2018 (7) TMI 1721 - AT - Income Tax

Disallowance of proportionate interest - sufficiency of interest free funds - Held that - In so far as the revenue does not disprove the contention of the assessee that they had interest free funds in their hands over and above the loans are advances given to the Directors as on such date, inasmuch as such interest-free funds are sufficient to advance such loans to the Directors, the presumption is that the loans would be out of the interest-free funds available with the assessee. Further the impugned order reveals that the business expediency was also pleaded before the authorities below besides demonstrating that the total amount of interest debited to profit and loss account amounting to ₹ 1,47,51,794/- was pleaded to different the bankers/lenders. The impugned order does not commented anything adverse on this aspect. Thus the disallowance of proportionate interest cannot be sustained. - Decided in favour of assessee Depreciation claimed in respect of the asset comprised of land and building components integrally - Held that - except the year under consideration, for all remaining years from purchase of the asset to its sale, depreciation was allowed on the total value of the asset without resorting to any bifurcations of the asset into the land component and building complaint, but is only for the year under consideration such a view is taken by the Assessing Officer - the rule of consistency demands that the consistent view had to be taken in similar matters of the same assessee over a period of time and to discriminate the issue for a single year is not permissible. Following the decision of the Hon ble Apex Court in the case of Radhasoami Satsang (1991 (11) TMI 2 - SUPREME COURT) find it difficult to sustain the disallowance of depreciation and the consequential addition. We therefore, direct the assessing officer to delete the disallowance - Appeal of the assessee is allowed.

Summary

Issues:
1. Disallowance of interest on borrowals
2. Disallowance of depreciation for an amount
3. Disallowance of depreciation on land component

Issue 1 - Disallowance of interest on borrowals:
The assessee appealed against the order disallowing a proportionate amount of interest on borrowed funds given as interest-free advances to Directors. The Assessing Officer invoked section 36(1)(iii) of the Income Tax Act and disallowed a sum towards the proportionate interest. The CIT(A) partially allowed relief by directing the AO to compute interest on funds deployed for investments and restrict the disallowance. The assessee argued that they had sufficient own funds to cover the interest-free advances and the investments were made to protect business interests. The paid-up capital and reserves available exceeded the advances made. The Tribunal relied on precedents and held that if interest-free funds were sufficient, investments would be presumed to be from such funds. The business expediency was also considered, leading to the direction to delete the addition of proportionate interest.

Issue 2 - Disallowance of depreciation for an amount:
The AO disallowed depreciation claimed on an office building, considering only the value of the land for depreciation. The CIT(A) upheld the disallowance, citing the purchase deed showing a composite value of land and building. The Tribunal noted that depreciation was allowed in previous and subsequent years on the total asset value without bifurcation. Following the rule of consistency, the Tribunal directed the AO to delete the disallowance and consequential addition, as the same treatment should be applied as in previous years.

Issue 3 - Disallowance of depreciation on land component:
The AO disallowed depreciation on the land component of an asset, contrary to previous and subsequent years' treatment. The Tribunal held that consistency in treatment over time was essential, and the AO's differentiation for a single year was impermissible. Relying on the decision in Radhasoami Satsang case, the Tribunal directed the AO to delete the disallowance and consequential addition, aligning with the consistent treatment in previous assessments.

In conclusion, the Tribunal allowed the appeal of the assessee, directing the AO to delete the disallowances made on interest, depreciation, and land component, emphasizing the importance of consistency in tax treatment over time.