Amit Mehra, Noida V. ITO, New Delhi

ITA 856/DEL/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 1996 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-05-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 14-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Fair market value; Tax effect; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A, NEW DELHI BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 856/DEL/2017 : ASSTT. YEAR : 2012-13 AMIT MEHRA, S/O ARUN KUMAR MEHRA, PLOT NO. 142A/11-12, NOIDA SEZ (NSEZ), NOIDA-201305 VS INCOME TAX OFFICER, WARD-16(3), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AAPPM0542A ASSESSEE BY : SH. M. P. RASTOGI, ADV. REVENUE BY : SH. RAKESH KUMAR, SR. DR DATE OF HEARING: 17.02.2020 DATE OF PRONOUNCEMENT: 05.05.2020 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A)-33, NEW DELHI DATED 28. 12.2016. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSESS EE: 1. THE LOWER AUTHORITIES HAVE ERRED IN DISALLOWING A SUM OF RS.1,14,655/- ON ACCOUNT OF INTEREST PAID ON BORROWED MONIES. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LOWER AUTHORITIES HAVE ERRED IN DISALLOWING A SUM O F RS.73,036/- BY INVOKING THE PROVISIONS OF RULE 8D O F THE INCOME TAX RULES, 1962 READ WITH SECTION 14A OF THE INCOME TAX ACT, 1961 (THE ACT). 3. IT IS CONTENDED THAT THE COMPUTATION OF DISALLOWANCE OF RS.73,036/- IS WRONG AND IS OPPOSED TO FACTS ON RECORDS. ITA NO. 856/DEL/2017 AMIT MEHRA 2 4. THE DISALLOWANCE OF RS.15,21,979/- BEING INTERES T ON CAPITAL WORKING PROGRESS, ON AN ESTIMATE BASIS, IS WRONG AND IS OPPOSED TO FACTS AND EVIDENCES ON RECORD. 5. THE LOWER AUTHORITIES HAVE ERRED IN DISALLOWING A SUM OF RS.1,08,641/- ON ACCOUNT IF DIWALI EXPENSES. 6. THE LOWER AUTHORITIES HAVE ERRED IN EFFECTING TH E DISALLOWANCE OF RS.5,79,100/- ON ACCOUNT OF FOOD EXPENSES INCURRED ON THE FACTORY WORKERS OF THE APPELLANT. 7. THAT THE ABOVE GROUNDS OF APPEAL ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURING OF DISPOSABLE ECG ELECTRODES. DURING THE YEAR, THE ASSESSEE FILED RETURN OF INCOME DECLARING INCOME OF RS.6,38, 90,030/- FROM THE BUSINESS TURNOVER OF RS.44,42,05,373/-. DU RING THE YEAR, THE ASSESSEE HAS PAID INTEREST OF RS.41,375/- TO TWO PERSONS NAMELY, AMIT MEHRA (HUF) AND RS.73,280 VEEN A MEHRA, MOTHER OF THE ASSESSEE. THE AO AFTER GOING THROUGH THE BANK ACCOUNTS OF THE ENTITIES INVOLVED HELD THAT THE LOA NS RECEIVED BY THESE TWO INDIVIDUALS ARE INFACT ARE THE AMOUNTS GI VEN BY THE ASSESSED HIMSELF. THE AO HELD THAT THE TRANSFER OF FUNDS FROM THE PROPRIETARY CONCERN OF THE ASSESSEE TO THE ASSE SSEES PERSONAL ACCOUNT AND THEN TO THE FIRM WHEREIN THE A SSESSEE IS A PARTNER AND FROM THE PARTNERSHIP FIRMS THE AMOUNTS HAVE BEEN TRANSFERRED TO THE HUF AND TO THE MOTHERS ACCOUNT AND FINALLY THE AMOUNTS HAVE BEEN RECEIVED FROM THE ACCOUNT OF THE MOTHER AND THE HUF TO THE PROPRIETARY CONCERN OF THE ASSES SEE AND KEEPING IN VIEW THE CIRCULAR ROUTE OF THE FLOW FUND S, THE LOANS GIVEN ARE NOT FOR GENUINE BUSINESS PURPOSE AND SINC E THE LOANS ITA NO. 856/DEL/2017 AMIT MEHRA 3 ARE NOT FOR THE BUSINESS PURPOSE, THE INTEREST ON T HESE LOANS HAS TO BE DISALLOWED U/S 40A(2)(B). 4. HOLDING THUS, THE AO HAS DISALLOWED THE INTEREST PAID OF RS1,14,655/- TO THESE TWO PARTIES. 5. THE LD. CIT (A) CONFIRMED THE ADDITION HOLDING T HAT THE LOAN PARTIES (THE HUF AND THE MOTHER) RECEIVED THE AMOUNTS FROM THE ASSESSEE HIMSELF IN A CIRCUITOUS ROUTE. BE FORE US, IT WAS SUBMITTED THAT THE SIMILAR ADDITION MADE BY THE AO FOR THE ASSESSMENT YEAR 2010-11 HAS BEEN DELETED BY THE LD. CIT (A) AND THE REVENUES APPEAL FILED BEFORE THE ITAT HAS BEEN DISMISSED OWING TO LOW TAX EFFECT. THE LD. DR RELIE D ON THE ORDER OF THE LD. CIT (A) FOR THE INSTANT YEAR. 6. WE HAVE PERUSED THE MATERIAL ON RECORD. THE MAIN CONTENTION OF THE AO IS THAT THE TRANSACTIONS HAVE BEEN MADE UP WITH AN INTENTION TO LOWER THE TAX LIABILITY OF THE ASSESSEE AND ALSO TO BUILD UP CAPITAL FOR THE HUF AND FOR TH E MOTHER. WE FIND THAT THIS IS NOT A CASE WHERE THE BORROWED FUN DS HAVE BEEN DIVERTED TO INTEREST FREE ADVANCES WITHOUT ANY COMM ERCIAL EXPEDIENCY. THE CASE OF THE AO IS THAT THE INTEREST EXPENSES ARE CLAIMED ONLY TO REDUCE THE TAX LIABILITY OF THE ASSESSEE AND TO AID IN INCREASED CAPITALIZATION OF THE LOAN PART IES. THERE IS NO DISPUTE ABOUT THE PAYMENT OF THE INTEREST AND THE U TILIZATION OF THE LOANS RECEIVED BY THE BUSINESS ENTITY. THE INVO CATION OF THE SECTION 40A(2)(B) BY THE AO IN THIS CASE IS ON A WR ONG INTERPRETATION/APPLICATION OF THE PROVISIONS. THE P ROVISIONS OF SECTION 40A(2)(B) ENTITLES DISALLOWANCE ON ACCOUNT OF ANY EXPENDITURE BEING EXCESSIVE ARE UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE. IN THE INSTANT CASE, WE FIND THAT THE ITA NO. 856/DEL/2017 AMIT MEHRA 4 AMOUNTS HAVE BEEN RECEIVED FROM THE PARTNERSHIP FIR M BY THE LOAN PARTIES AND IF AT ALL ANY DISALLOWANCE IS TO B E MADE, THE SAME NEEDS TO BE CONSIDERED IN THE HANDS OF THE PAR TNERSHIP FIRMS BUT NOT IN THE PROPRIETARY CONCERN. FURTHER, THE SECTION 40A(2)(B) DOES NOT ENVISAGE THE COMPLETE DISALLOWAN CE OF EXPENDITURE UNLESS IT IS PROVED TO BE EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE. NO SUCH FIN DING WITH REGARD TO THE EXCESS PAYMENT HAS ALSO BEEN ESTABLIS HED BY THE REVENUE WHILE INVOKING THE PROVISIONS OF SECTION 40 A(2)(B). HENCE, THE DISALLOWANCE MADE IS HEREBY DIRECTED TO BE DELETED. DISALLOWANCE U/S 14A R.W. RULE 8D: 7. THE UNDISPUTED FACT IS THAT THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME NOR CLAIMED ANY EXPENSES WITH REG ARD TO THE INVESTMENTS MADE. THE AO HAS DISALLOWED AN AMOUNT O F RS.73,036/- BASED ON THE CBDT CIRCULAR NO. 5/2014 D ATED 11.12.2014. SINCE, NO EXEMPT INCOME HAS BEEN EARNED AND NO EXPENSES HAS BEEN CLAIMED, WE HEREBY HOLD THAT NO DISALLOWANCE IS WARRANTED UNDER THIS SECTION. INTEREST ON CAPITAL WORK IN PROGRESS (CWIP): 8. FACTS RELEVANT TO THIS ISSUE ARE THAT THE CLOSIN G CAPITAL WORK IN PROGRESS STANDS AT RS.1,26,83,160/- AND THE AO HELD THAT THE INTEREST NEEDS TO BE CAPITALIZED AND ESTIM ATED THE INTEREST AT THE RATE OF 12% UNDER CWIP. THE TOTAL I NTEREST DISALLOWED BY THE AO WAS RS.10,05,317/-. FROM THE R ECORDS, WE FIND THAT THE ASSESSEE HAS PAID AND CLAIMED IN P&L A/C, AN INTEREST OF RS.10,05,318/- WHICH WAS ON ACCOUNT OF INTEREST ON CASH CREDIT, INTEREST ON UNSECURED LOANS AND INTERE ST ON CAR LOAN ITA NO. 856/DEL/2017 AMIT MEHRA 5 BUT NOT ANYTHING RELATED TO CWIP. THE ASSESSEE HAS NOT DEBITED ANY INTEREST IN THE P&L A/C UNDER THE HEAD CAPITAL WORK IN PROGRESS. THE CAPITAL OF THE ASSESSEE WAS RS.20.24 CRORES AND THE OPERATING PROFIT FOR THE YEAR IS RS.11.70 CRORE S. SINCE, NO AMOUNT HAS BEEN DEBITED IN THE P&L A/C, NO DISALLOW ANCE OUGHT TO HAVE BEEN MADE BY THE AO. THE DISALLOWANCE IS HE REBY DIRECTED TO BE DELETED. DIWALI & FOOD EXPENSES: 9. FROM THE RECORDS, WE FIND THAT THE DIWALI EXPENS ES HAVE BEEN FULLY VOUCHED ALONGWITH THE RELEVANT BILLS. SI NCE, ALL THE SUPPORTING DOCUMENTS FOR THE SERVICES OBTAINED AND PAYMENTS MADE ARE ON RECORD, THE DISALLOWANCE MADE BY THE AO AT THE RATE OF 25% ON ESTIMATE BASIS IS HEREBY DIRECTED TO BE DELETED. SIMILARLY, 50% OF THE AMOUNT DISALLOWED OUT OF EXPE NSES PERTAINING TO FOOD SUPPLY TO APPROXIMATELY 100 PERS ONS WORKING FOR THE ASSESSED, INSPITE OF THE EVIDENCES AVAILABL E FOR SUPPLY OF FOOD, PAYMENTS TO FOOD SUPPLIERS THEREOF AND EMPLOY MENT OF IS HEREBY DIRECTED TO BE DELETED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 05/05/2020. SD/- SD/- (AMIT SHUKLA) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACCOUNT ANT MEMBER DATED: 05/05/2020 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR