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TMI Blog2024 (9) TMI 348X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s reliance on judicial precedents was appropriate and well- founded. Accordingly, we uphold the Ld.CIT(A)'s decision to delete the addition - Revenue's this ground is dismissed. Disallowance u/s 37(1) on account of 10% of Trade Payables - HELD THAT:- AO's decision to disallow 10% of the sundry creditors was primarily due to the lack of supporting documentation and the inability to verify the genuineness of these creditors. The assessee had provided sample ledger accounts, audited financial statements, and details for subsequent years to demonstrate the genuineness of the creditors. The Ld.CIT(A) observed that the statutory and tax audits had not raised any adverse remarks regarding these liabilities, thus supporting the assessee's claim. The Ld.CIT(A) noted that the AO did not furnish specific evidence to support the claim that the expenses were not incurred for business purposes. The AO s approach of making an ad hoc disallowance of 10% without concrete evidence was deemed arbitrary and unjustified. CIT(A) also highlighted the inconsistency in the AO s actions, where similar liabilities were treated differently under Sections 41(1) and 37(1) of the Act. This con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on by the assessee. Thus, we find that the Ld.CIT(A) erred in upholding the disallowance u/s 36(1)(iii) of the Act. The assessee has successfully demonstrated that it had sufficient interest-free funds to cover the loan to the subsidiary, and the loan was advanced for commercial expediency, thus qualifying for interest deduction u/s 36(1)(iii) of the Act. Accordingly, we overturn the Ld.CIT(A)'s decision and directs the deletion of the disallowance - Decided in favour of assessee. Disallowance u/s 14A read with Rule 8D - assessee argued that the AO did not correctly apply the provisions of Rule 8D of IT Rules, particularly in relation to the interest disallowance - HELD THAT:- We conclude that the disallowance under Section 14A read with Rule 8D of IT Rules was not warranted for the assessment year in question in absence of exempt income. Accordingly, we overturn the Ld.CIT(A)'s decision and directs that the disallowance u/s 14A read with Rule 8D of IT rules be deleted in full. The appeal on these grounds is allowed in favour of the assessee, reaffirming the principle that disallowance under Section 14A of the Act is inapplicable in the absence of exempt income. The appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25/08/2021 (for AY 2018-19) passed by the Assessing Officer (AO) under section 143(3) / 144B of the Income Tax Act, 1961 (hereinafter referred to as the Act ). Facts of the case: 2. The assessee-company was engaged in the business of manufacturing and trading of engineering equipment for chemicals, petrochemicals, fertilizers, textiles and other industries. The assessee also acts as agents of indigenous manufacturers from various industries viz. chemicals, textiles, plastics, machine toolsets, as well as sole concessionaries of number of foreign manufacturers from various countries. The assessee filed its return of income for the A.Y. 2016-17 on 14-10-2016 declaring total income of Rs. 10,25,170/-. The case was selected for complete scrutiny under CASS and notices were issued under sections 143(2) and 142(1) of the Act, and the assessment order was passed by the AO u/s .43(3) of the Act, assessing total income to Rs. 3,42,96,135/-. The assessee preferred an appeal before Ld.CIT(A), who partly allowed the appeal of the assessee. The summary of additions and decision of the Ld.CIT(A) is tabulated as follows: Sr Particulars of disallowance / addition by AO Amount of addition/ disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tstanding for more than three years. The AO scrutinized these trade payables and treated them as cessation of liability under Section 41(1) of the Income Tax Act, 1961. The total amount involved is Rs. 1,35,94,166/-. The AO identified several creditors with balances outstanding for more than three years. The AO noted that the assessee failed to submit sufficient verification details, such as confirmation from these parties, PANs, addresses, or any other supporting documents. The AO also observed that the assessee provided only ledger copies from their own books, but failed to submit confirmations or any communications from the creditors and no evidence was provided to demonstrate that these amounts were still payable or that any payments had been made in subsequent years. Due to the lack of evidence, the AO concluded that these liabilities had ceased to exist and treated the outstanding amount as income under Section 41(1) of the Act. The assessee argued that these liabilities were still outstanding and would be paid in subsequent years and mentioned that some balances were returned as 'kasar/vavav' in subsequent years and offered to tax. 5. Before the Ld.CIT(A), the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Gujarat High Court in case of PCIT Vs Adani Agr (P.) Ltd. [2020] 118n taxmann.com 307. The Ld. DR relied on the order of AO and pointed out that the assessee only produced ledger copies of such creditors. 6. We have heard the parties, perused the material available on the record and noted the judicial precedents relied on by the assessee and the Ld.CIT(A). The judicial precedents collectively establish the principles regarding cessation of liability under Section 41(1) of the Act, which held that the onus is on the AO to prove the cessation or remission of liability with concrete evidence, liabilities shown in the balance sheet are considered existing until there is evidence to the contrary, simply non-payment over a period or debts becoming time-barred do not automatically constitute cessation of liability and there must be clear and specific evidence of cessation or remission for liabilities to be considered as ceased under Section 41(1) of the Act. 6.1. Considering the Ld.CIT(A)'s findings, we conclude that the addition of Rs. 1,35,94,166/- as cessation of liability under Section 41(1) of the Act, was unjustified. The AO did not provide sufficient evidence to establish th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine in the earlier years or the current year. The Ld.CIT(A) found that the AO did not provide any concrete evidence to prove that the expenses were not incurred for business purposes. The Ld.CIT(A) emphasized that disallowing 10% of the creditors' balances based on estimation and without specific evidence was not justified. The assessee placed reliance on the decision(s) in case of Om Prakash Joshi vs. ITO 123 TTJ 246 (Jodhpur Bench) and Sonic Biochem Extractions (P.) Ltd. 35 taxmann.com 463 (Mumbai - Trib.). 7.2. The Ld. DR placed reliance on the order of AO and pointed out that the assessee could not provide PANs and addresses of such trade payables and, therefore, the AO could not verify the genuineness of the same. The Ld.AR, on the other hand, relied on the order of the Ld.CIT(A) and stated that the AO has accepted the purchase and expenses related to such payable therefore disallowing 10% on ad-hoc basis is purely guesswork. He placed reliance on decision of Hon ble Supreme Court in case of Umacharan Shaw Bros [1959] 37 ITR 271. 8. Upon thorough review of the findings and decision of the Commissioner of Income Tax (Appeals), we conclude that the Ld.CIT(A) meticulously ana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantiation, leading to an erroneous addition. Therefore, we uphold the CIT(A)'s decision to delete the disallowance of Rs. 1,06,18,997/- under Section 37(1) of the act.. The Revenue s this ground is dismissed. Revenue s Ground No.3 is relating to disallowance of personal expenses of Rs. 1,28,273/-. 9. During the assessment proceedings, the AO scrutinized various expenses claimed by the assessee. It was found that certain expenses appeared to be personal in nature and were disallowed under Section 37 of the Income Tax Act, 1961. The total disallowance amounted to Rs. 1,28,273/-. Expenses in Question were Gift Articles of Rs. 64,382/- and Entertainment Expenses of Rs. 63,891/- The AO observed that the expenses claimed under 'Gift Articles' and 'Entertainment Expenses' were inherently personal. The payments for these expenses were made in cash, raising further doubts about their authenticity and business necessity. The assessee provided only the ledger accounts of the mentioned expenses without any supporting documents such as vouchers, bills, or receipts. In the absence of detailed evidence to substantiate these expenses the AO questioned the legitimacy as busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng used exclusively for business purposes, disallowed proportionate interest of Rs. 26,25,000/- (calculated at 15% of Rs. 1,75,00,000/-) under Section 36(1)(iii) of the Act. 12. Before the Ld.CIT(A), the assessee argued that it had sufficient interest-free funds to cover the loan to the subsidiary, and hence no disallowance of interest expenditure was warranted. The assessee provided a breakdown of its interest-free funds, including share capital, general reserves, and unsecured loans, totalling to Rs. 17,89,98,524/- as of 31.03.2016. The assessee cited the decision of Hon ble Supreme Court in the case of Munjal Sales Corporation v. CIT [2008] 298 ITR 298 (SC), where it was held that if sufficient interest-free funds are available, no disallowance of interest can be made. The assessee also relied on other judgments from the Gujarat High Court and ITAT Ahmedabad, which supported the principle that disallowance of interest cannot be made if interest-free funds exceed the interest-free advances. The assessee maintained that the loan to the subsidiary was for business purposes, supporting the operations of the subsidiary, which is integral to the assessee s business strategy. 12.1. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in the case of Reliance Industries (261 Taxman 165). The Ld.AR further stated that the assessee has recovered Service Charges of Rs. 70 Lacs in F.Y. 2014-15 and Sold goods worth Rs. 2.39 Cr. in the current financial year and, therefore, there is interlinked business interest of two companies and the money has been given for commercial expediency. He placed reliance on the decision of Hon ble Supreme Court in case of SA Builders (288 ITR 1).The DR, on the other hand, relied on the orders of lower authorities. 14. Upon review of the facts and the judicial precedents presented by the Ld.AR and considering the findings and decision of the Ld.CIT(A), we reach to conclusion that the Ld.AR has demonstrated, with reference to the audited financial statements as of 31-03-2016, that the assessee had substantial interest-free funds available, totalling to Rs. 17,62,44,918/- (comprising Rs. 12,12,00,000/- in share capital and Rs. 5,50,44,918/- in reserves and surplus). This amount far exceeds the loan of Rs. 1,75,00,000/- extended to the subsidiary. The Ld.AR relied on the Hon'ble Supreme Court's decision in Munjal Sales Corporation(supra), where it was held that if an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es involving the disallowance of interest under Section 36(1)(iii) of the Act. When funds are considered fungible, it means that money from various sources, whether interest-bearing or interest-free, is interchangeable and indistinguishable once it is deposited into a common pool, such as a company's bank account. The doctrine that funds are fungible has been supported by various judicial precedents including those relied on by the assessee. 14.4. In light of the above considerations, we find that the Ld.CIT(A) erred in upholding the disallowance of Rs. 26,25,000/- under Section 36(1)(iii) of the Act. The assessee has successfully demonstrated that it had sufficient interest-free funds to cover the loan to the subsidiary, and the loan was advanced for commercial expediency, thus qualifying for interest deduction under Section 36(1)(iii) of the Act. The judicial precedents cited by the assessee clearly support the allowance of such interest deductions. Accordingly, we overturn the Ld.CIT(A)'s decision and directs the deletion of the disallowance of Rs. 26,25,000/-. The appeal on this ground is allowed in favour of the assessee. Assessee s Ground No. 2 and 3 relates to disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's claims regarding the interest expenses and to recalculate the disallowance accordingly. The Ld.CIT(A) recognized the need to ensure that only expenses directly attributable to exempt income should be disallowed and that a fair assessment of the assessee's funds should be made. The Ld.CIT(A) referred to judicial precedents which emphasize that the AO must record proper satisfaction before invoking Rule 8D of IT Rules. The Ld.CIT(A) also recognized the principle that if sufficient own funds are available, they should be presumed to have been used for making the investments, thus avoiding interest disallowance. 17. Before us, the Ld.AR argued that the assessee has not earned any exempt income during the year under consideration. He placed on record the details from the financial statements that no dividend is received from the subsidiary. The Ld.AR placed reliance on the decision of Hon ble Gujarat High Court in case of Corrtech Pvt. Ltd. 45 Taxmann.com 116. The Ld.AR further argued that the AO mistakenly referred to tax Audit Report of A.Y. 2015-16 where the disallowance u/s.14A of the Act, was worked out by the assessee and the assessee has not worked out such disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter back to the AO. The AR emphasized that when a legal issue is covered by a Hon ble Jurisdictional High Court s ruling, the lower authorities should follow that ruling without remanding the case, as this could result in unnecessary prolongation of the litigation. 18.1. In light of the above findings, we conclude that the disallowance under Section 14A read with Rule 8D of IT Rules was not warranted for the assessment year in question. Accordingly, we overturn the Ld.CIT(A)'s decision and directs that the disallowance of Rs. 52,07,537/- under Section 14A read with Rule 8D of IT rules be deleted in full. The appeal on these grounds is allowed in favour of the assessee, reaffirming the principle that disallowance under Section 14A of the Act is inapplicable in the absence of exempt income. The appeal of the assessee on these grounds is allowed. 19. In Revenue s appeal, in ITA No.807/Ahd/2023, relating to A.Y. 2018-19 the grounds before us are: 1. On the facts and circumstances of the case, Ld.CIT(A) erred in deleting addition of Rs. 2,66,47,479/- made u/s.37(1) of the Act without appreciating that the assessee could not substantiate the expenditure with supporting evidence th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions. The Ld.CIT(A) emphasized that disallowing a percentage of trade payables without proper evidence or examination of each transaction is not justified. The Ld.CIT(A) highlighted that the assessee s accounts were audited under both the Companies Act and Section 44AB of the Income Tax Act, 1961. The Audit Reports did not contain any adverse remarks regarding the genuineness of the trade payables. The Ld.CIT(A) noted that the AO did not adequately consider the significance of these audit reports, which should have been a strong factor in favour of the assessee. The Ld.CIT(A) observed that similar disallowances made in previous assessment years were deleted on appeal. The Ld.CIT(A) underscored the importance of judicial consistency and found no reason to deviate from the decisions made in prior years, where similar disallowances were not upheld. 24.1. We have noted that the assessee provided detailed replies to the AO regarding the trade payables associated with five specific parties during the assessment proceedings. These responses were critical in contesting the AO's decision to disallow 10% of the trade payables under Section 37 of the Act. The assessee s replies demonst ..... X X X X Extracts X X X X X X X X Extracts X X X X
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