2015 (12) TMI 193 - AT - Income Tax

Disallowance of sampling expenses - CIT(A) allowed claim - Held that - The Assessing Officer was not convinced with the level of sampling expense incurred vis-a-vis the amount incurred in the preceding assessment year. In our considered opinion, the variation in the level of expenses, vis-a-vis an earlier year can be a ground to further investigate the matter, but the same by itself cannot be a ground to disallow any expenditure, specially, without bringing on record any infirmity or falsity in the claim made by the assessee. In the present case, in our view, the CIT(A) made no mistake in deleting the disallowance made by the Assessing Officer , which was essentially an adhoc disallowance bereft of any factual support. Thus, on this aspect we affirm the order of CIT(A) and Revenue fails. - Decided in favour of assessee. Disallowance on account of interest expenditure under section 36(1)(iii) - CIT(A) allowed claim - Held that - The Annual Financial statements of the assessee, clearly bring out the nature of the advances to the sister concerns, being trade advances. The assessee company had pointed out before the CIT(A) that the amount advanced to M/s. Premier Knit Processors Pvt. Ltd. was for purchasing yarn of requisite quality and getting garments manufactured at various factories at Tirupur for supplying to the assessee. It was also pointed out that the said concern was providing dyeing services to the assessee. It was pointed out that due to such arrangement, assessee s job orders got priority from M/s. Premier Knit Processors Pvt. Ltd. and, therefore, there was a measure of commercial expediency in making such advances. Further, with regard to the advance of ₹ 83,41,385/- to M/s. Kaytee Apex Ltd., it was explained that the amount was advanced for setting-up stitching facility at Tirupur, which was exclusively provided to the assessee. Therefore, such loan was for the ultimate advancement of the assessee s business operations as it facilitated timely delivery and quality of products, which was crucial for meeting the export obligations. These aspects have been appreciated by the CIT(A), and in our view, there is no cogent material before us, which would require us to distract from ultimate finding of the CIT(A).- Decided in favour of assessee. Unexplained investment in shares - CIT(A) allowed claim - Held that - The assessee explained that all investments except to the extent of ₹ 50,000/-, were made in the past years and there was no disallowance out of interest expenditure in the past years. On this aspect also, we find no reason to interfere with the decision of the CIT(A) in deleting the disallowance, as no nexus can be established between the interest bearing funds and the investment in shares. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of sampling expenses
2. Disallowance of interest attributable for investment in shares

Disallowance of Sampling Expenses:
The appeal pertains to the disallowance of sampling expenses amounting to Rs. 35,04,272 by the Assessing Officer. The respondent-assessee, engaged in garment trading and manufacturing, explained the increased expenses due to innovative designs for customer approval. The CIT(A) deleted the disallowance citing lack of evidence proving the expenses as bogus. The Revenue appealed, arguing the absence of evidence during assessment. The Tribunal held that variation in expenses from the previous year does not justify disallowance without factual support. The CIT(A)'s decision was upheld as the disallowance lacked factual basis.

Disallowance of Interest Attributable for Investment:
The second issue concerns a disallowance of Rs. 16,44,647 on interest expenditure by the Assessing Officer. The disallowance was based on investments in shares and interest-free loans to sister concerns. The CIT(A) upheld the assessee's stance, citing commercial expediency and adequate funds to cover advances. The Revenue challenged this decision, arguing for disallowance under section 36(1)(iii) of the Act. The Tribunal, after reviewing submissions and financial statements, affirmed the CIT(A)'s findings. It noted the trade nature of advances to sister concerns and lack of nexus between interest-bearing funds and share investments. Consequently, the CIT(A)'s decision to delete the disallowance was upheld, and the appeal of the Revenue was dismissed.

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