DCIT CENTRAL CIRCLE-7(2), MUMBAI, MUMBAI vs. SUPER VALUE PROPERTIES PRIVATE LIMITED, MUMBAI

Whether on the facts and circumstances of the case and in law, the Id. CIT(A) erred in deleting the addition of Rs. 5,90,806/- made by AO on account of interest paid on car loans without adjudicating the merits of the case?

Whether on the facts and circumstances of the case and in law, the Id. CIT(A) erred in deleting the addition of Rs. 1,60,19,717/ made by AO on account of interest expenses u/s 36(1)(iii) of the act, without adjudicating the merits of the case?

Whether on the facts and circumstances of the case and in law, the Id. CIT(A) erred in deleting the addition of Rs. 1,08,058/ made by AO on account of disallowance of insurance, without adjudicating the merits of the case?

Whether on the facts and circumstances of the case and in law, the Id. CIT(A) erred in deleting the addition of Rs. 8,14,141/- made on account of disallowance of depreciation u/s 32 of the Act, without adjudicating the merits of the case?

Whether on the facts and circumstances of the case and in law, the Ld CIT(A) erred in deleting the addition of Rs. 82,80,000/- made on account of disallowance of rent expenses u/s 37 of the Act, without adjudicating the merits of the case?

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 76,673/- made on account of disallowance of penal interest u/s 36(1)(iii), without adjudicating the merits of the case?

Facts of the case are that the assessee, filed its return of income declaring loss at Rs.3,32,78,692/- under normal provisions of the Act and Book Profit of Rs. Nil u/s. 115JB of the Act. The assessee company is engaged in the business of running school, providing education to the students and leasing of properties. A search and seizure action under section 132 of the Act was conducted on 14.03.2022in cases of one Shri Jesus Sudhir Lall and Universal Education Group of which the assessee company is part of the group.

1 In response to a query in this respect by the AO, it was stated that even if the car was registered in the name of director, the same was used for the purpose of the business of company. Further, they had shown it as a fixed asset of the company and thus, all the expenses related to the same should be allowed as a deduction to the company. The AO observed that it was clear that the vehicles were purchased in the name of the directors. Further, no explanation was offered by the assessee company as to why the cars had been purchased in the name of its directors of the company. Besides, the assessee could not substantiate with any documentary evidences to prove that the loan funds availed from bank were used for the purpose of business. As per section P a g e | 4 A.Y. 2021-22 Super Value Properties Private Limited 36(1)(iii) of the Act, the deduction is allowed for the amount of interest paid in respect of capital borrowed for the purposes of the business or profession.

2 However, in this case of the assessee company, Mr. Jesus Lall, the director of the assessee company, availed the car loans for personal purpose and claimed the interest in the books of accounts of the assessee company. Thus, it was seen that the interest paid to the above mentioned car loan was not for the purpose of business. Therefore, the interest claimed of Rs. 5,90,806/- was disallowed under section 36(1)(iii) of the Act and added back to the total income.

3 Further, it was seen that the assessee company had claimed insurance charges on the motor cars purchased by Mr. Lall, the director of the assessee company. Since the same was not an expense for the purpose of business, the insurance charges claimed by the assessee company amounting to Rs.1,08,058/- wasalso disallowed.

4 It was also noticed by the AO that that the assessee company claimed depreciation on these motor cars. As the cars were purchased in the name of Mr. Jesus Lall, the director of the assessee company, no explanation was offered by it as to why the cars had been purchased in the name of its director. As the assesse was not the owner of the motor

In the subsequent appeal before the ld.CIT(A) the assessee reiterated the submission made in the assessment proceedings. It has relied upon number of judicial pronouncements, including the decision of the juri ictional ITAT, Mumbai, where the identical issue was decided in its favour. He noted that it was not an uncommon practice to purchase the vehicle in the names of the Directors. The reason was probably to save on the indirect taxes. In such cases, while the Registration Certificate (RC) identifies the Director as the “legal owner” under the Motor Vehicles Act, the taxability and allowability of expenses under the Act are governed by the economic substance of the arrangement rather than its mere legal form. In the present case too, the vehicle is purchased in the name of the director. However, the funds for the purchase of the vehicle partly came from the assessee’s account and partly financed through a vehicle loan. The said loan is duly recognized

The ld.DR. before us claimed that the assessee having failed to demonstrate exclusive usage of the vehicles for business purposes, the AO was justified in disallowing the above expenses as also depreciation thereon. Per contra, the ld.AR relied on the appellate order. It was also P a g e | 7 A.Y. 2021-22 Super Value Properties Private Limited submitted that the AO in the assessment order for AY 2019-20 did not make any such disallowance on the same set of facts.

We have carefully considered the above facts. In the course of hearing the bench made a query whether any record i.e. log book or any other record was maintained so as to rule out any element of personal user by the director. In response, it was admitted that no such records were maintained. It was also admitted that even the margin money on the vehicle loan was paid by the company and not the director concerned. In view of such admitted facts, we opine that some element of personal user by the director cannot be ruled out altogether though the expenses are being booked in the books of account of the assessee company. The expenses could not be considered to have been wholly and exclusively incurred for the business of the company. Therefore, a part of such expenses need to be disallowed. The contention that no such disallowance was made in earlier assessment order is concerned, we find no merit as it is a settled law that the principles of res judicata are not applicable to income tax proceedings.

1 In our considered view, it would be reasonable to restrict the disallowance of 25% of the above expenses as also the depreciation considering the personal element involved. We, therefore, set aside the P a g e | 8 A.Y. 2021-22 Super Value Properties Private Limited appellate order and direct the AO to work out such disallowance while the balance amount would stand deleted. The above grounds are partly allowed.

Ground no.2 pertains to the disallowance of Interest expenses under section 36(1)(iii) of the Act. During assessment proceedings, it was seen that the assessee company was having secured loans outstanding amounting to Rs. 40,10,503/- as on 31.03.2021 on which it had claimed interest expenses of Rs. 1,66,40,523/-. Further, it was also seen that the assessee had given interest free loans/ advances to Mr. Jesus Lall, the director of the assessee company amounting to Rs. 34,69,00,000/- outstanding as on 31.03.2021. As the assessee company had given interest free advances to the director, the interest at the rate of 12% was calculated on the same which amounts to Rs 4,16,28,000/- .Further, it was seen that the interest expense claimed by the assessee for the year under consideration is Rs 1,66,40,523/-. Therefore, the interest expenses claimed by the assessee company on the secured loans amounting to Rs. 1,66,40,523/-, debited to the Profit and Loss account of the assessee company was disallowed under section 36(1)(iii) of the Act. However, an amount of Rs. 5,90,806/-was already disallowed on account of interest expenses claimed on motor cars used by the directors

Before the ld.CIT(A), the main contention is that the bank loans were availed from Tamil Nadu Mercantile Bank in the preceding years for the purpose of construction of building and for repayment of earlier bank loans of Indian Bank which were utilized for the purpose of purchase of leasehold rights. The aforesaid bank loans were repaid during the year and only motor car loans were outstanding as on 31.03.2021 of Rs. 40,10,503/-. The assessee company had taken unsecured interest free loan from Mr. Jesus Lall of Rs. 26 cr. which was used to repay the existing secured bank loans. Thereafter, the assessee had advanced a total sum of Rs 34.69 cr. to Mr. Jesus Lall, thereby making net advance of Rs. 8.69 cr. to him as on 31.03.2021.It had received a sum of Rs. 46.14 cr. from M/s Universal Edu Infra Services Pvt Ltd as an interest free security deposit which was used to advance interest free advance to Mr. Jesus Lall. There is no nexus between the secured bank loans taken from Tamilnadu Mercantile Bank on which the P a g e | 10 A.Y. 2021-22 Super Value Properties Private Limited interest had been paid and the advances given to Mr. Jesus Lall. According to the ld.CIT(A), the assessee provided the details of the interest-bearing loans including the purpose of the loans, their utilization and repayment. The said loans stood repaid during the year under consideration. From the details provided, it could be said that the said loan was utilized for business purpose and therefore, the interest paid on such loan was allowable expenditure. As regard the funds advanced to Mr. Jesus Lall, it was seen that the net outgo of the funds to Mr. Jesus Lall was Rs 8.69 cr. The said funds are advanced out of the interest free deposits from the sister concern of the assessee. As contended by it, there appeared no nexus between the secured bank loans and the advances given to Mr. Jesus Lall. Considering the overall facts of the case, the disallowance of interest of Rs.1,60,49,717/- on the loan from Tamil Nadu Co-op Bank could not be upheld. The AO was directed to delete the same.

The ld.DR. has claimed that the AO was justified in making the disallowance as the assessee company lent substantial amount as loan to the director without charging any interest.

We have carefully considered the facts of the case. It is noticed from the appellate order that the ld.CIT(A) has taken into consideration

Ground no.5 relates to the disallowance of Rent for office.During assessment proceedings, it was seen that the assessee company had claimed rental expense of Rs. 82,80,000/- for the premises situated at Niyati Residency, situated at N.S. Road No 9, Juhu, Mumbai. On perusal of the copy of the rent agreement submitted by the assessee, it was found that the rent was paid to a residential property (4BHK) with all furniture which was rented for the licensee and family members. Further, it was also seen that, it was at this residential premise where search and seizure action under section 132 of the Act was conducted in the case of Mr. Jesus Lall, the director of the assessee company.

In response to the query in this regard, the assessee company contended that it paid the above mentioned rent for the above premises

1 The reply of the assessee was not found acceptable as it was evident that premise was used by the director of the assessee company as his residence and thus, it was clear that such expenses were not incurred by the assessee company for the purpose of business. Thus, the same was not an allowable business expense in the case of the assessee company as per the provisions of the Act. Therefore, the amount of Rs. 82,80,000/- claimed by the assessee company on account of rental expenses was disallowed and added back to the total income.

Before the ld.CIT(A), the assessee reiterated that the said premises were used for the purpose of its business as well as for the P a g e | 13 A.Y. 2021-22 Super Value Properties Private Limited residential accommodation of the Director, Mr. Jesus S. Lall, and hence, should be allowed as a deduction. Though the leave and licence agreement mentioned that the premises had been taken on lease for the Directors and their family members, it could not be said that, in the course of such use, the directors were not carrying out any official work, such as holding board meetings, meeting with clients, or meeting with office staff. TDS on such rent has been duly deducted, and all rent payments had been made by the assessee Company. The perquisite value of the rent would be taxable in the hands of Mr Jesus Lall. It relied upon the decision of Hon’ble ITAT, Mumbai, in the case of Acuity Holdings Pvt. Ltd. Vs DCIT in ITA no. 4011/Mum./2017. The ld.CIT(A) observed that as per the Act where a Rent-Free Accommodation or accommodation at concessional rent is provided by an employer to its employees, such accommodation could be out of its owned properties or properties taken on rent. In either case, the employee wouldliable to pay tax on the perquisite value of the accommodation, which is calculated on the basis of the actual rent paid for such property. This implied that the expenditure incurred by the employer in providing such accommodation would be an allowable expenditure in its hands. In the present case, the lease agreement was entered into by the assessee. The rent was actually borne by the assessee after deducting of TDS. The premises were used as P a g e | 14 A.Y. 2021-22 Super Value Properties Private Limited a residence did not, per se, disqualify the expenditure. In a corporate setup, providing accommodation to key management personnel can be a matter of commercial expediency. Furthermore, the assessee’s claim that the premises were also used for official meetings is plausible and can be accepted. Thus, the rental expenditure borne by the assessee could be said to be incurred for the purpose of the business. In light of the aforementioned observations and the judicial precedent cited, the disallowance of rental expenditure was held to be unsustainable. The AO was directed to delete the same. It is seen that the perquisite value of the rent-free accommodation was not offered to tax by Mr Jesus Lall. The appeal proceedings in the case of Mr Jesus Lall were pending before this office. The AO was directed to calculate the perquisite value of the accommodation and tax the same in the hands of Mr Jesus Lall, at the time of passing the giving effect order in his case.

The ld.DR placed reliance on the assessment order though he admitted that the perquisite value could be added in the personal case of the above named director.

On careful consideration of the facts of the case, we find no infirmity in the appellate order whereby the AO has been directed to allow such expenses but at the same time, it should be considered in the P a g e | 15 A.Y. 2021-22 Super Value Properties Private Limited hands of the Director as perquisite in his personal case. The ld.DR did not rebut the decision of the appellate authority in any manner. Accordingly, we uphold the decision of the ld.CIT(A) and the ground is therefore, dismissed.

Ground no.6 pertains to the disallowance of penal interest assessment proceedings, it was seen that the assessee company had claimed an expense on account of penal interest of Rs. 76,673/-. In response to the query in this regard, the assessee stated that the penalty paid was against late payment of interest on bank loan taken claiming that such interest paid on delayed payment of the instalment as penal interest is allowable as expenditure. However,the AO rejected the contention holding that penal interest paid was not an allowable expense and thus, an amount of Rs. 76,673/- was disallowed and added back to the total income.

The ld.CIT(A) observed that penal charges for delayed payment of instalmentscould not be termed as an offence prohibited by law and is compensatory in nature and does not constitute any breach of law. Since, the interest was allowable business expenditure,the AO was directed to delete the same.

Before us, the ld.DR relied on the assessment order and the grounds of appeal.

On careful consideration, we find no infirmity in the appellate order. The expense of penal interest is compensatory in nature and is to be paid towards any breach of contractual obligation with the bank. Such interest is charged on the delay in payments made by the borrower to the bank. This does not constitute a breach of law but instead poses as a charge against the late payment.Even seen in the light Explanation 1 to Section 37(1) of the Act, it is clear that any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and such expenditure is not allowed as deduction. The delay in payment of interest in late payment of loan instalment cannot be said to be an offence or incurred for the purpose which is prohibited by law. The appellate order is, therefore, is upheld. The ground of the Revenue stands dismissed.

In the result, the appeal of the Revenue stands partly allowed.