Proportionate interest can’t be disallowed u/s 14A if investments in shares have been made from interest free funds:

AO found that the assessee had made investment in the shares and securities of its group companies and it also had substantial interest bearing secured loans and unsecured loans. Assessee had also paid substantial interest and financial charges during the year under consideration. AO therefore took a view that interest bearing business funds had been diverted and utilized for the purpose of making the aforesaid investment and hence, he made disallowance of proportionate interest expenses u/s 14A. On appeal, CIT(A) observed that the said investments were made in earlier years and that too from interest free funds available with the assessee. Also, the assessee was having substantially high share capital and reserves as compared to such investments. Hence, it cannot be presumed that any part of interest bearing borrowed funds was utilized for the said investments. In light of the said facts, CIT(A) deleted the impugned disallowance and his order was further upheld by Hon’ble ITAT.

[DCIT vs. Nandan Exim Ltd - ITA Nos.601 & 225/Ahd/2011 and 2419/Ahd/2010]

It is not a mandatory requirement to fully utilize the permissible FSI so as to claim deduction u/s S.80IB(10):

AO disallowed assessee’s claim for deduction u/s 80IB(10) on the count that the assessee that the assessee was not the owner of the land on which the housing project under consideration was developed. CIT(A), while confirming the said disallowance, further observed two things viz. a) one particular flat was of 1517.47 sq. ft. i.e. more than 1500 sq. ft. and b) assessee had not properly utilized the area of land i.e. the assessee had not developed one acre of land because, as per permissible FSI, more no. of residential units in multi-storied buildings could have been constructed. On appeal, Hon’ble ITAT held that the issue as to ownership of land is squarely covered in favour of the assessee vide the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Radhe Developers – 341 ITR 403 (Guj). As regards improper development of land, it was held that it is not a mandatory requirement to fully utilize the permissible FSI and there was no condition as to FSI u/s 80IB(10). Thus, the deduction u/s 80IB(10) was restricted only in respect of flat of 1517.47 sq. ft.

[Kamleshkumar Gandalal Shah vs. ITO – ITA No.2709/Ahd/2010 &

 Kamleshkumar Gandalal Shah HUF vs. ITO – ITA Nos.2710-11/Ahd/2010]

No addition can be made u/s 41(1) merely because some liabilities are outstanding at the end of the year:

AO made addition u/s 41(1) in respect of liabilities outstanding at the end of the year which was confirmed by CIT(A). On appeal, Hon’ble Tribunal observed that the liabilities were outstanding at the end of the given year and there was no material on record to prove that the said liabilities had ceased to exist. Assessee had not even written off the said liabilities in books of accounts. In light of the above, the Hon’ble Tribunal, following the ratio laid down in the case of “CIT vs. Nitin S. Garg” – 71 DTR (Guj) 73 / 22 taxmann.com 59 (Guj), deleted the said addition.

[Shri Ahmedabad Flexible Tube Mfg. & Yarn Proc. Co. P. Ltd. vs. ITO – ITA No.3133/Ahd/2011]

AS-7 is applicable to a “Contractor” and not to a “Developer”:

Assessee is engaged in the business of sale/purchase of TDR and earns income by way of stallage and construction activity. During the year under consideration, assessee received advance booking amount on account of construction activity and the same was shown as WIP following the “Project completion method”. AO was of the view that assessee must follow “Percentage completion method” as per AS-7. Hence, he rejected assessee’s books of accounts and estimated profit @ 8% of the booking advance. The said addition was deleted by CIT(A). On Revenue’s appeal, Hon’ble ITAT observed that in earlier year, Hon’ble ITAT had held that the assessee was not a “Contractor” but was a “Developer” who awarded contracts to different contractors for executing civil, electrical, plumbing work, etc. Hence, AS-7 was not applicable to the assessee. Also, no construction activity was carried out during the year under consideration. Assessee had merely received advances and there was no certainty of revenue recognition at that stage. Also, all the significant risks and ownership at that juncture vested in the hands of the assessee. Hence, like addition was deleted in earlier year by the Hon’ble ITAT. Following the earlier year’s order, Hon’ble ITAT deleted the impugned addition.

[ITO vs. M/s. Meeti Investment and Consultancy P. Ltd. – ITA No.1714/Ahd/2010]

Penalty u/s 271D cannot be levied in respect of cash deposited in bank by director of company for making urgent payments to suppliers of machinery:

AO found that the assessee had received loans in cash from its director which was in contravention of S.269SS and hence, he levied penalty u/s 271D. The said penalty was confirmed by CIT(A). On further appeal, Hon’ble ITAT observed that it was assessee’s first year of operation. Construction of factory building and installation of plant was in progress and the assessee had applied to a bank for loan for the same. However, the assessee was in urgent need of funds for making payments to the suppliers of machinery. To make such payments, director of the assessee deposited funds in assessee’s bank account which in turn were used to make payments to the suppliers within 1 to 5 days of receipt of such funds. Prior to such deposits, assessee had nominal bank balance. It was not the case of Revenue that such transactions were not genuine or that the suppliers of such machinery were not genuine. Transaction of purchase of such machinery was also not doubted. Also AO had not given any finding that the assessee had mala fide intention of disclosing concealed or undisclosed money. In light of the above facts, Hon’ble ITAT held that no penalty can be levied u/s 271D in the given case.

[Makewell Inducto Cast Pvt. Ltd. vs. JCIT – ITA No.2235/Ahd/2013]

Depreciation on vehicles cannot be disallowed merely because such vehicles have been registered in the name of partner of an assessee-firm:

AO disallowed depreciation on motor vehicles on the count that such vehicles were registered in the name of the partner of the assessee firm. On appeal, CIT(A) observed that the said vehicles were reflected in the assesse-firm’s balance-sheet under the head “Fixed Assets”. Assessee had raised loans for purchasing some of those vehicles. Further, AO had accepted running and maintenance expenses debited by the assessee which makes it abundantly clear that the said vehicles were purchased from the funds of the assessee and were used for assessee’s business purposes. CIT(A), placing reliance in the case of “Mysore Minerals vs. CIT – 239 ITR 775 (SC)”, held that depreciation on such vehicles was allowable and the said order was further confirmed by Hon’ble ITAT.

[ACIT vs. Gopal Fabrics – ITA No.3338/Ahd/2010 and 463/Ahd/2013]

Interest expenses cannot be disallowed if there are substantial interest free funds as against interest free advances:

AO found that the assessee had charged interest on advances from only two parties and hence, he disallowed interest expenses on the count that assessee failed to charge interest on rest of the advances. The said addition came to be deleted by CIT(A). on Revenue’s appeal, Hon’ble ITAT found that the assessee had substantial interest free funds in the form of partners’ capital and the amount of concerned advances was less than such interest free funds. Hon’ble ITAT, following the decision in the case of “CIT vs. Raghuvir Synthetics Ltd. – (2013) 217 Taxman 178 (Guj), held that where huge funds were available without any interest liability with the assessee and there was no evidence to hold that borrowed money was utilized for the purpose of such advances, disallowance of interest was unwarranted. Accordingly, CIT(A)’s order was upheld and revenue’s appeal was dismissed.

[ACIT vs. Gopal Fabrics – ITA No.3338/Ahd/2010 and 463/Ahd/2013]

No addition can be made u/s 41(1) in respect of sundry creditors merely because the same are outstanding for last few years:

AO made addition u/s 41(1) in respect of “sundry creditors for exports” appearing in Balance-sheet since the same were outstanding for last few years. On appeal, CIT(A) observed that S.41(1) comes into play when an assessee obtains, in cash or in kind, any amount out of the expenditure allowed earlier. Alternatively, assessee must have obtained benefit by way of remission or cessation of trading liability. The third scenario in which the provisions can be invoked is when the assessee unilaterally writes off the liability. In the given case, none of the above mentioned events took place. It was also observed that the said liability continued to be outstanding even at the end of given year. Hence, CIT(A) deleted the said addition. On Revenue’s appeal, Hon’ble ITAT held that CIT(A)’s order was in conformity with the decision in the case of “CIT vs. Nitin S. Garg – 22 taxmann.com 59 (Guj)” and hence, no interference was required in CIT(A)’s order. Accordingly, Revenue’s appeal was dismissed.

[ACIT vs. Gopal Fabrics – ITA No.3338/Ahd/2010 and 463/Ahd/2013]

No disallowance can be made u/s 40A(3) if cash payments are made to “Broker” who is required to make cash payments on behalf of the assessee:

AO made disallowance u/s 40A(3) in respect of cash payments made towards freight charges since the same were in excess of limit prescribed u/s 40A(3). The said disallowance was confirmed by CIT(A). On appeal, Hon’ble ITAT observed that the assessee had not made such cash payments to individual truck owners. Rather, such payments were made to “Brokers” through whom the trucks were arranged and such brokers, in turn, made cash payments to individual truck owners. As per Rule 6DD(k), no disallowance u/s 40A(3) is called for if cash payments in excess of the prescribed limit are made to “Agent” who in turn is required to make cash payments on behalf of the assessee. It was thus held that the term “Broker” is akin to “Agent” and hence, disallowance u/s 40A(3) is unwarranted.

[Chartered Logistics Ltd. vs. ACIT – IT(SS)A Nos.37 to 40/Ahd/2013 &

 ACIT vs. Gyanchand Gandhi HUF - IT(SS)A Nos.41 to 44/Ahd/2013]