2014 (4) TMI 358 - AT - Income Tax

Nature of expenses Capital OR Revenue GPA registration charges - Held that - CIT(A) rightly held that the AO has failed to appreciate the legitimate expenditure incurred on registration of GPA for commencing the works in the site - The expenditure incurred to facilitate rights to the firm for commencing the work and is wholly incurred for the business which is not a capital expenditure since it is intimately related to the construction activity in which the firm is engaged - The entire expenditure is completely revenue in nature since it is incurred for carrying out the development activity of the construction project in which the firm is engaged - the entire amount spent was claimed in earlier years also and the one claimed in this is the remaining amount thus, CIT(A) correctly allowed the expenditure as revenue expenditure there is no reason to interfere with the order of the CIT(A) Decided against Revenue. Deletion of interest on loan Loans granted to related persons Violation of section 40(a)(2b) of the Act Held that - CIT(A) rightly was of the view that, it has become inevitable to consider the request for temporary advance, on which no interest was charged - The transaction has a business nexus and business connection amount advanced was in view of commercial expediency, that too after examining the assessee s submissions and remand report from AO, there is no reason to interfere with the decision AO should have invoked the provisions of section 36(i)(iii), if there are any diversion of borrowed funds but cannot bring notional interest to tax on the so-called advances made, without establishing that the borrowed funds are diverted for non-business purposes - The entire addition made by the AO itself is bad in law - thus, charging of notional interest is not warranted and he AO is directed to delete Decided against Revenue.

Summary

Issues:
1. Allowance of expenditure of capital nature as revenue expenditure.
2. Deletion of interest on loans granted to related persons from funds taken on loans.
3. Reliance on a judgment for a different transaction while deleting additions made by the Assessing Officer.

Issue 1: Allowance of Expenditure of Capital Nature as Revenue Expenditure
The Assessing Officer (A.O.) disallowed an expenditure claimed towards general power of attorney charges, treating it as capital expenditure. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the expenditure as revenue expenditure, citing that it was intimately related to the construction activity of the business. The CIT(A) noted that the expenditure was legitimate and wholly incurred for business purposes. The CIT(A) directed the A.O. to allow the expenditure, emphasizing its revenue nature and past allowances. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, rejecting the Revenue's appeal on this ground.

Issue 2: Deletion of Interest on Loans Granted to Related Persons
The A.O. added an amount as unexplained income, considering notional interest on advances made to a partner. The CIT(A) deleted the addition, stating that the advances were made for commercial expediency and had a business nexus. The CIT(A) held that charging notional interest was unwarranted and directed the A.O. to delete the addition. The ITAT upheld the CIT(A)'s decision, emphasizing the absence of diversion of borrowed funds for non-business purposes and the commercial nature of the transactions.

Issue 3: Reliance on a Judgment for a Different Transaction
The Revenue contested an addition based on a document found during a survey, alleging undisclosed income. The CIT(A) considered the document and related transactions, concluding that the addition lacked merit. The ITAT upheld the CIT(A)'s decision, noting that similar additions in the past were deemed baseless. The ITAT found the document to be inconclusive and lacking corroborative evidence, leading to the dismissal of the Revenue's appeal.

In conclusion, the ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all contested issues. The judgments emphasized the factual and legal considerations, leading to the rejection of the Revenue's claims.