2020 (5) TMI 79 - AT - Income Tax

Disallowance of prior period expenses - HELD THAT - Having said that, the fact that the interest was paid by the assessee has not been disputed by the Revenue and following the proposition laid down by the Hon ble Supreme Court in case of case of Excel Industries 2013 (10) TMI 324 - SUPREME COURT where there is no change in effective rate of tax at which the assessee company has paid the taxes in the preceding financial year and in the year consideration, there is no loss to the Revenue. Whether such borrowing has been made for business purposes has not been examined by the Assessing officer as the claim was rejected on ground of prior period expense, the same has to be examined by the Assessing officer. Therefore, for these two limited purposes of examining the effective rate of tax at which the assessee company has paid taxes and whether borrowing has been made for business purposes, the matter is set-aside to the file of the Assessing officer after providing reasonable opportunity to the assessee. In the result, ground No. 2 of assessee s appeal is allowed for statistical purposes. Disallowance of travel expenses - whether such travel have been undertaken for the purposes of assessee s business or not? - HELD THAT - In the instant case, we find that nothing has been brought on record in terms of any dealer s meeting invitation and related correspondence which can reasonably be relied upon in support of assessee s contention. In absence of appropriate documentary evidence in support of the foreign travel, the onus cast on the assessee is not satisfied and we see no infirmity in the action of the Assessing officer and the disallowance so made by the Assessing Officer is hereby confirmed and the Ground No. 3 of assessee s appeal is dismissed. Disallowance of rent expenses - Addition u/s 40A(2)(b) - assessee company was using the said premises just for address purposes and no business activities were being carried out and the said premises were actually residence of the directors - HELD THAT - On perusal of the minute books of the assessee-company, it is noted the meetings of Board of Directors and also of the shareholders in terms of annual general meetings are regularly held at this place. Therefore, we find that the said office premises have been used for the purposes of assessee-company s business and it has established the necessary nexus of the rent expenses being incurred for the purpose of its business - rent payments have been made by the assessee company to one of its Directors, however, merely because payment has been made to a related person would not be sufficient to make the disallowance U/s 40A(2)(b) - onus is on the Revenue to bring on record comparable instances wherein the rent payment for similar premises are the lower than the rent paid by the assessee-company - there is nothing on record which has been brought by the Revenue to hold the payment as excessive -disallowance so made by the Assessing Officer is hereby deleted - ground no. 4 of assessee s appeal is allowed. Disallowance of interest u/s 36(1) - HELD THAT - There are liquid funds which are not locked up in assets and inventory and which can be actually used for placing the advance towards the purchase of land. That is, availability of surplus deployable funds at the relevant point in time when the advances were placed towards the purchase of land. Secondly, whether such funds are arising out of operating revenues for the year and otherwise available as part of free reserves and doesn t carry any interest burden or not. In the instant case, we find that there are mere contentions not supported by any hard data and figures. At the same time, where the Assessing officer alleges that interest bearing funds have been used for placing such advances, the onus is equally on the Revenue to support the said contention with verifiable hard data and figures. Merely stating that the assessee is paying huge interest cost on borrowed funds and has given interest-free funds is not sufficient as necessary nexus has to be established between the borrowed funds and placing of such advances. There are short-comings on both side, the matter require further examination, and in the interest of justice, it would be appropriate that the matter is set-aside to the file of the Assessing officer to examine the same afresh after providing reasonable opportunity to the assessee. In the result, the matter is set-aside to the file of the AO and the ground of appeal is allowed for statistical purposes. Disallowance of salary expenses - HELD THAT - CIT(A) has recorded a finding that during the assessment and appellate stage, the assessee did not furnish complete name and address or designation of the employees whom the salary was claimed to have been paid and the maximum salary is claimed to have been paid in cash. Per contra, the contention of the asseseee is that it maintains full record of salaries subject to regular scrutiny of labour department. Further, salary has been paid after deduction of ESI, PF etc and details are available on record showing month wise salary, PF, ESI and net payment to employees along with evidences. The question is whether such records were produced and available before the Assessing officer for his examination or not, however, we donot find any clear answer from the perusal of records. Given that such records are claimed to be maintained at the relevant point in time and already subject to scrutiny of labour department, we believe that the assessee deserve one more opportunity to produce such records for verification before the Assessing officer and the matter is accordingly set-aside to the file of the Assessing officer. In the result, the ground of appeal is allowed for statistical purposes. Disallowance @15% out of various expenditures - HELD THAT - There are contradictory claims and contentions advanced by both the parties and in absence of relevant facts emerging from records, we deem it appropriate to restore the matter to the file of the Assessing officer to examine the same afresh and to pass a speaking order in this regard. Factum of particular expense payment in assessee s line of business may be consistent with earlier years, however, the examination thereof is a factual exercise to be undertaken every year and outcome thereof need not be guided solely with the outcome and treatment done in the earlier years. It is therefore, incumbent on part of the Assessing officer, where he intends to disallow any expenses, to bring out specific defect in the documentation so maintained for the year under examination and submitted for verification, and record a finding that a particular expense has not been incurred for the purposes of business or the expense is bogus in nature for the relevant year. In the result, the ground of appeal is allowed for statistical purposes. Non deduction of TDS - payments u/s 194H and 194C - HELD THAT - Payments are below the threshold limits provided in the respective TDS provisions and thus, the disallowance so made is directed to be deleted. In the result, the ground of appeal is allowed.

Summary

Issues Involved:
1. Rejection of additional evidence under Rule 46A.
2. Disallowance of prior period expenses of ?46,875.
3. Disallowance of travel expenses of ?55,040.
4. Disallowance of rent expenses of ?3,00,000.
5. Disallowance of interest of ?8,64,000.
6. Disallowance of interest of ?6,00,000.
7. Disallowance of salary expenses of ?4,56,583.
8. Addition of ?18,25,000 under Section 68.
9. Disallowance of various expenses amounting to ?10,83,521.
10. Disallowance of ?21,378 for want of TDS.

Detailed Analysis:

1. Rejection of Additional Evidence under Rule 46A:
The assessee filed an application under Rule 46A for admission of additional evidence. The Tribunal admitted the additional evidence and set aside the matter to the Assessing Officer (AO) to examine the same on merits. The Tribunal emphasized that technicality should not override substantial justice.

2. Disallowance of Prior Period Expenses of ?46,875:
The assessee claimed interest on an unsecured loan, which was related to the last quarter of the preceding financial year. The Tribunal noted that the assessee follows the mercantile system of accounting and thus the interest expenses should have been claimed in the preceding financial year. However, considering there was no revenue loss due to the same tax rate applicable in both years, the Tribunal set aside the matter to the AO to examine the effective tax rate and the business purpose of the borrowing.

3. Disallowance of Travel Expenses of ?55,040:
The assessee claimed travel expenses for the Managing Director’s foreign travel. The Tribunal found that although the travel was undertaken by the Managing Director, the assessee failed to provide documentary evidence to substantiate that the travel was for business purposes. Hence, the disallowance by the AO was confirmed.

4. Disallowance of Rent Expenses of ?3,00,000:
The assessee paid rent to one of its directors for the registered office. The Tribunal found that the premises were used as the registered office and for holding meetings. The AO's invocation of Section 40A(2)(b) was not supported by comparable instances. Thus, the disallowance was deleted.

5. Disallowance of Interest of ?8,64,000:
The assessee advanced a sum for booking land for business purposes. The Tribunal admitted additional evidence regarding the business expediency and set aside the matter to the AO to examine the evidence on merits.

6. Disallowance of Interest of ?6,00,000:
The assessee claimed that the advance for land purchase was made from its own funds. The Tribunal noted that both the assessee and the Revenue failed to provide sufficient evidence regarding the use of borrowed funds for the advance. The matter was set aside to the AO for further examination.

7. Disallowance of Salary Expenses of ?4,56,583:
The AO disallowed part of the salary expenses due to inconsistencies in the payment records. The Tribunal found that the assessee maintained detailed records and subjected them to scrutiny by the labor department. The matter was set aside to the AO to verify the records.

8. Addition of ?18,25,000 under Section 68:
The Tribunal did not provide specific details regarding this ground in the summarized judgment.

9. Disallowance of Various Expenses Amounting to ?10,83,521:
The AO disallowed 15% of various expenses due to lack of supporting vouchers. The Tribunal directed the AO to re-examine the expenses and provide specific reasons for any disallowance, emphasizing the need for a detailed audit methodology.

10. Disallowance of ?21,378 for Want of TDS:
The AO disallowed certain payments due to non-deduction of TDS. The Tribunal found that the payments were below the threshold limits for TDS and directed the deletion of the disallowance.

Conclusion:
The appeal was partly allowed for statistical purposes, with several matters set aside to the AO for further examination. The Tribunal emphasized the importance of substantial justice and proper verification of evidence.