2015 (1) TMI 1150 - AT - Income Tax

Interest paid on borrowed capital utilized for construction of house property - whether the interest credited to sundry creditor's account par takes the character of interest payable as contemplated u/s 24(b) or not? - CIT(A) confirmed disallowance made by AO - Held that - It cannot be denied that for the relationship of lender (creditor) and borrower (assessee), it is not necessary that there should be actual flow of money between lender and borrower, but the borrowing can take place in different forms also. The true nature of relationship has to be considered and no restrictive meaning can be assigned to the term borrowed capital in section 24(b). If there is direct nexus between the interest payment and construction of property, which in the present case is through creditors, because they had supplied material for construction, then the said interest would come within the ambit of section 24(b). Therefore, in principle we agree with the assessee that interest payable to sundry creditors, who supplied material for construction of the property, is an allowable deduction u/s 24(b). As the assessee has not been able to substantiate its claim regarding supply of material by alleged creditors, inasmuch as the AO, inter alia, observed that the interest had not been paid and it was merely credited in the accounts of the parties year after year. Therefore, we restore the matter to the file of AO for verification of bills, confirmation of parties etc. which were filed before ld. CIT(A) and also to verify whether the payment of interest had been made to parties in subsequent years or not, as claimed by assessee. - Decided in favour of assessee for statistical purposes. Disallowance of various expenses claimed by the assessee u/s 37(1) - Held that - CIT(A) correctly restricted the disallowance to the extent of 10% out of salary claimed to have been paid to the employees, further restricted disallowance, and on estimate basis, to ₹ 6,500/- as against 11,500/- on account of telephone expenses; ₹ 24,000/- as against 54,000/- on account of security expenses; ₹ 14,610/- as against 24,610/- on account of conveyance expenses; ₹ 14,780/- as against 19,780/- on account of staff welfare expenses; and ₹ 6,670/- as against ₹ 12,670/- on account of office expenses. - Decided against assessee.

Summary

Issues Involved:
1. Validity of the orders passed by the A.O. and partly confirmed by the CIT(A).
2. Disallowance of interest paid on borrowed capital for house property construction under section 24(1)(vi) of the Act.
3. Disallowance of various business expenses under section 37(1) of the Act.
4. Levying of interest under section 234B of the Act.

Issue-wise Detailed Analysis:

1. Validity of the Orders Passed by the A.O. and Partly Confirmed by the CIT(A):
The assessee contended that the orders passed by the A.O. and partly confirmed by the CIT(A) are "bad in law and void ab initio." However, this issue was not elaborated upon separately in the judgment, and no specific findings were provided by the Tribunal on this ground.

2. Disallowance of Interest Paid on Borrowed Capital for House Property Construction Under Section 24(1)(vi) of the Act:
The assessee claimed a deduction of Rs. 4,63,367/- representing interest paid on borrowed capital utilized for constructing a house property. The A.O. disallowed this claim, arguing that the interest was not paid but merely credited to the accounts of the parties year after year, and there was no evidence of actual borrowing. The CIT(A) upheld the disallowance, stating that the relationship of a borrower and lender did not exist and relied on the decision in Dundoo Madan Mohan Rao vs. CIT.

The Tribunal noted that there can be different forms of borrowing, and the relationship of lender and borrower does not necessarily require actual money flow. If there is a direct nexus between the interest payment and the construction of property, the interest would fall under section 24(b). The Tribunal found that the assessee had not substantiated its claim regarding the supply of material by the creditors and remanded the matter to the A.O. for verification of bills, confirmations, and actual payment of interest.

3. Disallowance of Various Business Expenses Under Section 37(1) of the Act:
For A.Y. 2005-06, the A.O. disallowed expenses such as salary, telephone, security, conveyance, staff welfare, and office expenses. The CIT(A) restricted these disallowances to certain amounts on an estimate basis. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere.

For A.Y. 2007-08, similar disallowances were made by the A.O., and the CIT(A) again restricted these disallowances to certain amounts. The Tribunal upheld the CIT(A)'s decision, noting that the CIT(A) had properly considered the facts and circumstances of the case.

4. Levying of Interest Under Section 234B of the Act:
The issue of levying interest under section 234B was deemed consequential. The Tribunal directed the A.O. to recalculate the interest while giving effect to the appellate order.

Conclusion:
For A.Y. 2005-06, the appeal was partly allowed for statistical purposes, with the matter remanded to the A.O. for verification of interest payments. For A.Y. 2007-08, the appeal was dismissed, upholding the CIT(A)'s disallowances of various business expenses.