2022 (8) TMI 1479 - AT - Income Tax

Addition on account of warehouse rent being excessive - payment to persons covered u/s 40A(2)(b) and not expedient to business expenditure - CIT(A) deleted addition - HELD THAT - Disallowance on account of warehouse rent being excessive payment was rightly deleted by the CIT(A) as the assessee has given the details related to warehouse expenditure on rent thereby filing the details of related to entry/payment of the corresponding receipts along with cheques. CIT(A) has taken cognisance of the same referring to the bills and invoices towards warehouse rent and recipient as party has already paid due tax thereon. Therefore ground of Revenue s appeals are dismissed. Addition on account of interest payment u/s. 36(1)(iii) - CIT(A) deleted addition - HELD THAT - CIT(A) has rightly observed that CFS bill account shows that sizable amount of payables by the assessee to GFPL thus the assessee was having sufficient fund and the assessee has established the nexus between the interest-free advance and the interest-bearing loans. The books of account of the assessee also show this fact. In fact the assessee earned positive income of more than Rs.5 Crores which in any case should necessarily be considered available for making interest-free advances. As per observation of the CIT(A) the deployment of fund available with one concern of the group for the purpose of business has been taken into account while deleting this addition by the CIT(A). There is no need to interfere with the same and hence ground no.2 of Revenue s appeal dismissed. Addition on account of Repairs Maintenance - CIT(A) deleted addition - HELD THAT - The payments were made after deducting TDS. The parties directly confirmed the said charges while replying notice u/s 133(6) of the act. Thus the Assessing Officer has totally ignored the evidences placed before him and therefore the CIT(A) rightly deleted this addition.

Summary

Issues:
- Disallowance of warehouse rent as excessive payment under Section 40A(2)(b)
- Disallowance of interest payment under Section 36(1)(iii)
- Disallowance of Repairs & Maintenance expenses
- Refusal to expunge unwarranted observations in the assessment order
- Action under Section 142(2A) for special audit

Disallowance of Warehouse Rent:
The Revenue contended that the CIT(A) erred in deleting the addition of excessive warehouse rent payment under Section 40A(2)(b). The Revenue argued that there was no written agreement for the rent, no documentary evidence provided by the assessee, and no justification for the rent increase. The Revenue claimed it was an accommodation entry to evade tax. However, the CIT(A) upheld the deletion, considering the details provided by the assessee on warehouse rent expenditure, including related receipts and cheques. The CIT(A) noted the bills and invoices for warehouse rent and confirmed tax payment by the recipient, leading to the dismissal of the Revenue's appeals.

Disallowance of Interest Payment:
Regarding the disallowance of interest payment under Section 36(1)(iii), the Revenue argued that the genuineness of the interest payment was not established by the assessee. The Revenue claimed that the response to the notice under Section 133(6) lacked documentary evidence like bank statements or bills, and there was no proof of commercial expediency for the advances. However, the CIT(A) found that the assessee had sufficient funds based on the CFS bill account, established a nexus between interest-free advances and interest-bearing loans, and earned substantial income. The CIT(A) considered the fund deployment for business purposes and dismissed the Revenue's appeal on this ground.

Disallowance of Repairs & Maintenance Expenses:
On the disallowance of Repairs & Maintenance expenses, the Revenue argued that the assessee failed to provide details from the parties involved. However, the CIT(A) found evidence in the account statements and the assessee's books, confirming the repair and maintenance work with TDS deductions. The parties corroborated the charges in their responses to the notice under Section 133(6), leading the CIT(A) to delete this addition and dismiss the Revenue's appeal on this issue.

Refusal to Expunge Unwarranted Observations:
The assessee raised objections against unwarranted observations in the assessment order, claiming prejudice and illegal exercise of invoking Section 142(2A) for special audit. The CIT(A) refused to expunge these observations, stating no positive evidence justified it and disregarding the material presented. The CIT(A) held that the special audit action was not to extend limitations unlawfully and did not bar the assessment due to this exercise.

Conclusion:
Ultimately, the ITAT upheld the CIT(A)'s decisions, dismissing the Revenue's appeals and the assessee's cross objections. The ITAT found in favor of the assessee on the grounds of warehouse rent, interest payment, and repairs & maintenance expenses, based on the evidence and explanations provided. The judgment was pronounced on August 31, 2022, in the open court.