2016 (5) TMI 170 - AT - Income Tax

Disallowance u/s.14A - Held that - No infirmity in the order of CIT(A) for excluding the strategic investment made in the joint venture business projects while computing disallowance under rule 8D(ii).- Decided in favour of assessee Disallowance u/s.37(2B) - donation to Bharatiya Janata Party - Held that - The assessee has not given any advertisement in souvenir of the political party therefore not hit by the provisions of section 37(2B). Since the expenditure was incurred wholly and exclusively for the purpose of business and was not in personal nature, there was no justification for disallowing the same. Accordingly, we confirm the order of CIT(A) on this issue. - Decided in favour of assessee Disallowance of interest - CIT(A) allowed the claim - Held that - none of the borrowed funds have been utilized for giving interest free loans to either blood relative or friends. Whatever advances have been given were out of own capital. This fact is verifiable from the enclosed balance sheet of the assessee. The finding of fact recorded by CIT(A) are as per material on record, therefore, does not require any interference on our part. Accordingly, we confirm the action of the CIT(A) following the decision of jurisdictional High Court in the case of Reliance Utilities Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT - Decided in favour of assessee Adhoc disallowance on telephone expenses, vehicle expenses etc. - Held that - We have considered rival contentions and found that personal element in such expenses cannot be ruled out. Therefore, keeping in view the totality of facts and circumstances of the case, we restrict the disallowance to the extent of 10% of such expenses. - Decided in favour of assessee partly Addition on account of alleged non-genuine purchases of the assessee - Held that - All the materials were supplied at the site of the execution of work, payment of which were made by account payee cheque. We also found that when the work was being executed the site has been visited by the engineers of BMC to check the progress and validity of the work. The MCGM is also having its own inhouse vigilance department to check the quantity and quality of the work done. Only after satisfying with the quantity and quality of work done, the payment was made by the assessee, therefore, it cannot be said that assessee has not purchased the goods, because without purchase, it was not possible to execute work allotted. From the record we also found that assessee has appointed project manger for each site. As per the terms of the contract, assessee has to erect a readymade site office of for MCGM staff before commencing of the work and the has to set up a laboratory before commencing of work, for which quality control engineer has to be appointed. The assessee had also sent samples of all the materials received at site to municipal staff laboratory under sub engineers signature. The CIT(A) has dealt with great detail of the statement dated 2-5-2012 as recorded by the AO and reply filed by the concerned parties. After recording detailed finding the CIT(A) has applied the proposition of law laid down by various High Courts and came to the conclusion that assessee s actual purchase of material by the assessee and disallowing the same was not justified. The detailed finding recorded by CIT(A) are as per material on record, which has not been controverted by ld. DR by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the finding recorded by CIT(A) resulting into deletion of addition on account of purchases. - Decided in favour of assessee

Issues Involved:
1. Deleting disallowance made by the AO u/s.14A.
2. Deleting disallowance of ?4,18,000/- u/s.37(2B) of the I.T.Act.
3. Deleting disallowance of interest of ?4,61,376/-.
4. Deleting adhoc disallowance of ?1,00,000/- on telephone expenses, vehicle expenses, etc.
5. Deleting addition of ?3,50,19,655/- on account of alleged non-genuine purchases.

Issue-wise Detailed Analysis:

1. Deleting disallowance made by the AO u/s.14A:
The assessee, a government contractor, had computed disallowance under Rule 8D(2) by excluding strategic investments in joint venture business projects. The AO did not accept this and made a disallowance of ?3,54,957/-. The CIT(A) deleted the disallowance, observing that the AO erred by including investments that did not yield exempt income. The tribunal found the issue covered by the decision of the Hon’ble Delhi High Court in the case of Oriental Structural Engineers (P) Ltd. and other similar cases, upholding the CIT(A)’s decision to exclude strategic investments while computing disallowance under Rule 8D(ii).

2. Deleting disallowance of ?4,18,000/- u/s.37(2B) of the I.T.Act:
The AO disallowed the expenditure towards advertisement in souvenir, brochures, etc., published by a political party. The CIT(A) deleted the disallowance, noting that the expenditure was a donation to a political party and not covered under section 37(2B). The tribunal upheld the CIT(A)’s order, confirming that the expenditure was incurred wholly and exclusively for business purposes and was not personal in nature.

3. Deleting disallowance of interest of ?4,61,376/-:
The AO observed that the assessee had made interest-free advances while paying interest on loans taken, leading to a disallowance of ?4,61,376/- at 12% per annum. The CIT(A) deleted the disallowance, noting that the assessee had sufficient surplus funds in the form of capital, and borrowed money was not used for advancing interest-free loans. The tribunal affirmed the CIT(A)’s decision, referencing the jurisdictional High Court’s decision in the case of Reliance Utilities Ltd., which established that if interest-free funds are sufficient to meet investments, interest on borrowed capital used for business purposes is deductible.

4. Deleting adhoc disallowance of ?1,00,000/- on telephone expenses, vehicle expenses, etc.:
The AO made an adhoc disallowance of ?1,00,000/- citing the possibility of personal use. The CIT(A) deleted the disallowance, noting that the assessee had furnished evidence for each expenditure head, and the AO had no material to show personal use. The tribunal, however, found that personal elements in such expenses could not be ruled out and restricted the disallowance to 10% of the expenses.

5. Deleting addition of ?3,50,19,655/- on account of alleged non-genuine purchases:
The AO added the entire purchases from 12 parties as non-genuine based on information from the Sales Tax Department’s website listing suspicious dealers. The CIT(A) deleted the addition, highlighting that the purchases were genuine, supported by invoices, account payee cheques, and certification by BMC authorities. The tribunal upheld the CIT(A)’s decision, noting that the assessee maintained proper records, and the materials were used in executing contracts, verified by BMC engineers and vigilance departments. The tribunal found no adverse material to suggest that the assessee received cash back against payments made, confirming the deletion of the addition.

Conclusion:
The tribunal allowed the revenue’s appeal in part, upholding the CIT(A)’s decisions on most issues while partially allowing the revenue’s contention on the disallowance of personal expenses. The order was pronounced on 27/04/2016.

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