Shri Paresh Chandulal Patel, Ahmedabad V. The Income tax Officer,Ward-7(1), Ahmedabad

ITA 1740/AHD/2011

• Counselvise Citation: 174020514 RSA 2011
• Duration Of Justice: 1 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 18-08-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 30-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VINOD TANWANI
• Assessee Lawyers: S N DIVETIA
• Keywords: Salary income; Earning of tax free income; Source of fund; Proportionate interest
• Section: 143(3); 14A

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, SMC BENCH . .. . . .. . , , , , ! ! ! ! BEFORE SHRI T.K. SHARMA, JUDICIAL MEMBER ITA NO.1740/AHD/2011 [ASSTT.YEAR : 2007-2008] PARESH CHANDULAL PATEL B/42, SURYAVAN, NR. JUDGES BUNGLOW BODAKDEV, AHMEDABAD. ' /VS. ITO, WARD-7(1) AHMEDABAD. ( (( ($% $% $% $% / APPELLANT) ( (( (&'$% &'$% &'$% &'$% / RESPONDENT) ' () * + / ASSESSEE BY : SHRI S.N. DIVETIA - * + / REVENUE BY : SHRI VINOD TANWANI .'/ * )0/ DATE OF HEARING : 18 TH AUGUST, 2011 123 * )0/ DATE OF PRONOUNCEMENT : 26 TH AUGUST, 2011 / O R D E R THIS IS ASSESSEES APPEAL AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-VI, AHMEDABAD DATED 19.4.2011 ARISING OUT OF THE ORDER OF THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. THE ASSESSEE IS AGGRIEVED BY THE ACTION OF THE CIT(A) IN CONFIRMING THE DISALLOWANCE OF INTEREST EXPENSES TO THE EXTENT OF RS.1,60,090/- UNDER SECTION 36(1)(III) AND 14A OF T HE ACT FOR THE ASSESSMENT YEAR 2007-2008. 2. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS AN INDIVIDUAL ENGAGED IN TRADING OF COTTON AND PAPER IN THE TRADE NAME OF M/ S.SHIV TRADERS. FOR THE ASSESSMENT YEAR UNDER APPEAL THE ASSESSEE FILED RETURN OF INCOME ON 20-10-2007 SHOWING TOTAL INCOME OF RS.99,530/-. ON PERUSAL OF THE PROFIT AND LOSS ACCOUNT, THE AO NOTICED THAT THE AS SESSEE HAS CLAIMED ITA NO.1740/AHD/2011 -2- INTEREST OF RS.2,22,692/-. THE AO OBSERVED THAT TH E ASSESSEE HAS DIVERTED THE FIND TO ADJUST UNSECURED LOAN RECEIVED FROM THE RELATIVES OF THE ASSESSEE AND THE FUND WAS NOT UTILISED FOR BUSINESS PURPOSE BUT THE SAID FUND WAS UTILISED AS INVESTMENT IN MUTUAL FUND AND SHARE FOR EARNING DIVIDEND INCOME. HE ACCORDINGLY DISALLOWED INTERES T AMOUNTING TO RS.1,60,090/- (RS.2,22,692 MINUS RS.62,602/-) ON TH E FUND WHICH WAS NOT UTILISED FOR BUSINESS PURPOSE. ON APPEAL BEFORE TH E LEARNED CIT(A), THE ASSESSEE CONTENDED THAT BORROWED FUND WAS UTILISED FOR BUSINESS PURPOSE ONLY AND THEREFORE ELIGIBLE DEDUCTION AS BUSINESS E XPENDITURE. HOWEVER, THE CIT(A) CONFIRMED THE ACTION OF THE AO WITH THE FOLLOWING OBSERVATIONS: 2.3 I HAVE CONSIDERED THE FACTS OF THE CASE, ASSES SMENT ORDER AND APPELLANT'S SUBMISSION. IT IS NOT IN DISPUTE THAT A PPELLANT IS PROPRIETOR AND IS HAVING, BUSINESS ACTIVITY IN PROP RIETARY CONCERN AND DOING INVESTMENT AND OTHER ACTIVITIES IN INDIVI DUAL CAPACITY. HOWEVER THE NET RESULT OF BOTH THE CAPACITIES IS TO BE TAKEN FOR INCOME TAX PURPOSES. IF APPELLANT BORROWS IN THE BU SINESS CONCERN AND TAKES OUT FUNDS FROM BUSINESS CONCERN AND INVES T IN INDIVIDUAL CAPACITY, BOTH CANNOT BE TREATED SEPARATELY. SINCE SOURCE OF FUND IN INDIVIDUAL CAPACITY IS PROPRIETARY CONCERN ONLY, AN Y BORROWING MADE IN PROPRIETARY CONCERN AND UTILISATION OF FUND S OF PROPRIETARY CONCERN IN INDIVIDUAL BASIS WILL ATTRACT DISALLOWAN CE OF INTEREST UNDER SECTION 36 (1) (III) AS WELL AS SECTION 14 A IN CASE OF INVESTMENT IN TAX-FREE SECURITIES. APPELLANT SUBMITTED THAT BORROWINGS WERE USED FOR M AKING PAYMENT TO SUPPLIERS BUT APPELLANT IS SILENT AS TO HOW PAYMENTS RECEIVED FROM DEBTORS WERE USED. FOR BUSINESS CONCE RN, SUPPLIERS ARE TO BE PAID FROM THE PROCEEDS OF SOLES OR RECEIP TS FROM DEBTORS. IF SUPPLIERS ARE PAID BY BORROWED FUNDS AND RECEIPT S FROM DEBTORS ARE DIVERTED FOR NON-BUSINESS PURPOSE, IT ALSO AMOU NTS TO DIVERSION OF BORROWED FUNDS FOR NON-BUSINESS PURPOSE. APPELLA NT HAS DONE EXACTLY SAME. HE HAS DIVERTED RECEIPTS FROM DEBTORS FOR NON- BUSINESS PURPOSE AND BORROWED FUNDS FOR PAYING TO C REDITORS. THIS ITA NO.1740/AHD/2011 -3- IS NOTHING BUT DIVERTING BUSINESS FUNDS FOR NON-BUS INESS PURPOSE REQUIRING INTEREST-BEARING BORROWINGS. PAYMENT OF I NTEREST ON SUCH BORROWINGS IS NOTHING BUT FOR NONBUSINESS PURP OSE AND ACCORDINGLY NOT ALLOWABLE. APPELLANT HAS ALSO MADE INVESTMENT IN SHARES AND MUTUAL FUNDS, INCOME OF WHICH IS NOT TAX ABLE. PROPORTIONATE INTEREST IS ALSO DISALLOWABLE UNDER S ECTION 14 A BEING EXPENSES RELATABLE TO EXEMPT INCOME. THEREFOR E THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS JUSTI FIED NOT ONLY UNDER SECTION 36 (1) (III) FOR GIVING INTEREST FREE LOANS BUT ALSO UNDER SECTION 14A FOR INVESTMENTS IN EXEMPT SECURIT IES. CONSIDERING THIS, THE DISALLOWANCE MADE BY THE ASSE SSING OFFICER IS CONFIRMED. 3. AGGRIEVED ASSESSEE IS IN APPEAL BEFORE US. AT T HE TIME OF HEARING BEFORE US, SHRI S.N. DIVETIA APPEARED ON BEHALF OF THE ASSESSEE AND FURNISHED COPY OF THE RETURN. THE LEARNED COUNSEL OF THE ASSESSEE POINTED OUT THAT THE FUNDS WERE INVESTED IN HDFC LIQUID FUN D FROM WHICH THE ASSESSEE RECEIVED INTEREST OF RS.13,351/-. THIS IN VESTMENT IS NOT EXEMPT INCOME. THE ONLY OTHER EXEMPT INCOME IS DIVIDEND I NCOME OF RS.7,856/-. HE POINTED OUT THAT NO BORROWED FUND WAS UTILIZED F OR MAKING THE INVESTMENT IN SHARES FROM WHICH DIVIDEND EXEMPT UND ER SECTION 10(34) OF THE ACT AMOUNTING TO RS.7,856/- WAS CLAIMED. T HE LEARNED COUNSEL FOR THE ASSESSEE FURTHER POINTED OUT THAT THE ASSESSEE HAS ALSO ADVANCED THE MONEY ON WHICH IT HAS EARNED THE INTEREST INCOME OF RS.62,602/-. ON THIS BASIS, THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT SINCE NO BORROWED FUNDS WERE DIVERTED FOR EARNING INCOME WHI CH IS EXEMPT UNDER SECTION 10(34) OF THE ACT, THEREFORE, NO DISALLOWAN CE IS CALLED FOR. HE POINTED OUT THAT THE ENTIRE INTEREST IS ALLOWABLE E ITHER UNDER SECTION 36(1)(III) OR 14A OF THE ACT. ON THE OTHER HAND, SHRI VINOD TANWAIN, THE LEARNED SR.DR APPEARED ON BEHALF OF THE REVENUE AND POINTED OUT THAT THE ASSESSEE HAS FURNISHED ONLY ONE BALANCE SHEET OF HI S PROPRIETARY CONCERN I.E. SHIV TRADERS. THE MONEY BORROWED ON INTEREST WAS INVESTED IN ITA NO.1740/AHD/2011 -4- EARNING TAX FREE INCOME. THEREFORE, THE DISALLOWAN CE MADE BY THE AO AMOUNTING TO RS.1,60,092/- AND CONFIRMED BY THE LEA RNED CIT(A) BE UPHELD. 4. HAVING HEARD BOTH THE SIDES AND HAVING GONE THRO UGH THE ORDERS OF THE AUTHORITIES, IT IS PERTINENT TO NOTE THAT THE A SSESSEE IS PROPRIETOR AND HAVING BUSINESS ACTIVITY IN THE SAID CONCERN AND DO ING THE INVESTMENT AND OTHER ACTIVITIES IN HIS INDIVIDUAL CAPACITY. THE S TATE OF AFFAIRS OF THE ACTIVITIES, IN THE INDIVIDUAL CAPACITY OF THE ASSES SEE, WAS NEVER FURNISHED NEITHER BEFORE THE AO NOR BEFORE THE LEARNED CIT(A) . IT IS ADMITTED BY THE ASSESSEE THAT THE SURPLUS FUND INVESTED IN HDFC LIQUID FUND. THE ONLY SAVING FROM THE SALARY INCOME WAS INVESTED IN SHARES FROM WHICH THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.7856/- WH ICH IS EXEMPT UNDER SECTION 10(34) OF THE ACT. ON PERUSAL OF THE ORDER S OF THE AUTHORITIES BELOW, PRIMA FACIE IT APPEARS THAT THERE WERE NO DETAILS AS TO WHEN T HE INVESTMENT IN SHARES WERE MADE. IT IS ALSO NOT KNO WN HOW MUCH MONEY IS INVESTED OUT OF BORROWED FUNDS IN SHARES FROM WH ICH THE ASSESSEE HAS EARNED DIVIDEND INCOME AMOUNTING TO RS.7856/- WHICH IS EXEMPT UNDER SECTION 10(34) OF THE ACT. I AM THEREFORE OF THE V IEW THAT IT WILL MEET ENDS OF THE JUSTICE, IF THE IMPUGNED ORDER OF THE L EARNED CIT(A) IS SET ASIDE AND REMIT THE MATTER BACK TO THE FILE OF THE AO FOR RE-ADJUDICATION. THE ASSESSEE WILL FURNISH THE DETAILS OF INVESTMENT MADE IN SHARES. THE AO WILL EXAMINE WHETHER ANY BORROWED FUNDS WERE MAD E AND WHETHER THE SAME WAS UTILISED FOR MAKING INVESTMENT IN SHAR ES. AFTER BRINING ON RECORD THE COMPLETE FACTS, IF NECESSARY, THE AO MAY CONSIDER DISALLOWANCE UNDER SECTION 14A OF THE ACT. WITH TH ESE DIRECTIONS, THE DISALLOWANCE OF INTEREST OF RS.1,60,092/- IS RESTOR ED BACK TO THE FILE OF THE ITA NO.1740/AHD/2011 -5- AO FOR RE-ADJUDICATION AFTER GIVING REASONABLE OPPO RTUNITY OF THE ASSESSEE OF BEING HEARD. 5. IN RESULT, ASSESSEES APPEAL IS DEEMED TO BE ALL OWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN OPEN COURT ON 26 TH AUGUST, 2011 SD/- ( . .. . . .. . /T.K. SHARMA) /JUDICIAL MEMBER PLACE : AHMEDABAD DATE : 26-08-2011 C OPY OF THE ORDER FORWARDED TO: 1) : APPELLANT 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR/AR, ITAT, AHMEDABAD