2018 (4) TMI 1128 - AT - Income Tax

Disallowance u/s 40A(3) - payments to Truck drivers not under prescribed limit - cash payment exceeding ₹ 20,000/- - Held that - The assessee has discharged its onus by submitting that the payments at ₹ 9,47,220/- made to other persons was below the prescribed limit mentioned in section 40A(3) of the Act and the ld. DR for the Revenue could not bring any evidence on the report to show that the said amount was paid by the assessee in violation of section 40A(3) of the Act. Therefore, based on the factual position explained above, we delete the addition - Decided in favour of assessee Disallowance of interest on borrowed fund - assessee provided interest free advance to related business entities/concern - sufficiency of own funds - Held that - Hon ble Bombay High Court in the case of Reliance Utilities (2009 (1) TMI 4 - BOMBAY HIGH COURT) wherein as held that if there were funds available, both interest-free and overdraft and/or loans taken, then a presumption would be that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In the assessee s case presumption was established considering the fact that assessee has its own capital at ₹ 1,23,06,344/- whereas the interest free advances were given to the tune of ₹ 11,41,000/-. As presumed that these interest free advances have been given out of its own capital and hence, no disallowance should be made. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 40A(3) of the Income Tax Act.
2. Deletion of addition under Section 40A(3) by considering payments to an agent.
3. Disallowance of interest on borrowed funds due to interest-free advances to related concerns.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40A(3) of the Income Tax Act:
The primary issue revolves around the disallowance of ?42,47,229/- under Section 40A(3) for payments exceeding the prescribed limit made in cash. The Assessing Officer (AO) identified that the assessee paid freight charges in cash, exceeding ?20,000/- and ?35,000/- (post 01.10.2009), thus violating Section 40A(3).

2. Deletion of Addition under Section 40A(3) by Considering Payments to an Agent:
The CIT(A) deleted ?33,00,009/- of the total disallowance, confirming that these payments were made to an agent, Shri Dipu Banerjee, and thus fell under the exception provided in Rule 6DD(k). However, the CIT(A) upheld the disallowance of ?9,47,220/- as these payments were made to others without any formal agreement proving their status as agents. The assessee contended that these payments were also below the prescribed limit and should not attract disallowance. The Tribunal found that the CIT(A) did not verify whether the payments of ?9,47,220/- were below the prescribed limit and thus deleted the disallowance, concluding that the assessee had discharged its onus of proving compliance with Section 40A(3).

3. Disallowance of Interest on Borrowed Funds Due to Interest-Free Advances to Related Concerns:
The AO disallowed ?2,17,606/- of interest, arguing that the assessee diverted interest-bearing loans to provide interest-free advances to related concerns. The CIT(A) deleted this disallowance, noting that the assessee had sufficient own funds (?1,23,06,344/-) to cover the advances (?11,41,000/-). The Tribunal upheld the CIT(A)'s decision, citing the presumption established by the Bombay High Court in Reliance Utilities (313 ITR 340) that if sufficient interest-free funds are available, it is presumed that investments are made from these funds. The Tribunal concluded that the interest-free advances were made from the assessee's own capital, thus no disallowance was warranted.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under Section 40A(3) and dismissed the Revenue's appeal on both the disallowance under Section 40A(3) and the interest on borrowed funds. The Tribunal's decision emphasized the importance of verifying the compliance with prescribed limits and the availability of sufficient own funds before making disallowances.