2015 (3) TMI 228 - AT - Income Tax

Disallowance of interest - Held that - addition is wholly unjustified. The balance sheet of the assessee P.B.37 shows that assessee has capital of ₹ 56,37,092/- and apart from the same the assessee has also sufficient liquidity in the form of sundry creditor of ₹ 1,20,83,648/- on which no interest was payable and was also available for investment, sundry debtors and other assets. if there were funds available both interest free and overdraft/loans taken, then the presumption would arise that investments would be out of interest free funds generated or available with the company, if the interest free funds was sufficient to meet the investments. In this case, this presumption was established considering the finding of fact both by the learned CIT(A) and the Tribunal. Interests were deductable all these decisions support the case of the assessee. The A.O. has not proved any nexus between the borrowed funds and interest free loans given - it is clear that assessee has sufficient capital, profit and interest free funds available with him for the purpose of giving interest free loans to the above person. Therefore, proportionate disallowance of interest is wholly unjustified. Disallowance in respect of depreciation and vehicle expenses for personal use - A.O. disallowed 1/5th of these expenses for personal user of the car - CIT(A) restricted the same to 1/8th of the expenditure - Held that - personal user of the car cannot be ruled out being the assessee individual, however, the disallowance is reduced to 1/10th of the total claim. Disallowance of telephone travelling staff welfare, sales promotion and Diwali expenses - Held that - According to A.O., these expenses are not fully supported by the vouchers and mostly vouchers have been produced, therefore, expenses were not subject to verification. 1/5th of the expenses were disallowed which were modified and reduced by the learned CIT(A) to 1/8th of the expenditure. Considering the explanation of the parties, we find that the addition is justified on this issue, however, the addition is reduced to 1/10th of the total claim - Decided partly in favour of assesse.

Summary

Issues:
1. Disallowance of interest on borrowed funds for personal loans
2. Disallowance of depreciation and vehicle expenses for personal use
3. Disallowance of various expenses like telephone, traveling, staff welfare, sales promotion, and Diwali expenses

Issue 1: Disallowance of interest on borrowed funds for personal loans

The assessee challenged the disallowance of interest amounting to &8377; 2,17,640 on borrowed funds. The Assessing Officer (A.O.) found that funds of &8377; 51,05,000 were with relatives/friends, not for business purposes. The A.O. disallowed the interest, stating the loans were personal, not for business. The assessee argued the loans were for educational purposes and property purchase, justifying the investment of borrowed funds in business. The CIT(A) dismissed the appeal, noting the capital was invested in assets, FDRs, and stocks. The ITAT found the addition unjustified, citing the assessee's sufficient capital and liquidity, supported by various High Court decisions. The ITAT held that if capital or reserves cover interest-bearing loans, no disallowance is warranted. It referenced the Reliance Utility Power Ltd. case, where investments from interest-free funds were presumed if sufficient. The ITAT found no nexus between borrowed funds and interest-free loans, citing a similar decision in favor of the assessee by the ITAT, Agra Bench. The ITAT deleted the addition, ruling it wholly unjustified.

Issue 2: Disallowance of depreciation and vehicle expenses for personal use

The assessee contested the disallowance of &8377; 34,714 for depreciation and vehicle expenses due to personal use. The A.O. disallowed 1/5th of the expenses for personal car use, reduced to 1/8th by the CIT(A). The ITAT acknowledged personal car use but reduced the disallowance to 1/10th of the total claim, partially allowing this ground of appeal.

Issue 3: Disallowance of various expenses like telephone, traveling, staff welfare, sales promotion, and Diwali expenses

The assessee challenged the disallowance of &8377; 38,170 for various expenses like telephone, traveling, staff welfare, sales promotion, and Diwali expenses. The A.O. disallowed 1/5th of the expenses due to lack of voucher support, reduced to 1/8th by the CIT(A). The ITAT found the addition justified but reduced it to 1/10th of the total claim, partly allowing this ground of appeal.

In conclusion, the ITAT partly allowed the assessee's appeal, overturning the disallowance of interest on borrowed funds for personal loans, reducing the disallowance of depreciation and vehicle expenses for personal use, and partially allowing the disallowance of various other expenses.