2018 (7) TMI 2115 - AT - Income Tax

Expenditure under the heading Contractors Benevolent Fund (CBF) - Expenditure is not allowable u/s.37 - HELD THAT - Contractor is under an obligation to deduct tax by notification issued by the Government of Karnataka, dt.18.1.2007 to make the payment of CBF which is equivalent to 1% of the estimated cost of the contract and therefore this is an expenditure which is wholly and solely related to the business of the assessee. In our view, whether actually this amount is spent by the assessee for the purposes of business is required to be verified by the A O with reference to the bills / running bills submitted by the assessee. We remand the matter back to the file of the AO with a direction to verify whether the assessee had made the contribution to CBF in pursuance to the notification dt.18.1.2007 or the corrigendum issued. If the payment of CBF is made in accordance with the said notification then the same shall be allowed after verification. Disallowance of the interest paid to NBFC u/s.40(a)(ia) - HELD THAT - Since the assessee has filed the confirmation letter in proof of paying the interest against loans given by NBFC and therefore in the fitness of things, it is required that the facts are required to be verified by the AO after affording opportunity of being heard to the assessee. In the light of the above, we remand this issue also to the file of the AO to verify whether the assessee had paid interest to NBFC or not and whether the NBFC had shown the interest as income in its books of account and return of income. If it has been done then the AO shall allow the amount.

Summary

Issues:
1. Disallowance of expenditure towards Contractors Benevolent Fund
2. Disallowance of interest paid to NBFC under section 40(a)(ia) of the Act

Analysis:
1. The first issue revolves around the disallowance of expenditure towards Contractors Benevolent Fund (CBF) by the assessing officer (AO) under section 37 of the Act. The appellant, a civil contractor, contended that the AO disallowed the expenditure without proper verification. The appellant highlighted that the contribution to CBF is mandatory as per the notification issued by the Government of Karnataka. The Appellate Tribunal observed that the expenditure is related to the business of the assessee and should be allowed if verified. The matter was remanded back to the AO to verify if the payment was made in accordance with the notification, emphasizing the need for proper verification based on bills submitted by the assessee.

2. The second issue pertains to the disallowance of interest paid to a Non-Banking Financial Company (NBFC) under section 40(a)(ia) of the Act. The appellant argued that the interest payment was genuine and supported by a confirmation letter from the NBFC. However, the CIT (A) did not verify the submitted documents and upheld the AO's decision. The Appellate Tribunal noted that the confirmation letter was filed as proof of interest payment. The Tribunal remanded the issue back to the AO for verification, emphasizing the need to confirm the payment of interest to the NBFC and its treatment in the NBFC's books of accounts and return of income. If verified, the amount of disallowed interest should be allowed.

In conclusion, the appeal of the assessee was allowed for statistical purposes, with both issues being remanded back to the AO for proper verification and consideration based on the facts presented during the appeal.