Nikunj Jagdishchandra Soni, Ahmedabad V. The Income tax Officer, Ward-1(3)(4), Ahmedabad

ITA 2923/AHD/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9707 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: misc
• Appeal Filed On: 09-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G C DAXINI
• Assessee Lawyers: PF JAIN
• Keywords: Proportionate interest
• Section: 14A

Judgement Text

, ,LK ,LK,LK ,LK- -- -,E ,E,E ,E- -- -LH LHLH LH * ** * IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, AHMEDABAD L LL LK KK KOZJH OZJH OZJH OZJH OLHE VGEN OLHE VGEN OLHE VGEN OLHE VGEN] YS[KK LNL; ,OA ] YS[KK LNL; ,OA ] YS[KK LNL; ,OA ] YS[KK LNL; ,OA EK/KQFERK JKW; EK/KQFERK JKW; EK/KQFERK JKW; EK/KQFERK JKW;] U;KF;D ] U;KF;D ] U;KF;D ] U;KF;D LNL; DS LE{KA LNL; DS LE{KA LNL; DS LE{KA LNL; DS LE{KA BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SMT MADHUMITA ROY, JUDICIAL MEMBER ./ I.T.A. NO. 2923/AHD/2016 ( / ASSESSMENT YEAR : 2012-13) NIKUNJ JAGDISHCHANDRA SONI, 308, 3 RD FLOOR, CRISTAL SQUARE, NEAR TELEPHONE EXCHANGE, C.G. ROAD, NAVRANGPURA, AHMEDABAD 380 009. / VS. ITO, WARD 1(3)(4), AHMEDABAD 380 015 ./ ./ PAN/GIR NO. : AKIPS 7473 B ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI P. F. JAIN, A.R. / RESPONDENT BY : SHRI G. C. DAXINI, SR. D.R. / DATE OF HEARING 30/10/2018 !'# / DATE OF PRONOUNCEMENT 03/12/2018 $% / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)10, AHMEDABAD [CIT(A) IN SHORT] VIDE APPEAL NO.CIT(A)-1 0/ITO WD 1(3)(4)/42/15-16 DATED 26.08.2016 ARISING IN THE MA TTER OF ASSESSMENT ORDER PASSED UNDER S.143(3) OF THE INCOME TAX ACT, 1961(HERE-IN-AFTER REFERRED TO AS 'THE ACT') DATED 18.03.2015 RELEVANT TO ASSESSMENT YEAR (AY) 2012-13. ITA NO.2923/AHD/2016 NIKUNJ JAGDISHCHANDRA SONI. VS. ITO A.Y. 2012-13 - 2 - 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE A RE AS UNDER:- 1) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS I N UPHOLDING ADDITION OF RS.85,000/- ON INTEREST FREE ADVANCE GI VEN BY THE ASSESSEE OUT OF HIS OWN FUND WITHOUT PROPERLY APPRE CIATING THE FACTS OF THE ASSESSEE. 2) HE HAS ERRED IN LAW AND ON FACTS IN NOT APPRECI ATING THE ERRONEOUS OBSERVATION OF THE A.O. THAT THE ASSESSEE HAS ADVANCED LOAN OUT OF INTEREST BEARING FUNDS IN AS MUCH AS TH AT THE ADVANCE WAS NOT GIVEN OUT OF INTEREST BEARING FUNDS. 3) ON THE FACTS NO SUCH ADDITION OUGHT TO HAVE BEE N MADE. 4) ON THE FACTS HE HAS ERRED IN UPHOLDING CHARGING OF INTEREST U/S. 234-A, 234-B AND 234-C BY THE A.O. WITHOUT SPECIFYI NG THE DEFAULT. 5) THE APPELLANT CRAVES LEAVE TO ADD, ALTER AND/OR MODIFY ANY OF THE GROUNDS OF APPEAL 3. THE SOLITARY ISSUE RAISED BY THE ASSESSEE IS THA T LD. CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE AO FOR RS.85 ,000/- ON ACCOUNT OF DIVERSION OF THE FUND. 4. THE BRIEFLY STATED FACTS ARE THAT THE ASSESSEE I S AN INDIVIDUAL AND ENGAGED IN THE BUSINESS OF TRADING AND MANUFACTURIN G IN GOLD ORNAMENTS. THE AO DURING THE YEAR OBSERVED THAT THE ASSESSEE H AD SHOWN BORROWED FUND OF RS. 2,62,61,488/- IN ITS BALANCE SHEET AS O N 31.03.2012. THE ASSESSEE ON SUCH LOAN HAS INCURRED INTEREST EXPENSE OF RS.12,31,359/- ONLY WHICH WAS DEBITED IN THE PROFIT AND LOSS ACCOU NT. 4.1 THE AO FURTHER OBSERVED THAT THE ASSESSEE HAD G IVEN AN ADVANCE OF RS.10,08,390/- TO KINNARI SONI WITHOUT CHARGING ANY INTEREST THEREON. THEREFORE, THE AO WAS OF THE VIEW THAT THE ASSESSEE HAS DIVERTED INTEREST- ITA NO.2923/AHD/2016 NIKUNJ JAGDISHCHANDRA SONI. VS. ITO A.Y. 2012-13 - 3 - BEARING FUND AS INTEREST-FREE ADVANCE. THEREFORE HE WORKED OUT THE AMOUNT OF PROPORTIONATE INTEREST OF RS.85,000/- ON SUCH LOAN & ADVANCEAND AND DISALLOWED THE SAME UNDER THE PROVIS ION OF SECTION 36(1)(III) OF THE ACT. THE AMOUNT DISALLOWED WAS AD DED TO THE TOTAL INCOME OF THE ASSESSEE. 5. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL TO LD. C IT(A). THE ASSESSEE BEFORE THE LD. CIT(A) INTER ALIA SUBMITTED THAT ITS OWN FUNDS EXCEED THE AMOUNT OF INTEREST-FREE ADVANCES PROVIDE D TO KINNARA SONI. THEREFORE, NO INTEREST CAN BE DISALLOWED ON ACCOUNT OF DIVERSION OF THE FUND. AS SUCH, THE ASSESSEE CLAIMED TO HAVE MADE IN TEREST FREE ADVANCES OUT OF OWN CAPITAL. HOWEVER, THE LD. CIT(A) DISREGARDED THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE ORDER OF AO BY OBSERVING AS UNDER: IT HAS ALSO BEEN ARGUED WITHOUT PREJUDICE BY THE A PPELLANT THAT THE AMOUNT PAID TO THE ABOVE PERSON WAS OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT IN THE FORM OF SALE PROCEEDS AND THEREFORE THE SAME COULD NOT BE DISALLOWED. 5.2 IT IS A FACT THAT THE APPELLANT PAID HUGE INTE REST ON UNSECURED LOANS. THE TOTAL INTEREST PAID ON UNSECURED LOANS W AS RS. 12,21,359/- DURING THE YEAR. THEREFORE, IT IS TO BE SEEN WHETHE R THE ADVANCES BEING GIVEN BY THE APPELLANT WAS FOR THE PURPOSE OF BUSIN ESS OBJECTIVES OR NOT. THE HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILD ERS LTD. VS CIT 288 ITR 01, HAS HELD THAT WHENEVER THE FUNDS OF THE BUS INESS ARE DIVERTED FOR INTEREST FREE LOANS, THE MAIN CRITERIA FOR PERM ISSIBILITY OF INTEREST ON THOSE FUNDS ARE BASED ON WHETHER IT WAS FOR COMMERC IAL EXPEDIENCY OR NOT. THE RELEVANT PORTION OF THE OBSERVATIONS OF HO N'BLE SUPREME COURT ARE AS UNDER:- ITA NO.2923/AHD/2016 NIKUNJ JAGDISHCHANDRA SONI. VS. ITO A.Y. 2012-13 - 4 - 'THERE HAS TO BE A NEXUS BETWEEN THE ADVANCING OF F UNDS AND BUSINESS INTEREST OF THE ASSESSEE. SOME BUSINESS OB JECTIVE SHOULD BE SOUGHT TO HAVE BEEN ACHIEVED BY EXTENDING SUCH I NTEREST FREE ADVANCES WHEN THE ASSESSEE ITSELF IS BORROWING FUND S FOR RUNNING ITS BUSINESS. THE HON'BLE SUPREME COURT HAS ALSO DELVED INTO THE CASE WHE RE THERE WOULD BE MIXED FUND AT THE DISPOSAL OF THE AS SES SEE. IT FURTHER CLARIFIES THAT UNDER SECTION 36(1)(III) THE ULTIMATE USE OF THE FUNDS IS IMPORTANT. IT MAY NOT BE RELEVANT AS T O WHETHER THE ADVANCES HAVE BEEN EXTENDED OUT OF THE BORROWED FUN DS OR OUT OF MIXED FUNDS WHICH INCLUDES BORROWED FUNDS. THE TEST TO BE APPLIED IN SUCH CASES IS NOT THE SOURCE OF THE FUND S BUT THE PURPOSE FOR WHICH THE ADVANCES ARE EXTENDED.' 6.2 THE ADVANCES GIVEN TO KINNARI SONI DO NOT HAVE ANY BUSINESS PURPOSE. THE APPELLANT HAS NOT SPECIFIED THE PURPOS E FOR WHICH THE MONEY HAS BEEN ADVANCED. THE HON'BLE SUPREME COURT IN THE ABOVE REFERRED JUDGEMENT HAS CLEARLY HELD THAT THE TEST W HICH NEEDS TO BE APPLIED IN SUCH CASES IS NOT THE SOURCES OF FUNDS B UT THE PURPOSE FOR WHICH THE ADVANCES ARE EXTENDED. ALL ALONG, THE APP ELLANT HAS MADE ELABORATE SUBMISSIONS ONLY ABOUT THE SOURCES OF THE FUNDS. NOWHERE THE APPELLANT HAS TRIED TO GIVE SUBMISSIONS ABOUT THE P URPOSE FOR WHICH THE ADVANCES ARE EXTENDED. IT HAS CLEARLY BEEN HELD BY THE SUPREME COURT THAT IF THE ADVANCES HAVE BEEN MADE FOR THE PURPOSE OF BUSINESS, THE SAME WOULD BE ALLOWABLE. DESPITE BEING GIVEN ENOUGH OPPORTUNITIES, THE APPELLANT HAS NOT AT ALL GIVEN SUBMISSIONS ABOU T THE OBJECTIVES/PURPOSES OF THE ADVANCES AND WHETHER THE SAME HAS BEEN GIVEN FOR THE PURPOSE OF FULFILLING BUSINESS OBJECT IVES OR NOT. IN THE ABSENCE OF ANY SUBMISSIONS BY THE APPELLANT ABOUT T HE PURPOSE OF THE ADVANCE, IT IS HELD THAT THE ADVANCE TO THIS PARTY HAS NOT BEEN MADE FOR THE PURPOSE OF BUSINESS INTEREST/OBJECTIVE OF THE A PPELLANT. IF THE ADVANCES ARE NOT BEEN EXTENDED TO ACHIEVE SOME BUSI NESS PURPOSE/OBJECTIVES, THE SAME CANNOT BE ALLOWED. RESPECTFULLY FOLLOWING THE JUDGEMENT OF HON'BLE SUP REME COURT, IT IS HELD IS THE ABSENCE OF EVIDENCES TO SUPPORT THE CON TENTION OF THE APPELLANT THAT THE ADVANCES HAVE BEEN MADE FOR BUSI NESS PURPOSE/OBJECTIVE, THE ADVANCES HAVE BEEN MADE BY T HE APPELLANT FOR NON-BUSINESS PURPOSE AND THEREFORE, THE SAME HAS RI GHTLY BEEN ITA NO.2923/AHD/2016 NIKUNJ JAGDISHCHANDRA SONI. VS. ITO A.Y. 2012-13 - 5 - DISALLOWED BY THE AO U/S. 36{1)(III) OF THE ACT. TH EREFORE, THIS GROUND OF APPEAL IS DISMISSED. 8. GROUND NO. 2 AND 3 ARE GENERAL IN NATURE WHICH A RE NOT BEING SEPARATELY ADJUDICATED UPON. THE FOURTH GROUND OF A PPEAL IS AGAINST CHARGING OF INTEREST U/S. 234A/B/C OF THE ACT. THIS GROUND BEING CONSEQUENTIAL IN NATURE, IS ACCORDINGLY DISMISSED. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) ASSE SSEE IS IN APPEAL BEFORE US. 6. THE LD. AR BEFORE US FILED A PAPER BOOK RUNNING FROM PAGES 1-24 AND SUBMITTED THAT ITS OWN FUNDS AS ON 31.03.2012 E XCEED THE INTEREST- FREE LOANS AND ADVANCES PROVIDED TO KINNARI SONI. T HE LD. AR IN SUPPORT OF HIS CLAIM DREW OUR ATTENTION ON THE BALANCE SHEE T OF THE ASSESSEE AS ON 31.03.2012 WHICH IS PLACED ON PAGE 19 OF THE PAPER BOOK. ACCORDINGLY, THE LD. AR PRAYED THAT A PRESUMPTION CAN BE DRAWN T HAT THE INTEREST-FREE ADVANCE WAS PROVIDED OUT OF THE OWN FUND OF THE ASS ESSEE. 7. ON THE OTHER HAND, LD. DR VEHEMENTLY SUPPORTED T HE ORDER OF AUTHORITIES BELOW. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. FROM THE PRECEDING DISCUSSION, WE NOTE THAT THE LOWER AUTHORITIES HAVE NOT DOUBTED THE FACTS OF THE CASE AS DISCUSSED BELOW: (I). OPENING CAPITAL OF THE FIRM AS ON 01.04.2011 F OR RS.13,99,830/-. ITA NO.2923/AHD/2016 NIKUNJ JAGDISHCHANDRA SONI. VS. ITO A.Y. 2012-13 - 6 - (II). THERE WAS CAPITAL CONTRIBUTION BY THE ASSESSE E ON 18.04.2011 FOR RS.15,00,000/-. (III). THE INTEREST-FREE ADVANCE TO KINNARA SONI WA S PROVIDED ON 15.07.2011. FROM THE ABOVE DETAILS, WE NOTE THAT THERE WAS SUFF ICIENT BALANCE IN THE CAPITAL ACCOUNT OF THE ASSESSEE I.E., EXCEEDING THE AMOUNT OF INTEREST-FREE AT THE TIME WHEN THE ADVANCE WAS GIVEN TO KINNARA S ONI. THEREFORE, IT CAN BE ASSUMED THAT INTEREST-FREE ADVANCES HAVE BEE N GIVEN BY THE ASSESSEE OUT OF ITS CAPITAL AND THERE WAS NO ELEMEN T OF THE BORROWED FUND WHICH WAS DIVERTED TO INTEREST-FREE LOANS AND ADVAN CES. THEREFORE IN OUR CONSIDERED VIEW NO DISALLOWANCE OF INTEREST EXPENSE IN THE GIVEN FACTS AND CIRCUMSTANCES IS WARRANTED. IN HOLDING SO, WE F IND SUPPORT AND GUIDANCE FROM THE JUDGEMENT OF HONBLE BOMBAY HIGH COURT IN THE 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 8.1 SIMILARLY, WE ALSO RELY ON THE JUDGMENT OF THE HONBLE 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 REP RODUCED BELOW:- WHERE ASSESSEE'S CAPITAL, PROFIT RESERVES, SURPLUS AND CURRENT ACCOUNT DEPOSITS WERE HIGHER THAN THE INVESTMENT IN TAX-FRE E SECURITIES, IT WOULD HAVE ITA NO.2923/AHD/2016 NIKUNJ JAGDISHCHANDRA SONI. VS. ITO A.Y. 2012-13 - 7 - TO BE PRESUMED THAT INVESTMENT MADE BY THE ASSESSEE WOULD BE OUT OF THE INTEREST-FREE FUNDS AVAILABLE WITH ASSESSEE AND NO DISALLOWANCE WAS WARRANTED U/S 14A. 8.2 SIMILARLY, WE ALSO FIND SUPPORT FROM THE JUDGME NT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF UTI BANK LTD. REP ORTED 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 THE ABOVE PROPOSITION, WE HOLD THAT NO D ISALLOWANCE OF INTEREST EXPENSE CLAIMED BY THE ASSESSEE CAN BE MADE ON ACCO UNT OF LOAN AND ADVANCES AS DISCUSSED ABOVE. HENCE, WE REVERSE THE ORDER OF THE AUTHORITIES BELOW. THE AO IS DIRECTED TO DELETE THE ADDITION MADE BY HIM. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOW ED. 9. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED . THIS ORDER PRONOUNCED IN OPEN COURT ON 03/12/2018 SD/- SD/- E/KQFERK JKW; E/KQFERK JKW; E/KQFERK JKW; E/KQFERK JKW; 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 LN YKS[KK LN YKS[KK LN YKS[KK LNL; L; L; L; (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 03/12/2018 PRITI YADAV, SR.PS ITA NO.2923/AHD/2016 NIKUNJ JAGDISHCHANDRA SONI. VS. ITO A.Y. 2012-13 - 8 - !'# $#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. & '( ) / CONCERNED CIT 4. ) () / THE CIT(A)-10, AHMEDABAD. 5. ,-. //'( , '(# , 12$&$ / DR, ITAT, AHMEDABAD. 6. .34 5 / GUARD FILE. % & / BY ORDER, , / //TRUE COPY// '/& () ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION 29/10/2018 (PAGE-3) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER : .. 29/11/2018 3. OTHER MEMBER.. 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S 30/11/2018 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