2007 (10) TMI 444 - AT - Income Tax

Summary

Issues:
1. Addition made under section 59(1) of the Income-tax Act, 1961 for loan liability.
2. Deletion of disallowance of 75% of expenses claimed by the assessee.

Issue 1: Addition made under section 59(1) for loan liability:
The appeal was filed by the revenue against the order of CIT (Appeals) for the assessment year 1999-2000 regarding the addition made under section 59(1) of the Income-tax Act, 1961. The Assessing Officer added a sum of Rs. 5,25,764 on account of liability outstanding as payable to certain individuals. However, CIT (Appeals) deleted the addition stating that the liability shown by the assessee was in the nature of loan liability and no credit or deduction was taken by the assessee in previous assessment years. The Tribunal analyzed the provisions of section 59(1) and section 41(1) of the Act. It was observed that the liabilities outstanding were not similar to trading liabilities for which deduction was allowed in earlier years. The onus was on the revenue to establish that the assessee had taken benefit of deduction of such liability in previous years, which was not proven in this case. The Tribunal found that the liabilities in question were loan liabilities and not trading liabilities, hence the provisions of section 59(1) were not applicable. The Tribunal upheld the deletion of the addition made under section 59(1) by CIT (Appeals).

Issue 2: Deletion of disallowance of 75% of expenses claimed by the assessee:
The second ground of the appeal involved the deletion of disallowance of 75% of the expenses claimed by the assessee. The Tribunal noted that it was the first year of the business of the assessee, with total receipts of Rs. 88,489 and total expenditure of Rs. 63,937. A loss of Rs. 59,771 had arisen due to car depreciation and interest on a car loan. CIT (Appeals) deleted the disallowance after considering that the net profit, excluding car depreciation and interest on the car loan, was reasonable at Rs. 26,645, which was 30.11% of the gross receipt. The Tribunal agreed with CIT (Appeals) that the disallowance was unjustified, especially considering it was the first year of the business. The Tribunal found no error in the order of CIT (Appeals) regarding the deletion of the disallowance of expenses. Consequently, the appeal of the revenue was dismissed.