2021 (6) TMI 1024 - AT - Income Tax

Disallowance of interest expenses - assessee did not collect any interest from the advances made - addition of interest on the interest free advances computed @ 14.5%, being the rate charged by SBI - HELD THAT - Admittedly, the own funds available with the assessee as at the beginning and end of the year worth ₹ 367.92 crores and ₹ 416.53 crores respectively. The interest free advances given by the assessee is ₹ 87.30 crores as on 31.3.2013. It has been held by Hon'ble Bombay High Court in Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds. Accordingly, the interest disallowance is not called for in the present case.. Even though the A.O. has observed that the Ld. A.R. has accepted for the addition of interest expenditure, the said observation is being disputed now before us. In any case, the decision rendered by Hon'ble Bombay High Court supports the case of the assessee. - Decided in favour of assessee. Ad hoc disallowance of other expenses - AO made ad hoc disallowance of 25% of the aggregate amount of expenses - HELD THAT - Admittedly, the assessee did not furnish evidences in support of the claim of various expenses before the A.O. As pointed out by Ld. D.R., we also notice that the additional evidences furnished by the assessee are mainly in the form of ledger account copies, self-made vouchers, etc. Hence, we are of the view that no useful purpose would be served in admitting these additional evidences and in remitting the matter to the file of the A.O. Accordingly, we decline to admit the additional evidences. However, we are of the view that the disallowance @ 25% made by the A.O. is on the higher side, since the assessee is a limited company and its accounts are being audited - the non-production of details and vouchers was also not appropriate. It is settled proposition that the onus to prove the claim would lie upon the shoulders of the assessee - disallowance of expenses may be reduced to 12.5% and the same would meet the ends of justice. Accordingly, we modify the order passed by Ld. CIT(A) on this issue and direct the A.O. to restrict the disallowance to 12.5% of the other expenses claimed by the assessee - Appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Disallowance of interest expenses.
2. Ad hoc disallowance of other expenses.

Issue 1: Disallowance of Interest Expenses
The assessee appealed against the order confirming disallowances made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) (CIT(A)) for the assessment year 2013-14. The first issue concerned disallowance of interest expenses related to advances made to a third party for non-business purposes. The AO disallowed the interest expenditure of ?2.48 crores as the assessee advanced interest-free funds. The CIT(A) affirmed this decision. The assessee argued that the interest-free advances were made from its substantial interest-free own funds. The dispute centered on whether there was a nexus between the interest-free advances and the business activities of the assessee. The Tribunal noted that the interest-free funds exceeded the value of investments, following a precedent set by the Bombay High Court. The Tribunal held that the interest disallowance was unwarranted, overruling the CIT(A)'s decision. The Tribunal emphasized that the assessee's acceptance of the addition before the AO did not preclude contesting the disallowance. The Tribunal directed the AO to delete the interest disallowance.

Issue 2: Ad Hoc Disallowance of Other Expenses
The second issue pertained to an ad hoc disallowance of 25% of various expenses claimed by the assessee due to the inability to produce supporting details. The AO disallowed ?24.23 crores out of the total claimed expenses of ?96.95 crores, a decision upheld by the CIT(A). The assessee later submitted additional evidence, but the AO and the Departmental Representative (DR) objected to its admissibility, citing lack of third-party evidence. The Tribunal declined to admit the additional evidence, noting that it mainly consisted of self-made vouchers and ledger account copies. However, considering the audited status of the assessee's accounts and the onus on the assessee to prove expenses, the Tribunal found the 25% disallowance excessive. The Tribunal reduced the disallowance to 12.5% of the claimed expenses, deeming it appropriate and just. Consequently, the Tribunal modified the CIT(A)'s order, directing the AO to limit the disallowance to 12.5% of the other expenses claimed. The appeal by the assessee was partially allowed.

In conclusion, the Appellate Tribunal ITAT Bangalore ruled in favor of the assessee on the issue of interest expenses disallowance, citing the adequacy of interest-free own funds. Additionally, the Tribunal reduced the ad hoc disallowance of other expenses from 25% to 12.5%, considering the audited status of the assessee's accounts and the burden of proof.