M F CONSTRUCTION COMPANY, KANKER,KANKER vs. DY. COMMISSIONER OF INCOME TAX 2(1), RAIPUR, RAIPUR

That when the matter was called for hearing, none appeared for the assessee. That even power of attorney and Vokalatnama were also not found as filed on record. Submissions of the Ld. Sr. DR are recorded, documents/material are carefully considered and the matter is taken as heard.

The brief facts in this case are that the assessee is engaged in the business of Civil construction. The return of income was filed declaring total income of Rs.19,51,604/-. Subsequently, the case was selected for scrutiny under CASS. That the assessment was completed u/s. 143(3) of the Act on 05.12.2016 by making addition of Rs.4,42,040/-on account of disallowance made u/s. 40a(ia) of the Income Tax Act, 1961 (for short ‘the Act’) and disallowance of interest of Rs.6,51,615/-.

The Ld. CIT(Appeals)/NFAC after considering the submissions of the assessee and assessment order observed and held as follows: “6.2.2 The submissions of the appellant have been duly considered. It is pertinent to mention here that the obligation to deduct tax at source is mandatory and failure to do so attracts disallowance under Section 40(a)(ia) of the act. Reference may be made to the decision of the Hon'ble Punjab and Haryana High Court in Rakesh Kumar & Co, v. Union of India And Others (2009) 178 Taxman 481/(2009) 15 CPT 158 (PUNIJ, & HAR.), wherein it was held that disallowance under Section 40(a)(ia) is valid where the assessee fails to comply with TDS provisions.

That neither before the first appellate authority nor before this Bench, any evidence has been furnished to justify non deduction of TDS by the assessee. Admittedly, expenses were claimed towards JCB rent paid by the assessee to sister concern and TDS u/s. 194I should have been deducted which the assessee had failed to do and at the same time, there is no explanation by the assessee before the Revenue authorities or in record regarding the same. It was further contended by the assessee that this sister concern i.e. payee M/s. Fiza Traders had duly accounted for lease rent as income and had paid due taxes on time, therefore, there cannot be any disallowance u/s. 40a(ia) of the Act in the hands of the payer assessee. The obligation of the assessee to deduct tax at source is mandatory and failure to do so attracts disallowance u/s. 40(a)(ia) of the Act. In the landmark decision of the Hon’ble Supreme Court in the case of Palam Gas Service vs Commissioner Of Income Tax, AIR 2017 SC (CIVIL) 1827 has held that Section 40a(ia) shall apply not only to outstanding/payable amount at the end year but also to the expenses that have been actually paid during previous year without deducting TDS. That in the earlier decision, the Hon’ble High Court of Allahabad in the case of CIT Vs Vector Shipping Services Pvt. Ltd. 357 ITR 642(All), it was

That further the assessee has only made bare assertions that the payee had paid the due taxes. There is no evidence on record that payee [M/s. Fiza Traders] has paid the due taxes on the said rent received. Nothing has been brought on record either at the time of assessment proceedings or at the time of hearing before the first appellate authority nor evidence placed on record along with appeal memo before this Bench. Mere assertions therefore cannot take the place of true facts. That in absence of documentary evidence, I find no infirmity with the findings of the Ld. CIT(Appeals)/NFAC which is upheld. Thus, the Ground of appeal No.2 is dismissed.

The Ld. CIT(Appeals)/NFAC on this issue has held and observed as follows: “6.3.2 I have carefully considered the assessment order and the submissions of the appellant. It is undisputed fact that substantial interest free advances were granted to relatives without any commercial justification. The appellant has not been able to conclusively demonstrate that the interest-free advances were made entirely out of non-interest-bearing funds. The burden lies upon the appellant to establish that borrowed funds were not diverted for non-business purposes. In the absence of clear evidence establishing such nexus, the Assessing Officer was justified in disallowing proportionate interest. 6.3.3 The Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. v. CIT has held that where an assessee advances interest-free funds to related parties while paying interest on borrowed funds, the disallowance of proportionate interest is justified if the assessee fails to establish that the advances were made out of its own funds. 6.3.4 A similar view has been expressed by the Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (288 ITR 1) (SC), wherein it has been held that interest on borrowed funds is allowable only when the advances are made out of commercial expediency. In the present case, no evidence has been furnished to demonstrate any commercial expediency in granting interest-free advances to relatives. 6.3.5 In view of the above facts, the Assessing Officer was justified in disallowing proportionate interest at the rate of 12% on the amount of Rs.54,30,1221-. The addition of Rs. 6,51,615/- is therefore confirmed. Hence Ground no. 2(B) is dismissed.”

The Ld. CIT(Appeals)/NFAC had relied on the decision of the Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (288 ITR 1) (SC), wherein it has been held that interest on borrowed funds is allowable only when the advances are made out of commercial expediency.

In the result, appeal of the assessee is dismissed. Order pronounced in open court on 22nd day of May, 2026.