2015 (8) TMI 1445 - AT - Income Tax

Addition on account of interest payment on borrowed funds - Allowable busniss expenditure - deduction of the interest paid on borrowings u/s 57(iii) - Held that - CIT(A) had passed the order in line with the settled principle of law that the Assessing Officer cannot step into shoes of the assessee and decide as to how which of the expenditure can be incurred. Once the expenditure has been incurred wholly or exclusively for the business purposes, no disallowance can be made. The ld. Departmental Representative had not filed any material contradicting the findings reached by the CIT(A). Further, we notice that no such additions were made either in the immediate preceding year or succeeding year by the Assessing Officer. In these circumstances, we uphold the order of CIT(A) and dismiss the appeal filed by the Revenue.

Summary

Issues:
- Disallowance of interest payment on borrowed funds
- Disallowance of various expenses under the head "income from other sources"

Disallowance of Interest Payment on Borrowed Funds:
The appeal involved the Revenue challenging the order of CIT(A) deleting an addition of Rs. 39,76,476 on account of interest payment on borrowed funds for the assessment year 2007-08. The Assessing Officer disallowed the interest amount as the assessee failed to prove that the expenses were wholly and exclusively incurred in relation to income earned under the head "income from other sources." The CIT(A) deleted the addition by relying on case laws and finding that the borrowings were utilized in investments to earn interest, justifying the deduction under Section 57(iii) of the Income Tax Act. The CIT(A) emphasized that the Assessing Officer failed to substantiate his allegation with evidence, and additions cannot be made based on presumption, conjecture, or surmise. The CIT(A) concluded that the case of the assessee was covered by relevant case laws, hence deleting the addition.

Disallowance of Various Expenses under "Income from Other Sources":
The second issue pertained to the disallowance of various expenses totaling Rs. 10,03,861 under the head "income from other sources." The Assessing Officer disallowed the expenses, stating they were not incurred wholly and exclusively for earning income under this head. The CIT(A) deleted this addition, highlighting that the Assessing Officer did not provide any material to suggest the expenses were not related to earning income under the specified head. The CIT(A) noted the Assessing Officer's failure to conduct any verification or investigation to disprove the submissions of the assessee. The CIT(A) emphasized that tax liability cannot be imposed based on presumption, surmise, or conjecture. Ultimately, the CIT(A) held that the additions were not justified as the expenses were incurred for business purposes. The Tribunal upheld the CIT(A)'s order, emphasizing that once expenses are incurred wholly or exclusively for business purposes, no disallowance can be made. The Tribunal also noted the absence of contradictory material from the Revenue and the lack of similar additions in prior or subsequent years, leading to the dismissal of the Revenue's appeal.