Ashmeet Singh, New Delhi vs Department Of Income Tax

This appeal, by the assessee, is directed against the order dated 30-11-2011 passed by the ld. CIT(A)-XVI, New Delhi in appeal no. 96/11-12 relating to A.Y. 2008-09.

2. None put in appearance on behalf of the assessee at the hearing fixed for 16- 3-2015, despite issue of notice for hearing, sent through RPAD at the address furnished by the assessee in column no. 10 of form no. 36. Accordingly, we proceed to dispose of the appeals, ex parte, qua the assessee and in that process we have heard ld. DR and perused the material available on record.

2 ITA 1862/Del/2012 ACIT Vs. Ashmeet Singh

3. The assessee, in the relevant assessment year enjoyed income from export of garment in various countries through his proprietorship concern M/s Cocoon Exports. He had filed return of income showing total income of Rs. 43,85,010/-. The assessment was completed u/s 143(3)/144 of the I.T. Act at total income of Rs. 1,04,35,640/-, inter alia, making disallowance of interest as per proviso to sec. 36(1)(iii) of Rs. 22,10,351/-. Disallowance was deleted by ld. CIT(A). Being aggrieved the department is in appeal before us and has taken following ground of appeal:

'On the facts and on the circumstances of the case the Ld. CIT(A) has erred in deleting the addition made by AO on account of disallowance of interest of Rs. 22,10,351/- under proviso of section 36(1)(iii) of the I.T. Act."

4. Brief facts apropos the issue involved are that during assessment proceedings the AO noticed that as per P&L a/c, assessee had claimed expenses on account of payment of interest as per following details:

i. Interest and bank charges Rs. 17,48,553/-

ii. Interest on car loan Rs. 91,929/- iii. Interest on loan Rs. 4,61,798/- Rs. 23,02,280/-

5. From the comparison of balance-sheet as on 31-3-2007 and 31-3-

2008, the AO noticed that there was increase in fixed assets aggregating to Rs. 1,98,31,778/- and also increase in unsecured loan of Rs. 40,56,876/-. He examined the schedule of fixed assets and noticed that assessee during the year under consideration had made advance for purchase of factory retail outlet, a factory plot at Gurgaon and an office flat at Unitech. He further observed that in the previous year also the assessee had heavily invested in 3 ITA 1862/Del/2012 ACIT Vs. Ashmeet Singh

real estate and had shown these properties in the fixed asset schedule terming those to be a business asset. He concluded that borrowed funds were utilized towards acquisition of asset which the assessee intended to use for expansion of his business. In response to show cause notice issued by AO, the asessee gave following reply:

"With reference to above addition, we humbly submit that assessee has not utilized interest bearing fund in connection with above mention assets.

During the year under consideration, the assessee ahs introduced fresh capital of Rs. 38,40,000/- on which no claim of any interest has been made in the book.

There are no fresh loan taken in connection with acquisition of these assets if the fresh loan has taken those are interest free as explained as under:-

Name of the party Amount Ashmeet Singh (HUF) Rs. 3,38,000/- Harmeet Singh Rs. 12,96,530/- Last Resoures (Mrs. Satinder Kaur) Rs. 20,36,661/- Perfection House Rs. 1,00,000/- Satinder Kaur Rs. 13,77,189/- Inca Trade Rs. 8,25,000/-

6. The AO, however, did not accept the assessee's contention and pointed out that in view of proviso to section 36(1)(iii), since the asset was not put to use, the interest could not be allowed qua the fixed asset for the acquisition of which the borrowed capital was utilized. He further observed that assessee failed to give any details as to what was the exact fund borrowed and utilized towards purchase of new asset and further failed to prove or give any details for such interest attributable to the funds borrowed 4 ITA 1862/Del/2012 ACIT Vs. Ashmeet Singh

and use for the purpose of acquisition of new asset. He, accordingly, disallowed Rs. 22,10,351/-.

7. Before ld. CIT(A) the assessee had, inter alia, pointed out that the investment in the factory plot at Gurgaon (Rs. 93,800/-); commercial property at Unitech (Rs. 40,25,285/-); and factory retail outlet (Rs. 19,55,045/-) had been made out of non-interest bearing funds. The assessee further pointed out that even if it is considered that investments were made out of interest bearing funds in regard to aforementioned properties, then too the total disallowance could be made was Rs. 2,98,893/- for which detailed calculation was given, as reproduced at page 6 of CIT(A)'s order. Ld. CIT(A) deleted the disallowance by observing as under:

"4.1. I have considered the facts of the case and the submissions of the AR. The Assessing Officer has not been able to establish the nexus of interest bearing funds borrowed by the appellant with the application of such funds for non-business purposes. Moreover, and without prejudice to the above, any investments made by an assessee in land etc. to be used for business purposes may not yield any interest or rental income, but this does not imply that the interest paid on loans, if any, taken for such investments is not allowable as a business expenditure. The disallowance made by the Assessing Officer is deleted."

8. Aggrieved, the revenue is in appeal before us.

9. We have heard ld. DR and perused the material available on record. Section 36(1)(iii) reads as under:

5 ITA 1862/Del/2012 ACIT Vs. Ashmeet Singh

36(1) The deduction provided for in the following clause shall be allowed in respect of the matters dealt with therein in computing the income referred to in section 28 -

....

....

(iii) the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession.

Provided that any amount of the interest paid, I respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction".

10. A bare perusal of the proviso to section 36(1)(iii) clearly reveals that there should be specific finding that the amount of interest paid is in respect of capital borrowed for acquisition of an asset for extension of existing business or profession. Therefore, direct nexus between the capital borrowed and the acquisition of asset has to be established before proviso can be invoked. In the present case the AO has not established this nexus. Therefore, the proviso was wrongly invoked by him. Further, we find that it was specifically stated before the AO that there was introduction of fresh capital of Rs. 38,40,000/- on which no claim of any interest had been made in the books. The AO has not at all taken into consideration as to how this fund was utilized. Further, assessee has also pointed out that it had received interest free loan, which has been reproduced earlier. In any case, the assessee's claim was that the entire borrowed funds had been utilized for business purposes and not for acquisition of fixed assets. In view of above 6 ITA 1862/Del/2012 ACIT Vs. Ashmeet Singh

discussion, we do not find any reason to interfere with the order of ld. CIT(A) and the same is upheld.

14. In the result, revenue's appeal is dismissed.

Order pronounced in open court on 24-04-2015.

Sd/- Sd/- (A.T. VARKEY ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 24-04-2015. MP: Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR