Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH ‘A’, NEW DELHI
Before: Sh. Amit ShuklaDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order of the ld. CIT(A)-33, New Delhi dated 28.12.2016.
2. Following grounds have been raised by the assessee: “1. The lower authorities have erred in disallowing a sum of Rs.1,14,655/- on account of interest paid on borrowed monies.
On the facts and circumstances of the case, the lower authorities have erred in disallowing a sum of Rs.73,036/- by invoking the provisions of Rule 8D of the Income Tax Rules, 1962 read with Section 14A of the Income Tax Act, 1961 (the Act).
It is contended that the computation of disallowance of Rs.73,036/- is wrong and is opposed to facts on records.
2 Amit Mehra 4. The disallowance of Rs.15,21,979/- being interest on capital working progress, on an estimate basis, is wrong and is opposed to facts and evidences on record.
The lower authorities have erred in disallowing a sum of Rs.1,08,641/- on account if Diwali expenses.
6. The lower authorities have erred in effecting the disallowance of Rs.5,79,100/- on account of food expenses incurred on the factory workers of the appellant.
That the above grounds of appeal are independent and without prejudice to one another.”
3. The assessee is engaged in the business of manufacturing of disposable ECG electrodes. During the year, the assessee filed return of income declaring income of Rs.6,38,90,030/- from the business turnover of Rs.44,42,05,373/-. During the year, the assessee has paid interest of Rs.41,375/- to two persons namely, Amit Mehra (HUF) and Rs.73,280 Veena Mehra, mother of the assessee. The AO after going through the bank accounts of the entities involved held that the loans received by these two individuals are infact are the amounts given by the assessed himself. The AO held that the transfer of funds from the proprietary concern of the assessee to the assessee’s personal account and then to the firm wherein the assessee is a partner and from the partnership firms the amounts have been transferred to the HUF and to the mother’s account and finally the amounts have been received from the account of the mother and the HUF to the proprietary concern of the assessee and keeping in view the circular route of the flow funds, the loans given are not for genuine business purpose and since the loans
3 Amit Mehra are not for the business purpose, the interest on these loans has to be disallowed u/s 40A(2)(b).
Holding thus, the AO has disallowed the interest paid of Rs1,14,655/- to these two parties.
5. The ld. CIT (A) confirmed the addition holding that the loan parties (the HUF and the mother) received the amounts from the assessee himself in a circuitous route. Before us, it was submitted that the similar addition made by the AO for the assessment year 2010-11 has been deleted by the ld. CIT (A) and the revenue’s appeal filed before the ITAT has been dismissed owing to low tax effect. The ld. DR relied on the order of the ld. CIT (A) for the instant year.
We have perused the material on record. The main contention of the AO is that the transactions have been made up with an intention to lower the tax liability of the assessee and also to build up capital for the HUF and for the mother. We find that this is not a case where the borrowed funds have been diverted to interest free advances without any commercial expediency. The case of the AO is that the interest expenses are claimed only to reduce the tax liability of the assessee and to aid in increased capitalization of the loan parties. There is no dispute about the payment of the interest and the utilization of the loans received by the business entity. The invocation of the Section 40A(2)(b) by the AO in this case is on a wrong interpretation/application of the provisions. The provisions of Section 40A(2)(b) entitles disallowance on account of any expenditure being excessive are unreasonable having regard to the fair market value. In the instant case, we find that the 4 Amit Mehra amounts have been received from the partnership firm by the loan parties and if at all any disallowance is to be made, the same needs to be considered in the hands of the partnership firms but not in the proprietary concern. Further, the Section 40A(2)(b) does not envisage the complete disallowance of expenditure unless it is proved to be excessive or unreasonable having regard to the fair market value. No such finding with regard to the excess payment has also been established by the revenue while invoking the provisions of Section 40A(2)(b). Hence, the disallowance made is hereby directed to be deleted.
Disallowance u/s 14A r.w. Rule 8D:
7. The undisputed fact is that the assessee has not earned any exempt income nor claimed any expenses with regard to the investments made. The AO has disallowed an amount of Rs.73,036/- based on the CBDT Circular No. 5/2014 dated 11.12.2014. Since, no exempt income has been earned and no expenses has been claimed, we hereby hold that no disallowance is warranted under this Section.
Interest on Capital Work in Progress (CWIP):
Facts relevant to this issue are that the closing capital work in progress stands at Rs.1,26,83,160/- and the AO held that the interest needs to be capitalized and estimated the interest at the rate of 12% under CWIP. The total interest disallowed by the AO was Rs.10,05,317/-. From the records, we find that the assessee has paid and claimed in P&L A/c, an interest of Rs.10,05,318/- which was on account of interest on cash credit, interest on unsecured loans and interest on car loan
5 Amit Mehra but not anything related to CWIP. The assessee has not debited any interest in the P&L A/c under the head “capital work in progress”. The capital of the assessee was Rs.20.24 crores and the operating profit for the year is Rs.11.70 crores. Since, no amount has been debited in the P&L A/c, no disallowance ought to have been made by the AO. The disallowance is hereby directed to be deleted.
Diwali & Food Expenses:
From the records, we find that the Diwali expenses have been fully vouched alongwith the relevant bills. Since, all the supporting documents for the services obtained and payments made are on record, the disallowance made by the AO at the rate of 25% on estimate basis is hereby directed to be deleted. Similarly, 50% of the amount disallowed out of expenses pertaining to food supply to approximately 100 persons working for the assessed, inspite of the evidences available for supply of food, payments to food suppliers thereof and employment of is hereby directed to be deleted.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 05/05/2020.