2015 (8) TMI 1492 - AT - Income Tax

Disallowance of interest expenses - FAA assumed that assessee must have incurred 95% of this income as expenditure on interest and, therefore, only to that extent, interest expenditure is to be allowed - HELD THAT - Assumption by FAA is not the requirement in law, the requirement is that expenditure must be laid down by the assessee wholly and exclusively for earning of income. The expression wholly refers to quantum of expenditure and exclusively refers to the object and purpose of expenditure. Though these expressions are not used in section 57 but the overall meaning of section 57 is also to the same effect that, the expenditure ought to be incurred for earning income which is assessable under the head income from other sources . If the logic of CIT (Appeals) is accepted, then, in each and every case, expenditure would be allowed only, when there is resultant income. In other words, there cannot be any loss in any activity which results income from other sources . All the details were before CIT(Appeals) but instead of pin pointing any concrete diversion of interest bearing funds 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 Assessment Year 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 ld. Assessing Officer in scrutiny assessment. Thus considering the past history and stand of the revenue itself, we are of the view that AO has erred in making the disallowance. CIT (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 of ₹ 1,09,29,139/- claimed by him. Addition of cost of improvement on account of long term capital gain - HELD THAT - Assessee while offering capital gain on sale of a plot of land had claimed cost of improvement for ₹ 10,84, 275/-. The Assessing Officer 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. Contrary to this finding of fact recorded by the Commissioner of Income Tax (Appeals), nothing was pointed out to us during the course of hearing, therefore, we do not find any merit in this ground of appeal. It is rejected.

Summary

Issues Involved:
1. Disallowance of interest expenditure claimed by the assessee.
2. Addition on account of long-term capital gain.

Detailed Analysis:

1. Disallowance of Interest Expenditure Claimed by the Assessee:

The primary issue revolves around the assessee's claim of an interest expenditure of Rs. 1,09,29,139/-. The Assessing Officer (AO) disallowed Rs. 1,07,38,191/- of this claim, while the Commissioner of Income Tax (Appeals) [CIT(A)] allowed Rs. 47,76,424/- and confirmed the disallowance of Rs. 59,62,567/-. The revenue contested the deletion of Rs. 47,76,424/-, whereas the assessee contested the confirmation of Rs. 59,62,567/-.

The AO's scrutiny revealed that the assessee claimed interest expenses against interest income, leading to a significant disallowance due to the lack of correlation between the interest paid and income earned. The AO highlighted several reasons for disallowance, including the failure to establish the nexus between interest paid and income earned, the involvement of relatives as depositors, and the lack of evidence for actual payment of interest.

On appeal, the CIT(A) partly deleted the disallowance, allowing interest expenditure of Rs. 47,76,424/- based on the assumption that the appellant incurred 95% of interest expenditure to earn the interest income of Rs. 50,27,815/-. However, the CIT(A) confirmed the disallowance of Rs. 59,62,567/- due to the inability to establish that all loans and advances were directly connected to earning interest income.

The Tribunal, after careful consideration, found that the CIT(A) was satisfied that the assessee had taken loans/borrowings at interest and invested them for earning interest income. However, the CIT(A) restricted the allowance based on assumptions rather than concrete evidence. The Tribunal noted that in earlier and subsequent years, the department consistently accepted the assessee's claims under similar circumstances. Therefore, the Tribunal concluded that the AO erred in making the disallowance and that the CIT(A) failed to appreciate that the total expenditure incurred wholly and exclusively for earning income should be allowed. Consequently, the Tribunal allowed the assessee's appeal, granting the entire claimed expenditure of Rs. 1,09,29,139/- and rejected the revenue's appeal.

2. Addition on Account of Long-Term Capital Gain:

The second issue pertains to the addition of Rs. 6 lakhs made by the AO on account of long-term capital gain. The assessee claimed additional cost for improvement of Rs. 6 lakhs, which the AO disallowed due to the lack of a corresponding bill raised by the builder. The AO further added Rs. 6 lakhs as undisclosed income.

On appeal, the CIT(A) found that the assessee had submitted all relevant details, including the payment of Rs. 6 lakhs by account payee cheque in the subsequent year. The CIT(A) noted that the AO himself acknowledged the expenditure but questioned the source of payment. Given that the assessee consistently followed the mercantile system of accounting, the CIT(A) allowed the cost of improvement and deleted the addition of Rs. 6 lakhs.

The Tribunal, after reviewing the records, upheld the CIT(A)'s decision, finding no merit in the revenue's appeal. The Tribunal agreed that the payment was made through an account payee cheque, and the necessary details were provided, justifying the cost of improvement.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the interest expenditure, granting the full claimed amount of Rs. 1,09,29,139/-. It also upheld the CIT(A)'s decision to delete the addition of Rs. 6 lakhs on account of long-term capital gain, rejecting the revenue's appeal.