Tribunal Rules in Favor of Assessee: Disallowances Deleted, Consistent Policies Upheld

M/s KGK Enterprises (now known as KGK Diamonds (I) Pvt. Ltd.) Versus The Asstt. Commissioner of Income-tax Central Circle-2, Jaipur AND The Dy. Commissioner of Income-tax Central Circle-2, Jaipur Versus M/s KGK Enterprises (now known as KGK Diamonds (I) Pvt. Ltd.)

M/s KGK Enterprises (now known as KGK Diamonds (I) Pvt. Ltd.) Versus The Asstt. Commissioner of Income-tax Central Circle-2, Jaipur AND The Dy. ... Issues Involved:
1. Disallowance under section 14A r.w.r. 8D.
2. Addition on account of interest on outstanding receivables from associated enterprises (AEs).
3. Disallowance of business promotion expenses.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A r.w.r. 8D:
The assessee contested the disallowance of Rs. 6,47,319 under section 14A r.w.r. 8D. The assessee argued that investments were made from internal accruals, not borrowed funds, and no expenditure was incurred. The Tribunal noted that similar disallowances were deleted in previous years (AY 2010-11) due to the availability of sufficient interest-free funds. The Tribunal found no nexus between borrowed funds and investments and cited various High Court decisions supporting the assessee’s stance. It was concluded that disallowance under section 14A was not warranted, and the disallowance was deleted. Additionally, as no exempt income was earned during the year, no disallowance under section 14A could exceed the exempt income.

2. Addition on Account of Interest on Outstanding Receivables from AEs:
The Revenue challenged the deletion of Rs. 1,87,41,073 made on account of interest on outstanding receivables from AEs. The TPO had determined this addition by treating the delayed receivables as akin to loans and applying a 14.05% interest rate. The CIT(A) deleted the addition, noting that the assessee had a uniform policy of not charging interest on delayed payments from both AEs and non-AEs. The Tribunal upheld this deletion, emphasizing that the assessee extended similar credit facilities to non-AEs without charging interest. The Tribunal referred to several judicial precedents, including the Bombay High Court decision in Indo American Jewellery Ltd., which supported the assessee’s practice of not charging interest on delayed receivables. The Tribunal also noted that the amendment to section 92B by the Finance Act 2012 should be treated as prospective and not applicable to the assessment years in question (2007-08 to 2009-10).

3. Disallowance of Business Promotion Expenses:
The assessee contested the disallowance of Rs. 64,060 being 10% of business promotion expenses. The AO had disallowed Rs. 4,76,314 on an estimated basis, which the CIT(A) reduced to Rs. 64,060. The Tribunal found that the disallowance was made on an ad-hoc basis without specific defects in the books or vouchers. Consequently, the Tribunal deleted the disallowance of Rs. 64,060.

Consolidated Findings for AY 2008-09 and 2009-10:
The Tribunal noted that the facts and circumstances for AY 2008-09 and 2009-10 were similar to those of AY 2007-08. Therefore, the findings and directions for AY 2007-08 were applied mutatis mutandis to these years, resulting in similar outcomes for the respective appeals.

Conclusion:
The appeals filed by the assessee were allowed, and the appeals filed by the Revenue were dismissed. The Tribunal's order was pronounced in the open court on 28/11/2017.