1996 (10) TMI 118 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of interest paid to M/s Shiv Trust.
2. Deduction under Section 32AB on fixtures, water cooler, TV set, etc. installed in a hotel.
3. Charge of interest under Sections 139(8) and 215 of the IT Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Paid to M/s Shiv Trust:

The assessee claimed interest of Rs. 1,97,010 paid to M/s Shiv Trust at 21% on an outstanding balance of Rs. 9,38,142. The AO allowed interest only at 12%, disallowing Rs. 84,433, citing that the interest paid to other depositors was lower and that the interest rate in the subsequent year was also 12%. The CIT(A) restricted the interest rate to 18%, disallowing Rs. 28,144, noting that the bank and other institutions had a maximum interest rate of 18%.

On appeal, the assessee argued that the funds were raised for business purposes, the interest rate was higher due to the lack of security, and that the market rate was higher than 21%. The assessee also cited the absence of a special relationship with Shiv Trust, making Section 40A(2)(b) inapplicable. The Tribunal noted that the loan was genuine, for business purposes, and the interest was paid. It concluded that the AO was not justified in considering the reasonableness of the interest rate, as the market rate was higher than the bank rate. The Tribunal allowed the interest at 21%, directing the deletion of the disallowance.

2. Deduction under Section 32AB on Fixtures, Water Cooler, TV Set, etc.:

The assessee claimed a deduction under Section 32AB for Rs. 19,318 utilized for purchasing furniture and fixtures, water cooler, refrigerator, TV set, etc., for its hotel business. The AO disallowed the deduction, stating that these items were not 'plant'. On appeal, the CIT(A) upheld the AO's decision, noting that except for furniture, other items were not necessary for running the hotel business and were not considered 'plant'.

The assessee argued that the hotel building was treated as a plant for depreciation purposes, and thus, the items purchased should also be considered as plant. The Tribunal, considering various case laws, concluded that the items purchased were of the nature of plant installed in the hotel building. It directed the AO to allow the deduction under Section 32AB as claimed.

3. Charge of Interest under Sections 139(8) and 215 of the IT Act:

The AO charged interest under Sections 139(8) and 215. The CIT(A) observed that these sections are consequential and directed the AO to recompute the interest while giving effect to the appellate order.

For Section 139(8), the return was delayed by 11 months, and the interest was charged accordingly. The Tribunal found no infirmity in the CIT(A)'s direction.

For Section 215, the assessee argued that the additions made were not anticipated at the time of advance tax payment. The Tribunal noted that the interest under Section 215 became leviable due to additions that were not anticipated, and directed the deletion of the interest charged on such additions.

Appeal for Assessment Year 1988-89:

The issues for the assessment year 1988-89 were similar to those for 1987-88. The Tribunal directed the AO to allow the deduction under Section 32AB and disposed of the interest charge issue as per the findings for 1987-88.

Conclusion:

The Revenue's appeal for the assessment year 1987-88 was dismissed, while the assessee's appeals for the assessment years 1987-88 and 1988-89 were partly allowed.