2015 (1) TMI 54 - AT - Income Tax

Applicability of section 40A(3) Payment of retrenchment compensation - payment exceeding ₹ 2,00,000/- in cash allowability of deduction u/s 35DDA - assessee submitted that the expenditure claimed under the head Gratuity, Retrenchment and Notice Pay in assessment year 2003-04 was not allowed by the AO in the assessment. Therefore, they were claimed in the assessment year 2004-05. The AO allowed only 1/5th expenses after reducing the cash payment u/s 40A(3) of the Act. - Held that - CIT(A) was not justified in confirming the addition u/s 40A(3) of the Act on the basis of cash payment exceeding ₹ 20,000/- In this case Rule 6DD(h) of the Income-tax Rules is applicable wherein the cash payment limit is not exceeding ₹ 50,000/- The Revenue s grounds are revolving around allowing expenses claimed by the assessee at ₹ 45,13,340/- u/s 35DDA - CIT(A) held that these expenses are not covered u/s 35DDA - as per Section 35DDA, the only expenses are allowed to be proportionate basis i.e. 15th expenditure in connection with voluntary retirement - there was no voluntary retirement in assessee case - the payments were related to Gratuity, Retrenchment and Notice Pay - CIT(A) has rightly decided the case Decided in favour of assessee. Interest payment on advance paid disallowed Held that - AO rightly was of the view that the assessee has shown advance to both the parties i.e. M/s. D.R. Polymers (P) Ltd., New Delhi and M/s. Neel Kanth Corporation, Jaipur and opening balance as on 01-04-2003 was at ₹ 7.50 lacs and ₹ 7.00 lacs respectively and closing balance was at ₹ 5.25 lacs in the case of M/s. Neel Kanth - assessee has not charged any interest on these advances - dealing in the share is not the business of the assessee, hence money borrowed relatable to the advance to M/s. D.R. Polymer (P) Ltd. is not for the purpose of business - Similarly, as interest free advance has been given to M/s. Neelkanth Corporation, it is evident that money borrowed to that extent is not used for the purpose of business assessee has not brought any evidence to substantiate its claim except the arguments that these payments were made either in the form of share application money or weak financial position of the company - before AO, no reply was filed by the assessee thus, the matter is remitted back to the AO for fresh adjudication Decided partly in favour of

Summary

Issues:
1. Applicability of Section 40A(3) to retrenchment compensation.
2. Disallowance of interest payment on advances to specific parties.
3. Application of Section 35DDA on retirement/retrenchment payments.
4. Allowance of expenses under Rule 6DD(h) of the Income-tax Rules.
5. Disallowance of interest on interest-free advances.

Analysis:

1. The case involved cross-appeals against the order of the CIT(A) for the assessment year 2004-05. The assessee contested the applicability of Section 40A(3) to retrenchment compensation exceeding a specified cash limit and disallowance of interest payments. The Revenue challenged the disallowance made under Section 35DDA relating to retirement/retrenchment payments. The AO disallowed certain expenses under Section 40A(3) and Section 35DDA, based on agreements between the management and workers. The CIT(A) partly allowed the assessee's appeal, stating that the expenses were not covered under Section 35DDA.

2. Regarding the applicability of Section 40A(3), the ITAT held that the cash payment limit was not exceeded as per Rule 6DD(h) of the Income-tax Rules, reversing the CIT(A)'s decision. The Revenue's grounds related to expenses under Section 35DDA were dismissed as the CIT(A) correctly determined that the expenses did not fall under this section. The ITAT noted that no additional evidence was accepted during the appellate proceedings.

3. The second issue concerned the disallowance of interest on advances to specific parties. The AO disallowed interest on advances to M/s. D.R. Polymers (P) Ltd., New Delhi, and M/s. Neel Kanth Corporation, Jaipur. The CIT(A) upheld the addition, stating that the advances were not for business purposes. The ITAT remanded this issue to the AO for further examination, directing the assessee to provide evidence to support its claims.

4. In conclusion, the ITAT partly allowed the assessee's appeal and dismissed the Revenue's appeal. The case was remanded to the AO for reconsideration of the interest disallowance issue. The judgment highlighted the importance of providing evidence to substantiate claims and the proper application of relevant tax provisions.

This detailed analysis covers the various issues raised in the judgment, providing a comprehensive overview of the legal arguments and decisions made by the authorities involved.