2022 (12) TMI 160 - AT - Income Tax

Disallowance of interest expenses incurred by the assessee on availing the bank overdraft facility which was debited in the profit and loss account and claimed in the return of income - Sufficiency of own interest free funds - HELD THAT - It is observed that the law is well settled that where assessee is having mixed i.e. interest free/interest bearing funds both, but the interest free funds are larger than the interest free advances than there will be a presumption that the interest free advances were given out of the interest free funds (but not out of interest bearing fund/OD) and hence, no interest can be disallowed. As noticed that this year also the assesse continued maintaining account with the Canara Bank having Overdraft Account facility on the strength of the FDRs. A careful perusal of bank Overdraft account summary, bank FDR summary submitted along with the written submission as also perusal of the other materials placed in the Assessee s Paper Book (APB) shows that all types of business receipts and all types of payments are routed through the bank Overdraft Account. This proves the fact that the assessee was having mixed funds both in form of business receipts and borrowings in the form of overdraft from the bank from time to time. It is also an admitted fact that apart from the overdraft account based on the FDR of the assesse, the assesse did not make any other borrowing or taken loan from any source as no such account appear in the balance sheet and annual statement of accounts of the assessee - all the outgoing being the investment in the mutual fund, purchases of plot, construction of building, interest free loan advances given to faculties or to some other charitable organisation (as may be noted in the next grounds of appeal), in the year before us, were made from the OD Account only or in other words, from the mixed funds being the interest free funds as also the interest bearing. The AO failed to establish the necessary nexus between the borrowings and the investment so made. We find that the controversy involved in the present case is directly covered by the case of ACIT v/s Ram Kishan Verma 2012 (5) TMI 417 - ITAT, JAIPUR wherein the factual matrix is also the same. In fact, the cited case also of a coaching institute of Kota itself and there also the assessee used to receive the entire fees at the beginning of the year/session whereas it had to incur recurring expenditure on monthly basis. As a part of financial management/planning and to maximize its income, that assessee also used to deposit the entire fees in the FDRs and got OD A/c from which funds were utilized as per need. This way, it was claimed that it was assessee s own money only who did not borrow any fresh money. The disallowance made by the AO u/s 36(i)(iii) was fully deleted. However, we find the decision cited by the ld. DR in the case of CIT v/s Abhishek Industries Ltd. 2006 (8) TMI 123 - PUNJAB AND HARYANA HIGH COURT has already being distinguished in this context by the above decisions. In light of above discussions and in the entirety of facts and circumstances of the case, we are of the view that the lower authorities were not justified in disallowing interest expense in the hands of the assessee. Hence Ground No. 2 of the assessee is allowed. Advances for business purposes - HELD THAT - The facts and circumstances of the case are similar to the one which we have examined in detail in Ground no. 2 above. Apart from what has already been stated and held in preceding paras, it is noticed that the incremental outgoings in the shape of investment in mutual fund, investment in construction, loans and advances etc. totalling to Rs. 18.56 Crores as also the closing balances of the interest free outgoings up to 31.03.2010, were far below the current year s profit of Rs. 50.76 Crores and net profit before depreciation at Rs. 53.02 crores. A table submitted by the assesse in its written submission (not controverted by the Ld. DR) and reproduced somewhere in this order, support this conclusion. Our findings and directions contained in Ground No. 2 shall mutatis mutandis to these grounds of appeal as well. Thus the Grounds No. 3 and 4 of the assessee s appeal are allowed. Allowability of the claim deduction on account of the Scholarship Scheme being run by the assessee - disallowance was made mainly on the ground that it was a contingent and unascertained liability, which was based on condition of completion of 4 year course and moreover, it was a mere provision which was not allowable under the provisions of the Act - HELD THAT - As liability towards the amount payable under the scholarship scheme was rightly claimed and authorities below were not correct in disallowing the same. Hence, the disallowance so made is fully deleted. Therefore, this ground is allowed. Disallowances of various expenses - connection charges, electricity lines, supervision charges, CTPT set cost and meter cost - HELD THAT - A careful perusal of the facts and the material on record shows that the claimed expenditure with, AO was on account of connection charges, electricity lines, supervision charges, CTPT set cost and meter cost as contended such expenditure did not create any new asset and the facts as stated, remaining uncontroverted by the revenue, no disallowance was called for. The authorities below were not justified in making the disallowance hence, the same is hereby is deleted. Therefore, this ground is allowed. Addition on account of Internet Networking expenses - We feel that Revenue has completely failed to establish as to how such expenditure has resulted into the creation of a new asset therefore, the authorities below were not correct in making the disallowance and hence the same is also deleted. Hence, this ground is allowed. Disallowance on account of Name Transfer Fee - A careful consideration of the orders of the authorities below, rival contentions and the material placed on record, clearly shows that it was the case where the property was already purchased in CP-7, Indra Vihar, Kota. However, it was only a procedural formality of transferring the name was done whereupon, this amount was paid to the concerned authority i.e. Nagar Nigam, Kota, as evident from a copy placed at APB 151. The AO has not established that such expenditure resulted into creation of a new property or the assessee got an advantage of an enduring nature and hence, such a disallowance was wrongly made. Hence impugned disallowance is hereby deleted in full. Therefore, this ground is allowed. Construction Expenses of boundary wall - A reference has been made by the Ld. AR to the copy of invoice however it is a fact on the record that the height of the building was raised from the existing level. In that view of the matter, therefore we find the authorities below were justified in considering the expenditure as capital expenditure and in allowing depreciation therefrom to assessee hence no interference is called for. This ground of appeal is therefore dismissed. Expenditure on Regularisation of the construction of Old Building - The disallowance has been made because there has been a violation of building by laws, hence, penalty was imposed by the Urban Improvement Trust, Kota, on account of unauthorised construction made. The Ld. CIT(A) also confirmed the disallowance. Looking at the undisputed facts of the case, that it was case of penalty, it was not allowable. The authorities below were justified in disallowing the claimed expenditure. Hence, this ground of the appeal is dismissed.

Summary

Issues Involved:
1. Jurisdictional validity of the assessment order.
2. Disallowance of Rs. 10,83,901/- out of interest expenses.
3. Disallowance of Rs. 7,236/- out of interest payment on account of alleged notional interest.
4. Disallowance of Rs. 76,60,166/- out of interest expenses under Section 36(1)(iii).
5. Disallowance of Rs. 15,60,000/- on account of scholarship expenses.
6. Disallowance of Rs. 11,20,083/- for various expenses.
7. Levy of interest under Sections 234A, 234B, 234C, and 234D, and withdrawal of interest under Section 244A.

Detailed Analysis:

1. Jurisdictional Validity of the Assessment Order:
The ground challenging the jurisdictional validity of the assessment order was dismissed as it was considered general in nature and did not require adjudication.

2. Disallowance of Rs. 10,83,901/- out of Interest Expenses:
The assessee challenged the disallowance of Rs. 10,83,901/- out of interest expenses incurred on availing bank overdraft facility. The AO disallowed the interest proportionate to the investment in mutual funds, considering it as non-business expenditure. The CIT(A) upheld the AO's decision, stating that the income from mutual funds was exempt, and hence, the related interest was disallowable under Section 14A. The Tribunal, however, found that the assessee had sufficient interest-free funds to cover the investments and followed the presumption that interest-free funds were used for the investments. The Tribunal allowed the assessee's ground and deleted the disallowance.

3. Disallowance of Rs. 7,236/- out of Interest Payment on Account of Alleged Notional Interest:
The AO disallowed Rs. 7,236/- as notional interest on interest-free advances to charitable trusts. The CIT(A) confirmed the disallowance. The Tribunal, considering the availability of sufficient interest-free funds, deleted the disallowance, holding that there could be no notional interest disallowance when interest-free funds were available.

4. Disallowance of Rs. 76,60,166/- out of Interest Expenses under Section 36(1)(iii):
The AO disallowed interest expenses related to funds used for capital expenditure, invoking Section 36(1)(iii). The CIT(A) upheld the disallowance. The Tribunal, however, found that the assessee had sufficient interest-free funds and profits to cover the capital expenditure. The Tribunal followed the presumption that interest-free funds were used for the capital expenditure and deleted the disallowance.

5. Disallowance of Rs. 15,60,000/- on Account of Scholarship Expenses:
The AO disallowed Rs. 15,60,000/- out of the total scholarship expenses, considering it as a contingent liability. The CIT(A) confirmed the disallowance. The Tribunal found that the scholarship liability was ascertained and quantified when the scholarships were awarded. The liability was not contingent as there was no condition for the students to complete the course. The Tribunal deleted the disallowance, holding that the liability was ascertained and allowable under Section 37(1).

6. Disallowance of Rs. 11,20,083/- for Various Expenses:
- Electricity Connection Charges (Rs. 2,01,515/-): The AO disallowed the expenditure as capital in nature. The Tribunal found no creation of a new asset and deleted the disallowance.
- Internet Networking Expenses (Rs. 67,715/-): The AO disallowed the expenditure as capital in nature. The Tribunal found no creation of a new asset and deleted the disallowance.
- Name Transfer Fee (Rs. 21,000/-): The AO disallowed the expenditure as capital in nature. The Tribunal found it was a procedural formality and deleted the disallowance.
- Repairs & Maintenance (Rs. 7,02,578/-): The AO disallowed the expenditure as capital in nature. The Tribunal upheld the disallowance, considering the expenditure resulted in raising the height of the boundary wall.
- Regularization of Construction of Old Building (Rs. 1,21,275/-): The AO disallowed the expenditure as penalty for unauthorized construction. The Tribunal upheld the disallowance, considering it as non-allowable expenditure.

7. Levy of Interest under Sections 234A, 234B, 234C, and 234D, and Withdrawal of Interest under Section 244A:
The levy and withdrawal of interest were considered consequential in nature, and the AO was directed to act accordingly.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal deleted the disallowances related to interest expenses, scholarship expenses, electricity connection charges, internet networking expenses, and name transfer fee, while upholding the disallowances related to repairs and maintenance and regularization of construction. The interest levied and withdrawn under various sections was directed to be consequentially adjusted.