2018 (7) TMI 817 - AT - Income Tax

Income Tax Appeals: Partial win for assessee on disallowances, revenue's appeal dismissed.

The Tribunal partly allowed the assessee's appeal regarding disallowance under Section 14A of the Income Tax Act, disallowance of interest expense, and ... Disallowance u/s.14A - assessee did not raise this particular ground in the statement of grounds of appeal before the Ld.CIT(A) and thus prays for reappraisal of the said ground - Held that:- As gone through the materials available on record including the orders passed by the authorities below. We find merit in the plea of the assessee towards inadvertence for omitting to raise a specific ground for adjudication before CIT(A) despite detailed presentation of facts in ‘statement of facts’. In the facts and circumstances of the case, we consider it just and proper and in the interest of justice to set aside the issue in dispute and restore the matter to the file of the ld.CIT(A) to decide the issue afresh Disallowance of interest expense @ 6% (18% - 12%) out of interest payment - whether the interest received by the assessee @ 12% which is reasonable and not the estimated rate of interest @18% notionally as done by the ld.CIT(A) - Held that:- We find that the AO has not made any enquiry as to the prevailing market rate of interest independently and only on surmises and conjectures without any basis the order of disallowance of 6% interest as made excessive. We therefore set aside the order of disallowing interest expense of ₹ 12,330/-. Thus, ground of appeal preferred by the assessee is allowed. Disallowance of depreciation on Car - rate claimed by the assessee can only be considered had it been a commercial vehicle and used in the business of hiring and thus 50% of the depreciation was allowed by the AO and excess depreciation denied - Held that:- We find merit in the plea of the assessee towards inadvertence for omitting to raise a specific ground for adjudication before CIT(A) despite detailed presentation of facts in ‘statement of facts’. In the facts and circumstances of the case, we consider it fair and proper and in the interest of justice to set aside the order passed by the authorities below on the issue in dispute and restore the matter to the file of the ld.CIT(A) to decide the issue afresh upon giving a proper opportunity of hearing to the assessee and further taking into consideration of the entire evidence already available on record as well as other documentary evidence which the assessee may choose to file in support of the claim on the issue. Thus, the said ground preferred by the assessee is allowed for statistical purposes. Disallowance of interest expenses/salary being excess u/s.40A(2)(b) - Held that:- We have found justification in the submission made by the Ld.AR particularly when no deliberation has been made by the ld.AO while deviating from his earlier stand taken by Revenue in accepting the rate in regard to payment of salary and performance of these employees in the earlier assessment year. We, therefore, do not justify the orders passed by the authorities below and delete such addition. Disallowance of insurance expenses - Held that:- The assessee is following mercantile system of accounting and the assessee was given ample opportunities to substantiate their claim. The issue is not of commercial expediency/business purpose but the expenses shown by the assessee were incurred for insurance for the period falling in next year and have not approved. Since it has not approved and it pertains to subsequent year, it is not allowable and we find no infirmity in the order passed by the Ld. CIT(A) in confirming the disallowance made by him. Addition made u/s.37 - disallowance of commission expenses/payment made to agents - Held that:- We find that the justification given by the Ld.CIT(A) in deleting the addition made by the Ld.AO on commission expenses incurred by the assessee is just and proper relying on observation made in the judgement of CIT vs. Associated Electrical Agencies (2003 (12) TMI 36 - MADRAS HIGH COURT) where it was held that if the assessee which carries on a business finds that it is commercially expedient to incur certain expenditure directly or indirectly, it would be open to such an assessee to do so notwithstanding the fact that a formal deed does not proceed the incurring of such expenditure. Addition u/s.40A(2)(b) on account of excess interest payment - Held that:- he rate of interest will definitely be lesser in respect of the partners since the partners have interest in profits and even the partners may agree to forgo the capital interest also. On this premise, the payment of 18% interest to the parties lending unsecured loans have reasonably given by the Ld. CIT(A) and disallowance made by the AO has been deleted. The reasons for allowing the interest @ 18% as assigned by the Ld. CIT(A) is, according to us, justiciable so far as the interest of the business is concerned. Addition on account of interest of late payment of Excise duty - Held that:- It is well settled that interest on belated payment of excise duty is compensatory in nature and is not in the nature of penalty or offence in terms of Explanation 1 to Section 37 of the Act. Thus, we find merit in the plea of the assessee for the claim of interest amount as business expenditure and we therefore delete the addition. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Disallowance of interest expense.3. Disallowance of depreciation on a car.4. Disallowance of salary expenses under Section 40A(2)(b).5. Disallowance of insurance expenses.6. Deletion of commission expenses disallowance under Section 37.7. Deletion of excess interest payment disallowance under Section 40A(2)(b).8. Disallowance of interest on late payment of excise duty.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The assessee's appeal raised an issue about the disallowance of Rs. 19,65,003/- under Section 14A. The assessee admitted that this issue was inadvertently not raised before the CIT(A) despite detailed submissions in the statement of facts. The Tribunal found merit in the assessee's plea and set aside the issue, remanding it back to the CIT(A) for fresh adjudication, allowing the assessee to present additional evidence.2. Disallowance of Interest Expense:The assessee contested the disallowance of Rs. 12,330/- interest expense. The AO disallowed this amount, arguing that the interest paid at 18% was excessive compared to the 12% charged to M/s. Sona Stainless Steel. The Tribunal found that the AO did not independently verify the prevailing market rate of interest and based the disallowance on conjectures. The Tribunal set aside the disallowance, allowing the assessee's appeal.3. Disallowance of Depreciation on a Car:The assessee claimed depreciation of Rs. 61,286/- on a Maruti WagonR car at 50%, which the AO disallowed, stating that the higher rate was only applicable to commercial vehicles used for hiring. The Tribunal noted that the issue was not raised before the CIT(A) and remanded the matter back to the CIT(A) for fresh adjudication, allowing the assessee to present additional evidence.4. Disallowance of Salary Expenses under Section 40A(2)(b):The AO disallowed Rs. 1,29,248/- paid as salary to employees covered under Section 40A(2)(b), arguing that the assessee failed to justify the reasonableness of these payments. The Tribunal found that similar payments were accepted in earlier years without dispute and deleted the disallowance, allowing the assessee's appeal.5. Disallowance of Insurance Expenses:The AO disallowed Rs. 1,29,248/- of insurance expenses, arguing that these expenses pertained to the next year and were not allowable under the mercantile system of accounting. The Tribunal upheld the disallowance, agreeing with the AO and CIT(A) that expenses for the next year cannot be claimed in the current year.6. Deletion of Commission Expenses Disallowance under Section 37:The Revenue's appeal contested the CIT(A)'s deletion of Rs. 21,00,000/- disallowed by the AO as commission expenses. The AO argued that the assessee failed to provide sufficient details and justification for these payments. The CIT(A) found that the assessee provided adequate evidence, including bank statements, TDS deductions, and confirmations from the parties. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere.7. Deletion of Excess Interest Payment Disallowance under Section 40A(2)(b):The Revenue's appeal also contested the deletion of Rs. 26,44,150/- disallowed by the AO as excess interest payment to related parties. The AO disallowed the interest paid at 18%, deeming it excessive compared to the 12% rate. The CIT(A) found that the 18% rate was reasonable and consistent with market rates for unsecured loans. The Tribunal upheld the CIT(A)'s decision, agreeing with the reasoning provided.8. Disallowance of Interest on Late Payment of Excise Duty:The assessee's appeal contested the disallowance of Rs. 8,741/- paid as interest on late payment of excise duty, which the AO considered penal in nature. The Tribunal found that such interest is compensatory and not penal, allowing the assessee's claim as a business expenditure.Summary of Results:1. Assessee’s appeal in ITA No.2049/Ahd/12 for AY 2009-10 is partly allowed for statistical purposes.2. Revenue’s appeal in ITA No.2054/Ahd/12 for AY 2009-10 is dismissed.3. Assessee’s CO No.213/Ahd/12 for AY 2009-10 is dismissed.4. Assessee’s appeal in ITA No.1835/Ahd/12 is allowed for statistical purposes.