2015 (11) TMI 534 - AT - Income Tax

Addition on interest paid to HDFC Bank - CIT(A) deleted the addition - Held that - It is undisputed fact that the assessee has invested ₹ 50 lakhs in the partnership firm and as a result of this investment, it has earned remuneration of ₹ 6 lakhs and share of income of ₹ 32,48,000/- from the firm. Unless this investment is being made, the assessee would not have earned these two incomes. The A.O. disallowed the interest paid on loan on the sole ground that the income from the partnership firm is exempt in the hands of the assessee and the remuneration received from the firm is for the services rendered by him to the firm. Therefore, there is no nexus between investments and income earned from the firm. We do not agree with the stand of the A.O., for the simple reason that there is a nexus between investment and income earned. As a result of investment in the firm, the assessee has earned these two incomes, i.e. ₹ 6,00,000/- remuneration, which is taxable in the hands of the assesse and also share of profit of ₹ 32.48 lacs, which is exempt, as it has already suffered tax in the hands of the firm. Therefore, expenditure incurred on the borrowed funds for investments in share capital of firm should be allowed as business expenditure. - Decided in favour of assessee. Disallowance of standard deduction and interest paid on housing loan - Held that - The property so let out is consisting of land and building. The assessee has acquired the said property in the year 2004 by borrowing a loan from commercial bank and assessed the income under the head income from house property right from the beginning. The department accepts the stand of the assessee in the earlier years, cannot dispute now under the same set of facts. The AO was of the view that the property was predominantly was a vacant site and having a small building cannot be considered as a house property to assess the income from said property under income from house property. We do not agree with the contention of the Assessing Officer, for the reason that the annual vale of any buildings or land appurtenant thereto of which the assessee is a owner, income from such property is chargeable under the head income from house property. Further, Once the income is assessable under the head house property, consequent deductions being standard deduction u/s 24(a) and interest paid on borrowed capital u/s 24(b) should be allowed while computing the income from house property. The CIT(A), has rightly deleted the additions made by the Assessing Officer. - Decided in favour of assessee. Estimated income from the house property - CIT(A) deleted the addition - Held that - The two properties are different in the sense that assessee s property is a residential property situated in a residential locality of Nallakunta area, Hyderabad, whereas assessee wife property which is situated at Himayatnagar, a posh commercial locality. To arrive at an annual value one has to refer to section 22 of the Act. The said section prescribes the mode of computation of annual value which is the higher of the gross annual value received by the assessee, municipal valuation and fair market value of the property. In the present case, the municipal valuation of the said property as per the assessee s claim is ₹ 10,544/- and the assessee has received annual rent of ₹ 96,000/-. Further, the fair market value of the property cannot be ascertained from the same locality as the relevant materials are not available on record. So, from the above, it is very clear that the gross rent received by the assessee is higher of these three. The assessee has rightly adopted the gross annual value of ₹ 96,000/-, whereas the assessing officer without bringing on record any comparable cases, simply compared the property, which is situated in a different locality and estimated the income. The CIT(A), after examining the details of the property deleted the additions made by the A.O. Therefore, for the reasons stated above, we do not find any infirmity in the order of the CIT(A) and accordingly delete the additions made by the A.O. and dismiss the ground raised by the revenue. - Decided in favour of assessee. Disallowance of Advertisement charges u/s 40a(ia) - Held that - The issue is squarely covered in favour of the assessee by the decision of this coordinate bench in the case of Merilyn Shipping & Transport Vs. ACIT (2012 (4) TMI 290 - ITAT VISAKHAPATNAM). By respectfully following the decision cited supra, we delete the additions made by the assessing officer and accordingly ground raised by the revenue is dismissed.- Decided in favour of assessee. Notional interest on investment in firms - Held that - There was no provision in the Income-Tax Act empowering the Income-Tax authorities to include the interest income which was not due or not collected, See3F Industries Ltd. Versus Joint Commissioner of Income-tax, Rajamundry Range 2014 (9) TMI 311 - ITAT VISAKHAPATNAM - Decided in favour of assessee. Notional Interest of Investments in Company - Held that - A.O. cannot estimate notional interest without establishing that either interest is received or accrued to the assessee. Unless, there is contractual obligation to charge interest, the question of income accrue or arise does not arise. The A.O., cannot sit in the place of a businessman and decide how to conduct business. Every prudent businessman makes investment with the intention to earn income. But, the fact is that all investments may not yield income. The A.O. has not given any cogent reason to establish that such legal right to receive the income has arisen to the assessee. There is no evidence with the A.O., to show that the assessee has received any interest income. Therefore, the A.O., is not correct in estimating the income. The CIT(A), rightly deleted the addition after considering the facts.- Decided in favour of assessee.

Summary

Issues Involved:

1. Interest paid to HDFC Bank.
2. Disallowance of standard deduction and interest paid on housing loan.
3. Estimated income from house property.
4. Disallowance of advertisement charges u/s 40a(ia).
5. Notional interest on investments in firms.
6. Notional interest on investments in companies.

Detailed Analysis:

Interest paid to HDFC Bank:

The assessee borrowed Rs. 50 lakhs from HDFC Bank and invested the same in a partnership firm, claiming the interest paid on the loan as a business expenditure. The Assessing Officer (A.O.) disallowed this interest, arguing that the deduction was claimed without deriving any taxable income. The CIT(A) deleted this addition, noting that the assessee received Rs. 6 lakhs as remuneration from the firm, taxable under income from business, and Rs. 32,48,000 as share income, exempt under section 10(2A) of the Act. The CIT(A) reasoned that the income was a result of the investment in the firm from borrowed funds. The tribunal upheld the CIT(A)'s decision, stating that there was a clear nexus between the investment and the income earned.

Disallowance of standard deduction and interest paid on housing loan:

The assessee owned a property let out to a partnership firm and claimed deductions under section 24 of the Act. The A.O. assessed the income from this property under the head 'income from other sources' and disallowed the deductions. The CIT(A) allowed the claim, holding that the income from the property should be assessed under 'income from house property.' The tribunal agreed, noting that the property was consistently assessed under 'income from house property' in previous years and the deductions under section 24 were applicable.

Estimated income from house property:

The A.O. estimated the gross annual rental value of a property owned by the assessee based on the rent paid for another property owned by the assessee's wife. The CIT(A) deleted the addition, noting that the properties were in different localities and had different characteristics. The tribunal upheld the CIT(A)'s decision, emphasizing that the municipal valuation and actual rent received were more appropriate measures for determining the annual value.

Disallowance of advertisement charges u/s 40a(ia):

The A.O. disallowed advertisement expenditure of Rs. 23,974 due to non-deduction of tax at source. The CIT(A) deleted the addition, relying on a coordinate bench decision. The tribunal confirmed this decision, following the precedent set by the coordinate bench.

Notional interest on investments in firms:

The A.O. estimated notional interest on the assessee's investments in partnership firms, arguing that the assessee should have received interest. The CIT(A) deleted the addition, stating that there was no provision in the Act to assess income that neither accrued nor was received. The tribunal upheld the CIT(A)'s decision, noting that the partnership deed did not provide for interest on the partner's capital and there was no evidence of interest being received.

Notional interest on investments in companies:

The A.O. estimated notional interest on the assessee's investment in a company, arguing that the assessee should have received interest. The CIT(A) deleted the addition, noting that the company had not commenced commercial operations and there was no contractual obligation to charge interest. The tribunal upheld the CIT(A)'s decision, emphasizing that the A.O. cannot estimate notional interest without evidence of interest being received or accrued.

Conclusion:

The tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The tribunal emphasized the importance of actual receipt or accrual of income and the absence of provisions in the Act to assess notional income. The judgments were pronounced in the open court on 30th September 2015.