2015 (10) TMI 70 - AT - Income Tax

Disallowance under section 40A(3) - payments made against purchase of traded goods exceeding ₹ 20,000 - Held that - Assessee s claim is not covered by any of the exceptions provided under rule 6DD. However, the first proviso below section 40A(3) clearly takes into consideration the nature of expenses, banking facilities, consideration of business expediency and other relevant factors. Rule 6DD in intent and purpose takes into consideration all these aspects for prescribing various exceptional circumstances. Therefore, rule 6DD cannot be mechanically applied and we have to consider the overall explanation of the assessee having regard to the business consideration (the assessee s explanation is that the assessee had no bank account at Cuttack and seller was insisting for cash payments. The payments had been made to the seller because of that reason. The genuineness of the purchases had not been doubted by the Assessing Officer. Under such circumstances, we are of the opinion that the disallowance of these expenses by applying to section 40A(3) would not be justified. - Decided in favour of assessee. Charge of interest on interest-free loan to another business concern - Held that - If the assessee is able to substantiate its claim, that the advance was given out of its own funds, then no addition is called for. It is well-settled law that if the assessee has advanced interest-free loan out of its own funds, then no disallowance can be made under section 36(1)(iii) of the Act. We find this aspect has not been examined by the lower revenue authorities and, therefore, we restore the matter to the file of the Assessing Officer to decide the issue de novo in the light of our observations. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance under section 40A(3) of the Income-tax Act.
2. Disallowance of interest on interest-free loan.

Analysis:
1. Disallowance under section 40A(3):
The appeal was against the order of the Commissioner of Income-tax for the assessment year 2008-09. The Assessing Officer disallowed payments made for purchase of goods exceeding Rs. 20,000 under section 40A(3). The appellant argued that the payments were made due to seller's demand for cash, as there was no bank account in Cuttack. The Commissioner upheld the disallowance, stating that the exceptional circumstances under rule 6DD were not proven. However, the Appellate Tribunal found that the nature of expenses, banking facilities, and business expediency should be considered. As the purchases were genuine and made due to lack of a bank account, the disallowance under section 40A(3) was deemed unjustified. The Tribunal set aside the Commissioner's order on this ground.

2. Disallowance of interest on interest-free loan:
The appellant had given an interest-free loan to a business concern owned by his wife. The Assessing Officer disallowed interest on the outstanding loan amount, stating lack of business nexus between the two concerns. The Commissioner confirmed the disallowance, citing lack of commercial expediency. The appellant argued that the loan was given from interest-free funds, supported by the balance sheet. The Tribunal noted that if the loan was indeed from the appellant's own funds, no disallowance could be made under section 36(1)(iii). As this aspect was not properly examined, the matter was remanded to the Assessing Officer for a fresh decision. Consequently, the appeal was allowed for statistical purposes.

In conclusion, the Appellate Tribunal found in favor of the appellant on both issues, setting aside the disallowances under section 40A(3) and interest on the interest-free loan. The Tribunal emphasized the importance of considering business expediency and the source of funds in such cases, directing a reevaluation by the Assessing Officer for the interest-free loan issue.