2018 (7) TMI 948 - AT - Income Tax

Disallowance of interest expenses - CIT-A deleted the disallowance - assessee has pleaded that it has sufficient interest free funds out of which it could easily advance these interest free loans to the sister concerns. - Held that - It is pertinent to observe that in the assessment year 2006-07, the assessee firm was having interest free funds of ₹ 1,59,23,2625/- whereas at the close of the account, advance outstanding against the name of Antai Balaji Ltd was of ₹ 24,22,185/-. Similarly in the assessment year 2007-08, the assessee was having interest free funds of more than ₹ 4.63 crores against the outstanding of ₹ 24,22,185/-. Similar is the position with regard to the assessment year 2008-09. The assessee was having sufficient interest free funds out of which it could give interest free funds to associate concerns. The ld.CIT(A) has rightly deleted the addition Disallowance of equipments hire charges and warehouse rent charges - CIT(A) has deleted disallowance by holding that during the course of search no incriminating material was found showing excess payment - whether there is any income from this activity, and if it has income, then expenditure of this nature has any nexus with this gross receipt? - Held that - AO nowhere considered whether the activity undertaken by the assessee gives rise to income of more than ₹ 4.51 crores in the assessment year 2007-08 and ₹ 4.88 crores in the assessment year 2008-09 would require expenditure. AO has made disallowance without any application of mind in sweeping manner. He has not made reference to any seized material found during the course of search and also not made any analysis of business needs and the expenditure debited by the assessee. He has simply disbelieved claim of the assessee on the ground that the expenditure were debited on the last date. To our mind, this approach of the AO is unacceptable.CIT(A) has considered the issue in right perspective and rightly deleted the addition - assessee appeal allowed

Summary

Issues Involved:
1. Deletion of disallowance out of interest expenses.
2. Deletion of disallowance out of equipment hire charges and warehouse rent charges.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance Out of Interest Expenses:

The Revenue's primary grievance was the deletion of disallowance of interest expenses by the CIT(A) for the assessment years 2006-07, 2007-08, and 2008-09. The case originated from a search and seizure operation on "Friends Group" on 15.6.2011, which included the assessee. The AO observed that the assessee had advanced interest-free loans to associated concerns while paying interest on secured loans. The AO believed that interest-bearing funds were diverted towards interest-free advances, leading to disallowance. However, the CIT(A) deleted the disallowance, noting that no incriminating material was found during the search indicating misuse of interest-bearing funds.

Upon review, it was found that the assessee had sufficient interest-free funds to cover the interest-free advances. For instance, in the assessment year 2006-07, the assessee had interest-free funds amounting to ?1,59,23,2625/- against an advance of ?24,22,185/- to Antai Balaji Ltd. Similar situations were noted for the other assessment years. The Tribunal agreed with the CIT(A) that the disallowance was unwarranted and upheld the deletion, dismissing the Revenue's appeal on this ground.

2. Deletion of Disallowance Out of Equipment Hire Charges and Warehouse Rent Charges:

The second issue involved the deletion of disallowance of equipment hire charges and warehouse rent charges by the CIT(A). The AO disallowed these expenses, citing the absence of written agreements and lack of documentary evidence. The AO also noted that the entries were made on the last day of the financial year, suggesting they were accommodation entries to avoid tax.

The CIT(A) deleted the disallowance, emphasizing that no incriminating material was found during the search to indicate excess payment of these charges. The CIT(A) referred to several judicial precedents, including the Special Bench decision in All Cargo Global and the Gujarat High Court decision in Jayaben Ratila Sorathia, which held that additions in assessments under section 153A should be based on incriminating material found during the search.

The Tribunal reviewed the AO's findings and noted that the AO failed to provide any evidence demonstrating the non-genuineness of the expenses or any excess payment. The Tribunal also considered the business context, noting that the assessee had significant gross receipts from the container freight station division, necessitating such expenses. The Tribunal found the AO's disallowance to be without proper application of mind and upheld the CIT(A)'s deletion of the disallowance.

Conclusion:

The Tribunal dismissed the Revenue's appeals and the assessee's cross objections. The CIT(A)'s orders deleting the disallowances were confirmed, as the AO failed to provide substantial evidence to support the disallowances, and no incriminating material was found during the search to justify the additions. The judgments were pronounced in the open court on 11th July 2018.