2021 (12) TMI 1294 - AT - Income Tax

Unexplained expenditure u/s 69C - difference of balances of creditors - HELD THAT - Provisions of section 69 C of the Act provide if assessee for which no explanation incurs any expenditure or unsatisfactory explanation is provided. In the impugned appeal, there is no evidence that the difference in the credit balance in the books of assessee with the debit balance in the books of creditor is an expenditure incurred by assessee during financial year. It is not the case of the revenue that creditor has received sum but it are not recorded in books of assessee as payment. Therefore, according to us provision of section 69C cannot be attracted in this case, unless revenue brings on record any proof of incurring such expenditure. Hence, we reverse the orders of lower authorities and direct ld AO to delete the addition made u/s 69C of the Act. Accordingly, Ground no 1 of the appeal of the assessee is allowed Disallowance of interest paid by the assessee on the pretext that assessee has given loans and advances to its employees without charging any interest and, therefore, interest to that extent is not allowable under section 36(1)(iii) - HELD THAT - The natures of advances are festival loans, medical advances, educational advances and personal loans. Looking into the nature of the operation of the company where the employee benefit expenses are incurred and the annual turnover is shown, amount of advances to the staff is in the nature of business advances. The assessee has also stated that advances are given in accordance with the company policy. Therefore, we find that advances given by the assessee are for the purposes of the business. It can also not said that there is an absence of business expediency in giving loans to staff. There is no contrary evidences recorded by the lower authority that advances given to the staff are bogus or for any non-business purposes and is not in accordance with the nature of business policy of the assessee as well as the custom of the trade. In view of this, the amount disallowed by AO and confirmed by the learned CIT(A) is unsustainable. Accordingly, we reverse the orders of the lower authorities and direct the assessing officer to delete the above disallowance.

Summary

Issues:
1. Disallowance under section 69C of the Act for unexplained expenditure on account of difference in creditor balances.
2. Disallowance of interest paid on loans and advances to employees under section 36(1)(iii) of the Act.

Issue 1: Disallowance under section 69C of the Act for unexplained expenditure on account of difference in creditor balances:

The appellant, a company manufacturing speciality chemicals, challenged the addition of ?3,22,962 under section 69C of the Act for unexplained expenditure due to a difference in creditor balances. The assessing officer noted a discrepancy of ?16,89,522 between the company's books and the creditor's confirmation. The Commissioner of Income-tax (Appeals) partially allowed the appeal, deleting ?13,66,560 of the addition. The ITAT Mumbai held that the provisions of section 69C did not apply as there was no evidence of unrecorded expenditure by the appellant. The ITAT directed the assessing officer to delete the addition of ?3,22,962, as the difference in balances did not indicate unexplained expenditure.

Issue 2: Disallowance of interest paid on loans and advances to employees under section 36(1)(iii) of the Act:

The appellant contested the disallowance of ?5,36,107 as interest paid on loans and advances to employees under section 36(1)(iii) of the Act. The assessing officer deemed the advances diverted for non-business purposes, leading to the disallowance. The ITAT noted that the advances, totaling ?59,56,744 to 117 employees, were for business purposes like festival loans, medical advances, and educational loans. The advances were in line with the company policy and business nature, with no evidence of non-business purposes. Consequently, the ITAT reversed the lower authorities' decision, directing the assessing officer to delete the disallowance of ?5,36,107.

In conclusion, the ITAT Mumbai allowed both appeals filed by the assessee, ruling in favor of the appellant in both cases and directing the assessing officer to delete the disputed additions.