2017 (6) TMI 913 - AT - Income Tax

Addition on account of income from house property from a vacant property - notional income - annual value of the property computation - Held that - When the assessee has already stated that the impugned property is used as a transit house and has also given necessary details of work being done there such as supply, etc of aluminum glazing and ACP, the rejection of this contention of the assessee is not proper. In fact the building is under furnishing itself shows that it is being used and occupied by the assessee for the purpose of the business. Even otherwise there is no evidence that property is let or being used by the assessee for any other purposes. In view of this mere rejection of the submission of the assessee cannot be used to tax the income from the impugned property. Hence, we direct AO to delete the addition on account of notional income u/s 23. Further, it is also stated that property is lying vacant therefore, according to the provisions of section 23(1)(c) it cannot be charged to tax. - Decided in favour of assessee Disallowance on account to interest to partners - Held that - Where the drawings are deemed to have been made by the partners on day to day basis then respective profits should also have been credited on day to day basis. The ld DR could not point out any contrary decision. In the facts of the present case the opening balance of the partner capital account is ₹ 3457875/-. Profits earned during the year is ₹ 5804796/- and drawings of the partners is ₹ 2864259/- which makes the closing balance of ₹ 6398412/-. From the above figures it is apparent that profits are much higher then the drawings and therefore, the reasoning given by the coordinate bench clearly applies to the facts of the present case. Therefore, on relying on Deval Utensil Factory case 2005 (8) TMI 328 - ITAT PUNE-B we direct the ld Assessing Officer to delete the disallowance confirmed by ld CIT(A) on account of excess interest paid to the partners on capital.- Decided in favour of assessee Addition u/s 40A(3) - Held that - No reason to dislodge the findings of the lower authorities in disallowance of the above, which is clear cut violation of section 40A(3) paid on 24.10.2008 in cash. - Decided against assessee

Summary

Issues Involved:
1. Addition of ?45,000 on account of income from house property from a vacant property at Ghaziabad.
2. Disallowance of ?1,24,383 on account of interest on partners' capital.
3. Disallowance of ?27,300 on account of cash expenses under Section 40A(3).

Issue-wise Detailed Analysis:

1. Addition of ?45,000 on account of income from house property:
The assessee, a partnership firm, filed its return of income without showing income from a flat at Indirapuram, Ghaziabad under the head "income from house property." The Assessing Officer (AO) computed the annual value of the property at ?65,000 based on an inspector's report, leading to a taxable income of ?45,500 after deductions. The assessee argued that the property was used for business purposes and should be excluded under Section 22 of the Income Tax Act. The CIT(A) upheld the AO's decision, stating that the property was not disclosed until confronted with AIR information, and the explanation provided by the assessee was deemed an afterthought. The Tribunal found that the property was used as a transit house for business purposes, and there was no evidence of it being let out or used otherwise. Thus, the addition of ?45,000 was deleted, and the appeal on this ground was allowed.

2. Disallowance of ?1,24,383 on account of interest on partners' capital:
The AO disallowed interest paid to partners, calculated on the opening balance, instead of on a daily reducing balance method as per the decision in Architectural Associates vs. ACIT. The CIT(A) upheld the disallowance, stating that the interest should be computed on daily balances after considering drawings and monthly remuneration. The Tribunal, however, noted that the partnership deed specified interest on the opening balance, and the profits earned were higher than the drawings. Citing a coordinate bench decision, it was held that interest should be allowed as per the partnership deed, leading to the deletion of the disallowance of ?1,24,383. The appeal on this ground was allowed.

3. Disallowance of ?27,300 on account of cash expenses under Section 40A(3):
The AO disallowed ?27,300 paid in cash on 24.10.2008, as it violated Section 40A(3). The assessee's argument that the vendor did not accept cheque payments was rejected by both the AO and CIT(A). The Tribunal upheld the disallowance, finding no reason to overturn the lower authorities' decisions. The appeal on this ground was dismissed.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the additions related to the income from house property and interest on partners' capital, while upholding the disallowance of cash expenses. The order was pronounced in the open court on 18/04/2017.