TMI Blog2023 (3) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... paid on capital borrowed for the purpose of business should be allowed as deduction while computing business income ? - It is the settled position of law that any expense incurred by the assessee for the purpose of the business the same can be allowed as deduction provided it is not capital or personal in nature. It is the onus upon the assessee to justify based on the documentary evidence the utilization of the loan borrowed by the assessee from Capital First Ltd over and above the amount used for the settlement of outstanding loan from Bajaj Auto Finance Ltd. On perusal of the financial statements of the assessee pertaining to the different years, we note that the assessee is not carrying out any business activity. Admittedly, the assessee is a corporate and legal entity. Indeed, the assessee to maintain legal entity has to incur certain expenses such as audit expenses, ROC filing charges etc. To maintain the legal status of the assessee, it is not required to incur the expenses beyond the certain points until and unless some cogent material is brought on record by the assessee. Considering the fact that there was no business carried on by the assessee during the year unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in such facts and circumstances is widened in order to disprove the contention raised by the assessee during the assessment proceedings. But we find that no such exercise has been done by the authorities below. Accordingly, in the absence of necessary verification and having any doubt on the details filed by the assessee, we do not find any reason to uphold the finding of the learned CIT(A). Hence, we direct the AO to delete the addition made by him. Thus, the ground of appeal of the assessee is hereby allowed. Disallowance of insurance premium - assessee has not furnished the documentary evidence for payment of such insurance premium - HELD THAT:- In the present case, the assessee has claimed insurance expense as claimed as prepaid expenses incurred in the earlier year. For this purpose, we have referred the balance sheet of the last year ending as on 31st March 2013 and find that the assessee in the immediate preceding year has shown prepaid expenses under the head short-term loans and advances amounting to ₹68,425/- only which was written off in the year under consideration. Thus, to this extent it cannot be said that the assessee has claimed any expense which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) is liable to be deleted. 3. In law and in the facts and in the circumstances of the appellant's case, the Ld. CIT(A) has erred in confirming disallowance of insurance expense of Rs. 68,425/- without appreciating that such expenses are incurred for maintenance of business and shall be allowed. The same is liable to be deleted. 4 The appellant craves leave to add, alter, amend and/or withdraw any of the grounds either before or at the time of appeal hearing. 3. The first issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowances of interest expense of Rs. 76,00,227/- by holding the same is neither allowable under section 24(a) nor under section 36(1)(iii) of the Act. 4. The facts in brief are that the assessee in the present case is a private limited company and engaged in the activity of trading of vehicles. The assessee during the assessment proceedings claimed that it has acquired a property for the purpose of the business out of the loan taken from Bajaj Auto Finance Ltd in the month of January 2010. However, the assessee failed to use such property for the purpose of the business or for any other purpose till immediat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the head house property. Thus, the addition was made on account of interest of ₹76,00,227/- to the total income of the assessee. 6. Aggrieved assessee preferred an appeal to the learned CIT(A) who confirmed the addition made by the AO by observing as under: 4.2.1 On going through the observations of the AO and submissions made by the appellant, find that it is a fact that no business activity has been carried out by the appellant during the year under consideration. It is also a fact that the property that was purchased during the year by taking a loan from Bajaj Finance Ltd, was also not used for the purpose of business. Further, the appellant has borrowed funds from Capital First Ltd. to repay the loan taken from Bajaj Finance Ltd. This loan has ostensibly been taken for the purpose of expansion of business, the appellant was aware that no business had been carried out during the year and that in the absence of the same, the said property had been given on rent to HDFC Bank. Therefore, borrowing funds from Capital First Ltd. claiming it; was for expansion of its business is misrepresentation of facts and patently wrong. It may have been the intention of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred the financial statements of the earlier years available on record and based on such financial statements reached to the conclusion that there was no enhancement in the value of any fixed assets except the capital work in progress. Thus, it can be presumed that such interest cost has been incurred towards the loan from Bajaj Auto Finance Ltd which was effectively utilized for acquiring the property. Thus, we hold that the Bajaj loan was used the purpose of acquiring the property in dispute. Proceedings further, there is no dispute to the fact that the assessee has obtained fresh loans from Capital First Ltd dated 27 February 2013. It was submitted that such loan has been utilized for repayment of the loan of the Bajaj Auto Finance Ltd. In this regard, we note that the money borrowed from the Capital First Ltd was Rs. 6 crores which is evident from the loan sanction letter and ledger accounts available on pages 16 to 17 and 19 to 20 of the paper book. 10.1 As per the ledger account of Bajaj Auto Finance Ltd placed on page 31 to 32 of paper book, the amount of loan was settled against the loan taken from the Capital First Ltd is for Rs. 9,26,287/- and Rs. 3,89,78,640/- only. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to maintain legal entity has to incur certain expenses such as audit expenses, ROC filing charges etc. However, to maintain the legal status of the assessee, it is not required to incur the expenses beyond the certain points until and unless some cogent material is brought on record by the assessee. Considering the fact that there was no business carried on by the assessee during the year under consideration and in immediate previous year, we therefore hold that the amount of loan borrowed by the assessee from the Capital First Ltd over and above the amount utilized for settlement of outstanding loan of Bajaj Auto Finance Ltd was not for the purpose of business. Hence the interest cost incurred thereon cannot be considered for the purpose of the business. Hence, the ground of appeal of the assessee is partly allowed. 11. The next issue raised by the assessee is that the learned CIT(A) erred in confirming the addition of Rs. 16,29,800/- on account of mismatch in the interest amount with form 26AS. 12. The necessary fact are that AO from the form 26AS observed that during year the HDFC Bank made payment of Rs 16,29,800/- to the assessee and deducted tax on the same under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payer and income in the hands of the recipient. In the present case, it is certainly an expense in the hands of the HDFC bank but the question arises whether the amount received by the assessee from the bank represents the income in its hands. Generally, any payment received by the payee after the deduction of tax is considered as income of the payee. But this rule cannot be made applicable to each and every receipt in the hands of the assessee that it represents the income. In the given case, the assessee has categorically submitted that it has incurred certain expenses on behalf of the bank which was reimbursed to the assessee by the bank and therefore the same does not represent any income in its hands. To this effect, we note that the assessee before the authorities below has filed the copy of the ledger and receipt issued by Indian Electric Corporation, payments received from the bank, invoice issued by Indian Electric Corporation in the name of the bank and the latter issued by the assessee to the bank for the reimbursement of the expenses which are placed on pages 34 to 39 of the paper book. None of the document placed in the paper book has been doubted by the authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same by holding that no evidence or justification was furnished in respect of impugned payment. 21. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us. 22. The learned AR before us contended that the prepaid expenses were incurred in the earlier year which were shown in the audited balance sheet and no defect of whatsoever was pointed out therein. As per the learned AR, the expenses were incurred for the purpose of the business and therefore the same should be allowed as deduction. 23. On the contrary, the learned DR before us vehemently supported the order of the authorities below. 24. We have heard the rival contentions of both the parties and perused the materials available on record. In the present case, the assessee has claimed insurance expense amounting to 68,425/- which was claimed as prepaid expenses incurred in the earlier year. For this purpose, we have referred the balance sheet of the last year ending as on 31st March 2013 and find that the assessee in the immediate preceding year has shown prepaid expenses under the head short-term loans and advances amounting to ₹68,425/- only which was written off in the year u ..... 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