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Facts
The assessee filed its return of income for AY 2015-16. The AO disallowed interest expenses of Rs. 5,79,862/- on unsecured loans from specified persons and Rs. 85,250/- for conveyance expenses. The CIT(A) confirmed these additions.
Held
The Tribunal held that the disallowance of interest was not warranted as the loans were old and utilized for business purposes, and similar interest payments were allowed in preceding years. Regarding conveyance expenses, the Tribunal restricted the addition to 20% of the disallowed amount, considering past disallowances.
Key Issues
Whether the disallowance of interest on unsecured loans from specified persons and conveyance expenses was justified.
Sections Cited
40A(2)(b), 143(3), 250
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Before: SHRI SANJAY GARG & SHRI BIJAYANANDA PRUSETH
आदेश / O R D E R
PER BIJAYANANDA PRUSETH, AM:
This appeal by the assessee emanates from the order passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’), dated 08.11.2024 by the Commissioner of Income-tax, Appeal/ Addl./JCIT(A)-11, Mumbai [in short, ‘CIT(A)’] for the assessment year (AY) 2015-16, which in turn arises out of assessment order passed by Assessing Officer (in short, ‘AO’) u/s 143(3) of the Act dated 18.12.2017.
Grounds of appeal
raised by the assessee are as under:
1. On the facts and circumstances of the case, the learned Commissioner of Income tax (Appeals) has erred in confirming addition of Rs.579862/- towards payment considered to be excessive towards interest in respect of persons specified u/s 40A(2)(A).
A.Y 15-16 V V & Bros. 2. On the facts and circumstances of the case, the learned Commissioner of Income tax (Appeals) has erred in confirming addition of Rs.85250/- in respect of conveyance expenses which are in the need of daily business expenditure. 3. The appellant reserves right to add, alter, vary any or all grounds of appeal.”
Facts of the case in brief are that assessee filed its return of income for AY 2015-16 declaring income of Rs.4,95,990/- on 26.09.2014. The case was selected for scrutiny under CASS and notice u/s 143(2) was issued on 24.09.2016. On perusal of the profit and loss account it is noticed that assessee has debited amount of Rs.15,09,942/- as interest expenses on unsecured loans on the closing balance of Rs.1,00,93,742/- as on 31.03.2015. On further verification of submission filed by assessee during assessment proceedings, it was noticed that all lenders of unsecured loans are persons specified u/s 40A(2)(b) of the Act and interest was paid @ 18% on opening balances of the unsecured loans. The AO observed that assessee paid loan @ 18% but invested the fund in FD, which fetched interest @ 9% only. The excess interest was Rs.2,62,974/-. Further, the excess interest paid to the persons specified u/s 40A(2)(b) of the Act was Rs.3,16,888/- as compared to the prevailing market rate of interest @ 12%. Hence, the excess interest paid of Rs.5,79,862/- (2,62,974 + 3,16,888) was disallowed.
3.1 The AO also disallowed conveyance expenses of Rs.85,250/- because nothing to support the claim of the above expense was produced by the assessee.
A.Y 15-16 V V & Bros. 4. Aggrieved by the addition made by AO, assessee preferred appeal before CIT(A). The CIT(A) requested the assessee to submit details regarding its claim vide notice dated 22.10.2024. But the assessee did not produce any further evidence to support his argument. Therefore, the CIT(A) upheld the disallowance of expenses and dismissed the appeal.
Further aggrieved by the order of CIT(A) assessee filed present appeal before the Tribunal. The Ld. AR of the assessee filed written submission and paper book in support of the grounds raised in the appeal. He submitted that the disallowances made by the AO is without any basis and not justified. He submitted that FD was not kept for specified period but it is auto FD, meaning thereby that if the balance in the current account exceeds certain amount, it is automatically converted into FD. The amount of FD continues to change and no fixed amount was kept as FD. The Ld. AR also submitted that the interest prevailing in the market was between 16-18% for loan obtained from NBFC. The interest is calculated on monthly basis and the effective rate is much higher. Further, NBFC charge, processing fees, insurance charge etc., are to be paid on such loan which is not required in case of loans from the family members. The Ld. AR further submitted that interest @ 18% was allowed in the earlier scrutiny assessment for AYs 2013-14 and 2014-15 and no such addition was made. It is the same loan on which interest was paid at the same rate. Copies of the assessment orders are enclosed pages 33 to 36 of the paper book.
A.Y 15-16 V V & Bros. 5.1 The Ld. AR also submitted that disallowance u/s 40A(2)(b) is also not correct because the fair market value/price of such expenditure was comparable and not excessive. The AO has simply compared the rate of interest on FD and not the interest prevailing in the market. He submitted that the loan from NBFC and banks involved lot of procedures including mortgages of property etc. He relied on the following decisions: (i) DCIT vs. ANS Jewellery (2025) 197 TR(A) 296 (Chen-Trib) dated 01.02.2025; (ii) Fias Pack Synthetics vs. ACIT dated 01.08.2015; (iii) Vipul Y Mehta vs. ACIT dated 09.07.2010 and (iv) Omkarmal Gaurishankar vs. ITO ITA No.276/Ahd/1987 dated 14.09.1990. The Ld. AR also submitted that the loan was not obtained from the partners but from relatives of the partners of the assessee-firm.
5.3 The Ld. AR also submitted that the AO has added the entire conveyance expenses of Rs.85,250/- which was confirmed by the CIT(A). The whole of expenditure cannot be disallowed and the conveyance expense may be allowed.
On the other hand, Ld. Sr-DR for the revenue relied on the orders of the lower authorities.
We have heard both the parties and perused the materials on record carefully. We have also deliberated on the decisions relied upon by Ld. AR. Regarding the disallowance of interest, we find that the appellant had not A.Y 15-16 V V & Bros. made any FD for a specific period, which was fetching interest @ 9%. Rather, it was auto-FD, meaning thereby if the balance in the current account exceeded certain amount, it was automatically converted into FD. Therefore, the conclusion of AO is not on correct appreciation of the fact. We find that the appellant had taken the loan in the earlier years for purchase of various fixed assets, CNG deposit with Gujarat Gas, GEB deposit for electric company and construction etc. These borrowed funds were utilized for business purposes and no fresh loan was taken during the year. We find that the case of the appellant was also taken for scrutiny in AYs 2013-14 and 2014-15, which are enclosed at pages 33 to 36 of the paper book. No addition on these accounts were made in any of the two preceding assessment years. Only 1/5th of the conveyance expense was disallowed in both years. The impugned loans are old loans and no fresh loan was taken during the subject AY. Since interest expenses were paid but the AO did not disallow any part of such interest expenses in the scrutiny assessments of the preceding two AYs i.e., 2013-14 and 2014-15, no such disallowance is warranted in the year under consideration. The AO is accordingly directed to delete the same. This ground of assessee is allowed.
The next ground is addition for Rs.85,250/- in respect of conveyance expense. The CIT(A) has confirmed the addition made by AO. The AO has disallowed because no documentary evidences were furnished by the assessee to prove that they were incurred for business purposes. The Ld. AR submitted A.Y 15-16 V V & Bros. that the entire conveyance expense cannot be disallowed because the assessee was running a fuel station and has shown business turnover of Rs.63.58 lakhs. The Ld. Sr-DR supported the orders of lower authorities. We find that in appellant’s own case in the immediately preceding AYs, 2013-14 and 2014—15, 20% of the conveyance expenses were disallowed by the AO, which has not been agitated in any appellate forum. Therefore, the addition is restricted to 20% of Rs.85,250/- i.e., Rs.17,050/-. The remaining addition is deleted. The AO is directed accordingly. This ground of assessee’s appeal is partly allowed.
In the result, appeal of the assessee is partly allowed.