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2022 (7) TMI 1403 - AT - Income TaxDisallowance of interest expenses on account of diversion of interest-bearing loan - HELD THAT:- As the impugned amount borrowed by the assessee has been diverted for making the contribution in the partner’s capital account, investment in the lands and interest free/interest bearing advances. As far as the contribution in partner’s capital account is concerned, we note that the assessee has shown interest income from the partners which is chargeable to tax. Assessee, against such interest income from the partners ship account, is eligible for deduction for the interest expenses. It is for the reason that there is direct nexus between the interest income and the interest expenses. Interest expense on loan diverted to interest bearing loans and advances is also eligible for interest expenses. It is for the reason that there is direct nexus between the interest income and the interest expenses. The amount of loan diverted for the investments in land and interest free loans and advances, the corresponding interest cannot be allowed as deduction against the interest income. It is for the reason that there is no direct nexus between the interest income and the interest expenses. Such interest expenses cannot be allowed as deduction either under the provisions of section 36(1)(iii) or 57 of the Act. In view of the above, we set aside the order of the CIT (A) with the direction to the AO to calculate the amount of interest attributable to the investment made in the lands and interest-free loans and advances and make the disallowance proportionately. Hence the ground of appeal of the assessee to this extent is partly allowed. Unexplained cash expenses - assessee has incurred certain expenses on purchase of property such as stamp duty charges and registration charges but failed to explain the source of such expenses - HELD THAT:- We note that all the cash expenses incurred by the assessee have been duly incorporated in the cash book. No doubt raised by the authorities below with respect to the cash book filed by the assessee. Since, the expenses incurred in cash have been duly recorded in the books of accounts, the source of cash for such expenses cannot be doubted. The cash book is a summary of the transactions which are carried out in cash demonstrating the source of receipt of cash and payment of cash. Thus, it cannot be said that such expenses were incurred by the assessee outside the books of accounts. The issue on hand relates to the cash payment which was recorded in the cash book but corresponding receipt of cash was nowhere doubted by the authorities below, accordingly, we set aside the finding of the CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Addition on account of interest expenses on the car loan and the depreciation on the car - As found that the assessee is not carrying out any business activity and therefore such expenses cannot be allowed as deduction as business expenses under the provisions of income tax Act - HELD THAT:- Admittedly, the assessee is a partner in 5 partnership firm and drawing handsome amount of share of profit, remuneration and the interest. Indeed, the amount of share of profit is not chargeable to tax in the hands of the assessee but the remaining items of interest income and the remuneration are chargeable to tax under the head business and profession which have been duly disclosed in the income tax return. Thus, in such a situation, the interest on the car loan and the depreciation thereon cannot be denied for the purpose of the deduction - Admittedly, there is a flat rate of tax in the case of partnership firm whereas the rate of tax in the case of a partner is qualified for slab rate of tax besides the maximum exemption limit provided under the statute. As such, had the deduction been allowed to the partnership firm, there would have been less revenue in the hands of the partnership firm. Thus keeping in view the above principles, we are not convinced with the finding of the learned CIT-A and accordingly direct the AO to delete the addition made.
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