2019 (5) TMI 1162 - AT - Income Tax

Addition towards notional interest on loans and advances - HELD THAT - As decided in EAST INDIA PHARMACEUTICAL WORKS LIMITED VERSUS COMMISSIONER OF INCOME-TAX 1997 (3) TMI 5 - SUPREME COURT it is manifest if an assessee has interest free funds as well as interest bearing funds at its disposal, then the presumption would be that investments were made from interest free funds at its disposal. Similar view has been taken by the Hon'ble Dehi High Court in CIT vs. Tin Box Company 2002 (11) TMI 75 - DELHI HIGH COURT holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank was not justified. As the shareholders fund in the instant case is far in excess of the amount of advance, we are satisfied that the disallowance made by the AO has been wrongly sustained in the first appeal to this extent. Therefore, order to delete the same. Addition towards expenses incurred through credit card - Treating such expenses as personal in nature, the AO made disallowance - CIT(A) restricted the addition to 50% - HELD THAT - The assessee in the instant appeal is a private limited company. There is no dearth of judicial precedents holding that there cannot be any disallowance of expenses in the hands of company on account of personal use even by its directors. The Hon ble Gujarat High Court in Sayaji Iron and Engineering Company vs. CIT 2001 (7) TMI 70 - GUJARAT HIGH COURT has held that there cannot be any disallowance of personal expenses for cars on account of personal use by the director. It has been further held that no disallowance can be made even by treating such expenditure as not having been incurred for the business purpose. CIT(A) was not justified in sustaining the disallowance at 50%. The addition is deleted. Addition for foreign tour of director - personal expenses OR business expenses - AO disallowed 50% of the expenditure - HELD THAT - Referreing to letter from Larsen and Toubro addressed to Mr. Nitish Shastri requesting him to visit the Switchgears plant in Malaysia. It is pursuant to this letter that Mr. Nitish Shastri visited Malaysia. As such, the business purpose is established and there is no reason to make any disallowance on this score. Therefore, order to delete the addition. Addition u/s.68 - HELD THAT - In so far as the loan from Mr. Krupali Shastri is concerned, the assessee could not file any evidence to substantiate the genuineness of transaction except confirmation despite specific requisition of the AO. Neither any return of income, balance sheet, wealth tax return of Mr. Krupali Shastri was filed nor any other evidence to show the genuineness of the transaction. Similar position prevails up to the Tribunal level as well. As such, I am satisfied that the addition has been rightly confirmed. As regards the remaining amount of loan of ₹ 1.00 lakh from Mr. Sonar Subhas, it is seen that the assessee claimed to have received this amount from his employee. It is seen that the ld. CIT(A) has restored the matter to the file of the AO, for which he has no power. In the absence of the Revenue having filed any appeal against the impugned order, I cannot put the assessee to a more disadvantageous position than in which it was before the filing of the appeal before the tribunal. In the given circumstances, I approve the action of the ld. CIT(A) in restoring the matter to the AO without granting any further relief to the assessee. Addition on ad hoc basis out of certain expenses - HELD THAT - It is observed that the AO has made the addition on ad hoc basis, without pointing out specifically as to which particular expenses were not properly vouched. In such circumstances, there can be no partial sustenance of addition on ad hoc basis. I, therefore, order to delete the remaining addition of ₹ 1.00 lakh also. This ground is allowed

Summary

Issues:
1. Addition of notional interest on loans and advances.
2. Disallowance of expenses incurred through credit card.
3. Addition of personal expenses for foreign tour.
4. Addition under section 68 of the Income-tax Act, 1961.
5. Ad hoc disallowance of certain expenses.

Issue 1: Addition of notional interest on loans and advances:
The appeal challenged the confirmation of adding notional interest on loans and advances by the CIT(A). The AO observed loans and advances given by the assessee company and applied a notional interest rate of 12%. The CIT(A) deleted the interest on one advance but confirmed it on others. The Tribunal referred to legal precedents emphasizing the use of interest-free surplus funds for investments. Relying on Supreme Court and High Court judgments, the Tribunal held that if an assessee has interest-free funds, the presumption is that investments were made from those funds. Considering the substantial shareholders' funds, the Tribunal concluded that the disallowance of interest was unwarranted.

Issue 2: Disallowance of expenses incurred through credit card:
The appeal contested the addition of expenses incurred through a credit card. The AO disallowed the expenses as personal, leading to a 50% addition upheld by the CIT(A). The Tribunal referred to judicial precedents stating that personal expenses by directors cannot be disallowed in a company's hands. Following the legal principles, the Tribunal deleted the addition, emphasizing that personal expenses could be treated as perquisites in the hands of employees.

Issue 3: Addition of personal expenses for foreign tour:
The appeal challenged the addition of personal expenses for a foreign tour by a director. The AO disallowed 50% of the expenditure, which was upheld by the CIT(A). The Tribunal noted a business purpose for the tour established through relevant documents. Consequently, the Tribunal ordered the deletion of the addition, as the expenses were justified for business reasons.

Issue 4: Addition under section 68 of the Income-tax Act, 1961:
The appeal contested the addition of loans received from individuals under section 68 of the Income-tax Act. The Tribunal found inadequate evidence for the genuineness of transactions, leading to the confirmation of the addition in one case. In another case, the Tribunal noted the lack of proof for the existence of the loan in the balance sheet, upholding the CIT(A)'s decision to refer the matter back to the AO for verification.

Issue 5: Ad hoc disallowance of certain expenses:
The appeal challenged the ad hoc disallowance of certain expenses by the AO. The AO made a 5% ad hoc disallowance without specifying unsupported expenses. The CIT(A) reduced the addition, but the Tribunal found the ad hoc basis unjustified without specific details. Consequently, the Tribunal ordered the deletion of the remaining addition, as partial sustenance on an ad hoc basis was not permissible.

In conclusion, the Tribunal partly allowed the appeal, addressing each issue raised and providing detailed legal analysis based on relevant precedents and factual considerations.