2013 (8) TMI 820 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions on Key Issues: Interest Rate, Depreciation, DVO Report

The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on three key issues. It found the interest rate on unsecured loans ... Disallowance of interest paid on unsecured loans to the persons specified under section 13(3)/40A(2)(b) of the Income-tax Act, 1961 - Substantial loan was borrowed by the assessee from the parties specified under section 40A(2)(b) of the Act besides other creditors. But interest was paid at the same rate i.e. @ 18% per annum to both the types of creditors - Nothing is placed on record to establish that the assessee has paid lesser rate of interest to the financial institutions. Moreover, no loan was borrowed from the financial institutions in the impugned assessment year - Since the assessee has paid interest @ 18% per annum to all types of its creditors, disallowance of excess payment of interest on the ground that higher rate of interest was paid to the persons specified under section 40A(2)(b) of the Act cannot be sustained – Decided against the Revenue. Rate of depreciation of books purchased for college library - Assessee claimed depreciation @ 60% on book purchased for college library, but the Assessing Officer allowed depreciation only @ 15% by holding that the books are plant and machinery and the assessee is running an educational institution and is not engaged in the business of lending library – Held that:- There is force in the contentions of the assessee that due to fast changing technology around the globe, the reference books also become obsolete in a short span - Books were given to the students for which library charges were collected by the assessee-society. Therefore, as per para 9(ii) of the Schedule of Depreciation of the Income-tax Rules depreciation is to be allowed @ 100% - Decided against the Revenue. Reference under section 142A of the Act was made to the DVO for estimating the value of college building of the assessee-society without rejecting the books of account – Held that:- Reliance is placed upon the Apex court judgment in the case of Sargam Cinema vs. CIT [2009 (10) TMI 569 - Supreme Court of India ], wherein it was held that without rejecting the books of account, reference to the DVO cannot be made – In the present case, assessing Officer has not rejected the books of account of the assessee. The assessee's books of account are properly audited and no defect has been pointed out therein. There is no specific finding of the Assessing Officer for rejection of the books of account. Therefore, reference to the DVO was made without rejecting the books of account. Thus, the reference to the DVO was not sustainable in the eyes of law as per the aforesaid judgment of the Hon'ble Apex Court and estimation made on the basis of the DVO's report deserves to be deleted – Decided against the Revenue. Issues Involved:1. Deletion of addition made on account of interest paid on unsecured loans under section 13(3)/40A(2)(b) of the Income-tax Act, 1961.2. Disallowance of depreciation claimed by the assessee.3. Deletion of addition made on account of unexplained investment in construction of building by considering the report of the Departmental Valuation Officer (DVO).Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Interest Paid on Unsecured Loans:The primary issue pertains to the deletion of the addition made by the Assessing Officer (AO) on account of interest paid on unsecured loans to persons specified under section 13(3)/40A(2)(b) of the Income-tax Act, 1961. The AO disallowed the excess interest paid, citing that the interest rate was increased from 12% to 18% per annum without justification. The assessee contended that the interest rate of 18% was reasonable and market-related, as approved by the Executive Committee, and was uniformly applied to all creditors. The CIT(A) re-examined the issue and concluded that the interest rate was reasonable and market-related, thus deleting the addition. The Tribunal upheld the CIT(A)'s decision, noting that the interest rate was uniformly applied to all creditors and no loans were taken from financial institutions during the relevant year.2. Disallowance of Depreciation Claimed by the Assessee:The second issue involves the disallowance of depreciation claimed by the assessee on books purchased for the college library. The AO allowed depreciation at 15%, treating the books as plant and machinery, while the assessee claimed 100% depreciation, arguing that the books were part of a lending library. The CIT(A) accepted the assessee's contention, noting that the library collected charges from students and that the books became obsolete quickly due to technological changes. The Tribunal confirmed the CIT(A)'s decision, agreeing that the books should be depreciated at 100% as per the relevant schedule of the Income-tax Rules.3. Deletion of Addition on Account of Unexplained Investment in Construction of Building:The third issue concerns the deletion of the addition made by the AO based on the DVO's report estimating the cost of construction of the college building. The AO added the difference between the declared investment and the estimated cost. The assessee challenged the DVO's report, pointing out various defects and arguing that the valuation should be based on UPPWD rates rather than CPWD rates. The CIT(A) found merit in the assessee's contentions, allowing deductions for certain discrepancies and concluding that the difference between the estimated cost and the declared investment was less than 10%, thus deleting the addition. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO had not rejected the assessee's books of account, which were duly audited and found no specific defects. The Tribunal also referenced the Supreme Court's judgment in Sargam Cinema vs. CIT, which held that without rejecting the books of account, a reference to the DVO is not sustainable.Conclusion:The appeals of the Revenue were dismissed, with the Tribunal confirming the CIT(A)'s decisions on all three issues. The Tribunal found that the interest rate on unsecured loans was reasonable and uniformly applied, the depreciation on library books was correctly claimed at 100%, and the addition based on the DVO's report was not justified without rejecting the books of account. The judgment emphasizes the importance of proper examination and justification of additions and disallowances by the AO, as well as adherence to legal precedents and standards.