PEEJAY SILK MILLS, MUMBAI V. ITO 20(2)(1), MUMBAI

ITA 1814/MUM/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0307 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-08-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2010-2011
• Appeal Filed On: 28-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARJU GARODIA
• Assessee Lawyers: R K BOTHRA
• Keywords: Business income; Depreciation; Notional interest
• Section: 143(3); 142(1); 28

Judgement Text

1 ITA 1814/MUM/2016 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J, MUMBAI BEFORE SHRI SAKTIJIT DEY(JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NO.1814/MUM/2016 (ASSESSMENT YEAR 2010-11) PEEJAY SILK MILLS RK BOTHRA, 3/37, TARDEO AC MARKET, MUMBAI 400 034 PAN : AAAFP6034H VS ITO, WARD 20(2)(1), MUMBAI APPELLANT RESPONDENT APPELLANT BY SHRI RK BOTHRA RESPONDENT BY ARJU GARODIA DATE OF HEARING 03-07-2017 DATE OF PRONOUNCEMENT 04-08-2017 O R D E R PER G MANJUNATHA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A)-36, MUMBAI DATED 06-01-2016 AND IT PERTAINS TO ASSESSME NT YEAR 2010-11. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL:- 1. ON THE FACTS, IN LAW AND IN THE CIRCUMSTANCES OF T HE CASE, WHETHER THE LEARNED CIT (A) WAS JUSTIFIED IN CONFIR MING THE ACTION OF A.O. THAT INTEREST PAID TO CITI BANK ON HOUSING LOA N ACCOUNT NO. 2211395 TO THE EXTENT OF RS. 60,000/- IS NOT ALLOWA BLE AS DEDUCTION. 2. ON THE FACTS, IN LAW AND IN THE CIRCUMSTANCES OF TH E CASE, WHETHER THE LEARNED CIT (A) WAS JUSTIFIED IN CONFIRMING THE ACTION OF A.O. THAT INTEREST PAID TO CITI BANK ON HOUSING LOAN ACCOUNT NO. 219658 TO THE 2 ITA 1814/MUM/2016 EXTENT OF RS. 7,74,887/- IS NOT ALLOWABLE AS DEDUCT ION. 3. ON THE FACTS, IN LAW AND IN THE CIRCUMSTANCES OF TH E CASE WHETHER THE LEARNED CIT(A) WAS JUSTIFIED IN CONFIRMING THE ACTION OF THE A.O. DIS- ALLOWING A SUM OF RS. 2,75,000/- OUT OF SALARY, REP AIRS AND MAINTENANCE AND WATER CHARGES. 4. ON THE FACTS OF THE CASE, IN LAW AND IN THE CIRCUMS TANCES OF THE CASE WHETHER THE LEARNED CIT(A)WAS JUSTIFIED IN CONFIRMI NG THE ACTION OF THE A.O. OF LEVYING INTEREST AMOUNTING TO RS. 6,18,430/ - ON VARIOUS BUSINESS ADVANCES AND ADDING TO THE TOTAL INCOME OF THE APPE LLANT. 5. ON THE FACTS OF THE CASE, IN LAW AND IN THE CIRCUMS TANCES OF THE CASE, WHETHER THE LEARNED CIT(A) WAS JUSTIFIED IN C ONFIRMING THE ACTION OF THE A.O. IN ALLOWING DEPRECIATION ON FURNITURE A ND FIXTURE ON THE BASIS OF TURNOVER OF THE BUSINESS AND INCOME FROM R ENT AND FURTHER CLUBBING TWO BLOCKS OF ASSETS INTO ONE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S A PARTNERSHIP FIRM CARRYING ON BUSINESS OF TRADING IN TEXTILES, PACKIN G OF TEXTILES AND COMPUTER SERVICES AND ALSO DERIVES INCOME FROM HOUSE PROPERT Y, HAS FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2010-11 ON 14-10-2010 DE CLARING TOTAL INCOME OF RS.49,490. THE CASE HAS BEEN SELECTED FOR SCRUTINY AND ACCORDINGLY, NOTICES U/S 143(2) AND 142(1) OF THE ACT WERE ISSUED. IN RESPO NSE TO THE NOTICES, AUTHORIZED REPRESENTATIVE OF THE ASSESSEE ATTENDED FROM TIME TO TIME AND FILED NECESSARY DETAILS, AS CALLED FOR. THE ASSESSMENT W AS COMPLETED U/S 143(3) ON 28 TH MARCH, 2013 DETERMINING TOTAL INCOME AT RS.21,03,1 40 BY MAKING FOLLOWING ADDITIONS:- 1. DISALLOWANCE OF MUNICIPAL TAXES RS.5,24,570/- 3 ITA 1814/MUM/2016 2. DISALLOWANCE OF PAYMENT MADE TO CITIBANK RS.7,6 7,732/- FOR HOUSING LOAN TAKEN IN EARLIER YEARS 3. DISALLOWANCE OF LEGAL EXPENSES RS. 29,050/- 4. DISALLOWANCE OUT OF SALARY, REPAIRS AND MAINTENANCE AND WATER CHARGES RS.2,75,711/- 5. DISALLOWANCE OUT OF INTEREST PAID BY CALCULATIN G NOTIONAL INTEREST ON BUSINESS ADVANCES PAID. RS.8 ,24,227/- 6. REDUCTION OF DEPRECIATION WHILE WORKING OUT INCOME FROM BUSINESS RS.2,74,285/- 7. GRANTING CREDIT FOR TDS FOR RS.5,50,990/- AS AGAINST CREDIT CLAIMED FOR RS.6,42,994/- LESS BY 92,004/- 8. NON GRANT OF DEDUCTION OF AMOUNT PAID AS SOCIETY CHARGES WHILE DETERMINING ALV OF THE FLAT GIVEN ON RENT RS.2,11,109/- 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PRE FERRED APPEAL BEFORE CIT(A). BEFORE CIT(A), THE ASSESSEE HAS FILED ELAB ORATE WRITTEN SUBMISSIONS AND CHALLENGED ADDITIONS MADE BY THE AO TOWARDS DISALLO WANCE OF MUNICIPAL TAXES, INTEREST ON HOUSING LOAN, ADHOC DISALLOWANCE OF EXP ENDITURE AND DISALLOWANCE OF DEPRECIATION ON THE BASIS OF APPORTIONMENT BETWE EN INCOME DECLARED UNDER THE HEADS, BUSINESS INCOMEAND INCOME FROM HOUSE PROPERTY. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE P ARTLY ALLOWED APPEAL FILED BY THE ASSESSEE, WHEREIN HE HAS CONFIRMED ADDITIONS MA DE BY THE AO TOWARDS DISALLOWANCE OF INTEREST PAID ON HOUSING LOAN, DISA LLOWANCE OF EXPENDITURE; HOWEVER, ALLOWED PARTIAL RELIEF IN RESPECT OF NOTIO NAL INTEREST WORKED OUT BY THE 4 ITA 1814/MUM/2016 AO ON ADVANCES, RE-WORKING OF DEPRECIATION ON FIXED ASSETS, ETC. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS IN APPEAL BEFO RE US. 4. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATION IS DISALLOWANCE OF INTEREST ON HOUSING LOAN BORROWED FROM CITIBANK. T HE FACTS WHICH LEAD TO THE IMPUGNED ADDITION ARE THAT THE ASSESSEE HAS BORROWE D TWO HOUSING LOANS FROM CITIBANK, VIDE LOAN ACCOUNTS NOS 2211395 & 219658. THE AO NOTED THAT THE ASSESSEE HAS BORROWED TWO HOUSING LOANS, I.E. ONE I N ASSESSEES NAME AND ANOTHER IN THE NAME OF M/S JESSICA IMPEX. THE AO DISALLOWED INTEREST PAID ON HOUSING LOAN BORROWED IN THE NAME OF M/S JESSICA I MPEX ON THE GROUND THAT THE LOAN IS BORROWED IN DIFFERENT NAME AND ALSO THE ASSESSEE FAILED TO PROVE THE BORROWAL OF LOAN AND UTILIZATION OF LOAN PROCEE DS FOR ACQUISITION OF ASSETS. IT IS THE CLAIM OF THE ASSESSEE THAT BOTH HOUSING L OANS ARE BORROWED FOR THE PURPOSE OF ACQUISITION OF ASSET AND REPAYMENT OF LO AN HAS BEEN MADE FROM ITS ACCOUNT. THEREFORE, THE AO WAS INCORRECT IN DISALL OWING INTEREST PAID ON LOAN MERELY FOR THE REASON THAT THE LOAN IS STANDING IN DIFFERENT NAME BUT FACTS REMAINS THAT THE ASSESSEE HAS BORROWED THE LOAN IN THE NAME OF M/S JESSICA IMPEX, WHICH IS A SISTER CONCERN AND THESE FACTS AR E CLEARLY MENTIONED IN LOAN SANCTION LETTER. THE ASSESSEE FURTHER CONTENDED TH AT EVEN WHILE ALLOWING INTEREST ON LOAN FOR FIRST HOUSING LOAN, THE AO HAS ADOPTED AN INCORRECT FIGURE WHICH IS DIFFERENT FROM INTEREST PAID. THE CERTIFI CATE ISSUED BY THE BANK CLEARLY 5 ITA 1814/MUM/2016 SHOWS PAYMENT OF INTEREST OF RS.3,99,896, WHEREAS T HE AO HAS CONSIDERED INTEREST PAYMENT OF RS.3,39,896 WHICH RESULTED IN D IFFERENCE OF RS.60,000. 5. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS BORROWED TWO HOUSING LOANS FR OM CITIBANK, I.E. ONE IN THE NAME OF M/S PEEJAY SILK MILLS AND ANOTHER IN THE NA ME OF M/S JESSICA IMPEX. THE AO ALLOWED INTEREST PAID ON HOUSING LOAN BORROW ED IN THE NAME OF M/S PEEJAY SILK MILLS AND DISALLOWED INTEREST ON LOAN I N THE NAME OF M/S JESSICA IMPEX BY HOLDING THAT THE ASSESSEE HAS FAILED TO EX PLAIN THE LOAN BORROWED IN THE NAME OF M/S JESSICA IMPEX FOR ACQUISITION OF ASSET. THE ASSESSEE HAS F ILED INTEREST CERTIFICATE OBTAINED FROM THE BANK. ON PE RUSAL OF THE DETAILS FILED BY THE ASSESSEE, WE FIND THAT THE BANK HAS ISSUED TWO SEPARATE CONFIRMATION LETTERS FOR REPAYMENT OF INTEREST WHICH SHOWS THAT ONE LOAN IS BORROWED IN THE NAME OF M/S PEEJAY SILK MILLS AND ANOTHER IN THE NA ME OF M/S JESSICA IMPEX. THOUGH ASSESSEE CLAIMS TO HAVE BORROWED BOTH THE LO ANS FOR THE PURPOSE OF ACQUISITION OF PROPERTY, BUT FAILED TO PROVE THE NE XUS OF THE LOAN AND PURCHASE OF PROPERTY. THEREFORE, WE ARE OF THE VIEW THAT TH E AO WAS RIGHT IN MAKING DISALLOWANCE TOWARDS INTEREST PAID ON HOUSING LOAN BORROWED IN THE NAME M/S JESSICA IMPEX. INSOFAR AS HOUSING LOAN BORROWED IN THE NAM E OF M/S PEEJAY SILK MILLS, ON PERUSAL OF CERTIFICATE OF INTEREST ISSUED BY THE BANK CLEARLY SAYS THAT THE ASSESSEE HAS PAID INTEREST OF RS.3,99,896, BUT THE AO HAS ALLOWED INTEREST 6 ITA 1814/MUM/2016 AMOUNT OF RS.3,39,896. THUS, THERE IS A DIFFERENCE OF RS.60,000 WHICH HAS BEEN EXPLAINED BY THE ASSESSEE THAT THE AO HAS TAKEN INC ORRECT FIGURE WHICH IS EVIDENT FROM THE FACT THAT THE CERTIFICATE ISSUED B Y THE BANK CLEARLY ESTABLISHES PAYMENT OF INTEREST OF RS.3,99,896. THEREFORE, WE DIRECT THE AO TO ALLOW INTEREST OF RS.3,99,896 AS CLAIMED BY THE ASSESSEE AS AGAINST RS.3,39,896. 6. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S DISALLOWANCE OF EXPENDITURE OF RS.2,75,711 OUT OF STAFF SALARY, REP AIRS AND MAINTENANCE AND WATER CHARGES. THE AO HAS WORKED OUT EXPENDITURE D EBITED IN THE P&L ACCOUNT ON THE BASIS OF GROSS RECEIPTS AND DISALLOW ED A SUM OF RS.2,75,711 PROPORTIONATELY ON THE BASIS OF GROSS RECEIPTS FROM RENT AND GROSS RECEIPTS FROM BUSINESS. THE ASSESSEE HAS CLAIMED RENTAL INCOME U NDER THE HEAD INCOME FROM BUSINESS AND CLAIMED EXPENSES AGAINST SUCH IN COME IN THE P&L ACCOUNT. WHILE COMPLETING THE ASSESSMENT, THE AO HAS TREATED RENTAL INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND ALLOWED STATU TORY DEDUCTIONS ALLOWABLE U/S 24. IN RESPECT OF EXPENDITURE CLAIME D IN THE P&L ACCOUNT, THE AO HAS BIFURCATED TOTAL EXPENDITURE INTO EXPENDITURE R ELATABLE TO BUSINESS ACTIVITY AND EXPENDITURE RELATABLE TO INCOME FROM HOUSE PROP ERTY AND ACCORDINGLY WORKED OUT AN AMOUNT OF RS.2,75,711 FOR DISALLOWANC E. IT IS THE CLAIM OF THE ASSESSEE THAT THE TOTAL EXPENDITURE DEBITED UNDER T HE HEAD SALARY IS FULLY RELATABLE TO BUSINESS ACTIVITY AND OTHER EXPENSES L IKE REPAIRS AND MAINTENANCE 7 ITA 1814/MUM/2016 AND WATER CHARGES HAS ALREADY BEEN ALLOCATED ON THE BASIS OF GROSS RECEIPTS FROM RENTAL INCOME AND BUSINESS INCOME. THE AO, WI THOUT ANY BASIS, SIMPLY DIVIDED THE TOTAL EXPENDITURE ON THE BASIS OF TURNO VER WHICH IS NOT ONLY ILLEGAL BUT ILLOGICAL. WE FIND FORCE IN THE ARGUMENTS OF T HE ASSESSEE FOR THE REASON THAT UNLESS THE AO SPECIFIES HIMSELF NEXUS BETWEEN THE E XPENDITURE DEBITED IN THE P&L ACCOUNT TO THE RECEIPTS CANNOT DISALLOW EXPEND ITURE ON THE BASIS OF RECEIPTS. THE ASSESSEE HAS FILED ITS FINANCIAL STA TEMENTS FOR THE RELEVANT FINANCIAL YEAR. ON GOING THROUGH THE FINANCIAL STA TEMENT FILED BY THE ASSESSEE, WE FIND THAT THE ASSESSEE HAS ALLOCATED EXPENDITURE RELATABLE TO RENTAL INCOME AND BUSINESS INCOME. THE AO, IGNORING THE WORKINGS FILED BY THE ASSESSE, DISALLOWED EXPENDITURE ON ADHOC BASIS WITHOUT ANY B ASIS. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE ISSUE NEEDS TO BE RECO NSIDERED BY THE AO IN THE LIGHT OF THE EXPLANATION OF THE ASSESSEE. HENCE, W E SET ASIDE THE ISSUE TO THE FILE OF THE AO AND DIRECT HIM TO CONSIDER THE EXPLA NATION OF THE ASSESSEE WITH REGARD TO THE ALLOCATION OF EXPENDITURE TOWARDS REN TAL INCOME AND BUSINESS RECEIPTS. 7. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S DISALLOWANCE OF NOTIONAL INTEREST ON LOANS AND ADVANCES. DURING TH E COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAS BORROWED UNSECURED LOANS ON WHICH PAID INTEREST, WHEREAS ASSESSEE HAS ADVAN CED VARIOUS LOANS BUT 8 ITA 1814/MUM/2016 FAILED TO CHARGE ANY INTEREST ON SUCH LOANS. THERE FORE, THE AO CALLED UPON THE ASSESSEE TO EXPLAIN WHY INTEREST ON LOANS SHALL NOT BE DISALLOWED. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE CLAIMS THAT THE LOANS AND ADVANCES ARE ADVANCED IN THE NORMAL COURSE OF BUSINESS AND THESE LOANS ARE EXTENDED OUT OF INTEREST FREE FUNDS AVAILABLE. THE ASSESSEE FURTHE R CONTENDED THAT IT HAS INTEREST FREE FUNDS OF RS.98,57,000 WHEREAS ITS ADV ANCES ARE RS.55,28,591, THEREFORE, THE AO WAS INCORRECT IN ADDING NOTIONAL INTEREST ON BUSINESS ADVANCES. THE ASSESSEE FURTHER CONTENDED THAT MAN Y OF THE ADVANCES HAVE BECOME BAD WHICH ARE IRRECOVERABLE AS THESE ADVANCE S ARE MORE THAN 10-12 YEARS OLD PAID FOR EITHER PURCHASE OF RAW MATERIAL S OR EXPENSES. THEREFORE, THERE IS NO REASON FOR COMPUTING NOTIONAL INTEREST ON SUCH ADVANCES IN THE ABSENCE OF ANY NEXUS BETWEEN DIVERSION OF INTEREST BEARING FUNDS TO NON BUSINESS PURPOSES. 8. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATERIAL ON RECORD, WE FIND THAT THE AO AS WELL AS THE CIT (A) HAS RECORDED A C ATEGORICAL FINDING THAT THE ASSESSEE HAS PAID INTEREST ON UNSECURED LOANS BORRO WED FROM OTHER PARTIES, WHEREAS NOT CHARGED ANY INTEREST ON LOANS AND ADVAN CES. WE FURTHER OBSERVE THAT THE ASSESSEE HAS FAILED TO PROVE THE NEXUS BET WEEN ADVANCES AND BUSINESS CONNECTION. THOUGH ASSESSEE CLAIMS THAT THESE ADVA NCES BECOME BAD DEBT AND NOT RECOVERABLE, BUT FAILED TO FILE ANY EVIDENCE. THIS FACTUAL SITUATION COMPEL 9 ITA 1814/MUM/2016 US TO CONCLUDE THAT THE ASSESSEE HAS ADVANCED INTER EST FREE FUNDS TO THE SAID PERSONS WITHOUT CHARGING ANY INTEREST. THEREFORE, WE ARE OF THE VIEW THAT THE ASSESSEE HAS FAILED TO PROVE THE NEXUS BETWEEN INTE REST FREE FUNDS AND LOANS AND ADVANCES GIVEN TO THIRD PARTIES. THE CIT(A), A FTER CONSIDERING RELEVANT FACTS HAS RIGHTLY UPHELD ADDITIONS MADE BY THE AO. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A); HENCE, WE ARE INCLINED TO UPHO LD THE ORDER OF CIT(A) AND REJECT THE GROUND RAISED BY THE ASSESSEE. 9. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S DISALLOWANCE OF DEPRECIATION ON FURNITURE & FIXTURE ON THE BASIS OF TURNOVER OF THE BUSINESS AND INCOME FROM HOUSE PROPERTY. THE AO HAS DISALLOWE D DEPRECIATION ON FURNITURE & FIXTURES PROPORTIONATELY ON THE BASIS O F TURNOVER. THE AO DISALLOWED DEPRECIATION ON FURNITURE & FIXTURES WHI CH ARE RELATABLE TO RECEIPTS FROM INCOME FROM HOUSE PROPERTY. THE ASSESSEE CL AIMS THAT THE FURNITURE & FIXTURES BELONGS TO ITS BUSINESS ACTIVITY AND HENCE , THE AO WAS INCORRECT IN BIFURCATING DEPRECIATION ON FURNITURE & FIXTURES BA SED ON TURNOVER. WE FIND FORCE IN THE ARGUMENT OF THE ASSESSEE FOR THE REASO N THAT THE ASSESSEE HAS FILED A FINANCIAL STATEMENT EXPLAINING THE CALCULATION OF DEPRECIATION WHEREIN HE HAD BIFURCATED THE ASSETS USED IN THE BUSINESS ACTIVITY AND ASSETS USED IN THE BUILDINGS WHICH IS PART OF INCOME FROM HOUSE PROPE RTY. THE AO WITHOUT ANY BASIS ALLOCATED DEPRECIATION ON FURNITURE AND FIXTU RES ON THE BASIS OF GROSS 10 ITA 1814/MUM/2016 TURNOVER AND DISALLOWED DEPRECIATION RELATABLE TO T HE ACTIVITY OF INCOME FROM HOUSE PROPERTY ON THE GROUND THAT THE DEDUCTION U/ S 24 HAS BEEN ALLOWED. THEREFORE, WE ARE OF THE VIEW THAT THE ISSUE NEEDS TO BE RE-EXAMINED BY THE AO IN THE LIGHT OF SUBMISSIONS OF THE ASSESSEE THAT A SEPARATE WORKING HAS BEEN FURNISHED TO EXPLAIN THE DEPRECIATION ON FURNITURE AND FIXTURES, WHICH IS FULLY RELATABLE TO BUSINESS ACTIVITY OF THE ASSESSEE. HE NCE, WE SET ASIDE THE ISSUE TO THE FILE OF THE AO AND DIRECT HIM TO CONSIDER THE I SSUE AFRESH IN THE LIGHT OF THE DETAILS FILED BY THE ASSESSEE. 10. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PAR TLY ALLOWED, FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH AUGUST, 2017. SD/- SD/- (SAKTIJIT DEY) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 04 TH AUGUST, 2017 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI