2018 (10) TMI 1093 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - the amount of capital work in progress and advance given for purchase of machinery - interest bearing funds attribution - Held that - We agree with the assessee that no interest bearing funds can be attributed to have been used for the purpose of making impugned investment in capital work-in-progress and advance for purchase of machinery. The Revenue,we find, has not pointed out any nexus between the interest bearing funds of the assessee and the investment in the same and the disallowance has been made by giving a vague/ general statement that the funds have been found to have been advanced for the purchase of capital asset without specifying whether /which interest bearing funds have been so used. In the absence of the same and considering the totality of the facts and circumstances of the present case, we hold that no disallowance of interest is warranted in the present case as per the provisions of section 36(1)(iii) of the Act. The disallowance so made therefore, directed to be deleted. - Decided in favour of assessee. Disallowance of expenses u/s 14A - assessee had contended that the investment had been made out of sale of mutual funds held in the preceding year - Held that - As demonstrated through the schedule of investment forming part of the balance sheet showing none of the old investments of ₹ 8.5 crores appearing in the investments of the current year which show new investments of ₹ 2.60 crores. Thus we find that the assessee had clearly demonstrated the attribution of the source of the investment in the mutual funds to be out of non interest bearing sources. There was no occasion at all to invoke the provisions of section 14A and made disallowance of interest under the same. The disallowance, therefore, made is directed to be deleted. - Decided in favour of assessee. Disallowance of expenses for purchase of diesel u/s 40A(3) - payment made in cash exceeding the specified limit - Held that - in the present case the assessee has filed evidence to establish the genuineness of the expenditure and also the business expediency for making the payment in cash, by filing copies of accounts of both the parties one from whom diesel was purchased in regular course and the other in urgent situations only making payment to him in cash on demand. The Revenue has not controverted the said facts. Therefore the genuineness of the expenditure and also the business expediency for making the payment in cash stands established - no disallowance u/s 40A(3) was warranted ,merely for the reason that the assessee s situation did not fall in that listed in Rule 6DD of the Income Tax Rules,1962. - decided in favour of assessee. Disallowance of foreign travelling expenses - allowable busniss expenditure u/s 37(1) - Held that - he fact that the travelling was undertaken by the directors of the assessee company was established by the assessee filing details and copy of account of travelling expenses. The revenue has not controverted the said fact. Further the fact that the assessee has made considerable export sales in the immediately succeeding years of ₹ 32 lacs and ₹ 1.42 crores has also remained uncontroverted. Therefore there is no reason for attributing any personal/non business usage in the said expenses when the entire travel has been undertaken by the directors of the company resulting in visible increase in sales in the succeeding year. The disallowance upheld by the CIT(A) to the extent of ₹ 87,000/- is purely adhoc without any basis - decided in favour of assessee.

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Disallowance of expenses under Section 14A of the Income Tax Act, 1961.
3. Disallowance of expenses under Section 40A(3) of the Income Tax Act, 1961.
4. Disallowance of foreign travel expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
The primary issue was the disallowance of ?35,131/- under Section 36(1)(iii) related to capital work in progress and advance given for the purchase of machinery. The Assessing Officer (AO) disallowed the interest, arguing that the assessee used common funds, including interest-bearing funds, for these investments. The CIT(A) upheld this disallowance, stating that the funds were for capital assets and interest must be capitalized as per the proviso to Section 36(1)(iii).

However, the Tribunal found merit in the assessee's argument, noting that the assessee had sufficient interest-free funds amounting to ?26.54 crores (profits, share capital, reserves, and surplus) to cover the investments of ?37.5 lacs. Citing the jurisdictional High Court decisions in Gurudas Garg and Kapsons Associates, the Tribunal held that if sufficient interest-free funds are available, it is presumed they are used for such investments. The Tribunal directed the deletion of the ?35,131/- disallowance, allowing the assessee's appeal on this ground.

2. Disallowance of Expenses under Section 14A:
The AO disallowed ?3,98,008/- under Section 14A, arguing that the assessee earned exempt income from mutual fund investments and had not adequately accounted for related expenses. The assessee had voluntarily disallowed ?1,36,000/- for administrative expenses. The CIT(A) upheld the AO's disallowance, invoking Rule 8D for computation.

The Tribunal found the assessee had sufficient own funds (?26.54 crores) to cover the investments of ?2.60 crores, negating the need for disallowance under Section 14A. Additionally, the Tribunal noted that the investments were made from the sale of mutual funds held in the preceding year. Citing the High Court decisions in Max Industries and Sintex Industries, the Tribunal held that no disallowance was warranted under Section 14A due to sufficient own funds and directed the deletion of the ?3,98,008/- disallowance, allowing the appeal on this ground.

3. Disallowance of Expenses under Section 40A(3):
The AO disallowed ?5,79,063/- under Section 40A(3) for diesel purchases made in cash exceeding ?20,000/-. The assessee argued that cash payments were made due to urgent needs and business expediency. The CIT(A) upheld the disallowance, stating the assessee failed to prove the payments fell under Rule 6DD exceptions.

The Tribunal found merit in the assessee's argument, emphasizing that genuineness and business expediency of the expenditure were established, even if not covered under Rule 6DD. Citing the jurisdictional High Court decision in Gurudas Garg and ITAT's decision in Dhuri Wines, the Tribunal held that business exigency justified cash payments, and no disallowance was warranted under Section 40A(3). The Tribunal directed the deletion of the ?5,79,063/- disallowance, allowing the appeal on this ground.

4. Disallowance of Foreign Travel Expenses:
The AO disallowed 20% of the foreign travel expenses (?1,74,966/-) due to lack of evidence linking the expenses to business purposes. The CIT(A) reduced the disallowance to ?87,000/-, still citing insufficient evidence of business nexus.

The Tribunal found that the travel was undertaken by the directors, and the assessee demonstrated increased exports in subsequent years, establishing a business purpose. The Tribunal held that the disallowance was ad hoc and without basis, directing the deletion of the ?87,000/- disallowance, allowing the appeal on this ground.

Conclusion:
The Tribunal allowed the assessee's appeal on all grounds, directing the deletion of disallowances under Sections 36(1)(iii), 14A, 40A(3), and the ad hoc disallowance of foreign travel expenses. The decision emphasized the importance of sufficient own funds, business exigency, and genuineness of expenditures in tax assessments.

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