Shri Jaywant S. Pattani, HUF, Ahmedabad V. The Asstt. Commissioner of Income Tax, Circel-1, Bhavnagar

ITA 2845/AHD/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 8110 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2013-2014
• Appeal Filed On: 28-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Source of fund; Fair market value
• Section: 14A

Judgement Text

, LH LHLH LH IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD OLHE VGEN] YS[KK LNL; OLHE VGEN] YS[KK LNL; OLHE VGEN] YS[KK LNL; OLHE VGEN] YS[KK LNL; , BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ./ I.T.A. NO.2845/AHD/2016 ( / ASSESSMENT YEAR : 2013-14) JAYWANT S. PATTANI HUF, C/O CA MILIND K. MEHTA, 9, PROFESSORS COLONY, NR. VIJAY CROSS ROADS, NAVRANGPURA, AHMEDABAD 380 009 / VS. CIT(A)-6, AHMEDABAD. ./ ./ PAN/GIR NO. : AABHJ 1757 N ( / APPELLANT ) .. ( !' / RESPONDENT ) ./ I.T.A. NO.2846/AHD/2016 ( / ASSESSMENT YEAR : 2013-14) SHASHIKANT B. PATTANI HUF, C/O CA MILIND K. MEHTA, 9, PROFESSORS COLONY, NR. VIJAY CROSS ROADS, NAVRANGPURA, AHMEDABAD 380 009 / VS. ACIT, CIRCLE 1, BHAVNAGAR. ./ ./ PAN/GIR NO. : AANHS 2103 P ( / APPELLANT ) .. ( !' / RESPONDENT ) # / APPELLANT BY : SHRI SURENDRA MODIANI, A.R. !' $ # / RESPONDENT BY : SHRI PRASOON KABRA, SR. D.R. % &' $ () / DATE OF HEARING 31/05/2018 *+,- $ () / DATE OF PRONOUNCEMENT 20/06/2018 ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 2 - . / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEALS HAVE BEEN FILED AT THE INSTAN CE OF THE ASSESSEE AGAINST TWO SEPARATE ORDERS OF THE COMMISSIONER OF INCOME TAX(APPEALS)-6, AHMEDABAD [CIT(A) IN SHORT] VIDE APPEAL NO.(I) CIT(A)-6/247/15-16, (II) CIT(A)-6/246/15-16 DATED 2 7/09/2016 ARISING IN THE ASSESSMENT ORDER PASSED UNDER S.143(3) OF TH E INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') DATED 28/09/2015 & 29/09/2015 RELEVANT TO ASSESSMENT YEAR (AY) 2013-14 . SINCE THE COMMON ISSUE IS ARISING IN THE APPEALS FI LED BY BOTH THE ASSESSEE, THEREFORE, BOTH THE APPEALS ARE HEARD TOG ETHER AND ARE BEING DISPOSED OF BY WAY OF A CONSOLIDATED ORDER FOR THE SAKE OF BREVITY. FIRST, WE TAKE UP ITA 2845/AHD/2016 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AS UNDER:- 1. THE LD. CIT(A)-6, AHMEDABAD ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST ON BORROWINGS TO THE TUNE OF RS.46,481/- 2. THE LD. CIT(A)-6, AHMEDABAD ALSO ERRED IN CONFI RMING DISALLOWANCE OF PROFESSIONAL FEES TO THE TUNE OF RS .3,20,000/-. 3. YOUR APPELLANT CRAVES LEAVE TO ADD TO, ALTER OR DELETE ABOVE GROUNDS OF APPEAL. 3. THE FIRST ISSUE RAISED BY THE ASSESSEE IS THAT L EARNED CIT(A) ERRED IN CONFIRMING THE ADDITION OF INTEREST EXPENSES MAD E BY THE AO FOR RS.46,481/- UNDER THE PROVISION OF SECTION 14A R.W. R. 8D. ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 3 - 4. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IN TH E PRESENT CASE IS HUF AND DERIVING ITS INCOME UNDER THE HEAD CAPITAL GAIN AND INTEREST. THE ASSESSEE IN ITS BALANCE SHEET HAS SHOWN INVESTMENT IN THE MUTUAL FUND, EQUITY SHARES AND PPF AGGREGATING TO RS.52,20,853/- ONLY. THE ASSESSEE SIMULTANEOUSLY HAS CLAIMED INTEREST EXPENSES IN ITS INCOME TAX RETURN. THE AO DURING THE ASSESSMENT PROCEEDINGS OBSERVED T HAT BORROWED FUND HAD BEEN INVESTED IN THE SECURITIES WHICH WOULD GEN ERATE EXEMPT INCOME. THEREFORE, DISALLOWANCE U/S 14A OF THE ACT NEEDS TO BE MADE. HOWEVER, THE ASSESSEE ON BEING CONFRONTED BY THE AO SUBMITTED THAT ITS OWN FUNDS EXCEED THE AMOUNT OF INVESTMENT. THEREFOR E, NO DISALLOWANCE CAN BE MADE UNDER THE PROVISION OF SECTION 14A R.W. R. 8D. HOWEVER, THE AO DISREGARDED THE CONTENTION OF THE A SSESSEE BY OBSERVING THAT IT HAS FAILED TO PROVE THE SOURCE OF FUNDS FOR MAKING THE INVESTMENTS AS DISCUSSED ABOVE. ACCORDINGLY, THE AO WORKED OUT THE DISALLOWANCE OF INTEREST EXPENSES U/S 14A R.W.R. 8D FOR RS.46,481/- AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE AND ADDED TO THE TOTAL INCOM E OF THE ASSESSEE. 5. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL TO LEARN ED CIT(A). THE ASSESSEE BEFORE THE LEARNED CIT(A) SUBMITTED THAT I TS OWN FUNDS EXCEED THE AMOUNT OF INVESTMENTS. THEREFORE, NO DISALLOWAN CE U/S 14A IS WARRANTED GIVEN THE JUDGMENT OF HONBLE GUJARAT HIG H COURT IN THE CASE OF UTI BANK LTD. REPORTED IN 32 TAXMAN.COM 370. HOW EVER, THE LEARNED ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 4 - CIT(A) DISREGARDED THE SUBMISSION OF THE ASSESSEE A ND CONFIRMED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER: 9. I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDE R AND THE SUBMISSION OF THE APPELLANT. IT IS SEEN THAT THE AO HAS WORKED OUT THE DISALLOWANCE OF EXPENDITURE AS PER THE PROVISION OF SECTION 14A. THE APPELLANT HAS RELIED ON VARIOUS CASE LAWS AND THE D ECISION OF GUJARAT HIGH COURT IN THE CASE OF UTI BANK LTD. 32 TAXMAN.C OM 370, HOWEVER, THE FACTS ARE DIFFERENT AND DISTINGUISHABLE AS THE ASSESSEE COULD NOT PROVE BEFORE THE AO THAT HE HAS SUFFICIENT INTEREST FREE FUND FOR MAKING TAX FREE INVESTMENT. IN THE CASE OF UTI BANK THE HO NBLE GUJARAT HIGH COURT HAS NOTED THAT THE ASSESSEE HAD INTEREST FREE FUND OF RS.3404/- CRORES AND TAX FREE INVESTMENT WAS ONLY 589 CRORES THUS THE INTEREST FREE FUND WERE FAR IN EXCESS OF THE INVESTMENT. HOWEVER, IN THE APPEAL UNDER CONSIDERATION THE APPELLANT COULD NOT JUSTIFY THAT THE INTEREST FREE FUND WAS GIVEN OUT OF EXCESS FUND AVAILABLE. SINCE THE A O HAS DISALLOWED EXPENDITURE AS PER RULE 8D THEREFORE THE SAME IS UP HELD. THE GROUND IS DISMISSED. BEING AGGRIEVED BY THE ORDER OF LEARNED CIT(A) REVE NUE IS IN APPEAL BEFORE US. THE LEARNED DR BEFORE US VEHEMENTLY SUPPORTED THE O RDER OF THE AO, WHEREAS, THE LEARNED AR BEFORE US FILED A PAPER BOO K COMPRISING PAGES FROM 1 TO 34 AND REITERATED THE SUBMISSIONS AS MADE BEFORE THE LEARNED CIT(A). 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IT IS AN UNDISPUTED FACT THAT THE OWNED FUNDS OF THE ASSESSEE EXCEED THE AMOUNT OF INVESTMENT AS ON 31 ST MARCH 2013 AS EVIDENT FROM ITS BALANCE SHEET WHICH IS PLACED ON P AGE 12 OF THE PAPER BOOK. THE RELEVANT EXTRACT OF THE BALANCE SHEET IS REPRODUCED AS UNDER: ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 5 - LIABILITIES RS. RS. ASSETS RS. RS. CAPITAL ACCOUNT UNSECURED INTEREST- FREE LOANS: JAYWANT PATTANI FAMILY TRUST JAYWANT S. PATTANI AVNI J. PATTANI MAITRYI J. PATTANI RUPA J. PATTANI 19,50,000 2,60,000 3,50,000 2,50,000 11,50,000 6,59,71,110 39,60,000 FIXED ASSETS SWIFT DESIRE INVESTMENTS EQUITY SHARES MUTUAL FUND UNITS FIXED DEPOSITS IN BANK: FIXED DEPOSITS IN ICICI BANK 3,55,652 30,20,044 5,40,962 33,75,696 3,00,30,000 FROM THE ABOVE, IT IS CLEAR THAT THE OWNED FUNDS OF THE ASSESSEE EXCEED THE AMOUNT OF INVESTMENT. IN SUCH FACTS AND CIRCUMS TANCES, A PRESUMPTION CAN BE DRAWN THAT THE INVESTMENT HAS BE EN MADE OUT OF THE OWNED FUNDS OF THE ASSESSEE. IN HOLDING SO, WE FIND SUPPORT AND GUIDANCE FROM THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN T HE CASE OF RELIANCE UTILITIES AND POWER LTD. REPORTED IN 313 ITR 340 WHEREIN IT WAS HELD AS UNDER:- THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THE N A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE IN TEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE TH IS PRESUMPTION IS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE CIT(A) AND TRIBUNAL SIMILARLY, WE ALSO RELY ON THE JUDGMENT OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS HDFC BANK LTD REPORTED IN 366 ITR 505 (BOM). THE RELEVANT EXTRACT OF THE ORDER IS REPRODU CED BELOW:- WHERE ASSESSEE'S CAPITAL, PROFIT RESERVES, SURPLUS AND CURRENT ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENT IN TAX-FRE E SECURITIES, IT WOULD ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 6 - HAVE TO BE PRESUMED THAT INVESTMENT MADE BY THE ASS ESSEE WOULD BE OUT OF THE INTEREST-FREE FUNDS AVAILABLE WITH ASSESSEE AND NO DISALLOWANCE WAS WARRANTED U/S 14A. SIMILARLY, WE ALSO FIND SUPPORT FROM THE JUDGMENT O F HONBLE GUJARAT HIGH COURT IN THE CASE OF UTI BANK LTD. REPORTED IN 32 TAXMANN.COM 370 WHERE THE HEADNOTE READS AS UNDER : IF THERE ARE SUFFICIENT INTEREST FREE FUNDS TO MEE T TAX FREE INVESTMENTS, THEY ARE PRESUMED TO BE MADE FROM INTEREST FREE FUN DS AND NOT LOANED FUNDS AND NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A IN VIEW OF ABOVE PROPOSITION, WE HOLD THAT NO DISAL LOWANCE OF INTEREST EXPENSE CLAIMED BY THE ASSESSEE CAN BE MADE UNDER T HE PROVISION OF SECTION14A OF THE ACT R.W.R. 8D OF IT RULES. HENCE, WE REVERSE THE ORDER OF AUTHORITIES BELOW. THE AO IS DIRECTED TO DELETE THE ADDITION MADE BY HIM. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 7. THE SECOND ISSUE RAISED BY THE ASSESSEE THAT LEA RNED CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE AO FOR RS.3, 20,000/- ON ACCOUNT OF PROFESSIONAL FEES. THE ASSESSEE DURING THE YEAR HAS SHOWN GROSS INTERE ST INCOME OF RS.63,79,238/- ONLY, WHICH WAS OFFERED TO TAX AS IN COME FROM OTHER SOURCES. THE ASSESSEE AGAINST SUCH INTEREST INCOME HAS CLAIMED AN EXPENSE OF RS.5,60,000/- UNDER THE PROFESSIONAL HEA D FEES. THE ASSESSEE CLAIMED TO HAVE MADE THE PAYMENT OF PROFESSIONAL FE ES FOR AVAILING THE SERVICES ABOUT ITS INVESTMENT ACTIVITIES. THE SERVI CES AVAILED BY THE ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 7 - ASSESSEE WERE CONFIRMED BY SHRI MILIND MEHTA, CA, A UTHORITIES REPRESENTATIVE, AND SERVICE PROVIDER TO THE ASSESSE E. THE AUTHORITIES REPRESENTATIVE IN ITS SUBMISSIONS SUBMITTED THAT A LOT OF EFFORTS ARE REQUIRED FOR GETTING THE BETTER YIELD OUT OF VARIOU S OPTIONS AVAILABLE FOR THE INVESTMENTS. HOWEVER, THE AO DURING THE ASSESSMENT PROCEEDINGS O BSERVED THAT THE AMOUNT OF PROFESSIONAL CHARGES PAID BY THE ASSESSEE DOES NOT COMMENSURATE WITH THE MARKET RATE. THE AO ALSO OBSE RVED THAT SHRI MEHTA IS ACTING AS A PRACTICING CHARTED ACCOUNTANT AND NOT INVESTMENT CONSULTANT. THEREFORE, THE AO MADE A DISALLOWANCE O F RS.3,20,000/- OUT OF A TOTAL CLAIM OF RS.5,60,000/- BY MAKING AN ADDI TION TO THE TOTAL INCOME OF THE ASSESSEE. 8. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL TO LEARN ED CIT(A). THE ASSESSEE BEFORE THE LEARNED CIT(A) SUBMITTED THAT T HE FEES WERE NOT PAID TO THE RELATED PARTY AND THE AO IS NOT EXPECTED TO DECIDE THE REASONABLENESS OF THE EXPENSES. THE ASSESSEE WITH T HE HELP OF SUCH PROFESSIONAL SERVICES HAS MADE THE INVESTMENTS AS D ETAILED UNDER: DATE NATURE OF INVESTMENT AMOUNT INVESTED (RS.) 30-04-2012 UNIQUE AGMART BILL DISCOUNT 2,00,000 24 - 05 - 2012 FIXED DEPOSIT WITH HDFC LTD. 50,00,000 26-07-2012 UNIQUE AGMART BILL DISCOUNT 2,00,000 12-10-2012 SIDDARTH CANMAR MILL DISCOUNT 2,00,000 17-10-2012 FIXED DEPOSIT WITH JP ASSOCIATES LTD. 1, 40,00,000 04-01-2013 SIDDHARTH CANMART BILL DISCOUNT 5,00,000 ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 8 - THE ASSESSEE ALSO SUBMITTED THAT THE AMOUNT OF INVE STMENTS WAS QUITE HUGE, THEREFORE, THE REASONABLENESS OF THE EXPENSES CANNOT BE QUESTIONED. HOWEVER, THE LEARNED CIT(A) DISREGARDED THE CONTENT ION OF THE ASSESSEE AND CONFIRMED THE ORDER OF THE AO BY OBSERVING AS U NDER: 13. I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORD ER AND THE SUBMISSION OF THE APPELLANT. THE BRIEF FACT OF THE CASE IS THAT THE APPELLANT HAS PAID PROFESSIONAL FEE OF RS.5,60,000/ - AGAINST THE INTEREST INCOME ARISING OUT OF VARIOUS FDS WITH BANK UNDER T HE INCOME FROM OTHER SOURCES. THE ABOVE PROFESSIONAL FEE WAS PAID TO THE CA OF THE APPELLANT SHRI MILIND MEHTA WHO HAS REPRESENTED THE CASE DURING THE APPELLATE PROCEEDINGS ALSO. THE AO NOTED THAT SHRI MEHTA IS PRACTICING CA AND DOES NOT HAVE ANY EXPERIENCE IN INVESTMENT C ONSULTANCY AND NOTED THAT THE QUANTUM OF INVESTMENT DO NOT JUSTIFY THE FEES PAID THEREFORE DISALLOWED RS.3,20,000/- OUT OF RS.5,60,0 00/- SHOWN BY THE APPELLANT. DURING THE APPELLATE PROCEEDINGS, THE A. R./CA SHRI M.K. MEHTA WAS ASKED TO FURNISH THE DETAIL OF SERVICES R ENDERED FOR THE PROFESSIONAL FEE RECEIVED BY HIM. THE A.R. HAS SUBM ITTED THE DETAILS FOR WHICH HE HAS CHARGED PROFESSIONAL FEE OF RS.5,60,00 0/- AS UNDER: DATE NATURE OF INVESTMENT AMOUNT INVESTED (RS.) 30-4-12 UNIQUE AGMART BILL DISCOUNTED 2,00,000 24-5-2012 FIXED DEPOSIT WITH HDFC LTD 50,00,000 26 - 7 - 12 UNIQUE AGMART BILL DISCOUNTED 2,00,000 12-10-12 SIDDHARTH CONMART BILL DISCOUNTED 2,00,000 17-10-2012 FIXED DEPOSIT WITH JP ASSOCIATES LTD. 1,40,00,000 04-1-2013 SIDDHARTH CONMART BILL DISCOUNTED 5,00,000 13.1 THUS IT IS SEEN THAT THE APPELLANT GOT SOME B ILL DISCOUNTED AND MADE FD FOR WHICH PROFESSIONAL CHARGES OF RS.5,60,0 00/- WAS PAID IS NOT JUSTIFIED AND THE SAME CANNOT BE LINKED WITH TH E INTEREST INCOME SHOWN FROM INCOME FROM OTHER SOURCES. THE PROVISION S OF SECTION 57(III) IS VERY CLEAR THAT ANY EXPENDITURE LAID DOWN OR EXP ANDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF EARNING THE INCOME I S ALLOWABLE. THERE SHOULD BE DIRECT NEXUS BETWEEN THEM. ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 9 - 13.2 RELIANCE IS PLACED ON THE FOLLOWING DECISIONS OF HON'BLE SUPREME COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. P. MOHANAKALA [2007] 161 TAXMAN 169 (SC) WHERE IT IS HELD THAT TH E PAYMENT THROUGH ACCOUNT PAYEE CHEQUE IS NOT CONCLUSIVE / SU FFICIENT TO DECIDE THE GENUINENESS OF THE TRANSACTIONS WE ARE UNABLE TO PERSUADE OURSELVES TO ACCEPT THE SUBMISSION. THE FINDINGS OF FACT ARRIVED AT BY THE AUTHORITIES BELOW ARE BASED ON PROPER APPRECIATION OF THE FACTS AND THE MATERIA L AVAILABLE ON RECORD AND SURROUNDING CIRCUMSTANCES. THE DOUBTFUL NATURE OF THE TRANSACTION AND THE MANNER IN WHICH THE SUMS WE RE FOUND CREDITED IN THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE HAVE BEEN DULY TAKEN INTO CONSIDERATION BY THE AUTHORITI ES BELOW. THE TRANSACTIONS THOUGH APPARENT WERE HELD TO BE NOT RE AL ONE. MAY BE THE MONEY CAME BY WAY OF BONK CHEQUES AND PAID T HROUGH THE PROCESS OF BANKING TRANSACTION BUT THAT ITSELF IS O F NO CONSEQUENCE. 13.3 RELIANCE IS ALSO PLACED IN THE FOLLOWING DECI SIONS AND CASE LAWS WHERE IT IS HELD THAT SUBSTANCE IS MORE IMPORTANT T HAN THE FORM AND THE AO IS EMPOWERED TO BRING THE HIDDEN ASPECT OF THE T RANSACTION. 13.3.1 IN THE CASE OF SURNATI DAYAL V. CIT [1995] 80 TAXMAN 89 (SC) THE HON'BLE SUPREME COURT HAS HELD THAT THERE WAS NO DISPUTE THAT THE AMOUNTS WERE RECEIVE D BY THE APPELLANT FROM VARIOUS RACE CLUBS ON THE BASIS OF W INNING TICKETS PRESENTED BY HER. WHAT WAS DISPUTED WAS THAT THEY W ERE REALLY THE WINNINGS OF THE APPELLANT FROM THE RACES. THIS RAISED THE QUESTION WHETHER THE APPARENT COULD BE CONSIDERED A S REAL. APPARENT MUST BE CONSIDERED REAL UNTIL IT IS SHOWN THAT THERE ARE REASONS TO BELIEVE THAT THE APPARENT IS NOT THE REA L AND THAT THE TAXING AUTHORITIES ARE ENTITLED TO LOOK INTO THE SU RROUNDING CIRCUMSTANCES TO FIND OUT THE REALITY AND THE MATTE R HAS TO BE CONSIDERED BY APPLYING THE TEST OF HUMAN PROBABILIT IES. 13.3.2 THE ISSUE OF LIFTING OF CORPORATE VEIL WAS DISCUSSED BY THE VARIOUS COURTS AND CERTAIN GUIDELINES WERE MADE. IN THE CASE OF K. RAMASWAMY VS. CIT - 261 ITR 358 (MAD) THE HON'BLE M ADRAS HIGH COURT FOLLOWED THE RATIO LAID DOWN BY THE SUPREME C OURT IN THE CASE OF JUGGILAL KAMLAPAT V. CIT [1969] 73 ITR 702 HELD THA T IN CASES WHERE THE SAME PERSONS ENTERED INTO TRANSACTIONS THOUGH B Y INTRODUCING A CORPORATE PERSONALITY INTO SOME OF THOSE TRANSACTIO NS, THE INCOME-TAX ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 10 - AUTHORITIES ARE ENTITLED TO PIERCE OF VEIL OF CORPO RATE PERSONALITY AND LOOK AT THE REALITY OF THE TRANSACTION. THE COURT I N THAT CASE OBSERVED: ... IT IS TRUE THAT FROM JURISTIC POINT OF VIEW TH E COMPANY IS Q LEGAL PERSONALITY ENTIRELY DISTINCT FROM ITS MEMBER S AND THE COMPANY IS CAPABLE OF ENJOYING RIGHTS AND BEING SUB JECTED TO DUTIES WHICH ARE NOT THE SAME AS THOSE ENJOYED OR B ORNE BY ITS MEMBERS. BUT IN CERTAIN EXCEPTIONAL CASES THE COURT IS ENTITLED TO LIFT THE VEIL OF THE CORPORATE ENTITY AND TO PAY RE GARD TO THE ECONOMIC REALITIES BEHIND THE LEGAL FACADE... .(P. 710) 13.3.3 IN THE CASE OF CIT VS. INDIAN EXPRESS NEWS P APERS 238 ITR 70 (MAD) THE HONBLE MADRAS HIGH COURT HELD AS UNDER:- THE FACT THAT THE MONEY WAS NOT PAID DIRECTLY BUT W AS SHOWN AS HAVING BEEN INVESTED IN THE SUBSIDIARY COMPANY WAS NOT DECISIVE OF THE TRUE CHARACTER OF THE TRANSACTION. THE MERE FACT THAT THE INVESTMENT COMPANY WAS A DISTINCT LEGAL ENTITY DID NOT BY ITSELF ESTABLISH THAT THE PURPORTED INVESTMENT WAS A GENUI NE INVESTMENT WHICH ASSESSEE-COMPANY HAD MADE FOR SECURING BENEFI TS TO ITSELF BY WAY OF TRADING OR CARRYING ON BUSINESS THROUGH T HAT SUBSIDIARY. THE IMPUGNED SUM WAS PAID TO THE BOMBAY COMPANY ON THE SAME DAY ON WHICH IT WAS PAID TO THE INVESTM ENT COMPANY. THOUGH THE INVESTMENT COMPANY WAS PURPORTED TO CHAR GE INTEREST IN THE FIRST YEAR, SUBSEQUENTLY NO INTERES T AT ALL WAS CHARGED TO THE BOMBAY COMPANY ON THAT SUM. IT WAS N OT THE ASSESSEE'S CASE THAT THE MONEY WAS RETURNED BY THE INVESTMENT COMPANY SUBSEQUENTLY WITH INTEREST OR THAT THE ASSE SSEE RECEIVED DIVIDENDS FROM OUT OF THE INVESTMENTS MADE BY IT IN THAT COMPANY. IT IS WELL-SETTLED THAT THE CORPORATE VEIL OF A COM PANY CAN BE LIFTED FOR THE PURPOSE OF ASCERTAINING THE REAL CHA RACTER OF A TRANSACTION, IF THAT TRANSACTION WAS A FRAUDULENT O NE OR WAS INTENDED TO EVADE PAYMENT OF TAX. WHILE LEGITIMATE TAX AVOIDANCE IS ALWAYS PERMISSIBLE, THE DEVICES ADOPTED TO EVADE PAYMENT OF TAX, HOWEVER, ARE NOT PERMISSIBLE; THOUGH THE DIVID ING LINE IS NOT ALWAYS EASY TO DRAW, SUCH A LINE DOES EXIST. THE TR UE CHARACTER OF THE TRANSACTION HERE CLEARLY WAS ONE OF AN ADVANCE OF RS. 10 LAKHS BY THE ASSESSEE TO THE BOMBAY COMPANY FOR WHO SE BENEFIT ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 11 - THAT SUM WAS OBVIOUSLY INTENDED AND HAD ONLY BEEN C HANNELED THROUGH THE INVESTMENT COMPANY. THE TRIBUNAL HAD FA ILED TO NOTICE THE FACTS AND HAD ALSO ERRED IN ADOPTING THE WRONG APPROACH FOR THE PURPOSE OF DECIDING AS TO WHETHER THE AMOUNT DISALLOWED WAS A SUM WHICH COULD PROPERLY FAIL WITH IN THE AMBIT OF SECTION 36(1)(III). THE AMOUNT DISALLOWED WAS TH E AMOUNT PAID ON AMOUNTS BORROWED, BUT NOT USED FOR THE PURPOSE O F BUSINESS OR PROFESSION OF THE ASSESSEE. RS. 10 LAKHS 'INVEST ED' IN THE INVESTMENT COMPANY, BEING IN SUBSTANCE AND REALITY AN AMOUNT ADVANCED TO THE BOMBAY COMPANY FOR FINANCING THE CO NSTRUCTION UNDERTAKEN BY IT AT BOMBAY, COULD NOT BE SAID TO BE AN AMOUNT WHICH FORMED PORT OF THE CAPITAL BORROWED FOR THE P URPOSE OF THE ASSESSEE'S BUSINESS. 13.4 CONSIDERING THE FACTS AND DECISION MENTIONED ABOVE I AM OF THE VIEW THAT THE AO HAS RIGHTLY DISALLOWED THE PROFESS IONAL FEE PAYMENT AGAINST INTEREST INCOME THEREFORE ADDITION OF RS.3, 20,000/- IS CONFIRMED. THE GROUND IS DISMISSED. BEING AGGRIEVED BY ORDER OF LEARNED CIT(A) ASSESSEE IS IN THE SECOND APPEAL BEFORE US. THE ASSESSEE BEFORE US HAS SUBMIT TED AS UNDER: IV) APPELLANT'S SUBMISSIONS A) IT IS SUBMITTED THAT THE ASSESSING OFFICER AND THE COMMISSIONER (APPEALS) HAVE NOT PROPERLY APPRECIATED INFORMATION FURNISHED DURING ASSESSMENT AND APPEAL PROCEEDINGS AND THE DI SALLOWANCE IS BASED MERELY ON THEIR OWN PERSONAL OPINION AND J UDGMENT EXERCISED IN A MANNER NOT CONTEMPLATED UNDER S.58(2 ) READ WITH S.40A(2). B) THAT THE APPELLANT HAS PAID PROFESSIONAL FEES I S NOT IN DISPUTE BUT BOTH AUTHORITIES HAVE HELD A BIASED VIEW ABOUT INCA PABILITY OF CAS TO ACT AS INVESTMENT ADVISOR. THEY HAVE CHOSEN TO IGNORE A SUBMISSION THAT DUE TO THEIR PROFESSIONAL EDUCATION , CAS ARE VERSATILE PROFESSIONALS AND THERE ARE LARGE FIRMS R ENDERING A WIDE VARIETY OF PROFESSIONAL SERVICES, NOT JUST AUD ITING AND TAXATION. C) ALTHOUGH GROSS TAXABLE INTEREST OF RS.64.03 LAK H FROM LOAN, TIME DEPOSITS AND BILL DISCOUNTING INCOME WAS OFFERED UN DER THE HEAD ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 12 - 'INCOME FROM OTHER SOURCES' IN COMPUTATION OF INCOM E FURNISHED DURING ASSESSMENT AND APPEAL, BOTH THE AO AND COMMI SSIONER (APPEALS) HAVE FAILED TO SEE A LINK' BETWEEN INVEST MENTS AND SUCH INCOME OFFERED TO TAX. AO IGNORED ENTRIES OF INTERE ST EARNED DURING THE YEAR FROM INVESTMENTS, SHOWN IN A COPY O F LEDGER ACCOUNT OF 'INTEREST ON NCDS & COMPANY FDS' SUBMITT ED DURING SCRUTINY. EVEN ASSUMING THOUGH NOT ADMITTING, THAT NO TAXABLE INCOME WAS EARNED DURING THE YEAR FROM INVESTMENTS MADE WITH PROFESSIONAL SERVICES, THE ALL-IMPORTANT CONDITION FOR ALLOWABILITY OF EXPENDITURE IS THE PURPOSE OF EARNING TAXABLE INCOME IN VIEW OF RULING OF THE APEX COURT IN RAJENDRA PRASAD MOOD Y V. CIT, 115 ITR 519. THE JUDGMENT SAYS, 'S. 57(III) DOES NO T REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED'. D) COMMISSIONER(APPEALS) HAS COMPLETELY IGNORED A LIST OF ACTIVITIES COMPRISING THE PROFESSIONAL SERVICES REN DERED IN CONNECTION WITH INVESTMENT OF FUNDS OF APPELLANT, F URNISHED AT PARA 1 TO 3 OF LETTER SUBMITTED ON 22-9-2016 DURING APPELLATE PROCEEDINGS. E) BOTH THE AO AND COMMISSIONER (APPEALS) HAVE FA ILED TO APPRECIATE THAT WHETHER IT IS A QUESTION OF INVESTI NG RS.2 CRORE OR RS.20 CRORE, THE SCRUTINY AND ANALYSIS OF AVAILABLE INVESTMENT OPTIONS INVOLVES SIMILAR ACTIVITIES. IN CIT V. ASHO K WADIA (ITA NO.4555/DEL/2010) / ITAT BENCH 'A' DELHI AND CIT V. DALMIA CEMENT BHARAT LTD. (DEL) 254 ITR 377 A SETTLED PRIN CIPLE OF LAW WAS REITERATED THAT THE ASSESSING OFFICER CANNOT ST EP INTO SHOES OF THE ASSESSEE AND DECIDE AS TO HOW WHICH OF THE E XPENDITURE CAN BE INCURRED. ONCE THE EXPENDITURE HAS BEEN INCU RRED WHOLLY OR EXCLUSIVELY FOR THE PURPOSES OF EARNING INCOME N O DISALLOWANCE CAN BE MADE. F) THEREFORE, HAVING ACCEPTED THAT FEES WERE PAI D FOR INVESTMENT ADVISORY SERVICES, TO A PROFESSIONAL NOT RELATED TO THE APPELLANT IN ANY WAY, THEY SHOULD NOT HAVE JUDGED WHETHER THE FEES PAID WERE EXCESSIVE OR UNREASONABLE HAVING REGARD TO ITS FAIR MARKET VALUE OR THE LEGITIMATE NEEDS OF THE APPELLANT. ANY DISALLOWANCE ON SUCH A GROUND IS CONTEMPLATED ONLY U/S.58(2) SO FAR AS RELATES TO CASES FALLING U/S.40A(2) OF THE ACT IN RESPECT O F PAYMENTS MADE TO RELATED PARTIES. ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 13 - G) IT IS FURTHER SUBMITTED THAT A PART OF PROFESSI ONAL FEES TO THE EXTENT RELATING INVESTMENTS THAT GENERATE EXEMPT IN COME WOULD BE COVERED BY SEPARATE DISALLOWANCE OF RS.23,948 FR OM EXPENDITURE U/S.14A AS PER RULE 8D COMPUTED @ 1 /2% OF AVERAGE INVESTMENTS IN TAX-FREE INCOME SECURITIES. H) IN BHAVIN A. SHAH V. ACIT, CIR. 14, AHMEDABAD, PRONOUNCED ON 29-3-2017, HON'BLE ITAT, T BENCH, AHMEDABAD ALSO HE LD THAT ONCE IT IS BEYOND DISPUTE THAT EXPENSES WERE INCURR ED FOR EARNING INCOME, MERE FACT THAT EXPENSES ARE ON HIGHER SIDE CANNOT BE REASON ENOUGH FOR DISALLOWANCE AND THAT EVEN IF EXP ENSES ARE ON HIGHER SIDE IT DOES NOT IMPLY THAT THEY ARE FICTITI OUS AND INADMISSIBLE. I) APPELLANT SUBMITS THAT THE RATIO OF JUDICIAL D ECISIONS CITED BY COMMISSIONER (APPEALS) IS INAPPROPRIATE IN PRESENT CASE AS DESCRIBED HEREUNDER: A. GIT V. P. MOHANAKALA (2007) 161 TAXMAN 169 (S C) IT WAS RULED THAT PAYMENT THROUGH BANKING CHANNEL I S NOT A CONCLUSIVE EVIDENCE TO DECIDE GENUINENESS OF TRANSACTIONS. BUT IN THAT CASE, DEPARTMENT HAD ESTABLISHED, THROUGH ROVING INQUIRIES THAT CASH CREDITS APPEARING IN DIFFERENT NAMES IN ASSESSEE'S BOOKS WERE IN FACT FROM SAME PERSON. IN THIS CASE, THOUGH FACTS ARE QUITE DIFFERENT, COMMISSIONER (APPEALS) HAS NOT ESTABLISHED THAT IDENTITY OF EITHER THE APPELLAN T OR THE PROFESSIONAL IS DOUBTFUL OR FAKE. B. SUMATI DAVAL V. GIT (1995) 80 TAXMAN 89 (SC) THE RATIO OF THIS DECISION WOULD REQUIRE THAT TO FI ND OUT WHETHER APPARENT IS NOT REAL, TAX AUTHORITIES ARE E NTITLED TO LOOK INTO SURROUNDING CIRCUMSTANCES AND TO APPLY THE TEST OF HUMAN PROBABILITIES. THE APPELLANT FAILS TO UNDERSTAND WHAT HIDDEN ASPEC T OF THE TRANSACTION IS VISIBLE TO COMMISSIONER (APPEALS ) THAT HE HAS NOT CATEGORICALLY MENTIONED, WHEN THE PROFES SIONAL WHO RECEIVED THE FEES HAS PAID 28.6% OF THE FEES TO GOVT. IN THE FORM OF SERVICE TAX AND INCOME TAX WHEREAS AVERAGE RATE OF INCOME TAX ON ASSESSEE'S TOTAL INCOME WORKS OUT TO 26.9%. C. K. RAMASWAMY V. CIT 261 ITR 358 (MAD) AND CIT V. INDIAN EXPRESS NEWSPAPERS 238 ITR 70 (MAD): ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 14 - TRUE, INCOME TAX AUTHORITIES ARE ENTITLED TO PIERCE CORPORATE VEIL AND LOOK AT REALITY OF THE TRANSACTI ON, BUT WHEN THE APPELLANT IS A HUF AND THE PROFESSIONAL IN RECEIPT OF HIS FEES IS AN INDEPENDENT PERSON NOT RE LATED IN ANY WAY TO THE APPELLANT, HOW IS IT POSSIBLE TO VIE W THIS AS SAME PERSONS ENTERING INTO TRANSACTIONS BY INTRODUC ING A CORPORATE PERSONALITY INTO THOSE TRANSACTIONS? IN VIEW OF ABOVE SUBMISSIONS, YOUR APPELLANT PRAYS THAT THE DISALLOWANCE OF RS.3,20,000 FROM PROFESSIONAL FEES PAID BY THE APPELLANT MAY KINDLY BE DELETED. ON THE OTHER HAND, THE LEARNED DR VEHEMENTLY SUPPOR TED THE ORDER OF THE AO. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE INSTANT CASE, THE ASSES SEE HAS CLAIMED AN EXPENSE OF RS.5,60,000/- ON ACCOUNT OF PROFESSIONAL SERVICES AVAILED FROM CHARTERED ACCOUNTANT ABOUT ITS INVESTMENTS ACT IVITIES. THE AO WAS OF THE VIEW THAT SUCH EXPENSES ARE UNREASONABLE AS PER THE MARKET RATE. ACCORDINGLY, HE PARTLY DISALLOWED THE EXPENSES TO T HE TUNE OF RS.3,20,000/-. THE VIEW TAKEN BY THE AO WAS SUBSEQU ENTLY CONFIRMED BY THE LEARNED CIT(A). NOW THE ISSUE BEFORE US ARISES FOR ADJUDICATION WHE THER THE DISALLOWANCES MADE BY THE LOWER AUTHORITIES IS CORR ECT AS PER THE PROVISIONS OF LAW. IN THIS REGARD, WE NOTE THAT THE GENUINENESS OF THE EXPENSES HAS NOT BEEN DOUBTED. THE PAYMENT WAS MADE THROUGH BANKING CHANNEL. HOWEVER, AS PER THE LOWER AUTHORITIES, THE EXPENSES CLAIMED BY THE ASSESSEE WERE UNREASONABLE AND EXCEEDING MARKET RATE. HOWEVER, ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 15 - BEFORE US, NONE OF THE LOWER AUTHORITY HAS BROUGHT ON RECORD TO JUSTIFY THE PREVAILING MARKET RATE FOR SUCH CONSULTANCY FEES. T HUS, IT APPEARS THAT THE DISALLOWANCE HAS BEEN MADE ON THE ESTIMATED BASIS O N THE SURMISES AND CONJUNCTURE OF THE AO. IN THESE CIRCUMSTANCES, WE A RE OF THE VIEW THAT THE ESTIMATED DISALLOWANCE IS NOT SUSTAINABLE IN TH E EYES OF THE LAW. IN THIS CONNECTION, WE ALSO RELY ON THE ORDER OF CO-OR DINATE BENCH OF ITAT KOLKATA IN THE CASE OF ANIMESH SADHU VS. ACIT IN ITA 11/KOL/2013 DATED 12.11.2014. THE RELEVANT EXTRACT IS REPRODUCE D BELOW: - 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PER USAL OF THE ASSESSMENT ORDER SHOWS THAT THE ASSESSING OFFICER H AS DISALLOWED 20% OF THE EXPENSES ON ESTIMATE BASIS ON THE GROUND THA T NO INDEPENDENT VERIFICATION TO BE MADE TO FIND OUT THE AUTHENTICIT Y OF THE EXPENSES. LD. CIT(APPEALS) HAS REDUCED THE SAME ON THE SAME GROUN D. HOWEVER, WE ARE OF THE VIEW THAT NO ESTIMATED DISALLOWANCE SCAN BE MADE FOR INABILITY TO MAKE INDEPENDENT VERIFICATION. IF ANY SPECIFIC EXPENDITURE IS UNVERIFIABLE OR IS UN-VOUCHED, THEN SUCH SPECIFIC E XPENDITURE IS DISALLOWABLE. HER NO SUCH SPECIFIC IDENTIFICATION H AS BEEN DONE. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE ESTIMATE D DISALLOWANCE AS CONFIRMED BY THE LD. CIT(APPEALS) IS UNSUSTAINABLE. CONSEQUENTLY THE SAME STANDS DELETED. IN THE RESULT, GROUNDS NO. 2 & 3 OF THE ASSESSEES APPEAL STAND ALLOWED. RESPECTFULLY, FOLLOWING THE ORDER OF THE CO-ORDINAT E BENCH (SUPRA), WE DELETE THE ADDITION MADE BY THE LOWER AUTHORITIES. HENCE, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED. ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 16 - NOW COMING TO ITA 2846/AHD/2016 10. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE AR E AS UNDER:- 1. THE LD. CIT(A)-6, AHMEDABAD ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST ON BORROWINGS TO THE TUNE OF RS.65,286/- 2. THE LD. CIT(A)-6, AHMEDABAD ALSO ERRED IN CONFI RMING DISALLOWANCE OF PROFESSIONAL FEES TO THE TUNE OF RS .3,20,000/-. 3. YOUR APPELLANT CRAVES LEAVE TO ADD TO, ALTER OR DELETE ABOVE GROUNDS OF APPEAL. AS STATED EARLIER, THE ISSUES IN THE CASE UNDER CON SIDERATION IS SAME AS OF LAST YEAR. THE ONLY DIFFERENCE IS THE AMOUNT INVOLV ED. SINCE THE FACTS ARE IDENTICAL, BOTH THE PARTIES AGREED WHATEVER VIEW WA S TAKEN IN THE ABOVE APPEAL (ITA NO. 1845/AHD/2016) MAY BE TAKEN IN THIS APPEAL OF THE ASSESSEE. WE HOLD ACCORDINGLY. 11. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED. 12. IN COMBINE RESULT, BOTH THE APPEALS FILED BY TH E ASSESSEE ARE ALLOWED. THIS ORDER PRONOUNCED IN OPEN COURT ON 20/06/2018 SD/- SD/- JKTIKY ;KNO JKTIKY ;KNO JKTIKY ;KNO JKTIKY ;KNO OLHE VGEN OLHE VGEN OLHE VGEN OLHE VGEN U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; YKS[KK LNL; YKS[KK LNL; YKS[KK LNL; YKS[KK LNL; (RAJPAL YADAV) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 20/06/2018 PRITI YADAV, SR.PS ITA NOS.2845 & 2846/AHD/20 16 ASST.YEAR 2013-1 4 - 17 - !'# $#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. !' / THE RESPONDENT. 3. /01( % 2( / CONCERNED CIT 4. % 2( ( ) / THE CIT(A)-6, AHMEDABAD. 5. 567 !(&01 , ) 01- , 8 / / DR, ITAT, AHMEDABAD. 6. 79 :' / GUARD FILE. % & / BY ORDER, ' 5( !( //TRUE COPY// '/& () ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION 08/06/2018 (DICTATION-PAD 4 PA GES ATTACHED AT THE END OF THIS FILE) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 11/06/2018 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S 19/06/2018 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S. 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER