2019 (5) TMI 274 - AT - Income Tax

Disallowance u/s 36(1)(iii) - proportionate interest disallowance on interest free advances - nexus been established by AO in between the interest free advances and the interest bearing borrowed fund? - HELD THAT - AO himself admitted that on the loans and advances given by the assessee out of the borrowed funds by using the OD facility the interest was earned, he therefore allowed the interest expenditure to the extent of ₹ 7,17,875/-. As regards to the other interest free advances, the bank statement of the assessee placed at page no. 16 of the assessee s compilation reveals that the capital of the assessee as on 31.3.2012 was at ₹ 3,48,04,747/- and the Assessing Officer pointed out in the assessment order that the assessee had given interest free advances to the family and relatives for a sum of ₹ 2,79,00,000/- which shows that the interest free funds in the form of capital were more than the interest free loans given to the family and relatives. In the present case, no nexus had been established by AO in between the interest free advances and the interest bearing borrowed funds, therefore, the disallowance made by the Assessing officer out of the interest paid by the assessee and sustained by the CIT(A) was not justified. Accordingly the same is deleted. - Decided in favour of assessee. Disallowance of car expenses - AO was of the view that 1/5th of the expenses were personal in nature - assessee submitted that the disallowance made by the Assessing Officer and sustained by the Ld. CIT(A) was highly excessive - HELD THAT - Major disallowance was worked out on account of depreciation amounting to ₹ 2,79,870/- which is a statutory deduction. If such figure is reduced from the figure worked out by the Assessing Officer the remaining amount comes at ₹ 1,38,995/- while the assessee has already disallowed suo motu a sum of ₹ 1,92,230/-. Therefore the disallowance made by the Assessing Officer and sustained by the CIT(A) at ₹ 2,26,635/- (₹ 4,18,665 ₹ 1,92,230/ ) appears to be excessive.Therefore, to meet the ends of justice restrict the addition made by the Assessing Officer and sustained by the Ld. CIT(A) at ₹ 50,000/- instead of ₹ 2,26,635/-. - Decided in favour of assessee partly.

Summary

Issues Involved:
1. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Disallowance of car expenses, depreciation, telephone, and traveling expenses on account of estimated personal use.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure under Section 36(1)(iii):

The assessee challenged the disallowance of ?13,77,730/- out of interest expenditure by the Assessing Officer (AO) under Section 36(1)(iii) of the Income Tax Act, 1961. The AO observed that the assessee had given interest-free advances to friends and family, which were not for business purposes, while claiming interest expenditure in the P&L Account. The AO calculated the total interest expenditure claimed by the assessee as ?26,62,621/- and allowed ?7,17,875/- where the direct nexus between borrowed funds and interest income was established. The remaining ?13,77,730/- was disallowed.

The assessee argued that no part of the borrowed funds was used for the advances and that these advances were made from internal accruals and non-interest-bearing funds, including the capital of ?3.71 crores. The assessee also cited various case laws to support their claim. However, the CIT(A) upheld the AO's disallowance, stating that the assessee did not have sufficient interest-free funds to make the advances and that the nexus between borrowed funds and interest-free advances was established.

Upon appeal, it was noted that the assessee's capital as on 31.3.2012 was ?3,48,04,747/-, which exceeded the interest-free advances of ?2,79,00,000/-. Since no nexus was established between the interest-free advances and the interest-bearing borrowed funds, the disallowance of ?13,77,730/- was deemed unjustified and was deleted.

2. Disallowance of Car Expenses, Depreciation, Telephone, and Traveling Expenses:

The AO disallowed ?2,26,635/- out of car expenses, depreciation, telephone, and traveling expenses, citing personal use. The AO calculated the disallowance at 1/5th of the total expenses, amounting to ?4,18,865/-, and after considering the assessee's own disallowance of ?1,92,230/-, the net disallowance was ?2,26,635/-.

The assessee contended that the expenses were incurred for business purposes and that the AO's disallowance was based on mere suspicion without any specific evidence of personal use. The CIT(A) upheld the AO's disallowance, agreeing that personal use could not be ruled out in the absence of detailed records.

Upon appeal, it was noted that the major disallowance was on account of depreciation, a statutory deduction. After reducing the depreciation amount, the remaining disallowance was ?1,38,995/-, while the assessee had already disallowed ?1,92,230/-. Therefore, the disallowance of ?2,26,635/- was considered excessive. To meet the ends of justice, the disallowance was restricted to ?50,000/-.

Conclusion:

The appeal was partly allowed, with the disallowance of ?13,77,730/- on interest expenditure deleted and the disallowance on car expenses, depreciation, telephone, and traveling expenses reduced to ?50,000/-.