Income Tax Act, 1961 – Sections 36(1)(iii), 36(1)(va), 37 and 68 - The appellant engaged in real estate filed its return of income for AY 2015-16, declaring a total income of Rs.2.22 crores. Additions were made by the Assessing Officer (AO), including disallowance of travel expenses, delay in depositing employees' PF/ESI contributions, and interest expenses on loans, as well as an addition under Section 68 for unexplained cash credits - Whether foreign travel expenses can be wholly allowed under Section 37(1) when a personal element is present - Whether unexplained cash credits under Section 68 were properly substantiated - Whether employees’ PF/ESI contributions paid after the statutory due date but before filing the return can be allowed - Whether interest expenses under Section 36(1)(iii) on funds diverted to related parties and cash withdrawals are allowable when sufficient interest-free funds are available – HELD - Foreign travel expenses must be "wholly and exclusively" for business purposes. While no substantial evidence was provided to justify the business nexus of all expenses, a 30% disallowance was deemed reasonable for personal elements - The appellant failed to establish the identity, creditworthiness, and genuineness of a cash credit transaction of Rs.9.06 lakhs. The absence of corroborative evidence led to the addition being upheld - Following the Supreme Court decision in Checkmate Services (P.) Ltd., employees' contributions deposited after statutory due dates but before filing the return were disallowed - The Tribunal noted that the appellant had sufficient interest-free funds to cover advances given to related parties. Following the principle in Reliance Industries Ltd., no disallowance was warranted, and the addition of Rs.27.83 lakhs was deleted - The appeal was partly allowed. Additions under Sections 68 and 36(1)(va) were upheld, travel expenses were partly disallowed, and the disallowance under Section 36(1)(iii) was deleted

 

2024-VIL-1762-ITAT-AHM

 

IN THE INCOME TAX APPELLATE TRIBUNAL

“B” BENCH AHMEDABAD

 

ITA No. 300/Ahd/2020

Assessment Year: 2015-16

 

Date of Hearing: 03.12.2024

Date of Pronouncement: 11.12.2024

 

SHRIDEV PROCON LIMITED

(EARLIER KNOWN AS DEV PROCON LIMITED)

 

Vs

 

DEPUTY COMMISSIONER OF INCOME TAX

 

Assessee by: Shri Dhrunal Bhatt, AR & Shri Gulab Thakor, AR

Revenue by: Ms. Ketaki Desai, Sr.DR

 

BEFORE

SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER

SHRI MAKARAND V. MAHADEOKAR, ACCOUNTANT MEMBER

 

ORDER

 

PER MAKARAND V. MAHADEOKAR, AM:

 

This appeal by the assessee is directed against the order dated 12.03.2020 passed by the Commissioner of Income Tax (Appeals)-12, Ahmedabad [hereinafter referred to as ‘CIT(A)’] for the Assessment Year (AY) 2015-16, arising from the assessment order dated 29.12.2017 passed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] by the Deputy Commissioner of Income Tax, Central Circle-2(1), Ahmedabad [hereinafter referred to as ‘AO’].

 

Facts of the case:

 

2. The assessee is engaged in the real estate business. The assessee filed its return of income for AY 2015-16 on 26.07.2016, declaring a total income of Rs.2,22,72,640/-. The return was processed under Section 143(1) on 01.10.2016 and the case was selected for scrutiny under CASS. The AO completed the scrutiny after making following additions:

 

 

3. The assessee preferred an appeal before the CIT(A), who partly allowed the appeal by allowing a relief on account of prior period expenses.

 

4. Aggrieved by the order of the CIT(A), the assessee is in appeal before us with following grounds of appeal:

 

1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the addition made by Assessing Officer for Rs.35,60,621/- on account of travel expenses u/s 37. The Ld. CIT(A)ought to have appreciated the fact that the such expenditure was incurred for the purpose of appellant's business.

 

2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the addition made by Assessing Officer for Rs.9,06,000/- u/s. 68. The Ld. CIT(A) ought to have appreciated that members collection received during the year cannot be subject matter of addition u/s 68 of the Act and such amount is already repaid in subsequent year on cancellation of booking.

 

3. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the addition made by Assessing Officer for Rs.1,03,440/- u/s.36(1)(va) on account of delay in depositing PF/ESI contribution without appreciating the fact that such payment is made before due date of filing of return of income.

 

4. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the addition made by Assessing Officer for Rs.27,83,725/- u/s. 36(1)(iii) when no such addition is called for. The Ld. CIT(A) ought to have appreciated that no disallowance is required to be made as advances are for the purpose of business.

 

5. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.

 

5. During the course of hearing before us, the Authorized Representative (AR) of the assessee explained the facts and circumstances of the case and took us through the various grounds of appeal, emphasizing the legal and factual aspects relevant to each disallowance or addition. The Departmental Representative (DR) relied on the detailed findings and reasoning provided in the order of the CIT(A). After considering the submissions of both parties and perusing the material placed on record, we proceed to discuss and decide each ground of appeal as follows:

 

Ground No. 1 - Addition on account of Travel Expenses u/s.37 of the Act amounting to Rs.35,60,621/-

 

6. The AO observed that the assessee claimed a total travel expense of Rs.36,98,417/-, out of which Rs.35,60,621/- related to foreign travel to countries such as the USA, Dubai, and France. The assessee contended that these expenses were incurred to explore business opportunities and establish relations abroad. The AO disallowed the foreign travel expenses, citing absence of evidence to substantiate the business purpose of the trips and lack of supporting documents such as agreements, emails, contracts, or correspondence showing the purpose of travel was wholly and exclusively for the assessee's business. The AO also observed that the assessee did not have any branch, office, or operational activities outside India, which could justify the expenditure.

 

6.1. The CIT(A) upheld the AO's disallowance. The CIT(A) noted that the assessee failed to submit supporting documents such as agreements, contracts, or communications to establish that the foreign travel was undertaken for business purposes. The CIT(A) also noted that mere statements claiming that the expenses were for negotiating business deals are insufficient to meet the requirements of Section 37(1). The CIT(A) observed that there was no evidence to substantiate that the assessee engaged in negotiations or entered into contracts with specific entities during the foreign visits especially when the assessee did not have any operational business presence or branch office in Dubai or other foreign locations. CIT(A) also placed reliance on some judicial precedents.

 

7. During the course of hearing before us, the AR stated that the statement of expenses submitted before lower authorities explains that the Dev Thakkar, Director of the company has travelled frequently to Dubai and such frequent travel is for establishing business in Dubai and to have insight into the business practices of Dubai. The AR also explained that consultants have also travelled to foreign countries along with the directors. The AR also stated that considering the total revenue from the operations the travel expenses is negligible (0.56% of turnover). On enquiry, however, the AR could not deny the personal element in such travel expenses as the directors were accompanied by spouses and agreed for reasonable disallowance.

 

7.1. We have carefully considered the submissions made by the AR of the assessee, the findings of the AO, and the observations of the CIT(A). The AR contended that the frequent travel of the Director, Mr. Dev Thakkar, and consultants to Dubai was for establishing business operations and gaining insights into the business practices of Dubai. The AR also emphasized that the travel expenses, being only 0.56% of the total turnover, are negligible and proportional to the scale of operations. However, during the hearing, the AR admitted that the directors were accompanied by their spouses on such trips, which introduced a personal element into the travel expenses. The AR agreed to a reasonable disallowance in light of this fact.

 

7.2. Under Section 37(1) of the Act, only those expenses that are incurred "wholly and exclusively" for business purposes are allowable. The onus is on the assessee to substantiate the business nexus of such expenses. In the present case, no documentary evidence, such as agreements, business communications, or other substantiating material, was produced to establish that the foreign travel was undertaken solely for business purposes. The absence of such evidence weakens the claim of the assessee that the expenses were incurred wholly and exclusively for business purposes.

 

7.3. The judicial precedents relied upon by the CIT(A) further support the disallowance. At the same time, we recognize that not all travel expenses can be attributed to personal purposes. Based on the AR’s submissions and admission, and in the interest of fairness, we deem it reasonable to disallow 30% of the foreign travel expenses to account for the personal element, while allowing the balance 70% as business expenses. Accordingly, we partly allow this ground of appeal.

 

Ground No. 2 – Addition of Rs.9,06,000/- u/s 68 of the Act

 

8. During the course of assessment proceedings, the AO observed that amount of Rs.9,06,000/- was recorded in the head "Dev Aurum Booking Account" in the books of the assessee and represented cash received during the financial year under consideration. The assessee claimed that this amount was received as an advance for booking Unit No. B-403 in the “Dev Aurum Scheme” from a party, Mr. Utpal Gajjar. The assessee explained that the booking advance was subsequently repaid in the next financial year upon the cancellation of the booking.

 

8.1. The AO concluded that the assessee failed to furnish supporting documents to establish the identity, creditworthiness, and genuineness of the transaction with Mr. Utpal Gajjar. The AO observed that the entry was recorded in the books under the head "Dev Aurum Booking Account" without specifying the name of the depositor initially. Regarding the repayment of booking advance, the AO concluded that no evidence such as bank statements, repayment confirmations, or correspondence with the party was submitted to substantiate this claim. Consequently, the AO treated the amount of Rs.9,06,000/- as unexplained cash credit under Section 68 of the Act.

 

8.2. The CIT(A) confirmed the addition of Rs.9,06,000/- made by the AO under Section 68, holding that the assessee failed to discharge its burden of proving the nature and source of the cash credited in the books of accounts and the explanation provided was inadequate and lacked documentary support. The CIT(A) also noted that the tax auditor flagged this transaction in the audit report, stating that the amount in the "Dev Aurum Booking Account" was "subject to reconciliation.

 

9. During the course of hearing before us, the AR stated that the amount was booking amount received and since the accountant was not aware of the name of party the amount was booked under the same heading. The AR also stated that since the AO has not taken any adverse view on repayment of such booking advance in F.Y. 2016-17, as supported by ledger account entry, no such disallowance be made.

 

10. We have carefully considered the submissions made by the AR, the findings of the AO, and the decision of the CIT(A). The AO added the amount under Section 68 of the Act on the grounds that the assessee failed to provide supporting documents to establish the identity, genuineness, and creditworthiness of the depositor, as required under Section 68. The explanation that the accountant was initially unaware of the depositor’s name was insufficient to discharge the assessee’s burden of proof. We note that no evidence of repayment, such as bank statements or confirmation from Mr. Utpal Gajjar, was submitted. The CIT(A) upheld the AO’s decision, noting that the assessee failed to address the issue of reconciliation flagged by the tax auditor and did not provide adequate evidence to support its claim. Before us, the AR reiterated that the amount was a booking advance and explained that the entry was initially recorded under the general head "Dev Aurum Booking Account" as the accountant was unaware of the depositor’s name. The AR further argued that no adverse view was taken by the AO in the subsequent financial year (F.Y. 2016-17) regarding the repayment of this booking advance, which was reflected in the ledger account. While the AR’s argument regarding repayment in the subsequent year is noted, the assessee has not provided any supporting documentary evidence to substantiate the claim of the transaction’s genuineness and the source of funds. The onus is squarely on the assessee to prove the identity, creditworthiness, and genuineness of the transaction, which remains unfulfilled in this case.

 

101. Further, the tax auditor’s comment that the transaction was "subject to reconciliation" indicates a lack of clarity and proper documentation regarding the nature and source of the cash credit. This strengthens the view that the assessee failed to maintain proper records and reconcile the transaction adequately.

 

10.2. In view of the above facts and the failure of the assessee to discharge its onus under Section 68, we find no infirmity in the findings of the AO and the CIT(A). Accordingly, the addition of Rs.9,06,000/- under Section 68 is confirmed, and this ground of appeal is dismissed.

 

Ground 3 – Addition made by AO u/s 36(1)(va) on account of delay in depositing PF/ESIC contributions.

 

11. During assessment proceedings, the AO observed that the assessee had delayed depositing employees' contributions toward PF/ESI beyond the statutory due dates specified under the respective Acts. However, these contributions were deposited before the due date of filing the return of income under Section 139(1) of the Act. Under Section 36(1)(va) read with Section 2(24)(x), employees' contributions to PF/ESI must be deposited within the due dates prescribed under the relevant Acts for such contributions to be allowed as a deduction. The AO relied on the Hon’ble Gujarat High Court’s decision in CIT vs. Gujarat State Road Transport Corporation [2014] 41 taxmann.com 100, which held that employees' contributions deposited after the statutory due dates but before the due date for filing the return of income are not allowable as a deduction as per section 43B. As the assessee failed to deposit the contributions within the statutory due dates, the AO disallowed the amount of Rs.1,03,440/- under Section 36(1)(va) of the Act. The CIT(A) confirmed the disallowance made by the AO.

 

12. During the course of hearing before us, the AR conceded that the issue is already decided by the Hon’ble Jurisdictional High Court against the assessee. Additionally, this issue has been conclusively settled by the Hon’ble Supreme Court in the case of Checkmate Services (P.) Ltd. vs. CIT [2022] 143 taxmann.com 178 (SC).

 

12.1. In view of the binding decisions of the Hon’ble Gujarat High Court and the Hon’ble Supreme Court, we find no merit in the assessee's contention. The disallowance of Rs.1,03,440/- made by the AO and confirmed by the CIT(A) is upheld. Accordingly, this ground of appeal is dismissed.

 

Ground 4 – Addition of Rs.27,83,725/- u/s 36(1)(iii) on account of interest

 

13. The assessee claimed interest expenses of Rs.2,98,62,125/- paid to banks on loans during the financial year under consideration. The AO found that substantial amounts from the borrowed funds were advanced to related parties, including Devdip Builders Pvt. Ltd., Jyotsnaben Pravinbhai, and Bhavin Parinbhai, without establishing any business purpose or commercial expediency. The AO also identified substantial cash withdrawals from the borrowed funds. However, the assessee failed to substantiate how these withdrawals were utilized for business purposes. In the absence of any linkage to business operations, the AO concluded that these withdrawals amounted to diversion of borrowed funds for non-business purposes. The AO calculated the interest attributable to the advances and cash withdrawals at Rs.27,83,725/-. This amount was disallowed on the ground that the borrowed funds were not used "wholly and exclusively" for the purposes of the business.

 

14. The CIT(A) observed that the assessee failed to demonstrate the business purpose or commercial expediency for the advances given to related parties or cash withdrawals. It was noted that the advances were interest-free, while the assessee was incurring significant interest expenses on borrowed funds, indicating a diversion of funds for non-business purposes. The assessee claimed that the advances were made for business purposes. However, the CIT(A) noted that the assessee did not have sufficient interest-free funds to grant such advances. The CIT(A) also noted that there was a clear nexus between the borrowed funds and the advances given, as the assessee was paying interest on loans while giving interest-free advances. The CIT(A) referred to disallowances made in the case of group entities such as Sanjay Hiralal Thakkar, where interest disallowances were upheld on similar grounds. This reinforced the decision that the funds were not used for business purposes. The CIT(A) upheld the disallowance of Rs.27,83,725/- under Section 36(1)(iii) made by the AO.

 

15. During the course of hearing before us, the AR reiterated the facts and stated that the assessee has also received Rs.41.92 Crore as interest free loans. The AR explained these amounts from Note No. 4 – Short Term Borrowings. As per this note the Interest Free Advance amount borrowed during the year is calculated as:

 

Balance as on 31-03-2015	- Rs.1,12,16,92,214/-
Less: Balance as on 31-03-2014	- Rs. 70,24,49,610/-
Interest Free Advance borrowed during the year	- Rs. 41,92,24,604/-

 

16. The AR also stated that the Loans and Advances given to Related Parties during the year is only Rs.3.40 Crore as detailed below (as per Note No. 10a):

 

Balance as on 31-03-2015	- Rs. 2,07,20,93,346/-
Less: Balance as on 31-03-2014	- Rs. 2,03,79,93,577/-
Loans and Advances given during the year	- Rs. 3,40,99,769/-

 

16.1. The AR further stated that the AO has neither quantified the interest free loans given nor given any basis for arriving at the proportionate disallowance making it arbitrary. The AR also stated that the names of two parties - Jyotsnaben Pravinbhai and Bhavin Parinbhai are not even appearing in the list of related party loans and in case of Devdip Builders Pvt. Ltd. the advance is partly repaid by the party during the year. The AR contended that since the assessee has sufficient interest free funds to lend any addition made by AO is not justified. The AR placed reliance on following decisions of coordinate bench which followed the decision of Hon’ble Supreme Court in case of Reliance Industries Ltd. (410 ITR 466):

 

- Chetankumar Raojibhai Patel (ITA No. 533/Ahd/2020)

 

- Sidiqbhai Usmanbhai Kaliwala (ITA No. 1945/Ahd/2018)

 

17. We have carefully considered the submissions made by the AR, the findings of the AO, and the decision of the CIT(A) in this matter. The AO disallowed Rs.27,83,725/- under Section 36(1)(iii) of the Act on the grounds that substantial amounts of interest-bearing borrowed funds were advanced to related parties and also withdrawn in cash without establishing a business nexus or commercial expediency. The AO attributed the disallowance proportionately to these advances and withdrawals. The CIT(A) upheld the disallowance, concluding that the assessee failed to demonstrate that the advances were made for business purposes and noting a clear nexus between the borrowed funds and the interest-free advances.

 

17.1. The financial statements indicate that the assessee had sufficient interest-free funds of Rs.41.92 crore during the year, which exceeded the advances of Rs.3.40 crore given to related parties. Following the principle established by the Hon’ble Supreme Court in Reliance Industries Ltd., it can be presumed that these advances were made out of interest-free funds.

 

17.2. We find that the AO failed to specifically quantify the interest-free advances or cash withdrawals and establish the exact utilization of borrowed funds for non-business purposes. The disallowance of Rs. 27,83,725/- was computed arbitrarily without a clear linkage between the borrowed funds and the advances. The AR’s contention that two parties (Jyotsnaben Pravinbhai and Bhavin Parinbhai) were not even included in the list of related party advances was not rebutted by the Revenue. We also noted that the advance to Devdip Builders Pvt. Ltd. was partly repaid during the year. The decisions relied upon by the AR, which relied on the Hon’ble Supreme Court’s judgment in Reliance Industries Ltd., clearly establish that no disallowance can be made under Section 36(1)(iii) when sufficient interestfree funds are available to cover the advances.

 

17.3. In view of the above findings and considering the judicial precedents, we hold that the disallowance of Rs.27,83,725/- made by the AO and upheld by the CIT(A) is not sustainable. The assessee has demonstrated the availability of sufficient interest-free funds and the lack of a direct nexus between borrowed funds and the advances. Accordingly, we delete the addition of Rs.27,83,725/- made under Section 36(1)(iii) of the Act. This ground of appeal is allowed.

 

18. In the result, the appeal of the assessee is partly allowed.

 

Order pronounced in the Open Court on 11th December, 2024 at Ahmedabad.

 

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