Flat purchased for providing Residential Accommodation to Managing Director is a Business Necessity: ITAT [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that when a company purchases flat for providing accommodation facility to its Managing Director, the tax benefits shall not be denied to it since the activity is a business necessity. The Tribunal also deleted the order of the Assessing officer wherein the Officer made an addition by invoking the provisions of deemed dividend under Section 2(22)(e) of the Income Tax Act.

The assessee- Company purchased the flat at Dadar for the residence of CMD of the assessee company. The assessee took the loan in the sum of Rs.300 lacs and paying the instalment along with interest. The AO declined the claim of the assessee in view of the provision under section 2(22)(e) of the I.T. Act, 1961. The AO declined the claim of the assessee on the ground of that there was no business nexus between the residential premises and the assessee company.

Before the Tribunal, the assessee argued that the assessee can purchase the flat for his CMD where he can treat the patient of the hospital very conveniently when the residence is near to hospital, therefore, it is a business necessity. It was also argued that the assessee nowhere transferred the fund/amount to any other person, therefore, the application of provision u/s 2(22)(e) of the Act is totally wrong.

Allowing the appeal, the Tribunal held that the claim of the assessee is not liable to be declined.

In support of its findings, the Tribunal relied on the decision of the Apex Court in Union of India Vs. Azadi Bachao Andolan and the Madras High Court decision in M.V. Vallipan Vs. CIT.

“The assessee company neither transferred the funds outside the company nor to the director, therefore, the provision of Section 2(22)(e) of the Act is not applicable to the facts of the case. Accordingly, we set aside the finding of the CIT(A) in this regard. Since the finding given by lower authorities attracting the provision of Section 2(22) (e) of the Act is not justifiable, therefore, the ancillary claim is also not liable to be declined. So far as disallowance of repayment of loan instalment is concerned the CIT(A) has deleted the disallowance subject to verification by the AO, we do not find any infirmity in the direction of CIT(A) for allowing verification. However, the claim of interest to the tune of Rs.24,62,285/- is revenue in nature, therefore, is liable to be allowed. Accordingly, we allow the claim of the assessee company for such interest expenditure on bank loan taken for the purpose of the assessee business. So far as the claim of depreciation is concerned, we are of the view that the assessee is entitled to claim the depreciation @ 5% of the total value of the purchase of Rs.34,72,037/-,” the Tribunal said.