ITO 25(3)(2), MUMBAI V. KISHORE HARGOVINDAS MEHTA (HUF), MUMBAI

ITA 1770/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55188 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 05-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C G K NAIR
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, A BENCH, MUMBAI. BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SMT ASHA VIJAYRAGHAVAN, JUDICIAL MEMBER I.T.A NO.1770/ MUM/2010 ASSESSMENT YEAR: 2006-07 INCOME TAX OFFICER 25(3)(2) .. APPELLANT C-11, R.NO.306, PRATYAKSHA KAR BHAVAN, BANDRA-KURLA COMPLEX, BANDRA (E), MUMBAI-51. VS KISHORE H MEHTA (HUF) .. RESPONDEN T D-201, PANCHSHEEL GARDENS, DAHANUKAR WADI, MAHAVIR NAGAR, KANDIVALI(W), MUMBAI-400067 PA NO.AACHK 7504 H APPEARANCES: VIPUL JOSHI, FOR THE APPELLANT C.G.K. NAIR , FOR THE RESPONDENT DATE OF HEARING : 30.8.2011 DATE OF PRONOUNCEMENT : 7 -09-2011 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HAS CHALL ENGED CORRECTNESS OF CIT(A)S ORDER DATED 14 TH DECEMBER, 2009, IN THE MATTER OF ASSESSMENT UNDER SECTI ON 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2004-05 ON THE FOLLOWING GROUNDS: I.T.A NO.1770/ MUM/2010 ASSESSMENT YEAR: 2006-07 2 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD CIT(A) ERRED IN DIRECTING THE AO TO DELETE THE DISALLOWANC E OF CLAIM OF INTEREST AGAINST THE CONSIDERATION RECEIVED FOR ENTERING INTO COLLUS IVE ARRANGEMENTS FACILITATING EVASION OF TAX WITHOUT APPRECIATING THE FACTS THAT CLAIM OF INTEREST WAS JUST TO GIVE A COLOURABLE LOOK TO THE ENTIRE TRANSACTION. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD CIT(A) ERRED IN HOLDING THAT THERE IS NO PROVISION UNDER T HE INCOME TAX ACT, 1961 TO DISALLOW THE INTEREST(SUPRA) SO AS TO OVERCOME THE PROVISION OF SECTION 2(22)(E) OF THE ACT WITHOUT APPRECIATING THE FACT THAT INTER EST CLAIMED WAS A PART OF THE SHAM TRANSACTION AND WITHOUT ANALYZING THE PROVISIO NS OF SECTION 57 OF THE I.T.ACT, 1961 AND RELATED DECISION OF THE APEX COUR T ASSERTING THAT EXPENSES U/S.57 SHOULD BE ALLOWED ONLY WHEN INCURRING OF EXP ENSES IS ESSENTIALLY REQUIRED TO EARN SUCH INCOME. 2. BRIEFLY STATED THE RELEVANT MATERIAL FACTS ARE L IKE THIS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF BORROWING THE FUNDS AT LESSER AMOUN T OF INTEREST AND ADVANCING THE LOAN AT A HIGHER RATE OF INTEREST. DURING THE COURSE O F ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD TAKEN LOAN FR OM M/S. MANIPUT INVESTMENT PVT LTD AND ADVANCED LOAN TO SOME PERSONS WHO WERE SHARE HO LDERS OF M/S. MANIPUT INVESTMENT PVT LTD. THE ASSESSING OFFICER FURTHER NOTICED THAT THE ASSESSEE HAD SHOWN INTEREST INCOME OF RS. 14,21,855 AND AFTER CLAIMING BANK CHARGES OF RS.706 AND INTEREST ON LOAN OF RS.11,56,486, THE NET PROFIT WAS DECLARE D AT RS.2,64,663. IT WAS IN THIS BACKGROUND THAT THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO ESTABLISH THE NEXUS BETWEEN THE LOANS TAKEN AND LOANS ADVANCED FIXING T HE HEARING ON 28..11.2008. ON THE SAID DATE, AS THERE WAS NO RESPONSE FROM THE SIDE O F THE ASSESSEE, THE AO INFERRED THAT FOR THE PURPOSE OF AVOIDING SECTION 2(22)(E), M/S. MANIPUT INVESTMENT (P)LTD., ROUTED THE LOAN THROUGH THE ASSESSEE AND, ACCORDINGLY, DIS ALLOWED THE INTEREST CLAIM OF RS.11,56,486. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), IT WAS CONTENDED BY THE ASSESSEE THAT ON 28.11.2008, THERE WAS TERRORIST ATTACK IN DIFFERENT PLACES OF MUMBAI AAND THERE WAS FEARFUL ATMOSPHERE IN ALL OVER THE MUMBAI AND FOR THIS REASON , THE ASSESSEE COULD NOT APPEAR BEFORE THE AO. THE CIT(A) AGREED WITH THE SUBMISSION OF THE ASSESS EE AND SOUGHT A REMAND REPORT FROM THE ASSESSING OFFICER WITH THE DIRECTION TO PROVIDE OPPORTUNITY TO THE ASSESSEE TO ESTABLISH THE NEXUS BETWEEN THE LOAN TAKEN AND GIVE N. THE ASSESSING OFFICER SUBMITTED I.T.A NO.1770/ MUM/2010 ASSESSMENT YEAR: 2006-07 3 HIS REPORT, INTER ALIA, ACCEPTING THE NEXUS BETWEEN THE LOANS RECEIVED AN D LOANS GIVEN BUT THE ONLY OBJECTION OF THE AO WAS THAT THE ASSES SEE ACTED AS A CONDUIT FOR THE COMPANY M/S. MANIPUT INVESTMENT PVT LTD., TO ADVANC E LOAN TO ITS SHAREHOLDERS HAVING SUBSTANTIAL INTEREST. THE AO ALSO FURTHER OBSERVED THAT IT IS A COLLUSIVE ARRANGEMENT AND THE ASSESSEE RECEIVED CONSIDERATION ONLY FOR BE ING A PARTY TO THE COLLUSIVE ARRANGEMENT. WHEN THE COPY OF THE REMAND REPORT WAS CONFRONTED WITH THE ASSESSEE, IT WAS CONTENDED THAT IF THE SHAREHOLDERS OF M/S. M ANIPUT INVESTMENT PVT LTD., AVAILED LOAN FROM THE COMPANY USING THE ASSESSEE AS A CONDU IT, THE DEPARTMENT COULD HAVE TAKEN ACTION AGAINST THE SHAREHOLDERS BY APPLYING S ECTION 2(22)(E) AND THAT COULD NOT BE A GROUND FOR DENYING THE CLAIM OF THE ASSESSEE. AF TER CONSIDERING THE ASSESSEES SUBMISSIONS AND ALSO THE REMAND REPORT, THE CIT(A) DIRECTED THE AO TO DELETE THE IMPUGNED DISALLOWANCE, BY OBSERVING AS FOLLOWS: AFTER CONSIDERING THE SUBMISSIONS OF THE REPRESENT ATIVE AND THE REMAND REPORT, I ACCEPT THE PLEA OF THE REPRESENTATIVE THAT AS FAR A S THE APPELLANT IS CONCERNED, NO DISALLOWANCE COULD BE MADE AS THE BORROWED FUNDS WE RE UTILIZED FOR THE PURPOSE OF ADVANCING LOANS ON WHICH INTERESTS WERE CHARGED AND ADMITTED IN RETURN OF INCOME. IT IS TRUE THAT THE APPELLANT ACTED AS THE CONDUIT FOR THE SHAREHOLDERS OF M/S. MANIPUT INVESTMENT P. LTD. TO RECEIVE LOAN FRO M THE COMPANY SO AS TO OVERCOME THE PROVISIONS OF SECTION 2(22) (E) BUT NE CESSARY ACTION IS TO BE TAKEN AGAINST SUCH BENEFICIAL SHAREHOLDERS AND THERE IS N O PROVISION UNDER THE INCOME- TAX ACT, 1962 TO DISALLOW THE INTEREST CLAIM OF THE APPELLANT. IN THE CIRCUMSTANCES, THE A. O. IS DIRECTED TO DELETE THE DISALLOWANCE OF INTEREST CLAIMED AND INFORM THE A. O. OF THE SHAREHOLDERS OF M/S. MANIPUT INVESTMEN T P. LTD. FOR TAKING APPROPRIATE ACTION AS DEEMED FIT BY THE CONCERNED A . O. 3. HAVING CONSIDERED THE RIVAL CONTENTIONS AND HAVI NG PERUSED THE MATERIAL ON RECORD, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A). WE HAVE NOTED THAT THE BORROWED FUNDS WERE UTILIZED FOR THE PURPOSES OF ADVANCING LOANS ON WHICH INTEREST WAS CHARGED AND ADMITTED IN THE RETU RN OF INCOME. THE AO, IN HIS REMAND REPORT, HAS ADMITTED THE NEXUS BETWEEN THE L OANS RECEIVED AND LOANS GIVEN. MERE BECAUSE THE FUNDS WERE ROUTED THROUGH THE SHAR EHOLDERS CANNOT BE A GROUND THAT THE ASSESSEE HAS ACTED AS A CONDUIT. IT WAS THE SU BMISSION OF THE ASSESSEE THAT IF THE SHAREHOLDERS OF M/S. MANIPUT INVESTMENT PVT LTD., A VAILED LOAN FROM THE COMPANY USING THE ASSESSEE AS A CONDUIT, THERE WAS NO PREVENTION TO TAKE ACTION AGAINST THE SHAREHOLDERS BY THE DEPARTMENT BY APPLYING SECTION 2(22)(E) OF THE ACT. THE CIT(A) HAS I.T.A NO.1770/ MUM/2010 ASSESSMENT YEAR: 2006-07 4 RIGHTLY HELD THAT THERE IS NO PROVISION UNDER THE I NCOME TAX ACT, 1961 TO DISALLOW THE INTEREST CLAIM OF THE ASSESSEE, IF NEXUS BETWEEN TH E BORROWINGS AND GIVING ADVANCE IS ESTABLISHED. IN VIEW OF THIS, WE UPHOLD THE ORDER OF THE CIT(A) AND DECLINE TO INTERFERE. 5. IN THE RESULT, APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 7 TH SEPTEMBER, 2011 SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI, DATED 7 TH SEPTEMBER, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)-35 MUMBAI 4. COMMISSIONER OF INCOME TAX,25 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH A MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI