2009 (8) TMI 131 - AT - Income Tax

Tribunal rules in favor of assessee on bank interest but upholds disallowance of foreign tour expenses

Xebec Exports. Versus Assistant Commissioner Of Income-Tax.

Xebec Exports. Versus Assistant Commissioner Of Income-Tax. - TTJ 126, 190, Issues Involved:1. Disallowance of bank interest due to debit balance in partner's capital account.2. Disallowance of foreign tour expenses.Detailed Analysis:1. Disallowance of Bank Interest due to Debit Balance in Partner's Capital Account:The primary issue revolves around the disallowance of bank interest amounting to Rs. 4,09,773 due to the debit balance in the capital account of one of the partners, Smt. Sudarshan Manchanda. The AO noted that the assessee had given interest-free advances and had a significant debit balance in the partner's capital account while paying interest on borrowed funds. The AO relied on judicial pronouncements including CIT vs. P. Ganu Rao & Sons, Highways Construction Co. (P) Ltd. vs. CIT, and CIT vs. Sujanni Textiles (P) Ltd. to justify the disallowance.The assessee argued that there was no nexus between the bank borrowings and the debit balance in the partner's account, emphasizing that the net capital of all partners was in credit. It was also highlighted that the assessee had sufficient funds from export sales deposited in the same bank account.The Tribunal reviewed the facts and found that the disallowance was unjustified. It referenced the case of CIT vs. Mira Industries, where similar circumstances led to the deletion of disallowance because no borrowed money was utilized for non-business purposes. Additionally, the Tribunal cited the judgment of the Allahabad High Court in CIT vs. Radico Khaitan Ltd., which held that if sufficient funds are available, it cannot be presumed that advances were made from borrowed funds.The Tribunal concluded that the facts of the present case were identical to the cited cases, and therefore, no disallowance of interest was justified. The Tribunal also clarified that the judgments relied upon by the AO were not applicable due to different factual matrices, where a direct nexus between borrowed funds and non-business advances was established, which was not the case here.2. Disallowance of Foreign Tour Expenses:The second issue pertained to the disallowance of foreign tour expenses amounting to Rs. 43,390. The AO disallowed 10% of the total foreign tour expenses, alleging that part of the expenses were of a personal nature. The assessee contended that the disallowance was made on an ad hoc basis without specific evidence of personal expenditure and relied on Tribunal decisions in Nodi Exports vs. Asstt. CIT and Kumar International.The Tribunal examined the case and noted that the assessee did not furnish detailed evidence regarding the foreign tour expenses, particularly the foreign exchange spent. Given the lack of detailed documentation, the AO's estimation could not be faulted. The Tribunal distinguished the present case from the cited decisions, where complete details were provided, and no personal expenses were identified.Consequently, the Tribunal upheld the disallowance, emphasizing that in the absence of proper details and supporting evidence, the AO's estimation was justified.Conclusion:The appeal was partly allowed. The Tribunal ruled in favor of the assessee regarding the disallowance of bank interest, finding no justification for the disallowance due to the lack of a direct nexus between borrowed funds and non-business advances. However, the Tribunal upheld the disallowance of foreign tour expenses due to insufficient documentation provided by the assessee.