2012 (10) TMI 783 - AT - Income Tax

Addition towards estimated interest on advances - Held that - AO disallowed interest @12% per annum on the amount paid to three relatives on loan taken by the assessee on the ground that the assessee paid interest to the bank and on unsecured loans. Neither the date of advances nor the nexus between loans or advances and funds borrowed is evident from the impugned order nor the CIT(A) recorded any findings as to the business expediency of interest free advances or on the nexus between borrowed funds and interest free advances. As the complete facts are not available nor the assessee furnished date(s) of interest free advances or dates of borrowings and nor furnished any material, establishing commercial expediency in advancing aforesaid funds nor the CIT(A) recorded any findings on these aspects, it will be fair and appropriate to set aside the order of the CIT(A) and restore the issue raised in this ground back to his file for deciding the matter afresh in accordance with law - in favour of assessee for statistical purposes. Payment to MCD towards registration, conversion and parking charges - revenue v/s capital - Held that - Expenses which are permitted as deductions are such as are made for the purpose of carrying on the business and if a sum is paid by an assessee conducting his business because in conducting it he has acted in a manner which has rendered him liable to penalty for breach of laws, it cannot be claimed as a deductible expense. The assessee is expected to carry on the business in accordance with law. The evasion of law cannot be a trade pursuit. Since in the instant case, MCD demanded the aforesaid compounding charges only when Hon ble Apex Court directed the MCD to act and seal the premises in view of flagrant violations of various laws including Municipal Laws, Master Plan and other plans besides Environmental laws and indisputably, the assessee misused its property and violated the civic and Environmental laws, it is to be opined that aforesaid charges paid by the assessee to MCD, could not be allowed in view of explanation to sec. 37(1). Thus the issue as to whether expenditure is revenue or capital, becomes academic and therefore, does not survive for our adjudication - against assessee. Disallowance of 1/5th of expenses - conveyance, vehicle maintenance & telephone expenses - Held that - Since personal use of cars and telephones by the Karta of the assessee HUF and his family members or staff has not been denied nor it was claimed that the Karta or his family members had any independent vehicles or telephones for personal use, disallowance of 1/5th of the conveyance expenses, expenses on running and maintenance of vehicles as also expenses on telephones/mobiles, in the light of provisions of sec. 38(2) is reasonable - against assessee.

Issues Involved:
1. Dismissal of the appeal by CIT(A).
2. Confirmation of addition towards estimated interest on advances.
3. Rejection of claim regarding the payment made to MCD as revenue expenditure.
4. Confirmation of the addition made by the Assessing Officer for payment made to MCD as capital expenditure.
5. Confirmation of disallowance of conveyance expenses.
6. Confirmation of disallowance of vehicle maintenance expenses.
7. Confirmation of disallowance of telephone expenses.

Detailed Analysis:

1. Dismissal of the Appeal by CIT(A):
The assessee contended that the CIT(A)-XXVIII was not justified in dismissing the appeal. However, no specific arguments or evidence were presented to support this ground, leading to its dismissal.

2. Confirmation of Addition Towards Estimated Interest on Advances:
The Assessing Officer (AO) noticed that the assessee had given interest-free advances to related persons while paying interest on borrowed funds. The AO disallowed Rs.47,650/- as interest on these advances, citing a lack of business connection. The CIT(A) upheld this disallowance, agreeing with the AO's reliance on judicial precedents. The Tribunal found that neither the date of advances nor the nexus between loans and advances was evident. The assessee failed to establish the commercial expediency of these advances. Consequently, the Tribunal set aside the CIT(A)'s order and remanded the issue for fresh consideration.

3. Rejection of Claim Regarding the Payment Made to MCD as Revenue Expenditure:
The assessee paid Rs.4,67,950/- to the MCD for registration, conversion, and parking charges, claiming it as revenue expenditure. The AO disallowed this amount, treating it as capital expenditure and citing the violation of municipal laws. The CIT(A) upheld this disallowance, agreeing that the payments resulted in enduring benefits and were made for violations of law. The Tribunal found that the payments were made due to violations of various laws, including municipal laws, and were not incurred wholly and exclusively for business purposes. Thus, the Tribunal upheld the disallowance, treating the expenditure as capital in nature.

4. Confirmation of the Addition Made by the Assessing Officer for Payment Made to MCD as Capital Expenditure:
The AO treated the payment to MCD as capital expenditure, allowing depreciation on the amount. The CIT(A) upheld this view, stating that the payments resulted in enduring benefits and were necessary to avoid the sealing of the premises. The Tribunal agreed with the lower authorities, emphasizing that the payments were made for violations of municipal laws and were not incurred solely for business purposes. Therefore, the Tribunal confirmed the treatment of the expenditure as capital in nature.

5. Confirmation of Disallowance of Conveyance Expenses:
The AO disallowed 1/5th of the conveyance expenses due to the possibility of personal use. The CIT(A) upheld this disallowance, considering it reasonable. The Tribunal agreed, noting that personal use of vehicles by the Karta and his family members or staff was not denied. Thus, the disallowance was deemed reasonable.

6. Confirmation of Disallowance of Vehicle Maintenance Expenses:
Similar to the conveyance expenses, the AO disallowed 1/5th of vehicle maintenance expenses due to potential personal use. The CIT(A) upheld this disallowance, and the Tribunal concurred, finding the disallowance reasonable given the personal use of vehicles.

7. Confirmation of Disallowance of Telephone Expenses:
The AO disallowed 1/5th of telephone expenses, citing potential personal use. The CIT(A) upheld this disallowance, and the Tribunal agreed, considering the disallowance reasonable due to the likelihood of personal use of telephones by the Karta and his family members.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, remanding the issue of interest on advances for fresh consideration while upholding the disallowances related to MCD payments, conveyance, vehicle maintenance, and telephone expenses. The general ground and the residuary ground were dismissed.

← Previous Next →