Bharat Nagori, Pune V. Deputy Commissioner of Income tax, Pune

ITA 1309/PUN/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4841 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 5 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 23-08-2018
• Assessment Year: 2010-2011
• Appeal Filed On: 23-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M K VERMA
• Keywords: Business expenditure; Rule of consistency; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

- IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH SMC, PUNE , BEFORE MS. SUSHMA CHOWLA, JM ./ ITA NO. 1309/PUN/2017 / ASSESSMENT YEAR : 2010-11 BHARAT MITTHALAL NAGORI, 603, SAN MAHU COMPLEX, OPP. POONA CLUB, 5, BUND GARDEN ROAD, PUNE-411 001 PAN : ACQPN2497Q ....... / APPELLANT ! / V/S. THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), PUNE. / RESPONDENT APPELLANT BY : SHRI KISHORE PHADKE RESPONDENT BY : SHRI M.K. VERMA / DATE OF HEARING : 08.10.2018 / DATE OF PRONOUNCEMENT : 24.10.2018 ' / ORDER PER SUSHMA CHOWLA, JM THE APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORD ER OF COMMISSIONER OF INCOME TAX (APPEALS)-3, PUNE DATED 27.02.2017 RELAT ING TO ASSESSMENT YEAR 2010-11 PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL:- 2 ITA NO.1309/PUN/2017 A.Y.2010-11 1. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS, IN SU STAINING THE DISALLOWANCE OF INTEREST EXPENDITURE AMOUNTING TO R S.32,05,320/- MADE BY THE LEARNED AO, U/S. 14A OF THE ITA, 1961 R . W.R. 8D OF THE IT RULES,1962. THE LEARNED IT AUTHORITIES OUGHT TO HAVE APPRECIATE D THAT THERE IS NO NEXUS BETWEEN INTEREST EXPENDITURE AND EXEMPT INCOME EARN ED I . E. SHARE OF PROFIT FROM PARTNERSHIP FIRMS, AND THE INVESTMENTS IN PART NERSHIP FIRMS ARE MADE OUT OF OWN CAPITAL . 2. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN SUSTAINING THE AD - HOC DISALLOWANCE OF INTEREST EXPENDITURE OF RS.2 LACS M ADE U/S. 57 OF THE ITA, 1961 MADE BY THE LEARNED AD ON THE ANALOGY THAT THE INTEREST CHARGED ON LOANS GIVEN IS LESS THAN THE INTEREST PAID ON LOANS TAKEN. THE IT AUTHORITIES OUGHT TO HAVE APPRECIATED THE REALITIES OF THE SITU ATION. 3.THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND A ND DELETE ALL OR ANY OF THE GROUNDS OF APPEAL. 3. THE FIRST ISSUE RAISED IN THE PRESENT APPEAL IS AGAINST DISALLOWANCE MADE U/S.14A OF THE ACT AT RS.32,05,320/- AND THE SECOND ISSUE IS WITH RESPECT TO AD-HOC DISALLOWANCE OF INTEREST EXPENDITURE OF RS.2,00,0 00/- MADE U/S.57 OF THE ACT. 4. BRIEFLY IN THE FACTS OF THE CASE, ASSESSEE WAS A N INDIVIDUAL AND HAD FURNISHED RETURN OF INCOME DECLARING TOTAL INCOME AT RS.10,75 ,400/-. THE ASSESSEE WAS ENGAGED IN PROPRIETARY BUSINESS AND WAS ALSO PARTNER IN VAR IOUS CONSTRUCTIONS, FIRMS AND WAS ALSO DIRECTOR IN VARIOUS FIRMS. DURING ASSESSMENT P ROCEEDINGS, ASSESSING OFFICER ON VERIFICATION OF RETURN OF INCOME AND COMPUTATION OF INCOME NOTED THAT THE ASSESSEE HAD EARNED SHARE OF PROFIT FROM FIRMS AT RS.5,75,24,397 /- WHICH WAS CLAIMED AS EXEMPT U/S.10(2A) OF THE ACT. THE DETAILS ARE LISTED IN PA RA 4 OF THE ASSESSMENT ORDER. THE ASSESSEE ALSO RECEIVED DIVIDEND INCOME OF RS.39,75, 031/- AND CLAIMED AS EXEMPT INCOME. THE ASSESSING OFFICER NOTED THAT THE ASSESS EE HAD NOT MADE ANY DISALLOWANCE U/S.14A OF THE ACT. HOWEVER, HE HAD DE BITED FINANCIAL EXPENSES OF RS.45,79,657/- AND INTEREST EARNED ON CAPITAL OF RS .32,05,320/- AND CLAIMED THE SAME AS BUSINESS EXPENDITURE. THE ASSESSEE WAS SHOW CAUS ED AS TO WHY INTEREST PAID TO FIRMS AGAINST SHARE OF PROFIT, WHICH WAS EXEMPT, BE NOT DISALLOWED IN VIEW OF THE PROVISIONS OF SECTION 14A OF THE ACT. THE ASSESSEE FILED SUBMISSION VIDE LETTER DATED 18.12.2012. HOWEVER, THE ASSESSING OFFICER HELD THA T UNDER SECTION 14A OF THE ACT, IT IS PROVIDED NOT TO ALLOW DEDUCTION IN RESPECT OF ANY E XPENDITURE EXCLUSIVELY INCURRED BY 3 ITA NO.1309/PUN/2017 A.Y.2010-11 THE ASSESSEE IN RELATION TO EXEMPT INCOME. THE PLEA OF THE ASSESSEE THAT THERE WAS NO NEXUS BETWEEN INTEREST PAID AND THE SHARE OF PROFIT FROM THE FIRMS AS IT WAS NOT INCURRED TOWARDS EARNING EXEMPT INCOME FROM THE PARTNERSHIP FIRMS, WAS NOT ACCEPTED. THE ASSESSING OFFICER ALSO COMPUTED INTEREST FREE FUNDS AVAILABLE EXCLUDING INVESTMENT IN FIXED ASSETS, CURRENT ASSETS OF THE ASSESSEE AND NO TED THAT ASSESSEE HAD MADE INVESTMENT IN FIRMS AT RS.5.47 CRORES, INVESTMENT I N EQUITY SHARES AT RS.2.16 CRORES WHICH WAS MUCH HIGHER THAN THE INTEREST FREE FUNDS AT RS.1.07 CRORES. THE ASSESSING OFFICER, THUS, OBSERVED THAT LOAN BEARING FUNDS TO THE EXTENT OF RS.6.31 CRORES WERE UTILIZED FOR MAKING INVESTMENT. HENCE, CONTENTION O F THE ASSESSEE THAT IT HAD SURPLUS FUNDS TO MAKE INVESTMENT OF RS.7.63 CRORES WAS NOT ACCEPTED. 5. THE SECOND PLEA OF THE ASSESSEE WAS THAT EXPENDI TURE INCURRED AS INTEREST EXPENSES WAS NOT TOWARDS EARNING EXEMPT INCOME BUT TOWARDS EARNING THE TAXABLE INCOME IN THE FORM OF INTEREST RECEIVED FROM OTHERS WHICH WAS OFFERED TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES. THIS PLEA OF THE AS SESSEE WAS NOT ACCEPTED BY THE ASSESSING OFFICER AS THE ASSESSEE HAD SHOWN INCOME FROM OTHER SOURCES AT NIL AFTER DEBITING INTEREST EXPENSE INCURRED ON BORROWED FUND S GIVEN AS ADVANCE. THE ASSESSING OFFICER HELD THAT THE PROVISIONS OF SECTI ON 14A OF THE ACT WERE APPLICABLE AND TOTAL INTEREST EXPENDITURE OF RS.32,05,320/- CL AIMED AS BUSINESS EXPENDITURE , WAS DISALLOWED AND ADDED BACK IN THE INCOME OF THE ASS ESSEE. 6. WITH REGARD TO DISALLOWANCE U/S.57 OF THE ACT, T HE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD EARNED INTEREST INCOME AT RS. 38,56,312/- SHOWN UNDER HEAD INCOME FROM OTHER SOURCES AGAINST WHICH IT HAD CLA IMED EXPENDITURE OF THE SAME AMOUNT AND THE BALANCE INCOME WAS SHOWN AS NIL. THE ASSESSING OFFICER NOTED THAT ASSESSEE HAD TAKEN LOAN AT HIGHER RATE OF INTEREST UP TO 22.8% AND HAD CHARGED INTEREST ON ADVANCE GIVEN @18% ONLY. FURTHER, IN MO RE CASES, 10 OUT OF 17 CASES OF BORROWED LOAN, ASSESSEE HAD PAID INTEREST; HOWEVER, ASSESSEE HAD CHARGED INTEREST ON ADVANCES GIVEN IN 4 CASES OUT OF 18 CASES ONLY. THUS, IN THE PRESENT CASE, EXCESS 4 ITA NO.1309/PUN/2017 A.Y.2010-11 CLAIM OF INTEREST OF RS. 2,00,000/- OUT OF TOTAL IN TEREST OF RS.38,56,312/- CLAIMED U/S.57 OF THE ACT WAS DISALLOWED AND ADDED BACK IN THE INC OME OF THE ASSESSEE. 7. THE CIT(A) UPHELD THE ORDER OF ASSESSING OFFICER BY CONFIRMING BOTH THE ADDITIONS IN THE HANDS OF ASSESSEE AGAINST WHICH, T HE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 8. IN RESPONSE TO THE DISALLOWANCE MADE U/S.14A OF THE ACT, LD. AR FOR THE ASSESSEE HAS DRAWN MY ATTENTION TO THE COMPUTATION OF INCOME FOR THE YEAR UNDER CONSIDERATION AND POINTED OUT THAT ASSESSEES SHARE OF PROFITS OF THE FIRMS WAS ALREADY SUBJECTED TO TAX AT THE PARTNERSHIP LEVEL, WAS EXEM PT IN TERMS OF SECTION 10(2A) OF THE ACT AND THERE SHOULD HAVE APPROXIMATE CAUSE FOR THE DISALLOWANCE U/S.14A OF THE ACT WHICH RELATES WITH THE TAX EXEMPT INCOME AND THE EX PENDITURE WHICH MUST BE INCURRED TOWARDS EARNING THE SAID EXEMPT INCOME. IN RESPECT OF INCOME FROM OTHER SOURCES, HE POINTED OUT THAT ASSESSEE HAD PAID SUM OF RS.45,30, 821/- AS INTEREST AND HAD EARNED INCOME OF RS.38,56,312/- AND THE CLAIM WAS RESTRICT ED U/S.57(III) OF THE ACT TO THE SUM OF RS.38,56,312/- AND NOT CLAIMED THE WHOLE OF INTE REST PAID OF RS.45,38,211/-. THE LD. AR FURTHER SUBMITTED THAT NO DISALLOWANCE IS WARRAN TED U/S.57(III) OF THE ACT. 9. THE LD. DR FOR THE REVENUE HAS PLACED RELIANCE O N THE ORDERS OF THE AUTHORITIES BELOW. 10. ON PERUSAL OF THE RECORD AND AFTER HEARING BOTH THE AUTHORIZED REPRESENTATIVES, THE FIRST ISSUE WHICH IS RAISED IN THE PRESENT APPE AL IS AGAINST DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. THE ASSESSEE WAS PARTNER IN VARIOUS PARTNERSHIP FIRMS AND ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT AND DISALLOWED THE INTEREST EXPENDITURE OF RS.32,05,320/-. THE SAID IN TEREST WAS PAID BY THE ASSESSEE ON DEBIT BALANCES OF THE PARTNERSHIP FIRMS. THE ASSESS EE HAD SHOWN THE SAME AS BUSINESS EXPENDITURE AND HAD CARRIED FORWARD LOSS T O BE ADJUSTED AGAINST INCOME IN 5 ITA NO.1309/PUN/2017 A.Y.2010-11 THE SUCCEEDING YEARS. THE CASE OF THE ASSESSING OF FICER ON THE OTHER HAND WAS THAT THE ASSESSEE HAD OVER DRAWN CAPITAL ACCOUNT AND IN TURN MADE INVESTMENT IN THE PARTNERSHIP FIRMS, INCOME FROM WHICH WAS EXEMPT FRO M TAX. HENCE, PROVISIONS OF SECTION 14A OF THE ACT WERE ATTRACTED AND THE ASSES SING OFFICER DISALLOWED THE TOTAL INTEREST. THE CASE OF THE ASSESSEE HAS TWO FOLDS. T HE CASE OF THE ASSESSEE WAS THAT NO DISALLOWANCE WAS TO BE MADE ON ACCOUNT OF INTERE ST EXPENDITURE AS THE AMOUNT WAS INVESTED IN PARTNERSHIP FIRMS, NOT FOR EARNING SHAR E OF PROFITS WHICH IN ANY CASE WAS EARNED IRRESPECTIVE OF THE INVESTMENT MADE. HE FURT HER POINTED WITHOUT PREJUDICE BASIS, THAT THE ASSESSING OFFICER HAS NOT APPLIED THE PROV ISIONS OF RULE 8D OF THE IT RULES CORRECTLY. HE ALSO STRESSED THAT ON SIMILAR CIRCUMS TANCES, NO DISALLOWANCE WAS MADE IN A.YS. 2009-10 AND 2013-14 VIDE ORDERS PASSED UNDER SECTION 143(3) OF THE ACT. THOUGH RULE OF CONSISTENCY IS NOT APPLICABLE TO THE INCOME TAX PROCEEDINGS, BUT CONSISTENT APPROACH SHOULD BE ADOPTED IF FACTS REMA IN SAME. IN ANY CASE FACTUAL ASPECTS OF THE OTHER YEARS ARE NOT AVAILABLE EXCEPT THAT NO SUCH DISALLOWANCES U/S.14A OF THE ACT HAD BEEN MADE IN THE OTHER YEARS. HOWEVE R, IN THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER APPLIED PROVISIONS OF SECTION 14A OF THE ACT AND DISALLOWED THE TOTAL INTEREST CHARGED ON THE DEBIT BALANCE OF THE CAPITAL ACCOUNTS. IN THIS REGARD, ANOTHER ASPECT IS THE TOTAL INTEREST FREE FUNDS AVA ILABLE AS PER BALANCE SHEET WERE 11.62 CRORE AND TAX FREE INVESTMENTS AGGREGATING TO RS.7.78 CRORE AND PLEA OF THE ASSESSEE WAS THAT NO DISALLOWANCE IS CALLED FOR IN VIEW OF THE RATIO LAID DOWN IN THE CASE OF HDFC BANK LTD. VS. DCIT, 366 ITR 505( BOM.) . APPLYING THE SAID PRINCIPLE, NO DISALLOWANCE IS TO BE MADE UNDER SECTION 14A OF THE ACT. ACCORDINGLY, GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS ALLOWED. 11. COMING TO THE NEXT ISSUE RAISED VIDE GROUND OF APPEAL NO.2, WHEREIN DISALLOWANCE OF RS.2,00,000/- WAS MADE UNDER SECTIO N 57(III) OF THE ACT. THE ASSESSING OFFICER VIDE PARA 5 AT PAGE 12 OBSERVED TWO THINGS I.E. RATE OF INTEREST ON WHICH LOAN WAS TAKEN, WAS HIGHER I.E. @ 22.8% AND ON ADVANCE; INTEREST WAS CHARGED BY ASSESSEE @18%. FURTHER, IN MORE CASES, 10 OUT OF 17 CASES OF BORROWED LOAN 6 ITA NO.1309/PUN/2017 A.Y.2010-11 ASSESSEE HAD PAID INTEREST. HOWEVER, ASSESSEE HAD C HARGED INTEREST ON ADVANCES IN 4 CASES OUT OF 18 CASES. THE ASSESSING OFFICER DISALL OWED EXCESS CLAIM OF RS.2,00,000/- OUT OF TOTAL INTEREST OF RS.38,56,312/- CLAIMED U/S .57(III) OF THE ACT. IT WAS CLARIFIED BY LD. AR FOR THE ASSESSEE THAT THE INTEREST PAID BY A SSESSEE WAS TO THE TUNE OF RS. RS.45,30,821/- WHICH WAS RESTRICTED TO RS.38,56,312 /-; HENCE , THERE IS NO MERIT IN THE SO-CALLED DISALLOWANCE OF RS.2,00,000/-. SINCE THE ACTUAL CLAIM OF THE ASSESSEE HAS BEEN RESTRICTED, NO OTHER DISALLOWANCE IS, THUS, WA RRANTED. ACCORDINGLY, ADDITION OF RS.2,00,000/- IS, THUS, DELETED. THUS, GROUND OF AP PEAL NO. 2 RAISED IS ALLOWED. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED ON 24 TH DAY OF OCTOBER, 2018. SD/- (SUSHMA CHOWLA) /JUDICIAL MEMBER / PUNE; / DATED : 24 TH OCTOBER, 2018. SB ' # $%&' ('% / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(APPEALS)-3, PUNE. 4. THE PR. CIT-2, PUNE. 5. !'# $% , & $% , - '() , / DR, ITAT, SMC BENCH, PUNE. 6. #*+ ,- / GUARD FILE. // TRUE COPY // &. / BY ORDER, / $) /PRIVATE SECRETARY & $% , / ITAT, PUNE.