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2019 (9) TMI 599 - AT - Income TaxAddition u/s 68 - Loans taken from non-resident Indians - HELD THAT - Assessee has discharged his duties imposed u/s 68 of the Act by establishing the identity of the lenders, the genuineness of the transactions and creditworthiness of the lenders. Assessee has taken a loan in the assessment year 2005- 06 from Shri Shushibhai Patel which was not doubted by the Revenue in the assessment proceedings framed under section 143(3) of the Act. Thus it is clear that the Revenue doubted the loan taken by the assessee in the year under consideration whereas the Revenue did not doubt the loan taken by the assessee from the same party in the subsequent year. Thus it is clear that the Revenue has taken the contradictory stand in two different assessment years. Lenders are non-resident Indians and the loan was given to the assessee out of the NRE accounts. This fact has not been doubted by the authorities below. It is an established the fact that the income in an NRE account can be deposited only from the foreign countries. The fund cannot be deposited in NRE accounts from India. No allegation of the Revenue that the assessee has provided funds from his unaccounted fund to the lenders to get its unaccounted fund in the accounting form. In the absence of any adverse remarks by the Revenue on this issue lenders have provided funds to the assessee out of their sources generated by them. Loan taken by the assessee in the instant case as discussed above cannot be treated as unexplained cash credit under section 68 - Decided in favour of assessee Addition in respect of bad debts written-off - no ambiguity that any advance given by the assessee in the course of the business can be written off in the books of accounts and the assessee is entitled to the deduction either under section 37(1) or section 28 - claim of the assessee was denied due to non-furnishing of supporting evidence by the assessee - HELD THAT - From the preceding discussion, we find a contradiction in the submission of the assessee before the Ld. CIT(A) vis a vis the finding of the Ld. CIT(A). We also find that the Ld. Counsel for the assessee had not furnished the copies of the ledgers of the parties in the paper book filed before us to whom the assessee provided the trade advances. The facts of the dispute are not clear as discussed above from the order of authorities below. But we note that the onus lies on the assessee to justify its claim by the documentary pieces of evidence that these advances were in the course of the business. However, the assessee failed to do so. Accordingly, we are inclined to hold that there is no infirmity in the order of authorities below. Hence the ground of appeal of the assessee is dismissed. Ad-hoc disallowances for sales promotion expenses - HELD THAT - Expenses incurred by the assessee under the head sales promotion cannot not be disallowed on an estimated basis. Hence we 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. Ad-hoc disallowance for vehicle and telephone expenses - HELD THAT -The basis adopted by the assessee for the purpose of the disallowance was not disputed by the authorities below. In our considered view the authorities below before making any further disallowance of the expenses described above on account of personal use of the assessee should have rejected the disallowance made by the assessee at its own with cogent reasons. As such we note that no defect was pointed out by the authorities below in the disallowance made by the assessee. We conclude that the expenses incurred by the assessee as discussed above cannot be disallowed on an estimated basis. Hence we reverse the order of authorities below. Thus we set aside the order of Ld. CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Ad-hoc disallowance for traveling and conveyance expenses - HELD THAT - Onus lie on the assessee to prove that the expenses were incurred wholly and exclusively for the purpose of the business. But the assessee in the case before us failed to do so. Therefore we justify the disallowances made by the authority below. Hence the ground of appeal of the assessee is dismissed. Nature of expenses - treating the trademark expenses as capital expenditure - HELD THAT - It is an undisputed fact that the trademark represents the intangible assets of the company and duly covered within the definition of assets as provided under section 32 of the Act. Therefore we are of the view that the expenditure incurred on the registration of the trademark cannot be treated as revenue in nature. See L T DEMAG PLASTICS MACHINERY (P) LIMITED. VERSUS INCOME TAX OFFICER. 2009 (1) TMI 299 - ITAT BOMBAY-J - thus we hold that the expenditure incurred in connection with the registration of trademark represents the intangible assets. - decided against assessee. Disallowance of interest expenses u/s.36(1)(iii) - assessee claimed that the advances were given during the normal business transaction, out of internal accruals and it was for a very short period, therefore no interest was charged on such advances - HELD THAT - The assessee has not produced any documentary of evidence suggesting that these advances made to the parties are representing the business transactions. Therefore in the absence of any documentary evidence, we concur with the finding of the lower authorities and justify the disallowance. There was not sufficient own fund available with the assessee to make such interest-free advance. Thus it is clear that interest-bearing fund has been diverted by the assessee for interest-free advances. Therefore in our considered view the interest claimed as a deduction to the extent of the funds diverted for interest-free advances will be disallowed under the provisions of section 36(1)(iii) of the Act. - Decided against assessee Ad-hoc disallowance for factory and welfare expenses - HELD THAT - AO in his assessment order has noticed that these expenditures were incurred on lunch, biscuits, snacks, tea, etc. The nature of the expenses suggest that the assessee incurred these for the staff welfare and to keep the conducive working environment in the company - even if the staff or the partners obtain some personal advantage, then also it will be in nature of maintaining good relations with officers and in nature of staff welfare expenses. These expenses were incurred to keep the staff happy and active so that there should be better performance of the staff. However, the assessee must maintain supporting evidence to justify that these expenses do not fall in the category of personal expenses. Assessee has claimed almost similar expenses in the immediately preceding and succeeding assessment year. There can be negligible difference in the quantum of the expenses comparing to the turnover of the business of the assessee in all the years. There was no specific instance referred by the authorities below suggesting that the impugned expenses were in the nature of personal expenditure. Therefore we are not inclined to uphold the finding of the authorities below. Accordingly, we reverse the same. - Decided in favour of assessee.
Issues Involved:
1. Addition under Section 68 of the Income Tax Act. 2. Addition in respect of bad debts written-off. 3. Ad hoc disallowance of sales promotion expenses. 4. Ad hoc disallowance of vehicle and telephone expenses. 5. Ad hoc disallowance of traveling and conveyance expenses. 6. Treatment of trademark expenses as capital expenditure. 7. Disallowance of interest expenses under Section 36(1)(iii). 8. Ad hoc disallowance of factory and welfare expenses. 9. Alleged breach of law and principles of natural justice. 10. Levying interest under Section 234A/B/C. 11. Initiation of penalty proceedings under Section 271(1)(c). Issue-wise Detailed Analysis: 1. Addition under Section 68 of the Income Tax Act: The assessee, a partnership firm in the pharmaceutical business, took loans from two non-resident Indians (NRIs). The AO treated the loans as unexplained cash credits due to doubts about the confirmation letters and lack of evidence for the lenders' identity, genuineness, and creditworthiness. The CIT(A) upheld this view. However, the Tribunal found that the assessee provided sufficient documentation, including bank statements and PAN details, proving the identity and genuineness of the transactions. The Tribunal also noted that the funds were from NRE accounts, implying foreign income. Thus, the Tribunal directed the AO to delete the addition, allowing the assessee's appeal on this ground. 2. Addition in respect of bad debts written-off: The assessee wrote off bad debts amounting to ?33,594 but failed to provide supporting evidence to the AO. The CIT(A) confirmed the AO's disallowance, noting the lack of proof that these were trade advances given in the course of business. The Tribunal upheld the CIT(A)'s decision, emphasizing the assessee's failure to substantiate the claim with documentary evidence, thereby dismissing the assessee's appeal on this ground. 3. Ad hoc disallowance of sales promotion expenses: The AO disallowed 50% of the sales promotion expenses, deeming them exorbitant and unverifiable as they were incurred in cash. The CIT(A) reduced the disallowance to 20%. The Tribunal, however, held that the expenses were incurred for business purposes and should not be disallowed merely because they were paid in cash. The Tribunal reversed the CIT(A)'s decision, directing the AO to delete the disallowance, thus allowing the assessee's appeal on this ground. 4. Ad hoc disallowance of vehicle and telephone expenses: The AO disallowed 20% of the vehicle and telephone expenses, assuming personal use. The CIT(A) upheld this disallowance due to the absence of logbooks and call details. The Tribunal found that the assessee had already disallowed a portion of these expenses for personal use and that the AO did not dispute this. Therefore, the Tribunal reversed the CIT(A)'s decision and directed the AO to delete the additional disallowance, allowing the assessee's appeal on this ground. 5. Ad hoc disallowance of traveling and conveyance expenses: The AO disallowed 20% of these expenses, suspecting personal use. The CIT(A) reduced the disallowance to 10%. The Tribunal upheld the disallowance, noting the assessee's failure to prove that the expenses were incurred solely for business purposes, thereby dismissing the assessee's appeal on this ground. 6. Treatment of trademark expenses as capital expenditure: The AO treated the trademark registration expenses as capital expenditure, which the CIT(A) confirmed. The Tribunal upheld this view, citing that trademark expenses create an intangible asset, thus capital in nature. The assessee's appeal on this ground was dismissed. 7. Disallowance of interest expenses under Section 36(1)(iii): The AO disallowed interest expenses proportionate to interest-free advances given by the assessee, as there was no evidence these were business-related. The CIT(A) upheld this disallowance. The Tribunal agreed with the lower authorities, noting the assessee's lack of own funds and failure to prove business necessity, thereby dismissing the assessee's appeal on this ground. 8. Ad hoc disallowance of factory and welfare expenses: The AO disallowed 20% of these expenses, suspecting personal use. The CIT(A) reduced the disallowance to 10%. The Tribunal found no specific defects in the expenses and noted their business necessity. Hence, the Tribunal reversed the CIT(A)'s decision and directed the AO to delete the disallowance, allowing the assessee's appeal on this ground. 9. Alleged breach of law and principles of natural justice: The Tribunal did not find specific grounds for this issue requiring adjudication. 10. Levying interest under Section 234A/B/C: The Tribunal did not find specific grounds for this issue requiring adjudication. 11. Initiation of penalty proceedings under Section 271(1)(c): The Tribunal did not find specific grounds for this issue requiring adjudication. Conclusion: The Tribunal partly allowed the appeal, providing relief on several grounds, particularly where the expenses were deemed necessary for business operations and adequately substantiated. The Tribunal emphasized the importance of documentary evidence to substantiate claims and disallowed arbitrary disallowances without specific defects.
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