2025 (7) TMI 1160 - AT - Income Tax

Disallowance of freight charges - Allowable business expenditure or not? - as in absence of actual business activities AO observed that these expenses cannot be held to be justified and are not allowable - HELD THAT - We observed that the coordinate Bench in the case of Upright Enterprises Pvt. Ltd. 2025 (2) TMI 1211 - ITAT DELHI considered the similar facts on record also relating to same group of companies held financials of an assessee and the duly audited accounts based on bills and vouchers verified in the audit and expenditure being of the nature of freight cannot be doubted without finding the revenue from business of building construction material supply itself to be bogus. If it was a case of inflation of expenses that also required due inquiry and mere suspicion for being a part of group upon which the search was conducted is not sufficient to make the disallowance. It is settled proposition of law that suspicion howsoever strong cannot take place of proof . Even in quasi judicial proceedings the gap between may be true and must be true should be covered by the ld. Tax authorities to discredit an expenditure on standalone basis without examining the nature of business and financials as same has not been done we are inclined to sustain the grounds. Decided in favour of asseesee. Disallowance u/s 14A - Mandation to record satisfaction - HELD THAT - We observed that no doubt AO observed that assessee has declared income of Rs. 1, 45, 600/- and assessee has disallowed an amount of Rs. 63, 805/- under protest relying on the decisions of ITAT Chandigarh Bench and ITAT Mumbai Bench. Since assessee has disallowed certain expenditure and AO has not recorded proper satisfaction before proceeding to make addition u/s 14A of the Act. With the above observation therefore we are inclined to allow these grounds raised by the assessee by deleting the disallowance u/s 14A with the observation that no proper satisfaction was recorded. Addition solely on the basis of Form 26AS - as submitted that the assessee has declared the mismatch amount found from Form 26AS in the subsequent year therefore it amounts to double taxation - HELD THAT - We observed that mismatch amount of receipts declared in Form 26AS and the actual receipts declared by the assessee amounting to Rs. 26, 910/-. It is brought to our notice that the abovesaid difference is already declared by the assessee in the subsequent assessment year. That being so the same addition cannot be made in this current assessment year. Denial of carry forward losses - In the appellate proceedings assessee has raised separate ground before the ld. CIT (A) as well as before us - HELD THAT - We are inclined to remit this issue back to the file of Assessing Officer to verify the same as per law whether assessee is allowed to carry forward and brought forward losses to the merged company and if so the same may be allowed after due verification as per law needless to add assessee may be provided opportunity of being heard. Disallowance of interest expenditure - As observed that the assessee has given interest free short term loans and advances - HELD THAT - We observed that the assessee has borrowed secured and unsecured loan and also carrying huge inventories and trade receivables in the business. We also observed that assessee has taken secured and unsecured loans against the inventories and receivables and incurred interest expenditure. It clearly shows that assessee has interest free funds available in the business therefore AO cannot proceed to disallow all the finance cost claimed by the assessee.

Summary

ISSUES:

• Validity of jurisdiction assumed by Assessing Officer (AO) under sections 143(2), 147, and 148 of the Income Tax Act when the entity in whose name notice was issued did not exist.
• Legality and correctness of disallowance of freight charges claimed as business expenditure under section 37(1) of the Income Tax Act.
• Disallowance of interest expenses under section 36(1)(iii) on the basis that interest-bearing funds were used to advance non-interest-bearing loans and advances.
• Disallowance under section 14A read with Rule 8D relating to expenses incurred in relation to exempt income.
• Legitimacy of additions made solely on the basis of mismatch in Form 26AS.
• Withdrawal and disallowance of brought forward and carry forward losses and unabsorbed depreciation without proper appreciation or opportunity to be heard.
• Whether principles of natural justice were observed in passing the impugned assessment orders.

RULINGS / HOLDINGS:

• Jurisdictional challenges under sections 143(2), 147, and 148 were not pressed by the appellant and thus dismissed.
• The disallowance of freight charges under section 37(1) was found to be unjustified where the expenditure was supported by audited accounts and bills, and suspicion alone cannot discredit such expenditure; accordingly, disallowance was deleted following precedent that "suspicion howsoever strong cannot take place of proof."
• Interest disallowance under section 36(1)(iii) was deleted where the assessee demonstrated that interest-bearing loans were incurred against business requirements and interest-free loans were funded from interest-free funds available in business, showing no nexus for disallowance.
• Disallowance under section 14A was deleted due to lack of proper satisfaction recorded by the AO before making the addition.
• Additions based solely on mismatch in Form 26AS were deleted where the mismatched amount was declared by the assessee in a subsequent assessment year, preventing double taxation.
• Disallowance of brought forward and carry forward losses was set aside and remitted to AO for verification, with directions to provide opportunity of being heard, recognizing that the assessee claimed merger and eligibility to carry forward losses in merged entity.
• General grounds alleging violation of natural justice were not adjudicated as they were general in nature.

RATIONALE:

• The Court applied the statutory provisions of the Income Tax Act, 1961, including sections 143(2), 147, 148, 37(1), 36(1)(iii), and 14A read with Rule 8D.
• Precedent was relied upon emphasizing that "suspicion howsoever strong cannot take place of proof" in disallowing business expenditure, especially when accounts are audited and vouchers exist.
• The Court recognized the importance of proper satisfaction and recording of reasons by the AO before making disallowances under section 14A, consistent with settled law requiring AO to record satisfaction.
• Regarding interest disallowance, the Court noted that disallowance is not warranted where interest-bearing loans are incurred for business purposes and interest-free advances are funded from interest-free funds, following judicial decisions cited by the appellant.
• The Court acknowledged the principle against double taxation by disallowing additions based on Form 26AS mismatch when the amount was declared in a subsequent year.
• The remand on carry forward losses reflects a procedural safeguard ensuring that the assessee is given an opportunity to prove entitlement, consistent with principles of natural justice and proper appreciation of facts.
• No dissent or doctrinal shift was indicated; the Court followed coordinate Bench decisions and established principles of tax law.