2021 (4) TMI 168 - AT - Income Tax

Disallowance u/s 37(1) - interest free loan to its Managing Partner - assessee claims that the MD has used it for assessee's business purposes only - HELD THAT - As assessee relied upon case GOPIKRISHNA MURALIDHAR 1961 (11) TMI 68 - ANDHRA PRADESH HIGH COURT which is not applicable to the facts of the case before me, as in the said case, it was undisputed that the assessee therein had borrowed the money from HUF for the business of the family and had not borrowed for the purpose of household expenses. It was held that the family was entitled to withdraw from the capital supplied by it, with the result of the capital being depleted. In the case before me, it is not the contention that the Managing Partner has withdrawn his capital. As seen from the balance sheet of the firm also, there is no withdrawal of capital by Sri Suresh Reddy. This contention is not acceptable. The assessee has, in fact claimed it as spent for its business purposes only. Further, the amount spent on construction of shed is not available on record. Therefore,we are not inclined to accept this contention of the assessee and therefore, the disallowance u/s. 37(1) of the Act is upheld. As regards the administrative expenses, we also feel that the disallowance of 10% of the expenses under the respective head is quite excessive. Therefore, restrict the disallowance to 5% of the expenses under the relevant heads. Assessee's appeal is partly allowed.

Summary

Issues:
- Disallowance of interest on interest-free loan to Managing Partner
- Disallowance of administrative expenses

Disallowance of interest on interest-free loan to Managing Partner:
The case involved an appeal by the assessee against the CIT(A)'s order for the A.Y 2015-16. The assessee, a firm engaged in trading motor vehicles, accessories, and spares, had given an interest-free loan of ?38.00 lakhs to its Managing Partner. The Assessing Officer (AO) disallowed the interest attributable to the interest-free loan advanced to the partner and made an ad hoc disallowance under various heads. The assessee contended that the loan was used for constructing a shed for business purposes. The CIT(A) confirmed the AO's order as no one appeared for the assessee. The Tribunal found that the loan was not withdrawn capital and the amount spent on construction was not documented. Thus, the disallowance under section 37(1) was upheld.

Disallowance of administrative expenses:
The assessee also challenged the excessive disallowance of administrative expenses. The Tribunal noted that a 10% disallowance was high and reduced it to 5% under the relevant heads. The learned Counsel for the assessee argued that the disallowances were unreasonably high, but the DR supported the assessment order. Ultimately, the Tribunal partially allowed the appeal, reducing the disallowance percentage for administrative expenses.

In conclusion, the Tribunal upheld the disallowance of interest on the interest-free loan to the Managing Partner due to lack of evidence supporting business purposes and the unavailability of construction expenditure details. Additionally, the excessive disallowance of administrative expenses was reduced from 10% to 5% under the relevant heads. The appeal was partly allowed by the Tribunal.