2022 (11) TMI 460 - AT - Income Tax

Disallowance of interest expenditure on account of diversion of funds for non-business purpose - Proof of Sufficiency of interest free funds entitling diversion thereof to sister concern as such - HELD THAT - We are mindful to the fact that, the funds borrowed on interest under OD facility is meant for working capital needs of the borrower is governed by terms of loan agreement and bench is also aware of the fact that, every banker while making such a sanction invariably restricts the borrower from diverting the such loan funds or utilization thereof for any purpose outside the sanctioned tenacity by stipulating appropriate condition in the loan agreement itself. Since the appellant neither brought on the record any authorisation from the banker entitling such diversion of funds to sister concern nor placed any evidential material to substantiate such interest free payments or diversion were triggered on account of business exigencies vis- -vis obligation and commercial expediency, consequently the claim of the appellant fails the test laid by the Hon ble Supreme Court in S.A. Builders Ltd. Vs CIT 2006 (12) TMI 82 - SUPREME COURT thus we find no infirmity with the disallowance made on this count, ergo ground number 1 stands dismissed. Repairs maintenance expenditure - Revenue or capital expenditure - HELD THAT - In the present case before us, it is an admitted fact that, the appellant has occupied the premises on short term lease in a disfigured condition and carried out the extensive repairs to convert the same into workshop and showroom so has to suit its business operation to be carried therefrom under a dealership specification, but without bringing into existence any capital field / asset or rights therein, except enduring usage over a short period of lease, which naturally subjected to pre-termination, consequently no control over the term of enduring usage as well. And the question as to whether or not such extensive repairs is of enduring nature is extensively dealt in the case of Alembic Chemical Works Co. 1989 (3) TMI 5 - SUPREME COURT For the purpose of allowability of any expenditure under the Act, what is material is the classification between the capital and revenue and the same-does not recognise of any concept of deferred revenue expenditure cataloguing with enduring benefit, hence for the reason we disapprove the contention of Ld. DR s for treating the revenue expenditure as deferred expenditure, and are we are of the considered view that, the expenses incurred by the appellant squarely intra-legem to the provision of section 30(a)(i) of the Act, and the same finds fortified by the decision in Cultural Enterprises Corp. Vs CIT 1992 (1) TMI 81 - CALCUTTA HIGH COURT ergo we remove the infirmity in the order of both the tax authorities below by deleting the disallowance carried out u/s 30(a)(i) of the Act.

Summary

Issues:
1. Sufficiency of interest-free funds for diversion to sister concern.
2. Classification of repairs & maintenance expenditure as capital expenditure.

Detailed Analysis:
1. The judgment pertains to an appeal challenging the order of the Commissioner of Income Tax (Appeals) and the assessment order passed by the Assistant Commissioner of Income Tax for the assessment year 2013-14. The two main issues considered are the sufficiency of interest-free funds for diversion to a sister concern and the classification of repairs & maintenance expenditure as capital expenditure.

2. The appellant argued that the disallowance of interest expenditure on diversion of funds for non-business purposes and the disallowance of repairs & maintenance expenditure as capital expenditure were unjustified. The appellant contended that the equity capital and reserves & surplus exceeded the total amount of interest-free funds lent to the sister concern, thus justifying the diversion. Regarding repairs & maintenance expenditure, the appellant claimed that the expenses did not create any qualifying capital asset.

3. The Departmental Representative argued that the equity capital and reserves & surplus were meant for long-term commitments, while the diverted funds were interest-bearing working capital funds. The Departmental Representative also highlighted the substantial expenditure incurred in creating new structures and argued that the repairs were not undertaken under a lease obligation but were self-driven.

4. The Tribunal considered the arguments of both parties and examined the provisions of the Income Tax Act. The Tribunal first addressed the delay in filing the appeal and condoned the delay based on established legal precedents. The Tribunal then analyzed the first ground related to the disallowance of interest expenditure on diverted funds. It was observed that the diverted funds were interest-bearing borrowed funds, and the appellant failed to provide evidence of business exigencies or commercial expediency justifying the diversion. Consequently, the disallowance was upheld.

5. Moving to the second ground concerning repairs & maintenance expenditure, the Tribunal referred to Section 30 of the Act, which makes a distinction between repairs to a building occupied as a tenant and repairs when occupied otherwise. The Tribunal noted that the repairs carried out by the appellant did not result in the creation of any capital asset or enduring benefit, and thus, the disallowance as capital expenditure was unwarranted. The Tribunal cited relevant case law to support its decision.

6. Ultimately, the Tribunal partially allowed the appeal, dismissing the first ground related to interest expenditure disallowance and allowing the second ground concerning repairs & maintenance expenditure. The Tribunal's decision was based on a thorough analysis of the facts, legal provisions, and precedents cited by both parties.

7. The judgment provides a detailed analysis of the issues raised by the appellant, the arguments presented by both parties, and the Tribunal's reasoning behind the decision. It demonstrates a comprehensive understanding of the relevant legal principles and their application to the specific facts of the case.