2016 (9) TMI 67 - AT - Income Tax

Allowable business expenditure - directors remuneration - Held that - As regards directors remuneration debited in the profit and loss account we find that it was for the purpose of business. The directors remuneration is authorized by Article of Association of Company which is within the limit. The statutory auditor of the company has not commented against this expenditure. It is a part of administrative expenditure. Without using the services of the directors, the key decisions of the business cannot be taken. Therefore, it is essential to give remuneration as per Rules and Regulations of the company. In view of this, this expenditure is allowable as business expenditure. Disallowance of interest on bank loans and processing charges on such loans - AO has disallowed these expenditure because no any business activity has been done - Held that - After analyzing the balance sheet of the company, we find that there is no vast difference between the figures of balance sheet as compared to the previous year except schedule-9 relating to loans and advances (advances recoverable in cash or in kind), which has been increased by ₹ 8,44,28,188/- in asset side of the balance sheet and in schedule 2, secured loans has been enhanced by ₹ 8,17,55,868/- at liability side in the balance sheet. The company has paid interest & processing charges on this loan to the bank. The interest paid is allowable u/s. 36(1)(iii) of the IT Act for purchase of asset only when such assets are first put to use in the business. It is clear from the audited accounts of the company and submissions made before the lower authorities that the aforesaid term loan has been given as advance for purchase of land. However, the record reveals that no such land stood purchased by the assessee company. Therefore, once the asset in the form of land, for which the assessee is said to have given the advance, does not stand proved in possession of the assessee, there is no question of its use for the purpose of business. Only advancing the money for acquisition of asset does not qualify the deduction of interest unless the said asset is acquired by the assessee company and is put to use by it for the purpose of business. In the instant case, no such circumstances exist. Therefore, in these peculiar facts and circumstances, in our considered opinion, the assessee is not entitled to get deduction of interest and processing charges on the impugned loan as revenue expenditure. Decided partly in favour of assessee

Summary

Issues:
1. Disallowance of business expenditure by AO and CIT(A).
2. Disallowance of interest on FDR and loans under Section 14A and Rule 8D.
3. Denial of interest charges under Section 234A, 234B, 234C, and 234D.

Issue 1: The assessee appealed against the disallowance of business expenditure by the Assessing Officer (AO) and confirmed by the CIT(A). The AO disallowed expenses totaling &8377;1,28,61,917, stating they were not related to the business due to lack of business activity during the year. The appellant argued that the expenses were wholly for business purposes, supported by evidence. The Tribunal found that the directors' remuneration, interest on bank loans, and processing charges on loans were allowable as business expenditure as they were essential for business operations and within legal limits. The Tribunal allowed this ground of appeal in part.

Issue 2: The AO treated interest on FDR and loans as income from other sources, disallowing them under Section 14A and Rule 8D. The appellant contended that these expenses were revenue expenditures related to business activities. The Tribunal, relying on a previous High Court decision in favor of the assessee, held that the disallowance under Section 14A should be deleted. However, regarding interest and processing charges on loans, the Tribunal found that the loan was not utilized for business purposes, thus disallowing the deduction of interest and processing charges as revenue expenditure.

Issue 3: The appellant challenged the imposition of interest charges under Section 234A, 234B, 234C, and 234D. The Tribunal considered these charges as consequential and needing no specific adjudication.

In conclusion, the Tribunal partly allowed the appeal of the assessee, ruling in favor of the appellant on the disallowance of business expenditure and interest under Section 14A, while upholding the disallowance of interest and processing charges on loans. The interest charges under Section 234A, 234B, 234C, and 234D were deemed consequential and required no further adjudication.