ASST CIT 9(2)(1), MUMBAI V. BASONS INVESTMENTS P.LTD, MUMBAI

ITA 103/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8805 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-11-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 08-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V JENARDHANAN LD
• Assessee Lawyers: RAKESH JOSHI LD
• Keywords: Business income; Business expenditure; Opportunity of being heard; Rule of consistency
• Section: 143(3); 14A

Judgement Text

ITA.NO.103/MUM/2015 BASONS INVESTMENTS PRIVATE LIMITED ASSESSMENT YEAR-2012-13 IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI . . , , BEFORE SHRI D.T. GARASIA, JM AND SHRI MANOJ KUMAR AGGARWAL, AM ./I.T.A. NO.103/MUM/2016 ( / ASSESSMENT YEAR: 2012-13) ASSISTANT COMMISSIONER O F INCOME TAX 9(2)(1) ROAD NO.665A,6 TH FLOOR AAYKAR BHAVAN, M.K.ROAD MUMBAI-400 020 / VS. BASONS INVESTMENTS PRIVATE L T D . B/21, MONARCH NAGAR J.B.NAGAR, ANDHERI (EAST) MUMBAI-400 059 ! ./ ./PAN/GIR NO. AABCB-4095-L ( !# /APPELLANT ) : ( $%!# / RESPONDENT ) A SSESSEE BY : RAKESH JOSHI ,LD.AR RE VENUE BY : V.JENARDHANAN, LD. SR. DR / DATE OF HEARING : 26/10/2017 / DATE OF PRONOUNCEMENT : 01/11/2017 / O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. THE CAPTIONED APPEAL BY REVENUE FOR ASSESSMENT Y EAR [AY] 2012- 13 ASSAILS THE ORDER OF THE LD. COMMISSIONER OF INC OME-TAX (APPEALS)- 16 [CIT(A)], MUMBAI, APPEAL NO. CIT(A)-16/IT-270/DCIT9(1)(1)/2014-15 DATED 27/10/2015. THE ASSESSMENT FOR IMPUGNED AY WAS FRAMED BY LD. ITA.NO.103/MUM/2015 BASONS INVESTMENTS PRIVATE LIMITED ASSESSMENT YEAR-2012-13 2 DEPUTY COMMISSIONER OF INCOME TAX-9(1)(1), MUMBAI [ AO] U/S 143(3) OF THE INCOME TAX ACT,1961 ON 18/02/2015. THE REVENUE HAS RAISED FOLLOWING EFFECTIVE GROUNDS OF APPEAL:- 1. THE LD. CIT(A) ERRED IN HOLDING THAT THE INTERE ST INCOME WAS ASSESSABLE AS BUSINESS INCOME RELYING ON DECISION OF THE BOMBAY H IGH COURT IN THE CASE OF KARSONDAS RANCHHODDASS (83 ITR 1) IGNORING THE FACT THAT IN THAT CASE THERE WAS A PERIOD OF INACTIVITY BETWEEN TWO PERIODS OF A CTIVITY, WHICH WAS NOT THE FACT IN THE PRESENT ONE. 2. THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE ON ACCOUNT OF INTEREST ON THE GROUND THAT SINCE INTEREST INCOME HAD BEEN ASSESSED AS BUSINESS INCOME, SUCH EXPENSES WERE ALLOWABLE IGNORING THE FINDING G IVEN BY THE AO NO NEXUS EXISTED BETWEEN THE INTEREST BEARING BORROWED FUND AND INTEREST YIELDING INVESTMENT AND THEREFORE, NOTWITHSTANDING THE INTER EST INCOME HELD AS BUSINESS INCOME, SUCH INTEREST EXPENSES WAS DISALLOWABLE U/S .36(1)(III) OF THE ACT. 2.1. FACTS LEADING TO THE SAME ARE THAT THE ASSESSE E BEING RESIDENT CORPORATE ASSESSEE ENGAGED AS BUILDERS, DEVELOPERS & BUSINESS OF INVESTMENTS WAS ASSESSED U/S 143(3) FOR IMPUGNED AY ON 18/02/2 015 AT RS.669.78 LACS UNDER NORMAL PROVISIONS AS AGAINST R ETURNED INCOME OF RS.159.66 LACS E-FILED BY THE ASSESSEE ON 08/09/2012. THE SUBJECT MATTER OF THIS APPEAL IS HEAD UNDER WHICH CERTAIN I NTEREST INCOME EARNED BY THE ASSESSEE WOULD BE ASSESSABLE TO TAX AND ALSO THE ALLOWABILITY OF CERTAIN INTEREST EXPENDITURE AS BUSINESS EXPENSES. 2.2 DURING ASSESSMENT PROCEEDINGS, IT WAS NOTED THA T THE ASSESSEE DID NOT CARRY OUT ANY BUSINESS ACTIVITY SINCE FINANCIAL YEAR 2009-2010. THE CREDIT SIDE OF PROFIT & LOSS CONSISTED OF RENTAL INCOME, INTEREST INCOME, LOSS/GAINS ON SHARES / MUTUAL FUNDS & DIVIDEND INCO ME . THE ONLY DISPUTE IN PRESENT APPEAL IS WITH RESPECT TO INTERE ST INCOME AND INTEREST EXPENDITURE. 2.3 IT WAS NOTED THAT THE ASSESSEE EARNED INTEREST INCOME FROM FIXED DEPOSITS [FDR] TO THE TUNE OF RS.420.94 LACS & INTEREST INCOME OF ITA.NO.103/MUM/2015 BASONS INVESTMENTS PRIVATE LIMITED ASSESSMENT YEAR-2012-13 3 RS.8.81 LACS ON LOANS GRANTED BY THE ASSESSEE WHERE AS IT PAID INTEREST ON BANK OVERDRAFT ACCOUNTS & UNSECURED LOANS OBTAIN ED FROM DIRECTORS TO THE TUNE OF RS.319.06 LACS AND OFFERED NET INTER EST INCOME OF RS.110.69 LACS UNDER THE HEAD BUSINESS INCOME . THE LD. AO ALSO NOTED THAT THE AMOUNT OF FDR FAR EXCEEDED THE BORRO WED FUNDS AND WERE IN EXISTENCE IN THE BALANCE SHEET SINCE A LONG TIME AND THEREFORE, THE INVESTMENT BEING OUT OF SURPLUS FUNDS WAS ASSES SABLE UNDER THE HEAD INCOME FROM OTHER SOURCES AGAINST WHICH ONLY DIRECT EXPENDITURE COULD BE ALLOWED TO THE ASSESSEE. THE LD. AO FURTHE R OPINED THAT THE ASSESSEE PAID EXORBITANT RATE OF INTEREST ON LOANS OBTAINED FROM DIRECTORS RANGING FROM 15% TO 30% WHICH, AT MAXIMUM, COULD BE ALLOWED @12% IN TERMS OF SECTION 40A(2)(B) AND HENCE, WORKED OUT DIFFERENTIAL INTEREST DISALLOWANCE TO THE EXTENT OF 120.66 LACS. SIMILARL Y, AFTER ANALYSIS OF BANK OVERDRAFT ACCOUNTS, LD. AO CONCLUDED THAT BORR OWED FUNDS WERE DIVERTED FOR VARIOUS PURPOSES, WHICH WERE NOT WHOLL Y AND EXCLUSIVELY LINKED WITH EITHER EARNING INTEREST ON FDR OR RENTA L INCOME EARNED BY THE ASSESSEE. FINALLY, LD. AO REACHED A CONCLUSION THAT TOTAL INTEREST EXPENDITURE OF RS.319.06 LACS AS CLAIMED BY THE ASS ESSEE COULD NOT BE ALLOWED TO HIM AGAINST INTEREST INCOME OR UNDER THE HEAD BUSINESS INCOME. 3. AGGRIEVED, THE ASSESSEE CONTESTED THE SAME WITH SUCCESS BEFORE LD. CIT(A) VIDE IMPUGNED ORDER DATED 27/10/2015 WHE RE THE ASSESSEE WHILE PLACING RELIANCE ON SEVERAL JUDICIAL PRONOUNC EMENTS, DREW ATTENTION TO THE FACT THAT INVESTMENT ACTIVITY CONSTITUTED BU SINESS OF THE ASSESSEE AND INTEREST INCOME EARNED BY ASSESSEE, IN SIMILAR MANNER, RIGHT FROM AY 2000-01 TO AY 2010-11 WAS ASSESSED AS BUSINESS INCOME . THE LD. ITA.NO.103/MUM/2015 BASONS INVESTMENTS PRIVATE LIMITED ASSESSMENT YEAR-2012-13 4 CIT(A) AFTER PERUSING OBJECT CLAUSE IN THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE AND PLACING RELIANCE ON SEVERAL DEC ISIONS INCLUDING THE DECISION OF HONBLE BOMBAY HIGH COURT RENDERED IN KARSONDAS RANCHHODDASS VS. CIT [83 ITR 1] & ALSO ON CIT VS. P ARAMOUNT PREMISES [190 ITR 259] CONCLUDED THAT INTEREST INCOME WAS RIGHTLY ASSESSED AS BUSINESS INCOME . AS A LOGICAL CONSEQUENCE, LD. CIT(A) FURTHER CONCLUDED THAT INTEREST EXPENDITURE HAD DIR ECT NEXUS WITH ASSESSEES BUSINESS AND THEREFORE, THE SAME WAS ALL OWABLE IN FULL U/S 37(1). AGGRIEVED, THE REVENUE IS IN FURTHER APPEAL BEFORE US. 4. THE LD. DEPARTMENTAL REPRESENTATIVE [DR] PLACED RELIANCE ON THE STAND OF LD. AO AND CONTENDED THAT INTEREST ON FDRS HAD TO BE ASSESSED AS INCOME FROM OTHER SOURCES SINCE IT WAS ADMITTED FACT THAT THE ASSESSEE DID NOT CARRY OUT ANY BUSINESS ACTIVIT Y SINCE FINANCIAL YEAR 2009-2010 AND FDRS WERE CREATED OUT OF SURPLUS FUND S. THE LD. DR FURTHER CONTENDED THAT BORROWED FUNDS WERE DIVERTED FOR NON BUSINESS PURPOSES AND HENCE, THE INTEREST EXPENDITURE COULD NOT BE ALLOWED TO THE ASSESSEE UNDER ANY HEAD. PER CONTRA , LD. COUNSEL FOR ASSESSEE [AR] REITERATED THE CONTENTIONS AS RAISED BEFORE LD. CIT (A) AND PLACED ON RECORD A CHART SHOWING TREATMENT OF INTEREST INCOME RIGHT FROM AY 2003- 2004 ONWARDS. 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED RELEVANT MATERIAL ON RECORD. FIRST OF ALL, WE OBSERVE THAT LD. CIT(A) HAS NOTED THAT ONE OF THE MAIN OBJECT OF THE ASSESSEE AS PER MEMORANDUM OF ASSOCIATION WAS INVESTMENT ACTIVITY WHICH IS NOWHERE DISPUTED BY TH E REVENUE. SECONDLY, THE PERUSAL OF INTEREST CHART FOR VARIOUS YEARS AS PLACED ON RECORD REVEALS THAT INTEREST INCOME EARNED BY ASSESSEE SIN CE AY 2003-04 HAS ITA.NO.103/MUM/2015 BASONS INVESTMENTS PRIVATE LIMITED ASSESSMENT YEAR-2012-13 5 BEEN ASSESSED UNDER THE HEAD BUSINESS INCOME ONLY BY THE REVENUE IN VARIOUS ASSESSMENTS U/S 143(3) AS WELL AS PROCESSIN G U/S 143(1). HENCE, FOLLOWING RULE OF CONSISTENCY, WE CONCUR WIT H THE STAND OF LD. CIT(A) AND SEE NO REASON TO INTERFERE WITH THE SAME SO FAR AS THE HEAD UNDER WHICH INTEREST INCOME WAS ASSESSABLE, IS CONCERNED. RESULTANTLY, THE FIRST GROUND OF REVENUES APPEAL STANDS DISMISS ED. 6. THE SECOND GROUND IS RELATED WITH CLAIM OF ASSES SEE QUA INTEREST EXPENDITURE. SINCE WE HAVE ALREADY CONCLUDED THAT INTEREST INCOM E WAS ASSESSABLE UNDER THE HEAD BUSINESS INCOME, THE ADMI SSIBILITY OF INTEREST EXPENDITURE HAS TO BE TESTED UNDER THE PROVISIONS O F SECTION 36(1)(III) & SECTION 37(1). AS PER THE PROVISIONS OF SECTION 37( 1), THE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS ARE ALLOWABLE AS BUSINESS EXPENDITURE AND FURTHER INTER EST ON BORROWED CAPITAL USED FOR ASSESSEES BUSINESS IS ALLOWABLE U /S 36(1)(III). A PERUSAL OF THE QUANTUM ASSESSMENT ORDER REVEALS THAT LD. AO , AFTER ANALYSIS OF BORROWED FUNDS, NOTED THAT THE SAME WERE DIVERTED / USED FOR ACTIVITIES LIKE CARRYING OUT SHARE TRANSACTIONS, FOREIGN TRAVELLING, PURCHASE OF PROPERTY, PAYMENT OF INSURANCE FOR DIRECTORS OF THE COMPANY, INVESTMENT IN TAX FREE BONDS ETC. FURTHER, THE LD. AO, IN THE ALTERNATIVE, HAS COMPUTED SEPARATE DISALLOWANCE U/S 14A TO THE TUNE OF RS.113.50 LACS TOWARDS INTEREST EXPENDITURE SINCE THE ASSESSEE MAD E SUO-MOTO DISALLOWANCE U/S 14A TO THE TUNE OF RS.11.88 LACS T OWARDS EXPENDITURE BUT DID NOT MAKE ANY DISALLOWANCE QUA INTEREST EXPENDITURE. THE LD. CIT(A) HAS DELETED THE SAME ON THE PREMISES THAT OW N FUNDS FAR EXCEEDED THE INVESTMENTS MADE BY THE ASSESSEE. HOWE VER, SINCE AO HAS NOTED DIVERSION OF BORROWED FUNDS FOR NON-BUSIN ESS PURPOSES AND ITA.NO.103/MUM/2015 BASONS INVESTMENTS PRIVATE LIMITED ASSESSMENT YEAR-2012-13 6 THEREFORE, THE ISSUE REQUIRES FRESH ADJUDICATION. M OREOVER, WE HAVE ALREADY NOTED THAT INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE HAS TO FULFILL THE PRESCRIBED CONDITIONS OF SECTION 36(1)( III)/37(1). THEREFORE, THE MATTER OF INTEREST EXPENDITURE IS RESTORED BACK TO THE FILE OF LD. AO FOR FRESH ADJUDICATION AS PER LAW. NEEDLESS TO SAY THAT ADEQUATE OPPORTUNITY OF BEING HEARD SHALL BE PROVIDED TO THE ASSESSEE, W HO, IN TURN, IS DIRECTED TO SUBSTANTIATE HIS CLAIM IN THIS REGARD. RESULTANTLY, THIS GROUND OF REVENUES APPEAL STANDS ALLOWED FOR STATISTICAL PURPOSES. 7. IN NUTSHELL, REVENUES APPEAL STANDS PARTLY ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 01 ST NOVEMBER, 2017. SD/- SD/- (D.T. GARASIA) (MANOJ KUMAR AGGARW AL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 01.11 .2017 SR.PS:- THIRUMALESH ! / COPY OF THE ORDER FORWARDED TO : 1. !# / THE APPELLANT 2. $%!# / THE RESPONDENT 3. + ( ) / THE CIT(A) 4. + / CIT CONCERNED 5. $'- , - , / DR, ITAT, MUMBAI 6. . / GUARD FILE / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI