2019 (8) TMI 1205 - AT - Income Tax

Disallowance of interest u/s 57(iii) - A.O. alleged that the assessee could not explain to his satisfaction that the interest paid on the loans was having any nexus with interest income earned u/s 57 - business expenditure - HELD THAT - Referring to claim of the assessee is that interest bearing funds were utilized for the business purposes and the interest paid in similar circumstances was allowed in the earlier year i.e 2012- 13 by the ITAT in assessee s own case 2019 (5) TMI 274 - ITAT CHANDIGARH , copy of the said order was furnished which is placed on the record. However the said order was not available either to the A.O. or to the Ld. CIT(A), I therefore deem it appropriate to set aside this limited issue to the file of the A.O. to be adjudicated by keeping in view the observations given in the aforesaid order, in accordance with law. - Appeal of the Assessee allowed for statistical purposes. Disallowance of car expenses, depreciation, telephone and travelling expenses - assessee himself had disallowed a sum partially out of the above said expenses - HELD THAT - In such type of cases the use of Telephone and Car for personal purposes cannot be ruled out, however the disallowance made by the A.O. and sustained by the Ld.CIT(A) @ 1/5th of the expenses appears to be excessive, I therefore to meet the ends of justice, deem it appropriate to restrict the disallowance to 1/10th of the expenses incurred by the assessee on Telephone, Car and depreciation instead of 1/5th worked out by the A.O. while restricting the above disallowance the A.O. should also give the benefit of the disallowance already made by the assessee

Summary

Issues Involved:
1. Disallowance of ?15,44,043/- out of interest account under Section 57(iii) of the Income Tax Act, 1961.
2. Disallowance of ?2,01,874/- out of car expenses, depreciation, telephone, and traveling expenses due to estimated personal use.

Issue-wise Detailed Analysis:

1. Disallowance of ?15,44,043/- out of Interest Account under Section 57(iii):

The assessee filed a return of income declaring ?19,08,250/-, which was processed under Section 143(1) and later selected for scrutiny. The Assessing Officer (A.O.) noticed that the assessee had given interest-free advances to friends and family, which were not for the purpose of earning income from other sources as required by Section 57(iii). The A.O. observed that the assessee had debited ?5,66,645/- on account of interest on a car loan and claimed a deduction on interest expenditure under Section 57 amounting to ?40,22,756/-. The A.O. disallowed ?15,44,043/- of the interest expenditure, as the assessee failed to demonstrate a direct nexus between the interest paid and received for the purpose of allowability under Section 57.

The assessee argued that no fresh loans were raised during the year, and the loans squared up were from past borrowings. The assessee maintained that the interest-bearing funds were used for business purposes and that interest-free advances were given out of surplus funds. The Ld. CIT(A) upheld the A.O.'s disallowance, citing the assessee's failure to distinguish between borrowed and own funds.

The ITAT noted that a similar disallowance in the preceding year was deleted by the ITAT in ITA No. 315/Chd/2017. The ITAT set aside this issue to the A.O. for reconsideration, taking into account the observations from the previous ITAT order.

2. Disallowance of ?2,01,874/- out of Car Expenses, Depreciation, Telephone, and Traveling Expenses:

The A.O. disallowed 1/5th of the expenses incurred on telephone, car repair, car insurance, car expenses, and depreciation, totaling ?3,76,245/-, as these were mixed in nature, and personal use could not be ruled out. The assessee had already disallowed ?1,74,371/-, and the A.O. added the difference of ?2,01,874/- to the income.

The Ld. CIT(A) sustained the disallowance, finding it reasonable. The ITAT, however, deemed the 1/5th disallowance excessive and restricted it to 1/10th of the expenses, ensuring the benefit of the disallowance already made by the assessee.

Conclusion:

The appeal was partly allowed for statistical purposes, with the interest disallowance issue remanded to the A.O. for reconsideration, and the disallowance of car and related expenses adjusted to a more reasonable 1/10th.