2016 (12) TMI 1137 - AT - Income Tax

Disallowance of administrative expenses - Held that - From the record we found that the AO had wrongly disallowed 7/8th of the administrative expenses considering that the said expenses are incurred for the other 7 group companies mentioned in the order. The 7 group companies have their own business set up and functions independently, are separately assessed under the Income Tax Act and do not have any common business interest with the assessee. We found that expenses incurred for and on behalf of such companies aggregating to ₹ 45,91,976/- have been recovered from the said group companies. A statement showing the said recovery with a brief rational was submitted before the lower authorities. This shows that no part of the group companies expenses are included in the Profit & Loss account of the company which the learned DCIT has wrongly noted. We had also verified the break-up of the expenses included in the Administrative Expenses are fixed overheads in nature and irrespective of the volume / turnover of the company; it has to be incurred and cannot be reduced immediately. The Administrative expense are incurred based on the set up of the business and commercial expediency in the context of type of activity, business profile of the company and the volume of turnover / activity. We also found that during the year under consideration expenses have been reduced by 7% as compared to the expenditure of last year. Moreover, company s total income for the AY 2009-10 was ₹ 2.89 crores as per Profit and Loss Account which is more or less same as per last year. Disallowance of interest - interest attributable to funds given free of interest or given on interest but no interest on such advances were accounted for in the books of accounts - Held that - We have considered the rival contention and found that for not providing interest income on advances, no material was brought on record by assessee to substantiate that even principle amount is in doubt. In the interest of justice, we restore this issue back to the file of the AO to find interest free funds available with the assessee which has been used for giving interest free advances. Assessee is also directed to place on record the position of borrower so as to find out if the principle loan itself is in doubt, so as to justify assessee s claim of not accounting of interest on such advances. We direct accordingly.

Issues Involved:
1. Maintainability of Revenue's appeal based on the tax effect.
2. Disallowance of administrative expenses.
3. Disallowance of interest expenses.

Issue-wise Detailed Analysis:

1. Maintainability of Revenue's Appeal Based on the Tax Effect:

At the outset, the learned AR pointed out that the tax effect in the appeal filed by the Revenue is less than ?10 lakhs. Therefore, in view of the CBDT Circular No. 21/2015 dated 10.12.2015, the appeal is not maintainable. The Tribunal reviewed the orders of the authorities below and found that the tax amount in respect of the addition deleted by learned CIT(A) works out to be ?5,84,503/-. Consequently, following the CBDT Circular No. 21/2015, the appeal filed by the Revenue is not maintainable.

2. Disallowance of Administrative Expenses:

The assessee is aggrieved by the disallowance of administrative expenses amounting to ?3,99,62,011/-. The facts in brief are that the assessee, a company engaged in trading shares, securities, and finance, disclosed a total loss of ?7,55,82,608/- for the Assessment Year 2009-10. During assessment proceedings, the AO noted that the assessee debited administrative and other expenses of ?4,79,54,413/- in the P&L account. The AO, after deputing a ward inspector and reviewing the office premises and employee distribution, allowed only 1/8th of the administrative expenses, resulting in a disallowance of ?4,19,60,112/-.

The learned CIT(A) partly allowed the assessee’s claim by considering several factors, such as the reimbursement of ?45 lakhs from other companies and the non-functional status of two group companies during the year. The CIT(A) directed the AO to reallocate the expenses among the remaining six companies and allow further reimbursement of expenses to the extent of ?45,91,976/-.

The Tribunal found that the total administrative expenses incurred by the group company amounted to ?22.02 crores, with the assessee debiting ?4.79 crores and recovering ?45.91 lakhs from the group company. The Tribunal noted that the AO wrongly disallowed 7/8th of the administrative expenses, considering the group companies have independent business setups and are separately assessed under the Income Tax Act. The Tribunal verified that the administrative expenses were fixed overheads and necessary irrespective of the company's volume or turnover. The Tribunal concluded that there was no justification for the disallowance made by the AO.

3. Disallowance of Interest Expenses:

The assessee also contested the disallowance of interest expenses amounting to ?1,64,86,521/-. The AO observed that the assessee's total borrowed capital as of the Balance Sheet date was ?4702.85 lakhs, with a total interest expenditure of ?379,81,170 claimed. The AO noted that the assessee did not charge interest on certain advances and proceeded to disallow interest expenditure to the extent of interest chargeable on such loans and advances.

The learned AR argued that the concept of "real income" based on commercial principles should be considered, and revenue recognition should be postponed in cases of uncertainty. The AR relied on the decision of the Hon'ble Delhi High Court in Vasisth Chay Vyapar Ltd. (330 ITR 440), where it was held that interest on non-performing assets should not be recognized as income if it is not realizable.

The Tribunal considered the rival contentions and judicial pronouncements. It found that the AO disallowed interest attributable to funds given interest-free or on interest but not accounted for in the books. The Tribunal noted that no material was provided by the assessee to substantiate the claim that the principal amount was in doubt. In the interest of justice, the Tribunal restored the issue to the AO to verify the availability of interest-free funds used for giving interest-free advances and the status of the borrower to determine if the principal loan itself was in doubt. The AO was directed to decide the matter afresh, considering all relevant documents and judicial pronouncements.

Conclusion:

In the result, the appeal of the assessee was allowed in part, whereas the appeal of the Revenue was dismissed. The order was pronounced in the Court on 21/10/2016.

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