2017 (12) TMI 1668 - AT - Income Tax

Interest expenditure - AO disallowed the same because the interest income on term deposits as claimed by the assessee, in the opinion of the AO, was not allowable due - HELD THAT - We set aside the order of the CIT(A) and direct the AO to allow deduction in respect of said interest accrued and calculated at 12% per annum amounting to ₹ 2,64,72,208/- after disallowing proportionate interest in respect of the investment in shares amounting to ₹ 3,51,176/- after verifying the calculation of the interest quantification. Now coming to the additional ground raised with respect to capitalization of interest we are of the view that to the extent the interest relate to the investment, i.e. being disallowable under Section 57 will become part of cost of acquisition of shares and therefore the AO is directed to take it as part of the cost of shares for determining profit on sale of the shares. Thus, the additional ground stands allowed to that extent. Addition on account of personal household expenses - HELD THAT - We find that the addition made by the AO as well as sustained by the CIT(A) are though on ad-hoc basis, but same was done because no details of expenditures was filed by the appellant. Before us, the Ld. Counsel has submitted that, most of the expenses have been incurred by Dr. Hitesh S. Mehta and other family members living in a Joint family set-up. Further other members have contributed for household expenses and that some of the additions have been confirmed on account of personal household expenses by the Department. On these facts and circumstances, we are inclined to scale down the additions to ₹ 3 lakhs. Accordingly, addition sustained on account of personal household expenses would be ₹ 3 lakhs. Levy of interest under Section 234A, 234B and 234C as well as calculation of the said interest - HELD THAT - Respectfully following the said order of the Tribunal in the case of Eminent Holding P. Ltd. 2014 (7) TMI 466 - ITAT MUMBAI we direct the AO to recomputed the interest liability after reducing the amount of tax deductible at source on the income earned. Allow the deduction of interest expenditure as claimed by the assessee out of the interest on term deposit after verification of the calculation of interest quantification. We further direct the AO to allow capitalisation of interest which has been proportionately disallowed in view of the additional ground.

Issues Involved:
1. Deduction of interest expenditure.
2. Estimated addition on account of personal household expenses.
3. Levy of interest under Sections 234A, 234B, and 234C of the Income Tax Act.
4. Capitalization of interest expenses attributable to shares and securities.
5. Unexplained entries in the bank account.
6. Disallowance of audit fees.

Detailed Analysis:

1. Deduction of Interest Expenditure:
The primary issue was whether the interest expenditure claimed by the assessee should be allowed as a deduction. The assessee argued that the interest paid on borrowings used for acquiring shares and securities should form part of the cost of acquisition and be capitalized. The Tribunal, after considering various precedents, held that the interest paid on borrowings for acquiring shares should be capitalized and form part of the cost of acquisition. The Tribunal directed the AO to allow the deduction of interest expenditure after verifying the calculations.

2. Estimated Addition on Account of Personal Household Expenses:
The AO made an estimated addition for personal household expenses, which was partially sustained by the CIT(A). The Tribunal, following its previous decisions, further reduced the addition by 50%, acknowledging that the assessee lived in a joint family setup where expenses were shared among family members.

3. Levy of Interest under Sections 234A, 234B, and 234C:
The assessee contended that the income assessed was subject to TDS, and hence, no interest should be computed under Sections 234B and 234C. The Tribunal upheld the applicability of these sections but directed the AO to recompute the interest liability after considering the amount of tax deductible at source on the income assessed.

4. Capitalization of Interest Expenses Attributable to Shares and Securities:
The assessee argued that the interest expenses attributable to shares and securities, which are not allowable under Section 57(iii), should be capitalized. The Tribunal agreed with this contention and directed the AO to treat the proportionate disallowed interest as part of the cost of acquisition of shares and securities.

5. Unexplained Entries in the Bank Account:
In the case of unexplained entries in the bank account, the Tribunal restored the issue to the file of the AO for reconsideration, directing the AO to redecide the issue after considering the assessee’s submissions and evidence.

6. Disallowance of Audit Fees:
The Tribunal did not specifically address the disallowance of audit fees in detail, as it was not pressed by the assessee.

Conclusion:
The Tribunal's consolidated order provided relief to the assessees by allowing the capitalization of interest expenses and directing the AO to recompute interest liabilities considering TDS. The Tribunal also reduced the estimated additions for household expenses and restored certain issues for reconsideration by the AO. The decisions were made following the principles of consistency and based on precedents set in similar cases.

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