2017 (1) TMI 1095 - AT - Income Tax

Disallowance U/S 40A(3) - whether persons to whom payments were made were made at places where your assessee had no bank account and in the course of transport business the provision of section 40A(3) disallowance is not warranted? - Held that - The assessee had incurred the expenditure during transportation and logistics in that process the drivers and staff incurred these expenses en-route to the destination like diesel repairs toll charges etc. One has to verify each payment and sub-payment whether it crosses the limit of Rs. 20, 000 in individual case. The accounts of the assessee are subject to audit in the earlier three years and the disallowances were 0.13% 0.11% and 0.26% of the Turn Over. We cannot apply the law of percentage in the case of disallowances. It has to be actual. Hence in our view the details of expenditure could be verified and the payment of above Rs. 20, 000/- should be verified. In case it is found that the payment of above Rs. 20, 000/- to any one person on a day only these payments alone should be disallowed. We find it appropriate to remit the issue back to the file of the AO to determine the payment above Rs. 20, 000/- to any person as per section 40A(3) of the Act and make the disallowance accordingly. Ground Nos. 1 & 2 are treated as allowed for statistical purposes. Addition being notional interest - AO has charged notional interest @ 14% on the advances given to group companies directors and relatives considering the fact that IGF had invested money in the business - Held that - We observe from the Balance Sheet that the term loans working capital loans and vehicle loans ere existing loans (balance carried from previous year). There is no fresh loan taken this year which the assessee would have diverted during this year. We also observe that the assessee has considerable reserves in the company and is in good financial position it is the discretion of the assessee to finance the group concerns on commercial expediency. With regard to advances to directors/relatives we do not have details for which purpose they were given. Still we do not see any reason to charge notional interest on the advances when there is no cost to the company in case the advances were paid utilizing the IGF investments. Thus we are inclined to treat the advances given to group concerns is on commercial expediency and loan to directors as allowable as the company has enough reserves in the business to finance the same - Decided in favour of assessee Disallowance of expenditure - Held that - CIT(A) has classified the expenses of Rs. 227.96 cores out of which the assessee had paid TDS for Rs. 109.15 crores and balance expenses were incurred through cheque and cash payments. Since the accounts were not audited we can infer that the assessee would have made the payment by cheque only for those which have proper bills etc. Cash expenses need to be verified. But considering the complications involved and volume of the transactions we agree with the CIT(A) that 7% of the expenses may be disallowed. The CIT(A) has considered the total expenditure (cheque & cash) in our considered view we restrict the disallowance to cash expenses alone. Hence AO is directed to disallow the cash expenses to the extent of 7%. Thus Ground Nos. 7 & 8 are partly allowed.

Summary

Issues Involved:
1. Disallowance under section 40A(3) of the Income Tax Act.
2. Addition of notional interest.
3. Disallowance of expenditure due to lack of supporting bills and invoices.

Issue-Wise Detailed Analysis:

1. Disallowance under section 40A(3):
- The assessee contested the disallowance of Rs. 70,00,000/- under section 40A(3) for payments exceeding Rs. 20,000/- made in cash.
- The Assessing Officer (AO) observed that payments totaling Rs. 1,88,95,204/- were made in cash, exceeding the Rs. 20,000/- limit, and disallowed the amount.
- On appeal, the CIT(A) reduced the disallowance to Rs. 70,00,000/- considering the nature of the business and past records.
- The Tribunal noted that the AO disallowed the expenses solely because they exceeded Rs. 20,000/- without verifying individual payments. The Tribunal remitted the issue back to the AO to verify if any single payment to a person on a day exceeded Rs. 20,000/-, and only such payments should be disallowed.

2. Addition of notional interest:
- The AO added Rs. 65,80,441/- as notional interest, assuming funds were diverted as interest-free advances to group companies, directors, and relatives.
- The assessee argued that the funds received from India Growth Fund (IGF) were for equity investment and did not bear interest. The advances to group companies were on commercial expediency.
- The CIT(A) upheld the AO’s decision, noting that the assessee paid interest on term loans while giving interest-free loans to related parties.
- The Tribunal observed that the funds from IGF did not carry any cost to the company and the advances were made on commercial expediency. Citing the Supreme Court’s decision in Hero Cycles (P) Ltd., the Tribunal allowed the assessee’s appeal, stating that notional interest should not be charged when there is no cost to the company.

3. Disallowance of expenditure due to lack of supporting bills and invoices:
- The AO disallowed 10% of the expenses claimed by the assessee due to the inability to produce supporting bills for Rs. 1,74,92,54,028/- out of total expenses of Rs. 2,27,96,29,398/-.
- The CIT(A) reduced the disallowance to 7%, acknowledging that the accounts were not audited and considering the nature of the business.
- The Tribunal noted that the CIT(A) classified expenses into those paid by cheque and those paid in cash. The Tribunal agreed with the CIT(A) on the 7% disallowance but restricted it to cash expenses only, directing the AO to disallow 7% of the cash expenses.

Conclusion:
- The appeal was partly allowed for statistical purposes, with the Tribunal directing a reassessment of disallowances under section 40A(3) and restricting the disallowance of expenses to cash payments only. The addition of notional interest was deleted.