1994 (9) TMI 135 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest claimed to be payable to Dena Bank.
2. Disallowance of truck maintenance expenses.
3. Disallowance made under section 40A(3) of the IT Act, 1961.

Issue 1: Disallowance of interest claimed to be payable to Dena Bank:
The appeal pertains to the disallowance of Rs. 1,60,763 on account of interest claimed to be payable to Dena Bank for the assessment year 1985-86. The assessee had borrowed funds from the bank and calculated interest liability at 18% p.a., but did not pay the amount to the bank. The Assessing Officer rejected the claim, noting the bank's suit against the assessee for recovery of the principal amount and interest. The CIT(A) also denied the claim, considering the pending civil court adjudication on the liability to pay interest. The Tribunal upheld the decision, stating that the liability was contingent on the court's decision and not an accrued liability under the mercantile system of accounting.

Issue 2: Disallowance of truck maintenance expenses:
The next issue involves the disallowance of Rs. 6,000 out of truck maintenance expenses claimed by the assessee. The Assessing Officer disallowed a portion of the expenses for both trucks, citing unverifiable small amounts. The CIT(A) reduced the disallowance to Rs. 6,000, which the assessee challenged in the appeal. The Tribunal found that the expenses were fully vouched, with detailed records provided by the assessee. The disallowance was deemed unjustified as no reasonable basis was established, leading to the deletion of the disallowance.

Issue 3: Disallowance under section 40A(3) of the IT Act, 1961:
The final issue concerns the disallowance of Rs. 41,953 under section 40A(3) of the IT Act, 1961, for certain cash payments made by the assessee. The Assessing Officer disallowed the payments for violating the section's provisions, which was partially upheld by the CIT(A). The assessee argued that the payments were for repairing charges and small parts, supported by proper bills and payees assessed to income tax. The Tribunal agreed with the assessee, noting the genuineness of payments and the circumstances requiring cash transactions, ultimately deleting the disallowance based on the established identity of payees and genuine business needs.

In conclusion, the Tribunal partly allowed the appeal, dismissing the claim regarding interest payable to Dena Bank but ruling in favor of the assessee for truck maintenance expenses and cash payments disallowance under section 40A(3) of the IT Act, 1961.