2017 (8) TMI 917 - AT - Income Tax

Disallowance of interest on housing loan borrowed from Citibank - Held that - On perusal of the details filed by the assessee, we find that the bank has issued two separate confirmation letters for repayment of interest which shows that one loan is borrowed in the name of M/s Peejay Silk Mills and another in the name of M/s Jessica Impex. Though assessee claims to have borrowed both the loans for the purpose of acquisition of property, but failed to prove the nexus of the loan and purchase of property. Therefore, we are of the view that the AO was right in making disallowance towards interest paid on housing loan borrowed in the name M/s Jessica Impex. Insofar as housing loan borrowed in the name of M/s Peejay Silk Mills, on perusal of certificate of interest issued by the bank clearly says that the assessee has paid interest of ₹ 3,99,896, but the AO has allowed interest amount of ₹ 3,39,896. Thus, there is a difference of ₹ 60,000 which has been explained by the assessee that the AO has taken incorrect figure which is evident from the fact that the certificate issued by the bank clearly establishes payment of interest of ₹ 3,99,896. Therefore, we direct the AO to allow interest of ₹ 3,99,896 as claimed by the assessee as against ₹ 3,39,896. Disallowance of expenditure of staff salary, repairs and maintenance and water charges - Held that - AO, without any basis, simply divided the total expenditure on the basis of turnover which is not only illegal but illogical. We find force in the arguments of the assessee for the reason that unless the AO specifies himself nexus between the expenditure debited in the P&L Account to the receipts cannot disallow expenditure on the basis of receipts. The assessee has filed its financial statements for the relevant financial year. On going through the financial statement filed by the assessee, we find that the assessee has allocated expenditure relatable to rental income and business income. The AO, ignoring the workings filed by the assessee, disallowed expenditure on adhoc basis without any basis. Therefore, we are of the considered view that the issue needs to be reconsidered by the AO in the light of the explanation of the assessee. Hence, we set aside the issue to the file of the AO and direct him to consider the explanation of the assessee with regard to the allocation of expenditure towards rental income and business receipts. Disallowance of notional interest on loans and advances - Held that - AO as well as the CIT (A) has recorded a categorical finding that the assessee has paid interest on unsecured loans borrowed from other parties, whereas not charged any interest on loans and advances. We further observe that the assessee has failed to prove the nexus between advances and business connection. Though assessee claims that these advances become bad debt and not recoverable, but failed to file any evidence. This factual situation compel us to conclude that the assessee has advanced interest free funds to the said persons without charging any interest. Therefore, we are of the view that the assessee has failed to prove the nexus between interest free funds and loans and advances given to third parties. The CIT(A), after considering relevant facts has rightly upheld additions made by the AO. We do not find any infirmity in the order of CIT(A); hence, we are inclined to uphold the order of CIT(A) and reject the ground raised by the assessee. Disallowance of depreciation on furniture & fixture on the basis of turnover of the business and Income from house property - Held that - We find force in the argument of the assessee for the reason that the assessee has filed a financial statement explaining the calculation of depreciation wherein he had bifurcated the assets used in the business activity and assets used in the buildings which is part of Income from house property . The AO without any basis allocated depreciation on furniture and fixtures on the basis of gross turnover and disallowed depreciation relatable to the activity of Income from house property on the ground that the deduction u/s 24 has been allowed. Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of submissions of the assessee that a separate working has been furnished to explain the depreciation on furniture and fixtures, which is fully relatable to business activity of the assessee. Hence, we set aside the issue to the file of the AO and direct him to consider the issue afresh in the light of the details filed by the assessee.

Summary

Issues:
1. Disallowance of interest paid on housing loans.
2. Disallowance of expenditure on staff salary, repairs, and maintenance.
3. Disallowance of notional interest on loans and advances.
4. Disallowance of depreciation on furniture and fixture based on turnover.

Analysis:

Issue 1: Disallowance of interest paid on housing loans
The assessee had borrowed two housing loans from Citibank, one in its name and another in the name of a sister concern. The AO disallowed interest on the loan in the sister concern's name, citing lack of proof for asset acquisition. The ITAT found that the loans were indeed taken for asset acquisition but lacked evidence linking the loans to property purchase. The AO's incorrect interest calculation was rectified, directing the correct interest amount to be allowed.

Issue 2: Disallowance of expenditure on staff salary, repairs, and maintenance
The AO disallowed a portion of the expenditure based on gross receipts, without establishing a clear nexus between the expenditure and receipts. The ITAT found the AO's approach illogical and directed a reconsideration based on the assessee's explanation, highlighting the need for a specific link between expenses and income sources.

Issue 3: Disallowance of notional interest on loans and advances
The AO disallowed notional interest on business advances, as the assessee failed to charge interest on loans given. The ITAT upheld this decision, noting the lack of evidence proving a business connection between interest-free funds and advances, despite the assessee's claims of bad debts.

Issue 4: Disallowance of depreciation on furniture and fixture based on turnover
The AO disallowed depreciation on furniture & fixtures based on turnover, attributing it to "Income from house property." The ITAT disagreed, stating that the assets were for business use and directed a reassessment based on the detailed explanation provided by the assessee, emphasizing the need to differentiate between business assets and property assets.

In conclusion, the ITAT partly allowed the appeal, setting aside certain issues for the AO's reconsideration based on the explanations provided by the assessee.