2021 (10) TMI 65 - AT - Income Tax

Allowable business expenditure v/s personal use out of expenditure - Disallowance towards alleged personal use out of expenditure on festival and gifts - HELD THAT - We find merit in the contentions of the Ld. Counsel for the assessee that the addition has been made purely on adhoc basis. The Assessing Officer has not pointed out any specific item related to the personal uses. Therefore, the addition made by the Assessing Officer and sustained by Ld.CIT(A) is not justified hence, deleted. TDS u/s 195 - Disallowance of legal and professional expenses by invoking section 40(a)(i) - Scope of amendment - HELD THAT - We do not see any justification to sustain the addition as made by the Assessing Officer. Ld.CIT(A) has categorically stated that the retrospective amendment has been clarified that even if non-resident has no business communication to India and not rendered any services in India then also the payment received deem to accrue or arise in India. As decided in MIRA EXIM LTD. 2018 (1) TMI 739 - DELHI HIGH COURT as amounts paid were not Fee for Technical Services (FTS) under Explanation 7 to section 9(2),the deduction under section 40(a)(ia) was not warranted - Decided in favour of assessee. Disallowance of interest paid on account of notional interest on interest free advances given to the related party against the purchase of guest house property - HELD THAT - The issue is identical to the issue involved in the earlier year. The matter travelled to Hon ble High Court. Hon ble High Court has confirmed the deletion made by the Tribunal 2018 (1) TMI 739 - DELHI HIGH COURT disallowance under section 36(1)(iii) is concerned, the addition was made purely on the basis that the funds were borrowed by a Director and that interest needed to be charged. This was wholly erroneous premise because the amounts were given to the Director for purely business purpose of the entity, i.e. to acquire guest house. The proposal did not materialize and eventually the money was returned. It is not Revenue s case that the amounts were utilized by the Director for her own purpose - finding with respect to commercial expediency, in the circumstances, does not call for interference - Decided against revenue. Addition invoking the provision of section 40A(3) - assessee submitted that Ld.CIT(A) was not justified in directing the Assessing Officer to invoke the provisions of Rule 6DD of the Income Tax Rules, 1962 - grievance of the assessee that Ld.CIT(A) gave direction for enhancement without complying the provision of section 251(2) - HELD THAT - We find that Ld.CIT(A) did not comply with the provision of section 251(2) of the Act. Therefore, the direction of Ld.CIT(A) is hereby, quashed being illegal.

Summary

Issues Involved:
1. Disallowance of ?1,30,609/- and ?1,10,593/- towards alleged personal use out of expenditure on festival and gifts.
2. Disallowance of ?55,14,741/- and ?25,88,314/- out of legal and professional expenses by invoking section 40(a)(i) of the Income Tax Act.
3. Disallowance of ?87,18,393/- out of interest paid on account of notional interest on interest-free advances given to related parties.
4. Direction to disallow ?1,14,612/- u/s 40A(3) after verification as per Rule 6DD.
5. Alleged insufficient opportunity provided to the appellant.
6. Charging of interest u/s 234B, 234C, 234D, and 244A.

Issue-wise Detailed Analysis:

1. Disallowance towards Alleged Personal Use:
- Assessment Year 2010-11: The tribunal found merit in the appellant's contention that the addition of ?1,30,609/- was made purely on an ad hoc basis without the Assessing Officer pointing out any specific items related to personal use. Thus, the addition was deleted.
- Assessment Year 2011-12: Similarly, the tribunal deleted the addition of ?1,10,593/- for the same reasons as in the previous year, finding the disallowance unjustified.

2. Disallowance of Legal and Professional Expenses:
- Assessment Year 2010-11: The tribunal noted that the identical issue had been decided in favor of the appellant by the Hon’ble Delhi High Court in a previous year, where it was held that the amounts paid were not Fee for Technical Services (FTS) under Explanation 7 to section 9(2). Consequently, the tribunal directed the Assessing Officer to delete the addition of ?55,14,741/-.
- Assessment Year 2011-12: Following the same reasoning and previous judgments, the tribunal directed the deletion of ?25,88,314/- disallowed out of legal and professional expenses.

3. Disallowance of Interest on Notional Interest-Free Advances:
- Assessment Year 2010-11: The tribunal found that the issue was identical to the previous year where the Hon’ble High Court confirmed the deletion of such an addition, as the advances were given for business purposes and not utilized for personal purposes. Thus, the tribunal directed the deletion of ?87,18,393/-.
- Assessment Year 2011-12: Not applicable as this issue was not raised.

4. Direction to Disallow u/s 40A(3):
- Assessment Year 2011-12: The tribunal found that the Commissioner of Income Tax (Appeals) [CIT(A)] directed the enhancement without complying with section 251(2) of the Act, which requires a reasonable opportunity to be given to the appellant. Thus, the tribunal quashed the direction for disallowance of ?1,14,612/-.

5. Alleged Insufficient Opportunity:
- Assessment Year 2010-11 & 2011-12: The tribunal found that the appellant was given sufficient opportunity by the authorities below, thus rejecting this ground of appeal.

6. Charging of Interest:
- Assessment Year 2010-11 & 2011-12: The appellant did not provide arguments on how the interest charged under sections 234B, 234C, 234D, and 244A was incorrect or excessive. As a result, the tribunal rejected this ground.

Conclusion:
- The appeals for both assessment years were partly allowed. The tribunal deleted the disallowances made on an ad hoc basis and those related to legal and professional expenses, following precedents set by higher courts. However, it upheld the charging of interest and found no merit in the claims of insufficient opportunity provided by the authorities.