RAMESH RAVJI THAKKAR, V. ITO 21(3)(4), MUMBAI

ITA 2103/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9264 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 10-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V JUSTIN
• Keywords: Unexplained investment; Earning of tax free income; Proportionate interest
• Section: 69C; 143(3); 142(1); 14A; 145; 154; 69

Judgement Text

1 ITA NO.2103/MUM/2015 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E, MUMBAI BEFORE SHRI JOGINDER SINGH(JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NO.2103/MUM/2015 (ASSESSMENT YEAR 2010-11) RAMESH RAVJI THAKKAR PROP HARDIK ENTERPRISES GANDHI NAGAR, ADI SANKARACHARYA MARG, NEAR I.I.T. POWAI, MUMBAI-400 076 PAN : AAGPC1169C VS ITO, WD.21(3)(4), MUMBAI APPELLANT RESPONDENT APPELLANT BY SHRI VIMAL PUNMIYA RESPONDENT BY SHRI V JUSTIN DATE OF HEARING 14 - 09 - 2017 DATE OF PRONOUNCEMENT 25 - 0 9 - 2017 O R D E R PER G MANJUNATHA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGA INST THE ORDER OF THE CIT(A)-38, MUMBAI DATED 09-01-2015 AND IT PERTAINS TO AY 2010-11. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- 1. THE LEARNED CIT (APPEALS)-38, MUMBAI HAS ERRED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE IN U PHOLDING THE ACTION OF THE ASSESSING OFFICER (HEREINAFTER RE FERRED TO AS A.0) IN REJECTING THE BOOKS OF ACCOUNT AND RESORTIN G TO THE PROVISIONS OF SECTION 145 OF THE INCOME TAX ACT, 1961. 2. THE LEARNED CIT (APPEALS)-38, MUMBAI HAS ERRED IN 2 ITA NO.2103/MUM/2015 LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE IN U PHOLDING THE ADDITIONS MADE BY A.O TO THE TUNE OF RS.22,71,237/- OUT OF THE TOTAL ADDITIONS OF RS.27,04,348/- MADE BY THE A.O. 3. THE LEARNED CIT (APPEALS)-38, MUMBAI HAS ERRED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE IN UPHOLDING THE ADDITION MADE BY A.O OF RS. 16,41,096 /- U/S. 69 OF THE INCOME TAX ACT, 1961. 4. THE LEARNED CIT (APPEALS)-38, MUMBAI HAS ERRED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE IN N OT ACCEPTING THE 'CASH FLOW STATEMENT' AS SUBMITTED BY THE APPEL LANT DURING THE COURSE OF ASSESSMENT/APPEAL PROCEEDINGS WITHOUT ASS IGNING ANY REASONS. 5. THE LEARNED CIT (APPEALS)-38, MUMBAI HAS ERRED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE IN N OT APPRECIATING THAT ALL RECEIPTS FROM AND ALL PAYMENT S MADE TO MIS. CHAMUNDA EARTH MOVERS (R.F) (A FIRM IN WHICH T HE APPELLANT IS A PARTNER) WERE EXPLAINED BY THE APPEL LANT BY PRODUCING NECESSARY EVIDENCE LIKE BANK STATEMENTS O F THE APPELLANT AS WELL AS OF M/S. CHAMUNDA ENTERPRISES A ND ALSO NOT ADJUDICATING UPON THE SUBMISSIONS MADE, 6. THE LEARNED CIT(APPEALS)-38, MUMBAI HAS ERRED IN LA W AND ON FACTS AND CIRCUMSTANCES OF THE CASE IN UPHOL DING THE ADDITIONS MADE BY THE A.O OF RS.2,99,064/- ON ACCOU NT OF INTEREST PAID ON BORROWINGS AND USED FOR MAKING ADV ANCES WITHOUT CHARGING INTEREST. 7. THE LEARNED CIT(APPEALS)-38, MUMBAI HAS ERRED IN LA W AND ON FACTS AND CIRCUMSTANCES OF THE CASE IN UPHOL DING THE CONCLUSION MADE BY A.O THAT THE APPELLANT HAS USED INTEREST BEARING FUNDS FOR INTEREST FREE LOANS. 8. THE LEARNED CIT(APPEALS)-38, MUMBAI HAS ERRED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE IN U PHOLDING THE ADDITIONS MADE BY THE A.O OF RS.3,3 1,076/- U/S . 14-A OF THE I.T. ACT, 1961 READ WITH RULE 8D OF INCOME TAX RULE S. 3 ITA NO.2103/MUM/2015 9. THE LEARNED CIT(APPEALS)-38, MUMBAI HAS ERRED IN LA W AND ON FACTS AND CIRCUMSTANCES OF THE CASE IN COMING TO CONCLUSION THAT THE APPELLANT HAS NOT FURNISHED TO THE CIT (AP PEALS) A STATEMENT OF DISALLOWANCE U/S. 14-A OF THE I.T. ACT , 1961 OF RS.14,627/- WHICH WAS FURNISHED DURING THE COURSE O F APPEAL PROCEEDINGS. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, AN INDIVIDUAL ENGAGED IN THE BUSINESS OF EARTHWORK CONTRACTOR, FILED HIS RET URN OF INCOME FOR THE AY 2010-11 ON 09-10-2010 DISCLOSING TOTAL INCOME AT RS .15,75,040. THE CASE WAS SELECTED FOR SCRUTINY AND STATUTORY NOTICES U/S 143 (2) AND 142(1) OF THE ACT ALONG WITH DETAILED QUESTIONNAIRE WERE ISSUED. IN RESPONSE, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED AND FURNISH ED THE DETAILS AS CALLED FOR. THE ASSESSMENT WAS COMPLETED U/S 143(3) ON 30-04-20 12 DETERMINING THE TOTAL INCOME AT RS.42,79,388 INTERALIA MAKING ADDITIONS T OWARDS UNEXPLAINED INVESTMENT U/S 69C OF THE ACT, DISALLOWANCE OF INTE REST, DISALLOWANCE OF EXPENDITURE IN RELATION TO EXEMPT INCOME U/S 14A AN D UNDISCLOSED TRANSACTION AS PER ITS DATA. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PRE FERRED APPEAL BEFORE CIT(A) AND FILED ELABORATE WRITTEN SUBMISSIO NS AND ARGUED THAT THE AO WAS ERRED IN ADDING A SUM OF RS.16,31,563 AS UNEXPL AINED INVESTMENT TOWARDS DIFFERENCE IN CAPITAL ACCOUNT BALANCE OF PARTNERSHI P FIRM M/S CHAMUNDA EARTHMOVERS EVEN THOUGH THE ASSESSEE HAS EXPLAINED EACH DEBIT AND CREDIT 4 ITA NO.2103/MUM/2015 APPEARED IN THE LEDGER ACCOUNTS. THE ASSESSEE FURT HER SUBMITTED THAT ADDITIONS MADE BY THE AO TOWARDS DISALLOWANCE OF IN TEREST AGAINST INTEREST INCOME, THE ASSESSEE HAS EARNED INTEREST INCOME FRO M M/S D THAKKAR DEVELOPERS PVT LTD AND ALSO PAID INTEREST ON LOANS BORROWED FROM VARIOUS PERSONS WHICH HAS BEEN CLAIMED AS DEDUCTION U/S 57 OF THE ACT. THE AO HAS DISALLOWED PROPORTIONATE INTEREST PAID ON LOANS ON THE ASSUMPTION THAT THE ASSESSEE HAS DIVERTED ITS INTEREST BEARING FUNDS. INSOFAR AS DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME, THE AO HAS WORKED OUT DISALLOWANCE IN RELATION TO EXEMPT INCOME IN RESPEC T OF SHARE OF PROFIT EARNED FROM THE PARTNERSHIP FIRM FOR INVOKING RULE 8D EVEN THOUGH DISALLOWANCE PROVIDED U/S 14A HAS NO APPLICATION TOWARDS SHARE O F PROFIT RECEIVED FROM THE PARTNERSHIP FIRM BECAUSE THE SAID INCOME HAD BEEN T AXED IN THE HANDS OF THE FIRM. AS REGARDS DISALLOWANCE OF DIFFERENCE IN ITS DATA, THE ASSESSEE SUBMITTED THAT TWO PARTIES, VIZ. M/S VASANTLAL & CO AND M/S R AINBOW CONTRUCTION CO, HAVE FILED THEIR TDS RETURNS BY WRONGLY MENTIONING THE PAN OF THE ASSESSEE WHICH WAS REFLECTED IN FORM 26AS, HOWEVER, THE SAME HAS BEEN RECTIFIED BY THE PARTIES BY FILING REVISED TDS RETURNS AND THE CONFI RMATION OF THE PARTIES WAS SUBMITTED TO THE AO. THE ASSESSEE ALSO FILED AN AP PLICATION U/S 154 REQUESTING FOR RECTIFICATION OF THE ABOVE MISTAKE WHICH IS PEN DING FOR ADJUDICATION BEFORE THE AO. THEREFORE, THE ADDITIONS MADE BY THE AO MA Y BE DELETED. 5 ITA NO.2103/MUM/2015 4. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF TH E ASSESSEE PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE WHEREIN HE CONFIRMED ADDITIONS MADE TOWARDS DIFFERENCE IN CAPITAL ACCOUNT OF PARTNERSHI P FIRM U/S 69 OF THE ACT, AND ADDITION MADE TOWARDS DISALLOWANCE OF INTEREST AND ALSO DISALLOWANCE OF EXPENDITURE IN RELATION TO EXEMPT INCOME. HOWEVER, HE SET ASIDE THE ISSUE OF ADDITION TOWARDS DIFFERENCE IN ITS DATABASE WITH A DIRECTION TO THE AO TO DISPOSE OF THE RECTIFICATION APPLICATION FILED BY T HE ASSESSEE. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS IN APPEAL BEFORE U S. 5. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATION IS ADDITION TOWARDS DIFFERENCE IN CAPITAL ACCOUNT BALANCE OF PARTNERSHI P FIRM, M/S CHAMUNDA EARTHMOVERS OF RS.16,41,096. THE AO MADE ADDITION TOWARDS DIFFERENCE IN CAPITAL ACCOUNT U/S 69 OF THE ACT, AS UNEXPLAINED I NVESTMENTS FOR THE REASON THAT THE ASSESSEE HAS FAILED TO EXPLAIN DIFFERENCE IN CAPITAL ACCOUNT BALANCE OF PARTNERSHIP FIRM. THE AO HAS ANALYSED THE BALANCE- SHEET FILED BY THE ASSESSEE ALONG WITH LEDGER EXTRACT OF PARTNERSHIP FIRM TO RE CONCILE THE DEBITS AND CREDITS APPEARED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE FR OM PARTNERSHIP FIRM. ACCORDING TO THE AO, THE ASSESSEE HAS FAILED TO EXP LAIN THE DIFFERENCE APPEARING IN THE FIRMS CAPITAL ACCOUNT. IT IS THE CONTENTION OF THE ASSESSEE THAT IT HAD EXPLAINED EACH AND EVERY ENTRY APPEARED IN T HE ACCOUNT OF THE PARTNERSHIP FIRM, WHICH HAS BEEN DEBITED / CREDITED TO HIS CAPITAL ACCOUNT. THE 6 ITA NO.2103/MUM/2015 ADDITIONS MADE BY THE AO OF RS.16,41,096 REPRESENTS OPENING BALANCE CARRIED FORWARD FROM THE PREVIOUS FINANCIAL YEAR WHICH IS O N ACCOUNT OF NET TRANSFER OF FUNDS BETWEEN THE ASSESSEE AND PARTNERSHIP FIRM FOR WHICH NECESSARY RECONCILIATION HAS BEEN FILED BEFORE THE AO. 6. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATERIAL ON RECORD, WE FIND THAT THE AO HAS MADE ADDITION ON THE GROUND THAT TH E ASSESSEE HAS NOT EXPLAINED DIFFERENCE IN CAPITAL ACCOUNT OF PARTNERS HIP FIRMS. THE ASSESSEE HAS FILED PAPER BOOK CONTAINING COPIES OF LEDGER EXTRAC T OF PARTNERSHIP FIRM. THE ASSESSEE EXPLAINED THAT ADDITIONS MADE BY THE AO TO WARDS DIFFERENCE IN CAPITAL ACCOUNT IS OPENING BALANCE BROUGHT FORWARD FROM PRE VIOUS FINANCIAL YEAR WHICH REPRESENTS NET BALANCE OF DEBITS / CREDITS OF PREVI OUS FINANCIAL YEAR WHICH HAS BEEN RECONCILED BEFORE THE AO. THE DEBITS AND CRED ITS OF CURRENT FINANCIAL YEAR HAVE BEEN EXPLAINED. THE AO HAS NOT DISPUTED THE F ACT THAT ALL ENTRIES APPEARING IN THE ACCOUNT HAS BEEN PROPERLY EXPLAINE D. WE FIND THAT THE AO HAS MADE ADDIITON TOWARDS DIFFERENCE IN CAPITAL ACCOUNT ON THE BASIS OF ENTRY APPEARING IN THE LEDGER EXTRACT WHICH REPRESENTS OP ENING BALANCE BROUGHT FORWARD FROM PREVIOUS FINANCIAL YEAR. THE FACTS RE CORDED BY THE AO AND CONCLUSION DRAWN FOR MAKING IMPUGNED ADDITION ARE I NCONSISTENT WITH EACH OTHER. THEREFORE, WE ARE OF THE VIEW THAT THE ISSU E NEEDS TO BE RE-EXAMINED BY THE AO IN THE LIGHT OF EXPLANATIONS OF THE ASSESSEE AND HENCE, WE SET ASIDE THE 7 ITA NO.2103/MUM/2015 ISSUE TO THE FILE OF THE AO AND DIRECT HIM TO CONSI DER RECONCILIATION FILED BY THE ASSESSEE AND DECIDE THE ISSUE IN ACCORDANCE WITH LA W. 7. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S ADDITION TOWARDS DISALLOWANCE OF INTEREST PAID ON BORROWED CAPITAL. DURING THE FINANCIAL YEAR RELEVANT TO AY 2010-11, THE ASSESSEE HAS EARNED INT EREST INCOME OF RS.21,87,861 FROM M/S D THAKKAR DEVELOPERS PVT LTD. THE ASSESSEE ALSO PAID INTEREST OF RS.16,34,442 AND CLAIMED IT AS DEDUCTIO N AGAINST INTEREST INCOME U/S 57 OF THE INCOME-TAX ACT, 1961. THE AO DISALLOWED PROPORTIONATE INTEREST EXPENSES OF RS.2,99,065 ON THE GROUND THAT THE ASSE SSEE HAS DIVERTED ITS INTEREST BEARING FUNDS FOR NON BUSINESS PURPOSE, TH EREFORE, DEDUCTION TOWARDS TOTAL INTEREST PAID ON LOAN BORROWED CANNOT BE ALLO WED AS DEDUCTION. THE AO HAS WORKED OUT DISALLOWANCE OF RS.2,99,065 ON THE B ASIS OF AVERAGE RATE OF INTEREST WORKED OUT BY TAKING INTO ACCOUNT INTEREST PAID BY THE ASSESSEE MULTIPLIED BY AVERAGE AMOUNT APPEARED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. THE AO HAS WORKED OUT THE AVERAGE RATE O F INTEREST OF 13.91% AND APPLIED IT TO THE INTEREST FREE FUNDS AND DETERMINE D DISALLOWANCE OF RS.2,99,065. 8. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED THE MATERIALS AVAILABLE ON RECORD. THE FACT WITH REGARD TO THE EARNING OF INTEREST INCOME FROM LOANS AND PAYMENT OF INTEREST AGAINST LOAN BORROWED IS NO T DISPUTED BY THE AO. THE 8 ITA NO.2103/MUM/2015 AO DISALLOWED PROPORTIONATE INTEREST PAID BY THE AS SESSEE FOR THE REASON THAT THE ASSESSEE HAS DIVERTED ITS INTEREST BEARING FUND S FOR NON BUSINESS PURPOSE AND ALSO FAILED TO EXPLAIN AND ESTABLISH NEXUS OF I NTEREST BEARING FUNDS AND INTEREST EARNING ADVANCE. THEREFORE, HE OPINED THA T INTEREST PAID TO THE EXTENT OF RS.2,99,065 CANNOT BE ALLOWED AS DEDUCTION. WE DO NOT FIND ANY MERIT IN THE FINDING OF THE AO FOR THE REASON THAT THE AO HA S DISALLOWED PROPORTIONATE INTEREST ON ADHOC BASIS WITHOUT FINDING ANY FACT WI TH REGARD TO THE DIVERSION OF INTEREST BEARING FUNDS FOR NON BUSINESS PURPOSE. T HE FACTS RECORDED BY THE AO AND CONCLUSION DRAWN IN THE ASSESSMENT ORDER ARE IN CONSISTENT WITH EACH OTHER. THEREFORE, WE SET ASIDE THE ISSUE TO THE FI LE OF THE AO AD DIRECT HIM TO RECONSIDER THE ISSUE AFRESH AFTER AFFORDING AN OPPO RTUNITY OF HEARING TO THE ASSESSEE. 9. THE THIRD ISSUE THAT CAME UP FOR OUR CONSIDERATION IS DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE AO HAS DISALLOWED EXPENDITURE IN RELATION TO EXEMPT INCOME IN RESPECT OF SHARE OF PROFIT RECEIVED FROM PARTNERSHIP FIRM, M/S CHAMUNDA EARTHMOVERS PVT LTD. ACCORDING TO THE AO, THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.4 ,82,280 AND SHARE OF PROFIT FROM PARTNERSHIP FIRM WHICH IS EXEMPT U/S 10(2A), W HEREAS FAILED TO DISALLOW RELATED EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE AO HAS WORKED OUT THE DISALLOWANCE U/R 8D(2)(II) AND 8D(2)(III) A ND WORKED OUT THE 9 ITA NO.2103/MUM/2015 DISALLOWANCE OF RS.2,99,348 BASED ON HIS OWN CALCUL ATION OF AVERAGE ASSETS AND AVERAGE INVESTMENTS, WHICH YIELDED EXEMPT INCOME. THE AO FURTHER DISALLOWED INDIRECT EXPENDITURE @0.5% OF THE AVERAG E INVESTMENT WHICH WORKED OUT TO RS.31,728. THUS, HE MADE TOTAL DISAL LOWANCE OF RS.3,31,076. THE ASSESSEE CLAIMS THAT THE AO WAS INCORRECT IN AP PLYING PROVISIONS OF SECTION 14A TO DISALLOW EXPENDITURE IN RELATION TO EXEMPT I NCOME IN RESPECT OF SHARE OF PROFIT RECEIVED FROM PARTNERSHIP FIRM. THE ASSESSE E FURTHER CONTENDED THAT ITS EXEMPT INCOME IS RS.48,230 WHEREAS DISALLOWANCES WO RKED OUT BY THE AO IS RS.3,31,076 WHICH IS MORE THAN THE EXEMPT INCOME WH ICH CANNOT BE DONE AS PERT THE PROVISIONS OF SECTION 14A OF THE ACT. 10. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE AO HAS WORKED OUT DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME U/S 14A BY INVOKING RULE 8D(2)(II) AND 8D(2)(III). THE AO HAS WORKED OUT PROPORTIONATE INTEREST BEARING FU NDS TO PARTNERSHIP FIRMS, WHICH EARNED EXEMPT INCOME BEING SHARE OF PROFIT. THE AO ALSO DISALLOWED EXPENDITURE @0.50% OF THE AVERAGE VALUE OF INVESTME NT. WE DO NOT AGREE WITH THE FINDINGS OF THE AO FOR THE REASON THAT INC OME EARNED FROM PARTNERSHIP FIRM IN THE FORM OF SHARE OF PROFIT THOUGH EXEMPT I N THE HANDS OF THE PARTNERS, IS A TAXABLE INCOME SUFFERED TAX IN THE HANDS OF TH E FIRM. WE FURTHER OBSERVE THAT THE CALCULATIONS DONE BY THE AO FOR DISALLOWAN CE OF INTEREST AND INDIRECT