DCIT CEN CIR 23 CEN RG 7, MUMBAI V. HIMANSHU B.KANAKIA, MUMBAI

ITA 3190/MUM/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3298 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 16-03-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 05-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Proportionate interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H, MUMBAI BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.3190 & 3191/M/2014 ASSESSMENT YEAR: 2010-11 & 2011-12 DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 4(1), CENTRAL RANGE-4, MUMBAI VS. SHRI HIMANSHU B. KANAKIA, MONT BLANC BUILDERS, 2 ND FLOOR, ACME SHOPPING ARCADE, TIKAMDAS ROAD, KANDIWALI (EAST), MUMBAI 400 056 PAN: AASPK5262C (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI RAHUL RAMAN, D.R. REVENUE BY : SHRI VIJAY MEHTA, A.R. DATE OF HEARING : 16.03.2016 DATE OF PRONOUNCEMENT : 16.03.2016 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE ABOVE TITLED APPEALS HAVE BEEN PREFERRED BY TH E REVENUE AGAINST THE TWO SEPARATE ORDERS BOTH DATED 18.02.2014 OF THE CO MMISSIONER OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS THE CIT(A)] R ELEVANT TO ASSESSMENT YEARS 2010-11 & 2011-12. SINCE THE ISSUES TAKEN IN BOTH THE APPEALS ARE IDENTICAL IN NATURE, HENCE THE SAME ARE TAKEN TOGETHER FOR DISPO SAL BY THIS COMMON ORDER. FOR THE SAKE OF CONVENIENCE, THE FACTS HAVE BEEN TA KEN FROM ITA NO.3190/M/2014. THE REVENUE HAS TAKEN THE FOLLOWIN G GROUNDS OF APPEAL: '(I) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A)-40, MUMBAI WAS CORRECT IN DELETING THE ADDIT ION OF RS.63,12,722/- MADE BY THE AO ON ACCOUNT OF DISALLOWANCE OF INTEREST?' (II) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) WAS CORRECT IN HOLDING THAT THERE EXISTED A NEXUS BETWEEN THE INTEREST EXPENSES AND INTEREST INCOME SOLELY ON THE BASIS OF THE BANK STATEMENTS ? ITA NO.3190/M/2014 SHRI HIMANSHU B. KANAKIA 2 THE APPELLANT CRAVES TO LEAVE, TO ADD, TO AMEND AND / OR TO ALTER ANY OF GROUNDS OF APPEAL, IF NEED BE. THE APPELLANT, THEREFORE, PRAYS THAT ON THE GROUNDS STATED ABOVE, THE ORDER OF THE CIT(A)-40, MUMBAI MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 2. THE BRIEF FACTS RELATING TO THE ISSUE RAISED BEF ORE US ARE THAT IN THE RETURN OF INCOME, THE ASSESSEE HAD SHOWN THE INTEREST INCO ME OF RS.88,14,417/- AND HAD CLAIMED SET OFF OF THE INTEREST EXPENDITURE OF RS.81,76,776/-. THE ASSESSEE OFFERED THE BALANCE AMOUNT OF RS.6,37,641/- TO TAX ALONG WITH CERTAIN OTHER DISALLOWANCES. THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS THE AO), HOWEVER, OBSERVED THAT THE ASSESSEE HAD NOT BEEN AB LE TO ESTABLISH THE NEXUS BETWEEN THE FUNDS USED FOR GIVING INTEREST BEARING LOANS TO OTHER PARTIES, ON WHICH INTEREST HAD BEEN EARNED WITH THE FUNDS WHICH HAVE BEEN TAKEN ON INTEREST FROM OTHER PARTIES. HE OBSERVED THAT ONLY IF THE FUNDS TAKEN ON INTEREST WOULD HAVE BEEN ADVANCED BY THE ASSESSEE TO OTHER P ARTIES FROM WHOM HE HAS CHARGED THE INTEREST, THEN ONLY THE ASSESSEE COULD CLAIM DEDUCTION AND SINCE THE ASSESSEE HAD FAILED TO ESTABLISH THE NEXUS BETWEEN THE TWO, HENCE THE INTEREST EXPENDITURE COULD NOT BE ALLOWED TO BE SET OFF. HE , THEREFORE, HELD THAT THERE WAS REASONABLE PRESUMPTION THAT THE CAPITAL OF THE ASSESSEE HAD BEEN USED BY HIM TO FORWARD THE INTEREST BEARING LOANS TO PARTIE S WHEREAS THE INTEREST BEARING LOANS TAKEN BY THE ASSESSEE WOULD HAVE BEEN UTILIZE D FOR OTHER PURPOSE. HE ACCORDINGLY DISALLOWED THE SET OFF OF THE EXPENDITU RE AND ASSESSED THE INTEREST INCOME OF THE ASSESSEE AT RS.88,14,417/-. BEING AG GRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE THE LD. CI T(A). 3. THE LD. CIT(A) OBSERVED THAT THE LOANS UPON WHIC H THE ASSESSEE HAD PAID INTEREST WERE NOT THE NEW LOANS. THE ISSUE RE LATING TO PAYMENT OF INTEREST ON SUCH LOANS HAD ALREADY BEEN EXAMINED BY THE AO I N THE EARLIER ASSESSMENT YEARS AND NO SUCH DISALLOWANCE OF INTEREST WAS MADE BY THE AO IN THE EARLIER YEARS. HE, FURTHER, OBSERVED FROM THE BANK STATEME NT OF THE ASSESSEE THAT THERE WAS A DIRECT CORRELATION BETWEEN THE LOAN AMOUNT RE CEIVED AND THE LOAN AMOUNT ITA NO.3190/M/2014 SHRI HIMANSHU B. KANAKIA 3 ADVANCED BY THE ASSESSEE. HE OBSERVED THAT IT WAS EVIDENT THAT THE LOANS WERE RAISED AND INVESTMENTS WERE MADE BY THE ASSESSEE WI TH A VIEW TO EARN INTEREST INCOME AND THE ASSESSEE HAD OFFERED FOR TAXATION A POSITIVE INTEREST INCOME. BESIDES THAT THE ASSESSEE AT HIS OWN DISALLOWED A S UM OF RS.18,64,054/- AND HAS OFFERED INTEREST INCOME OF RS.25,01,695/- AND T HAT THE SUO-MOTO DISALLOWANCE HAD BEEN MADE BY THE ASSESSEE TAKING I NTO CONSIDERATION THE OVERALL LOAN TAKEN DURING THE YEAR ON WHICH THE INT EREST WAS PAID AND THE OVERALL LOAN GIVEN DURING THE YEAR ON WHICH INTERES T WAS RECEIVED. THE ASSESSEE HAS DISALLOWED THE PROPORTIONATE INTEREST ON THE AMOUNT OF LOAN TAKEN WHICH WAS MORE THAN THE AMOUNT OF LOAN GIVEN. THE LD. CIT(A) HAS GIVEN A WELL REASONED FINDING, THE RELEVANT PART OF WHICH, FOR THE SAKE OF COMPLETENESS, IS REPRODUCED AS UNDER: 18. THUS, THE OVERWHELMING VIEW IS THAT ONCE THE I SSUE HAS BEEN SPECIFICALLY EXAMINED BY THE AO IN THE EARLIER PROCEEDINGS AND H AS BEEN ALLOWED, AND IF THERE IS NO FRESH EVIDENCE OR MATER IAL AGAINST THE ASSESSEE, THE SAME ISSUE SHOULD NOT BE RAKED UP AGA IN IN THE LATER ASSESSMENT PROCEEDINGS. IN MY CONSIDERED VIEW, THE INTEREST EXPENDITURE ON LOAN TAKEN IS A VALID AND ALLOWABLE CLAIM IN THE EYES OF LAW. EVIDENTLY, LOANS WERE RAISED AND INVES TMENTS WERE MADE WITH A VIEW TO EARN INTEREST INCOME AND INTERE ST INCOME TO THE TUNE OF RS.88,14,417/- HAS ACTUALLY BEEN EARNED AND DECLARED. THEREFORE, INTEREST EXPENDITURE CANNOT BE DISALLOWED. IN ANY CASE, INTEREST RECEIVED AT RS.88,14,417/- IS MORE THAN THE INTERES T PAID AT RS.81,76,776/-, RESULTING INTO POSITIVE INCOME UNDE R THE HEAD INTEREST. STILL THE ASSESSEE ON HIS OWN DISALLOWED A SUM OF R S.18,64,054/- AND HAS OFFERED INTEREST INCOME OF RS.25,01 ,695/-. THIS DISALLOWANCE HAS BEEN MADE ON THE BASIS OF A WELL THOUGHT OUT LOGIC, WHIC H IS 'WHAT IS THE AVERAGE LOAN TAKEN DURING THE YEAR ON WHICH INTEREST IS PAID AND WHAT IS THE AVERAGE LOAN GIVEN DURING THE YEAR ON WHICH INTEREST IS RECEIVED '. IF THE AVERAGE LOAN TAKEN IS HIGHER THAN AVERAGE LOAN GIVEN DURING THE YEAR, THEN INTEREST IS DISALLOWED ON THE DIFFERENCE AMOUNT OF LOAN TAKEN V IS--VIS LOAN GIVEN CALCULATED AT THE EFFECTIVE RATE OF INTEREST PAID. IN FORMULA TERMS, IT IS DENOTED AS UNDER:- INTEREST DISALLOWED= [AVERAGE AMOUNT OF LOAN TAKEN ON WHICH INTEREST IS PAID - AVERAGE AMOUNT OF LOAN ON WHICH INTEREST IS RECEIVED] X EFFECTIVE RATE OF INTEREST PAID. SO IF AVERAGE OF AMOUNT OF LOAN TAKEN IS LESS THAN AVERAGE AMOUNT OF LOAN GIVEN, THEN NO DISALLOWANCE IS CALLED FOR. HOW EVER, THIS CALCULATION DOES NOT CONSIDER INTEREST-FREE FUNDS TAKEN OR GIVE N, AND RIGHTLY SO. / ITA NO.3190/M/2014 SHRI HIMANSHU B. KANAKIA 4 THIS METHODOLOGY HAS BEEN ADOPTED BY THE ASSESSEE C ONSISTENTLY OVER LAST FEW YEARS AND HAD BEEN ACCEPTED BY THE THEN AO AND ADDL. CIT. CENTRAL, WHILE COMPLETING THE SEARCH ASSESSMENTS EA RLIER VIDE ORDER DATED 31/3/2009 FOR A.YS. 2007-08 AND 2008-09 AND A PPEARS TO BE REASONABLE. ON THE CONTRARY, THE LOGIC GIVEN BY THE AO TO DISALLOW THE ENTIRE INTEREST PAID ON LOAN TAKEN, THOUGH IT WAS E ARLIER ACCEPTED, DOES NOT APPEAR TO BE SOUND ENOUGH. AS PER BALANCE SHEET, TOTAL AMOUNT OF UNSECURED LOAN TAKEN IS RS.15,88,47,709/- AND LOAN GIVEN IS RS.15,13,64,527/-. HOWEVER, AMOUNT ON WHIC H INTEREST IS PAID AND RECEIVED IS DIFFERENT. IN THE CURRENT YEAR, AVE RAGE LOAN TAKEN WORKS OUT TO RS.9,40,86,738/- AND AVERAGE LOAN GIVEN WORK S OUT TO RS.7,33,75,025/-. THUS, THERE IS DIFFERENCE OF RS.2 ,07,11,713/-. EFFECTIVE RATE OF INTEREST WORKS OUT TO 9%. SO DISALLOWANCE O F INTEREST WORKS OUT TO RS.18,64,054/-, WHICH HAS BEEN DONE BY THE ASSESSEE AND IN MY CONSIDERED VIEW APPEARS TO BE FAIR. 19. THE LEARNED AO, IN HIS ORDER, HAS MENTIONED THA T THERE WAS NO DIRECT CORRELATION BETWEEN IOAN GIVEN AND LOAN TAKE N. HOWEVER, IT DOES NOT APPEAR TO BE A CORRECT OBSERVATION. I LOOKED IN TO THE BANK STATEMENT OF THE ASSESSEE MAINTAINED JOINTLY WITH SHRI RASESH KANAKIA, HIS BROTHER, AND FOUND THAT BY AN LARGE, THERE IS DIRECT CO-RELA TION, EVEN THOUGH IT IS NOT NECESSARY TO CLAIM SUCH AN INTEREST EXPENDITURE . THIS ISSUE HAS BEEN DEALT WITH BY ME IN THE APPELLATE ORDERS IN CASE OF SHRI RASESH KANAKIA FOR A.YS. 2005-06 TO 2011-12, WHICH IS BEING DECIDED SIMULTANEOUSLY. THEREFORE, IT MAY BE MENTIONED THAT THERE WAS STRONG CO-RELATION BETWEEN THE LOAN TAKEN AND LOAN ADVANCED. HOWEVER, I WOULD LIKE TO ADD THAT THE IN TEREST EXPENDITURE IS ALLOWABLE, EVEN IF THERE IS NO DIRECT CORRELATION BETWEEN THE LOAN TAKEN AND THE LOAN GIVEN, AS LONG AS THE ASSESSEE IS CHARGING INTEREST ON LOAN G IVEN BY HIM. IN ANY CASE, THE FUNDS ARE FLOWING IN AND FLOWING OUT, OUT OF THE BA NK ACCOUNT, AND GENUINENESS OF LOAN TAKEN AND LOAN GIVEN IS NOT IN DOUBT. 20. IN VIEW OF THE ABOVE DISCUSSION AND RESPECTFULL Y FOLLOWING THE JUDGEMENTS OF HON'BLE APEX COURT AND HON'BLE HIGH C OURTS AS MENTIONED IN PARAS 11 TO 17 OF THIS ORDER, RESPECTF ULLY FOLLOWING THE ABOVE JUDGEMENTS, I HOLD THAT DISALLOWANCE OF INTER EST EXPENDITURE AND CONSEQUENTLY MAKING AN ADDITION OF RS.63,12,722 /- IS UNSUSTAINABLE AND UNJUSTIFIED. THE SAME IS, THEREFO RE, DIRECTED TO BE DELETED AND THIS GROUND OF APPEAL IS ALLOWED. 4. WE DO NOT FIND ANY INFIRMITY IN THE ABOVE WELL R EASONED ORDER OF THE LD. CIT(A) AND THE SAME IS ACCORDINGLY UPHELD. ITA NO.3191/M/2014 5. THE ISSUES TAKEN IN ITA NO.3191/M/2014 ARE IDENT ICAL. HENCE IN VIEW OF OUR FINDINGS UPHOLDING THE ORDER OF THE LD. CIT( A) ON IDENTICAL ISSUE IN ITA NO.3190/M/2014, THE ORDER OF THE LD. CIT(A) FOR A.Y. 2011-12 IS ALSO ITA NO.3190/M/2014 SHRI HIMANSHU B. KANAKIA 5 UPHELD. 6. IN THE RESULT, BOTH THE APPEALS ARE HEREBY DISMI SSED. ORDER PRONOUNCED IN THE OPEN COURT ON 16.03.2016. SD/- SD/- (RAJESH KUMAR) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 05.03.2016. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.