2017 (4) TMI 610 - AT - Income Tax

Disallowance of interest paid from personal Account - Held that - Assessee could have taken loan for commodity business and should not have utilized loan taken in personal capacity. I find that this adverse inference is devoid of cogency. Assessee has raised loan and used it for business purpose. Revenue authorities cannot sit into the shoes of the businessman and direct as to from where he should raise the loan. Secondly the assesse has interest bearing as well as interest free funds. In the said circumstances it is the settled law that it is up to the assessee to attribute the source of investment if interest free and interest bearing funds are available. The assessee can very well attribute the interest free funds for other purpose and interest bearing funds for the business purpose. Hence adverse inference drawn by the authorities below is not also sustainable on this issue. It is not the case of the revenue that interest free funds were not sufficient to meet the amount spent on acquisition of other assets. Hence attribution of the authorities below that interest bearing funds were not used for business purpose cannot be sustained. Accordingly, set aside the order of the authorities below and decide the issue in favour of the assessee. 15% disallowance out of various expenses debited in Profit & Loss Account - addition on the ground that all the expenditures were not supported by complete expenditure bills and vouchers hence he made an adhoc disallowance of 15% - Held that - Assessing Officer has made the disallowance on adhoc basis. He has not brought on record specific vouchers and the defects therein. However this fact also cannot be ruled out that the expenditures were not fully backed by proper external vouchers. In these circumstances in my considered opinion the disallowance of 5% of the expenditure involved would serve the end of justice. Learned counsel of the assessee fairly agreed to this proposition. Accordingly, direct that disallowance be restricted to 5% of the expenditure. - Decided partly in favour of assessee

Summary

Issues:
1. Disallowance of interest paid from personal account for business purpose.
2. Disallowance of bank charges charged by the bank on O/D.
3. Disallowance of 10% of the expenses debited to P&L Account of M/s. M.K.Sons Jewellers.
4. Disallowance of 10% of the expenses debited to P&L Account of M/s. Kush India Commodities.

Analysis:

Issue 1 - Disallowance of interest paid from personal account for business purpose:
The Assessing Officer disallowed interest paid from the personal account for business purposes, leading to an addition of Rs. 27,63,587. The appellant argued that loans were taken in the personal name due to difficulty in obtaining loans for the commodities business and were subsequently transferred to the proprietary concerns. However, the CIT(A) upheld the disallowance, stating that the loans were invested in personal assets, not for business purposes. The ITAT found the adverse inference drawn by the authorities to be without merit, emphasizing that the assessee had the right to attribute interest-free and interest-bearing funds for different purposes. The ITAT ruled in favor of the assessee, overturning the lower authorities' decision.

Issue 2 - Disallowance of bank charges on O/D:
The appellant decided not to press this ground, leading to its dismissal as not pressed.

Issue 3 & 4 - Disallowance of expenses debited to P&L Account:
The Assessing Officer made a 15% disallowance on various expenses debited in the Profit & Loss Account due to incomplete expenditure documentation. The CIT(A) reduced the disallowance to 10%, which the assessee appealed before the ITAT. The ITAT noted the ad-hoc basis of the disallowance and the lack of specific vouchers presented by the Assessing Officer. It decided that a 5% disallowance of the expenses would suffice in the interest of justice, a proposition agreed upon by the assessee's counsel. Consequently, the ITAT partially allowed the appeal, restricting the disallowance to 5% of the expenditure.

In conclusion, the ITAT ruled in favor of the assessee on the disallowance of interest paid from the personal account for business purposes, overturned the decision on the expenses debited to the P&L Account, and dismissed the ground regarding bank charges. The appeal was partly allowed, with the disallowance of expenses reduced to 5%.