2017 (8) TMI 1184 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - interest on borrowed capital - Held that - On the similar issue pertaining to disallowance of interest on borrowed capital u/s. 36(1)(iii), substantial relief had been given by the CIT(A) while disposing of the appeal of the assessee for A.Y. 2010-11. We thus remained divested of being afforded sufficient opportunity of being heard by the CIT(A). We thus in all fairness restore the issue to the file of the A.O with a direction to verify the facts as had been averred by the ld. A.R before us. The A.O is directed to consider the claim of the assessee in respect of interest which is claimed by him to have been received in respect of the amounts advanced to third parties, as well as verify the availability of interest free funds with the assessee at the time when the interest free advances were given by him to certain parties. In case if the assessee is able to substantiate the availability of interest free funds with him at the time of advancing of the interest free loans/advances, then to the said extent no disallowance of the interest expenditure claimed by the assessee u/s. 36(1)(iii) would be liable to be made. We thus restore the matter to the file of the A.O for fresh adjudication - Ground of appeal no. 1 raised by the assessee is thus allowed for statistical purposes. Disallowance of the vehicle expenses - expenses attributed to the personal usages - Held that - In the case of the present assessee the A.O had carried out disallowance of vehicle expenses not merely for the reason that some part of usage of the motor cars could safely be attributed to the personal usages by the partners of the assessee firm and their family members, but also on the ground that the documentary evidence supporting incurring of the vehicle expenses by the assessee neither did inspire much confidence, nor the authenticity of the same could be proved to the hilt by the assessee. We thus in the totality of the facts involved in the case of the present assessee, in all fairness restrict the disallowance made by the A.O. in respect of vehicle expenses to 10%. The order of the CIT(A) upholding the disallowance of vehicle expenses at the rate of 20% is thus modified in light of our aforesaid observations. The Ground of appeal No. 2 raised by the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of interest expense of ?5,23,872/- under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Disallowance of vehicle expenses amounting to ?31,057/-.

Detailed Analysis:

1. Disallowance of Interest Expense:
The assessee firm, deriving income from brokerage, commission, rental receipts, and other sources, filed its return of income declaring a total income of ?88,68,570/-. During scrutiny proceedings, the Assessing Officer (A.O) observed that the assessee had claimed interest expenditure of ?5,23,872/- on interest-bearing loans. The A.O noted that the assessee had advanced interest-free amounts to certain parties and the partners had overdrawn their capital accounts, resulting in significant debit balances. Consequently, the A.O disallowed the interest expenditure under Section 36(1)(iii) of the Income Tax Act, 1961, on the grounds that the loans were not used for business purposes.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O's decision, stating that the assessee failed to prove that the interest-free advances were not made from interest-bearing funds. The assessee argued that it had received interest income of ?3,93,569/- on loans advanced and had substantial interest-free funds available, which the A.O did not consider. The Tribunal found merit in the assessee's contention and noted that the assessee had not been given sufficient opportunity to substantiate its claims. The Tribunal directed the A.O to verify the facts, including the interest income received and the availability of interest-free funds, and to adjust the disallowance accordingly.

2. Disallowance of Vehicle Expenses:
The A.O disallowed 20% of the vehicle expenses and depreciation on motor cars, amounting to ?31,057/-, on the grounds that the expenses were not fully supported by credible evidence and the personal usage of the vehicles by the partners and their family members could not be ruled out. The CIT(A) upheld this disallowance.

The assessee contended that the vehicle expenses were incurred exclusively for business purposes and that depreciation, being a statutory allowance, should not be disallowed. The Tribunal agreed in part, referencing a similar case where disallowance of depreciation was deleted as it is a statutory allowance. However, the Tribunal noted that the A.O's disallowance was also based on the lack of credible evidence supporting the expenses. Therefore, the Tribunal modified the CIT(A)'s order, reducing the disallowance of vehicle expenses from 20% to 10%.

Conclusion:
The appeal was partly allowed. The issue of disallowance of interest expense was remanded back to the A.O for fresh adjudication with specific directions to verify the facts. The disallowance of vehicle expenses was reduced from 20% to 10%, acknowledging both the statutory nature of depreciation and the insufficiency of supporting evidence for the claimed expenses.

Order Pronouncement:
The order was pronounced in the open court on 11.08.2017.