TIKAMCHAND KOTHARI, MUMBAI V. ITO WD 20(3)(1), MUMBAI

ITA 5142/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55613 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 12-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 22-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: AJAY I THAKORE
• Keywords: Business income; Business expenditure; Salary income; Opportunity of being heard
• Section: 14A; 37(1); 11

Judgement Text

1 TIKAMCHAND KOTHARI IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI H BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI J SUDHAKAR REDDY, AM & SHRI VIJAY PAL RAO, JM ITA NOS. 5141 & 5142/MUM/2010 (ASST YEARS 2004-05 & 2006-07 ) TIKAMCHAND KOTHARI C-501 ABHISHEK APARTMENTS BEHIND ESIC NAGAR - FOUR BUNGALOW ANDHERI (W), MUMBAI 9 VS THE INCOME TAX OFFICER WARD 20(3)(1), MUMBAI (APPELLANT) (RESPONDENT) PAN NO. AADPK1836D ASSESSEE BY SHRI AJAY I THAKORE REVENUE BY SHRI V V SHASTRI DT.OF HEARING 12 TH OCT 2011 DT OF PRONOUNCEMENT 19 TH , OCT 2011 PER VIJAY PAL RAO, JM THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE COMPOSITE ORDER DATED 28.4.2010 OF THE CIT(A) FOR THE AYS 2004-05 A ND 2006-07 RESPECTIVELY. 2 THE ASSESSEE HAS RAISED COMMON GROUNDS IN THESE A PPEALS EXCEPT QUANTUM OF DISALLOWANCE. THEREFORE, FOR THE SAKE OF CONVENI ENCE, THE GROUNDS RAISED FOR AY 2004-05 BY THE ASSESSEE ARE REPRODUCED HERE UNDER: I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD CIT(A) ERRED IN MAKING ENHANCEMENT OF INCOME WITHOUT GIVING THE NOT ICE FOR ENHANCEMENT AND THEREFORE THE ORDER SO FRAMED IS ILLEGAL AND WITHO UT THE AUTHORITY OF LAW. II)(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD CIT(A) ERRED IN DISALLOWING INTEREST AGGREGATING TO RS.22,74,410/- O N ERRONEOUS ASSUMPTION THAT THE BORROWED FUNDS HAVE BEEN UTILIZED FOR ACQUI RING CONTROLLING STAKE OF NOBLE EXPLOCHEM LTD (B) WITHOUT PREJUDICE TO THE AFOREMENTIONED THE LD C IT (A) ERRED IN HOLDING THAT THE EXPENDITURE INCURRED DIRECTLY RELATED TO AC QUISITION OF SHARES OF A LIMITED COMPANY IN HIS PERSONAL CAPACITY AND CANNOT BE CONSIDERED AS BUSINESS EXPENDITURE, ELIGIBLE FOR DEDUCTION/S 37(1) OR U/S 36(1)(III) OF I T ACT. 2 TIKAMCHAND KOTHARI 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER FOR COMPUTING DISAL LOWANCE U/S 14A R.W.;R 8D IN ADDITION TO THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER WHICH IS CONFIRMED IN PARA 2 OF ASSESSING OFFICERS ORDER. 3 GROUND NO.1 IS REGARDING VALIDITY OF ENHANCEMENT OF INCOME BY CIT(A). WE WILL DEAL THIS GROUND ALONG WITH GROUND NO.3 4 GROUND NO.2 IS REGARDING DISALLOWING OF INTEREST. 4.1 THE BRIEF FACTS AS EMERGING FROM THE RECORDS AR E THAT THE ASSESSEE IS AN INDIVIDUAL AND HAVING INCOME FROM BUSINESS, SALARY AND INCOME FROM OTHER SOURCES. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OF FICER OBSERVED THAT THE ASSESSEE HAS CLAIMED INTEREST EXPENDITURE AGAINST THE INCOME FROM INTEREST RECEIVED, INCOME FROM SALARY AS THE BUSINESS INCOME SHOWN BY THE ASS ESSEE DURING THESE YEARS IS VERY LESS/NEGLIGIBLE INCOME IN COMPARISON TO THE INTERES T EXPENDITURE CLAIMED BY THE ASSESSEE. THEREFORE, THE ASSESSING OFFICER ASKED T HE ASSESSEE TO EXPLAIN THE NEXUS BETWEEN THE INTEREST EXPENDITURE AND THE INCOME REC EIVED BY THE ASSESSEE. 4.2 THE ASSESSEES MAIN CONTENTION BEFORE THE LOWER AUTHORITIES WAS THAT THE ASSESSEE IS A STRATEGIC INVESTOR AND RAISED LOAN TO MAKE INVESTMENT IN COMPANY VIZ. NOBLE EXPLOCHEM LTD., AS WELL AS TO INTRODUCE CAPI TAL IN PARTNERSHIP FIRM AND ADVANCING IT ON INTEREST. IT WAS ALSO CONTENDED TH AT NO NEW LOAN WAS TAKEN BY THE ASSESSEE DURING THESE YEARS AND THE LOAN WAS TAKEN IN THE EARLIER ASSESSMENT YEAR. 4.3 AFTER CONSIDERING THE CONTENTION OF THE ASSESSE E, THE ASSESSING OFFICER HELD THAT THE SALARY INCOME AND BUSINESS INCOME RECEIVED BY THE ASSESSEE BY WAY COMMISSION HAS NO NEXUS TO THE INTEREST EXPENDITURE CLAIMED. THE ASSESSING OFFICER HELD THAT THE ENTIRE LOAN RAISED WAS FOR THE PURPOS E OF INVESTMENT AND THE INCOME THEREOF IS NEITHER CHARGEABLE TO TAX NOR THE SAME I S RECEIVED AND OFFERED FOR TAX. 3 TIKAMCHAND KOTHARI ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED THE E NTIRE INTEREST CLAIM OF RS. 22,74,410/- FOR THE AY 2004-05 AND RS. 15,46,20 6/- FOR THE AY 2006-07. 5 ON APPEAL, THE CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BY OBSERVING THAT THE LOAN RAISED AND THE EXPENDITURE INCURRED THEREON IS NOT RELATED TO HIS BUSINESS; THEREFORE, THE EXPENDI TURE IS NOT ALLOWABLE NEITHER U/S 37(1) OR U/S 36(1)(III) OF THE ACT. 6 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT THE ASSESSING OFFICER DISALLOWED THE INTEREST EXPENDITURE ON THE BASIS TH AT THE BORROWED FUND WAS UTILIZED BY THE ASSESSEE FOR INVESTMENT IN SHARES OF NOBLE E XPLOCHEM LTD. HE HAS FURTHER SUBMITTED THAT NO INVESTMENT WAS MADE BY THE ASSESS EE DURING THE YEAR UNDER CONSIDERATION AND THE INVESTMENT WAS MADE IN THE EA RLIER YEARS AND THERE WAS NO DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE FOR THE AY 2002-03 AND 2003-04 BY THE ASSESSING OFFICER. THE LD AR HAS FILED THE DETA ILS REGARDING SOURCE AND APPLICATION OF THE FUNDS AND SUBMITTED THAT THE ENT IRE INVESTMENT WAS MADE DURING THE YEAR 2002-03 AND IN THE SUBSEQUENT YEARS THIS I NVESTMENT WAS CARRIED FORWARD AND NO ADDITIONAL INVESTMENT WAS MADE. THUS, THE LD AR OF THE ASSESSEE HAS FORCEFULLY CONTENDED THAT WHEN NO DISALLOWANCE WAS MADE FOR AY 2002-03 AND 2003-04, THE DISALLOWANCE MADE IN THE ASSESSMENT YE AR UNDER CONSIDERATION IS NOT JUSTIFIED AND SUSTAINABLE. IN SUPPORT OF HIS CONTE NTION, THE LD AR RELIED UPON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT D ATED 8.8.2001 IN THE CASE OF CIT VS K RAHEJA CORPORATION P LTD IN INCOME TAX APPEAL N O.1260 OF 2009. 6.1 THE LD AR FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAS NOT EXAMINED THE SOURCE AND APPLICATION OF THE FUNDS AND THEREFORE, THE DISALLOWANCE IS NOT SUSTAINABLE. IN FACT THE ASSESSEE WAS HAVING OWN SU FFICIENT FUNDS USED FOR INVESTMENT. HE HAS REFERRED THE DETAILS FILED BEFORE US AND SUB MITTED THAT AS ON 31.3.2001, THE 4 TIKAMCHAND KOTHARI ASSESSEES OWN INTEREST BORROWING FUND STOOD AT RS .1.44 CRORES WHEREAS THE INVESTMENT WAS MADE DURING THAT YEAR AT RS. 1.71 CRORES. THEREFORE, WHEN THE ASSESSEE WAS HAVING ITS OWN SUFFICIENT FUNDS FOR IN VESTMENT THEN, THE ENTIRE DISALLOWANCE OF INTEREST IS NOT BASED ON THE FACTS OF THE CASE. THUS, THE LD AR URGED THAT THE MATTER SHOULD BE REMANDED BACK TO THE RECO RDS OF THE ASSESSING OFFICER FOR VERIFICATION OF THE SOURCE AND APPLICATION OF THE F UNDS AND THEREAFTER, IT SHOULD BE ADJUDICATED ACCORDINGLY. 6.2 THE LD AR OF THE ASSESSEE FURTHER SUBMITTED THA T WITHOUT PREJUDICE TO THE ABOVE CONTENTION, THE ASSESSEE MADE THE INVESTMENT IN THE SHARES OF NOBLE EXPLOCHEM LTD FOR CONTROLLING SHARES OF THE COMPANY AND THEREFORE, THE INVESTMENT WAS MADE FOR THE PURPOSE OF THE BUSINESS OF THE ASS ESSEE AND THE EXPENDITURE ON INTEREST IS ALLOWABLE U/S 36(1)(III) OF THE ACT. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE FOLLOWING DECISIONS: I) CIT VS PHIL CORPN LTD & OTHERS - 6 1 DTR 15 (BOM) II) MUNJAL SALES CORPORATION VS CIT - ( 298 ITR 298 (SC) III)CIT VS SRIDEV ENTERPRISES - 192 ITR 165 (KAR) 6.3 ON THE OTHER HAND, THE LD DR HAS RELIED UPON TH E ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE ASSESSEE HAS FAI LED TO ESTABLISH THE NEXUS BETWEEN THE INTEREST EXPENDITURE WITH THE INTEREST EARNED BY THE ASSESSEE INCLUDING, SALARY AND BUSINESS INCOME. EVEN, THE ASSESSEE HA S NOT ESTABLISHED AS TO HOW THE INVESTMENT IN THE SHARES OF THE NOBLE EXPLOCHEM LTD ARE BENEFICIAL FOR THE BUSINESS OF THE ASSESSEE. 7 WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULLY PERUSED THE RELEVANT MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE D ECISIONS RELIED UPON BY THE LD AR OF THE ASSESSEE. AS FAR AS THE NON-DISALLOWANCE OF THE CLAIM OF INTEREST FOR THE AY 5 TIKAMCHAND KOTHARI 2002-03 AND 2003-04 IS CONCERNED, THERE WAS NO SCRU TINY ASSESSMENT IN THOSE ASSESSMENT YEARS AND ONLY INTIMATION U/S 143(1) WAS THERE. EVEN OTHERWISE, THE PRINCIPLE OF RESJUDICATE IS NOT APPLICABLE IN THE M ATTER OF TAXATION AND PARTICULARLY WHEN NO SCRUTINY ASSESSMENT WAS IN THE EARLIER YEAR . THEREFORE, WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE LD AR OF THE ASSESS EE THAT NO DISALLOWANCE WAS MADE IN THE EARLIER ASSESSMENT YEARS; THEREFORE, THE A SSESSING OFFICER CANNOT MAKE ANY DISALLOWANCE FOR THE YEAR UNDER CONSIDERATION. 7.1 AS REGARDS THE ASSESSEES OWN FUNDS AVAILABLE F OR INVESTMENT IS CONCERNED, IT IS PERTINENT TO NOTE THAT THE DISALLOWANCE MADE DUR ING THE YEAR UNDER CONSIDERATION BECAUSE THE ASSESSEE FAILED TO ESTABLISH THE NEXUS BETWEEN THE INTEREST EXPENDITURE AND THE INTEREST EARNED BY THE ASSESSEE FROM SALARY , COMMISSION AND BUSINESS INCOME. FROM THE DETAILS FILED BY THE ASSESSEE, IT IS NOT CLEAR AS HOW MUCH LOAN WAS TAKEN BY THE ASSESSEE AND HOW THE LOAN AMOUNT WAS U TILIZED BY THE ASSESSEE. THE ASSESSEE HAS FILED THE DETAILS WITH RESPECT TO NON- INTEREST BEARING FUND WHICH INCLUDES THE CAPITAL AND VARIOUS INCOME BY THE ASSE SSEE. IT IS MATERIAL TO NOTE THAT THE MAJOR INCOME OF THE ASSESSEE IS FROM SALARY, IN TEREST AND SHARES OF PROFIT FROM PARTNERSHIP FIRM. NOTHING HAS BEEN BROUGHT ON RECO RD TO SHOW THAT THE ASSESSEE HAS UTILIZED THE BORROWED FUNDS FOR EARNING THE INCOME OFFERED FOR TAX. EVEN OTHERWISE, IT IS NOT THE CLAIM THAT THE BORROWED FUND IS UTILIZED FOR INTRODUCING ANY CAPITAL IN THE PARTNERSHIP FIRMS. ONLY IN THE AY 2004-05, THE ASSE SSEE HAS SHOWN BUSINESS INCOME APART FROM SHARE OF PROFIT FROM PARTNERSHIP FIRM TH AT TOO AS COMMISSION INCOME. THERE IS NOTHING ON RECORD OR EVEN ANY AVERMENTS OR CONTENTION BY THE ASSESSEE TO SHOW AS TO HOW THE INVESTMENT IN THE SHARES OF NOBL E EXPLOCHEM LTD., WOULD BENEFIT THE ASSESSEES BUSINESS OR THAT INVESTMENT IS FOR C OMMERCIAL EXPEDIENCY OR TO PROTECT THE INTEREST OF THE BUSINESS OF THE ASSESS EE. IN THE ABSENCE OF ANY MATERIAL OR FACT TO SUPPORT THE CONTENTION OF THE ASSESSEE, WE FIND OURSELVES UNABLE TO 6 TIKAMCHAND KOTHARI ACCEPT THE CONTENTION OF THE ASSESSEE. THE ASSESSE E EVEN FAILED TO EXPLAIN AND DEMONSTRATE AS TO HOW THE BORROWED FUNDS WERE UTILI ZED AND IF THE SAME WERE NOT UTILIZED FOR INVESTMENT IN SHARES THEN WHAT IS THE APPLICATION OF THE BORROWED FUND. 8 FOR THE SAKE OF ARGUMENT, IF IT IS ACCEPTED THAT THE ENTIRE NONINTEREST BEARING FUNDS HAVE BEEN INVESTED BY THE ASSESSEE IN THE SHA RES OF NOBLE EXPLOCHEM LTD., EVEN THEN, THERE IS A SHORTAGE OF FUNDS OF ABOUT 27 LACS, WHICH MUST HAVE BEEN MADE BY THE ASSESSEE FROM THE BORROWED FUNDS. 9 IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF T HE CASE AND BY TAKING A LENIENT VIEW, WE GRANT ONE MORE OPPORTUNITY TO THE ASSESSEE TO PRODUCE THE ENTIRE RELEVANT RECORDS AND DETAILS TO EXPLAIN AND ESTABLI SH THE APPLICATION OF THE BORROWED FUNDS FOR THE PURPOSE OF BUSINESS. ACCORDI NGLY, THE ISSUE IS REMANDED TO THE RECORD OF THE ASSESSING OFFICER TO VERIFY AND E XAMINE THE RELEVANT MATERIAL AND THEN DECIDE THE SAME IN ACCORDANCE WITH LAW. 10 NEXT ISSUE IS REGARDING DISALLOWANCE U/S 14A. 11 BEFORE THE CIT(A), THE ASSESSEE HAS RAISED AN AD DITIONAL GROUND FOR THESE ASSESSMENT YEARS THAT THE ASSESSING OFFICER HAS NO T CONSIDERED SECTION 14A AND THE DISALLOWANCE SHOULD BE RESTRICTED TO THE EXTENT OF AMOUNT OF RS. 12,71,825/- FOR THE AY 2004-05 AND RS. 3,12,454/- FOR AY 2006-05 AS WOR KED OUT BY THE ASSESSEE BY APPLYING RULE 8D. THE CIT(A) ADMITTED THE ADDITION AL GROUND BUT IT WAS TAKEN AS A DISALLOWANCE U/S 14A OVER AND ABOVE THE DISALLOWANC E MADE BY THE ASSESSING OFFICER . CONSEQUENTLY BY ACCEPTING THE ADDITIONAL GROUND AND DISALLOWANCE U/S 14A BY APPLYING RULE 8D, THE CIT(A) HAS ENHANCED TH E ASSESSMENT . 12 WE HAVE HEARD THE LD AR AS WELL AS THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. SINCE THIS ISSUE IS NOW COVERE D BY THE DECISION OF THE HONBLE 7 TIKAMCHAND KOTHARI JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ BOY CE MFG CO LTD VS DCIT REPORTED IN 328 ITR 81; THEREFORE, WE RESTORE THIS ISSUE TO THE RECORD OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION IN THE LIGHT OF THE DECISION CIT ED SUPRA AND IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 12.1 HOWEVER, WE MAY CLARIFY THAT WHATEVER DISALLOW ANCE IS MADE U/S 14A, THE SAME HAS TO BE CONSIDERED FOR DISALLOWANCE OF INTE REST U/S 36/37 OF THE I T ACT, IF ANY. 14 IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THE 19 TH , DAY OF OCT 2011. SD/ SD / ( J SUDHAKAR REDDY ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 19 TH , OCT2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI