2014 (7) TMI 514 - AT - Income Tax

Interest u/s 36(1)(iii) of the Act - disallowance of motorcar expenses and depreciation on motorcar on ad-hoc basis @ 20% towards personal use Held that - The net interest of ₹ 11,38,490, was shown on the credit side of Profit & Loss account - The assessee s claim of interest of ₹ 5,66,188, paid on overdraft account has been claimed as business expenditure u/s 36(1)(iii) - it is not borne out, whether the fund flow of overdraft account has been examined or not to ascertain, how much overdraft credit has been used for business purpose and how much for the personal user - If the overdraft facility has been used for the purpose of business, then the interest paid has to be allowed under section 36(1)(iii) thus, the matter is to be remitted back to the AO for examination of the nature of the overdraft account and the fund flow of such account to examine the utilization of overdraft account for the business purpose Decided in favour of Assessee. As regards the disallowance of motorcar expenditure and depreciation on motorcar, it is seen that the disallowance has been made on account of personal user - the assessee has not been maintaining a log book for his business purpose, therefore, personal element of usage of motorcar cannot be ruled out - disallowance @ 20% is slightly on higher side, thus, the disallowance is restricted on account of motorcar expenses and depreciation @ 10% - Decided partly in favour of Assessee.

Summary

Issues:
1. Disallowance of interest under section 36(1)(iii)
2. Disallowance of motorcar expenses and depreciation
3. Initiation of penalty proceedings under section 271(1)(c)

Issue 1: Disallowance of interest under section 36(1)(iii)
The assessee challenged the disallowance of interest amounting to Rs. 5,66,188 under section 36(1)(iii). The Assessing Officer noted interest earned on fixed deposits and interest paid on overdraft account, car loan, etc. The assessee claimed the interest paid was for business purposes against the overdraft facilities obtained by pledging fixed deposits. However, the Commissioner (Appeals) upheld the disallowance stating the burden of proof was on the assessee to establish the interest expenditure was for business purposes. The tribunal found that the nature of the overdraft account and fund flow had not been examined to determine the business usage. Hence, the matter was remanded back to the Assessing Officer for further examination. The tribunal allowed the appeal for statistical purposes.

Issue 2: Disallowance of motorcar expenses and depreciation
The disallowance of motorcar expenses amounting to Rs. 15,629 and depreciation of Rs. 18,410 at 20% was challenged by the assessee. The tribunal observed that the disallowance was made due to the lack of a log book for business usage, implying personal usage. While acknowledging the personal element, the tribunal deemed the 20% disallowance excessive and reduced it to 10%. Consequently, the appeal on this issue was partly allowed.

Issue 3: Initiation of penalty proceedings under section 271(1)(c)
The assessee objected to the initiation of penalty proceedings under section 271(1)(c) during the quantum assessment, arguing it was premature. The tribunal agreed that penalty proceedings should be distinct and separate from quantum proceedings. Therefore, the initiation of penalty proceedings could only be challenged during the penalty proceedings.

In conclusion, the tribunal partially allowed the assessee's appeal on the disallowance of interest and motorcar expenses, remanding the interest issue back to the Assessing Officer for further examination. The tribunal also clarified the distinction between penalty and quantum proceedings, emphasizing the need to challenge penalty proceedings separately.