2018 (10) TMI 1595 - AT - Income Tax

Denying the benefit of deduction u/s 11 - diversion of funds - advance by account payee cheques - Taking an amount at the maximum marginal rate and allow exemption for the balance amount - violation of provisions of section 13(1)(c) - Held that - In the garb of purchase of timber, the advance amounts were diverted for the personal benefit of an interested party, who is mentioned in section 13(3) of the I. T. Act. Therefore, there is clear violation of provisions of section 13(1)(c). The contention of the assessee that the amounts were returned by account payee cheques and within a short period is of no consequence. Only a small portion of the advance was repaid to the assessee trust within four months from the date of advance. Therefore, the repayment by M/s. VUS Timbers of all the advance by account payee cheques is of no significance insofar as there was already a violation of provisions of section 13(1)(c). Therefore, the CIT(A) is justified in directing the A. O. to treat an amount of ₹ 72,45,000 as advance as income of the assessee. The assessee was paying interest on borrowings, and therefore, notional interest at the rate of 18% on the advance of ₹ 72,45,000 was rightly brought to tax as income of the assessee by the A. O. Therefore, we see no reason to interfere with the findings of the CIT(A). Accordingly, we confirm the order of the CIT(A) on this issue. Disallowance invoking the provisions of section 40(a)(ia) - Held that - Admittedly, no tax was deducted on the payment of ₹ 21,27,846. The assessee has not proved that the provisions of section 40(a)(ia) of the I. T. Act does not have any application on the said payment of ₹ 21,27,846. Hence, the A. O. was correctly disallowed the expenditure by invoking the provisions of section 40(a)(ia) of the I. T. Act, which was confirmed by the CIT(A). Hence, we see no reason to interfere with the order of the CIT(A) and we confirm the same. Disallowance of labour charges expenses - Held that - The assessee has not produced any details that the said labour charges has been expended by it. Hence, the A. O. had correctly disallowed the expenditure and added back to the income of the assessee. We see no reasons to interfere with the orders of the Income-tax authorities, and confirm the same.

Summary

Issues Involved:
1. Whether the CIT(A) is justified in directing the A. O. to tax an amount of Rs. 72,45,000 and interest of Rs. 13,04,700 at the maximum marginal rate?
2. Whether the CIT(A) is justified in confirming the disallowance of Rs. 21,27,846 by invoking the provisions of section 40(a)(ia) of the I. T. Act?
3. Whether the CIT(A) is correct in confirming the disallowance of labour charges expenses amounting to Rs. 5,40,390?

Analysis:

1. Issue 1 - Taxation of Advance Amount:
- The assessee advanced Rs. 72,45,000 to M/s. VUS Timbers for timber purchase for a medical college construction.
- The Assessing Officer invoked section 13(1)(c) of the I. T. Act, denying exemption u/s 11 due to the advance to the wife of the Managing Trustee.
- CIT(A) upheld the denial but directed to tax only the advanced amount and interest, allowing exemption for the balance.
- Tribunal confirmed CIT(A)'s decision, as the advance diverted for personal benefit violated the Act.

2. Issue 2 - Disallowance under Section 40(a)(ia):
- AO disallowed Rs. 21,27,846 for non-deduction of TDS from payments to creditors.
- CIT(A) affirmed the disallowance due to lack of TDS and inadequate proof provided by the assessee.
- Tribunal upheld the disallowance under section 40(a)(ia) as correct and dismissed the appeal.

3. Issue 3 - Disallowance of Labour Charges:
- AO disallowed Rs. 5,40,392 of labour charges for lack of proof on nature and place of work.
- CIT(A) upheld the disallowance, finding the assessee's submissions insufficient.
- Tribunal confirmed the disallowance, as the assessee failed to provide adequate details.

In conclusion, the Tribunal dismissed the appeal and stay application, upholding the decisions of the CIT(A) and AO on all issues raised by the assessee. The judgment emphasizes compliance with tax laws, proper documentation, and adherence to statutory provisions in financial transactions.