2021 (4) TMI 854 - AT - Income Tax

Disallowance of interest expenses - Addition on account of interest on term loan - HELD THAT - We find that the revenue authorities are not disputing that assessee has obtained the term loan from the bank. That the interest has also been paid to the bank. The view of the authorities below is that assessee did not need to take the term loan for paying its creditors. We find that it is also settled law that revenue authorities cannot step into the shoes of businessman and decide how the business should be conducted. Why the assessee is not charging from debtors and why it is using the money obtained from bank loan to pay the creditor is a businessman discretion and Assessing Officer cannot decide this aspect. Without any finding that assessee has actually not taken the loan and not paid interest on the loan or that assessee had diverted interest-bearing funds such addition lack cogency. In this view of the matter in our considered opinion the addition is not sustainable. Hence, the same is directed to be deleted. Disallowance on estimated basis out of travelling and telephone expenses - HELD THAT - We find that the same has been done without bringing on record cogent material. Just writing that personal expenses cannot be ruled out the same cannot be ipso facto a ground for disallowance of expenditure. In this view of the matter in our considered opinion the addition made by the revenue authorities in this regard is not sustainable. Hence we direct that the same should be deleted. Appeal by the assessee stands allowed.

Summary

Issues:
1. Disallowance of interest on term loan.
2. Disallowance of various expenses like telephone, traveling, and sale of motor car.

Analysis:
1. Disallowance of Interest on Term Loan:
The Assessing Officer disallowed interest paid on a bank loan, claiming it was not for business purposes. The appellant's explanation of financial crisis and the need to pay creditors promptly was rejected. The CIT(A) upheld the disallowance, emphasizing the mismatch between outstanding debtors and sales, questioning the justification for interest debited to the Profit & Loss A/c. The ITAT, however, found the disallowance unjustified. They held that the revenue authorities cannot dictate business decisions, emphasizing that the loan was indeed taken and interest paid. Without evidence of diversion of interest-bearing funds, the addition was deemed unsustainable, leading to its deletion.

2. Disallowance of Various Expenses:
Additionally, an ad-hoc disallowance of 25% on traveling and telephone expenses was made by the assessing officer, citing lack of complete details and potential personal use. The CIT(A) reduced this disallowance to 20%. Upon appeal, the ITAT found the disallowance unjustified. They emphasized the lack of cogent material to support the estimated disallowance, stating that the mere possibility of personal expenses does not warrant such action. Consequently, the ITAT directed the deletion of the disallowance.

In conclusion, the ITAT allowed the appeal, overturning the disallowances of interest on the term loan and the estimated expenses on traveling and telephone. The judgment highlighted the importance of substantiated reasoning and the boundaries of revenue authorities in interfering with business decisions.