Shri Lokendrasinghji C. Raol, Bhavnagar V. The Income tax Officer, Ward-1(3), Bhavnagar

ITA 1562/AHD/2007

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 2322 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 30-12-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 19-04-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S S SHUKLA
• Keywords: Business expenditure; Salary income; Earning of tax free income
• Section: 143(3); 234B; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI D.C. AGRAWAL, ACCOUNTANT MEMBER DATE OF HEARING : 30/12/2010 DRAFTED ON: 07 /1/11 ITA NO.1562/AHD/2007 ASSESSMENT YEAR : 2004-05 SHRI LOKENDRASINGHJI C.RAOL MANGALSINGHJI MAHEL MANGALSINGHJI ROAD BHAVNAGAR VS. THE ITO WARD-1(3) BHAVNAGAR PAN/GIR NO. : ABJPR 3439A ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY : SHRI TUSHAR HEMANI RESPONDENT BY: SHRI S.S. SHUKLA, SR. DR O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE ASSESSEE W HICH HAS EMANATED FROM THE ORDER OF THE LEARNED CIT(APPEALS) -XIX, AHMEDABAD DATED 7/2/2007 AND THE SUBSTANTIVE GROUND WHICH W AS ARGUED BEFORE US READS AS FOLLOWS: 1. THE LEARNED CIT(A) HAS GROSSLY ERRED IN LAW AN D ON FACTS IN CONFIRMING THE ACTION OF AO IN DISALLOWING INTEREST EXPENSES OF RS.3,91,264/-. UNDER THE FACTS AND CIRCUMSTANCE S OF THE CASE, THE SAID EXPENDITURE OUGHT TO HAVE BEEN ALLOW ED AS BUSINESS EXPENDITURE. ITA NO.1562/AHD /2007 SHRI LOKENDRASINGHJI C.RAOL VS. ITO ASST.YEAR 2004-05 - 2 - 2. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDI NG ASSESSMENT ORDER PASSED U/S. 143(3) OF THE I.T. ACT, 1961 DATED 28/ 11/2006 WERE THAT THE ASSESSEE IS SUBJECTED TO TAX IN THE STATUS OF INDI VIDUAL. IT IS WORTH TO MENTION, AT THE OUTSET, THAT A RETURN OF INCOME WAS FILED ON AN INCOME OF RS.8,17,990/-. THE HEADS OF INCOME FOR THE YEAR UN DER CONSIDERATION WERE SALARY INCOME AND INTEREST INCOME. ON EXAMINATION OF THE STATEMENTS OF INCOME, IT WAS NOTED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS CLAIMED A DEDUCTION OF INTEREST OF RS. 3,91,264/-. THE EXPLANATION OF THE ASSESSEE WAS THAT HE HAD BECOME DIRECTOR IN FEW COMPANIES BY MAKING INVESTMENT IN THE COMPANY. THE FUND FOR INVESTMENT WAS BORROWED FROM RELATIVES AND FRIEND S. ON THE BORROWED FUNDS, THE ASSESSEE HAD TO PAY INTEREST WHICH WAS C LAIMED AS DEDUCTION. IT WAS ALSO MENTIONED THAT ON BECOMING DIRECTOR, TH E ASSESSEE GOT REMUNERATION OF RS.12,05,500/-. IT WAS ALSO CLARIF IED THAT NO DIVIDEND WAS DECLARED BY THOSE COMPANIES. ON THESE FACTS, IT WAS SUBMITTED THAT THE DEDUCTION OF INTEREST EXPENSE WAS SET OFF AGAIN ST THE REMUNERATION RECEIVED. ON THE BASIS OF ASSESSES SUBMISSIONS, T HE ASSESSING OFFICER HAD MADE TWO OBSERVATIONS. THE FIRST OBSERVATION OF THE ASSESSING OFFICER WAS THAT IN VIEW OF THE PROVISIONS OF SECTI ON 71(2A) OF THE I.T.ACT, THE ASSESSEE WAS NOT ENTITLED FOR SET OFF OF LOSS AGAINST THE SALARY HEAD OF INCOME. HIS SECOND OBSERVATION WAS THAT TH E INVESTMENT WAS MADE IN THE COMPANIES AND SHARES WERE ALLOTTED WITH THE RESULT ENTITLED FOR AN EXEMPTED DIVIDEND INCOME. THE EXEMPTED DIVID END INCOME HAD DIRECT CONNECTION WITH THE EXPENDITURE OF INTEREST, THEREFORE, NOT ALLOWABLE U/S.14A OF THE I.T.ACT. ACCORDINGLY THE TAXABLE INCOME WAS ITA NO.1562/AHD /2007 SHRI LOKENDRASINGHJI C.RAOL VS. ITO ASST.YEAR 2004-05 - 3 - COMPUTED AND TAXED IN THE HANDS OF THE ASSESSEE. T HE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. 3. BEFORE THE FIRST APPELLATE AUTHORITY, THE ASSESS EES FIRST ARGUMENT WAS THAT THE REMUNERATION RECEIVED FROM THE COMPANI ES SHOULD NOT BE ASSESSED TO TAX UNDER THE HEAD SALARY INCOME, BUT UNDER THE HEAD OTHER SOURCES FOR THIS LEGAL PROPOSITION, THE A SSESSEE HAS PLACED RELIANCE ON THE DECISION OF HON'BLE BOMBAY HIGH COU RT IN THE CASE OF CIT VS. LADY NAVAJBAI R.J. TATA (1947) 15 ITR 8 (BO M). AFTER ADVANCING THIS ARGUMENT THAT THE REMUNERATION OF A DIRECTOR CAN BE ASSESSED UNDER THE HEAD OTHER SOURCES, THEN THE N EXT PLANK OF ARGUMENT BEFORE LEARNED CIT(APPEALS) WAS THAT IF THE REMUNER ATION IS ASSESSED AS THE INCOME FROM OTHER SOURCES, THEN ENTITLED FOR SET-OFF OF EXPENDITURE OF INTEREST PAID ON BORROWED MONEY AND DEDUCTIBLE U /S.57(III) OF THE I.T.ACT AS HELD IN THE CASE OF CIT VS. RAJENDRA P RASAD MOODY REPORTED AS (1978) 115 519 (SC). IN RESPECT OF THE INVOCATI ON OF THE PROVISIONS OF SECTION 14A OF THE I.T.ACT, THE ASSESSEE HAS SUBMIT TED THAT SINCE NO DIVIDEND INCOME WAS RECEIVED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION, THEREFORE, THERE WAS NO OCCASION TO INVOKE THE SAID SECTION. HOWEVER, LEARNED CIT(APPEALS) WAS NOT CONVINCED AND UPHELD THE ACTION OF THE ASSESSING OFFICER IN THE FOLLOWING MA NNER:- 5. I HAVE CAREFULLY CONSIDERED THE CONTENTION OF T HE AUTHORISED REPRESENTATIVE AND PERUSED THE CASE LAWS RELIED UPO N. HOWEVER, I AM NOT CONVINCED WITH THE CONTENTION OF THE APPEL LANT BECAUSE ON PERUSAL OF THE COMPUTATION OF INCOME IT IS CLEARLY SEEN THAT THE APPELLANT HIMSELF HAD SHOWN REMUNERATION FROM THREE COMPANIES UNDER THE HEAD SALARY INCOME. HE HAS SHOWN NEGAT IVE INCOME ITA NO.1562/AHD /2007 SHRI LOKENDRASINGHJI C.RAOL VS. ITO ASST.YEAR 2004-05 - 4 - OF RS.3,91,264/- UNDER THE HEAD INCOME FROM OTHER SOURCES. THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HA S CLAIMED SET OFF OF SAID NEGATIVE INCOME AGAINST THE SALARY INCO ME. ON VERIFICATION OF THE FACTS, THE ASSESSING OFFICER HA S FOUND THAT THE ASSESSEE HAD BORROWED FUNDS FROM FRIENDS AND RELATI VES WHICH ARE STATED TO HAVE BEEN INVESTED IN SHARES OF THREE COM PANIES WHEREIN THE ASSESSEE IS ONE OF THE DIRECTORS. INTERESTS PA ID ON SUCH BORROWALS HAVE BEEN SHOWN LOSS UNDER THE HEAD INCO ME FROM OTHER SOURCES. AS INCOME LIKELY TO GENERATE IN FU TURE ON SUCH INVESTMENTS WILL BE BY OF DIVIDEND AND THE DIVIDEND INCOME IS AT PRESENT EXEMPT. HENCE, THE ASSESSING OFFICER HAS I NVOKED THE PROVISION OF SECTION 14A OF THE INCOME TAX ACT AND ACCORDINGLY CLAIMED SET OFF OF SAID INTEREST AGAINST SALARY INC OME HAS BEEN DISALLOWED. ACTION OF THE ASSESSING OFFICER IS IN ACCORDANCE WITH THE PROVISION OF THE INCOME TAX ACT AND I DO NOT FI ND ANY INFIRMITY THEREIN. 5.1. I DO NOT AGREE WITH THE ALTERNATIVE CONTENTION OF THE AUTHORISED REPRESENTATIVE THAT THE APPELLANT HAD MA DE INVESTMENT IN THE SHARES OF THE COMPANIES WITH INTENT TO BUY THE CONTROL OVER THE COMPANIES, HENCE, REMUNERATIONS RECEIVED FROM S AID COMPANIES ARE TAXABLE UNDER THE HEAD INCOME FROM O THER SOURCES AND ACCORDINGLY INTEREST PAID ON THE BORRO WALS IS ALLOWABLE U/S.57(III) OF THE INCOME TAX ACT. THE D ECISION OF BOMBAY HIGH COURT IN THE CASE OF SMT. AMRITABEN R.S HAH [238 ITR 777] IS RELEVANT, WHEREIN THE HON'BLE COURT HAS CLEARLY HELD THAT : THE EXPENDITURE INCURRED BY WAY OF INTEREST ON THE LOAN TAKEN BY THE ASSESSEE FOR THE SAID PURPOSE COULD NO T BE HELD TO BE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY F OR THE PURPOSE OF EARNING INCOME BY WAY OF DIVIDENDS. FRO M THE NATURE OF TRANSACTION, IT WAS CLEAR THAT THE EXPEND ITURE WAS NOT FOR THE PURPOSE OF EARNING INCOME BY WAY OF DIV IDENDS BUT FOR THE PURPOSE OF ACQUIRING CONTROLLING INTERE ST IN THE COMPANY AND, THEREFORE, IT WOULD NOT BE ALLOWABLE A S A DEDUCTION UNDER SECTION 57 (III) OF THE ACT. ITA NO.1562/AHD /2007 SHRI LOKENDRASINGHJI C.RAOL VS. ITO ASST.YEAR 2004-05 - 5 - 4. THE LEARNED CIT(APPEALS) HAS ALSO MENTIONED THAT THE DECISION OF CIT VS. LADY NAVAJBAI R.J. TATA (SUPRA) COULD NOT B E APPLICABLE ON THE FACTS OF THE CASE BECAUSE THE ASSESSEE HIMSELF HAS DISCLOSED THE REMUNERATION UNDER THE HEAD SALARY INCOME AND CLA IMED STANDARD DEDUCTION U/S.16 OF THE I.T.ACT. LIKEWISE, LEARNED CIT(APPEALS) HAS DISTINGUISHED AN ANOTHER DECISION VIZ. CIV VS. SMT. SHANTI DEVI & OTHERS (1993) 199 ITR 800 (ORISSA) ON THE GROUND THAT IN THE PRESENT CASE, THE ASSESSEE HAD AN EMPLOYER AND EMPLOYEE RELATIONSHIP AND THEREUPON CLAIMED STANDARD DEDUCTION U/S.16(I) OF THE I.T.ACT . WITH THOSE FINDINGS, THE VIEW TAKEN BY THE ASSESSING OFFICER WAS AFFIRM ED. NOW THE ASSESSEE IS IN FURTHER APPEAL. 5. WE HAVE HEARD BOTH THE SIDES AT SOME LENGTH. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW IN THE LIGHT OF THE CASE LAWS CITED AND COMPILATION PLACED BEFORE US. TO DECIDE THE CONTROVERSY AS RAISED IN THE GROUNDS OF APPEAL, WE HAVE TO EXAMINE THE ARGUMENTS OF LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE M R.TUSHAR HEMANI IN THREE SEGMENTS. THE FIRST PLANK OF ARGUMENT WAS THAT THE REMUNERATION RECEIVED FROM THE COMPANIES MUST BE ASSESSED UNDER THE HEAD OTHER SOURCES INSTEAD OF UNDER THE HEAD SALARY INCOME. WE ARE NOT CONVINCED WITH THIS LINE OF ARGUMENT BECAUSE THE RE MUNERATION WAS SUO- MOTO DECLARED AS PER THE RETURN UNDER THE HEAD SA LARY INCOME. OTHERWISE ALSO THE ASSESSEE HAS NOT DISPUTED THE FA CT THAT THE RELATIONSHIP OF THE ASSESSEE WITH THOSE COMPANIES WAS NOT A RELA TIONSHIP OF AN EMPLOYER AND EMPLOYEE. ONE MORE IMPORTANT POINT IS THAT BECAUSE THE ASSESSEE HAS RECEIVED THE INCOME UNDER THE HEAD SA LARY INCOME, ITA NO.1562/AHD /2007 SHRI LOKENDRASINGHJI C.RAOL VS. ITO ASST.YEAR 2004-05 - 6 - THEREFORE, HE HAS CLAIMED STANDARD DEDUCTION AS PRE SCRIBED U/S.16 OF THE I.T.ACT. WE ARE OF THE VIEW THAT THE REMUNERATION WAS CORRECTLY ASSESSED UNDER THE HEAD SALARY INCOME. 5.1. AS FAR AS THE CASE LAWS CITED BY THE ASSES SEE ARE CONCERNED, THE FACTS WERE NOT IDENTICAL BECAUSE IN THE CASE OF CIT VS. LADY NAVAJBAI R.J. TATA(SUPRA) THE ADMITTED FACT WERE THAT THERE WAS N O CONTRACT OF EMPLOYMENT BETWEEN THE COMPANY AND THE DIRECTORS UN DER WHICH THE SAID ASSESSEE WAS ENTITLED FOR THE REMUNERATION. O N THOSE FACTS, IT WAS HELD THAT SINCE THERE WAS ABSENCE OF ANY CLAUSE IN THE ARTICLE, THERE WAS ABSENCE OF EXISTENCE OF EMPLOYMENT. LIKEWISE, IN T HE CASE OF CIV VS. SMT. SHANTI DEVI & OTHERS (1993) 199 ITR 800 (ORISS A), THERE WAS ABSENCE OF EMPLOYER AND EMPLOYEE RELATIONSHIP DUE T O WHICH THE COURT HAS HELD THAT THE INCOME WAS NOT TO BE ASSESSED AS SALARY INCOME AND THE CLAIM OF STANDARD DEDUCTION U/S.16(I) OF THE I. T.ACT WAS DENIED. ONCE WE HAVE HELD THAT IN THE PRESENT CASE, THE ASSESSEE HAS EARNED SALARY INCOME AND THE SAID REMUNERATION WAS NOT INCOME UN DER THE HEAD OTHER SOURCES, THEREFORE, THE PROVISION OF SECTION 57(II I) AUTOMATICALLY DO NOT APPLY. 6. THE NEXT ARGUMENT OF THE ASSESSEE WAS IN RESPEC T OF THE SIMULTANEOUS INVOCATION OF SECTION 14A OF THE I.T.A CT FOR THE IMPUGNED DISALLOWANCE OF INTEREST. THE LEARNED AUTHORISED REPRESENTATIVE MR. TUSHAR HEMANI HAS RAISED AN OBJECTION THAT ONCE THE RE WAS NO DIVIDEND INCOME EARNED DURING THE YEAR UNDER CONSIDERATION, THEREFORE, THERE WAS NO REASON FOR INVOKING THE PROVISIONS OF SECTION 14 A OF THE I.T.ACT. ITA NO.1562/AHD /2007 SHRI LOKENDRASINGHJI C.RAOL VS. ITO ASST.YEAR 2004-05 - 7 - ACCORDING TO HIM, SECTION 14A(2) PRESCRIBES THAT T HE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . HE HAS EMPHASIZED THAT THE EXPENDITURE OUGHT TO BE INCURRE D IN RELATION TO SUCH INCOME WHICH HAS BEEN EARNED DURING THE YEAR UNDER CONSIDERATION. IF THERE IS NO INCOME EARNED, THEN, NATURALLY THERE S HOULD NOT BE ANY DISALLOWANCE. HOWEVER, WE ARE NOT CONVINCED WITH T HIS ARGUMENT BECAUSE THIS ISSUE STOOD COVERED BY THE DECISION OF RESPECTED CO- ORDINATE BENCH ITAT NEW DELHI IN THE CASE OF CHEM I NVEST LTD. REPORTED AT 124 TTJ 577 (SB)[DELHI], WHEREIN A FIND ING HAS BEEN GIVEN THAT THE DISALLOWANCE U/S.14A OF THE I.T.ACT CAN BE MADE IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR RECEIVED BY THE ASSESSEE. KEEPING BREVITY IN MIND, WE ARE NOT DISCUSSING THE REASONS ASSIGNED BY THE RESPECTED CO-ORDINATE BENCH AND HEREBY HOLD THA T THE ASSESSING OFFICER WAS RIGHT IN MAKING SUCH AN OBSERVATION. 7. LASTLY, THE ARGUMENT WAS THAT SINCE THERE IS NO FUNDS BORROWED DURING THE YEAR UNDER CONSIDERATION, THEREFORE, SUC H AN ACTION WAS NOT WARRANTED. IN FACT, THIS ARGUMENT HAS NO SUBSTANCE BECAUSE THIS IS NOT THE ISSUE THAT WHETHER AN EXPENDITURE OF INTEREST IS AL LOWABLE U/S.36(1)(III) OF THE I.T.ACT, BUT THE ISSUE IS WHETHER INTEREST EXPE NDITURE CAN BE ADJUSTED AGAINST THE SALARY INCOME. BECAUSE OF THIS REAS ON, THIS ARGUMENT HAS NO FORCE, HENCE, THIS GROUND IS DISMISSED. ITA NO.1562/AHD /2007 SHRI LOKENDRASINGHJI C.RAOL VS. ITO ASST.YEAR 2004-05 - 8 - 8. REST OF THE GROUNDS IN RESPECT OF INTEREST CHARG ED U/S.234A, 234B AND 234C OF THE I.T.ACT ARE CONSEQUENTIAL IN NATURE NEED NO ADJUDICATION AT THIS STAGE, HENCE, DISMISSED. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMIS SED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 13/ 1 /2011. SD/- SD/- ( D.C. AGRAWAL) ( MUKUL KR. SH RAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMBE R AHMEDABAD; DATED 13/ 01 /2011 T.C. NAIR, SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE DEPARTMENT. 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-XIX, AHMEDABAD 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD 1. DATE OF DICTATION..5/1/11 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 7/1/11 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S13.1.11 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 13.1.11 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER