2021 (6) TMI 864 - AT - Income Tax

Allowability of the interest paid to the partner by the assessee firm calculating on the opening balance of the capital account of the partner without considering the subsequent withdrawals made by the partner - HELD THAT - Assessee has taken a stand that since the partnership deed provides the payment of interest on the opening balance of the capital account of the partner, therefore, the subsequent withdrawals of the amount from the capital account of the partner is irrelevant. It is pertinent to note that Section 40(b)(iv) is restrictive in nature and not a provision enabling the deduction. For allowing the claim of interest paid to the partner it has to be first considered in terms of Section 36(1)(iii) or the section 37(1) of the Act and then the claim has to be restricted as per the provisions of section 40(b)(iv) of the Act. In the case in hand, there is no dispute that the opening balance in the capital account of the partner, Shri Satish Kumar Agarwal was ₹ 8,72,785/- but during the year the said partner has withdrawn a sum of ₹ 8,55,587/- which means the substantial amount except a meager sum of ₹ 3,80,630/- was withdrawn by the partner and was not available with the partnership firm for its business purpose. Hence, the claim of interest for full year @ 12% is otherwise not allowable in terms of Section 36(1)(iii) or Section 37(1) of the Act as the case may be. Once the basic condition as prescribed u/s 36(1) (iii) or Section 37(1) of the Act was not satisfied regarding allowability of particular claim of interest then the said claim cannot be allowed by invoking the Section 40(b)(iv) of the Act, which is a restrictive provisions and not enabling provision. Accordingly, the Assessing Officer has rightly allowed the claim on pro-rata basis i.e. the average of opening and closing balance was taken as eligible amount while allowing the interest paid to the partner. This ground of the assessee s appeal is dismissed. Disallowance of 5% of repair and maintenance expenditure - AO asked the assessee to explain the details of TDS payment on transport expenses - HELD THAT - Except the narration of being cash paid for plant repair and maintenance no other particulars or details are mentioned in the ledger account. Even the vouchers claimed by the assessee are not produced before the Tribunal and the same are claimed as self-made vouchers. Since the assessee has not produced the vouchers, therefore, the only inference can be drawn from ledger account of the repair and maintenance expenses is that these expenses are not substantiated by the assessee by producing a verifiable supporting documentary evidence. The nature of payment being each less than 20,000/- shows that the assessee has carried out the entries to avoid the TDS provisions. Since all the payments are made in cash and no details are provided by the assessee to whom the payments are made therefore, the assessee has failed to prove that the claim of expenditure incurred by the assessee on account of repair and maintenance is a genuine claim. Accordingly, in the facts and circumstances of the case 5% disallowance made by the Assessing Officer is found to be reasonable and justified. Accordingly, this ground of the assessee s appeal is dismissed. Valuation of closing stock of dust - HELD THAT - AO in the assessment order has made an adhoc addition to the closing stock of dust without even considering the volume or any other para meters for such adhoc valuation. Even the Assessing Officer has not tried to estimate by wild guess work but the addition is purely on adhoc addition without any reasonable basis. Once the Assessing Officer is not satisfied about the valuation of the closing stock of the dust then it is incumbent upon the Assessing Officer to conduct a proper enquiry and to apply proper criteria or basis for valuation of the closing stock. The wrong valuation of the closing stock on the part of the assessee does not authorized the Assessing Officer to make a wrong addition. Therefore, even if the valuation of the closing stock made by the assessee is not found to be correct the Assessing Officer has to make the valuation on some proper guidance and criteria. In the absence of any basis the adhoc addition made by the Assessing Officer is not justified and the same is deleted. It is pertinent to note that since the closing stock shown by the assessee is regarding the dust of the stone chip which is generated during the course of the manufacturing of the stone chip. Therefore, the assessee has explained the reasons for not maintaining the quantitative details and maintaining the stock register of such dust stock. Once the explanation of the assessee is reasonable keeping in view the nature of scrap generating during the manufacturing process then the action of the Assessing Officer in making the adhoc addition is not justified. Hence, the addition made by the Assessing Officer is deleted. Disallowance of entertainment expenses @ 20% - HELD THAT - It is noted that the Assessing Officer has made disallowance of 20% of the entertainment expenses on the ground of not fully verifiable. The Assessing Officer made a similar disallowance in respect of the repair and maintenance expenses but @ 5% which has been confirmed by this Tribunal in the preceding part of this order. Accordingly to maintain the rule of consistency the disallowance made by the Assessing Officer is restricted to 5%. This ground of the appeal is partly allowed. Disallowance @ 20% of telephone expenses on the ground of personal use of partners - AO made the disallowance on the ground of personal use in respect of telephone expenses - HELD THAT - AO has not discussed anything about the personal use of telephone. Hence, except the suspicion of the AO regarding the possible personal use of telephone by the partners nothing has been brought on record by the Assessing Officer to substantiate such suspicion of personal use. Further, since the telephone expenses are fully verifiable and supported by the bills and other details therefore, once the assessee has claimed the telephone expenses based on actual payment/due then the disallowance on the ground of personal use cannot be allowed without bringing some tangible material or facts on record. Accordingly, the disallowance made by the Assessing Officer on account of telephone expenses is not justified, the same is deleted.

Summary

Issues Involved:
1. Restriction of claim of interest payment on partner’s capital.
2. Adhoc disallowance of repair and maintenance expenditure.
3. Addition on account of valuation of closing stock of dust.
4. Adhoc disallowance under the head interest paid on VAT.
5. Adhoc disallowance of customer entertainment expenses.
6. Adhoc disallowance of telephone expenses.

Detailed Analysis:

1. Restriction of Claim of Interest Payment on Partner’s Capital:
The assessee, a partnership firm, claimed interest of ?1,04,734 on the opening balance of partner’s capital at 12% per annum. The Assessing Officer (AO) noted significant withdrawals by a partner, reducing the closing balance substantially. Consequently, the AO allowed interest on a pro-rata basis, granting only ?29,529. The assessee argued that the partnership deed allowed interest on the opening balance, thus justifying the full claim. However, the Tribunal upheld the AO's decision, stating that Section 40(b)(iv) of the Income Tax Act is restrictive and not enabling. The interest must first be allowable under Sections 30 to 38, specifically Sections 36(1)(iii) and 37(1), which require the expenditure to be for business purposes. Given the substantial withdrawals, the interest for the full year was not deemed allowable, and the pro-rata basis was justified.

2. Adhoc Disallowance of Repair and Maintenance Expenditure:
The AO made a 5% adhoc disallowance of repair and maintenance expenses, amounting to ?53,280, due to unverifiable claims and cash payments without proper vouchers. The assessee contended that the expenses were recorded in audited books and supported by ledger accounts. However, the Tribunal noted the absence of verifiable vouchers and supporting evidence, leading to the inference that the expenses were not substantiated. The Tribunal upheld the 5% disallowance, referencing the jurisdictional High Court's decision in Pr. CIT vs. Rimjhim Ispat Ltd., which justified disallowance in the absence of bills and vouchers.

3. Addition on Account of Valuation of Closing Stock of Dust:
The AO made an adhoc addition of ?50,000 to the closing stock of dust, questioning the lack of quantitative details and stock register. The assessee argued that the dust was scrap, and its valuation at ?1,90,200 was reasonable. The Tribunal found the AO's addition unjustified due to the absence of a proper basis or criteria for valuation. The Tribunal emphasized the need for a proper enquiry and criteria for valuation, and deleted the adhoc addition, accepting the assessee's explanation regarding the nature of the scrap.

4. Adhoc Disallowance under the Head Interest Paid on VAT:
The assessee did not press this ground during the hearing, leading to its dismissal.

5. Adhoc Disallowance of Customer Entertainment Expenses:
The AO disallowed 20% of the customer entertainment expenses, amounting to ?9,980, due to unverifiable claims. The assessee argued that such petty cash expenses could not have proper vouchers. The Tribunal, maintaining consistency with the disallowance rate for repair and maintenance expenses, restricted the disallowance to 5%.

6. Adhoc Disallowance of Telephone Expenses:
The AO disallowed 20% of telephone expenses, suspecting personal use by partners. The Tribunal found no substantive evidence for personal use and noted that the expenses were fully verifiable and supported by bills. Consequently, the Tribunal deleted the disallowance.

Conclusion:
The appeal was partly allowed, with specific disallowances being upheld or modified based on the evidence and legal provisions. The Tribunal emphasized the need for verifiable evidence and proper criteria for disallowances, aligning with legal precedents and statutory requirements.