TMI Blog2018 (6) TMI 1121X X X X Extracts X X X X X X X X Extracts X X X X ..... ly allowed for statistical purposes. Disallowance of building repair expenses, on account of website designing and internet expenses and on account of EAPBX repair aggregating - nature of expenditure - Held that:- Had the expenditure incurred on creation of a new room or space in the building, it would have increased the efficiency of the building. But before us, no such evidences have been brought on record by the Revenue, which could establish coming into existence of a new asset or increase in efficiency of the existing asset. In the circumstances, we hold the building repair expenses in the nature of revenue expenditure As in respect of the expenses on website designing and Internet marketing expenses, the Assessing Officer has not brought on record any evidence to establish that the said expenses would qualify for capital expenditure. Repair to EAPBX, which was damaged due to shortcircuiting. On perusal of copy of EAPBX repair account, which is available on 64 of the Paper Book, it is evident that the expenses have been incurred for battery and other parts of EAPBX against Bills raised by Rasana Telecom. In view of the above, we are of the opinion that by way of repla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture in the hands of the company. Similarly, the expenditure on use of car by the directors, has also been held to be allowable under section 37(1) of the Act. Ad-hoc disallowance is not justified - ITA No.5288/Del/2016 - - - Dated:- 20-6-2018 - SH. AMIT SHUKLA, JUDICIAL MEMBER AND SH.O.P. KANT, ACCOUNTANT MEMBER For The Appellant : Sh. Sandeep Sapra, Adv. For The Respondent : Sh. Atiq Ahmed, Sr.DR ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 12/07/2016 passed by the Ld. Commissioner of Income-tax (Appeals), Karnal [in short the Ld. CIT(A) ] for assessment year 2011-12, raising following grounds: 1. The Learned Commissioner of Income Tax (Appeals) has erred, without appreciating the facts and circumstances of the case, in sustaining the capitalization of interest amounting to ₹ 1,38,125/- u/s 36 (i) (iii) of Income Tax Act. 1961 on the machinery purchased during the year. 2. The Learned Commissioner of Income Tax (Appeals) has wrongly confirmed the addition of ₹ 5,96,472/- treating the building repair and internet marketing as capital expenditure without appreciating the facts and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and not allowed as revenue expenditure. The Ld. CIT(A) upheld the finding of the Ld. Assessing Officer. 3.2 Before us, the Ld. counsel filed a paperbook containing pages 1 to 98 and submitted that a term loan was sanctioned to the assessee by the Small Industries Development Bank of India (SIDBI), which was disbursed to the assessee on 19/05/2010 for purchase of machinery. The Ld. counsel submitted that the assessee did not buy the machinery immediately and deposited the term loan disbursed in Cash Credit (CC) account, which resulted in a reduction of CC limit and subsequently on 07/10/2010 the assessee purchased a machinery for ₹ 33.15 lakhs. The Ld. counsel contended that during the period from 19/05/2010 to 07/10/2010 the term loan was utilized for business purposes and therefore no disallowances could be made under section 36(1)(iii) of the Act. 3.3 The Ld. DR, on the other hand, submitted that money was borrowed for the purpose of the acquisition of the asset and the interest corresponding to the said money borrowed till the date of asset is put to use, was to be capitalized by the assessee and cannot be allowed as revenue expenditure in view of section 36(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for acquisition of the asset till the date on which asset was first put to use, cannot be allowed as deduction. The purpose of the said proviso is clear that expenditure related to acquisition of the capital asset prior to it is put to use cannot be allowed as revenue expenditure during the year under consideration. It is immaterial whether the said borrowed capital has been utilized for the purpose of business or profession, because, otherwise the interest paid for capital borrowed for the purpose of business of provision is allowable; however, the proviso has restricted allowability interest in respect of the capital borrowed for acquisition of the asset. 3.6 However, we note that in the said proviso interest paid in respect of capital borrowed for acquisition of the asset for extension of existing business or profession was only to be disallowed during the relevant assessment year. The part for extension of the existing business or profession has been omitted by Finance Act, 2015, w.e.f. 1/04/2016. In the case of the assessee, the assessment involved is for assessment year 2011-12 and therefore, applicability of the proviso to section 36(1)(iii) has to be seen in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rced shelves and plastering of dilapidated walls. Heave repairs of the floor of machine shops. Repair of old wooden almirahs of the office and stores. 4.2.1 Regarding addition of ₹ 13,000/- the Ld. counsel referred to page 62 to 63 of the paper book, which is a copy of the ledger account of publicity and advertising ledger account and a copy of Bill of Phoenix Creation for ₹ 13,000/- and submitted that the expenditure was incurred for website designing and Internet marketing expenses, which being in the nature of advertisement, it was debited under said head. 4.2.2 Regarding addition of ₹ 26,453/-, the Ld. Counsel referred to page 64 of the paper book, which is a ledger account of EAPBX repair and submitted that the EAPBX system was damaged by short-circuiting and therefore main parts along with battery were replaced. 4.2.3 In view of the above, the Ld. counsel submitted that the expenses were mainly in the nature of the repairs and no new asset was created and, thus, the expenses incurred were being revenue in nature, same are allowable under section 37(1) of the Act. 4.3 The Ld. DR, on the other hand, relied on the finding o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... site designing and Internet expenses and EAPBX repair is deleted. The Ground No. 2 of the appeal of the assessees accordingly allowed. 5. The ground No. 3 of the appeal relates to disallowance of interest of ₹ 1,68,600/-under section 40A(2)(b) of the Act paid to three persons. 5.1 The Assessing Officer observed that interest @ 15% was paid to three persons, namely, Sh. Satya Prakash Gupta, Smt. Priyanka Gupta and Smt. Nisha Gupta, which are persons specified under section 40A(2)(b) of the Act. According to the Assessing Officer, the rate of 12% was reasonable and thus, he disallowed @ 3% interest paid being excessive and unreasonable. He computed the disallowance accordingly to ₹ 1,68,600/-. The Ld. CIT(A) confirmed the disallowance. 5.2 Before us, the Ld. counsel referred to pages 39 to 40 of the paperbook and submitted that the Assessing Officer has taken the figure of the interest incorrectly. He also submitted that interest at the rate of 15% was being paid to four party since 2008-09 and to two parties since 2009-10 and no such disallowance has been made in earlier years. Further, he submitted as the interest at the rate of 15% has been allowed to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier years also and no disallowance has been made by the Assessing Officer. According to the Ld. counsel, there is no change in the facts and circumstances as compared to the earlier years and, therefore, in view of the rule of consistency, no disallowance would have been made. Before us, records of earlier years, for verifying the fact, whether the Assessing Officer allowed interest at the rate of 15% to the three parties, are not available, and therefore, we feel it appropriate to restore this issue to the file of the Assessing Officer for verifying the facts of earliers years and then decide the isuue in dispute in the light of rule of consistency laid down in various decisions of the Hon ble Supreme Court and other courts cited by the Ld. counsel before us. Accordingly, Ground no. 3 is allowed for statistical purposes. 6. The ground No. 4 of the appeal relates to disallowance of ₹ 2,88,377/- under section 40(a)(ia) of the Act, for nondeduction of tax at source on watch and ward expenses. 6.1 The Assessing Officer observed the expenses of ₹ 2,88,377/- incurred toward security expenses and no tax was deducted by the assessee under section 194C of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and may be decided in view of the proviso to section 40(a)(ia) of the Act. 6.2.6 The Ld. DR relied on the order of the lower authorities, however, did not object for restoring the issue to the file of the Ld. Assessing Officer. 6.3 We have heard the rival submissions and perused the relevant material on record. The issue in dispute is regarding non-deduction of tax at source on the expenditure of security expenses to the three parties mentioned above in the submission of the Ld. counsel. The Ld. counsel has submitted each transaction in respect of the two parties, namely, Premier Security Private Limited and SP Automation was below the threshold of ₹ 30,000 (each transaction) and total payment of ₹ 75,000/- and, therefore, not liable for tax deduction at source. We note from the records available for us that this issue of each transactions being less than threshold amount liable for TDS, has not been examined by the lower authorities. 6.4 Regarding the payment of ₹ 2,00,076/- made to M/S Aries Integrated Security, the Ld. counsel has submitted that in view of the proviso to section 40(a)(ia) inserted by the Finance Act, 2012, w.e.f., 01/04/2013, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur opinion, the Tribunal was wrong while disallowing 1/6th of the total car expenditure and depreciation claimed by the assessee on account of the personal use of the cars which were used by the directors. We, therefore, answer the question in the negative, i.e. in favour of the assessee and against the Revenue . 76 ITD 32, DCIT Vs. Haryana Oxygen Ltd. (ITAT Delhi) Now when the directors and the company are two separate legal entities, the use of the car by the directors of the company could not be characterized as for non business purpose. No disallowance under section 37(1) was justified . 109 ITD 198, Midland International Limited vs. DCIT (Delhi ITAT), in which at page 214, it was held as under: Hence, keeping in mind this principle and following the decision of Gujarat High Court in the case of Syaji Iron Industries (supra) and the decisions (supra) of the Tribunals we hold that the CIT (A) was not justified in upholding the order of Assessing Officer wherein a case of a company he disallowed the expenses claimed by the assessee company with regard to telephone and car/depreciation treating the same to be of personal nature. Accordingly, the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was for the purpose of the business and commercially expedient and the same was admissible as deduction, he made a token disallowance of 20 per cent of such expenses on the ground that element of excessiveness in such reimbursement cannot be ruled out - Not justified - AO has accepted that the accounts were duly admitted - Disallowance was inherently based on surmises and conjectures and devoid of a legally sustainable foundation - CIT(A) justified in deleting the disallowance . 7.3 On the contrary, the Ld. DR relied on the order of the lower authorities on the issue in dispute. 7.4 We have heard the rival submissions and perused the relevant material on record. The Assessing Officer has made disallowance at the rate of 1/10th of expenses, out of the following expenses: Sl. No. Particulars amount i) Travelling expenses 1,27,090 ii) Telephone depreciation 6,547 iii) Festival celebration 23,200 ..... 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