M/S DEEPA DEVELOPERS ,MANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-2(1), MANGALORE

We heard the parties and perused the record. The assessee is a Partnership firm. It is engaged in the business of undertaking civil contract works, engaged as developer and builder and also runs hotel.

The first issue urged in AY 2011-12 relates to the disallowance made u/s 40A(3) of the Act. At the time of hearing, the Ld A.R did not press the grounds relating to the same and hence they are dismissed as not pressed.

The next issue common in both the years under consideration relate to the disallowance of interest expenditure made u/s 40(a)(ia) of the Act for non-deduction of tax at source. The assessee had taken loan from M/s Tata Capital Limited for purchase of car and paid interest thereon without deducting tax at source. Hence the AO disallowed the interest expenditure in both the years by invoking the provisions of sec.40(a)(ia) of the Act. The Ld CIT(A) also confirmed the same, since the assessee could not furnish Form No.26A as required under the first proviso to sec. 201(1) of the Act.

The Ld A.R submitted that the assessee has taken loan form a leading finance company for purchase of car and interest was paid thereon. Accordingly he pleaded that the assessee may be provided with one more opportunity to furnish the certificate as required under sec. 201(1) and to explain the compliance of the second proviso to sec. 40(a)(ia) of the Act. & 2504(B)/2018 3 6. The Ld D.R, on the contrary, submitted that the assessee has not furnished the certificate till date and hence no purpose will be served in affording one more opportunity to the assessee.

Having heard rival contentions, we are of the view that, in the interest of natural justice, the assessee may be provided with one more opportunity, since the vehicle loan has been taken from one of the leading companies. Accordingly we set aside the order passed by Ld CIT(A) on this issue in both the years and restore the same to the file of the AO for examining this issue afresh in both the years, after affording adequate opportunity of being heard to the assessee. After hearing the assessee, the AO may take appropriate decision in accordance with law.

8. The next issue contested in AY 2011-12 relates to disallowance of Lifetime tax paid on purchase of car treating the same as Capital expenditure. The assessee had claimed life time tax paid on purchase of car as revenue expenditure, but the AO disallowed the same holding it as capital expenditure. The Ld CIT(A) confirmed the same by observing that the payment of life time tax is compulsory at the time of purchase of car and hence it shall form part of cost of acquisition of car.

The Ld A.R submitted that the Car can be put to use even with temporary registration without paying life time tax and hence it cannot be said that the same will form part of expenditure incurred to put the asset ready for use. The Ld A.R took support of decision rendered by Ahmedabad bench of Tribunal in the case of Elecon Engineering Company Ltd vs. ACIT & 2504(B)/2018 4 (ITA No.3893/Ahd/07 dated 18-05-2012) and submitted that the Tribunal has allowed the life time tax as revenue expenditure.

On the contrary, the Ld D.R submitted that the life time tax is paid along with purchase cost and hence the Ld CIT(A) has rightly treated the same as capital expenditure.

We notice that the Ahmedabad bench of Tribunal has examined an identical issue in the case of Elecon Engineering Company Limited (supra) and has held that the life time tax paid at the time of purchase of car is revenue expenditure with the following observation:-

The next common issue urged in both the years relate to the enhancement of disallowance made out of car expenses towards personal use. The assessee voluntarily disallowed as sum of Rs.30,000/- and Rs.50,000/- respectively in AY 2011-12 and 2012-13 towards personal expenses. The AO noticed that the disallowance of Rs.30,000/- made in AY 2011-12 worked out to 27.56% of car running expenses (excluding life time tax claimed as part of car expenses). Accordingly he disallowed 27.56% of Car depreciation and Car interest expenses. In AY 2012-13, the disallowance of Rs.50,000/- made by the assessee worked out to 11.36% of the car running expenses. Accordingly the AO disallowed 11.36% of Car depreciation and Car interest in that year. The Ld CIT(A) confirmed the same in both the years.

The Ld A.R submitted that the car has been mainly used for the purpose of business only and the assessee, on a safer course, has disallowed lump sum amount to take care of personal expenses, if any, out of Car running expenses. He submitted that the tax authorities are not justified in disallowing part of depreciation and interest expenses, since the Car was substantially used for the purposes of business only. He submitted that the AO has disallowed 27.56% of depreciation and interest expenses in AY 2011-12 and 11.36% in AY 2012-13. The varying percentage of disallowance would show that there is flaw in the methodology adopted by & 2504(B)/2018 7 the AO and further the AO was not also sure about the exact usage of car for personal purposes.

On the contrary, the Ld D.R submitted that the assessee has voluntarily disallowed round sum out of car running expenses. Since the assessee did not disallow part of depreciation and interest expenses in terms of sec.38(2) of the Act, the AO has disallowed part of both the expenditure.

We notice that the provisions of sec.38(2) warrant disallowance of part of interest expenses and depreciation, if the asset is not exclusively used for the purposes of business. The voluntary disallowance made by the assessee out of car running expenses would show that the car was used for personal purposes also. However, the computation made by the AO for disallowing depreciation and interest by adopting the round sum disallowance made by the assessee as the base, in our view, is not appropriate. This is evidenced by the fact that the AO himself has disallowed 27.56% of depreciation and interest expenses in AY 2011-12 and 11.36% in AY 2012-13, which were inconsistent. Since the assessee did not have actual details of use of car for personal purposes, the possible personal use can only be estimated. The Ld A.R submitted that the car has been mainly used for business purposes only. Hence, on a conspectus of matter, we are of the view that this issue can be put to rest, if the disallowance out of car depreciation and car interest is restricted to 10% in both the years. Accordingly we set aside the order passed by Ld CIT(A) on this issue in both the years and direct the AO to disallow 10% of car depreciation and car interest in both the years. & 2504(B)/2018 8 16. In the result, both the appeals of the assessee are treated as partly allowed for statistical purposes.