2018 (2) TMI 1642 - AT - Income Tax

Disallowance u/s 36(1)(iii) - Addition being notional interest on alleged interest free advances given by the assessee - whether the advances were given out of own funds of the assessee - Held that - Since the interest free own funds of the assessee far exceed the interest free advances, the disallowance u/s 36(1)(iii) was not warranted in view of various judicial pronouncements relied on by Learned A. R. Hon ble Allahabad High Court in the case of Smt. Chanchal Katyal vs. CIT 2006 (10) TMI 92 - ALLAHABAD HIGH COURT . As regards the other disallowances, it is noticed that Assessing Officer had made ad hoc disallowance without pointing out any specific defect in the vouchers or pointing out any specific instance. Assessing Officer has merely acted on presumption.

Summary

Issues:
1. Disallowance of notional interest on interest-free loans
2. Ad hoc disallowance of conveyance & telephone expenses
3. Ad hoc addition of staff welfare, miscellaneous expenses, and traveling expenses
4. Ad hoc addition and disallowances made arbitrarily and excessively

Issue 1 - Disallowance of Notional Interest on Interest-Free Loans:
The appellant appealed against the order of the CIT(A) confirming the disallowance of notional interest on alleged interest-free loans. The appellant argued that the advances were covered by own funds, and there was no nexus between the advances and borrowed funds. The appellant's capital far exceeded the interest-free advances, and therefore, no disallowance should be made under section 36(1)(iii) of the Act. Citing relevant case laws, the appellant contended that when own funds exceed non-interest-bearing advances, no disallowance can be made. The Tribunal agreed with the appellant, setting aside the CIT(A)'s order and directing the Assessing Officer to allow the deduction.

Issue 2 - Ad Hoc Disallowance of Conveyance & Telephone Expenses:
The appellant challenged the ad hoc disallowance of conveyance & telephone expenses, arguing that the Assessing Officer made disallowances without specifying any defects in the vouchers or providing specific instances. The appellant maintained that all expenses were fully vouched and incurred for repair and maintenance, warranting no disallowance. Citing case laws, the appellant emphasized that ad hoc disallowances cannot be made arbitrarily. The Tribunal concurred, stating that the Assessing Officer cannot make ad hoc disallowances without specific defects or instances, deleting the ad hoc disallowance confirmed by the CIT(A).

Issue 3 - Ad Hoc Addition of Staff Welfare, Miscellaneous Expenses, and Traveling Expenses:
The appellant contested the ad hoc addition of expenses in these categories, arguing that the Assessing Officer acted on presumptions without proper verification. The appellant emphasized that the expenses were open to strict verification and that the Assessing Officer's actions were arbitrary. Citing relevant case laws, the appellant highlighted that expenses should be allowed when appropriate evidence is provided. The Tribunal agreed, stating that the disallowances sustained by the CIT(A) were not in order, and therefore, deleted the ad hoc disallowance confirmed by the CIT(A).

Issue 4 - Arbitrary Ad Hoc Additions and Disallowances:
The appellant raised concerns about arbitrary and excessive ad hoc additions and disallowances made by the Assessing Officer. The Tribunal, after considering the arguments and evidence presented, concluded that the disallowances sustained by the CIT(A) were not justified. Consequently, the Tribunal allowed the appeal of the assessee, setting aside the ad hoc disallowances and additions made by the authorities.

In conclusion, the Tribunal ruled in favor of the appellant, overturning the disallowances and additions made by the authorities, emphasizing the importance of proper verification and adherence to legal principles in determining deductions and allowances.