M/s.Trinity Heart Foundation Pvt, Ltd, Bangalore V. ACIT, Bangalore

ITA 59/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57466 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 12-01-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 20-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS SUSAN THOMAS JOSE
• Assessee Lawyers: ASHOK A KULKARNI
• Keywords: Opportunity of being heard

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI N.K.SAINI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER I.T.A. NO.59/BANG/2011 (ASSESSMENT YEAR : 2007-08) M/S. TRINITY HEART FOUNDATION PRIVATE LIMITED, NO.27, SRI RAMA MANDIRA ROAD, BASAVANGUDI, BANGALORE-560 004 . APPELLA NT. PAN AABCT 2658M VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE 5, BANGALORE. .. RESPONDENT. APPELLANT BY : MR. ASHOK A KULKARNI. RESPONDENT BY : MRS. SUSANTHOMAS JOSE. DATE OF HEARING : 12.01.2012. DATE OF PRONOUNCEMENT : 27.01.2012. O R D E R PER N.K. SAINI, A.M. : THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINS T THE ORDER DATED 1.11.2010 OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-I, BAN GALORE. 2. THE FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS A PPEAL : 1. THE ORDER OF THE LEARNED COMMISSIONER IS OPPOS ED TO LAW AND FACTS OF THE CASE. 2. THE LEARNED COMMISSIONER HAS ERRED IN UPHOLDING THE DISALLOWANCE OF INTEREST IN A SUM OF RS.7,43,811 PAID BY THE APPELL ANT ON THE GROUND THAT THE AMOUNT BORROWED WAS DIVERTED FOR NON-BUSINESS PURPO SES. ANYWAY THE WHOLE OF THE INTEREST COULD NOT BE DISALLOWED. 2 ITA NO.59/BANG/2011 3. IT OUGHT TO HAVE BEEN APPRECIATED THAT THERE WA S NO DIVERSION OF ANY PART OF SUCH BORROWED FUNDS FOR NON-BUSINESS PURPOSES DU RING THE ACCOUNTING YEAR OR IN THE EARLIER YEAR AND THEREFORE NO DISALL OWANCE ON THE BORROWALS COULD BE MADE. 4. THE AUTHORITIES BELOW FAILED TO APPRECIATE THAT , EVEN OTHERWISE, THE APPELLANT HAD OTHER FUNDS TO COVER THE AMOUNT INVES TED IN M/S. TRINITY COMFORTS PVT. LTD. AND IT COULD NOT BE SAID THAT SU CH INVESTMENTS CAME OUT OF THE AMOUNTS BORROWED ON WHICH THE INTEREST HAS B EEN DISALLOWED. 5. WITHOUT PREJUDICE AND IN THE ALTERNATIVE IF IN TEREST OF BORROWED FUNDS IS TO BE DISALLOWED ON THE GROUND OF DIVERSION FOR NON -BUSINESS PURPOSES IT IS FOR THE REVENUE TO PROVE AND CORRELATE THE BORROWED AMOUNT TO SUCH UTILIZATION FOR NON-BUSINESS PURPOSES AND THIS HAVI NG NOT BEEN DONE NO PART OF INTEREST ON THE AMOUNTS BORROWED COULD BE DISALL OWED. 6. WITHOUT PREJUDICE AND IN THE ALTERNATIVE IT SH OULD HAVE BEEN APPRECIATED THAT INVESTMENTS IN SHARES OF A COMPANY WAS A PERMI SSIBLE BUSINESS TO BE CARRIED ON UNDER THE MEMORANDUM OF THE COMPANY AND THEREFORE INVESTMENTS IN SHARES COULD NOT BE SAID TO BE A VEN TURE NOT RELATING TO THE BUSINESS OF THE APPELLANT. 7. NO PART OF THE INTEREST ON THE AMOUNTS BORR OWED FOR SETTING UP OF A CATH LAB COULD HAVE BEEN DISALLOWED AS SETTING UP O F A CATH LAB WAS IN THE VERY COURSE OF ASSESSEES BUSINESS AND SUCH INTERES T COULD NOT BE SAID TO FALL UNDER THE PROVISO OF SECTION 36(1)(III). 8. THE APPELLANT CRAVES FOR LEAVE TO ADD, TO DELETE FROM OR AMEND THE GROUNDS OF APPEAL. 3. THE GROUND NOS.1 & 8 ARE GENERAL IN NATURE WHILE GROUND NO.7 WAS NOT PRESSED BEFORE US. THEREFORE, THE ONLY ISSUE TO BE ADJUDICA TED WHICH HAS BEEN RAISED IN GROUND NOS.2 TO 6 IN THIS APPEAL RELATES TO THE DISALLOWAN CE OF INTEREST OF RS.7,43,811. 4. THE FACTS OF THE CASE IN BRIEF ARE THAT THE ASSE SSEE FILED ITS RETURN OF INCOME ON 14.11.2007 DECLARING AN INCOME OF RS.1,30,49,090. THE SAID RETURN WAS PROCESSED UNDER SECTION 143(1) AS PER INTIMATION DATED 28.3.2009. THEREAFTER THE CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS, THE ASSESSING OFFICER HAD NOTICED THAT THE ASSESSEE DEBITED AN OVER DRAFT (OD ) INTEREST OF RS.7,43,811 AND ALL 3 ITA NO.59/BANG/2011 OTHER INTEREST DEBITED PERTAINED TO LOANS TAKEN FOR PURCHASE OF SPECIFIC EQUIPMENTS, VEHICLE AND THE LIKE. THE ASSESSING OFFICER ALSO N OTICED THAT THE ASSESSEE HAD MADE INVESTMENT IN A GROUP COMPANY BY THE NAME M/S. TRIN ITY COMFORTS PVT. LTD. WHICH HAD SET UP A NEW 3 STAR HOTEL IN THE CITY. THE ASSESSI NG OFFICER HAD ASKED THE ASSESSEE TO EXPLAIN THE SAID INVESTMENTS. IN RESPONSE, THE AS SESSEE HAD SUBMITTED TO THE A. O. AS UNDER : AT THE END OF THE LAST FINANCIAL YEAR, SHARE APPL ICATION MONEY TO TRINITY COMFORTS PRIVATE LIMITED STANDS AT RS.1,62,00,000. DURING THE YEAR RS.1,50,00,000 WAS TRANSFERRED TO INVESTMENTS TOWAR DS ALLOTMENT OF SHARES ON 22.06.2006. HOWEVER, SHARES WERE ALLOTTED FOR RS.5 5,00,000. THE BALANCE RS.95,00,000 IS STILL CLASSIFIED AS SHARE APPLICATI ON MONEY UNDER THE HEAD INVESTMENTS. FURTHER CONTRIBUTION FOR SHARE APPLIC ATION IN TRINITY COMFORTS PVT. LTD. TO THE TUNE OF RS.90,20,000 DURING THE YEAR BR INGS THE BALANCE IN SHARE APPLICATION ACCOUNT TO RS.1,02,20,000 AND HENCE, SH ARE APPLICATION MONEY IN LOANS AND ADVANCES IS LOWER WHEN COMPARED TO THE PREVIOUS YEAR. OPENING BALANCE AS ON 1.4.2006 RS.1,62,00,000 LESS : TRANSFER TO INVESTMENTS RS.1,50,00,000 RS.12,00,000 ADD : FURTHER SHARE APPLICATION DURING THE YEAR. RS.90,20,000 BALANCE AS AT 31.03.2007 RS.1,02,20,000 5. THE ASSESSING OFFICER AFTER CONSIDERING THE ABOVE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE ASSESSEE HAD DIVERTED SUBSTANTIAL AMOUNT FOR MAKING INVESTMENT IN A GROUP COMPANY AND THE ASSESSEE HAD SET UP A NEW VEN TURE, THEREFORE, THE EXPENDITURE RELATABLE TO THE SAME ALSO NEEDED TO BE CAPTIALISED . HE ALSO POINTED OUT THAT A SUBSTANTIAL AMOUNT OF INVESTMENT IN THE GROUP COMPA NY HAD GONE FROM THE OD ACCOUNT AVAILABLE TO THE ASSESSEE WHICH STOOD AT RS.1,01,21 ,362 AS ON 1.4.2006 AND AT RS.1,07,88,622 AS ON 31.3.2007. THE ASSESSING OFFI CER ALSO OBSERVED THAT THE INVESTMENTS WERE MADE IN A GROUP COMPANY FOR THE PU RPOSE OF EARNING DIVIDEND OR FOR CAPITAL APPRECIATION AND AS THE DIVIDENDS INCOME IS EXEMPT, ANY EXPENDITURE RELATED TO THE EARNING OF DIVIDEND SHALL NOT BE ALLOWED UNDER SECTION 14A. HE, THEREFORE, HELD THAT 4 ITA NO.59/BANG/2011 THE OD OF RS.7,43,811 WAS RELATABLE TO THE INVESTME NT MADE IN THE GROUP COMPANY AND ACCORDINGLY DISALLOWED THE SAME. RELIANCE WAS PLAC ED ON THE FOLLOWING CASES : A) CIT VS. CALCUTTA AGENCY LTD. (19 ITR 191) (SC) B) HEH NIZAMS RELIGIOUS ENDOWMENT TRUST VS. CIT (59 ITR 582) (SC) C) INDIA CEMENT LTD. VS. CIT, MADRAS (60 ITR 52) (SC) D) CIT VS. HINDUSTAN CONDUCTORS PVT. LTD. (240 ITR 762 )(BOM) E) K. SOMASUNDARAM & BROTHERS VS. CIT (238 ITR 939) (M AD) F) CIT VS. ABHISHEK INDUSTRIES LTD. (2006) (286 ITR 01 ) (P&H). G) CIT VS. MAITREYI PAI (152 ITR 247) (KAR) 6. THE ASSESSEE CARRIED THE MATTER TO T HE LEARNED CIT(A) AND SUBMITTED THAT THE INVESTMENT MADE IN THE GROUP COMPANY WAS OUT OF CURRENT ACCOUNTS OF THE BANK I.E. PAID UP CAPITAL AND RESERVES WHICH BEAR NO INTEREST AND THEN NO FUNDS WERE UTILIZED FROM OD MONEY FOR INVESTMENT PURPOSES, THE QUESTION OF CAPITALIZING INTEREST ON OD DID NOT ARISE. IT WAS FURTHER STATED THAT BALANCE IN O D ACCOUNT STOOD AT RS.1,07,88,622 AS ON 31.3.2007 AS AGAINST THE OPENING BALANCE OF RS.1 ,01,21,362. THUS THE INCREASE IN THE OD ACCOUNT WAS ONLY OF RS.6,67,260. IT WAS FURTHER SUBMITTED THAT THE TOTAL INVESTMENT MADE DURING THE YEAR CAME TO RS.5,38,78, 107 AGAINST THE FUNDS RAISED AMOUNTING TO RS.4,68,10,315 AND OUT OF THE TOTAL FU NDS A SUM OF RS.2,26,66,932 REPRESENTED NON-INTEREST CAPITAL FUND. 7. THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE OBSERVED THAT THE INVESTMENT MADE IN THE FIXED ASSETS, WORK- IN-PROGRESS, LOANS AND ADVANCES, SHARES AND SHARE APPLICATION MONEY AMOUNTED TO RS.3 ,12,11,175 WHICH WAS MADE OUT OF INTEREST BEARING FUND AND THAT THE ASSESSEE HAD MAD E PAYMENT FOR SHARE APPLICATION FOR ALLOTMENT OF SHARES OF M/S. TRINITY COMFORTS PV T. LTD., ( A SISTER CONCERN ) AND THE DETAILS FURNISHED BY THE ASSESSEE INDICATED THAT A PART OF THE BORROWED FUNDS WAS INVESTED IN GROUP COMPANY BY WAY OF SHARE APPLICATI ON MONEY AND, OUT OF THE SAME, SHARES TO THE EXTENT OF RS.1,50,00,000 WERE ALLOTT ED DURING THE YEAR. ACCORDING TO HIM, THE INVESTMENT WAS NOT THE PURPOSE OF THE ASSE SSEES BUSINESS, MAINLY BECAUSE THE 5 ITA NO.59/BANG/2011 INVESTMENT WAS MADE IN ORDER TO SET UP A HOTEL, WHI CH WAS DIFFERENT FROM THE ASSESSEES BUSINESS. HE ALSO POINTED OUT THAT THE DIVIDEND O N SHARES ARE EXEMPT FROM TAX IN THE HANDS OF THE RECIPIENT UNDER SECTION 10(33) OF THE ACT AND SUBSEQUENTLY UNDER SECTION 10(34) WHICH WAS INSERTED WITH EFFECT FROM 1.4.2003 . THEREFORE INTEREST ON BORROWED WHICH WAS INVESTED IN SHARES OF THE COMPANIES WAS N OT AN ADMISSIBLE DEDUCTION AGAINST THE PROFESSIONAL INCOME. THE LEARNED CIT(A) ALSO O BSERVED THAT THE LOANS AND ADVANCES WERE GIVEN TO OTHER PARTIES, WHICH INCREASED FROM R S.95,65,320 TO RS.2,17,32,088 AND THE PROFIT AND LOSS ACCOUNT SHOWED THAT NO INTEREST INCOME WAS DISCLOSED BY THE ASSESSEE WHICH REVEALED THAT ADVANCES WERE GIVEN WI THOUT CHARGING INTEREST. THE LEARNED CIT(A) POINTED OUT THAT IN THE BALANCE SHEE T FOR THE YEAR ENDED ON 31.3.2007, ON THE ASSET SIDE APPEARED WORK-IN-PROGRESS OF RS. 2,90,43,523 WHICH WAS NIL IN THE LAST YEAR, THEREFORE, THE ASSESSEE INCURRED EXPENDI TURE ON CONSTRUCTION OF BUILDING, BUT NO DETAILS WERE AVAILABLE. THE LEARNED CIT(A) CONF IRMED THE ADDITION MADE BY THE ASSESSING OFFICER AND PLACED HIS RELIANCE ON THE JU DGEMENT BY THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF SARABHAI SONS (P) LTD VS. CIT (1993) 201 ITR 464 (GUJ). NOW THE ASSESSEE IS IN APPEAL. 8. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT NO FUNDS WERE DIVERTED TOWARDS CONSTRUCTION OF HOTEL BUILDING. IT WAS CONTENDED TH AT THE A.O. WRONGLY ALLEGED THAT THE ASSESSEE HAD DIVERTED THE INTEREST BEARING FUNDS IN CONSTRUCTION OF THE HOTEL BUILDING. IT WAS FURTHER CONTENDED THAT INCREASE IN THE OD LI MIT IN COMPARISON TO THE EARLIER YEAR WAS ONLY BY RS. 6,67,260. THE LEARNED COUNSEL FOR T HE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER AS WELL AS THE LEARNED CIT(A) WER E NOT JUSTIFIED IN HOLDING THAT THE INTEREST AMOUNTING TO RS.7,43,811 WAS DISALLOWABLE BEING THE INTEREST ON DIVERSION OF FUNDS WHICH WERE DIVERTED TO A SISTER CONCERN. IT WAS SUBMITTED THAT THE ASSESSING OFFICER WITHOUT ESTABLISHING THE NEXUS BETWEEN THE INTEREST BEARING FUND AND THE INTEREST FREE ADVANCES MADE DISALLOWANCE AND THE LE ARNED CIT(A) WITHOUT APPRECIATING THE FACTS CONFIRMED THE ACTION OF THE ASSESSING OFF ICER. HE, THEREFORE, PRAYED TO 6 ITA NO.59/BANG/2011 DELETE THE ADDITION MADE BY THE ASSESSING OFFICER A ND CONFIRMED BY THE LEARNED CIT(A). 9. IN HER RIVAL SUBMISSION, THE LEARNED DEPARTMENTA L REPRESENTATIVE STRONGLY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 10. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND GONE THROUGH THE MATERIAL ON RECORD. IN THE PRESENT CASE, IT IS NO TICED THAT THE ASSESSING OFFICER MADE THE DISALLOWANCE BY OBSERVING THAT THE ASSESSEE DIV ERTED BORROWED FUNDS FOR NON- BUSINESS PURPOSES OF THE ASSESSEE. HOWEVER, NO CON CRETE EVIDENCE ISBROUGHT ON RECORD TO SUBSTANTIATE THAT THE BORROWED FUNDS WERE DIVERT ED FOR NON-BUSINESS PURPOSES. THE DISALLOWANCE HAS BEEN MADE MAINLY ON THIS BASIS THA T THE ASSESSEE WAS HAVING OD ACCOUNT WHICH STOOD AT RS.1,07,88,622 AS ON 31.3.20 07 AS AGAINST THE OPENING BALANCE OF RS.1,01,21,382 IN THE BEGINNING OF THE YEAR. HOWEV ER, THE ASSESSING OFFICER DID NOT DISCUSS AS TO WHAT WAS THE POSITION IN BETWEEN THE BEGINNING AND END OF THE YEAR AND AS TO WHETHER THE ASSESSEE IN FACT UTILIZED THE OD ACC OUNT FOR MAKING THE INVESTMENT WHICH WERE UTILIZED FOR NON-BUSINESS PURPOSES. SI NCE THE NEXUS HAS NOT BEEN ESTABLISHED BEFORE MAKING THE DISALLOWANCE, THE DIS ALLOWANCE APPEAR TO BE MADE WITHOUT CONSIDERING THE FACTS IN RIGHT PERSPECTIVE. IN THE PRESENT CASE, IT APPEARS THAT THE ASSESSEE HAD ALSO NOT FURNISHED THE FULL DETAILS IN SUPPORT OF ITS CLAIM. IN THIS REGARD, IT IS RELEVANT TO POINT OUT THAT THE LEARNED CIT(A) IN PARAS 3.1 TO 3.12 OF THE IMPUGNED ORDER HAS CATEGORICALLY STATED THAT NO DETAILS WERE AVAILABLE BUT THE AMOUNT APPEARING IN ASSETS SIDE UNDER THE HEAD WORK-IN-PROGRESS AT RS.2,90,43,523 INDICATED THAT CERTAIN PART OF THE BORROWED FUND HAD BEEN UTILIZED IN THE CONSTRUCTION OF BUILDING. FROM THE FACTS OF THE PRESENT CASE WHICH ARE AVAILA BLE ON RECORD, IT IS NOT CLEAR HOW MUCH AMOUNT WAS UTILIZED FROM THE INTEREST BEARING BORROWED FUNDS FOR THE CONSTRUCTION OF BUILDING. WE, THEREFORE, IN THE AB SENCE OF THE RELEVANT DETAILS AND BY CONSIDERING THAT NO CLEAR NEXUS HAS BEEN ESTABLISHE D BY THE ASSESSING OFFICER IN BETWEEN THE INTEREST BEARING BORROWED FUND AND THE INVESTMENT FOR NON-BUSINESS 7 ITA NO.59/BANG/2011 PURPOSES, DEEM IT APPROPRIATE TO SET ASIDE THE IMPU GNED ORDER OF THE LEARNED CIT(A) AND REMAND THE CASE BACK TO THE FILE OF THE ASSESSI NG OFFICER FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONA BLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 10. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. (ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JAN., 2012.) SD/- SD/- (GEORGE GEORGE) (N.K. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED: 27.1.2012. *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, -B BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDER ASSTT. REGISTRAR, ITAT, BAN GALORE .