2019 (6) TMI 1415 - AT - Income Tax

Disallowing interest on bank loan for purchase of flat - disallowance of depreciation on flat that was provided as residential accommodation to the Managing Director holding the same as non-business transaction - HELD THAT - As decided in own case 2018 (10) TMI 1352 - ITAT MUMBAI facts and circumstances are exactly identical and the issue is same. Even, the property transaction question is the same and this property was purchased in FY 2009-10 relevant to A.Y. 2010-1. Respectfully following the Tribunal s order in assessee s own case for immediate preceding year, delete both the disallowance and allow the appeal of the assessee.

Summary

Issues Involved:
1. Whether the purchase of a flat for providing residential accommodation to the Managing Director constitutes a "Non-Business Transaction."
2. Disallowance of interest on the bank loan taken for the purchase of the flat.
3. Disallowance of depreciation on the flat provided as residential accommodation to the Managing Director.

Detailed Analysis:

Issue 1: Non-Business Transaction
The primary issue was whether the flat purchased by the assessee for providing residential accommodation to its Managing Director (MD) constituted a "Non-Business Transaction." The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the flat purchase was not for the business purposes of the assessee but for the personal use of the MD. The CIT(A) relied on the previous year's order, stating that the flat was not used for the appellant's business and was purely for the personal benefit of the MD. The CIT(A) emphasized that the MD held 99% of the company’s shares and was the sole decision-maker, indicating no employer-employee relationship, thus confirming the AO's findings.

Issue 2: Disallowance of Interest
The AO disallowed the interest expenditure of ?24,18,057 incurred on the loan taken for purchasing the flat, considering it a non-business transaction. The CIT(A) upheld this disallowance, reasoning that since the property was not a business asset, the loan for its acquisition did not qualify as a business loan. The CIT(A) directed the AO to verify the amount not debited to the Profit and Loss account to avoid double disallowance.

Issue 3: Disallowance of Depreciation
The AO also disallowed the depreciation of ?31,24,834 claimed on the flat, holding that the flat was not used for business purposes. The CIT(A) supported this view, stating that the flat was not a business asset and thus did not qualify for depreciation. The CIT(A) cited the Delhi High Court's decision in the case of Modi Industries Ltd. and a Board Circular, which clarified that assets provided at the residence of employees should be considered for business use. However, the CIT(A) concluded that these references were not applicable as the flat was not a business asset.

Tribunal's Findings:
The Tribunal found that the issue of interest and depreciation disallowance was covered by the decision of the co-ordinate Bench in the assessee’s own case for AY 2010-11. The Tribunal noted that the flat was purchased for the residence of the CMD, who held 99% of the company’s shares. The Tribunal held that the AO could not interfere in the business decisions of the assessee company and that the provision of Section 2(22)(e) of the Income Tax Act was not applicable as the funds were not transferred outside the company. The Tribunal allowed the interest expenditure as revenue in nature and permitted depreciation at 5% of the total value of the flat.

Conclusion:
The Tribunal, respecting its previous order for AY 2010-11, concluded that the flat purchase was a business necessity and not a non-business transaction. It deleted the disallowances of interest and depreciation, allowing the assessee's appeals for AYs 2011-12 to 2015-16.

Final Judgment:
All five appeals of the assessee were allowed, and the disallowances of interest and depreciation were deleted.

Order Pronounced:
The judgment was pronounced in the open court on 24-06-2019.