2013 (8) TMI 379 - AT - Income Tax

Disallowance u/s 36(1)(iii) - CIT partly deleted disallowance - Use of interest bearing borrowed funds in the investment of shares - Held that - The deduction contemplated by the section is in relation to the expenditure which could properly be regarded as necessary for the purpose of the business or profession. Expenditure incurred on account of commercial expediency for the purpose of business would be allowable under this provision. The expenditure to be allowed must have a nexus with the business of the Assessee. If the expenditure incurred is ostensibly incurred for the business, but if in reality is not for the purpose of business then such expenditure is not allowable - assessee has right to replace his own capital with borrowed funds which were already used for the purpose of business in acquiring assets and other - for the purpose of ascertaining profit and gains, the normal principles of commercial accounting should be applied, so long as they do not conflict with any express statutory provisions - The onus is on the assessee to furnish the relevant material regarding replacement of borrowed funds by own capital and interest free funds available with the assessee - Following decision of Commissioner of Income-Tax Versus Prem Heavy Engineering Works P. Limited 2005 (4) TMI 32 - ALLAHABAD High Court - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Disallowance of various expenses on account of personal use.

Analysis:
1. The first issue pertains to the disallowance under section 14A of the Income Tax Act, 1961. The Assessing Officer disallowed Rs.11,34,432/- based on Rule 8D of Income Tax Rules, regarding the investment of interest-bearing funds in shares. The CIT(A) reduced the disallowance to Rs.8,00,000/-, citing the applicability of section 14A from A.Y. 2007-08. The Tribunal noted that the Revenue did not appeal the CIT(A)'s decision, making it final that section 14A with Rule 8D applies from 2007-08. The Tribunal further analyzed the case, emphasizing that interest on borrowed funds is allowable under section 36(1)(iii) if used for business purposes. It was concluded that the assessee had sufficient own funds for share investments, thus no disallowance was warranted under section 36(1)(iii). Consequently, the Tribunal set aside the CIT(A)'s decision and deleted the Rs.8,00,000/- addition.

2. The second issue concerns the disallowance of various expenses on the basis of personal use. The Assessing Officer disallowed Rs.2,00,000/- from different expenses, which the CIT(A) reduced to Rs.1,00,000/- due to personal nature involvement. The Tribunal, following precedents, ruled that disallowance based on personal elements cannot apply to private limited companies. Citing judgments from the Gujarat High Court, the Tribunal deleted the Rs.1,00,000/- addition sustained by the CIT(A).

In conclusion, the Tribunal allowed the appeal of the assessee, pronouncing the order on 20.04.2012.