2018 (12) TMI 824 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance being the amount of interest on account of diversion of the fund - Held that - Regarding the loan taken from magma leasing Ltd for the purchase of machinery Rs. 45, 09, 000/- we note that there was no interest paid by the assessee in the year under consideration. The assessee has received a sum of Rs. 45, 09, 000/- from M/s Shri OSHIYA Engineering company as evident from the copy of the ledger placed on page 52 of the paper book. The amount received was deposited in the syndicate bank account (SOD) and Indian Overseas Bank of the assessee as evident from the bank book placed on pages 53 to 57 of the paper book. Such deposits have resulted in the reduction of the loan amount from the Syndicate Bank and Indian Overseas Bank - the assessee subsequently has Squared up the account of Shri OSHIYA Engineering company with the amount of loan taken from magma leasing Ltd. All these accounting adjustments show that the amount of loan taken by the assessee from magma leasing company Ltd for the purchase of machinery was ultimately utilized for the purpose of the business. - no disallowance can be made Treating the amount of Rs. 3, 39, 456/- as undisclosed income of the assessee - Held that - On perusal of the ledger of the assessee in the books of the V Arks Engineers private Ltd we note that the assessee has raised invoices for Rs. 16, 09, 044/- which evidences that the assessee has worked for V arks Engineers private Ltd for Rs. 16, 09, 044/- in the year under consideration. The copies of ledgers are placed on pages 69 to 73 of the paper book. Therefore we do not find any infirmity in the order of the Ld. CIT(A). Hence the ground of appeal of the assessee is dismissed. Regarding the penalty appeal at the outset we note that there was no representation made by the assessee on merit. Therefore we are of the view that the matter should be restored back to the file of AO in the interests of justice and fair play. Accordingly we remit the issue to the file of AO with the direction to adjudicate the issue of fresh in the light of the order of this Tribunal in relation to the quantum appeal of the assessee. Hence the ground of appeal of the assessee is allowed for statistical purposes.

Summary

Issues involved:
1. Disallowance of interest expenses of Rs. 11,68,759/-.
2. Addition of Rs. 3,39,456/- as undisclosed income.
3. Imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of Interest Expenses of Rs. 11,68,759/-

The assessee, a partnership firm engaged in fabrication contracts, claimed interest expenses of Rs. 42,62,462/-, out of which Rs. 23,70,314/- was paid to specified persons under section 40A(2)(b) of the Act. The assessee showed advances of Rs. 52,30,661/- to 15 parties in its balance sheet, claiming these were for business transactions, hence no interest was charged. Additionally, a loan of Rs. 45,09,000/- taken for machinery was purportedly used for business activities instead.

The AO, unsatisfied with the explanations, noted that some advances were adjusted at year-end without evidence of business utilization of the loan. Consequently, a proportionate interest of Rs. 11,68,759/- was added to the assessee's income.

On appeal, the CIT(A) upheld the AO's decision, noting the advances were not classified as trade advances and there was no evidence of business transactions or utilization of the loan for business purposes.

The Tribunal found that the Revenue did not dispute expenses claimed against such advances, and TDS was deducted on expenses adjusted against advances. However, for certain parties where advances were not adjusted, the matter was remanded to the AO for fresh adjudication. The Tribunal also noted that the loan from Magma Leasing Ltd. was used to reduce bank overdrafts, thus no disallowance was warranted.

Issue 2: Addition of Rs. 3,39,456/- as Undisclosed Income

The assessee reported an income of Rs. 12,03,620/- from V Arks Engineers Pvt. Ltd., but the TDS certificate showed Rs. 16,09,044/-. The AO added the difference of Rs. 3,39,456/- as undisclosed income due to lack of satisfactory explanation from the assessee.

The CIT(A) upheld the addition, noting the assessee should have revised the return upon receiving the TDS certificate and did not provide the confirmation letter from V Arks Engineers during assessment.

The Tribunal, upon reviewing the ledger, confirmed that the assessee worked for Rs. 16,09,044/-, thus upholding the CIT(A)'s decision.

Issue 3: Imposition of Penalty under Section 271(1)(c)

The AO initiated penalty proceedings for the disallowance of interest expenses and addition of undisclosed income. The CIT(A) confirmed the penalty despite the assessee's request to keep proceedings in abeyance until the quantum appeal was finalized.

The Tribunal noted no representation on merit from the assessee and remanded the matter to the AO for fresh adjudication in light of the Tribunal's decision on the quantum appeal.

Conclusion:

The Tribunal partly allowed the assessee's appeal on the disallowance of interest expenses by remanding the matter for fresh adjudication regarding certain advances. It upheld the addition of Rs. 3,39,456/- as undisclosed income. The penalty issue was remanded to the AO for fresh adjudication, considering the Tribunal's findings on the quantum appeal.