2019 (12) TMI 402 - AT - Income Tax

Disallowance of rental expenses - Nature of expenses - revenue or capital - HELD THAT - Undisputedly, the subject premise in respect of which the assessee has claimed the rental expenses has been taken on lease by the assessee. Though, in the leave and license agreement, it is mentioned that it has been taken on lease for the use of residence of directors/employees, however, it cannot be said that in course of such user, the directors are not doing any official work, such as, meeting the investors, etc. Therefore, merely because as per the terms of the leave and license agreement the premise is to be used for residence purpose of the directors, assessee s claim cannot be rejected. Tribunal in Stuish Capital Services Pvt. Ltd. 2018 (5) TMI 1948 - ITAT MUMBAI while considering the allowability of depreciation on a premise taken on lease for use of director s residence allowed assessee s claim by holding that since the company is engaged in share trading, the premise is used by directors for official work also, hence, as per CBDT Circular and the decision of the Hon ble Delhi High Court in CIT v/s Modi Industries Ltd. 1994 (4) TMI 61 - DELHI HIGH COURT assessee s claim is allowable. Disallowance of interest expenditure - AO on the basis of AIR information called upon the assessee to reconcile the interest income earned by it during the year - specific contention of the assessee that the borrowed funds on which the assessee has paid interest was utilized for investing in derivatives and NCDs - HELD THAT - If the borrowed fund or part of it has been utilized in acquiring the NCDs, then the interest on such borrowed fund has to be set off against the interest income earned on NCDs to the extent of utilization of borrowed funds in NCDs. The aforesaid claim of the assessee, therefore, needs factual verification. In case, it is found that a part of the borrowed fund was utilized for investment in NCDs, then the interest expenditure corresponding to the borrowed fund utilized in NCDs has to be set off against the interest earned on NCDs. With the aforesaid observation, the issue is restored back to the Assessing Officer for fresh adjudication after verification of facts on record and due opportunity of being heard to the assessee. This ground is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of rental expenses
2. Disallowance of interest expenditure

Issue 1: Disallowance of Rental Expenses
The appeal was filed challenging the disallowance of rental expenses amounting to ?65.25 lakh for the assessment year 2012-13. The Assessing Officer disallowed the expenses as the premises leased by the assessee were meant for residential purposes, not directly related to the business activities of investing in shares and securities. The Commissioner (Appeals) upheld this disallowance. However, the Authorized Representative argued that the premises were used for meetings with investors, essential for the business. Referring to previous decisions, it was contended that even if the premises were used for residential purposes, as long as it was also utilized for official work, the rental expenses should be allowed. The Tribunal agreed, citing a similar case where depreciation on a premise used for the director's residence was allowed due to its use for official work. Consequently, the Tribunal allowed the claim of depreciation, stating that the rental expenses were allowable as a business expense.

Issue 2: Disallowance of Interest Expenditure
The second ground of appeal challenged the disallowance of interest expenditure amounting to ?1,00,07,470. The Assessing Officer disallowed the claim as the assessee failed to establish a clear nexus between the interest income earned and the interest expenditure claimed. The Commissioner (Appeals) upheld this disallowance, stating that the requirement under section 57(iii) of the Act was not met. The Authorized Representative argued that the borrowed funds were entirely used for trading in derivatives and NCDs, justifying the interest expenditure claimed on a pro-rata basis. It was contended that there was a direct relationship between the interest expenditure and income earned. The Tribunal observed that if the borrowed funds were used for investing in NCDs, the interest on such funds should be set-off against the interest income from NCDs. However, due to the need for factual verification regarding the utilization of borrowed funds, the issue was sent back to the Assessing Officer for further examination and a fresh decision. Consequently, the ground was allowed for statistical purposes.

In conclusion, the appeal was partly allowed, with the Tribunal ruling in favor of the assessee regarding the disallowance of rental expenses and sending back the issue of interest expenditure for further verification and decision.