2015 (8) TMI 1491 - AT - Income Tax

Addition of expenditure towards interest - CIT-A allowed part deduction - revised return filed - In the original return, a loss was claimed which was reduced in the alleged revised return - HELD THAT - There cannot be any loss in any activity which results income from other sources . All the details were before the CIT(Appeals) but instead of pin pointing any concrete diversion of interest bearing funds; ld. CIT (Appeals) only assumed that some funds might have been used by the assessee for some other purposes. The department has been consistently accepting the claim in earlier years and in subsequent years. It appears that in the beginning, assessee has more income under the head income from other sources as than the interest expenditure, but in AY 2006-07, 2007-08 and 2009-10, the interest expenditure was more than income, in spite of that loss under the head income from other source was allowed by the AO in scrutiny assessment. Thus considering the past history and stand of the revenue itself, we are of the view AO has erred in making the disallowance. Ld. Commissioner of Income Tax (Appeals) also failed to appreciate that total expenditure is to be allowed which is incurred wholly and exclusively for earning income. It cannot be restricted in proportion of income. We allow the ground of appeal raised by assessee and consequently reject the ground raised by the revenue. The assessee is entitled to expenditure claimed by him. Addition of of long term capital gain - cost of improvement claimed - HELD THAT - As gone through the record carefully. Section 48 of the income tax act, 1961 provides that income chargeable under the head capital gains, shall be computed by deducting from the full value of consideration received or accrued as a result of the transfer of the capital asset, the amounts namely (a) expenditure incurred wholly and exclusively in connection with such transfer (b) the cost of acquisition of the asset and the cost of any improvement thereof. The assessee while offering capital gain on sale of a plot of land had claimed cost of improvement for ₹ 10,84, 275/-. AO rejected the additional cost to the extent of ₹ 6 lacs. On appeal, ld. Commissioner of Income Tax (Appeals) allowed the claim of assessee on the ground that payment was made through account payee cheque for the construction made. The detail of material and other evidence were produced on the record.

Summary

Issues Involved:
1. Disallowance of Interest Expenditure
2. Addition on Account of Long Term Capital Gain

Detailed Analysis:

1. Disallowance of Interest Expenditure:

Facts and Background:
The assessee claimed an expenditure of Rs. 1,09,29,139 towards interest, but the Assessing Officer (AO) disallowed Rs. 1,07,38,191. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed Rs. 47,76,424 and confirmed the disallowance of Rs. 59,62,567. The revenue challenged the deletion of Rs. 47,76,424, while the assessee contested the confirmation of Rs. 59,62,567.

Assessment and Disallowance:
- The AO scrutinized the accounts and noted that the interest expenses claimed were significantly higher than the interest income.
- The AO disallowed the interest expenses on the grounds that the assessee failed to establish a nexus between the interest paid and the income earned, as required under Section 57 of the Income Tax Act, 1961. The AO also highlighted that most depositors were relatives of the assessee and that the interest payments were not substantiated with documentary evidence.

CIT(A) Findings:
- The CIT(A) observed that the assessee had declared interest income and expenditure under the head "income from other sources" in previous years, and most parties involved were the same.
- The CIT(A) concluded that the assessee could not establish a direct connection between all the loans and advances on which interest was paid and the interest income earned. The CIT(A) allowed 95% of the interest expenditure as deductible, amounting to Rs. 47,76,424, and confirmed the disallowance of the balance Rs. 59,62,567.

Tribunal's Analysis:
- The Tribunal noted that the CIT(A) was satisfied that the assessee had taken loans/borrowings at interest and invested them for earning interest income, which was shown under "income from other sources."
- The Tribunal emphasized that the CIT(A)'s assumption that the assessee might have invested funds elsewhere was not based on evidence but on an assumption that no prudent businessman would borrow at a higher rate and invest at a lower rate.
- The Tribunal reviewed the assessee's assessment history, noting that similar claims had been accepted in previous and subsequent years without dispute.
- The Tribunal concluded that the expenditure must be allowed if it was incurred wholly and exclusively for earning income, irrespective of the resultant income. The Tribunal allowed the assessee's claim for the full interest expenditure of Rs. 1,09,29,139 and rejected the revenue's appeal.

2. Addition on Account of Long Term Capital Gain:

Facts and Background:
The AO added Rs. 6 lakhs to the assessee's income on account of long-term capital gain, rejecting the assessee's claim of additional cost incurred for property improvement.

CIT(A) Findings:
- The CIT(A) noted that the assessee had provided detailed submissions and evidence, including ledger accounts and construction bills, showing that the payment of Rs. 6 lakhs was made by cheque in the subsequent year.
- The CIT(A) found that the AO's action was contradictory, as the AO acknowledged the expenditure but treated the payment as from undisclosed sources.
- The CIT(A) allowed the cost of improvement of Rs. 6 lakhs and deleted the addition.

Tribunal's Analysis:
- The Tribunal reviewed the CIT(A)'s findings and the evidence provided by the assessee.
- The Tribunal upheld the CIT(A)'s decision, noting that the payment was made through an account payee cheque and that the assessee had consistently followed the mercantile system of accounting.
- The Tribunal found no merit in the revenue's appeal and rejected it.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the full interest expenditure of Rs. 1,09,29,139 and upheld the CIT(A)'s decision to delete the addition of Rs. 6 lakhs on account of long-term capital gain. The revenue's appeals were dismissed.