Gautam Pranlal Shah, Mumbai vs Department Of Income Tax

ITA No. : 6568/Mum/2012 (Assessment year: 2008-09) Asst. Commissioner of Income Tax - Vs Mr Gautam Pranlal Shah, 16(1), Central Bldg. No. 1, 2nd Floor, Matru Mandir, Tardeo Road, Ground Floor, 36, Bomanji Master Rd Mumbai -400 007 Opp. Kalbadevi Post Office, Mumbai -400 002 ःथयी लेखा सं.:PAN: AAFPS 3789 K अपीलाथȸ (Appellant) ू×यथȸ (Respondent) Appellant by : Shri R N D'Souza Respondent by : Shri Neelkanth Khandelwal

सुनवाई कȧ तारȣख /Date of Hearing : 18-11-2014 घोषणा कȧ तारȣख /Date of Pronouncement : 02-01-2015

आ दे श

᮰ी िववेक वमाᭅ, ᭠या स: स: ORDER

PER VIVEK VARMA, JM:

The appeal is filed by the department against the order of CIT(A) 27, Mumbai, dated 21.08.2012, wherein solitary issue pertains to deletion of disallowance u/s 14A.

2. The brief facts are that the assessee is a proprietor of M/s Shree Upendra Paper Corp. and trading in paper & boards for the last many years. In the course of scrutiny proceedings, it was noticed that the assessee had claimed interest expense of Rs 36,25,853/- in his Profit & Loss account and in the Balance sheet, the assessee had shown shares held as investments and stock in trade. The AO, therefore, came to the view that diversion of interest bearing funds for acquisition of assets yielding exempt income could not be ruled out. The AO, therefore, called 2 Mr Gautam Pranlal Shah ITA 6568/M/2012

for detailed explanation from the assessee on this aspect. The assessee, vide his letter dated 13.12.2010 submitted (extracted)

"iv. Your assessee has not debited any direct expenditure for earning any tax free income. v. The interest paid during the year is on loans and advances taken for the working capital requirements of the business and taken and utilized purely for the business.

Thus Sir you will notice that in the event the loans borrowed by your assessee are used purely for business and thus the disallowance u/s 14A is not justified".

3. The AO, after considering the reply of the assessee, observed, "The reply of the assessee has been carefully considered. As regards the claim of the assessee about utilization of the borrowed funds exclusively for business, it is to be noted that the same is not evident from the accounts maintained by the assessee. The assessee maintains consolidated balance sheet which preclude one-to-one nexus between borrowed funds and business activities. It cannot be ruled out, having regard to the accounts maintained by the assessee, that borrowed funds are utilized for the purposes of investment as well. In these circumstances, section 14A of the Act is manifestly applicable. Disallowance u/r 8D(2)(ii) 31.3.2007 31.3.2008 AVERAGE TOTAL ASSETS AS PER BALANCE SHEET 3,39,98,383 5,34,60,352 4,37,29,368 -C VALUE OF INVESTMENT AS PER BALANCE SHEET 85,65,570 1,47,96,576 1,16,81,073 -B INTEREST PAID 36,25,853 -A DISALLOWANCE U/r.8D(2)(iii) A*B/C = 9,68,545

Disallowance u/r 8D(2)(iii) ½ % of average value of investment=½% of Rs. 1,16,81,073/-

=Rs. 58,405 So, disallowance u/s 14A as per Rule 8D comes to Rs. 10,26,950/- (i.e. Rs. 9,68,545/- + Rs. 58,405/-). The same is added in the total income of the assessee under the head profits and gains of business or profession".

4. The AO, therefore, computed the disallowance of Rs. 10,26,950/- u/s 14A and added the same to the income of the assessee.

3 Mr Gautam Pranlal Shah ITA 6568/M/2012

5. Aggrieved, the assessee approached the CIT(A), before whom, the assessee reiterated his submissions and further submitted, "During the proceedings before, the AR submitted that appellant has not debited any expenditure incurred towards purchasing and maintaining investments in shares and mutual funds to the trading and Profit & Loss Account. Instead, expenses against STT and depositary charges have been debited to the capital / drawings account of appellant. It is further stated that the loans borrowed by the appellant were used purely for the purpose of business and therefore, no disallowance is warranted u/s 14A of the Act. The AR also pointed out that the balance in the capital account of the appellant as on 01.04.2007 is Rs. 1,52,61,244/- and the balance in the investment account as on 31.03.2008 is Rs. 1,47,96,576/-. The AR submitted that as the balance in proprietor's capital account is more than the closing balance in the investment, presumption would arise that interest free funds have been utilized for investments and no disallowance of interest could be made u/s 14A. As regards the claim for set off of carried forward speculation loss against business income, the AR stated that there was a mistake in not claiming such set off in the earlier years. It is also stated that set off of F & O loss against business income has come in effect from AY 2006-07 and this being third year of the amendment, appellant is entitled to claim the same at present".

6. The CIT(A), on consideration of the submissions made by the assessee, observed "I have carefully considered the appellant's submissions. As noted from the assessment order, the only expenditure stated to have relation to the exempt income was interest of Rs. 36.25 lakhs. In this regard, I note that appellant is carrying on business as a proprietor and the capital account balance as on 01.04.2007 was Rs. 1,52,61,244/- and as on 31.03.2008 at Rs. 1,66,10,084/-. As against this, appellant had investments of Rs. 1,47,96,576/- in shares an securities as on 31.03.2008. In other words, the capital balance held by the appellant as on 31.03.2008 is sufficient enough to cover the investments in shares and securities. There are no other personal assets/investments appearing in the balance sheet. In this background, as held by the Hon'ble Bombay High Court in the case of CIT vs Reliance Utilities and Power Ltd. (2009) 313 ITR 340, presumption is clearly established that the investments would be out of interest free funds available to the appellant in the form of this own capital. Therefore, the interest paid on borrowed funds has to be allowed as business expenditure u/s 36(1)(iii) of the Act in Toto. Once the entire interest 4 Mr Gautam Pranlal Shah ITA 6568/M/2012

amount is attributed to the business, there is no case for the AO to treat the same as partly laid out in earning exempt income. In such a situation, there is no room for any disallowance u/s 14A of the Act. Accordingly, the disallowance made by the AO of Rs. 10,26,950/- is hereby deleted".

7. Against this order, the department is in appeal before the ITAT.

8. Before us, the DR vehemently supported the order of the AO, whereas the AR supported the order of the CIT(A)

9. After hearing the arguments from both the sides and after perusing the order impugned before us, we find that the CIT(A) has followed the decision of Hon'ble Bombay High Court in the case of CIT vs Reliance Utilities & Power Ltd, reported in 313 ITR 340 (Bom), wherein the crux has been that if the assessee had interest free funds available then it would be presumed that interest free funds are utilized first and in that view of matter, the assessee would have utilized his interest free funds towards assets yielding exempt income. The CIT(A), therefore, deleted the disallowance made.

10. On going through, we do not find any infirmity in the order of the CIT(A) which we sustain and consequentially reject the sole issue involved in grounds taken in appeal.

11. We therefore dismiss the appeal filed by the department. Order pronounced in the open Court on 2nd January, 2015.

(आर.

आर. सी.

सी. शमाᭅ) (िववेक वमाᭅ) Sd/- Sd/-

लेखा सदःय Ûयाईक सदःय (R C SHARMA) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 2nd January, 2015 5 Mr Gautam Pranlal Shah ITA 6568/M/2012

ूित/Copy to:-

1) अपीलाथȸ /The Appellant. 2) ू×यथȸ /The Respondent. 3) The CIT(A)-27, Mumbai. 4) The CIT, City-16, Mumbai.

5) ǒवभागीय ूितिनिध "जी", आयकर अपीलीय अिधकरण, मुब ं ई/ The D.R. "G" Bench, Mumbai.

6) गाड[ फाईल Copy to Guard File.

आदे शानुसार/By Order / / True Copy / /

उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, मुबं ई Dy./Asstt. Registrar I.T.A.T., Mumbai च᭪हान व.िन.स * *Chavan, Sr.PS