2016 (5) TMI 170 - AT - Income Tax

Tribunal upholds CIT(A) decisions, excludes strategic investments, restricts adhoc disallowance.

The tribunal partially allowed the revenue's appeal, upholding the CIT(A)'s decisions on most issues, including deleting disallowances under various ... Disallowance under Rule 8D(ii) - expenditure to political parties and section 37(2B) - disallowance of interest where borrowed funds not applied to interest free advances - adhoc disallowance for personal element in business expenses - addition on account of alleged non genuine/bogus purchases - evidentiary value of statements recorded under section 133ADisallowance under Rule 8D(ii) - Exclusion of strategic investments in joint ventures while computing disallowance under Rule 8D(ii). - HELD THAT: - The CIT(A) held that in computing the average value of investments ('B' in the formula), only investments yielding exempt income must be taken into account and strategic investments in joint ventures not yielding exempt income should be excluded. The Tribunal, following precedent of the Delhi High Court and coordinate Bench decisions of this Tribunal, found no infirmity in the CIT(A)'s direction to adopt the assessee's share investment figure instead of the larger amount taken by the Assessing Officer and upheld deletion of the Rule 8D(ii) disallowance. [Paras 5, 6, 7]Order of CIT(A) deleting the disallowance under Rule 8D(ii) by excluding strategic joint venture investments is confirmed.Expenditure to political parties and section 37(2B) - Allowability of expenditure characterized as donation to a political party and applicability of section 37(2B). - HELD THAT: - The Assessing Officer disallowed amounts treating them as advertisement in a political party's souvenir etc. The CIT(A) accepted the assessee's case that the amounts were donations and not payments for political advertisement within the scope of section 37(2B). The Tribunal found that there was no evidence of advertisement expenditure and that the expenditure was incurred wholly and exclusively for business; accordingly the CIT(A)'s deletion of the disallowance was confirmed. [Paras 8, 9, 10]Disallowance under section 37(2B) is deleted and the CIT(A)'s order is confirmed.Disallowance of interest where borrowed funds not applied to interest free advances - Whether interest on borrowed funds is disallowable when advances were made out of interest free capital. - HELD THAT: - The AO disallowed interest attributing an imputed interest to interest free advances. The CIT(A) found from balance sheet figures that the assessee had sufficient interest free funds/capital and borrowed monies were not used for advancing interest free loans, relying on the jurisdictional High Court authority that, where interest free funds suffice, a presumption arises that investments/advances were out of such funds. The Tribunal accepted the CIT(A)'s factual finding as supported by record and upheld deletion of the interest disallowance. [Paras 11, 12, 13]Disallowance of interest is deleted; CIT(A)'s finding that advances were out of own capital is upheld.Adhoc disallowance for personal element in business expenses - Extent of permissible adhoc disallowance in respect of telephone and vehicle expenses alleged to contain personal element. - HELD THAT: - The Assessing Officer made an adhoc disallowance for possible personal use; the CIT(A) deleted the adhoc addition after the assessee produced vouchers and the AO had no material to demonstrate personal use. The Tribunal found that some personal element could not be ruled out and, balancing the facts, restricted the disallowance to 10% of such expenses, allowing the appeal in part. [Paras 14, 15, 16]CIT(A)'s deletion is modified: disallowance restricted to 10% of the relevant expenses (appeal allowed in part).Addition on account of alleged non genuine/bogus purchases - evidentiary value of statements recorded under section 133A - Whether purchases from suppliers appearing in a 'suspicious dealers' list can be treated as bogus and additions sustained where AO relied primarily on survey statements and an external list. - HELD THAT: - The AO added purchases as non genuine relying on a Sales Tax Department list and survey statements; notices under section 133(6) were issued to only two suppliers and the AO did not conduct basic bank/creditor enquiries. The CIT(A) examined contract documents, site certifications by municipal engineers, testing reports, running bills and payment certificates, and concluded materials were received and utilised and that statements recorded under section 133A lack independent evidentiary value absent corroboration. The Tribunal found the CIT(A)'s detailed factual findings supported by material on record, noted absence of any positive contrary material from the Revenue, and refused to interfere with deletion of the addition. [Paras 17, 18, 20]Addition on account of alleged non genuine purchases is deleted; CIT(A)'s findings are sustained.Final Conclusion: The Tribunal upheld the CIT(A)'s deletions on the major additions except that it allowed the Revenue's challenge in part by sustaining a 10% adhoc disallowance on telephone/vehicle expenses; the Revenue's appeal is otherwise dismissed (appeal allowed in part). Issues Involved:1. Deleting disallowance made by the AO u/s.14A.2. Deleting disallowance of Rs. 4,18,000/- u/s.37(2B) of the I.T.Act.3. Deleting disallowance of interest of Rs. 4,61,376/-.4. Deleting adhoc disallowance of Rs. 1,00,000/- on telephone expenses, vehicle expenses, etc.5. Deleting addition of Rs. 3,50,19,655/- on account of alleged non-genuine purchases.Issue-wise Detailed Analysis:1. Deleting disallowance made by the AO u/s.14A:The assessee, a government contractor, had computed disallowance under Rule 8D(2) by excluding strategic investments in joint venture business projects. The AO did not accept this and made a disallowance of Rs. 3,54,957/-. The CIT(A) deleted the disallowance, observing that the AO erred by including investments that did not yield exempt income. The tribunal found the issue covered by the decision of the Hon’ble Delhi High Court in the case of Oriental Structural Engineers (P) Ltd. and other similar cases, upholding the CIT(A)’s decision to exclude strategic investments while computing disallowance under Rule 8D(ii).2. Deleting disallowance of Rs. 4,18,000/- u/s.37(2B) of the I.T.Act:The AO disallowed the expenditure towards advertisement in souvenir, brochures, etc., published by a political party. The CIT(A) deleted the disallowance, noting that the expenditure was a donation to a political party and not covered under section 37(2B). The tribunal upheld the CIT(A)’s order, confirming that the expenditure was incurred wholly and exclusively for business purposes and was not personal in nature.3. Deleting disallowance of interest of Rs. 4,61,376/-:The AO observed that the assessee had made interest-free advances while paying interest on loans taken, leading to a disallowance of Rs. 4,61,376/- at 12% per annum. The CIT(A) deleted the disallowance, noting that the assessee had sufficient surplus funds in the form of capital, and borrowed money was not used for advancing interest-free loans. The tribunal affirmed the CIT(A)’s decision, referencing the jurisdictional High Court’s decision in the case of Reliance Utilities Ltd., which established that if interest-free funds are sufficient to meet investments, interest on borrowed capital used for business purposes is deductible.4. Deleting adhoc disallowance of Rs. 1,00,000/- on telephone expenses, vehicle expenses, etc.:The AO made an adhoc disallowance of Rs. 1,00,000/- citing the possibility of personal use. The CIT(A) deleted the disallowance, noting that the assessee had furnished evidence for each expenditure head, and the AO had no material to show personal use. The tribunal, however, found that personal elements in such expenses could not be ruled out and restricted the disallowance to 10% of the expenses.5. Deleting addition of Rs. 3,50,19,655/- on account of alleged non-genuine purchases:The AO added the entire purchases from 12 parties as non-genuine based on information from the Sales Tax Department’s website listing suspicious dealers. The CIT(A) deleted the addition, highlighting that the purchases were genuine, supported by invoices, account payee cheques, and certification by BMC authorities. The tribunal upheld the CIT(A)’s decision, noting that the assessee maintained proper records, and the materials were used in executing contracts, verified by BMC engineers and vigilance departments. The tribunal found no adverse material to suggest that the assessee received cash back against payments made, confirming the deletion of the addition.Conclusion:The tribunal allowed the revenue’s appeal in part, upholding the CIT(A)’s decisions on most issues while partially allowing the revenue’s contention on the disallowance of personal expenses. The order was pronounced on 27/04/2016.