2022 (7) TMI 1403 - AT - Income Tax

Disallowance of interest expenses on account of diversion of interest-bearing loan - HELD THAT - As the impugned amount borrowed by the assessee has been diverted for making the contribution in the partner s capital account investment in the lands and interest free/interest bearing advances. As far as the contribution in partner s capital account is concerned we note that the assessee has shown interest income from the partners which is chargeable to tax. Assessee against such interest income from the partners ship account is eligible for deduction for the interest expenses. It is for the reason that there is direct nexus between the interest income and the interest expenses. Interest expense on loan diverted to interest bearing loans and advances is also eligible for interest expenses. It is for the reason that there is direct nexus between the interest income and the interest expenses. The amount of loan diverted for the investments in land and interest free loans and advances the corresponding interest cannot be allowed as deduction against the interest income. It is for the reason that there is no direct nexus between the interest income and the interest expenses. Such interest expenses cannot be allowed as deduction either under the provisions of section 36(1)(iii) or 57 of the Act. In view of the above we set aside the order of the CIT (A) with the direction to the AO to calculate the amount of interest attributable to the investment made in the lands and interest-free loans and advances and make the disallowance proportionately. Hence the ground of appeal of the assessee to this extent is partly allowed. Unexplained cash expenses - assessee has incurred certain expenses on purchase of property such as stamp duty charges and registration charges but failed to explain the source of such expenses - HELD THAT - We note that all the cash expenses incurred by the assessee have been duly incorporated in the cash book. No doubt raised by the authorities below with respect to the cash book filed by the assessee. Since the expenses incurred in cash have been duly recorded in the books of accounts the source of cash for such expenses cannot be doubted. The cash book is a summary of the transactions which are carried out in cash demonstrating the source of receipt of cash and payment of cash. Thus it cannot be said that such expenses were incurred by the assessee outside the books of accounts. The issue on hand relates to the cash payment which was recorded in the cash book but corresponding receipt of cash was nowhere doubted by the authorities below accordingly we set aside the finding of the CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Addition on account of interest expenses on the car loan and the depreciation on the car - As found that the assessee is not carrying out any business activity and therefore such expenses cannot be allowed as deduction as business expenses under the provisions of income tax Act - HELD THAT - Admittedly the assessee is a partner in 5 partnership firm and drawing handsome amount of share of profit remuneration and the interest. Indeed the amount of share of profit is not chargeable to tax in the hands of the assessee but the remaining items of interest income and the remuneration are chargeable to tax under the head business and profession which have been duly disclosed in the income tax return. Thus in such a situation the interest on the car loan and the depreciation thereon cannot be denied for the purpose of the deduction - Admittedly there is a flat rate of tax in the case of partnership firm whereas the rate of tax in the case of a partner is qualified for slab rate of tax besides the maximum exemption limit provided under the statute. As such had the deduction been allowed to the partnership firm there would have been less revenue in the hands of the partnership firm. Thus keeping in view the above principles we are not convinced with the finding of the learned CIT-A and accordingly direct the AO to delete the addition made.

Issues Involved:
1. Disallowance of interest expenses.
2. Addition on account of unexplained cash expenses.
3. Addition of interest expenses on the car loan and depreciation on the car.

Analysis:

Issue 1: Disallowance of Interest Expenses
The Assessing Officer (AO) disallowed interest expenses amounting to Rs. 9,59,093/- as he found that the borrowed funds were diverted for non-business purposes. The Commissioner of Income Tax (Appeals) partly confirmed this disallowance. However, the Appellate Tribunal noted that interest expenses related to investments in lands and interest-free loans lacked a direct nexus with interest income, hence disallowance was upheld only for these specific expenses. The Tribunal directed the AO to calculate and disallow the interest proportionately for these specific investments.

Issue 2: Addition on Account of Unexplained Cash Expenses
The AO added Rs. 7,22,272/- as unexplained cash expenses for stamp duty and registration charges. The CIT (A) upheld this addition, stating that the source of these expenses was not substantiated. However, the Appellate Tribunal found that all cash expenses were duly recorded in the books of accounts, and the source of cash was evident from the cash book provided by the assessee. Consequently, the Tribunal directed the AO to delete this addition.

Issue 3: Addition of Interest Expenses on the Car Loan and Depreciation on the Car
The AO disallowed interest paid on the car loan and depreciation on the car, stating they were personal expenses. The CIT (A) confirmed this disallowance, claiming the expenses were not admissible against the share income from the partnership firm. The Tribunal disagreed, noting that the assessee, a partner in multiple firms, had business income chargeable under the head "business and profession." As such, the interest on the car loan and depreciation were allowed as deductions. The Tribunal directed the AO to delete this addition.

In conclusion, the appeal filed by the assessee was partly allowed by the Appellate Tribunal after detailed analysis and consideration of the issues raised regarding interest expenses, unexplained cash expenses, and car-related expenses.

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