Shri Harshad B. Vaghela, Ahmedabad V. The Income tax Officer, Ward-4(3), Ahmedabad

ITA 1871/AHD/2010

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 9162 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 9 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 15-12-2015
• Assessment Year: 1996-1997
• Appeal Filed On: 31-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DINESH SINGH
• Assessee Lawyers: J P SHAH WITH SAKAR SHARMA ARS
• Keywords: Business income; Depreciation; Business expenditure; Principle of natural justice; Bad and doubtful debts; Condonation of delay; Revenue expenditure; Capital expenditure
• Section: 143(3); 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH AHMEDABAD BEFORE SHRI KUL BHARAT, JM, & SHRI MANISH BORAD, AM. ITA NO.1871 & 1872/AHD/2010 ASST. YEAR: 1996-97 & 1997-98 SHRI HARSHAD B. VAGHELA, 104, SHANTANU, OPP. HOTEL CLASSIC GOLD, SARDAR PATEL NAGAR, AHMEDABAD. VS. INCOME-TAX OFFICER, WARD 4(3), AHMEDABAD. APPELLANT RESPONDENT PAN AAKPV 5488K APPELLANT BY SHRI J. P. SHAH WITH SAKAR SHARMA, ARS RESPONDENT BY SHRI DINESH SINGH, SR.DR DATE OF HEARING: 3/3/2016 DATE OF PRONOUNCEMENT: 21/03/2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THESE TWO APPEALS OF ASSESSEE ARE DIRECTED AGAINST TWO SEPARATE ORDERS OF LD. CIT(A)VIII, AHMEDABAD OF EVE N DATED 25.2.2009 FOR ASST. YEARS 1996-97 & 1997-98. ASSESS MENTS WERE FRAMED U/S 143(3) R.W.S 254 OF THE IT ACT, 1961 (IN SHORT THE ACT) ON 31.3.1998 AND ON 26/12/2007 FOR ASST. YEARS 1996-97 & 1997-98 RESPECTIVELY; GROUNDS OF APPEAL RAISED IN THESE APP EALS ARE AS UNDER:- ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 2 2. IN ITA NO.1871/AHD/2010 FOR ASST. YEAR 1996-97 - 1. THE C.I.T.(APPEALS) ERRED IN UPHOLDING THE DISALLOW ANCE OF BUSINESS EXPENSES OF RS.54,29,5087- MADE BY THE ASSESSING OFFICER CONSISTING OF- (A) DEPRECIATION RS. 110869 (B) INTEREST PAID TO BANK RS. 218635 (C) RTO TAX RS. 9766 (D) INTEREST PAID TO OTHERS RS.1534307 (E) BAD DEBTS WRITTEN OFF RS.3047240 (F) MISC. SERVICES RS. 100000 (G) SALES TAX RS. 393368 (H) MISC. OTHER EXPENSES RS. 15323 2. THE C.I.T.(APPEALS) ERRED IN UPHOLDING THE DISAL LOWANCE OF INTEREST OF RS.23,54,592/- AS MADE BY THE ASSESSING OFFICER. 3. THE C.LT.(APPEALS) ERRED IN UPHOLDING THE DECISI ON OF THE ASSESSING OFFICER IN ASSESSING THE INSURANCE CLAIM RECEIVED OF RS.30,443/- AND SUNDRY BALANCE WRITTEN OFF OF RS. 1 4,054/- UNDER THE HEAD 'INCOME FROM OTHER SOURCES' INSTEAD OF UNDER T HE HEAD 'INCOME FROM BUSINESS'. 3. IN ITA NO.1872/AHD/2010 FOR ASST. YEAR 2097-98 - 1. THE C.I.T.(APPEALS) ERRED IN UPHOLDING THE DISALLOWANCE OF BUSINESS EXPENSES OF RS. 17,93,439/- MADE BY THE AS SESSING OFFICER CONSISTING OF- (A) DEPRECIATION RS. 79647 (B) INTEREST PAID TO BANK RS. 19251 (C) INTEREST PAID TO OTHERS RS.1601916 (D) MISC. OTHER EXPENSES RS. 92625 4. THESE TWO APPEALS ARE TIME BARRED BY 345 DAYS. L D. AR HAS REQUESTED FOR CONDONATION OF DELAY IN FILING THESE APPEALS BEFORE THE ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 3 TRIBUNAL. THE LD. AR HAS REFERRED TO THE AFFIDAVIT DATED 31 ST MAY, 2010 SUBMITTED ON 7/6/2010 WITH THE REGISTRY. FROM GOING THROUGH THIS AFFIDAVIT WE FIND THAT ACCOUNTANT OF ASSESSEES BUS INESS AFFAIRS NAMELY DIGANT UPADHYAY HAS SIGNED THIS AFFIDAVIT ST ATING THAT HE RECEIVED THE IMPUGNED ORDERS PASSED BY LD. CIT(A) D ATED 25.2.2009 ON 21.04.2009. DURING THIS PERIOD ASSESSEE MR. HARS HAD B. VAGHELA WAS ABROAD AND THESE ORDERS WERE KEPT IN THE OFFICE BY THE ACCOUNTANT AND PURSUANT TO ARRIVAL OF MR. VAGHELA, ACCOUNTANT FORGOT TO INFORM ABOUT THE SAID ORDERS AND LATER ON WHEN I T CAME TO HIS MIND THEN HE CONTACTED THE LD. AR AND FILED THE APPEALS AND LD. AR OF THE ASSESSEE HAS PRAYED TO CONDONE THE DELAY WHICH HAPP ENED DUE TO HUMAN ERROR AND THAT TOO BY THE EMPLOYEE OF ASSESSE E. WE HAVE GONE THROUGH THE DOCUMENTS PLACED ON RECORD FOR THE CONDONATION OF DELAY AND IN THE INTEREST OF NATURAL JUSTICE, WE TH INK IT PROPER TO CONDONE THE DELAY AND ADMIT THE APPEALS FOR ADJUDIC ATION. 5. FROM GOING THROUGH THE APPEALS OF ASSESSEE WE FI ND THAT GROUND NO.1 IS COMMON IN BOTH THE APPEALS AND GROUN D NO.2 & 3 ARE RAISED ONLY IN APPEAL FOR ASST. YEAR 1996-97 AND TH ERE IS NO OTHER GROUND. THEREFORE, WE WILL DEAL WITH ITA NO.1971/AH D2010 FOR ASST. YEAR 1996-97 AND THE DECISION FOR GROUND NO.1 OF TH IS APPEAL WILL APPLY TO GROUND NO.1 OF APPEAL IN ITA NO.1872/AHD/2 010 FOR ASST. YEAR 1997-98. 6. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE IS AN INDIVIDUAL RUNNING A PROPRIETARY CONCERN NAMELY M/S LABH ENTERPRISES. THE ASSESSEE FILED HIS RETURN OF INCOM E ON 31.3.1998 ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 4 DECLARING TOTAL INCOME AT RS.41,58,551/- . ASSESSME NT WAS FRAMED U/S 143(3) R.W.S. 144A OF THE ACT ON 30/3/1999 AND TOTAL INCOME WAS DETERMINED AT RS.1,19,50,490/-. ASSESSEE WENT IN AP PEAL BEFORE LD. CIT(A) WHO VIDE HIS ORDER DATED 31.10.2000 CONFIRME D THE ADDITION MADE BY ASSESSING OFFICER EXCEPT THE AMOUNT RS.7,83 6/-. 7. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE THE TR IBUNAL AND VIDE ITS ORDER IN ITA NO.38/AHD/2001 AND 2100/AHD/2 001 FOR ASST. YEARS 1996-97 AND 1997-98 DATED 28/09/2006 SET ASID E THE ORDER OF THE CIT(A) AND RESTORED THE MATTER TO THE FILE OF A SSESSING OFFICER TO DECIDE THE ISSUE DE NOVO. 8. THEREAFTER ASSESSMENT WAS FRAMED UNDER SECTION 1 43(3) R.W.S. 254 OF THE ACT ON 26/12/2007 DETERMINING INCOME AT RS.1,19,42,652/- 9. LD. CIT(A) PARTLY ALLOWED THE APPEAL OF ASSESSEE . AGGRIEVED, ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 10. WE TAKE UP GROUND NO.1 IN WHICH LD. CIT(A) HAS CONFIRMED THE DISALLOWANCE OF BUSINESS EXPENSES OF RS. 54,29,508/ - CONSISTING OF - (A) DEPRECIATION RS. 110869 (B) INTEREST PAID TO BANK RS. 218635 (C) RTO TAX RS. 9766 (D) INTEREST PAID TO OTHERS RS.1534307 (E) BAD DEBTS WRITTEN OFF RS.3047240 (F) MISC. SERVICES RS. 100000 (G) SALES TAX RS. 393368 (H) MISC. OTHER EXPENSES RS. 15323 ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 5 OUT OF THE ABOVE REFERRED 8 ITEMS TOTALED TO RS. 54 ,29,508/- WE WILL DEAL WITH 7 ITEMS EXCLUDING BAD DEBTS WRITTEN OF RS .30,47,240/-. MATTER RELATING TO BAD DEBTS WILL BE DEALT LATER ON . 11. THE LD. AR OF THE ASSESSEE SUBMITTED THAT DURIN G THE YEAR UNDER APPEAL ASSESSEE HAS TAKEN OVER THE BUSINESS O F M/S LABH ENTERPRISE WHICH WAS RUNNING AS A PARTNERSHIP FIRM UPTO END OF ASST. YEAR 1995-96 AND IN THAT PARTNERSHIP FIRM ASSESSEE WAS ALSO A PARTNER AND AFTER THE RETIREMENT OF SECOND PARTNER THE BUSINESS UNDER THE NAME AND STYLE OF M/S LABH ENTERPRISES WAS TAKE N OVER BY THE ASSESSEE AS A SOLE PROPRIETOR FROM 1 ST APRIL, 1995 RELEVANT TO ASST. YEAR 1996-97. THE LD. AR SUBMITTED THAT THE BUSINES S OF LABH ENTERPRISE WAS OF DEALING IN REAL ESTATE, DEVELOPER AND RUNNING BUSINESS WITH ITS EXISTING ASSETS AND LIABILITIES W AS TAKEN OVER BY THE ASSESSEE WHICH IS VERIFIABLE FROM THE DISSOLUTION D EED PLACED ON RECORD. THE LD. AR OF ASSESSEE SUBMITTED THAT IN TH E ASSESSMENT ORDER U/S 143(3) R.W.S 144A OF THE ACT, THE ONLY RE ASON FOR DISALLOWANCE OF EXPENSES DEBITED TO PROFIT AND LOSS ACCOUNT BY THE ASSESSING OFFICER WAS THAT AS PER HIS OBSERVATION N O BUSINESS WAS CARRIED ON BY M/S LABH ENTERPRISE DURING ASST. YEAR 1996-97 AND THEREFORE, NO ALLOWANCE OF EXPENSES WOULD BE GIVEN. THEREAFTER LD. CIT(A) CONFIRMED MOST OF THE ADDITIONS MADE BY ASSE SSING AUTHORITY. THEREAFTER THE LD. AR OF THE ASSESSEE SUBMITTED THA T THE CO-ORDINATE BENCH IN ITS ORDER IN ITA NO.38/AHD/2001 AND 2100/A HD/2001 FOR ASST. YEARS 1996-97 AND 1997-98 DATED 28/09/2006 IN THE CASE OF ASSESSEE HAS HELD THAT ASSESSEE HAS CARRIED OUT THE BUSINESS DURING ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 6 THE YEAR UNDER CONSIDERATION AND ASSESSEE WAS HELD TO BE ELIGIBLE FOR CLAIMING THE EXPENSES INCURRED FOR BUSINESS PURPOSE S. 12. FURTHER REFERRING TO THE DECISION OF CO-ORDINAT E BENCH IN ASSESSEES OWN CASE, LD. AR SUBMITTED THAT A CLEAR FINDING WAS GIVEN BY THE TRIBUNAL THAT ALL THE EXPENSES HAVE TO BE AL LOWED AND, THEREFORE, DURING THE COURSE OF ASSESSMENT PROCEEDI NGS U/S 143(3) R.W.S. 254 OF THE ACT, LD. ASSESSING OFFICER WAS NE EDED JUST TO ALLOW THE EXPENSES AND THERE WAS NO NECESSITY TO GO INTO THE MERITS OF THE GENUINENESS OF THE EXPENSES BEING INCURRED FOR BUSI NESS EXPEDIENCY OR NOT. 13. ON THE OTHER HAND, LD. DR SUBMITTED THAT HON. T RIBUNAL RESTORED THE ISSUE BACK TO THE FILE OF ASSESSING OFFICER TO CONSIDER THE ALLOWABILITY OF EXPENSES ON MERITS WITH A DECIDED F ACT BASIS THAT ASSESSEE HAS PROVED TO BE INDULGING IN CARRYING ON BUSINESS ACTIVITY. 14. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE NOW BEFORE US IS IN THE SECOND ROUND FOR ADJUDICATION THAT WHETHER THE LD. CIT(A) WAS CORREC T IN UPHOLDING THE DISALLOWANCE OF BUSINESS EXPENSES OF RS.23,82,268/- (TOTAL AMOUNT REFERRED IN GROUND NO. AT RS.54,29,508/- LESS BAD D EBTS RS.30,47,240/-) RELATING TO FOLLOWING EXPENSES (A) DEPRECIATION RS. 110869 (B) INTEREST PAID TO BANK RS. 218635 (C) RTO TAX RS. 9766 (D) INTEREST PAID TO OTHERS RS.1534307 ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 7 (F) MISC. SERVICES RS. 100000 (G) SALES TAX RS. 393368 (H) MISC. OTHER EXPENSES RS. 15323 EXCLUDING (E) BAD DEBTS WRITTEN OFF RS.3047240/-. 15. WE FIND THAT CO-ORDINATE BENCH IN ITA NO.38/AHD /2001 & 2100/AHD/2001 HAS DEALT WITH THE SPECIFIC ISSUE AS TO WHETHER THE ASSESSEE WAS CARRYING ON BUSINESS ACTIVITY DURING T HE ASST. YEAR 1996-97 AND THEY HAVE OBSERVED AS FOLLOWS :- 6. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES. LOOKING TO THE FACTS AND SUBMISSIONS OF THE CASE, WE FIND T HAT THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEES BUSINES S WAS NOT CONTINUOUS AND ACTIVITIES WITH THE OBJECT OF MAKING INCOME OR PROFIT WERE STOPPED. IN CASE OF PROPRIETORSHIP CONCERN M/S LABH ENTERPRISES HAVE ONLY BOOKED ONE UNIT AND A SUM OF RS.1.68 WERE COLLECTED BY WAY OF MEMBERS RECEIPT DURING THE YEAR. THE PROJECT HA S BOOKED 339 PREMISES BEFORE THE BEGINNING OF THE PREVIOUS YEAR. WE FIND THAT THE ASSESSEE HAS MADE COLLECTION AND THE PARTNERSHIP WA S CONTINUOUS. WE FIND THAT THE ORIGINAL PARTNERSHIP DEED WAS DT.30.4 .9. A COPY OF THE PARTNERSHIP DEED IS PLACED ON PAGE 1 TO 8 OF THE PA PER BOOK. THE PARTNERSHIP WAS DISSOLVED ON 1.4.1995 AND THE PARTN ERSHIP BECOMES PROPRIETORSHIP CONCERN OF THE ASSESSEE, WHEREIN ENT IRE ASSETS AND LIABILITIES OF THE FIRM WERE TRANSFERRED TO THE ASS ESSEE AND ON 29.2.96 ASSESSEE AND SAMRAJYA CO-OP. HOUSING SOCIETY THERE WAS DISPUTE WHICH WAS SETTLED BY THE SETTLEMENT THEREOF. IN THE AY 1995-96 THE ASSESSEE HAD NO INCOME ON CONSTRUCTION BUT THE INCO ME WAS FROM HIRING THE TRUCKS. WE FIND THAT FROM THESE DOCUMENT S IT CAN BE SEEN THAT THE ASSESSEES BUSINESS WAS CONTINUOUS AS PROP RIETORSHIP FIRM THOUGH ONE PARTNER WAS RETIRED FROM THE PARTNERSHIP FIRM. THEREFORE, IF THE ASSESSEE HAS CARRIED OUT ONLY THE BOOKING IN TH E YEAR UNDER CONSIDERATION, IT CANNOT BE SAID THAT THE ASSESSEE S BUSINESS WAS NOT CARRIED OUT DURING THE YEAR. WE ALSO FIND FROM THE ORDER OF THE HON. GUJARAT HIGH COURT, WHERE IT HAS BEEN SHOWN THAT TH E ASSESSEE FIRM WAS CARRYING ON THE BUSINESS IN THE NAME AND STYLE SAMRAJYA CO-OP. HOUSING SOCIETY AND THE ASSESSEE WAS DIRECTED BY T HE HON. COURT TO PROVDE SAFETY FACILITY TO THE OCCUPANTS IN THE BUIL DING IN QUESTION. THEREFORE,IT CANNOT BE SAID THAT THE ASSESSEE WAS N OT CARRYING ON ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 8 BUSINESS. WE FIND THAT THE ASSESSEE WAS CARRYING ON BUSINESS. WE ARE OF THE CONSIDERED OPINION THAT, ALL THE EXPENSES HA S TO BE ALLOWED. WE FIND THAT THE AO MADE ALL THE ADDITIONS ON THE GROU ND THAT M/S LABH ENTERPRISE HAS NOT CARRIED OUT THE BUSINESS ACTIVIT IES. AS WE HOLD THAT THE ASSESSEE HAS CARRIED OUT THE BUSINESS, THE ASSE SSEE IS ENTITLED TO DEDUCTION OF ALL THE EXPENSES UNDER THE HEAD BUSINE SS INCOME AND ALSO THE ASSESSEE IS ENTITLED TO OTHER CLAIMS. IT IS PER TINENT TO NOTE HERE THAT IN THE FY 1998-99 THE REVENUE HAS TREATED THE INCOME OF THE ASSESSEE AS INCOME FROM BUSINESS AND M/S LABH ORGAN ISERS WAS ALLOWED THE LOSS AND THE REVENUE HAS ACCEPTED THAT DECISION WHICH IS EVIDENT FROM THE ASSESSMENT ORDER FOR AY 1999-2000, A COPY OF WHICH IS PLACED ON PAGES 35-36 OF THE PAPER BOOK. IN VIEW OF THE ABOVE, WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE M ATTER TO THE FILE OF ASSESSING OFFICER FOR MAKING ASSESSMENT DE NOVO IN THE LIGHT OF OUR ABOVE OBSERVATION IN RESPECT OF ALL THREE ISSUES. 7. WE ARE OF THE CONSIDERED VIEW THAT ASSESSEE HAS CARRIED OUT THE BUSINESS ACTIVITIES DURING THE YEAR UNDER CONSIDERA TION. THE ASSESSEE HAS CARRIED OUT THE BUSINESS, THEREFORE, CIT(A) IS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF ASSESSEE AMOUNTING TO RS.5 4,29,508/- AND DISALLOWANCE ON THE GROUND THAT NO BUSINESS ACTIVIT Y WAS CARRIED OUT DURING THE YEAR OF RS.23,54,592/- ON ACCOUNT OF EXP ENDITURE ON ACCOUNT OF INTEREST PAYMENT, WE ARE OF THE OPINION THAT ASSESSEE HAS CARRIED OUT THE BUSINESS ACTIVITIES AND ASSESSEE HA S BORROWED THE MONEY WHICH IS UTILIZED TO REPAY THE EARLIER UNSECU RED LOANS. THE ASSESSEE HAS ALSO FURNISHED THE FUNDS FLOW STATEMEN T SHOWING THE SOURCE AND APPLICATION OF THE FUNDS. THEREFORE, WE SET ASIDE THE ORDER OF CIT(A) ON ALL THE ISSUES AND RESTORE TO THE FILE OF ASSESSING OFFICER TO DECIDE THE SAME AFRESH AS PER LAW, AFTER GIVING REA SONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 16. FROM GOING THROUGH THE DECISION OF CO-ORDINATE BENCH IN ASSESSEES OWN CASE, WE FIND THAT THE ISSUE RELATIN G TO THE FACT THAT WHETHER ASSESSING WAS CARRYING ON BUSINESS OR NOT D URING ASST. YEAR 1996-97 AND 1997-98, HAS BEEN DEALT ELABORATELY BY THE CO-ORDINATE BENCH, WHEREIN THEY HAVE GIVEN A FINDING THAT ASSES SEE HAS CARRIED OUT THE BUSINESS ACTIVITY DURING THE YEAR UNDER CON SIDERATION AND HAS ALSO HELD THAT LEGITIMATE EXPENSES WHICH HAVE BEEN INCURRED FOR CARRYING ON THE BUSINESS ACTIVITY DURING THE YEAR U NDER APPEAL MAY BE ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 9 ALLOWED SUBJECT TO EXAMINATION ON MERITS BY THE LD. ASSESSING OFFICER AND THE ISSUE WAS RESTORED TO THE FILE OF ASSESSING OFFICER FOR DECIDING THE SAME AFRESH AS PER LAW AS THE SAME WAS NOT DEALT BY LD. ASSESSING OFFICER IN PROCEEDINGS U/S 143(3) R.W.S. 144 OF THE ACT. 17. NOW DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) R.W.S. 254 OF THE ACT THE ASSESSEE HAS SUBMITTED VA RIOUS DETAILS AND EXPLANATION TOWARDS BUSINESS EXPENSES AT RS.23,82,2 68/- RELATING TO FOLLOWING EXPENSES :- (A) DEPRECIATION RS. 110869 (B) INTEREST PAID TO BANK RS. 218635 (C) RTO TAX RS. 9766 (D) INTEREST PAID TO OTHERS RS.1534307 (F) MISC. SERVICES RS. 100000 (G) SALES TAX RS. 393368 (H) MISC. OTHER EXPENSES RS. 15323 EXCLUDING (E) BAD DEBTS WRITTEN OFF RS.3047240/-. IN VIEW OF ABOVE REFERRED EXPENSES OF RS.23,82,268/ - DEPRECIATION AT RS.1,08,869/-, INTEREST PAID TO BANK AT RS.15,34,30 7/-, RTO EXPENSES AT RS.9766/-, MISC. OTHER EXPENSES AT RS.15,323/- A ND SALES TAX AT RS.3,93,368/- AND CONSULTANCY CHARGES FOR SPECIAL A UDIT FOR RS.1 LACS ARE RELATED TO THE BUSINESS ACTIVITIES AND FEW OF T HEM ARE EVEN RELATED TO THE ERSTWHILE PARTNERSHIP FIRM M/S LABH ENTERPRI SE WHICH WAS TAKEN OVER BY THE ASSESSEE AS A RUNNING BUSINESS AND WAS CONTINUED AS SOLE PROPRIETOR BUSINESS CONCERN IN THE YEAR UNDER APPEAL. SIMILARLY, INTEREST EXPENDITURE OF RS.15,34,307/- IS IN RELATI ON TO UNSECURED LOAN ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 10 STANDING AT THE END OF FY 1994-95 I.E. ASST. YEAR 1 995-96 IN THE BOOKS OF M/S LABH ENTERPRISES. AS ALL THESE EXPENSE S DISCUSSED HERE IN PARAGRAPH AT RS.23,82,268/- ARE RELATED TO THE B USINESS ACTIVITY OF M/S LABH ENTERPRISE AND IN VIEW OF THE FACT THAT IT HAS BEEN HELD BY THE CO-ORDINATE BENCH THAT THE SAME BUSINESS ACTIVI TY HAS BEEN CARRIED OUT BY THE ASSESSEE DURING THE YEAR ALSO AN D SIMULTANEOUSLY LD. ASSESSING OFFICER HAS NOT DOUBTED TO THE GENUIN ENESS OF THESE EXPENSES AT RS.23,82,268/- EXCEPT WITH A SINGLE OBJ ECTION THAT THESE EXPENSES ARE RELATING TO THE PARTNERSHIP FIRM M/S L ABH ENTERPRISE FOR THE PREVIOUS YEAR AND NOT TO THE SOLE PROPRIETARY C ONCERN RUN BY THE ASSESSEE DURING THE YEAR UNDER APPEAL. AS OBJECTION RAISED BY THE LD. ASSESSING OFFICER IN DISALLOWING THESE EXPENSES OF RS.23,82,268/- HAS ALREADY BEEN STRUCK DOWN BY THE DECISION OF CO- ORDINATE BENCH CONFIRMING THE EXISTENCE OF BUSINESS ACTIVITY IN TH E YEAR UNDER APPEAL, WE DO NOT FIND ANY REASON FOR DISALLOWANCE OF THESE NORMAL BUSINESS EXPENSES AND ACCORDINGLY WE ALLOW THE EXPENSES OF R S.23,82,268/- AS BUSINESS EXPENSES OUT OF THE TOTAL DISALLOWANCE OF RS.54,29,508/- AS MENTIONED IN GROUND NO.1 OF THE APPEAL AND FOR T HE REMAINING AMOUNTS OF BAD DEBTS OF RS.30,47,240/- WE WILL DISC USS THE SAME IN THE FOLLOWING PARAGRAPHS. 18. NOW WE TAKE UP THE ISSUE REGARDING DISALLOWANCE OF BAD DEBT OF RS.30,47,240/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) R.W.S 254 OF THE ACT ASSESSEE IN REPLY TO TH E OBJECTION RAISED BY THE ASSESSING OFFICER IN REGARD TO THE CLAIM OF BAD DEBT OF RS.30,47,240/- REPLIED AS BELOW :- ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 11 THE FACTS RELATING TO WRITING OFF OF THIS AMOUNT A RE THAT DUE TO CERTAIN LITIGATIONS WITH THE SOCIETY ON WHOSE LAND M/SLABH ENTERPRISE A CTED AS DEVELOPER THE AMOUNT WAS AGREED TO BE NOT RECOVERABLE UNDER THE T ERMS OF SETTLEMENT ARRIVED WITH THE PARTY. THE OUTSTANDING AMOUNT RECOVERABLE AS ON 31/3/1996 WAS RS. 62,01,859/-. AGAINST THIS, STOCK OF FLAT VALUED AT RS. 8,53,600/- WAS ON HAND WITH LABH ENTERPRISE AND THEREFORE NET RECOVERABLE AMOUN T WAS RS. 53,48,259/-. OUT OF THIS, AN AMOUNT OF RS. 23,Q1,019/~ WAS CONSENTED TO BE PAID BY THE SOCIETY AS PER THE SETTLEMENT TERMS ARRIVED AND RECORDED IN WR ITTEN AGREEMENT. BALANCE AMOUNT OF RS. 30,47,240/- BEING NOT RECOVERABLE BY ANY MEANS WAS WRITTEN OFF AND CLAIMED AS BUSINESS LOSS / BAD DEBTS' 19. LD. ASSESSING OFFICER WAS NOT CONVINCED WITH TH IS REPLY AND DISALLOWED THE CLAIM OF ASSESSEE AND EVE ON APPEAL BEFORE LD. CIT(A) THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS CONFIRMED. 20. AGGRIEVED, THE ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 21. THE LD. AR REITERATED THE SUBMISSIONS MADE BEFO RE THE LOWER AUTHORITIES AND FURTHER REFERRED TO THE PROVISIONS OF SECTION 36(2)(V) OF THE ACT AND SUBMITTED THAT THE ASSESSEE WILL BE ENT ITLED TO CLAIM BAD DEBTS IN THE YEAR IN WHICH THE SAID AMOUNT HAS BEEN DEBITED TO PROFIT AND LOSS ACCOUNT. 22. ON THE OTHER HAND, LD. DR CONTROVERTED THE SUBM ISSIONS MADE BY LD. AR IN RELATION TO AMOUNT OF BAD DEBTS CLAIME D BY THE ASSESSEE AT RS.30,47,240/- IN RELATION TO IRRECOVERABLE AMOU NT FROM SAMRAJYA CO-OP. HOUSING SOCIETY. LD. DR SUBMITTED THAT IN TH E FINANCIAL STATEMENTS OF M/S LABH ENTERPRISE (PARTNERSHIP FIRM IN SCHEDULE-G OF THE BALANCE SHEET AS ON 31.3.1995 THE OUTSTANDING A MOUNT TO BE RECEIVED FROM SAMRAJYA CO-OP. HOUSING SOCIETY WAS S HOWN AT RS.1480458/- WHICH FURTHER INCREASED TO RS.2301018/ - IN THE BALANCE ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 12 SHEET OF M/S LABH ENTERPRISE (SOLE PROPRIETORSHIP C ONCERN) AS ON 31.3.1996. THE LD. DR ALSO REFERRED TO PAGE 13 OF T HE PAPER BOOK IN REGARD TO THE MEMORANDUM OF UNDERSTANDING (MOU) EFF ECTED ON 29.2.1996 BETWEEN THE SAMRAJYA CO-OP. HOUSING SOCIE TY AND M/S LABH ENTERPRISE AND IN THIS MOU AT PAGE 2 (PAGE 14 OF THE PAPER BOOK) FOLLOWING CLAUSE IS APPEARING :- AND WHEREAS LABH AS ON 31 ST MARCH, 1996 HAS TO RECOVER RS.62,01,858.92 FROM THE SOCIETY WHICH INCLUDES PRO JECT DEFICIT OF RS.27,21,435 CALCULATED AS PER ANNEXURE-A, ROUTI NE EXPENSES FOR THE MAINTENANCE OF THE PROJECT AMOUNTI NG TO RS.11,79,405.33 INCURRED BY LABH SO FAR AND RS.23,0 1,018.59 TOWARDS CERTAIN FINANCIAL TRANSACTIONS. ANNEXLJRE *A CALCULATION OF PROJECT OFFICIATE MEMBER RECEIPT RS. 73,115,151.00 LESS : LAND COST 281 ,450,00 LEGAL EXP. (LAND) . 18,891.00 LEGAL. EXP. LAND 3,495.00 303,836.00 LESS S WORK COMPLETION 1990-91 ,33,345,500.00 1991-92 16,406,910.00 1992-93 17,910,500.00 199394 7 869.840,00 75,532,750.00 ---- --------------------- PROJECT DEFICIATE (2,721,435.00) LD. DR SUBMITTED THAT THIS MOU IS DATED 29 TH FEBRUARY, 1996 BUT SURPRISINGLY IN THE ABOVE CLAUSE DATE MENTIONED IS 31.3.1996 WITH ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 13 REFERENCE TO M/S LABH ENTERPRISE, WHICH IS COMPLETE LY CONTRADICTORY AND SECONDLY THE DEBIT BALANCE OF M/S SAMRAJYA CO-O P. HOUSING SOCIETY AT RS.14,80,458.55 IN THE BOOKS OF M/S LABH ENTERPRISE AS ON 31.3.1995 HAS INCREASED TO A FIGURE OF RS.62,01,858 .92 AND THERE IS NO JUSTIFICATION AND DETAIL FOR THIS INCREASE IRRES PECTIVE OF THE FACT THAT THERE WAS NO REVENUE SHOWN BY M/S LABH ENTERPRISE I N THE PROFITS & LOSS A/C DURING FY 1995-96 EXCEPT SOME MINOR INSURA NCE CLAIM AND SUNDRY CREDITOR WRITTEN OFF. 23. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE FOR ADJUDICATION BEFORE US IS ABO UT THE GENUINENESS OF BAD DEBT CLAIMED BY ASSESSEE AT RS.30,47,240/- W HICH HAS EMANATED OUT OF THE RECOVERABLE BAD DEBTS IN THE HA NDS OF ERSTWHILE PARTNERSHIP FIRM WHICH HAS BEEN TAKEN OVER AS SOLE PROPRIETARY CONCERN BY THE ASSESSEE. LOOKING TO THE ASPECT OF T HE ALLOWABILITY OF BAD DEBTS IN THE HANDS OF ASSESSEE ARISING OUT OF T HE DEBTS SHOWN IN THE BOOKS OF PREVIOUS YEAR OWNER I.E. PARTNERSHIP F IRM WE AGREE WITH THE SUBMISSIONS MADE BY LD. AR TO THIS EFFECT AND A LSO TO THE LAW LAID DOWN BY THE HON. SUPREME COURT IN THE CASE OF CIT V S.T. VEERABHADRA RAO K. KOTESWARA RAO & CO. (1985) 155 I TR 152 (SC) REFERRED AND RELIED ON BY THE LD. AR WHEREIN THEIR LORDSHIPS HAVE HELD AS BELOW :- IT SEEMS TO US THAT EVEN IF THE DEBT HAD BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE PREDECESSOR FIRM ONLY AND HAD SUBSEQU ENTLY BEEN WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE, THE ASSESSEE WOULD STILL HAVE BEEN ENTITLED TO A DEDUCTION OF THE AMOUNT WRITTEN OFF AS A BAD DEBT. IT IS NOT IMPERATIVE THAT THE ASSESSEE REFERRED TO IN SUB-CL. (A) MUST NECESSARILY MEAN THE IDENTICAL ASSESSEE REFERRED TO IN SUB-CL. (B). A SU CCESSOR TO THE PERTINENT INTEREST ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 14 OF A PREVIOUS ASSESSEE WOULD BE COVERED WITHIN THE TERMS OF SUB-CL. (B). THE SUCCESSOR ASSESSEE, IN EFFECT, STEPS INTO THE SHOES OF HIS PREDECESSOR. ACCORDINGLY, WE HOLD THAT THE ASSESSEE IN THE INSTA NT CASE WAS ENTITLED TO THE DEDUCTION AS A BAD DEBT OF THE SUM OF RS. 15,100 WR ITTEN OFF BY IT IN ITS ACCOUNTS OF THE PREVIOUS YEAR AS IRRECOVERABLE. 24. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF HO N. SUPREME COURT, WE AGREE WITH THE SUBMISSIONS OF LD. AR THAT IF ANY BAD DEBT IS BOOKED IN THE PROFIT AND LOSS ACCOUNT BY THE ASSESS EE THEN SUBJECT TO GENUINENESS OF THE BAD DEBT WHICH IF HELD TO BE COR RECT THEN ASSESSEE WOULD BE ENTITLED TO THE BAD DEBTS OF IRRE COVERABLE DEBTS HELD IN THE NAME OF THE PREVIOUS OWNER I.E. LABH EN TERPRISE. 25. HOWEVER, NOW WHEN WE LOOK INTO THE FACTS ABOUT THE QUANTIFICATION OF BAD DEBTS CLAIMED BY THE ASSESSEE , WE FIND FORCE IN THE ARGUMENTS MADE BY LD. DR WHEREIN HE HAS REFERRE D TO VARIOUS FACTS AND FIGURES IN THE PAPER BOOK SUBMITTED BY TH E ASSESSEE. WE FIND THAT THERE IS COMPLETE DISPARITY OF FIGURE IN THE BALANCE SHEET AS ON 31.3.1995 WHICH SHOWS SUNDRY DEBTORS OF RS.14,80 ,458.55 IN THE NAME OF SAMRAJYA CO-OP. HOUSING SOCIETY WHICH HAS I NCREASED TO RS.23,01,018.59 IN THE YEAR ENDING ON 31.3.1996. FU RTHER THE MOU BETWEEN THE ASSESSEE AND SAMRAJYA CO-OP. HOUSING SO CIETY IS ALSO NOT REFLECTING TRUE FACTS BECAUSE THE MOU IS DATED 29.2.1996 AND THE BALANCE SHEET AS ON 31.3.1996 IS REFERRED IN THIS M OU AND ALSO THE BALANCE REFERRED IN THIS MOU AS ON 31.3.1996 AT RS. 62,01,858.92 IS LOOKING FAR FROM TRUTH AND BASELESS BECAUSE AS ON 3 1.3.1995 THE AMOUNT OF SAMRAJYA CO-OP. HOUSING SOCIETY HAS SHOWN RS.14,08,458 AND THE SAME HAS INCREASED BY RS.47214 40.37 TO ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 15 ARRIVE AT RS.62,01,858.92 IN A PECULIAR SITUATION W HEN THERE IS NO REVENUE BOOKED IN THE CURRENT YEAR. BAD DEBTS IN RE LATION TO SUNDRY DEBTORS CAN BE CLAIMED ONLY IF SALES/REVENUE HAS BE EN BOOKED IN THE BOOKS OF ACCOUNT WHICH DOES NOT HAPPEN TO BE SO IN THE CASE OF ASSESSEE REFERRING TO THE FINANCIAL STATEMENT RELIE D ON BY THE ASSESSEE. 26. IN OUR VIEW, LOOKING TO THE FACTS AND CIRCUMSTA NCES OF THE CASE, WHEN ASSESSEES CASE HAS TRAVELLED TO THE TRIBUNAL IN THE SECOND ROUND AND ASSESSEE HAD SUFFICIENT OPPORTUNITY TO P ROVE THE GENUINENESS OF THE CLAIM OF BAD DEBT OF RS.30,47,24 0/- AND THEN ALSO HE HAS BEEN UNABLE TO SATISFY THE LOWER AUTHORITIES AND EVEN BEFORE US, DURING THE COURSE OF HEARING, WE DO NOT FIND AN Y REASON TO ACCEPT THE CONTENTIONS AND CLAIM MADE BY THE ASSESSEE IN T HIS GROUND RELATING TO DISALLOWANCE OF BAD DEBT OF RS.30,47,24 0/- IN THE GIVEN CIRCUMSTANCES AND WE DISMISS THE SAME AND UPHOLD TH E ORDER OF LD. CIT(A). IN NUT SHELL IN THE GROUND NO.1 RAISED BY A SSESSEE TOWARDS DISALLOWANCE OF BUSINESS EXPENSES AT RS.54,29,508/- WE DELETE THE ADDITION OF RS.23,82,268/- AND SUSTAIN THE REMAININ G PART AT RS.30,47,240/-. THIS GROUND IS PARTLY ALLOWED. 27. NOW WE TAKE UP GROUND NO.2 RAISED BY ASSESSEE A GAINST THE ACTION OF LD. CIT(A) IN UPHOLDING THE DISALLOWANCE OF INTEREST OF RS.23,54,592/-. 28. FROM GOING THROUGH THE RECORDS, WE FIND THAT TH IS DISALLOWANCE IS IN LIEU OF INTEREST CLAIMED BY ASSESSEE AGAINST INTEREST INCOME ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 16 SHOWN UNDER THE HEAD INCOME FROM OTHER SOURCES. LD. ASSESSING OFFICER HAS DEALT WITH THIS ISSUE OF INTEREST EXPEN SES OF RS.23,54,592/- IN HIS ASSESSMENT ORDER AT PAGES 10 & 11 WHICH READS AS UNDER :- 12. INTEREST EXPENSES RS. 23.54.592/- ON PERUSAL OF THE SUBMITTED DETAILS IT IS OBSERVED THAT THE ASSESSEE HAS CLAIMED TOTAL INTEREST OF RS, 45,54,551/- AS EXPENSES AND ON THE OTHER HAND, INTEREST INCOME DECLARED OF RS. 5,34,557/-.DURING THE ORIGINALLY AS SESSMENT THE A-O. HAS OBSERVED THAT THE ASSESSEE HAS TAKEN UNSECURED LOANS OF RS. 3,21,23,958/- AND UTILIZATION THEREOF WAS AS UNDER: APPLICATION OF UNSECURED LOANS SHARE INVESTMENT RS.2,65,60,243/- INTEREST BEARING LOANS AND ADVANCES RS. 19,42,811/ - INVESTMENT IN LABH INTERNATIONAL RS. 64,16,839/- 12.1 THE THEN AO HAS MADE AN ADDITION OF RS. 23,54, 594/- ON OBSERVING THE BELOW MENTIONED POINTS: > THE SUM BORROWED FOR THE PURPOSES OF MAKING INTER EST PAYMENTS ON BORROWINGS WHICH HAD BEEN EARLIER UTILIZED FOR THE PURPOSES OF EARNING INCO ME UNDER THE HEAD 'INCOME FROM OTHER SOURCES' IN THE PERSONAL SET OF THE BOOKS OF ACCOUN T OF THE ASSESSEE WAS NOT FOR THE PURPOSE OF EARNING INCOME FROM OTHER .SOURCES, AS ENVISAGED IN SECTION 57(III) OF THE IT ACT. > THE APPLICATION OF FUNDS FOR PURCHASING PERSONAL AS SETS, PAYING INSURANCE PREMIUM, INCURRING HOUSEHOLD EXPENDITURE OR PERSONAL TRAVELING EX PENDITURE WAS FOR PERSONAL PURPOSES AND INTEREST ON SUCH BORROWINGS WAS''NOT ALLOWABLE UN DER SECTION 57(III) OF THE ACT OR U/S.36(L)(III) OF THE ACT. > THE INTEREST ON BORROWINGS UTILIZED IN MAKING INVES TMENT IN THE A CONCERN COULD NOT BE ALLOWED AS DEDUCTION U/S. 36(L)(III) OF THE IT ACT. EVEN THE INTEREST ON SUCH BORROWINGS CANNOT BE ALLOWED U/S. 57(III) OF THE ACT, AS THE BORROWINGS HA D NOT BEEN MADE FOR THE PURPOSE OF EARNING INCOME. THE INTEREST PAYMENT FOR ACQUIRING BUSINESS ASSETS AR E IN THE NATURE OF CAPITAL HENCE SAME CAN'T BE ALLOWED AS REVENUE EXPENDITURE. FURTHER THE ASSESSEE HAS NOT GIVEN THE DETAILS IN RESPECT OF THE PAYMENT OF INTEREST OF THE PAYMENT 12.2 IN SUPPORT OF THE CLAIMED, THE ASSESSEE HAS SIMPLY MENTIONED IN THIS RESPECT OF CLAIMING OF EXPENSES ARE AS UNDER:- ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 17 ' THE ASSESSEE HAS CARRIED OUT THE BUSINESS, THEREFOR E, CIT (A) IS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE AMOUNTING TO RS. 54,29,508/- AND DISALLOWANCE ON THE GROUND THAT NO BUSINESS ACTIVIT Y WAS CARRIED OUT DURING THE YEAR OF RS. 23,54,592/~ ON ACCOUNT OF EXPENDITU RE ON ACCOUNT INTEREST PAYMENT, WE ARE OF THE OPINION THAT ASSESSEE HAS CA RRIED OUT THE BUSINESS ACTIVITIES AND THE ASSESSEE HAS BORROWED THE MONEY WHICH IS UTILISED TO REPAY THE EARLIER UNSECURED LOANS. THE ASSESSEE HAS ALSO FURNISHED THE FUND FLOW STATEMENT SHOWING THE SOURCE AND APPLICATION OF THE FUNDS. THEREFORE, WE SET ASIDE THE ORDER OF CIT ON ALL THE ISSUES AND RESTOR ED TO THE FILE OF ASSESSING OFFICER TO DECIDE THE SAME AFRESH AS PER LAW AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE'. 12.3 AFTER CAREFUL CONSIDERATION OF THE ASSESSEE SUBM ISSION IT IS FOUND THAT THE ASSESSEE HAS NOT SUBMITTED ANY FACTUAL DETAILS BUT REPRODUCE THE FIN DING OF HON'BLE ITAT. SINCE, IT WAS ESTABLISHED IN ORIGINAL ORDER THAT THE INTEREST EXPENSE WAS RELATED TO PERSONAL EXPENSES. FURTHER, THE ASSESSEE HAS PAID INTEREST ON THE BORRO WINGS TAKEN/ACCEPTED DURING THE YEAR, WHICH WAS UTILISED FOR THE PURPOSE OF REPAYMENT OF OL D BORROWINGS OF THE PARTNERSHIP FIRM, OF WHICH THE ASSESSEE BECAME PROPRIETOR DUE TO DISSOLUT ION, THE PAYMENT OF INTEREST FOR SUCH OLD PARTNERSHIP BORROWINGS WAS NOT RELATED TO CURRENT BUSINESS OF THE ASSESSEE, THE EXPENDITURE OF INTEREST WAS NOT FOR THE PURPOSE OF BU SINESS OF THE ASSESSEE I.E., CONSTRUCTION BUSINESS AS CLAIMED BY THE ASSESSEE. THE PAYMENT OF INTEREST IS TO PAY OFF OLD LIABILITIES, W HICH ARE NOT PERTAINING TO THE BUSINESS OF THE ASSESSEE AS CLAIMED, ON THE CONTRARY THE PAYMEN T IS TOWARDS OLD LIABILITIES, WHICH CAN BE SAID AS OF PERSONAL NATURE, AS THE ASSESSEE AS ACCEP TED THE LIABILITIES ON HIS HEAD, WITHOUT LOOKING TO THE COMMERCIAL ASPECT AND THE EXPENSES TO P AY OFF SUCH LIABILITIES CANNOT BE SAID AS FOR THE PURPOSE OF BUSINESS, THEREFORE THE INTERE ST PAYMENT IS PURELY OF PERSONAL NATURE, FOR WHICH THE ASSESSEE HAS TAKEN CONSCIOUS DECISION BY TAKING OWNERSHIP OF LOSS MAKING FIRM IN DISSOLUTION. IN VIEW OF AFORESAID FACTS, THE EXPENDITURE ON ACCOUN T OF INTEREST PAYMENT OF RS. 23,54.592/- WAS NOT FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE , THEREFORE THE SAME IS DISALLOWED AS BUSINESS EXPENDITURE AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 29. IN APPEAL, THE GROUND WAS REJECTED BY LD. CIT(A ) BY OBSERVING AS UNDER :- 10. THE NEXT ISSUE RELATES TO DISALLOWANCE OF INTER EST AMOUNTING TO RS.23,54,592/-. THE A.O. FOUND THAT THE APPELLANT HAD CLAIMED INTER EST EXPENSES IN RESPECT OF UNSECURED LOANS AMOUNTING TO RS.3,21,23,958/- WHICH WERE UTILIZED AS UNDER: INVESTMENT IN SHARES RS.2,65,60,243/- INTEREST BEARING LOANS AND ADVANCES RS. 19,42,811/- INVESTMENT IN LABH INTERNATIONAL RS. 64,16,8397- ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 18 10.1 SINCE, DURING THE ASSESSMENT PROCEEDINGS UNDER REFERENCE COMPLETE DETAILS WERE NOT PROVIDED FOR JUSTIFICATION OF SUCH CLAIM, THE A.O. MADE A DISALLOWANCE OF RS.23,54,592/- UNDER THIS HEAD. 10.2 DURING THE APPELLATE PROCEEDINGS, THE LD.A.R. ONLY REFERRED TO THE FINDINGS OF THE HON'BLE I.T.A.T. AND DID NOT PROVIDE COMPLETE D ETAILS TO JUSTIFY SUCH CLAIM. 10.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND TH E SUBMISSIONS OF THE LD.A.R. CAREFULLY. I FIND THERE IS NO IMPROVEMENT IN THE AP PELLANT'S CI.SE DURING THE APPELLATE PROCEEDINGS. THE A.O. WHILE MAKING THE DISALLOWANCE HAS MADE THE FOLLOWING OBSERVATIONS: '12.3 AFTER CAREFUL CONSIDERATION OF THE ASSESSES SUBMISSION IT IS FOUND THAT THE ASSESSEE HAS NOT SUBMITTED ANY FACTUAL DETAILS BUT REPRODUCE THE FINDING OF HON'B'E ITAT. SINCE, IT WAS ESTABLISHED IN ORIGI NAL ORDER THAT THE INTEREST EXPENSE WAS RELATED TO PERSONAL EXPENSES. FURTHER, THE ASSESSEE HAS PAID INTEREST ON THE BORROWINGS TAKEN/ACCEPTED DURING TH E YEAR, WHICH WAS UTILIZED FOR THE PURPOSE OF REPAYMENT OF OLD BORROWINGS OF T HE PARTNERSHIP FIRM, OF WHICH' THE 'ASSESSEE BECAME PROPRIETOR DUE TO DISSO LUTION, THE PAYMENT OF INTEREST FOR SUCH OLD PARTNERSHIP BORROWINGS WAS NO T RELATED TO CURRENT BUSINESS OF THE ASSESSEE, THE EXPENDITURE OF INTERE ST WAS NOT FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE I.E., CONSTRUCTION BUSI NESS AS CLAIMED BY THE ASSESSEE. THE PAYMENT OF INTEREST IS TO PAY OFF OLD LIABILITI ES, WHICH ARE NOT PERTAINING TO THE BUSINESS OF THE ASSESSEE AS CLAIMED, ON THE CON TRARY THE PAYMENT IS TOWARDS OLD LIABILITIES, WHICH CAN BE SAID AS OF PE RSONAL NATURE, AS THE ASSESSEE AS ACCEPTED THE LIABILITIES ON HIS HEAD, WITHOUT LOOKI NG TO THE COMMERCIAL ASPECT AND THE EXPENSES TO PAY OFF SUCH LIABILITIES CANNOT BE SAID AS FOR THE PURPOSE OF BUSINESS, THEREFORE, THE INTE REST PAYMENT IS PURELY OF PERSONAL NATURE, FOR WHICH THE ASSESSEE HAS TAKEN C ONSCIOUS DECISION BY TAKING OWNERSHIP OF LOSS MAKING FIRM IN DISSOLUTION .' 10.4 SINCE, THE LD.A.R. HAS NOT PROVIDED COMPLETE D ETAILS FOR INTEREST EXPENSES TO PROVE THEIR BUSINESS EXPEDIENCY, I DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS OF THE A.O: AT THIS STAGE. THEREFORE, THE DISALLOWANCE MADE BY THE A.O. IS HEREBY CONFIRMED. 30. AGGRIEVED, ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 31. THE LD. AR DID NOT BRING ANYTHING NEW EXCEPT RE FERRING AND RELYING ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF ASSESSEE WHEREIN IT WAS HELD ASSESSEE IS CARRYING O N REGULAR BUSINESS ACTIVITIES. ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 19 32. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 33. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE BEFORE US IS TO EXAMINE THE AL LOWABILITY OF INTEREST EXPENSES OF RS.23,54,592/- UNDER THE PROVI SIONS OF SECTION 57(III) OF THE ACT. BEFORE GOING FURTHER LET US FIR ST GO THROUGH THE PROVISIONS OF SECTION 57(III) OF THE ACT WHICH READ S AS BELOW :- SEC.57( III ) ANY OTHER EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME; 34. FROM THE ABOVE PROVISIONS, WE UNDERSTAND THAT P ROVISIONS IN RELATION TO INCOME REFERRED TO IN SECTION 56 OF THE ACT WHICH IS INCOME FROM OTHER SOURCES IS CERTAINLY NOT RELATING TO BUS INESS. ASSESSEE HAS SHOWN LOSS OF RS.4019108/- UNDER THE HEAD INCOME FR OM OTHER SOURCES WHICH HAS BEEN ARRIVED AFTER CLAIMING THE I MPUGNED INTEREST OF RS.23,54,592/-. FINDING OF THE ASSESSING OFFICER WHICH HAS NOT BEEN CONTROVERTED BY THE LD. AR ARE THAT THE ASSESS EE HAD CLAIMED INTEREST EXPENSES IN RESPECT OF UNSECURED LOAN AMOU NTING TO RS.32123958 WHICH WERE UTILIZED FOR FOLLOWING PURPO SES :- INVESTMENT IN SHARES RS.2,65,60,243/- INTEREST BEARING LOANS AND ADVANCES RS. 19,42,811/- INVESTMENT IN LABH INTERNATIONAL RS. 64,16,839/- ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 20 35. IT HAS BEEN HELD IN VARIOUS JUDICIAL DECISIONS THAT IN ORDER TO CLAIM EXPENSES UNDER THE PROVISIONS OF SECTION 57(I II) OF THE ACT NEXUS HAS TO BE PROVED THAT THE SAME HAS BEEN INCUR RED FOR EARNING THE INCOME SHOWN UNDER THE PROVISIONS OF SECTION 56 OF THE ACT I.E. THE INCOME FROM OTHER SOURCES. APPLYING THESE PROVI SIONS TO THE FACTS OF THE CASE, WE FIND THAT ASSESSEE HAS DECLARED INT EREST INCOME OF ONLY RS.534557/- AND HAS CLAIMED INTEREST EXPENSES OF RS.4554551/- OUT OF TOTAL INTEREST CLAIMED AT RS.4554551/- ASSES SING OFFICER HAS ALREADY ALLOWED THE CLAIM AT RS.2199959/- AND FOR T HE BALANCE AMOUNT OF INTEREST OF RS.2354592/- NOTHING WAS PLAC ED ON RECORD BY THE ASSESSEE TO PROVE THAT IT HAS BEEN SPENT TO EAR N INTEREST INCOME WHICH HAS BEEN DECLARED U/S 56 OF THE ACT AND RATHE R WE FIND FORCE IN THE OBSERVATION MADE BY LD. ASSESSING OFFICER THAT THE AMOUNT OF INTEREST OF RS.2354592/- HAS BEEN PAID ON LOANS TAK EN HAS ACTUALLY BEEN DIVERTED TOWARDS INVESTMENT IN SHARES AND OTHE R NON-INTEREST BEARING INVESTMENT AND THIS GETS FURTHER SUPPORT BY THE FACT THAT ASSESSEE HAS EARNED LONG TERM CAPITAL GAINS OF RS.1 3260055/-. IN THESE CIRCUMSTANCES, WE ARE UNABLE TO ACCEPT THE CO NTENTION MADE BY LD. AR OF ASSESSEE ABOUT THE ALLOWABILITY OF INT EREST EXPENSES AT RS.2354592/- UNDER THE HEAD INCOME FROM OTHER SOURC ES AND WE UPHOLD THE ORDER OF LD. CIT(A) AND ACCORDINGLY DISM ISS THIS GROUND OF ASSESSEE. 36. GROUND NO.3 OF ASSESSEES APPEAL RELATES TO INS URANCE CLAIM RECEIVED OF RS.30,443/- AND SUNDRY BALANCE WRITTEN OFF OF RS. 14,054/- WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ONLY ISSUE IN THIS GROUND IS THAT THE I NSURANCE CLAIM OF ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 21 RS.30,443/- AND SUNDRY BALANCE WRITTEN OFF AT RS.14 ,054/- HAS WRONGLY BEEN HELD AS INCOME FROM OTHER SOURCES INST EAD OF INCOME FROM BUSINESS BY LD. CIT(A). WE ARE OF THE VIEW THA T IN THE LIGHT OF DECISION OF THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO.38/AHD/2001 AND ITA NP.2100/AHD/2001 WHEREIN IT HAS BEEN HELD THAT ASSESSEE HAS CARRIED OUT THE BUSINESS ACTIVITI ES AND ALLOWED THE IMPUGNED PROFIT AND LOSS ACCOUNT WHEREIN THE INSURA NCE CLAIM AND SUNDRY BALANCE WRITTEN OFF WERE SHOWN IN THE CREDIT OF PROFIT AND LOSS ACCOUNT OF M/S LABH ENTERPRISE AND THESE CREDITS OF RS.30,443/- AND AT RS.14,054/- ON ACCOUNT OF INSURANCE CLAIM AND SU NDRY BALANCE ARE ARISING OUT OF BUSINESS ACTIVITIES OF M/S LABH ENTE RPRISE CARRIED OUT BEFORE 1.4.1995 I.E. TAKING OVER OF THE BUSINESS BY THE ASSESSEE AS A SOLE PROPRIETOR. WE ARE, THEREFORE, OF THE VIEW THA T THESE CREDITS OF RS.30,443/- AND RS.14,054/- ON ACCOUNT OF INSURANCE CLAIM RECEIVED AND BALANCE WRITTEN OFF TOTALED AT RS.44997/- WERE RIGHTLY SHOWN BY THE ASSESSEE UNDER THE HEAD BUSINESS INCOME AND LD. CIT(A) WAS NOT CORRECT IN UPHOLDING THE ACTION OF ASSESSING OFFICE R IN ASSESSING THESE CREDITS OF RS.44997/- UNDER THE HEAD INCOME F ROM OTHER SOURCES. THIS GROUND OF ASSESSEE IS ALLOWED. 37. IN THE RESULT, THIS APPEAL OF ASSESSEE IS PARTL Y ALLOWED. 38. NOW WE TAKE UP ITA NO.1872/AHD/2010. THE ONLY G ROUND RAISED IN THIS APPEAL READS AS UNDER :- ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 22 1. THE C.I.T.(APPEALS) ERRED IN UPHOLDING THE DISALLOWANCE OF BUSINESS EXPENSES OF RS. 17,93,439/- MADE BY THE ASSESSING O FFICER CONSISTING OF- (A) DEPRECIATION RS. 79647 (B) INTEREST PAID TO BANK RS. 19251 (C) INTEREST PAID TO OTHERS RS. 1601916 (D) MISC. OTHER EXPENSES RS. 92625 39. WE HAVE DEALT WITH SIMILAR GROUND WHILE DECIDIN G THE APPEAL OF ASSESSEE IN ITA NO.1871/AHD/2010 FOR ASST. YEAR 199 6-97 WHEREIN WE HAVE HELD THAT AS THE ASSESSEE HAS CARRIED ON BU SINESS ACTIVITIES AND NO MATERIAL HAS BEEN PLACED ON RECORD QUESTIONI NG THE GENUINENESS OF THESE EXPENSES, AND THE ONLY REASON FOR DISALLOWANCE OF THESE EXPENSES WAS THAT NO BUSINESS ACTIVITIES H AS BEEN CARRIED ON AS OBSERVED BY THE ASSESSING OFFICER. 40. APPLYING THE SAME DECISION IN THIS GROUND OF AP PEAL ALSO, WE FIND THAT ASSESSEE IS ELIGIBLE TO CLAIM THE EXPENSE S OF RS.17,93,439/- INCURRED ON ACCOUNT OF - (A) DEPRECIATION RS. 79647 (B) INTEREST PAID TO BANK RS. 19251 (C) INTEREST PAID TO OTHERS RS. 1601916 (D) MISC. OTHER EXPENSES RS. 92625 ----------------- RS.17,93,439 ----------------- AS THEY HAVE BEEN INCURRED IN THE COURSE OF BUSINES S ACTIVITIES AND REVENUE HAS NOT DOUBTED THE GENUINENESS OF THESE EX PENSES, WE THEREFORE, ALLOW THE APPEAL OF ASSESSEE. ITA NO. 1871 & 1872/AHD/2010 ASST. YEAR 1996-97 & 1997-98 23 41. IN THE RESULT, APPEAL IN ITA NO.1871/AHD/2010 F OR ASST. YEAR 1996-97 IS PARTLY ALLOWED AND APPEAL IN ITA NO.1872 /AHD/2010 FOR ASST. YEAR 1997-98 IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST MARCH, 2016 SD/- SD/- (KUL BHARAT) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 21/03/2016 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: 14/03/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 15/03/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 21.3.2016 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: