TaxTMI 
TaxTMI 
2010 (9) TMI 1119
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Assessing Officer be directed to restrict the disallowance at 1/7th of the amount of depreciation and aviation expenses as has been done in the past." 3. Further, during the proceedings before us, the assessee filed an additional ground which is reproduced as follows:- "Without prejudice to the claim of the assessee that the interest expenditure of Rs. 22,13,037/- is rightly allowed by the learned CIT(A) while computing income from other sources, the assessee submits that alternatively, the said interest expenditure is allowable as a business expenditure while computing the total income." 4. Thus, from the grounds and the additional grounds, it is evident that the following are the issue's for adjudication:- 1) Fairness of the estimation of the aviation expenses and depreciation relatable to Bell Helicopter @ 1/5th of the claim instead of 1/7th as agreed by the assessee. 2) Fairness of the estimation of quantum of disallowance of aviation expense and depreciation relatable to Cessna Aircraft @ 30% of the claim as against 1/7th of the claim of expenditure agreed to by the assessee. 3) whether the CIT(A) should have allowed the claim of i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isputed. Further, it was stated that traveling to hill stations or tourist spots was not only for the purpose of enjoyment but it was a landing point for visit to Koyna site of the assessee. Further, the visit to Lonavala and Amby Valley was for scouting of employees for hotel projects of the assessee. On the basis of the above, it was stated that all such trips are not for the personal purposes of the assessee. The Assessing Officer applied the provisions of section 38(2) of the Act and disallowed the depreciation and aviation expenses @ 30% totaling Rs. 28,19,032/-. The claims as per assessee and the disallowances by the AO are tabulated as follows. Sr. No. Name of the Aeroengine Depreciation Claimed Aviation exp. Claimed Disallowance @ 30% 1. Bell Helicopter 16,81,010/- 19,39,836/- 10,86,254/- 2. Cessana Aircraft 49,23,970/- 8,51,955/- 17,32,778/- 66,04,980/- 27,91,791/- 28,19,032/- 7. Aggrieved with the above disallowances the assessee filed the appeal before the CIT(A). During the first appellate proceedings, it was submitted that the assessee claimed total expenditure ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee. It is also seen that the assessee was asked to submit and furnish details vide letter dated 31- 07-2007 and again vide letter dated 16-10-2007 and 26-11-2007 when the original logbooks of the Bell helicopter were produced from where the Assessing Officer was able to know the personal nature of the expenditure incurred for various trips. It was only on 18-12-2007 that the reply to the final notice was given to the Assessing Officer. In view of the above facts and taking into consideration the reply of the assessee, in my considered view, the ends of justice would be met if 1/5th of the aviation expenses are disallowed with respect to Bell helicopter. 5.4 Regarding the Cessna aircraft, the Assessing Officer lamented that the assessee was requested several times to produce the logbook of Cessna aircraft so to see the use for business activity, but no logbook was produced. The final notice was issue on 17-12-2007 proposing to disallow the entire depreciation when Xerox copies of the logbook were produced on 19-12-2007. the original logbooks of Cessna aircraft were not produced before the Assessing Officer. Those logbooks were not produced in the appellate proceedi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e expense has been incurred with the sole object of furthering the trade or business interest of the assessee unalloyed or unmixed with any other consideration. If the expense is found to bear an element other than the trade or business interest of the assessee the expenditure is not allowable one. On the basis of the fact that the assessee was not maintaining the details of passengers traveling on Cessna aircraft, the purpose of visit and there was undeniably visits to holy places like Tirupati and tourist places like Goa, etc. the action of the Assessing Officer in disallowing 30% of the expenditure for non-business purposes is, confirmed. 5.5 Further, the provisions of section 38(2) of the Income Tax Act are squarely applicable in the case of the assessee as both the aero engines were not exclusively used for the purposes of business. In Section 38(2), the words used are "not exclusively used for the purposes of business or profession." It signifies that the asset has been used for other purposes and not exclusively for the purposes of business or profession. This section specifically provides for part disallowance of certain expenses including depreciation in relation ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iminately and these vehicles are subjected to aviation rules too. 9. On the other hand, the DR for the revenue relied heavily on the order of the Income Tax authorities. Further, he argued stating that the onus is on the assessee in these matters relating the making of claims of deduction and in this case, the assessee failed miserably to discharge the same. As per the DR, assessee neither filed the logbook in respect of the aircraft nor filed the list of the passengers travelled nor the details of the destinations covered by these helicopter or aircraft, as the case may be nor the purposes of the travel using the impugned helicopter or aircraft. In such circumstances, the decisions of the CIT(A) do not need any mutation or interference. 10. We have heard the parties and perused the orders and the paper books made available to us. Undisputed facts are that the assessee used both Bell helicopter as well as the Cessna aircraft for the mixed use and therefore, there is no dispute on the invoking of the provisions of section 38(2) of the Act. Further, there is no dispute that the AO restricted the disallowance art 1/7th of the claim. The same is evidenced by filing the copies of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee has not maintained the log book. The possibility of personal user of the car cannot be ruled out. In the case of Gulati Saree Centre vs Asstt CIT [1999] 71 ITD 73 (Chd)(SB) [ITAT Chandigarh Bench], the Tribunal held that even after the incorporation of the concept of block asset, the provisions of section 38(2) were applicable and the Assessing Officer was empowered to restrict the depreciation to a fair part thereof having regard to the user of asset for the purposes of business. In this view of the matter, we hold that order of the revenue authorities is correct in law. As far as the proportion of disallowance for personal use is concerned, we find that the revenue authorities have made a reasonable proportionate disallowance at the rate of 1/6th of the total expenses including depreciation. Accordingly, we decline to interfere in the matter." Further, it has come to our notice that the Pune bench has taken decision in the case of M/s Kirloskar Oil Engines Ltd vide ITA no 1039 and 1040 for the AY 1995-96 and 1996-97 in connection with the disallowance of aircraft expenditure and held that the disallowances at the rate of 15% (nearly 1/7th) of the claim is fair and re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....venue is no fair in adopting 20% (1/5th of the claim) in respect of the Bell Helicoptor and in adopting 30% (nearly 1/3th of the claim) in respect of the Cessna Aircraft and in our opinion, it constitutes an artificial difference. It is also relevant to mention that the section 38(2) refers to the expression 'fair' and neither of the IT authorities ie AO or CIT(A) have undertaken any exercise to establish the said fairness in adopting the said percentages. It is true that the onus is on the assessee to substantiate the claim of the assessee. Considering the peculiar circumstances better known to the assessee, there is surrender of claim to the extent of 1/7th of the total claims Rs. 93,96,771/- (ie Rs. 66,04,980/- on account of depreciation of vehicles and Rs. 27,91,791/- on account of aviation expenses). At this point of time, in our opinion, the Onus has shifted to the revenue to demonstrate that the said surrender is incorrect and estimations made by the AO are fair within the meaning of section 38(2) of the Act. Fairness is an important factor in matters of quantification of the disallowances, when section 38(2) of the Act is invoked. The revenue has not done any probe independ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....empts in resorting to the estimations when the ALV is to be calculated where the assessee followed the method of determining the ALV of the Walkeswhare property based on the actual rental receipts. 19. Aggrieved with the same, the Revenue is before us. Ld DR for revenue argued that the AO is empowered to determine the ALV of the property on the basis of the comparable cases. In this regard, he relied on the decision of the co-ordinate Bench in the case of Makrupa Chemicals (P) Ltd (108 ITD 95) where the ITAT has discussed the scope of different decisions of the judgments of the High Courts as well as the Supreme Court and the Tribunal in Para 14 of the said order that the "Municipal ratable value is not binding on the AO if the AO can show that the ratable value and municipal laws does not represent the fair rent. Further, he relied on the order of the AO. 20. On the other hand, Ld AR for assessee heavily relied on the orders of the CIT (A) and the jurisdictional High Court judgments in the case of J K Investors (Bom) Ltd and above cited apex court judgments ie Dewan Daulat Rai Kapoor (supra). He took us through the relevant paras of the said judgments. He argued that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the above legal position we have examined the facts of the instant case. The assessee has let out space to the sister concern, which is undisputed fact and is receiving Rs. 10,000/- per month from each sister concern. Therefore, the assessee's property is covered by provisions of clause (b) of section 23(1). This is a fact that assessee's actually rent received or receivable in respect of the said property is not in excess of the ALV computed under clause (a) of section 23(1). In the light of these facts, AO's decision to invoke a comparable case to the property covered under clause (b) is not in tune with the above referred legal position. Further, it is not also the case of the AO that assessee is covered by the exemptions provided in the Maharashtra Rent Control Act and, therefore, ALV of the property shall be determined on the basis of the comparable cases. In any case, the standard rent is upper limit for determination the ALV as held in the case of Makrupa Chemicals Pvt Ltd (supra). Therefore, we are of the opinion that the order of the CIT (A) does not call for any interference. 22. Thus, it is not the case of the revenue that the ALV determined by the assessee is less th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for purchase of shares of TCS (Rs. 8,09,99,500) and for purchase of shares of SPANCO (Rs. 5,00,00,000/-). The Assessing Officer in the last lines of para 5.3 observed that "in the case of the assessee, there is a direct nexus between the funds borrowed from BNP Paribus Bank and the investment made in shares..." It was held that decision in the case of Shree Digvijay Cement Co. Ltd. vs. CIT (supra) was applicable. In that case the investment in shares made out of borrowed funds was not proved as no new borrowings were made. The TCS shares were sold by the assessee on 17-02-2005 and long term capital gain has been offered for taxation. In case of SPANCO shares, the share application amount was received back by the assessee on 06-12-2004 and according to the Assessing Officer no income was earned by the assessee on these transactions. 4.3 Irrespective of the fact whether any income was earned by the appellant from the investment in shares, interest paid on money borrowed for investment in shares is deductible u/s. 57(iii) of the Act for section 57(iii) requires that the expenditure must be laid out and expended wholly and exclusively for making and earning income and not tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....share, the claim is allowable as business expenditure too. In connection with the interest expenditure claim relatable to the investment of the loan in the IPO of the SPANCO shares unsuccessfully, the CIT(A) is of the view that the 'earning of income' does not mean the dividend income should have been actually earned in the year under consideration. Finally, as per the CIT(A), the addition of Rs. 22,13,037/- being disallowance of interest paid on borrowed funds is held to be allowable u/s. 57(iii) of the Act. 25. Aggrieved with the said decision of the CIT(A), the revenue filed the present appeal with ground 2. During the proceedings, the Ld DR mentioned that the impugned interest claim of Rs. 22,13,037/- has two segment ie (i) the interest relatable to the investment in TCS shares and (ii) the interest relatable to the investment in the IPO of the SPANCO shares. As per the DR, the Revenue has strong objection to the decision of the CIT(A) in treating the interest payment relatable to the borrowed funds invested in SPANCO shares unsuccessfully as allowable u/s. 57(iii) of the Act, as this is the case of investment which never resulted in earning of the shares forget about the ea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tainly not under the provisions of section 57(iii) of the Act for the reason that the impugned interest expenditure is not 'expanded wholly and exclusively for the purpose of making or earning such income' ie interest income against which the said interest expenditure is allowed by the CIT(A) to be set off. The expression such income in the provisions of section 57(iii) relates to incomes chargeable to tax u/s 56 of the Act. The same reasoning applies to the interest expenditure relatable to the loan invested in the investment SPANCO shares too and the assessee is not eligible for set off against the other interest income receipts chargeable to tax u/s 56 of the Act as the assessee has no chance of 'such income' out of the SPANCO shares as he never got allotment of such shares. Therefore, we do not agree with the CIT(A) in concluding that the addition of Rs. 22,13,037/- being disallowance of interest paid on borrowed funds is held to be allowable u/s. 57(iii) of the Act. 28. Now we proceed to examine if the assessee is entitled to deduction either u/s 36(iii) of the Act or not. In this regard, we have considered the following undisputed facts, ie (i) very existence of business o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ue of penny shares. Assessee offered the relevant investment as income of the assessee. While making the assessment the AO disallowed the said 10% towards the relatable or incident cost of the alleged investment. But the fact, AO is not in possession of any direct evidence to support the impugned addition. CIT(A) deleted the same as per the discussion given in para 7.2 of the impugned order. During the proceedings, Ld Counsel for the assessee brought to our notice the decision of the Tribunal of the Pune bench for the proposition that the addition is not sustainable in the absence of any evidences to support the payment of unaccounted commission in connection with the investment in the penny stock. On the other hand, Ld DR for the revenue relied on the order of the AO. 31. We have heard the parties and perused the orders of the revenue and the paper book filed before us. It is a fact that the assessee surrendered the unaccounted investment in the penny stocks. At the same time, it is also a fact that there is no direct evidence to demonstrate the payment of the alleged commission to the broker for arranging the transactions of bogus purchase and sale bill and other incidental se....