Tribunal allows appeal, removes disallowance of job work expenses and interest paid.

The tribunal allowed the appeal of the assessee, deleting the disallowance of Rs. 25,00,000 for job work expenses and Rs. 5,11,060 for interest paid.

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Issues Involved:

1. Disallowance of job work expenses on a lump sum basis.
2. Disallowance of interest paid on the grounds of excessiveness.

Detailed Analysis:

1. Disallowance of Job Work Expenses:

During the assessment proceedings, the AO observed discrepancies in the job work expenses claimed by the assessee amounting to Rs. 8,77,81,594/-. The AO noted that some bills lacked descriptions, were unsigned, or had signatures in the same handwriting. Despite the assessee's argument that payments were made through banking channels with TDS duly deducted, the AO made a lump sum disallowance of Rs. 25,00,000/- due to unverifiable expenses.

The assessee appealed to the CIT(A), who confirmed the AO's disallowance, noting defects in the bills and substantial cash payments to related parties. The CIT(A) justified the disallowance, stating it was less than 3% of total job work charges and reasonable.

The assessee contended that the disallowance was arbitrary, without specific instances of unverifiable expenses, and that all payments were vouched and made through banking channels. The assessee argued that the AO did not consider past assessments where no such disallowances were made.

Upon review, it was found that the disallowance was made on an ad hoc basis without any specific instances of unverifiable payments or violations of Section 40A(3) of the Income Tax Act. The tribunal accepted the assessee's contention and deleted the disallowance of Rs. 25,00,000/-. Thus, ground No.1 of the assessee was allowed.

2. Disallowance of Interest Paid:

The assessee paid interest of Rs. 17,88,712 to M/s Poddar Consultancy Organization at 16.8%. The AO disallowed the excess interest of Rs. 5,11,060/-, restricting it to 12%, the rate paid to other concerns, under Section 40A(2)(b) due to the recipient being a shareholder.

The CIT(A) upheld the AO's decision, reasoning that the interest rate of 16.8% was unreasonable compared to the 12% rate from banks and institutions.

The assessee argued that M/s Poddar Consultancy Organization was not a shareholder and thus not a related party under Section 40A(2)(b). Furthermore, the higher interest rate was justified as it was unsecured borrowing, unlike secured bank loans.

The tribunal noted that the AO failed to provide a comparable case for the interest rate on unsecured borrowing. The tribunal found the interest paid reasonable and allowed ground No.2 of the assessee.

Conclusion:

In conclusion, the tribunal allowed the appeal of the assessee, deleting the disallowance of Rs. 25,00,000/- for job work expenses and Rs. 5,11,060/- for interest paid. The order was pronounced in the open court on 23/02/2017.

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