2019 (3) TMI 627 - AT - Income Tax

Disallowance on account of diversion of the fund - interest expenses - HELD THAT - M/s Goyal & Co was having a similar contract with M/s Anshul associates. In the case of M/s Anshul associates the ITAT was pleased to delete the addition made by the AO. As the facts of the case on hand are identical to the facts of the case as discussed above, we respectfully following the same reverse the order of authorities below. Thus we set aside the order of CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Disallowance of wooden material expenses - HELD THAT - There remains no ambiguity that there was any evasion of taxes. Therefore in our considered view, the disallowance cannot be made under the provision of Rule 40(A)(2)(b) of the Act. The genuineness and the business connection of wooden expenses have not been doubted by the authorities below. Therefore we can safely hold that the expenses were incurred in connection with the business of the assessee. In view of the above, we set aside the order of the Ld. CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Addition of the other material expenses - HELD THAT - The assessee incurred the expenses in the earlier assessment year which were carried forward to the year under consideration. We note that there was no such disallowance made by the authorities below in the immediately preceding assessment Year. Therefore we are of the view the opening balances which have been carried forward from the earlier Years cannot be disturbed in the year under consideration. We also note that genuineness and the business connections of the expenses have not been doubted. The only reason for the disallowance is that these expenses are not in pursuance to the joint development agreement. Thus such expenses were either to be allowed to the assessee or Goyal & Co. and both the companies are paying the tax at the same rate. Therefore, respectfully following the reasoning as given in the preceding ground no. 2 Para 14 of this order, we reverese the order of the authorities below. Thus we set aside the order of the ld. CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Disallowance of miscellaneous work expenses - HELD THAT - The expenses were incurred in the immediately preceding assessment year cannot be ignored. It is because the expenses were accepted by the Revenue in the earlier assessment year which was brought to the under consideration as the opening balance. It is established law that the closing balance of one year becomes the opening balance of the next year. Therefore the opening balance brought forward from the earlier year cannot be disturbed in the year under consideration. Accordingly, we are not inclined to uphold the finding of the authorities below. Thus we set aside the order of the Ld. CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

Issues Involved:
1. Disallowance of interest expenditure.
2. Disallowance of wooden work expenses.
3. Disallowance of other material expenses.
4. Disallowance of miscellaneous work expenses.
5. Non-direction for charging interest under sections 234A, 234B, and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure:
The first issue raised by the assessee pertains to the disallowance of ?11,32,288/- on account of diversion of funds. The assessee, a partnership firm engaged in building projects, entered a joint development agreement with M/s Goyal & Company, where the assessee was to receive 21 flats and Goyal & Company 23 flats. The AO observed that Goyal & Company received all sale proceeds first and transferred the assessee's share after a significant delay without charging interest. The AO disallowed the proportionate interest amounting to ?11,32,288/-. The CIT(A) upheld this disallowance, but the ITAT reversed this decision, citing a similar case (CIT Vs. M/s Ansul Associates) where such disallowance was deleted. The ITAT directed the AO to delete the addition, allowing the assessee's appeal.

2. Disallowance of Wooden Work Expenses:
The second issue concerns the disallowance of ?16,63,880/- for wooden work expenses. The AO disallowed these expenses, arguing they were not authorized under the joint development agreement. The CIT(A) upheld this disallowance. However, the ITAT noted that the assessee provided sufficient evidence, including engineer certificates and bills, supporting the expenses. It also highlighted that the assessee and Goyal & Company were taxed at the same rate, implying no revenue loss. Following the precedent set in the case of M/s Anshul Associates, the ITAT directed the AO to delete the addition, allowing the assessee's appeal.

3. Disallowance of Other Material Expenses:
The third issue involves the disallowance of ?8,89,664/- for other material expenses like chemicals and small pipes. The AO disallowed these expenses, claiming they were not incurred as per the joint development agreement. The CIT(A) upheld this disallowance. The ITAT, however, noted that these expenses were genuine, incurred for business purposes, and carried forward from the previous year. It emphasized that the expenses were not doubted for their reasonableness or business connection. The ITAT directed the AO to delete the addition, allowing the assessee's appeal.

4. Disallowance of Miscellaneous Work Expenses:
The fourth issue pertains to the disallowance of ?12,93,300/- for labor charges. The AO disallowed these expenses, questioning their authorization under the joint development agreement and their genuineness. The CIT(A) upheld this disallowance. The ITAT acknowledged that these expenses were incurred in the previous year and carried forward as opening balances. Despite the AO's claim of self-generated vouchers, the ITAT noted that these expenses were accepted in the earlier year, thus should not be disturbed in the current year. The ITAT directed the AO to delete the addition, allowing the assessee's appeal.

5. Non-direction for Charging Interest under Sections 234A, 234B, and 234C:
The fifth issue raised by the assessee was regarding the CIT(A)'s failure to direct the AO for charging interest under sections 234A, 234B, and 234C of the Income Tax Act. However, the detailed analysis and decision on this issue were not provided in the judgment.

Conclusion:
In conclusion, the ITAT allowed the appeal filed by the assessee, directing the AO to delete the additions made for disallowance of interest expenditure, wooden work expenses, other material expenses, and miscellaneous work expenses. The ITAT's decision was based on the genuineness of the expenses, their connection with the business, and the precedent set in similar cases. The judgment was pronounced on 01/01/2019 at Ahmedabad.

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