2025 (9) TMI 1126 - AT - Income Tax

Assessments revised: Interest on advances allowed, foreign payments to non-resident not taxable under s.195, multiple disallowances deleted

ITAT, Kolkata - AT allowed the assessee's appeal in full and set aside the AO's and ld. CIT(A)'s additions/disallowances. Interest on advances was held ... Disallowance of interest on account of interest paid to bank - HELD THAT:- We find that these advances were given for business purposes only and no diversion of funds have ever taken place. We also note that assessee had more than sufficient funds to make the advances as is evident from the balance sheet filed . Therefore, the case of the assessee is squarely covered by the decision of Reliance Utilities and Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] and CIT Vs. HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] wherein it has been held that if the interest free funds available with the assessee are more than the interest free loans given then no disallowance is called for. Therefore, we set aside the order of the ld. CIT (A) and direct the ld. AO to delete the addition. Hence, the appeal of the assessee in ground no.1 is allowed. Disallowance u/s 40(a)(ia) - non-deduction of tax at source paid to non-resident who was non-resident having no PE in India - HELD THAT:- We find that since the recipient of the money is non-resident and having no PE in India and also no work was carried out in India. Besides, the payment was made in foreign currency. Then the provisions of Section 195 of the Act are not applicable and accordingly, we set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition. Ground no.2 is allowed. Disallowing 20% of the cash purchase made during the year - We find that there was no basis given by the ld. AO to make these disallowances. The disallowance to protect the interest of the Revenue on estimated basis has no unsustainable in law. Therefore, the addition cannot be sustained. Accordingly, we set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition. Ground no.3 is allowed. Disallowance equal to 50% commission paid to the relatives - AO disallowed the said commission without making any comparative analysis as to unreasonableness of the amount paid. Therefore, the sum disallowed by the ld. AO on the ground that it was paid to the related parties was not a ground for making disallowance when same is not shown to be unreasonable having record to the similar comparable cases. It is for the assessee to decide which expenses to be incurred for the business of the assessee and the AO cannot sit on the armchair of the businessman to decide how much is reasonable and how much is not reasonable and unless any comparable are brought on record to show the unreasonableness of the expenses to record. The case of the assessee is covered by the decision of SA Builders [2006 (12) TMI 82 - SUPREME COURT] Disallowance of 25% of the assembling charges on estimated basis - said expenses are being constantly incurred from year-to-year basis and were not even disallowed during scrutiny assessment in the preceding assessments. Thus direct the ld. AO to delete the addition. Disallowance nearly 50% of the usage of gold in the manufacturing process on estimated basis - We find that similar disallowance was made in the preceding assessment year also which has been deleted by the CIT (A) of the appellate order Accordingly, maintaining the consistency as there is no change of facts and circumstances of the present case, we are inclined to set aside the order of ld. CIT (A) and direct the ld. AO to delete the disallowance by following the decision of Radhasoami Satsang, Saomi Bagh, Agra [1991 (11) TMI 2 - SUPREME COURT] Addition @ 15% in respect of car expenses - Disallowance has been made for the reason that assessee has not maintained log book. We note that the assessee has maintained regular books of accounts and the ld. AO has not pointed out any defect or deficiency therein - No reason to make the disallowance on estimated basis. Accordingly, we set aside the order of CIT (A) and directed the ld. AO to delete the disallowance. Hence, ground is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether interest on bank loan is disallowable where assessee advanced interest-free funds to related concerns but had sufficient own funds to meet advances. 2. Whether Section 40(a)(ia) disallowance is warranted for payments to a non-resident having no permanent establishment in India and where services were not rendered in India and payment was in foreign currency. 3. Whether a downward adjustment of 20% of cash purchases can be sustained on an estimated basis where no finding of bogus purchases or unreasonable profit was recorded and cash payments formed less than 5% of total purchases. 4. Whether a 50% disallowance of commission paid to relatives is permissible where no comparative analysis or evidence of unreasonableness was recorded and similar payments in an earlier year were sustained on appeal. 5. Whether 25% (or 50%) disallowance of assembling charges paid to related parties is sustainable where vouchers/bills were not produced but identical expenses are recurrent and were not disallowed in prior years. 6. (Not pressed) Issue abandoned. 7. Whether a 50% disallowance of expenditure on usage of gold in manufacturing can be sustained on estimate where like disallowance in preceding year was deleted on appeal and facts remain unchanged. 8. Whether a 15% disallowance of car expenses on an estimated basis is sustainable because a log book was not maintained, where books of account are regular and no defect was pointed out by the Assessing Officer. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Interest disallowance on account of interest-free advances Legal framework: Disallowance of interest is undertaken to the extent interest-bearing funds are diverted to interest-free advances; taxable disallowance arises only if there is diversion and insufficiency of own funds to meet advances. Precedent Treatment: Decision of relevant High Court authority (reliance on principles in earlier decisions cited by the Tribunal) holding that where interest-free funds available with assessee exceed interest-free loans given, disallowance is not called for. Interpretation and reasoning: The Tribunal found advances were for business purposes, no diversion of funds occurred, and balance sheet showed more than sufficient funds to make advances. Hence the factual predicate for disallowance (diversion or lack of own funds) was absent. Ratio vs. Obiter: Ratio - where assessee's own interest-free funds exceed the amount advanced interest-free for business purposes and no diversion to personal/private uses is shown, interest disallowance cannot be sustained. Conclusion: Disallowance deleted; addition set aside and matter remitted for deletion by Assessing Officer. Issue 2 - Section 40(a)(ia) disallowance for payment to non-resident Legal framework: Section 40(a)(ia) penalises deduction from taxable income where tax is required to be deducted at source under Chapter XVII-B (notably Section 195 for payments to non-residents) but not deducted; applicability depends on whether payment is chargeable to tax in India. Precedent Treatment: Principle that Section 195 applies only where payments are chargeable to tax in India (e.g., services rendered in India or payment attributable to permanent establishment); absence of PE and services rendered outside India and payment in foreign currency generally mean Section 195 not attracted. Interpretation and reasoning: Tribunal found recipient was non-resident with no PE in India, no work performed in India, and payment made in foreign currency; therefore provisions of Section 195 were not applicable and corresponding Section 40(a)(ia) addition could not stand. Ratio vs. Obiter: Ratio - where a payment to a non-resident is not chargeable to tax in India (no PE, no services in India), failure to deduct tax at source does not attract Section 40(a)(ia) disallowance. Conclusion: Addition under Section 40(a)(ia) deleted; disallowance set aside. Issue 3 - Disallowance of 20% of cash purchases on estimated basis Legal framework: Assessing Officer may make enquiries and disallow expenses where purchases are bogus or where records fail to support transactions; however, unsupported estimated additions to protect revenue require some basis or finding of suspicion. Precedent Treatment: Principle that additions on mere estimate without evidence or reasoned findings are unsustainable in law. Interpretation and reasoning: AO made 20% disallowance without recording any finding of bogus purchases or unreasonable profit; cash payments constituted less than 5% of total purchases and no purchases exceeded Section 40A(3) limits. Tribunal held AO's action was purely protective/estimate-based without legal foundation. Ratio vs. Obiter: Ratio - additions cannot be sustained when made on mere estimate in absence of specific findings of irregularity, bogus nature, or unreasonable profit. Conclusion: Disallowance deleted; addition set aside. Issue 4 - 50% disallowance of commission to relatives Legal framework: Related-party transactions are examinable but expenses paid to relatives are not automatically disallowable; AO must demonstrate unreasonableness or lack of commercial propriety via comparables or material. Precedent Treatment: Reliance on apex-court principle that tax authorities cannot substitute their judgment for bona fide business decisions unless evidence shows unreasonableness (SA Builders principle invoked). Interpretation and reasoning: AO disallowed 50% without comparative analysis or demonstration of unreasonableness; similar payments in preceding year were not sustained as disallowable on appeal. Tribunal emphasized AO cannot act as a businessman to fix reasonable quantum absent comparators or negative evidence. Ratio vs. Obiter: Ratio - payments to relatives cannot be disallowed solely because of relatedness; disallowance requires evidence of unreasonableness or lack of commercial substance. Conclusion: Disallowance deleted; ground allowed. Issue 5 - Disallowance of assembling charges paid to related parties (25%/50%) Legal framework: Expenses disallowable where vouchers absent and payments to related parties are suspect; nonetheless recurring and consistently documented expenses carry evidentiary weight, and prior treatment in assessments is relevant. Precedent Treatment: Past assessments and appellate outcomes bearing on identical items may be followed for consistency in absence of changed facts. Interpretation and reasoning: AO disallowed 50% for absence of vouchers; CIT(A) reduced to 25%. Tribunal noted recurring nature of expenses, non-disallowance in prior scrutiny assessments and absence of changed facts; on that consistency principle and lack of fresh adverse material, disallowance could not be sustained. Ratio vs. Obiter: Ratio - where identical expenses recur and prior assessments did not disallow them, and no new adverse material is produced, estimated disallowance is unsustainable. Conclusion: Disallowance set aside; addition deleted. Issue 7 - 50% disallowance of high-value metal (gold) usage on estimate Legal framework: Disallowance on estimated basis requires supporting basis; consistency with earlier assessment and appellate decisions is a factor where facts remain unchanged. Precedent Treatment: Reliance on Apex Court authority favoring deletion where like disallowance in earlier year was deleted and facts remain unchanged. Interpretation and reasoning: AO made large disallowance for lack of supporting evidence; CIT(A) halved the disallowance. Tribunal observed similar disallowance in preceding year was deleted on appeal; as facts remained same, principle of consistency and absence of new material required deletion of current disallowance. Ratio vs. Obiter: Ratio - tax disallowances based on estimation cannot be sustained where identical earlier disallowance was successfully challenged and there is no change in facts. Conclusion: Disallowance deleted; ground allowed. Issue 8 - 15% disallowance of car expenses for lack of log book Legal framework: Disallowances for car expenses commonly rest on absence of log book to segregate personal and business use; however, regular books of account and absence of objectionable defects by AO weigh against estimated disallowance. Precedent Treatment: Principle that AO must point out defects or discrepancies in books to justify estimating and disallowing expenses. Interpretation and reasoning: Though AO relied on non-maintenance of log book, assessee maintained regular books of account and AO did not point to any defect or deficiency. Tribunal found no basis for estimating and disallowing 15% of car expenses. Ratio vs. Obiter: Ratio - in absence of any defect found in regular books of account and without pointed deficiencies, AO cannot make an estimated disallowance for car expenses merely because a log book is not maintained. Conclusion: Disallowance deleted; ground allowed.