Shri Ajay J.Desai, Ahmedabad V. The Income tax Officer,Ward-10(3), Ahmedabad

ITA 395/AHD/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9367 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 23-11-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 08-02-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SHAILAJA RAI
• Assessee Lawyers: SHRI S R SHAH
• Keywords: Capital asset; Business income; Salary income

Judgement Text

IT A.NO.395/AHD/2010 ASSESSMEN T YEAR : 2005-06. 1 1 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH SMC BEFORE SHRI T.K. SHARMA JUDICIAL MEMBER. I. T. A. NO. 395 /AHD/2010 ASSESSMENT YEAR :2005-06 SHRI AJAY J. DESAI, 83, TAPOVAN SOCIETY, S.M. ROAD, AHMEDABAD. VS. INCOME TAX OFFICER, WARD 10(3), 1 ST FLOOR, NARAYAN CHAMBERS, ASHRAM ROAD, AHMEDABAD. APPELLANT RESPONDENT. PAN NO:ABLPD 2506 Q APPELLANT BY : SHRI SHRI S.R. SHAH. RESPONDENT BY : SMT. SHAILAJA RAI, D.R. ORDER PER SHRI T.K. SHARMA, JUDICIAL MEMBER. THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE O RDER DATED 26-3-2009 OF THE LEARNED C.I.T.(A)-XVI, AHMEDABAD FOR THE ASSESS MENT YEAR 2005-06 CONFIRMING THE INTEREST DEFICIT OF RS.5,65,978/- AS AGAINST THE INTEREST DEFICIT OF RS.7,45,236/- DISALLOWED BY ASSESSING OFFICER IN TH E ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2005-06. 2. BRIEFLY STATED THE FACTS ARE THAT ASSESSEE IS AN INDIVIDUAL. FOR THE ASSESSMENT YEAR UNDER APPEAL, HE FILED THE RETURN O F INCOME DECLARING LOSS OF RS.4,51,979/- AS UNDER :- 1. INCOME FROM SALARY. 90,000/- 2. INCOME FROM BUSINESS & PROFESSION . INTEREST AND SALARY. 1,33,22 7/- 3. INCOME FROM OTHER SOURCES . INTEREST AS PER INTEREST A/C. INTEREST RECEIVED FROM JAY ENGINEERS SHOWN IN BUSINESS INCOME. -674206 -6,74,206 IT A.NO.395/AHD/2010 ASSESSMEN T YEAR : 2005-06. 2 2 GROSS TOTAL INCOME. - 4,51,979 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER ASKED THE ASSESSEE TO SHOW CAUSE HOW THE INTEREST E XPENSE OF RS.7,45,237/- IS ALLOWABLE WHEN ASSESSEE IS NOT CARRYING ON ANY INDE PENDENT BUSINESS. THE SAID SHOW CAUSE NOTICE IS REPRODUCED HEREUNDER:- DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT IS NOTICED THAT YOU HAVE CLAIMED INTEREST PAYMENT OF RS.7,45,237/- AGAINST T HE INCOME RECEIVED BY WAY OF INTEREST AND SALARY FROM PARTNERSHIP FIRM AN D SALARY FROM M/S. A.K. ENGINEERS IT IS ALSO NOTICED THAT YOU HAVE NO INDE PENDENT BUSINESS AND IT IS ALSO NOT KNOWN WHY YOU HAVE BORROWED SUCH HUGE F UNDS ON WHICH INTEREST PAYMENT IS CLAIMED. ON GOING THROUGH THE D ETAILS FILED BY YOU, IT IS NOTICED THAT YOU HAVE OBTAINED LOANS FROM BHAGYODAY A BANK LTD., HDFC BANK LTD., AND KOTAK MAHINDRA BANK LTD., AND THE UT ILIZATION THEREOF WAS NOT GIVEN. IN ABSENCE OF ANY DETAILS, IT IS PRESUME D THAT THE LOANS BORROWED BY YOU MIGHT HAVE BEEN UTILIZED FOR YOUR P ERSONAL PURPOSES AND AS SUCH THE INTEREST PAYMENT ON SUCH LOANS ARE NOT ALLOWABLE AGAINST THE INCOME EARNED BY YOU FROM THE PARTNERSHIP FIRM AND SALARY. MOREOVER, IT IS ALSO NOTICED THAT YOU HAVE PAID A HUGE AMOUNT OF IN TEREST TO M/S. A.K. ENGINEERS. ON GOING THROUGH THE COPY OF ACCOUNT FRO M A.K. ENGINEERS, IT IS NOTICED THAT THE WITHDRAWALS ARE MAINLY FOR PERS ONAL PURPOSES ONLY SUCH AS PAYMENT OF DIESEL/PETROL BILLS, CREDIT CARD PAYM ENTS AND DINERS CLUB PAYMENT, ETC. IN VIEW OF THE ABOVE FACTS, YOUR CLAI M FOR INTEREST PAYMENT CANNOT BE ACCEPTABLE. YOU ARE, THEREFORE, REQUESTED TO FURNISH THE DETAILS OF INTEREST PAYMENT, UTILIZATION OF BORROWED FUNDS AND THE JUSTIFICATION FOR THE PAYMENT OF INTEREST WITHIN THREE DAYS FROM THE RECEIPT OF THIS LETTER, FAILING WHICH IT WILL BE PRESUMED THAT YOU HAVE NOT HING TO SAY IN THE MATTER AND THE ASSESSMENT WILL BE FINALIZED DISALLOWING TH E INTEREST PAYMENT CLAIMED BY YOU, WHICH PLEASE NOTE. 4. TO THE AFORESAID SHOW CAUSE NOTICE THE ASSESSEE VIDE HIS REPLY DATED 10- 10-2007 SUBMITTED AS UNDER :- I AM IN RECEIPT FOR YOUR LETTER NO. ITO, WARD-10( 3)/AJD/2007-08, DATED 9-10-2007 AND HAVE NOTICED THE CONTAINS. IN F ACT IN THIS YEAR I HAVE NO INDEPENDENT BUSINESS INCOME BUT THE INCOME FROM SALARY AS WELL AS INTEREST AND SHARE INCOME FROM PARTNERSHIP FIRM. HO WEVER, IN EARLIER YEARS, I WAS DOING INDEPENDENT BUSINESS FOR WHICH I BORROW ED SUBSTANTIAL LOANS AND ADVANCES. SUCH LOANS AND ADVANCES WERE UTILIZED EITHER FOR MY BUSINESS OR MONEY IS LENT OUT FOR BUSINESS PURPOSE OR TO EARN THE INTEREST INCOME. THE MOST OF THE LOANS AND ADVANCES WERE TA KEN IN EARLIER YEAR FOR MORE THAN 4 TO 5 YEARS AND SINCE THEN IT IS CAR RIED FORWARD FROM YEAR TO IT A.NO.395/AHD/2010 ASSESSMEN T YEAR : 2005-06. 3 3 YEAR UNDER CONSIDERATION, I HAVE NOT BORROWED ANY F UND OR DEPOSIT FROM ANY OF THE PARTY. IN PAST YEARS, I INCURRED THE HEA VY LOSSES AND THEREFORE, I COULD NOT RETURN THE DEPOSIT TO THE DEPOSITORS BUT INCREASE FROM YEAR TO YEAR BECAUSE OF APPLICATION OF INTEREST THEREON. IF YOUR GOODSELF WILL GIVE ME THE REASONABLE TIME THEN I SHALL ESTABLISH THE N EXUS BETWEEN THE AMOUNT BORROWED AND UTILIZATION OF THE FUND FOR BUS INESS PURPOSE. MOREOVER, FROM THE FIRM M/S. JAY ENG., WHERE I AM P ARTNER AND I HAVE INVESTED THE CAPITAL THEREIN ON WHICH I AM GETTING THE INTEREST @ THE RATE OF 12% AS AGAINST INTEREST PAID BY ME FROM 15% TO 24% ON AMOUNT BORROWED. THE INTEREST PAID @ 21% AND 24% WAS ACUTE NECESSITY OF THE FUND TO INVEST IN BUSINESS AS WELL AS IN PARTNERSHI P FIRM. 5. AFTER CONSIDERING THE AFORESAID REPLY, IN THE IM PUGNED ORDER, THE ASSESSING OFFICER DISALLOWED INTEREST PAYMENT AMOUN TING TO RS.7,45,237/- FOR THE DETAILED REASONS GIVEN IN PARAGRAPH 3.2 WHICH IS R EPRODUCED AS UNDER :- 3.2. I HAVE GONE THROUGH THE SUBMISSION FURNISHED BY THE ASSESSEE. THE CONTENTION RAISED BY THE ASSESSEE IS NOT ACCEPT ABLE ON THE FOLLOWING GROUNDS: ON GOING THROUGH THE DETAILS FILED BY THE ASSESSEE, , IT IS NOTICED THAT THE ASSESSEE HAS TAKEN HUGE LOANS FROM BHAGYODAYA BANK, HDFC BANK LTD., AND KOTAK MAHINDRA BANK LTD., RECENTLY AND IT IS NO THING TO DO WITH THE BUSINESS CARRIED ON BY THE ASSESSEE IN THE PAST. IN SPITE OF THE SPECIFIC REQUEST TO THE ASSESSEE TO FURNISH THE DETAILS OF T HE UTILIZATION OF BORROWED FUNDS, THE ASSESSEE DID NOT FURNISH ANY DETAILS IN RESPECT OF THE UTILIZATION OF THE BORROWED FUNDS. IN ABSENCE OF ANY DETAILS, I T IS NOT KNOW FOR WHAT PURPOSE THE ASSESSEE HAS UTILIZED THE BORROWED FUND S. ON PERUSAL OF THE INTEREST ACCOUNT FILED BY THE ASSESSEE IT IS NOTICE D THAT THE ASSESSEE HAS PAID INTEREST OF RS.1,46,000/- OR MORE TO BHAGYODAY A BANK LTD., ON ITS LOAN ACCOUNT. HENCE, THE INTEREST PAID ON SUCH BORR OWED FUNDS ARE NOT ALLOWABLE. SIMILARLY, IT IS ALSO NOTICED THAT THE A SSESSEE HAS PAID INTEREST OF RS.2,66,329/- TO M/S. A.K. ENGINEERS. ON GOING T HROUGH THE COPY OF ACCOUNTS FILED, IT IS SEEN THAT THE WITHDRAWALS ARE MAINLY FOR PERSONAL PURPOSES ONLY SUCH AS PAYMENT FOR DIESEL/PETROL BIL LS, CREDIT CARD PAYMENTS AND DINERS CLUB PAYMENT, ETC. FROM THE ABO VE, IT IS CLEAR THAT THE ASSESSEE HAS MADE HUGE WITHDRAWALS FROM M/S. A. K. ENGINEERS WHICH WAS UTILIZED FOR HIS PERSONAL PURPOSES. CONSIDERING ALL THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE MORE PARTICULARLY THE ASS ESSEE HAS NOT FURNISHED THE DETAILS OF UTILISATION OF BORROWED FU NDS, THE CLAIM OF INTEREST PAYMENT ON SUCH BORROWED FUNDS ARE NOT ADMISSIBLE. ACCORDINGLY, THE CLAIM OF INTEREST PAYMENT OF RS.7,45,237/- IS HEREB Y DISALLOWED. IT A.NO.395/AHD/2010 ASSESSMEN T YEAR : 2005-06. 4 4 6. ON APPEAL BEFORE THE LD. CIT (A) IT WAS CONTENDE D THAT THE ASSESSEE WAS A PROPRIETOR OF M/S. LUCKY TRADERS. THE BUSINESS OF THIS PROPRIETARY CONCERN WAS DISCONTINUED ON 31-3-2002. SUBSEQUENTLY, THE ASSESS EE BECAME PARTNER IN M/S. JAY ENGINEERING WITH EFFECT FROM 2005-06. THE CAPIT AL CONTRIBUTION IN THE FIRM WAS MADE OUT OF BORROWING OR WITH THE FUNDS AVAILABLE W ITH LUCKY TRADER. ON THE BORROWED FUNDS THE APPELLANT HAS PAID TOTAL INTERES T OF RS.74,733/- AND ALSO EARNED INTEREST OF RS.1,79,257/-. THE BORROWED MON EY WAS UTILIZED IN ACQUIRING THE FIXED ASSETS IN THE PROPRIETARY CONCERN AND PAR TNERSHIP BUSINESS TO THE EXTENT OF RS.64.67 LACS. THE LOAN RECEIVED FROM THE BANK A ND M.S. JAY ENGINEERS WAS NOT ONLY UTILIZED FOR PERSONAL PURPOSES BUT ALSO FO R DAY TO DAY BUSINESS TRANSACTION. BEFORE THE LD. C.I.T.(A), IT WAS CONT ENDED THAT EVEN IF THE ASSESSING OFFICER HAS TO MAKE DISALLOWANCE HE SHOULD CONSIDER NET INTEREST EXPENDITURE. 7. AFTER CONSIDERING THE AFORESAID SUBMISSIONS, IN THE IMPUGNED ORDER THE LD. C.I.T. (A) RESTRICTED THE DISALLOWANCE TO RS.5,65,9 78/- FOR THE DETAILED REASONS GIVEN IN PARAGRAPH 2.2 WHICH IS REPRODUCED AS UNDER :- 2.2. I HAVE CONSIDERED THE SUBMISSION. AS REGARDS THE DISALLOWANCE OF INTEREST, I AGREE WITH THE ASSESSING OFFICER THAT I N THIS CASE SINCE MOST OF THE BORROWINGS WERE MADE FOR THE PURPOSE OF THE BUS INESS OF M/S. LUCKY TRADERS, A PROP. CONCERN OF THE APPELLANT, WHOSE BU SINESS WAS DISCONTINUED ON 31-3-2002, THE INTEREST EXPENSES ON THE BORROWED LOANS TAKEN BY THE PROP. CONCERN ARE NOT ALLOWABLE EXPEND ITURE. HOWEVER, SINCE SOME OF THE FUNDS HAVE BEEN UTILIZED BY THE APPELLA NT IN EARNING INTEREST INCOME, IN MY OPINION, THE ASSESSING OFFICER SHOULD HAVE DISALLOWED THE NET OF THE INTEREST EXPENSES I.E. RS.7,45,236/- MIN US RS.1,79,257/- = RS.5,65,978/-. THE INTEREST IS RECEIVED BY THE APPE LLANT FROM M/S/ JAY ENGINEERS (RS.1,08,227/-) IN WHICH THE APPELLANT IS A PARTNER. FURTHER INTEREST OF RS.70,961/- HAS BEEN RECEIVED BY THE AP PELLANT ON THE LOANS ADVANCED TO MEDISURGE ASSOCIATION PVT. LTD., M/S. H IND HARDWARE STORES & ANJANABEN DESAI. THERE IS A NEXUS BETWEEN THE BOR ROWED FUNDS AND THE INTEREST INCOME EARNED. THEREFORE, THE ASSESSIN G OFFICER IS DIRECTED TO RESTRICT THE DISALLOWANCE TO RS.5,65,978/- AS AGAIN ST RS.7,45,236/-. 8. AGGRIEVED WITH THE AFORESAID ORDER OF D. CIT (A) ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. IT A.NO.395/AHD/2010 ASSESSMEN T YEAR : 2005-06. 5 5 9. AT THE TIME OF HEARING ON BEHALF OF THE ASSESSEE SHRI S.R. SHAH, APPEARED AND FILED THE PAPER BOOK CONTAINING 21 PAGES WHICH INTERALIA INCLUDE THE RETURNS FILED FOR THE ASSESSMENT UNDER APPEAL AS WELL AS FO R THE EARLIER YEARS. IT WAS CONTENDED THAT IN EARLIER YEAR ASSESSEE WAS HAVING BUSINESS INCOME BEING SHARE INCOME AND INTEREST INCOME FROM PARTNERSHIP AND ALS O BUSINESS INCOME/LOSS FROM PROPRIETARY CONCERN NAMELY LUCKY TRADERS AND LUCKY SUPER MARKET ETC. THE APPELLANT HAS DISCONTINUED THE PROPRIETARY CONCERN NAMELY M/S LUCKY TRADERS. ALL THE ASSETS AND LIABILITIES OF THE SAID FIRM WER E TAKEN OVER IN HIS PERSONAL NAME AS WELL AS PERSONAL BOOKS OF ACCOUNTS. IT WAS FURTH ER CONTENDED THAT THE ASSESSMENT YEAR 2002-03 WAS THE LAST YEAR OF HIS BU SINESS ACTIVITY AND BOTH THE PROPRIETARY BUSINESS WERE DISCONTINUED. ONLY IN TH E ASSESSMENT YEAR 2005-06, THE ASSESSEE BECAME PARTNER IN THE FIRM M/S. JAY EN GINEERING. THE POSITION OF INCOME TAX RETURNS AND INTEREST DEFICIT FROM ASSESS MENT YEAR 2001-02 TO 2005- 06 IS AS UNDER :- PARTICULARS. INTEREST DEFICIT CLAIMED BUSINESS INCO ME/LOSS. A.Y. 2000-01 RS. 2,75,105/- (-) RS. 2,83,511/- A.Y. 2001-02 RS. 2,70,554/- (-) RS. 2,03,247/- A.Y. 2002-03 RS. 5,55,414/- RS . 89,744/- A.Y. 2003-04 RS. 5,45,254/- (-) RS. 4,10,505/- A.Y. 2004-05 RS. 4,67,652/- (-) RS. 3,05,653/- A.Y. 2005-06 RS.5,65,979/- (-) RS. 4 ,51,979/- 10. ON THE BASIS OF ABOVE, IT WAS CONTENDED THAT AS SESSEE WAS CARRYING ON THE BUSINESS AND INTEREST DEFICIT OF EACH ASSESSMEN T YEAR SHOULD BE ALLOWED FROM YEAR TO YEAR UPTO A.Y. 2004-05 AS BUSINESS EXPENDIT URE. THEREFORE, IN THE ASSESSMENT YEAR UNDER APPEAL, ALSO THE ASSESSING OF FICER OUGHT TO HAVE ALLOWED THE ENTIRE INTEREST DEFICIT. FOR THIS THE COUNSEL OF THE ASSESSEE RELIED ON THE DECISION OF MADRAS HIGH COURT IN THE CASE OF PRMS R AMNATRHAN CHATTIER VS. CIT(1969) 72 ITR 534 WHEREIN IT WAS HELD THAT THAT INTEREST PAID ON BORROWED LOAN WILL BE ALLOWED AS DEDUCTION ONLY IF THE CAPIT AL BORROWED AND USED FOR THE PURPOSE OF BUSINESS. THE CAPITAL BORROWED WHICH WA S UTILIZED FOR PURCHASE OF IT A.NO.395/AHD/2010 ASSESSMEN T YEAR : 2005-06. 6 6 CAPITAL ASSET IS ALSO ALLOWABLE U/S.36(1)(III) OF T HE INCOME TAX ACT. HE SUBMITTED THAT THE ENTIRE CAPITAL WAS USED FOR THE PURPOSE OF THE BUSINESS, THEREFORE THE SAME IS ALLOWABLE. 11. WITHOUT PREJUDICE TO AFORESAID SUBMISSION IT WA S CONTENDED THAT DISALLOWANCE OF RS.5,65,978/- CONFIRMED BY THE LD. C.I.T.(A) IS VERY EXCESSIVE, THE SAME SHOULD BE REDUCED TO NOMINAL AMOUNT. 12. ON THE OTHER HAND, SMT. SHAILAJA RAI, APPEARED FOR THE REVENUE SUPPORTED THE ORDER OF THE LD. C.I.T.(A). SHE POINT ED OUT THAT INTEREST ON WHICH LOANS TAKEN FOR THE PURPOSE OF BUSINESS CAN ONLY BE ALLOWED AS DEDUCTION TO THE EXTENT THE ASSESSEE HAS PROVED THAT THE AMOUNT IS U TILIZED FOR THE PURPOSE OF BUSINESS. THE LD. C.I.T.(A) HAS ALLOWED THE PARTIAL RELIEF TO THE EXTENT THE ASSESSEE HAS PROVED THE NEXUS. INTEREST CLAIMED ON BORROWED FUNDS FOR BUSINESS WHICH WAS DISCONTINUED IN THE ASSESSMENT YEAR 2002- 03 CANNOT BE ALLOWED AS DEDUCTION. SHE ACCORDINGLY CONTENDED THAT VIEW TAK EN BY THE LD. C.I.T.(A) BE UPHELD. 13. AFTER HEARING BOTH THE PARTIES, I HAVE CAREFULL Y GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND MATERIAL PLACED BEFORE ME . IN THE IMPUGNED ORDER, THE LD. C.I.T.(A) HAS HELD THAT INTEREST EXPENSE ON BOR ROWED LOANS FOR THE PROPRIETARY CONCERN ARE NOT ALLOWABLE BECAUSE THOSE BUSINESSES WERE DISCONTINUED ON 31-3- 2002. HOWEVER, IN THE IMPUGNED ORDER, THE LD. C.I.T .(A) HAS ALLOWED FURTHER INTEREST AMOUNTING TO RS.1,79,257/- BEING INTEREST ON FUNDS BORROWED AND UTILIZED BY THE ASSESSEE FOR EARNING THE INTEREST INCOME. UN DER THESE CIRCUMSTANCES, I AM OF THE VIEW THAT LD. C.I.T.(A) IS LEGALLY AND FA CTUALLY CORRECT IN RESTRICTING THE DISALLOWANCE OF INTEREST TO RS.5,65,978/-. I THERE FORE, INCLINE TO UPHOLD THE ORDER OF THE LD. C.I.T.(A). IT A.NO.395/AHD/2010 ASSESSMEN T YEAR : 2005-06. 7 7 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMIS SED. ORDER SIGNED AND PRONOUNCED IN THE COURT ON 26 TH DAY OF NOVEMBER, 2010. SD/- (T. K. SHARMA) JUDICIAL MEMBER. AHMEDABAD: ON THIS 26 TH DAY OF NOVEMBER, 2010. COPY OF THE ORDER FORWARDED TO:- 1. THE APPELLANT. 2. THE RESPONDENT 3. THE CIT CONCERNED. 4. THE LD. CIT (A) XVI, AHMEDABAD. 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER. DY./ASSISTANT REGISTRAR),ITAT.,AHMEDAB AD. DATE. INITIALS. 1. DRAFTED DICTATED ON 2 3-11-2010 2. DRAFT PLACED BEFORE AUTHORITY. 23-11- 2010 3. DRAFT PROPOSED & PLACED BEFORE SECOND MEMBER. - 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. - 5. APPROVED DRAFT COMES TO P.S. 26-11-2010 6. KEPT FOR PRONOUNCEMENT ON 26-11-2010 7. FILE SENT TO THE BENCH CLERK. 26-11-2 010 8. DATE ON WHICH FILE GOES TO AR 9. DATE OF DISPATCH OF ORDER.