2025 (7) TMI 1232 - AT - Income Tax

Disallowance of contingent liability u/s. 37 - assessee was required to provide party-wise details and the nature of this contingent expenses which were not complied and it also not explained whether any TDS was made on this amount shown as contingent expenses - HELD THAT - The contingent liability was added for the reason that no detail in this respect was filed before the AO - However the assessee had furnished party-wise details of these expenses in the course of appeal proceedings. It is found that these expenses were on account of Audit Fee Godown Rent Interest on SBI Global Freight Charges Professional Fees etc. and represented the provision made at the end of the year. The matter was verified by the AO in the course of remand proceedings and he had certified that the provision of expenses was on account of ascertained liability and was eligible for deduction. Further TDS was also made in respect of these expenses. Considering the explanation of the assessee as well as the remand report of the AO CIT(A) had rightly deleted the addition. We do not find anything wrong with order of the Ld. CIT(A) on this issue. Therefore the order of Ld. CIT(A) deleting the addition. Bogus purchase - addition made parties had not responded to the notice u/s 133(6) issued by the AO in the course of assessment proceedings and did not confirm the transactions as claimed by the assessee - HELD THAT -Assessee had filed a copy of the ledger account and balance confirmation of the parties in the course of appellate proceedings. The matter was referred to the Assessing Officer and in the remand proceedings the Assessing Officer had again issued notice u/s 133(6) of the Act to the said parties who had responded to the notices and furnished the requisite details. Since the purchase made by the assessee from these two parties was duly confirmed in the course of remand proceedings the Ld. CIT(A) had rightly deleted the addition on the basis of the report of the AO. The ground raised by the Revenue has not merit as the addition was deleted on the basis of the remand report of the Assessing Officer. Addition on account of loan processing fee - AO treated the processing fee as not a valid business expenses - CIT-DR explained that the assessee had not explained the purpose for which the loan was taken - HELD THAT - If the loan was taken for acquisition of capital asset then the loan processing fee had to be capitalized. Therefore no general stand could be taken that loan processing fee is always revenue in nature. Since the purpose for which the loan was taken was not examined nor explained by the assessee we deem it proper to set-aside the matter to the file of the AO with a direction to examine the purpose of loan in connection of which the loan processing fee was paid by the assessee. If the loan was on account of working capital then the loan processing fee has to be allowed as revenue expenditure. AO may decide the matter after calling for the necessary details and explanation of the assessee in this respect. Addition on account of disallowance of expense u/s 57 - HELD THAT - . As the shares were acquired during the year it was necessary to examine the immediate source from which these investments were made. The disallowance of interest u/s 57 of the Act can be made only if the borrowings of the assessee was utilized towards making the investment in the shares the income of which was exempt from tax. We therefore deem it proper to set-aside the matter to the file of AO with a direction to examine the source of investment in shares made by the assessee during the year. It should be examined whether the short-term borrowings were utilized towards investment in the shares made during the year. The Assessing Officer is directed to provide proper opportunity of being heard to the assessee on this issue. At the same time the assesse is also directed to produce the required details and evidences before the AO to establish its contention that the investment in the shares was made out of own funds and not out of the borrowings. The ground taken by the Revenue is allowed for statistical purposes.

Summary

ISSUES:

Whether the addition of contingent liability disallowance under Section 37 of the Income Tax Act was justified in absence of supporting evidence and TDS compliance.Whether deletion of addition on account of alleged bogus purchases was proper despite non-response of vendors to Section 133(6) notices and lack of primary documentary evidence.Whether loan processing fees should be treated as capital expenditure under Accounting Standard 16 or as allowable revenue expenditure.Whether disallowance of finance cost under Section 57 of the Act is justified without establishing a direct nexus between borrowed funds and exempt income from investments.

RULINGS / HOLDINGS:

On contingent liability disallowance: The deletion of addition of Rs. 1,50,81,767/- was upheld as the assessee furnished party-wise details during appellate proceedings and the Assessing Officer certified that the provision was on account of "ascertained liability" eligible for deduction, with TDS made accordingly.On bogus purchases: The deletion of addition of Rs. 4,57,73,285/- was upheld since the parties responded to Section 133(6) notices during remand proceedings and confirmed transactions; ledger confirmations filed at appellate stage were accepted based on remand report.On loan processing fees: The matter was set aside for fresh examination because the assessee failed to explain the purpose of the loan; if the loan was for capital asset acquisition, fees must be capitalized per AS-16, otherwise allowable as revenue expenditure.On disallowance under Section 57: The disallowance of Rs. 37,31,239/- was set aside for reassessment to determine whether borrowed funds were used for investments yielding exempt income; mere assertion of self-generated funds without detailed evidence was insufficient.

RATIONALE:

The court applied statutory provisions including Section 37 (business expenditure), Section 133(6) (power to summon persons), Section 57 (disallowance of interest expense relating to exempt income), and Accounting Standard 16 concerning capitalization of expenses.The decision emphasized the importance of adducing primary evidence and the Assessing Officer's role in verifying facts via remand reports and notices under Section 133(6).For contingent liabilities and bogus purchases, the appellate authority's acceptance of additional evidence and remand reports was deemed proper and consistent with procedural fairness.Regarding loan processing fees and Section 57 disallowance, the court recognized the necessity of examining the purpose and source of funds, reflecting a doctrinal insistence on establishing a direct nexus between borrowed funds and exempt income before disallowing expenses.No dissenting or concurring opinions were noted; the judgment reflects adherence to established principles without doctrinal shifts.