2025 (4) TMI 532 - AT - Income Tax

Disallowance of interest expenses and claim of depreciations on Car - Cars (Motor Vehicle) not registered in the name of company but registered in the name of Director - HELD THAT - While disallowing the said expenditure the ld. AO noted that interest expenses and depreciation claimed for the car which was not in the name of the company but was registered in the name of the Individual. As per-loan-papers the other car (Ciaz) was also in the name of an individual and not in the name of company. AO considered that the vehicles were not registered in the name of the company and yet the company was bearing interest expenses and depreciation pertaining to them and therefore AO disallowed interest expenses and claimed on depreciations. When the matter carried before the ld. CIT(A) he rejected the claim of the assessee by observing that if a vehicle is in the name of the director then personal use cannot be ruled out. While vehicle expenses for running may be paid by the company and therefore he hold that the depreciation and interest on vehicles cannot be allowed on an assets owned by another person. Before us the assessee submitted the assessee claiming the said expenditure since 2012 and the relevant assets is reflected in the books of the company and has since the car is used for the purpose of the business interest and depreciation on the assets put to use by the company cannot be denied to the assessee. Assessee cited the decision of the apex court in the case of CIT Vs. Poddar Cement P. Ltd. 1997 (5) TMI 2 - SUPREME COURT wherein it has been held that any one in possession of the property in his own title exercising such dominical over the property as would enable the others being excluded there from and having the right to use and occupy the property and / or to enjoy its usurp in his own right would be the owner . Respectfully following the binding precedent we do not find any reason to sustain the disallowance direct the ld. AO to delete the same. Disallowance of business promotion expenses - assessee submitted that the claim was for the purpose of the business of the assessee - HELD THAT - Before us assessee did not rebut the finding of the ld. CIT(A) that claim made was contrary on facts and the expenditure was incurred in cash and therefore we do not find any merit in this grounds of appeal raised by the assessee and same is dismissed. Disallowance being the interest on the loan given - HELD THAT - On this aspect of the matter we note that the advance were not given in the year under consideration except Shri Kulbir Singh. Assessee submitted that all the parties in the line of fabrication work colonizer and developer which is also at par with nature of the business of the assessee. Even otherwise there was no direct nexus was established and the assessee was having sufficient interest free funds and therefore considering the decision of the jurisdictional high court cited by the ld. AR of the assessee in his written submission we do not find any reason to sustain the addition and therefore the same is directed to be deleted. Disallowance of revenue expenditure @ 12 % on the building construction expenditure - HELD THAT - AO noted that since the assets on which the expenditure incurred was not put to use the notional income is required to be added and ordered to be capitalized. When the matter carried before the ld. CIT(A) he has confirmed the addition stating that the assessee could not refute the reasoning given by the ld. AO. Whether the assets is put to use or not without correlating the fact that the assessee has used the borrowed fund in building the assets then interest can be capitalized. When there is no nexus no addition can be made. We get support for this view from decision in CIT Vs. Ram Kishan Verma 2016 (1) TMI 223 - RAJASTHAN HIGH COURT . Considering that aspect of the matter that no notional disallowance of interest can be made and thereby ground raised by the assessee is allowed. Disallowance being the 5 % claim of the assessee under the head salary expenses - HELD THAT - There was no defect pointed out by the ld. AO in the books or that of with the vouchers. Even the vouchers produced for which the AO gave the credit this itself shows that the ld. AO acted based on the assumptions and presumptions. Even he has not given any basis by which he arrived to disallow 5 % of the expenses claimed. Thus there is no such basis and that too without rejecting the books of account no disallowance can be made. We direct the ld. AO delete the disallowance so made on estimate basis.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

(1) Whether the disallowance of depreciation and interest claimed on vehicles not registered in the company's name was justified.

(2) Whether the disallowance of business promotion expenses due to lack of supporting bills was appropriate.

(3) Whether the disallowance of interest on loans given to related parties and others was valid.

(4) Whether the disallowance of revenue expenditure on building construction was correct.

(5) Whether the disallowance of unverifiable salary expenses was justified.

(6) Whether the charging of interest under sections 234A, 234B, and 234D was appropriate.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of Depreciation and Interest on Vehicles

Relevant Legal Framework and Precedents: The assessment focused on whether vehicles not registered in the company's name could still qualify for depreciation and interest deductions. The assessee cited the Supreme Court decision in CIT Vs. Poddar Cement P. Ltd., which allows beneficial ownership to suffice for such claims.

Court's Interpretation and Reasoning: The Tribunal accepted the assessee's argument that beneficial ownership, rather than legal ownership, is sufficient for claiming depreciation. The vehicles were used for business purposes, and the company bore the expenses.

Conclusions: The Tribunal directed the deletion of the disallowance, allowing the depreciation and interest claims.

Issue 2: Disallowance of Business Promotion Expenses

Relevant Legal Framework and Precedents: The disallowance was based on the absence of supporting bills for claimed expenses.

Court's Interpretation and Reasoning: The Tribunal upheld the disallowance, noting the inconsistency in the assessee's claim regarding payment by cheques versus cash expenses.

Conclusions: The disallowance was confirmed due to lack of verifiable evidence.

Issue 3: Disallowance of Interest on Loans

Relevant Legal Framework and Precedents: The focus was on whether interest-free loans to related parties justified disallowance of interest expenses. The assessee relied on precedents emphasizing business judgment and the availability of interest-free funds.

Court's Interpretation and Reasoning: The Tribunal found that the advances were not new and were covered by sufficient interest-free funds, negating the need for disallowance.

Conclusions: The disallowance was deleted, as the advances were consistent with business practices and supported by interest-free funds.

Issue 4: Disallowance of Revenue Expenditure on Building Construction

Relevant Legal Framework and Precedents: The disallowance was based on the non-utilization of the asset and the need to capitalize interest expenses.

Court's Interpretation and Reasoning: The Tribunal found no direct nexus between borrowed funds and construction expenses, aligning with the jurisdictional High Court's decision in CIT Vs. Ram Kishan Verma.

Conclusions: The disallowance was deleted, as no direct linkage was established between borrowing and asset construction.

Issue 5: Disallowance of Unverifiable Salary Expenses

Relevant Legal Framework and Precedents: The disallowance was based on the absence of detailed employee records and sample bills.

Court's Interpretation and Reasoning: The Tribunal criticized the arbitrary nature of the disallowance, noting the absence of defects in the audited accounts and the lack of a basis for the 5% disallowance.

Conclusions: The disallowance was deleted, as it was based on assumptions without rejecting the books of account.

Issue 6: Charging of Interest under Sections 234A, 234B, and 234D

Conclusions: These charges were deemed consequential and not separately adjudicated.

3. SIGNIFICANT HOLDINGS

Core Principles Established:

The Tribunal reinforced the principle that beneficial ownership suffices for depreciation claims, and business judgment should be respected in interest-free loan cases, provided there are sufficient interest-free funds.

Final Determinations on Each Issue:

The Tribunal allowed the appeal in part, deleting disallowances related to depreciation, interest on loans, and revenue expenditure on building construction, while upholding the disallowance of unverifiable business promotion expenses.