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2014 (2) TMI 1334 - AT - Income TaxNon charging of interest from debtors - Held that - No part of the paper book has been pointed out to us how the interest free funds available were advanced to these persons - since nothing has been brought on record by the assessee or by the CIT(A) with regard to the purpose for which the various persons to whom money has been advanced has actually used the money. The advances given mostly are to the persons in their personal capacity and in the absence of any material or cogent explanation on record, the same have to be treated to have been advanced for personal benefit of such persons - thus this ground of revenue is allowed. Disallowance u/s 40A(3) made for payment in cash for purchase of property - Held that - In the proviso to section 40A(3) the exceptions are prescribed under Rule 6DD of the having regard to the nature and extent of banking facilities available for consideration of business expediency and other relevant factors and nothing beyond that - Ld. CIT(A) has not taken the said proviso in the right spirit and has deleted the addition, which is against the facts of the case and against the provisions of law - thus the order of the CIT(A) is reversed - appeal of Revenue is allowed.
Issues Involved:
1. Deletion of disallowance of interest paid to banks. 2. Deletion of disallowance under Section 40A(3) for cash payments exceeding Rs. 20,000. Issue-wise Detailed Analysis: 1. Deletion of Disallowance of Interest Paid to Banks: The Revenue challenged the CIT(A)'s decision to delete the disallowance of Rs. 7,76,043/- for interest paid to banks, arguing that the interest-free loans given by the assessee to certain individuals were not made for "commercial expediency." The assessee had taken loans from Allahabad Bank and Indiabulls Financial Services Limited, paying interest rates of 15.75% and 22.25%, respectively. However, the assessee did not charge interest on loans advanced to various individuals without any business connection or commercial necessity. The AO relied on the Supreme Court's judgment in S.A. Builders Ltd. vs. CIT, which held that interest on borrowed capital could be proportionately disallowed if interest-free loans were given without commercial expediency. The CIT(A) accepted the assessee's argument that it had enough interest-free borrowings (Rs. 10,20,360/-) to cover the interest-free advances (Rs. 6,30,380/-), thus deleting the disallowance. However, the Tribunal found that the CIT(A) did not properly verify whether the interest-free funds were actually available for advancing to these individuals. The Tribunal noted that the advances were made to persons with no business dealings with the assessee, implying personal benefits rather than business purposes. Consequently, the Tribunal reversed the CIT(A)'s order and restored the AO's disallowance of Rs. 7,76,043/-. 2. Deletion of Disallowance under Section 40A(3) for Cash Payments Exceeding Rs. 20,000: The AO disallowed Rs. 33,71,275/- under Section 40A(3) for cash payments made for property purchases, arguing that such payments violated the provision requiring payments exceeding Rs. 20,000 to be made by crossed cheque or bank draft. The assessee contended that the transactions were genuine, supported by registration deeds, and that the payments were made in cash due to business expediency and the insistence of the sellers. The CIT(A) accepted the assessee's explanation, noting that the identity of the payee, genuineness of the transaction, and amount were documented, thus not attracting Section 40A(3). However, the Tribunal disagreed, emphasizing that Section 40A(3) and Rule 6DD exceptions must be strictly interpreted to prevent the use of unaccounted money. The Tribunal found that the assessee's reasons for cash payments were not covered under Rule 6DD exceptions and that the CIT(A) misinterpreted the proviso to Section 40A(3). The Tribunal concluded that the assessee failed to demonstrate exceptional circumstances justifying cash payments and reversed the CIT(A)'s order, restoring the AO's disallowance of Rs. 33,71,275/-. Conclusion: The Tribunal allowed the Revenue's appeal, reinstating the AO's disallowances of Rs. 7,76,043/- for interest payments and Rs. 33,71,275/- under Section 40A(3), emphasizing the need for commercial expediency and compliance with statutory provisions.
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