M/S. SRI MOTORS,CHENNAI vs. ACIT, NCC-14, CHENNAI

The brief facts of the case emanating from the records are that the assessee is a partnership firm and is a dealer in Yamaha Motorcycles and

Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us. The ld.AR for the assessee. assailing the action of the ld.CIT(A), submitted that both the authorities have erred in making the addition both on account of disallowance of interest expenditure as well as the adhoc disallowance of other expenses. The ld.AR submitted that in respect of interest expenditure disallowed to the tune of Rs.10,84,485/- stated that the assessee has taken the loan through banking channel for the purpose of making the payment to the Yamaha Company for getting delivery of purchased vehicles, which has been allotted in the regular course of business. Further, on availability of liquidity during the year itself, the assessee had repaid the said short term loan to M/s.Malini Sri Motors and paid the interest on such short term borrowing after deducting the applicable TDS u/s.194A of the Act. The ld.AR argued that both

In respect of adhoc disallowance of Rs.5 lakhs out of the expenditure claimed, the ld.AR submitted that the entire expenditure have been paid through banking channel only, which has been established by submitting the entire bank statements during the assessment proceedings. However, the bills, vouchers and other documents, which have been sought by the AO could not be furnished due to destroying of evidences and documents existing at the showroom premises in December 2015 floods. Hence, the ld.AR prayed for deleting the disallowance made by the AO as the entire expenditure has been spent towards business purpose only.

Per contra, the ld.DR for the Revenue by supporting the orders of the authorities submitted that the AO has clearly observed that on examination of the balance sheet as on 31st March, 2013 and the loans squared up during the previous year 2013-14 there is no mention of any funds borrowed from M/s.Malini Sri Motors. The ld.DR prayed for remitting the matter back to the AO for verification. In respect of adhoc disallowance of expenditure of Rs.5 lakhs, the ld.DR fairly agreed that the December 2015 floods have destroyed most of the offices and residences in the city of Chennai, and therefore, the assessee could have given other contemporaneous evidence in support of the expenditure.

We have heard the rival submissions made by both sides, perused the orders of the authorities below and carefully considered the material available on record. The assessee has raised two substantive issues before us, namely,

The first issue relates to disallowance of interest expenditure of Rs.10,84,485/- paid by the assessee to M/s. Malini Sri Motors. The AO noticed that the name of M/s.Malini Sri Motors did not appear under the unsecured loans outstanding in the balance sheet as on 31.03.2014. The AO further observed that even on examination of the balance sheet as on 31.03.2013 and the details of loans squared up during the previous year relevant to the assessment year under consideration, there was no mention of any funds having been borrowed from the said party. On this basis, the AO disallowed the interest expenditure u/s.36(1)(iii) of the Act. The Ld.CIT(A) sustained the disallowance substantially on the same reasoning.

Before us, the specific case of the assessee is that it is an authorised dealer in Yamaha motorcycles and, whenever vehicles are allotted by the manufacturer in lots, funds are required to be arranged immediately for making payment and taking delivery of such vehicles. According to the assessee, the amount borrowed from M/s.Malini Sri Motors was only a short-term borrowing made during the relevant financial year to meet such temporary business liquidity requirements. It was further submitted that the entire borrowing was repaid during the very same financial year and, consequently, no amount remained outstanding either as on 31.03.2013 or as on 31.03.2014. The assessee has also contended that the borrowing as well as repayment were routed through banking channels and that interest was paid after deduction of tax at source u/s.194A of the Act.

In our considered view, the mere fact that the name of M/s.Malini Sri Motors does not appear in the opening or closing balance sheet cannot, by itself, be a conclusive ground for holding that no borrowing had taken place

At the same time, for claiming deduction of interest u/s.36(1)(iii) of the Act, the assessee is required to establish that the capital was in fact borrowed, that interest was paid thereon and that such borrowing was utilised for the purposes of its business or profession. The assessee has specifically pleaded that the funds were borrowed for making payments towards purchase of Yamaha vehicles and that the borrowing and repayment were effected through banking channels. It is also the case of the assessee that tax was deducted at source from the interest payment u/s.194A of the Act. These are relevant contemporaneous circumstances which require examination before determining the allowability of the expenditure.

We find that the authorities below have primarily proceeded on the absence of the loan balance in the opening and closing balance sheets without properly examining the assessee's explanation that the borrowing was both obtained and repaid during the same financial year. In our view, the correct approach would be to examine the transaction with reference to the bank statements of the assessee and the lender, ledger account of M/s.Malini Sri Motors in the books of the assessee, confirmation of the lender, evidence regarding receipt and repayment of the loan, utilisation of the borrowed funds for the business of the assessee and the corresponding TDS particulars relating to the interest payment.

We also take note of the submission of the Ld.DR that the matter may be restored to the file of the AO for verification. Considering the facts and

The next issue relates to the ad hoc disallowance of Rs.5,00,000/- out of the expenditure claimed by the assessee. The AO made the disallowance on the ground that supporting bills and vouchers in respect of certain expenses were not produced and, therefore, the expenditure was not fully verifiable. The explanation of the assessee was that the relevant records maintained at its showroom premises were destroyed in the unprecedented floods that affected Chennai during December 2015. The Ld.CIT(A), however, sustained the disallowance observing that the destruction of records in the floods would not absolve the assessee of its obligation to establish the genuineness of the expenditure.

We have considered the matter. It is an undisputed fact that Chennai witnessed severe and unprecedented floods during December 2015, resulting in widespread damage to properties and records. Significantly, the Ld.DR has also fairly acknowledged before us that the floods had affected a large number of offices and residences in Chennai. Therefore, the explanation of the assessee regarding loss or destruction of certain primary records cannot be brushed aside as inherently improbable or merely self-serving.

At the same time, destruction of primary vouchers does not automatically establish the allowability of every expenditure debited to the Profit and Loss Account. The assessee continues to bear the initial burden of demonstrating, to the extent reasonably possible, that the expenditure was actually incurred and that it was incurred wholly and exclusively for the purposes of its business. However, while appreciating such evidence, the surrounding circumstances and the genuine difficulty faced by the assessee due to destruction of records by a natural calamity have also to be kept in view.

In the present case, the assessee has consistently contended that the expenditure was recorded in its regularly maintained books of account, that the accounts were subjected to audit and that the payments in question were made through banking channels. It was further submitted that the bank statements had been furnished during the assessment proceedings. We find that neither the AO nor the Ld.CIT(A) has identified any particular item of expenditure as bogus, fictitious, personal in nature or unrelated to the business of the assessee. There is also nothing in the assessment order to indicate that any specific defect was found in the books of account or that the books were rejected by invoking section 145(3) of the Act.

What is further significant is that the AO has made a round-sum disallowance of Rs.5,00,000/- merely stating that the expenditure was non- verifiable. The assessment order does not disclose the total amount or particular heads of expenditure subjected to verification, the specific expenditure in respect of which supporting evidence was deficient, or the basis on which the figure of Rs.5,00,000/- was arrived at. An addition cannot be sustained merely on conjecture or on an arbitrary estimate without demonstrating a reasonable nexus between the material found during assessment and the quantum ultimately disallowed.

In this regard, we also find force in the contention of the Ld.AR that the transactions were reflected in the regularly maintained books and the payments were made through banking channels. The Revenue has not brought any material on record to demonstrate that the expenditure was not incurred or that any part thereof represented personal or non-business expenditure. The AO has also not pointed out any specific discrepancy in the bank statements stated to have been furnished by the assessee. Therefore, in our considered opinion, the ad hoc disallowance of Rs.5,00,000/- is devoid of a definite factual basis.

It is well settled that although the burden of establishing the allowability of an expenditure rests upon the assessee, once the books of account are maintained in the regular course, payments are supported by banking records and no specific defect or non-business element is demonstrated by the Revenue, an arbitrary lump-sum disallowance cannot be sustained merely on suspicion or for want of some vouchers, particularly where the assessee has satisfactorily explained the circumstances leading to their non-availability.

Considering the totality of the facts and circumstances, including the destruction of records in the Chennai floods, the availability of the audited books of account and banking records, and more importantly, the absence of identification of any specific bogus or non-business expenditure by the AO, we

In the result the appeal of the assessee is partly allowed for statistical purposes.