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Facts
The assessee appealed against several disallowances made by the AO and confirmed by the CIT(A), including disallowance of interest on interest-free advances, disallowance under Section 40(a)(ia) for non-deduction of TDS on payments to a non-resident, estimated disallowances of cash purchases, commission paid to relatives, estimated assembling charges, estimated gold usage in manufacturing, and estimated car expenses. One ground related to gold usage was similar to a previous year's issue which was deleted.
Held
The Tribunal allowed most of the assessee's grounds, holding that disallowance of interest for interest-free advances is not justified if the assessee has sufficient interest-free funds. It ruled that TDS provisions under Section 195 are not applicable for payments to non-residents without a Permanent Establishment (PE) in India, made in foreign currency, for work not carried out in India. The Tribunal also held that estimated disallowances without a proper basis, defect finding, or comparable analysis are unsustainable, especially when regular books of accounts are maintained.
Key Issues
1. Whether interest disallowance for interest-free advances is justified when the assessee possesses sufficient interest-free funds. 2. Whether disallowance under Section 40(a)(ia) applies to foreign currency payments to non-residents without a PE in India. 3. Whether estimated disallowances of various expenses (cash purchases, commission, assembling charges, gold usage, car expenses) are legally sustainable without specific findings or comparable evidence.
Sections Cited
40(a)(ia), 195, 40A(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, KOLKATA
This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 05.02.2024 for the AY 2013-14.
The issue raised in ground no.1 is against the conformation of disallowance of interest by the ld. CIT (A) as made by the ld. AO of ₹6,54,236/- on account of interest paid to bank.
2.1. The facts in brief are that during the assessment proceedings, the ld. AO found that assessee has taken loan of ₹1.86 crores on which interest of ₹18.17 lacks was paid. Since, the assessee paid Rs. 68.00 lacs advances to various concerns free of interest and therefore, accordingly, the ld. AO disallowed the 2.2. After hearing the rival contentions and perusing the materials available on record, we find that these advances were given for business purposes only and no diversion of funds have ever taken place. We also note that assessee had more than sufficient funds to make the advances as is evident from the balance sheet filed at page no.12 of the Paper Book. Therefore, the case of the assessee is squarely covered by the decision of the Bombay High Court in case of CIT Vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 and CIT Vs. HDFC Bank Ltd., in of 2012 vide order dated 23.07.2014, wherein it has been held that if the interest free funds available with the assessee are more than the interest free loans given then no disallowance is called for. Therefore, we set aside the order of the ld. CIT (A) and direct the ld. AO to delete the addition. Hence, the appeal of the assessee in ground no.1 is allowed.
The issue raised in ground no.2 is against the confirmation of disallowance as made by the ld. AO u/s 40(a)(ia) of the Act for non- deduction of tax at source of ₹2,01,804/- paid to non-resident M/s Johnson matthey Noble Export who was non-resident having no PE in India and also no works were carried out in India. 3.1. The facts in brief are that the assessee paid to M/s Johnson matthey Noble Export a sum of ₹2,01,804/-, who was the non- resident of India and also have no any PE in India. No work was carried out in India and payment was also made in foreign currency. No TDS was deducted on the said payment. During the 3.3. After hearing the rival contentions and perusing the materials available on record, we find that since the recipient of the money is non-resident and having no PE in India and also no work was carried out in India. Besides, the payment was made in foreign currency. Then the provisions of Section 195 of the Act are not applicable and accordingly, we set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition. Ground no.2 is allowed.
The issue raised in ground no.3 is against the confirmation of addition by the ld. CIT (A) as made by the ld. AO by disallowing 20% of the cash purchase made during the year amounting to ₹23,56,486/-.
4.1. The facts in brief are that the ld. AO during the course of assessment proceeding disallowed 20% of the cash purchases made during the year, whereby making disallowance of ₹23,56,486/-, simply to protect the interest of the Revenue. The ld. AO has not recorded any finding as to the unreasonable profit or recorded any finding as to the bogus purchases. The total purchases of the assessee were more than 26.00 crores and the total cash payments were only 1.17 crores which is less than 5% of the total purchases and also there was no purchase exceeding 4.2. After hearing the rival contentions and perusing the materials available on record, we find that there was no basis given by the ld. AO to make these disallowances. The disallowance to protect the interest of the Revenue on estimated basis has no unsustainable in law. Therefore, the addition cannot be sustained. Accordingly, we set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition. Ground no.3 is allowed.
The issue raised in ground no.4 is against the confirmation of disallowance by the ld. CIT (A) as made by the ld. AO equal to 50% paid to the relatives.
5.1. During the year the assessee paid commission to 4 relatives for rendering services in the business of the assessee. The ld. AO found that the payments were made to the related parties and accordingly, disallowed 50% of the said commission and added the same to the return income of the assessee. Similar commission was also paid in the immediately preceding assessment year which was also added by the ld. AO but allowed by the ld. CIT (A) by directing the ld. AO to delete the disallowance. Copy of the appellate order is available at page no.55 of the Paper Book. The ld. AO disallowed the said commission without making any comparative analysis as to unreasonableness of the amount paid. Therefore, the sum disallowed by the ld. AO on the ground that it was paid to the related parties was not a ground for making disallowance when
Ground no.5 is against the order of ld. CIT (A) confirming the disallowance as made by the ld. AO of 25% of the assembling charges on estimated basis. 6.1. After hearing the rival contentions and perusing the materials available on record, we find that during the course of assessment proceedings, the ld. AO found that assessee has incurred the assembling charges of ₹8,00,000/-, for which the bills, vouchers were not produced. The said expenses were paid to the related parties and accordingly, 50% of the expenses were disallowed and added to the income of the assessee. 6.2. In the appellate proceedings, the ld. CIT (A) restricted the disallowance to 25% of the total expenses, thereby deleting ₹4 lacs and sustained the remaining ₹4 lacs. The said expenses are being constantly incurred from year-to-year basis and were not even disallowed during scrutiny assessment in the preceding assessments. A sample copy of the assessment order is enclosed at page no.4 to 37 of the Paper Book. Accordingly, we set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition. Hence, ground no.5 is allowed.
Ground No.7, is against the confirmation of disallowance as made by the ld. AO nearly 50% of the usage of gold in the manufacturing process amounting to ₹24,67,500/- on estimated basis. 8.1. The facts in brief are brief are that during the assessment proceedings the ld. AO observed that the assessee has debited huge expenditure towards high value metal charges like gold, etc., for which assessee could not submit supporting evidences. Accordingly, the ld. AO disallowed ₹49,35,000.
8.2. In the appellate proceedings, the ld. CIT (A) restricted the disallowance to 50%, which comes to 24,57,500/-.
8.3. After hearing the rival contentions and perusing the materials available on record, we find that similar disallowance was made in the preceding assessment year also which has been deleted by the ld. CIT (A) in Para no.7.3 of page no.14 of the appellate order which is available at page no. 51 of the Paper Book. Accordingly, maintaining the consistency as there is no change of facts and circumstances of the present case, we are inclined to set aside the order of ld. CIT (A) and direct the ld. AO to delete the disallowance by following the decision of Hon'ble Apex court in the case of Radhasoami Satsang, Saomi Bagh,Agra vs CIT 1991 (1992) 193 ITR 321 (SC). Hence, ground no.7 is allowed.
The issue raised in ground no.8 is against the confirmation of disallowance by the ld. CIT (A) as made by the ld. AO on estimated basis at the rate of 15% in respect of car expenses.
In the result, the appeal of the is partly allowed.
Order pronounced in the open court on 17.09.2025.