Business expenditure —Disallowance under s. 40A(2)    

            

PUNJAB WOOL COMBERS LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX

ITAT, CHANDIGARH 'A’ BENCH Vimal Gandhi, Vice President & P.K. Bansal, A.M.

ITA No. 1058/Chd/1996 14th January, 2003 (2003) 22 CCH 0029 ChdTrib

(2004) 1 SOT 0114

Legislation Referred to

Section 40A(2)

Case pertains to

Asst. Year 1993-94

Decision in favour of:

Assessee

Business expenditure—Disallowance under s. 40A(2)—Interest on amount

borrowed—Interest-free advance by assessee to two companies—AO neither

making any disallowance nor recording any finding in the year of advance that

same was for non-business purposes—Disallowance of part of interest cannot

be made in the year under consideration—

(Para 2.1)

Conclusion:

AO having no made any disallowance under s. 40A(2) in the year of interest-free

advance to other company, no disallowance could be made on that ground in the

relevant year.

In favour of:

Assessee

Counsel appeared:

M.L. Joshi, for the Appellant : S.S. Thind, for the Respondent

ORDER

P.K. BANSAL, A.M.: :

ORDER

The assessee has come in appeal against the order of CIT(A)(c), Ludhiana, dt. 24th July,

1996, for the asst. yr. 1993-94 on the following grounds :

1. That the learned CIT(A) has erred in law and on the facts while upholding the

disallowance of Rs. 2 lacs out of interest paid during the year.

2. That the learned CIT(A) has erred in law and on the facts while upholding the

disallowance of proportionate premium payable on redemption of debenture as revenue

expenditure.

3. That the learned CIT(A) has erred in law and on the facts while disallowing Rs. 10,873

out of telephone expenses.

4. That the learned CIT(A) has erroneously upheld the action of the learned AO for the

reduction of claim under s. 80-I from Rs. 6,88,017 to nil.

5. That the learned CIT(A) has erred in law and on the facts while rejecting the

assessee’s contention that no adjustrnent in the relief claimed under s. 80-I could be

made in view of the order of Hon’ble Tribunal in appellant’s own case for asst. yr. 1990-

91.

6. That the learned CIT(A) has erred in law and on the facts in upholding the action of

reducing the claim under s. 80HHC from Rs. 7,61,342 to Rs. 7,56,348.

2. In respect of ground No. 1 which relates to upholding the disallowance of Rs. 2 lacs

out of interest paid during the year, the AO noted that there is a debit balance of Rs. 5

lacs each in the accounts of M/s Manipur Vanaspati and Allied Inds., and M/s Oswal

Wools Ltd., on which no interest has been charged while the assessee has paid interest

of Rs. 296.25 lacs on the loans raised by it. The assessee went in appeal before the

CIT(A) and submitted before the CIT(A) that the assessee is a promoter of M/s Oswal

Wools Ltd. and M/s Manipur Vanaspati & Allied Inds. The funds to Oswal Wools were

given. These loans were advanced not during the year but in the year ending 31st

March, 1990. The funds were advanced for the purpose of business. No nexus was

established between the money borrowed and the money given by the assessee.

Therefore, no disallowance should be made on the basis that the funds have been put to

use for non-business purposes. The CIT(A) confirmed the order of the AO. Being

aggrieved, the assessee has come in appeal before us.

2.1 We have heard the rival submissions and perused the material on record. We find

force in the submissions of the assessee. The case of the assessee is duly covered by the

decision of Karnataka High Court in the case of CIT vs. Sridev Enterprises (1991) 97 CTR

(Kar) 80 : (1991) 59 Taxman 439 (Kar) in which the Hon’ble High Court has held that no

addition has been made in the earlier years, the opening balance could not be

considered in the year in question for the purpose of computation of disallowance. The

facts of the assessee are duly covered by the aforesaid decision because in the earlier

year when the money was advanced by the assessee, the AO did not make any

disallowance and no finding has been recorded by the AO that the money so advanced

by the assessee to these parties was for non-business purposes. In the absence of

findings by the AO for the assessment year in which the money was advanced, we feel

that no disallowance can be made during the year and accordingly we allow this ground

of appeal of the assessee. Thus first ground of appeal filed by the assessee is allowed.

3. The Second ground of appeal relates to upholding of disallowance of proportionate

premium payable on redemption of debentures. Learned Aurthorized Representative was

fair enough to concede that this issue is duly covered against the assessee by the

decision of Hon’ble Supreme Court in the case of Madras Industrial Investment Corpn.

Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC).

3.1 We, therefore, after perusing the facts of the case, are of the view that this ground

of appeal is duly covered by the decision of the Hon’ble Supreme Court in the case of

Madras Industrial Investment Corpn. Ltd. (supra) and accordingly we dismiss the second

ground of appeal filed by the assessee.

4. The third ground of appeal relates to the disallowance of Rs. 10,873 out of telephone

expenses. After carefully considering the rival submissions, we find that this ground is

duly covered in favour of the assessee by the order of Tribunal Chandigarh Bench in ITA

No. 1408/Chandi/94 for the asst. yr. 1990-91, a copy of which is filed before us in which

this Tribunal has taken a view that in the case of a company where telephone facility is

provided at the residence of the Director, wholly and exclusively for the business

purposes of the assessee, no disallowance can be made in the hands of the company.

Accordingly, following the said judgment, we allow this ground of appeal of the assessee

and direct the AO to delete the sum of Rs. 10,873.

5. Ground Nos. 4 & 5 relate to the reduction of claim of the assessee made under s. 80-I

from Rs. 6,88,017. After hearing the rival submissions and perusing the material on

record, we find that the assessee has claimed a relief to the extent of Rs. 688017. The

AO noted that the spinning unit was not working independently and the combing unit

first purchased greezy wool, manufactured wool tops and transferred these to the

spinning unit and not at the prevailing market rate due to which the profit of the

spinning unit got increased. Therefore, by applying provisions of ss. 80-I(6), (8), (9), the

AO made adjustment in the transfer price and after making other adjustments for

administrative and other expenses, reduced the deduction of Rs. 6,88,017 to nil. Both

the parties although agreed before us that this issue is duly covered by the order of this

Tribunal in the earlier years, but from the facts on record, we find that in the earlier

year, the AO had adjusted the profit due to less charge of the transfer price from the

market value but in this year on account of adjustment on account of difference in

transfer price as well as sale price is only Rs. 60,172 while in this year, profit has been

adjusted on account of allocation of the indirect expenses and increase in the value of

the closing stock, beyond difference in transfer price. In respect difference due to

transfer price. We have already in ITA No. 1057/Chandi/96, restored this issue to the file

of the AO directing the AO that if difference between the market price and the transfer

price is to the extent of .026 per cent the same should be ignored and if it is in excess of

.026 per cent, then relief to the assessee in excess of .026 per cent be reduced.

Accordingly we direct in respect of adjustment on account of difference in transfer price.

Respectfully following the order for the asst. yr. 1992-93 by restoring this issue to the

file of the AO to reduce the relief if the market price is in excess of .026 per cent of the

transfer price, otherwise the relief need not be reduced but the adjustment on account of

common indirect expenses and on account of reduction in profit due to increase in the

value of the closing stock are hereby confirmed in the absence of any plea or arguments

being advanced before us. We, therefore, restore these grounds of appeal to the file of

the AO directing him to recompute the deduction under s. 80-I on the basis of our

aforesaid findings.

6. Ground No. 6 relates to the reduction under s. 80HHC from Rs. 7,61,342 to Rs.

7,56,348. Both the parties to the dispute agreed that this issue is duly covered in favour

of the assessee by the decision of this Tribunal in the case of Malwa Cotton Spg. Mills

Ltd. (IT Appeal Nos. 264 and 408/Chd/1996) where this Tribunal has taken a view that

items like CST and ST (Central Sales-tax and Sales-tax) are not to be included in the

total turn over. Following the judgment of Bombay High Court in the case of CIT vs.

Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596 : (2000) 245 ITR 769

(Bom) and after giving our careful consideration, and following the aforesaid judgment of

this Tribunal, restore the issue to the file of the AO directing him that the CST and ST

need not be included in the total turnover for the purpose of computation of deduction

under s. 80HHC. Accordingly, the AO is directed to recompute the deduction under s.

80HHC. Thus, the assessee succeeds on this ground.

7. In the result the appeal is partly allowed.