2018 (4) TMI 1660 - AT - Income Tax

Disallowance of interest expenses - Allowable business expenses - CIT(A) deleted the addition as convinced with the claim of expenditure and on finding that both the assessee and Goyal & Co. are taxed at the maximum rate of tax there would be no revenue leakage if the expenditure are claimed by either of the two - HELD THAT - There is no dispute that the assessee has in fact incurred the expenditures which have been disallowed by the A.O. Equally true that nowhere the A.O. has mentioned that the expenditures were not related to the business of the assessee. As also true that quantitative specification of works allotted to assessee has not been mentioned in the said agreement but at the same time the A.O. has accepted the said agreement without questioning its legality or enforceability. Sale consideration was first received by Goyal & Co. and thereafter after the gap of 4 to 6 days the same was transferred to the account of the assessee. On such fact it cannot be said that the assessee has deliberately passed on some favour to Goyal & Co. Therefore it cannot be said that by doing so the assessee has unnecessarily incurred interest expenditure on loans from Punjab National Bank. The assessee is also having sufficient interest free funds available with it. The disallowance of proportionate interest is uncalled for. Expenditure on Tube Well was incurred for the constant availability of flow of water for RCC work and Plaster work. A.O. has not disputed that such expenditure was never incurred for the purpose of the business. Expenditure on Wooden Work is also not in dispute. The only reason for making the disallowances is that the assessee has done some work beyond the scope of work allotted to it. Assuming yet not accepting the contention of the A.O. is correct then also if the assessee has done some work which was not allotted to it the same would be a matter of dispute between the assessee and Goyal & Co. By no stretch of imagination the expenditure incurred can be disallowed. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest expenses
2. Disallowance of wooden material expenses
3. Disallowance of solar water heating equipment expenses

Analysis:

Issue 1: Disallowance of Interest Expenses
The Revenue appealed against the deletion of the addition of interest expenses amounting to ?2,82,812. The Assessing Officer (A.O.) disallowed the interest expenses on a loan facility availed from the Punjab National Bank due to a perceived delay in the receipt of sale proceeds by the assessee. The A.O. believed that had the sale consideration been received directly by the assessee, the interest expenses could have been avoided. The Appellate Tribunal noted that the A.O. did not dispute the business-related nature of the expenditures. Additionally, the Tribunal found that the assessee had sufficient interest-free funds available and that the delay in receiving sale proceeds did not indicate favoritism towards another party. Consequently, the Tribunal held that the disallowance of interest expenses was unwarranted.

Issue 2: Disallowance of Wooden Material Expenses
The A.O. disallowed wooden material expenses and wooden labor expenses totaling ?30.83 lakhs, alleging that the assessee had undertaken work beyond the scope defined in the development agreement. However, the assessee contended that the work was done jointly with another party as per the agreement. The Appellate Tribunal observed that the A.O. did not challenge the legality or enforceability of the development agreement. The Tribunal emphasized that the disallowance was based solely on the assumption that the assessee had exceeded the agreed scope of work, without concrete evidence to support this claim. Consequently, the Tribunal upheld the deletion of the disallowed expenses by the CIT(A).

Issue 3: Disallowance of Solar Water Heating Equipments Expenses
The A.O. disallowed expenses of ?2,91,375 incurred on solar water heating equipment, alleging that it was beyond the scope of the development agreement. However, the CIT(A) allowed the expenses considering the tax implications for both parties involved. The Tribunal, relying on legal precedents, supported the CIT(A)'s decision, emphasizing that the expenses were related to the business activities and that the disagreement over the scope of work did not justify disallowing the expenses. The Tribunal found no merit in the A.O.'s disallowances and upheld the CIT(A)'s findings.

In conclusion, the Appellate Tribunal dismissed all grounds raised by the Revenue, affirming the CIT(A)'s decision to delete the disallowed expenses. The Tribunal found no justification for the disallowances made by the A.O., emphasizing the business-related nature of the expenses and the lack of concrete evidence to support the disallowances.