2014 (3) TMI 535 - AT - Income Tax

Tribunal ruling on expense disallowances in tax case

M/s. Ratan Silk Mills Gala Wood Work Compound Versus Income Tax Officer

The disallowance of interest, motor car expenses, sales promotion expenses, traveling and conveyance expenses, and telephone and mobile charges were ... Disallowance of interest u/s 36(1)(iii) of the Act – Diversion of Interest bearing borrowed funds – Held that:- As decided in assessee’s own case for the earlier assessment year, the assessee had interest free funds available at its disposal at a higher figure then the amount advanced to its sister concern, the closing balance of which has been reported – Relying upon CIT vs. Reliance Utilities and Power Ltd. [2009 (1) TMI 4 - HIGH COURT BOMBAY] - if there are interest free fund available with the assessee sufficient to meet its investment and at the same time, loan has been raised, it can be presumed that the investments were made from interest free funds - From the very prescription of section 36(1)(iii), it is discernible that the amount of interest paid in respect of capital borrowed, for the purpose of business or profession, is allowed as deduction - So long as the purpose of utilisation of the capital borrowed is towards business, no disallowance can be made - the advances were made by the assessee to its sister concern for effecting purchases, the CIT(A) cannot be held to be justified in restricting the addition on account of disallowance of any interest – Decided in favour of Assessee. Disallowance of motor car expenses – Held that:- The mere fact that the vehicle not standing in the name of the assessee, cannot be a reason for making or sustaining any disallowance on the account of motor car expenses – Relying upon CIT vs. Mirza Ataullaha Baig and other [1992 (10) TMI 52 - BOMBAY High Court] – the assessee to be entitled to depreciation on vehicle purchased which was not registered in the assesses's name – the reason of the AO for making the disallowance of expenses cannot be sustained – thus, it will be just and fair if 10% of the total motor car expenses, in respect of all the 9 cars, are held to be relatable to be personal use by the partners of the firm – Decided partly in favour of Assessee. Disallowance of depreciation and interest paid on loan – Held that:- The sustenance of the disallowance of depreciation on that ground cannot be sustained – the disallowance of depreciation is sustained @ 10% on account of personal use by the partners in respect of all the motor cars - the interest part towards loan on motor car is deductible in view of the fact that the cars were purchased by the assessee firm and were standing in its balance sheet – Decided partly in favour of Assessee. Disallowance of sales promotion expenses – Disallowance of Travelling and conveyance expenses – Disallowance of Telephone and Mobile Charges - Nature of Expenses – Personal OR Business - Held that:- The CIT(A) was justified in sustaining the disallowance at 10% of expenses in view of the facts that these expenses were not properly substantiated with bills etc. – Only kutcha bills and vouchers were produced for Travelling and conveyance expenses - Decided against Assessee. Issues Involved:1. Disallowance of interest for alleged diversion of interest-bearing borrowed funds.2. Disallowance of motor car expenses and depreciation due to alleged non-business use and lack of logbook.3. Disallowance of sales promotion expenses as personal in nature.4. Disallowance of traveling and conveyance expenses due to cash payments.5. Disallowance of telephone and mobile charges as personal in nature.Detailed Analysis:Issue 1: Disallowance of InterestGround No.1 (A.Y. 2005-06)- The assessee contested the disallowance of interest amounting to Rs. 4,98,045/- due to alleged diversion of interest-bearing borrowed funds.- The Tribunal had previously adjudicated a similar issue in the assessee's own case for earlier years, where it was observed that the assessee had sufficient interest-free funds available.- The Tribunal referenced the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), which held that if interest-free funds are available, it can be presumed that investments were made from such funds.- The Tribunal concluded that the advances made to the sister concern were for business purposes and thus, no disallowance of interest was warranted.- Following the consistency of the earlier judgment, this issue was decided in favor of the assessee.Ground No.1 (A.Y. 2006-07)- The issue of disallowance of interest amounting to Rs. 3,86,908/- was similarly decided in favor of the assessee, following the findings for A.Y. 2005-06.Issue 2: Disallowance of Motor Car Expenses and DepreciationGround No.2 (A.Y. 2005-06)- The assessee contested the disallowance of motor car expenses amounting to Rs. 1,14,877/- and depreciation of Rs. 1,88,470/-.- The Tribunal had previously adjudicated a similar issue, where it was held that the mere fact that vehicles were not registered in the assessee's name was not a valid reason for disallowance.- However, due to the lack of a logbook, the Tribunal sustained a disallowance of 10% of the total motor car expenses for personal use by the partners.- Following the earlier judgment, this issue was partly allowed in favor of the assessee, restricting the disallowance to 10%.Ground No.2 (A.Y. 2006-07)- The issue of disallowance of motor car expenses amounting to Rs. 2,42,987/- was similarly decided, restricting the disallowance to 10% of the total expenses.Issue 3: Disallowance of Sales Promotion ExpensesGround No.3 (A.Y. 2005-06)- The assessee contested the disallowance of Rs. 50,000/- out of Rs. 14,44,441/- incurred on sales promotion expenses.- The Tribunal had previously adjudicated a similar issue, where it sustained a disallowance of 10% of the total expenses due to lack of proper substantiation with bills.- Since the CIT(A) had restricted the disallowance to Rs. 50,000/- and the Revenue did not appeal, the disallowance was confirmed.Ground No.3 (A.Y. 2006-07)- The issue of disallowance of Rs. 20,000/- out of Rs. 8,98,213/- was similarly decided, confirming the disallowance made by the CIT(A).Issue 4: Disallowance of Traveling and Conveyance ExpensesGround No.4 (A.Y. 2005-06)- The assessee contested the disallowance of Rs. 20,000/- on account of traveling and conveyance expenses.- The Tribunal had previously adjudicated a similar issue, where it sustained a disallowance of 10% of the total expenses due to lack of proper substantiation.- Following the earlier judgment, the disallowance was restricted to 10% of the total expenses.Ground No.4 (A.Y. 2006-07)- The issue of disallowance of Rs. 20,000/- on account of traveling and conveyance expenses was similarly decided, restricting the disallowance to 10% of the total expenses.Issue 5: Disallowance of Telephone and Mobile ChargesGround No.6 (A.Y. 2005-06)- The assessee contested the disallowance of Rs. 10,000/- out of Rs. 2,16,761/- incurred on telephone and mobile charges.- The Tribunal had previously adjudicated a similar issue, where it sustained a disallowance of 10% of the total expenses for personal use.- Since the CIT(A) had restricted the disallowance to Rs. 10,000/- and the Revenue did not appeal, the disallowance was confirmed.Ground No.6 (A.Y. 2006-07)- The issue of disallowance of Rs. 20,000/- out of Rs. 4,03,948/- was similarly decided, confirming the disallowance made by the CIT(A).Conclusion- The appeals were partly allowed, with specific disallowances being confirmed or adjusted based on the consistency of earlier judgments.- The Tribunal maintained the principle of consistency and followed its previous rulings on similar issues to ensure uniformity in the application of the law.