ACIT 16(1), MUMBAI V. GAUTAM PRANLAL SHAH, MUMBAI

ITA 6568/MUM/2012

• Counselvise Citation: 656819914 RSA 2012
• Duration Of Justice: 2 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 18-11-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 30-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R N DSOUZA
• Assessee Lawyers: NEELKANTH KHANDELWAL
• Keywords: Business income; Business expenditure; Earning of tax free income; Speculation loss
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G, MUMBAI , ,, , BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. : 6568/MUM/2012 (ASSESSMENT YEAR: 2008-09) ASST. COMMISSIONER OF INCOME TAX - 16(1), 2 ND FLOOR, MATRU MANDIR, TARDEO ROAD, MUMBAI -400 007 VS MR GAUTAM PRANLAL SHAH, CENTRAL BLDG. NO. 1, GROUND FLOOR, 36, BOMANJI MASTER RD OPP. KALBADEVI POST OFFICE, MUMBAI -400 002 .: PAN: AAFPS 3789 K (APPELLANT) ! (RESPONDENT) APPELLANT BY : SHRI R N DSOUZA RESPONDENT BY : SHRI NEELKANTH KHANDELWAL '# $ %& /DATE OF HEARING : 18-11-2014 '() $ %& / DATE OF PRONOUNCEMENT : 02-01-2015 + , + , + , + , O R D E R PER VIVEK VARMA, JM: THE APPEAL IS FILED BY THE DEPARTMENT AGAINST THE ORDER O F CIT(A) 27, MUMBAI, DATED 21.08.2012, WHEREIN SOLITARY ISSUE PERTAINS TO DELETION OF DISALLOWANCE U/S 14A. 2. THE BRIEF FACTS ARE THAT THE ASSESSEE IS A PROPRIETO R OF M/S SHREE UPENDRA PAPER CORP. AND TRADING IN PAPER & BOARD S FOR THE LAST MANY YEARS. IN THE COURSE OF SCRUTINY PROCEEDIN GS, IT WAS NOTICED THAT THE ASSESSEE HAD CLAIMED INTEREST EXPENSE OF RS 36,25,853/- IN HIS PROFIT & LOSS ACCOUNT AND IN THE BALANCE SHEET, THE ASSESSEE HAD SHOWN SHARES HELD AS INVESTMEN TS AND STOCK IN TRADE. THE AO, THEREFORE, CAME TO THE VIEW THAT DIVERSION OF INTEREST BEARING FUNDS FOR ACQUISITION OF ASSETS YIELDING EXEMPT INCOME COULD NOT BE RULED OUT. THE AO, THEREFORE, C ALLED MR GAUTAM PRANLAL SHAH ITA 6568/M/2012 2 FOR DETAILED EXPLANATION FROM THE ASSESSEE ON THIS ASPECT. THE ASSESSEE, VIDE HIS LETTER DATED 13.12.2010 SUBMITTED (EXTRACTED) IV. YOUR ASSESSEE HAS NOT DEBITED ANY DIRECT EXPENDITURE FOR EARNING ANY TAX FREE INCOME. V. THE INTEREST PAID DURING THE YEAR IS ON LOANS AN D ADVANCES TAKEN FOR THE WORKING CAPITAL REQUIREMENTS OF THE BUSINESS AND TAKEN AND UTILIZED PURELY FOR THE BUSINESS. THUS SIR YOU WILL NOTICE THAT IN THE EVENT THE LOAN S BORROWED BY YOUR ASSESSEE ARE USED PURELY FOR BUSIN ESS AND THUS THE DISALLOWANCE U/S 14A IS NOT JUSTIFIED . 3. THE AO, AFTER CONSIDERING THE REPLY OF THE ASSESSEE, OBSERVED, THE REPLY OF THE ASSESSEE HAS BEEN CAREFULLY CONSIDERED. AS REGARDS THE CLAIM OF THE ASSESSEE AB OUT UTILIZATION OF THE BORROWED FUNDS EXCLUSIVELY FOR BUSINESS, IT IS TO BE NOTED THAT THE SAME IS NOT EV IDENT FROM THE ACCOUNTS MAINTAINED BY THE ASSESSEE. THE ASSESSEE MAINTAINS CONSOLIDATED BALANCE SHEET WHICH PRECLUDE ONE-TO-ONE NEXUS BETWEEN BORROWED FUNDS AN D BUSINESS ACTIVITIES. IT CANNOT BE RULED OUT, HAVING REGARD TO THE ACCOUNTS MAINTAINED BY THE ASSESSEE, THAT BORROWED FUNDS ARE UTILIZED FOR THE PURPOSES OF INVESTMENT AS WELL. IN THESE CIRCUMSTANCES, SECTION 14A OF THE ACT IS MANIFESTLY APPLICABLE. DISALLOWANCE U/R 8D(2)(II) 31.3.2007 31.3.2008 AVERAGE TOTAL ASSETS AS PER BALANCE SHEET 3,39,98,383 5,34,60,352 4,37,29,368 -C VALUE OF INVESTMENT AS PER BALANCE SHEET 85,65,570 1,47,96,576 1,16,81,073 -B INTEREST PAID 36,25,853 -A DISALLOWAN CE U/R.8D(2)(III) A*B/C = 9,68,545 DISALLOWANCE U/R 8D(2)(III) % OF AVERAGE VALUE OF INVESTMENT=% OF RS. 1,16,8 1,073/ - =RS. 58,405 SO, DISALLOWANCE U/S 14A AS PER RULE 8D COMES TO RS . 10,26,950/- (I.E. RS. 9,68,545/- + RS. 58,405/-). T HE SAME IS ADDED IN THE TOTAL INCOME OF THE ASSESSEE U NDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSIO N. 4. THE AO, THEREFORE, COMPUTED THE DISALLOWANCE OF RS. 10,26,950/- U/S 14A AND ADDED THE SAME TO THE INCOME O F THE ASSESSEE. MR GAUTAM PRANLAL SHAH ITA 6568/M/2012 3 5. AGGRIEVED, THE ASSESSEE APPROACHED THE CIT(A), BEFORE WHOM, THE ASSESSEE REITERATED HIS SUBMISSIONS AND FURTHER SUBMITTED, DURING THE PROCEEDINGS BEFORE, THE AR SUBMITTED TH AT APPELLANT HAS NOT DEBITED ANY EXPENDITURE INCURRED TOWARDS PURCHASING AND MAINTAINING INVESTMENTS IN SHARES AND MUTUAL FUNDS TO THE TRADING AND PROFIT & LOSS ACCOUNT. INSTEAD, EXPENSES AGAINST STT AND DEPOSITARY CHARGES HAVE BEEN DEBITED TO THE CAPITAL / DRAWINGS ACCOUNT OF APPELLANT. IT IS FURTHER STATED THAT THE LOANS BORROWED BY THE APPELLANT WERE USED PUREL Y FOR THE PURPOSE OF BUSINESS AND THEREFORE, NO DISALLOWANCE IS WARRANTED U/S 14A OF THE ACT. THE A R ALSO POINTED OUT THAT THE BALANCE IN THE CAPITAL AC COUNT OF THE APPELLANT AS ON 01.04.2007 IS RS. 1,52,61,244/- AND THE BALANCE IN THE INVESTMENT ACCOUNT AS ON 31.03.2 008 IS RS. 1,47,96,576/-. THE AR SUBMITTED THAT AS THE BALANCE IN PROPRIETORS CAPITAL ACCOUNT IS MORE THA N THE CLOSING BALANCE IN THE INVESTMENT, PRESUMPTION WOUL D ARISE THAT INTEREST FREE FUNDS HAVE BEEN UTILIZED F OR INVESTMENTS AND NO DISALLOWANCE OF INTEREST COULD B E MADE U/S 14A. AS REGARDS THE CLAIM FOR SET OFF OF C ARRIED FORWARD SPECULATION LOSS AGAINST BUSINESS INCOME, T HE AR STATED THAT THERE WAS A MISTAKE IN NOT CLAIMING SUCH SET OFF IN THE EARLIER YEARS. IT IS ALSO STATED THA T SET OFF OF F & O LOSS AGAINST BUSINESS INCOME HAS COME IN EFFE CT FROM AY 2006-07 AND THIS BEING THIRD YEAR OF THE AMENDMENT, APPELLANT IS ENTITLED TO CLAIM THE SAME AT PRESENT. 6. THE CIT(A), ON CONSIDERATION OF THE SUBMISSIONS MADE BY THE ASSESSEE, OBSERVED I HAVE CAREFULLY CONSIDERED THE APPELLANTS SUBMIS SIONS. AS NOTED FROM THE ASSESSMENT ORDER, THE ONLY EXPENDITURE STATED TO HAVE RELATION TO THE EXEMPT I NCOME WAS INTEREST OF RS. 36.25 LAKHS. IN THIS REGARD, I NOTE THAT APPELLANT IS CARRYING ON BUSINESS AS A PROPRIE TOR AND THE CAPITAL ACCOUNT BALANCE AS ON 01.04.2007 WA S RS. 1,52,61,244/- AND AS ON 31.03.2008 AT RS. 1,66,10,084/-. AS AGAINST THIS, APPELLANT HAD INVESTMENTS OF RS. 1,47,96,576/- IN SHARES AN SECUR ITIES AS ON 31.03.2008. IN OTHER WORDS, THE CAPITAL BALAN CE HELD BY THE APPELLANT AS ON 31.03.2008 IS SUFFICIEN T ENOUGH TO COVER THE INVESTMENTS IN SHARES AND SECURITIES. THERE ARE NO OTHER PERSONAL ASSETS/INVESTMENTS APPEARING IN THE BALANCE SHEET. IN THIS BACKGROUND, AS HELD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340, PRESUMPTION IS CLEARLY ESTABLISHED THAT THE INVESTMENTS WOULD BE OUT OF IN TEREST FREE FUNDS AVAILABLE TO THE APPELLANT IN THE FORM O F THIS OWN CAPITAL. THEREFORE, THE INTEREST PAID ON BORROW ED FUNDS HAS TO BE ALLOWED AS BUSINESS EXPENDITURE U/S 36(1)(III) OF THE ACT IN TOTO. ONCE THE ENTIRE INTE REST MR GAUTAM PRANLAL SHAH ITA 6568/M/2012 4 AMOUNT IS ATTRIBUTED TO THE BUSINESS, THERE IS NO C ASE FOR THE AO TO TREAT THE SAME AS PARTLY LAID OUT IN EARN ING EXEMPT INCOME. IN SUCH A SITUATION, THERE IS NO ROO M FOR ANY DISALLOWANCE U/S 14A OF THE ACT. ACCORDINGLY, T HE DISALLOWANCE MADE BY THE AO OF RS. 10,26,950/- IS HEREBY DELETED. 7. AGAINST THIS ORDER, THE DEPARTMENT IS IN APPEAL BEFORE T HE ITAT. 8. BEFORE US, THE DR VEHEMENTLY SUPPORTED THE ORDER OF THE AO, WHEREAS THE AR SUPPORTED THE ORDER OF THE CIT(A) 9. AFTER HEARING THE ARGUMENTS FROM BOTH THE SIDES AND A FTER PERUSING THE ORDER IMPUGNED BEFORE US, WE FIND THAT THE CIT(A) HAS FOLLOWED THE DECISION OF HONBLE BOMBAY HIGH COURT IN TH E CASE OF CIT VS RELIANCE UTILITIES & POWER LTD, REPORTED IN 3 13 ITR 340 (BOM), WHEREIN THE CRUX HAS BEEN THAT IF THE ASSESSEE HAD INTEREST FREE FUNDS AVAILABLE THEN IT WOULD BE PRESUMED THA T INTEREST FREE FUNDS ARE UTILIZED FIRST AND IN THAT VIEW OF MAT TER, THE ASSESSEE WOULD HAVE UTILIZED HIS INTEREST FREE FUNDS TO WARDS ASSETS YIELDING EXEMPT INCOME. THE CIT(A), THEREFORE, DELETED THE DISALLOWANCE MADE. 10. ON GOING THROUGH, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) WHICH WE SUSTAIN AND CONSEQUENTIALLY REJECT THE SOLE ISSUE INVOLVED IN GROUNDS TAKEN IN APPEAL. 11. WE THEREFORE DISMISS THE APPEAL FILED BY THE DEPARTMENT. ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND JANUARY, 2015. SD/- SD/- ( ) ( ) + + + + + + + + (R C SHARMA) ( VIVEK VARMA ) ACCOUNTANT MEMBER J UDICIAL MEMBER MUMBAI, DATE: 2 ND JANUARY, 2015 MR GAUTAM PRANLAL SHAH ITA 6568/M/2012 5 %/ COPY TO:- 1) / THE APPELLANT. 2) ! / THE RESPONDENT. 3) THE CIT(A)-27, MUMBAI. 4) THE CIT, CITY-16, MUMBAI. 5) /#01 %' , , / THE D.R. G BENCH, MUMBAI. 6) 123 4 COPY TO GUARD FILE. +,' / BY ORDER / / TRUE COPY / / 5 / 6 , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * *CHAVAN, SR.PS