2018 (11) TMI 1610 - AT - Income Tax

Disallowance of interest on car loan - used for business/profession - HELD THAT - We find force in the submission of Ld. AR that the car loan of ₹ 50 lacs is no match against the amounts advanced during the year under consideration which are to the tune of ₹ 2.98 crores by the assessee. Further, it is not the case of the learned Assessing Officer that the car loan was diverted for any other purpose, because there is no denial of the statement of the assessee that the loan amount was directly disbursed to the seller of the car. Inasmuch as the loan was for the purpose of business and no question of diversion of such funds had taken place, merely because the assessee placed his own funds and also the interest free loans for some other purposes, is not open for the learned Assessing Officer to disallow the interest on the amount taken for business purpose. We, therefore, direct the Assessing Officer to delete this addition. Addition u/s 14A - investments for earning of exempt income - AO alleged that assessee being busy profession would have incurred several expenses - HELD THAT - According to the assessee the investment was made in mutual funds and the expenses were already directed by the operators and a certificate to that extent was submitted before the learner Assessing Officer. The instructions are that the dividend income will be directly credited to the bank account of the assessee so that no probable expenditure at the end of the assessee for deposit of the dividend in bank could have occurred. Instead of making a sweeping enumeration of the probable expenses involved in investment process, learned Assessing Officer could have taken legal exercise to verify the correctness or otherwise of the certificate that was issued by the asset management companies or the Citibank in this respect. We, therefore, find that there is no proper record of satisfaction as to the expenses incurred by the assessee for earning the exempt income. By following the decision reported in CIT versus Taikisha Engineering India Ltd 2014 (12) TMI 482 - DELHI HIGH COURT and Joint Investments (P) Ltd versus CIT 2014 (12) TMI 482 - DELHI HIGH COURT we are of the opinion that the AO at the first instance should have examined the correctness of the statement made by the assessee that no expenses were incurred for earning the exempt income during the year and if and only if the learned AO is not satisfied on this account after making reference to the accounts, he is entitled to adopt the method under rule 8D of the rules - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest on car loan
2. Invocation of section 14 A of the Income-tax Act

Issue 1: Disallowance of interest on car loan

The appellant, a Senior Advocate, filed an appeal challenging the order passed by the Learned Commissioner of Income Tax disallowing the interest on a car loan and invoking section 14 A of the Act for the assessment year 2009-10. The assessing officer disallowed the interest on the ground that the appellant diverted a significant amount for personal needs, despite the car being used for business purposes. The appellant contended that the car loan was the only interest-bearing loan taken during the year, and all other funds were interest-free or from the capital account. The Tribunal found merit in the appellant's argument, noting that the loan was for business purposes, directly disbursed to the seller, and not diverted for personal use. Therefore, the Tribunal directed the Assessing Officer to delete this addition.

Issue 2: Invocation of section 14 A of the Income-tax Act

Regarding the addition made by invoking section 14 A, the appellant argued that no expenses were incurred for earning exempt income as operators of mutual funds deducted expenses before remitting income. The assessing officer contended that heavy investments necessitated expenses like staff diversion, office premises use, and more. However, the Tribunal found the assessing officer's reasoning lacking specificity on actual expenses incurred by the appellant. The Tribunal emphasized the need for verifying the correctness of the appellant's claim before resorting to rule 8D. Citing legal precedents, the Tribunal directed the Assessing Officer to delete the addition, as there was no proper record of satisfaction regarding expenses incurred for earning exempt income.

In conclusion, the Tribunal allowed the appeal of the appellant, highlighting discrepancies in the assessing officer's reasoning for disallowing the interest on the car loan and invoking section 14 A. The Tribunal emphasized the importance of verifying claims before making additions under the Income-tax Act, ultimately directing the Assessing Officer to delete both disputed additions.