Gagan Khosla, New Delhi vs Department Of Income Tax

Assessee By : Shri C.S. Aggarwal, Sr. Advocate & Shri Ravi Pratap Mall, Advocate Department By : Shri T. Vasanthan, Sr. DR

Date of Hearing : 29.07.2015 Date of Pronouncement : 31 .07.2015

ORDER PER R.S. SYAL, AM:

This appeal by the Revenue is directed against the order passed by

the CIT(A) on 13.10.2011 in relation to the assessment years 2008-09. ITA No.208/Del/2012

2. Ground nos.1 and 2 of this appeal are interconnected and, hence,

these are being taken up together for consideration and decision. Briefly

stated, the facts of the case are that the assessee is a sole proprietor of

M/s NGK Trading Company which is engaged in the business of

purchase and sale of fresh fruits. The assessee is also a proprietor of M/s

Fresh Produce Shoppe and running a departmental store for fresh fruits.

The assessee purchased a property at Navi Mumbai, bearing Flat

No.1502, 15th Floor, Cupola Building, B-Wing, Bhumiraj at Plot No.1

and 2, Sector 18, Sanpada, New Mumbai at a price of Rs.34,65,000/- on

18.1.2007. The AO referred the matter of valuation of this property to

the DVO, who determined its value at Rs.40,50,000/-. It was also

intimated that the assessee had made additions/alterations by way of

furniture and fixtures amounting to Rs.3,81,999/-. On being called upon

to explain as to why difference of Rs.5,85,000/- (Rs.40,50,000/- minus

Rs. 34,65,000/-) should not be added as unexplained investment u/s 69

and, further, why a sum of Rs.3,81,999/- be not added as unexplained

expenditure u/s 69C for additions/alterations to the said property, the

assessee submitted that besides the above sale consideration of Rs.34.65 2 ITA No.208/Del/2012

lac, the assessee also paid Rs.1,76,300/- towards stamp duty, Rs.30,880/-

towards registration fees and Rs.1,50,000/- towards cost of parking

space. As regards the sum of Rs.3,81,999/-, the assessee submitted that

renovation was carried out in the succeeding financial year 2008-09 and

the investment/expenditure of Rs.3,81,999/- was disclosed in the balance

sheet of M/s NGK Trading Company. Not convinced with the

assessee's submissions, the AO made addition of Rs.9,39,999/-

(Rs.5,85,000/- plus Rs.3,81,999/-). The ld. CIT(A) ordered for the

deletion of these additions. The Revenue is aggrieved against such

deletion.

3. We have heard the rival submissions and perused the relevant

material on record. It can be observed that the entire addition made by

the AO rests on the valuation report of the DVO, who estimated the

value of property at Rs.40.50 lac against the purchase price at

Rs.34,65,000/-. The provisions of section 69, invoked by the AO

provides that: `Where in the financial year immediately preceding the

assessment year the assessee has made investments which are not

3 ITA No.208/Del/2012

recorded in the books of account, if any, maintained by him for any

source of income, and the assessee offers no explanation about the

nature and source of the investments or the explanation offered by him is

not, in the opinion of the Assessing Officer, satisfactory, the value of the

investments may be deemed to be the income of the assessee of such

financial year.' It can be observed from this provision that an addition

towards unexplained investment can be made only where 'the assessee

has made investments' , which are not recorded in the books of account.

The factum of the assessee making investments outside the books of

account is required to be positively proved by the Revenue with some

cogent evidence. A mere DVO's report, which is nothing more than an

estimate of the value of the property, cannot be a substitute for an

evidence directly indicating unexplained investment. A fair market

value determined by the DVO need not necessarily match with the actual

price paid inasmuch as there can be several reasons for the sale of a

property at a higher or lower price than its fair market value. Unless the

AO brings on record some authentic material divulging the assessee

having made investment over and above that declared in the registered 4 ITA No.208/Del/2012

sale deed, there can be no question of invoking the provisions of section

69 of the Act. Here is a case in which the assessee claimed to have

purchased the property for a sum of Rs.34.65 lac and the AO has made

addition of Rs.5.85 lac simply on the basis of difference between the

DVO's report and apparent sale consideration. No attempt has been

made for verifying the price from the seller of the property. In other

words, there is no positive material evidencing the making of actual

investment by the assessee over and above Rs.34.65 lac. Under such

circumstances, there can be no point in making any addition towards

unexplained investment. Here it is relevant to mention that the

legislature has carried out amendment by the Finance Act, 2013 w.e.f.

1.4.2014 by substituting section 56(2)(vii)(b) providing that where an

individual or HUF receives any immovable property, inter alia, for a

consideration which is less than the stamp duty value of the property by

an amount exceeding Rs.50,000/-, the stamp duty value of such property

as exceeded such consideration shall be taxed as 'Income from other

sources.' The legislature has brought in section 56(2)(vii)(b) with the

sole intention of bringing such under-payment of sale consideration of 5 ITA No.208/Del/2012

immovable property to tax. This provision has been enshrined w.e.f. the

AY 2014-15 and is not applicable retrospectively to the AY 2008-09

under consideration. Since this provision is prospective and there is no

other authentic evidence of the assessee having actually made any

investment over and above the declared sale consideration, we are of the

considered opinion that the ld. CIT(A) was justified in deleting the

addition to the extent of Rs.5,85,000/-.

4. As regards the other amount of Rs.3,81,999/-, we find that the

assessee made a categorical claim before the authorities that this amount

was spent on furniture and fixtures during renovation of building which

was recorded in the books of account for the AY 2008-09. This fact has

not been denied by the authorities that the assessee, in fact, recorded this

amount of Rs.3,81,999/- in his books of account of M/s NGK Trading

Company. Once this amount has been duly recorded in the books of

account of a subsequent year and there is no material to indicate that

such furniture and fixture was purchased in the year in question, we

6 ITA No.208/Del/2012

countenance the action of the ld. CIT(A) in deleting the addition to this

extent. These two grounds are not allowed.

5. Ground no. 3 is against the deletion of addition of Rs.16,25,945/-

made by the AO on account of the interest on loans. During the course

of assessment proceedings, the AO observed that the assessee had taken

secured and unsecured loans to the tune of Rs.1,70,25,179/- on which

interest of Rs.16,25,945/- was paid. It was also noticed that the assessee

advanced loans to the extent of Rs.35 lac to Exotic Fresh Produce Pvt.

Ltd., and Rs.22,40,000/- to Narco Exports on which nominal interest

was charged, which was without any business expediency. The assessee

was also found to have made additional payment of Rs.16,05,662/- for

purchase of shop at South City, Gurgaon. In spite of the assessee having

huge cash and bank balances of Rs.1,50,17,867/-, the AO observed that

the assessee had taken interest bearing loans, which ought not have been

done. He further noticed that the assessee repaid a sum of Rs.60 lac to

various persons from whom unsecured loans were taken in earlier years.

In the background of these facts, he opined that the assessee diverted

7 ITA No.208/Del/2012

business funds and interest bearing funds either for giving loans and

advances or investment in properties or for repaying of loans. The

assessee was show caused as to why deduction for interest amounting to

Rs.16.25 lac be not denied. The assessee explained its stand that has

been reproduced on page 4 of the assessment order, which we will

shortly advert to. Not convinced with the assessee's submissions, the

AO made an addition of Rs.16,25,945/-. The ld. CIT(A) ordered for the

deletion of addition. The Revenue is before us against the deletion of

such addition.

6. We have heard the rival submissions and perused the relevant

material on record. It is noted that the AO has discussed the issue of

advancing loans in various segments, the first being loans and advances

of Rs.57,40,000/- given to sister concerns, viz., Exotic Fresh Fruits

Produce Ltd., and M/s Narco Exports. In this regard, it is pertinent to

note that the assessee charged interest @ 11% on such amounts which

was shown as income in its Profit & Loss Account. It is obvious that

when interest has been received @ 11% as against payment of interest

8 ITA No.208/Del/2012

@ 10% to 11% on the loans taken by the assessee, there can be no

question of making any disallowance of interest.

7. The second component is additional payment of Rs.16,05,662/-

made by the assessee for purchase of shop at South City, Gurgaon,

which was shown as Investment in the balance sheet of M/s NGK

Trading Company. We have gone through the assessee's balance sheet

of NGK Trading Company, a copy of which is available at page 5 of the

paper book. It can be seen that the assessee made investment of

Rs.16,05,662/- in shop at South City-II, Gurgaon during the year under

consideration and the remaining amount of Rs.10 lac was invested in the

preceding year, making the total figure of investment in shop at

Rs.26.05,662 appearing in the balance sheet. The case of the assessee is

that this shop was purchased for carrying on business.

8. Section 36(1)(iii) of the Act allows deduction for the amount of

interest paid in respect of capital borrowed for the purposes of business

or profession. Even if the borrowings are made for acquiring capital

asset but for business purpose, interest paid on such borrowing is

9 ITA No.208/Del/2012

allowable u/s 36(1)(iii) because acquiring assets for carrying on business

is also a business purpose. What is significant to note here is that the

legislature has inserted provisions to section 36(1)(iii) by the Finance

Act, 2003 w.e.f. 1.4.2004, which provides that any amount of interest

paid in respect of capital borrowed for acquisition of an asset, etc., 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. The effect of the insertion of

this proviso is that even in a running business where interest is paid for

acquisition of an asset, the same shall not be allowed as deduction till

the date on which such asset is first put to use. In simple words, interest

for the period up to the date of putting the asset to use for the first time is

not deductible u/s 36(1)(iii), but, is required to be capitalized. Coming

back to the facts of the instant case, it is found as an admitted position

that the assessee made investment in shop at South City, Gurgaon,

amounting to Rs.16.05 lac in the current year and a sum of Rs.10 lac was

paid in the preceding year. The case of the assessee is that the shop was

acquired for carrying on business from this premises. There is no 10 ITA No.208/Del/2012

material on record manifesting the date from which such shop was

actually put to use. Going by the proviso to section 36(1)(iii), any

interest paid for the period up to the date of actual use of the shop,

cannot be allowed as deduction. The AO is directed to ascertain the date

from which the assessee took possession of this shop and then put it to

use. Interest up to the date of putting such shop of South City-II,

Gurgaon to use shall not be allowed as deduction, but, will be

capitalized. In the absence of any material throwing light on the above

issues, we set aside the impugned order and remit the matter to the file

of AO for deciding this issue in conformity with our above observations.

9. The next item is loans advanced to sister concerns, namely, Exotic

Fresh Produce Pvt. Ltd., and Narco Exports. The assessee charged

interest on such advances to sister concerns at 11% against the payment

of interest at 10% to 11% on loans and advances taken by him. As such,

there can be no question of making any disallowance of interest towards

the use of interest bearing funds for non-business purpose.

11 ITA No.208/Del/2012

10. The next item is cash and bank balance of Rs.1,50,17,867/- which

includes demand drafts in hand amounting to Rs.51,03,840/-. The very

fact that this much cash and bank balance is available with the assessee

at the year end, can't be a ground for making any disallowance towards

the interest paid on interest bearing loans taken by the assessee for the

simple reason that retaining of amount in cash and bank balances does

not in any manner indicates the diversion of funds for non-business

purpose. It is for the assessee to decide as to how he has to conduct his

business by keeping the borrowed funds in cash or otherwise. If loan is

taken for business purpose and the loan is still in the possession of the

assessee, the interest paid thereon has to be allowed as deduction.

11. The next item is repayment of old unsecured loans amounting to

Rs.60 lac. The assessee repaid these loans taken earlier for business

purpose on which he was paying interest @ 11.33%, as against fresh

loans taken on interest @ 10% to 11% per annum. It is, therefore, self

evident that there is no loss of revenue in the repayment of unsecured

loans. Even otherwise, the repayment of business loans taken earlier out

12 ITA No.208/Del/2012

of the fresh interest bearing funds borrowed by the assessee, cannot be a

reason for making any disallowance of interest paid on fresh funds taken

as loan.

12. The above discussion disposes of ground no. 3 taken by the

Revenue.

13. The next ground is against the deletion of addition of

Rs.84,48,290/-. The facts apropos this ground are that the assessee made

investments in four properties enlisted on page 5 of the assessment

order. The AO observed that these investments were not shown in the

books of account. On being called upon to explain as to why the

provisions of sections 69/69B be not applied, the assessee stated that

these investments were made by means of withdrawals from his capital

account. Not convinced, the AO made disallowance of Rs.84.48 lac u/s

69B of the Act, which came to be deleted in the first appeal. The

Revenue is aggrieved against the deletion of this addition.

14. We have heard the rival submissions and perused the relevant

material on record. It is obvious that the assessee instead of separately

13 ITA No.208/Del/2012

showing Investments in these four properties has withdrawn the amount

from his capital account, which fact was stated before the AO and has

remained uncontroverted. There is hardly any difference in showing

investment in properties either by way of separate asset in the balance

sheet or by reducing it from the capital account by means of

withdrawals. Once an amount is withdrawn from capital account, which

is utilized for making an investment, it cannot be brought within the

purview of sections 69/69B in any manner. It is further relevant to note

that even after making the above investments, which are meant for non-

business purpose, the assessee has still credit balance of his capital

account in both the proprietorship concerns. It shows that these

investments were made by the assessee for non-business purpose by

withdrawing the amounts from his capital account and even after such

withdrawals, there was some credit balance of his capital available with

him. Under such circumstances, there can be no question of making any

addition u/ss 69/69B of the Act. This ground is not allowed.

14 ITA No.208/Del/2012

15. The last ground is against the deletion of addition of Rs.3,98,689/-

made by the AO from foreign travel expenses. The assessee claimed

foreign travel expenses amounting to Rs.15.94 lac. The AO made an ad

hoc 25% disallowance from foreign travel expenses by observing that no

proof of purpose of foreign travel was filed. The ld. CIT(A) ordered for

the deletion of addition.

16. After considering the rival submissions and perusing the relevant

material on record, it is observed from the impugned order that the

assessee filed all relevant details with the AO about the foreign visits

undertaken by him, meeting the suppliers of fruits and attending various

conferences related to fruits in various countries. The assessee also

furnished names of parties or companies with whom he interacted during

his foreign visits. These findings recorded by the ld. CIT(A) have not

been controverted by the ld. DR. Under such circumstances, we are of

the considered opinion that there can be no basis for making any ad hoc

disallowance towards foreign travel expenses. We, therefore, approve

the view taken by the ld. CIT(A) on this score. This ground fails.

15 ITA No.208/Del/2012

17. In the result, the appeal is partly allowed for statistical purposes.

The order pronounced in the open court on 31.07.2015.

Sd/- Sd/-

[H.S. SIDHU] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated, 31st July, 2015. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT

AR, ITAT, NEW DELHI.

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