was not able to prove nexus between interest bearing loans vis-a-vis interest free loans/advances, therefore, in our view as well, once the AO was not able to come to a definite conclusion as to nexus having been established about interest bearing loans having been diverted towards interest free loans/advances, and such being a finding of fact based on appreciation of evidence, in our view no substantial question of law arise on this question as well. - Decided against revenue

Summary

Issues Involved:
1. Disallowance of refund of tuition fees paid in cash.
2. Disallowance of interest on loans and advances to friends and relatives.

Issue-wise Detailed Analysis:

1. Disallowance of Refund of Tuition Fees Paid in Cash:

The respondent assessee, running a coaching institute, refunded tuition fees to students who opted out. The Assessing Officer (AO) disallowed refunds paid in cash, amounting to Rs. 21,51,100/- for the assessment year 2005-06 and Rs. 18,19,487/- for 2008-09, due to lack of verifiable evidence. The AO accepted refunds paid by cheques but doubted cash refunds, requesting confirmatory letters which the assessee partially provided.

Upon appeal, the CIT(A) reviewed additional evidence and reduced the disallowance to Rs. 86,500/- for 2005-06 and Rs. 2,50,000/- for 2008-09. The Tribunal further reduced the disallowance to Rs. 60,200/- for 2005-06 while upholding Rs. 2,50,000/- for 2008-09. The Tribunal's decision was based on the substantial evidence provided by the assessee, including confirmations and receipts, and found the AO's disallowance excessive.

The High Court upheld the Tribunal's findings, noting that the AO's disallowance was based on a random check of a few cases, and the majority of the refunds were satisfactorily explained. The appellate authorities' decisions were based on a thorough analysis of the evidence, and no substantial question of law arose from these findings.

2. Disallowance of Interest on Loans and Advances to Friends and Relatives:

The AO disallowed interest on the grounds that the assessee diverted interest-bearing loans towards interest-free advances to friends and relatives. The AO argued that the assessee should have charged interest on these advances.

The CIT(A) partially upheld the AO's disallowance for 2005-06 but deleted it for 2008-09, considering the assessee's claim of having sufficient own capital to cover the interest-free advances. The Tribunal deleted the disallowance entirely, noting that the assessee's own capital exceeded the interest-free advances, and there was no compulsion to charge interest on such advances.

The High Court agreed with the Tribunal, emphasizing that the assessee had substantial own capital and the AO failed to establish a direct nexus between the interest-bearing loans and interest-free advances. The court cited precedents, including the case of CIT v. Vijay Solvex Ltd., affirming that no notional interest could be disallowed when the assessee's own funds were sufficient to cover the advances.

Conclusion:

The High Court dismissed both appeals, affirming the Tribunal's findings as based on a proper appreciation of evidence and facts. The court found no perversity or legal infirmity in the Tribunal's order, and no substantial question of law was identified.