2018 (6) TMI 1121 - AT - Income Tax

Tribunal allows appeal on key issues: Revenue vs. capital expenditure, interest disallowance, and more

The Tribunal partly allowed the appeal for statistical purposes, restoring certain issues to the Assessing Officer for re-examination. The Tribunal ... Capitalization of interest u/s 36 (i) (iii) on the machinery purchased during the year - Held that:- We note that in the said proviso interest paid in respect of capital borrowed for acquisition of the asset for extension of existing business or profession was only to be disallowed during the relevant assessment year. The part “for extension of the existing business or profession” has been omitted by Finance Act, 2015, w.e.f. 1/04/2016. In the case of the assessee, the assessment involved is for assessment year 2011-12 and therefore, applicability of the proviso to section 36(1)(iii) has to be seen in the provision available during the relevant period of time. Assessing Officer has not examined the issue of extension of existing business profession in the case of the assessee, and therefore, we feel it appropriate to restore this issue to the file of the Assessing Officer for deciding afresh in accordance with law. Needless to mention, the assessee shall be afforded adequate opportunity of being heard on the issue in dispute. The ground No. 1 of the appeal is accordingly allowed for statistical purposes. Disallowance of building repair expenses, on account of website designing and internet expenses and on account of EAPBX repair aggregating - nature of expenditure - Held that:- Had the expenditure incurred on creation of a new room or space in the building, it would have increased the efficiency of the building. But before us, no such evidences have been brought on record by the Revenue, which could establish coming into existence of a new asset or increase in efficiency of the existing asset. In the circumstances, we hold the building repair expenses in the nature of revenue expenditure As in respect of the expenses on website designing and Internet marketing expenses, the Assessing Officer has not brought on record any evidence to establish that the said expenses would qualify for capital expenditure. Repair to EAPBX, which was damaged due to shortcircuiting. On perusal of copy of EAPBX repair account, which is available on 64 of the Paper Book, it is evident that the expenses have been incurred for battery and other parts of EAPBX against Bills raised by Rasana Telecom. In view of the above, we are of the opinion that by way of replacement of the parts of the existing EAPBX, no new asset has been created, and thus the expenditure incurred is revenue in nature. Disallowance of interest under section 40A(2)(b) paid to three persons - Held that:- there is no change in the facts and circumstances as compared to the earlier years and, therefore, in view of the rule of consistency, no disallowance would have been made. Before us, records of earlier years, for verifying the fact, whether the Assessing Officer allowed interest at the rate of 15% to the three parties, are not available, and therefore, we feel it appropriate to restore this issue to the file of the Assessing Officer for verifying the facts of earliers years and then decide the isuue in dispute in the light of rule of consistency laid down. TDS u/s 194C - Disallowance u/s 40(a)(ia) - non-deduction of tax at source on watch and ward expenses - Held that:- We note from the records available for us that this issue of each transactions being less than threshold amount liable for TDS, has not been examined by the lower authorities. Regarding the payment made to M/S Aries Integrated Security, the Ld. counsel has submitted that in view of the proviso to section 40(a)(ia) inserted by the Finance Act, 2012, w.e.f., 01/04/2013, which has been held to be applicable retrospectively in the case of Ansal Landmark Township Private Limited [2015 (9) TMI 79 - DELHI HIGH COURT], no disallowance under section 40(a)(ia) is required. We have observed that the applicability of the proviso to section 40(a)(ia) inserted by the Finance Act, 2012 has not been examined by the lower authorities - restore this issue to the file of the Assessing Officer for verification of facts and decide the issue in accordance with law. Ad-hoc 10% disallowance of various expenses - Held that:- Assessing Officer has not pointed out any specific defects of non-maintenance of vouchers or non-business purpose of the expenses. The Assessing Officer cannot reject the vouchers simply on the reason that same have been prepared internally. In view of the various decisions cited by the Ld. counsel, it is evident that no disallowance can be made on adhoc basis when the Assessing Officer has accepted the books of accounts. Similarly, the expenses on telephone at the residence of the Managing Director of the assessee company has been held to be allowable as business expenditure in the hands of the company. Similarly, the expenditure on use of car by the directors, has also been held to be allowable under section 37(1) of the Act. Ad-hoc disallowance is not justified Issues Involved:1. Capitalization of interest under Section 36(1)(iii) of the Income Tax Act.2. Treatment of building repair and internet marketing expenses as capital expenditure.3. Disallowance of interest under Section 40A(2)(b) of the Income Tax Act.4. Disallowance of watch and ward expenses under Section 40(a)(ia) of the Income Tax Act.5. Ad-hoc disallowance of certain expenses as personal in nature.Issue-wise Detailed Analysis:1. Capitalization of Interest under Section 36(1)(iii):The Assessing Officer (AO) disallowed Rs. 1,38,125/- as interest on a term loan for machinery acquisition, arguing it should be capitalized as the asset was not used until 07/10/2010. The CIT(A) upheld this. The Tribunal noted that under Section 36(1)(iii), interest on borrowed capital for asset acquisition until the asset is put to use must be capitalized. However, the proviso 'for extension of existing business or profession' was omitted effective 01/04/2016. The AO did not examine if the borrowed capital was for business extension. Thus, the Tribunal restored the issue to the AO for re-examination, allowing the appeal for statistical purposes.2. Treatment of Building Repair and Internet Marketing Expenses:The AO treated expenses of Rs. 5,62,937/- on building repair, Rs. 13,000/- on website designing, and Rs. 26,453/- on EAPBX repair as capital expenditure, allowing depreciation and disallowing the balance. The CIT(A) upheld this. The Tribunal found these expenses were for repairs, not creating new assets or enhancing efficiency, thus qualifying as revenue expenditure. The Tribunal deleted the disallowance, allowing the appeal.3. Disallowance of Interest under Section 40A(2)(b):The AO disallowed Rs. 1,68,600/- as excessive interest paid to specified persons under Section 40A(2)(b), considering 12% reasonable against 15% paid. The CIT(A) upheld this. The Tribunal noted the assessee’s argument of consistency, as 15% was paid in earlier years without disallowance. The Tribunal restored the issue to the AO to verify earlier years' records and decide based on the rule of consistency, allowing the appeal for statistical purposes.4. Disallowance of Watch and Ward Expenses under Section 40(a)(ia):The AO disallowed Rs. 2,88,377/- for non-deduction of tax at source on security expenses under Section 194C. The CIT(A) upheld this. The Tribunal noted the assessee’s claim that payments to two parties were below the TDS threshold and the third party had declared the income. The Tribunal restored the issue to the AO for verification and decision per the proviso to Section 40(a)(ia), allowing the appeal for statistical purposes.5. Ad-hoc Disallowance of Certain Expenses as Personal in Nature:The AO made an ad-hoc disallowance of Rs. 1,23,995/- (1/10th of Rs. 12,39,949/-) for personal use of expenses like travelling, telephone, car running, etc. The CIT(A) upheld this. The Tribunal found no specific defects or non-business use pointed out by the AO. It cited various judicial decisions disallowing ad-hoc disallowances without specific evidence. The Tribunal deleted the disallowance, allowing the appeal.Conclusion:The appeal was partly allowed for statistical purposes, with certain issues restored to the AO for re-examination and others decided in favor of the assessee.