HEAVEN M SHAH, Mumbai V. ACIT-33(1), Mumbai

ITA 206/MUM/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8285 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 16-01-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Capital expenditure; Capital Gains
• Section: 14A; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA , AM / I .T.A. NO. 206 / MUM/ 20 1 9 ( / ASSESSMENT YEAR: 2012 - 13 ) HEAVEN M. SHAH 501/502 COSMOS N.M. ROAD VILE PARLE (W), MUMBAI - 400056 . / VS. ACIT - 33(1) ROOM NO.711, C - 12 BLDG, PR ATYAKSHAKAR BHAVAN, BKC, BANDRA (E), MUMBAI - 400051 . ./ ./ PAN/GIR NO. : AAGPS 3148 F ( / APPELLANT ) .. ( / RESPONDENT ) / DATE OF HEARING : 15 / 0 1 / 2020 / DATE OF PRONOUNCEMENT : 03 / 03 / 2020 / O R D E R PER SHAMIM YAHYA, AM: THIS APPEAL BY THE ASSESSES AGAINST THE ORDER OF LEARNED CIT(A) DATED 10 .0 9 .201 8 AND PERTAINS TO A.Y.2012 - 1 3 . 2. GROUNDS OF APPEAL READ AS UNDER.: - 1. THE LD. CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE MADE BY THE AO OF INTEREST PAID OF RS.665842/ - (NET OF RECEIPT) U/S 57(III) OF THE ACT. 2. IN DOING SO, THE LD. CIT(A) DID NOT APPRECIATE THAT THE APPELLANT HAD SUFFICIENT IN TEREST FREE FUNDS AVAILABLE WITH HIM WHICH COULD HAVE BEEN DEEMED TO BE UTILIZED FOR INVESTMENT IN PROPERTIES AND IN CONTRIBUTING TOWARDS CAP ITAL IN THE PARTNERSHIP FIRMS IN WHICH HE IS A PARTNER. 3. IN ANY EVENT, THE LD. CIT(A) OUGHT TO HAVE RESTRICTED THE DISALLOWANCE OUT OF INTEREST PAID TO THE EXTENT OF INTEREST PAID IN RELATION TO LOANS BORROWED DURING THE YEAR AS REDUCED BY INTEREST R ECEIVED DURING THE YEAR IN AS MUCH AS INTEREST RELATING TO THE LOANS BROUGHT FORWARD FROM THE LAST YEAR WAS ALLOWED U/S 57(III) OF THE ACT IN EARLIER YEARS. ASSESSEE BY : SHRI R. C. JA IN REVENUE BY: SHRI DHARM VEER SINGH (DR) ITA. NO. 206 /M/201 9 A.Y.20 12 - 13 2 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN INDIVIDUAL AND HIS INCOME INCLUDED SALAR Y, BUSINESS INCOME, CAPITAL GAINS AND INCOME FROM OTHER SOURCES. DURING THE COURSE OF ASSESSMENT, THE AO NOTED THAT THE ASSESSEE HAS SHOWN THE INTEREST OF RS.4,49,088/ - AND HAS CLAIMED INTEREST PAYMENT OF RS.11,14,930/ - . THE AO ASKED THE ASSESSEE TO PROVE ONE IS TO ONE NEXUS OF INTEREST BEARING FUNDS ON WHICH INTEREST OF RS.11,14,930/ - HAS BEEN PAID WHICH HAS BEEN UTILIZED FOR EARNING OF INTEREST OF RS.4,49,088/ - . THE ASSESSEE RESPONDED AS UNDER.: - CLARIFICATION FOR INTEREST EXPENSE OF PS. 11,14,930/ - A. T OTAL INTEREST PAID RS.14,94,500/ - B. 14A WORKING SHOWS DISALL OWABLE INTEREST IS AS. 3,79,570/ - ON ACCOUNT OF INTEREST EXPENSE REFERRED TO EXEMPTED INCOME ARISE DUE TO INVESTMENT IN SHARES& MUTUAL FUND. C. AFTER DEDUCTION BY NOT CLAIMING THERE EXPENSE I HAVE CLAIMED ONLY RS.11,14,930/ - ( 14,94, 500 - 3,79,570). D. INTEREST EXPENSE UNDER INCOME FROM OTHERS SOURCE ARE PS. 11,14,930/ - AGAINST PS. 4,49,0881 - AS INTEREST INCOME. NET OFF TO R S. 6, 65,842/ - AS INTEREST EXPENSE CLAIMED IN COMPUTATION. E . I HAVE INVESTED PS. 62,49,658/ - IN THE PARTNERSHIP FIRM AS MY CAPITAL FROM BORROWED & OTHER FUNDS. F. FROM THE INVESTMENT IN FIRM, INCOME IS INTEREST & SHARE OF PROFIT & REMUNERATION. THESE IS NOT FOLLOWING UNDER EXEMPTED INCOME SUBJECT TO DISALLOWANCE IN SEC 14A G. MY BORROWED FUND ARE UTILIZED BY WAY OF INVESTMENT IN PARTNERSHIP FIRM ALSO. THEREFORE, SUCH INTEREST IS ALLOWABLE EXPENSE UNDER BUSINESS HEAD, BUT SINCE COMPUTER PROGRAM DOES NOT ACCEPT SUCH INTEREST EXPENSE MINUS FIGURES. I HAVE CLAIM THESE IN TEREST UNDER HEAD OF OTHER SOURCE. EVEN INTEREST @ 10% ON INVESTMENT IN FIRM MAY COST RS.6,24,658/ - AS EXPENSE ON BORROWED FUND. 2. IN ADDITION TO THIS I HAVE INVESTED CURRENT PERIOD FUND FOR TAXABLE BOND AND PROPERTY WHICH HAS GIVEN INCOME IN NEXT YEA R. THEREFORE, INTEREST INCOME & INTEREST EXPENSE SHOULD NOT BE LINKED TO WORK OUT WHY THERE IS OVERALL MINUS INTEREST. 3. OVERALL THE INTEREST CLAIM OF PS. 11,14,930/ - IS ALLOWABLE EXPENSE. ITA. NO. 206 /M/201 9 A.Y.20 12 - 13 3 4. HOWEVER, THE AO WAS NOT SATISFIED, HE DISALLOWED THE CLAI M U/S 57(III) OF THE ACT BY OBSERVING AS UNDER.: - (A) THE ASSESSEE HAS FAILED TO ESTABLISH NEXUS OF WHOLE INTEREST EXPENDITURE HAS BEEN UTILIZED FOR EARNING THE INCOME. (B) ALSO, THE INVESTMENT IN PARTNERSHIP FIRM ATTRACTS EXEMPTED INCOME AS PROFIT OF FIRM IS EXEMPTED ONE. (C) NEXT YEAR INCOME HAS NO RELEVANCE WITH THE CURRENT YEAR EXPENDITURE. 5. AGAINST ABOVE ORDER , ASSESSEE IS IN APPEAL BEFORE THE LD. CIT(A) . THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER BY HOLDING AS UNDER.: - 4.4 I HAV E CAREFULLY GONE THROUGH THE ASSESSMENT ORDER AND SUBMISSIONS OF THE ASSESSEE. IT IS SEEN THAT THE BORROWED FUNDS DURING THE YEAR AS UNDER.: - S. NO. OPENING BALANCE RECEIVED PAID INTEREST PAID 1 DHIMAN TRADING P. LTD. 5321781 0 5646028 324247 2 DISHA CO SNTRUCTION (LOAN) 6563432 23631013 11968000 945670 3 MAHENDRA J. SHAH 0 8307305 3889045 165452 4 PRAFULLA M. SHAH 0 2027487 2123904 42487 5 VAISHALI GEMS 938836 0 955480 16644 TOTAL 12824049 339658065 21082317 1494500 OUT OF THE BORROWED FUNDS, THE A SSESSEE INVESTED IN VARIOUS ITEMS. THE PATTERN OF INVESTMENT SHOWS THAT THE ASSESSEE INVESTED MAJORITY OF FUNDS IN IMMOVABLE PROPERTIES AND MUTUAL FUNDS & SHARES. IT IS SUBMITTED THAT THE INVESTMENTS IN PROPERTIES WAS MADE TOWARDS THE END OF THE YEAR. THIS ARGUMENT IS NOT SUPPORTED BY ANY EVIDENCE ON RECORD. HE INVESTED PART OF THE AMOUNT IN PARTNERSHIP FIRMS. ASSESSEE IS SHOWING BORROWED FUNDS AND INTEREST PAID UNDER THE HEAD 'OTHER SOURCES'. HOWEVER, THE FUNDS BORROWED WERE DIVERTED TO INVEST IN MUTUAL FU NDS AND SHARES DIVIDEND INCOME FORM WHICH IS EXEMPT, AND INCOME FROM LTCG ON SALE OF THESE IS ALSO EXEMPT. HE ALSO DIVERTED SOME PART OF LOANS TO INVESTMENT IN IMMOVABLE PROPERTIES, FROM WHICH THERE IS NO IMMEDIATE INCOME. BY DIVERTING THE BORROWED FUNDS T O INVESTMENTS ITA. NO. 206 /M/201 9 A.Y.20 12 - 13 4 INCOME FROM WHICH IS EITHER EXEMPT OR THERE IS NO INCOME FOR THE YEAR, THE ASSESSEE IS MAKING THE REVENUE TO PAY FOR HIS INVESTMENTS. IN OTHER WORDS, THE HEAVY INTEREST PAID IS BEING CLAIMED AGAINST THE OTHER INCOME BY SET OFF LOSS REDUCING T HE INCIDENCE OF TAX. COURTS HAVE HELD THAT INTEREST ON LOANS BORROWED FOR PURCHASE OF SHARES HAVE TO BE ADDED TO COST OF SHARES. SIMILARLY, THE INTEREST PAID ON LOANS RELEVANT TO PROPERTIES HELD BY THE ASSESSEE WILL GO TO ADD TO THE COST OF ASSET. HOWEVER, THE ASSESSEE IS CLAIMING THE INTEREST PAID ON THE FUNDS UTILIZED FOR OTHER PURPOSES PARTICULARLY INVESTMENTS IN PERSONAL ASSETS AND INVESTMENTS INCOME FROM WHICH IS EXEMPT TINDER THE HEAD 'OTHER SOURCES' U/S 57(III) OF THE ACT. SECTION 57(III) THE ALLOWAB LE EXPENDITURE AGAINST INCOME FROM OTHER SOURCES READS.: - '57. DEDUCTIONS. - THE INCOME CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCES' SHALL BE COMPUTED AFTER MAKING THE FOLLOWING DEDUCTIONS, NAMELY : - . (III) ANY OTHER EXPENDITURE (NOT BEING IN T HE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME.' AS CAN BE SEEN FROM THE PROVISIONS OF SECTION 57(III), ONLY EXPENDITURE WHICH IS LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FO R THE PURPOSE OF MAKING OR EARNING SUCH INCOME IS ALLOWABLE AGAINST THE INCOME FROM OTHER SOURCES. THE INTEREST PAID ON THE FUNDS UTILIZED FOR INVESTMENTS IN PERSONAL ASSETS AND FOR INVESTMENTS, INCOME FROM WHICH IS EXEMPT CANNOT BE CLAIMED AGAINST THE INT EREST INCOME UNDER THE HEAD OTHER SOURCES. THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS ON THE RIGHT FOOTING AND CORRECT AS PER THE ACT. 6. AGAINST ABOVE ORDER , ASSESSEE IS IN APPEAL BEFORE US. I HAVE HEARD BOTH THE COUNSEL AND PERUSED TH E RECORDS. LEARNED COUNSEL OF THE ASSESSEE HAS CONTENDED THAT THE ASSESSEE H AS SUFFICIENT OWN FUNDS HENCE NO DISALLOWANCE SHOULD BE DONE . 7. THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT THE MATTER MAY BE REMITTED TO THE FILE OF ASSESSING OFFICER TO ENABLE THE ASSESSEE TO PROPERLY CANVASS THE APPEAL. 8. UPON CAREFUL CONSIDERATION , I FIND THAT THE REQUEST OF THE LEARNED COUNSEL OF THE ASSESSEE IS NOT ACCEPTABLE. ASSESSEE IN ITS SUBMISSIONS ITA. NO. 206 /M/201 9 A.Y.20 12 - 13 5 AS ABOVE HAS HIMSELF ACCEPTED THAT HE HAS INVESTED A SUM OF RS. 62, 49,658 / - IN PARTNERSHIP FIRMS OUT OF BORROWED FUNDS FROM WHERE IT HAS RECEIVED INTEREST ON SHARE OF PROFIT AND REMUNERATION. THE ASSESSEE SUBMISSION THAT NO DISALLOWANCE UNDER SECTION 14 A CAN BE DONE ON THIS ACCOUNT IS NOT IN ACCORDANCE WITH THE LAW. A SSESSEE HIMSELF SUBMITS THAT INTEREST AT THE RATE OF 10% ON INVESTMENT IN FI RM MAY COST RS.6,24,658/ - AS EXPENSE ON BORROWED FUNDS. SINCE THIS BORROWED FIRM HAS BEEN USED TO MAKE INVESTMENT FOR EARNING INCOME WHICH IS EXEMPT FROM TAX THE SAID INTEREST IS N OT ALLOWABLE. HENCE IN MY CONSIDERED OPINION THERE IS NO INFIRMITY IN THE DISALLOWANCE OF RS.6,24,658/ - . HENCE I HOLD THAT THE DISALLOWANCE TO THIS EXTENT IS SUSTAINABLE. I DIRECT ACCORDINGLY. 9. AS REGARDS THE ARGUMENT OF THE ASSESSEE THAT ASSESSEE HAS SU FFICIENT OWN FUNDS TO MAKE INVESTMENT, I NOTE THAT THE ISSUE IS NOT AVAILABILITY OF FUND RATHER THE ISSUE IS UTILIZATION OF THE BORROWED FUNDS FOR EARNING THE INTEREST INCOME. SINCE IT HAS NOT BEEN COGENTLY PROVE D THAT THOSE BORROWED FUNDS WERE USED FOR EAR NING THE INTEREST INCOME THE ADJUSTMENT THEREOF IS NOT PERMISSIBLE. IN THE RESULT , THIS APPEAL BY THE AS SESSEE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 03 /03 /2020 S D/ - ( SHAMIM YAHYA ) / ACCOUNTANT MEMBER MUMBAI; DATED : 03 / 03 / 2020 V IJAY PAL SINGH/SR. PS ITA. NO. 206 /M/201 9 A.Y.20 12 - 13 6 / 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// / / (DY./ASS TT. REGISTRAR) , / ITAT, MUMBAI