2019 (11) TMI 581 - AT - Income Tax

Disallowance on account of interest on borrowings paid by the assessee - AR submitted that no disallowance can be made in respect of the amount paid to such parties in the earlier years which is standing under the head loans and advances as opening balance - HELD THAT - Payment was made from the current account held with the bank, are duly reflected in the ledger accounts. The details of party wise interest paid also reveals that no interest was paid to such bank. The said bank account is reflecting under the head current assets in the balance sheet. It is the case of the assessee that the assessee had to apply for the flat as a measure of commercial expediency in order to recover the fees amount. It was mutually agreed between the assessee and the respective parties that the payment for fees will be made subject to the condition that the assessee applies for allotment of flat. Assessee had to apply for allotment of flat as a measure of commercial expediency. The ledger account of such parties where in the receipt of money is reflecting was also placed on record. Further, a summary sheet reflecting the date of receipt of amount and the date of payment for flat is also submitted by the assessee. From the records it can be seen that the assessee had applied the fees amount towards the purchase of flat as per the terms agreed upon. It can further emerges from the records that the assessee had duly offered such receipt amount to its income on cash basis in accordance with its method of accounting which is also evident from the ledger accounts of such parties. CIT(A) was not right in sustaining the addition in respect of interest incurred on account of amount standing as advance in respect of interest incurred on account of amount standing as advance in respect of such parties. Therefore, the order of the CIT(A) is set aside. Ground No. 2(i) and 2(iii) are allowed. Addition on account of Vehicle Repair and maintenance - AR submitted that it is settled law that if the Assessing Officer has not pointed out any specific defect in the books of the assessee, and has not even pointed out the specific instances where the expenses have been incurred by the assessee for personal purposes, ad-hoc disallowance made by the Assessing Officer without any basis could not be upheld - HELD THAT - From the perusal of records it can be seen that the assessee duly furnished the bills/vouchers in respect of the expenses related to vehicle repairs and maintenance. The Assessing Officer as well as the CIT(A) could not point out any discrepancy in the books of account of the assessee. Therefore, the CIT(A) is not right in confirming this addition. Ground No. 3 is allowed.

Summary

Issues:
1. Disallowance of interest on borrowings
2. Disallowance of expenses on vehicle running & maintenance

Analysis:

Issue 1: Disallowance of interest on borrowings
The appellant, engaged in providing architectural services, contested the disallowance of interest on borrowings amounting to ?19,43,548. The appellant argued that the loans and advances extended were for business expediency, hence no disallowance was warranted. The appellant highlighted that the borrowed funds were utilized for business activities only. The appellant further demonstrated that the borrowed funds were used for commercial expediency to recover fees, and the interest paid was a deductible expenditure. The appellant provided evidence showing the payments were made from a current account with a bank and reflected in ledger accounts. The tribunal found in favor of the appellant, noting that the disallowance was unjustified both in law and on facts.

Issue 2: Disallowance of expenses on vehicle running & maintenance
The appellant challenged the disallowance of ?11,542 on vehicle running & maintenance expenses. The appellant argued that the Assessing Officer did not specify any defects in the books or point out instances of personal use of the expenses. The appellant cited legal precedents to support their contention that ad-hoc disallowance without a basis was unsustainable. The tribunal agreed with the appellant, observing that the expenses were duly supported by bills and vouchers, and no discrepancies were found in the books of accounts. Consequently, the disallowance was deemed unwarranted, and the appeal on this issue was allowed.

In conclusion, the tribunal partially allowed the appeal of the assessee, setting aside the disallowances of interest on borrowings and vehicle running & maintenance expenses. The judgment emphasized the importance of commercial expediency in justifying expenses and the necessity of specific defects to uphold disallowances.