2023 (7) TMI 1322 - AT - Income Tax

Disallowance u/s 40A(3) - assessee has made cash payment in respect of the purchase of land at Khajuri Khurd - assessee has submitted that the cash was paid only in compliance to the settlement of Court proceedings and therefore, no disallowance could be made u/s 40A(3) - HELD THAT - Payment made by the assessee in cash to settled the dispute pending in the court was inhabitable to purchase the land in question. Thus, the payment was made for business expediency and specific circumstances to avoid abnormal delay of transactions of purchase of land which could have adversely affected the business of the assessee. AO has not disputed the genuineness of the transaction and identity of the parties to whom the assessee has paid of Rs. 17,50,000/- in question. Though the payment was made under the mutual settlement but to bring to an end the litigation pending in the court of law and therefore, the settlement made by the assessee with plaintiff who filed the suit was on account of business expediency and rules out any scope or intention of tax evasion on the part of the assessee or other parties as the entire transaction was made part of the court order and decree. Therefore, the genuineness of the transactions and payment as well as identification of the payee were beyond the doubt. As decided in case of Anupam Tele Services 2014 (2) TMI 30 - GUJARAT HIGH COURT if section 40A(3) is read together with rule 6DD it will be clear that the provisions are not intended to restrict business activities. The payment by crossed cheque or crossed bank draft is insisted to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. Considerations of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. Therefore, if the assessee has brought on record to establish genuineness of the transactions and payment as well as identity of the payee to the satisfaction of the AO then the benefit of Rule 6DD is available. As section 40A(3) was intended to penalize the tax evader and not honest transactions and that is why after framing Rule 6DD(j) the CBDT steps in by issuing the circular dated 31st May 1977. Therefore, the disallowance u/s 40A(3) cannot be made without considering the business expediency and other relevant factors falling in the exceptions given in Rule 6DD of I.T. Rules. Thus we decide this issue in favour of the assessee and consequently disallowance made by the AO u/s 40A(3) is deleted. Jurisdiction of the AO 154 for levying interest u/s 220(2) - HELD THAT - As there were mistake in computing surcharge and education cess consequently the interest u/s 234A, 234B and 220(2) were levied incorrectly. The last correction proposed by the AO in the order u/s 154 in respect of the interest u/s 220(2) is nothing but consequential to the rectification in respect of the surcharge and education cess. Even otherwise the interest u/s 220(2) is automatic once the AO issues demand notice after the assessee failed to make payment. Therefore, the issue raised by the assessee in this appeal is purely academic in nature which is not going to change the tax liability of the assessee. Even otherwise once the AO is required to give effect to the orders of the Ld. CIT(A) as well as this Tribunal then this issue of interest u/s 220(2) becomes infructuous. Disallowance of interest on account of interest free loan given to related parties - AO noted that the assessee has given interest free loan to related party and as no business purpose is served by giving such interest free loan and advance to the related party, made the disallowance of interest @ 12% - HELD THAT - It is settled proposition of law that even if the interest bearing fund and interest free funds are put in common pool, the investment or loan given by the assessee would be deemed to have been given from assessee s own interest free fund. The assessees own fund is more than sufficient to advance this amount to the related party. Thus when the assessee s own interest free fund are sufficient to advance to the related party the disallowance made by the AO on account of interest calculated @ 12% is not justified and the same is deleted. Addition of agricultural income - HELD THAT - Assessee has shown agricultural income in its return of income for this year as well as for the A.Y. 2014-15 and this fact has not been disputed by the Ld DR. Further when the assessee has produced evidence of owning agricultural income and revenue record showing the cultivation of the land and crop production then the claim of the assessee cannot be denied in toto. The AO has not disputed the claim of agricultural income of Rs. 21,52,089/-for A.Y. 2014-15. Accordingly in the facts and circumstances of the case when the AO has not disputed the claim of agricultural income for assessment year 2014-15 then the disallowance made for the year under consideration is not justified the same is deleted. Disallowance of salary/remuneration paid to the directors - HELD THAT - Assessee has explained the qualification and work experience as well as business knowledge of the directors who are responsible for overall business affairs of the assessee company. we further note that the AO has made disallowance of 40% of enhancement without doing any exercise to determine what should be the fair salary to the directors having regard to the services they have render to the assessee company. It is matter of record that two of the directors are paying income tax at the maximum marginal rate and therefore, there is no revenue loss on this account. Accordingly we are of the considered view that an ad hoc disallowance made by the AO without doing the necessary exercise of determination of the fair remuneration of the salary payment to the directors is not justified. Accordingly the disallowance made by the AO is deleted. Disallowance made u/s 40(a)(ia) in respect of provisions made on account of auditor fees - AO has noted that the assessee has claimed the auditor fees in the profit and loss account which was yet to be paid by the assessee as no bill or voucher was received during the year under consideration - HELD THAT - Since it is only the provision for the auditor fees and assessee did not deduct tax at source on the said provisions therefore, in the facts and circumstances of the case we find it appropriate that the claim of auditors fees be allowed by the AO in the subsequent year when the assessee has actually deducted and paid TDS on this amount. Ld. AO is directed accordingly. Disallowance of of telephone, traveling and fuel expenses on the ground of personal use - HELD THAT - AO has just doubted the personal use and the disallowance is made purely on the basis of the assumption without bringing any record or fact to show that these facilities are being used for personal purpose of the directors. As relying on Sayaji Iron and Engineering Co 2001 (7) TMI 70 - GUJARAT HIGH COURT the adhoc disallowance is not sustainable and liable to be deleted.

Summary

Issues Involved:
1. Validity of reopening of the assessment.
2. Disallowance under Section 40A(3) of the Act.
3. Rectification order under Section 154.
4. Disallowance of interest-free advances.
5. Classification of agricultural income.
6. Disallowance of salary paid to directors.
7. Disallowance due to non-deduction of tax on provisions.
8. Ad hoc disallowance of expenses.

Summary:

1. Validity of Reopening of the Assessment:
The assessee did not press the ground challenging the validity of the reopening of the assessment under Section 147 r.w.s. 143(3) for A.Y. 2010-11. Consequently, this ground was dismissed as not pressed.

2. Disallowance under Section 40A(3):
The assessee contended that the cash payment of Rs. 17,50,000/- was made due to a court-ordered settlement, thus should not attract disallowance under Section 40A(3). The Tribunal noted that the payment was genuine, necessary for business expediency, and supported by court orders. The Tribunal relied on precedents like Anupam Tele Services vs. ITO and Smt. Harshila Chordia vs. ITO, concluding that disallowance under Section 40A(3) was not justified in this case, and thus, deleted the disallowance.

3. Rectification Order under Section 154:
The rectification order passed by the AO included corrections in surcharge, education cess, and interest under Sections 234A, 234B, and 220(2). The Tribunal held that the interest under Section 220(2) is automatic and the issue raised by the assessee is academic, not affecting the tax liability. Thus, this ground was considered infructuous.

4. Disallowance of Interest-free Advances:
The assessee argued that it had sufficient interest-free funds to cover the advances given to related parties. The Tribunal agreed, citing the balance sheet showing substantial interest-free funds and relying on the Supreme Court's decision in CIT vs. Reliance Industries Limited. The disallowance of interest was deleted.

5. Classification of Agricultural Income:
The AO reclassified agricultural income as income from other sources due to insufficient evidence. The Tribunal noted the assessee's consistent reporting of agricultural income in other years and the supporting land revenue records. The disallowance was deleted.

6. Disallowance of Salary Paid to Directors:
The AO disallowed part of the directors' salary as excessive. The Tribunal found the disallowance arbitrary, noting the directors' qualifications and responsibilities. It relied on the Chennai Tribunal's decision in Carmel Softech Pvt. Ltd., concluding that the disallowance was not justified and deleted it.

7. Disallowance Due to Non-deduction of Tax on Provisions:
The AO disallowed auditor fees provisions due to non-deduction of TDS. The Tribunal directed that the claim should be allowed in the subsequent year when TDS is deducted and paid.

8. Ad hoc Disallowance of Expenses:
The AO made an ad hoc disallowance of Rs. 1,00,000/- for personal use of telephone, traveling, and fuel expenses. The Tribunal found the disallowance unsustainable, citing the Gujarat High Court's decision in Sayaji Iron and Engineering Co. vs. CIT, and deleted it.

Conclusion:
The appeals for A.Y. 2012-13 and 2013-14 were partly allowed, while the appeals for A.Y. 2010-11 (u/s 143(3)], 2010-11(u/s 154), and 2015-16 were allowed. The order was pronounced in the open court on 31.07.2023.