2014 (11) TMI 645 - AT - Income Tax

Disallowance out of interest Held that - AO was of the view that memorandum and article of association of the assessee did not authorize the assessee to become a partner in a firm, so this capital could have been used by the assessee in a routine business and if the assessee had not been introduced the capital into the partnership for running M/s. Lizard Lounge then the interest liability of the assessee would have been lower - no new investment was made by the assessee in the partnership business to run restaurant during the year under consideration because the partnership was entered into on 22/02/2007 i.e the period relevant to the A.Y. 2007-08 and the investment was at ₹ 1,29.53 Lac as on 31/03/2007 which came down to ₹ 82.95 Lac during the year under consideration, so, there was a reduction in the capital during the year under consideration - the assessee was having sufficient interest free funds available which were at ₹ 4,341 Lac as on 31/03/2007 and the AO had not established the nexus between the borrowed funds and the amount used for non-business purpose - there was no prohibition for the assessee to enter into any partnership business, therefore, disallowance on account of notional interest was arbitrary and the CIT(A) rightly deleted the same Decided against revenue. Disallowance out of Rebate & Discount account Facts not properly appreciated or not Held that - CIT(A) rightly noted that the assessee had allowed discount as per the credit note - the trading discount /rebate was being allowed by the assessee in the earlier years to various purchasers and this consistent practice being followed - it had not been shown that the discount was non-genuine, excessive or unreasonable - the discount was to the customers of the assessee for the commercial expediency to increase the sales - the similar type of trading discount was allowed in the earlier years and there is no deviation in the facts of the years under consideration vis- -vis facts involved in the earlier years - the commission and trade discount was given by the assessee to the customers for the commercial expediency to increase the sales and nothing is brought on record to substantiate that the payment was non-genuine, excessive or unreasonable the order of the CIT(A) is upheld Decided against revenue. Disallowance out of sales promotion expenses Held that - CIT(A) rightly was of the view that the sales promotion expenses had decreased to ₹ 16.68 Lac as compared to the earlier year s expenses of ₹ 19.18 Lac, in spite of increase in turnover - turnover of the assessee increased in comparison to the earlier year, but there was decrease in the sales promotion expenses the order of the CIT(A) is upheld Decided against revenue. Deletion of freight and forwarding expenses Held that - The adhoc addition made by the AO was without any basis - He did not point out any specific instance where the expenses incurred on account of transportation and forwarding were not related to the business of the assessee - the assessee furnished the complete details relating to the expenses incurred on account of freight and forwarding - the freight and forwarding expenses had been incurred in the transportation of the goods sold by the assessee on F.O.R. basis and those expenses had not been proved to be non-genuine, bogus or unreasonable the order of the CIT(A) is upheld Decided against revenue.

Issues Involved:
1. Deletion of addition on account of disallowance out of interest.
2. Deletion of addition on account of disallowance out of rebate and discount.
3. Deletion of addition on account of disallowance out of sales promotion expenses.
4. Deletion of addition on account of disallowance out of freight and forwarding expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Disallowance Out of Interest:
The Assessing Officer (A.O.) disallowed Rs. 9,95,400/- on account of interest, arguing that the assessee invested Rs. 82,95,000/- in a partnership firm, M/s. Lizard Lounge, which was not authorized by the memorandum and articles of association. The A.O. claimed that this capital could have been used in the routine business, reducing the interest liability. The assessee contended that no new investment was made during the year in question and that the interest burden had decreased. The CIT(A) observed that the assessee had sufficient interest-free funds and that no new investment was made during the year. The CIT(A) also noted that the memorandum allowed the assessee to engage in any legal business. The Tribunal upheld the CIT(A)'s decision, stating that the disallowance was arbitrary and not supported by evidence of a nexus between borrowed funds and the investment in the partnership.

2. Deletion of Addition on Account of Disallowance Out of Rebate and Discount:
The A.O. disallowed Rs. 1,50,000/- out of Rs. 154.04 Lac claimed as rebate and discount, citing inconsistencies in the documentation. The assessee argued that trade discounts were a common practice to boost sales in a competitive market. The CIT(A) found that the rebate and discount were consistent with previous years and were given for commercial expediency. The Tribunal agreed, noting that the discounts were neither non-genuine nor unreasonable, and upheld the CIT(A)'s decision to delete the disallowance.

3. Deletion of Addition on Account of Disallowance Out of Sales Promotion Expenses:
The A.O. disallowed Rs. 1,20,000/- out of Rs. 16.68 Lac claimed as sales promotion expenses, citing insufficient documentation for certain expenses, including gold ornaments. The assessee maintained that these were customary gifts and that similar expenses had been allowed in previous years. The CIT(A) observed that the sales promotion expenses had decreased despite an increase in turnover and that similar expenses had been allowed by the ITAT in earlier years. The Tribunal upheld the CIT(A)'s decision, finding no basis for the A.O.'s disallowance.

4. Deletion of Addition on Account of Disallowance Out of Freight and Forwarding Expenses:
The A.O. disallowed Rs. 5 Lac out of Rs. 1,454 Lac claimed as freight and forwarding expenses, questioning the documentation and the absence of agreements specifying who would bear the freight costs. The assessee provided detailed documentation and argued that the expenses were consistent with previous years. The CIT(A) found that the expenses were genuine, related to the business, and supported by proper documentation. The Tribunal upheld the CIT(A)'s decision, noting that the A.O.'s disallowance was arbitrary and not based on specific evidence.

Conclusion:
The Tribunal dismissed the appeals of the Department, affirming the CIT(A)'s decisions on all counts. The disallowances made by the A.O. were found to be arbitrary, unsupported by evidence, and inconsistent with the assessee's past practices and documentation. The Tribunal emphasized the importance of concrete evidence and proper documentation in making disallowances.

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