Accounting misclassification and arbitrary disallowance cannot defeat genuine deductions where the record supports business use and threshold compliance.

A mere accounting misclassification did not justify treating flat-sale consideration as unexplained credit, so the addition was deleted. Interest on a personal loan was also allowed where the record did not dispute that the borrowing was used for business purposes. Interest on the housing loan required fresh computation of the admissible deduction under the alternate housing-property claim, with consequential relief to follow. Disallowance for alleged failure to deduct tax at source on professional fees failed because the payments were below the threshold and tax had been deducted on the amount exceeding it. The 20% ad hoc expenditure disallowance was held arbitrary and deleted.

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Issues: (i) whether the addition of Rs. 93 lacs as unexplained credit was sustainable; (ii) whether the disallowance of interest on personal loan claimed to have been used for business was sustainable; (iii) whether the disallowance of interest on housing loan was sustainable and whether the alternate claim under section 24 could be considered; (iv) whether the disallowance for non-deduction of tax at source on professional fees was sustainable; and (v) whether the ad hoc disallowance of 20% of expenditure was sustainable.

Issue (i): whether the addition of Rs. 93 lacs as unexplained credit was sustainable.

Analysis: The record showed that the amount reflected in the books arose from a transaction of sale of a flat and not from an unexplained liability. The alleged creditor confirmed payment towards purchase of the property, and the discrepancy in accounts was found to be only a mistaken classification under current liabilities. On the facts, the credit did not represent unexplained income.

Conclusion: The addition of Rs. 93 lacs was deleted and the issue was decided in favour of the assessee.

Issue (ii): whether the disallowance of interest on personal loan claimed to have been used for business was sustainable.

Analysis: The assessee's explanation that the personal borrowing was utilised for business purposes was not doubted on the record. The disallowance was made only because the loan stood in the personal account, without any adverse finding on actual user for business.

Conclusion: The disallowance of interest was deleted and the issue was decided in favour of the assessee.

Issue (iii): whether the disallowance of interest on housing loan was sustainable and whether the alternate claim under section 24 could be considered.

Analysis: It was undisputed that borrowing had been used for acquisition of property. The claim for allowance could not be rejected merely because the Revenue did not accept it as business expenditure. The alternate statutory claim for interest deduction under section 24 required consideration on the facts already on record.

Conclusion: The issue was restored to the Assessing Officer to compute the admissible deduction under section 24 and grant consequential relief, and was decided in favour of the assessee to that extent.

Issue (iv): whether the disallowance for non-deduction of tax at source on professional fees was sustainable.

Analysis: The payments in dispute were found to be below the prescribed threshold for deduction of tax at source under the relevant provision, while tax had already been deducted on the payment that exceeded the limit. No legal basis for the disallowance remained.

Conclusion: The disallowance was deleted and the issue was decided in favour of the assessee.

Issue (v): whether the ad hoc disallowance of 20% of expenditure was sustainable.

Analysis: The disallowance was made without identifying any specific defect in the expenditure. The requirement of maintaining logbooks or detailed call records was found to be impractical on the facts, and the estimate was held to be arbitrary.

Conclusion: The ad hoc disallowance was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded on the major substantive issues, one issue was sent back for fresh computation of the permissible deduction, and the remaining challenged disallowances were deleted.

Ratio Decidendi: A mere accounting misclassification does not convert a genuine property sale consideration into unexplained income, and disallowance of expenditure cannot be sustained on an arbitrary basis where the claim is supported by the record or where the Revenue fails to establish a contrary factual finding.

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