2018 (10) TMI 1352 - AT - Income Tax

Addition u/s 2(22)(e) - Flat purchased for providing residential accommodation to its Managing Director is a Non-Business Transaction of the appellant - cost of the flat that was provided as residential accommodation to the Managing Director is a deemed dividend within the meaning of Section 2(22)(e) - Held that - The assessee company neither transferred the funds outside the company nor to the director, therefore, the provision of Section 2(22)(e) is not applicable to the facts of the case. Accordingly, we set aside the finding of the CIT(A) in this regard. Since the finding given by lower authorities attracting the provision of Section 2(22)(e) of the Act is not justifiable, therefore, ancillary claim is also not liable to be declined. So far as disallowance of repayment of loan installment is concerned the CIT(A) has deleted the disallowance subject to verification by the AO, we do not find any infirmity in the direction of CIT(A) for allowing verification. However, the claim of interest to the tune of ₹ 24,62,285/- is revenue in nature, therefore, is liable to be allowed. Accordingly, we allow the claim of the assessee company for such interest expenditure on bank loan taken for the purpose of the assessee business. So far as the claim of depreciation is concerned, we are of the view that the assessee is entitled to claim the depreciation @ 5% of the total value of the purchase of ₹ 34,72,037/-. The claim of the electricity charges has not been pressed by Ld. AR, therefore, the same is hereby dismissed being not pressed. Accordingly, the issues nos. 1, 2, 4 & 5 are hereby decided in favour of the assessee and against the revenue. Foreign travel expenses disallowance - Held that - The assessee purchased the air ticket of jet airways from Mumbai Newark-Mumbai on 20.10.2009. The assessee purchased the ticket in cash. A mail was found in which it was stated that the Jet airways detailed about the cash payment on 09 October. The contents speaks about the cash payment, therefore, the claim of the assessee was declined u/s 40A(3). The facts are not distinguishable at this stage. Moreover, no business expediency is on record in connection with the said transaction/travelling. CIT(A) has rightly confirmed the addition and in this regard the finding is not liable to be disturbed. Accordingly, this issue is decided in favour of the revenue against the assessee.

Summary

Issues:
1. Disallowance of flat purchase for Managing Director
2. Treatment of flat cost as deemed dividend
3. Disallowance of loan installment repayment
4. Disallowance of interest payment on bank loan
5. Disallowance of depreciation on flat
6. Disallowance of electricity charges
7. Disallowance of foreign travel expenses

Issue 1 to 6 - Disallowance of Flat Purchase for Managing Director:
The assessee, a private limited company, purchased a flat for its Managing Director (MD) near its hospital. The Assessing Officer (AO) disallowed the claim under Section 2(22)(e) of the Income Tax Act, stating lack of business nexus. The CIT(A) upheld the AO's decision. The assessee argued that the purchase was for business convenience and not a violation of any tax laws. Citing legal precedents, the tribunal found no fund transfer to the director, thus Section 2(22)(e) did not apply. The AO's interference in business decisions was deemed unjustified. The tribunal allowed the claim for depreciation, interest payment, and loan repayment, dismissing the disallowances. Issues 1, 2, 4, and 5 were decided in favor of the assessee.

Issue 7 - Disallowance of Foreign Travel Expenses:
The assessee claimed foreign travel expenses paid in cash for a Jet Airways ticket. The AO disallowed the claim under Section 40A(3) due to lack of business expediency. The CIT(A) upheld the disallowance. The tribunal agreed with the lower authorities, finding no justification for the cash payment and lack of business necessity. Issue 7 was decided in favor of the revenue against the assessee.

In conclusion, the tribunal partly allowed the assessee's appeal, overturning disallowances related to the flat purchase for the MD, loan installment repayment, interest payment, and depreciation. However, the disallowance of foreign travel expenses was upheld. The order was pronounced on 24.10.2018.