2017 (12) TMI 1041 - AT - Income Tax

Calculation of disallowance of u/s 36(1)(iii) - Held that - In the present case also we are of the opinion that Assessing Officer should examine the disallowance keeping in view the case laws relied on by assessee wherein it has been held that on opening balances of advances no disallowance u/s 36(1)(iii) was warranted and similarly in cases it has been held that if the interest free funds of the assessee are more than the interest free advances, no disallowance u/s 36(1)(iii) can be made. Addition u/s 41(1) - Held that - AR clearly establish that addition u/s 41(1) is not warranted unless the assessee writes off the credit balances of such creditors. Tax was not deductible as the amounts were paid as reimbursement to shipping agents - Held that - emit this issue to Assessing Officer who should examine the nature of expenses and if the payments made are covered by the provisions of section 172(8) and CBDT Circular No. 723, then Assessing Officer should allow relief thereof. In view of the above ground no. 8 is allowed for statistical purposes. Addition was made u/s 69C on account of certain items jotted in pencil on two sheets of paper which were recovered during the course search and seizure operation. The assessee submitted that the said can not be treated as unexplained expenditure and under these circumstances, the Hon ble Delhi High Court in the case of Lubtech India Ltd. 2007 (7) TMI 281 - DELHI HIGH COURT has held that section 69(c) postulates that first of all, the assessee must have incurred the expenditure and thereafter if the - explanation offered by the assessee was not found satisfactory only then the addition can be made u/s 69C of the Act. In the present case also the assessee had denied to have incurred this expenditure and the assessee had been maintaining that such expenditure was never incurred by the assessee and these were not reimbursed to the employees and therefore we are in agreement with the arguments of assessee that addition under these circumstances can not be made u/s 69C of the Act. Disallowance of 1/10th out of vehicle expenses - Held that - Assessing Officer is directed to delete disallowance on account of depreciation which the Ld. CIT(A) had sustained due to personal use. However as regards other expenses the disallowance sustained by Ld. CIT(A) is upheld. Addition of credit balance - Held that - We find that assessee at its own had transferred this amount to rebate and discount in the succeeding year and therefore addition during the year under consideration will tantamount to double addition. Deemed dividend u/s 2(22)(e) - Held that - We find that in the present case also the registered and beneficial shareholders are different than the assessee company

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii).
2. Addition under Section 41(1) for cessation of liability.
3. Trading addition due to Gross Profit (G.P.) rate.
4. Disallowance under Section 40(a)(ia).
5. Disallowance under Section 40A(3).
6. Deemed dividend under Section 2(22)(e).
7. Disallowance of vehicle expenses.
8. Addition for unaccounted vouchers.
9. Addition for credit balance.

Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
The appeals involved disallowance of interest on advances made by the assessee firm to various entities. The assessee argued that the CIT(A) did not consider the exclusion of opening balances for the purpose of calculating disallowance. It was contended that interest-free funds available with the assessee were more than the interest-free advances. The Tribunal directed the Assessing Officer (AO) to re-examine the disallowance, considering the case laws which state that no disallowance can be made for opening balances and when interest-free funds exceed interest-free advances.

2. Addition under Section 41(1) for Cessation of Liability:
The AO made additions for cessation of liability, which were partly deleted by the CIT(A). The Tribunal noted that liabilities shown in the balance sheet cannot be treated as remitted unless the assessee writes off the credit balances. The CIT(A) deleted substantial portions of the addition after examining the documents, concluding that the reasons for the amounts being outstanding were explainable. The Tribunal upheld the deletion of the addition by the CIT(A).

3. Trading Addition due to Gross Profit (G.P.) Rate:
The Tribunal found that the G.P. rate declared by the assessee was progressive compared to previous years and that the AO did not reject the books of accounts. It was held that no addition on account of G.P. can be made if the books of accounts are not rejected. The Tribunal allowed the appeal of the assessee on this ground.

4. Disallowance under Section 40(a)(ia):
The assessee argued that in some cases, taxes were deposited before filing the return, and in other cases, taxes were deposited in the succeeding year. The Tribunal remitted the issue back to the AO to verify the deposits and decide the issue afresh. For payments made to shipping agents, it was directed to examine if the payments were covered by Section 172(8) and CBDT Circular No. 723, and allow relief accordingly.

5. Disallowance under Section 40A(3):
The Tribunal agreed with the assessee that the payment of ?21,000 in cash was due to exceptional circumstances (payment to the UAE embassy on a Friday). The AO did not doubt the genuineness of the payment, and thus, the Tribunal allowed the appeal on this ground.

6. Deemed Dividend under Section 2(22)(e):
The CIT(A) deleted the addition made by the AO on account of deemed dividend, holding that the deemed dividend can only be assessed in the hands of the shareholder. The Tribunal upheld the CIT(A)’s decision, noting that the assessee firm was not a shareholder in the company that advanced the loan. The Tribunal distinguished the case from the Supreme Court judgment in Gopal and Sons (HUF), where the HUF was shown as the registered and beneficial owner.

7. Disallowance of Vehicle Expenses:
The Tribunal directed the AO to delete the disallowance on account of depreciation due to personal use, as depreciation is a statutory allowance. However, the disallowance of other car expenses sustained by the CIT(A) was upheld.

8. Addition for Unaccounted Vouchers:
The Tribunal agreed with the assessee that the addition for unaccounted vouchers could not be made under Section 69C, as the assessee denied incurring such expenditure. The Tribunal allowed the appeal on this ground.

9. Addition for Credit Balance:
The Tribunal found that the amount of ?10,319 had already been transferred to rebate and discount in the succeeding year, and thus, sustaining the addition would result in double addition. The Tribunal allowed the appeal on this ground.

Conclusion:
The appeals were decided with various issues being remitted back to the AO for fresh examination, while other issues were decided in favor of the assessee, with the Tribunal providing detailed directions for each issue.