2018 (1) TMI 1720 - AT - Income Tax

Disallowance on account of expenses claimed in P L account - assessee has failed to produce books of account but the assessee has claimed to have audited the books of account - CIT(A) relying on various judgements held that the accounts are audited to which, AO ought to have given due consideration but to meet the ends of justice he estimated the net profit @ 2.75% of gross contract receipts and sustained addition - HELD THAT - Before us, ld D.R. could not point out any mistake in the order of the CIT(A). We find that the books of account of the assessee are audited and the assessee has furnished the tax audit report to which no adverse inference was drawn by the AO. We find that the CIT(A) has dealt on the issue and relied on various judicial pronouncement on this matter and estimated the net profit @ 2.75% of gross contract receipts and sustained addition - Hence, we uphold his order and dismiss the ground of appeal of the revenue. Disallowance out of interest expenses made by the AO on account of interest on fund diverted for non-business purposes - assessee firm has advanced various amounts to different parties, therefore, the assessee was required to explain the mode of advance - CIT(A) deleted the disallowance by observing that the AO has not brought on record any evidence to demonstrate nexus of the assessee with five parties - HELD THAT - IT(A) has relied on various judicial pronouncements including the decision of Hon ble Supreme Court in the case of S.A. Builders, 2006 (12) TMI 82 - SUPREME COURT , wherein, it was held that interest on borrowed funds cannot be disallowed if the assessee has advanced interest free loan to a sister concern as a measure of commercial expediency. The assessee has adopted the alternative of borrowing money from the market instead of liquidating its own assets. We find that except relying on the order of the Assessing Officer, ld .D.R. could not point out any specific error in the order of the CIT(A) and could not controvert the findings of the CIT(A) by bringing any positive material on record that the advances were not made to five parties for normal course of business. In view of above, we confirm the order of the CIT(A) in deleting the addition. Appeal filed by the revenue is dismissed.

Summary

Issues:
1. Addition to expenses claimed in P&L account
2. Disallowance of interest expenses on fund diverted for non-business purposes

Analysis:

Issue 1: Addition to expenses claimed in P&L account
The appeal was filed by the revenue against the CIT(A)'s order for the assessment year 2010-2011, specifically challenging the addition of Rs. 6,77,080 out of disallowance on account of expenses claimed in the profit and loss account. The Assessing Officer estimated an adhoc disallowance due to the absence of bills and vouchers, resulting in an addition of Rs. 53,95,151. The CIT(A) noted that the assessee failed to produce books of account but claimed they were audited. The CIT(A) emphasized that the Assessing Officer did not provide any specific reasons for the adhoc addition and that the assessed income was higher than comparable instances. Relying on various judgments, the CIT(A) estimated the net profit at 2.75% of gross contract receipts, sustaining the addition at Rs. 6,77,080. The Tribunal upheld the CIT(A)'s order, stating that the books were audited, no adverse inference was drawn, and the CIT(A) appropriately considered judicial pronouncements.

Issue 2: Disallowance of interest expenses on fund diverted for non-business purposes
The second ground of appeal related to the disallowance of interest expenses of Rs. 2,19,004 made by the Assessing Officer on account of interest on funds diverted for non-business purposes. The Assessing Officer identified transactions for non-business purposes and added the disallowance amount. The CIT(A) deleted this disallowance, stating that there was no evidence demonstrating a nexus with the parties involved. The CIT(A) relied on judicial precedents, including the Supreme Court decision in S.A. Builders, emphasizing that interest on borrowed funds cannot be disallowed if loans were advanced for commercial expediency. The Tribunal confirmed the CIT(A)'s decision, noting the lack of specific errors pointed out by the revenue and the absence of evidence contradicting the business nature of the advances. Consequently, the appeal filed by the revenue was dismissed.

In conclusion, the Tribunal upheld the CIT(A)'s order on both issues, emphasizing the importance of audited accounts, lack of specific errors in the CIT(A)'s decision, and adherence to judicial precedents in determining the additions and disallowances in the assessment.