Bhikhiben Balavantsinh Rajput, Sidhpur V. DCIT,Patan Circle, Patan

ITA 1043/AHD/2018

AI Insights

The case revolves around the disallowance of interest expenses claimed by the assessee, Bhikhiben Balvantsinh Rajput, on funds borrowed from her partnership firm, Gokul Overseas, which were used to purchase land. The AO disallowed the interest expenses under section 57 of the Income Tax Act, 1961, stating that the funds were not used to generate any income. The CIT (A) upheld this decision. However, the Tribunal found that the assessee had a direct nexus between the interest paid on the borrowed funds and the interest income earned from other investments, leading to the allowance of the appeal.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 127158 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 06-12-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 25-04-2018
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Cost of acquisition

Judgement Text

आयकर अपील य अ धकरण, अहमदाबाद यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’A’’ BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER आयकरअपीलसं./ITA No.1043/AHD/2018 नधा रणवष /Asstt. Year: 2014-15 Bhikhiben Balvantsinh Rajput C/o. Gokul Overseas, Opp. Sujanpura Patia, Highway Road, Sidhpur PAN: ABFPR3417A Vs. DCIT Patan Circle, Patan (Applicant) (Respondent) Assessee by : Shri Parimalsinh B Parmar, A.R. Revenue by : Shri Dilip Kumar, Sr. D.R स ु नवाईक तार ख/Date of Hearing : 07/12/2022 घोषणाक तार ख/Date of Pronouncement: 11/01/2023 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: 1. The captioned appeal has been filed at the instance of the assessee against the order of the Learned Commissioner of Income Tax(Appeals), Gandhinagar, Ahmedabad dated 05/02/2018 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2014-15. 2. The assessee has raised the following grounds of appeal: “1. The learned CIT(A) has erred both in law and on facts of the case in confirming the action of AO in disallowing interest expense paid to Gokul Overseas of Rs. 1,15,64,054/- u/s. 57 of the Act. 2. The learned CIT(A) has erred both in law and on facts of the case in holding that there was a nexus between the funds withdraw from Gokul Overseas and funds used for acquiring immovable property. ITA No.1043/AHD/2018 A.Y. 2014-15 2 3. Alternatively and without prejudice, the interest expense may be allowed to be capitalized and added to the cost of acquisition of the immovable property. 4. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 5. The learned CIT(A) has erred in law and on facts of the case in confirming action of the ld. AO in levying interest u/s.234A/B/C of the Act. 6. The learned CIT(A) has erred in law and on facts of the case in confirming action of the ld. AO in initiating penalty u/s.271(1)(c) of the Act. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.” 3. The issue raised by the assessee vide ground no. 1 to 4 of her appeal is that the learned CIT (A) erred in confirming the disallowances of interest expenditure of Rs. 1,15,64,054/- under the provision of section 57 of the Act. 4. The facts in brief are that the assessee in the present case is an individual and deriving income from firm, property and interest income. The assessee is also a partner in the partnership firm namely M/s Gokul Overseas. The assessee time to time on need basis was withdrawing money from the partnership firm in the form of loan and as per partnership deed the assessee was required to pay interest @ 12% to the firm on withdrawal. The total outstanding liability of the assessee on account of withdrawal from the firm was standing at Rs. 10,52,07,072/- on which assessee incurred interest expenditure of Rs. 1,15,64,054/- only. 5. The assessee, likewise, has made deposits and advanced loan to two parties namely M/s Gokul Infracon Pvt. Ltd and M/s Gokul Foundation on which, she was also earning interest income @ 12%. As such, the assessee for the year under consideration earned gross interest income of Rs. 1,22,72,751/- only. The assessee in the return of income has adjusted the interest expenses of Rs. ITA No.1043/AHD/2018 A.Y. 2014-15 3 1,15,64,054/- incurred on borrowing from the firm against interest income of Rs. 1,22,72,751/- only. Thus, the net interest income was only offered to tax. 6. However, the AO found that the assessee during the year acquired a piece of land along with her husband for Rs. 3,16,81,058/- only. The investment in impugned land was directly sourced from the amount withdrawn from the firm. The AO found that the money borrowed from the partnership firm has been invested in the piece of land from which no income accrued to the assessee. Therefore, the AO opined that the interest expenses of Rs. 1,15,64,054/- paid on borrowing from the firm has not been incurred to generate any income. According to the AO, the provisions of section 57 of the Act mandate that the expenses which have been incurred wholly and exclusively for the purpose of generating of income will only be eligible for deduction. As such, the impugned interest expense has not been incurred for generating the impugned interest income. Thus, the AO disallowed the same and added to the total income of the assessee. 6.1 Aggrieved assessee preferred an appeal to the learned CIT (A) who confirmed the order of the AO by observing as under: “4.2 I have considered the facts of the case, assessment order and submission filed by the appellant. The AO disallowed the interest expenses claimed by the appellant as paid to Gokul Overseas in view of the fact that the fund received from Gokul Overseas where the appellant is a partner, has been utilized for acquisition of immovable property by her, jointly with her husband. The appellant has claimed that she had sufficient funds and that there was direct nexus between the interest paid and interest income earned. It is seen from the material on record that the funds transferred to the appellant from Gokul Overseas amounting to Rs.3,14,91,750/- have been used to make payment for a plot to Gokul Infracon Pvt. Ltd. In fact even the fees for stamp duty and registration of the said plot has been made out of the funds of Gokul Overseas, on which the appellant has claimed interest expenditure. The appellant’s submission that she had sufficient funds of her own to make the said investment cannot be accepted since the AO has very clearly established the nexus between the funds withdrawn from the firm and the investment made by the appellant in the plot, from which she has not earned any income. Therefore, I find no reason to interfere in the decision taken by the AO. The addition of Rs.1,15,64,054/- is confirmed. Ground of appeal no.1 is dismissed.” 7. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us. ITA No.1043/AHD/2018 A.Y. 2014-15 4 8. The learned AR before us filed a paper book running from pages 1 to 33 and submitted that the assessee has made investment in the impugned land out of the borrowed fund but at the same time she had sufficient fund which was deposited with the companies in order to earn the interest income. The assessee instead of withdrawing the fund from the companies, has borrowed fund for making the investment in the land. Had the assessee withdrawn the deposits made from the company for the purpose of making the investment, there would not have been any interest income and likewise there would not have been any interest expenses. Consequently, there would not have been any disallowance of interest expenses in the manner as discussed in the order of the authorities below. Accordingly, it was prayed to allow the interest expenses as there is a direct nexus. 9. On the other hand, the learned DR before us vehemently supported the order of the authorities below. 10. We have heard the rival contentions of both the parties and perused the materials available on record. The facts of the case are not in dispute which have been elaborated in the preceding paragraph. Therefore, for the sake of brevity and convenience, we are not inclined to repeat the same. The controversy arises before us further the assessee is eligible for deduction of the interest expenses paid on the money borrowed from the partnership firm which was utilized in making the personal asset being land against the interest income earned from the deposits made with the parties namely M/s Gokul Infracon Pvt. Ltd and M/s Gokul Foundation. Apparently, it seems to us that there is no nexus between the interest expenses viz a viz the interest income. However, the assessee could have easily avoided the interest expenses. The assessee instead of borrowing the money from the partnership firm on interest basis could have withdrawn money which was deposited with the companies as discussed above on which she was earning the interest income. In such a scenario, there wouldn’t have been any income by way of interest in the hands of the assessee and likewise there would not have been ITA No.1043/AHD/2018 A.Y. 2014-15 5 any interest expenses as discussed above. Accordingly, there would not have been any issue with respect to the interest expenses. Thus merely the assessee has taken a decision that instead withdrawing money from deposit made to make investment in land property, has borrowed the money from the partnership firm on interest basis, the assessee could not be made suffer to tax. In simple words, there might be a possibility that the company in which the assessee has made deposit, it was not having any liquid fund and therefore it was not in a position to return the money to the assessee for the purpose of the investment. In such a situation, the assessee prudently decided to borrow the money from the partnership firm on interest as there was no loss to the assessee. Thus, we are of the view that in the given facts and circumstances the assessee should not be penalized by way of making the disallowance of interest expenses. 10.1 Moving further, a question also strikes to our mind whether the impugned interest expense was capital in nature and therefore the same cannot be allowed as deduction under section 57(iii) of the Act. In this regard, we note that the order of the authorities below is silent. Nevertheless, what is gathered from the preceding discussion is that the assessee has not capitalized the interest expense incurred by him. It is for the reason that the assessee has claimed the interest expense against the interest income which evidences that the assessee has not claimed any interest expenses as capital in nature. Moreover, if we apply the reasoning given in the immediate preceding paragraph that had the assessee not borrowed the money from the partnership firm on interest basis and would have taken the money out of the deposits made with the companies, there would not have been any question of the interest expenses whether capital or revenue in nature. 10.2 Before parting it is also important to highlight that the assessee has incurred interest expenses of Rs. 1,15,64,054/- on total outstanding of Rs. 10,52,07,072/- whereas amount invested in land property was of Rs. 3,61,85,825/- only. Further, the assessee before the lower authorities has ITA No.1043/AHD/2018 A.Y. 2014-15 6 contended that the deposits yielding interest income was made out of money withdrawn from the partnership firm. The lower authorities have not disputed the claim of the assessee that the deposit made with the impugned parties were made out of withdrawal from the partnership. The lower authorities also failed to consider the fact that assessee incurred interest expenses onthe total outstanding liability of Rs. 10,52,07,072/- whereas the alleged investment in land property out of borrowing money was of Rs. 3,61,85,825/- only. Thus, it shows that the AO made addition with prejudice mind without properly considering the materials made available on record before him. 10.3 In view of the above and after considering the facts in entirety, we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. 11. The other issue raised by the assessee are either consequential or premature to decide, hence the same are dismissed accordingly. 12. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the Court on 11/01/2023 at Ahmedabad. Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 11/01/2023 Tanmay, Sr. PS TRUE COPY आदेशक त ल प!े षत/Copy of the Order forwarded to : आदेशान ु सार /BY ORDER, उप/सहायकपंजीकार (Dy./Asstt.Registrar) आयकरअपील यअ धकरण, अहमदाबाद / ITAT, Ahmedabad 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धतआयकरआय ु त/ Concerned CIT 4. आयकरआय ु त(अपील) / The CIT(A) 5. !वभागीय $त$न ध, आयकरअपील यअ धकरण/ DR, ITAT, 6. गाड&फाईल / Guard file.