2017 (3) TMI 525 - AT - Income Tax

Disallowance of job work expenses - payment of expenditure in cash - Held that - All the bills contains the description of work done, though in short form, as per the trade practice and custom of the assessee trade. So far as the payment in cash is concerned, the same was made within the permissible limits of Section 40A(3) of the Act. We have given a careful consideration to the matter and we are of the view that the assessee s contention deserves to be accepted. Firstly, the addition has been made on purely an adhoc basis without highlighting any specific instance where the payment is not verifiable or the expenses claimed by the assessee are bogus or have not been incurred for the purpose of business. Further, no specific instance of cash payment has been highlighted which has violated the provisions of Section 40A(3) of the Act. Thus we hereby delete the disallowance - Decided in favour of assessee Excess interest paid disallowance - Held that - The rate of interest on borrowing need to be benchmarked with the third party transaction in the similar facts & circumstances of the case. In the instant case, what is being compared is a rate of interest on an unsecured borrowing vis- -vis a secured borrowing. In absence of a comparable case being highlighted by the Assessing Officer, we are unable to accept the stand of the revenue that the interest paid is on a higher side. In light of above, the ground No.2 of the assessee is allowed. - Decided in favour of assessee

Issues Involved:

1. Disallowance of job work expenses on a lump sum basis.
2. Disallowance of interest paid on the grounds of excessiveness.

Detailed Analysis:

1. Disallowance of Job Work Expenses:

During the assessment proceedings, the AO observed discrepancies in the job work expenses claimed by the assessee amounting to ?8,77,81,594/-. The AO noted that some bills lacked descriptions, were unsigned, or had signatures in the same handwriting. Despite the assessee's argument that payments were made through banking channels with TDS duly deducted, the AO made a lump sum disallowance of ?25,00,000/- due to unverifiable expenses.

The assessee appealed to the CIT(A), who confirmed the AO's disallowance, noting defects in the bills and substantial cash payments to related parties. The CIT(A) justified the disallowance, stating it was less than 3% of total job work charges and reasonable.

The assessee contended that the disallowance was arbitrary, without specific instances of unverifiable expenses, and that all payments were vouched and made through banking channels. The assessee argued that the AO did not consider past assessments where no such disallowances were made.

Upon review, it was found that the disallowance was made on an ad hoc basis without any specific instances of unverifiable payments or violations of Section 40A(3) of the Income Tax Act. The tribunal accepted the assessee's contention and deleted the disallowance of ?25,00,000/-. Thus, ground No.1 of the assessee was allowed.

2. Disallowance of Interest Paid:

The assessee paid interest of ?17,88,712 to M/s Poddar Consultancy Organization at 16.8%. The AO disallowed the excess interest of ?5,11,060/-, restricting it to 12%, the rate paid to other concerns, under Section 40A(2)(b) due to the recipient being a shareholder.

The CIT(A) upheld the AO's decision, reasoning that the interest rate of 16.8% was unreasonable compared to the 12% rate from banks and institutions.

The assessee argued that M/s Poddar Consultancy Organization was not a shareholder and thus not a related party under Section 40A(2)(b). Furthermore, the higher interest rate was justified as it was unsecured borrowing, unlike secured bank loans.

The tribunal noted that the AO failed to provide a comparable case for the interest rate on unsecured borrowing. The tribunal found the interest paid reasonable and allowed ground No.2 of the assessee.

Conclusion:

In conclusion, the tribunal allowed the appeal of the assessee, deleting the disallowance of ?25,00,000/- for job work expenses and ?5,11,060/- for interest paid. The order was pronounced in the open court on 23/02/2017.

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