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2024 (9) TMI 348 - AT - Income TaxCessation of liability u/s 41(1) - Several trade payables had been outstanding for more than three years - HELDTHAT - Principles regarding cessation of liability u/s 41(1) of the Act, which held that the onus is on the AO to prove the cessation or remission of liability with concrete evidence, liabilities shown in the balance sheet are considered existing until there is evidence to the contrary, simply non-payment over a period or debts becoming time-barred do not automatically constitute cessation of liability and there must be clear and specific evidence of cessation or remission for liabilities to be considered as ceased u/s 41(1). Thus, we conclude that the addition as cessation of liability u/s 41(1) was unjustified. The AO did not provide sufficient evidence to establish that the liabilities had ceased during the year under consideration. The liabilities were duly reflected in the assessee's audited balance-sheet and the CIT(A)'s reliance on judicial precedents was appropriate and well- founded. Accordingly, we uphold the Ld.CIT(A)'s decision to delete the addition - Revenue's this ground is dismissed. Disallowance u/s 37(1) on account of 10% of Trade Payables - HELD THAT - AO's decision to disallow 10% of the sundry creditors was primarily due to the lack of supporting documentation and the inability to verify the genuineness of these creditors. The assessee had provided sample ledger accounts, audited financial statements, and details for subsequent years to demonstrate the genuineness of the creditors. The Ld.CIT(A) observed that the statutory and tax audits had not raised any adverse remarks regarding these liabilities, thus supporting the assessee's claim. The Ld.CIT(A) noted that the AO did not furnish specific evidence to support the claim that the expenses were not incurred for business purposes. The AO s approach of making an ad hoc disallowance of 10% without concrete evidence was deemed arbitrary and unjustified. CIT(A) also highlighted the inconsistency in the AO s actions, where similar liabilities were treated differently under Sections 41(1) and 37(1) of the Act. This contradictory approach further undermined the AO's position. The Ld.CIT(A) further emphasized the need for judicial consistency and adherence to established legal principles. Disallowances u/s 37(1) of the Act should be made only when there is clear evidence that the expenditure is not for business purposes. Disallowance u/s 37(1) was unjustified and arbitrary - CIT(A) correctly identified that the AO failed to provide substantial evidence to support the disallowance. The assessee s documentation, including audited financial statements and ledger accounts, sufficiently demonstrated the genuineness of the expenses. AO s approach lacked the required substantiation, leading to an erroneous addition. Therefore, we uphold the CIT(A)'s decision to delete the disallowance u/s 37(1) -Revenue s ground is dismissed. Disallowance of personal expenses - AO observed that the expenses claimed under 'Gift Articles' and 'Entertainment Expenses' were inherently personal - payments for these expenses were made in cash, raising further doubts about their authenticity and business necessity - CIT(A) deleted addition - HELD THAT - Upon reviewing the Ld.CIT(A)'s detailed findings and conclusions, we agree that the disallowance was not substantiated with adequate evidence by the AO. The AO s decision was based on assumptions rather than concrete proof of personal use. The assessee demonstrated that the expenses were incurred for business purposes, and the tax auditor s acceptance further supported this claim. Therefore, we uphold the CIT(A)'s decision to delete the disallowance u/s 37(1) of the Act. The Revenue s this ground is dismissed. Disallowance Interest on Loan to Subsidiary - AO, after concluding that the borrowed funds were not being used exclusively for business purposes, disallowed proportionate interest u/s 36(1)(iii) - HELD THAT - The concept of the fungibility of funds is crucial in tax assessments, particularly in cases involving the disallowance of interest under Section 36(1)(iii) of the Act. When funds are considered fungible, it means that money from various sources, whether interest-bearing or interest-free, is interchangeable and indistinguishable once it is deposited into a common pool, such as a company's bank account. The doctrine that funds are fungible has been supported by various judicial precedents including those relied on by the assessee. Thus, we find that the Ld.CIT(A) erred in upholding the disallowance u/s 36(1)(iii) of the Act. The assessee has successfully demonstrated that it had sufficient interest-free funds to cover the loan to the subsidiary, and the loan was advanced for commercial expediency, thus qualifying for interest deduction u/s 36(1)(iii) of the Act. Accordingly, we overturn the Ld.CIT(A)'s decision and directs the deletion of the disallowance - Decided in favour of assessee. Disallowance u/s 14A read with Rule 8D - assessee argued that the AO did not correctly apply the provisions of Rule 8D of IT Rules, particularly in relation to the interest disallowance - HELD THAT - We conclude that the disallowance under Section 14A read with Rule 8D of IT Rules was not warranted for the assessment year in question in absence of exempt income. Accordingly, we overturn the Ld.CIT(A)'s decision and directs that the disallowance u/s 14A read with Rule 8D of IT rules be deleted in full. The appeal on these grounds is allowed in favour of the assessee, reaffirming the principle that disallowance under Section 14A of the Act is inapplicable in the absence of exempt income. The appeal of the assessee on these grounds is allowed. Disallowance of 10% of the trade payables - HELD THAT - We concur with the Ld.CIT(A) that the assessee had provided comprehensive documentation to substantiate the trade payables in question. This included ledger accounts, confirmation letters from the creditors, and sample invoices. We note that these documents are standard and credible forms of evidence in substantiating business transactions. We agree with the Ld.CIT(A) s finding that the AO's disallowance of 10% of the trade payables was arbitrary and lacked a rational basis. The AO's reliance on assumptions and the non-response to notices under Section 133(6) of the Act, and without considering the extensive evidence provided by the assessee, is deemed improper. We emphasize that disallowances must be based on concrete evidence and not on mere conjecture or ad-hoc estimations. We also uphold the findings of the Ld.CIT(A) in concluding that the AO erred in including the amount relating to The Bengal Mills Stores Supply Co., which had already been added to the assessee s income in a previous assessment year. We agree that including this amount in the current disallowance would result in double taxation, which is against the principles of natural justice. We acknowledge the unique circumstances surrounding the trade payable to Shivam Water Treaters Pvt. Ltd., which was under NCLT proceedings. We find that the Ld.CIT(A) rightly considered these circumstances in accepting the legitimacy of the trade payable despite the absence of certain confirmations - Similar disallowances made in previous years were not upheld on appeal, reinforcing the importance of judicial consistency. CIT(A) has correctly deleted the addition - Decided in favour of assessee.
Issues Involved:
1. Disallowance under Section 36(1)(va) for late payment of Employee's Contribution to Provident Fund (PF). 2. Addition under Section 41(1) for cessation of liability (sundry creditors). 3. Disallowance under Section 37 for trade payables verification (less than 1 year). 4. Disallowance under Section 36(1)(iii) for interest on loans given to a subsidiary without interest. 5. Disallowance of personal expenses. 6. Disallowance under Section 14A read with Rule 8D. 7. Disallowance under Section 37(1) for trade payables (A.Y. 2018-19). Detailed Analysis: 1. Disallowance under Section 36(1)(va) for Late Payment of Employee's Contribution to Provident Fund (PF): The CIT(A) upheld the addition of Rs. 10,96,992/- made by the AO, referencing the Supreme Court's decision in Checkmate Services (P.) Ltd v. CIT, which clarifies that employees' contributions must be paid within the due dates specified under the respective Acts. No appeal was made against this decision. 2. Addition under Section 41(1) for Cessation of Liability (Sundry Creditors): The AO treated sundry creditors outstanding for more than three years as cessation of liability under Section 41(1), amounting to Rs. 1,35,94,166/-. The CIT(A) deleted this addition, finding no evidence that the liabilities ceased to exist during the year under consideration. The CIT(A) relied on judicial precedents, emphasizing that liabilities shown in the balance sheet cannot be presumed to have ceased merely due to the passage of time. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not provide sufficient evidence to establish the cessation of liabilities. 3. Disallowance under Section 37 for Trade Payables Verification (Less Than 1 Year): The AO disallowed 10% of the total trade payables under Section 37, amounting to Rs. 1,06,18,997/-, due to the inability to verify the genuineness of these payables. The CIT(A) found this disallowance unjustified, as the AO did not provide sufficient evidence to prove that the expenditures were not for business purposes. The Tribunal upheld the CIT(A)'s decision, emphasizing that disallowances must be based on substantive evidence rather than estimations or assumptions. 4. Disallowance under Section 36(1)(iii) for Interest on Loans Given to a Subsidiary Without Interest: The AO disallowed Rs. 26,25,000/- as interest on loans given to a subsidiary, concluding that the borrowed funds were not used exclusively for business purposes. The CIT(A) upheld this disallowance, not accepting the assessee's argument that they had sufficient interest-free funds to cover the loan. The Tribunal overturned the CIT(A)'s decision, noting that the assessee had substantial interest-free funds and that the loan was given for commercial expediency, thus qualifying for interest deduction under Section 36(1)(iii). 5. Disallowance of Personal Expenses: The AO disallowed Rs. 1,28,273/- for expenses on gift articles and entertainment, considering them personal in nature. The CIT(A) deleted this disallowance, noting that the AO did not provide adequate evidence to substantiate the personal nature of these expenses. The Tribunal upheld the CIT(A)'s decision, agreeing that the disallowance was based on assumptions rather than concrete proof of personal use. 6. Disallowance under Section 14A read with Rule 8D: The AO disallowed Rs. 52,07,537/- under Section 14A read with Rule 8D, attributing it to expenses related to earning exempt income. The CIT(A) directed the AO to verify the assessee's claims regarding interest expenses and recalculate the disallowance accordingly. The Tribunal overturned the CIT(A)'s decision, noting that the assessee did not earn any exempt income during the year under consideration, thus making the disallowance under Section 14A inapplicable. 7. Disallowance under Section 37(1) for Trade Payables (A.Y. 2018-19): The AO disallowed 10% of the total trade payables, amounting to Rs. 2,66,47,479/-, due to inadequate documentation and failure to provide proof of the genuineness of transactions. The CIT(A) deleted this disallowance, finding that the assessee had submitted sufficient evidence to substantiate the trade payables. The Tribunal upheld the CIT(A)'s decision, agreeing that the disallowance was arbitrary and lacked a rational basis. Conclusion: The Tribunal dismissed the Revenue's appeals for AY 2016-17 and AY 2018-19, while allowing the Assessee's appeal for AY 2016-17. The Tribunal upheld the CIT(A)'s decisions where they found the AO's disallowances to be arbitrary or unsupported by sufficient evidence, and overturned the CIT(A)'s decisions where they failed to recognize the adequacy of the assessee's interest-free funds or the absence of exempt income.
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