2021 (2) TMI 1143 - AT - Income Tax

Tribunal allows appeal, reduces disallowances on interest, wastage, and household withdrawals. Substantiation key.

The Tribunal partially allowed the appeal, directing the deletion of disallowances related to interest on credit card dues, wastage and shrinkage ... Disallowance of interest paid - interest charged by banks for late payment of credit card dues - Allowable business expenses or not? - HELD THAT:- Assessee, before the AO as well as CIT(A), has explained that credit cards were used for business related expenses and therefore such interest on late payment of credit card dues has to be allowed as business purposes - we find merit in the above argument of the ld. Counsel for the assessee. The various expenses so incurred for which payments made through credit card were claimed as business expenses and no such disallowance has been made by the AO. Therefore, merely because there is delay in payment of credit card for which interest has been charged by the bank for late payment of credit cards, the same in my opinion, cannot be disallowed. We find merit in the arguments of the ld. Counsel that the amount used through credit cards are just like temporary loans and therefore interest charged by banks for late payment of credit card dues partakes the character of business expenses. Disallowance of wastage and shrinkage expenses - assessee failed to furnish the details or documents in support of the claim nor produced books of accounts - HELD THAT:- While the Assessing Officer in his remand report has given his comment that shrinkage is possible to the extent of 3%, however, he is silent in his comments on wastage. As earlier mentioned, there is bound to be some wastage while cutting the cloths for making of dresses in a garment factory. The lower authorities have completely closed their eyes on this issue. The assessee also filed various articles showing that there is wastage of cloths to the extent of ranging from 16 to 20% in garments industry. Since, the assessee in the instant case has shown about 10% of the wastage and shrinkage, therefore, in considered opinion that the same is reasonable under the facts and circumstances of the case and no disallowance is called for on this issue. The order of the CIT(A) is accordingly set-aside and the Assessing Officer is directed to delete the addition. Ad-hoc disallowance on account of household withdrawing - HELD THAT:- It is submission of the Ld. Counsel for the assessee that the family of the assessee consists of the assessee, his wife and daughter. The wife and daughter are tax payers and are also contributing towards the house hold expenses. However, on a pointed query by the Bench as to what is the amount shown by the wife and the daughter of the assessee for household expenses, the learned counsel for the assessee was not in a position to substantiate the same. Therefore, the contention of the assessee that the amount of ₹ 93,632/- shown by the assessee as withdrawals for household expenses is sufficient to run the family along with the withdrawals shown by the wife and the daughter of the assessee cannot be accepted in full. At the same time, the estimation made by the Assessing Officer at ₹ 2,50,000/- in absence of any material in his hand to show any lavish life style of the assessee appears to be on the higher side. Disallowance of ₹ 1 lakh lump sum on ad-hoc basis on the facts and circumstances of the case will meet the ends of the justice. I hold and direct accordingly. The order of the CIT(A) is accordingly modified and the Assessing Officer is directed to restrict the disallowance at ₹ 1 lakh. Addition being 10% of all the Direct & Indirect expenditure - HELD THAT:- Admittedly, the accounts of the assessee are audited and no discrepancies have been pointed out by the auditors. Assessing Officer has not invoked the provisions of section 145 of the Act and has straightway applied the rate of 10% for making ad-hoc disallowance. He has not pointed out any mistake in any of the bills/vouchers. Since, the accounts of the assessee are audited and the auditors have not pointed out any discrepancy and since the books of accounts were also produced before the CIT(A) and no discrepancy was found by him and considering the fact that books were also not rejected by the Assessing Officer by invoking the provisions of section 145 of the Act, therefore, no ad-hoc disallowance is called for. Thus direct the AO to delete the disallowance. Appeal of the assessee is partly allowed. Issues Involved:1. Disallowance of interest paid.2. Disallowance of shortage expenses.3. Household withdrawals.4. Disallowance of expenses.5. Late deposit of ESI & EPF.Issue-wise Detailed Analysis:1. Disallowance of Interest Paid:The first issue raised by the assessee relates to the CIT(A) sustaining an amount of Rs. 1,40,300 out of the disallowance of Rs. 9,58,626 made by the Assessing Officer (AO) on account of interest paid. The AO observed that the assessee claimed financial expenses totaling Rs. 10,38,602, including Rs. 9,58,626 as interest to the bank. The AO disallowed the interest due to the assessee's failure to provide details or produce books of accounts. The CIT(A), after a remand report, deleted Rs. 8,18,324 but sustained Rs. 1,40,300 as interest paid on credit card dues. The Tribunal found merit in the assessee's argument that credit card dues were for business expenses and directed the AO to delete the addition.2. Disallowance of Shortage Expenses:The second issue pertains to the addition of Rs. 10,05,579 on account of disallowance of wastage and shrinkage expenses. The AO disallowed the entire amount due to lack of satisfactory details. The CIT(A) upheld this, noting the AO's allowance of only 3% shrinkage. The Tribunal, recognizing the inherent wastage in garment manufacturing, found the 10% wastage and shrinkage claimed by the assessee reasonable and directed the AO to delete the addition.3. Household Withdrawals:The third issue involves an ad-hoc disallowance of Rs. 2,50,000 on account of household withdrawals. The AO found the assessee's withdrawal of Rs. 93,632 insufficient for family maintenance. The CIT(A) confirmed this, considering the assessee's business nature. The Tribunal, however, deemed the AO's estimation high and reduced the disallowance to Rs. 1 lakh, considering the family's tax-paying status.4. Disallowance of Expenses:The fourth issue concerns the confirmation of Rs. 8,11,938, being 10% of all direct and indirect expenses. The AO disallowed this amount due to the assessee's failure to produce books of accounts and substantiate expenses. The CIT(A) upheld this disallowance, citing potential personal use and lack of supporting documents. The Tribunal, noting the audited accounts and absence of discrepancies pointed out by the AO, found the ad-hoc disallowance unjustified and directed the AO to delete it.5. Late Deposit of ESI & EPF:The CIT(A) deleted the disallowance of Rs. 1,34,194 for the late deposit of EPF & ESI, which was not contested further.Conclusion:The Tribunal allowed the appeal partly, directing deletions of disallowances related to interest on credit card dues, wastage and shrinkage expenses, and ad-hoc disallowance of expenses, while reducing the household withdrawal disallowance. The judgment emphasizes the need for proper substantiation and reasonable estimations in disallowances.