2014 (2) TMI 316 - AT - Income Tax

ITAT remands case for reassessment due to fund flow issues & new evidence

The ITAT allowed the appeals for statistical purposes and remanded the case back to the AO for reconsideration. The ITAT directed the AO to reassess the ... Disallowance of interest - Held that:- Relying upon the decision in CIT vs. Reliance Utilities and Power Ltd [2009 (1) TMI 4 - HIGH COURT BOMBAY] - If there are funds available, both interest free and overdraft/loans taken, then presumption would arise that investments would be out of the interest free fund generated or available with the assessee - The assesse has failed to prove that on the particular dates of investments/ advancement of loans to the family members, sufficient own funds were available with it - The assesse had submitted before the AO that the Assessee's capital as on 31.3.2008 was Rs.7.72 Crores and the profit during the year was at Rs.1.95 crores - The assessee had sufficient own capital - The assessee's own capital and loans were in circulation during the year as the assessee had also been engaged in the business of money lending - The issue has been restored for fresh adjduication. Disallowance u/s 40(a)(ia) - Held that:- Relying upon the decision in Smt. Prabhavati S.Shah v. CIT [1998 (2) TMI 107 - BOMBAY High Court] - The powers conferred on the first appellate authority under sub-section (4) of section 250 of the Act, being a quasi-judicial power, it is incumbent on him to exercise the same, if the facts and circumstances justify - The CIT(A) has failed to exercise his appellate jurisdiction u/s 250 of the Act - The learned CIT(A) didnot admit and consider the evidence produced before him by the assessee - The documents relied upon by the assessee are very much relevant and necessary for the just and proper decision of the case - The issue has been restored for fresh adjudication. Issues Involved:1. Sustaining of interest disallowance by the CIT(A).2. Disallowance under section 40(a)(ia) of the Income Tax Act.Issue-wise Detailed Analysis:1. Sustaining of Interest Disallowance:The primary issue raised by the assessee was the sustaining of interest disallowance of Rs.4,58,039/- by the CIT(A), reduced from Rs.5,78,670/- disallowed by the AO. The AO noted that the assessee paid 18% interest on borrowed funds but charged only 9-12% on advanced funds. The assessee argued it had sufficient own funds to cover the advances, negating the need for disallowance. The CIT(A) upheld the disallowance, noting the assessee failed to establish a direct nexus between interest-free funds and business purposes for the advances. The CIT(A) emphasized the need for the assessee to produce day-to-day cash flow statements to prove no interest-bearing funds were used for these advances. The CIT(A) referenced the case of 'CIT Vs. Reliance Utilities' but distinguished it by noting the assessee in that case had demonstrated sufficient interest-free funds, which was not done here.Upon appeal, the ITAT considered the precedent set by 'CIT vs. Reliance Utilities and Power Ltd.' which presumes investments are made from interest-free funds if available. However, the ITAT found merit in the DR's contention that such presumption applies only if interest-free funds were available on the investment date. The ITAT noted the assessee failed to produce day-to-day fund flow statements and observed a clear diversion of higher interest-bearing funds into lower interest-yielding investments. The ITAT acknowledged the assessee's argument that business management decisions, including fund usage, are the prerogative of the assessee. The ITAT suggested that if the assessee could show the availability of own funds within a reasonable period after the investment, a presumption of using own funds could be made. The case was remanded back to the AO to reconsider the issue in light of these observations and make a proportionate disallowance if justified.2. Disallowance under Section 40(a)(ia):The second issue related to the disallowance of Rs.16,18,692/- under section 40(a)(ia) for non-deduction of TDS on payments. The AO disallowed the amount as the assessee failed to deduct TDS on clearing, forwarding, and demurrage charges. The assessee argued before the CIT(A) that certain payments were exempt from TDS under section 197(1) and others were governed by the Double Taxation Agreement, making them non-taxable. The CIT(A) refused to consider these documents, citing Rule 46A, which restricts the admission of new evidence at the appellate stage unless specific conditions are met.The ITAT found that the CIT(A) failed to exercise his appellate jurisdiction properly by not considering the new evidence, which was crucial for a just decision. The ITAT cited the Bombay High Court's decision in 'Smt. Prabhavati S. Shah v. CIT', emphasizing the CIT(A)'s duty to admit relevant evidence under section 250 of the Act. The ITAT also referenced Rule 46A(4), which allows the CIT(A) to call for necessary documents. The ITAT remanded the matter back to the AO to reconsider the issue after allowing the assessee to submit the necessary documents and evidence.Conclusion:The appeals were allowed for statistical purposes, with directions to the AO to reconsider both issues based on the ITAT's observations and after providing the assessee an opportunity to present relevant evidence. The order was pronounced in the open court on 05.02.2014.