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2017 (1) TMI 1095 - AT - Income Tax


Issues Involved:
1. Disallowance under section 40A(3) of the Income Tax Act.
2. Addition of notional interest.
3. Disallowance of expenditure due to lack of supporting bills and invoices.

Issue-Wise Detailed Analysis:

1. Disallowance under section 40A(3):
- The assessee contested the disallowance of ?70,00,000/- under section 40A(3) for payments exceeding ?20,000/- made in cash.
- The Assessing Officer (AO) observed that payments totaling ?1,88,95,204/- were made in cash, exceeding the ?20,000/- limit, and disallowed the amount.
- On appeal, the CIT(A) reduced the disallowance to ?70,00,000/- considering the nature of the business and past records.
- The Tribunal noted that the AO disallowed the expenses solely because they exceeded ?20,000/- without verifying individual payments. The Tribunal remitted the issue back to the AO to verify if any single payment to a person on a day exceeded ?20,000/-, and only such payments should be disallowed.

2. Addition of notional interest:
- The AO added ?65,80,441/- as notional interest, assuming funds were diverted as interest-free advances to group companies, directors, and relatives.
- The assessee argued that the funds received from India Growth Fund (IGF) were for equity investment and did not bear interest. The advances to group companies were on commercial expediency.
- The CIT(A) upheld the AO’s decision, noting that the assessee paid interest on term loans while giving interest-free loans to related parties.
- The Tribunal observed that the funds from IGF did not carry any cost to the company and the advances were made on commercial expediency. Citing the Supreme Court’s decision in Hero Cycles (P) Ltd., the Tribunal allowed the assessee’s appeal, stating that notional interest should not be charged when there is no cost to the company.

3. Disallowance of expenditure due to lack of supporting bills and invoices:
- The AO disallowed 10% of the expenses claimed by the assessee due to the inability to produce supporting bills for ?1,74,92,54,028/- out of total expenses of ?2,27,96,29,398/-.
- The CIT(A) reduced the disallowance to 7%, acknowledging that the accounts were not audited and considering the nature of the business.
- The Tribunal noted that the CIT(A) classified expenses into those paid by cheque and those paid in cash. The Tribunal agreed with the CIT(A) on the 7% disallowance but restricted it to cash expenses only, directing the AO to disallow 7% of the cash expenses.

Conclusion:
- The appeal was partly allowed for statistical purposes, with the Tribunal directing a reassessment of disallowances under section 40A(3) and restricting the disallowance of expenses to cash payments only. The addition of notional interest was deleted.

 

 

 

 

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