2016 (11) TMI 1770 - AT - Income Tax

Tax authority upholds addition for unbooked road tax; AO to verify later-year taxation; other interest disallowances deleted under s.36(1)(iii)

ITAT PUNE - AT upheld the CIT(A)'s addition for non-booking of road tax, rejecting the assessee's unsupported claim that the purchase price included road ... Addition on account of non-booking of road payment tax - HELD THAT:- As undisputed fact that assessee had purchased Mahendra Bolero during the assessment year. During the course of assessment proceedings, assessee was asked to produce the proof of payment of road tax which the assessee has failed to do. Even before the ld. CIT(A) assessee did not produce any evidence demonstrating the payment of road tax. Even before us ld.AR has only reiterated the submission of the purchase price that is reflected on the books of accounts to be inclusive of road tax but has however not placed any material on record to demonstrate that the price paid for purchase of vehicle was inclusive of road tax. No reason to interfere with the order of ld. CIT(A). Thus, the ground of assessee is dismissed. Cessation of liability u/s. 41(1) - As per AO, no liability should have been reflected by the assessee and shown in the accounts of the assessee since the assessee was following Cash System of accounting - HELD THAT:- Before us the ld. AR could not produce any evidence in support of the contention that the amount was taxed in subsequent years. No interference of the order of CIT (A) is called for. However we direct the AO to verify the contention of the assessee of having the amount offered to tax in subsequent years and if the assessee’s contention is found correct then he has to ensure that no double addition of the same amount takes place. We also direct the assessee to produce the relevant details as called by the AO. In case, assessee fails to produce the relevant details, AO shall be free to decide the matter on the basis of material on record. Thus, this ground is allowed for statistical purposes. Disallowance u/s 36(1)(iii) - interest free advances given - HELD THAT:- In the present case, we find that AO had proceeded to make disallowance on the basis of the presumption that assessee has diverted funds from interest bearing funds to parties for non-business purposes. Before us ld. AR has placed on record the copy of the Balancesheet of the assessee which shows that the assessee has capital which is far in excess of the amount that has been advanced, on which the disallowance of interest has been worked out by the AO. Disallowance has been made on ad-hoc basis and without bringing any material to show that interest bearing funds have been used by the assessee for advancing interest free advances. Considering all and case of Mahanagar Gas [2013 (7) TMI 118 - BOMBAY HIGH COURT] we are of the view that no disallowance of interest is called for in the present case. Disallowance of interest - disallowance of interest has been made by the AO by presuming that the funds from C.C Account has been utilized by the assessee for acquisition of assets more so when there were no debtors or stock at the year end - HELD THAT:- Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd [2009 (1) TMI 4 - BOMBAY HIGH COURT] has held that if there are funds available both interest free and overdraft / or loan taken, then a presumption would arise that investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investments. We further find that in the case of CIT Vs. Mahanagar Gas Ltd. [2013 (7) TMI 118 - BOMBAY HIGH COURT] has held that there is no requirement under section 36(1)(iii) that assessee should have separate account in respect of non-interest bearing funds from that of interest bearing funds to establish that investments have been made out of its own funds i.e., non-interest bearing funds. We are of the view that no addition on account of disallowance of interest is called for in the present case. Disallowance on account of contract payments (machinery expenses) - AO noted that assessee could not justify the increase in expenses and further the expenses were paid by self-made vouchers and the vouchers were not fully verifiable as payments were also made to parties covered u/s 40A(2)(b) - HELD THAT:- In the present case, we find that AO compared the ratio of expenses with contract in the year under consideration and immediately preceding year and on that basis he concluded that assessee has incurred expenditure which are not for the purpose of business. Before us apart from the general submissions, Revenue has also not placed any material on record to demonstrate that which of the expenditure was not for the purpose of business. When the expenditure has been disallowed on ad-hoc basis and without bringing any material on record to demonstrate as to which all the expenses are not allowable, we are of the view that AO was not justified in working out the disallowance of expenditure. ISSUES PRESENTED AND CONSIDERED 1. Whether an addition under section 69C can be sustained for alleged unaccounted payment of road tax where the assessee asserts the purchase price was inclusive of tax but fails to produce corroborative documents. 2. Whether amounts shown as liabilities in the books by a cash-basis assessee can be treated as cessation of liability taxable under section 41(1) when the assessee claims those amounts were subsequently offered to tax in a later year. 3. Whether interest disallowance under section 36(1)(iii) is sustainable where advances/deposits (including to persons covered by section 40A(2)(b)) are interest-free but the assessee contends advances were made out of sufficient interest-free funds or for business/agricultural purposes. 4. Whether interest paid on borrowings is disallowable under section 36(1)(iii) to the extent borrowed funds are presumed to have been utilised for acquisition of non-income-earning assets when the assessee contends there were sufficient interest-free funds and no cash-flow/fund-flow proof was provided. 5. Whether an ad-hoc disallowance of contract payment expenses is permissible where the Assessing Officer compares ratios between years and disallows excess without identifying specific non-business items or adducing corroborative material. 6. Whether levy of interest under sections 234B and 234C requires separate adjudication in view of other tax adjustments (consequential nature). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Addition under section 69C for alleged unaccounted road tax payment Legal framework: Section 69C permits addition where expenditure is proved to be from undisclosed sources; AO requires proof to rebut presumption of unexplained expenditure. Precedent treatment: No specific binding precedent cited on point; lower authorities relied on principle that unexplained payments not reflected in accounts may be added. Interpretation and reasoning: The Court examined whether the assessee produced documentary evidence that the vehicle purchase price was inclusive of road tax. The assessee repeatedly asserted inclusion but failed to produce invoices or transactional documents corroborating that contention, despite opportunities before AO and CIT(A). In absence of proof, the AO's inference that the separate road-tax amount was paid from unexplained sources was held justified. Ratio vs. Obiter: Ratio - where an assessee asserts inclusion of tax in a lumped purchase price, documentary proof is necessary to rebut AO's presumption under s.69C; absence of such proof justifies addition. Conclusion: Addition of Rs.69,670 u/s 69C affirmed; assessee's ground dismissed. Issue 2 - Cessation of liability under section 41(1) for liabilities shown by cash-basis assessee Legal framework: Section 41(1) treats cessation of liability as income; cash-basis accounting ordinarily does not reflect liabilities unless payments outstanding are erroneously booked. Precedent treatment: No novel precedent distinguished or overruled; applied accounting principle for cash system. Interpretation and reasoning: AO treated liabilities shown in the balance sheet by a cash-system assessee as incorrect and hence added them as ceased liabilities. The assessee claimed the amounts related to expenditure and non-recovery of TDS and that such amounts were offered to tax in a subsequent year. The assessee, however, failed to furnish documentary proof before AO, CIT(A), or the Tribunal to show those amounts were indeed taxed later. The Tribunal directed AO to verify the assessee's claim and allowed the ground for statistical purposes with direction to avoid double taxation if subsequent taxation proved. Ratio vs. Obiter: Ratio - where a cash-basis assessee shows liabilities inconsistent with cash accounting and fails to substantiate their nature or subsequent taxation, AO may add them under s.41(1); but if later proved taxed in another year, double taxation must be avoided. Conclusion: Addition sustained subject to verification; ground allowed for statistical purposes and remand directed to verify whether amounts were taxed subsequently and to prevent double addition. Issue 3 - Disallowance under section 36(1)(iii) for interest on advances/deposits (advances covered by section 40A(2)(b)) Legal framework: Section 36(1)(iii) disallows interest if funds borrowed have been diverted to other purposes; section 40A(2)(b) covers payments to related parties requiring scrutiny. Precedent treatment: Tribunal relied on High Court decisions (Mahanagar Gas Ltd. and Reliance Utilities & Power Ltd.) recognizing that when sufficient interest-free funds exist, presumption of diversion of borrowed funds does not automatically arise and that separate accounting for interest-free funds is not a statutory requirement to establish source. Interpretation and reasoning: The AO made an ad-hoc disallowance by applying an assumed interest rate where advances to certain persons were interest-free. The assessee produced balance-sheet evidence showing capital far in excess of advances. No material was produced by Revenue to demonstrate actual diversion of interest-bearing funds. Applying principles in Mahanagar Gas and Reliance Utilities, the Tribunal found that where non-interest funds are sufficient to cover advances, disallowance is improper and there is no requirement for separate ledger proof of non-interest funds. Ratio vs. Obiter: Ratio - disallowance under s.36(1)(iii) cannot rest on mere presumption of diversion where the assessee demonstrates, by balance-sheet/capital sufficiency, that interest-free funds were available; no requirement to maintain segregated accounts for non-interest funds. Conclusion: Disallowance of Rs.2,22,157 (AY 2009-10) and corresponding disallowance in AY 2010-11 deleted; grounds allowed. Issue 4 - Disallowance of interest attributable to borrowings used to acquire non-income-earning assets Legal framework: Interest paid on borrowed funds is deductible if for business purposes under s.36(1)(iii); where borrowed funds are used for acquisition of non-income-earning assets, corresponding interest can be disallowed. Precedent treatment: Reliance on Reliance Utilities & Power Ltd. and Mahanagar Gas Ltd. High Court decisions holding that availability of sufficient interest-free funds gives rise to presumption investments were out of such funds and segregated accounting is not mandated to prove this. Interpretation and reasoning: AO inferred from lack of inventory/debtors and substantial investments that cash-credit funds financed non-income assets and disallowed interest proportionately. The assessee produced balance-sheet showing capital adequate to fund investments and relied on High Court precedents to rebut AO's presumption. No positive evidence was produced by Revenue to show actual utilisation of borrowed funds for investments. The Tribunal held the AO's ad-hoc presumption and disallowance unsustainable on facts and precedent. Ratio vs. Obiter: Ratio - where interest-free funds are demonstrably sufficient to meet investments, AO cannot merely presume borrowings financed such investments and disallow interest; absence of cash-flow/fund-flow proof by Revenue undermines disallowance. Conclusion: Disallowance of Rs.3,45,758 deleted; ground allowed. Issue 5 - Ad-hoc disallowance of contract payment expenses Legal framework: Expenses are allowable if proved to be for business purpose; Revenue must identify non-business items or prove disallowance basis rather than rely on inter-year ratio comparison alone. Precedent treatment: Applied general principle that ad-hoc disallowance without identification of specific non-business payments is not sustainable. Interpretation and reasoning: AO disallowed Rs.10,19,529 by comparing ratios of machinery/contract payments between years and noting increased payments and payments to parties within s.40A(2)(b). Revenue did not identify particular payments as non-business or produce evidence of sham or non-business nature. Tribunal held that ad-hoc percentage disallowance without demonstrating which items are not for business is impermissible; business exigencies and client-driven billing could explain higher payments. Ratio vs. Obiter: Ratio - disallowance of general expense claims requires identification of non-business components or cogent evidence; mere ratio comparison and ad-hoc trimming is not a valid basis for disallowance. Conclusion: Disallowance of Rs.10,19,529 deleted; ground allowed. Issue 6 - Levy of interest under sections 234B/234C Legal framework: Interest under sections 234B/234C is consequential upon assessment and tax adjustments. Interpretation and reasoning: The Tribunal treated levy of interest as consequential to substantive adjustments and observed no separate adjudication was required once primary disallowances were addressed. Ratio vs. Obiter: Obiter/Practical disposition - where primary tax adjustments are varied in favour of assessee, consequential interest demand requires recalculation; separate adjudication unnecessary on settled points. Conclusion: Interest levy need not be specifically adjudicated as consequential; A.Y. 2009-10 partly allowed and A.Y. 2010-11 allowed.