TMI Blog2017 (1) TMI 1095X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowed. We find it appropriate to remit the issue back to the file of the AO to determine the payment above ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee submits that CIT(A) direction that opening stock as ~ on 1-4-2009 should be taken as 6,13,97,833/- following the Hon'ble Supreme Court decision in the case of V.K.J. Builders contractor Pvt Ltd Vs CIT 184 Taxman 357 (SC) be allowed. 5. The CIT(A) erred in law and facts of the case in confirming the addition of ₹ 65,80,441/- being notional interest estimated by the Assessing Officer ignoring the fact that there was no diversion of borrowed funds, your Assessees prays for deletion of the same. 6. The CIT(A) as well as the Assessing Officer erred in law and facts of the case in charging notional interest on assumption and presumption that funds have been diverted without giving any findings, ignoring the fact that the investment had been made in the previous year and no disallowance was made in the previous years, your assessee prays that the addition may be deleted. 7. Your Assessee submits that the CIT(A) ought to have appreciated the facts and nature of business disallowance at 7% of the expenses of ₹ 174,92,54,030/- is on high side and further submits that out of ₹ 174,92,54,030/-, ₹ 109,15,23,126 is subjected to TDS and ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the details submitted, some of the entries in excess of ₹ 20,000/- include several expenses of small amounts incurred en-route by the drivers, cleaners etc. for diesel, tollgate, etc., and all such expenses were clubbed and one entry was passed for each trip. The 40A(3) disallowances made for the last three years where the books of account were audited were as under: S.No. AY Disallowance of cash payments exceeding ₹ 20,000/- Turnover (Rs. in crores) 1 2006-07 14,88,116/- 116.40 2 2007-08 19,82,471 181.31 3 2008-09 69,17,063 261.66 Keeping in view the nature of the business where incurring of cash expenses cannot be avoided, and keeping in view the past record of the assessee, the turnover for A.Y. 2009-10 at ₹ 231.41 crores, the CIT(A) sustained a roundsum amount of ₹ 70,00,000/- u/s.40A(3) as against the disallowance made by the AO at ₹ 1,88,95,204/-. 6. Aggriev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 40A(3) of the Act and make the disallowance accordingly. Ground Nos. 1 2 are treated as allowed for statistical purposes. 10. As regards ground Nos. 5 6 regarding the addition of ₹ 65,80,441/- being notional interest, on verification of impounded material, the AO noticed that India Growth Fund (IGF), a unit scheme of Kotak SEAF India. Funds invested a sum of ₹ 65 crores in the assessee company in the Financial Year 2007-08 vide agreement entered into on 06.02.2007 and the shares were allotted subsequently. From the balance sheet, it is seen that 'Advances' of ₹ 8,86,92,075/- was made to group companies, directors and relatives. The AO was, therefore, of the view that the funds were diverted in the form of interest free advances to group companies, directors and their relatives. Accordingly, the AO computed the notional interest @ 14% and the same was put forth to the assessee s AR, to which the AR vide letter dated 05/12/2011 agreed and submitted calculation of notional interest income and the total of which comes to ₹ 65,80,441/-. 11. Before the CIT(A), the AR of the assessee submitted that the Assessing Officer had estimated not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not audited, I find no infirmity in disallowance of the notional interest made by the AO. Accordingly, this ground of appeal is dismissed. 13. Ld. AR submitted that during the year, India Growth Fund (IGF) has invested ₹ 65 crores for the purpose of investment in shares, the assessee has subsequently issued shares. These funds do not carry any interest. Hence, there is no cost to the company. The assessee has invested the funds in the group companies on commercial expediency. The AO cannot charge notional interest when there is no cost to the assessee. 14. Ld. DR relied on the orders of AO and CIT(A). 15. Considered the rival submissions and perused the material facts on record. It is noted that 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. We agree with ld. AR that the money invested by IGF do not carry any cost to the company as the same was invested by IGF to subscribe to the shares in the company. The ld. CIT(A) has sustained the addition considering the fact that the assessee has incurred financial charges to the tune of ₹ 6.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equently, the assessee company had off-loaded its share holding in the said M/s. Hero Fibres Limited to various companies of Oswal Group and at that time, the assessee company not only refunded back the entire loan given to M/s. Hero Fibres Limited by the assessee but this was refunded with interest. In the year in which the aforesaid interest was received, same was shown as income and offered for tax. Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of ₹ 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilize those funds for giving advance to its Directors. On the basis of aforesaid discussion, the present appeal is allowed, thereby setting aside the order of the High Court and restoring that of the Income Tax Appellate Tribunal. Following the above ratio, 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 enou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 7% instead of 10% adopted by the AO, thereby 3% relief was given to assessee. Accordingly, the disallowance made by the AO is restricted to ₹ 12,24,47,782/- as against ₹ 17,49,25,403/-. 19. Ld. AR submitted that CIT(A) has classified the expenses as per the table (supra) i.e. expenses incurred by cheque and cash. But, while giving relief, he has reduced the disallowance % on the total expenses. He submitted that it is appropriate to apply the % on the cash expenses alone. 20. Ld. DR submitted that enough relief was already given by the CIT(A) and relied on the orders of revenue authorities. 21. Considered the rival submissions and perused the material facts on record. The ld. CIT(A) has classified the expenses of ₹ 227.96 cores, out of which, the assessee had paid TDS for ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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