SHRI NATARAJAN SOMASUNDARAM,CHENNAI vs. ITO, NCW-8(2), CHENNAI

The ld. AR Shri D. Anand, Advocate submits that the ld. CIT(A)/NFAC erred in disallowing the claim of depreciation on the asset used for business purposes without appreciating the fact that the asset was acquired and put to use exclusively for the purposes of the assessee’s business. He vehemently argued that the disallowance is contrary to the provisions of section 32 of the Act. Further, he argued that the asset in question was actively used in the assessee’s business during the relevant assessment year. He submits that the mere fact the revenue generated from the asset was minimal cannot be a valid ground for disallowance, as the law only requires the asset to be “put to use” during the relevant year.

The ld. DR Ms. Gouthami Manivasagam, JCIT submits that there was no proof at all furnished before the Assessing Officer in support of assessee’s claim. She drew our attention to page 19 of the impugned order and argued that the ld. CIT(A)/NFAC asked the assessee to file relevant documents for consideration of the claim. She argued that no 4 evidence was produced before the ld. CIT(A) and supported the reasons recorded by the ld. CIT(A).

Heard both the parties and perused the material available on record. We agree with the findings of the ld. CIT(A) in observing that no comparison between the rental income and business income in reducing depreciation on the property commonly used for the business, but, however,, the ld. CIT(A) asked the assessee for certain details from the assessee and it is noted that the assessee confirmed that no rental agreement is entered into with the tenant. Further, no proof of payment of municipal tax wherever produced. Further, the ld. CIT(A) asked the assessee to furnish the payment receipts showing the proof of corporation tax paid to cross verify the claim of the assessee, but, no such corporation tax paid proof of corporation tax receipt furnished. Taking into account the submissions of the ld. AR and the ld. DR and facts and circumstances of the case, we are of the opinion that though no comparison could be taken into account to compare rental income and business income with reference to depreciation, but, having no evidence on record, we restrict 50% at ₹.1,67,660/- of total disallowance of ₹.3,35,320/- made by the Assessing Officer and sustain balance 50% at ₹.1,67,660/-. Thus, ground Nos. 2 & 3 are partly allowed.

Ground Nos. 4 & 5 raised by the assessee in challenging the action of the ld. CIT(A) in confirming the disallowance made on account of interest expenditure. According to the Assessing officer, the assessee has OD account with Kotak Mahendra Bank and its opening and closing balance are at ₹.1,77,21,002/- and ₹.1,62,41,471/- respectively. It was explained that the said loan amount was utilized for business purpose only. The Assessing Officer doubted the said explanation and proceeded to disallow the aggregate interest claim of ₹.11,12,600/- on non-business advance to Shri S. Muthurathinam and land advance against the claim of ₹.18,06,860/-. The ld. CIT(A) proceeded to confirm the order of the Assessing Officer for non-production of direct evidence in support of the claim of the assessee.

The ld. AR submits that the ld. CIT(A)/NFAC erred in holding the disallowance of interest on borrowed capital claimed under section 36(1)(iii) of the Act only on the assumption of business of trading in onions does not require capital expenditure or term loans. He vehemently argued that the said disallowance has no basis on any law or facts and prayed to delete the same. Further, he argued that the ld. CIT(A) failed to appreciate that it is not within the domain of the tax authorities to determine the necessity of borrowing for a business as held by the 6 Hon’ble Supreme Court in the case of SA Builders Ltd. v. CIT 288 ITR 1 (SC). He argued that the disallowance as confirmed by the ld. CIT(A) is not maintainable if the borrowings is for the purpose of business, the necessity, reasonableness, or prudence of such borrowing cannot be questioned by the taxing authorities. He relied on the decision in the case of SA Builders Ltd. v. CIT (supra) and argued that the disallowance confirmed by the ld. CIT(A) is not sustainable and liable to be deleted.

The ld. DR submits that there was no proof furnished by the assessee showing the nexus between the OD funds utilized for the purpose of business. She drew our attention to para 16 of the impugned order and argued that the Assessing Officer rightly compared the turnover and requirement of funds to the business of trading in onions and arriving a conclusion that the interest claimed on bank loan is not an expenditure incurred for the purpose of business. She supported the order passed by the ld. CIT(A) and prayed to dismiss the ground raised by the assessee.

Heard both the parties and perused the material available on record. It is noted that the assessee has submitted that OD account was used for his business and no loan and advance given out of the OD. Further, he brought to the notice of the Assessing Officer that loan given to Shri Muthurathinam and interest earned thereon was disclosed in the 7 return of income from time to time. Further, the assessee submitted that the capital balance suffices the amounts of loan given and advance given to land and specifically contends that the land advance was also from the capital funds and not from the OD account. We note that the Assessing Officer and the ld. CIT(A) did not examine the issue with reference to the submissions of the assessee that there is sufficient capital balance and no need of availing loan for the purpose of business. On careful reading of the decision of the Hon’ble Supreme Court in the case of SA Builders v. CIT (supra), we find that the Hon’ble Supreme Court was pleased to agree with the view taken by the Hon’ble High Court of Delhi in the case of CIT v. Dalmia Cement (Bharat) Ltd. 254 ITR 377 (Del), which held that once it is established that there was a nexus between the expenditure and the purpose of business, which need not necessarily be the business of the assessee itself, the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. In the present case, the assessee explained before the Assessing Officer, which is reflecting at page 5 of the assessment order, wherein, the assessee stated that the OD account is used for the purpose of business only and no loan or advance given out of the OD account. The Assessing Officer doubted the said expenditure vide para 5.3 of the assessment order and observed that the purchases and sales justify that the assessee does not keep the purchased items for longer period and thus, no loan funds are required, but, however, the Assessing Officer did not doubt the nexus between the business and the expenditure as the assessee has sufficient capital balance and no need of availing loan for the purpose of business. In our opinion, the Revenue is not justifiably claim to put itself in the armchair of the businessman as held by the Hon’ble Supreme Court in the case of SA Builders Ltd. v. CIT (supra). Therefore, the facts and circumstances in the case of the assessee and in the case of SA Builders are similar and respectfully following the same, the disallowance made by the Assessing Officer on account of interest, which was confirmed by the ld. CIT(A), is not justified and accordingly deleted. Thus, ground Nos. 4 & 5 raised by the assessee are allowed.

Ground Nos. 6, 7 & 8 raised by the assessee in challenging the action of the ld. CIT(A) in confirming the disallowance of 30% of commission payment under section 40(a)(ia) of the Act. The Assessing Officer noticed commission expenses at ₹.13,03,930/- in the profit and loss account. The Assessing Officer asked the assessee to furnish evidence for such payments together with tax deducted out of the same.

The ld. AR argued that the ld. CIT(A)/NFAC erred in disallowing 30% of the commission payment under section 40(a)(ia) of the Act without appreciating the fact that the payment do not fall under section 40(a)(ia) of the Act. Further, he argued that the ld. CIT(A) failed to consider the individual commission payment made to various agents are small amounts, which do not attract the provision of section 194H of the Act. Further he submits that the entire commission payment was routed through a primary agent, does not alter the nature of individual payments made to the recipients which remain below the threshold for TDS applicability. Further, he argued that the ld. CIT(A)/NFAC failed to see the commission payments were made through proper banking channel and separate ledgers were maintained for each recipient proving the genuineness of the said transactions. He argued vehemently that the ld. CIT(A) and the Assessing Officer ignored the said documentary evidences and proceeded to disallow 30% of the expenses arbitrarily.

The ld. DR did not agree with the submissions of the ld. AR and drew our attention to the submissions of the details of commission paid which are reflecting at pages 9 & 10 of the assessment order and argued that the assessee is required to deduct TDS on such commission payment. She supported the order of the ld. CIT(A) in confirming the order of the Assessing Officer and prayed to dismiss the ground raised by the assessee.

We note that admittedly, the commission payment to an extent of ₹.13,03,930/- debited to the profit & loss account of the assessee. It is also noted that the said commission was paid to the main agents in the respective cities which will be further distributed by them to all other procurement agents who will canvas and procure the goods and the main agent is the guarantor to the assessee, this being a common trade practice in line with the business of the assessee. Further, it is also submitted before the Assessing Officer that all payments are made through cheques supported by individual ledger extract to show the proof of genuineness of the payments. We find that there is no dispute with regard to the payments made by the assessee through banking channel duly supported by ledger extract and as rightly argued by the ld. AR that there was no reference by the Assessing Officer and the ld. CIT(A) in respect of genuineness of such ledger extract in the orders of the Assessing Officer and the ld. CIT(A). It is noted that the Assessing Officer proceeded to disallow 30% of the commission payment without considering the ledger extract and explanations of the assessee in the said business field. Therefore, we accept the submissions of the assessee, which are reflected in page 11 of the assessment order and hold that the disallowance of 30% and confirmed by the ld. CIT(A), is not justified. Accordingly, ground Nos. 6, 7 & 8 raised by the assessee are allowed.