SHRI SURINDER SINGH BHATIA,INDORE vs. THE JCIT RANGE-3, INDORE

These are the two appeals filed by assessee. (AY 2010-11) challenges the appeal-order dated 28.10.2014 passed by learned Commissioner of Income-Tax (Appeals)-I, Indore [“Ld. CIT(A)”], which in turn arises out of assessment-order dated 07.03.2013 passed by learned JCIT, Range-3, Indore [“Ld. AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”]. (AY 2011-12) challenges the appeal-order dated 30.03.2016 passed by same CIT(A), which in turn arises out of Page 1 of 13

Both of these appeals relate to the same assessee; argued by same counsels and involve identical issues; therefore they were heard together and are being disposed of by this common order for the sake of convenience.

We would first take up this appeal. The effective grounds raised in this appeal are as under:

This ground relates to the adhoc disallowance of Rs. 2,33,720/- made by Ld. AO out of “BCC house maintenance expenditure” claimed by assessee.

During assessment-proceeding, Ld. AO observed that the assessee has debited Rs. 23,37,193/- to Profit and Loss A/c under the head “BCC house maintenance expenditure”. He further observed that (i) vouchers expenditure were unsigned, (ii) vouchers were not available, (iii) some vouchers were not supported with supporting evidences, and (iv) payments were also made in cash. Lastly, he observed that the expenditure claimed in current year was excessive as compared to the preceding year. With these observations, Ld. AO made a lump-sum disallowance of 10% of the total expenditure amounting to Rs. 2,33,720/-.

Before us, Ld. AR representing the assessee argued that the Ld. AO has not rejected the books of account of assessee. He submitted that the AO has made general remarks/observations in assessment-order without pointing out any single instance of defect in vouchers. He submitted that the books of account are audited and the auditors have not made any adverse remark. He argued that the AO has made 10% adhoc disallowance without any basis. He submitted that it has been consistently held in numerous decisions that the AO does not have any authority to make adhoc disallowance under any provision of Income-tax Act. He also relied upon the recent decision of ITAT, Raipur Bench in Kailash Chand Agarwal Vs. DCIT, order dated 01.04.2022 where it has been categorically held thus:

Per contra, Ld. DR representing the revenue contested that the AO has found and clearly mentioned the types of defects in assessment-order, namely the vouchers were unsigned, unsupported, absent or having been paid in cash. He submitted that such observations of AO are based on scrutiny of books of account produced by assessee and cannot be said to be baseless. He submitted that the 10% disallowance made by AO is quite reasonable, justified and should be upheld.

We have considered rival submissions of both sides and perused the material held on record including the orders of lower authorities. We observe that though the AO has made observations to the effect that vouchers were unsigned, unsupported, absent or paid in cash, yet he has not mentioned a single instance of such lapse or defect. The observations/remarks made by AO are very general and nothing specific comes out. Ld. AR has observed that payments have been made in cash but nowhere he has mentioned that the cash-payment exceeded the statutory limit prescribed in section 40A(3) of the act. It is further observed that the AO has not rejected the books of accounts in terms of section 145 of the act; that means the books of account are acceptable to Ld. AO. Lastly, we observe that the AO has made an adhoc

Therefore, we observe that the approach of adhoc disallowance without citing a single instance of specific lapse by assessee is not in accordance with law. Being so, we are not in a position to countenance the adhoc addition made / sustained by revenue-authorities. Resultantly, we are inclined to delete the same; accordingly we direct the AO to delete the addition. This ground is thus allowed.

This ground relates to the adhoc disallowance of Rs. 2,00,000/- made by Ld. AO out of travelling expenses.

During assessment proceedings, Ld. AO observed that the assessee has claimed travelling expenses of Rs.14,93,610/-. He further observed that (i) vouchers were self-made and (ii) vouchers were not supported by Shri Surinder Singh Bhatia & 774/Ind/2016 Assessment year 2010-11 supporting evidences. Ld. AO further observed that personal element out of the expenditure cannot be ruled out. He further observed that there was increase in quantum of expenditure as compared to preceding year. With such observations, he made a lump-sum disallowance of Rs. 2,00,000/-.

During first appeal, Ld. CIT(A) confirmed disallowance with the reasoning that the assessee has failed to justify as to why the quantum of expenditure has gone up when the turnover has come down.

Learned Representatives of both sides made the same line of pleading as made in preceding Ground No. 1. We observe that the AO has made adhoc disallowance and the factual and legal aspects are broadly same as elaborately discussed by us in Ground No. 1. Therefore, without delving much, we adopt the same view i.e. the adhoc disallowance made by AO cannot be sustained; accordingly we direct the AO to delete this addition too. This ground is also allowed.

This ground relates to the disallowance of Rs. 12,44,569/- out of interest expenditure claimed by assessee u/s 36(1)(iii).

During assessment-proceeding, Ld. AO observed that the assessee has advanced loans to its sister concerns/family members by charging interest @ 4 to 6% whereas the assessee has himself taken loans @ 12%. When the AO confronted the assessee for disallowance of proportionate interest, the assessee submitted that he was having interest-free funds own funds in the form of capital to the tune of Rs. 4,22,90,338/- and therefore the loans were given out of capital of assessee and not out of interest-bearing borrowed funds. Ld. AO, however, was not satisfied with assessee’s submission. He observed “It is observed that advances to the family members are not given for the short period as claimed by the assessee; most of the advances were outstanding from the last many years”. He further observed that when the Shri Surinder Singh Bhatia & 774/Ind/2016 Assessment year 2010-11 assessee was having interest-free funds, there was no need to borrow funds from banks and simultaneously make loans to sister concerns/family members. He critically observed that the assessee has charged interest @ 4 to 6% on loans given, which is much lesser than the interest @ 12% paid on borrowed funds. Relying upon certain judicial rulings, Ld. AO made a disallowance of Rs. 12,44,569/-.

During first appeal, Ld. CIT(A) upheld the disallowance by observing and holding as under:

During hearing before us, Ld. AR attacked the orders of lower authorities on several premises. At the outset he submitted that the AO has Shri Surinder Singh Bhatia & 774/Ind/2016 Assessment year 2010-11 recorded a patently incorrect finding that the assessee has not given short- term loans to sister concerns/family members, the loans were outstanding for many years. Drawing our attention to Page No. 129 of the Paper-Book where a “party-wise details of advances” has been given, Ld. AR pointed out that majority of the loans were given during the year and also received back during the year; therefore the loans were short-term. Then, Ld. AR submitted that the assessee has given loans to sister concerns/family members as a matter of commercial expediency. Then, he submitted that the assessee had to take loan @ 12% because the business-needs cannot be predicted in advance and a businessman has to maintain liquidity in business; on the other hand the assessee could advance loans to sister concerns/family members @ 4 to 6% only. Next, referring to the order of Ld. CIT(A), he submitted that the Ld. CIT(A) has made baseless finding that the assessee’s own capital has gone into fixed assets, cash and bank balances, sundry debtors, etc. and the borrowed funds have been utilized to give loans to sister concerns/family members. Lastly, he submitted that it is for the revenue-authorities to establish that the assessee has diverted borrowed funds for making loans/advances which they have not done. He referred to a few judicial rulings in favour of assessee which held that unless revenue proves the diversion of borrowed funds to non-business use, disallowance cannot be made particularly in a situation where the assessee has own capital.

Replying to above, Ld. DR strongly opposed the submissions of Ld. AR and defended the orders of lower authorities. He emphasized certain vital facts, namely (i) the assessee is claiming commercial expediency for the sake of arguments but there is no iota of evidence given by assessee in this regard, (ii) the fact that the assessee has charged interest @ 4 to 6% despite borrowing himself @ 12% is more than enough to infer that the assessee has claimed excessive/wrong deduction in computing his taxable income. Ld. DR further submitted that it is the assessee who knows from where the funds come and to where the funds go; therefore it is the duty of assessee to Shri Surinder Singh Bhatia & 774/Ind/2016 Assessment year 2010-11 explain the sources from which the loans/advances have been made to sister concerns/family members. Ld. AR emphasized that since the assessee is claiming deduction of interest on borrowed funds u/s 36(1)(iii) as a business expenditure, it is the duty of assessee to prove that the borrowed- funds were used only and only for his own business. The assessee can’t shift burden onto the tax authorities to prove otherwise. Ld. DR also submitted that rather than supplying the details and discharging the burden cast on himself, the assessee is just making a heighted claim that he had his own capital, therefore such capital would have been used for giving loans. Lastly, Ld. DR defended the finding made by Ld. CIT(A) with the submission that the assessee’s capital never remains idle; it is always blocked in business assets like fixed assets and working capital in the form of cash, bank, stock, sundry debtors. He submitted that the CIT(A) has, therefore, rightly concluded that borrowed funds have been used for giving loans to sister concerns/family members.

We have considered rival submissions of both sides and perused the orders of lower authorities. After a careful consideration, we observe certain facts. Firstly, on perusal of Page No. 129 of Paper-Book, we agree to the submission of Ld. AR that majority of loans were given/returned back during the year, only a few were outstanding from earlier years. But, however, we do not agree to submission of Ld. AR that the loans were given for commercial expediency for the simple reason that there is no material on record to prove the existence of commercial expediency and nothing in this respect has been placed before lower authorities or even before us during hearing. Regarding the necessity of maintaining liquidity in business raised by Ld. AR, we referred to Page No. 32 of the Paper-Book where Schedule No. 2 to the Balance-Sheet is placed and raised a query to Ld. AR that the assessee has taken loans by way of O/D and C/C from banks which are available round the clock wherein borrowals as well as repayments are permitted freely without any time-restriction, then the liquidity is automatically available and there is no need to hold funds and advance just

Having discussed the arguments of both sides, we now revert back to the assessment-order where the Ld. AO has made disallowance of Rs. 12,44,569/- based on following figures:

Now we take up this appeal. The effective ground raised in this appeal is as under:

Both sides agree that this issue is identical to Ground No. 3 of AY 2010-11 and there is no change in facts. Being so, the view taken by us in foregoing discussion while adjudicating Ground No. 3 of AY 2010-11 shall apply mutadis mutandis; accordingly this ground is also remitted back to the file of AO; thus allowed for statistical purpose.