2014 (1) TMI 704 - AT - Income Tax

Disallowance of interest on term loan Held that - It is admitted that the term loan was for repair and renovation of the capital asset being industrial shed - The security for the term loan was also the asset itself - The assessee has also capitalized the cost of the repairs and renovations - once the cost of repairs and renovations is capitalized, the interest on the loan taken for the said repairs and renovations cannot be treated as revenue expenditure Decided against Assessee. Disallowance of Interest Nature of Expenses Capital OR revenue expenditure expenses made to capital work in progress Bank commission - Held that - The assessee has explained the source for the sum - The AO has only on presumption estimated 40% of the cash credit loans to have been used for the repairs and renovations of sheds - Additions cannot be made on presumptions especially when the assessee has produced factual evidence to prove that the balance of the cost in respect of the repairs and renovations were from sister concern Thus, the disallowance as confirmed by the CIT(A) further confirmed. The amount of Rs.1,27,000/- only out of the total of Rs.1,81,288/- relates to the term loan in relation to repairs and renovations of the capital asset - the amount of Rs.1,27,000/- is also liable to be disallowed on the same lines as the amount of Rs.7,35,627/- has been confirmed by the CIT(A) - the order of the CIT(A) modified and the disallowance in respect of the interest on borrowed capital, which is treated as capital expenditure and confirmed as such stands increased by an amount of Rs.1,27,000. Addition made u/s 2(22)(e) of the Act Assessee not a shareholder in the ending company held that - The CIT(A) has deleted the addition made by the AO by invoking the provisions of section 2(22)(e) of the Act Decided partly in favour of Assessee.

Summary

Issues:
1. Disallowance of interest on term loan for repairs and renovations of industrial shed.
2. Disallowance of bank commission and additional disallowance of loan amount.
3. Addition under section 2(22)(e) of the Income-tax Act.

Analysis:

Issue 1: Disallowance of interest on term loan for repairs and renovations of industrial shed
The assessee appealed against the disallowance of interest on a term loan for repairs and renovations of an industrial shed. The Assessing Officer (AO) disallowed the expenditure as it related to a capital asset. The Appellate Tribunal noted that the term loan was used for repair and renovation of the industrial shed, which was also the security for the loan. The cost of repairs had been capitalized by the assessee. The Tribunal held that once the repairs and renovations were capitalized, the interest on the loan could not be treated as revenue expenditure. Therefore, the Tribunal confirmed the findings of the Commissioner of Income Tax (Appeals) and dismissed the assessee's appeal.

Issue 2: Disallowance of bank commission and additional disallowance of loan amount
The revenue appealed against the restriction of disallowance of interest to a certain amount and sought additional disallowance. The Assessing Officer had estimated a percentage of cash credit loans used for repairs and renovations. The Tribunal found that the assessee had explained the source of a significant amount borrowed from sister concerns. The Tribunal held that additions cannot be made on presumptions when factual evidence is provided. The Tribunal confirmed the disallowance of interest and increased it by the bank commission amount related to the term loan. The Tribunal modified the order of the Commissioner of Income Tax (Appeals) accordingly.

Issue 3: Addition under section 2(22)(e) of the Income-tax Act
The revenue contested the deletion of an addition made under section 2(22)(e) of the Act regarding a loan taken by the assessee company from a sister concern. The Assessing Officer treated the loan as deemed dividend. The Commissioner of Income Tax (Appeals) deleted the addition based on a Tribunal decision that deemed dividend can only be assessed in the hands of a shareholder of the lender company. The Tribunal upheld the Commissioner's decision, stating that the issue was covered by the Tribunal's earlier decision. Therefore, the revenue's appeal on this issue was dismissed.

In conclusion, the Tribunal dismissed the assessee's appeal and partly allowed the revenue's appeal, maintaining the disallowance of interest and deletion of the addition under section 2(22)(e) of the Income-tax Act.