Friday, December 30, 2011

I-T - Whether merely incurring expenditure and paying by account payee cheques a

I-T - Whether merely incurring expenditure and paying by account payee cheques apart from deducting tax at source on such payments are not enough to claim an expenditure as revenue expenditure - Yes, rules ITAT

AHMEDABAD, OCT 18, 2011: THE questions before the Tribunal are - Whether merely incurring business expenditure and paying by cheque apart from deducting tax at source on such payments are not enough to claim business expenses; Whether assessee is required to establish that such expenses were incurred wholly and exclusively for the purpose of business; Whether interest paid on capital can be disallowed notionally ignoring that no disallowance was made in earlier year in which such advances were made and the assessee had sufficient interest free funds and whether failure to attend proceedings before AO attracts penalty for non-appearance. And the verdict partly goes against the assessee.

Facts of the case

Assesses is engaged in the manufacturing of yarn. It filed its ROI claiming deduction of certain payments made by it on account of services obtained, AO asked the details, assessee filed details in parts however could not file any document establishing that the services obtained were wholly and exclusively for the purpose of business- CIT(A) affirmed the order of the AO rejecting the contention that the payments are allowable since made by account payee cheques and TDS was also deducted from the same.

Assessee gave certain advances to its near and dears and hence the AO disallowed notional interest attributable to these advances from the payments of interest made by assessee- CIT (A) affirmed the same- Before ITAT AR of the assessee points out that the advances were made in preceding assessment year and no disallowance was made beside this the assessee was having ample funds at the time of advancing of the funds- In respect of third issue the AO levied penalty of 271(1)(b) on account of non-appearance of the assessee-CIT(A) affirmed the same.

After hearing the parties the ITAT held that,

++ the assessee failed to submit any test report either before the authorities below or before the Tribunal. In the absence of any evidence of testing of yearn by this Consultancy Services, the assessee failed to prove that they had rendered any services for the purpose of business of the assessee. The AO also specifically asked the assessee to produce the person to whom consultancy service charges have been paid and to establish their identity. The assessee however, did not produce any such persons before the AO and even the identity is not established. The AO also noted in the assessment order that as per information available during the course of assessment proceedings, the assessee was purchasing some cotton bales from other parties for supply to Mafatlal Industries Ltd. Considering the facts of the case noted above and failure of the assessee to prove that expenses were incurred wholly and exclusively for the purpose of its business, the authorities below were justified in rejecting the claim of the assessee;

++ copy of the intimation u/s 143(1) of the IT Act for preceding assessment year 2006-07 is also filed at PB-26 in which no disallowance out of interest have been made. Since the interest has not been disallowed in the earlier year on the same facts, therefore, on mere opening balances in the assessment year under appeal, no disallowance could have been made. We rely upon the decision of the Hon'ble Karnataka High Court in the case of Sridev Enterprises;

++ the assesses filed copy of the balance sheet for the assessment year under appeal to show that interest-free funds from M/s. Travel World was available to the assessee in a sum of Rs.30,00,000/- and sufficient capital was available in the capital account of the partners. The profit of the assessee as per profit & loss account was also shown at Rs.28,95,852/-. Thus, sufficient interest free funds were available with the assessee to give interest-free loans and advances to these 3 parties. The AO has also not made out any case if any borrowed funds have been diverted for non-business purposes;

++ the AO noted in the penalty order that despite show cause notice for levy of penalty was served upon the assesses but the assessee did not give any reasons why penalty should not be imposed. Thus, according to the AO no explanation is filed for failure to comply with statutory notice. The learned Counsel for the assessee however, referred to the show cause notice dated 17-07-2009 and the reply filed by the assessee on 23-07-2009 (PB-19) which according to her also is referred to in the assessment order. We find that though this reply dated 23-07-2009 was filed before the AO but no reasons have been given for failure to comply with the statutory notices. The assessee from Para 1 to 8 submitted the details on merit and in the bottom merely stated that the assessee has no intention to not to comply with the statutory notices and that the notice u/s 143(2) of the IT Act could not be complied with because it was not possible to collect various information. Thus, the assessee has not given any specific or reasonable cause to show why there was failure to comply with the statutory notices.

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