2022 (9) TMI 331 - AT - Income Tax

Disallowing interest expenses - interest bearing loans taken by the assessee has been utilized for the purpose of interest free loans - HELD THAT - As per financial statement, it is also clear that the borrowed funds have not been utilized for the investments in LKP Finance Ltd., since opening and closing balance reflects the same figure. It has been further observed that there is increase in the loan from UBHL to the extent and on further perusal of long term loan schedule no.7 there is increase of 13.39 crores which is interest free loans and advances. During the course of arguments, AR drew our attention to copy of HDFC Bank current account and ld.AR of the assessee was tried to reconcile that the particular interest bearing funds have been returned to the UBHL but he produced the bank statement only. From the bank statement, it cannot be ascertained that the funds have been utilized for refunding to the UBHL. At this moment, considering the fact that the assessee has not produced copy of ledger accounts and any confirmation from the party, considering the totally of the facts and circumstances of the case we think it to send back to the assessing officer for the verification the raised by the assessee before us, and the assessee is directed to establish/substantiate before the AO that the particular interest bearing funds have not been utilized for the purpose of interest free loans. Appeal of the assessee is allowed for statistical purposes. Expenditure on management consultancy services - AO has accepted the revenue generated and restricted the addition to the extent which is incurred over and above from in the previous assessment year. The AO has accepted the revenue generated towards management consultancy fees but the assessee has not filed any agreement made with the UB holding company Ltd. with regard to the nature of services to be provided. Even before us the ld. AR could not file any documentary evidence for justifying any services rendered by them. On perusal of the assessment year 2014-15 the assessee has incurred the similar nature of expenditure but no any revenue has been received. During the impugned assessment year the assessee has received consultancy income which has been credited into profit and loss account and the manpower cost has also been increased by Rs.88,19,232/-. Before us, the assessee is not furnished any nature of services rendered by these two employees to whom the amount has been paid. No doubt, for earning income the expenditure is required to be incurred by the assessee. Considering the totality of the facts and circumstances of the case, we restrict to the disallowance from the total expenditure to the extent of 50%. Appeal decided partly in favour of assessee.

Summary

Issues:
1. Disallowance of interest expenses and manpower cost for Assessment Year 2014-15 and 2015-16.

Analysis:
1. For Assessment Year 2015-16, the assessee raised grounds regarding disallowance of interest expenses and manpower cost. The AO disallowed interest expenses of Rs.27,94,519 and manpower cost of Rs.88,19,232. The CIT(A) upheld the AO's order. The ITAT observed that the assessee earned interest income of Rs.2,20,12,744 but failed to substantiate that interest-bearing funds were not used for interest-free loans. The case was remitted back to the AO for verification.

2. In the same year, the AO noted a significant increase in manpower cost from Rs.25,63,365 to Rs.1,13,82,597. The AO restricted the claim to the previous year's amount and added the balance to the total income. The CIT(A) affirmed this decision. The ITAT found that the nature of services by the employees was not adequately explained, leading to a partial disallowance of 50% of the excess expenditure, benefitting the assessee by Rs.44,09,616.

3. For Assessment Year 2014-15, similar issues arose regarding interest expenses and manpower cost disallowance. The ITAT remitted this issue back to the AO for further examination, aligning with the decision made for the assessment year 2015-16.

4. Ultimately, the ITAT partly allowed the appeal for Assessment Year 2015-16, granting relief to the assessee. The appeal for Assessment Year 2014-15 was also allowed for statistical purposes, following the remittance back to the AO for reevaluation.

The judgment highlights the importance of substantiating expenses and income sources to justify claims, emphasizing the need for clear documentation and evidence in tax assessments. The ITAT's decision to remit the issue back to the AO underscores the significance of thorough verification and compliance with tax regulations in such cases.