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2021 (3) TMI 1149 - AT - Income TaxAddition of business promotion expenses u/s. 40(a)(ia) - Non-deduction of TDS - CIT(A) has not given relief in respect of expenditure the assessee seeks verification in respect of two items of expenditure i.e. in respect of M/s. Rakshit Company and M/s. Choicest Enterprises Ltd. to whom the assessee had made payment - HELD THAT - We find force in the said contention of the Ld. AR and we direct the AO to verify from these two concerns as to whether they (M/s. Rakshit Company and M/s. Choicest Enterprises Ltd.) have shown these amounts/receipts in their trading receipts in this assessment year and have paid due taxes thereon. The assessee to give all the details to the AO regarding their identity. And the AO to verify from these concerns the veracity of the payment made by assessee and if the AO finds that both the concerns have shown these two payments made by the assessee as their receipts and have paid taxes thereon in this assessment year then no deduction u/s. 40(a)(ia) of the Act is warranted if not the same may be confirmed. In respect of other items confirmed by the Ld. CIT(A) the Ld. AR does not want to press taking into account the smallness of the amount and therefore those expenses to be disallowed u/s. 40(a)(ia) of the Act. So this ground is partly allowed for statistical purposes. Disallowance on account of interest on office loan - AO disallowed it since this office was not utilized/put to use - as demonstrated that assessee has its own fund to the tune of 8, 28, 88, 111/- and the loan amount is only to the tune of 1.3 cr. and therefore according to the Ld. AR the assessee possessed mixed fund which includes its own fund in sufficient quantity - HELD THAT - CIT(A) has found that the assessee has got the office in question registered next year i.e. F.Y 2016-17 i.e. AY 2017-18 which fact corroborates the finding of AO and therefore the proviso to section 36(1)(iii) of the Act is attracted. And in this case the presumption as per the ratio of the decision rendered by Hon ble Bombay High Court in Reliance Utilities 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC 2014 (8) TMI 119 - BOMBAY HIGH COURT cannot be applied because in those cases there was mixed funds in the hands of assessee i.e. both own and borrowed funds and allocation of borrowed funds could not be specifically determined. In the case in hand the loan amount was allocated for its office/capital which is a factual finding which could not be disproved by the assessee so the presumption based on mixed fund cannot be applied. So we confirm the action of Ld. CIT(A). Therefore this ground of appeal of assessee is dismissed. Addition on inflated purchases - According to the Ld. AR promoter and directors of both the companies were same during that period and the entire business of both the companies were run by the same directors and since the indirect taxes has already been levied and paid by the sister concern and once this figure is deducted it is not more than the purchase price of the assessee i.e. 123 cr. therefore according to him there is no inflated purchase as alleged by the Ld. CIT(A) - HELD THAT - CIT(A) has not enquired properly which fact is discernible from the show cause notice wherein the Ld. CIT(A) gave enhancement notice to assessee only alleging total inflated purchase to the tune of 4.99 cr. However after receiving replies of assessee (supra) the Ld. CIT(A) has made an addition of 20, 35, 94, 402/-. According to us the action of the Ld. CIT(A) is bad for not conducting proper enquiry and for non-application of mind. Therefore we set aside the order of the Ld. CIT(A) and remand this issue to the file of AO for verification of the details given (supra) and if the assessee has not inflated any purchase as contended by it then no adverse view may be taken. With the aforesaid observation we direct the AO to enquire into this limited issue raised by the Ld. CIT(A) and the assessee is directed to produce all documents pertaining to this issue to the AO and the AO to decide in accordance to law.
Issues Involved:
1. Disallowance of business promotion expenses under Section 40(a)(ia) of the Income Tax Act, 1961. 2. Disallowance of interest on office loan under Section 36(1)(iii) of the Income Tax Act, 1961. 3. Enhancement of income by the CIT(A) on account of alleged inflated purchases. Detailed Analysis: 1. Disallowance of Business Promotion Expenses: The assessee challenged the CIT(A)'s decision to restrict the addition on account of business promotion expenses to ?20,65,713/-, whereas the AO had disallowed only ?15,12,574/- (30% of ?50,41,915/-) under Section 40(a)(ia) of the Income Tax Act, 1961. The CIT(A) had given partial relief by excluding certain expenditures but erroneously directed the addition of the entire amount of ?20,65,713/- instead of 30% of that amount. The Tribunal found merit in the assessee's contention and directed the AO to verify whether payments to M/s. Rakshit & Company and M/s. Choicest Enterprises Ltd. were included in their respective turnovers and taxes were paid. If verified, no disallowance under Section 40(a)(ia) would be warranted. The remaining items confirmed by the CIT(A) were not pressed by the assessee due to the smallness of the amounts, and thus, the ground was partly allowed for statistical purposes. 2. Disallowance of Interest on Office Loan: The AO disallowed ?4,02,837/- claimed as interest on borrowed funds for office purchase, citing that the office was not put to use during the year. The CIT(A) upheld this disallowance, stating that the office was registered in the subsequent financial year. The assessee argued that it had sufficient own funds to cover the purchase, invoking the presumption from the Reliance Utilities & Power Ltd. case. However, the Tribunal upheld the disallowance, noting that the loan was specifically for the office purchase and the proviso to Section 36(1)(iii) applied since the asset was not put to use in the relevant year. 3. Enhancement of Income by CIT(A) on Account of Alleged Inflated Purchases: The CIT(A) enhanced the assessee's income by ?20,35,94,402/- for alleged inflated purchases through circular transactions with sister concerns. The assessee argued that these transactions were necessitated by issues with the VAT authorities and that the sister concern had paid significant VAT and income tax on these transactions. The Tribunal noted that the CIT(A) initially issued a show-cause notice for an enhancement of ?4.99 crores but later made an addition of ?20.35 crores without proper inquiry or application of mind. The Tribunal set aside the CIT(A)'s order and remanded the issue to the AO for verification of the details provided by the assessee. The AO was directed to verify the transactions and decide in accordance with the law. Conclusion: The Tribunal allowed the assessee's appeal for statistical purposes, directing the AO to verify specific details regarding business promotion expenses and alleged inflated purchases, while upholding the disallowance of interest on the office loan. The order was pronounced on February 17, 2021.
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