2015 (7) TMI 242 - AT - Income Tax

Disallowance u/s 36(i)(iii) on account of interest payment - Held that - Once admittedly borrowings have been used for the purpose of business and interest has been paid on such borrowing then such interest is eligible for deduction u/s 36(1)(iii) of the Act. The contention of the ld. DR that asset were not put to use i.e. namely the property at 141, First Floor, DLF South Court Yard, Saket was not put to use is an irrelevant consideration. The issue is confined to use of the borrowed funds which have been held to have been used for business then such interest undeniably has to be allowed as deduction. We therefore decline to interfere in the conclusion of the CIT(A) that the disallowance of interest of ₹ 12,95,595/- on the loan availed on mortgage of this property cannot be upheld as the appellant has not utilized the interest bearing funds for purchase of property. As regards interest of ₹ 14,90,373/- it is undisputed that out of the borrowed of ₹ 1,25,00,000/- sum of ₹ 68,00,000/- was utilized for purchase of shop No. GS 0122, First Floor, DLF Grand Mall, Gurgaon. It is also not denied that the property has not been actually used for the purpose of the assessee. All what has been contended is that it is kept as an alternative premise in view of the ceiling drive of residential premises by MCD at Delhi. No evidence has been led to support the aforesaid claim of the appellant. Mere assertion unsupported by any evidence cannot be accepted. On the contrary it has been found as a matter of fact that the said premises is used by M/s Origin Overseas, a sister concern and an internet search showed that the property is presently listed as the branch office of Queens Furniture and Affaire with the contact number of M/s Shikha Birla, spouse of the appellant. In such circumstances we are unable to accept the claim of assessee that property was an alternative premise. However, since the amount utilized for the purchase of property was ₹ 68,00,000/- therefore the CIT(A) was justified to direct the AO to re-compute the disallowance of interest expenses to the extent relatable to the utilization of interest bearing funds for the purchases of property i.e. ₹ 68,00,000/- out of total loan of ₹ 1,25,00,000/- . - Decided partly in favour of assessee for statistical purposes. Disallowance of interest on service tax penalty - CIT(A) deleted the addition - Held that - We are of the considered opinion that it is well settled law that the interest is compensatory and not penalty. See Mahalakshmi Sugar Mills Co. v CIT 1980 (4) TMI 1 - SUPREME Court - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act.
2. Adhoc disallowance of vehicle running and maintenance expenses, interest on car loan, and car depreciation.
3. Adhoc disallowance of telephone and telex charges.
4. Disallowance of electricity and water charges.
5. Deletion of disallowance of interest on service tax considered penal in nature.
6. Admission of additional evidence without providing an opportunity to the AO.

Detailed Analysis:

1. Disallowance of Interest Expenses under Section 36(1)(iii)
The assessee's appeal and the revenue's cross-appeal primarily revolved around the disallowance of Rs. 27,85,968/- under Section 36(1)(iii) of the Income Tax Act. The assessee had debited interest expenses of Rs. 40,64,973/- in the profit and loss account, which included interest payments to HDFC Bank. The AO disallowed the interest payment on the grounds that the properties for which the loans were taken were not used for business purposes. The CIT(A) partially upheld the AO's disallowance, directing the AO to re-compute the disallowance to the extent of Rs. 68,00,000/- used for purchasing the property. The Tribunal upheld the CIT(A)'s decision, stating that the interest payment of Rs. 12,95,595/- was used for business purposes and should be allowed, while the interest of Rs. 14,90,373/- was correctly disallowed as the property was not used for business.

2. Adhoc Disallowance of Vehicle Running and Maintenance Expenses, Interest on Car Loan, and Car Depreciation
The assessee's appeal included a ground against the adhoc disallowance of Rs. 1,30,152/- for vehicle running and maintenance, interest on car loan, and car depreciation. However, this ground was not pressed during the hearing and was dismissed.

3. Adhoc Disallowance of Telephone and Telex Charges
Similarly, the assessee's ground against the adhoc disallowance of Rs. 65,909/- on account of telephone and telex charges was not pressed during the hearing and was dismissed.

4. Disallowance of Electricity and Water Charges
The assessee also appealed against the disallowance of Rs. 3,64,409/- on account of electricity and water charges. This ground was not pressed during the hearing and was dismissed.

5. Deletion of Disallowance of Interest on Service Tax Considered Penal in Nature
The revenue appealed against the deletion of the disallowance of Rs. 12,97,627/- being interest on service tax, arguing it was penal in nature. The CIT(A) deleted the disallowance, noting that the payment was towards interest charges and not penalties. The Tribunal upheld this decision, citing the Supreme Court's ruling in Mahalakshmi Sugar Mills Co. v CIT, which states that interest is compensatory and not penal.

6. Admission of Additional Evidence without Providing Opportunity to the AO
The revenue also contended that the CIT(A) admitted additional evidence under Rule 46A without providing an opportunity to the AO. The Tribunal found no merit in this ground, stating that no additional evidence was pointed out that had been admitted without due process.

Conclusion
The Tribunal upheld the CIT(A)'s decisions on all grounds. The assessee's and the revenue's appeals were dismissed. The key points were the partial allowance of interest expenses under Section 36(1)(iii) and the deletion of the disallowance of interest on service tax. The Tribunal emphasized the need for evidence to support claims and the proper use of borrowed funds for business purposes.