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2023 (1) TMI 761 - AT - Income TaxAddition u/s 40A(3) - assessee was making cash payment in excess of Rs. 20,000/- in violation of provisions with respect to certain expenses such as salary, labour expenses, materials purchases and land purchases - HELD THAT - The salary paid to the directors has nowhere been doubted by the authorities below. Furthermore, it is the directors who were managing the affairs of the company and they were acting as the custodian of the cash belonging to the assesse. As such the directors of the company closely connected with each other. Thus any salary paid to them by way of making any adjustment of the salary cannot be made subject to the disallowance under the provisions of section 40A(3) of the Act. Payment towards the purchase of bricks, we find that there was no argument advanced by the learned AR for the assesse at the time of hearing. Accordingly, we hold that such payment has been made inviolation of the provisions of section 40A(3) and therefore the same has to be disallowed. Hence the ground of appeal of the assesse is hereby partly allowed. Addition on account of interest not charged on the interest-free loans and advances given to the parties - assessee on one hand has incurred interest expenses on the borrowed fund and on the other hand, it has made interest-free loans and advances - Thus the AO computed the amount of interest being 14% on the interest-free loans and advances provided by the assessee and added to the total income of the assessee - HELD THAT - There is no dispute to the fact that the own fund of the assessee including the interest-free loans and advances exceeds the amount of interest free loans and advances provided by the assessee and therefore a presumption can be drawn that owned fund which is interest-free available with the assessee has been utilized for making such advances - See R.L. KALTHIA ENGGINEERING AUTOMOBILES PVT. LTD. 2013 (2) TMI 754 - GUJARAT HIGH COURT - thus disallowances of interest expenditure in the given facts circumstances where the assessee was having sufficient interest free fund is not justified. - Decided in favour of assessee.
Issues Involved:
1. Addition under Section 40A(3) of the Income Tax Act, 1961. 2. Disallowance of interest expenditure. Detailed Analysis: 1. Addition under Section 40A(3) of the Income Tax Act, 1961: Background: The assessee, a private limited company engaged in the development and sale of residential units, declared NIL income for the assessment year 2012-13. The Assessing Officer (AO) observed that the assessee made cash payments exceeding Rs. 20,000 in violation of Section 40A(3) of the Act, leading to a proposed disallowance of Rs. 31,64,040. Assessee's Argument: The assessee contended that most cash payments were made to laborers and suppliers who did not have bank accounts. They argued that Section 40A(3) should not apply to land purchases and that some payments were rectification entries, not actual cash payments. AO's Findings: The AO rejected the assessee's submissions, citing a lack of evidence and ruling that the payments did not fall under the exceptions provided in Rule 6DD of the Income Tax Rules. The AO disallowed the cash payments, adding Rs. 31,64,040 to the assessee's income. CIT(A) Decision: The CIT(A) confirmed the AO's findings, except for Rs. 6,97,340, which was not claimed in the profit and loss account. Tribunal's Analysis: - Rectification Entry of Rs. 1,90,000: The Tribunal noted the need for verification of the assessee's claim that this was a rectification entry and not an actual cash payment. The issue was remanded to the AO for verification. - Payment for Land Purchase of Rs. 2 Lacs: The Tribunal found that payments were made in installments of Rs. 20,000, which did not violate Section 40A(3). The genuineness of the expenses was not doubted, and the disallowance was deleted. - Payment for Land Purchase of Rs. 13.03 Lacs: The Tribunal accepted the affidavits from vendors stating they had no bank accounts, falling under the exception in Rule 6DD(g). The disallowance was deleted. - Director's Salary of Rs. 7.20 Lacs: The Tribunal held that payments to directors, who were custodians of the company's cash, did not violate Section 40A(3). The disallowance was deleted. - Payment for Bricks of Rs. 53,700: The Tribunal upheld the disallowance as there was no argument advanced by the assessee. Conclusion: The Tribunal partly allowed the appeal, deleting most of the disallowances except for the payment towards bricks. 2. Disallowance of Interest Expenditure: Background: The AO disallowed interest expenditure of Rs. 12,95,695, arguing that the assessee had made interest-free loans and advances while incurring interest expenses on borrowed funds. Assessee's Argument: The assessee contended that their own funds exceeded the interest-free loans and advances, implying that the advances were made from their own funds. CIT(A) Decision: The CIT(A) directed the AO to verify the assessee's computation, which claimed that the interest expenses were already added to the closing stock, avoiding double taxation. Tribunal's Analysis: The Tribunal noted that the assessee's own funds exceeded the interest-free loans and advances, drawing support from the Gujarat High Court's judgment in CIT vs. R L Kalthia Engineering & Automobiles (P.) Ltd. The Tribunal held that the disallowance of interest expenditure was not justified and directed the AO to delete the addition. Conclusion: The Tribunal allowed the appeal on this issue, directing the deletion of the disallowed interest expenditure. Final Order: The appeal filed by the assessee was partly allowed, with the Tribunal pronouncing the order on 04/01/2023 at Ahmedabad.
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