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2010 (2) TMI 918 - AT - Income TaxDisallowance of car expenses and depreciation, telephone expenses, business promotion expenses - assessee appeared from time to time and filed the required details, without discussing anything in the assessment order & AO disallowed 1/5th of the car expenses and depreciation on car and 1/5th on telephone expenses being treated as personal nature - Held that - Merely on estimate or on ad hoc basis no disallowance can be made, AO has to give a specific finding as to which expenses are not wholly and exclusively for the business purposes. Therefore, the disallowance is not called for Disallowance of interest on borrowed capital expenses claimed under section 36(1)(iii) - interest paid in respect of capital borrowed for the purposes of business or profession Held that - Terms of MOU have been followed in letter and spirit, amount was borrowed for the purpose of business and hence interest paid on such borrowal are allowable. If by giving the advances the business interest of the assessee is served and even if such advances are without charging any interest or whether such advances are to associate concern, it will not alter the situation. Advances for the purpose out of borrowed funds will still be considered to be Capital borrowed for the purpose of business and hence interest payable on such borrowal are allowable as deduction under sec.36(1)(iii) of the Act while computing the business income. Therefore, there is no ground to disallow the interest payable by the assessee, appeal is dismissed.
Issues Involved:
1. Disallowance of car expenses and depreciation. 2. Disallowance of telephone expenses. 3. Disallowance of business promotion expenses. 4. Disallowance of interest on borrowed capital. Detailed Analysis: 1. Disallowance of Car Expenses and Depreciation: The revenue contested the deletion of a disallowance amounting to Rs. 3,20,084/- related to car expenses and depreciation. The Commissioner of Income-tax (Appeals) [CIT(A)] had deleted this disallowance on the grounds that the Assessing Officer (AO) disallowed these expenses on an ad hoc basis without identifying any specific expenses not pertaining to the business. The Tribunal agreed with the CIT(A), stating that the AO must give a specific finding indicating which expenses are not wholly and exclusively for business purposes. Therefore, the disallowance was not justified. 2. Disallowance of Telephone Expenses: The revenue also challenged the deletion of a Rs. 16,000/- disallowance related to telephone expenses. Similar to the car expenses, the CIT(A) deleted this disallowance because the AO made it on an ad hoc basis without examining the details of the expenses. The Tribunal upheld the CIT(A)'s decision, reiterating that disallowances cannot be made merely on estimates without specific findings. 3. Disallowance of Business Promotion Expenses: The revenue argued against the deletion of a Rs. 50,000/- disallowance related to business promotion expenses. The CIT(A) had deleted this disallowance for the same reasons as the car and telephone expenses, citing the lack of specific findings by the AO. The Tribunal concurred with the CIT(A), emphasizing that disallowances must be based on concrete findings rather than estimates. 4. Disallowance of Interest on Borrowed Capital: The most significant issue involved a disallowance of Rs. 37,86,528/- related to interest on borrowed capital. The AO observed that the assessee had advanced substantial amounts to sister concerns without charging interest, which he deemed not for business purposes. The CIT(A) disagreed, noting that the advances were made as part of a business decision to secure a showroom space and use the brand name "Litolier" under an MOU with Ashok Mittal. The CIT(A) found a direct nexus between the expenditure and the business purpose, citing the Supreme Court's decision in S.A. Builders Ltd. v. CIT, which held that interest-free advances made for commercial expediency are allowable as business expenses. The Tribunal reviewed the facts and the trail of the borrowed funds and concluded that the advances were indeed for business purposes. The Tribunal emphasized that the business interest is best understood by the assessee and that the AO cannot dictate business decisions. Since the advances were aimed at securing valuable business rights and premises, the interest on the borrowed funds was deemed allowable under section 36(1)(iii) of the Income-tax Act, 1961. Conclusion: The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s deletions of the disallowances related to car expenses, telephone expenses, business promotion expenses, and interest on borrowed capital. The judgment emphasized the necessity of specific findings by the AO to justify disallowances and recognized the commercial expediency of the assessee's business decisions. The appeal was pronounced dismissed in the open court on 26.2.2010.
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