DIAMONDS 'R' US, MUMBAI V. DCIT CEN CIR 39, MUMBAI

ITA 2365/MUM/2014

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8555 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-11-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2010-2011
• Appeal Filed On: 09-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S PADMAJA
• Keywords: Proportionate interest
• Section: 10AA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, MUMBAI BEFORE SHRI P K BANSAL, VICE PRESIDENT AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NO. 4583/MUM/2012 (ASSESSMENT YEAR: 2009-10) ITA NO. 2365/MUM/2014 (ASSESSMENT YEAR: 2010-11) M/S. DIAMONDS 'R' US VS. J CIT (OSD), CENTRAL CIRCLE - 39 C/O. KARNAVAT & CO. 2A KITAB MAHAL, 1ST FLOOR 192 DR. D.N. ROAD, FORT MUMBAI 400001 ROOM NO. 32(1), GR. FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 PAN AAAFD4507H APPELLANT RESPONDENT ITA NO.4935/MUM/2012 (ASSESSMENT YEAR: 2009-10) ITA NO.3490/MUM/2014 (ASSESSMENT YEAR: 2010-11) JCIT (OSD), CENTRAL CIRCLE - 39 VS. M/S. DIAMOND 'R' US ROOM NO. 32(1), GR. FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 1110, PRASAD CHAMBERS OPERA HOUSE MUMBAI 400004 PAN AAAFD4507H APPELLANT RESPONDENT APPELLANT BY: S/SHRI VIJAY MEHTA & SUNIL HIRAWAT & ANUJ KISNADWALA RESPONDENT BY: SMT. S. PADMAJA DATE OF HEARING: 15.11.2017 DATE OF PRONOUNCEMENT: 15.11.2017 O R D E R PER P.K. BANSAL, VICE PRESIDENT THESE CROSS APPEALS HAVE BEEN FILED AGAINST THE RES PECTIVE ORDERS OF THE CIT(A) FOR A.Y. 2009-10 DATED 11.05.2012 AND FO R A.Y. 2010-11 DATED 14.02.2014 ITA NOS. 4583 & 4935/MUM/2012 ITA NO. 2365& 3490/MUM/2014 M/S. DIAMONDS 'R' US 2 2. BOTH THE PARTIES AGREED THAT THE ISSUE INVOLVED IN BOTH THE ASSESSMENT YEARS IN THE APPEALS OF BOTH THE PARTIES ARE COMMON EXCEPT THE FIGURE AND WHATEVER DECISION THE TRIBUNAL MAY TAKE IN A.Y. 2009-10 THE SAME MAY BE TAKEN IN A.Y. 2010-11 ALTHOUGH THE NUMB ER OF GROUNDS ARE DIFFERENT. THE GROUNDS OF APPEAL TAKEN BY THE PARTI ES FOR A.Y. 2009-10 ARE AS UNDER: - ITA NO. 4583/MUM/2012 (ASSESSEES APPEAL) BEING AGGRIEVED BY THE ORDER OF THE COMMISSIONER O F INCOME-TAX (APPEALS) - 41 [CIT (A)] UNDER SECTION 250 OF THE I NCOME-TAX ACT, 1961, THIS APPEAL PETITION IS SUBMITTED ON THE FOLLOWING GROUNDS WHICH MAY CONSIDERED WITHOUT PREJUDICE TO ONE ANOTHER: - 1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (A) ERRED IN CONFIRMING DISALLOWANCE OF RS. 9,84 , 36 , 555/- BEING PROPORTIONATE INTEREST DEBITED TO THE P ROFIT & LOSS A/C UNDER SECTION 36(1))(III) OF THE ACT HOLDI NG THAT THE SAME IS IN RELATION TO INTEREST-FREE ADVANCES AND IGNORI NG THAT THE APPELLANT HAS INCURRED INTEREST OF RS 12,40,92,432/ - ONLY FOR THE PURPOSE OF BUSINESS. THE DISALLOWANCE BEING BAD IN LAW THE SAME NEEDS TO BE DELETED. 2) WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS A ND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN CON FIRMING THE AMOUNT OF DISALLOWANCE OF RS 9,84,36,555 WITHOUT AP PRECIATING THE FACT THAT THE DISALLOWANCE AMOUNTS TO APPROXIMA TELY 80% OF THE INTEREST PAID OF RS.12,40,92,432 AND THAT INTER EST SHOULD BE COMPUTED ON A DAILY BASIS AND NOT ON THE CLOSING BA LANCES. ITA NO. 4935/MUM/2012 (REVENUES APPEAL) (1) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) IS JUSTIFIED IN ALLOWING THE CL AIM OF THE ASSESSEE FOR DEDUCTION OF RS.56,25,38,852/- UNDER S ECTION 10AA OF THE INCOME TAX ACT ON THE GROUND THAT ACTIVITIES OF THE ASSESSEE FOR IMPORTING DIAMONDS AND RE-EXPORTING TH E SAME AMOUNTS TO PROVING SERVICES FOR THE PURPOSE OF THIS SECTION. (2) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS JUSTIFIED IN ALLOWING THE A PPEAL OF THE ASSESSEE, AS THE LD. CIT(A) HAS FAILED TO APPRECIAT E THAT THE LOSS CLAIMED, ON ACCOUNT OF FOREIGN EXCHANGE FORWARD CON TRACT IS ONLY A RESTATEMENT OF OPENING POSITIONS OF FOREIGN EXCHA NGE FORWARD CONTRACTS, AS PER THE RATE PREVAILING ON THE BALANC E SHEET, AS ON 31.03.2009, THEREBY MEANING THAT THE LOSS CLAIMED I S ONLY A NOTIONAL LIABILITY AND IS NOT ALLOWABLE UNDER THE INCOME TAX ACT AS THE ASSESSEE IS FOUND TO BE FOLLOWING MERCANTILE SYSTEM.' ITA NOS. 4583 & 4935/MUM/2012 ITA NO. 2365& 3490/MUM/2014 M/S. DIAMONDS 'R' US 3 3. IN A.Y. 2010-11 EVEN THOUGH REVENUE HAS TAKEN VARIO US GROUND, AS AGREED BY THE LEARNED D.R., THE ONLY ISSUE INVOLVED IS THE SAME AS IN GROUND NO. 1 FOR A.Y. 2009-10. GROUND NO. 1 IN REVE NUES APPEAL RELATES TO THE CLAIM OF ASSESSEES DEDUCTION UNDER SECTION 10AA OF THE INCOME TAX ACT. BOTH THE PARTIES AGREED THAT THIS ISSUE IS COV ERED BY THE DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2007- 08 IN ITA NO. 276/MUM/2012. AFTER HEARING THE RIVAL SUBMISSIONS A ND GOING THROUGH THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE I N CO 276/MUM/2014 FOR A.Y. 2007-08 WE NOTED THAT THE ISSUE INVOLVED I N GROUND NO. 1 OF REVENUES APPEAL HAS BEEN CONSIDERED BY THIS TRIBUN AL AND ULTIMATELY THIS TRIBUNAL WHILE CONSIDERING THE SAME ISSUE HAS CONFI RMED THE ORDER OF THE CIT(A) ALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUC TION UNDER SECTION 10AA BY HOLDING AS UNDER: - 5. WE FIND THAT SIMILAR ISSUE CAME UP IN A.Y. 2006 -07 IN ASSESSEES OWN CASE WHEREIN FOLLOWING THE DECISION OF THE ITAT IN ITA NO. 509/JP/2011 IN THE CASE OF GOENKA DIAMOND & JEWELLE RS LTD. THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY OBSERVING AS UNDER: - WE NOTED THAT LEARNED CIT(A) HAS TAKEN INTO CONSID ERING THE ASPECT AND OBSERVATION OF THE AO THAT DEDUCTION UND ER SECTION 10AA IS NOT ALLOWABLE FOR THE REASON THAT THE ASSES SEE HAS NOT CARRIED OUT ANY MANUFACTURING ACTIVITY BUT HAS DONE TRADING OF GOODS ONLY. FOR THIS PURPOSE, LEARNED AO HAS PLACED RELIANCE ON THE ORDER OF HONBLE DELHI HIGH COURT. LEARNED CIT( A) HAS TAKEN INTO CONSIDERATION THESE OBSERVATION OF THE AO AND THEREAFTER HE FOUND THAT THE GOVERNMENT OF INDIA HAS ISSUES A CIR CULAR NO.17 OF 29.5-2006, WHICH WAS ISSUED BY EXPORT PROMOTION COUNCIL FOR EOUS & SEZ UNIT (MINISTRY OF COMMERCE & INDUSTRY, G OVERNMENT OF INDIA). THE CONTENTS OF THE CIRCULAR HAVE ALSO B EEN INCORPORATED IN THE FINDING OF THE LEARNED CIT(A), WHICH HAVE ALSO BEEN REPRODUCED SOMEWHERE ABOVE IN THIS ORDER. THER EFORE, WE ARE NOT REPEATING THE CONTENTS OF THAT CIRCULAR ISS UED BY THE MINISTRY OF COMMERCE & INDUSTRY, GOVERNMENT OF INDI A). UNDER SECTION 51(1) OF THE SEZ ACT, IT HAS BEEN CLEARLY P ROVIDED THAT THE PROVISION OF THIS ACT HAS OVERRIDING EFFECT IN CASE OF CONTRADICTION BETWEEN THE SEZ ACT AND OTHER ACT. HENCE, BY VIRTUE OF SECTION 51 OF THE SEZ ACT, THE PROVISION OF SEZ ACT AND RUL ES WILL HAVE OVERRIDING EFFECT OVER THE PROVISION CONTAINED IN A NY OTHER ACT. LEARNED CIT(A) HAS TAKEN INTO CONSIDERATION THIS CI RCULAR ISSUED BY GOVERNMENT OF INDIA AND THE PROVISION OF SECTION 51 OF THE SEZ ACT AND FOUND THAT TRADING DONE BY THE ASSESSEE IS A SERVICE ITA NOS. 4583 & 4935/MUM/2012 ITA NO. 2365& 3490/MUM/2014 M/S. DIAMONDS 'R' US 4 AND, THEREFORE, DEDUCTION UNDER SECTION 10AA IS ALL OWABLE. WE FURTHER NOTED THAT ON SIMILAR FACTS IN CASE OF GOEN KA DIAMONDS AND JEWELLERY LIMITED (SUPRA), THE JAIPUR BENCH OF THE TRIBUNAL HAS DISCUSSED THE ISSUE IN DETAIL. THE PROVISIONS O F SECTION 51 OF SEZ ACT WERE ALSO CONSIDERED. THE DECISION OF THE H ONBLE SUPREME COURT IN THE CASE OF TAX RECOVERY OFFICER V S. CUSTODIAN APPOINTED UNDER THE SPECIAL COURT, REPORTED IN THE CASE OF 211 CTR 369 (SC) AND THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. VASISTH CHAY VYAPAR LTD., REPOR TED IN 238 CTR 142 (DELHI), WERE ALSO TAKEN INTO CONSIDERATION AND THEREAFTER IT WAS CONCLUDED THAT IN VIEW OF THE INS TRUCTION NO.1 OF 2006, DATED 24- 3-2006 AS MODIFIED BY INSTRUCTION N O.4 OF 2006, DATED 24- 5-2006 ISSUED BY THE MINISTRY OF COMMERCE & INDUSTRY, GOVERNMENT OF INDIA AND THE DEFINITION OF SERVICE GIVEN IN THE SEZ ACT, 2005, WHICH OVERRIDES THE WORD SER VICE ACCRUING IN SECTION 10AA BY VIRTUE OF SECTION 51 OF THE SEZ ACT. THE ASSESSEE ENGAGED IN TRADING IN NATURE OF RE-EXPORT OF IMPORTED GOODS AND FOR THE SAME THE ASSESSEE WAS ENTITLED DE DUCTION UNDER SECTION 10AA OF THE ACT. FACTS ARE SIMILAR BE FORE US, AS THE ASSESSEE IS ENGAGED IN TRADING OF RE-EXPORT OF IMPO RTED GOODS AND, THEREFORE, THE ASSESSEE IS ENTITLED FOR DEDUCT ION UNDER SECTION 10AA OF THE ACT. ALL THE ARGUMENTS ADVANCED BY THE LEARNED DR BEFORE US HAVE ALSO BEEN TAKEN CARE OF B Y THE TRIBUNAL WHILE DISCUSSING THE APPEAL IN THE CASE OF GOENKA DIAMONDS AND JEWELLERY LIMITED (SUPRA). IT IS FURTH ER NOTED THAT THE MAIN PLANK OF ARGUMENT OF LEARNED DR IS THAT RU LES PROVIDED UNDER THE SEZ ACT CANNOT PARTAKE THE CHARACTER OF T HE SECTION OF THE INCOME TAX ACT. WE FIND THAT IN THE SEZ ACT UND ER SECTION 51, IT HAS BEEN CLEARLY PROVIDED THAT THE PROVISION OF SEZ ACT WILL OVERRIDE THE PROVISION OF ANY OTHER ACT, MEANING TH EREBY THE PROVISION PROVIDED UNDER THE SEZ ACT HAS TO OVERRID E ON THE PROVISION OF SECTION 10AA OF THE INCOME TAX ACT. UN DER THE RULES, IT IS NOT PROVIDED BUT UNDER SECTION 51 OF THE SEZ ACT, IT IS PROVIDED, THEREFORE, IN OUR VIEW, THE CONTENTION RA ISED BY THE LEARNED DR IS NOT TENABLE. MOREOVER, THE ISSUE IS S QUARELY COVERED BY THE DECISION OF THE COORDINATE BENCH IN THE CASE OF GOENKA DIAMONDS AND JEWELLERY LIMITED (SUPRA). THER EFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF GOENKA DIAMONDS AND JEWELLERY LIMITED (SUPRA) AND I N VIEW OF THE REASONING GIVEN BY THE LEARNED CIT(A), WE CONFI RM HIS ORDER. 6. NOTHING CONTRARY WAS BROUGHT TO OUR KNOWLEDGE ON BEHALF OF REVENUE. THE FACT BEING SIMILAR, FOLLOWING THE SAME REASONS WE UPHOLD THE ORDER OF THE CIT(A) WHO HAS ALLOWED THE CLAIM OF ASSESSEE OF DEDUCTION UNDER SECTION 10AA OF THE ACT. AS A RE SULT REVENUES APPEAL IS DISMISSED. ..... ITA NOS. 4583 & 4935/MUM/2012 ITA NO. 2365& 3490/MUM/2014 M/S. DIAMONDS 'R' US 5 4. NO CONTRARY DECISION WAS BROUGHT TO OUR KNOWLEDGE. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF THE ASSESSEE WE DISMISS GROUND NO. 1 TAKEN BY THE REVENUE. 5. GROUND NO. 2 IN REVENUES APPEAL RELATES TO THE LOS S CLAIMED BY THE ASSESSEE ON ACCOUNT OF FOREIGN EXCHANGE FORWARD CON TRACTS. WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME . WE NOTED THAT THIS ISSUE HAS BEEN DECIDED BY THE CIT(A) UNDER PARA 3.7 IN FAVOUR OF THE ASSESSEE BY HOLDING AS UNDER: - 3.7 I HAVE PERUSED THE SUBMISSIONS OF THE APPELLA NT AND FACTS OF THE CASE CAREFULLY. IT IS NOTICED THAT THE CONTENTI ON OF THE AR OF THE APPELLANT IS TRUE THAT INADVERTENTLY THE BUYER'S CR EDIT TRANSLATION OF RS,53,60,17,299/- WAS ERRONEOUSLY CONSIDERED AS FOR WARD CONTRACT LOSS WHEREAS IN FACT THERE WAS A GAIN OF RS.44,56,9 5,930/- IN FORWARD CONTRACT TRANSLATION. IT IS ALSO TRUE THAT FROM THESE TRANSACTIONS THE APPELLANT HAS SHOWN A NET GAIN OF RS.55,90,915/- WHICH IS CREDIT TO THE P & L A/C. THUS, IT IS A MIS TAKE APPARENT FROM THE RECORD WHICH WAS DUE TO TYPOGRAPHIC ERROR. REGA RDING THE ARGUMENT OF THE AO THAT IT IS ONLY A PROVISION AND NOT ALLOWABLE, THE HON'BLE SUPREME COURT HAS DECIDED THIS ISSUE IN THE CASE OF CIT VS. WOODWARD GOVERNOR (INDIA) P. LTD. (SUPRA) WHERE IT IS HELD THAT THE ACCOUNTING METHOD FOLLOWED BY AN ASSESSEE CONTINUOU SLY FOR A GIVEN PERIOD NEEDS TO BE PRESUMED TO BE CORRECT TILL THE AO COMES TO THE CONCLUSION FOR REASONS TO BE GIVEN THAT SYSTEM DOES NOT REFLECT TRUE AND CORRECT PROFITS. SECONDLY, THE AO HAS TREATED T HIS AS A SPECULATION TRANSACTION. ON THIS ISSUE, THE HON'BLE MUMBAI TRIB UNAL (SPECIAL BENCH) IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUP RA) BY FOLLOWING THE DECISION OF HON'BLE SUPREME COURT IN CASE OF WO ODWARD GOVERNOR (INDIA) P. LTD. HAS HELD THAT WHERE A FORWARD CONTR ACT IS ENTERED INTO BY THE ASSESSEE TO SELL THE FOREIGN CURRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF ACCOUNT ING PERIOD, THE LOSS IS INCURRED TO THE ASSESSEE ON ACCOUNT OF EVALUATIO N OF THE CONTRACT ON THE LAST DATE OF THE ACCOUNTING PERIOD, I.E. BEFORE THE DUE DATE OF MATURITY OF THE FORWARD CONTRACT IS NOT A SPECULATI VE TRANSACTION. IN THE PRESENT CASE, THE ASSESSEE IS ALSO FOLLOWING TH E MERCANTILE SYSTEM OF ACCOUNTING CONTINUOUSLY AND THERE IS NO CHANGE I N THE ACCOUNTING SYSTEM AND THE METHOD OF ACCOUNTING. A.O. ALSO COUL D NOT BROUGHT ON RECORD ANY ADVERSE FINDING THAT THE ASSESSEE HAS CH ANGED THE METHOD IN PREVIOUS OR SUBSEQUENT YEARS AND THE COMP UTATION WAS OF A COMPLICATED NATURE & DOES NOT REFLECT TRUE AND CO RRECT PROFITS AS HELD BY THE APEX COURT. THE HON'BLE DELHI TRIBUNAL IN THE CASE OF MUNJAL SHOWA LTD. VS. DCIT HAS ALSO HELD THAT THE P RESUMPTION OF ANY SPECULATIVE TRANSACTION IS, THEREFORE, DIRECTLY REBUTTED IN VIEW OF THE LEGAL IMPOSSIBILITY AND IN VIEW OF THE FACT THA T FOREIGN CURRENCY ITA NOS. 4583 & 4935/MUM/2012 ITA NO. 2365& 3490/MUM/2014 M/S. DIAMONDS 'R' US 6 WAS NEITHER COMMODITY NOR SHARES. KEEPING IN VIEW A LL THESE FACTS AND CIRCUMSTANCES, IT IS HELD THAT IT WAS A MISTAKE APPARENT FROM THE RECORD AND MOREOVER, THE FACTS OF THE CASE ARE COVE RED BY THE DECISION OF SUPREME COURT AND THE DECISION OF SPL. BENCH MUM BAI & DELHI TRIBUNAL THAT THE ASSESSEE HAS NOT CHANGED ITS METH OD OF ACCOUNTING NOR THE A.O. COULD BROUGHT ANY ADVERSE MATERIAL OR DISTINGUISH THE FACTS OF THE PRESENT CASE TO THE FACTS DECIDED BY T HE HON'BLE SUPREME COURT. SECONDLY, THE MUMBAI SPL. BENCH DECISION AND THE DECISION OF HON'BLE DELHI TRIBUNAL IS ALSO SQUARELY COVERED THE FACTS OF THE CASE WHERE IT IS HELD THAT FORWARD CONTRACT IN CASE OF F OREIGN EXCHANGE TRANSACTION IS NOT SPECULATIVE TRANSACTION. THUS, T HE DECISION OF THE AO THAT IT IS A SPECULATIVE INCOME COVERED U/S. 43( 5) & THE PROVISIONS OF SECTION 73 IS NOT CORRECT BECAUSE HE COULD NOT S UBMIT ANY FAVOURABLE DECISION ON THIS ISSUE. THEREFORE, THE D ISALLOWANCE MADE BY THE AO IS NOT SUSTAINABLE, HENCE DELETED. THE GR OUND OF APPEAL IS ALLOWED. 6. THE LEARNED D.R. BEFORE US VEHEMENTLY RELIED ON TH E ORDER OF THE AO BUT COULD NOT ADDUCE ANY COGENT MATERIAL FOR EVIDEN CE WHICH MAY PROVE THAT THE FACT STATED BY THE CIT(A) THAT THE ASSESSEE IN FACT HAS NOT INCURRED ANY LOSS ON FORWARD CONTRACTS BUT IN FACT THERE WAS A G AIN OF ` 44,56,95,930/- IN THE FORWARD CONTRACT TRANSACTIONS AND THE ASSESSEE HAS CREDITED INTO THE PROFIT & LOSS ACCOUNT NET GAIN OF ` 55,90,915/-. IN VIEW OF THIS FACT WE DO NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF TH E CIT(A) AND WE CONFIRM THE SAME. THUS, GROUND NO. 2 TAKEN BY THE REVENUE STAND S DISMISSED. 7. NOW COMING TO ASSESSEES GROUND NOS. 1 & 2, IT REL ATE TO THE COMMON ISSUE REGARDING TO THE DISALLOWANCE OF ` 9,84,36,555/-. THE BRIEF FACTS RELATING TO THIS GROUNDS ARE THAT THE AO NOTE D THAT THE ASSESSEE HAS SHOWN NET INTEREST INCOME OF ` 13,22,79,483/- IN THE PROFIT & LOSS ACCOUNT. HE ALSO OBSERVED ON PERUSAL OF THE BALANCE SHEET TH AT THE ASSESSEE HAS GIVEN INTEREST FREE LOANS AND ADVANCES OF ` 95,25,15,572/- TO ITS MAIN PERSON, SHRI NIRAV MODI. AFTER CONSIDERING THE REPL Y OF THE ASSESSEE, THE AO NOTED THAT THE ASSESSEE HAS EARNED GROSS INTEREST A ND AFTER REDUCING THERE FROM BANK INTEREST OF ` 12,40,92,432/- SHOWN NET INTEREST INCOME AT ` 13,22,68,483/-. THE AO WAS OF THE VIEW THAT THE ASS ESSEE HAS UTILISED BORROWED FUNDS FOR ADVANCING INTEREST FREE LOANS. A CCORDINGLY HE DISALLOWED PROPORTIONATE INTEREST AMOUNTING TO ` 9,84,36,555/-. ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) AND BEFORE THE CIT (A) THE ASSESSEE MADE ITA NOS. 4583 & 4935/MUM/2012 ITA NO. 2365& 3490/MUM/2014 M/S. DIAMONDS 'R' US 7 DETAILED SUBMISSIONS MENTIONING THEREIN THAT SHRI N IRAV MODI IS A PARTNER IN THE PARTNERSHIP FIRM AND IT IS NOT A CASE THAT M ONEY ALWAYS REMAINS DEBIT BUT THERE WAS A CREDIT BALANCE ALSO IN THE AC COUNT OF SHRI NIRAV MODI. IN FACT IN THE CAPITAL ACCOUNT OF ALL THE PARTNERS THERE WAS A CREDIT BALANCE AS ON 31 ST MARCH, 2008 TO THE EXTENT OF ` 1,15,70,667/- AND AS ON 31 ST MARCH, 2009 AT ` 58,16,76,653/-. THUS INTEREST FREE FUNDS WERE AVAIL ABLE TO THE ASSESSEE. THEREFORE IT IS NOT A CASE WHERE THE BORROWED FUNDS HAS BEEN UTILISED FOR THE PURPOSE OF BEING GIVEN TO THE PART NER SHRI NIRAV MODI. HE ALSO CONTENDED THAT NOT ONLY THE CAPITAL THE ASSESS EE HAS INTEREST FREE FUNDS IN THE SHAPE OF SUNDRY CREDITORS TO THE EXTEN T OF ` 57,91,37,315/- AS WELL AS AMOUNT RECEIVED FOR THE BOOKING TO THE EXTE NT OF ` 5,59,42,707/- AND THEREFORE THE DISALLOWANCE HAS SIMPLY BEEN DONE ON THE PRESUMPTION AS IF INTEREST FREE FUNDS HAS BEEN ADVANCED OUT OF THE BORROWED FUNDS. RELIANCE WAS PLACED BEFORE THE CIT(A) ON THE DECISI ON IN THE CASES OF CIT VS. ABHISHEK INDUSTRIES LTD. 156 TAXMAN 257 (P&H), S.A. BUILDERS LTD. VS. CIT (SC) AS WELL AS MUJAL SALES CORPORATION VS. CIT 168 TAXMAN 43 (SC). THE CIT(A) DID NOT AGREE WITH THE SUBMISSION OF THE ASSESSEE BUT UPHELD THE PROPORTIONATE DISALLOWANCE BY HOLDING AS UNDER: - 4.7 FROM THE PERUSAL OF THE SUBMISSIONS OF THE APP ELLANT AND FACTS OF THE CASE, IT IS NOTICED THAT THE ASSESSEE HAS SH OWN NET INTEREST INCOME OF RS.13,22,69,483/- AFTER ADJUSTING THE BAN K INTEREST PAID OF RS.12,40,92,432/-. THE ASSESSEE FIRM HAS GIVEN ADVA NCES OF RS.92,25,15,572/- TO SHRI NIRAV MODI. THUS, IT IS A N UNDISPUTED FACT THAT, THE ASSESSEE FIRM HAS BORROWED FUNDS AND PAID INTEREST OF RS.12,40,92,432/- AND AT THE SAME TIME HAS GIVEN IN TEREST-FREE ADVANCES TO SHRI NIRAV MODI AMOUNTING TO RS.92,25,1 5,572/-. WHEN THE AO HAS CONFRONTED THAT AS PER THE PROVISIONS OF SECTION 36(1)(III), THE ASSESSEE HAS TO PROVE THAT THE BORROWED FUNDS H AVE BEEN UTILIZED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSES, T HE ASSESSEE HAS FAILED TO SUBMIT ANY DOCUMENTARY EVIDENCE TO PROVE THIS FACT BEFORE THE AO. AS PER THE PROVISIONS OF SECTION 36(1)(III) , THE ONUS IS ON THE ASSESSEE TO PROVE THAT THE BORROWED FUNDS ARE UTILI ZED FOR BUSINESS PURPOSES. HOWEVER, IN THE PRESENT CASE, THE ASSESSE E HAS FAILED TO SUBMIT ANY EVIDENCE BEFORE THE AO AND BEFORE ME TO PROVE THIS FACT THAT THE BORROWED FUNDS WERE UTILIZED FOR THE BUSIN ESS PURPOSES ONLY AND NOT FOR ADVANCING INTEREST-FREE LOANS TO THE PA RTNER OF THE FIRM. MOREOVER, THE DECISIONS RELIED ON BY THE AO SUPRA H AS CLEARLY HELD THAT WHEN THE BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF BUSINESS, ONLY THEN IT IS ALLOWABLE AS DEDUCTION U/ S. 36(1)(III). ITA NOS. 4583 & 4935/MUM/2012 ITA NO. 2365& 3490/MUM/2014 M/S. DIAMONDS 'R' US 8 FURTHER, THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF MIR MOHAMMED ALI VS. CIT (38 ITR 413) HAS BEEN CONFIRME D BY THE HONBLE SUPREME COURT REPORTED IN 52 ITR 165 BY HOL DING THAT THE ONUS IS ON THE ASSESSEE TO PROVE THAT THE BORROWED FUNDS WERE UTILIZED FOR BUSINESS PURPOSES ONLY. EVEN THE DECIS IONS RELIED ON BY THE AR OF THE APPELLANT ALSO CONFIRM THIS ISSUE THA T ONUS IS ON THE ASSESSEE TO PROVE THAT THE BORROWED FUNDS WERE UTIL IZED WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES OTHERWISE, THE DE DUCTION U/S. 36(1)(III) IS NOT ALLOWABLE. SECONDLY, THE AR OF TH E APPELLANT HAS SUBMITTED THAT NO INTEREST HAS BEEN DEBITED TO THE P & L A/C. AND ONLY NET INTEREST OF RS. 13,22,79,483/-WAS CREDITED . ON THIS ISSUE OF NETTING OF INTEREST, THE HON'BLE SUPREME COURT IN C ASE OF CIT VS. V.P. GOPINATHAN (248 ITR 449) HAS HELD THAT EARNING OF I NTEREST AND PAYING OF INTEREST ARE TWO DIFFERENT TRANSACTIONS. THE INTEREST RECEIVED BY THE ASSESSEE FROM THE BANK WAS INCOME IN HIS HAN DS. IT COULD STAND DIMINISHED ONLY IF THERE WAS PROVISION IN LAW WHICH PERMITS SUCH DIMINUTION. THERE IS NONE, THEREFORE, THE AMOU NT PAID BY THE ASSESSEE AS INTEREST ON LOAN THAT HE TOOK FROM THE BANK DID NOT REDUCE HIS INCOME BY WAY OF FD PLACED BY HIM IN THE BANK. SIMILARLY, IN CASE OF K.S. SUBBHI & CO. VS. CIT (260 ITR 304) THE HON'BLE MADRAS HIGH COURT HAS HELD THAT INTEREST PAID AND C LAIMED AS DEDUCTION IN COMPUTATION OF PROFIT AND GAIN OF BUSI NESS CANNOT BE SET- OFF AGAINST INTEREST RECEIVED AND COMPUTED UNDER TH E INCOME FROM OTHER SOURCES. IN VIEW OF THESE CIRCUMSTANCES, THE SECOND ARGUMENT OF THE APPELLANT THAT NET INTEREST HAS BEEN CREDITED T O THE P & L A/C. AND NOT INTEREST PAID EXPENDITURE HAS BEEN DEBITED IS A LSO NOT ACCEPTABLE BECAUSE NETTING OF INTEREST IS NOT ALLOWABLE. IN VI EW OF THESE FACTS AND DECISIONS OF HONBLE COURTS, IT IS HELD THAT THE AS SESSEE HAS FAILED TO PROVE WITH ANY DOCUMENTARY EVIDENCE BEFORE THE AO A ND BEFORE ME THAT THE BORROWED FUNDS WERE UTILIZED WHOLLY AND EX CLUSIVELY FOR BUSINESS PURPOSES. THEREFORE, THE DISALLOWANCE MADE PROPORTIONATELY OF RS.9,84,36,555/- IS UPHELD AND THE GROUND OF APP EAL IS DISMISSED. 8. BEFORE US THE LEARNED A.R. REITERATED THE SUBMISSIO NS MADE BEFORE THE CIT(A) AS WELL AS HE SUBMITTED BEFORE US A CHAR T SHOWING THE DAILY DEBIT AND CREDIT BALANCES OF SHRI NIRAV MODI AND ON THE BASIS OF THE DEBIT AND CREDIT BALANCES OUTSTANDING HE HAS COMPUTED INT EREST ON FLUCTUATING BALANCES ON DAILY BASIS @7%. ON THE BASIS OF THIS C ALCULATION, WE NOTED THAT THE INTEREST RECEIVABLE BY THE ASSESSEE COME T O ` 43,46,101/- WHILE THE INTEREST PAYABLE COMES TO ` 1,54,81,052/- AND ON THAT BASIS HE CONTENDED THAT NO ADDITION SHOULD BE MADE IN THE CASE OF THE ASSESSEE. HE ALSO DRAWN OUR ATTENTION TOWARDS THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT AS WELL AS THE SCHEDULE THERETO APPEARING AT PAGES 58, 59, 60 AND 61 OF THE PAPER BOOK. ITA NOS. 4583 & 4935/MUM/2012 ITA NO. 2365& 3490/MUM/2014 M/S. DIAMONDS 'R' US 9 9. THE LEARNED D.R., ON THE OTHER HAND, RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 10. AFTER CAREFULLY CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES AND MATERIAL AVAILABLE ON RECORD, THE AO IS DIRECTED TO COMPUTE THE DISALLOWANCE, IF ANY, AFTER CONSIDERING THE DAILY F LUCTUATING BALANCES OUTSTANDING AND AFTER DEDUCTING THEREFROM THE CAPIT AL BALANCE OF THE PARTNERS AVAILABLE WITH THE FIRM AS ON 01.04.2008 A ND CALCULATING SUCH INTEREST BY APPLYING THE RATE OF INTEREST AT WHICH THE ASSESSEE HAD BORROWED FUNDS. THE ASSESSEE IS DIRECTED TO FURNISH ALL THE NECESSARY DOCUMENTS ON WHICH HE MAY RELY BEFORE THE AO. THUS, THIS GROUND IS STATISTICALLY ALLOWED IN BOTH THE ASSESSMENT YEARS EXCEPT THAT WHILE COMPUTING DISALLOWANCE IN A.Y. 2010-11 HE HAS TO TA KE THE PARTNERS OPENING BALANCE FOR THE PURPOSE OF COMPUTATION OF D ISALLOWANCE AS O 01.04.2009. 11. IN THE RESULT, BOTH THE APPEALS FILED BY THE REVENU E STAND DISMISSED WHILE BOTH THE APPEALS FILED BY THE ASSESSEE ARE ST ATISTICALLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH NOVEMBER, 2017. SD/ - SD/ - (AMARJIT SINGH) (P.K. BANSAL) JUDICIAL MEMBER VICE PRESIDENT MUMBAI, DATED: 17 TH NOVEMBER, 2017 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) -41, MUMBAI 4. THE CIT - CENTAL -III, MUMBAI 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.