2019 (9) TMI 1722 - AT - Income Tax

Tribunal Upholds Business Expense Deductions: Bank Interest, Legal Fees, and Warehousing Charges Deemed Justified.

DCIT Circle 7 (2), New Delhi Versus M/s. Diageo Distilleries Pvt. Ltd.

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on all issues. It concluded that the disallowance of bank interest expenses ... Disallowance on account of bank interest expenses - CIT(A) deleted addition - HELD THAT:- As from the perusal of the records it can be seen that the loan procured was utilized by the assessee wholly and exclusively for its business as per clause 14 of the arrangement between third party contract bottling units (CBUs). The working capital is advanced to these CBUs so as to enable them to procure material, undertake manufacturing and maintain stocks and debtors for the assessee. Assessee’s profit earning source is the arrangement with the CBUs wherein the assessee provides working capital to these CBUs to enable them to procure materials and carry out large scale manufacturing of alcoholic beverages and deliver the same to the assessee’s customers on its behalf. Thus, from this it is clear that working capital loan was taken by the assessee for its business purpose and use for business purposes only. CIT(A) was right in deleting this disallowance. Ground No. 1 of the Revenue’s appeal is dismissed. Disallowance on account legal & Professional Fee Expenses and warehousing and demurrage charges - CIT(A) deleted addition - HELD THAT:- As admitted position that during the year there was no business activity, but during the said period the assessee incurred expenses on the maintenance of its business establishment. During the said year, the AO has not pointed out any bogus or expenditure of personal nature, which will warrant any disallowance. CIT(A) rightly held that by simply mentioning that the expenditures are not commensurate with the turnover, will not automatically prove that they have not been incurred wholly and exclusively for business purposes. Thus, there is no need to interfere with the findings of the CIT(A). Ground Nos. 2 and 3 are dismissed. Issues:1. Disallowance of bank interest expenses2. Disallowance of legal & professional fee expenses3. Disallowance of warehousing and demurrage chargesAnalysis:Issue 1: Disallowance of Bank Interest ExpensesThe appellant contested the disallowance of Rs. 2,79,11,315 by the Assessing Officer (AO) on the grounds of bank interest expenses. The Departmental Representative (DR) argued that the appellant failed to establish a direct nexus between the expenses and its business purpose as required under sections 36 and 37 of the Income Tax Act. Additionally, the DR highlighted that other Contract Bottling Units (CBUs) were separate entities. However, upon review, it was found that the loan procured was utilized exclusively for the appellant's business, as per the agreement with the CBUs. The working capital advanced to these units facilitated material procurement, manufacturing, and stock maintenance for the appellant's business operations. The Tribunal concluded that the working capital loan was legitimately used for business purposes, leading to the dismissal of the appeal on this ground.Issue 2: Disallowance of Legal & Professional Fee ExpensesThe AO disallowed Rs. 61,87,589 for legal and professional fee expenses, which the appellant challenged before the Commissioner of Income Tax (Appeals) [CIT(A)]. The DR contended that the appellant failed to justify incurring such significant expenses for business purposes, especially in the absence of business activities during the relevant period. Despite the lack of business operations, the appellant incurred expenses for maintaining its business establishment. The Tribunal noted that the AO did not identify any bogus or personal expenditures that would necessitate disallowance. The CIT(A) correctly observed that the mere lack of proportional expenses concerning turnover does not automatically invalidate their business purpose. Consequently, the Tribunal upheld the CIT(A)'s decision and dismissed the appeal on this issue.Issue 3: Disallowance of Warehousing and Demurrage ChargesThe AO disallowed Rs. 27,67,483 for warehousing and demurrage charges, a decision contested by the appellant. The DR argued that the appellant failed to demonstrate the business necessity of these expenses, particularly in the absence of active business operations. However, the Tribunal found that the expenses were incurred for maintaining the business establishment during a period of no business activity. Without evidence of bogus or personal expenditures, the disallowance was deemed unwarranted. The Tribunal concurred with the CIT(A)'s reasoning that the expenses were incurred wholly and exclusively for business purposes, leading to the dismissal of the appeal on this ground.In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all three issues. The judgment was pronounced on September 23, 2019.