2023 (11) TMI 731 - AT - Income Tax

Estimation of notional interest income for making the disallowance out of interest expenditure - AO reproduced the details of eight entities to whom the assessee has given loan between 01.04.2013 and 31.03.2014 on which interest rate was determined but not charged - HELD THAT - As the assessee has demonstrated that it is in the business of finance. It has earned interest income on the loans advanced by it at Rs. 2.38 crores during this activity, there could be certain situation, where it failed to receive interest from all its loanees. The ld. Assessing Officer ought to have not over emphasized about the conduct of the assessee for not charging the interest. It is just a normal business incident and in the absence of any interest income, according to the assessee, the notional interest income cannot be estimated for making the disallowance out of interest expenditure. We allow this ground of appeal and delete the addition. Disallowance of garden visit expenses - AO has disallowed 10% of such expenditure on the ground that certain payments have been made through self-made vouchers without any addresses of the recipients - HELD THAT - AO has unnecessarily disbelieved the vouchers of petty expenses for adopting a method of disallowing expenditure on adhoc basis. He has not specifically pointed out which vouchers were doubtful and how the nature of expenses could be construed as not related to the business. Therefore, the findings of the ld. Assessing Officer is not sustainable. Disallowance out of the first head of expenditure is deleted. Disallowance of car expenditure - It has pointed out which car is being used by which partners or the employees - We find that the assessee has been maintaining details and ld. Assessing Officer has not pinpointed any specific thing except observing that log-book is not maintained. It is to be appreciated that nowadays facility of small cars is not a luxury, rather a necessity and it is quite difficult to maintain log-book by a businessman. The ld. Assessing Officer ought to have not devoted much energy on such type of petty issues. Disallowance of telephone expenses - There is no disallowance out of telephone charges because it is not the era of old days when thirty rupees was required to pay by talking on STD for a minute. Every individual is having mobile phone number and the data is quite cheap. Therefore, this type of disallowance is not sustainable. We allow all these three grounds of appeal and delete the disallowances. Appeal of the assessee is partly allowed.

Summary

Issues involved:
The judgment involves issues related to the addition of notional interest income, disallowance under section 14A read with Rule 8D(2) of the Income Tax Rules, and adhoc disallowance of motor car expenses, telephone expenses, and garden visit expenses.

Addition of Notional Interest Income:
The assessee, engaged in finance business, appealed against the addition of Rs. 10,38,950 as notional interest income by the Assessing Officer. The Tribunal observed that the assessee had earned interest income on loans advanced, but failed to receive interest from all loanees, leading to the disallowance. The Tribunal held that in the absence of actual interest income, notional interest income cannot be estimated, and thus, allowed the appeal deleting the addition.

Disallowance under Section 14A read with Rule 8D(2):
The assessee challenged the disallowance of Rs. 4,846 under section 14A read with Rule 8D(2) of the Income Tax Rules. The Tribunal noted that the assessee did not press this ground of appeal, and hence, rejected the challenge.

Adhoc Disallowance of Expenses:
The Tribunal addressed adhoc disallowances of motor car expenses, telephone expenses, and garden visit expenses. The Assessing Officer disallowed portions of these expenses due to lack of proper documentation and verification. However, the Tribunal found that the Assessing Officer's reasoning was not sustainable. It noted that the assessee provided consultancy services to tea estates, and the disallowed expenses were related to the business. The Tribunal also found no merit in the disallowance of car and telephone expenses, stating that maintaining logbooks for small car usage is challenging and that telephone charges are common in the current era. Consequently, the Tribunal allowed the appeal and deleted the disallowances on these grounds.

Separate Judgment:
The Tribunal pronounced the order in the open court on July 10, 2023, partly allowing the appeal of the assessee.