M/S SAMAR & SAMAR,KOLKATA vs. ACIT, CIR-33, KOLKATA, KOLKATA

- This assessee’s appeal for assessment year 2010-11 arises against Commissioner of Income Tax (Appeals)-9, Kolkata’s order 23.01.2015 in case No.67/CIT(A)-9/Circle-33/2014-15/Kol upholding Assessing Officer’s action disallowing / adding amount(s) of ₹16,01,158 @ 10% of labour charges payments, interest of ₹13,26,873/- u/s. 36(1)(iii), miscellaneous cash purchases of ₹6,80,842/-, sales promotion expense of ₹2,34,810/- and payment made to certain individuals of ₹3,82,000/-; respectively in assessment order dated 25.03.2013.

We advert to first issue of estimated disallowance amounting to ₹16,01,158/- @ 10% of the total labour charges paid amounting to ₹1,60,11,582/- there does not appear to be much dispute about the fact that both the lower authorities have made the impugned disallowance on account of assessee having paid this labour charges in cash without being supported A.Y.2010-11 M/s Samar & Samar Vs. ACIT, Cir-33, Kol. Page 2 by the relevant bills/vouchers produced for necessary verification during assessment as well as lower appellate proceedings. The Assessing Officer and the CIT(A) have therefore made the impugned estimated disallowance @ 10%.

We have given our thoughtful consideration to rival contention against and in support of impugned disallowance. There is no dispute about the fact that this assessee is a contractor executing general orders as well as acting as a supplier. We do not find any discussion either in assessment or lower appellate order that the impugned expenditure carries inflated claim vis-à-vis preceding and succeeding assessment years. Learned Departmental Representative fails to dispute that such cash payments are very common in assessee’s line of business involving intensive labour employment. The fact also remains at the same time is that the assessee has not filed on record the relevant details for the purpose of payees verification as well. We therefore deem it appropriate in larger interest of justice that the impugned disallowance @ 10% is on little higher side is liable to be restricted to 5% only with a rider that it shall not form a precedent in assessee’s case in preceding as well as succeeding assessment years. The instant substantive issue is treated as partly accepted.

The assessee’s second substantive grievance challenges both the lower authorities action disallowing u/s. 36(1)(iii) interest of ₹13,26,873/- in relation to its interest free advances as upheld during the course of lower appellate proceedings as under:- “10- Ground No.(vii) relates to disallowance of Rs.13,26,873/- made by the AO. The fact of the case is that the AO found that thee appellant had taken secured/unsecured loan on which interest during the year of Rs.14,53,036/- was paid and claimed. But at the same time certain interest free loan and advances to the tune of Rs.1,31,24,199/- was given to various persons on which no interest was charged. The AO calculated interest on such advances at Rs.13,26,873/- and accordingly claim of interest u/s. 36(1)(iii) was reduced/disallowed. However, the appellant claimed that out of total advances Rs.15,00,000/- was paid to Eastern India Health Care Foundation who were running a hospital, Rs.1,50,000/- was given to supplier, Kotlron Components, Advance given to Sanroy Development and support Services Ltd. was in earlier year which was repaid during assessment year 2011-12. Rs.34,26,000/- was paid to Samar & Samar Infrastructural Development (P) Ltd. to help in getting civil contract. After going through the fact and circumstances of the case, I do not find any merit in the argument of the appellant as the appellant could A.Y.2010-11 M/s Samar & Samar Vs. ACIT, Cir-33, Kol. Page 3 not prove with the help of supporting document/details that the interest free advances were given for the purpose of business or there was direct nexus between the interest free advances given and business requirement. Since, the interest bearing loans were diverted for non-business purposes by giving interest free advances to the persons with whom no business connection was existed. Under these circumstances, the AO was justified to make disallowance of Rs.13,26,873/-.”

Both parties reiterate their respective stands in seeking to delete and confirm the impugned disallowance. There is no dispute about the basic fact about assessee having made the impugned advances to various parties totaling to ₹1,31,24,199/-. The said advance made to M/s Samar & Samar Infrastructural Development (P) Ltd., Eastern India Health Care Foundation and Sanroy Development and Support Services Ltd. involved corresponding sums of ₹34.26 lakh, 1.05 lakh, 15 lakh and 80,48,199/-; respectively.

It emerges from assessment order dated 25.03.2013 that the Assessing Officer has not proved diversion of interest bearing funds as per assessee’s books of account qua the impugned loans. He has rather added notional interest thereupon to the tune of ₹1,63,090/- ₹18,000/-, ₹1,80,000/- and ₹9,65,783/-; respectively, totaling to the sum in dispute of ₹13,26,873/-. Hon'ble Delhi high court’s decision in M/s Shivnandan Build Con Pvt. Ltd. vs. CIT Writ Petition 625/2013 dated 30.02.2015 summarises the relevant settled legal proposition to conclude that such an addition of notional interest is not sustainable. We thus direct the Assessing Officer to delete the instant disallowance in question of ₹13,26,873/-.

We proceed further to notice that assessee’s next two substantive grounds challenge correctness of disallowance / addition(s) of miscellaneous cash purchase as well as advertisement and sales promotion expenditure of ₹6,80,842/-, 1,60,538/- and ₹2,34,810/-; respectively. The Assessing Officer sole reason for disallowing all the said three claims appears to be assessee’s failure in producing the relevant documents in the nature of cash purchases, bills, cash books qua its miscellaneous cash purchases as well as absence of any material on record indicating the sales promotion / advertisement expenditure to have been wholly and exclusively incurred for the purpose of its business. All this resulted in three claims to be completely disallowed. A.Y.2010-11 M/s Samar & Samar Vs. ACIT, Cir-33, Kol. Page 4 Learned Departmental Representative strongly supports both the lower authorities action in this regard. He fails to rebut the fact that such kind of miscellaneous cash purchase or sales promotion / advertisement expenses may be required in assessee’s services involving contractor and suppliers activities. There is no abnormality or inflation being pointed out in the lower authorities respective orders. The fact also remains that the taxpayer has also not discharged its onus of having incurred the impugned expenses. We therefore accept assessee’s impugned claim(s) to the extent 50% only is as all these three heads by taking note of its failure in filing all supportive detailed evidence. It is made clear our instant estimation of the impugned disallowances(s) @ 50% shall not be treated as a precedent in any preceding or succeeding assessment year. The assessee partly succeeds in its instant corresponding substantive grounds.

This leaves us with the assessee’s last grievance challenging both the lower authorities action disallowing its payment of ₹3,82,000/- made it various individuals on account of its failure in deducting TDS attracting u/s. 40(a)(ia) of the Act. There is no dispute as per assessment order that the impugned payment made to Ramashish Mukherjee, Anjan Cooomer, Nirmala Saha, A.S. Khan, N.K. Maity and Bipulendra Thakur involve accounting charges and legal/professional charges paid deducting TDS. The Assessing Officer rejected assessee’s plea claiming the same to be salary payments because the fact that there was no evidence of regular employment as upheld in the course of lower appellate proceedings.

Both parties reiterate their respective pleadings against and in support of impugned disallowance. We notice in this backdrop of facts that a co- ordinate bench in Samanwaya vs. ACIT (2009) 34 SOT 332(Kol) holds that section 194-J of the Act does not apply in case of payment made to for accounting charges. It draws a distinction between this kind of service and the payment made to chartered accountants. We therefore delete the impugned disallowance qua accounting charges of ₹72,000/- in question. Coming to balance component of the impugned disallowance, the assessee’s case is that