Loan not income under IT Act, legitimate business expenses allowed, department appeal dismissed

The ITAT upheld the CIT(A)'s decision that the loan amount was not income under Section 2(22)(e) of the Income Tax Act, as the assessee was not a shareholder in the lending company. The ITAT also directed the AO to allow the travelling expenses and interest on borrowed funds, finding them to be legitimate business expenses. The department's appeal was dismissed, and the assessee's cross-objection was allowed.

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Issues Involved:
1. Applicability of Section 2(22)(e) of the Income Tax Act, 1961.
2. Disallowance of travelling expenses.
3. Disallowance of interest on borrowed funds.

Summary:

1. Applicability of Section 2(22)(e):
The department contested the CIT(A)'s decision that the loan amount of Rs. 1,19,82,954 is not income u/s 2(22)(e) of the Income Tax Act, 1961. The CIT(A) noted that the assessee company was not a shareholder in M/s. Sanitech Engineers Pvt. Ltd., which provided the loan. The CIT(A) relied on the Special Bench decision in ACIT v. Bhaumik Colour Pvt. Ltd. and the Bombay High Court decision in CIT v. Universal Medicare Pvt. Ltd., which held that deemed dividend u/s 2(22)(e) can only be taxed in the hands of the shareholder, not the non-shareholder. The ITAT upheld the CIT(A)'s decision, rejecting the department's appeal.

2. Disallowance of Travelling Expenses:
The assessee contested the disallowance of Rs. 6,97,974/- out of total travelling expenses of Rs. 69,79,740/-, which the AO disallowed on the grounds that the expenses were incurred in cash and could not be verified as wholly and exclusively for business purposes. The CIT(A) sustained the disallowance. The ITAT, however, found that the expenses were incurred in the ordinary course of business and should be allowed. The ITAT directed the AO to delete the disallowance, setting aside the CIT(A)'s order.

3. Disallowance of Interest on Borrowed Funds:
The assessee contested the disallowance of Rs. 9,47,708/- being 8% of the interest debited to the books, which the AO disallowed on the grounds that the borrowed funds were used for factory building construction. The CIT(A) sustained the disallowance. The ITAT found that the assessee had sufficient own funds and cash to cover the construction expenses. The ITAT relied on the Supreme Court decision in DCIT v. Health Care Ltd. and the Bombay High Court decision in CIT v. Reliance Utilities & Powers Ltd., concluding that the disallowance was not justified. The ITAT directed the AO to delete the disallowance, setting aside the CIT(A)'s order.

Conclusion:
The ITAT dismissed the department's appeal and allowed the assessee's cross-objection, directing the AO to delete the disallowances related to travelling expenses and interest on borrowed funds. The order was pronounced on 08/08/2012.

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