2019 (11) TMI 979 - AT - Income Tax

Disallowance of ad-hoc rate of 2% of certain expenses u/s 37(1) - HELD THAT - It is an undisputed fact that the assessee had furnished the requisite documents before the AO and produced the books of accounts. AO has proceeded to make a general statement about the expenses being not verifiable as some of the vouchers are self-made and they do not bear name and signature of the recipients. He on the basis of such surmises had concluded that the probability of the expenses for non-business purpose cannot be ruled out and accordingly, he disallowed ₹ 2% on aggregate amount on ad-hoc basis. We find that no instance of the expenses being for non-business purpose has been pointed out by the AO in the assessment order. Further, before us, Ld.A.R. has contended that no disallowance of expenses has been made either in subsequent years nor in earlier years. Considering the totality of the aforesaid facts, we are of the view that in the present case, no disallowance of expenses is called for - Ground of the assessee is allowed. Disallowance u/s 36(1)(iii) - Revenue s case that assessee has diverted borrowed funds to its sister concerns and for which no interest has been charged - HELD THAT - CIT(A) after considering the factual position has given a finding that assessee had sufficient interest free funds and it was not the case of diversion of funds to its sister concerns. To arrive at the aforesaid conclusion, Ld.CIT(A) also relied on the submissions of the assessee in the case of Reliance Utilities 2019 (1) TMI 757 - SUPREME COURT . Before us, no fallacy in the findings of Ld.CIT(A) has been pointed out. We therefore find no reason to interfere with the order of Ld.CIT(A). Thus, the grounds of Revenue are dismissed.

Summary

Issues:
1. Disallowance of expenses on ad-hoc basis under section 37(1) of the Act.
2. Disallowance of interest expenses under section 36(1)(iii) of the IT Act.

Issue 1: Disallowance of expenses on ad-hoc basis under section 37(1) of the Act:
The case involved cross-appeals by the assessee and Revenue arising from the Commissioner of Income-Tax (A) - Pune - 3's order for the assessment year 2013-14. The assessee, a Private Limited Company engaged in the transportation business, filed its return of income showing a loss. The Assessing Officer (AO) disallowed expenses on an ad-hoc basis, leading to an appeal by the assessee. The Income Tax Appellate Tribunal (ITAT) Pune considered the issue and found that the AO's disallowance lacked specific instances of non-business expenses. The ITAT noted that the assessee had provided necessary documents, and no disallowance was made in subsequent years. Consequently, the ITAT directed the deletion of the addition made by the AO, allowing the assessee's appeal.

Issue 2: Disallowance of interest expenses under section 36(1)(iii) of the IT Act:
The Revenue's appeal concerned the disallowance of interest expenses claimed by the assessee. The AO disallowed a proportionate amount of interest, alleging that the assessee had not demonstrated the business purpose of loans given to subsidiaries and a partnership firm. The CIT(A) deleted the addition, stating that the assessee had sufficient interest-free funds for the loans, and there was no diversion of interest-bearing funds. The Revenue contended that the borrowed funds were diverted, citing the Reliance Industries Ltd. case. However, the ITAT upheld the CIT(A)'s decision, finding no evidence of diversion and supporting the reliance on the Reliance Industries Ltd. case. Consequently, the ITAT dismissed the Revenue's appeal.

In conclusion, the ITAT allowed the assessee's appeal regarding the disallowance of expenses and dismissed the Revenue's appeal concerning the interest expenses. The judgments were pronounced on October 16, 2019.