BIREN SURESH KARANI, MUMBAI V. INCOME TAX OFFICER-31(1)3, MUMBAI

ITA 6273/MUM/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 4841 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 16-10-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income
• Section: 143(3)

Judgement Text

1 ITA 6273/MUM/2017 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B, MUMBAI BEFORE SHRI SANDEEP GOSAIN (JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) ITA NO. 6273/MUM/2017 (ASSESSMENT YEAR : 2012-13) SHRI BIREN SURESH KARANI 13/42, TRIVENI CHS LTD OPP. NEW LINK ROAD OSHIWARA (W), MUMBAI-400 102 PAN AAMPK6502D VS ITO,31(1)3, MUMBAI APPELLANT RESPONDEDNT APPELLANT BY SHRI MEHUL SHAH RESPONDENT BY SHRI ARVIND KUMAR DATE OF HEARING 09- 01-2019 DATE OF PRONOUNCEMENT 15-02-2019 O R D E R PER G MANJUNATHA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF THE CIT(A)-42, MUMBAI DATED 29-06-2017 AND IT PERTAINS TO AY 2012-13. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- BEING AGGRIEVED BY THE ORDERS OF THE ASSISTANT CO MMISSIONER OF INCOME TAX, 31 (1) - 3, MUMBAI, AND LEARNED COMMISSIONER OF INCOME-TAX (APPEAL) - 42, MUMBAI THIS APPEAL PETITION IS FILED ON THE FOLLOWING AMONGST O THER GROUNDS OF APPEAL, WHICH IT IS PRAYED MAY BE CONSIDERED WITHOUT PREJUDICE TO ONE A NOTHER. 1. ON THE FACTS, AND IN CIRCUMSTANCES OF THE CASE , AND IN LAW, LEARNED COMMISSIONER OF INCOME-TAX (APPEAL) ERRED IN UPHOLDING ACTION OF THE ASSESSING OFFICER IN 2 ITA 6273/MUM/2017 DISALLOWING INTEREST EXPENSE OF RS. 648,422 WITHOUT APPRECIATING THAT THE ADVANCES GIVEN WERE IN NATURE OF TRADE ADVANCES, AND THE LOA NS TAKEN WERE UTILIZED FOR THE PURPOSE OF BUSINESS. 2. WITHOUT PREJUDICE TO ABOVE, ON THE FACTS, AND IN CIRCUMSTANCES OF THE CASE, AND IN LAW, LEARNED COMMISSIONER OF INCOME-TAX (APPEAL) ER RED IN NOT APPRECIATING THAT OVERDRAFT WAS RAISED IN THE BUSINESS AS SOME OF THE FUNDS WERE EMPLOYED TO BUY INDUSTRIAL UNITS WHICH WERE LET OUT; AND THUS, INTE REST IF NOT ALLOWABLE AS BUSINESS EXPENSE, WAS ALLOWED AGAINST INCOME FROM HOUSE PROP ERTY. 3. ON THE FACTS, AND IN CIRCUMSTANCES OF THE CASE , AND IN LAW, LEARNED COMMISSIONER OF INCOME-TAX (APPEAL) ERRED IN UPHOLDING ACTION OF THE ASSESSING OFFICER IN DISALLOWING INTEREST OF RS. 37,965 PAID AGAINST LOA N FROM LIC AND LOAN FROM HDFC WITHOUT APPRECIATING THAT THE SAID LOANS WERE OBTAI NED IN CONNECTION WITH ACQUISITION OF THE INDUSTRIAL UNITS. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS AN INDIVIDUAL AND PROPRIETOR OF M/S VARTSILA, WHICH IS ENGAGED IN THE BUSINESS OF DEALER OF PRESSURE REDUCING VALVES. THE ASSESSEE HAS FILED H IS RETURN OF INCOME FOR AY 2012-13 ON 19-09-1992 DECLARING TOTAL INCOME OF RS. 10,23,840. THE CASE WAS SELECTED OR SCRUTINY AND NOTICES U/S 143(2) AND 142 (1) OF THE ACT WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORISED REPRESENTATI VE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FILED VARIOUS DETAILS, AS CAL LED FOR. THE ASSESSMENT HAS BEEN COMPLETED U/S 143(3) OF THE INCOME-TAX ACT, 19 61 ON 27-03-2015 DETERMINING THE TOTAL INCOME AT RS.20,33,340 INTERA LIA MAKING ADDITION TOWARDS DISALLOWANCE OF INTEREST PAID ON LOANS ON T HE GROUND THAT INTEREST BEARING FUNDS HAS BEEN DIVERTED TO GIVE VARIOUS LOA NS AND ADVANCES FOR NON BUSINESS PURPOSES. 3. AGGRIEVED BY THE ASSESSMENT ORDER, ASSESSEE PREF ERRED APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), ASSESSEE SUBMITTED THAT THE AO WAS ERRED IN 3 ITA 6273/MUM/2017 DISALLOWING INTEREST PAID ON LOANS BORROWED FOR THE PURPOSE OF BUSINESS MERELY FOR THE REASON THAT THE ASSESSEE HAS GIVEN VARIOUS ADVANCES TO CERTAIN PERSONS FOR NON BUSINESS PURPOSE WITHOUT APPRECIATING THE F ACT THAT THE LOANS HAVE BEEN BORROWED FOR SPECIFIC PURPOSES, WHICH HAVE BEE N USED FOR THE PURPOSE OF BUSINESS ALONE. THOUGH THE ASSESSEE HAS GIVEN VA RIOUS ADVANCES, BUT THOSE ADVANCES WERE GIVEN OUT OF ASSESSEES OWN FUNDS, TH EREFORE, MERELY FOR THE REASON THAT THERE IS A NEGATIVE CAPITAL ACCOUNT FOR THE YEAR UNDER CONSIDERATION, THE AVAILABILITY OF OWN FUNDS CANNOT BE IGNORED WHEN A DETAILED CASH FLOW STATEMENT HAS BEEN FILED TO PROVE THE AVA ILABILITY OF OWN FUNDS. 4. THE LD.CIT(A), AFTER CONSIDERING RELEVANT SUBMIS SIONS OF THE ASSESSEE HELD THAT ASSESSEE HAS USED INTEREST BEARING FUNDS TO SUBSIDISE THE INVESTMENT MADE BY WIFE FOR PURCHASE OF PROPERTY AND FOR MAKIN G PAYMENTS TO SHRI SUNIL J SHAH FOR AN INVESTMENT OPPORTUNITY IN GUJARAT OR FO R MAKING PAYMENT FOR HIS RESIDENTIAL PROPERTY. ALTHOUGH, THE ASSESSEE HAS R AISED SPECIFIC LOANS FOR ACQUISITION OF PURCHASE OF PROPERTY, CLAIMED HUGE I NTEREST FOR ITS PROPRIETORY BUSINESS WITHOUT ANY RELEVANCE TO LOANS BORROWED FO R ACQUISITION OF PROPERTY AND BUSINESS ACTIVITY OF THE ASSESSEE. THE ASSESSE E ALSO FAILED TO MAKE OUT A CASE OF AVAILABILITY OF OWN FUNDS. THEREFORE, HE O PINED THAT THERE IS NO ERROR IN THE FINDINGS RECORDED BY THE AO TO DISALLOW INTERES T EXPENDITURE. THE RELEVANT OBSERVATIONS OF THE LD.CIT(A) ARE AS UNDER:- 4 ITA 6273/MUM/2017 THE ASSESSEE HAS CLAIMED THAT THE INTEREST EXPENSE S ARE ALLOWABLE AND THAT THE LOAN FROM CITIBANK WAS USED TO REPAY UNSECURED LOANS ALSO. TH E ASSESSEE ADMITTED THAT THE MAIN REASON FOR THE NEGATIVE CAPITAL BALANCE IS ON ACCOU NT OF THE AMOUNT PAID TO MS SEJAL KARANI, DEBIT ON ACCOUNT OF RESIDENTIAL PREMISES TR ANSFER TO PERSONAL BALANCE SHEET AND OTHER WITHDRAWALS. THE ABOVE SUBMISSIONS OF THE ASSESSEE ARE DULY CONS IDERED. IT IS SEEN THAT THE ASSESSEE HAD A NEGATIVE CAPITAL BALANCE OF RS. 41,20,030/- A ND THE ASSESSEE HAD BORROWED SECURED FUNDS FROM M/S CITIBANK TO THE TUNE OF RS.62,88,015 /- AND THE ASSESSEE HAS ALSO TAKEN MINOR AMOUNT OF UNSECURED LOANS FROM FRIENDS/RELATI VES OF RS.5,82,200/-. THE LOAN FROM CITIBANK AND SOME OF THE UNSECURED LOANS ARE INTERE ST BEARING. AS AGAINST THESE, THE NET CURRENT ASSETS OF THE ASSESSEE ARE ONLY TO THE TUNE OF RS.25,52,607/- AND THE ASSESSEE HAS NEARLY OBLITERATED HIS FIXED ASSETS AND INVESTMENTS . THEREFORE, IT IS CLEAR THAT THE ASSESSEE IS FUNDING HIS ACTIVITIES THROUGH INTEREST-BEARING FUNDS ONLY. IT IS ONLY ON ACCOUNT OF THE MASSIVE LOANS TAKEN FROM THE BANK AND OTHERS FOR TH E PURPOSE OF ACQUIRING PROPERTIES THAT THE ASSESSEE HAS BEEN FORCED TO PAY BANK INTERESTS, OTHER INTERESTS AND BANK CHARGES ON THE SAME. FURTHER THE ASSESSEE HAD NOT ACQUIRED ANY BUSINESS ASSET ALSO AND THE INDUSTRIAL UNITS ACQUIRED BY THE ASSESSEE JOINTLY W ITH HIS WIFE HAVE BEEN MERELY LET OUT. THE INCOME FROM THE LET OUT PROPERTY IS CLAIMED AS INCOME FROM HOUSE PROPERTY ONLY. HE HAS CLAIMED ONE THIRD OF THE INTEREST IN HIS INC OME TAX RETURN. IT WAS ALSO MENTIONED THAT HE HAD] TAKEN A JOAN OF RS. 1.10 CRORES FROM M /S EDLEWEISS FINANCE & INVESTMENT LTD JOINTLY WITH HIS WIFE FOR THE PURCHASE OF TWO I NDUSTRIAL GALAS AND THAT THE INTEREST ON THE SAME HAS BEEN CLAIMED AGAINST INCOME FROM HOUSE PROPERTY PROPORTIONATELY. IT WAS ALSO CLAIMED THAI HE HAS TAKEN A LOAN OF RS. 35.50 LACS AGAINST HIS RESIDENTIAL PREMISES WHICH WAS USED BY HIM TO REPAY THE EARLIER LOAN TAK EN FROM SB1 ETC. ON THE BASIS OF THE ABOVE SUBMISSION MADE BY THE ASSESSEE IN THE ASSESS MENT PROCEEDINGS THE AQ HAS NOTED THAT THE THE ASSESSEE IS NOT ENTITLED TO CLAIM ANV INTEREST EXPENSE IN RESPECT OF THE ABOVE BORROWINGS IN HIS PROPRIETARY BUSINESS AND THE AO A LSO FOUND THAT THE FUNDS FROM M/S HDFC & LIC WERE ALSO NOT USED AT ALL FOR THE PURPOS E OF THE BUSINESS. IN THE APPELLATE PROCEEDINGS THE AR HAS MERELY JUGGLED THE FACTS BUT HAS NOT BEEN ABLE TO DISPROVE THIS FINDING OF THE AO. AS A RESULT OF ALL ABOVE, THE DI SALLOWANCE OF RS.6,48,422/- IS CONFIRMED AND THE APPEAL OF THE ASSESSEE NO. 3,4 & 5 ARE DISMISSED. 5. THE LD.AR FOR THE ASSESSEE SUBMITTED THAT THE LD .AO WAS ERRED IN DISALLOWING INTEREST EXPENDITURE WITHOUT APPRECIATI NG THE FACT THAT SUCH EXPENDITURE HAS BEEN INCURRED FOR LOANS BORROWED FO R THE PURPOSE OF BUSINESS AND ALSO SOME LOANS HAVE BEEN BORROWED FOR THE PURP OSE OF ACQUISITION OF PROPERTY. THE LD.AR FURTHER SUBMITTED THAT THE ASS ESSEE HAS PAID INTEREST ON OVERDRAFT LOAN WITH CITIBANK WHICH WAS USED FOR THE PURPOSE OF BUSINESS AND FOR THAT PURPOSE VARIOUS EVIDENCES HAVE BEEN FILED. THE OVERDRAFT ACCOUNT 5 ITA 6273/MUM/2017 WITH CITIBANK WAS ALSO WITNESSED CERTAIN CREDITS ON ACCOUNT OF SALE OF GOODS AND SERVICES. THUS IT IS EVIDENT THAT THE ASSESSEE IS ENTITLED FOR INTEREST PAID ON CITIBANK LOAN PARTIALLY AGAINST BUSINESS INCOME AND PARTIALLY AGAINST INCOME FROM HOUSE PROPERTY. THE LD.AR FURTHER SUBMITTED T HAT THE OTHER LOANS WERE PURELY USED FOR THE PURPOSE OF BUSINESS FROM TIME T O TIME AND AS A MATTER OF FACT THAT THERE ARE NO NEW LOAN TAKEN DURING THE YE AR, THEREFORE, WHATEVER INTEREST PAID ON UNSECURED LOAN AMOUNTING TO RS.2,4 3,251 CANNOT BE DISALLOWED. THE LD.COUNSEL ALSO TOOK AN ARGUMENT I N THE LIGHT OF DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS REL IANCE UTILITIES & POWER LTD (2009) 313 ITR 340 (BOM) TO ARGUE THAT WHEN MIXED F UNDS ARE AVAILABLE, A GENERAL PRESUMPTION GOES IN FAVOUR OF THE ASSESSEE THAT LOANS AND ADVANCES ARE GIVEN OUT OF OWN FUNDS AND NO INTEREST BEARING FUNDS ARE USED FOR THE PURPOSE. THEREFORE, NO DISALLOWANCE CAN BE MADE. 6. ON THE OTHER HAND, THE LD.DR STRONGLY SUPPORTING THE ORDER OF THE LD.CIT(A) SUBMITTED THAT THE ASSESSEE FAILED TO PRO VE AVAILABILITY OF OWN FUNDS IN THE LIGHT OF CLEAR FACTS BROUGHT OUT BY THE LD.A O THAT IT HAS BORROWED LOANS AND DIVERTED INTEREST BEARING FUNDS TO HIS WIFE FOR PURCHASE OF PROPERTY AND ALSO TO MAKE INVESTMENT FOR FUTURE BUSINESS PROSPEC TS. THE AO HAS BROUGHT OUT CLEAR FACTS TO THE EFFECT THAT INTEREST CLAIMED IN THE P&L ACCOUNT CANNOT BE 6 ITA 6273/MUM/2017 ALLOWED AND HENCE, THE LD.CIT(A) WAS RIGHT IN CONFI RMING THE ADDITION MADE BY THE AO AND HIS ORDER SHOULD BE UPHELD. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED MATER IAL AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH THE ORDERS OF AU THORITIES BELOW. THE AO HAS DISALLOWED INTEREST EXPENSES DEBITED TO P&L ACC OUNT ON THE GROUND THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING FUNDS FO R NON BUSINESS PURPOSE WITHOUT CHARGING ANY INTEREST. THEREFORE, WHATEVER INTEREST DEBITED TO THE P&L ACCOUNT CANNOT BE ALLOWED AS DEDUCTION. ACCORD ING TO THE AO, THE ASSESSEE HAS DIVERTED INTEREST BEARING FUNDS TO SUB SIDISE INVESTMENT MADE BY HIS WIFE FOR PURCHASE OF PROPERTY AND FOR MAKING PA YMENTS TO SHRI SUNIL J SHAH FOR INVESTMENT MADE IN GUJARAT. IT IS THE CONTENTI ON OF THE ASSESSEE THAT THE AO HAS DISALLOWED INTEREST EXPENDITURE DEBITED TO T HE P&L ACCOUNT IN TOTAL INCLUDING BANK CHARGES AND INTEREST PAID ON CITIBAN K LOAN WHICH IS PARTIALLY TAKEN TO MEET BUSINESS NEEDS AND PARTIALLY FOR ACQU ISITION OF PROPERTY. THE ASSESSEE FURTHER CONTENDED THAT INTEREST PAID ON OT HER LOANS HAS BEEN UTILISED PURELY FOR THE PURPOSE OF BUSINESS AND SUCH LOAN HA S BEEN TAKEN IN THE PREVIOUS FINANCIAL YEAR AND WHICH HAS NOTHING TO DO WITH ACQUISITION OF PROPERTY. THEREFORE, THE AO WAS ERRED IN DISALLOWI NG TOTAL INTEREST EXPENSES EVEN THOUGH THE FUNDS HAVE BEEN PARTIALLY USED FOR BUSINESS PURPOSE AND PARTIALLY USED FOR ACQUISITION OF PROPERTIES. THE ASSESSEE ALSO HAS TAKEN AN 7 ITA 6273/MUM/2017 ALTERNATIVE ARGUMENT IN THE LIGHT OF DECISION OF HO NBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES & PO WERS LTD (SUPRA) FOR THE PROPOSITION THAT WHEN MIXED FUNDS ARE AVAILABLE, A GENERAL PRESUMPTION GOES IN FAVOUR OF THE ASSESSEE THAT LOANS AND ADVANCES A RE OUT OF OWN FUNDS. CONSEQUENTLY, NO INTEREST EXPENSE CAN BE DISALLOWED . 8. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATER IAL AVAILABLE ON RECORD WE FIND THAT THE ASSESSEE HAS CLAIMED TO HAVE BORRO WED LOANS FOR SPECIFIC PURPOSE OF ACQUISITION OF PROPERTY. ACCORDING TO T HE ASSESSEE, AMOUNT FROM CITIBANK HAS BEEN PARTIALLY USED FOR BUSINESS PURPO SE AND PARTIALLY USED FOR ACQUISITION OF PROPERTY. SIMILARLY LOAN TAKEN FROM LIC AND HDFC ARE FOR THE PURPOSE OF ACQUISITION OF PROPERTY. LIKEWISE, INTE REST PAID ON UNSECURED LOAN IS FULLY FUNDED FOR THE PURPOSES OF BUSINESS. THER E ARE DIVERGENT FACTS EMERGING FROM THE ORDERS OF THE LOWER AUTHORITIES A ND THE ARGUMENTS OF THE ASSESSEE IN LIGHT OF CERTAIN EVIDENCES. IT IS THE CASE OF THE AO THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING FUNDS FOR NON BUSINES S PURPOSES, BUT THE ASSESSEE CLAIMS THAT THE LOAN TAKEN FROM CITIBANK H AS BEEN PARTIALLY FUNDED FOR BUSINESS PURPOSE AND PARTIALLY FUNDED FOR ACQUISITI ON OF PROPERTY. WE FURTHER NOTICE THAT THE ASSESSEE HAS TAKEN A PROPOSITION IN THE LIGHT OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS REL IANCE UTILITIES & POWER LTD (SUPRA), WHERE THE HONBLE BOMBAY HIGH COURT HELD T HAT WHEN MIXED FUNDS ARE 8 ITA 6273/MUM/2017 AVAILABLE, A GENERAL PRESUMPTION GOES IN FAVOUR OF THE ASSESSEE THAT LOANS AND ADVANCES ARE OUT OF INTEREST FREE FUNDS AND NO PART OF INTEREST BEARING FUNDS HAS BEEN USED. CONSEQUENTLY, NO INTEREST EXPENSE H AS BEEN DISALLOWED. IN THIS CASE, THE ASSESSEE HAS FILED ENOUGH EVIDENCE T O PROVE THAT LOAN HAS BEEN PARTIALLY BORROWED FOR THE PURPOSE OF BUSINESS. TH EREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE ISSUE NEEDS TO BE RE-EXAMI NED BY THE AO IN THE LIGHT OF CLAIM OF THE ASSESSEE THAT THE CITIBANK LOAN HAS BEEN PARTIALLY FUNDED FOR BUSINESS PURPOSE. ACCORDINGLY, WE SET ASIDE THE IS SUE TO THE FILE OF THE AO. IN CASE, THE AO FINDS THAT THE CITIBANK LOAN HAS BEEN PARTIALLY BORROWED FOR THE PURPOSE OF BUSINESS, THEN THE INTEREST TO THAT EXTE NT NEEDS TO BE ALLOWED. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 15-02-2019 . SD/- SD/- (SANDEEP GOSAIN) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 15 TH FEBRUARY, 2019 PK/- 9 ITA 6273/MUM/2017 COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI