2014 (2) TMI 796 - HC - Income Tax

Entitlement for deduction u/s 57(iii) of the Act Interest incurred on borrowed funds Held that - Relying upon CIT Vs. Rajendra Prasad Moody 1978 (10) TMI 133 - SUPREME Court - Assessee rightly contended that the expenditure on account of interest was a proper expenditure allowable under section 57 - there was no reason why a proper expenditure should have been disallowed only because the investment was not made for the purpose of earning dividend - There is no finding that the investment was made otherwise than for the purpose of making an income - both the Tribunal and the AO were wrong in disallowing the expenditure Decided in favour of Assessee. Disallowance of depreciation on motor cars - Whether the Tribunal was justified in law in upholding the disallowance of 1/5th depreciation on motor cars hired out by the appellant by invoking Section 38(2) of the Act Held that - The vehicle has been hired out - the vehicle is not used for the business of the company. The vehicle has been used for the purpose of earning money by way of hiring charges thus, the order disallowing any part of the depreciation on account of personal use of the directors, under section 38(2), does not appear to have been passed upon application of mind - When the director had no opportunity to use the car, the question of disallowing any part of depreciation on account of directors personal use appears to be altogether misconceived Decided in favour of Assessee.

Summary

Issues:
1. Deduction under Section 57(iii) of the Income Tax Act for interest incurred on borrowed funds used for share investment.
2. Disallowance of 1/5th depreciation on motor cars hired out under Section 38(2).

Issue 1: Deduction under Section 57(iii) of the Income Tax Act for interest incurred on borrowed funds used for share investment

The appeal questioned the justification of the Tribunal's decision to disallow the deduction under Section 57(iii) of the Income Tax Act for interest incurred on borrowed funds utilized for share investment without receiving dividends. The appellant argued that the expenditure on interest was a valid deduction as per Section 57 and cited the judgment in CIT Vs. Rajendra Prasad Moody. The appellant contended that the investment was made for income generation, even if dividend was not the immediate source. The respondent, however, argued that the Moody case was specific to expenditure for earning dividends and not applicable here. The Court analyzed Sections 56 and 57 of the Income Tax Act, emphasizing the wide scope of "income from other sources" and the allowance of proper expenditures under Section 57. The Court disagreed with the Assessing Officer and Tribunal, stating that disallowing the expenditure solely based on the investment not being for dividend income was incorrect. The Court held that as long as the investment was made for income generation, the expenditure should be allowed. The appeal was decided in favor of the assessee.

Issue 2: Disallowance of 1/5th depreciation on motor cars hired out under Section 38(2)

The second question raised in the appeal concerned the disallowance of 1/5th depreciation on motor cars hired out under Section 38(2) of the Income Tax Act. The assessment order indicated that the vehicles were hired out for earning income, not used for the company's business. The Court noted that disallowing depreciation due to personal use of directors would be relevant if the vehicles were used for the company's business. However, since the cars were hired out for profit and not used by the directors, the disallowance based on personal use was deemed inappropriate. The Court held that the disallowance under Section 38(2) was arbitrary and unsupported by the circumstances. Consequently, the second question was answered in favor of the assessee, leading to the disposal of the appeal.

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