Harishankar Agarwal, Agra V. Dy.C.I.T.-4(1), Agra

ITA 44/AGR/2012

• Counselvise Citation: 4420314 RSA 2012
• Duration Of Justice: 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 17-07-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 03-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: EPASS ROAD AGRA
• Assessee Lawyers: RAJENDRA SHARMA SHRI A K
• Keywords: Business income; Earning of tax free income; Capital receipt
• Section: 14A; 133(6); 56; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, AGRA BENCH, AGRA BEFORE : SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A.L. GEHLOT, ACCOUNTANT MEMBER ITA NO. 44/AGRA/2012 ASSTT. YEAR : 2008-09 HARISHANKAR AGARWAL, VS. D.C.I.T., 4(1), 7/52 D. NAGLA JAWAHAR, AGRA. BYEPASS ROAD, AGRA. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAJENDRA SHARMA, ADVOCATE. RESPONDENT BY : SHRI A.K. SHARMA, JR. D.R. DATE OF HEARING : 17.07.2012 DATE OF PRONOUNCEMENT OF ORDER : 20.07.2012 ORDER PER BHAVNESH SAINI, J.M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF LD. CIT(A)-II, AGRA DATED 30.11.2011 FOR THE ASSESSMENT YEAR 2008- 09. 2. WE HAVE HEARD THE LD. REPRESENTATIVES OF BOTH TH E PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND CONSIDERED TH E MATERIAL AVAILABLE ON RECORD. THE ASSESSEE ON FIVE GROUNDS OF APPEAL RAIS ED THREE ISSUES. THE SAME ARE DECIDED AS UNDER : ITA NO. 44/AGRA/2012 2 GROUNDS NO. 1 & 2 : 1. THAT THE CIT (APPEALS) HAS ERRED ON FACTS AND I N LAW WHILE SUSTAINING THE ADDITION FOR RS. 2503452/- AS MADE B Y INVOKING THE PROVISION OF SECTION 28 (IV) OF THE I.T. ACT, TREAT ING THE AMOUNT OF RS. 15/- LACS AND RS. 1003452/- REPRESENT THE LIABI LITIES IN THE NAME OF M/S CRB CAPITAL LTD. AND M/S CRB CORPORATIO N LTD. RESPECTIVELY AS NOT GENUINE LIABILITY AND HAS ADDED TO THE INCOME OF THE APPELLANT. NO ADDITION ON THIS SCORE IS CALLED FOR, ADDITION MADE BY THE AO AND SUSTAINED BY THE CIT (APPEALS) I S LIABLE TO BE DELETED. 2. THAT WHILE MAKING OF THE ADDITION IN RESPECT OF AMOUNTS APPEARING IN THE LIABILITY SIDE OF THE BALANCE SHEE T AMOUNTED TO RS. 2503452/-, THE AUTHORITIES BELOW HAVE COMPLETELY IG NORED THE FACTS THAT THE AFORESAID AMOUNT ARE PAYABLE TO THE CREDITORS, TO WHOM THE AMOUNT BELONGED, THE CREDITORS HAVE NOT FO RGONE THE AFORESAID AMOUNT AS NOT TO BE TAKEN BACK, THE GENUI NE LOANS WERE TAKEN AND GENUINE LIABILITIES TO BE PAYABLE ARE STA NDING IN THE BALANCE SHEET, NO ADDITION TREATING THE SAME AS NOT GENUINE CAN BE MADE, ADDITION MADE ON THIS SCORE BY THE AO AND SUS TAINED BY THE CIT (APPEALS) IS LIABLE TO BE DELETED. 3. ON THESE GROUNDS, THE AO MADE ADDITION OF RS.25, 03,452/- BY INVOKING THE PROVISIONS OF SECTION 28(IV) OF THE IT ACT. AS PER THE AO, THE ASSESSEE HAD RECEIVED SUMS OF RS.15 LACS AND RS.10,03,452/- FROM M/S. CRB CAPITAL LTD. AND M/S. CRB CORPORATION LTD. RESPECTIVELY. THE AO ASKED THE ASSESSEE TO FURNISH CONFIRMATIONS FROM THESE PARTIES AND ALSO C ORRESPONDENCE MADE WITH THESE CREDITORS. THE AO ALSO ASKED THE ASSESSEE AS TO WHEN THESE AMOUNTS WERE RECEIVED FROM THESE PARTIES AND WHAT WAS THE SUBSEQ UENT TREATMENT OF THE SAME? IT WAS ALSO ENQUIRED BY THE AO AS TO WHETHER THESE PARTIES HAD FILED ANY SUIT FOR RECOVERY OF THE AMOUNTS AS SHOWN DUE TO THEM. THE A O PROPOSED TO TAX THESE ITA NO. 44/AGRA/2012 3 AMOUNTS UNDER THE PROVISIONS OF SECTION 28(IV) OF T HE IT ACT. IT WAS STATED BEFORE THE AO BY THE ASSESSEE THAT THESE WERE OLD L OANS AND THE SAME STOOD ACCEPTED BY THE DEPARTMENT IN SCRUTINY ASSESSMENTS. HOWEVER, AS PER AO, IN SPITE OF HAVING BEEN AFFORDED THE OPPORTUNITIES, TH E ASSESSEE FAILED TO FILE CONFIRMATIONS AND EXPLAIN THE OPENING BALANCES CRED ITED IN THE BOOKS OF ACCOUNT. IT WAS ALSO SUBMITTED BY THE ASSESSEE BEFO RE THE AO THAT THESE PERSONS WERE IN JAIL. HOWEVER, THE AO HELD THAT THE CREDITO RS WERE COMPANIES AND A PERSON IS INDEPENDENT FROM THE COMPANY. AS PER THE AO, IT WAS LEARNT THAT THE COMPANIES AND THEIR DIRECTORS WERE FOUND INDULGING IN SERIOUS IRREGULARITIES AND, THEREFORE, LEGAL PROCEEDINGS ARE PENDING AT VARIOUS COURTS, FOR WHICH THE DIRECTORS OF THE COMPANIES ARE IN JAIL. THE AO IN T HE ABSENCE OF CONFIRMATIONS FROM THESE LOAN CREDITORS, AFTER DISCUSSING THE PRO VISIONS OF SECTION 2(24) OF THE ACT WHEREIN INCOME IS DEFINED AND ALSO REFERRING TO PROVISIONS OF SECTION 56 OF THE ACT HELD THAT THOUGH THE AMOUNTS MIGHT HAVE BEE N RECEIVED AS LOAN AND ON ACCOUNT OF CAPITAL ACCOUNT BUT WITH THE EFFLUX OF T HE TIME AS CREDITORS HAVE NOT PUT IN ANY EFFORTS TO RECOVER THE SAME, HE HELD THA T THE SAME CONSTITUTE INCOME OF THE ASSESSEE AS PER THE PROVISIONS OF SECTION 28 (1)(IV) OF THE ACT AND ACCORDINGLY, MADE THE ADDITION OF RS.25,03,452/-. 3.1 THE ASSESSEE CHALLENGED THE ADDITION BEFORE THE LD. CIT(A) AND HIS WRITTEN SUBMISSION IS INCORPORATED IN THE APPELLATE ORDER IN WHICH THE ASSESSEE ITA NO. 44/AGRA/2012 4 BRIEFLY EXPLAINED THAT THE ABOVE AMOUNTS WERE RECEI VED IN EARLIER YEARS AND WAS THE LIABILITY DUE ON THE ASSESSEE TO BE PAID AS AND WHEN THE SAME IS CALLED FOR BY THE CREDITORS. ALL THE DETAILS WERE PROVIDED TO EXP LAIN THAT THE SAME WAS OPENING BALANCE APPEARING IN THE BOOKS OF ACCOUNT. THE ASSE SSEE COULD NOT GET THE ACCOUNTS CONFIRMED BECAUSE THE PARTIES WERE NOT AVA ILABLE. HOWEVER, THERE IS NO DISPUTE THAT THE LIABILITY SHALL HAVE TO BE PAID BY THE ASSESSEE WHENEVER ASKED BY THE LENDERS. SINCE, IT WAS OPENING BALANCE IN TH E BOOKS OF ACCOUNT OF THE ASSESSEE, IT CANNOT BE TREATED AS INCOME. IN FACT, NO MONEY HAS BEEN RECEIVED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION AN D THE ASSESSEE HAS TO REPAY THE AMOUNTS TO THE PARTIES. THERE IS NO CESSATION O F LIABILITY DURING THE YEAR UNDER CONSIDERATION. THERE IS NO CIRCUMSTANTIAL EVI DENCE AVAILABLE AGAINST THE ASSESSEE TO PROVE THAT THE AMOUNT PAYABLE AS LIABIL ITY HAS CHANGED ITS COLOUR AS INCOME. THE PROVISIONS OF SECTION 28(IV) ARE NOT AP PLICABLE AS NO BENEFIT OR PERQUISITES HAS ACCRUED TO THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THE AMOUNT OF LOAN RECEIVED FROM BOTH THE PARTIES IS AN ESTABLISHED LIABILITY, WHICH THE ASSESSEE ACKNOWLEDGES TO PAY BACK. THEREFORE, I T CANNOT BE TREATED AS INCOME ACCRUED OR EARNED BY THE ASSESSEE. SINCE, NO INCOME ACCRUED OR RECEIVED BY THE ASSESSEE, THE SAME CANNOT BE TAXED IN THE HA NDS OF THE ASSESSEE. CERTAIN DECISIONS HAVE BEEN RELIED UPON. THE LD. CIT(A), HO WEVER, REJECTED THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE ADDITI ON. HIS FINDINGS IN PARA 3.2 OF THE APPELLATE ORDER ARE REPRODUCED AS UNDER : ITA NO. 44/AGRA/2012 5 3.2. I HAVE CONSIDERED THE RIVAL CONTENTIONS AND FIND TH AT THE LOANS UNDISPUTEDLY HAVE NOT BEEN RECEIVED DURIN G THE YEAR. HOWEVER, NOTHING HAS BEEN BROUGHT ON RECORD BY THE APPELLANT THAT THESE ARE GENUINE OUTSTANDING LOANS INSPITE OF HAVING BEEN AFFORDED SUFFICIENT OPPORTUNITY BY THE AO TO THE AS SESSEE. IT WAS SIMPLY STATED BEFORE THE AO THAT THE DIRECTORS OF T HESE COMPANIES ARE IN JAIL. THOUGH THE ASSESSEE REQUESTED THE AO T O ISSUE SUMMONS U/S. 131 OF THE ACT OR REQUISITION THE INFO RMATION U/S. 133(6) BUT AS ALREADY POINTED OUT BY THE AO, NO ADD RESSES AS TO WHERE THE SUMMONS / LETTERS COULD BE ISSUED WERE SU PPLIED TO THE AO DURING THE ASSESSMENT PROCEEDINGS. IT IS ALSO NO T CLEAR FROM THE INFORMATION AVAILABLE ON RECORD AS TO WHEN THESE LO ANS WERE RECEIVED BY THE ASSESSEE. ALSO, THERE IS NOTHING ON RECORD TO SUGGEST THAT THE CREDITORS ARE PURSUING THE RECOVER Y AND FOR THAT PURPOSES HAVE FILED ANY SUIT ETC. AGAINST THE ASSES SEE IN ANY COURT OF LAW COUPLED WITH THAT THE ASSESSEE IS ALSO NOT P AYING ANY INTEREST TO THESE CREDITORS. AS MENTIONED BY THE AO , THESE COMPANIES, I.E., CREDITORS AND THEIR DIRECTORS WERE FOUND INDULGING IN SERIOUS FINANCIAL IRREGULARITIES AND, THEREFORE, I AGREE WITH THE AO THAT THE CREDITORS AS APPEARING IN THE BOOKS OF ACCOUNT DO NOT SEEM TO BE GENUINE. AS PER THE AO, THE ASSESSEES O WN BROTHER NAMELY SHRI KRISHNA MURARI LAL AGARWAL FOR THE SAME ASSESSMENT YEAR HAD HIMSELF CREDITED THE AMOUNT OF RS.10 LAC A S LIABILITY FOREGONE. THOUGH THE LOANS WHEN CLAIMED TO HAVE BEE N RECEIVED WERE OF CAPITAL NATURE, BUT WITH THE EFFLUX OF TIME THE SAME HAVE BECOME ASSESSEES OWN MONEY. IN THE CASE OF CIT VS. T.V. UNDARAM IYNGER & SONS 222 ITR 344, THE HONBLE SUPR EME COURT DEALT WITH THE SIMILAR SITUATION, THE HEAD NOTE OF THIS CASE READS AS UNDER :- BUSINESS INCOME TRADING RECEIPT IF AN AMOUNT I S RECEIVED IN THE COURSE OF TRADING TRANSACTION, EVEN THOUGH IT IS NOT TAXABLE IN THE YEAR OF RECEIPT AS BEING OF R EVENUE CHARACTER, THE AMOUNT CHANGES ITS CHARACTER WHEN TH E AMOUNT BECOMES THE ASSESSEES OWN MONEY BECAUSE OF LIMITATION OR BY ANY OTHER STATUTORY OR CONTRACTUAL RIGHT ASSESSEE RECEIVING DEPOSITS (NOT BEING IN THE NATUR E OF SECURITY DEPOSITS HELD BY THE ASSESSEE FOR PERFORMA NCE OF CONTRACT BY HIS CONSTITUENTS) FROM HIS CUSTOMERS IN THE COURSE OF HIS BUSINESS, WHICH DEPLETED BY ADJUSTMEN T FROM TIME TO TIME, UNCLAIMED BALANCES TRANSFERRED BY THE ASSESSEE TO HIS P&L A/C ARE HIS TRADING RECEIPT, EVEN THOUGH THE ITA NO. 44/AGRA/2012 6 DEPOSITS WERE INITIALLY TREATED AS CAPITAL RECEIPTS , THE CLAIM OF DEPOSITORS HAVING BECOME BARRED BY TIME. VIDE PARA NO. 14 OF THIS JUDGMENT, THE COURT FURTHE R HELD IN THE PRESENT CASE, THE MONEY HAS RECEIVED BY THE ASSESSEE IN THE COURSE OF CARRYING ON HIS BUSINESS. ALTHOUGH IT WAS TREATED AS DEPOSIT AND WAS OF CAPITAL NATURE AT THE POINT OF TIME IT WAS RECEIVED BY EFFLUX OF TIME THE MONEY HAS BECOME ASSESSEES OWN MONEY. THEREFORE, FOLLOWING THE JUDGMENT OF THE HONBLE S UPREME COURT, I CONFIRM THE ADDITION MADE BY THE AO. 4. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUB MISSIONS MADE BEFORE THE AUTHORITIES BELOW AND REFERRED TO PB-16, WHICH CONTAINS SCHEDULE-J ATTACHED TO THE BALANCE SHEET TO SHOW THAT THE AMOUNT RECEIV ED FROM M/S. CRB CAPITAL LTD. AND CRB CORPORATION LTD. ARE PART OF THE BALAN CE SHEET AND THE SAME HAVE BEEN SHOWN AS LIABILITY IN THE ACCOUNTS OF THE ASSE SSEE. HE HAS, THEREFORE, SUBMITTED THAT THE PROVISIONS OF SECTION 28(IV) WOU LD NOT APPLY IN THE CASE OF THE ASSESSEE, AS THE ASSESSEE HAS NOT FORGONE THE L IABILITY. THE AMOUNTS IN QUESTION HAVE NOT BEEN CREDITED IN THE PROFIT AND L OSS ACCOUNT OR ASSETS OF THE ASSESSEE. THE ASSESSEE IS WILLING TO PAY BACK THE A MOUNT TO THE PARTIES AND IT WAS ONLY THE OPENING BALANCE IN THE ASSESSMENT YEAR UNDER APPEAL AND LIABILITY IS COMING UP FROM THE EARLIER YEAR. IT IS ALSO SUB MITTED BEFORE THE AO, AS NOTED IN PARA 1.1 OF THE ASSESSMENT ORDER THAT THESE ARE OLD LOANS, WHICH HAVE BEEN ITA NO. 44/AGRA/2012 7 ACCEPTED BY THE DEPARTMENT IN THE SCRUTINY ASSESSME NT OF THE PRECEDING ASSESSMENT YEAR. NO ADDITION TO THE LOAN HAS BEEN M ADE AND THE LIABILITY STILL HOLDS GOOD. THE LOANS HAVE NOT BEEN WRITTEN OFF EIT HER BY THE CREDITORS OR SQUARED UP BY THE DEBTOR. THEREFORE, NO ADDITION CO ULD BE MADE AGAINST THE ASSESSEE. THE LD. CIT(A) RELIED UPON THREE DECISION S IN THE APPELLATE ORDER FOR REJECTING THE CLAIM OF THE ASSESSEE, BUT NONE OF TH E DECISIONS ARE APPLICABLE TO THE FACTS OF THE CASE. HE HAS SUBMITTED THAT THE DE CISION RELIED BY THE AUTHORITIES BELOW IN THE CASE OF CIT VS. T.V. SUNDARAM IYNGER & SONS (SUPRA) IS NOT APPLICABLE BECAUSE IN THIS CASE, UNCLAIMED BALANCES TRANSFERRED BY THE ASSESSEE TO HIS PROFIT AND LOSS ACCOUNT WERE, THEREFORE, TRE ATED AS TRADING RECEIPTS, EVEN THOUGH THE DEPOSITS WERE INITIALLY TREATED AS CAPIT AL RECEIPTS, THE CLAIMS OF DEPOSITORS HAVING BECOME TIME BARED. THEREFORE, THE ISSUE WAS DECIDED AGAINST THE ASSESSEE. IN THE DECISION OF HONBLE BOMBAY HIG H CURT IN THE CASE OF SOLID CONTAINERS LTD. VS. DCIT, 308 ITR 147, THE AMOUNT R ECEIVED AS LOAN BY THE ASSESSEE FOR TRADING ACTIVITIES AND ULTIMATELY RETA INED IN THE BUSINESS WAS HELD AS TAXABLE U/S. 28(IV) OF THE ACT. IN THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. ARIES ADVERTISING (P) LTD., 255 ITR 510 (MAD.) HELD THAT CREDIT BALANCE WRITTEN OFF AND TRANSFERRED TO GENER AL RESERVE ACCOUNT WAS INCOME OF THE ASSESSEE CHARGEABLE TO INCOME TAX. THE LD. C OUNSEL, THEREFORE, SUBMITTED THAT ALL THE ABOVE DECISIONS RELIED UPON BY THE AUT HORITIES BELOW ARE NOT APPLICABLE TO THE CASE OF THE ASSESSEE. THEREFORE, THE ADDITION IS UNJUSTIFIED. ITA NO. 44/AGRA/2012 8 ON THE OTHER HAND, THE LD. DR RELIED UPON THE ORDE RS OF THE AUTHORITIES BELOW AND SUBMITTED THAT PARTIES WERE FOUND IN JAIL AND THE ASSESSEE COULD NOT GET THE BALANCE CONFIRMED. THEREFORE, THE ADDITIONS HAVE BEEN RIGHTLY MADE IN THE CASE OF THE ASSESSEE. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND DO NOT FIND ANY JUSTIFICATION TO SUSTAIN THE ADDITION. SECTION 28(I V) OF THE IT ACT PROVIDES THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INCOME -TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION (IV). THE VALUE OF ANY BENEFIT OR PERQUISITE, WHET HER CONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINES S OR THE EXERCISE OF A PROFESSION 5.1 THE ABOVE PROVISION IS NOT APPLICABLE TO THE FA CTS AND CIRCUMSTANCES OF THE CASE. THE ASSESSEE HAS SHOWN LIABILITY OF THE A FORESAID AMOUNTS IN ITS BOOKS OF ACCOUNT AND THE BALANCE SHEET. THE LIABILITY IS STILL EXISTING, WHICH IS ALSO NOTED IN SCHEDULE-J TO THE BALANCE SHEET (PB-16). T HE ASSESSEE SPECIFICALLY PLEADED BEFORE THE AO THAT THESE WERE OLD LOANS, WH ICH WERE ACCEPTED BY THE REVENUE DEPARTMENT IN THE PRECEDING ASSESSMENT YEAR IN THE SCRUTINY ASSESSMENT. THUS, THESE WERE OPENING BALANCE COMING UP IN THE ASSESSMENT YEAR UNDER APPEAL. THE ASSESSEE HAS NOT WRITTEN OFF OR S QUARED UP ANY OF THE AMOUNTS IN THE ACCOUNTS OF THE ASSESSEE. THE AMOUNT IN QUES TION HAS NOT BEEN TRANSFERRED ITA NO. 44/AGRA/2012 9 TO THE PROFIT AND LOSS ACCOUNT, THERE IS NO WAIVER OF THE LOAN AND THE AMOUNTS HAVE NOT BEEN TRANSFERRED TO ANY RESERVE FUND OF TH E ASSESSEE. THEREFORE, THE SAME CANNOT BE TREATED AS INCOME OF THE ASSESSEE BE CAUSE THE LIABILITY STILL EXISTING IN THE BOOKS OF THE ASSESSEE. THE DECISION S CITED BY THE AUTHORITIES BELOW ARE, THEREFORE, CLEARLY DISTINGUISHABLE ON TH E FACTS OF THE CASE. SINCE THE ASSESSEE HAS NOT RECEIVED ANY AMOUNT DURING THE YEA R UNDER CONSIDERATION, IT CANNOT BE TREATED AS INCOME RECEIVED BY THE ASSESSE E. THE AO MERELY ON PRESUMPTION AND WITHOUT ANY BASIS APPLIED THE ABOVE PROVISIONS OF LAW, WHICH ARE NOT APPLICABLE TO THE PRESENT CASE. IN VIEW OF THE ABOVE FACTS, EVEN IF THE LIABILITY COULD NOT BE CONFIRMED THROUGH THE PARTIE S, IT WOULD NOT MAKE ANY DIFFERENCE FOR TREATING THAT THE INCOME ACCRUED OR AROSE TO THE ASSESSEE. WE, THEREFORE, SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDITION. AS A RESULT, GROUND NOS. 1 & 2 OF THE APPEAL OF ASS ESSEE ARE ALLOWED. GROUNDS NOS. 3 & 4 : 3 THAT THE CIT (APPEALS) HAS ERRED ON FACTS AS WEL L AS IN LAW WHILE SUSTAINING THE ADDITION FOR RS. 602311 /- MADE BY THE AO, INVOKING THE PROVISION OF SECTION 14 A OF THE I .T. ACT, NO ADDITION INVOKING THE PROVISION OF SECTION 14 A OF THE I.T. ACT IS LIABLE TO BE MADE, ADDITION MADE ON THIS SCORE IS L IABLE TO BE DELETED. 4 THAT WHILE MAKING OF THE ADDITION BY INVOKING THE PROVISION OF SECTION 14 A OF THE I.T. ACT, THE AUTH ORITIES BELOW HAVE COMPLETELY IGNORED THE FACTS THAT THE APPELLANT HAS NOT MADE ANY INVESTMENT OUT OF THE BORROWED FUNDS FOR EARNING OF THE EXEMPT INCOME, BORROWED FUNDS ARE NOT UTILIZED IN MAKING O F SUCH INVESTMENT, NEITHER ANY EXEMPT INCOME HAS BEEN EARN ED BY THE ITA NO. 44/AGRA/2012 10 ASSESSEE. INVESTMENT MADE IN THE EARLIER YEARS DOES NOT ATTRACT THE PROVISION OF SECTION 14 A OF THE I.T. ACT., THE ADD ITION MADE BY THE A.O. AND SUSTAINED BY THE CIT (APPEALS) AT RS. 6,02 ,311/- IS LIABLE TO BE DELETED. 6. THE AO MADE ADDITION OF RS.6,02,311/- U/S. 14A OF T HE IT ACT. AS PER THE AO, THE ASSESSEE HAD INVESTED A SUM OF RS.1,83, 12,000/- OUT OF TOTAL OF BALANCE SHEET OF RS.3,92,13,029/-. THUS, AS PER THE AO, IT WAS THE INTENTION OF THE ASSESSEE TO EARN THE EXEMPT INCOME. WHEN THE AS SESSEE WAS CONFRONTED AS TO WHY THE PROVISIONS OF SECTION 14A SHOULD NOT BE INV OKED FOR DISALLOWANCE OF EXPENDITURE RELATABLE TO INVESTMENT MADE FOR EARNIN G EXEMPT INCOME, IT WAS SUBMITTED BEFORE THE AO THAT THERE WAS NO INVESTMEN T IN RESPECT OF EXEMPT INCOME COVERED BY THE PROVISIONS OF SECTION 14A REA D WITH RULE 8D AND AS SUCH THERE WAS NO OCCASION TO MAKE ANY ADDITION U/S. 14A OF THE ACT. HOWEVER, THE AO HELD THAT EVEN IF THERE IS NO INCOME EARNED ON T HE INVESTMENT MADE TOWARDS EARNING OF EXEMPT INCOME, STILL THE EXPENDITURE REL ATABLE TO INVESTMENT MADE IS DISALLOWABLE AS PER THE PROVISIONS OF SECTION 14A O F THE ACT. FOR THIS PROPOSITION OF LAW, THE AO HAS RELIED ON THE JUDGME NT OF SPECIAL BENCH OF ITAT, NEW DELHI IN THE CASE OF M/S. CHEMINVEST LTD. VS. ITO, WD. 3(3), NEW DELHI IN ITA NO. 87/DEL/2008. THE AO ALSO BY RELYIN G ON THE JUDGMENT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P&H) HELD THAT NOT ONLY INCOME BUT EXPENDITURE ALSO GOES FROM THE COMMON KI TTY. THE AO HAS ALSO REFERRED TO THE JUDGMENT OF BOMBAY HIGH COURT IN TH E CASE OF GODREJ & BOYCE ITA NO. 44/AGRA/2012 11 VS. DCIT 328 ITR 81 FOR THE PROPOSITION THAT RULE 8 D IS APPLICABLE IN THE ASSESSEES CASE. ACCORDINGLY, BY APPLYING THE PROVI SIONS OF RULE 8D(2)(II), THE AO WORKED OUT THE DISALLOWANCE AT RS.6,02,311/-. 6.1 THE ASSESSEE CHALLENGED THE ADDITION BEFORE THE LD. CIT(A) AND HIS WRITTEN SUBMISSION IS INCORPORATED IN THE APPELLATE ORDER, IN WHICH THE ASSESSEE BRIEFLY EXPLAINED THAT THE PROVISIONS OF SECTION 14 A WOULD NOT APPLY TO THE ASSESSMENT YEAR UNDER APPEAL BECAUSE THE SAME IS AP PLICABLE FROM 24.03.2008. IT WAS ALSO EXPLAINED THAT THE AO HAS NEGLECTED IN CONSIDERING THE FACTS OF THE CASE. THE ASSESSEE FILED LIST OF COMPANIES OF WHICH THE ASSESSEE PURCHASED SHARES ALONG WITH RESPECTIVE DATES, WHICH IS INCORP ORATED BY THE LD. CIT(A) AT PAGE 14 OF THE APPELLATE ORDER, WHICH GIVENS DETAIL S OF SEVEN PARTIES ALONG WITH THE DATE OF PURCHASE OF SHARES, NUMBER OF SHARES AN D THE AMOUNTS, WHICH PERTAIN FROM THE YEAR 1991-92 TO DECEMBER, 2006. IT WAS, TH EREFORE, SUBMITTED THAT THE INVESTMENTS WERE MADE LONG BACK IN THE YEAR 1991-92 FROM OWN FUNDS AVAILABLE WITH THE ASSESSEE, WHICH WERE GENERATED THROUGH BUS INESS ACTIVITIES. THE SAID INVESTMENTS HAVE NO RELATION WITH THE BORROWED FUND S AND THE SAME HAVE BEEN BORROWED AT A VERY LATER STAGE AND SPECIFICALLY TO FULFILL CERTAIN DAY-TO-DAY BUSINESS REQUIREMENTS. THEREFORE, THE ADDITION IS U NJUSTIFIED. IT WAS SUBMITTED THAT SECTION 14A WILL APPLY TO MAKE DISALLOWANCES O NLY WHEN THERE IS DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPENDITURE IN CURRED AND THE INCOME NOT ITA NO. 44/AGRA/2012 12 FORMING PART OF THE TOTAL INCOME. THE FACTS OF THE CASE ARE TOTALLY DIFFERENT AND THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE. THER EFORE, NO DISALLOWANCE COULD BE MADE. IT WAS SUBMITTED THAT ONUS WAS UPON THE AO WHO ALLEGES THE ABOVE FACTS, BUT THE BURDEN BY THE AO HAS NOT BEEN DISCHA RGED. THE ASSESSEE HAS NOT MADE ANY INVESTMENT IN SHARES TO EARN DIVIDEND. THE INVESTMENT IN SHARES WAS MADE FROM EARLIER YEAR FROM OWN FUNDS AND BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF BUSINESS. THE DECISION IN THE CASE O F CIT VS. HERO CYCLES LTD., 323 ITR 518 WAS RELIED UPON WHICH DISTINGUISHED THE DECISION IN THE CASE OF ABHISHEK INDUSTRIES, THAT IF INVESTMENT IN SHARES I S MADE BY AN ASSESSEE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS, DISALLOWAN CE U/S. 14A IS NOT SUSTAINABLE. CERTAIN DECISIONS IN SUPPORT OF THE CL AIM WERE ALSO RELIED UPON BEFORE THE LD. CIT(A). HOWEVER, THE LD. CIT(A) CONF IRMED THE ADDITION AND DISMISSED THIS GROUND OF APPEAL. HIS FINDING IN THE APPELLATE ORDER IN PARA 4.3 IS REPRODUCED AS UNDER : 4.3. I HAVE CONSIDERED THE RIVAL CONTENTIONS AND FIND TH AT THE DISALLOWANCE HAS BEEN RIGHTLY MADE BY THE AO. W HETHER ANY INCOME IS EARNED OR NOT IS IMMATERIAL FROM THE INVE STMENT MADE TO EARN EXEMPT INCOME AS HELD IN THE CASE OF M/S. CHEM INVEST LTD. VS. CIT(SUPRA). IN THE CASE OF GODREJ & BOYCE VS. DCIT, 328 ITR 81, THE HONBLE BOMBAY HIGH COURT HAS HELD THAT RULE 8D IS APPLICABLE FROM A.Y. 2008-09. THE AO HAS ALSO RIGHT LY HELD THAT THE FUNDS AVAILABLE WITH THE ASSESSEE ARE IN A COMM ON KITTY AND IN THE ABSENCE OF ANY DEMONSTRATION BY THE ASSESSEE WI TH THE HELP OF CASH FLOW STATEMENT THAT NO INTEREST BEARING FUNDS WERE DIVERTED FOR INVESTMENT TOWARDS EARNING EXEMPT INCOME, THE A CTION OF THE AO CANNOT BE FAULTED. THEREFORE, THE DISALLOWANCE M ADE BY THE AO IS UPHELD. ITA NO. 44/AGRA/2012 13 7. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THAT THE INVEST MENTS WERE MADE ABOVE 20 YEARS BACK AND SUFFICIENT FUNDS ARE AVAILABLE WITH THE ASSESSEE TO MAKE INVESTMENT. PB-13 IS THE BALANCE SHEET AND THE OPEN ING CAPITAL BALANCE WITH THE ASSESSEE IS RS.2,53,66,343/- AND AFTER ADJUSTMENT, THE SAME IS AVAILABLE AT RS.3,09,03,113/-. HE HAS SUBMITTED THAT NO INVESTME NT WAS MADE IN THE ASSESSMENT YEAR UNDER APPEAL. PB-16 SHOWS THAT THE INTEREST FREE FUNDS FROM M/S. BHOLE BABA MILK FOOD INDUSTRIES LTD., DHOLPUR AND KOSI IN A SUM OF RS.4,70,37,185/- AND RS. 89,00,116/- ARE AVAILABLE TO THE ASSESSEE. HE HAS REFERRED TO THE DETAILS OF INTEREST EARNED AND PAID AND SUBMITTED THAT THE ASSESSEE RECEIVED THE INTEREST FROM BANK AFTER ADJUSTMENT IN A SUM OF RS.2,62,657/- AND PAID INTEREST AT RS.1,48,913/- (PB-18), WHICH IS RE FLECTED IN THE PROFIT AND LOSS ACCOUNT. THE INTEREST RECEIVED IS MORE THAN THE INT EREST PAID. THEREFORE, THE ASSESSEE HAS NOT INCURRED ANY LIABILITY FOR PAYMENT OF INTEREST. THEREFORE, SECTION 14A WILL NOT APPLY IN THE PRESENT CASE. HE HAS REFERRED TO PB-4, WHICH IS AUDIT REPORT IN WHICH THE AUDITOR HAS CERTIFIED THAT NO DEDUCTION IS CLAIMED OR ADMISSIBLE U/S. 14A AND 36(1)(III) OF THE IT ACT. H E HAS, THEREFORE, SUBMITTED THAT THE ADDITION IS CLEARLY UNJUSTIFIED. ON THE OT HER HAND, THE LD. DR RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED T HAT INTENTION OF THE ASSESSEE WAS TO EARN EXEMPT INCOME. THEREFORE, THE ADDITION IS JUSTIFIED. ITA NO. 44/AGRA/2012 14 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE MATERIAL ON RECORD. HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RE LIANCE UTILITIES AND POWER LTD., 313 ITR 340 HELD HELD, DISMISSING HE APPEAL, HA IF HERE WERE FUNDS AVAILAB LE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN , HEN A PRESUMPTION WOULD ARISE HA INVESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INV ESTMENTS. IN THIS CASE HIS PRESUMPTION WAS ESTABLISHED CONSIDERING TH E FINDING OF FACT BOTH BY THE COMMISSIONER (APPEALS) AND THE TRI BUNAL. THE INTEREST WAS DEDUCTIBLE. 8.1 HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. METALMAN AUTO PVT. LTD., 336 ITR 434 HELD HELD, (I) THAT DIVIDEND INCOME WAS EXEMPT. (II). THAT, IN THE ABSENCE OF ANY EXPENDITURE SHOW N FOR EARNING DIVIDEND INCOME, DISALLOWANCE UNDER SECTION 14A WAS NOT JUSTIFIED. 8.2 HONBLE SUPREME COURT IN THE CASE OF MUNJAL SAL ES CORPORATION VS. CIT, 298 ITR 298 HELD HELD ALSO, THAT SINCE THE OPENING BALANCE OF THE PROFITS OF THE ASSESSEE-FIRM AS ON APRIL 1, 1994, WAS RS.1.91 CRORES, AND THE PROFITS WERE SUFFICIENT TO COVER THE LOAN GIVEN TO A SISTER CONCERN OF RS.5 LAKHS ONLY, THE APPELLATE TRIBUNAL OUGHT TO HA VE HELD THAT THE LOAN GIVEN WAS FROM THE ASSESSEES OWN FUNDS. ITA NO. 44/AGRA/2012 15 8.3 CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF ABOVE DECISIONS, IT IS CLEAR THAT THE ADDITION IS CLEARLY UNJUSTIFIED IN THE MAT TER. THE ASSESSEE HAS GIVEN DETAILS OF SHARES PURCHASED, WHICH IS NOTED AT PAGE 14 OF THE APPELLATE ORDER TO SHOW THAT THE INVESTMENTS HAVE BEEN MADE IN SHARES IN ASSESSMENT YEARS STARTING FROM 1991-92 TO DECEMBER, 2006 AND NOV. 20 07 (35,000). THUS, NO INVESTMENT HAS BEEN MADE IN THAT ASSESSMENT YEAR UN DER APPEAL. NO BORROWED FUNDS HAVE BEEN USED FOR THE PURPOSE OF INVESTMENT. THE ASSESSEE CLAIMED THAT THE BORROWED FUNDS WERE TAKEN AT THE LATER STAGE FO R THE PURCHASE OF BUSINESS. THE AO HAS NOT PROVED ANY NEXUS BETWEEN THE BORROWE D FUNDS AND THE AMOUNTS INVESTED IN SHARES IN ASSESSMENT YEAR. BP-13 IS THE BALANCE SHEET TO SHOW THAT THE OPENING BALANCE OF THE PROFIT OF THE YEAR. THE ASSESSEE HAD SUFFICIENT BALANCE TO MAKE INVESTMENT IN THE AMOUNTS MENTIONED BY THE AO. THUS, SUFFICIENT FUNDS AND PROFITS ARE AVAILABLE TO THE A SSESSEE TO MAKE INVESTMENT THOUGH NO INVESTMENT HAS BEEN MADE IN THIS YEAR, BU T IT WAS MADE SEVERAL YEARS BACK. FURTHER, THE LD. COUNSEL RIGHTLY CONTENDED TH AT THE FUNDS FROM BHOLE BABA MILK FOOD INDUSTRIES LTD., DHOLPUR, KOSI ARE AVAILA BLE TO THE ASSESSEE FOR MAKING INVESTMENT (PB-16). THE DETAILS OF INTEREST HAVE BEEN FILED AT PAGE 18 AND 14 OF THE PAPER BOOK TO SHOW THAT THE INTEREST RECEIVED BY THE ASSESSEE ARE IN A SUM OF RS.2,62,656/-, BUT INTEREST PAID WAS RS .1,48,913/-. THUS, THE ASSESSEE PRACTICALLY DID NOT INCUR ANY EXPENDITURE ON THE INTEREST. THE PROVISIONS OF SECTION 14A, THEREFORE, HAVE BEEN WRO NGLY APPLIED. CONSIDERING ITA NO. 44/AGRA/2012 16 THE TOTALITY OF FACTS AND CIRCUMSTANCES, NOTED ABOV E, WE DO NOT FIND ANY JUSTIFICATION FOR DISALLOWANCE OF THE INTEREST WITH THE AID OF SECTION 14A OF THE IT ACT. ACCORDINGLY, THE ORDERS OF THE AUTHORITIES BELOW ARE SET ASIDE. THE ADDITION IS, THEREFORE, DELETED AND THE GROUND NOS. 3 & 4 OF APPEAL OF THE ASSESSEE ARE ALLOWED. GROUND NO. 5 : 5 THAT THE AUTHORITIES BELOW HAVE ERRED ON FACTS AND IN LAW WHILE DISALLOWING OF THE AMOUNT OF RS. 6,52,857 /- U/S 36(I)(III) OF THE INCOME TAX ACT, OUT OF THE TOTAL AMOUNT OF I NTEREST PAID BY THE ASSESSEE. WHILE SUSTAINING THE ADDITION AT RS. 6,52,857/- THE AUTHORITIES BELOW HAVE COMPLETELY IGNORED THAT THE ASSESSEE HAS NOT GIVEN THE AMOUNT OF RS. 1,13,44,044/- TO THE HU F OF HIM OUT OF BORROWED FUNDS AND WERE GIVEN OUT OF ACCUMULATED I NCOME WHICH CANNOT BE SAID TO HAVE BEEN INVESTED OUT OF THE BOR ROWED FUNDS, NO DISALLOWANCE U/S 36 (I)(III) OF THE I.T. ACT IS CAL LED FOR, ADDITION MADE AT RS. 652857/- BY THE AO AND SUSTAINED BY TH E CIT (APPEALS) IS LIABLE TO BE DELETED. 9. THE AO MADE DISALLOWANCE OF RS.6,52,857/- U/S. 3 6(1)(III) OF THE IT ACT. IT WAS NOTED BY THE AO THAT THE ASSESSEE HAD TAKEN INTEREST BEARING LOANS ON WHICH INTEREST @ 12% WAS PAID. HOWEVER, THE ASSESSE E HAD GIVEN RS.1,13,44,044/- TO HIS HUF. THE AO HELD THAT THE L OAN WAS NOT GIVEN BY THE ASSESSEE FOR ANY BUSINESS CONSIDERATION. ALSO THE A O NOTED THAT THE ASSESSEE DURING THE YEAR HAD PAID INTEREST OF RS.11,64,483/- ON THE BORROWED FUNDS. BY REFERRING TO CERTAIN CASE LAWS, THE AO HELD THAT TH E ASSESSEE WAS NOT ENTITLED FOR FULL ALLOWANCE OF INTEREST AS CLAIMED BY HIM U/S. 3 6(1)(III) OF THE ACT AS THE ITA NO. 44/AGRA/2012 17 FUNDS ADVANCED TO HIS HUF WERE NOT FOR ANY BUSINESS CONSIDERATION AND ACCORDINGLY, MADE THE ADDITION OF RS.6,52,857/-. 9.1 THE ASSESSEE CHALLENGED THE ADDITION BEFORE THE LD. CIT(A) AND HIS WRITTEN SUBMISSION IS INCORPORATED IN THE APPELLATE ORDER IN WHICH THE ASSESSEE BRIEFLY EXPLAINED THAT THE AO HAS NOT CO-RELATED TH E INTEREST PAYMENT WITH BORROWED FUNDS. THE ASSESSEE HAS PAID INTEREST AND RECEIVED PART INTEREST. THE DETAILS OF SAME HAVE BEEN GIVEN AT PAGE 18 OF THE P APER BOOK, AS NOTED IN GROUND NO. 3 & 4 ABOVE. FURTHER, THE ASSESSEE HAS S UFFICIENT CAPITAL INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE. THEREFORE, NO AD DITION COULD BE MADE. THE LD. CIT(A), HOWEVER, CONFIRMED THE ADDITION. HIS FINDIN GS IN PARA 5.3 OF THE APPELLATE ORDER READ AS UNDER : 5.3. I HAVE CONSIDERED THE FACTS AND CIRCUMSTANCES OF TH E CASE AND I AM OF THE OPINION THAT THE ASSESSEE AND HIS HUF ARE TWO SEPARATE LEGAL ENTITIES AND THEY ARE NOT ONE AN D THE SAME AS ARGUED. THE ASSESSEE HAS MADE OUT NO CASE AS TO FOR WHICH BUSINESS CONSIDERATION THE FUNDS WERE DIVERTED TO H UF, PARTICULARLY IN VIEW OF THE FACT THAT THE ASSESSEE WAS HIMSELF INCURRING INTEREST LIABILITY. THE BUSINESS EXPEDIEN CY DEMANDED THAT THE ASSESSEE SHOULD HAVE TAKEN BACK THE FUNDS FROM THE HUF WHEN NEEDED, INSTEAD OF BORROWING FUNDS AND PAYING INTER EST THEREON. THEREFORE, I AM OF THE OPINION THAT THE DISALLOWANC E HAS RIGHTLY BEEN MADE BY THE AO AND THE SAME IS UPHELD. 10. BOTH THE PARTIES SUBMITTED THAT THE ISSUE IS TH E SAME AS IS ARGUED IN GROUND NO. 3 & 4 ABOVE. ON CONSIDERATION OF THE ABO VE FACTS ON THIS ISSUE, WE ITA NO. 44/AGRA/2012 18 FIND THAT THE DECISION GIVEN ON GROUNDS NOS. 3 & 4 ALSO APPLIES TO THE FACTS OF THIS CASE ON THIS GROUND. THE ASSESSEE HAS SUFFICIE NT CAPITAL, PROFIT AND INTEREST- FREE FUNDS AVAILABLE WITH HIM FOR THE PURPOSE OF IN VESTMENT. NO NEXUS BETWEEN THE BORROWED FUNDS AND INTEREST FREE FUNDS HAS BEEN ESTABLISHED BY THE AO ON RECORD. THEREFORE, THE ADDITION WOULD BE UNJUSTIFIE D IN THE YEAR UNDER CONSIDERATION. CONSIDERING THE FINDING GIVEN ON GRO UND NO. 3 & 4 AND THE FACTS OF THIS ISSUE, WE DO NOT FIND ANY JUSTIFICATION TO SUSTAIN THE ADDITION. ACCORDINGLY, THE ORDERS OF THE AUTHORITIES BELOW ON THIS ISSUE ARE SET ASIDE AND THE ADDITION IS DELETED. IN THE RESULT, GROUND NO. 5 OF APPEAL OF THE ASSESSEE IS ALLOWED. NO OTHER POINT IS ARGUED OR PRESSED. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (A.L. GEHLOT) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER *AKS/- COPY OF THE ORDER FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A), CONCERNED BY ORDER 4. CIT, CONCERNED 5. DR, ITAT, AGRA 6. GUARD FILE SR. PRIVATE SECRETARY TRUE COPY