RAPHAEL SEQUEIRA, MUMBAI V. ADDL CIT 23(1), MUMBAI

ITA 4875/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54938 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 11-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C G K NAIR
• Assessee Lawyers: HARSHVARDHAN DATAR
• Keywords: Notional interest; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, MUMBAI BEFORE SHRI D.K. AGARWAL, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 4875/MUM/2010 (ASSESSMENT YEAR: 2007-08) SHRI RAPHAEL SEQUEIRA ADDL. CIT - 23(1) C/O. JAYES SANGHRAJKA & CO. PRATYAKSHAKAR BHAVAN UNIT NO. 405, HIND RAJASHTAN VS. BANDRA KURLA COMPLEX CENTRE, D.S. PHALKE ROAD DADAR (E), MUMBAI 400014 MUMBAI PAN - AADPS 4268 B APPELLANT RESPONDENT APPELLANT BY: SHRI HARSHVARDHAN DATAR RESPONDENT BY: SHRI C.G.K. NAIR DATE OF HEARING: 18.08.2011 DATE OF PRONOUNCEMENT: 26.08.2011 O R D E R PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY THE INDIVIDUAL ASSESSEE IS AGAINST T HE ORDER OF THE CIT(A) XXXIII, MUMBAI DATED 24.05.2010. 2. ASSESSEE HAS RAISED 10 GROUNDS INVOLVING 4 ISSUES. GROUND NOS. 1 TO 6 PERTAIN TO THE DISALLOWANCE OF; (1) REPAIRS AND MAI NTENANCE, (2) TRAVELLING AND BUSINESS PROMOTION EXPENSES, AND (3) GARMENT MA KING CHARGES. AS IN EARLIER YEARS THE A.O. MADE THE ADDITIONS/DISALLOWA NCES TO THE EXTENT OF ADDITION SUSTAINED BY THE LEARNED CIT(A) IN A.Y. 20 06-07. THE CIT(A) DIRECTED THE A.O. TO TAKE NECESSARY ACTION AS DIREC TED BY THE ITAT FOR A.Y. 2006-07 IN ASSESSEES OWN CASE. 3. THE LEARNED COUNSEL REFERRED TO THE ORDER OF THE IT AT ON THE ISSUE WHEREIN THE ITAT SET ASIDE THE MATTER BACK TO THE F ILE OF THE A.O. WITH THE FOLLOWING OBSERVATIONS: - 8. AFTER HEARING THE LEARNED D.R., WE ARE OF THE V IEW THAT THE ITAT HAS DECIDED THE IDENTICAL ISSUES IN EARLIER YEARS B Y ALLOWING ASSESSEES GROUNDS PARTLY. SINCE THE FACTS OF THE C ASE UNDER CONSIDERATION ARE IDENTICAL TO THAT OF CASES OF ASS ESSEE IN EARLIER ITA NO. 4875/MUM/2010 SHRI RAPHAEL SEQUEIRA 2 YEARS, WE RESPECTFULLY FOLLOW THE ORDER OF THE ITAT CITED SUPRA AND IN THE LIGHT OF IT WE REMIT THE MATTER BACK TO THE FIL E OF THE AO WITH A DIRECTION TO CALCULATE THE AMOUNTS OF DISALLOWANCES IN ACCORDANCE WITH THE DECISION OF ITAT (SUPRA) AFTER PROVIDING R EASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDE R OF THE CIT(A). THE A.O. IS DIRECTED TO RECOMPUTE THE DISALLOWANCE FOLL OWING THE ORDERS AS DIRECTED ABOVE. WITH THESE OBSERVATIONS THE GROUNDS ARE CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. 5. GROUND NOS. 7, 8 & 9 PERTAIN TO THE ISSUE OF ADDITI ON ON ACCOUNT OF NOTIONAL INTEREST. IT IS THE CASE OF THE REVENUE TH AT ASSESSEE HAS GIVEN INTEREST FREE LOANS OF ` 2 CRORES TO THE SISTER CONCERN M/S. RELIABLE FINANC E P. LTD. FROM A.Y. 2002-03 AND SINCE NO INTEREST HAS BE EN CHARGED, THE A.O. MADE ADDITION OF NOTIONAL INTEREST AT 10% OF THE AM OUNT ADVANCED THEREBY MAKING AN ADDITION OF ` 20,00,000/-. IT WAS THE CONTENTION OF THE ASSESSEE THAT IT WAS NOT AN ADVANCE GIVEN TO THE SISTER CONC ERN BUT AN INVESTMENT MADE IN A COMPANY WHICH IS OWNED BY THE ASSESSEE TO THE EXTENT OF 99.9% (AND BY HIS WIFE FOR THE BALANCE) AND IS OF THE SHA RES PURCHASED IN THE CASE OF M/S. RELIABLE FINANCE P. LTD. THIS IS AN INVESTM ENT BUT NOT A LOAN. IT WAS FURTHER SUBMITTED THAT ASSESSEE HAD USED THE BORROW ED FUNDS FOR THE PURPOSE OF BUSINESS AND EVEN THIS INVESTMENT IS FOR COMMERCIAL EXPEDIENCY. THE ISSUE IN A.Y. 2003-04 AND SUBSEQUENT YEARS WAS RESTORED TO THE FILE OF THE A.O. FOR EXAMINING THE NEXUS BETWEEN THE BORROW ED FUNDS AND ITS UTILISATION FOR BUSINESS. THE CIT(A), WHILE STATING THAT THE GROUND OF APPEAL WAS RESTORED TO THE A.O., HOWEVER, AFFIRMED THE ASS ESSING OFFICERS STAND ON THE REASON THAT THE ADDITION WAS NOT DELETED BY THE ITAT, THEREFORE, THE ACTION OF THE A.O. IN MAKING THE ADDITION IS TO BE CONFIRMED. 6. THE LEARNED COUNSEL REITERATED THE SAME ARGUMENTS A ND ALSO SUBMITTED THAT THE A.O. HAS NOT PASSED ANY ORDERS I N EARLIER YEARS AND HE HAS NO OBJECTION IF THE MATTER IS RESTORED TO THE F ILE OF THE A.O. 7. TO A QUERY WHETHER ANY INTEREST HAS BEEN DISALLOWED OR NOTIONAL INTEREST HAS BEEN ADDED, IT WAS THE SUBMISSION THAT IN EARLIER YEARS INTEREST WAS DISALLOWED WHEREAS IN THIS YEAR THE A.O. ADDED THE AMOUNT AS INCOME. ITA NO. 4875/MUM/2010 SHRI RAPHAEL SEQUEIRA 3 8. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE ORDE R OF THE A.O., THE A.O. MADE AN ADDITION OF NOTIONAL INTEREST AT 10% O N ` 2 CRORES. NO INTEREST CLAIM BY THE ASSESSEE IN THE COURSE OF BUSINESS WAS DISALLOWED AND PROVISIONS OF SECTION 36(1)(III) HAVE NOT BEEN INVO KED. IT IS AN ESTABLISHED PRINCIPLE THAT NOTIONAL INTEREST CANNOT BE BROUGHT TO TAX WHEN ASSESSEE GIVES INTEREST FREE ADVANCES. THEREFORE THE ACTION OF THE A.O. AND CIT(A) IN CONFIRMING THE ADDITION ON NOTIONAL INTEREST AT ` 20,00,000/- CANNOT BE UPHELD. HOWEVER, THERE SEEMS TO BE SOME FACTUAL ERR ORS COMMITTED BY THE A.O. ASSESSEE SEEMS TO HAVE INVESTED IN M/S. RELIAB LE FINANCE P. LTD., THE FACT OF WHICH WAS CONSIDERED BY THE A.O. AS ADVANCI NG OF INTEREST FREE LOANS. WE ARE NOT AWARE WHETHER THIS IS AN INVESTMENT IN T HE COMPANYS SHARE HOLDING OR AN ADVANCE GIVEN TO THE COMPANY DURING T HE COURSE OF BUSINESS. ASSESSEES BALANCE SHEET AS ON 31.03.2006 PLACED IN THE PAPER BOOK DO INDICATE INVESTMENT IN M/S. RELIABLE FINANCE P. LTD . IF IT IS AN INVESTMENT IN THE SHARE CAPITAL OF THE COMPANY, WE ARE UNABLE TO UNDERSTAND HOW THE A.O. HAS TAKEN THAT AS INTEREST FREE LOAN OF ` 2 CRORES. HOWEVER, THIS ISSUE DID NOT ARISE IN THIS YEAR AND IN THE EARLIER YEARS FROM A. Y. 2003-04 ONWARDS MATTER HAS BEEN RESTORED TO THE FILE OF THE A.O. FOR EXAMI NATION OF NEXUS. THEREFORE, IN THE INTEREST OF JUSTICE, WE RESTORE THIS ISSUE T O THE FILE OF THE A.O. TO TAKE A CONSISTENT STAND AFTER DUE EXAMINATION OF FACTS. WE MAKE IT CLEAR THAT ADDITION ON ACCOUNT OF NOTIONAL INTEREST CANNOT BE MADE JUST BECAUSE ASSESSEE INVESTED FUNDS AND DISALLOWANCE U/S 36(1)( III) DOES NOT ARISE UNLESS THERE IS DIVERSION OF FUNDS FOR NON-BUSINESS PURPOS E OUT OF THE BORROWALS MADE ON WHICH INTEREST WAS CLAIMED IN THE BUSINESS COMPUTATION. WITH THIS DIRECTION THE ISSUE IS RESTORED TO THE FILE OF THE A.O. TO DO ACCORDING TO THE FACTS AND LAW. 9. IN THE RESULT, APPEAL IS ALLOWED FOR STATISTICAL PU RPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH AUGUST 2011. SD/- SD/- (D.K. AGARWAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 26 TH AUGUST 2011 ITA NO. 4875/MUM/2010 SHRI RAPHAEL SEQUEIRA 4 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXXIII, MUMBAI 4. THE CIT XXIII, MUMBAI CITY 5. THE DR, D BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.