2020 (11) TMI 495 - AT - Income Tax

Disallowance of interest expenditure - AO observed that assessee has earned interest income on term deposits -deduction u/s. 57 in respect of interest expenditure disallowed -HELD THAT - As decided in own case 2017 (12) TMI 1668 - ITAT MUMBAI we find force in the submission of the learned A.R. that since the assessee as well as the recipients are notified entities under the Special Court Act unless the Court directs for distribution of the assets towards existing liabilities under Section 11(2) of the Special Court Act the assessee cannot make the payment to these creditors. Even otherwise since the existence of liability towards interest has accrued especially when the assessee is following the mercantile system of accounting the interest is to be allowed. we find that there is a nexus between borrowed funds and investments in term deposits. Therefore the interest paid on the borrowed funds has to be allowed out of the interest earned by the assessee on term deposits. We set aside the order of the CIT(A) and direct the AO to allow deduction in respect of said interest accrued and calculated at 12% per annum after disallowing proportionate interest in respect of the investment in shares. Disallowance u/s 14A - Capitalization of interest expenditure - Deduction on account of interest expenditure - HELD THAT - ITAT in assessee s own case 2017 (12) TMI 1668 - ITAT MUMBAI held to the extent the interest relate to the investment i.e. being disallowable under Section 57 will become part of cost of acquisition of shares and therefore the AO is directed to take it as part of the cost of shares for determining profit on sale of the shares. Thus the additional ground stands allowed to that extent. Addition of personal house hold expenses u/s. 69C - HELD THAT - Addition made by the AO as well as sustained by the CIT(A) are though on ad-hoc basis but same was done because no details of expenditures was filed by the appellant. Before us the Ld. Counsel has submitted that most of the expenses have been incurred by Dr. Hitesh S. Mehta and other family members living in a Joint family set-up. Further other members have contributed for household expenses and that some of the additions have been confirmed on account of personal household expenses by the Department. Following the said order of the Tribunal we reduce the disallowance sustained by the CIT(A) by 50%. Levy of interest u/s. 234A 234B and 234C - HELD THAT - As decided in own case 2017 (12) TMI 1668 - ITAT MUMBAI we direct the AO to recomputed the interest liability after reducing the amount of tax deductible at source on the income earned.

Summary

Issues Involved:
1. Disallowance of interest expenditure under Section 57 of the Income Tax Act.
2. Capitalization of disallowed interest expenditure under Section 14A of the Income Tax Act.
3. Addition of personal household expenses under Section 69C of the Income Tax Act.
4. Levy of interest under Sections 234A, 234B, and 234C of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Interest Expenditure under Section 57:
The assessee contested the disallowance of interest expenditure amounting to Rs. 2,20,45,030/-. The Ld. CIT(A) disallowed the interest expenditure due to the lack of details showing the nexus between borrowed funds and investments. The assessee argued that this issue had been favorably decided in previous years by the ITAT, citing several cases such as ITA No. 5799 to 5801/Mum/2015 and others. The ITAT acknowledged that similar issues had been resolved in favor of the assessee in the past, confirming that the interest expenditure was allowable. The Tribunal directed the AO to allow the deduction of interest accrued and calculated at 12% per annum after verifying the calculation.

2. Capitalization of Disallowed Interest Expenditure under Section 14A:
The assessee sought capitalization of the disallowed interest expenditure to the cost of shares. The ITAT had previously directed that the proportionate interest expense disallowed under Section 14A should be part of the cost of acquisition of shares. This was supported by several cases, including ITA Nos. 6768, 6769 & 6771/Mum/2018. The Tribunal followed the precedent and directed the AO to treat the proportionate interest expense disallowed as part of the cost of shares.

3. Addition of Personal Household Expenses under Section 69C:
The AO made an estimated addition of Rs. 6,00,000/- for personal household expenses, which was upheld by the Ld. CIT(A). The assessee argued that similar additions had been reduced by 50% in previous cases. The ITAT, following its earlier decisions, reduced the disallowance by 50%, thereby sustaining an addition of Rs. 3,00,000/-. This was consistent with the Tribunal's approach in similar cases, such as ITA No. 5799 to 5801/Mum/2015.

4. Levy of Interest under Sections 234A, 234B, and 234C:
The assessee challenged the levy of interest under Sections 234A, 234B, and 234C. The ITAT had previously directed the AO to recompute the interest liability after considering the amount of tax deductible at source. This approach was upheld in various cases, including ITA No. 2139/Mum/2013. The Tribunal directed the AO to follow this method, ensuring that the interest was calculated correctly after accounting for TDS.

Conclusion:
The ITAT allowed the appeal filed by the assessee, directing the AO to:
- Allow the deduction of interest expenditure after verifying the calculation.
- Capitalize the disallowed interest expenditure to the cost of shares.
- Reduce the addition for personal household expenses to Rs. 3,00,000/-.
- Recompute the interest liability under Sections 234A, 234B, and 234C after considering TDS.

The order was pronounced on 13.11.2020, adhering to Rule 34(4) of ITAT Rules by placing the pronouncement list on the notice board.