2025 (10) TMI 45 - AT - Income Tax

Ruling reduces repair-and-maintenance disallowance to 10%, deletes service tax interest addition, allows vehicle depreciation, denies housing loan interest deduction

ITAT, DELHI - AT reduced the repair-and-maintenance disallowance from 30% to 10% due to lack of vouchers and possible personal use, deleted an addition ... Disallowance of of repair and maintenance expenses - AO made disallowance of 30% of expenses claimed under the head “repair and maintenance” by observing that assessee has not furnished details and justification of the nature of the expenses - CIT(A) confirmed the disallowance by observing that expenses could not be verified in absence of proper vouchers and certain payments were made in cash also - HELD THAT:- On perusal of the facts and nature of business of the assessee company, engaged in the business of electrical goods under the name and style of “Shiva Electricals” and the copy of the ledger account of repair and maintenance filed before us, it is seen that assessee has paid petty amounts on regular basis for repair and maintenance, repairing of computer, machinery tools and vehicles repairs. Total expenses of INR 6,53,883/- were claimed on vehicles running and maintenance where the payments were made mostly for the petrol/diesel besides some payments towards repairing. All the payments were made in cash. Looking to these facts, possibility of personal use cannot be ignored and also verification of these expenses cannot be done in absence of bills and vouchers. Under these circumstances, in our considered opinion, disallowance @ 10 % of the expenses claimed would be fair and reasonable as against 30% disallowance made by the lower authorities which appears to be very high. Disallowance being interest paid on service tax for prior period - From the perusal of the narration of the entry it appears that it is the interest on delayed payment of service tax however, the other payment no supporting material is placed before us to establish that such payment was on account of delayed payment of interest and it is not penal in nature. We direct the AO to delete the addition being interest paid on delayed payment of service tax and balance disallowance is hereby confirmed. Disallowance as business promotion expenses being gift to one of the employee - claim of the assessee is that it had purchased vehicle and same was gifted to one of the employee however, neither before the lower authorities nor before us, any details were submitted of the service rendered by such employee which had benefited the assessee - HELD THAT:- At the most, assessee can claim depreciation on the cost of vehicle which was provided to one of the employee for performing his official duties. Vehicle was purchased in the name of assessee therefore, assessee is entitled for depreciation on the cost of the same. Accordingly, we uphold the disallowance made and direct the AO to allow depreciation on the cost of vehicle at the rate prescribed under the Act. Accordingly, Ground of appeal No.3 raised by the assessee is partly allowed. Deduction towards interest paid on the loans taken for acquisition of house property - In the instant case it is a fact on record that assessee had not made the claim of deduction towards interest paid from the house property income either in the original return nor in the revised return. No evidence was filed with respect to the interest paid on housing loan. Therefore, we do not find any infirmity in the order of the lower authorities in not allowing the claim of the assessee on this score. ISSUES PRESENTED AND CONSIDERED 1. Whether a portion of amounts claimed as repair and maintenance expenses can be disallowed where details/vouchers are incomplete and payments are largely in cash, and if so, what is the appropriate quantum of disallowance. 2. Whether interest paid on delayed payment of service tax is an allowable business expense or a penal/penalty-like expenditure, and which portion (if any) should be disallowed. 3. Whether a vehicle purchased and handed to an employee as a 'gift' for business promotion is an allowable business expenditure, and if not, whether depreciation on the vehicle is claimable. 4. Whether deduction for interest on loans for acquisition of house property can be allowed when the claim was not made in the original or revised return but first raised at the appellate stage, and what precedential rule governs such a claim. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Disallowance of repair and maintenance expenses for lack of vouchers and cash payments Legal framework: Business expenses must be supported by evidence (vouchers/receipts) and shown to be incurred wholly and exclusively for business; where personal use or unverifiable payments are possible, the assessing authority may disallow a portion. Precedent Treatment: Tribunal applied ordinary principles of verification and the need for vouchers; no new precedent was cited or overruled for this issue. Interpretation and reasoning: The AO disallowed 30% of repair and maintenance claimed (INR 7,85,105) due to lack of justification and vouchers; CIT(A) confirmed noting absence of proper vouchers and cash payments. Tribunal examined: nature of business (sale of electrical goods), ledger showing petty periodic payments for repair (computers, machinery, vehicles), and significant cash payments for vehicle running expenses (petrol/diesel). Tribunal found possibility of personal use and inability to verify payments without bills. Given facts, the Tribunal deemed 30% excessive and assessed a fairer disallowance of 10% of the expenses claimed. Ratio vs. Obiter: Ratio - where routine petty repairs and substantial cash payments lack supporting vouchers and there is possibility of personal use, a reasonable quantified disallowance (10% in the present facts) is sustainable; the precise percentage is fact-specific. Obiter - observations about nature of payments and personal use as factors to consider in other cases. Conclusions: Disallowance reduced from 30% to 10% of repair and maintenance expenses; ground partly allowed. Issue 2 - Allowability of interest paid on delayed service tax (distinguishing penal character) Legal framework: Interest on delayed tax payment is generally treated as interest (cost of finance) rather than penalty where narration and supporting documents show it is interest on delayed tax; penal payments lacking such character are not allowable as business expenditure. Precedent Treatment: No additional judicial precedent was invoked; Tribunal relied on documentary narration (ledger/challan) to distinguish interest from penal payments. Interpretation and reasoning: Ledger entry and challan established INR 1,89,271 as interest on delayed payment of service tax of INR 4,17,673 - this amount was accepted as interest and directed to be allowed. A further amount of INR 53,248 lacked supporting material to establish it as interest and hence was treated as penal/penalty in nature and confirmed as disallowance. The Tribunal thus split the claimed interest into allowable and non-allowable components based on documentary proof and narration. Ratio vs. Obiter: Ratio - documentary narration and challan that clearly identify an outlay as interest on delayed tax make such interest allowable; unexplained payments claimed as interest but without supporting material can be treated as penal and disallowed. Obiter - none beyond factual application. Conclusions: INR 1,89,271 (interest on delayed service tax) deleted from disallowance (allowed); INR 53,248 confirmed as disallowed. Ground partly allowed. Issue 3 - Disallowance of cost of vehicle gifted to employee; entitlement to depreciation Legal framework: Expenditure must be incurred wholly and exclusively for business to be allowable; capital expenditure (purchase of a vehicle) is not deductible as revenue expense but may attract depreciation when used for business. Gifts to employees must be shown to be for business purposes and proportionate to service rendered. Precedent Treatment: No contrary precedent was invoked; Tribunal applied established distinction between capital cost and revenue expenditure and the entitlement to depreciation for business asset. Interpretation and reasoning: AO disallowed INR 6.50 lakhs as business promotion/gift to an employee; CIT(A) confirmed. Tribunal noted absence of particulars about services rendered by the employee or business justification for such a substantial gift to a modestly paid employee (salary INR 15,000), raising doubts about business purpose. The vehicle was purchased in assessee's name, indicating ownership remained with the assessee. Tribunal concluded that the cost cannot be allowed as a revenue business expense, but depreciation on the cost of the vehicle at prescribed rates should be allowed since the vehicle is available for official duties. Ratio vs. Obiter: Ratio - cost of capital asset gifted or provided to an employee is not allowable as revenue expense absent convincing business purpose; depreciation is allowable where the asset is used for business. Obiter - comment on employee's salary creating doubt as to business character of the gift is fact-specific. Conclusions: Disallowance of INR 6.50 lakhs upheld (not allowable as revenue expense); AO to allow depreciation on the vehicle's cost under the Act. Ground partly allowed. Issue 4 - Claim for interest deduction on house property made first at appellate stage (requirement of earlier claim/revised return) Legal framework: Deductions must ordinarily be claimed in the return of income filed under section 139(1); where a fresh claim is to be made, a revised return may be necessary as per established law governing amendment of claims. Precedent Treatment: The Tribunal cited and followed the principle from Goetz (India) Ltd. - a fresh claim of deduction can be made by filing a revised return; absence of such revision precludes allowance of the new claim made first on appeal. Interpretation and reasoning: In the present case, the interest on house property was not claimed either in the original or in the revised return; no evidence of interest paid on housing loan was produced before the authorities. Following the rule permitting fresh claims by revised return, the Tribunal found no infirmity in rejecting the claim when first made on appeal without prior revision or documentary proof. Ratio vs. Obiter: Ratio - a deduction not claimed in the original or revised return, and first raised at appellate stage without proof, is not allowable; filing a revised return is the appropriate mechanism to bring fresh claims. Obiter - none beyond application of precedent. Conclusions: Claim for interest on house property disallowed for failure to make the claim in the return/revised return and for absence of evidence; ground dismissed.