VIKRAM BIHARISARAN KHANDELWAL,MUMBAI V. DCIT- CENTRAL CIRCLE 5(2), MUMBAI

ITA 623/MUM/2024

AI Insights

The case involves appeals by Vikram Biharisaran Khandelwal against the orders of the CIT(A)-53, Mumbai, for the Assessment Years 2005-06 and 2006-07. The primary issues in dispute were the disallowance of interest expenses, the addition of capital gains, and the addition of estimated commission expenses. The Tribunal found that the AO had not adequately examined the veracity of the documents provided by the assessee in the remand proceedings and had merely reiterated the additions made in the original assessments. The Tribunal directed the AO to accept the documented transactions of share purchases and sales, which were conducted through proper channels and involved payment of Securities Transaction Tax (STT).

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 37908 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-01-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 2006-2007
• Other Referred Cases: Reliance Utilities and Power Ltd (313 ITR 340)(Bom)
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SOLGY JOSE T. KOTTARAM
• Assessee Lawyers: S.M. BANDI
• Keywords: Set aside; Capital Gains; Search and seizure; Accommodation entries
• Section: 153A

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “F” BENCH : MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI SUNIL KUMAR SINGH, JUDICIAL MEMBER ITA No. A.Y. Appellant Respondent 622/Mum/2024 2005-06 Vikram Biharisaran Khandelwal, 601-A, Millenium Garden, Upper Govind Nagar, Malad East, Mumbai [PAN: AADPK9699N] DCIT, Central Circle-5(2), Air India Building, Nariman Point, Mumbai 623/Mum/2024 2006-07 Assessee by : Shri S.M. Bandi Revenue by : Shri Solgy Jose T. Kottaram, CIT-DR Date of Hearing : 15-10-2024 Date of Pronouncement : 01-01-2025 ORDER PER B.R. BASKARAN, A.M : The assessee has filed both the appeals challenging the orders passed by the Ld.CIT(A)-53, Mumbai and they relate to the Assessment Years (AYs.) 2005-06 and 2006-07. Both the appeals were heard together and hence, they are being disposed of by this common order, for the sake of convenience. 2. In both the years, the assessee is challenging the decision rendered by the Ld.CIT(A) in confirming the following additions made by the AO:- (a) Disallowance of interest expenses; (b) Addition of Capital gains declared by the assessee; (c) Addition towards estimated commission expenses. 2 ITA Nos. 622 & 623/Mum/2024 However, we notice that the assessee has committed an error in mentioning the quantum of disallowance in each of the grounds in AY. 2005-06, i.e., the assessee has wrongly mentioned the amounts disallowed in AY.2006-07 in the grounds raised in AY.2005-06 also. The actual disallowance made in AY 2005-06 are Rs.2,67,480/-, Rs.2,43,303/- and Rs.12,165/- respectively against the issues (a) to (c) mentioned above. Accordingly, we proceed to dispose of the appeals. 3. This is second round of proceedings. The ITAT, in the first round, had restored all the above said three additions to the file of the AO for examining them afresh. Accordingly, the AO passed the present assessment orders. The facts relating to the case are discussed in brief. The revenue carried out search and seizure operations on 10-11-2006 in Balaji Group of cases. The assessee was also subjected to search operations. Consequent thereto, the assessment order was passed u/s. 153A of the Act originally. Consequent to the remand of all the issues by the Tribunal, the present assessment order came to be passed by the AO. 4. We shall first take up the appeal filed for AY.2005-06. The first issue relates to the disallowance of interest expenses. The AO noticed that the assessee has given interest free loans to the tune of Rs.14,86,000/-, while he has borrowed loans to the tune of Rs.60.00 lakhs and was paying interest thereon. Accordingly, the AO took the view that the interest expense attributable to the interest free loan is not allowable as deduction. Accordingly, he disallowed a part of interest expense attributable to interest free loans given by the assessee, which was computed @ 18% on the interest free loan amount of Rs.14,86,000/-. Accordingly, the interest disallowance worked out to Rs.2,67,480/-. The said disallowance was confirmed by Ld CIT(A) and this issue was restored to the file of AO by the 3 ITA Nos. 622 & 623/Mum/2024 Tribunal. However, the same amount of disallowance was made by the AO again in the impugned set aside proceedings. The Ld.CIT(A) also again confirmed the same. 4.1. We heard the parties and perused the record. We notice that the assessee is the proprietor of a business concern named M/s Khandelwal Sheet Processors. The addition relating to interest expense is related to the above said business concern. The Balance Sheet of M/s Khandelwal Sheet processors is placed at page 21 of the paper book. The opening capital and closing balance of capital of the assessee was shown as Rs.7,53,105/- and Rs.12,62,047/- respectively as on 01-04-2004 and 31-03-2005. Hence, the average capital balance available with the assessee in the above said concern was around Rs.10.00 lakhs. The interest free loan given by the assessee is Rs.14,86,000/-. 4.2. The assessee also maintains a Personal Balance Sheet. The capital balance available in that Balance Sheet was Rs.24,52,304/-. The Ld A.R compared the above said capital balance available in personal Balance Sheet with the amount of interest free advances of Rs.14,86,000/- available in the Balance Sheet of the business concern. We are unable to accept the same. Since the loans taken by the assessee as well as the interest free loan given by the assessee are reflected in the Balance Sheet of business concern, the decision is required to be taken on the basis of that Balance Sheet of business concern only, i.e., all the data should relate to the same Balance Sheet only. Accordingly, we hold that it will not be appropriate to compare some data available in the Personal Balance Sheet with some other data available in the Balance Sheet of business concern for the purposes of this issue. 4 ITA Nos. 622 & 623/Mum/2024 4.3. We noticed earlier that the assessee was having average capital balance (own funds) of around Rs.10.00 lakhs. The Hon’ble Bombay High Court has held in the case of Reliance Utilities and Power Ltd (313 ITR 340)(Bom) that, when the own funds and loan funds are available with the assessee, then the presumption is that the own funds are first used for giving interest free advances. Accordingly, out of interest free advances of Rs.14.86 lakhs, the presumption is that a sum of Rs.10.00 lakhs available as own capital has been used to give interest free loans, as per the decision rendered by Hon’ble Bombay High Court in the above said case. Hence, the presumption is that the balance amount of interest free advances of Rs.4.86 lakhs only, has been given out of loan funds. Hence, the addition of interest expenditure should be computed on the balance loan amount of Rs.4.86 lakhs only. 4.4. We notice that the AO has applied interest rate of 18% for computing the addition towards interest expense. The Ld A.R submitted that the average rate of interest paid on the loans taken by the assessee works out to 9.39% only in this year. Accordingly, he submitted that the AO should have adopted interest rate of 9.39% for computing addition. We find merit in the above said submissions of the assessee. The interest disallowance/addition is being made only for the reason that the borrowed funds have been used to give interest free loans, i.e., the borrowed funds to the extent of such interest free loans, have not been used for the purpose of business. Hence, the rate of interest pertaining to borrowed funds alone should be used to disallow interest expense attributable to interest free loans. Hence, we hold that the AO should adopt average interest rate of 9.39% incurred on loan funds for computing interest disallowance. 5 ITA Nos. 622 & 623/Mum/2024 4.5. Accordingly, we set aside the order passed by the Ld.CIT(A) on this issue and direct the AO to disallow interest expenditure computed @ 9.39% on the balance interest free loan of Rs.4.86 lakhs worked out above. We order accordingly. 5. The next issue relates to the addition of short term capital gains. During the year under consideration, the assessee has purchased and sold 1500 shares of M/s Stanely Credit Ltd, which resulted in short term capital gains of Rs.2,43,303/-. The AO, in the original round, treated them as accommodation entries and accordingly assessed it as normal income of the assessee. The AO also added estimated commission expense of Rs.12,165/- that would have been incurred in procuring the accommodation entries. In the impugned set aside proceedings also, the AO again made both the additions mentioned above. 5.1. We heard the parties and perused the record. The Ld A.R submitted that the shares of M/s Stanely Credit Ltd., were purchased and sold through stock exchange platform after paying STT. The payments were made/received through banking channels. The shares have entered the Demat account and exited there from. All the documents evidencing the transactions were furnished before the AO. The ITAT had restored the matter to the file of the AO for examining the veracity of the documents. However, in the impugned set aside proceedings, the AO did not carry out any investigation/examination and further, did not find fault with any of those documents. Accordingly, the Ld A.R contended that there is no reason available with the AO to disbelieve the short term capital gains declared by the assessee. He also contended that there is no material available with the AO to show that the assessee has incurred commission 6 ITA Nos. 622 & 623/Mum/2024 expenses. Accordingly, there is no basis to make addition of estimate commission expenses. 5.2. The Ld D.R, on the contrary, supported the orders of the tax authorities. However, we find merit in the submissions made by the Ld A.R. We notice that the ITAT had restored the matter to the file of the AO for examining the veracity of the documents furnished by the assessee. However, the AO did not carry out any examination and simply reiterated the additions made in the original assessment proceedings. Since the documents furnished by the assessee have not been found to be false, we are of the view that they have to be accepted. Since the assessee has transacted the purchase and sale of shares through stock exchange platform after paying STT; since the shares have entered and exited his demat account and since the consideration was paid/received through banking channels, we hold that there is no reason to disbelieve the short term capital gains declared by the assessee. In this view of the matter, there is no reason to make addition of commission expenses on estimated basis. 5.3. Accordingly, we set aside the order passed by the Ld.CIT(A) on this issue and direct the AO to accept the short term capital gains declared by the assessee and delete the addition of commission expenses. 6. We shall now take up the appeal relating to AY 2006-07. The additions made by the AO are identical with the additions made in AY. 2005-06 discussed above. This is also second round of proceedings as in the case of AY 2005-06. 7 ITA Nos. 622 & 623/Mum/2024 7. The first issue relates to the disallowance of interest expenditure. The opening and closing capital (i.e., as on 01-04-2005 and 31-03-2006) available in the business books of the assessee were Rs.12.62 lakhs and Rs.16.62 lakhs respectively. The Balance sheet of business concern is placed at page 65 of the paper book. Hence, the average capital balance (own funds) available with the assessee is around Rs.14.62 lakhs. The interest free advances given by the assessee is Rs.14.86 lakhs. Hence, the presumption is that the own funds of Rs.14.62 lakhs was first used to give interest free loans of Rs.14.86 lakhs. Hence, the diversion of loan funds will work out to Rs.24,000/- only. The average rate of interest paid by the assessee on loan funds was stated as 10.41%. Accordingly, following the decision rendered by us in AY 2005-06, we direct the AO to compute interest disallowance on Rs.24,000/- @ 10.36% only. The order passed by the Ld.CIT(A) on this issue is set aside. We order accordingly. 8. The next issue relates to the addition relating to short term capital gains and long term capital gains earned by the assessee. The AO has assessed them as unexplained income of the assessee. He has also made addition of estimated commission expense of Rs.1,29,200/- as done in AY. 2005-06. 8.1. In this year, the assessee had earned short term capitals on sale of 3000 shares of M/s Stanely Credit Ltd and 1700 shares of M/s Shree Tulsi Ltd. He had earned long term capital gains on sale of 6000 shares of M/s Prime Capital Ltd. The AO treated them as procurement of accommodation entries. Since the documents furnished by the assessee were doubted, the Tribunal restored this issue to the file of the AO for examining it afresh. 8 ITA Nos. 622 & 623/Mum/2024 8.2. The facts prevailing in this year in respect of this issue are identical with that prevailed in AY.2005-06, i.e., the AO did not carry out any examination and simply reiterated the additions made in the original assessment proceedings. Since the documents furnished by the assessee have not been found to be false, we are of the view that they have to be accepted. Since the assessee has transacted the purchase and sale of shares through stock exchange platform after paying STT; since the shares have entered and exited his demat account and since the consideration was paid/received through banking channels, we hold that there is no reason to disbelieve the short term capital gains/long term capital gains declared by the assessee. In this view of the matter, there is no reason to make addition of commission expenses on estimated basis. 8.3. Accordingly, we set aside the order passed by the Ld.CIT(A) on this issue and direct the AO to accept the short term capital gains and long term capital gains declared by the assessee and delete the addition of commission expenses on estimated basis. 9. In the result, both the appeals of the assessee are partly allowed. Order pronounced in the open court on 01-01-2025 Sd/- Sd/- [SUNIL KUMAR SINGH] [B.R. BASKARAN] JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 01-01-2025 TNMM 9 ITA Nos. 622 & 623/Mum/2024 Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, “F” Bench, Mumbai 5) Guard file By Order Dy./Asst. Registrar I.T.A.T, Mumbai "