SURENDRAKUMAR SURANA, MUMBAI V. ITO WD 19(1)(2), MUMBAI

ITA 156/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 5186 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-11-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 11-11-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 06-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASHOK SURI
• Assessee Lawyers: J C LALA
• Keywords: Business income; Corroborative evidences; Revenue expenditure
• Section: 14A; 28

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E MUMBAI . . , / BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND . , SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER . / ITA NO.155/MUM/2012 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2006-07 . / ITA NO.156/MUM/2012 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2007-08 SHRI SURENDRAKUMAR SURANA, SINGAPORE ARCADE, 3 RD ROAD, PLOT NO.768, KHAR(WEST) MUMBAI 400052 ! ! ! ! / VS. THE INCOME TAX OFFICER 19(1)(2) PIRAMAL CHAMBERS, MUMBAI 400012 # ./ $% ./ PAN/GIR NO. : AAJPS 2563D ( #& / APPELLANT ) .. ( '(#& / RESPONDENT ) #& ) / APPELLANT BY: SHRI J.C.LALA '(#& * ) / RESPONDENT BY : SHRI ASHOK SURI ! * + / DATE OF HEARING : 11/11/2013 ,-' * + / DATE OF PRONOUNCEMENT : 11/11/2013 . / O R D E R PER I.P.BANSAL, J.M: BOTH THESE APPEALS ARE FILED BY THE ASSESSEE. THE Y ARE DIRECTED AGAINST TWO SEPARATE ORDERS PASSED BY LD. CIT(A)-22, MUMBAI DAT ED 25/10/2011 FOR ASSESSMENT YEARS 2006-07 AND 2007-08. GROUNDS OF A PPEAL IN BOTH THE APPEALS ARE IDENTICAL EXCEPT DIFFERENCE IN THE AMOUNTS STAT ED IN GROUND NO.1. GROUNDS OF APPEAL FOR ASSESSMENT YEAR 2006-07 READ AS UNDER: . / ITA NO.155&156/MUM/2012 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2006-07 & 07-08 2 1. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST TO RS.7,81,599/- AS REVENUE EXPENDITURE. 2. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE L EARNED COMMISSIONER OF INCOME- TAX(APPEALS) ERRED IN HOLDING THAT THE APPELLANT FA ILED TO FURNISH BIFURCATION OF INTEREST PAID 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE L EARNED COMMISSIONER OF INCOME- TAX(APPEALS) ERRED IN NOT APPRECIATING THE FACT THA T THE INTEREST PAID IS ALLOWABLE EXPENDITURE IN COMPUTING THE BUSINESS OF INCOME OF THE APPELLANT 4. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE L EARNED COMMISSIONER OF INCOME- TAX(APPEALS) ERRED IN NOT APPRECIATING THE FACT THA T THERE IS NO NEXUS OF INCOME EARNED AND/OR INVESTMENTS MADE IN PARTNERSHIP FIRMS TO THE EXPENDITURE INCURRED AS AND BY WAY OF INTEREST. 5. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE L EARNED COMMISSIONER OF INCOME- TAX(APPEALS) ERRED IN NOT APPRECIATING THE DIFFEREN CE BETWEEN DEDUCTION AND EXEMPTION IN COMPUTING THE TOTAL INCOME OF THE APPE LLANT. (DIVIDEND FROM COOPERATIVE BANK AND PRIVATE LIMITED COMPANIES ARE NOT EXEMPT UNDER SEC. 10) 6. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE L EARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN NOT PROVIDING AN OPPORTUNI TY OF BEING HEARD ON THE ISSUE OF APPLICABILITY OF SEC.14A 7. THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER, AME ND OR DELETE ANY OF THE ABOVE GROUNDS OF APPEAL. 2. FOR ASSESSMENT YEAR 2007-08 THE AMOUNT IS A SUM OF RS.12,90,373/-. FACTS ARE IDENTICAL FOR BOTH THE YEARS EXCEPT DIFFERENCE IN THE AMOUNTS. THESE APPEALS WERE ARGUED TOGETHER BY BOTH THE PARTIES. HENCE, FOR TH E SAKE OF CONVENIENCE BOTH THESE APPEALS ARE DISPOSED OF BY THIS CONSOLIDATED ORDER. 3. THE ASSESSEE IS AN INDIVIDUAL AND IS PROPRIETOR OF THREE CONCERNS NAMELY HOTEL CARNIVAL, THE CLASS RESTAURANT AND SURANA CONSTRUCT ION. FROM THE PROFIT AND LOSS ACCOUNT OF PROPRIETARY CONCERNS NAMELY THE CLASS RESTAURANT, THE AO NOTICED THAT THE ASSESSEE HAD DEBITED AN EXPENDITURE OF RS.8,45,129/ - TOWARDS INTEREST ON BANK LOANS. HOWEVER, IN THE BALANCE SHEET THE LOAN AMOUNT REFL ECTED WAS ONLY RS. 4,02,715/-. FURTHER, ON PERUSAL OF PERSONAL CAPITAL ACCOUNT O F THE ASSESSEE IT WAS NOTED THAT PROFIT FROM THE CLASS RESTAURANT WAS REFLECTED AT RS. 9,1 3,869/- AS AGAINST PROFIT SHOWN IN THE P&L ACCOUNT AT RS. 1,18,748/-. THE ASSESSEE WA S REQUIRED TO EXPLAIN SUCH . / ITA NO.155&156/MUM/2012 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2006-07 & 07-08 3 DISCREPANCY AND ALSO TO EXPLAIN UTILIZATION OF COR RESPONDING LOAN AMOUNT. IT WAS EXPLAINED THAT AMOUNT OF INTEREST ON LOAN OF RS. 7, 95,121/- WAS FOR THE INTEREST PAYMENT TO DIFFERENT BANKS. THE AMOUNT OF LOAN WAS UTILIZE D FOR THE PROPRIETARY CONCERN NAMELY M/S. SURANA CONSTRUCTION, BOMBAY, OF WHICH THE ASSE SSEE IS PROPRIETOR . FROM SUCH EXPLANATION OF THE ASSESSEE AO HAS ARRIVED AT A CON CLUSION THAT SUCH INTEREST EXPENDITURE PERTAIN TO M/S. SURANA CONSTRUCTION AN D THESE HAVE BEEN DEBITED IN THE P&L ACCOUNT OF THE CLASS RESTAURANT. THE AO NOTIC ED THAT EXPENDITURE INCURRED BY THE ASSESSEE ON THE PROJECT IN PROPRIETARY CONCERN OF M/S. SURANA CONSTRUCTION WERE CAPITALIZED, THEREFORE, A.O DISALLOWED A SUM OF RS. 7,95,121/- AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. 4. BEFORE LD. CIT(A) IT WAS PLEADED THAT THE ASSE SSEE IS MAINTAINING SEPARATE BOOKS OF ACCOUNT IN RESPECT OF EACH OF THE BUSINESS. TH E ASSESSEE HAS BORROWED FUNDS FROM BANKS ON INTEREST IN THE NAME OF RESPECTIVE PROPRI ETARY CONCERNS. THE ASSESSEE ALSO BORROWED FUNDS FROM BANKS IN HIS INDIVIDUAL NAME TO FINANCE BUSINESS ACTIVITIES AS AND WHEN REQUIRED. IN RESPECT OF M/S. SURANA CONSTRU CTION IT WAS SUBMITTED THAT ASSESSEE HAS ALREADY CAPITALIZED INTEREST OF RS. 14,51,539/- IN RESPECT OF BORROWINGS MADE FOR THE PURPOSE OF SAID BUSINESS. IT WAS SUBMITTED THAT DU RING THE YEAR THE ASSESSEE HAS REPAID A SUM OF RS.. 1,29,587/- TOWARDS TERM LOAN REPAYMEN T WHICH WERE FOR THE PURPOSE OF BUSINESS IN GENERAL AND NOT TO ANY OF HIS INDIVIDU AL CONCERNS AND, THUS, IT WAS PLEADED THAT AO WAS WRONG IN HOLDING THAT THE BORROWINGS W ERE NOT FOR THE PURPOSE OF BUSINESS OF M/S. SURANA CONSTRUCTION, WHEREAS THESE BORROWIN GS WERE FOR THE PURPOSES OF ASSESSEES BUSINESS GENERALLY. THEREFORE, IT WAS P LEADED THAT THE SAME IS ALLOWABLE. 5. LD. CIT(A) AFTER CONSIDERING ALL THESE SUBMISSIO NS HAS ARRIVED AT A CONCLUSION THAT SINCE THE ASSESSEE WAS ASKED TO FURNISH BIFURCATI ON OF INTEREST PROVIDED BY THE INDIVIDUAL TO THE PROPRIETARY CONCERN AND HE HAS FA ILED TO FURNISH THE SAME THE INTEREST WAS DISALLOWABLE. THE LD. CIT(A) HAS FURTHER OBSE RVED THAT AS PER OWN ADMISSION OF THE ASSESSEE BEFORE AO THE BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF BUSINESS OF M/S. SURANA CONSTRUCTION IN WHICH ALL EXPENDITURE HAVE BEEN CAPITALIZED, THEREFORE, ALSO DISALLOWANCE IS CORRECT. BESIDES, IT IS ALSO NO TICED BY LD. CIT(A) THAT ASSESSEE WAS HAVING SHARE OF PROFITS FROM THREE REGISTERED FIRMS WHICH IS EXEMPTED FROM TAX, THEREFORE, PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 1961 (THE ACT) WILL BE . / ITA NO.155&156/MUM/2012 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2006-07 & 07-08 4 APPLICABLE. HE HAS ALSO NOTICED THAT ASSESSEE HA S RECEIVED DIVIDEND INCOME ALSO ON THE SHARES PURCHASED AND DISALLOWANCE UNDER SECTION 14A IS ALSO APPLICABLE. THEREFORE, HE OBSERVED THAT SINCE INTEREST HAS ALREADY BEEN DISA LLOWED NO FURTHER DISALLOWANCE UNDER SECTION 14A IS CALLED FOR. IN THIS VIEW OF THE SI TUATION, LD. CIT(A) HAS UPHELD THE DISALLOWANCE IN RESPECT OF ASSESSMENT 2006-07. 6. FOR ASSESSMENT YEAR 2007-08 A SUM OF RS. 12,90,3 73/- WAS CLAIMED ON ACCOUNT OF INTEREST ON BANK LOANS. THE AO REQUIRED THE ASSESS EE TO FURNISH SUPPORTING EVIDENCE AND REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY THE CLAIM OF INTEREST SHOULD NOT BE DISALLOWED. IT WAS SUBMITTED THAT CONSTRUCTION WOR K OF S.R.A PROJECT WAS STOPPED BY NAVY DEPARTMENT WHICH RESULTED INTO A SITUATION TH AT WHATEVER AMOUNT WAS INVESTED FOR CONSTRUCTION WAS NOT COMING BACK AND HENCE, THE AS SESSEE HAD TO PAY INTEREST ON THE AMOUNT INVESTED. ACCORDING TO AO SUCH REPLY OF THE ASSESSEE WAS VAGUE AS ASSESSEE WAS REQUIRED TO ESTABLISH THE NEXUS BETWEEN LOANS TAKEN FROM THE BANK AND FINANCIAL INSTITUTIONS AND THE BUSINESS INCOME OF THE CONCER N AT A SUM OF RS.83,12,599/-. ACCORDING TO AO SUCH NEXUS SHOULD BE DIRECT AND I DENTIFIABLE IN EVERY CASE FAILING WHICH THE DEDUCTION WOULD RESULT IN DISTORTION OF INCOME. THE AO ALSO NOTICED FROM THE PERSONAL BALANCE SHEET THAT CAPITAL INVESTED BY TH E ASSESSEE IN M/S. SURANA CONSTRUCTION BOMBAY AS ON 31/3/2007 AMOUNT TO A SUM OF RS. 30,14,034/- AND ASSESSEE HAS ADVANCED A LARGE SUM AS INTEREST FR EE LOANS AND ADVANCES AND ALSO INVESTED HUGE SUM IN THE SHARE OF PRIVATE COMPANIES . THUS AO HAS FORMED AN OPINION THAT THE LOANS TAKEN FROM THE BANKS WERE NOT UTILIZ ED BY THE ASSESSEE FOR THE PURPOSES OF GENERATING BUSINESS INCOME AND THUS INTEREST CLAIME D BY THE ASSESSEE WAS DISALLOWABLE. THE AO ALSO NOTICED THAT THE PROJECT OF THE ASSES SEE AT AMAR NAGAR WAS SHOWN AS PROJECT UNDER CONSTRUCTION FOR WHICH NO INCOME WAS OFFERED. THEREFORE, AO OBSERVED THAT EVEN IF ANY INTEREST IS ATTRIBUTABLE TO SUC H PROJECT IT WAS REQUIRED TO BE ADDED TO THE COST OF THE PROJECT. IN THIS MANNER DISALLOWAN CE OF RS.12,90,373/- WAS MADE. 7. BEFORE LD. CIT(A) IT WAS PLEADED THAT INTEREST PAID BY THE ASSESSEE IS ALLOWABLE UNDER SECTION 36(1)(III) OF THE ACT IN RESPECT OF B USINESS INCOME COMPUTED UNDER SECTION 28 OF THE ACT. THE ASSESSEE DOES NOT REQUIRE TO E STABLISH DIRECT NEXUS AS ONLY THREE CONDITIONS ARE REQUIRED TO BE COMPLIED WITH NAMELY (I) CAPITAL SHOULD BE BORROWED; (II) BORROWING SHOULD BE FOR THE PURPOSE OF BUSINESS AN D (III) INTEREST SHOULD BE PAID. IT WAS . / ITA NO.155&156/MUM/2012 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2006-07 & 07-08 5 FURTHER PLEADED THAT THE OPENING BALANCE IN M/S. SURANA CONSTRUCTION WAS NEGATIVE BALANCE OF RS. 65,81,924/- AND DURING THE YEAR TH E ASSESSEE HAD RECEIVED CERTAIN SUM ON TRANSFER OF DEVELOPMENT RIGHTS OF A PROPERTY AND THIS AMOUNT WAS DEPOSITED IN THE ACCOUNT OF M/S. SURANA CONSTRUCTION. IT WAS SUBMI TTED THAT THE ASSESSEE HAS INCURRED INTEREST EXPENDITURE OF RS.12,90,373/-, WHICH WAS PAID ON BORROWING IN THE NAME OF M/S. SURANA CONSTRUCTION AND CAPITALIZED TO WORK-I N-PROGRESS IN EARLIER YEARS. IT WAS ALSO SUBMITTED THAT NO PART OF THE INTEREST BEARING BORROWED FUNDS WAS USED TO ADVANCE INTEREST FREE LOANS TO RELATIVES. THE BORROWINGS W ERE UTILIZED TO PAY OFF EARLIER LOANS AND WAS ONLY FOR THE PURPOSE OF BUSINESS. NO FRESH INV ESTMENT IN SHARES IS MADE DURING THE YEAR AND THUS IT WAS CLAIMED THAT INTEREST HAS WRON GLY BEEN DISALLOWED. LD. CIT(A), HOWEVER, FOR THE SAME REASONS WHICH ARE STATED IN R ESPECT OF ASSESSMENT YEAR 2006-07 HAS UPHELD THE DISALLOWANCE. 8. AFTER NARRATING THE FACTS, WHICH HAVE ALREADY BEEN DISCUSSED IN DETAIL IN THE ABOVE PART OF THIS ORDER, IT WAS PLEADED BY LD. AR THAT NO INTEREST BEARING BORROWED FUNDS WAS UTILIZED FOR THE PURPOSES OTHER THAN BUSI NESS. IT WAS PLEADED THAT ASSESSEE IS IN A POSITION TO ESTABLISH THE SAME. IT WAS SUBMIT TED THAT AO AS WELL AS LD. CIT(A) WERE WRONG IN MAKING AND CONFIRMING THE ADDITION ON THE BASIS OF WRONG FACTS. REFERRING TO THE SUBMISSIONS MADE BEFORE AO AND LD. CIT(A) IT W AS PLEADED THAT INTEREST HAS WRONGLY BEEN DISALLOWED. 9. ON THE OTHER HAND, IT WAS SUBMITTED BY LD. DR TH AT ASSESSEE HAS FAILED TO ESTABLISH THE NEXUS BETWEEN THE INTEREST BEARING BORROWED FUNDS AND UTILIZATION THEREOF FOR THE PURPOSE OF BUSINESS. IT WAS SUBMITTED THAT FOR CLAIMING AN AMOUNT UNDER SECTION 36(1)(III), IT IS REQUIRED THAT ASSESSEE MU ST PROVE THAT THE INTEREST WHICH IS BEING CLAIMED, MUST BE IN RESPECT OF FUNDS WHICH ARE UTIL IZED FOR THE PURPOSE OF BUSINESS. IT WAS PLEADED THAT IN VIEW OF FAILURE OF THE ASSESS EE TO PROVE SUCH NEXUS THE DISALLOWANCE HAS RIGHTLY BEEN CONFIRMED BY LD. CIT( A) AND THE ORDER OF LD. CIT(A) SHOULD BE UPHELD. 10. IN THE REJOINDER, IT WAS SUBMITTED BY LD. AR T HAT SINCE ALL THE FACTS ARE AVAILABLE ON RECORD AND ASSESSEE IS IN A POSITION TO PROVE TH AT INTEREST BEARING FUNDS WERE UTILIZED FOR THE PURPOSE OF BUSINESS, THE INTEREST IS ALLOWA BLE. . / ITA NO.155&156/MUM/2012 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2006-07 & 07-08 6 11. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TIONS HAVE CAREFULLY BEEN CONSIDERED. AS PER PROVISIONS OF SECTION 36(1)(III ) THE AMOUNT OF INTEREST PAID BY THE ASSESSEE CAN BE ALLOWED AS DEDUCTION ONLY IN RE SPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. IF ASSESSEE FAI LS TO PROVE THAT SUCH INTEREST IS IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSI NESS OR PROFESSION THEN THE AMOUNT CANNOT BE ALLOWED AS DEDUCTION. THOUGH IT IS THE C LAIM OF THE ASSESSEE THAT INTEREST BEARING BORROWED FUNDS WERE DEPLOYED FOR THE PURPO SES OF HIS BUSINESS OR PROFESSION BUT A DIRECT NEXUS HAS NOT BEEN ESTABLISHED. PROBABLY , THIS ASPECT HAS ALSO NOT BEEN EXAMINED BY AO BY BRINGING CLEAR FACTS ON RECORD. IN THIS VIEW OF THE SITUATION, WE CONSIDER IT JUST AND PROPER TO RESTORE THIS ISSUE R AISED IN BOTH THE APPEALS TO THE FILE OF AO WITH A DIRECTION TO EXAMINE THE CLAIM OF THE ASS ESSEE THAT THE FUNDS ON WHICH ASSESSEE HAS CLAIMED INTEREST AS EXPENDITURE UNDE R SECTION 36(1)(III) ARE UTILIZED FOR THE PURPOSE OF BUSINESS OR PROFESSION OF THE ASSESSEE W HICH IS A PRE-CONDITION FOR ALLOWABILITY OF SUCH EXPENDITURE. THE ONUS IS ON T HE ASSESSEE TO PROVE THAT THERE IS SUCH DIRECT NEXUS BETWEEN INTEREST BEARING BORROWED FUN DS AND UTILIZATION THEREOF FOR THE PURPOSE OF BUSINESS OR PROFESSION. WITH THESE OBSE RVATIONS WE RESTORE BACK THIS ISSUE FOR BOTH THE YEARS TO THE FILE OF AO WITH A DIRECTION TO GIVE THE ASSESSEE A REASONABLE OPPORTUNITY OF HEARING AND THEN DECIDE THIS ISSUE AS PER PROVISIONS OF LAW. WE DIRECT ACCORDINGLY. 12. IN THE RESULT, BOTH THE APPEALS ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11/11/2013 . * ,-' / 0!1 11/11/2013 - * 2 3 SD/- SD/- ( . / D.KARUNAKARA RAO ) ( . . / I.P. BANSAL ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 0! DATED 11/11/2013 . / ITA NO.155&156/MUM/2012 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2006-07 & 07-08 7 . . . . * ** * '+45 '+45 '+45 '+45 65'+ 65'+ 65'+ 65'+ / COPY OF THE ORDER FORWARDED TO : 1. #& / THE APPELLANT 2. '(#& / THE RESPONDENT. 3. 7 ( ) / THE CIT(A)- 4. 7 / CIT 5. 582 '+! , , / DR, ITAT, MUMBAI 6. 2 9 / GUARD FILE. .! .! .! .! / BY ORDER, (5+ '+ //TRUE COPY// : :: : / ; ; ; ; $ $ $ $ (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . ! . ./ VM , SR. PS . / ITA NO.155&156/MUM/2012 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2006-07 & 07-08 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 11/11/2013 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 11/11/2013 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER