Dr. Jwalit H.Sheth, Baroda V. The Dy.CIT.,Circle-5, Baroda

ITA 844/AHD/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6698 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 28-04-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 07-03-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: H P MEENA
• Assessee Lawyers: M J SHAH
• Keywords: Business income; Depreciation; Opportunity of being heard; Question of law
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH AHMEDABAD (BEFORE S/SHRI G. D. AGARWAL, VP AND BHAVNESH SAINI , JM) ITA NO.844 AND 845/AHD/2008 A. Y.: 2002-03 AND 2004-05 DR. JWALIT H SHETH, NEURO SURGICAL HOSPITAL, SANSTHA VASAHAT, PRATAP ROAD, BARODA VS THE D. C. I. T., CIRCLE -5, BARODA PA NO. ABWPS 4325 H (APPELLANT) (RESPONDENT) APPELLANT BY SHRI M. J. SHAH, AR RESPONDENT BY SHRI H. P. MEENA, SR. DR O R D E R PER BHAVNESH SAINI: BOTH THE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST DIFFERENT ORDERS OF THE LEARNE D CIT(A)-V, BARODA DATED 28-01-2008 FOR ASSESSMENT YEARS 2002-03 AN D 2004-05. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES AND PERUSED THE FINDINGS OF THE AUTHORITIES BELOW. ITA NO.844/AHD/2008: AY: 2002-03 3. ON GROUNDS NO.1 AND 2 OF THE APPEAL, THE ASSESSE E CHALLENGED THE DISALLOWANCE OF RS.33,082/- OUT OF INTEREST EXP ENSES AND ITA NO.844 AND 845/AHD/2008 DR. JWALIT H SHETH VS DCIT, CIRCLE-5, BARODA 2 DISALLOWANCE OF RS.3,82,572/- MADE U/S 14A OF THE I T ACT OF INTEREST EXPENSES. THE AO DISCUSSED THE ISSUE OF INTEREST FR EE LOANS AND DISALLOWANCE OF INTEREST IN THE ASSESSMENT ORDER AN D FOUND THAT THE ASSESSEE HAS ADVANCED INTEREST FREE LOANS TO HIS SO N SHRI SIDDARTH SHETH TO THE EXTENT OF RS.1,70,000/- AND TO HIS WIF E SMT. MADHVI SHETH AN AMOUNT OF RS.8,81,000/-. THE AO FOUND THAT THE ASSESSEE HAD NEGATIVE CAPITAL BALANCE (-) RS.36,173/- AT THE END OF THE YEAR, THEREFORE, BORROWINGS FROM BANK HAVE BEEN DIVERTED TO THE FAMILY MEMBERS FOR OTHER THAN BUSINESS PURPOSES. 15% WAS A CCORDINGLY DISALLOWED. FURTHER, IT WAS FOUND THAT THERE ARE IN VESTMENTS AMOUNTING TO RS.29,50,481/- INCOME OF WHICH IS NOT TAXABLE. SINCE THERE WAS NEGATIVE CAPITAL BALANCE WAS THERE AND BO RROWED FUNDS ARE DIVERTED TO FAMILY MEMBERS, EXPLANATION OF THE ASSE SSEE WAS CALLED, WHY DISALLOWANCE BE NOT MADE U/S 14 A OF THE IT ACT . IT WAS EXPLAINED THAT NO BORROWED FUNDS USED FOR INVESTMEN TS AND SAME WAS MADE OUT OF PERSONAL BANK ACCOUNT. BUT THE AO R EJECTED IT. IT WAS SUBMITTED BEFORE THE LEARNED CIT(A) THAT FOR DE TERMINING WHETHER THERE IS DIVERSION OF FUNDS OR NEGATIVE CAPITAL BAL ANCE, THE POSITION OF DEPRECIATION SHALL HAVE TO BE CONSIDERED WHICH WAS AT RS.57,24,236/- IN THE PRECEDING SEVERAL YEARS. THE INTEREST FREE A DVANCES ARE AVAILABLE TO THE ASSESSEE AND NO INVESTMENT MADE OU T OF BORROWED FUNDS. THE LEARNED CIT(A) DID NOT ACCEPT THE CONTEN TION OF THE ASSESSEE AND CONFIRMED THE ADDITION. 4. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND S UBMITTED THAT THE AO HAS FAILED TO ESTABLISH NEXUS BETWEEN THE FU NDS BORROWED AND ITA NO.844 AND 845/AHD/2008 DR. JWALIT H SHETH VS DCIT, CIRCLE-5, BARODA 3 THE PURPORTED INTEREST FREE LOANS GIVEN TO TWO OF T HE RELATIVES. HE HAS ALSO SUBMITTED THAT TAX FREE INVESTMENTS HAVE BEEN MADE OUT OF THE PROFIT OF THE ASSESSEE AND THE AO HAS IGNORED THE F ACT THAT THESE TAX FREE INVESTMENTS REPRESENT THE ACCUMULATED AMOUNT O F SEVERAL PREVIOUS YEARS. HE HAS, THEREFORE, SUBMITTED THAT T HE MATTER REQUIRES RECONSIDERATION. ON THE OTHER HAND, THE LEARNED DR RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE HO NBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UT ILITIES AND POWER LTD. 313 ITR 340 HELD AS UNDER: HELD, DISMISSING THE APPEAL, THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INTEREST-FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION WAS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE COMMISSIONER (APPEALS) AND THE TRIBUNAL. THE INTEREST WAS DEDUCTIBLE. 5.1 THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS HERO CYCLES 323 ITR 518 HELD AS UNDER: HELD, DISMISSING THE APPEAL, THAT THE EXPENDITURE ON INTEREST WAS SET OFF AGAINST THE INCOME FROM INTEREST AND THE INVESTMENT IN THE SHARES AND FUNDS WERE OUT OF THE DIVIDEND PROCEEDS. IN VIEW OF T HIS FINDING OF FACT, DISALLOWANCE UNDER SECTION 14A WAS NOT SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY ITA NO.844 AND 845/AHD/2008 DR. JWALIT H SHETH VS DCIT, CIRCLE-5, BARODA 4 EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, WAS A QUESTION OF FACT. THE CONTENTION OF THE REVENUE THAT DIRECTL8Y OR INDIRECTLY SOME EXPENDITURE WAS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED COULD NOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A, COULD NOT BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE AND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAD BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. CONSEQUENTLY, THE DISALLOWANCE WAS NOT PERMISSIBLE. 5.2 THE HONBLE GUJARAT HIGH COURT IN THE CASE OF C IT VS GUJARAT POWER CORPORATION LTD. IN TAX APPEAL NO.1587/2009 DATED 28-03- 2011 HELD AS UNDER: HAVING THUS HEARD LEARNED COUNSEL FOR BOTH SIDES AND HAVING PERUSED THE ORDERS ON RECORD, WE FIND THAT IN THE PRESENT CASE ASSESSEE HAD SUFFICIENTLY EXPLAINED ITS INVESTMENT FOR BORROWED FUNDS POINTING OUT THAT LOAN WAS OBTAINED IN ASSESSMENT YEAR 1997-1998 AND ITS MAJORITY OF THE INVESTMENT FOR TAX FREE SECURITY WERE MADE BEFORE THE SAID PERIOD. ONLY A SMALL PORTION OF INVESTMENT WAS MADE SUBSEQUENTLY. ASSESSEE HAD DEMONSTRATED THAT IT HAD OTHER SOURCES OF INVESTMENT AND THAT THEREFORE, ACCORDING TO THE ASSESSEE NO PART OF THE BORROWED FUND COULD BE STATED TO HAVE BEEN DIVERTED TO EARN TAX FREE INCOME. WHEN CIT(APPEALS) AND TRIBUNAL BOTH ON FACTS IN THE PRESENT CASE FOUND THAT ASSESSEE DID NOT INVEST BORROWED FUND FOR EARNING INTEREST FREE INCOME, ITA NO.844 AND 845/AHD/2008 DR. JWALIT H SHETH VS DCIT, CIRCLE-5, BARODA 5 WE ARE OF THE VIEW THAT NOT APPLYING PROVISION OF SECTION 14A OF THE ACT FOR TAXING SUCH INTEREST WAS JUSTIFIED. NO QUESTION OF LAW THEREFORE, IS ARISING FOR OUR CONSIDERATION. 6. IT IS STATED IN THE GROUNDS OF APPEALS ALSO THAT THE LEARNED CIT(A) HAS NOT FOLLOWED THE DECISION IN THE CASE OF THE SAME ASSESSEE FOR THE ASSESSMENT YEAR 2001-02, THEREFORE , THE LEARNED CIT(A) SHALL HAVE TO CONSIDER THE SAME AND GIVE REA SONS FOR NOT FOLLOWING ORDER IN THE PRECEDING ASSESSMENT YEAR. C ONSIDERING THE EXPLANATION OF THE ASSESSEE IN THE LIGHT OF THE ABO VE DECISIONS, WE ARE OF THE VIEW THE MATTER REQUIRES RECONSIDERATION AT THE LEVEL OF THE AO BECAUSE NO SPECIFIC FINDINGS HAVE BEEN GIVE ON F ACTS AGAINST THE ASSESSEE. WE ACCORDINGLY, SET ASIDE THE ORDERS OF T HE AUTHORITIES BELOW AND RESTORE BOTH THE ISSUES TO THE FILE OF TH E AO FOR PASSING ORDER AFRESH IN THE LIGHT OF THE ABOVE DECISIONS. T HE AO SHALL GIVE REASONABLE SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THE RESULT, GROUNDS NO.1 AND 2 OF THE APPEAL OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 7. ON GROUND NO.3, THE ASSESSEE CHALLENGED THE DISA LLOWANCE OF PRACTICE PROMOTION EXPENDITURE OF RS.18,050/-. THE LEARNED CIT(A) NOTED THAT THE ISSUE IS EXAMINED IN DETAIL IN PRECE DING ASSESSMENT YEAR 2001-02 AND 50% OF THE EXPENDITURE WAS DISALLO WED. CONSIDERING THE PAST PRACTICE, WE DO NOT FIND ANY M ERIT IN THIS GROUND OF APPEAL OF THE ASSESSEE. THE SAME IS ACCORDINGLY DISMISSED. 8. ON GROUND NO.4, THE ASSESSEE CHALLENGED DISALLO WANCE OF VEHICLE EXPENSES, DEPRECIATION AND INSURANCE EXPENS ES. 10% OF THE ITA NO.844 AND 845/AHD/2008 DR. JWALIT H SHETH VS DCIT, CIRCLE-5, BARODA 6 EXPENDITURE WAS DISALLOWED TOWARDS PERSONAL USE. IT WAS FURTHER NOTED THAT THE SAME FACILITIES HAVE BEEN USED BY TH E ASSESSEE AND HIS FAMILY MEMBERS. 10% WAS ACCORDINGLY DISALLOWED. SINCE NO SEPARATE LOG BOOK IS MAINTAINED AND NO DETAILS HAVE BEEN PRODUCED TO DENY PERSONAL USER OF THE VEHICLE ETC., WE DO NO T FIND ANY MERIT IN THIS GROUND OF APPEAL OF THE ASSESSEE. THE SAME IS ACCORDINGLY DISMISSED. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.845/AHD/2008:A.Y.: 2004-05 10. ON GROUND NO.1, THE ASSESSEE CHALLENGED THE DIS ALLOWANCE OF RS.1,11,212/- OUT OF INTEREST EXPENSES. THE SAME AD DITION IS MADE FOR DIVERTING BORROWED FUNDS TO THE FAMILY MEMBERS ON WHICH WE HAVE SET ASIDE THE MATTER IN ISSUE TO THE FILE OF THE AO IN ITA NO.844/AHD/2008 FOR ASSESSMENT YEAR 2002-03. BY FOL LOWING THE SAME ORDER, WE SET ASIDE THE ORDERS OF THE AUTHORIT IES BELOW AND RESTORE THIS ISSUE TO THE FILE OF THE AO FOR RECONS IDERATION AS IS EARLIER DIRECTED. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 11. ON GROUNDS NO.2 AND 3, THE ASSESSEE CHALLENGED THE DISALLOWANCE OF EXPENSES @10% OUT OF TELEPHONE AND VEHICLE EXPENSES. WE HAVE ALSO CONFIRMED SIMILAR ADDITION I N ITA NO.844/AHD/2008 IN THE CASE OF THE ASSESSEE IN ASSE SSMENT YEAR 2002-03. BY FOLLOWING THE SAME ORDER, WE CONFIRM TH E ORDERS OF THE ITA NO.844 AND 845/AHD/2008 DR. JWALIT H SHETH VS DCIT, CIRCLE-5, BARODA 7 AUTHORITIES BELOW AND DISMISS THESE GROUNDS OF APPE AL OF THE ASSESSEE. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. 13. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29-04-2011 SD/- SD/- (G. D. AGARWAL) VICE PRESIDENT (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 29-04-2011 LAKSHMIKANT/ LAKSHMIKANT/ LAKSHMIKANT/ LAKSHMIKANT/- -- - COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DY. REGISTRAR, ITAT, AHMEDABAD