2020 (6) TMI 128 - AT - Income Tax

Appeal successful: ITAT overturns disallowances on interest, Diwali, and food expenses

The ITAT allowed the appeal of the assessee, overturning disallowances made by lower authorities on interest paid on borrowed monies, disallowance under ... Disallowing interest paid on borrowed monies - Disallowance u/s 40A - AO held that the transfer of funds from the proprietary concern of the assessee to the assessee's personal account and then to the firm wherein the assessee is a partner and from the partnership firms the amounts have been transferred to the HUF and to the mother's account and finally the amounts have been received from the account of the mother and the HUF to the proprietary concern of the assessee - HELD THAT:- There is no dispute about the payment of the interest and the utilization of the loans received by the business entity. The invocation of the Section 40A(2)(b) by the AO in this case is on a wrong interpretation/application of the provisions. The provisions of Section 40A(2)(b) entitles disallowance on account of any expenditure being excessive are unreasonable having regard to the fair market value. In the instant case, we find that the amounts have been received from the partnership firm by the loan parties and if at all any disallowance is to be made, the same needs to be considered in the hands of the partnership firms but not in the proprietary concern. Section 40A(2)(b) does not envisage the complete disallowance of expenditure unless it is proved to be excessive or unreasonable having regard to the fair market value. No such finding with regard to the excess payment has also been established by the revenue while invoking the provisions of Section 40A(2)(b). Hence, the disallowance made is hereby directed to be deleted. Disallowance u/s 14A r.w. Rule 8D - HELD THAT:- The undisputed fact is that the assessee has not earned any exempt income nor claimed any expenses with regard to the investments made. The AO has disallowed an amount based on the CBDT Circular No. 5/2014 dated 11.12.2014. Since, no exempt income has been earned and no expenses has been claimed, we hereby hold that no disallowance is warranted under this Section. Interest on Capital Work in Progress (CWIP) - HELD THAT:- Assessee has paid and claimed in P&L A/c, an interest of ₹ 10,05,318/- which was on account of interest on cash credit, interest on unsecured loans and interest on car loan but not anything related to CWIP. The assessee has not debited any interest in the P&L A/c under the head 'capital work in progress'. The capital of the assessee was ₹ 20.24 crores and the operating profit for the year is ₹ 11.70 crores. Since, no amount has been debited in the P&L A/c, no disallowance ought to have been made by the AO. The disallowance is hereby directed to be deleted. Diwali & Food Expense Disallowance - HELD THAT:- We find that the Diwali expenses have been fully vouched alongwith the relevant bills. Since, all the supporting documents for the services obtained and payments made are on record, the disallowance made by the AO at the rate of 25% on estimate basis is hereby directed to be deleted. Similarly, 50% of the amount disallowed out of expenses pertaining to food supply to approximately 100 persons working for the assessed, inspite of the evidences available for supply of food, payments to food suppliers thereof and employment of is hereby directed to be deleted. Appeal of assessee allowed. Issues:1. Disallowance of interest paid on borrowed monies2. Disallowance under Rule 8D of the Income Tax Rules, 1962 read with Section 14A of the Income Tax Act, 19613. Disallowance of interest on capital work in progress4. Disallowance of Diwali expenses5. Disallowance of food expenses for factory workers1. Disallowance of Interest Paid on Borrowed Monies:The AO disallowed interest paid to two parties, holding that the loans were not for genuine business purposes, invoking Section 40A(2)(b). The CIT(A) confirmed the addition based on a circuitous route of fund transfer. However, the ITAT found that the loans were utilized for business purposes, and the disallowance under Section 40A(2)(b) was not justified. The ITAT directed the deletion of the disallowance.2. Disallowance under Rule 8D of the Income Tax Rules, 1962 read with Section 14A of the Income Tax Act, 1961:As the assessee had not earned any exempt income or claimed expenses on investments, the ITAT held that no disallowance was warranted under Section 14A read with Rule 8D, despite the AO's disallowance based on a CBDT circular.3. Disallowance of Interest on Capital Work in Progress:The AO disallowed interest on capital work in progress, estimating it at 12%. However, the ITAT found that the interest claimed was not related to capital work in progress and that no amount was debited under that head. Therefore, the ITAT directed the deletion of the disallowance.4. Disallowance of Diwali Expenses:The AO disallowed Diwali expenses on an estimate basis, but the ITAT found that all expenses were vouched with relevant bills. As all supporting documents were available, the ITAT directed the deletion of the disallowance.5. Disallowance of Food Expenses for Factory Workers:The AO disallowed food expenses for factory workers, but the ITAT found evidence of food supply, payments to suppliers, and employment records. As a result, the ITAT directed the deletion of the disallowance.In conclusion, the ITAT allowed the appeal of the assessee, overturning the disallowances made by the lower authorities on various grounds.