2012 (10) TMI 1128 - AT - Income Tax

Disallowance of interest paid to related parties u/s 4OA(2)(b)- disallowance of foreign travel expenses - disallowance of motor car expenses to 10% - Claim of deduction u/s 80G first time before CIT(A) in appellate proceedings - Held that - If assessee is able to establish that the recipient of interest are paying tax at the highest rate on the income then no disallowance is called for u/s 40A(2) - AO is directed to verify the rate of tax at which the recipient of interest have paid tax and if it is equivalent to the rate of tax paid by the assessee then interest is allowed Held that - The visits of the entire family of the partners of the assessee firm cannot be treated as business visit - expenses on family members who are not partners of the assessee firm cannot be allowed as business expenditure - AO to disallow the actual expenditure incurred on the foreign travel with respect to the non-partner - Decided against the assessee Held that - Fringe benefit tax is levied on the expenses incurred by the employer irrespective of whether the same are incurred for official or personal purposes - the expense have to be appropriately allowed as expenses incurred wholly and exclusively for the purpose of business - Decided in favor of assessee Claim of deduction u/s 80G first time before CIT(A) in appellate proceedings - Held that - Assessee is entitled for deduction under Section 80G @50% - The CIT(A) did not entertain the claim of the assessee since assessee has not claimed it before the AO in the statement of income - AO to consider and decide the claim of the assessee after verification of the relevant facts and records

Issues Involved:
1. Disallowance of interest payment under Section 40A(2)(b) of the Income Tax Act, 1961.
2. Disallowance of foreign travel expenses.
3. Disallowance of motor car expenses.
4. Disallowance of deduction under Section 80G on donations.

Detailed Analysis:

1. Disallowance of Interest Payment under Section 40A(2)(b):
The assessee paid interest at 18% to family members, while paying only 12% to an unrelated party. The Assessing Officer (AO) disallowed the differential 6% interest paid to related parties under Section 40A(2)(b), amounting to Rs. 613,576. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed this disallowance, stating the initial burden is on the assessee to prove that the amount paid is not excessive or unreasonable.

The assessee argued that the loans were taken in earlier years without any disallowance and that the interest rate comparison with a negligible loan amount from R.K. Construction was not appropriate. The assessee also contended that the interest rate paid to banks against security was 16.5%, making 18% reasonable without security. The assessee cited the CBDT Circular dated 6-7-1968 and case laws (CIT Vs. Indo Saudi Services and CIT Vs. V.S.Dempo & Co.) to argue that no tax evasion occurred as the recipients were taxed at the highest rate.

The tribunal agreed that if the assessee proves the recipients paid tax at the highest rate, no disallowance is warranted under Section 40A(2). The AO was directed to verify the tax rates paid by the recipients and allow the claim if they matched the assessee's tax rate.

2. Disallowance of Foreign Travel Expenses:
The AO disallowed Rs. 255,716 out of Rs. 383,574 spent on foreign travel, noting that only two partners were invited for business discussions, while the expenses included family members. The CIT(A) upheld this disallowance.

The assessee argued that the senior partner required his wife's attendance due to a heart condition, and the children could not be left behind. However, the tribunal found no evidence supporting this claim and directed the AO to disallow the actual expenses incurred for non-partners.

3. Disallowance of Motor Car Expenses:
The AO disallowed 20% of motor car expenses for personal use by partners, which the CIT(A) reduced to 10% considering Fringe Benefit Tax (FBT) paid.

The assessee argued that paying FBT should negate any disallowance. The tribunal referred to a similar case (Hansraj Mathuradas Vs. ITO) where FBT payment justified full allowance of expenses. Following this precedent, the tribunal deleted the 10% disallowance confirmed by the CIT(A).

4. Disallowance of Deduction under Section 80G:
The AO disallowed a deduction of Rs. 3,250 under Section 80G on a donation of Rs. 6,500, as the assessee did not add back the donation amount in the income statement. The CIT(A) upheld this disallowance, noting the claim was not made in the return of income.

The assessee argued that the donation receipt showed eligibility under Section 80G. The tribunal noted that the claim should be considered if the donation is eligible under the statute and directed the AO to verify and decide the claim accordingly.

Conclusion:
The appeal was partly allowed. The tribunal provided specific directions for the AO to verify and reassess the claims related to interest payments, foreign travel expenses, and donations, while deleting the disallowance of motor car expenses based on FBT payment. The judgment emphasized the need for reasonable and fair application of tax provisions, particularly in preventing tax evasion without causing undue hardship in bona fide cases.

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