2016 (5) TMI 242 - AT - Income Tax

Disallowance of business expenses - Held that - As objection raised by the ld. Assessing Officer in disallowing these expenses has already been struck down by the decision of co-ordinate bench in assessee s own case confirming the existence of business activity in the year under appeal, we do not find any reason for disallowance of these normal business expenses and accordingly we allow the expenses of ₹ 23,82,268/- as business expenses out of the total disallowance of ₹ 54,29,508/- as mentioned in ground no.1 of the appeal. - Decided against revenue Disallowance of bad debt - Held that - When assessee s case has travelled to the Tribunal in the second round and assessee had sufficient opportunity to prove the genuineness of the claim of bad debt of ₹ 30,47,240/- and then also he has been unable to satisfy the lower authorities and even before us, during the course of hearing, we do not find any reason to accept the contentions and claim made by the assessee in this ground relating to disallowance of bad debt in the given circumstances - Decided against assessee Allowability of interest expenses under the provisions of section 57(iii)- Disallowance of interest claimed by assessee against interest income shown under the head income from other sources - Held that - In order to claim expenses under the provisions of section 57(iii) of the Act nexus has to be proved that the same has been incurred for earning the income shown under the provisions of section 56 of the Act i.e. the income from other sources. Applying these provisions to the facts of the case, we find that assessee has declared interest income of only ₹ 534557/- and has claimed interest expenses of ₹ 4554551/- Out of total interest claimed at ₹ 4554551/- Assessing Officer has already allowed the claim at ₹ 2199959/- and for the balance amount of interest of ₹ 2354592/- nothing was placed on record by the assessee to prove that it has been spent to earn interest income which has been declared u/s 56 of the Act and rather we find force in the observation made by ld. Assessing Officer that the amount of interest of ₹ 2354592/- has been paid on loans taken has actually been diverted towards investment in shares and other non-interest bearing investment and this gets further support by the fact that assessee has earned long term capital gains of ₹ 13260055/-. In these circumstances, we are unable to accept the contention made by ld. AR of assessee about the allowability of interest expenses at ₹ 2354592/- under the head income from other sources and we uphold the order of ld. CIT(A) and accordingly dismiss this ground of assessee.- Decided against assessee Insurance claim received and sundry balance written off treated as ncome from other sources - Held that - In the light of decision of the co-ordinate bench in assessee s own case wherein it has been held that assessee has carried out the business activities and allowed the impugned profit and loss account wherein the insurance claim and sundry balance written off were shown in the credit of profit and loss account of M/s Labh Enterprise and these credits of ₹ 30,443/- and at ₹ 14,054/- on account of insurance claim and sundry balance are arising out of business activities of M/s Labh Enterprise carried out before 1.4.1995 i.e. taking over of the business by the assessee as a sole proprietor. We are, therefore, of the view that these credits of ₹ 30,443/- and ₹ 14,054/- on account of insurance claim received and balance written off totaled at ₹ 44997/- were rightly shown by the assessee under the head business income and ld. CIT(A) was not correct in upholding the action of Assessing Officer in assessing these credits of ₹ 44997/- under the head income from other sources - Decided in favour of assessee

Summary

Issues Involved:

1. Disallowance of business expenses.
2. Disallowance of interest expenses.
3. Classification of insurance claim and sundry balance written off.
4. Condonation of delay in filing appeals.

Detailed Analysis:

1. Disallowance of Business Expenses:

Issue: The CIT(A) upheld the disallowance of business expenses totaling ?54,29,508 for AY 1996-97 and ?17,93,439 for AY 1997-98. The expenses included depreciation, interest paid to banks and others, RTO tax, sales tax, and miscellaneous expenses.

Findings:
- The assessee argued that the business of M/s Labh Enterprises was taken over as a sole proprietorship from a partnership, and the expenses were legitimate business expenses.
- The Tribunal had previously determined that the assessee was carrying on business activities, thus eligible for claiming business expenses.
- The Tribunal found that the expenses totaling ?23,82,268 (excluding bad debts) were related to the business activities and should be allowed.
- However, the claim of bad debts amounting to ?30,47,240 was disallowed due to lack of substantiation and disparity in figures.

Conclusion: The Tribunal allowed the expenses of ?23,82,268 as business expenses for AY 1996-97 and disallowed the bad debts of ?30,47,240. For AY 1997-98, the disallowance of ?17,93,439 was overturned, allowing the appeal.

2. Disallowance of Interest Expenses:

Issue: The CIT(A) upheld the disallowance of interest expenses amounting to ?23,54,592 for AY 1996-97.

Findings:
- The Assessing Officer (AO) found that the interest expenses were related to personal expenses and not for the purpose of earning income.
- The AO noted that the unsecured loans were used for investments in shares and other non-interest-bearing assets, not for business purposes.
- The Tribunal agreed with the AO's findings, stating that the interest expenses were not incurred for earning income from other sources as required under Section 57(iii) of the IT Act.

Conclusion: The Tribunal upheld the disallowance of interest expenses of ?23,54,592.

3. Classification of Insurance Claim and Sundry Balance Written Off:

Issue: The CIT(A) classified the insurance claim received (?30,443) and sundry balance written off (?14,054) under "income from other sources" instead of "income from business."

Findings:
- The Tribunal noted that these amounts were part of the business activities of M/s Labh Enterprises before it was taken over as a sole proprietorship.
- The Tribunal held that these credits should be classified under "income from business" as they arose from business activities.

Conclusion: The Tribunal reclassified the insurance claim and sundry balance written off as "income from business."

4. Condonation of Delay in Filing Appeals:

Issue: The appeals were filed with a delay of 345 days, and the assessee requested condonation of the delay.

Findings:
- The delay was attributed to the accountant's oversight while the assessee was abroad.
- The Tribunal, in the interest of natural justice, condoned the delay and admitted the appeals for adjudication.

Conclusion: The delay in filing the appeals was condoned, and the appeals were admitted.

Final Judgment:

- ITA No.1871/Ahd/2010 for AY 1996-97: Partly allowed. Business expenses of ?23,82,268 were allowed, disallowance of bad debts of ?30,47,240 was upheld, and the classification of insurance claim and sundry balance written off was corrected to "income from business."
- ITA No.1872/Ahd/2010 for AY 1997-98: Allowed. The disallowance of business expenses of ?17,93,439 was overturned.