2012 (5) TMI 233 - AT - Income Tax

Disallowance u/s 40A(3) - 20% of the expenditure made in cash - AO alleged that since the assessee was engaged in the business of purchase and sale of land, the payment made towards advance should be treated as payment made towards purchase of land - Held that - The disallowance under s. 40A(3) can be made where the assessee Incurs any expenditure. In the instant case, the assessee has not claimed the expenditure in respect of purchase of land. The Revenue has not collected any material to suggest that what is apparent is not real. The assessee has filed the copy of the cancellation of the sale agreement by the assessee - Decided in favor of the assessee Interest free advances / loans - held htat - The assessee is having sufficient capital. If there are mixed funds then non-interest-bearing funds are to be considered as utilized for non-interest-bearing advances. It is the assessee who has to take a business decision. Fees is generally received at the beginning and surpluses are used for making fixed deposits as receipts are in advances while expenses are spread out throughout the year. Since interest-free advances are less than the capital and the AO has not brought on record any nexus of interest-bearing loans used the AO could not have disallowed the interest. - There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more. - Decided in favor of the assessee

Issues Involved:
1. General ground of appeal.
2. Disallowance under Section 40A(3) of the IT Act amounting to Rs. 19,84,000.
3. Addition on account of diversion of interest-bearing funds amounting to Rs. 2,43,177.
4. Charging of interest under Sections 234B, 234C, and 234D.

Detailed Analysis:

1. General Ground of Appeal:
The first ground of appeal is general in nature and is disposed of in view of the findings recorded against other grounds of appeal.

2. Disallowance under Section 40A(3) of the IT Act:
- Facts and AO's Findings: The assessee, engaged in various businesses, paid an advance of Rs. 1 crore for purchasing land, which was later refunded due to the deal's cancellation. The AO treated this payment as an expenditure for purchasing land, invoking Section 40A(3) and disallowing 20% of the expenditure amounting to Rs. 19,84,000. The AO's reasoning was based on the absence of the initial purchase agreement and the subsequent purchase of the same land by the assessee's firm.
- CIT(A) Findings: The CIT(A) upheld the AO's decision, emphasizing the lack of evidence from the assessee to prove the non-materialization of the land purchase. The CIT(A) applied the rule of preponderance of probability, concluding that the transaction had materialized upon full payment. The CIT(A) also referenced the case of Nathalal Jethalal vs. CIT, supporting the view that the payment was an expenditure under Section 40A(3).
- Assessee's Argument: The assessee argued that the payment was merely an advance, not an expenditure, as the land purchase did not materialize. The assessee provided explanations for the cancellation, including legal restrictions on purchasing land from a scheduled caste individual and the subsequent sale of the land to a third party.
- Tribunal's Decision: The Tribunal found that the assessee did not claim the expenditure in the accounts and that the Revenue did not provide evidence to contradict the apparent facts. The Tribunal noted the cancellation agreement and the reasons provided by the assessee. Consequently, the Tribunal concluded that the CIT(A) was not justified in confirming the addition of Rs. 19.84 lakhs.

3. Addition on Account of Diversion of Interest-Bearing Funds:
- Facts and AO's Findings: The AO observed that the assessee had advanced Rs. 48,68,657 to third parties without charging interest, while incurring interest expenses on borrowed funds. The AO disallowed Rs. 2,43,177 as interest expenditure for non-business purposes.
- CIT(A) Findings: The CIT(A) upheld the AO's decision, citing the assessee's failure to provide evidence that the advances were for business purposes and referencing the case of CIT vs. Abhishek Industries Ltd.
- Assessee's Argument: The assessee contended that the advances were made from interest-free funds, as evidenced by the capital account and balance sheet. The assessee relied on various judicial precedents supporting the view that no disallowance should be made without establishing a nexus between interest-bearing funds and interest-free advances.
- Tribunal's Decision: The Tribunal noted that the assessee's capital was sufficient to cover the interest-free advances and investments. Following the decision in the case of Asstt. CIT vs. Ram Kishan Verma, the Tribunal held that the CIT(A) was not justified in confirming the addition of Rs. 2,43,177.

4. Charging of Interest under Sections 234B, 234C, and 234D:
The ground related to charging interest under Sections 234B, 234C, and 234D was not pressed by the assessee and was dismissed as such.

Conclusion:
The appeal of the assessee was allowed, with the Tribunal overturning the CIT(A)'s decisions on the disallowance under Section 40A(3) and the addition for diversion of interest-bearing funds. The general ground of appeal was disposed of based on the findings on other grounds, and the ground related to interest under Sections 234B, 234C, and 234D was dismissed as not pressed.

← Previous Next →