ITAT Pune rules in favor of assessee, deletes ad-hoc expense disallowance; dismisses Revenue's interest expense appeal.

The ITAT Pune allowed the assessee's appeal, directing the deletion of ad-hoc disallowance of expenses under section 37(1) of the IT Act, as the AO lacked specific evidence of non-business expenses. Additionally, the ITAT dismissed the Revenue's appeal regarding interest expenses under section 36(1)(iii), upholding the CIT(A)'s finding that there was no diversion of interest-bearing funds.

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Issues:
1. Disallowance of expenses on ad-hoc basis under section 37(1) of the Act.
2. Disallowance of interest expenses under section 36(1)(iii) of the IT Act.

Issue 1: Disallowance of expenses on ad-hoc basis under section 37(1) of the Act:
The case involved cross-appeals by the assessee and Revenue arising from the Commissioner of Income-Tax (A) - Pune - 3's order for the assessment year 2013-14. The assessee, a Private Limited Company engaged in the transportation business, filed its return of income showing a loss. The Assessing Officer (AO) disallowed expenses on an ad-hoc basis, leading to an appeal by the assessee. The Income Tax Appellate Tribunal (ITAT) Pune considered the issue and found that the AO's disallowance lacked specific instances of non-business expenses. The ITAT noted that the assessee had provided necessary documents, and no disallowance was made in subsequent years. Consequently, the ITAT directed the deletion of the addition made by the AO, allowing the assessee's appeal.

Issue 2: Disallowance of interest expenses under section 36(1)(iii) of the IT Act:
The Revenue's appeal concerned the disallowance of interest expenses claimed by the assessee. The AO disallowed a proportionate amount of interest, alleging that the assessee had not demonstrated the business purpose of loans given to subsidiaries and a partnership firm. The CIT(A) deleted the addition, stating that the assessee had sufficient interest-free funds for the loans, and there was no diversion of interest-bearing funds. The Revenue contended that the borrowed funds were diverted, citing the Reliance Industries Ltd. case. However, the ITAT upheld the CIT(A)'s decision, finding no evidence of diversion and supporting the reliance on the Reliance Industries Ltd. case. Consequently, the ITAT dismissed the Revenue's appeal.

In conclusion, the ITAT allowed the assessee's appeal regarding the disallowance of expenses and dismissed the Revenue's appeal concerning the interest expenses. The judgments were pronounced on October 16, 2019.

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