Devi Construction Company, Pune V. Deputy Commissioner of Income-tax, Circle - 2, Pune

ITA 2405/PUN/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 9155 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 13-10-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: EMANATES FROM DATED PASSED
• Keywords: Bogus purchase; Capital asset; Business income; Commercial expediency; Reason to believe; Reassessment proceedings
• Section: 40(b); 201; 13; 153; 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE VIRTUAL COURT BEFORE SH RI R.S. SYAL, VICE PRESIDENT AND SH RI PARTHA SARATHI CHAUDHURY , J UDICIAL MEMBER I TA NO. 2405/PUN/2017 / ASSESSMENT YEAR : 201 1 - 12 DEVI CONSTRUCTION COMPA NY, 1161/10, DEVI NIWAS, SHIVAJI NAGAR, PUNE 411 005 PAN : AAAFD8922A VS. DCIT, CIRCLE - 2, PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : TH IS APPEAL BY THE ASSESSEE EMANATES FROM THE ORDER DATED 25.07.2017 PASSED BY THE CIT (A) - 2, PUNE, IN RELATION TO THE ASSESSMENT YEAR 201 1 - 12. 2. THE FIRST ISSUE , ON MERITS , IN THIS CASE IS AGAINST THE CONFIRMATION OF A DDITION OF RS.27,16,280/ - TOWARDS HAWALA PURCHASES MADE BY THE ASSESSEE FROM M/S. PARSHWA TRADING COMPANY. A SSESSEE BY SHRI KISHOR PHADKE RE VENUE BY SHRI MAHADEVAN A.M. KRISHNAN & SHRI DEEPAK GARG DATE OF HEARING 0 6 - 0 8 - 2020 DATE OF PR ONOUNCEMENT 07 - 0 8 - 2020 ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 2 3. FACTS ANENT TO THIS ISSUE ARE THAT THE ASSESSING OFFICER (AO) OBTAINED SOME INFORMATION FROM THE SALES TAX DEPARTMENT INDICATING THAT THE ASSESSEE WAS ONE OF THE BENEFICIARIES OF TRANSACTIONS SHOWN BY SOME HAWALA OPERATORS. THE ASSESSEE HAD RECORDED PURCHASES AMOUNTING TO RS.27,16,280/ - FROM M/S PARSHWA TRADING COMPANY , WHICH WAS ONE OF SUCH HAWALA OPERATOR S . ON THIS BASIS, A NOTICE U/S.148 WAS IS SUED. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 147 , THE AO CONFRONTED THE ASSESSEE WITH THE DETAILS OBTAINED QUA THE H AWALA TRANSACTIONS INDICATING BOGUS PURCHASES OF RS.27,16,280/ - . THE ASSESSEE TRIED TO EXPLAIN THE GENUINENESS OF THE TRANSACTIONS BUT WITHOUT SUCCESS FOR THE REASONS INDICATED IN THE ASSESSMENT ORDER. THIS LED TO D ISALLOWANCE OF RS.27,16,280/ - . THE LD. CIT(A) AFFIRMED THE ASSESSMENT ORDER ON THIS POINT. 4 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. THE LD. AR DID NOT SERIOUSLY PRESS THE GROUND OF GENUINENESS OF PURCHASES, BUT INSISTED THAT EVEN IF THE PURCHASES WERE FROM HAWALA OPERATORS, STILL ONLY THE EXCESS GROSS PROFIT ELEMENT OUGHT TO HAVE BEEN ADDED INSTEAD OF FULL AMOUNT OF PURCHA SE. IT IS SEEN THAT THE ISSUE OF BOGUS PURCHASES C A ME UP FOR ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 3 CONSIDERATION BEFORE THE HONBLE BOMBAY HIGH COURT IN PR.CIT VS. MOHOMMAD HAJI ADAM & CO. VIDE ITS JUDGMENT DATED 11 - 02 - 2019 IN ITA NO.1004 OF 2016 AND OTHERS, THE HONBLE JURISDICTIONAL HIGH C OURT HAS HELD THAT NO AD HOC ADDITION FOR BOGUS PURCHASES CAN BE MADE. IT LAID DOWN THAT THE ADDITION SHOULD BE MADE TO THE EXTENT OF DIFFERENCE BETWEEN THE GROSS PROFIT RATE ON GENUINE PURCHASES AND GROSS PROFIT RATE ON HAWALA PURCHASES. SUCH CASE SPECI FIC DETAILS WE RE NOT READILY AVAILABLE EITHER WITH THE LD. AR OR THE LD. DR FOR FACILITATING THE CALCULATION OF GROSS PROFIT RATE OF GENUINE AND HAWALA PURCHASES. UNDER THESE CIRCUMSTANCES, WE SET - ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO FOR APPLYING THE RATIO LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE ABOVE NOTED CASE AND RECOMPUTE THE AMOUNT OF ADDITIONS, IF ANY, AFTER ALLOWING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. SIMILAR VIEW HAS BEEN TAKEN BY T HE PUNE BENCHES OF THE TRIBUNAL VIDE ITS ORDER DATED 26.09.2019 IN A BUNCH OF APPEALS LED BY DINESH RATHI VS. DCIT IN ITA NO.975/PUN/2017 . ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 4 5 . GROUND NO.4 IS AGAINST THE SUSTENANCE OF DISALLOWANCE AT RS.97,008/ - OUT OF THE ADDITION MADE BY THE AO ON ACCOUNT OF VEHICLE AND TELEPHONE EXPENSES. 6 . THE FACTS APROPOS THIS ISSUE ARE THAT DURING THE COURSE OF PROCEEDINGS U/S 147 OF THE INCOME - TAX ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT) , THE AO OBSERVED THAT THE ASSESSEE HAD CLA IMED TELEPHONE AND VEHICLE EXPE NSES AT RS.6,44,245/ - , THE ASSESSEE COULD NOT PROVE THAT SUCH EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. CONSIDERING THE FACT THAT SOME PERSONAL USE WAS INVOLVED , THE AO MADE DISALLOWANCE AT 20% OF EXPENSES UNDER BOTH THE HE ADS , WHICH AMOUNT CAME A T RS.1,94,016/ - . THE LD. CIT(A) REDUCED THE RATE OF DISALLOWANCE FROM 20% TO 10% , THEREBY BRINGING DOWN THE AMOUNT OF ADDITION TO RS.97,008/ - . THE ASSESSEE IS AGGRIEVED BY THE CONFIRMATION OF ADDITION TO THIS EXTENT. 7 . WE HAVE HE ARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. THE LD. AR TOOK A PRELIMINARY OBJECTION ASSAILING THE MAKING OF SUCH ADDITION IN PROCEEDINGS U/S.147 OF THE ACT . IT WAS CONTENDED THAT NO FRESH MATERIAL QUA THE ABOVE ADDITION CA ME TO THE NOTICE OF THE AO IN THE PROCEEDINGS U/S ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 5 147 AND HENCE HE COULD NOT HAVE MADE THIS ADDITION ON THE BASIS OF ROVING ENQUIRIES IN THE REASSESSMENT PROCEEDINGS . HE HARPED ON THE WORDS `WHICH COMES TO HIS NOTICE SUBSEQUENTLY AS EMPLOYED IN SECTION 14 7 FOR BOLSTERING HIS SUBMISSION . THIS WAS COUNTERED BY THE LD. DR. 8 . RELEVANT PART OF SECTION 147 OF THE ACT PROVIDES THAT : ` IF THE ASSESSING OFFICER HAS REASON TO BELIEVE THAT ANY INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR ANY ASSESSMENT YEAR, HE MAY, SUBJECT TO THE PROVISIONS OF SECTIONS 148 TO 153 , ASSESS OR REASSES S SUCH INCOME AND ALSO ANY OTHER INCOME CHARGEABLE TO TAX WHICH HAS ESCAPED ASSESSMENT AND WHICH COMES TO HIS NOTICE SUBSEQUENTLY IN THE COURSE OF THE PROCEEDINGS UNDER THIS SECTION . THIS PROVISION PRIMARILY REFERS TO TWO COMPONENTS OF INCOME. THE FIRS T COMPONENT DEALS WITH THE TRIGGERING OF THE JURISDICTION OF THE AO AND FORMS THE BASIS FOR INITIATION OF ASSESSMENT OR REASSESSMENT U/S 147 , BEING THE OUTCOME OF THE AO HAVING REASON TO BELIEVE ABOUT A SPECIFIC INCOME CHARGEABLE TO TAX ESCAPING ASSESSMENT . THE SECOND COMPONENT , STARTS WITH THE WORDS `AND ALSO ANY OTHER INCOME CHARGEABLE TO TAX WHICH HAS ESCAPED ASSESSMENT AND WHICH COMES TO THE NOTICE OF THE AO SUBSEQUENTLY ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 6 IN THE COURSE OF THE PROCEEDINGS UNDER THIS SECTION . THIS LATTER COMPONENT IS NATU RALLY DE HORS THE SUBJECT MATTER OF INITIATION OF REASSESSMENT. AN INCOME IS SAID TO COME TO THE NOTICE OF THE AO WHEN HE FINDS FOR THE FIRST TIME DURING THE COURS E OF PROCEEDINGS U/S 147 THAT SUCH INCOME ESCAPED EARLIER ASSESSMENT . WHEREAS THE FIRST COMPO NENT MUST NEC ESSARILY SATISFY THE RELEVANT JURISDICTIONAL CONDITIONS OF FORMATION OF VALID REASONS TO BELIEVE BY THE AO, THE RE IS NO SUCH REQUIREMENT FOR THE SECOND COMPONENT TO PASS SUCH TESTS. ONCE AN ASSESSMENT IS VALIDLY REOPENED, THE AO IS FREE TO ASS ESS INCOME OF THE SECOND COMPONENT WHICH COMES TO HIS NOTICE IN THE COURSE OF THE PROCEEDINGS U/S 147. 9. VIEWED IN THE LIGHT OF THE ABOVE DISCUSSION, IT IS SEEN THAT RE - ASSESSMENT IN THIS CASE WAS INITIATED ON THE GROUND OF BOGUS PURCHASES AND THE ADDI TION ON THAT SCORE HAS BEEN SUSTAINED HEREIN ABOVE WITH A DI RECTION TO THE AO F O R RECOMPUT ING THE SAME IN ACCORDANCE WITH THE LAW LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN PR.CIT VS. MOHOMMAD HAJI ADAM & CO. (SUPRA). ONCE THE RE - ASSESSMENT PROCEEDING S ARE HELD TO BE VALIDLY INITIATED , WE FAIL TO FIND ANY ECLIPSE ON THE POWERS OF THE AO IN MAK ING ADDITION TOWARDS ANY OTHER INCOME THAT ESCAPED EARLIER ASSESSMENT ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 7 AND CAME TO HIS NOTICE IN THE COURSE OF THE ASSESSMENT PROCEEDINGS U/S 147 . 10. THE L D. AR HARPED ON THE EXPRESSION COMES TO HIS NOTICE SUBSEQUENTLY TO BOLSTER HIS SUBMISSION THAT DISALLOWANCE OF EXPENSES CANNOT BE CONSIDERED AS INCOME ESCAPING ASSESSMENT IN THE ORIGINAL ROUND AND COMING TO THE NOTICE OF THE AO SUBSEQUENTLY. IN OUR OPIN ION, T HE EXPRESSION ` COMING TO THE NOTICE OF THE AO DOES NOT MEAN THAT T HE AO, ON FINDING SOME FRESH ESCAPED INCOME DURING THE COURSE OF REASSESSMENT PROCEEDINGS , SHOULD QUIETLY MAKE THE ADDITION WITHOUT CONFRONTING IT TO THE ASSESSEE. THE CORRECT SEQUEN CE OF EVENTS FOR TAXING THE INCOME OF THE NATURE OF THE SECOND COMPONENT IS THAT WHEN SOME EX FACIE INCOME CHARGEABLE TO TAX, WHICH EARLIER ESCAPED ASSESSMENT, COMES TO THE NOTICE OF THE AO DURING THE COURSE OF PROCEEDINGS U/S 147 , HE SHOULD CONFRONT THE A SSESSEE WITH HIS POINT OF VIEW AND SEEK COMMENTS BEFORE MAKING THE ADDITION, IF WARRANTED, AFTER MAKING FURTHER ENQUIRY. THERE IS A PALPABLE DIFFERENCE IN TWO SITUATIONS, VIZ., ONE, WHERE SOME EX FACIE ESCAPED INCOME COMES TO THE NOTICE OF THE AO AND HE MA KES ENQUIRY BEFORE MAKING THE ADDITION AND TWO, WHERE ENQUIRY IS MADE BEFORE SOME EX FACIE ESCAPED INCOME ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 8 COMES TO THE NOTICE OF THE AO . T O PUT THE SECOND SITUATION SIMPLY, THE ENQUIRY ITSELF RESULTS IN DIGGING OUT THE ESCAPED INCOME COMING TO THE NOTICE O F THE AO IN THE PROCEEDINGS U/S 147. WHAT IS PROHIBITED U/S 147 IS THE SECOND SITUATION, NAMELY, THE ENQUIRY PRECEDING THE ESCAPED INCOME COMING TO THE NOTICE OF THE AO AND NOT VICE - VERSA . 11 . ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT TH E ASSESSEE CLAIMED VEHICLE AND TELEPHONE EXPENSES IN ENTIRETY WITHOUT OFFERING ANY SUO MOTU DISALLOWANCE ON ACCOUNT OF PERSONAL USE BY THE PARTNERS, MORE SO , WHEN THE VEHICLES AND TELEPHONE WERE ALSO ADMITTEDLY USED FOR NON - BUSINESS PURPOSE AS THE ASSESSEE HAD NOT MAINTAINED ANY LOG BOOKS ETC. TO SHOW THEIR EXCLUSIVE USER FOR BUSINESS PURPOSE . NON - OFFERING OF SUCH DISALLOWANCE ON ACCOUNT OF PERSONAL USE CAME TO THE NOTICE OF THE AO DURING THE COURSE OF PROCEEDINGS U/S 147 OF THE ACT. ONCE THE POSITION WA S SUCH, WE FIND NO HESITATION IN HOLDING THAT THE TEST OF SUCH ESCAPED INCOME `COMING TO THE NOTICE OF THE AO DURING THE COURSE OF PROCEEDINGS U/S 147 , GOT FULLY SATISFIED INASMUCH AS THE DISALLOWANCE OF THE INSTANT EXPENSES DULY ANSWER ED THE DESCRIPTION OF ANY OTHER INCOME CHARGEABLE TO TAX WHICH HAS ESCAPED ASSESSMENT AND WHICH ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 9 COMES TO HIS NOTICE SUBSEQUENTLY, IN THE COURSE OF PROCEEDINGS IN THIS SECTION. EX CONSEQUENTI , THE SUBMISSION OF THE LD. AR IN THIS REGARD IS JETTISONED. 12 . COMING TO THE MERI TS OF THE ADDITION, IT IS SEEN THAT THE ASSESSEE COULD NOT ADDUCE PROPER EVIDENCE IN SUPPORT OF VEHICLE AND TELEPHONE E XPENSES HAV ING BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS INASMUCH AS NO LOG BOOK S FOR V EHICLE ETC ., WERE PRODUCED DESPITE THE AOS SPECIFIC REQUISITION. CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES PREVAILING IN THE INSTANT CASE, WE ARE SATISFIED THAT SUSTENANCE OF DISALLOWANCE AT 10% OF THE EXPENSES IS REASONABLE AND DOES NOT REQUIRE ANY INTERFERENCE. 13 . T HE NEXT ISSUE RAISED IN THIS APPEAL IS AGAINST THE SUSTENANCE OF DISALLOWANCE OF RS.1,97,430/ - MADE BY THE AO ON ACCOUNT OF MEMBERSHIP AND SUBSCRIPTION FEES. 14 . SUCCINCTLY, THE FACTS OF THIS ISSUE ARE THAT THE ASSESSE E DEBITED RS.1 , 97 , 430 / - TOWARDS M EM BERS HIP FEES AND S UBSCRIPTION EXPENSES . ON BEING CALLED UPON TO FURNISH THE DETAILS OF SUCH EXPENSES, THE ASSESSEE SUBMITTED THAT THESE EXPENSES PERTAIN ED TO MEMBERSHIP FEES PAID TO CLUBS WHERE PARTNERS WERE MEMBERS. ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 10 SINCE SUCH EXPENSES , IN THE OPINION O F THE AO, WERE INCURRED FOR THE PER SONAL ENJOYMENT BY THE PARTNERS, HE D ISALLOWED THE ENTIRE AMOUNT. DURING THE F IRST A PPELLATE PROCEEDINGS, THE ASSESSEE SUBMITTED THAT A SUM OF RS.1,37,875/ - WAS TOWARDS SUBSCRIPTION FEES PAID TO TIMES B USINESS SOLUTIONS L TD. TOWARDS INTERNET S ERVICES O F M AGICBRICKS.COM , WHICH WAS FOR BUSINESS PURPOSE. NOT CONVINCED, THE LD. CIT(A) ECHOED THE ASSESSMENT ORDER ON THIS POINT. 15 . HAVING HEARD BOTH THE SIDES AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD, IT IS SEEN THAT TH E ASSESSEE IS ENGAGED IN THE R EAL E STATE SECTOR. IN SUCH CIRCUMSTANCES, S UBSCRIPTION TO M AGICBRICKS.COM IS OBVIOUSLY FOR THE ADVANCEMENT OF THE BUSINESS PURPOSE. A SUM OF RS.1,37,875/ - INCLUDED BY THE ASSESSEE IN THE OVERALL EXPENDITURE OF RS.1,97,430/ - U NDER THE HEAD S UBSCRIPTION FEES IS HELD AS DEDUCTIBLE. AS REGARDS THE REMAINING AMOUNT, THE ASSESSEE COULD NOT SUBSTANTIATE THE CLAIM OF SUCH EXPENDITURE PASSING THE TEST OF COMMERCIAL EXPEDIENCY AND HAVING BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PU RPOSE OF BUSINESS. T HE FINDING OF THE LD. CIT(A) IS ERGO AFFIRMED PRO TANTO AND THE DISALLOWANCE IS SUSTAINED AT RS.59,555/ - . ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 11 16 . THE ONLY OTHER ISSUE ON MERITS WHICH IS INVOLVED IN THIS APPEAL IS AGAINST THE CONFIRMATION OF ADDITION OF RS.31,54,535/ - MAD E BY THE AO U/S. 36(1)(III) OF THE ACT. 17 . BRIEFLY STATED, THE FACTS OF THIS GROUND ARE THAT THE AO NOTICED THAT OUT OF TOTAL INVESTMENTS O F RS.41 CRORE RECORDED IN THE BOOKS OF ASSESSEE, INVESTMENTS TO THE EXTENT OF RS.6.74 CRORE WERE IN P LOTS/LANDS. AS THE ASSESSEE HAD INCURRED HUGE INTEREST EXPENDITURE, THE AO DID NOT ALLOW INTEREST U/S.36(1)(III) TO THE EXTENT OF RS.31,54,535/ - IN RELATION TO SIX INVESTMENTS MADE BY THE ASSESSEE , WHICH HAVE BEEN TABULATED AT PAGE 18 OF THE ASSESSMENT ORDER. THE CONTE NTION OF THE ASSESSEE THAT IT WAS HAVING ENOUGH OWN FUNDS TO INVEST IN THESE PROPERTIES AND HENCE NO DISALLOWANCE WAS CALLED FOR, DID NOT FIND FAVOUR WITH THE AO. H E FOUND THAT THE ASSESSEE HAD TAKEN INTEREST BEARING LOAN OF RS.10.83 CRORE AND HAD ALSO PAI D INTEREST ON CAPITAL CONTRIBUTION OF PARTNERS. AS THE ASSESSEE CLAIMED DEDUCTION FOR INTEREST PAID TO PARTNERS AT RS.1.04 CRORE AND TO OTHERS AT RS.83.92 LAKH, THE AO HELD THAT INTEREST RELATABLE TO INVESTMENTS OF RS.6.74 CRORE WAS NOT DEDUCTIBLE, WHICH A MOUNT WAS COMPUTED AT RS.31,54,535/ - . THE LD. CIT(A) COUNTENANCED THE ASSESSMENT ORDER ON THIS COUNT. ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 12 18 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH TH E RELEVANT MATERIAL ON RECORD. SECTION 36(1)(III) PROVIDES FOR DEDUCTION OF : `THE AMOUNT OF T HE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF BUSINESS OR PROFESSION. IT IS THUS OVERT THAT SO LONG AS THE ` BUSINESS PURPOSE TEST IS SATISFIED, THERE CAN BE NO DISALLOWANCE OF INTEREST. `BUSINESS PURPOSE DOES NOT ENCOMPASS ONLY THE REVENUE FIELD, BUT ALSO COVERS THE CAPITAL SPHERE . IF A LOAN IS TAKEN AND SOME CAPITAL ASSET, SAY MACHINERY, IS PURCHASED, INTEREST ON SUCH A LOAN IS ALSO DEDUCTIBLE IN THE SAME WAY AS A LOAN IS TAKEN FOR SATISFYING WORKING CAPITAL REQUIREMENTS . IT IS FOR THE RAISON DETRE THAT AS SUCH LOAN FOR PURCHASING CAPITAL ASSET SATISFIES THE REQUIREMENT OF BUSINESS PURPOSE. 19 . THE ASSESSEE UNDER CONSIDERATION IS ENGAGED IN R EAL E STATE SECTOR. THUS, ANY INVESTMENT MADE BY IT FOR PURCHASE OF LAND OR BUILDING, W HETHER AS STOCK IN TRADE OR AS A CAPITAL ASSET FOR ITS BUSINESS PURPOSE, FALL S WITHIN THE REALM OF `BUSINESS PURPOSE. I NTEREST PAID ON THE CAPITAL BORROWED FOR SUCH INVESTMENT, SATISFIES THE TEST OF SECTION 36(1)(III) AS IT INVOLVES PAYMENT OF INTEREST; S UCH INTEREST BEING IN RESPECT OF CAPITAL BORROWED ; AND SUCH CAPITAL HAVING BEING USED FOR THE PURPOSE OF BUSINESS. ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 13 20 . REVERTING TO THE FACTUAL SCENARIO, WE FIND FROM THE TABLE GIVEN ON P AGE 18 OF THE ASSESSMENT ORDER THAT THERE IS REFERENCE TO SIX TYPES OF INVESTMENTS MADE BY THE ASSESSEE , WHICH HAVE RESULTED IN NOT ALLOWING INTEREST U/S.36(1)(III) OF THE ACT . THERE IS NO DISCUSSION ABOUT THE PURPOSE FOR WHICH THESE PROPERTIES WERE ACQUIRED. ON A POINTED QUERY ABOUT THE PURPOSE OF SUCH INVESTMENTS , THE LD. AR STATED SOME OF THESE PROPERTIES WERE PURCHASED FOR USE IN THE BUSINESS, WHILE OTHERS WE RE MEANT FOR LET OUT, INCOME FROM WHICH IS CHARGEABLE TO TAX UNDER THE HEAD I NCOME FROM HOUSE PROPERTY. DUE TO PAUCITY OF DETAILS, H E WAS UNABLE TO CLASSIFY AS TO WHICH OF THESE SIX PROPERTIES WERE MEANT FOR EARNING `B USINESS INCOME OR I NCOME FROM HOUSE PROPERTY. IN VIEW OF THE FOREGOING DISCUSSION, THERE CAN BE NO DOUBT THAT THE PROVISIONS OF SECTION 36(1)(III) WILL APPLY TO ALLOW INTEREST IN RESPECT OF THE INVESTMENTS MADE BY THE ASSESSEE FOR EARNING `BUSINESS INCOME. WE, THEREFORE, SET - ASIDE THE IMPUGNED ORDER ON THIS SCORE AND DIRECT THE AO TO VERIFY THE SIX INVESTMENTS , ONE BY ONE , FOR ASCERTAINING WHICH OF THESE WERE MADE FOR EARNING B USINESS INCOME . THERE CAN BE NO QUESTION OF DISALLOWANCE OF INTEREST IN RESPECT OF SUCH INVESTMENTS. ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 14 21. HOWEVER, ANY INTEREST RELATABLE TO INVESTMENTS MEANT FOR EARNING INCOME UNDER THE HEAD `INCOME FROM HOUSE PROPERTY CANNOT BE ALLOWED AS DEDUCTION UNDER THE HEAD ` PROFITS AND GAINS FROM BUSINESS OR PROFESSION AS THE `BUSINESS PURPOSE IS WANTING . THE LD. AR STRENUOUSLY ARGUED THAT THE ASSESSEES CAPITAL WAS MUCH MORE THAN THE AMOUNT OF INVESTMENTS AND HENCE NO DISALLOWANCE WAS CALLED FOR . H E R ELIED ON THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM.) FOR CONTENDING THAT IF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE ARE SUFFICIENT TO MEET ITS INV ESTMENT AND AT THE SAME TIME, A LOAN IS RAISED, IT CAN BE SAFELY PRESUMED THAT THE INVESTMENTS WERE FROM INTEREST FREE FUNDS. 2 2 . THERE IS NO QUARREL ON THE PROPOSITION ADVANCED BY THE LD. AR AS THE SAME IS DULY SUPPORTED BY THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT. THE MOOT QUESTION WHICH IS REQ UIRED TO BE ANSWERED HERE IS AS TO WHETHER ANY INTEREST BEARING FUNDS WERE AVAILABLE WITH THE ASSESSEE WHICH COULD BE CONSTRUED TO HAVE BEEN UTILISED FOR MAKING SUCH INVESTMENTS FOR NON - BUSINESS PURPOSE . THE LD. AR ACCENTUATED ON THE CAPITAL CONTRIBUTION BY THE PARTNERS FOR FORTIFYING HIS POINT OF VIEW OF THE AVAILABILITY OF INTEREST FREE ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 15 FUNDS . AU CONTRAIRE, THE AO HAS CATEGORICALLY NOTED THAT THE ASSESSEE PAID INTEREST OF RS.1.04 CRORE ON PARTNERS CAPITAL BALANCES . ONCE INTEREST GETS PAID ON CAPITAL OF PARTNERS, SUCH CAPITAL CEASES TO BE INTEREST FREE FUND . THE LD. AR PITCHED ANOTHER FACET OF THE CONTENTION THAT INTEREST TO PARTNERS ON CAPITAL CLAIMED U/S.40(B) IS NOT THE SAME AS INTEREST DEFINED U/S.2(28A) AND HENCE, INTEREST TO PARTNERS SHOULD NOT BE CONSIDERED FOR THE PURPOSE . THIS CONTENTION IS AGAIN UNTENABLE. THE LOGIC BEHIND RELIANCE UTILITIES (SUPRA) IS THE PRESUMPTION OF UTILIZATION OF INTEREST FREE FUNDS FOR MAKING INVESTMENTS FOR NON - BUSINESS PURPOSE . FOR APPLICATION OF THIS PROPOSITION, IT IS SINE QUA NON THAT THERE SHOULD BE SOME INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE, WHETHER IN THE SHAPE OF CAPITAL OR BORROWINGS, WHICH CAN THEN BE PRESUMED TO HAVE BEEN UTILIZ ED FIRST LY TOWARDS INVESTMENTS. IF, ON THE OTHER HAND, THERE ARE NO INT EREST FREE FUNDS, THE PRESUMPTION FAILS. ONCE THE ASSESSEE PA ID INTEREST ON CAPITAL TO PARTNERS, T HE CAPITAL NO MORE REMAIN ED INTEREST FREE FUND, NOTWITHSTANDING THE DEFINITION OF INTEREST U/S 2(28A) READ IN JUXTAPOSITION TO SECTION 40(B) OF THE ACT. IT IS FURTHER NOTED THAT S ECTION 36(1)(III) TALKS OF ALLOWING DEDUCTION TOWARDS INTEREST ON CAPITAL BORROWED . THE TERM `CAPITAL HERE ALSO ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 16 REFERS TO THE AMOUNT BORROWED AND NOT THE CAPITAL IN STRICT SENSE AS CONTRIBUTED BY PARTNERS. C APITAL CAN NEVER BE BORR OWED AS IT IS ALWAYS CONTRIBUTED IN CONTRAST TO A LOAN WHICH IS BORROWED AND NOT CONTRIBUTED. 23. IN VIEW OF THE ABOVE DISCUSSION, IT BECOMES EXPLICITLY CLEAR THAT THE ASSESSEE DID NOT HAVE ANY INTEREST FREE FUNDS AVAILABLE AT ITS DISPOSAL WHICH COULD H AVE BEEN USED FOR MAKING INVESTMENTS FOR NON - BUSINESS PURPOSE . TO THAT EXTENT, THE DISALLOWANCE OF INTEREST PERTAINING TO THE INVESTMENTS MAD E IN RELATION TO PROPERTIES MEANT FOR NON - BUSINESS PURPOSE , IS RIGHTLY CALLED FOR. 24 . NO ARGUMENT WAS ADVANCED I N SUPPORT OF GROUND NO.2 CHALLENGING THE INITIATION OF RE - ASSESSMENT PROCEEDINGS EXCEPT THE PART CONCERNING WITH THE DISALLOWANCE OF CERTAIN EXPENSES , WHICH ASPECT HAS BEEN DEALT WITH AND REJECTED IN AN EARLIER PARA. THIS GROUND , THEREFORE, FAILS. 25 . IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 07 TH AUGUST , 2020 . SD/ - SD/ - ( PARTHA SARATHI CHAUDHURY ) ( R.S.SYAL ) JUDICIAL MEMBER VI CE PRESIDENT PUNE ; DATED : 07 TH AUGUST , 2020 ITA NO . 2405 /PUN/ 2017 DEVI CONSTRUCTION COMPANY 17 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. 4. THE CIT(A) - 2, PUNE THE PR. CIT - 1 , PUNE 5 . , , / DR B , ITAT, PUNE 6 . / GUARD FILE / BY ORDER, / / TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 0 6 - 08 - 2020 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 06 - 08 - 2020 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DR AFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATC H OF ORDER. *