2020 (3) TMI 1109 - AT - Income Tax

Disallowance u/s 36(1)(iii) - interest free advances to its sister concern - diversion of funds - HELD THAT - Assessee has borrowed interest bearing funds and claimed the corresponding interest as expenditure. It advanced interest free loan to subsidiary concern but has not established the commercial expediency on the transaction with its sister concern. The assessee has not placed any material even before us to prove that the impugned transaction was undertaken on commercial consideration. Therefore,we uphold the disallowance made by the A.O. and sustained by the learned CIT(A) subject to verification as directed by the learned CIT(A). Therefore,the corresponding grounds of the assessee on this issue fail. Addition u/s 40A(3) - Proof of single payment,which is exceeding ₹ 20,000/- - HELD THAT - Expenditure incurred under the head Pooja expenses , gift purchases for Ayudha pooja,cash purchases,Sivaranjini Contractor ,could be allowed as business expenditure,towards which incurring of cash expenditure could be justified. Therefore,we direct the A.O. to allow these expenses. With regard to payments made under the following heads,Rajshree Associates-labour contractors,Emmkay Associates-labour contractors,Pachyappan-Masonary,Sivaranjini Contractor,Shanugam-centring,since the assessee is not able to establish that these payments did not attract the provisions of section 40A(3) we are of the view that disallowances made by the A.O. and as sustained by the learned CIT(A) under this heads do not require any disturbances and hence,such disallowances are confirmed. Thus,the corresponding grounds are treated as partly allowed on this issue. Donations disallowance u/s 37 - HELD THAT - We find that the assessee has incurred the impugned expenses wholly and exclusively for the purpose of business and hence,the disallowance made by the A.O is not warranted. Therefore,we direct the A.O to allow the expenses claimed by the assessee under Section 37 of the Act. Corresponding grounds of the assessee are allowed.

Summary

Issues involved:
1. Disallowance of interest-free advances to sister concern under Sections 36(1)(iii) and 40A(3) of the Income Tax Act, 1961
2. Disallowance of specific expenditures under Section 40A(3) of the Act
3. Disallowance of donations under Section 37 of the Act

Issue 1: Disallowance of interest-free advances to sister concern under Sections 36(1)(iii) and 40A(3) of the Income Tax Act, 1961

The appellant, engaged in construction and flat promotion, appealed against disallowances made by the Assessing Officer under Sections 36(1)(iii), 40A(3), and donations under Section 37 for the assessment year 2015-16. The appellant argued that interest-free advances to its sister concern were solely for business benefit. However, the Assessing Officer found that diverting interest-bearing funds to the subsidiary without charging interest was not justifiable. The lower authorities upheld the disallowance, citing lack of commercial expediency in the transaction. The tribunal agreed with the disallowance, noting the absence of proof of commercial consideration in the transaction with the sister concern.

Issue 2: Disallowance of specific expenditures under Section 40A(3) of the Act

The Assessing Officer identified various expenditures for disallowance under Section 40A(3), including Pooja expenses, gift purchases, and payments to labor contractors. The appellant argued that these expenses were incurred for business purposes and should be allowed. The tribunal directed the AO to allow certain expenses like Pooja expenses, gift purchases, and cash purchases, considering them as justified business expenditures. However, payments to specific contractors were not adequately justified, leading to the confirmation of disallowances made by the AO and CIT(A) under those heads.

Issue 3: Disallowance of donations under Section 37 of the Act

The Assessing Officer disallowed a donation made by the appellant, citing lack of evidence. The appellant claimed that the donations were made for business purposes, including advertisement fees and contributions to a recognized institution. The tribunal found that the donations were indeed made for business reasons and directed the AO to allow these expenses under Section 37 of the Act. Consequently, the tribunal allowed the corresponding grounds of the appellant related to the disallowance of donations.

In conclusion, the tribunal partially allowed the appeal of the appellant, upholding certain disallowances while directing the AO to allow justified business expenditures and donations. The judgment emphasizes the need for commercial expediency and proper documentation to support transactions and expenses claimed for tax purposes.