2018 (5) TMI 2087 - AT - Income Tax

Disallowance of 1/5th of the electricity and water charges - expenses disallowed for common use of the premises - HELD THAT - It can hardly be said that the electricity and water charge incurred by the assessee were for non-business purpose as the employees of the said firm were stated to have used the premises L-41 only while carrying out the professional work of the assessee - Authorities below have wrongly observed that the electric and water expenses are also attributable to this concern - it is worthwhile to note that additions on the identical issue were made in the preceding assessment years 2008-09 and 2009-10 where the CIT(A) has decided the issue in favour of the assessee in the identical facts and circumstances of the case. There is no material before us to show that those orders of the ld. CIT(A) were either reversed or set aside by any of the higher forum. There is also no material on record to establish that there is any change in the fact situation of the instant case. We therefore find no justification to deviate from the findings of the Revenue authorities reached in the preceding years and not to follow the rule of consistency during the year under consideration. Disallowance being 50% of the rent paid by the assessee for its branch office at Greater Kailash New Delhi - AO restricted the claim of rent simply on the ground that the said premises was being used by two persons i.e. assessee and M/s. Bhakru Associates the proprietor of which Ms. Pallavi Joshi Bhakhru is the partner in assessee firm - HELD THAT - Simply because Mrs. Pallavi Joshi was the partner in the assessee firm no adverse inference can be drawn that both the assessee and Bhakhru Assocites were using common space for their business or profession. This fact of internal relationship in our opinion would not go to belie the contention of the assessee that the assessee has paid rent for the space used by him to operate its branch office to Smt. Pallavi Joshi Bhakhru Prop. M/s. Bhakhru Associates as Pallavi Joshi was the owner of the said premises. There is not even an iota of evidence to justify that the assessee has claimed any rent for the space used by Bhakhru Associates for its registered office in the same premises or had paid rent for the space over and obove the space used by it for its branch office. No spot enquiry giving negative results appears to have been brought to our notice to belie the contentions of the assessee. We therefore do not find any justification to disallow the proportionate expenditure claimed on rent paid by the assessee without bringing any cogent material on record to establish that the assessee has claimed rent payment for the space over and above the space used by it. Addition being the amount of stale cheques - As per assessee cheque issued during the year but were not presented for payment and the same were reversed since their validity got expired and therefore shown as current liability and the disallowance so made should be deleted- HELD THAT - As clear from the orders of the lower authorities that stale cheques could not be encashed within the validity period. Therefore the stale cheque account has been debited and the relevant expenditure has been credited and shown as current liability at the year end. During the year under consideration there is no effect in the profit loss account and the assessee has again issued fresh cheque which has been encashed in the succeeding assessment year 2012-13. The assessee is maintaining cash system of accounting. Therefore in the impugned year no benefit of expenditure has been enjoyed by the assessee. AO directed that the benefit should be given to the assessee after due verification from the record of the assessee as to when the current liability has been discharged. Disallowance of 1/6th of the depreciation on cars - HELD THAT - If the asset is not used wholly for the purpose of business but partly then the Assessing Officer is empowered to restrict the fair portion of the claim of the assessee. The Assessing Officer has given the reasons for adopting 1/6th of the total depreciation that the assessee himself has disallowed 1/6th of the expenditure of motor cars. The assessee has relied upon the decision of MUKESH K. SHAH VERSUS INCOME-TAX OFFICER 2004 (5) TMI 530 - ITAT MUMBAI as deleted the disallowance holding that in that particular case there was no justification in making the above disallowance and further the provisions of section 38(2) were not considered in that decision whereas before us the Assessing Officer and the CIT(A) both have specifically invoked the provisions of section 38(2) of the Act. - Decided against assessee. Disallowance of 1/6th interest on vehicle loans - HELD THAT We find that the assessee has himself disallowed 1/6th of vehicle running repairing and maintenance expenses which admittedly suggest that partial use of the vehicles was made for personal purpose and not wholly for the purpose of business. Therefore in view of our finding on disallowance of 1/6th of the depreciation on vehicles noted above we find that the ld. Authorities below have rightly disallowed 1/6th of the assessee s claim of interest on vehicle loans. Accordingly this ground also deserves to be dismissed. Disallowance of 1/10 of the business development expenses - HELD THAT - AO has disallowed this expense only on adhoc basis without pointing out any expenditure of disallowable nature or personal in nature. From the submissions of the assessee before the lower authorities it is clear that photocopies of some of the vouchers were produced before the lower authorities. No personal expenses have been pointed out by the Assessee. Disallowance of interest u/s. 40(b) paid to Mr. Vinod Chandiok - HELD THAT - AO appears to have wrongly calculated. The contention of the assessee that there is no loss to revenue because the partner has shown this amount as his income and both the partner and the partnership firm are assessable in the same bracket of 30% is not acceptable for the reason that the intention of the IT Act is to collect tax from the right person as per law. AO also appears to have wrongly interpreted clause (5) of the partnership deed stating that first party was not authorized to receive interest. In presence of these facts we restore this issue to the file of the Assessing Officer to calculate the interest payable to partner as per provisions of section 40(b)(iv) of the IT Act. Accordingly this ground is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of electricity expenses.
2. Disallowance of rent paid for branch office.
3. Addition of stale cheques.
4. Disallowance of depreciation on cars.
5. Disallowance of interest on vehicle loans.
6. Disallowance of business development expenses.
7. Disallowance of interest paid to a partner under section 40(b).

Detailed Analysis:

1. Disallowance of Electricity Expenses:
The CIT(A) confirmed the disallowance of ?2,09,538/- being 1/5th of the electricity expenses of the office at L-41, Connaught Circus, New Delhi, on the grounds that the premises were used by other firms such as M/s Bakhru & Associates, M/s Grant Thornton India (P) Ltd., and M/s Walker Chandiok & Associates. The Tribunal found that the assessee successfully explained the use of the premises and that no cogent material was provided by the Assessing Officer to prove otherwise. The Tribunal noted that similar additions in previous years were deleted by the CIT(A) and found no justification to deviate from this precedent. Thus, the disallowance was deleted.

2. Disallowance of Rent Paid for Branch Office:
The CIT(A) upheld the disallowance of ?4,50,000/- being 50% of the rent for the branch office at W-129, Greater Kailash, New Delhi, on the assumption that M/s Bakhru & Associates also used the premises. The Tribunal found that the assessee provided sufficient evidence, including a letterhead, to show that M/s Bakhru & Associates had a separate registered office at the same address. The Tribunal concluded that the disallowance was unjustified and deleted it.

3. Addition of Stale Cheques:
The CIT(A) confirmed the addition of ?65,681/- for stale cheques, which were not presented for payment and reversed as current liability. The Tribunal directed the Assessing Officer to verify the records and allow the benefit to the assessee in the year when the liability was discharged, thus allowing the alternative ground of the assessee.

4. Disallowance of Depreciation on Cars:
The CIT(A) confirmed the disallowance of ?5,48,350/- being 1/6th of the depreciation on cars, applying section 38(2) of the IT Act, which allows the Assessing Officer to restrict deductions if the asset is not exclusively used for business purposes. The Tribunal upheld this disallowance, noting that the assessee had already disallowed 1/6th of car running expenses, suggesting partial personal use.

5. Disallowance of Interest on Vehicle Loans:
The CIT(A) upheld the disallowance of ?49,352/- being 1/6th of the interest on vehicle loans. The Tribunal found that the partial personal use of vehicles justified the disallowance and upheld it.

6. Disallowance of Business Development Expenses:
The CIT(A) confirmed the disallowance of ?1,32,725/- being 1/10th of business development expenses on an ad hoc basis. The Tribunal found no justification for this disallowance as the Assessing Officer did not point out any specific personal expenses and allowed this ground.

7. Disallowance of Interest Paid to a Partner under Section 40(b):
The CIT(A) upheld the disallowance of ?20,43,675/- paid to a partner, citing non-compliance with section 40(b) of the IT Act. The Tribunal noted that the interest payment was as per the partnership deed but found that the Assessing Officer misinterpreted the deed. The issue was restored to the Assessing Officer to calculate the interest payable as per section 40(b)(iv) of the IT Act, thus allowing this ground for statistical purposes.

Conclusion:
The Tribunal partly allowed the appeal, deleting the disallowances of electricity expenses, rent paid for the branch office, and business development expenses, while upholding the disallowances of depreciation on cars and interest on vehicle loans. The issue of interest paid to a partner was remanded back to the Assessing Officer for recalculation.