2019 (12) TMI 598 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - excessive interest - AO allowed interst @14.75% against the claim @15% and 16% - addition by further invoking the provisions of section 40A(2)(a) - HELD THAT - Unsecured loans were without any security and were continuing for the past more than 2-3 years and during the year there was no change of rate of interest, it was further submitted that the rate of interest was commensurate with the risk, need for funds, non-availability of bank loan, etc. It was also submitted that the bank loans were just one of the various options available to raise funds but taking loan from bank involves various factors such as lengthy application process, long list of pre-requisites to qualify for the loan and also involve collateral security whereas all the factors were not involved in the case of unsecured loans. CIT (Appeals) has ignored this submission of the assessee. Commissioner of Income-tax (Appeals), though noted the above submissions in his order but confirmed the addition by further invoking the provisions of section 40A(2)(a) of the Act. The action of the learned Commissioner of Income- tax (Appeals) is not as per law therefore, we allow ground No. 2 of the appeal Ad hoc disallowance - Expenditure incurred in cash - HELD THAT - AO has made the disallowance simply by holding that a perusal of bills and vouchers reveals that most of these expenses were incurred in cash and hence has disallowed 10 per cent. out of various expenses. AO has nowhere pointed out any specific discrepancy in the books of account nor has he rejected the same. In our opinion, the Assessing Officer cannot make ad hoc disallowance specifically in view of the case law relied on by the learned authorised representative. See ASHOK SURANA VERSUS COMMISSIONER OF INCOME-TAX 2016 (6) TMI 696 - CALCUTTA HIGH COURT

Summary

Issues:
1. Enhanced scope of enquiry in a limited scrutiny case.
2. Disallowance of interest on unsecured loans.
3. Ad hoc disallowances of various expenses.
4. Contravention of principles of natural justice and equity.

Enhanced Scope of Enquiry:
The appeal was filed against the order of the Commissioner of Income-tax (Appeals) regarding the assessment year 2014-15. The appellant contended that the Commissioner erred in upholding the enhanced scope of enquiry by the Assessing Officer in a limited scrutiny case, contrary to CBDT Instruction No. 20 of 2015. The Commissioner clarified it as an administrative matter, not grounds for quashing the assessment.

Disallowance of Interest on Unsecured Loans:
The appellant challenged the disallowance of interest on unsecured loans by the Assessing Officer, claiming the rate was justified due to the nature of private loans. The Commissioner upheld this disallowance, but the ITAT found the Commissioner's decision contrary to law, allowing the appeal on this ground.

Ad Hoc Disallowances of Various Expenses:
The Assessing Officer made ad hoc disallowances on travelling, general, telephone, and car expenses without specific discrepancies in the books of account. The ITAT held that such disallowances without evidence of discrepancies were unjustified, citing relevant case law that expenses should be allowed when appropriate evidence is provided.

Principles of Natural Justice and Equity:
The appellant argued that the Commissioner's order was insupportable in law and contrary to natural justice and equity. The ITAT partially allowed the appeal, finding in favor of the appellant on grounds related to interest on unsecured loans and ad hoc disallowances of expenses.

This judgment highlights the importance of adhering to legal provisions and case law in making assessments, emphasizing the need for specific evidence before disallowing expenses. It also underscores the significance of maintaining fairness and equity in tax proceedings.