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2015 (7) TMI 210 - AT - Income TaxDisallowance of interest liability made under section 36(l)(iii) - interest paid for advances given for land proposed to be used for construction in the factory of the respondent- assessee firm - CIT(A) deleted the disallowance - Held that - CIT(A) reached the conclusion after properly appreciating the facts governing the issue. The CIT(A) had come to the conclusion that there were enough internal accruals to make the above advances after considering the material on record. The view taken by the CIT(A) that when there is a mixture of borrowed funds and internal accruals, the presumption that the investments have been made out of internal accruals is supported by the decision of High Court of Calcutta in the case of Woolcombers of India Ltd. vs CIT, 1981 (2) TMI 36 - CALCUTTA High Court , Reliance Utilities and Powers Ltd. (2009 (1) TMI 4 - HIGH COURT BOMBAY), S.A. Builders Ltd. vs. CIT (A) & Anr. (2006 (12) TMI 82 - SUPREME COURT ). - Decided against revenue. Interest paid into on unsecured loans borrowed from the relatives of the partners of respondent-assessee firm - disallowance on the ground that interest paid was excessive - CIT(A) deleted the addition - Held that - AO had not brought any comparable rate of interest which is reasonable. No disallowance can be made based on mere suspicion. Therefore we are of the opinion that there is no basis to hold that payment of interest at 15% is excessive and accordingly we hereby confirm the order of the CIT(A) on this ground of appeal and therefore the ground of appeal filed by the revenue is dismissed.- Decided against revenue. Disallowance of keyman insurance policy - CIT(A) has allowed it after observing that there is no restriction under the Act that only the premium paid in respect of one person only to be allowed as deduction - Held that - AO had not disputed the allowability of the premium paid for keyman insurance policy. He was of the only view that the premium paid in respect of only one person can be allowed. He had no dispute at all about allowability of the keyman insurance policy premium. Similarly the provisions of the Income Tax Act does not stipulates that the premium paid in respect of only one partner or director is alone allowable. In absence of such bar we are of the opinion that deduction should be allowed and therefore we uphold the order of the CIT(A) - Decided against revenue. Disallowance of commission - Held that - The entire expenditure on commission paid to Mr. Karl Neuchel was genuine and incurred for the purpose of the business of the assesee, which is allowable as per the provision of section 37(1) of the Act. As agreeing with the contention of the appellant that stipulation in the contract regarding the commencement of the agreement w,e,f 1.1.2006 does not mean that athe appellant was debarred from making payment of commission for the earlier period when the services rendered by him are not disputed by the AO. Therefore, the addition made by the AO is deleted - Decided against revenue. Disallowance of building repair expenses - CIT(A) deleted the addition - Held that - The finding of CIT(A) is based on the well settled principle of law that the expenditure not resulting in creation of asset should be allowed as a revenue expenditure as held by Supreme Court in the case of Empire Jute Company Ltd. Vs. CIT 1980 (5) TMI 1 - SUPREME Court . Therefore the order of CIT(A) is in conformity with the well settled principle of law, hence we uphold the order of the CIT(A) in deleting the addition and this ground of appeal filed by the revenue is also dismissed.- Decided against revenue. Disallowance of the staff welfare expenses - Held that - From the bills on record we notice that this expenditure relates to refreshment, tea, milk, Prasad provided to workers who were outside the factory and office. From these it is very clear that the vouchers are mostly not supported by bills but nevertheless it cannot b e said that the expenditure was not incurred. In the absence of any evidence on record brought by AO to say that the assessee has not incurred this expenditure, the disallowance of expenditure is not justified - Decided against revenue. Disallowance of Staff Welfare Expenses - Held that - From the bills on record we notice that this expenditure relates to refreshment, tea, milk, Prasad provided to workers who were outside the factory and office. From these it is very clear that the vouchers are mostly not supported by bills but nevertheless it cannot b e said that the expenditure was not incurred. In the absence of any evidence on record brought by AO to say that the assessee has not incurred this expenditure, the disallowance of expenditure is not justified. No disallowance can be made on round some basis without pointing out the defects in the books of accounts. Hence we are of the considered opinion that the CIT(A) is not justified in confirm the disallowance to the extent of ₹ 50,000/- out of staff welfare expenses.- Decided against revenue.
Issues Involved:
1. Deletion of disallowance of interest liability under section 36(1)(iii). 2. Deletion of disallowance of interest liability on unsecured loans. 3. Deletion of disallowance of premium paid on the second partner's keyman insurance policy. 4. Deletion of disallowance of commission paid to a foreign agent. 5. Deletion of disallowance of building repair expenses. 6. Deletion of disallowance of staff welfare expenses. Detailed Analysis: 1. Deletion of Disallowance of Interest Liability under Section 36(1)(iii): The revenue challenged the deletion of interest liability of Rs. 14,28,230/- paid for advances given for land proposed to be used for the construction of the factory. The Assessing Officer (AO) disallowed the interest, citing that the land was not put to use. The respondent-assessee firm contended that the advances were made from internal accruals, not borrowed funds, and thus no disallowance was warranted. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, stating that the internal accruals were more than the investment made in the assets. The Tribunal upheld the CIT(A)'s decision, noting that there was sufficient internal accrual and no evidence was brought by the revenue to rebut this fact. 2. Deletion of Disallowance of Interest Liability on Unsecured Loans: The AO disallowed the interest paid on unsecured loans borrowed from relatives of the partners, considering it excessive. The CIT(A) found no evidence that the interest rate paid was higher than that paid to others and deleted the addition. The Tribunal confirmed this finding, emphasizing that no disallowance could be made based on mere suspicion without comparable evidence. 3. Deletion of Disallowance of Premium Paid on the Second Partner's Keyman Insurance Policy: The AO allowed the premium paid for one partner's keyman insurance policy but disallowed the premium for the second partner, citing a restriction to one partner. The CIT(A) disagreed, stating there is no restriction under the Income Tax Act limiting the deduction to one partner. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not dispute the allowability of the premium but misunderstood the law's provisions. 4. Deletion of Disallowance of Commission Paid to a Foreign Agent: The AO disallowed the commission of Rs. 4,97,300/- paid to Mr. Karl Neuchel for services rendered before the official start date of the contract. The CIT(A) deleted the disallowance, acknowledging that services were rendered throughout the year and payments were made through banking channels. The Tribunal agreed with the CIT(A), noting that the genuineness of the expenditure was established and the stipulation in the contract did not preclude payments for prior services. 5. Deletion of Disallowance of Building Repair Expenses: The AO treated Rs. 1,58,482/- out of total building repair expenses as capital expenditure. The CIT(A) allowed the deduction, stating that the expenditure did not result in the creation of an asset. The Tribunal upheld this decision, referencing the Supreme Court's principle that expenditures not resulting in asset creation should be allowed as revenue expenditure. 6. Deletion of Disallowance of Staff Welfare Expenses: The AO disallowed Rs. 1 lac out of staff welfare expenses. The CIT(A) reduced the disallowance to Rs. 50,000/-. The Tribunal found that the expenses were duly vouched and incurred for business purposes, and therefore, the disallowance was unjustified. The cross-objection by the respondent-assessee firm was allowed, and the entire disallowance was deleted. Conclusion: The appeal filed by the revenue was dismissed, and the cross-objection filed by the assessee firm was allowed. The Tribunal upheld the CIT(A)'s decisions on all grounds, emphasizing the principles of law and the genuineness of the expenditures incurred by the respondent-assessee firm. Order pronounced on 30.6.2015.
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