For disallowing interest AO must give a finding with regard to the nexus between the interest bearing funds available and interest free advances made during the year

Amarpali International  Vs. ACIT (ITAT Delhi) - Ld. counsel of the assessee submitted that assessee has adequate interest free funds available with the firm which have been used to make the advances during the year. She claimed that no nexus has been established between the interest bearing fund and advances to sister concerns. We have carefully considered the submissions. We find that for making any disallowance in connection with the interest, it is incumbent upon the authorities below to give a finding with regard to the nexus between the interest bearing funds available with the firm and interest free advances made during the year. In our considered opinion, the interest of justice will be served, if the matter is remitted to the file of the Assessing Officer to consider the issue afresh. Assessing Officer shall examine the assessee’s claim that sufficient interest free funds are available to assessee to give advances to the concerns. Accordingly, the issue stands remitted to the file of the Assessing Officer.

Disallowance of Expenditure on estimated basis without cogent reasons, are not sustainable -  Assessing Officer has made the disallowances in this regard on estimate basis and in making the disallowances Assessing Officer has not brought on record any specific instances that the vouchers are not maintained or the expenses are not related to the business of the assessee. Assessing Officer has made the disallowances of lumpsum 80% and 75 and Ld. Commissioner of Income Tax (Appeals) has sustained the same also. In our considered opinion, such disallowances based on estimate basis without bringing on record any cogent reasons, are not sustainable. Hence, we set aside the orders of the authorities below on this issue and decide the issue in favour of the assessee.

INCOME TAX APPELLATE TRIBUNAL, DELHI
I.T.A. No. 4505/DEL/2011 – A.Y.: 2007-08
Amarpali International 
Vs
Assistant Commissioner of  Income Tax

ORDER

PER SHAMIM YAHYA: AM

This appeal by the Assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 3.8.2011 pertaining to assessment year 2007-08.

2. The grounds raised read as under:-

(i) That the sustaining of disallowance of interest Rs. 1,61,226/- by Ld. Commissioner of Income Tax (Appeals) on the ground that assessee has made interest free advance of borrowed funds in arbitrary, unjust, unwarranted and at any rate very excessive by wrongly observing that books of the assessee are not proper and do not disclose its full and true income and as such are not reliable.

(ii) That the sustaining of disallowance of business development expenses of Rs. 2,13,123/- by Ld. Commissioner of Income Tax (Appeals) is arbitrary, unjust, unwarranted and at nay rate very excessive by wrongly observing that books of the assessee are not proper and do not disclose its full and true income and as such are not reliable.

(iii) That the sustaining of disallowance of telephone expenses of Rs. 2,05,123/- by Ld. Commissioner of Income Tax (Appeals) is arbitrary, unjust, unwarranted and at any rate very excessive by wrongly observing that books of the assessee are not proper and do not disclose its full and true income and as such are not reliable.

(iv) That the sustaining of disallowance of electricity and water expenses of Rs. 1,52,155/- by Ld. Commissioner of Income Tax (Appeals) is arbitrary, unjust, unwanted and at any rate very excessive by wrongly observing that books of the assessee are not proper and do not disclose its full and true income and as such are not reliable.

(v) That the sustaining of disallowance of legal and professional expenses of Rs. 1,41,123/- by Ld. Commissioner of Income Tax (Appeals) is arbitrary, unjust, unwarranted and at any rate very excessive by wrongly observing that books of the assessee are not proper and do not disclose its full and true income and as such are not reliable.

(vi) That the interest under section 234B and 234C has been wrongly charged.

(vii) The above grounds are independent and without prejudice to one another.

(viii) Appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.”

3. Apropos disallowance of interest of Rs. 1,61,226/- On this issue the Assessing Officer observed that assessee has given various advances and also has kept cash of the firm with partners. Assessing Officer observed that assessee is paying interest on loans taken during the year. From this Assessing Officer inferred that assessee has no interest free funds available to the firm. He found that assessee has not been charging any interest on the advances given, as per the table below:-

assessee with same address)2,60,4241,09,0002,60,4241,09,00021,250Jagdambay Builders Pvt. Ltd.1,00,000NilNil1,00,00012,500MozaicNil1,00,000Nil1,00,00011,460Khanna Farms (sister concern of the

assessee)Nil1,00,000Nil1,00,00011,460

56,670

Cash     /
imprest with

partners

836045

104556

161226

3.1 Assessing Officer observed that assessee has failed to justify the connection of these advances with the business income of the assessee. He observed that the advances given which are interest free are mostly related or to the sister concerns of the assessee. Assessing Officer observed that a sum of Rs. 1,61,226/- is disallowed as non-business expenditure debited on account of interest expense by the assessee and on account of interest free advances and on funds of the firm lying with the partners.

4. Upon assessee’s appeal Ld. Commissioner of Income Tax (Appeals) confirmed the Assessing Officer’s action.

5. Against the above order the assessee is in appeal before us.

6. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. counsel of the assessee submitted that assessee has adequate interest free funds available with the firm which have been used to make the advances during the year. She claimed that no nexus has been established between the interest bearing fund and advances to sister concerns. We have carefully considered the submissions. We find that for making any disallowance in connection with the interest, it is incumbent upon the authorities below to give a finding with regard to the nexus between the interest bearing funds available with the firm and interest free advances made during the year. In our considered opinion, the interest of justice will be served, if the matter is remitted to the file of the Assessing Officer to consider the issue afresh. Assessing Officer shall examine the assessee’s claim that sufficient interest free funds are available to assessee to give advances to the concerns. Accordingly, the issue stands remitted to the file of the Assessing Officer.
7. Apropos disallowances on account of business development expenses; telephone expenses; electricity and water expenses and disallowance of legal & professional expenses. The Assessing Officer in this case has made the following disallowances on estimate basis :-

i) Business development expenses total expenses of Rs. 2,56,404/- – disallowed 80% being Rs. 2,13,123/-.

ii) Telephone expenses Rs. 3,72,430/- – disallowed 80% being Rs. 2,05,123/-.

iii) Electricity and water charges of Rs. 2,02,874/- – disallowed 75% being Rs. 2,02,874/-.

iv) Leal and Professional charges of Rs. 2,54,830/- – disallowed 75% being Rs. 1,91,123/-.

8. Upon assessee’s appeal Ld. Commissioner of Income Tax (Appeals) confirmed the additions with regard to telephone expenses and business development expenses.

8.1 As regards electricity and water charges, Ld. Commissioner of Income Tax (Appeals) modified the Assessing Officer’s order for calculation mistake and confirmed the disallowance @ 75% amounting to Rs. 1,52,155/- 8.2 As regards legal and professional charges, Ld. Commissioner of Income Tax (Appeals) deleted Rs. 50,000/- and confirmed the balance amount of Rs. 1,41,123/-.

9. Against the above order the assessee is in appeal before us.

10. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. counsel of the assessee submitted that the authorities below have made the disallowances on estimate and adhoc basis. She claimed that no specific instances for non-business expenses have been brought on record. We have carefully considered the submissions. We find that Assessing Officer has made the disallowances in this regard on estimate basis and in making the disallowances Assessing Officer has not brought on record any specific instances that the vouchers are not maintained or the expenses are not related to the business of the assessee. Assessing Officer has made the disallowances of lumpsum 80% and 75 and Ld. Commissioner of Income Tax (Appeals) has sustained the same also. In our considered opinion, such disallowances based on estimate basis without bringing on record any cogent reasons, are not sustainable. Hence, we set aside the orders of the authorities below on this issue and decide the issue in favour of the assessee.

11. In the result, the appeal filed by the Assessee stands partly allowed for statistical purposes.

Order pronounced in the open court on 28/12/2011.

Related posts:

1. Disallowance on the ground that the assessee has diverted interest bearing funds into tax-free income can not be made where the assessee owes ample interest free funds on the date of investment
2. When the assessee has sufficient own funds, no disallowance can be made for the interest paid on borrowed funds, for the amount given on loan as interest free
3. No disallowance u/s 14A of interest expenditure if AO fails to show nexus between borrowed funds and tax-free investment
4. No Disallowance u/s. 14A of interest on borrowed funds if AO does not show nexus between borrowed funds and tax-free investment
5. Where the amount is given to the sister concern by the assessee interest-free out of own funds and for business purposes, no disallowance can be made for interest expenses u/s 40A(2)(a)