2017 (9) TMI 1699 - AT - Income Tax

Disallowance of proportionate interest - Held that - CIT(A) while granting partial relief has noted that no reasons were provided by the assessee for advancing interest free advances. Before us also assessee has not placed any material on record to demonstrate the commercial expediency. We further find that Ld.CIT(A) has noted that on perusal of the ledger account of M/s. Hira Enterprises as well as the copy of bank statement of Kharad Urban Co-operative Bank that amount advanced to sister concern was through the cash credit account. CIT(A) by a well reasoned and detailed order has decided the issue and granted partial relief to assessee. CIT(A) further directed to disallow the proportionate interest. Before us, assessee has not placed any material on record to controvert the findings of CIT(A). No reason to interfere with the order of CIT(A) and thus this ground of the assessee is dismissed. TDS u/s 194C - Disallowance u/s 40(a)(ia) - non deduction of tds on printing charges, loading and unloading charges, payment of rent and interest - Held that - Punjab and Haryana High Court in the case of CIT, Ludhiana Vs. Deputy Chief Accounts Officer, Markfed Khanna Branch 2008 (2) TMI 260 - PUNJAB AND HARYANA HIGH COURT has held that when assessee had purchased printed packing material from manufacturer for purpose of packing of its finished products and no raw material was supplied by it to manufacturer for manufacturing such packing materials transaction was a contract of sale and not a works contract and therefore it was outside the purview of Sec.194C of the Act. We are of the view that no disallowance u/s 40(a)(ia) of the Act was called for on the payment of printing charges paid by the assessee. With respect to the other expenses on which the disallowance has been confirmed by CIT(A), before us, assessee has not placed any material to controvert his findings and therefore to the extent of such disallowance, no interference to the order of Ld.CIT(A) is called for.

Summary

Issues Involved:
1. Disallowance of proportionate interest on loan.
2. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of TDS.

Detailed Analysis:

1. Disallowance of Proportionate Interest on Loan:

The assessee, a partnership firm engaged in the manufacturing and selling of tobacco products, filed its return of income for A.Y. 2007-08, declaring a total income of ?15,20,628/-. The case was selected for scrutiny, and the assessment was framed under Section 143(3) of the Income Tax Act, determining the total income at ?58,18,120/-. The assessee had debited bank interest of ?8,59,079/- on bank loans aggregating ?74,96,527/- and had granted interest-free advances of ?1,27,34,934/- to its sister concern, M/s. Hira Enterprises. The AO disallowed the interest on the interest-free amount advanced to the sister concern, as the capital of the firm was not sufficient to cover the interest-free advances, indicating that the advances were out of borrowed funds. The Ld.CIT(A) upheld the AO's decision, emphasizing that the assessee did not have sufficient interest-free funds at its disposal and that the bank loans were utilized towards making the interest-free advances. The Ld.CIT(A) directed the AO to disallow the proportionate interest expenditure relating to the interest-free advance made to the sister concern. The Tribunal found no reason to interfere with the order of Ld.CIT(A) as the assessee did not provide any material to demonstrate the commercial expediency of the interest-free advances.

2. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:

The AO noticed that the assessee had made payments aggregating ?34,28,931/- on account of printing charges, loading and unloading charges, payment of rent, and interest without deducting TDS. The AO disallowed these expenses under Section 40(a)(ia) of the Act. The Ld.CIT(A) granted partial relief by holding that the printing charges and tobacco processing charges were subject to TDS under Section 194C as they fell within the definition of a works contract/sub-contract. However, the transportation charges paid to Deepak Transport Agency Ltd. were justified as the firm had a specific direction from ACIT, Hyderabad, not to deduct TDS for the period 01.04.2006 to 31.03.2007. The Tribunal upheld the Ld.CIT(A)'s decision regarding the printing charges, agreeing that it was a "contract of sale" and not a "works contract," and thus outside the purview of Section 194C. The Tribunal also upheld the Ld.CIT(A)'s decision on the other expenses, as the assessee did not provide any material to controvert the findings.

Conclusion:

The Tribunal dismissed the ground of the assessee regarding the disallowance of proportionate interest on loan and partly allowed the ground concerning disallowance under Section 40(a)(ia) for non-deduction of TDS. The appeal of the assessee was partly allowed.