2016 (4) TMI 754 - AT - Income Tax

Disallowance on account of interest - Held that - If the money is utilised in a way that makes commercial sense and helps in running the business of the assessee more efficiently, then it can be said that the interest paid in respect of the borrowed money has been incurred for the purposes of commercial expediency. Moreover, the Ld. AR has demonstrated that as per the Balance sheet, the assessee had a capital of ₹ 2.73 crores and the profit for the year was ₹ 16.94 lacs. These figures, in our opinion, were sufficient to meet the investment requirements as well as the amount given as advance to M/s Victory Enterprises. These facts were before the Ld. CIT (A) also but he has not specifically dealt with them in the impugned order. Therefore, on an overall view of the facts of the case and in the case of S.A. Builders Ltd. vs CIT (2006 (12) TMI 82 - SUPREME COURT ) we direct the Assessing Officer to delete the disallowance of ₹ 54,477/- on account of interest. - Decided in favour of assessee Disallowance on account of 1/5th of the telephone expenses - Held that - Looking into the quantum of disallowance as well as a specific prayer of the assessee that the quantum of disallowance may be fixed at 1/10th, we feel that it would serve the interest of justice if the disallowance is restricted to 1/10th of the total telephone expenses. - Decided in favour of assessee Value of sales consideration for the purposes of section 50C - capital gain computation - Assessing Officer as well as the Ld. CIT(A) have doubted the veracity of the Ikrarnama or the Agreement on the ground that the same is signed by only one person whereas the land has been finally sold to three parties - Held that - In the case of K.K. Nag Ltd. vs. ACIT (2012 (6) TMI 184 - ITAT PUNE ) after detailed discussion of the provisions laid down u/s 50C of the Act has held that the discretion granted in such a situation is required to use in a judicious manner. Section 50C is a deeming provision and ostensibly involves creation of an additional tax liability on the assessee and, therefore, notwithstanding the presence of the expression may in section 50C (2)(a), the AO in this case ought to have referred the matter to the valuation officer for ascertaining the value of the capital asset in question. The order of the Commissioner (Appeals) was thus held to be set aside and the AO was directed to adopt the course mentioned in section 50C (2)(a) and thereafter proceed to determine capital gain on sale of land and building. Respectfully following the ratio of decisions as above, we, while setting aside the orders of the authorities below on the issue, direct the AO to adopt the course mentioned in section 50C(2)(a) and thereafter, proceed to determine capital gain on sale of the properties in question after affording opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of Rs. 54,477 on account of interest-free loans/advances.
2. Disallowance of Rs. 21,132 being 1/5th of telephone expenses.
3. Addition of Rs. 20,32,177 as alleged short-term capital gains under Section 50C of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Rs. 54,477 on account of interest-free loans/advances:
The Assessing Officer (AO) noted that the assessee had advanced interest-free loans to M/s Victory Enterprises and Panipat College of Textile Tech. Pvt. Ltd., without any business dealings, while claiming bank interest expenses of Rs. 11,42,875. Consequently, the AO disallowed Rs. 54,477, calculated at 12% interest on these advances. The CIT(A) upheld this disallowance, stating the assessee failed to substantiate the business purpose of these advances. The assessee argued that the investment in Panipat College was for commercial expediency and that surplus funds were available for the loan to M/s Victory Enterprises. The Tribunal, referencing the Supreme Court's decision in S.A. Builders Ltd. vs CIT, found that the investment in Panipat College was commercially expedient and that the assessee had sufficient funds for the advances. Therefore, the Tribunal directed the AO to delete the disallowance of Rs. 54,477.

2. Disallowance of Rs. 21,132 being 1/5th of telephone expenses:
The AO disallowed 1/5th of the telephone expenses, amounting to Rs. 21,132, which the CIT(A) confirmed. The assessee contended that all telephone expenses were for business purposes but could not provide evidence. The Tribunal, considering the quantum and the assessee's request to reduce the disallowance to 1/10th, restricted the disallowance to 1/10th of the total telephone expenses, thereby allowing this ground of appeal.

3. Addition of Rs. 20,32,177 as alleged short-term capital gains under Section 50C:
The assessee declared short-term capital gains of Rs. 1,19,570 from the sale of land. The AO, noting the circle rate of the property was Rs. 39,52,177 against the declared sale price of Rs. 19,20,000, invoked Section 50C and added Rs. 20,32,177 to the capital gains. The assessee argued that the deal was initiated before the circle rate hike and provided an 'Ikrarnama' (agreement) as evidence. However, the AO and CIT(A) found the 'Ikrarnama' unconvincing and upheld the addition. The Tribunal noted that the AO failed to refer the valuation to the Valuation Officer as required under Section 50C(2) when the assessee disputed the valuation. Citing judicial precedents, the Tribunal directed the AO to refer the valuation to the Valuation Officer and determine the capital gains accordingly, thus allowing the ground for statistical purposes.

Conclusion:
The Tribunal allowed the appeal by directing the AO to delete the disallowance of Rs. 54,477, restrict the disallowance of telephone expenses to 1/10th, and refer the property valuation to the Valuation Officer for accurate determination of capital gains. The appeal was thus allowed in favor of the assessee.