If the Assessee has substantial interest free funds to cover up the outstanding amounts then no disallowance can be made
The Dy. Commissioner of Income Tax, Circle vs. M/s Tally Solutions Pvt. Ltd.; ITA No. 579/Bang/2018; ITAT, Bangalore; 14.10.2021
This appeal at the instance of the Department is directed against CIT(A)’s order dated 04.12.2017. for the assessment year 2014-2015 on following grounds:
a. Whether on the facts and in the circumstances of the case, the CIT(A) was justified in law in following the decision of the jurisdictional High Court in the case of CIT & Anr. v. M/s Microlabs Ltd. (383 ITR 490), without looking into the commercial / business expediency of the transaction between the assessee and its subsidiary company.
b. Whether on the facts and in the circumstances of the case, the CIT(A) was justified in law in not relying on the decision of the jurisdictional High Court in the case of Embassy Development Corporation v. ACIT, wherein similar facts are involved.
c. Whether in the facts and circumstances of the case, the CIT(A) was justified in allowing the depreciation of the Home Theatre Systems relying on the indirect evidences and not providing an opportunity to the AO under Rule 46A(3) of the I.T.Rules to examine the issue.
- The assessee is a company engaged in the business of development and marketing of accounting business management software.
- For the assessment year 2014-2015, the return of income was filed on 28.11.2014 declaring total income of Rs.5,45,82,790. The assessment was selected for scrutiny.
- During the course of assessment proceedings the Assessing Officer noticed that the assessee had incurred interest expenditure. It was further noticed by the A.O. that the assessee-company had diverted some funds towards sister-concern without charging interest.
- The A.O. adopted the rate of interest at 14.5% on the amount outstanding from the sister concern and made an addition of Rs.1,40,99,637.
• Aggrieved, the assessee preferred an appeal to the first appellate authority. The CIT(A) deleted the addition of Rs.1,40,99,637. Revenue being aggrieved, has raised this issue before the Tribunal.
• The Assessing Officer, during the course of scrutiny proceedings notice, noticed that the assessee-company had purchased home-theatre and the A.O. was of the opinion that the home-theatre was not for the purpose of business. Hence, he disallowed the depreciation claim on the same.
• Aggrieved, the assessee preferred an appeal to the first appellate authority. Therefore, it was submitted that there is excess disallowance. It was further submitted on merits the home-theatre is for the business purpose only and the original invoices were destroyed in fire and the same could not be produced. The CIT(A) allowed the plea of the assessee and deleted the addition.
Observations and Findings:
On the point of addition of Rs. 1,40.99.637/-
- The A.O. imputed interest at 14.5% on the amounts outstanding as on 31.03.2014 by the sister-concern towards the assessee for making the addition of Rs.1,40,99,637.
- On perusal of the financials, it is noticed that the opening balance of the sister-concern was Rs.12,05,08,884 (as on 01.04.2013) and the advances had reduced to Rs.9,72,38,877 as on the close of the financial year, namely, 31.03.2014. Therefore, it is clear there is no advances was made during the year.
- The learned CIT(A) categorically held from perusal of assessment orders for the earlier years, i.e., assessment years 2011-2012, 2012-2013 and 2013-2014 there has been no addition on account of diversion of fund to sister-concern.
- Therefore, there cannot be any disallowance in the current assessment year in view of the Hon’ble Karnataka High Court judgment in case of CIT v. Sridev Enterprises reported in [(1991) 192 ITR 165 (Kar.).
- Further there is no nexus between the borrowed funds and the amounts outstanding in the case of the sister-concern, namely, M/s.Tally India (P) Ltd. In such factual situation, there cannot be any addition for the reason that funds have been diverted to the sister-concern interest free.
- Therefore, it was held by the bench that the CIT(A) was correct in observing that the assessee has substantial interest free funds to cover up the outstanding amounts and hence in the light of the decision of the Hon’ble High Court of Karnataka in the case of CIT & Another v. Microlabs Ltd (2016) 383 ITR 490 (Kar) no disallowance can be made.
On the point of Disallowance of depreciation of the Home Theatre Systems relying on the indirect evidences and not providing an opportunity to the AO under Rule 46A(3) of the I.T.Rules to examine the issue.
- The theatre is admitted used for the business purpose of exhibiting various technologies development in the field of software to the employees and also to the customers.
- There was a major fire accident in the premises of the assessee and various books of account, documents and invoices were destroyed.
- These facts were brought to the notice of the A.O. during the course of hearing vide assessee’s letter dated 21.12.2016. The proof regarding the fire accident was also furnished by supplying copy of FIR, paper report, etc.
- All the payments for the purchase of the equipment were made through bank account and the investment is not doubted.
- Further, the bench was of the view that there is no violation of Rule 46A(3) of the I.T.Rules, since there were no fresh facts produced before the CIT(A). The stand taken by the assessee before the A.O. was that there was a fire accident, wherein the invoices were destroyed and hence, cannot be produced.
- The same is the stand taken before the CIT(A) and the same set of evidence are produced. Therefore, there is no violation of provisions of Rule 46A(3) of the I.T.Rules. For the aforesaid reasons, it was held that the CIT(A) was justified in deleting the disallowance of depreciation made by the A.O.
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