Shri Maneshbhai Dayashankar Madeka, RAJKOT-GUJARAT V. The Assistant Commissioner of Income Tax, Circle-1, RAJKOT-GUJARAT

ITA 304/RJT/2011

• Counselvise Citation: [2012] 120 COUNSELVISE.COM (IT) 0179 (ITAT-RAJKOT)
• Duration Of Justice: 1 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 20-09-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 18-07-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AVINASH KUMAR
• Assessee Lawyers: RD LALCHANDANI
• Keywords: Business income; Salary income; Proportionate interest
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBULAL; RAJKOT BENCH, RAJKOT. . .. . . .. . , , , , . .. . . .. . , , , , $ $ $ $ BEFORE SHRI T. K. SHARMA, JM AND SHRI D. K. SRIVASTAV A, AM ITA NO.304/RJT/2011 / ASSESSMENT YEAR 2003-04 MANESHBHAI DAYASHANKAR MADEKA, C/O. M/S. ROLEX RINGS PVT. LTD., GONDAL ROAD, VILLAGE : KOTHARIYA, RAJKOT-360004 PAN: AASPM9191Q ( * / APPELLANT) VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1, AAYKAR BHAVAN, RACE COURSE RING ROAD, RAJKOT-GUJARAT +,* / RESPONDENT -. / ASSESSEE BY SHRI. R.D.LALCHANDANI . / REVENUE BY SHRI AVINASH KUMAR . / DATE OF HEARING 20.9.2012 . / DATE OF PRONOUNCEMENT 28 .09.2012 / / / / ORDER . .. . . . . . , , , , / T. K. SHARMA, J. M. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 23.05.2011 OF CIT(A)- AHMEDABAD, CONFIRMING THE DISALLOWANCE OF RS.2,14,894/- ON ACCOUNT OF INTEREST PAID BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2003-04. 2. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS AN INDI VIDUAL DERIVING INCOME FROM SALARY, SHARE INCOME FROM PARTNERSHIP FIRM AND INCOME FROM OTHER SOURCES. FOR THE ASSESSMENT YEAR UNDER APPEAL HE F ILED RETURN OF INCOME ON 20.8.2004 DECLARING TOTAL INCOME OF RS.5,83, 073/-. IN THIS RETURN OF INCOME THE ASSESSEE CLAIMED INTEREST EXPENSES OF RS.2,14,894/- FROM INCOME DECLARED UNDER THE HEAD BUSINESS INCOME I.E. SHARE FROM FIRM ITA NO.304/RJT/2011 2 M/S ROLEX INDUSTRIES, RAJKOT WHERE THE ASSESSEE IS A PARTNER. ON VERIFICATION OF THE LOAN ACCOUNT, THE AO NOTICED THAT THE ASSESSEE HAD TAKEN LOAN OF RS.51.80 LAKHS ON 27.10.1998 AGAIN THE TIME DEPOSIT AND THIS AMOUNT OF LOAN WAS DIVERTED, ON THE SAME DATE T O THE ACCOUNT OF M/S ROLEX INDUSTRIES, RAJKOT WHERE THE ASSESSEE IS A PARTNER. BEFORE THE AO, IT WAS CLAIMED THAT THIS INVESTMENT IS IN THE FIR M IS TOWARDS HIS CAPITAL, THEREFORE, INTEREST EXPENDITURE INCURRED THE REON IS ALLOWABLE FROM SHARE OF PROFIT FROM THE FIRM M/S ROLEX INDUSTRIES. THE AO DISALLOWED THE INTEREST OF RS.2,14,894/- ON THE GROUND THAT AS PER THE PROVISIONS OF SECTION 14A OF THE ACT, NO DEDUCTION IS ALLOWABLE IN R ESPECT OF EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH IS NOT FORMIN G PART OF THE TOTAL INCOME. SINCE SHARE OF PROFIT FROM M/S ROLEX INDUSTRI ES IS EXEMPT U/S 10(2A) OF THE ACT, INTEREST EXPENDITURE IS NOT ALLOW ABLE. 2.1 WITHOUT PREJUDICE TO THE ABOVE, THE AO ALSO NOT ICED THAT THE ASSESSEE HAD MADE ADVANCES, LOANS AND DEPOSITS TO SEVERAL PE RSONS INCLUDING HIS FAMILY MEMBERS WITHOUT INTEREST, THEREFOR E, ON THIS GROUND ALSO INTEREST CLAIM OF RS.2,14,894/- PAID TO THE BA NK IS NOT ALLOWABLE. 3. ON APPEAL, IN THE IMPUGNED ORDER, THE LD. CIT(A) IN PARAGRAPH 2.2 HELD THAT INTEREST CANNOT BE DISALLOWED U/S 14A OF T HE ACT. HOWEVER, HE CONFIRMED THE DISALLOWANCE FOLLOWING THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. V/S CIT AND A NOTHER [2007] 288 ITR 1 (SC). THE DETAILS OF REASONING GIVEN BY THE LD . CIT(A) AS CONTAINED IN PARAGRAPH 2.3 WHICH READS AS UNDER : 2.3 HOWEVER, THERE IS SUBSTANTIAL FORCE IN THE ALTERN ATIVE PLEA OF THE AO. THE AO HAD HELD IN PARA 6 OF THE ASSESSMENT O RDER THAT THE ASSESSEE IS DIVERTING AND UTILIZING HIS FUNDS IN MAKING INTEREST FREE ADVANCES TO HIS FAMILY MEMBERS. SUCH INTEREST FRE E ADVANCES ITA NO.304/RJT/2011 3 GIVEN TO FAMILY MEMBERS ARE FOR RS.61,64,900/-. THE DETAILS OF SUCH LOAN ARE AVAILABLE AT PARA 6 OF THE ASSESSMENT ORDE R. AS PER DISCUSSION IN PARAGRAPH 4, THE APPELLANT HAD TAKEN, A L OAN OF RS.51.80 LAKHS ON 27.10.1998 AGAINST TIME DEPOSITS. THER E WAS NO REQUIREMENT OF RAISING LOAN FROM THE BANK AS THE APPEL LANT WERE HAVING SUFFICIENT FUNDS OF HIS OWN WHICH WERE DIVERTED TO THE FAMILY MEMBERS WITHOUT CHARGING ANY INTEREST. THE INTEREST FREE LOANS TO FAMILY MEMBERS HAVE NOT BEEN GIVEN FOR COMMERCIAL CON SIDERATION AND THEREFORE, THE INTEREST ON THE LOANS UP TO RS.61, 64,900/- IS DISALLOWABLE. THE DL. COUNSEL HAS NOT GIVEN ANY SUBMISSI ON ON THIS ISSUE WHICH SHOWS THAT FACTS NARRATED IN PARA 6 OF THE ASSESS MENT ORDER ARE ADMITTEDLY CORRECT. CONSIDERING THE FACTS OF THE CASE, THE INTEREST OF RS.2,14,894/- PAID/PAYABLE TO THE BANK ON LOAN TAKEN FOR INVESTMENT IN THE FIRM CANNOT BE ALLOWED IN VIEW OF T HE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUI LDERS 288 ITR 1(SC). THE ADDITION MADE BY DISALLOWING THE INTEREST IS HEREBY CONFIRMED. THE FIRST GROUND OF APPEAL IS ACCORDINGLY DI SMISSED. AGGRIEVED WITH THE ORDER OF THE LD. CIT(A), THE ASSESS EE IS IN APPEAL BEFORE THIS TRIBUNAL. 4. AT THE TIME OF HEARING, ON BEHALF OF THE ASSESSEE SHRI R.D.LALCHANDANI, LD. COUNSEL APPEARED AND CONTENDED THAT ONLY REASON FOR CONFIRMING THE DISALLOWANCE OF INTEREST IS THAT THE ASSESSEE HAS GIVEN INTEREST FREE ADVANCES TO HIS FAMILY MEMBERS AMOUNTING T O RS.61,64,900/-. THE COUNSEL OF THE ASSESSEE PRODUCED A COPY OF THE LEDGER ACCOUNT IN THE BOOKS OF ACCOUNT OF PARTNERSHIP FI RM VIZ M/S ROLEX INDUSTRIES, RAJKOT FOR THE PERIOD 1.4.1998 TO 31.3.1999 AND 1.4.2002 TO 31.3.2003 AND CONTENDED THAT EVEN THE CLOSING BALANCE AS ON 31.3.1999 WAS RS.10,12,592/-. HE SUBMITTED THAT MAJOR PORTION OF THE LOAN HAS REMAINED INVESTED IN THE FIRM. THEREFORE, THE AO BE DIRECTED TO ALLOW THE PROPORTIONATE INTEREST. AS AGAINST THIS SHRI AVINASH KUMAR, THE LD. DR APPEARED ON BEHALF OF THE REVENUE AND VEHEMENTLY SUPPORTED THE OF THE LD. CIT(A). ITA NO.304/RJT/2011 4 5. HAVING HEARD BOTH THE SIDES WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT THE ASSESSEE HAS BORROWED THE LOAN OF RS.51.80 LAKHS ON 27.10.1998 AN D ON THE SAME DATE HE HAS DEPOSITED THIS AMOUNT TO THE ACCOUNT OF M/S ROLEX INDUSTRIES WHERE THE ASSESSEE IS A PARTNER. THE INTEREST PAID ON CA PITAL BORROWED FOR MAKING INVESTMENT IN THE PARTNERSHIP FIRM WHEREIN THE ASSESSEE IS A PARTNER IS ALLOWABLE EXPENDITURE AS HELD BY THE LD. CIT(A) IN PARAGRAPH 2.2 OF THE IMPUGNED ORDER. THE ONLY REASO N GIVEN BY LD. CIT(A) FOR CONFIRMING DISALLOWANCE IS THAT THE ASSESSEE HAS G IVEN INTEREST FREE ADVANCES OF RS.61,64,960/- TO HIS FAMILY MEMBERS. FRO M THE PERUSAL OF COPY OF ACCOUNT OF THE ASSESSEE WITH THE PARTNERSHIP FIRM M/S ROLEX INDUSTRIES, IT IS EVIDENT THAT HE HAS WITHDRAWN THE AMOUNT GRADU ALLY AND ALSO MADE DEPOSITS. THEREFORE, TO THE EXTENT THE L OAN AMOUNT IS USED BY THE PARTNERSHIP FIRM, INTEREST THEREON SHOULD HAVE B EEN ALLOWED. WE, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF THE AO W ITH A DIRECTION THAT THE ASSESSEE SHALL FURNISH HIS ACCOUNT WITH THE FIRM FROM 24.10 .1998 TO 31.3.2002 AND THE CALCULATION OF INTEREST WHICH IS AL LOWABLE KEEPING IN VIEW THE DIFFERENT PERIOD FOR WHICH LOAN AMOUNT HAS B EEN UTILISED BY THE PARTNERSHIP FIRM M/S ROLEX INDUSTRIES, THE AO WILL VERIFY THE SAME AND ALLOW THE INTEREST ON LOAN AMOUNT REMAINED INVESTED AND UTILISED BY THE PARTNERSHIP FIRM M/S ROLEX INDUSTRIES . 6. IN THE RESULT, FOR THE STATISTICAL PURPOSES THE APPE AL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED. ITA NO.304/RJT/2011 5 THIS ORDER IS PRONOUNCED IN THE OPEN COURT ON THE DAT E MENTIONED HEREINABOVE. SD SD ( .. / D. K. SRIVASTAVA) ( .. / T. K. SHARMA) / ACCOUNTANT MEMBER /JUDICIAL MEMBER 3/ ORDER DATE 28-09-2012. /RAJKOT SRL . .. . +4 +4 +4 [phone] / COPY OF ORDER FORWARDED TO:- 1. * / APPELLANT-, 2. +,* / RESPONDENT- 3. : / CONCERNED CIT. 4. :- / CIT (A). 5. 4 +, , / DR, ITAT, RAJKOT 6. / GUARD FILE. / BY ORDER , TRUE COPY SENIOR PRIVATE SECRETARY , INCOME TAX APPELLATE TRIBUNAL, RAJKOT.