2015 (10) TMI 1880 - AT - Income Tax

Disallowance of interest paid - in-genuine loans - Held that - It is already observed that the loan is not genuine in earlier assessment years. When the principal loan itself is not genuine, there is no question of allowing of any interest on such non-genuine loan. Being so, disallowance of interest on on-genuine loan is justified. Regarding the disallowance of interest on the unsecured land utilized for the purchase of land, in our opinion, the interest incurred upto the date of sale deed registration of the land to be considered as capital expenditure, if it is treated as capital asset by the assessee and to be added to the cost of the land and interest incurred after the purchase of the land to be considered as revenue expenditure. On the other hand, if the land is treated as stock-in-trade, the entire interest on the loan used to purchase the land to be treated as revenue expenditure if the loan is genuine. With this observation, we direct the AO to reconsider the issue. - Decided partly in favour of assessee. Disallowance of sub-contract expenses u/s.40(a)(ia) - AO noticed that the assessee has neither deducted any TDS as per the provisions of sections 194A and 194C of the Act, nor remitted to the Govt. of India as on 31.03 2008 - Held that - Similar issue was considered in the case of Shri N. Palanivelu v. ITO (2015 (10) TMI 1415 - ITAT CHENNAI), wherein held that sec 40(a)(ia) is not applicable when there is no outstanding balance at the end of the close of the year relevant to the assessment yea in respect of these payment. However, the assessee has not brought on record, the details of outstanding expenses or schedule of sundry creditors showing whether the impugned amount is outstanding at the end of the close of the previous year relevant to the assessment year either in the name of the party or outstanding expenses. Hence, in the interest of justice,we are remitting the issue back to the file of the Assessing Officer with direction to verify the claim of the assessee and the assessee shall place necessary evidence in support of his claim. - Decided in favour of assessee by way of remand.

Summary

Issues:
1. Disallowance of interest paid on unsecured loans.
2. Disallowance of interest on land purchase.
3. Disallowance of sub-contract expenses under section 40(a)(ia) of the Income Tax Act.

Analysis:

Issue 1: Disallowance of interest paid on unsecured loans
The appellant claimed interest paid on unsecured loans during the financial year 2007-08. The Assessing Officer disallowed the interest on a non-genuine loan of Rs. 8,00,000, previously disallowed in the assessment of A.Y. 2006-07. The Commissioner of Income-tax(Appeals) upheld the disallowance, stating that no interest on a non-genuine loan can be allowed. The appellant failed to substantiate the interest payments, leading to the disallowance. The ITAT Chennai concurred with the CIT(Appeals) on the disallowance of interest on the non-genuine loan. However, regarding interest on land purchase, the ITAT directed the Assessing Officer to reconsider, stating that interest incurred until the sale deed registration should be considered as capital expenditure.

Issue 2: Disallowance of interest on land purchase
The Assessing Officer disallowed proportionate interest on the amount utilized for land purchase, treating it as a capital asset. The CIT(Appeals) upheld this disallowance, stating that the land purchase was not a revenue transaction but a pure investment. The ITAT Chennai partially allowed this ground, directing the AO to reconsider the treatment of interest based on whether the land is a capital asset or stock-in-trade.

Issue 3: Disallowance of sub-contract expenses under section 40(a)(ia)
The Assessing Officer disallowed sub-contract expenses for non-deduction and non-remittance of TDS under section 40(a)(ia) of the Act. The CIT(Appeals) confirmed this disallowance. The ITAT Chennai, considering a similar issue in a previous case, remitted the matter back to the AO for fresh consideration. The ITAT directed the assessee to provide necessary evidence to support the claim regarding outstanding balances at the end of the relevant assessment year.

In conclusion, the ITAT Chennai partly allowed the appeal of the assessee, remitting the issues of interest on land purchase and sub-contract expenses back to the Assessing Officer for fresh consideration based on the provided directions and legal precedents.