2014 (10) TMI 984 - AT - Income Tax

Addition u/s 40A(2)(b) - payments to persons specified - payments made to MIs. Kukreja Services Pvt. Ltd. towards Business Centre Facility and Administration Charges - Held that - As gone through the order of the Tribunal in assessee s case and found that on identical facts and circumstances, the similar addition made in earlier years were deleted by the Tribunal. We also found that payments made for business centre facility and administrative charges were not in excess of fair market value of similar services available in the market. No merit in the addition so made by the AO under Section 40A(2)(b) of the Act. Accordingly, we direct to delete the same. Addition of interest paid on account of alleged interest-free loans given to the sister concerns - addition as interest bearing funds have been diverted for non-business purpose - Held that - As before the AO assessee has furnished full details of interest free funds available with it amounting to ₹ 10.22 crores out of which advance given to the sister concern was ₹ 6.99 crores. There is no dispute to the well settled proposition that if the interest bearing funds have been diverted for non-business purpose, disallowance is required to be made with respect to the interest expenditure attributable to such advances. Where interest free funds have been utilized for advancing non-business purpose, no disallowance can be made. In the instant case, assessee has demonstrated the interest free funds available which was alleged to be advanced to sister concern without charging interest which requires due consideration by the AO. In the interest of justice, we restore this ground back to the file of the AO for deciding afresh after considering the interest free funds available with the assessee firm with reference to the interest free advances given to the sister concern Addition of interest expenditure and directed for capitalization for the same towards project cost - as per AO same should be capitalized towards projects/plots/premises by observing that assessee is in the business of construction activity for which assessee was purchasing plot and making investment for construction of building - Held that - We are not in agreement with the contention of the lower authorities as well as the contention of the learned DR insofar as interest expenditure was indirect expenditure which is required to be debited to the profit and loss account in the year of incurring of such expenses while computing the business income of the assessee. The issue is also covered by the decision of K. Raheja (P) Ltd. 2005 (5) TMI 552 - ITAT MUMBAI wherein it was observed that where the assessee was following completed contract method for recognizing its income/loss, but claimed finance cost in nature of interest as a period cost, the same is deductible in the year in which it was incurred or accrued. It was further observed that the Accounting Standard 7 issued by the ICAI, also suggested that in case where expenditure cannot be attributed to a particular activity carried on by the assessee, same is to be allowed as period cost. It was further observed that various benches of the Tribunal have also taken a consistent view that claim made by the assessee for deduction of finance cost by way of interest is in conformity with said Accounting Standard. No merit in the action of the lower authorities for not allowing the claim of interest expenditure paid to the bank on the funds borrowed and debited to profit and loss account of the year under consideration. even after disallowing the said interest expenditure, the declared loss of ₹ 2.08 crores was assessed by AO at a loss of ₹ 40.18 lakhs. Thus, there was no intention of assessee to reduce its taxable income by claiming interest paid to bank as expenditure of the year under consideration. - Appeal decided partly in favor of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40A(2)(b) of the Income Tax Act.
2. Disallowance of interest paid on account of alleged interest-free loans to sister concerns.
3. Disallowance of interest paid, with the direction to capitalize it towards projects/plots/premises.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(2)(b) of the Income Tax Act:

The assessee challenged the disallowance of Rs. 3,30,000/- under Section 40A(2)(b) for payments made to M/s. Kukreja Services Pvt. Ltd. for Business Centre Facility and Administration Charges. The AO observed these payments in the Tax Audit Report and required justification for not disallowing them. The assessee justified the payments, citing past payments and TDS deductions, and referenced previous ITAT decisions in similar cases. However, the AO disallowed Rs. 3,30,000/-. The CIT(A) upheld this disallowance, and the assessee appealed to the ITAT. The ITAT noted that similar disallowances in previous years were deleted by the Tribunal, finding no excess payment over fair market value. Following the Tribunal's earlier decisions, the ITAT directed the deletion of the disallowance.

2. Disallowance of interest paid on account of alleged interest-free loans to sister concerns:

The AO disallowed Rs. 1,65,707/- out of interest paid, alleging that interest-bearing funds were diverted for non-business purposes. The AO's examination revealed unsecured loans and advances to sister concerns. The assessee argued that interest-free funds were used for these advances, providing detailed accounts of non-interest-bearing funds. The CIT(A) confirmed the AO's disallowance. The ITAT, acknowledging the assessee's demonstration of interest-free funds, remanded the issue to the AO for fresh consideration of the interest-free funds vis-`a-vis the advances to sister concerns.

3. Disallowance of interest paid, with the direction to capitalize it towards projects/plots/premises:

The AO disallowed Rs. 1,62,16,245/- of interest paid, directing its capitalization towards projects/plots/premises, as the assessee was in the construction business. The assessee contended that the interest was an indirect expenditure, deductible in the year incurred, per the Accounting Standard 7 and consistent Tribunal decisions. The ITAT agreed with the assessee, citing the ITAT Mumbai decision in K. Raheja (P) Ltd., which allowed finance costs as period costs deductible in the year incurred. The ITAT found no merit in the lower authorities' actions and allowed the interest expenditure claim.

Conclusion:
The ITAT allowed the appeal in part, directing the deletion of the disallowance under Section 40A(2)(b) and allowing the interest expenditure claim while remanding the issue of interest-free loans to the AO for fresh consideration. The order was pronounced on 10/10/2014.