2022 (9) TMI 1248 - AT - Income Tax

Disallowance of interest on estimated basis (50% of the total interest claimed in the profit on loss account) - interes disallowed on the ground that assessee has sufficient fund still the assessee has obtained loan - HELD THAT - CIT (A) is trying to enter in the shoes of a businessman and decide when the businessman should take loan and when he should not take loan and use his own funds. It is settled law that such an exercise by the Revenue is not at all sustainable if the assessee has sufficient funds and it has not been diverted for activities which could not earn interest, disallowance cannot be made on the ground of prudence which should have been done in the opinion of the Revenue authorities. Hence, we are of the considered opinion that the order of ld. CIT (A) is not sustainable and accordingly we set aside the same on this issue. Funeral expenses - Assessee s claim was that the same was related for business inasmuch as expenditure represents payment mad to microfinance clients on the death of their family members. It was held by the Revenue authorities to be not related to the business of the assessee. In our considered opinion on the facts and circumstances of the case, this expenditure deserves to be allowed and same is directed to be allowed accordingly. Appeal of assessee allowed.

Summary

Issues:
1. Disallowance of interest on estimated basis
2. Disallowance of funeral expenses incurred for maintaining client relationships

Analysis:
1. The appeal was against the order of the ld. CIT (Appeals) confirming the disallowance of interest of Rs.9,56,529 on an estimated basis and funeral expenses of Rs.4,000 for the Assessment Year 2010-11. The AO had made several additions, including the disallowance of interest and funeral expenses, which were partially upheld by the ld. CIT (A) despite granting substantial relief. The Tribunal noted that the assessee did not appear for the appeal, and the appeal was disposed of based on the submissions and records available.

2. Regarding the disallowance of interest, the Tribunal observed that the ld. CIT (A) had disallowed the interest based on the grounds that the assessee had sufficient funds but still obtained loans. The Tribunal referred to the assessment order, highlighting that the appellant was paying higher interest rates on loans compared to the interest earned on fixed deposits. Despite having idle funds in the form of cash and fixed deposits, the appellant took fresh loans at higher interest rates. The Tribunal concluded that the disallowance was not sustainable as the Revenue cannot dictate when a businessman should take a loan if the funds are available and not diverted for non-interest earning activities. Therefore, the Tribunal set aside the order of the ld. CIT (A) on this issue.

3. Concerning the issue of funeral expenses amounting to Rs.4,000, the assessee claimed that the expenses were incurred for business purposes to maintain client relationships, specifically for microfinance clients on the death of their family members. The Revenue authorities had rejected this claim, stating that the expenses were not related to the business of the assessee. The Tribunal, after considering the facts and circumstances of the case, found merit in the assessee's claim and directed the allowance of the expenditure related to funeral expenses.

4. In conclusion, the Tribunal allowed the appeal filed by the assessee, setting aside the disallowance of interest on an estimated basis and directing the allowance of funeral expenses incurred for business purposes. The order was pronounced in the open court on September 23, 2022.