TaxTMI 
TaxTMI 
2026 (9) TMI 607
X X X X Extracts X X X X
X X X X Extracts X X X X
.... AO completed assessment u/s 143(3) assessing total income at Rs. 72,05,875/- after making certain additions/disallowances. Aggrieved, the assessee carried matter in first-appeal whereupon the Ld. CIT(A) granted part-relief. Still not satisfied, the assessee has come in present appeal before us. 3. The effective grounds raised by assessee are as under: "1. The Id. CIT(A) has erred in law and on facts in confirming the action of the Id. A.O. of making disallowance of 1/4th of depreciation, interest, insurance and petrol and diesel expenses on motor cars u/s. 37 of the Act totaling to Rs. 8,84,973/-. 2. The Id. CIT(A) has erred in law and on facts in confirming the action of the ld. A.O. of making disallowance of interest expenses u/s 36(1)(iii) of the Act to the tune of Rs. 34,90,965/-. 3. The Id. CIT(A) has erred in law and on facts in confirming the action of the Id. A.O. of making disallowance of supervisor's salary, engineer's salary, wages and accountant's salary to the tune of Rs. 1,49,560/-. 4. The Id. CIT(A) has erred in law and on facts in partially confirming the action of the Id. A.O. of making disallowance of 15% of labo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r-Book). According to those submissions, the assessee agreed for a "minor element of personal use" but for that a reasonable disallowance could only be sustained and that too out of the elements of (i) depreciation and (ii) petrol/diesel expenses only. However, the "insurance" expenditure would remain constant and does not have any linkage with the use of car, therefore no disallowance ought to be sustained out of same. Further, the element of "interest" on car loan also cannot be considered for disallowance because the same has to be incurred irrespective of use of motor cars. In his final submission before us, Ld. AR proposed that a disallowance of 5% out of (i) depreciation of car and (ii) petrol/diesel expenditure would be sufficient. 8. Per contra, Ld. DR for revenue submitted that the AO has given conclusive findings for making the impugned disallowance. That, the AO has made a correct observation that "Vidhi A Sangani" was not a working partner of assessee-firm. He contended that the AO has made only 1/4th disallowance and already given deduction as high as 75% of remaining expenditure. Therefore, Ld. AR submitted, the disallowance made by AO is perfect and must be upheld....
X X X X Extracts X X X X
X X X X Extracts X X X X
....penditure or personal expenses of the assessee), laid out or expended wholly and exclusive for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profit and gains of business or profession". 11. Therefore, in present case, the AO could validly make disallowance of personal element out of (i) depreciation, (ii) insurance, and (iii) petrol/diesel expenditure incurred for motors cars. However, the interest on car loans is allowable u/s 36(1)(iii) and the AO has not brought any material on record to establish that the borrowed funds corresponding to the impugned interest expenditure were utilised for any purpose other than the acquisition and use of the motor cars in connection with assessee's business. We also find merit in the contention of the Ld. AR that the incidence of interest on the car loans is not dependent upon the extent of use of the cars. Further, unlike depreciation, insurance and petrol/diesel expenditure, there is no specific provision under the Act which contemplates restricting the deduction of interest expenditure u/s 36(1)(iii) merely on the basis of personal use of asset. Therefore, we find no just....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and Hon'ble Supreme Court in S.A. Builders Ltd. Vs. CIT 158 taxman 74, the AO made an estimated disallowance @ 12% on daily closing balance. 15. In first appeal, the Ld. CIT(A) approved the AO's action with the same findings. 16. Before us, Ld. AR for assessee made two-fold arguments and requested to delete the impugned disallowance: (i) That, the assessee was having interest-free funds to the tune of Rs. 13.15 crores from these sources, namely Unsecured loans - Rs. 0.05 crore, Sundry creditors - Rs. 0.79 crore and Shop/flat booking advances - Rs. 12.30 crore. As against this, the assessee has given loans of Rs. 4.47 crore only. Further, even if the debit balance of partners amounting to Rs. 5.88 crore is considered, then also the total funds given by assessee would amount to Rs. 10.35 crores [Rs. 4.47 crore + Rs. 5.88 crore], which is also much less than the interest-free funds of Rs. 13.15 crore available with assessee. Therefore, no disallowance ought to have been made. (ii) That, it is not a case that the assessee had only given loans to the four parties listed by AO; the assessee has also taken interest-free loans from some of those parties whenever re....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... been advanced during the current year itself, therefore the availability of such funds at the relevant point of time requires factual verification at the level of AO. The mere availability of such funds at the year-end, by itself, may not conclusively establish that the same were available with the assessee at the time when the impugned advances were made. 21. In so far as the second argument of commercial expediency is concerned, on a careful consideration of the entries appearing in Ledger A/cs of the parties available in Paper-Book at Pages 29 to 34, we find that there is a small magnitude of loans taken from those parties and that too for a very small period. Therefore, the plea of commercial expediency, in the facts of present case, is not substantial enough to decide this issue in favour of assessee. 22. On other side, we also note that the Ld. AO has made the impugned disallowance by applying an estimated rate of 12% on the daily closing balances without establishing any specific nexus between the interest-bearing borrowings taken and the impugned interest-free advances given. Therefore, considering overall facts, we deem it appropriate to restore this issue to the fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ountant Salary of Rs. 1,75,000/-, the appellant has submitted only ledgers wherein not even PAN of employees have been mentioned. Further, neither identity cards of the employees nor salary register/vouchers etc. have been submitted. Therefore, genuineness of said expenditure remained unverifiable. It is true that appellant has to incur such kind of expense for day to day working of his business. However, in view of non-submission of above mentioned details, it was not possible to actually ascertain the exact amount of expenses shown to have been incurred for business purposes. In view of these facts, 20% of Rs. 7,47,802/- (3,99,159 + 1,40,848 + 32,795 + 1,75,000) i.e. Rs. 1,49,560/- was disallowed and added back to the total income of the appellant by the AO. In the ground of appeal, the appellant taken the ground as under: "The Id. A.O. has erred in law and on facts in making disallowance of 20 percent of supervisors salary, engineers salary, wages and accountants salary to the tune of Rs. 1,49,560/- " From the facts of the case it is observed that the AO disallowed an amount of Rs. 1,49,560/- being 20% of 7,47,802/- on account of salary wages of the staff for w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....firmations. Therefore, we deem it appropriate to restore this issue to the file of the Ld. AO for fresh examination. The assessee shall furnish before Ld. AO the salary register, vouchers, PAN details, etc. The Ld. AO shall examine the same and verify the identity of the payees, the actual payment of salary/wages and the genuineness and business nexus of the expenditure. If, upon such verification, the expenditure is found to be genuine and incurred for the purposes of business, no disallowance shall be made. However, if any part of the expenditure is found to be unverifiable or not incurred for the purposes of business, the Ld. AO shall make an appropriate disallowance in accordance with law. Accordingly, this ground is allowed for statistical purposes. Ground No. 4: 28. In this ground, the assessee challenges the disallowance of Rs. 5,27,522/- upheld by Ld. CIT(A) in respect of labour charges claimed by assessee. 29. The Ld. AO has made this disallowance through Para 8 of assessment-order. During scrutiny proceedings, the AO observed that the assessee had incurred total expenditure of Rs. 35,16,816/- on labour payments to different parties/contractors. The AO issued summ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....25% of Rs. 35,16,816/- i.e. Rs. 8,79,204/- is disallowed and added back to the total income of the assessee. [Disallowance of Rs. 8,79,204/-]" 30. In first appeal, the Ld. CIT(A) upheld the observations and findings of the Ld. AO but, however, granted part-relief by curtailing disallowance from 25% to 15% as fair and reasonable. Consequently, the Ld. CIT(A) sustained disallowance of Rs. 5,27,523/- out of total disallowance of Rs. 8,79,204/- made by AO. 31. During hearing, the Ld. AR for assessee at first carried us to the following documents filed in Paper-Book: (i) Page 46 of Paper-Book - A statement showing details of labour charges paid. The statement contains details of 13 parties (including those 4 parties summoned by AO) to whom the assessee has made total payment of Rs. 35,16,816/-. The statement contains details under the columns such as Names of Contractors/Parties, Address, PAN, Opening balance, bill amount during the year, total amount paid through cheques, TDS deducted. (ii) Pages 46 to 59 of Paper-Book - The A/c confirmations of all 13 parties are filed. 32. Thereafter, Ld. AR made following submissions: (i) The Ld. AO has relied upo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e payees. Further, the AO has, upon recording statements of the payees, found material discrepancies regarding the labour work. Therefore, there is a serious doubt qua the genuineness of the labour expenditure. However, Ld. DR submitted, the Ld. CIT(A), after considering the facts and circumstances of the case, had already granted substantial relief to the assessee by reducing the disallowance from 25% to 15%. Therefore, the disallowance sustained by Ld. CIT(A) is fair and reasonable and must be upheld. 35. We have carefully considered the rival submissions and perused the material available on record. At the outset, we note that the assessee has furnished a statement containing details of all 13 labour contractors' names, addresses and PANs along with details of opening balances, bill amounts, payments made through cheques and TDS deducted. The assessee has also placed on record A/c Confirmations of all 13 parties. Thus, the assessee has furnished primary details and documents. 36. At the same time, we find that the Ld. AO had issued summons u/s 131 of the Act to 4 parties and statements of 2 parties were recorded. The assessment-order specifically refers to and relies upon ....