DR. BHAVIN G. JANKHARIA, MUMBAI V. ACIT CC-23, MUMBAI

ITA 3207/MUM/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4605 (ITAT-MUMBAI)
• Duration Of Justice: 40 year(s) 8 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2010
• Appeal Filed By: Assessee
• Assessment Year: misc
• Appeal Filed On: 01-01-1970
• Court: TRIBUNAL
• Department Lawyers: N K BARODIA
• Assessee Lawyers: B N RAO
• Keywords: Business expenditure; Earning of tax free income; Commercial expediency; Rule 8D; Set aside
• Section: 14A; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I, MUMBAI BEFORE SHRI A.L. GEHLOT, A.M. AND SMT. ASHA VIJAYAR AGHAVAN, J.M. ITA NOS. 3201, 3202, 3203, 3204, 3205, 3206, 3207/M /2009 ASSESSMENT YEARS: 2001-02, 2002-03, 2003-04, 2004-0 5, 2005-06, 2006-07 & 2007-08 DR. BHAVIN B. JANKHARIA, APPELLANT BHAVESHWAR VIHAR, 383-SVP ROAD, PRARTHANA SAMAJ, MUMBAI 400 004. (PAN AAAPJ6480H) VS. ASSTT. COMMISSIONER OF INCOME-TAX, RESPONDENT CC-33, AAYAKAR BHAVAN, GROUND FLOOR, MUMBAI 400 020. APPELLANT BY : MR. B.N. RAO RESPONDENT BY : MR. N.K. BARODIA ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THESE APPEALS FILED BY THE SAME ASSESSEE ARE DIREC TED AGAINST THE ORDERS OF CIT(A), CENTRAL VIII, MUMBAI FOR TH E ASSESSMENT YEARS 2001-02 TO 2007-08. THE COMMON ISSUES ARE INVOLVED IN THESE APPEALS ALONG WITH APPEALS OF ANOTHER PARTY DR. BIJAL B. JA NKHARIA, THESE ALL APPEALS HEARD TOGETHER THIS BENCH OF ITAT IN THE CA SE OF DR. BIJAL B. JANKHARIA AS DECIDE THE APPEALS BY AN ORDER EVEN DA TED READS AS UNDER: 2. THE GROUNDS RAISED BY THE ASSESSEE IN ALL THESE APPEALS ARE COMMON, THEREFORE, THE GROUNDS FROM AY 2001-02 BEING ITA NO. 3194/M/09, ARE REPRODUCED BELOW:- ITA NOS. 3201 TO 3207/M/09 2 1. THE LEARNED CIT(A), CENTRAL VIII, MUMBAI [CIT( A)] ERRED IN CONFIRMING DISALLOWANCE OF RS. 1,78,893/- U/S 14A READ WITH RULE 8D, OUT OF THE INTEREST PAID. 2. RULE 8D HAS BEEN INSERTED BY THE IT (FIFTH AMDT. ) RULES, 2008 W.E.F. 24.03.2008 AND IT IS SUBSTANTIVE IN NAT URE AND HENCE IT APPLIES TO ALL THE ASSESSMENT YEARS COMMEN CING AFTER THAT DATE AND NOT TO THE CURRENT YEAR. 3. THE LEARNED CIT(A) IN CONFIRMING THE DISALLOWANC E OF RS. 1,78,893/- U/S 14A READ WITH RULE 8D IN RESPECT OF THE INTEREST PAID BY THE APPELLANT FOR THE BORROWINGS M ADE BY HER FOR MAKING INVESTMENTS IN PARTNERSHIP FIRM FOR EARNING THE INTEREST INCOME WHICH IS TAXABLE. THERE IS DIRE CT NEXUS BETWEEN INTEREST EARNED FROM THE FIRM AND INTEREST PAID AND THERE IS NO NEXUS BETWEEN INTEREST PAID AND SHA RE OF PROFIT EARNED. ON VERIFICATION OF THE INTEREST A/C AND PROFIT & LOSS A/C IT MAY BE SEEN THAT THE INTEREST EXPENDI TURE HAS BEEN CLAIMED AGAINST TAXABLE INTEREST ONLY AND NOT AGAINST ANY OTHER TAX FREE INCOME. 4. THE APPELLANT PRAYS THAT THE DISALLOWANCE U/S 14 A READ WITH RULE 8D BE DELETED. 3. BRIEFLY THE FACTS OF THE CASE ARE THAT A SEARCH OPERATION U/S 132(2) OF THE ACT WAS CONDUCTED ON 22 ND FEBRUARY, 2007 AT THE RESIDENTIAL PREMISES OF THE JANKHARIA GROUP OF CASES INCLUDING THE ASSESSEE. TH E AO WORKED OUT THE DISALLOWANCE AMOUNT OF RS. 1,85,441/ - U/S 14A READ WITH RULE 8D OF THE ACT IN THE LIGHT O F ITAT SPECIAL BENCH IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD., 26 SOT 603 (BOM) (SPECIAL BEN CH). THE CIT(A) CONFIRMED THE ORDER OF THE AO OBSERVING THAT THE AO HAS RIGHTLY DISALLOWED PROPORTIONATE INTERES T ON THE EXEMPTED SHARE INCOME AND OTHER INCOME AS PER SECTION 14A R.W. RULE 8D OF THE ACT. HOWEVER, THE C IT(A) DELETED THE ADDITION OF RS. 6,548/- DISALLOWED BY T HE AO % OF THE AVERAGE VALUE OF INVESTMENT YIELDING EXEM PT INCOME. THE CIT(A) FOUND THAT NO OTHER EXPENDITURE EXCEPT INTEREST HAS BEEN CLAIMED BY THE ASSESSEE TO EARN THE EXEMPT INCOME OR OTHER INCOME, THEREFORE, NO OT HER EXPENDITURE EXCEPT INTEREST CAN BE DISALLOWED AS PE R RULE ITA NOS. 3201 TO 3207/M/09 3 8D OF IT RULES. THE CIT(A), ACCORDINGLY, GAVE RELI EF OF RS. 6,548/-. IT IS STATED THAT NO REVENUE APPEAL HAS BE EN FILED AGAINST THE ORDER OF CIT(A). 4. THE LEARNED AR HAS RELIED UPON THE DECISION OF I TAT, MUMBAI BENCH IN THE GROUP CASES IN CASE OF DR. GOVI NDJI R. JANKHARIA VIDE ITA NOS. 3188 TO 3193/MUM/09 FOR AY 2001-02 TO 2006-07 ORDER DATED 27 TH AUGUST, 2010 AND THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VIDE INCOME TAX APPEAL NO. 626 OF 2010 AND W.P. OF 758 O F 2010, JUDGMENT DATED 12.08.2010. THE LEARNED AR SUBMITTED THAT AS PER THE DECISION OF ITAT CITED SU PRA, NO DISALLOWANCE U/S 14A IS WARRANTED TO THE EXTENT OF BORROWED FUNDS UTILIZED FOR THE PURPOSE OF INVESTME NT IN FIRM AS THE SAME IS ALLOWABLE DEDUCTION FROM THE REMUNERATION AND INTEREST RECEIVED BY THE ASSESSEE FROM THE PARTNERSHIP FIRM. AS REGARDS, EXEMPT INCOME FR OM PPF AND OTHERS, THE LEARNED AR SUBMITTED THAT THE ASSESSEE USED OWN FUNDS IN THE INVESTMENT OF PPF, THEREFORE, NO DISALLOWANCE IS WARRANTED. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUBMITTED THAT THE FACTS OF THE CASE AR E REQUIRED TO BE EXAMINED IN THE LIGHT OF ITATS DECI SION CITED SUPRA AND THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING C O. LTD. (SUPRA), THEREFORE, MATTER MAY BE SENT BACK TO THE FILE OF THE AO. 6. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD. WE FIND THAT AS RE GARDS THE ISSUE PERTAINING TO CAPITAL CONTRIBUTION TO PAR TNERSHIP ITA NOS. 3201 TO 3207/M/09 4 FIRM AND APPLICABILITY OF SECTION 14A IS COVERED BY THE ORDER OF ITAT IN CASE OF DR. GOVINDJI R. JANKHARIA CITED SUPRA. THE FINDINGS OF THE ITAT IN THE SAID DECISIO N ARE REPRODUCED BELOW:- 3. THE LEARNED A.R. PLACED ON RECORD A COPY OF THE ORDER PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN MR. VIRESH S.TASWALA VS. ITO [2010-TIOL-337-ITAT-MUM] IN WHICH A VIEW HAS BEEN TAKEN THAT INTEREST PAID ON THE AMOUN T TAKEN ON LOAN AND UTILIZED FOR CAPITAL CONTRIBUTION IN TH E FIRM IS ALLOWABLE AS EXPENDITURE AGAINST THE REMUNERATION R ECEIVED FROM THE FIRM. IN REACHING THIS CONCLUSION, THE TRI BUNAL CONSIDERED THE PROVISIONS OF SECTION 14A AS WELL AS SECTION 10(2A) BY WHICH PARTNERS SHARE IN THE TOTAL INCOME OF THE FIRM HAS BEEN MADE EXEMPT FROM INCOME-TAX. THE TRIB UNAL FURTHER TOOK NOTE OF ANOTHER ORDER PASSED BY THE MU MBAI BENCH OF THE TRIBUNAL IN SUDHIR DATTARAM PATIL VS. DCIT (2005) 2 SOT 678 ON THE SAME LINES. NO CONTRARY DE CISION HAS BEEN BROUGHT ON RECORD BY THE LEARNED DEPARTMEN TAL REPRESENTATIVE. IN VIEW OF THE ORDER IN THE CASE OF MR.VIRESH S.TASWALA (SUPRA) IT BECOMES APPARENT TH AT THE AMOUNT OF INTEREST PAID BY A PARTNER ON LOAN BORROW ED FOR CONTRIBUTING CAPITAL IN THE FIRM HAS TO BE ALLOWED AS DEDUCTION AGAINST REMUNERATION RECEIVED FROM THE FI RM AND CANNOT BE ATTRIBUTED TO SHARE OF PROFIT, WHICH IS EXEMPT UNDER THE PROVISIONS OF THE ACT. ADVERTING THE FACT S OF THE INSTANT CASE IT IS NOTICED THAT THE ASSESSING OFFIC ER DISALLOWED THE AMOUNT OF INTEREST U/S.14A BY NOT ON LY CONSIDERING THE SHARE OF PROFIT FROM THE PARTNERSHI P FIRM BUT ALSO NOTING THAT THE ASSESSEE HAD EARNED INTEREST O N PPF AND DIVIDEND INCOME FROM SHARES WHICH ARE EXEMPT FR OM TAXATION. IT IS QUITE NATURAL THAT DISALLOWANCE IS CALLED FOR IN RESPECT OF THESE TWO ITEMS OF INCOME, WHICH ARE OTHERWISE EXEMPT FROM TAXATION. THERE IS NO MATERIA L ON RECORD TO BIFURCATE THE LOAN BORROWED AND UTILIZED IN PPF, SHARES AND INVESTMENTS IN PARTNERSHIP FIRM. IN SUCH CIRCUMSTANCES WE CANNOT ADJUDICATE UPON THE AMOUNT OF INTEREST DISALLOWABLE U/S.14A IN RESPECT OF INVESTM ENTS MADE IN PPF AND SHARES, IF ANY. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND RESTORE THE MA TTER TO THE FILE OF A.O. FOR EXAMINING THE EXTENT TO WHICH THE BORROWED FUNDS, WERE UTILIZED FOR THE PURPOSE OF M AKING INVESTMENT IN PPF AND SHARES IN RESPECT OF WHICH DI VIDEND INCOME HAS BEEN EARNED. AFTER THAT HE WILL MAKE DISALLOWANCE U/S.14A, IF ANY CALLED FOR, ON A REASO NABLE BASIS AS HAS BEEN HELD RECENTLY BY THE HONBLE BOMB AY HIGH COURT IN GODREJ& BOYCE LIMITED VS. ACIT VIDE I TS ITA NOS. 3201 TO 3207/M/09 5 JUDGEMENT DATED 12.08.2010. IT IS MADE CLEAR THAT T HE INTEREST ON BORROWINGS TO THE EXTENT OF AMOUNT UTIL IZED FOR THE PURPOSE OF INVESTMENT IN THE FIRM, SHALL BE AL LOWED AS DEDUCTION FROM THE REMUNERATION AND INTEREST RECEIV ED BY THE ASSESSEE FROM M/S. JANKHARIA IMAGING CENTRE. 7. AS REGARDS THE CONTENTION OF THE LEARNED AR THAT THE ASSESSEE MADE INVESTMENT IN PPF AND OTHERS OUT OF O WN FUND THEREFORE NO DISALLOWANCE IS WARRANTED UNDER S ECTION 14A OF THE ACT. IN PRINCIPLE THIS ISSUE HAS BEEN DE CIDED BY THE ITAT AFTER A DETAILED DISCUSSION WHILE DECIDIN G THE ISSUE RELATED TO DISALLOWANCE OF INTEREST UNDER SEC TION 36(1)(III) OF THE ACT IN THE CASE OF H.P. SHAH & C O. VIDE ITA NO. 3694/M/06 FOR AY 2003-04 ORDER DATED 15/01/ 09, WHEREIN THE ITAT HELD AS UNDER:- 4. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED RECORD. THE CRUX OF THE MATTER TO BE CONSIDERED BY US IS IN RESPECT OF ALLOWABILITY OF I NTEREST EXPENDITURE UNDER SECTION 36(1)(III) OF THE ACT WHE RE INTEREST BEARING BORROWED FUNDS AND OWN CAPITAL HAS LOST ITS SEPARATE IDENTITY AS BOTH ARE MIXED. SECTION 3 6 OF THE ACT OCCURS IN CHAPTER IV WHICH DEALS WITH THE COMPU TATION OF TOTAL INCOME AND IT IS A PROVISION WHICH RELATES TO THE COMPUTATION OF INCOME EARNED UNDER THE HEAD 'PROFIT S AND GAINS OF BUSINESS OR PROFESSION'. THE DEDUCTION CONTEMPLATED BY THE SECTION IS IN RELATION TO THE E XPENDITURE WHICH COULD PROPERLY BE REGARDED AS NECESSARY FOR T HE PURPOSE OF THE BUSINESS OR PROFESSION. EXPENDITURE INCURRED ON ACCOUNT OF COMMERCIAL EXPEDIENCY FOR THE PURPOSE OF BUSINESS WOULD BE ALLOWABLE UNDER THIS PROVISION. T HE EXPENDITURE TO BE ALLOWED MUST HAVE A NEXUS WITH TH E BUSINESS OF THE ASSESSEE. IF THE EXPENDITURE INCURR ED IS OSTENSIBLY INCURRED FOR THE BUSINESS, BUT IF IN REA LITY IS NOT FOR THE PURPOSE OF BUSINESS THEN SUCH EXPENDITURE I S NOT ALLOWABLE. 4.1 SECTION 36(1) (III) OF THE ACT REFERS TO 'THE A MOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FO R THE PURPOSES OF THE BUSINESS OR PROFESSION'. THE CAPITA L BORROWED SHOULD BE FOR THE PURPOSES OF THE BUSINESS OR PROFESSION. IT IS IMPLICIT IN THIS PROVISION THAT T HE CAPITAL SO BORROWED SHOULD NOT ONLY BE INVESTED IN THE BUSINES S, BUT THAT THE AMOUNT BORROWED SHOULD CONTINUE TO REMAIN IN THE BUSINESS. SO LONG AS THE AMOUNT BORROWED IS USED IN THE BUSINESS, THE INTEREST PAID ON SUCH BORROWING IS AN ITA NOS. 3201 TO 3207/M/09 6 EXPENDITURE WHICH IS REQUIRED TO BE DEDUCTED IN THE COMPUTATION OF THE INCOME FROM THE BUSINESS. THE IN TEREST PAYABLE ON THE CAPITAL BORROWED IS A LIABILITY WHIC H CONTINUES TILL SUCH TIME AS THE AMOUNT BORROWED IS REPAID. SUCH INTEREST IS ALLOWABLE UNDER THE PROVISION ONLY FOR THE REASON THAT THE AMOUNT ON WHICH INTEREST IS PAID CO NTINUES TO BE USED IN THE BUSINESS AND THE PAYMENT OF SUCH INTEREST IS, THEREFORE, NECESSARY FOR THE PURPOSE OF RUNNING THE BUSINESS. 4.2 THE OBJECT OF THE PROVISION IS NOT TO ENABLE AN ASSESSEE TO MAKE A LARGE BORROWING AND CREATE A LIA BILITY FOR PAYMENT OF INTEREST THEREON NOT ONLY IN THE YEA R IN WHICH THE BORROWING WAS MADE, BUT THE SUBSEQUENT YE ARS AS WELL, KEEP THE LOAN OUTSTANDING AND THEREAFTER, DIVERT THE AMOUNT BORROWED BY TAKING IT OUT OF THE BUSINES S BY GIVING IT INTEREST-FREE TO OTHERS LIKE SISTER CONCE RNS AND RELATIVES OR FOR PERSONAL USE., BUT CONTINUE TO PAY INTEREST OUT OF THE INCOME OF THE BUSINESS AND CLAIM THE AMO UNT OF INTEREST PAID AS A BUSINESS EXPENDITURE. THE PAYMEN T OF INTEREST ON THE AMOUNT NOT USED IN THE BUSINESS CAN NOT BE REGARDED AS A BUSINESS EXPENDITURE AS THE BUSINESS DOES NOT DERIVE ANY BENEFIT BY THE OUTGOING BY WAY OF IN TEREST ON AN AMOUNT WHICH IS NO LONGER IN THE BUSINESS, BUT H AD BEEN DIVERTED FROM THE BUSINESS. THIS PROVISION, THEREFO RE, CANNOT BE CONSTRUED AS ENABLING AN ASSESSEE TO BURD EN THE BUSINESS WITH INTEREST EVEN WHILE TAKING THE AMOUNT INITIALLY BORROWED FOR THE BUSINESS, BUT SUBSEQUENT LY TAKEN OUT OF THE BUSINESS BY DIVERTING IT AS INTEREST-FRE E LOANS TO SISTER CONCERNS AND RELATIVES OR FOR PERSONAL USE. 4.3 THE AMOUNT BORROWED FOR THE BUSINESS REMAINS A LIABILITY FOR THE BUSINESS TILL ITS DISCHARGE. THE FACT THAT THE AMOUNT BORROWED MAY HAVE BEEN INVESTED IN THE PURCH ASE OF MACHINERY OR UTILISED AS WORKING CAPITAL OR USED IN ANY OTHER WAY DOES NOT IN ANY WAY AFFECT THE LIABILITY FOR REPAYMENT OF THE AMOUNT BORROWED. SO LONG AS THE MO NEY BORROWED IS USED IN THE BUSINESS, INTEREST PAID ON SUCH BORROWING IS A PROPER CHARGE ON THE BUSINESS AND IS ALLOWABLE AS EXPENDITURE. UNDER SECTION 36(1)(III) OF THE ACT, AMOUNTS DIVERTED NOT BEING USED FOR THE PURPOSES OF THE BUSINESS, INTEREST RELATING TO THE AMOUNT DIVERTED OUT OF THE BUSINESS CANNOT BE TREATED AS A PERMISSIBLE DEDUCTI ON IN THE COMPUTATION OF INCOME. ON MANY OCCASIONS THE ASSESSEE TAKE STAND THAT ONCE THE AMOUNT BORROWED I S FOUND TO HAVE BEEN USED FOR SOME TIME IN THE BUSINE SS, THEN SUBSEQUENT DIVERSION IS OF NO CONSEQUENCE, BUT SUCH STAND OF THE ASSESSEE CANNOT BE ACCEPTED. THE LEGIS LATIVE LANGUAGE OF SEC. 36(1)(III) OF THE ACT IS VERY AS CLEAR EXPRESSION BORROWED FOR THE PURPOSE OF THE BUSINES S IS ITA NOS. 3201 TO 3207/M/09 7 USED. THE AMOUNT BORROWED MUST CONTINUE TO BE USED FOR THE PURPOSES OF THE BUSINESS AND THE FACT THAT IT W AS USED FOR SOME POINT OF TIME, BUT LATER DIVERTED WOULD NO T ENTITLE THE ASSESSEE TO CLAIM THE INTEREST PAID ON THE BORR OWING AS A DEDUCTION UNDER SEC.36(1)(III) EVEN AFTER SUCH DI VERSION. IN CASES WHERE DIVERSION OCCURS IMMEDIATELY AFTER T HE BORROWING AND THE BORROWED AMOUNTS ARE NOT INVESTED IN THE BUSINESS AT ALL, BUT DIVERTED FOR OTHER PURPOSE S, THEN THERE SHOULD NOT BE ANY CLOUD OF DOUBT THAT INTER EST PAID ON SUCH BORROWED AMOUNTS IS NOT ALLOWABLE DEDUCTION . THE FACTUM OF DEFERMENT, IN CASES WHERE SUCH DIVERSION OF FUNDS FROM THE BUSINESS IS CLEARLY ESTABLISHED FRO M THE FACTS ON RECORD, DOES NOT ENTITLE THE ASSESSEE TO C LAIM THE BENEFIT OF DEDUCTION IN RESPECT OF INTEREST PAID ON THE AMOUNTS BORROWED BUT NOT PRESENTLY USED IN ITS BUSI NESS. THE TIME AT WHICH THE DIVERSION TAKES PLACE IS NOT THE ONLY RELEVANT CRITERION BUT IT IS THE FACT OF THE DIVERS ION WHICH IS MATERIAL AND ONCE IT HAS BEEN SHOWN THAT THERE HAS BEEN DIVERSION OF INTEREST ON THE AMOUNT BORROWED, BUT SUBSEQUENTLY DIVERTED WOULD NOT QUALIFY FOR DEDUCTI ON. ANY VIEW TO THE CONTRARY WOULD NOT IN THE LEAST SUB SER VE THE OBJECT OF THE LEGISLATIVE PROVISION, BUT IT WOULD O NLY OPEN THE GATES FOR THE ASSESSEES TO BORROW MERRILY AND A FTER OSTENSIBLY USING IT IN THE BUSINESS FOR A SHORT PER IOD AND AT A SUBSEQUENT POINT OF TIME DIVERT THE FUNDS IN WHOL E OR PART, FOR NON-BUSINESS PURPOSES AND CONTINUE TO CLA IM THE INTEREST ON THE BORROWING AS A DEDUCTIBLE ITEM OF EXPENDITURE. THE OBJECTS OF THE SECTION WOULD NOT I N ANY WAY BE ADVANCED BY THE ADOPTION OF SUCH A VIEW. IF A BUSINESS FOR WHICH THE INTEREST PAID IS CLAIMED AS A DEDUCTION HAS NOT BENEFITED DURING THE YEAR FROM TH E CAPITAL BORROWED BY SUCH BORROWED AMOUNT BEING USED IN THE BUSINESS, SUCH INTEREST CANNOT BE REGARDED AS EXPENDITURE FOR THE PURPOSES OF THE BUSINESS. THE A SSESSEE MAY NOT EVEN WHILE USING BORROWED FUNDS FOR ITS PER SONAL PURPOSES AND NOT BUSINESS PURPOSES CLAIM DEDUCTION OF THE INTEREST PAID ON THE BORROWING. IN ANY CASE IF THE ASSESSEE TAKES STAND THAT IT IS BUSINESS EXPEDIENCY THEN, HE AVY BURDEN LIES ON THE ASSESSEE TO PROVE SUCH CONTENTIO N AND SAID CONTENTION IS TO BE EXAMINED BY APPLYING DEFER ENT CRITERIA. 4.4 A REAL PROBLEM ARISES IN CASES WHERE FUNDS ARE PUMPED OUT OF BUSINESS WHICH ARE COMPRISE OF BOTH T YPE OF FUNDS, BORROWED AS WELL AS OWN FUNDS FOR NON-BUSINE SS PURPOSES. IN ALL SUCH CASES WHERE MIXED FUNDS ARE U SED FOR BOTH BUSINESS AND OTHER THAN BUSINESS PURPOSES, THE RE IS NO PRESUMPTION THAT MONEYS USED FOR OTHER PURPOSES CAME OUT OF BORROWED FUNDS. IT CAN BE SAID THAT INTEREST FREE FUNDS GIVEN ARE OUT OF OWN FUNDS TO THE EXTENT OF C APITAL ITA NOS. 3201 TO 3207/M/09 8 AND RESERVES, AND THIS PROPOSITION IS SUPPORTED BY THE DECISION OF HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. GOPIKRISHNA MURLIDHAR, 47 ITR 469 ( AP) AND IN THE SAID CASE THEIR LORDSHIPS ACCEPTED THE CONTE NTION THAT THE ASSESSEE IS ENTITLED TO WITHDRAW FROM CAPI TAL. THE FACTS OF THAT CASE ARE THAT THE ASSESSEE IS A HINDU UNDIVIDED FAMILY CARRYING ON BUSINESS ON AN EXTENSI VE SCALE WITH A CAPITAL OF NEARLY RS. 20,00,000 (TWENT Y LAKHS). DURING THE YEAR ENDED 9TH NOVEMBER, 1950, THE ASSES SEE MADE LARGE BORROWINGS FOR PURPOSES OF HIS BUSINESS AND PAID INTEREST AMOUNTING TO RS. 93,611 ON SAID BORRO WINGS. DURING THE COURSE OF THAT YEAR, THE ASSESSEE WITHDR EW FROM THE BUSINESS FROM TIME TO TIME AMOUNT OF RS. 1,77,9 84 FOR HIS PERSONAL EXPENSES. THE INCOME-TAX OFFICER DISAL LOWED A SUM OF RS. 13,500 ON PRORATA, REPRESENTING THE INTE REST ELEMENT RELATING TO RS. 1,77,984, SINCE HE WAS OF V IEW THAT AMOUNT OF RS. 1,77,984 WITHDREW WAS MADE IN THE NAM E OF THE BUSINESS BUT USED FOR HIS PERSONAL PURPOSES. AC CORDING TO HIM, MONEY WAS WITHDRAWN FROM THE BOOKS OF ACCOU NT TO MEET THE PERSONAL EXPENDITURE OF THE ASSESSEE AND, AS THIS SUM OF MONEY WAS NOT ACTUALLY USED FOR THE BUSINESS , THE INTEREST PAID THEREON COULD NOT BE ALLOWED AS PERMI SSIBLE DEDUCTION. 4.5 THE RELEVANT FINDING OF THE COURT IS REPRODUCED BELOW:- WE DO NOT THINK THAT WE CAN GIVE EFFECT TO THIS AR GUMENT. INDISPUTABLY, THESE AMOUNTS WERE BORROWED ONLY FOR THE PURPOSE OF BUSINESS OF THE FAMILY. THE ASSESSEE DRE W OUT FROM TIME TO TIME VARIOUS SUMS OF MONEY AGGREGATING TO RS. 1,77,984/- FROM THE BUSINESS. IT IS NOT A CASE WHER E ANY PARTICULAR SUM PURPORTING TO BE BORROWED ON BEHALF OF THE BUSINESS WAS SPENT FOR HOUSEHOLD EXPENSES. THIS IS A CASE WHERE THE LOANS WERE TAKEN FOR CARRYING ON THE BUSI NESS BUT THE FAMILY USED TO WITHDRAW SOME AMOUNTS FROM T HE BUSINESS WHENEVER OCCASIONS AROSE. THE FAMILY WAS S URELY ENTITLED TO WITHDRAW FROM THE CAPITAL SUPPLIED BY I T WITH THE RESULT OF THE CAPITAL BEING DEPLETED. THERE IS, THE REFORE, NO SUBSTANCE IN THE SUBMISSION THAT THE FACT THAT PART OF THE AMOUNT BORROWED WAS LATER ON USED FOR PERSONAL EXPE NSES, WOULD DEPRIVE THE ASSESSEE OF THE BENEFITS. 4.6 FROM THE ABOVE JUDGMENT OF HONBLE ANDHRA PRADE SH HIGH COURT WE FIND THAT THE ASSESSEE HAS RIGHT TO R EPLACE HIS OWN CAPITAL WITH BORROWED FUNDS WHICH WERE ALRE ADY USED FOR THE PURPOSE OF BUSINESS IN ACQUIRING ASSET S AND OTHER. WITH THE HELP OF THIS RATIO OF THE JUDGMENT SUCH PROBLEM CAN BE RESOLVED BY EXAMINATION AND ANALYSES OF FINANCIAL STATEMENTS PREPARED ON THE BASIS OF BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. IT IS WELL ACCE PTED ITA NOS. 3201 TO 3207/M/09 9 PROPOSITION THAT FOR THE PURPOSE OF ASCERTAINING PR OFIT AND GAINS, THE NORMAL PRINCIPLES OF COMMERCIAL ACCOUNTI NG SHOULD BE APPLIED, SO LONG AS THEY DO NOT CONFLICT WITH ANY EXPRESS STATUTORY PROVISIONS AS HELD BY THE HONBL E SUPREME COURT IN CIT VS. U.P. STATE INDUSTRIAL DEVE LOPMENT CORPORATION, 225 ITR 703(SC). THUS SUCH PROBLEM CAN BE RESOLVED BY ANALYZING STATEMENT OF ACCOUNTS AND IN PARTICULAR BALANCE-SHEET. WHERE DETAILS OF OWN CAPI TAL, BORROWED FUNDS AND INTEREST FREE FUNDS GIVEN OR UTI LIZED FOR OTHER PURPOSES ARE AVAILABLE.THERE IS NO MUCH DIFFI CULTIES IN EXAMINATION OF RIGHT TO REPLACE OWN CAPITAL TO B ORROW FUNDS IN CASE OF INDIVIDUAL AND PARTNERSHIP FIRM. B UT IN THE CASE OF COMPANY, CAPITAL IS FUND OF PUBLIC/ SHARE H OLDERS WHICH IS MANAGED BY THE BOARD OF DIRECTORS. IN THE CASE OF COMPANY THERE ARE CERTAIN RESTRICTIONS UNDER THE CO MPANIES ACT IN USE OF CAPITAL/FUND FOR PERSONAL BENEFITS. S UCH REPLACEMENT IS REQUIRED TO BE AUTHORIZED BY PROPER RESOLUTION AND MUST BE IN CONFORMITY WITH THE PROVI SIONS OF COMPANIES ACT AND RULES AND REGULATIONS OF REGULATO RY BODIES. SAME ARE REQUIRED TO REFLECT IN THE FINANCI AL STATEMENTS PREPARED ON THE BASIS OF AUDITED BOOKS O F ACCOUNT. THE AUDITOR IS ALSO REQUIRED TO POINT OUT SUCH REPLACEMENT/UTILIZATION OF FUNDS. IF FUNDS ARE DIVE RTED IN CONTRAVENTION OF STATUTORY PROVISIONS, THEN SAME MA Y BE SUBJECT TO LEGAL AND PENAL CONSEQUESES UNDER THE COMPANIES ACT AND OTHERS. THE ONUS IS ON THE ASSESS EE TO FURNISH THE RELEVANT MATERIAL REGARDING REPLACEMENT OF BORROWED FUNDS BY OWN CAPITAL AND INTEREST FREE FUN DS AVAILABLE WITH THE ASSESSEE. 4.7 ON THE BASIS OF ABOVE DISCUSSION A PROPOSITION / FORMULA CAN BE LAID DOWN THAT IF AN ASSESSEE HAVING SUFFICIENT INTEREST FREE FUNDS, IN THE FORM OF CAPI TAL RESERVES AND OTHER FUNDS WITHOUT INTEREST BEARING FROM RELAT IVES AND FRIENDS NOT RELATED TO BUSINESS, TO COVER FUNDS GIV EN INTEREST FREE OR UTILIZED OTHER THAN FOR BUSINESS P URPOSES, NO DISALLOWANCE IS WARRANTED. IF THE OWN FUNDS ARE NOT SUFFICIENT TO COVER INTEREST FREE ADVANCES, A PROPO RTIONATE DISALLOWANCE IS WARRANTED. WHILE EXAMINING INTEREST FREE FUNDS AVAILABLE WITH ASSESSEE AND INTEREST FREE FUN DS GIVEN A CARE IS REQUIRED TO BE TAKEN THAT THESE FUNDS WER E NOT RELATED TO BUSINESS OF THE ASSESSEE. CAPITAL AND RE SERVES ARE CERTAINLY ASSESSEES OWN INTEREST FUNDS. THIS PROPORTION IS FORTIFIED BY THE DECISION OF ITAT IN THE CASE OF TORRENT FINANCERS V. ACIT, 73 TTJ 624 (AHD.), JUDGM ENT OF ALLAHABAD HIGH COURT IN THE CASE OF CIT V. PREM HEA VY ENGINEERING WORKS P. LTD., 285 ITR 554 (ALL.), AND THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF MU NJAL SALES CORPORATION V. CIT, 298 ITR 298 (SC).IT IS T O NOTE THAT DECISIONS OF THE HONBLE PUNJAB AND HARYANA HI GH ITA NOS. 3201 TO 3207/M/09 10 COURT IN MUNJAL SALES CORPORATION V CIT (208) 298 I TR 288 AND CIT V MUNJAL SALES CORPORATION(2008) 298 ITR 29 4 WHEREIN THE HONBLE PUNJAB AND HARYANA HIGH COURT FOLLOWED CIT ABHISHEK INDUSTRIES LTD (2006) 286 IT R 1(P&H) HAVE BEEN REVERSED BY THE HONBLE SUPREME C OURT. THUS THE DECISION OF THE PUNJAB AND HARYANA HIGH CO URT IN THE CASE OF CIT ABHISHEK INDUSTRIES LTD (2006) 286 ITR 1(P&H) HAS BEEN IMPLIEDLY REVERSED ON THE ISSUE. 8. THE FACTS OF THE CASE UNDER CONSIDERATION ARE REQUIRED VERIFICTION IN THE IN THE LIGHT OF ABOVE D ISCUSSION, WE REMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE THE DISALLOWANCE AMOUNT, IF ANY , IN ACCORDANCE WITH THE ABOVE DECISION OF ITAT AND IN ACCORDANCE WITH THE JUDGMENT OF HONBLE JURISDICTIO NAL HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURIN G CO. LTD. (SUPRA) AFTER PROVIDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. IT MAY BE STATED THAT THE ASSESSEE HAS FILED APPEAL AGAINST THE ORDER OF CIT (A) AND T HE REVENUE HAS NOT FILED ANY APPEAL, THEREFORE, THE DISALLOWANCE AMOUNT IF ANY SHOULD NOT BE MORE THAN WHAT THE CIT(A) HAS DECIDED IN HIS ORDER. 9. SINCE FACTS AND GROUNDS OF APPEALS ARE FOUND, WE FOLLOW THE ABOVE ORDER OF THIS BENCH AND IN THE LIGHT OF THAT THE MATTER ARE SENDING BACK TO THE ASSESSING OFFICER WITH IDENTICA L DIRECTION. 10. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF SEPTEMBER, 2010. SD/- (A.L. GEHLOT) ACCOUNTANT MEMBER SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER DATED: 30 TH SEPTEMBER, 2010 ITA NOS. 3201 TO 3207/M/09 11 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, I BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. JANHAVI