KEWAL KIRAN FINANCE P. LTD, MUMBAI V. ITO 12(3)(2), MUMBAI

ITA 1850/MUM/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 9955 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-05-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 16-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: CHAITANYA ANJARIA
• Assessee Lawyers: AYUSHI MODANI AR S
• Keywords: Notional interest
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH SMC MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 1850/MUM/2017 ASSESSMENT YEAR: 2012 - 13 KEWAL KIRAN FINANCE PVT. LTD., KEWAL KIRAN ESTATE, 460/7, L.B. PATEL ROAD, BEHIND TIRUPATIUDYOG, GOREGAON (E), MUMBAI - 400063. VS. INCOME TAX OFFICER 12(3)(2), (ROOM NO. 147, 1 ST FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI - 400020). PAN NO. AADCK2902P APPELLANT RESPONDENT ASSESSEE BY : MR. RONAK DOSHI & MS. AYUSHI MODANI, AR S REVENUE BY : MR. CHAITANYA ANJARIA, DR DATE OF HEARING : 13/05/2019 DATE OF PRONOUNCEMENT: 28/05/2019 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2012 - 13. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 20, MUMBAI [IN SHORT CIT(A)] AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME TAX ACT 1961, (THE ACT). 2. THE 1 ST GROUND OF APPEAL RELATES TO DISALLOWANCE OF INTEREST EXPENSE AMOUNTING TO RS.16,41,116/ - . BRIEFLY STATED, THE FACTS ARE THAT DURING THE YEAR UNDER CONSIDERATION, TH E ASSESSEE HAD MOSTLY INVESTED KEWAL KIRAN FINANCE LTD. ITA NO. 1850/MUM/2017 2 IN DIVIDEND REINVESTMENT PLAN OF MUTUAL FUND. ACCORDINGLY, NO SHORT TERM CAPITAL GAIN WAS REALIZED TO THE ASSESSEE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO ON EXAMINATION OF THE BANK STATEMENT FOUND THAT THE ASSES SEE HAD MADE THESE INVESTMENT FROM INTEREST RECEIPT ON THE LOANS GIVEN AND OUT OF THE FUND RECEIVED FROM THE PARTIES TO WHOM THE ASSESSEE HAD GIVEN LOAN ON INTEREST. IN RESPONSE TO A QUERY RAISED BY THE AO TO EXPLAIN WHY THE DIVIDEND INCOME SHOULD NOT BE R EDUCED FROM THE INTEREST EXPENSE S, THE ASSESSEE FILED A REPLY STATING THAT THE DIVIDEND INCOME RECEIVED FROM INVESTMENT WAS TOTALLY OUT OF OWN FUNDS AND NOT FROM THE BORROWED FUNDS. THE AO WAS NOT CONVINCED WITH THE SAID REPLY OF THE ASSESSEE FOR THE REASO N THAT (I) THE ASSESSEE HAD NOT GIVEN ANY DIRECT NEXUS OF FUND UTILIZED FOR INVESTMENT, (II) DURING THE YEAR THE ASSESSEE HAD RECEIVED BACK LOAN GIVEN OF RS.1.50 CRORE TO MUDRA FINVEST (GUJ) LTD. AND THE SAME FUND WAS UTILIZED FOR INVESTMENT IN MUTUAL FUND OF BIRLA SUNLIFE SAVING FUND , (III) IT WAS NOT EXPLAINED THAT THE FUND GIVEN TO M/S MUDRA FINVEST (GUJ) LTD. IS OUT OF OWN FUND OF THE ASSESSEE. THUS AS THE ASSESSEES MAIN BUSINESS WAS GIVING LOAN ON HIGHER INTEREST RATE AND PAYING INTEREST AT LOWER R ATE ON THE BORROWED FUND AND AS BOTH THE FUNDS ARE MIXED TOGETHER AND NO DIRECT NEXUS HAS BEEN ESTABLISHED, A DISALLOWANCE OF RS.16,41,116/ - ON ACCOUNT OF INTEREST EXPENSES WAS MADE BY THE AO. 3 . IN APPEAL, THE LD. CIT(A) HELD : THE BORROWED FUND HAVE B EEN UTILIZED FOR ACQUIRING MUTUAL FUNDS ON WHICH EXEMPT DIVIDEND INCOME OF RS.16,41,116/ - WAS RECEIVED. THE ASSESSEES CLAIM KEWAL KIRAN FINANCE LTD. ITA NO. 1850/MUM/2017 3 IS THAT, BY ACQUIRING THE MUTUAL FUNDS IT CARRIED ON THE BUSINESS MORE EFFICIENCY AND, THEREFORE, THE ENTIRE INVESTMENT OF FUNDS WA S FOR THE PURPOSE OF BUSINESS AND THE INTEREST PAID ON THE AMOUNT BORROWED WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. I AM UNABLE TO ACCEPT THIS CONTENTION FOR THE SIMPLE REASON THAT WHEN A SPECIFIC PROVISION HAS BEEN INCORPORATED UNDER THE AC T, THEN, THE OBJECT OF INVESTMENT IN MUTUAL FUND CANNOT OVERRIDE THE MANDATE OF THAT PROVISION. ADMITTEDLY, THE DIVIDEND INCOME WAS EXEMPT U/S 10(33) AND, THEREFORE, ANY INTEREST EXPENDITURE INCURRED IN CONNECTION WITH EARNING OF DIVIDEND INCOME COULD NOT BE ALLOWED IN VIEW OF THE PROVISIONS OF SECTION 14A OF THE ACT. SECTION 14A, DEALS WITH EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN THE TOTAL INCOME. ADMITTEDLY, DIVIDEND INCOME IS NOT INCLUDIBLE IN THE TOTAL INCOME. THEREFORE, THE EXPENDI TURE INCURRED, IF ANY, FOR EARNING THE DIVIDEND INCOME CANNOT BE ALLOWED. THE ASSESSING OFFICER HAS RIGHTLY MADE DISALLOWANCE, WHICH AMOUNTS TO RS.16,41,116/ - . IN VIEW OF THIS DISCUSSION AND CONSIDERING ALL THE ABOVE FACTS, THE DISALLOWANCE MADE OF RS.16,4 1,116/ - AS M A DE BY THE ASSESSING OFFICE IS UPHELD. 4 . BEFORE US, THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE IS HAVING INTEREST FREE CAPITAL OF RS.2,63,21,695/ - IN SHARE CAPITAL AND RESERVES. TOTAL INCOME - TAX FREE INVESTMENTS IS RS.76,79,670/ - OUT OF TOTAL INVESTMENT OF RS.87,29,032/ - . RELYING ON THE DECISION IN CIT V. RELIANCE UTILITIES & POWER LTD . 313 ITR 340 (BOM), IT IS SUBMITTED BY HIM THAT TRIBUNAL HAVING RECORDED A CLEAR FINDING THAT THE ASSESSEE POSSESSED SUFFICIENT INTEREST - FREE FUNDS OF ITS OWN WHICH WERE GEN ERATED IN THE COURSE OF THE RELEVANT FINANCIAL YEAR, APART FROM SUBSTANTIAL SHAREHOLDERS FUND, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST - FREE FUNDS. KEWAL KIRAN FINANCE LTD. ITA NO. 1850/MUM/2017 4 SIMILAR RELIANCE WAS PLACED ON THE DECISION IN DCIT V. HDFC BANK LTD . 366 ITR 505 (BOM). ON THE OTHER HAND, THE LD. DR RELIES ON THE ORDER OF THE LD. CIT(A). 5 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. IN THE INSTANT CASE THE ASSESSEE IS IN THE BU SINESS OF PROMOTION OF INDUSTRIAL FINANCE, INVESTMENT AND FINANCE AND TRADING IN SHARES AND SECURITIES. A PERUSAL OF THE AUDITED ACCOUNTS INDICATES THAT I N THE INSTANT CASE, OWN FUNDS OF THE ASSESSEE FOR THE AY 2012 - 13 ARE RS.2,63,21,695/ - (SHARE CAPITAL A ND RESERVES), WHILE TOTAL INVESTMENTS GENERATING TAX - FREE INCOME ARE RS.87,29,032/ - . AS THE OWN FUNDS OF THE APPELLANT ARE MORE THAN THE INVESTMENT GENERATING TAX - FREE INCOME, NO INTEREST DISALLOWANCE CAN BE MADE. AS THE OWN FUND S ARE MORE THAN INVESTMENTS , RELYING ON THE DECISION IN RELIANCE UTILITIES & POWER LTD. (SUPRA) AND HDFC BANK LTD . (SUPRA), WE DELETE THE DISALLOWANCE OF INTEREST EXPENSES OF RS.16,41,116/ - MADE BY THE AO. THUS THE 1 ST GROUND OF APPEAL IS ALLOWED. 6 . THE 2 ND GROUND OF APPEAL RELATE S TO THE ADDITION ON ACCOUNT OF NOTIONAL INTEREST OF RS.4,12,500/ - . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED BY THE AO TO EXPLAIN WHY INTEREST HAD NOT BEEN CHARGED TO M/S SHRINAGAR DEVELOPERS PVT. LTD. FOR RS.50,00,000/ - LOAN GIV EN ON 09.05.2011. IN THE MATTER OF THE ABOVE LOAN THE ASSESSEE HAD NEITHER TAKEN BACK THE PRINCIPLE LOAN AMOUNT NOR CHARGED ANY INTEREST ON THE SAME. THE AO ALSO FOUND THAT THE ASSESSEE HAD NOT PLACED ON RECORD ANY EVIDENCE THAT IT HAD MADE CONSIDERABLE EF FORTS TO RECOVER THE LOAN OR INTEREST ON IT. KEWAL KIRAN FINANCE LTD. ITA NO. 1850/MUM/2017 5 THE AO NOTED THAT THE ASSESSEE HAS NOT EXPLAINED THAT IT WAS UNAWARE OF FINANCIAL CRUNCH OF M/S SHRINAGAR DEVELOPERS PVT. LTD. AT THE TIME OF GIVING LOAN. HOLDING TH AT ALL THE ISSUES RELATING TO LE NDING TO M/S SHRINAGAR DEVELOPERS PVT. LTD. ARE AGAINST THE PROBABILITY OF BUSINESS PRUDENCE, THE AO ESTIMATED DEEMED INTEREST INCOME @ 9% ON RS.50,00,000/ - FOR 11 MONTHS. THUS THE DISALLOWANCE MADE BY THE AO COMES TO RS.4,12,500/ - . 7 . IN APPEAL, THE LD. CIT(A) HELD : THE BORROWED FUNDS HAVE BEEN GIVEN TO M/S SHRINAGAR DEVELOPERS PVT. LTD. FOR RS.50,00,000/ - ON 09.05.2011 AS LOAN. THE ASSESSEES CLAIM IS THAT, AT THE TIME OF ADVANCING LOAN BORROWER M/S SHRINAGAR DEVELOPERS PVT. LTD. WERE IN SOUND FINANCI AL POSITION. IT IS EVIDENT FROM THE FOLLOWING YEARS THAT TILL TODAY LOAN ARE NOT RECOVERABLE. THE LOAN WAS FOR THE PURPOSE OF BUSINESS AND THE INTEREST PAID ON THE AMOUNT BORROWED WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IT IS NOTED THAT THE ASSESSEE HAS NOT DEMONSTRATED THAT THE LOAN HAD TURNED AS A BAD LOAN AND NO DOCUMENTS WERE FILED BEFORE THE AO AND DURING THE APPELLATE PROCEEDINGS ESTABLISH THAT ANY EFFORTS WERE MADE TO RECOVER THE INTEREST AMOUNT DUE. THE ASSESSEE WAS TO OFFER THE INTE REST INCOME WHICH WAS NOT DONE. IT IS SEEN THAT THE AO HAS RIGHTLY CHARGED THE INTEREST OF RS.4,12,500/ - AT THE RATE OF 9% BEING THE BORROWING COST OF THE ASSESSEE ON THE LOAN OF RS.50,00,000/ - GIVEN TO M/S SHRINAGAR DEVELOPERS PVT. LTD. IN VIEW OF THE THI S DISCUSSION AND CONSIDERING ALL THE ABOVE FACTS, THE DISALLOWANCE MADE OF RS.4,12,500/ - AS MADE BY THE ASSESSING OFFICER IS UPHELD. 8 . BEFORE US, THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT THE APPELLANT HAS FOLLOWED ALL THE BUSINESS PRUDENCE AND CARE IN ADVANCING LOAN TO BORROWERS AND AT THE TIME OF ADVANCING LOAN, BORROWER M/S KEWAL KIRAN FINANCE LTD. ITA NO. 1850/MUM/2017 6 SHRINAGAR DEVELOPERS PVT. LTD. WERE IN SOUND FINANCIAL POSITION. IT IS STATED BY HIM THAT THE APPELLANT IS PUTTING ALL ITS EFFORTS TO RECOVER LOAN AND INTEREST AND IT HAS RECOVE RED RS.4,05,000/ - TOWARDS INTEREST AS ON JULY 2015. THE LD. COUNSEL FURTHER SUBMITS THAT IT IS THE PREROGATIVE OF THE APPELLANT TO FILE SUIT AGAINST THE BORROWER FOR RECOVERY AND THERE IS NO SUCH PROVISION IN STATUTE THAT BY FILING ONLY ONE CAN PROVE LOAN HAS BECOME STICKY. IN THIS REGARD RELIANCE IS PLACED BY HIM ON THE DECISION IN (I) CIT V. TEMPLETON ASSET MANAGEMENT (I) (P) LTD . 340 ITR 279 (BOM) (2011), (II) ACIT V. KOLKATA METROPOLITAN DEVELOPMENT AUTHORITY ITAT (KOL) 34 CCH 71 (2012) AND (III) UCO BAN K V. CIT 237 ITR 889 (SC) (1999). ON THE OTHER HAND, THE LD. DR RELIES ON THE ORDER PASSED BY THE LD. CIT(A). 9 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. IT IS A SETTLED LAW THAT IT IS THE REAL INCOME AND NOT THE HYPOTHETICAL INCOME WHICH IS TO BE TAXED. IN THE CASE OF KOLKATA METROPOLITAN DEVELOPMENT AUTHORITY (SUPRA), IT IS HELD THAT WHEN PRINCIPAL AMOUNT ITSELF IS UNRECOVERED AND PRACTICALLY UNRECOVERABLE, DEEMED ACCRUED INTEREST ON SUCH LOANS AND ADVANCES CAN NOT BE BROUGHT TO TAX. IN THE CASE OF UCO BANK (SUPRA), IT IS HELD THAT I NTEREST ON A LOAN WHOSE RECOVERY IS DOUBTFUL AND WHICH HAS NOT BEEN RECOVERED BY THE ASSESSEE - BANK FOR THE LAST THREE YEARS BUT HAS BEEN KEPT IN A SUSPENSE A/C AND HAS NOT BEEN BROUGHT TO THE P&L A/C OF THE ASSESSEE, COULD NOT BE INCLUDED IN THE INCOME OF THE ASSESSE FOR THE ASSESSMENT ON THE BASIS KEWAL KIRAN FINANCE LTD. ITA NO. 1850/MUM/2017 7 OF CIRCULAR NO. F.201/21/84 TTA - II, DT. 9 TH OCT, 1984, WHICH WAS APPLICABLE AT THE RELEVANT TIME AND WAS BINDING ON THE DEPARTMENT. THE RATIO LAID DOWN IN THE ABOVE CASES IS APPLICABLE TO THE INSTANT CASE. FOLLOWING THE SAME, WE DELETE THE ADDITION OF RS.4,12,500/ - MADE BY THE AO AS DEEMED INTEREST. 1 0 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28/05/2019. SD/ - SD/ - (MAHAVIR SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 28/05/2019 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (SR. PRIVATE SECRETARY) ITAT, MUMBAI