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Income Tax Appellate Tribunal, DELHI BENCH: ‘SMC’ NEW DELHI
Before: SH. N.K.SAINI
PER N.K.SAINI, ACCOUNTANT MEMBER
1. The present appeal has been filed by the assessee against the order dated 30.11.2016 of CIT(A), Ghaziabad pertaining to the AY 2012-13. Following grounds have been raised in this appeal:-
1. That the authorities below have erred on facts and under the law in making/confirming pro-rata disallowance of Rs.5,50,852/- out of interest paid on unsecured loans by assuming interest of 12% on the interest free amounts advanced by the Appellant to his sons Sh. Abhishek Gupta and Sh. Akhilesh Garg. At any rate, the disallowance as made is very excessive.
2. That the authorities below have erred on facts and under the law in making/confirming ad-hoc 20% disallowance of Rs.15,868/- out of various expenses aggregating to Rs.79,342/-. 3. That the authorities below have erred on facts and under the law in making/confirming ad-hoc 20% disallowance of Rs.6,011/- out of telephone expenses of Rs.30,557/-. 4. That the Appellant reserves his right to add, amend/modify the grounds of appeal.”
2. Vide ground No.1, the grievance of the assessee relates to the confirmation of addition made by the AO on account of pro-data disallowance of Rs.5,50,852/- out of interest paid on unsecured loans. Facts of the case in brief are that the ITA No-530/DEL/2017 (Sh. Pramod Kumar Garg VS ITO) assessee e-filed the return of income on 26.09.2012 declaring an income of Rs.4,84,611/- which was processed u/s 143(1) of the Income tax Act, 1961 (in short “Act”) on the returned income. Later on the case was selected for scrutiny.
During the course of assessment proceedings, the AO noticed that the assessee had given interest free loans to his sons Sh. Abhishekh Gupta and Sh. Akhilesh Garg at Rs.26,50,850/- and Rs.24,58,636/- respectively but the assessee had paid interest on secured loan to bank and also on unsecured loans to various persons.
He asked the assessee to explain as to why interest @ 12% may not be disallowed out of gross interest expenses and be added to the income of the assessee. In response the assessee submitted as under:-
“…..the interest on loan given to his sons the market rate i.e. 12% PA is Rs.5,50,852/- if calculated on daily basis, which is not acceptable and also that the assessee had given loans to his sons out of interest free funds. As per submission given on 09.01.2015, there is increase in sundry creditors of Rs.3,73,46,163. It is evident that the assessee had given loans to his sons out of natural love and affection out of interest free funds i.e. sundry creditors of Rs.3,15,75,611/- and net profit earned during the year i.e. 5,55,678/-.
In this respect, we rely on the following judgement of Hon’ble Supreme Court: M/s Munjal Sales Corporation vs CIT and Another [2008] 298 ITR 298 (SC).”
The AO however, did not find merit in the explanation of the assessee and disallowed Rs.5,50,852/-. Reliance was placed on the judgement of Hon’ble Allahabad High Court in the case of CIT vs H.R.Sugar Pvt. Ltd. [1991] reported in 187 ITR 363 (All.).
4. Being aggrieved, the assessee carried the matter to the Ld.CIT(A) and submitted as under:-
“Copy of ledger A/c of interest paid on unsecured loan alongwith copy of ledger A/cs of various parties to whom interest has been paid during the year under consideration is placed at pages 15 - 21. It is evident from such copies of accounts that fresh loans have not been raised from such parties during the year under consideration except from Smt. Savita Devi Garg. In other words, loans from such parties were raised in earlier years which have been carried ITA No-530/DEL/2017 (Sh. Pramod Kumar Garg VS ITO)
forward during the year under consideration. Therefore, disallowance out of interest paid on unsecured loans does not arise during the year under consideration. As regards, Smt. Savita Devi Garg, it is evident from the perusal of her copy of account placed at page 21, that only fresh loan of Rs.1,50,000/- was raised on 21/11/2011 from her which was deposited in appellants Allahabad Bank (OCC A/c), Hapur, copy placed at pages 22 - 23 and the same was utilised for purchase of fertilizer from Kribhco Shyam Fertilizers Ltd. Copy of relevant ledger account of Allahabad Bank (OCC A/c) is placed at page 24 - 26 and copy of relevant ledger account of Kribhco Shyam Fertilizers Ltd. is placed at page 27 - 29. In other words, fresh loan of Rs.1,50,000/- having been utilised for business purposes, question of disallowance of interest on fresh loan of Rs.1,50,000/- does not arise.
Copy of ITR, audited balance sheet and trading, P & L A/c and assessment order passed u/s 143(3) dated 11/12/2013 in the case of the Assessee for the preceding assessment year 2011-12 is placed at pages 30 - 40 from which it is evident that no disallowance out of interest debited to P & L A/c has been made.
3. Copy of ledger A/c of interest paid to others for the year under consideration is placed at page 41 - 42, from which it is evident that interest has mainly been paid to Allahabad Bank (OCC A/c), Hapur. In other words, disallowance of interest can only be made if the Appellant has advanced money out of Allahabad Bank OCC A/c, Hapur.
Copy of ledger A/c of Appellant's son Sh. Abhishek Gupta alongwith relevant bank statements of the Appellant for the year under consideration are placed at pages 43 - 46 to demonstrate that only Rs.7,60,000/- has been advanced on 17/11/2011 by the Appellant to his son through his Allahabad Bank OCC A/c. Therefore, the disallowance on such advance of Rs.7,60,000/- works out to Rs.33,750/- only as per the working given below:
Date Cheque issued from Amount (Dr.) Disallowance of Interest (Rs.) Allahabad Bank (OCC (Rs.) A/c) 17/11/2011 847263 7,60,000 Rs.33,750 on advance of Rs.7,60,000 for 135 days viz. till 31/03/2012
Similarly, copy of ledger A/c of Appellant's son Sh. Akhilesh Garg alongwith relevant bank statements of the Appellant for the year under consideration are placed at pages 47 - 58 to demonstrate that amount aggregating to Rs.18,90,000/- was advanced by the Appellant to his son for only a few days through his Allahabad Bank OCC A/c. Therefore, the disallowance on such advance of Rs.18,90,000/- works out to Rs.4,359/- only as per the working given below:
ITA No-530/DEL/2017 (Sh. Pramod Kumar Garg VS ITO)
Date Cheque issued from Amount Amount (Cr.) Balance (Rs.) Disallowance of Allahabad Bank (OCC (Dr.)(Rs.) (Rs.) interest (Rs.) A/c) 22/10/2011 846793 6,00,000 6,00,000 (Dr.) 22/10/2011 846794 5,90,000 11.90.000 (Dr.) 24/10/2011 505508 6,90,000 5,00,000 Rs.1,174 on (Dr.) advance of 11,90,000 for 3 days 25/10/2011 301467 5,00,000 Nil Rs.164 on advance of 5,00,000 for 1 day 15/02/2012 848679 7,00,000 7,00,000 (Dr.) 27/02/2012 312106 7,00,000 Nil Rs.2,992 on advance of 7,00,000 for 13 days Total Rs.4,359 disallowance of interest In view of the above, the disallowance of Rs.5,50,852/- deserves to be restricted to only Rs.38,109 (Rs.33,750 + Rs.4,359). In other words, Rs.5,12,743/- deserves to be deleted out of disallowance of Rs.5,50,852/-. At any rate, without prejudice, the disallowance as made is very excessive.”
5. Ld. CIT(A) after considering the submissions of the assessee confirmed the disallowance by observing in para 5.1.1 & 5.1.2 as under:-
5.1. “During the course of appellate proceedings, appellant produced a copy of ledger account and contented that no fresh loans have been raised from the parties reflecting in the group of interest bearing unsecured loans except for Smt. Savita Devi Garg. Thus according to the appellant, fresh loan of Rs.1,50,000/- only from Smt Savita Devi Garg have been utilized for business purposes during the year so according to appellant no interest should be disallowed on the fresh loan of Rs. 1,50,000/-. The appellant has also contended that during the year interest has been paid primarily to Allahabad Bank OCC account. Thereby disallowance of interest can only be made if appellant has given any advance out of the said account.
5.1.2 Verification of facts reveal that one of the son namely Shri Abhishek Gupta is drawing salary from the appellant concern namely M/s Pramod Trading Co. It is an established fact that the expenses which have been incurred wholly and exclusively for the purpose of business should be allowed. In the present case, even during the year appellant has extended interest free loan to the two sons out of the working capital. The doctrine that business man is the best judge of business experience does not affect of right and duty of assessing authority to know whether the expenditure was incurred for business purpose or for any other extraneous consideration. Had the appellant
ITA No-530/DEL/2017 (Sh. Pramod Kumar Garg VS ITO) not advanced the interest free loan to his sons the borrowing, to that extent, would have not been necessary. Consequently the payment of interest to that extent cannot be held to be wholly and exclusively for the appellant business. The estimate of AO disallowing interest @12% appears to be in order, as from the ledger account of person to whom appellant is paying interest shows that the payment of interest has been made at the same rate. Keeping in view of the above facts, these grounds of appeal are dismissed and addition made by the appellant is upheld.”
6. Now, the assessee is in appeal. Ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the own funds of the assessee were more than advance given to his sons. It was further submitted that there was an increase in the sundry creditors and no interest was provided on the sundry creditors amounting to Rs.3,15,75,611/-. It was stated that the AO had not provided any evidence on record to prove that interest bearing funds had been advanced by the assessee to his son but made the addition solely on the ground that the borrowing to the extent of loans advanced to the sons of the assessee would not be necessary and consequently the interest payment would have been lesser. It was further submitted that in the preceding year, no such disallowance had been made while framing the assessment u/s 143(3) of the Act vide order dated 11.12.2013, copy of which is placed at page No.30 to 40. It was contended that when interest bearing funds were not diverted to the interest free advances, the disallowance made by the AO and sustained by the Ld.CIT(A) was not justified. In his rival submissions, Ld. DR supported the order of the authorities below and reiterated the observations made in their respective orders.
I have considered the submissions of both parties and carefully gone through the material available on record. In the present case, it is noticed that the AO had not established the nexus between the interest bearing funds and the interest free loans given by the assessee. It is also not the case of the AO that the interest
ITA No-530/DEL/2017 (Sh. Pramod Kumar Garg VS ITO) bearing funds were diverted towards interest free loans. On the contrary, the claim of the assessee is that the interest free funds were available in the form of sundry creditors to the extent of Rs.3,15,75,611/-. The said contention has not been rebutted. Therefore, by considering the totality of the facts, I am of the view that the disallowance made by the AO and sustained by the Ld.CIT(A) was not justified.
Accordingly, the same is deleted.
The next issue vide Ground Nos. 2 & 3 relates to the adhoc disallowances @ 20% of the various expenses. The facts related to the issue in brief are that the AO during the course of the assessment proceedings noticed that the assessee had debited the various expenses amounting to Rs.79,342/- in his P&L Account and also debited Rs.30,557/- on account of telephone expenses. The AO disallowed @ 20% of those expenses by observing that the nature of those expenses was unverifiable and that the personal use could not have been ruled out.
Being aggrieved, the assessee carried the matter to the Ld.CIT(A) who sustained the addition by observing that the assessee had not been able to substantiate that those expenses had been incurred only and exclusively for the purpose of business. Now the assessee is in appeal.
The ld. Counsel for the assessee submitted that the expenses were incurred for the purpose of business only and no personal element was involved. It was further submitted that the assessee furnished the required details, information and produced the books of accounts alongwith bills and vouchers which were test checked by the AO. Therefore, the contention of the AO that the expenses were not supported by proper evidence was factual incorrect. It was further stated that adhoc disallowance made by the AO and sustained by the Ld.CIT(A) without
ITA No-530/DEL/2017 (Sh. Pramod Kumar Garg VS ITO) pointing out any specific expenditure of unverifiable nature, was not justified. In his rival submissions, Ld. DR supported the orders of the authorities below.
I have considered the rival submissions of both the parties and carefully gone through the material available on the record. In the present case, it is noticed that the AO while making the disallowance @ 20 % of the various expenses, had not pointed out any specific instance where the expenses were not incurred for the business purposes. At the same time, personal use of telephone and out of the travelling expenses cannot be ruled out. In my opinion, the disallowance made by the AO and sustained by the Ld.CIT(A) is highly excessive. I, therefore, to meet the ends of justice deem it appropriate to sustain the disallowance to the extent of Rs.5000/-.
In the result, the appeal of the assessee is partly allowed.
The order is pronounced in the open court on 28th June 2017.