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2020 (9) TMI 32 - AT - Income TaxDisallowance of commission expenses - AO was of the opinion that the assessee has not made any commission expenses to arrange buyers for sale of iron ores - CIT(A) deleted the disallowance - HELD THAT - DR could not point out any specific error, ambiguity or perversity in the findings of the CIT(A) that at times commission agent when approaches the purchasers, he does not identify himself as an agent of the seller and merely identifying himself as representative of the seller, the buyer cannot be aware that the person who has approached is employee of the seller or agent of the seller. CIT(A) observed that the commission may be paid to an agent for facilitating the trade even when the orders are directly given to the seller(assessee) by the purchaser - Non-service of letters to the buyers or non-compliance of the letters by the buyers does not show that the payment of commission was not genuine when the relative sale was considered genuine and accepted by the department. Further, non Smt. furnishing of the name of the buyers by agent in compliance to the notice does not necessarily mean that the agent is not aware of the buyers. In no situation commission can be earned by a person like HUF is also not tenable. We find that no material could be brought before us to show that the person to whom commission was paid were accommodation/entry provider and the money which was paid through banking channel to them came back to the assessee in cash or through any other mode. In the circumstances, in the absence of any specific defect being pointed out in the order of the CIT(A), we find no good reason to interfere with the findings recorded by the ld first appellate authority - Decided against revenue. Addition under the head punitive charges - AO required the assessee to furnish the details of such expenses with documentary evidence and same should not be disallowed being an expenditure not allowable u/s. 37 - CIT(A) deleted the addition - HELD THAT - Punitive charges is against overloading charges in the rake.punitive charges for overloading were actually in the nature of additional freight for transporting goods beyond the permissible carrying capacity which cannot be categorized as an expenditure incurred for any purpose which is an office or infringement of law. We also find that after considering the detailed submissions, the CIT(A) took the view that payment in question was compensatory in nature and was made towards extra or overloading bringing extra benefit for assessee in the form of transportation of extra goods or material, which cannot be tagged as penal and therefore the provision to Explanation to Section 37(1) of the Act will not be applicable. - Decided against revenue. Addition of interest - AO noticed that the assessee has given interest free loans and advances to related parties - CIT(A) deleted the addition - HELD THAT - When, the assessee has interest bearing funds as also other (i.e. interest free huge capital or own funds) then until unless it can be established by way of cogent material or facts that the assessee has advanced interest free loans out of interest bearing funds, the interest paid on the borrowed funds cannot be disallowed - mere fact that the assessee is paying interest on its borrowings and the assessee has also given interest free loans or advances , by itself, does not entitle the AO for making disallowance of interest so paid on the flimsy ground that the borrowed funds have been used for business purposes without any cogent adverse material or evidence proving the utilisation of interest bearing funds for the purpose of advancing interest free loans/advances. CIT(A) referred to the decision HDFC Bank 2014 (8) TMI 119 - BOMBAY HIGH COURT held that where the assessee s capital, net profit, reserves, surplus and current account deposits are higher than the investment in tax free security, it would have to be presumed that the investment made by the assessee would be out of interest free funds available with the assessee. CIT DR could not controvert that the claim of the assessee that she has total capital of ₹ 441.11 crores as on 31.3.2012. Therefore, we uphold and confirm the findings of the ld CIT(A) dismissing the ground of revenue. Disallowance of peripheral development charges - AO made addition by observing that he is unable to verify as to whether periphery development charge is the expenditure incidental to the business and must have been necessitated or justified by commercial expediency or not in the case of the assessee - CIT-A deleted the addition - HELD THAT -Assessee informed the name of contractor, who was paid the impugned amount for upgradation of roads in the periphery area i.e. M/s. Keonjhar Infrastructure Dev. Company Ltd. On receipt of above explanation, the AO without pointing out any defect in the quantum of expenses spent by the assessee and mode of payment adopted by the assessee for making payment and without verifying from the recipient contractor regarding receipt of payment and rendering of services towards upgradation of roads proceeded to make disallowance and addition. AO was duty bound to issue show cause notice to the assessee and if he was not satisfied with the reply, he could have issued notice to the recipient contractor who was paid the impugned the amount regarding the work of upgradation or construction of roads on the direction of the assessee in the periphery area of the mines owned by the assessee but no such exercise had been undertaken. Therefore, the allegation made by the AO that the assessee has failed to justify the expenses without evidences/documents has no legs to stand. - Decided in favour of assessee. Disallowance of donation - Donation for scientific research as per the provision of section 35(1) - as argued assessee has made donation out of her hard earned tax paid money with genuine benevolence to help the organisation doing yeomen service - HELD THAT - Office bearers of school have stated during the course of survey operation u/s.133A of the Act on 27.1.2015 accepted that the donations are received through agents and refunded the donation to the respective donors in exchange of 7% to 8% commission. CIT(A) rightly observed that from the statement of office bearers of donee organisation/school, it is seen that they have given generalised statement and nowhere the donation given by the assessee was refunded back to the assessee in cash. At the same time, we also note that the assessee has submitted certain statement before the authorities below, which shows that the assessee has verified the genuineness of the approval obtained by the school for the purpose of section 35(1) from the competent authority and only thereafter has given the donation for scientific research. We are in agreement with the findings of the ld CIT(A) that there is no evidence brought on record to show that the assessee has got back the donation money from the school on payment of commission, therefore, the donation cannot be treated as bogus. At the time of granting donation, the assessee was very much aware that the donee institution was enjoying the status of scientific research organiasation/insrtitution eligible for receiving donation u/s.35(1) of the Act and, therefore, we are unable to see any ambiguity and perversity in the findings of the ld CIT(A). Disallowance u/s 14A - Non recording of satisfaction - HELD THAT - While rejecting the claim of the assessee in regard to suo moto disallowed expenditure or no expenditure, as the case may be, in relation to exempt income, the AO has to indicate cogent reason for the same and for recording such cogent reasons, it is required that the AO has to examine the accounts of the assessee first and then if he is not satisfied with the correctness of such claim, only then he can invoke the provisions of section 14A of the Act r.w Rule 8D of the I.T.Rules. in the present case, as we have discussed above, that neither from the assessment order nor from the first appellate order, the authorities below have not considered the claim of the assessee that no expenditure has been incurred for earning exempt income as per mandate of section 14A From the relevant part of the assessment order, it is clearly discernible that the AO has not considered the claim of the assessee filed in response to the show cause notice that no expenditure has been incurred for earning exempt income and he straightforward embarked upon and jumped to compute the disallowance under Rule 8D of Rules on the presumption that there is every possibility that the investments made from which such exempt income is earned might have been made out of loan amount, for which the assessee has paid interest. The disallowance u/s.14A of the Act requires findings of the AO that the claim of the assessee pertaining to suo moto disallowance or no expenditure is not correct having regard to the accounts of the assessee and thereafter only the AO is validly entitled to compute disallowance under Rule 8D of the Rules. In absence of such exercise, the disallowance made by the AO cannot be held as valid and sustainable in view of mandate given by the legislature for invoking provisions of Section 14A. Expenses towards distribution of mosquito nets etc against malaria eradication - HELD THAT - No positive ground that expenses towards distribution of mosquito nets etc against malaria eradication fulfil the criteria the test of commercial expediency - findings of the ld CIT (A) could not be controverted by ld A.R. except pointing out that mosquitos are distributed among the resident of mining areas for the eradication of malaria. We also find that there is no business connection of the assessee for donating ₹ 4 lakhs for water shed development to Social health Education Development Society, hence, we affirm the findings of the ld CIT(A) in confirming the addition.
Issues Involved:
1. Disallowance of commission expenses. 2. Disallowance of punitive charges. 3. Disallowance of interest on loans. 4. Disallowance of peripheral development charges. 5. Disallowance of donation. 6. Disallowance under section 14A of the Income Tax Act. Detailed Analysis: 1. Disallowance of Commission Expenses: - Facts: The Assessing Officer (AO) disallowed commission expenses claimed by the assessee, totaling ?3,92,80,961 for A.Y. 2012-13 and ?85,59,687 for A.Y. 2013-14, on the grounds that the buyers denied involvement of agents and some agents did not respond to verification notices. - Assessee's Argument: The assessee contended that the commission agents were engaged for facilitating transactions and the payments were genuine, supported by TDS deductions and service tax payments. - CIT(A) Decision: The CIT(A) deleted the disallowance, noting that the AO did not provide evidence to show the commission payments were bogus and that the payments were made for services rendered. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO failed to disprove the genuineness of the commission payments and that the assessee had consistently made such payments in previous years. 2. Disallowance of Punitive Charges: - Facts: The AO disallowed ?34,25,485 for A.Y. 2012-13, claimed as punitive charges paid to Gangavaram Port Ltd. for overloading rakes, considering it as a penalty for infraction of law. - Assessee's Argument: The assessee argued that the charges were not for any legal infraction but were routine payments for overloading, a common feature in shipments. - CIT(A) Decision: The CIT(A) deleted the disallowance, stating that the charges were not penalties for legal infractions and thus allowable under section 37. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, agreeing that the charges were compensatory in nature and not penalties for legal violations. 3. Disallowance of Interest on Loans: - Facts: The AO disallowed notional interest on loans given to related parties, totaling ?37,17,885 for A.Y. 2012-13 and ?2,14,37,021 for A.Y. 2013-14, suspecting diversion of interest-bearing funds. - Assessee's Argument: The assessee claimed sufficient capital (?441.11 crores) to cover the interest-free loans and that the borrowed funds were used for specific assets. - CIT(A) Decision: The CIT(A) deleted the disallowance, citing the Bombay High Court's decision in HDFC Bank, which presumes investments are made from interest-free funds if the capital exceeds the loans and advances. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, noting the assessee's capital was significantly higher than the interest-free loans given. 4. Disallowance of Peripheral Development Charges: - Facts: The AO disallowed ?3,99,28,438 for A.Y. 2012-13 and ?1,85,46,330 for A.Y. 2013-14, claimed as peripheral development charges, questioning their necessity and commercial expediency. - Assessee's Argument: The assessee argued that the charges were for maintaining roads around the mines, essential for smooth business operations. - CIT(A) Decision: The CIT(A) deleted the disallowance, recognizing the expenses as incidental to the business and necessary for maintaining infrastructure. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, emphasizing the commercial necessity and direct connection of the expenses to the assessee's business operations. 5. Disallowance of Donation: - Facts: The AO disallowed ?1,75,00,000 for A.Y. 2013-14, claimed as a donation to the School of Human Genetics & Population Health (SHG&PH), citing a survey revealing the institution's fraudulent activities. - Assessee's Argument: The assessee contended that the donation was made in good faith to an institution approved for scientific research under section 35(1)(ii). - CIT(A) Decision: The CIT(A) deleted the disallowance, noting the lack of evidence that the donation was refunded to the assessee. - Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, recognizing the donation as genuine and made to an approved institution. 6. Disallowance under Section 14A of the Income Tax Act: - Facts: The AO made disallowances under section 14A, invoking Rule 8D, for both assessment years, without recording dissatisfaction with the assessee's claim of no expenditure for earning exempt income. - Assessee's Argument: The assessee argued that no expenditure was incurred for earning exempt income and that the AO did not follow the mandate of section 14A. - CIT(A) Decision: The CIT(A) confirmed the AO's disallowance, assuming some expenditure must have been incurred. - Tribunal's Decision: The Tribunal deleted the disallowance, citing the AO's failure to record dissatisfaction with the assessee's claim and the necessity of such a finding before invoking Rule 8D. Conclusion: The Tribunal dismissed the revenue's appeals for both assessment years and allowed the assessee's appeal for A.Y. 2012-13 while partly allowing the appeal for A.Y. 2013-14. The Tribunal's decisions were based on the failure of the AO to provide sufficient evidence and follow proper procedures as mandated by the Income Tax Act.
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