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2019 (10) TMI 1077 - AT - Income TaxWeighted deduction u/s. 35(1)(ii) - revenue withdrawing the recognition with retrospective effect - HELD THAT - We find that there is no provision in section 35(1)(ii) of the Act to withdraw the recognition granted to the assessee therein. When there is no provision for withdrawal of recognition in the Act, the action of the revenue in withdrawing the recognition with retrospective effect from 1.4.2007 is unwarranted. In this regard, the recent decision in the case of Industrial Infrastructure Development Corporation (Gwalior) M.P. Ltd vs CIT Gwalior 2018 (2) TMI 1220 - SUPREME COURT held that the power of cancellation of registration us 12A of the Act was conferred by the Act on the ld CIT w.e.f. 1.10.2004 and the Hon ble Apex Court held that prior to that date , no cancellation of registration could happen. But in the instant case, there is absolutely no provision for withdrawal of recognition u/s 35(1)(ii) of the Act . Hence, we hold that the withdrawal of recognition u/s 35(1)(ii) of the Act in the hands of the payee organizations would not affect the rights and interests of the assessee herein for claim of weighted deduction u/s 35(1)(ii) - CIT-A had wrongly confirmed the disallowance as made by the AO u/s 35(1)(ii) Addition of proportionate interest expenditure - assessee had given interest free advance - HELD THAT - Since the assessee has own funds of ₹ 148.27 cr. plus ₹ 28 cr. this year in its possession and the interest free advance amount is only to the tune of ₹ 4.51 cr. which is less than 3% of its own funds means, the presumption that has to be drawn in such a scenario is that the interest free advance has been made by the assessee from its own fund and, therefore, no disallowance was warranted and, therefore, we direct deletion of the disallowance confirmed by the Ld. CIT(A) to the tune of ₹ 40,65,156/-. This ground of appeal of assessee is allowed. Ad-hoc disallowance on the expenditure claimed - HELD THAT - AO is at liberty to disallow the expenditure if there is any deficiency in the vouchers or bills supporting the incurrence of an expenditure on the reason that expenditure are non-genuine and can be disallowed item wise. However, the action of the AO to disallow the expenditure on ad-hoc basis without rejecting the books of account cannot be accepted, since the action of AO smacks of arbitrariness and cannot be allowed to sustain, therefore, all the ad-hoc disallowances made by the AO and confirmed the Ld. CIT(A) are deleted.
Issues Involved:
1. Disallowance of weighted deduction under Section 35(1)(ii) of the Income-tax Act, 1961. 2. Disallowance of proportionate interest expenditure. 3. Ad-hoc disallowances on various expense accounts. 4. Interest under Sections 234B, 234C, and 234D of the Income-tax Act. Detailed Analysis: 1. Disallowance of Weighted Deduction under Section 35(1)(ii): The assessee made donations totaling ?2,71,25,000 to M/s. Herbicure Healthcare Bio-Herbal Research Foundation (HHBHRF) and claimed a weighted deduction under Section 35(1)(ii) of the Income-tax Act, 1961. The Assessing Officer (AO) disallowed this claim based on the admission of HHBHRF's founder and a whistleblower that the foundation was involved in giving bogus accommodation entries. The AO's decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the retrospective cancellation of HHBHRF's registration should not affect the weighted deduction claim. The Tribunal noted that HHBHRF was approved under Section 35(1)(ii) at the time of donation and cited judicial precedents, including the Hon'ble Bombay High Court's decision in M/s Seksaria Biswan Sugar Factory Ltd., which support the assessee's claim. The Tribunal held that the retrospective cancellation of the approval does not affect the assessee's right to claim the deduction and allowed the appeal in favor of the assessee. 2. Disallowance of Proportionate Interest Expenditure: The AO disallowed ?40,65,156 as proportionate interest expenditure, noting that the assessee had given interest-free advances amounting to ?4,51,68,397 while borrowing approximately ?30 crore. The CIT(A) confirmed this disallowance. The assessee contended that it had sufficient own funds (?148.27 crore plus a profit of ?28 crore) to cover the interest-free advances. The Tribunal referred to judicial precedents, including the Hon'ble Bombay High Court's decision in Reliance Utility & Powers Ltd. vs. CIT, and held that when an assessee has mixed funds, it is presumed that interest-free advances are made out of own funds. Consequently, the Tribunal directed the deletion of the disallowance. 3. Ad-hoc Disallowances on Various Expense Accounts: The AO made several ad-hoc disallowances on business promotion expenses, traveling expenses, and other expenses, totaling ?8,29,073. The CIT(A) confirmed these disallowances. The assessee argued that such disallowances were arbitrary, especially given that the firm had only two elderly partners and a high turnover with substantial net profit. The Tribunal agreed with the assessee, noting that ad-hoc disallowances without rejecting the books of account are arbitrary. Thus, the Tribunal deleted all the ad-hoc disallowances. 4. Interest under Sections 234B, 234C, and 234D: The interest levied under Sections 234B, 234C, and 234D was deemed consequential. Since the Tribunal deleted all the disallowances, the interest levied by the AO and confirmed by the CIT(A) was also dismissed. Conclusion: The appeals of the assessee were partly allowed. The Tribunal ruled in favor of the assessee on the major issues of weighted deduction under Section 35(1)(ii) and proportionate interest expenditure, and deleted the ad-hoc disallowances and consequential interest. The order was pronounced in the open court on 23 October 2019.
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