2014 (5) TMI 111 - AT - Income Tax

Disallowance of Various expenses - Motor Car Expenses, depreciation on Motor Car, Staff Welfare Expenses and Conveyance Expenses Held that - Revenue contended that the disallowances are warranted considering the cash payments, assessee s failure to discharge the onus, rejection of the self-serving vouchers, non-maintenance of the log book etc. - in principle, there is a need for disallowance - However, the unsupported flat rate of 20% adopted by the AO in all the four accounts for making disallowances cannot be appreciated - out of the total debits of Rs. 41,410/-, disallowance of Rs. 25,000/- on the four accounts should be allowed Decided partly in favour of Assessee. Disallowance of Loss on Sale of Motor Car Held that - The Motor Car is a part of block of asset on which the assessee has already been claimed depreciation in the earlier years - the loss claimed by the assessee is related to a depreciable asset it constitutes capital loss - the loss related to a depreciable asset does not constitute revenue expenditure and the disallowance made by the Revenue of Rs.23,123/- on account of loss on sale of motor car Decided against Assessee. Disallowance of Premises User Expenses Held that - For the purpose of the examining the annexures submitted by the assessee, the matter should be remanded to the files of the AO thus, the AO is directed to examine the annexures and the relevant material in this regard after providing a reasonable opportunity of being heard to the assessee Decided in favour of Assessee. Disallowance of Interest on Overdraft & Unsecured Loans Held that - The Revenue has erred in holding that the assessee has given interest free advances but the explanation given by the assessee suggests that there are interest bearing expenses - most of them are Opening Balances and it is not clear whether the similar amounts are added in the year of advancing the alleged interest free advances - For this purpose, the matter is remitted back to the AO for examination of the issue Decided in favour of Assessee.

Summary

Issues involved:
1. Disallowance of various expenses including Motor Car Expenses, Depreciation on Motor Car, Staff Welfare Expenses, Loss on Sale of Motor Car, Conveyance Expenses, Premises User Expenses, and Interest on Overdraft & Unsecured Loans for the assessment year 2003-2004.

Analysis:
1. Motor Car Expenses, Depreciation on Motor Car, Staff Welfare Expenses, and Conveyance Expenses:
The assessee disputed the disallowance of these expenses made by the Assessing Officer (AO). The AO disallowed a portion of these expenses due to lack of proper documentation and failure to prove business-related expenditure. The assessee argued that Motor Car expenses were not for personal use, but for business purposes. However, the lack of log books and evidence led to the disallowances. The Income Tax Appellate Tribunal (ITAT) acknowledged the need for disallowance but disagreed with the flat rate adopted by the AO. ITAT partially allowed the appeal, reducing the disallowance amount to Rs. 25,000 out of the total debits of Rs. 41,410 on these expenses.

2. Loss on Sale of Motor Car:
The AO disallowed the claimed loss on the sale of a depreciable asset, a Motor Car, stating it was a capital loss and not a revenue expenditure. The ITAT agreed with the AO's decision, considering the Motor Car as part of a depreciable asset block. The loss on the sale of a depreciable asset was deemed a capital loss, leading to the dismissal of the appeal regarding this issue.

3. Premises User Expenses:
The disallowance of Rs. 7,80,000 on Premises User Expenses was based on the lack of evidence establishing a business relationship between the parties involved. The AO viewed the payment as a tax-reducing tactic and made the disallowance. The CIT (A) upheld the disallowance due to the assessee's failure to prove the business purpose of the expenditure. The ITAT, upon reviewing additional annexures submitted by the assessee, remanded the matter to the AO for further examination, allowing the appeal for statistical purposes.

4. Interest on Overdraft & Unsecured Loans:
The disallowance of Rs. 3,23,533 on Interest on Overdraft & Unsecured Loans was due to the diversion of funds for non-business purposes by providing interest-free loans. The CIT (A) confirmed the AO's decision. However, the ITAT found discrepancies in the Revenue's assessment and remanded the matter to the AO for a detailed examination, considering the interest-bearing nature of the expenses. The appeal was allowed for statistical purposes.

In conclusion, the ITAT partially allowed the appeal on certain expense disallowances, dismissed the appeal on loss on sale of a depreciable asset, remanded the matter for Premises User Expenses, and allowed the appeal for statistical purposes on Interest on Overdraft & Unsecured Loans.