2018 (5) TMI 1317 - AT - Income Tax

Disallowance of interest - revenue or capital expenditure - Depreciation on account expenditure treated as capital expenditure - Held that - It is for the assessee to demonstrate through verifiable evidence that the purpose of loan and its utilization is not for the purposes of the building construction which it has failed to do so and nothing has been brought on record to controvert the findings of the AO. Given that by assessee s own treatment of capitalizing the interest expenditure in the previous assessment year 2012-13, where the assessee now claims that the expenditure is not capital but revenue, there is greater onus on the assessee which it has again failed to discharge in the present case. No infirmity in action of AO in disallowing the interest expenses till the new building was put to use in September, 2012. 455436 At the same time given that the AO has capitalized the said interest paid for the period April 2012 to August, 2012 in the building account, the assessee become eligible to claim depreciation @ 10% on the said interest being capitalized. We therefore, allow the alternative claim of the assessee regarding depreciation on the said interest being capitalized by the Assessing Officer. In the result, ground no. 1 of the assessee s appeal is dismissed and ground no. 2 is allowed. Disallowance 10% of the expenditure in the nature of telephone, travelling, conveyance and depreciation on cars - Held that - The expenditure has been disallowed on the basis that the personal use of the telephone facility cannot be ruled out and during the course of hearing, the ld AR has stated that the personal usage by the Partners is minimal though the quantum of disallowance is on a higher side. Given that no basis or allocation has been brought on record, we find that the AO is reasonable to disallow 10% of telephone expense and the same is upheld. Travel expenditure allowability, AR has submitted that expenditure is fully vouched and no specific instance has been brought on record by the Assessing officer determining the personal travel expenditure being claimed as part of official travel expenditure. We agree with the contentions of the ld AR and disallowance made regarding travel expenditure is deleted. Disallowance of conveyance expenditure, no specific arguments have been taken and the disallowance is hereby confirmed. Depreciation on cars, once it is not disputed by the Revenue that the vehicles are owned by the firm, the depreciation being a statutory allowance deserves to be allowed. At the same time, where it is established that the vehicle has been used for personal purposes, in such a scenario, the Revenue is well within its right to tax the vehicle running expenditure as perquisite in hands of the employees/directors. In the result, the ground of appeal is partly allowed. Disallowance 10% of entertainment and staff refreshment expenses - addition holding that these expenses were not fully supported by the proper bills due to which these expenses could not be verified completely - Held that - The nature of the expenditure is explained as refreshments in forms of tea/coffee offered to customers and employees. Given the nature of the assessee s business and its reported turnover, we find the nature and quantum of expenditure to be reasonable and the addition so made by the AO is hereby deleted.

Summary

Issues:
1. Disallowance of interest as capital expenditure
2. Disallowance of depreciation on interest treated as capital expenditure
3. Disallowance of certain expenses like telephone, travelling, conveyance, depreciation on cars
4. Disallowance of entertainment and staff refreshment expenses

Issue 1 - Disallowance of Interest as Capital Expenditure:
The Assessing Officer disallowed interest expenses of ?16,81,057, treating it as capital expenditure as the loan was taken for building construction. The assessee argued that the loan was not utilized for construction, but for business operations. However, since the loan was capitalized in the previous year and the building construction period overlapped with the loan period, the disallowance was upheld by the CIT(A). The ITAT concurred, stating the onus was on the assessee to prove the loan was not for construction, which was not done. The interest was disallowed until the building was used, but depreciation on the disallowed interest was allowed at 10%.

Issue 2 - Disallowance of Certain Expenses:
Regarding disallowance of telephone, travelling, conveyance expenses, and depreciation on cars, the AO disallowed 10% of ?4,28,126, citing personal use and unverified cash expenses. The CIT(A) upheld the disallowance. The ITAT found the disallowance of 10% of telephone expenses reasonable due to potential personal use. However, disallowance of travel expenses was deleted as they were fully vouched. No specific arguments were raised against the conveyance disallowance, confirming it. Depreciation on cars, being statutory, was allowed unless personal use was proven.

Issue 3 - Disallowance of Entertainment and Staff Refreshment Expenses:
The AO disallowed 10% of entertainment and staff refreshment expenses of ?69,765 due to lack of proper bills. The CIT(A) upheld this disallowance. The ITAT found the nature and quantum of these expenses reasonable given the business type and turnover, thus deleting the disallowance.

In conclusion, the ITAT partly allowed the appeal, dismissing ground 1, allowing ground 2, upholding the disallowance of 10% of telephone expenses, deleting disallowance of travel expenses, confirming conveyance disallowance, and deleting the disallowance of entertainment and staff refreshment expenses.