2014 (1) TMI 1290 - AT - Income Tax

Appeal partially allowed on car depreciation issue; interest disallowance dismissed. AO to reconsider with all facts.

The Revenue's appeal was partly allowed for statistical purposes. The issue of depreciation on the car was set aside for re-adjudication by the AO, while ... Allowability of depreciation u/s 32 of the Act - Deletion made on depreciation on car – Held that:- The Assessing Officer disallowed the depreciation due to two factors the first factor being non registration in the name of company and the second factor being the nature of business of assessee wherein the necessity of such luxurious car was not warranted - For claiming depreciation existence of two conditions is a must - That is asset must be owned wholly or partly by the assessee and secondly it should be used for the purpose of business or profession of the assessee - Assessee has not debited any amount for petrol or diesel which proves that vehicle was not used for the purpose of business or profession of the assessee - The Assessing Officer has though observed that business of the assessee did not require such luxurious car but he could not corroborate his findings with the facts from the profit and loss account – assessee contended that in the succeeding year the claim was allowed does not carry any force as in that year, asset might have been used for the purposes of business of assessee which does not seem to be the case the present year as profit and loss account of assessee does not show any expenditure to have been incurred on account of petrol/diesel – matter remitted back to the AO for re-adjudication – Decided in favour of Revenue. Deletion made on proportionate interest - Interest on borrowed capital paid and interest free loans advanced to sister concerns – Held that:- It has been made by Assessing Officer on the basis of assumptions only - The actual facts and figures as per balance sheet of the assessee do not indicate that interest bearing funds were diverted for interest free advances - assessee has not taken any loans and advances on which interest was paid and rather it has paid interest on the purchase of shares which were purchased on credit from share broking firms – there was no infirmity in the order of CIT (A) on this ground – Decided against Revenue. Issues Involved:1. Deletion of addition by disallowing depreciation on a car.2. Deletion of addition by disallowing proportionate interest.Issue-wise Detailed Analysis:1. Deletion of Addition by Disallowing Depreciation on Car:The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) [CIT (A)], which deleted the addition made by the Assessing Officer (AO) by disallowing depreciation on a car. The AO observed that the car was registered in the name of one of the directors and not the company, thus the company was not the owner of the car. The AO also questioned the necessity of such a luxurious car for the company's business, which was limited to trading in shares through the internet and telephone. Consequently, the AO disallowed the depreciation amounting to Rs. 11,41,773/-.The CIT (A) deleted the disallowance, relying on several case laws, including Mysore Minerals Ltd. Vs CIT, CIT vs. Salkia Transport Assoc., and CIT vs. Basti Sugar Mills Co. Ltd., which held that registration under the Motor Vehicle Act is not necessary for claiming depreciation under the Income Tax Act. The CIT (A) noted that the car was purchased in the director's name due to specific provisions of the Motor Vehicle Act and used for business purposes. The AO did not provide evidence that the car was not used for business or kept idle.The Tribunal agreed with the CIT (A) that non-registration under the Motor Vehicle Act alone cannot be the basis for denying depreciation. However, the Tribunal found that the AO did not corroborate the necessity of the car with the profit and loss account, which did not show any expenditure for petrol or diesel, indicating the car was not used for business. The Tribunal set aside this matter to the AO for re-adjudication, considering all facts and circumstances.2. Deletion of Addition by Disallowing Proportionate Interest:The AO disallowed Rs. 15,00,407/- as proportionate interest, observing that the assessee paid interest on borrowed capital while advancing interest-free loans to sister concerns. The AO argued that the interest-free advances had no apparent nexus with the business.The assessee contended that the interest paid was on credit balances with brokers and a car loan, not on borrowed funds. The assessee also argued that the total interest-free advances were less than the accumulated profits and that there were significant sundry creditors not carrying any interest. The CIT (A) accepted these arguments, noting that the assessee had substantial own funds and no nexus was proven between interest-bearing funds and interest-free advances.The Tribunal upheld the CIT (A)'s decision, noting that the AO's disallowance was based on assumptions. The balance sheet indicated that no interest-bearing funds were diverted for interest-free advances. The interest paid was for credit availed on the purchase of shares, which is part of the assessee's business. Therefore, the Tribunal found no infirmity in the CIT (A)'s order and dismissed the Revenue's appeal on this ground.Conclusion:The appeal filed by the Revenue was partly allowed for statistical purposes, with the issue of depreciation on the car set aside for re-adjudication by the AO, while the disallowance of interest was dismissed.