2017 (4) TMI 1143 - AT - Income Tax

Disallowance of expenditure under section 37(1) - car expenses - Held that - There is no merit in the plea of the assessee as the element of personal use out of the car expenses incurred cannot be ruled out, however, the said disallowance is restricted to 10% of the total expenditure under section 37(1) of the Act. Disallowance u/s 14A - Held that - On the perusal of the record and the ratio laid down by the Special Bench of the Tribunal in the case of Vishnu Anant Mahajan Vs. ACIT (2012 (6) TMI 297 - ITAT, Ahmedabad) while working out disallowance under section 14A of the Act, no disallowance is to be made on account of car depreciation claimed as deduction under section 32 of the Act. However, in respect of the interest expenditure on the car loans raised by the assessee there is no merit in the claim of the assessee. Accordingly, 50% of the balance expenditure is to be disallowed in the hands of assessee. In the paras hereinabove, we have already restricted the disallowance to 10% out of the total expenses for personal use and after excluding the same 50% is to be disallowed under section 14A of the Act. Disallowance made on account of interest paid against the interest income earned by the assessee on FDRs and other deposits - Held that - As assessee referred to pages 9 to 13 of the paper book to establish the link between the amounts borrowed and the investments thereof. A perusal of the said details reflect the nexus between the amount borrowed by the assessee and the amount being deposited in various concerns. Admittedly the assessee had made investment in FDRs with banks but the same were not encashed for several reasons while the assessee made borrowals from different concerns in order to make investment with various concerns. In the totality of the present facts and circumstances where the assessee had earned interest income from bank FDRs at ₹ 2,95,750/- and against deposit with other concerns at ₹ 5,23,500/-, the interest expenditure claimed at ₹ 5,62,761/- merits to be allowed in the hands of assessee. Accordingly, the Assessing Officer is so directed. Appeal of the assessee partly allowed

Summary

Issues:
1. Disallowance of expenses under sections 37(1), 57(iii), and 14A of the Income-tax Act, 1961.

Analysis:
The appellant challenged the disallowance and addition of expenses under sections 37(1), 57(iii), and 14A of the Income-tax Act, 1961. The appellant contended that the disallowances were unwarranted, unjustified, and contrary to the provisions of the Act. The Assessing Officer disallowed expenses claimed under various heads, including repairs, interest, insurance of car, and depreciation, due to lack of proper documentation. Additionally, disallowances were made on interest paid without a clear nexus between income earned and investments made. The CIT(A) upheld some disallowances but restricted others based on personal use and income sources.

The CIT(A) restricted the disallowance under section 37(1) for personal use of car expenses to 20% initially, later reducing it to 10%. In the case of expenses attributed to earning remuneration from a partnership firm and share of profit, half of the expenditure was disallowed under section 14A. The CIT(A) allowed the claim for interest on borrowed funds used for investment but upheld disallowances under section 57(iii) due to lack of direct connection between investments and income.

The appellant argued against the restrictions on disallowances related to personal use and claimed expenses, citing the usage of cars for business purposes. However, the Tribunal upheld the CIT(A)'s decision to restrict disallowances. Regarding disallowances under section 14A, the Tribunal referred to a Special Bench ruling and allowed deductions for car depreciation but disallowed 50% of interest expenditure on car loans. The Tribunal also directed the Assessing Officer to allow interest expenditure related to income earned from fixed deposits and other investments.

In conclusion, the Tribunal partially allowed the appeal, modifying the disallowances under sections 37(1), 57(iii), and 14A based on the arguments presented by the appellant and the legal provisions. The judgment provided detailed reasoning for each issue raised by the appellant, considering the specific circumstances and relevant legal precedents.

Order pronounced on 20th April 2017 by Ms. Sushma Chowla, JM.