Appeal allowed by ITAT for interest expenses and car depreciation disallowances.

The ITAT, Ahmedabad, allowed the appeal of the assessee, overturning the disallowances made by the AO and CIT(A) regarding interest expenses under section 14A for tax-free income and depreciation claimed on a motor car used for business purposes. The ITAT emphasized the availability of interest-free funds and the asset's business usage, following precedents such as Reliance and Power Ltd vs. CIT and ICDS Ltd vs. CIT.

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Issues:
1. Disallowance u/s. 14A for interest expenses on tax-free income.
2. Disallowance of depreciation claimed on a motor car used for business purposes.

Analysis:

Issue 1: Disallowance u/s. 14A for interest expenses on tax-free income:
- The assessee, a partnership firm engaged in business activities, filed its return for A.Y. 2006-07, declaring income. The AO disallowed interest expenses of Rs. 63,450 under section 14A related to tax-free income earned from investments in mutual funds.
- The CIT(A) upheld the AO's decision, stating that the appellant failed to prove the non-utilization of borrowed funds for investments. The CIT(A) relied on the decision of Daga Capital Management Pvt Ltd.
- The ITAT, Ahmedabad, considered the balance sheet showing sufficient interest-free funds available to the assessee. Citing the case law of Reliance and Power Ltd vs. CIT, the ITAT held that no disallowance under section 14A could be made without evidence of borrowed funds' utilization.

Issue 2: Disallowance of depreciation claimed on a motor car:
- The AO disallowed depreciation claimed on a motor car owned by a partner of the firm, as it was not registered in the firm's name. The CIT(A) upheld the AO's decision, stating that the firm must be the owner of the asset for depreciation claim under section 32.
- The ITAT noted that the firm had used its funds to purchase the car, as evidenced by the bank statement and balance sheet. Referring to ICDS Ltd vs. CIT, the ITAT allowed the depreciation claim, emphasizing the asset's usage for business purposes.

In conclusion, the ITAT, Ahmedabad, allowed the appeal of the assessee, overturning the disallowances made by the AO and CIT(A) regarding interest expenses under section 14A and depreciation on the motor car.

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