Loading judgment…
Facts
The assessee, a construction company, appealed an order upholding the disallowance of interest expenditure and an addition for unvouched expenses. The assessee had advanced loans to individuals and claimed interest expenses, while the AO disallowed these due to perceived lack of proper documentation and unvouched expenses.
Held
The Tribunal held that the disallowance of interest expenditure was not sustainable as the assessee had sufficient surplus funds to cover the interest-free advances. The addition for unvouched expenses was also deleted, as the AO's disallowance was sweeping and not based on specific errors in bills/vouchers.
Key Issues
Whether disallowance of interest expenditure is justified when sufficient own funds are available? Whether addition for unvouched expenses is sustainable when the disallowance is not specific?
Sections Cited
143(2), 68, 133(6)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DIVISION BENCH, ‘B’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI KRINWANT SAHAY
the order of the ld.Commissioner of Income Tax (Appeals) [in short ‘the CIT (A)’] dated 14.06.2019 passed in assessment year 2014-15. The assessee has taken five grounds of appeal, out of which ground No. 1 and 5 are general grounds which do not call for recording of any specific finding.
ITA No.1278/CHD/2019 A.Y.2014-15 2
In Ground No.2 assessee has pleaded that ld. CIT(A) has erred in upholding the disallowance of interest expenditure amounting to Rs.2,22,780/-.
The brief facts of the case are that assessee company at the relevant time was engaged in construction of roads and other development activities. It has filed its return of income electronically on 20.11.2014 declaring total income of Rs.1,24,51,890/-. The case of the assessee was selected for scrutiny assessment and a notice under Section 143(2) was issued and served upon the assessee.
On scrutiny of the accounts, it revealed that assessee has advanced a sum of Rs.7,82,243/- to three individuals, namely; Nitin Bansal Rs.3,75,125/-, Sunny Bansal Rs.4,55,618/- and Hunny Bansal Rs.9,51,500/-.
According to the AO, the assessee did not charge interest on these loans. He further observed that assessee has been availing cash credit limit from the bank and is paying interest on the same. Hence, without visualizing the status of the funds available with the assessee, ld. AO has A.Y.2014-15 3 calculated an interest income on these loans @ 12.50% and made the disallowance out of the interest expenditure.
The appeal to the CIT(A) did not bring any relief to the assessee.
With the assistance of ld. Representative, we have gone through the record carefully. On page 8 of the Paper Book, assessee has placed copy of the Balance Sheet as on 31.03.2014. A perusal of this Balance Sheet would reveal that assessee has reserve and surplus of Rs.3,25,01,530/-. It has share capital of Rs.20 lacs.
Thus, the surplus funds available with the assessee are much more higher than interest free advance given by it.
If the assessee has sufficient amount of interest free funds which can take care of any interest free loans to others, then notional interest income on such loans not to be computed which is to be disallowed out of interest expenditure. In other words, AO cannot disallow the claim of interest expenditure by believing that interest bearing funds must have been given advance by the assessee without charging interest. The assessee has sufficient A.Y.2014-15 4 surplus funds which can take care of any such advance.
Hence, second ground is allowed and the disallowance out of interest expenditure amounting to Rs.2,22,780/- is deleted.
In Ground No.3 assessee has pleaded that ld. CIT(A) has erred in upholding the addition of Rs.47,64,800/- which was added by the AO with the aid of Section 68 of the Income Tax Act. We find that assessee has taken a loan of Rs.47,64,800/- from four individuals namely, Deepak Rawa Rs.25 lacs, Harish Rs.5 lacs, Sarika Rana Rs. 5 lacs, Kanta Rani Garg Rs.12,64,000/-. According to the AO, assessee failed to submit requisite details for fulfilling the conditions enumerated under Section 68, hence AO made the addition.
Before ld. CIT(A), assessee has submitted copy of PAN number of each creditor, copy of the Bank Statement and copy of loan confirmation. Such details have been entertained by the CIT(A) under Rule 46A of the Income Tax Act. A Remand Report was called for from the AO.
The report of the AO has been reproduced in paragraph A.Y.2014-15 5 No. 4.3 on page No.5 of the CIT(A)’s order. The assessee, thereafter rebutted the report of the AO and complete details have been tabulated by the CIT(A) on page No. 7 to 9 of the impugned order. The ld. CIT(A), however, did not accept the claim of the assessee and recorded the finding in paragraph No. 4.5. The CIT(A) was of the view that assessee could not furnish any evidence in support of identity, credit worthiness and genuineness of unsecured loans.
With the assistance of ld. Representative, we have gone through the record carefully. A perusal of Section 68 would contemplate that where any sum is found credited in the books of the assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not in the opinion of the AO satisfactory, the sum so credited may be charged to Income Tax as income of the assessee of that previous year. Thus, in order to fulfil the requirements of Section 68, an assessee is required to prove the identity of the creditor, his credit worthiness to A.Y.2014-15 6 advance such loans to the assessee and genuineness of the transactions. A perusal of the detail submitted by the assessee in a tabular form and reproduced by the CIT(A) on page 7 to 9 would indicate that assessee has fulfilled all the ingredients. It has submitted the copy of Permanent Account Number of each individual that would prove his identity as well as status of the creditor that he/she is an income tax assessee. In order to prove credit worthiness, assessee has filed copy of the ITR. Assessee has filed banking details exhibiting the amount received by it. The AO called for information under Section 133(6) of the Income Tax Act. All the creditors have responded to the letter of AO and submitted the requisite details. They have confirmed that they have given loan to the assessee.
Thus, we fail to appreciate as to how assessee failed to prove identity, credit worthiness and genuineness of the transaction as observed by the CIT(A). The assessee has discharged its complete onus and no addition deserves to have been made with the help of Section 68 of the Income Tax Act. Therefore, we allow this ground of appeal and delete the disallowance. A.Y.2014-15
7. GROUND NO. 4
9. In this ground, the grievance of the assessee is that CIT(A) has erred in upholding the addition of Rs.8,51,776/-. The finding of the AO on this issue read as under :
“4. Disallowance on account of Unvouched Expenses During the course of assessment proceedings, books/vouchers were test checked basis and it is observed that following expenses to following extent were found unvouched. and not supported by proper bills/vouchers: 1. Purchase expenses Rs. 4,85,093/- 2. Staff Welfare Expenses Rs.3 66 683/- Total Rs. 8,51,776/- In this context, the AR of the assessee was asked to show caused why an amount of Rs. 8,51,776/ be not disallowed being unvouched expenses. No reply has been filed by the AR of the assessee in this regard. Accordingly disallowance of Rs. 8,51,776/ is being made to the returned income of the assessee on account of unvouched expenses. (Addition of Rs. 8,51,776/-) 10. The appeal to the CIT(A) did not bring any relief to the assessee.
The assessee is a construction company. It has filed its return of income declaring income of more than Rs.1.24 Crore. A perusal of this finding would not indicate which bill/voucher was not reliable and when the AO has confronted the assessee, he cannot make disallowance out A.Y.2014-15 8 of Staff Welfare Expenses in this manner. For such a big organization and engaged in construction activities, some expenditure must have been incurred by the assessee.
Those details were submitted. Its accounts are audited.
The disallowance cannot be made in a sweeping manner as made by the AO without pin pointing a specific error in any particular bill/voucher. Hence, this disallowance is not sustainable and accordingly deleted.
In the result, appeal of the assessee is allowed.
Order pronounced on 18.03.2025.