SENTINEL ELECTRIC CO., MUMBAI V. ADDL CIT 14(3), MUMBAI

ITA 1337/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75759 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 27-02-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 14-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B P K
• Assessee Lawyers: RASHMIKANT C MOD I
• Keywords: Notional interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUMBAI . . , . . , BEFORE SHRI B R MITTAL, JM & SHRI B R BASKARAN , AM ./I.T.A. NO.1337/MUM/2011 ( ' ' ' ' ' '' ' / ASSESSMENT YEAR: 2007-08) SENTINEL ELECTRIC CO 24 LAWYERS CHAMBERS GROUND FLOOR RC MAMA PATH LOHAR CHAWL, MUMBAI 400 002 / VS. THE ADDL COMMR OF INCOME TAX 14(3), MUMBAI ./PAN AAAFS4582K ( % /APPELLANT ) ( &'% / RESPONDENT ) % ( / APPELLANT BY : SHRI RASHMIKANT C MODI &'% ( / RESPONDENT BY : SHRI B P K PANDE ( + /DATE OF HEARING : 27.02.2014 ( + / DATE OF PRONOUNCEMENT 28 TH FEB 2014 / O R D E R PER B R BASKARAN, AM : THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 30.12.2010 OF THE LD CIT(A) - 25, MUMBAI AND IT REL ATES TO THE AY 2007-08. 2 THE FOLLOWING TWO ISSUES URGED IN THIS APPEAL: I) DISALLOWANCE OF INTEREST EXPENSES TO THE TUNE O F RS. 2,14,523/-; II)DISALLOWANCE MADE U/S 14A OF THE ACT OF RS.16,3 78/- 3 THE FACTS RELATING TO THE ABOVE SAID ISSUES ARE S TATED IN BELOW: THE ASSESSEE IS A PARTNERSHIP FIRM AND IS ENGAGED IN TH E BUSINESS OF DEALING IN ELECTRICAL GOODS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED ITA NO.1337/M/2011 2 FROM THE FUND FLOW STATEMENT FILED BY THE ASSESSEE THAT THERE WAS A NET INCREMENT OF RS.60.12 LACS IN THE BANK BALANCES LYI NG IN THE FLEXI AND CURRENT ACCOUNTS OF THE ASSESSEE. THE AO NOTICED THAT THE ASSESSEE HAD ALSO AVAILED LOANS FROM FAMILY MEMBERS AND RELATIVES @ AN INTERE ST RATE OF 12%. THE AO TOOK THE VIEW THAT THE ASSESSEE HAS KEPT THE ABOVE SAID BORROWED FUNDS IDLE IN THE BANK ACCOUNT, I.E., IT WAS NOT UTILISED FOR BUS INESS PURPOSES. ACCORDINGLY, TOOK THE VIEW THAT THE INTEREST EXPENDITURE RELATIN G TO THE ABOVE SAID AMOUNT OF RS.60.12 LAKHS NEEDS TO BE DISALLOWED. ACCORDINGLY , THE AO COMPUTED THE INTEREST @ 12% ON THE NET INCREMENT OF RS. 60,12, 813/-, WHICH WORKS OUT TO RS.7,21,537/-, AND ADDED THE SAME TO THE TOTAL INCO ME OF THE ASSESSEE. THE AO NOTICED THAT THE ASSESSEE HAS EARNED EXEMPTED IN COME OF RS. 18,051/- FROM THE INVESTMENTS MADE WITH UTI TAX FREE BONDS. THE TOTAL VALUE OF THE INVESTMENTS MADE IN UTI BONDS WAS RS. 5,47,000/-. HENCE, THE AO, BY APPLYING THE PROVISIONS OF RULE 8D OF I T RULES R.W .S 14A OF THE ACT, COMPUTED THE DISALLOWANCE AT RS. 16,378/- AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 4. IN THE APPELLATE PROCEEDINGS, THE LD CIT(A) NOTI CED THAT THE ASSESSEE HAD EARNED INTEREST FROM BANK DEPOSITS TO THE TUNE OF R S. 5,07,014/-. HENCE, THE LD CIT(A) GAVE SET OFF OF THE SAME AGAINST THE INTERES T ADDED BY THE AO AND ACCORDINGLY RESTRICTED THE DISALLOWANCE TO RS.2,14, 523/-. THE LD CIT(A), HOWEVER, CONFIRMED THE DISALLOWANCE MADE U/S 14A R .W.R 8D OF I T RULES. AGGRIEVED, THE ASSESSEE HAS FILED THE PRESENT APPEA L BEFORE US. ITA NO.1337/M/2011 3 5. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CURRENT ACCOUNT MAINTAINED BY THE ASSESSEE IS A FLEXI ACCOUNT. AS PER THE SCHEME APPLICABLE TO THE SAID ACCOUNT, ANY AMOUNT IN EXCESS OF THE MINIM UM LIMIT SHALL AUTOMATICALLY BE TRANSFERRED TO FD ACCOUNT. HE SUBMITTED THAT TH E ASSESSEE WOULD GET INTEREST FROM THE FD ACCOUNT SO TRANSFERRED. IN CASE OF NE ED OF FUNDS IN THE CURRENT ACCOUNT, THE FIXED DEPOSIT ACCOUNT WILL BE CLOSED A ND TRANSFERRED TO THE CURRENT ACCOUNT. THE LD AR SUBMITTED THAT THE ASSESSEE HAS ROUTED ITS BUSINESS TRANSACTIONS THROUGH THE CURRENT ACCOUNT. HE FURTH ER SUBMITTED THAT THE TRANSFER BETWEEN THE CURRENT ACCOUNT AND FLEXI FD A CCOUNT IS AUTOMATIC I.E. IF THERE IS EXCESS BALANCE, IT WILL BE TRANSFERRED TO FD ACCOUNT AND IF THERE IS SHORTAGE OF FUNDS, THE FD WILL BE CLOSED AND TRANSF ERRED TO CURRENT ACCOUNT. HE SUBMITTED THAT THE ASSESSEE RECEIVED A HUGE INCENT IVE AMOUNT FROM ITS SUPPLIERS BY THE END OF THE YEAR AND HENCE THE BANK BALANCE STOOD AT A HIGHER FIGURE AS ON THE DATE OF LAST YEAR. ACCORDINGLY, THE LD AR SUBMITTED THAT THE VIEW ENTERTAINED BY THE AO THAT THE BORROWED FUNDS HAVE BEEN KEPT IDLE IS INCORRECT. THE LD AR ALSO CONTENDED THAT THE ASSES SEE HAS NOT DIVERTED ANY FUNDS OUTSIDE ITS BUSINESS AND IN FACT HE HAS EFFEC TIVELY UTILIZED THE FUNDS AND ALSO EARNED INTEREST FROM OUT OF CURRENT ACCOUNT. THE LD AR FURTHER SUBMITTED THAT IT IS THE PREROGATIVE OF THE BUSINESS MAN TO R EGULATE ITS BUSINESS AFFAIRS AND HENCE, THE AO WAS NOT JUSTIFIED IN ENTERTAINING SUC H KID OF PRESUMPTION AGAINST THE ASSESSEE. WITH REGARD TO THE DISALLOWANCE MADE U/S 14A OF THE ACT, THE LD A.R SUBMITTED THAT THE PROVISIONS OF RULE 8D WAS NO T APPLICABLE TO THE YEAR UNDER CONSIDERATION AND HENCE THE TAX AUTHORITIES A RE NOT CORRECT IN APPLYING THE SAME TO THE INSTANT YEAR. ITA NO.1337/M/2011 4 6. ON THE CONTRARY, THE LD D.R PLACED STRONG REL IANCE ON THE ORDER OF LD CIT(A). 7. WE HAVE HEARD THE RIVAL CONTENTION AND CAREF ULLY PERUSED THE RECORDS. THE FIRST ISSUE RELATES TO THE ADDITION OF ESTIMATED IN TEREST AMOUNT ON THE OUTSTANDING BANK BALANCE OF RS.60.12 LAKHS. AS SUB MITTED BY LD A.R, IT IS A BALANCE OUTSTANDING AS ON THE LAST DATE OF THE YEAR . IT IS NOT THE CASE OF THE AO THAT THE SAID BALANCE STOOD AS IT IS THROUGH OUT TH E YEAR. FURTHER, ACCORDING TO THE FLEXI CURRENT ACCOUNT MAINTAINED BY THE ASSESSE E, THE EXCESS BALANCE SHALL AUTOMATICALLY BE TRANSFERRED TO A FIXED DEPOSIT ACC OUNT, WHICH WILL EARN INTEREST FOR THE ASSESSEE. THUS, WE NOTICE THAT THE ASSESSE E HAS EFFECTIVELY UTILISED THE SURPLUS FUNDS. FURTHER, WE FIND MERIT IN THE CONTE NTIONS OF THE ASSESSEE THAT IT IS THE PREROGATIVE OF THE BUSINESSMAN TO REGULATE THE AFFAIRS OF HIS BUSINESS. SINCE THE FLEXI CURRENT ACCOUNT IS A RUNNING ACCOUNT, THE DAILY BALANCES WOULD CHANGE EVERY DAY DEPENDING UPON THE DEPOSITS AND COLLECTIO NS. HENCE, IN ORDER TO PUT THE BANK BALANCES FOR BETTER USE, THE ASSESSEE SEEM S TO HAVE OPTED FOR FLEXI CURRENT ACCOUNT AND IN THAT PROCESS, IT HAS EARNED A SUM OF ABOUT RS.5.00 LAKHS AS INTEREST ALSO. FURTHER, IT IS NOT THE CASE OF T HE AO THAT THE FUNDS HAVE BEEN DIVERTED TO OTHER PURPOSES, WHICH DID NOT EARN ANY INCOME. HENCE, IN OUR VIEW, THE AO HAS ENTERTAINED THE VIEW THAT THE ASSESSEE H AS KEPT THE FUNDS IDLE IS NOT BASED ON ANY MATERIAL BUT ONLY ON SURMISES AND CONJ ECTURES. WE ALSO NOTICE THAT THE AO HAS COMPUTED NOTIONAL INTEREST OF RS.7, 21,537/- ON THE OUTSTANDING BANK BALANCE AS AT THE YEAR END, WHICH IS NOT PERMI SSIBLE UNDER THE ACT. ITA NO.1337/M/2011 5 ACCORDINGLY, WE FIND NO REASON TO SUSTAIN THE IMPUG NED ADDITION. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE A ND DIRECT THE AO TO DELETE THE ENTIRE ADDITION OF RS.7,12,537/-, DISCUSSED ABOVE. 8. THE NEXT ADDITION RELATES TO THE DISALLOWANC E OF RS.16,378/- MADE UNDER SEC. 14A OF THE ACT. WE NOTICE THAT THE AO HAS APP LIED RULE 8D, WHICH IS NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION. SINCE THE ASSESSEE HAS EARNED EXEMPTED INCOME, THE LD A.R WAS POINTED OUT THAT SO ME AMOUNT OF DISALLOWANCE IS CALLED FOR IN TERMS OF SEC. 14A. T HE LD A.R FAIRLY AGREED THAT A SUM OF RS.15,000/- MAY BE DISALLOWED AND THE SAID P ROPOSAL WAS ALSO ACCEPTED BY LD D.R. ACCORDINGLY, WE MODIFY THE ORDER OF LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO RESTRICT THE ADDITION TO RS.15,000 /- ON THIS GROUND. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. / '/ ( ( ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH FEB 2014 . ( 28TH FEB 2014 ( SD/ SD /- ( B R MITTAL ) ( B R BASKARAN ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; 7 DATED 28 TH FEB 2014 .../ RAJ , SR. PS ITA NO.1337/M/2011 6 ( &: ;: ( &: ;: ( &: ;: ( &: ;:/ COPY OF THE ORDER FORWARDED TO : 1. % / THE APPELLANT 2. &'% / THE RESPONDENT. 3. <() / THE CIT(A)- 4. < / CIT 5. : &, , / DR, ITAT, MUMBAI 6. ' / GUARD FILE. / BY ORDER, ': & //TRUE COPY// / // / ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI