Lumpsum expense disallowance deleted when AO fails to identify specific irregularities in kaccha bills

The ITAT Jodhpur allowed the assessee's appeal on both grounds. First, the tribunal deleted a lumpsum disallowance of Rs. 5 lac for expenses supported by self-made slips and kaccha bills, noting that such documentation doesn't automatically render expenses non-genuine when the AO failed to identify specific irregularities. The tribunal emphasized that kaccha bills often indicate necessity and urgency of expenditure. Second, regarding deemed interest on interest-free loans, the tribunal found no addition warranted as the assessee had sufficient non-interest bearing funds available, following SC precedent in Reliance Industries Ltd. that permits presumption of interest-free fund utilization when adequate such funds exist.

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Issues Involved:
1. Lump sum disallowance of Rs. 5,00,000/- for unverifiable expenses.
2. Disallowance of Rs. 9,66,212/- on account of interest against interest-free loans.

Summary:

Issue 1: Lump sum disallowance of Rs. 5,00,000/- for unverifiable expenses

The assessee, a Royalty & Toll Plaza contractor, filed a return declaring an income of Rs. 5,03,351/- for AY 2014-15. During the assessment, the AO observed that some expenses were supported only by self-made slips or "kachha bills" issued by local traders, which could not be verified. Consequently, the AO made a lump sum disallowance of Rs. 5,00,000/-. The CIT(A) upheld this disallowance, stating that the assessee's acceptance of using self-made slips justified the AO's decision. However, the Tribunal noted that there was no specific instance cited by the AO or CIT(A) to prove the expenses were not genuine. Citing various precedents, the Tribunal concluded that the lump sum disallowance was not warranted and deleted the addition.

Issue 2: Disallowance of Rs. 9,66,212/- on account of interest against interest-free loans

The AO disallowed Rs. 9,66,212/- out of the claimed bank interest and charges of Rs. 59,38,425/-, reasoning that the assessee had given interest-free advances to AOP members. The CIT(A) confirmed this disallowance, stating that the assessee did not provide evidence to prove the advances were for business purposes. However, the Tribunal found that the assessee had sufficient non-interest bearing funds amounting to Rs. 31.96 crores and had earned more interest income than the interest paid. Citing the Supreme Court's decision in CIT Vs. Reliance Industries Ltd., the Tribunal held that no notional interest should be disallowed when sufficient interest-free funds are available. Therefore, the disallowance was deleted.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting both the lump sum disallowance of Rs. 5,00,000/- and the interest disallowance of Rs. 9,66,212/-.

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