2012 (11) TMI 705 - AT - Income Tax

Payment made to the partners for hiring the tractors - excessive expenditure u/s 40A(2)(b) - held that - A.O. should have called for the bills etc and might have examined the concerned partners and outsiders to unearth the truth before alleging that the payment made by the assessee to the partners is excessive and unreasonable. In the absence of any material being brought on record by the A.O. in support of this allegation that the amount paid by the assessee to the partners is unreasonable and excessive, disallowance made by him is not sustainable. - Decided in favor of assessee. Interest free advances held that - Regarding this contention that these advances are business advances, no satisfactory evidence could be brought on record by the Ld. A.R. and hence, this argument is also rejected. Hence, it is seen that no interest free fund is available with the assessee which can be used for giving interest free advances and hence, we are of the considered opinion that no interference is called for in the order of Ld. CIT(A) on this issue. - Payment of interest rightly disallowed - Decided in favor of revenue. Disallowance of Employees contribution to Provident Fund The same was paid as per the statutory obligation for this purpose of business and therefore, there is no justification for disallowing the same. Following the decision of court in case of CIT Vs Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT held that;-Payment of PF have been made before the due date of filing of return of income - no disallowance can be made regarding payment of employees contribution not PF disallowance is deleted - Ground is allowed. Disallowance at 1% of the expenses out of diesel purchase, oil and grease, repairs and maintenance, octroi, freight and cartage expenses. - held that - A.O. himself has considered the value of defective vouchers at 1.5% of the total expenses and on this basis, he confirmed the disallowance to the extent of 1%. We are of the considered opinion that if majority of vouchers are available and are proper and only 1.5% vouchers are defective, no disallowance should be made on ad-hoc basis without pointing out any specific item of inadmissible expenditure. Disallowance on account of vehicle running expenses and maintenance and telephone expenses. Held that - 10% disallowance out of vehicle running expenses and maintenance and telephone expenses is reasonable and hence, order of CIT(A) on this issue is confirmed. Deduction u/s 40(a)(ia) held that - assessee is seeking direction for allowing deduction in the year of payment of TDS - no such direction is required because it is in the Act itself that if the TDS is paid in a subsequent year, deduction is allowable in that year as per the provisions of Section 40(a)(ia) of the Act and hence, no such direction is called for - This ground is also rejected. Interest on Interest free Advance Held that - Advances were given for the business purpose and hence no disallowance of interest at the rate of 15% was called for - without there being any nexus found with borrowed funds the disallowance be deleted. Allowance of Rs.17,470/- u/s 40A(3) - Held that;- On the facts of the case, disallowance of Rs.17,470/- is unjust and genuineness of expense having not been doubted the same be allowed - In the combined result, all the three appeals of the assessee are partly allowed and the appeal of the revenue is dismissed.

Issues Involved:

1. Disallowance under Section 40A(2)(b) of the Income Tax Act.
2. Disallowance of interest payments on advances.
3. Disallowance of employees' contribution to Provident Fund.
4. Disallowance of vehicle running expenses and maintenance, and telephone expenses.
5. Ad-hoc disallowance of 1% of expenses out of diesel purchase, oil, grease, repairs and maintenance, octroi, freight, and cartage expenses.
6. Disallowance of interest on interest-bearing funds.
7. Disallowance under Section 40(a)(ia) of the Income Tax Act.
8. Disallowance under Section 68 of the Income Tax Act.
9. Disallowance under Section 40A(3) of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 40A(2)(b) of the Income Tax Act:
The assessee disputed the disallowance of Rs. 35,200/- for the assessment year 2003-04. The Tribunal found that the Assessing Officer (A.O.) did not substantiate the claim that the payment to partners for hiring tractors was excessive or unreasonable. The Tribunal allowed this ground, stating that the A.O. should have examined the concerned partners and outsiders to unearth the truth before making the disallowance.

2. Disallowance of Interest Payments on Advances:
For the assessment year 2003-04, the assessee argued that advances to M/s. Bhagyodaya Tiles Factory and Shri Mahalaxmi Quarry Works were given for business purposes. The Tribunal found no evidence that interest-free funds were available with the assessee for these advances and upheld the disallowance. Similarly, for the assessment years 2004-05 and 2005-06, the Tribunal confirmed the disallowance of interest payments on advances, finding no satisfactory evidence that these were business advances.

3. Disallowance of Employees' Contribution to Provident Fund:
For the assessment year 2003-04, the Tribunal allowed the assessee's ground, noting that the payment of Provident Fund was made before the due date of filing the return of income, following the Supreme Court's judgment in CIT Vs Alom Extrusions Ltd. Similarly, for the assessment years 2004-05 and 2005-06, the Tribunal allowed the assessee's grounds on this issue.

4. Disallowance of Vehicle Running Expenses and Maintenance, and Telephone Expenses:
For the assessment year 2003-04, the Tribunal upheld a 10% disallowance of vehicle running expenses and maintenance, and telephone expenses as reasonable. This decision was also applied to the assessment year 2004-05.

5. Ad-hoc Disallowance of 1% of Expenses:
For the assessment year 2004-05, the Tribunal deleted the 1% ad-hoc disallowance on diesel, oil, grease, repair & maintenance, octroi, and freight expenses, noting that if only 1.5% of vouchers were defective, no ad-hoc disallowance should be made without pointing out specific inadmissible expenditures. This decision was similarly applied to the assessment year 2005-06.

6. Disallowance of Interest on Interest-bearing Funds:
For the assessment year 2004-05, the Tribunal upheld the disallowance of interest on advances to carting contractors, finding that these advances were not for business purposes. This decision was similarly applied to the assessment year 2005-06.

7. Disallowance under Section 40(a)(ia) of the Income Tax Act:
For the assessment year 2005-06, the Tribunal upheld the disallowance under Section 40(a)(ia), following the Special Bench decision in Bharati Shipyard Ltd. Vs. DCIT, which held that the amendment in Section 40(a)(ia) is not retrospective.

8. Disallowance under Section 68 of the Income Tax Act:
For the assessment year 2004-05, the Tribunal upheld the CIT(A)'s decision deleting the addition under Section 68, noting that the amount in question was borrowed in the financial year 1997-98 and not in the relevant year.

9. Disallowance under Section 40A(3) of the Income Tax Act:
For the assessment year 2005-06, the Tribunal noted that the ground regarding disallowance under Section 40A(3) was not pressed by the assessee and accordingly rejected it.

Conclusion:
In summary, the Tribunal provided a mixed outcome, allowing some grounds in favor of the assessee while upholding the disallowances on other grounds. The appeals of the assessee were partly allowed, and the appeal of the revenue was dismissed.

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