2023 (3) TMI 209 - AT - Income Tax

Disallowance of interest expenditure - allowable u/s 24(a) or u/s 36(1)(iii) - Whether entire expense is duly allowable? -whether the property in dispute was acquired by the assessee out of the loan taken from the Bajaj Auto Finance Ltd.? - HELD THAT - The onus lies upon the assessee but he did not furnish any detail to this effect as far as the quantification of the amount of loan adjusted against Bajaj Finance and other utilization. In the absence of sufficient documentary evidence, we hold that the amount borrowed by the assessee from the company namely Capital First Ltd over and above the amount of loan settled against such borrowing was not utilized for the purpose of acquiring the assets. Thus, we hold that the assessee is eligible for the deduction against the rental income on account of the interest cost incurred by it in proportion to the borrowing from Capital First Ltd utilized for repayment to the Bajaj Auto Finance Ltd loan. Whether such extra amount of interest can be allowed as deduction u/s 36(1)(iii) which provides that the amount of interest paid on capital borrowed for the purpose of business should be allowed as deduction while computing business income ? - It is the settled position of law that any expense incurred by the assessee for the purpose of the business the same can be allowed as deduction provided it is not capital or personal in nature. It is the onus upon the assessee to justify based on the documentary evidence the utilization of the loan borrowed by the assessee from Capital First Ltd over and above the amount used for the settlement of outstanding loan from Bajaj Auto Finance Ltd. On perusal of the financial statements of the assessee pertaining to the different years, we note that the assessee is not carrying out any business activity. Admittedly, the assessee is a corporate and legal entity. Indeed, the assessee to maintain legal entity has to incur certain expenses such as audit expenses, ROC filing charges etc. To maintain the legal status of the assessee, it is not required to incur the expenses beyond the certain points until and unless some cogent material is brought on record by the assessee. Considering the fact that there was no business carried on by the assessee during the year under consideration and in immediate previous year, we therefore hold that the amount of loan borrowed by the assessee from the Capital First Ltd over and above the amount utilized for settlement of outstanding loan of Bajaj Auto Finance Ltd was not for the purpose of business. Hence the interest cost incurred thereon cannot be considered for the purpose of the business. Hence, the ground of appeal of the assessee is partly allowed. Addition on account of mismatch in the interest amount with form 26AS - whether the amount received by the assessee from the HDFC Bank represents the income in the hands of the assessee as the bank has made the payment to the assessee after deducting the TDS u/s 194C of the Act which is reflecting in the Form-26AS generated by the Department? - HELD THAT - We note that the assessee before the authorities below has filed the copy of the ledger and receipt issued by Indian Electric Corporation, payments received from the bank, invoice issued by Indian Electric Corporation in the name of the bank and the latter issued by the assessee to the bank for the reimbursement of the expenses which are placed - None of the document placed in the paper book has been doubted by the authorities below. Likewise, the authorities below have not taken any confirmation from the bank or the company namely Indian Electric Corporation so as to verify the genuineness of the claim of the assessee. But the revenue has disbelieved the version of the assessee despite having many information in respect of which no doubt was raised. Undeniably, there was no direct evidence available on record from the bank stating that the payment made to the assessee was representing the reimbursement of the expenses incurred by the assessee on behalf of the bank. But in the absence of such evidence, the revenue is not expected to ignore the other information submitted by the assessee which have been elaborated in the preceding paragraph. The transaction shown in form 26AS cannot be taken as the gospel truth that it represents the income in the hands of the assessee especially in a situation where the assessee has contended that the above amount representing was reimbursement of the expenses. In such a situation, the Revenue is expected to be more vigilant before reaching to the conclusion that the assessee has not shown certain income. The scope of necessary verification in such facts and circumstances is widened in order to disprove the contention raised by the assessee during the assessment proceedings. But we find that no such exercise has been done by the authorities below. Accordingly, in the absence of necessary verification and having any doubt on the details filed by the assessee, we do not find any reason to uphold the finding of the learned CIT(A). Hence, we direct the AO to delete the addition made by him. Thus, the ground of appeal of the assessee is hereby allowed. Disallowance of insurance premium - assessee has not furnished the documentary evidence for payment of such insurance premium - HELD THAT - In the present case, the assessee has claimed insurance expense as claimed as prepaid expenses incurred in the earlier year. For this purpose, we have referred the balance sheet of the last year ending as on 31st March 2013 and find that the assessee in the immediate preceding year has shown prepaid expenses under the head short-term loans and advances amounting to ₹68,425/- only which was written off in the year under consideration. Thus, to this extent it cannot be said that the assessee has claimed any expense which is bogus in nature. The books of accounts of the assessee were audited and no defect of whatsoever was pointed out by the AO during the assessment proceedings. Thus, we hold that the assessee has incurred the expenses. Undeniably, the assessee has not been carrying out any business activity but the assessee being our body corporate has to carry out necessary compliance to maintain its status. For this purpose, the assessee may require to employ some staff, incur certain administrative expenses. Thus it cannot be said that the expenses claimed by the assessee will be ineligible for deduction in the absence of any business activity. The genuineness of the expenses cannot be doubted in the year under consideration as the same is arising from the earlier year. Accordingly, we are not convinced with the finding of the authorities below. Hence, the ground of appeal of the assessee is hereby allowed.

Summary

Issues Involved:

1. Disallowance of interest expenditure of Rs. 76,00,227.
2. Disallowance of Rs. 16,29,800 due to mismatch in Form 26AS.
3. Disallowance of insurance expense of Rs. 68,425.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure of Rs. 76,00,227:

The first issue concerns the disallowance of interest expenditure amounting to Rs. 76,00,227. The assessee, a private limited company engaged in trading vehicles, claimed that it had acquired a property for business purposes using a loan from Bajaj Auto Finance Ltd. This property was later let out to HDFC Bank, earning a rental income of Rs. 19,53,373. The assessee further claimed that it took another loan from Capital First Ltd to repay the initial loan and incurred interest expenses of Rs. 76,00,227, which it sought to deduct under section 24 of the Income Tax Act.

The Assessing Officer (AO) disallowed this claim, arguing that there was no evidence proving that the loan from Bajaj Auto Finance Ltd was used to acquire the property. Additionally, the AO noted that the assessee had ceased its business operations, and there was a possibility that the borrowed funds were used for investments in shares.

The CIT(A) upheld the AO's decision, stating that the loan from Capital First Ltd was not used for business purposes but for repaying another loan. The CIT(A) concluded that the interest expenses could not be allowed as deductions.

Upon appeal, the Tribunal examined the circumstantial evidence and financial statements, concluding that the loan from Bajaj Auto Finance Ltd was indeed used to acquire the property. However, the Tribunal found that the balance amount of the loan from Capital First Ltd was not utilized for acquiring the property and thus could not be allowed as a deduction under section 36(1)(iii) of the Act. The Tribunal allowed the deduction proportionate to the amount used for repaying the Bajaj Auto Finance Ltd loan.

2. Disallowance of Rs. 16,29,800 Due to Mismatch in Form 26AS:

The second issue pertains to the disallowance of Rs. 16,29,800 due to a mismatch in Form 26AS. The AO observed that HDFC Bank had made a payment of Rs. 16,29,800 to the assessee, which was not included in the assessee's income. The assessee contended that this amount was a reimbursement for expenses incurred on behalf of HDFC Bank.

The CIT(A) confirmed the AO's addition, stating that no documentary evidence was provided to support the assessee's claim.

The Tribunal, however, found that the assessee had submitted various documents, including ledgers and receipts, indicating that the amount was indeed a reimbursement. The Tribunal noted that the authorities did not verify these documents or seek confirmation from HDFC Bank or Indian Electric Corporation. The Tribunal concluded that the amount did not represent income and directed the AO to delete the addition.

3. Disallowance of Insurance Expense of Rs. 68,425:

The third issue involves the disallowance of an insurance expense of Rs. 68,425. The AO disallowed this expense, arguing that the assessee had not carried out any business activity and did not furnish documentary evidence for the payment.

The CIT(A) upheld the AO's decision, citing the lack of evidence.

The Tribunal reviewed the balance sheet and found that the insurance expense was shown as prepaid in the previous year and written off in the current year. The Tribunal noted that the books of accounts were audited without any defects pointed out by the AO. The Tribunal concluded that the expense was genuine and necessary for maintaining the corporate status of the assessee, allowing the deduction.

Conclusion:

The Tribunal partly allowed the appeal, granting relief on the disallowance of interest expenditure proportionate to the loan repayment, deleting the addition of Rs. 16,29,800, and allowing the insurance expense of Rs. 68,425.