2015 (5) TMI 146 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - assessee had utilized interest bearing funds for making interest free advances to sister concerns and therefore, the interest attributable to such advances was to be disallowed while computing the business income of the assessee for this year. - Held that - Where the investments / advances were made to sister concern for business purposes, then there is no question of any disallowance under section 36(1)(iii) of the Act and there would be no necessity to see as to whether the advances made to the sister concern were out of interest bearing borrowings or not. In view thereof, we find no merit in the order of CIT(A) in this regard and the same is set-aside and the Assessing Officer is directed to delete the addition of ₹ 12,67,428/-. - Decided in favour of assessee. Disallowance out of various heads of expenditure - Held that - We are of the view that where the expenditure has been subjected to fringe benefit tax, the nature of expenditure stands established and the same is to be allowed as business expenditure. In view thereof, there is no merit in making any disallowance out of sales promotion expenditure. Similarly, no disallowance was warranted out of travelling and conveyance expenses, communication expenses as the assessee had paid FBT against the said expenses. We also find no merit in the order of Assessing Officer in disallowing any part of the said expenditure for personal use in the hands of the assessee company being a private limited concern. Further disallowance of 10% out of legal and professional fees paid by the assessee in the absence of any finding that the expenditure has not been incurred for the purpose of business, there is no merit in the said disallowance and the same is deleted. The last head of expenditure is other administrative expenses which include office expenses and other miscellaneous expenses being routine business expenses. The Assessing Officer had made disallowance @ 10% out of the said expenditure, which was restricted to 5% by CIT(A). The expenditure has been disallowed since certain evidences were in the form of self-made vouchers. We uphold the order of CIT(A) to restrict the disallowance to 5% of the total expenditure. - Decided partly in favour of assessee. Order passed under section 143(3) r.w.s. 263 - Held that - The order passed by the Commissioner under section 263 of the Act has been quashed by the Tribunal relating to assessment year 2008-09, vide order dated 12.08.2013 and consequently, there is no merit in the impugned assessment order passed under section 143(3) r.w.s. 263 of the Act and the appeal filed by the assessee is against the order of CIT(A) in upholding the addition on merits should be allowed. . We find merit in the said plea of the assessee as pursuant to quashing of 263 proceedings in the hands of the assessee by the Tribunal, the consequent order passed by the Assessing Officer under section 143(3) r.w.s. 263 of the Act, does not survive and the same is hereby cancelled. - Decided in favour of assessee. Unexplained investment in land - Held that - The consideration agreed upon was ₹ 2,80,80,000/- by cheque and cash In the of 80 20 respectively and the amount was to be paid on or before the execution of the sale deed. In the absence of any corroborative evidences to the contrary, the self serving letter now filed by the appellant in support of its claim that the part of the consideration agreed upon as per the MOU was not actually paid is only an afterthought and cannot be accepted. It is also common knowledge that no person would execute the sale deed without receiving the full sale consideration agreed upon as per the agreement or MOU. Moreover, from the details placed on record, it is also observed that the notification for private forestation was issued much earlier i.e. before entering into the MOU and the appellant was aware of such restrictions on a portion of the land and then only appellant agreed for the consideration of ₹ 52,00,000/- per acre. It is also interesting to note that it is only the cash component of 20% in the safe consideration that was claimed to have been withheld till the time the land is deforested and all the disputes are resolved. The assessee has failed to controvert the findings of the CIT(A) in this regard and consequently, we find no merit in the grounds of appeal raised by the assessee and dismissing the same, we uphold the addition of ₹ 56,16,000/- - Decided against assessee. Disallowance of expenditure - Held that - The expenditure had been incurred in the course of carrying on the business and 90% of the payments in respect thereof were made by cheque. Further, complete vouchers were maintained by the assessee in this regard and there was no merit in disallowing 25% out of the said expenditure. The assessee before us is a private limited company and was engaged in manufacturing of construction machinery and equipment. The impugned expenditure under reference had been incurred by the assessee while carrying on its business. The Assessing Officer had accepted the plea of the assessee that the said expenditure was incurred in the course of business carried on by the assessee by allowing major portion of the expenditure. However, disallowance was made in the hands of the assessee because of increase in ratio of expenditure vis- -vis turnover. We find no merit in the said stand of the Assessing Officer in the absence of any evidence found to prove that the expenditure is not relatable to the business of assessee. Merely because there is an increase in the quantum of expenditure does not merit the disallowance in the hands of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961.
2. Adhoc disallowance of various heads of expenditure.
3. Addition on account of unexplained investment in land.
4. Disallowance of specific business expenses.

Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
- Facts: The assessee had made interest-free advances to sister concerns while incurring significant interest expenditure. The Assessing Officer disallowed interest expenditure, attributing it to non-business purposes.
- CIT(A) Decision: Partial relief was granted by reworking the disallowance based on the dates of advances.
- Tribunal's Decision: The Tribunal applied the precedent set by the Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd., holding that if interest-free funds are sufficient to cover the advances, the presumption is that these advances are made from interest-free funds. The disallowance of interest expenditure was deleted.

2. Adhoc Disallowance of Various Heads of Expenditure:
- Disallowed Expenses: Sales promotion, legal and professional fees, traveling and conveyance, communication, and administrative expenses.
- CIT(A) Decision: Confirmed the disallowances made by the Assessing Officer.
- Tribunal's Decision: The Tribunal found no merit in the adhoc disallowances, especially where Fringe Benefit Tax (FBT) was paid, indicating the nature of the expenses. The disallowance for personal use in a private limited company was also deemed unjustified. The Tribunal upheld the disallowance of 5% for administrative expenses due to self-made vouchers but allowed the rest.

3. Addition on Account of Unexplained Investment in Land:
- Facts: During a survey, a document indicated a higher purchase price for land than what was recorded in the sale deed. The difference was treated as unexplained investment.
- CIT(A) Decision: Upheld the addition, noting that the MoU indicated the full consideration, and the explanation provided by the assessee was unconvincing.
- Tribunal's Decision: The Tribunal agreed with the CIT(A), emphasizing the evidence found during the survey and the lack of credible contrary evidence from the assessee. The addition of Rs. 56,16,000/- was upheld.

4. Disallowance of Specific Business Expenses:
- Disallowed Expenses: Travelling and conveyance, labor charges, advertisement expenses, and guest house expenses.
- CIT(A) Decision: Confirmed the disallowances based on disproportionate increases in expenses relative to turnover.
- Tribunal's Decision: The Tribunal found the disallowances unjustified in the absence of evidence proving the expenses were not business-related. The adhoc disallowances were reversed, and the expenses were allowed in full.

Conclusion:
- Appeal ITA No.1465/PN/2013: Partly allowed, with the deletion of interest disallowance and most adhoc disallowances.
- Appeal ITA No.1466/PN/2013: Allowed, quashing the assessment order under section 143(3) r.w.s. 263.
- Appeal ITA No.975/PN/2013: Allowed, with the deletion of disallowances on business expenses but upholding the addition for unexplained investment in land.