PRATAP SONS,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, JAIPUR

That the Learned CIT(Appeals) erred in confirming disallowance of Telephone, Travelling, conveyance Expenses and depreciation on Car to the extent of Rs. 4,28,126/-.

That the Learned CIT(Appeals) erred in Confirming disallowance of entertainment and Staff Refreshment expenses to the extent of Rs. 69,766/-.”

Regarding ground Nos. 1 and 2, briefly the facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that the assessee has taken certain loan for building construction which has been capitalized in A.Y. 2012-13, however, for the year under consideration, the interest expenses on the said loan has not been capitalized. The assessee was issued a show-cause notice to justify why interest expense should not be capitalized before the building has been put to use by the assessee instead of claiming the interest expense as revenue expenditure. After considering the assessee’s submission, the Assessing Officer has returned a finding that by assessee’s own admission, the loan was taken for business purpose of building construction and interest expense has been capitalized for A.Y. 2012-13, the same should also be capitalized till the building is put to use. As per the Assessing Officer, the new showroom was built and put to use in September 2012 accordingly, the interest paid for the period April,2012 to August, 2012 amounting to Rs. 16,81,057/- was disallowed as revenue expenditure and the same was capitalized in the building account of the assessee. However, no depreciation on the said amount being capitalized was allowed by the Assessing Officer.

Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) and it was contended that the loan of Rs. 2.8 Crores was taken from the HDFC Bank in August, 2010 against mortgage of property at Bhagwan Das Road, Jaipur and it was further contended that this loan had been used for business purpose but was not used for building construction and interest thereon was therefore claimed as eligible revenue expenditure. As per the ld. CIT(A), since the assessee itself has capitalized the loan in the previous year and the period of construction of the building and the period of loan are for the same months, it cannot be ascertained whether the loan was utilized for business construction or not. In view of the same and by the assessee’s own treatment of capitalizing the same in the earlier year, the stand of the Assessing Officer was confirmed.

During the course of hearing, the ld. AR reiterated the submissions made before the lower authorities. It was submitted by the ld AR that the loan of Rs. 2.8 Crores from HDFC Bank was taken in August, 2010 against mortgage of property and the construction of building at Rambagh Circle, Jaipur stated in December, 2010. It was submitted that the source of investment in building is internal accruals from business operations and no loan has been taken for the purpose of construction of the building. It was submitted that the loan against the mortgage of property taken from HDFC Bank has nothing to do with the construction of the building at Rambagh Circle, Jaipur nor was this property mortgaged to the bank. It was submitted that the source of investment for building is internal accruals and from composite fund of business including sundry creditors and partners capital. It was

The ld. DR is heard who has relied on the finding of the Assessing Officer and drawn our attention to the fact that during the course of assessment proceedings, the assessee itself has admitted that the loan

We have heard the rival contentions and perused the material available on record. The AO has returned a finding that the purpose for which the mortgage loan has been taken by the assessee from HDFC Bank is for the purpose of building construction and the said finding is based on the assessee’s own submission during the course of assessment proceeding. Further, it was noted that in the previous assessment year 2012-13 the assessee itself has capitalized the interest expenses in its books of accounts and has not claimed the same as revenue expenditure while filing its return of income. Regarding contention of the ld AR that the loan has not been taken for building construction and further the AO has made the disallowance without correlating the HDFC Bank mortgage loan with the investment in the building account, in our view, it is for the assessee to demonstrate through verifiable evidence that the purpose of loan and its utilization is not for the purposes of the building construction which it has failed to do so and nothing has been brought on record to controvert the findings of the AO. Further, given that by assessee’s own treatment of capitalizing the interest expenditure in the previous assessment year 2012-13, where the assessee now claims that the expenditure is not capital but revenue, there is greater onus on the assessee which it has again failed to discharge in the present case. In this factual background, we do not see any infirmity in action of the Assessing Officer in disallowing the interest expenses till the new building was put

Regarding ground no. 3, the Assessing Officer has disallowed 10% of the expenditure in the nature of telephone, travelling, conveyance and depreciation on cars totaling to Rs. 4,28,126/-. The Assessing Officer observed that the said expenses are related to such facilities which are certainly proved to be used for other than business purpose and referring to the decision of Hon’ble Madras High Court in case of Sundram Industries Ltd 239 ITR 405 has observed that disallowance out of such expenses on account of personal nature is justified. It was further observed by the AO that the some of the these expenses in respect of conveyance and travelling were made in cash on the basis of self made vouchers so the complete verification of these expenses was not possible. Accordingly, 1/10th expenses were disallowed and added back to the income of the assessee which has been confirmed by the ld. CIT(A) holding the same to be reasonable.

During the course of hearing, the ld. AR submitted that the telephone expenses are fully vouched. Same are mainly of telephone installed at the shop and mobiles given to employees. Personal use by

We have heard the rival contentions and perused the material available on record. We find that the expenditure has been disallowed on the basis that the personal use of the telephone facility cannot be ruled out and during the course of hearing, the ld AR has stated that the personal usage by the Partners is minimal though the quantum of disallowance is on a higher side. Given that no basis or allocation has

Regarding ground no. 4, brief facts of the case are that the Assessing officer has disallowed 10% of entertainment and staff refreshment expenses amounting to Rs. 69,765 holding that these expenses were not fully supported by the proper bills due to which these expenses could not be verified completely. The disallowance has been confirmed by the ld. CIT(A) holding the same to be reasonable.

During the course of hearing, the ld. AR submitted that the A.O. has erred in disallowing 10% of expenditure on entertainment and Staff Refreshment (total expenditure Rs. 6,97,658/-). The assessee is in business of sarees and ladies wear. Nature of business is such that tea, coffee, cold drinks, mineral water, chocolates etc have to served to customers and tea etc to staff. The amount of expenditure on entertainment and staff refreshment is less than 0.20% of turnover which is most reasonable and deserves acceptance.

We have heard the rival contentions and perused the material available on record. The AO has disallowed 10% of the expenditure holding that the same are not fully supported by vouchers and evidences. The nature of the expenditure is explained as refreshments in forms of tea/coffee offered to customers and employees. Given the nature of the assessee’s business and its reported turnover, we find the nature and quantum of expenditure to be reasonable and the addition so made by the AO is hereby deleted.