The ACIT, Circle-7, Ahmedabad V. Shri Pradip N. Desai, Ahmedabad

ITA 2488/AHD/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9122 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 27-12-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 01-07-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R K DHANESTA
• Assessee Lawyers: K P SHAH
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL : A BENCH : AHMEDABAD (BEFORE HONBLE SHRI T.K. SHARMA, J.M. & HON' BLE SHRI A.N. PAHUJA, A.M. ) I.T.A. NO. 2488/AHD./2008 ASSESSMENT YEAR : 2005-2006 ASSISTANT COMMISSIONER OF INCOME TAX, -VS.- SHRI PRADIP N. DESAI, NAVRANGPURA CIRCLE-7, AHMEDABAD (PAN : AAQPD 0142 A) (APPELLANT) (RESP ONDENT) APPELLANT BY : SHRI R.K. DHANESTA, D .R. RESPONDENT BY : SHRI K.P. SHAH, A.R. O R D E R PER SHRI T.K. SHARMA, JUDICIAL MEMBER : THIS APPEAL FILED BY THE REVENUE IS AGAINST THE OR DER DATED 04.04.2008 OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-XI, AHMEDABAD DELETING THE ADDITION MADE OF RS.30,51,000/- ON ACCOUNT OF DISALLOWANCE UNDER SEC TION 14A OF THE INCOME TAX ACT, 1961 FOR THE ASSESSMENT YEAR 2005-06. 2. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE I S AN INDIVIDUAL. FOR THE ASSESSMENT YEAR UNDER APPEAL, HE FILED THE RETURN OF INCOME DECLARI NG TOTAL INCOME OF RS.26,06,934/-. THE ASSESSING OFFICER FRAMED THE ASSESSMENT UNDER SECTI ON 143(30 ON 31.10.2007 AT A TOTAL INCOME OF RS.71,08,699/-. IN THIS ASSESSMENT ORDER, THE AS SESSING OFFICER DISALLOWED, INTER ALIA, RS.30,51,100/- UNDER SECTION 14A OF THE INCOME TAX ACT, 1961. 3. ON APPEAL, BEFORE THE LEARNED COMMISSIONER OF IN COME TAX(APPEALS) THE ASSESSEE MADE THE FOLLOWING SUBMISSIONS :- 'IN ADDITION TO THE STATEMENT OF FACTS SUBMITTED AL ONGWITH THE GROUNDS OF APPEAL I HEREBY FURTHER SUBMIT AS UNDER: THE JT COMMISSIONER OF INCOME TAX HAS ARBITRARILY A ND WITHOUT ANY BASE DISALLOWED U/S 14A THE INTEREST OF RS. 30,51,1 00/- OUT OF INTEREST OF RS.34,75,704/- PAID BY M/S V.B. INVESTMENTS TO SHAR AFI DEPOSITORS WHOSE MONEY WAS GIVEN AS SHARAFI LOAN TO DIFFERENT PARTIES. AS A MATTER OF FACT INTEREST OF RS. 34,75,704/- HAS BEEN INCURRED IN RELATION TO ONLY SHARAFI BUSINESS. 2 ITA NO. 2488-AHD-2008 FROM THE FACTS IT HAS BEEN PROVED THAT SEPARATE PER SONAL BOOKS OF ACCOUNTS HAVE BEEN MAINTAINED FOR THE EXEMPT INCOME AND THE A 0. HAD NOT PROVED THE NEXUS OF INTEREST OF RS. 30,51,100/- WITH EXEMPT INCOME I RELY ON THE FOLLOWING DECISION. WIMCO SEEDLINGS LTD. V. DEPUTY CIT 293 ITR (AT) 216 (DELHI) THE HON'BLE TRIBUNAL HAS HELD AS UNDER ( ON PAGE 21 6 AND 217): 'ONLY EXPENDITURE WHICH HAS BEEN PROVED TO HAVE BEE N INCURRED IN RELATION TO THE EARNING OF TAX FREE INCOME CAN BE D ISALLOWED U/S 14A OF THE INCOME TAX ACT, 1961. THE WORD 'INCURRED' REFER S TO THE FACTUAL SPENDING OF THE EXPENDITURE IN RELATION TO THE EXEM PT INCOME AND DOES NOT REFER TO A DEEMED OR ASSUMED SPENDING FOR THE P URPOSE. NOT ONLY THE INCURRING OF THE EXPENDITURE BUT ALSO ITS RELATION TO THE EXEMPT INCOME MUST BE CLEAR AND MUST BE CAPABLE OF BEING ASCERTAINED ON THE FACE OF IT WITHOUT INVOLVING ANY FURTHER MEN TAL EXERCISE THE BURDEN IS ON THE A.O. NOT ONLY TO SHOW THAT SOME EX PENDITURE WAS FACTUALLY INCURRED BUT ALSO TO SHOW ITS RELATIONSHI P WITH INCOME EXEMPT FROM TAX.' THE A C.I.T., CIRCLE-7, AHMEDABAD IN HIS LETTER, RE FERRED AS ABOVE AS SUBMITTED AS UNDER :- 'SO FAR AS THE SECOND ISSUE OF ADDITION MADE ON ACC OUNT OF DISALLOWANCE U/S, 14A IS CONCERNED, IT IS STATED THAT THE DISALL OWANCE IS MADE ON THE PROPORTIONATE EXPENDITURE ON ACCOUNT OF INTEREST RE LATABLE TO THE EXEMPTED INCOME WHICH WAS AMOUNTING TO RS. 15,12,71 3/- AS AGAINST INTEREST INCOME OF RS. 17,73,228/-. ASSESSES HAS NE VER TAKEN ANY PLEA THAT THE SEPARATE BOOKS OF ACCOUNTS HAVE BEEN MAINT AINED FOR EXEMPTED INCOME AND HAS ALSO NOT PRODUCED SUCH BOOKS OF ACCO UNTS BEFORE THE A.0. DURING THE COURSE OF ASSESSMENT PROCEEDINGS. F URTHER, THE A.O. IN HIS ORDER AT PARA-1 ON PAGE-6 HAS CLEARLY SHOWN THE RELATION OF SUCH EXEMPTED INCOME WITH THE EXPENDITURE ON INTEREST IN VIEW OF THE ABOVE DISCUSSION AND ON FACTS OF THE CASE IT IS HUMBLY RE QUEST TO CONFIRM THE ADDITION AND REJECT THE ASSESSEE'S PLEA. 4. AFTER CONSIDERING THE AFORESAID SUBMISSIONS, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE ADDITION ON THE GROUND THAT T HE ASSESSING OFFICER HAS NOT PROVED THAT THE ASSESSEE HAD BORROWED LOANS BY PAYING INTEREST ON T HE SAID LOANS TO MAKE INVESTMENTS IN TAX FREE BONDS AND SHARES. THE LEARNED COMMISSIONER OF INCOM E TAX(APPEALS) FURTHER OBSERVED THAT INVESTMENTS MADE BY THE ASSESSEE WERE FROM CAPITAL ACCOUNT OF THE ASSESSEE, WHICH ARE ACCUMULATED PROFITS OF THE ASSESSEE. ON THIS BASIS, HE DELETED THE ADDITION OF RS.30,51,000/- MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE I NCOME TAX ACT, 1961. AGGRIEVED WITH THE 3 ITA NO. 2488-AHD-2008 ORDER OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS ), THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 5. AT THE TIME OF HEARING BEFORE US, ON BEHALF OF R EVENUE SHRI R.K. DHANESTA, LD. D.R. APPEARED AND RELYING ON THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS.- DCIT & ANOTHER REPORTED IN [2010] 328 ITR 81 (BOM.) CONTENDED THAT THE MATTER BE RESTORED TO THE FILE OF ASSESSIN G OFFICER FOR MAKING REASONABLE DISALLOWANCE. 6. ON THE OTHER HAND, SHRI K.P. SHAH, LD. COUNSEL A PPEARING ON BEHALF OF THE ASSESSEE VEHEMENTLY SUPPORTED THE ORDER OF LEARNED COMMISSIO NER OF INCOME TAX(APPEALS). THE LD. COUNSEL OF THE ASSESSEE SUBMITTED AS UNDER :- 1. PRADIP N.DESAI IS ASSESSED TO TAX SINCE LAST MOR E THAN 30 YEARS. 2. INVESTMENTS MADE IN THE EQUITY SHARES, GOVT. SEC URITIES, MUTUAL FUNDS ETC ARE SHOWN IN THE PERSONAL BALANCE SHEET AS ON 3 1/03/2004. THE SAID INVESTMENTS HAVE BEEN MADE BY P.N. DESAI OUT OF HIS PERSONAL WEALTH. 3. DURING THE YEAR NEW INVESTMENTS IN PURCHASE OF E QUITY SHARES OF RS.7,65,408/-, MUTUAL FUNDS OF RS.31,86,995/- AND G OVT. SECURITIES RS.11,00,000/- WERE MADE ONLY FROM HIS INDIVIDUAL W EALTH AND THE PAYMENT OF SUCH INVESTMENTS IS MADE ONLY FROM HIS PERSONAL BANK ACCOUNTS. 4. M/S. V.B. INVESTMENTS WAS A PARTNERSHIP FIRM IN WHICH P,N, DESAI WAS ONE OF THE PARTNER. AS ON 31.03.2004, THE FIRM WAS DISSOLVED AND THE BUSINESS WITH ALL THE ASSETS AND LIABILITIES WAS TA KEN OVER BY SHRI P.N. DESAI I.E. THE ENTIRE BALANCE-SHEET OF THE FIRM HAD BECAM E THE BALANCE-SHEET OF M/S. V.B. INVESTMENTS (PROPRIETOR : P.N. DESAI) 5. AS PER THE BALANCE-SHEET OF M/S. V,B, INVESTMENT S, UNSECURED LOAN OF RS. 297.32 LAKHS REPRESENTS THE ADVANCES MADE TO DIFFER ENT PARTIES. MOREOVER LOAN OF RS.112.73 LAKHS WAS ALSO ADVANCED TO DIFFERENT PARTIES FROM THE CAPITAL OF P.N. DESAI. THUS, TOTAL ADVANCES TO THE PARTIES DURING THE COURSE OF THE BUSINESS IS RS.410.05 LACS. THE PARTIES FROM WHOM UNSECURED LOAN OF RS. 297.32 LAKHS HAD BEEN TAKEN ARE PAID INTEREST OF RS, 34,75,704/- AND THE INTERE ST OF RS. 52,08,932/- IS RECEIVED FROM THE PARTIES TO WHOM LOANS ARE GIVEN. THUS THERE IS DIRECT NEXUS OF PAYMENT OF INTEREST OF RS.34,75,704/- TO S HARAFI BUSINESS ONLY. IN NUTSHELL, THERE IS NO DIVERSION OF FUNDS TO THE PROPRIETOR. ON THE CONTRARY THE CAPITAL OF RS. 112.73 LAKHS OF THE PROPRIETOR P .N.DESAI IS UTILIZED FOR GIVING LOANS DURING THE COURSE OF THE BUSINESS. 6.1. ON THE BASIS OF THE AFORESAID SUBMISSIONS, THE LD. COUNSEL OF THE ASSESSEE ARGUED THAT SINCE THE ASSESSEE HAS NOT INVESTED BORROWED MONEY IN EQUITY SHARES, GOVERNMENT SECURITIES, 4 ITA NO. 2488-AHD-2008 MUTUAL FUNDS, ETC., THEREFORE, THE LEARNED COMMISSI ONER OF INCOME TAX(APPEALS) RIGHTLY DELETED THE ADDITION OF RS.30,51,000/-, WHICH WAS M ADE BY THE ASSESSING OFFICER ON DOUBTS AND SUSPICION. 7. HAVING HEARD BOTH THE SIDES, WE HAVE CAREFULLY G ONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT THE ASSESSEE WA S A PARTNER OF M/S. V.B. INVESTMENTS, A PARTNERSHIP FIRM. ON 31.03.2004, THE SAID FIRM WAS DISSOLVED AND THE BUSINESS WITH ALL THE ASSETS AND LIABILITIES WAS TAKEN OVER BY THE ASSESSEE. AS PER BALANCE-SHEET OF M/S. V.B. INVESTMENTS, UNSECURED LOAN OF RS.297.32 LAKHJS REPRESENTS THE A DVANCES MADE TO DIFFERENT PARTIES. MOREOVER, LOAN OF RS.112.73 LAKHS WAS ALSO ADVANCED TO DIFFER ENT PARTIES FROM THE CAPITAL OF ASSESSEE. THUS THE TOTAL ADVANCES TO THE PARTIES DURING THE COURSE OF THE BUSINESS WERE RS.410.05 LACS. THE UNSECURED LOAN WAS OF RS.297.32 LAKHS, ON WHICH THE ASSESSEE HAS PAID INTEREST AMOUNTING TO RS.34,75,704/-. AS AGAINST THIS, THE ASSESSEE HAS R ECEIVED INTEREST OF RS.52,08,932/- FROM THE PARTIES TO WHOM HE HAS GIVEN LOAN OF RS.34,75,704/- IN HIS SHARAFI BUSINESS. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) IS LEGALLY AND FACTUALLY CORRECT IN DELETING THE DISAL LOWANCE OF RS.30,51,000/-, WHICH WAS MADE BY THE ASSESSING OFFICER BY INVOKING THE PROVISIONS CO NTAINED IN SECTION 14A OF THE INCOME TAX ACT, 1961 ON DOUBTS AND SUSPICION. WE, THEREFORE, I NCLINE TO UPHOLD THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS). 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON 28.12.20 10. SD/- SD/- (A.N. PAHUJA) (T.K. SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 28 / 12 / 2010 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE (2) THE DEPARTMENT. 3) CIT(A.) CONCERNED, (4) CIT CONCERNED, (5) D.R. , ITAT, AHMEDABAD. TRUE COPY BY ORDER DEPUTY REGIS TRAR, ITAT, AHMEDABAD LAHA/SR.P.S.