2003 (1) TMI 252 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest paid on account of interest-free advances.
2. Disallowance of consultation fee under Section 40A(12).
3. Disallowance of telephone expenses on account of personal use by partners.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Paid on Account of Interest-Free Advances:

The assessee appealed against the confirmation of disallowance of Rs. 1,87,285 out of interest paid. The Assessing Officer (AO) had observed that the interest-free advances were made to parties connected with the group to whom interest was paid, suggesting a diversion of funds. The AO disallowed the interest, calculating it at 15%, resulting in a disallowance of Rs. 1,91,975. The CIT(A) upheld the disallowance but directed the AO to rework the correct amount of disallowance.

The assessee argued that the interest-free advances were given from its own funds, not from borrowed funds, and cited the Tribunal's decision in similar cases where no disallowance was made if there was no nexus between interest-bearing borrowings and interest-free advances. The Departmental Representative did not dispute this factual position.

The Tribunal held that since the Department could not establish any nexus between the interest-free advances and the interest-bearing loans, the disallowance was unjustified. Consequently, the disallowance of Rs. 1,87,285 was deleted, allowing this ground of the appeal.

2. Disallowance of Consultation Fee under Section 40A(12):

The AO disallowed Rs. 16,000 out of the consultation fee of Rs. 26,000 claimed by the assessee, referencing a similar disallowance in a previous year. The CIT(A) upheld this disallowance, noting that the fee paid to Shri S.K. Mehta fell within the purview of Section 40A(12) as it was a retainership fee for attending proceedings before IT authorities.

The assessee contended that the fees paid to M/s B.D. Bansal & Co. for the assessment years 1990-91 and 1991-92, and the fee paid to Munni Lal Aggarwal & Sons for the assessment year 1980-81, were within the limit of Rs. 10,000 per year and should not be disallowed. The Tribunal found that the fee paid to Shri S.K. Mehta did not fall under Section 40A(12), following a previous decision in the assessee's favor.

Regarding the fees to M/s B.D. Bansal & Co., the Tribunal noted that the assessee followed a hybrid system of accounting and relied on the Gujarat High Court's decision, which allowed such expenses if they crystallized in the year they were claimed. Thus, the disallowance of Rs. 16,000 was set aside, and the assessee was granted relief.

3. Disallowance of Telephone Expenses on Account of Personal Use by Partners:

The assessee claimed Rs. 1,76,315 as telephone expenses. The AO disallowed Rs. 20,000 for personal use by partners and their family members, which the CIT(A) reduced to Rs. 10,000 based on the assessee's past history.

The Tribunal found the disallowance of less than 1/10th of the total expense to be fair and reasonable, thus upholding the CIT(A)'s decision and rejecting this ground of the appeal.

Conclusion:

The appeal was partly allowed. The disallowance of interest paid on account of interest-free advances was deleted. The disallowance of consultation fees under Section 40A(12) was set aside, granting relief to the assessee. However, the disallowance of Rs. 10,000 out of telephone expenses was upheld.