Smt. Ramesh Shobana, CHENNAI V. DCIT, CHENNAI

ITA 2223/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7726 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 25-07-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANAT KUMAR RAHA
• Assessee Lawyers: V S JAYAKUMAR
• Keywords: Gift; Commercial expediency
• Section: 14A

Judgement Text

, / , IN THE INCOME TAX APPELLATE TRIBUNAL C / SMC BENCH, CHENNAI . . . , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER ./ ITA NO. 2223/MDS/2016 / ASSESSMENT YEAR : 2012-13 SMT. RAMESH SHOBANA, C/O. M/S. U. GOPINATH & CO, GURU NIVAS, NO.5/2, KRISHNASWAMY AVENUE, MYLAPORE, CHENNAI 600 004. PAN : BFIPS0708H V. THE DEPUTY COMMISSIONER OF INCOME TAX, NON CORPORATE CIRCLE 2, CHENNAI 34. ( /APPELLANT) ( /RESPONDENT) /APPELLANT BY : SHRI V.S. JAYAKUMAR, ADVOCATE /RESPONDENT BY : SHRI SANAT KUMAR RAHA, JCIT /DATE OF HEARING : 24.01.2017 /DATE OF PRONOUNCEMENT :28.02.2017 / O R D E R THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-2, CHENNAI DAT ED 31.03.2016 AND PERTAINS TO THE ASSESSMENT YEAR 2012 -13. 2. SHRI V.S. JAYAKUMAR, THE LD. COUNSEL FOR THE ASS ESSEE SUBMITTED THAT THE FIRST ISSUE ARISES FOR CONSIDERA TION IS DISALLOWANCE 2 I.T.A. NO. 2223/MDS/2016 OF 2,86,186/- UNDER SECTION 36(1)(III) OF THE INCOME T AX ACT, 1961 (IN SHORT THE ACT). ACCORDING TO THE LD. COUNSEL , THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS ADVANCED INTERE ST FREE LOANS 37,30,000/- TO HER CLOSE RELATIVES. ACCORDING TO T HE LD. COUNSEL, THE ASSESSEE HAS SURPLUS INTEREST FREE FUNDS IN HER ACCOUNT. THEREFORE, DISALLOWANCE OF 3,44,622/- TOWARDS INTEREST PAYMENT IS NOT JUSTIFIED. THE ASSESSEE HAS FILED ALL THE FIN ANCIAL DETAILS INCLUDING THE BALANCE SHEET IN THE PAPER BOOK. 3. ON THE CONTRARY SHRI SANAT KUMAR RAHA, THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSE SSING OFFICER FOUND THAT THE LOAN AND ADVANCE DISCLOSED IN THE BA LANCE SHEET TO THE EXTENT OF 48,65,756/- INCLUDES THE INTEREST FREE LOANS TO THE ASSESSEES HUSBAND AND MOTHER-IN-LAW TO THE EXTENT OF 37,30,000/- IT IS NOT THE CASE OF THE ASSESSEE THAT THE MONEY W AS ADVANCED TO HER HUSBAND AND MOTHER-IN-LAW ON ACCOUNT OF ANY COM MERCIAL EXPEDIENCY. SINCE THE BORROWED FUNDS WERE DIVERTED FOR NON- BUSINESS PURPOSE, THE ASSESSING OFFICER FOUND THAT THE INTEREST PAID ON BORROWED FUNDS TO THE EXTENT OF 3,44,622/- CANNOT BE ALLOWED AS DEDUCTION WHILE COMPUTING THE TAXABLE INCOME. 3 I.T.A. NO. 2223/MDS/2016 4. I HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHE R SIDE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSE SSEE NOW CLAIMS BEFORE THIS TRIBUNAL THAT THERE WAS SUFFICIENT INTE REST FREE FUNDS AVAILABLE ON THE DATE OF PAYMENT OF ADVANCE TO HER HUSBAND AND HER MOTHER-IN-LAW. IT IS NOT THE CASE OF THE ASSES SEE THAT THERE WAS COMMERCIAL EXPEDIENCY IN MAKING PAYMENT TO HER HUSB AND AND MOTHER-IN-LAW. THE ASSESSEE CLAIMS THAT SUFFICIENT INTEREST FREE FUND IS AVAILABLE. THEREFORE, THIS TRIBUNAL IS OF THE C ONSIDERED OPINION THAT THE MATTER NEEDS TO BE RE-EXAMINED BY THE ASSE SSING OFFICER AFTER EXAMINING THE BALANCE SHEET AND OTHER FINANCI AL DETAILS OF THE ASSESSEE. ACCORDINGLY, THE ORDERS OF THE LOWER AU THORITIES BELOW ARE SET ASIDE AND THE DISALLOWANCE MADE BY THE ASSE SSING OFFICER TOWARDS PAYMENT OF INTEREST ON THE BORROWED FUNDS I S REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSIN G OFFICER SHALL RE- EXAMINE THE MATTER AFRESH AND BRING ON RECORD THE I NTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE INCLUDING THE PRO FIT FOR THE YEAR UNDER CONSIDERATION AND THEREAFTER DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTU NITY TO THE ASSESSEE. 4 I.T.A. NO. 2223/MDS/2016 5. THE NEXT ISSUE ARISES FOR CONSIDERATION IS DISAL LOWANCE OF 5,71,000/- TOWARDS CHIT LOSS. 6. SHRI V.S. JAYAKUMAR, THE LD. COUNSEL FOR THE ASS ESSEE SUBMITTED THAT THE ASSESSEE HAS DEBITED A SUM OF 5,71,000/- TOWARDS CHIT LOSS. ADMITTEDLY, THE ASSESSEE IS ENG AGED IN THE BUSINESS OF SALE OF IRON AND STEEL. THE SALE PROCE EDS OF IRONS AND STEEL WAS DEPOSITED IN THE CHIT SCHEMES. IN THAT P ROCESS, THE ASSESSEE SUFFERED LOSS. REFERRING TO THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE OF V. RAJKUMAR V CIT (2014) 363 ITR 21, THE LD. COUNSEL SUBMITTED THAT THE MADRAS HIGH COURT DE CIDED THE ISSUE AGAINST THE ASSESSEE. HOWEVER THE CIRCULAR ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES (CBDT) IN INSTRUCTION NO.1175 OF 1936 WAS NOT BROUGHT TO THE NOTICE OF THE MADRAS HIGH COURT. ACCORDING TO THE LD. COUNSEL, THE CBDT AFTER REFERRING TO THE JU DGMENT OF THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF SODA SIL ICATE & CHEMICAL WORKS V COMMISSIONER OF INCOME TAX (1989) 179 ITR 588 FOUND THAT THE INSTRUCTION ISSUED IN INSTRUCTIO N NO.1175 CANNOT BE WITHDRAWN EVEN AFTER THE JUDGMENT OF PUNJAB & HA RYANA HIGH COURT. THIS CIRCULAR WAS REPRODUCED BY COCHIN BENC H OF THIS TRIBUNAL IN RAJEES V ITO (1997) 63 ITD 0330. THERE FORE, THE LD. 5 I.T.A. NO. 2223/MDS/2016 COUNSEL SUBMITTED THAT THE ISSUE NEEDS TO BE CONSID ERED IN THE LIGHT OF THE CIRCULAR ISSUED BY THE CBDT. 7. ON THE CONTRARY, SHRI SANAT KUMAR RAHA, THE LD . DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE CIT (APPEALS) AFTER REFERRING TO THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE OF SHRI V. RAJKUMAR ( SUPRA) FOUND THAT CHIT LOSS CANNOT BE ALLOWED AS DEDUCTION SINCE THE ASSESSEE IS ONLY A SUBSCRIBER T O THE CHIT SCHEME PROMOTED BY ANOTHER PERSON. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMITTED LY, THE ASSESSEE IS A SUBSCRIBER TO A CHIT SCHEME PROMOTED BY A THIR D PARTY. THE CBDT EXAMINED THIS ISSUE IN INSTRUCTION NO.1175 AND FOUND THAT IN THE CASE OF THE SUBSCRIBER, A FEW SUBSCRIBERS WILL BE RECEIVING MORE THAN WHAT THEY HAVE SUBSCRIBED. THE EXCESS MONEY R ECEIVED BY SOME OF THE SUBSCRIBER IS IN THE NATURE OF INTEREST . THE SAME IS TAXABLE AS SUCH. THE SUBSCRIBER WHO TAKES THE MONE Y EARLIER FROM THE CHIT SCHEME WILL NECESSARILY CONTRIBUTE MORE MO NEY TO THE SCHEME. THEREFORE, SUCH PERSON WHO WITHDRAWS THE M ONEY EARLIER HAS TO NECESSARILY INCUR LOSS. THE CBDT FOUND THAT THIS LOSS / 6 I.T.A. NO. 2223/MDS/2016 MONEY PAID IN EXCESS OVER AND ABOVE THE MONEY RECEI VED ARE NOTHING BUT THE INTEREST PAID ON THE MONEY TAKEN IN ADVANCE. THE CBDT OBSERVED THAT CLAIM OF SUCH A LOSS WILL HAVE T O BE CONSIDERED FOR THE PURPOSE OF LOANS ACCORDING TO THE PROVISION S IN THE INCOME TAX ACT. REFERRING TO THE JUDGMENT OF THE PUNJAB & HARYANA HIGH COURT IN SODA SILICATE & CHEMICAL WORKS ( SUPRA), THE CBDT OBSERVED THAT THE EARLIER INSTRUCTION IN 1175 CANNO T BE WITHDRAWN. THIS INSTRUCTION OF THE CDBT WAS NOT BROUGHT TO THE NOTICE OF THE MADRAS HIGH COURT WHILE DECIDING THE ISSUE IN THE C ASE OF SHRI V. RAJKUMAR ( SUPRA) . THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE MATTER NEEDS TO BE RECONSIDERED BY THE ASSESSING OFFICER AFTER CONSIDERING THE INSTRUCTIONS OF THE C BDT IN INSTRUCTION NO.1175. WE ARE CONSCIOUS THAT THE JUDGMENT OF THE MADRAS HIGH COURT IS BINDING ON THE AUTHORITIES IN THE STATE OF TAMIL NADU AND PUDUCHERRY. HOWEVER, THE CIRCULAR ISSUED BY THE AP EX ADMINISTRATIVE BODY OF DIRECT TAXES ALSO NEEDS TO B E CONSIDERED. SINCE THE CIRCULAR ISSUED BY THE CBDT WAS NOT BROUG HT TO THE NOTICE OF THE MADRAS HIGH COURT, THIS TRIBUNAL IS OF THE C ONSIDERED OPINION THAT THE MATER NEEDS TO BE RECONSIDERED. ACCORDING LY, THE ORDERS OF THE LOWER AUTHORITIES HAVE BEEN SET ASIDE AND THE I SSUE OF CHIT LOSS IS REMITTED BACK TO THE ASSESSING OFFICER. THE ASS ESSING OFFICER 7 I.T.A. NO. 2223/MDS/2016 SHALL RECONSIDER THE CLAIM OF THE CHIT LOSS AFTER C ONSIDERING THE JUDGMENT OF THE MADRAS HIGH COURT IN SHRI V. RAJKUM AR AND CBDT INSTRUCTION IN INSTRUCTION NO.1175 AND THEREAFTER D ECIDE THE SAME IN ACCORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTU NITY TO THE ASSESSEE. 9. THE NEXT ISSUE ARISES FOR CONSIDERATION IS DISAL LOWANCE OF 17,327/- UNDER SECTION 14A OF THE ACT. 10. SHRI V.S. JAYAKUMAR, THE LD. COUNSEL FOR THE AS SESSEE SUBMITTED THAT THE ASSESSEE HAS NOT EARNED ANY EXEM PT INCOME EVEN THOUGH AN INVESTMENT WAS MADE. IN FACT, THE A SSESSING OFFICER HAS MADE DISALLOWANCE BY APPLYING THIRD LIM B OF RULE 8D(2). REFERRING TO THIRD LIMB OF RULE 8D(2) OF THE INCOME TAX RULES, THE LD. COUNSEL SUBMITTED THAT 0.5% OF THE AVERAGE VALU E OF THE INVESTMENT FROM WHICH THE INCOME FORM PART OF THE T OTAL INCOME ALONE HAS TO BE TAKEN INTO CONSIDERATION. IN THIS CASE NO INCOME WAS GENERATED AND NO INCOME WAS EXEMPTED FROM TAXAT ION. THEREFORE, THE ADDITION MADE BY THE ASSESSING OFFIC ER CANNOT BE SUSTAINED. 8 I.T.A. NO. 2223/MDS/2016 11. WE HEARD SHRI SANAT KUMAR RAHA, THE LD. DEPARTM ENTAL REPRESENTATIVE ALSO. ACCORDING TO THE LD. D.R., IR RESPECTIVE OF THE FACT THAT THE ASSESSEE EARNED INCOME OR NOT, THE EX PENDITURE INCURRED BY THE ASSESSEE HAS TO BE DISALLOWED. THE REFORE, THE CIT (APPEALS) HAS RIGHTLY CONFIRMED THE ADDITION MADE B Y THE ASSESSING OFFICER. 12. I HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. I HAVE A LSO CAREFULLY GONE THROUGH THE PROVISIONS OF SECTION 14A OF THE ACT AN D RULE 8D(2) OF THE INCOME TAX RULES. RULE 8D(2)(I) CLEARLY PROVID ES FOR DISALLOWANCE OF THE DIRECT EXPENDITURE. IN THIS CA SE, ADMITTEDLY THERE WAS NO DIRECT EXPENDITURE. THEREFORE, THERE CANNOT BE ANY DISALLOWANCE. RULE 8D(2)(II) PROVIDES FOR DISALLOW ANCE OF INDIRECT EXPENDITURE WHICH DOES NOT DIRECTLY CONTRIBUTABLE T O ANY PARTICULAR INCOME. IN THIS CASE, NO DISALLOWANCE WAS ADMITTED LY MADE BY THE ASSESSING OFFICER UNDER SECTION 8D(2)(II). NOW WHA T REMAINS TO BE CONSIDERED IS RULE 8D(2)(III). RULE 8D(2)(III) PRO VIDES FOR DISALLOWANCE OF AN AMOUNT EQUAL TO 0.5% OF THE AVER AGE VALUE OF THE INVESTMENT INCOME WHICH DOES NOT OR SHALL NOT F ORM PART OF THE TOTAL INCOME. IN THE CASE BEFORE US, NO INCOME WAS GENERATED OUT 9 I.T.A. NO. 2223/MDS/2016 OF THE INVESTMENT MADE BY THE ASSESSEE. THEREFORE, THERE WAS NO INCOME WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. HENCE, THERE CANNOT BE ANY DISALLOWANCE UNDER RULE 8D(2)(III) OF THE INCOME TAX RULES. THEREFORE, THE ASSESSING OFF ICER IS NOT JUSTIFIED IN DISALLOWANCE OF 17,327/-. ACCORDINGLY, THE ORDERS OF BOTH THE AUTHORITIES ARE SET ASIDE AND THE ADDITION OF 17,327/- IS DELETED. 13. THE NEXT GROUND OF APPEAL IS DISALLOWANCE OF 8,91,787/- UNDER SECTION 56(2)(VII) OF THE ACT. 14. SHRI V.S. JAYAKUMAR, THE LD. COUNSEL FOR THE AS SESSEE SUBMITTED THAT THE ASSESSEES PATERNAL UNCLE INTEND ED TO GIFT 8,91,787/- ON HIS BEHALF. THE ASSESSING OFFICER FO UND THAT SHRI GOPI KRISHNAN WHO IN FACT TRANSFERRED THE MONE Y TO THE ASSESSEES ACCOUNT WAS RESIDING IN USA IS BROTHERS SON OF ASSESSEES FATHER. REFERRING TO SECTION 56(2)(VII) OF THE ACT, THE ASSESSING OFFICER FOUND THAT SHRI GOPI KRISHNAN WHO IN FACT TRANSFERRED THE AMOUNT ON INSTRUCTION FROM HIS FATH ER CANNOT BE CONSIDERED TO BE RELATIVE WITHIN THE MEANING OF SEC TION 56(2)(VII) OF THE ACT. THEREFORE, THE ASSESSING OFFICER DISALLOW ED THE CLAIM OF 10 I.T.A. NO. 2223/MDS/2016 THE ASSESSEE. ACCORDING TO THE LD. COUNSEL, BROTHE RS SON IS ALSO A CLOSE RELATIVE. THEREFORE, DISALLOWANCE MADE BY TH E ASSESSING OFFICER CANNOT BE JUSTIFIED. 15. ON THE CONTRARY SHRI SANAT KUMAR RAHA, THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT RELATIVE MEANS BROTHER OR SISTER OF EITHER PARENTS OF THE INDIVIDUAL. IN THIS CASE, THE FUNDS WERE TRANSFERRED BY ONE SHRI GOPI KRISHNAN WHO IS N EITHER THE BROTHER OF THE ASSESSEE OR BROTHER OF THE ASSESSEE S PARENTS. THEREFORE, THE ASSESSING OFFICER FOUND THAT THE SAI D SHRI GOPI KRISHNAN CANNOT BE CONSTRUED AS RELATIVE WITHIN THE MEANING OF THE SECTION 56(2)(VII) OF THE ACT AND HENCE THE AMOUNT DONATED BY SHRI GOPI KRISHNAN WAS TAKEN AS INCOME OF THE ASSES SEE. 16. I HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSES SEE CLAIMS THAT HER PATERNAL UNCLE NAMELY THE BROTHER OF THE ASSESS EES FATHER INTENDED TO GIFT 8,91,787/- TO THE ASSESSEE SINCE HE HAS NO SUFFICIENT FUNDS, HE REQUESTED HIS SON TO DONATE 8,91,787/-. NO DOUBT PARENTS BROTHER SON WAS NOT A RELATIVE AS PRO VIDED UNDER SECTION 56(2)(VII) OF THE ACT. HOWEVER, WHEN THE A SSESSEE CLAIMS 11 I.T.A. NO. 2223/MDS/2016 THAT THE GIFT WAS MADE NOT BY HER FATHERS BROTHER SON BUT BY HER FATHERS BROTHER, THIS TRIBUNAL IS OF THE CONSIDERE D OPINION THAT THE MATTER NEEDS TO BE RE-EXAMINED BY THE ASSESSING OFF ICER TO FIND OUT WHO IN FACT GIFTED THE MONEY TO THE ASSESSEE. IF T HE ASSESSEES FATHERS BROTHER INTENDED TO GIFT THE MONEY IRRESPE CTIVE OF THE FACT THAT THE ASSESSEES COUSIN BROTHER TRANSFERRED THE FUNDS ON THE INSTRUCTION OF HIS FATHER CANNOT BE A REASON TO DIS ALLOW THE CLAIM OF THE ASSESSEE. IT IS FOR THE ASSESSEES FATHERS BR OTHER EITHER TO TRANSFER THE FUNDS FROM HIS OWN ACCOUNTS OR HE MAY REQUEST HIS FRIENDS OR RELATIVES TO TRANSFER THE FUNDS. IF THE GIFT WAS GIVEN TO THE ASSESSEE BY HER FATHERS BROTHERS INSTRUCTION, THE N THERE CANNOT BE ANY DISALLOWANCE. THEREFORE, THE ASSESSING OFFICER HAS TO RE- EXAMINE THE MATTER AND BRING ON RECORD WHO HAS IN F ACT INTENDED TO GIFT THE MONEY TO THE ASSESSEE. ACCORDINGLY, THE ORDERS OF BOTH THE AUTHORITIES BELOW ARE SET ASIDE AND THE DISALLOWANC E MADE BY THE ASSESSING OFFICER TO THE EXTENT OF 8,91,787/- IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFIC ER SHALL RE- EXAMINE THE MATTER AFRESH AND THEREAFTER DECIDE THE SAME IN ACCORDANCE WITH LAW AFTER GIVING REASONABLE OPPORTU NITY TO THE ASSESSEE. 12 I.T.A. NO. 2223/MDS/2016 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON 28 TH FEBRUARY, 2017 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER /CHENNAI, /DATED, THE 28 TH FEBRUARY, 2017. JR. ! ' ! /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. #$% ( )/CIT(A)-2, CHENNAI 4. #$% /CIT 5. ! /DR 6. &' /GF.