Monali Developers , Baroda vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL " D " BENCH, AHMEDABAD (BEFORE SHRI SHAILENDRA Kr. YADAV, J.M. & SHRI ANIL CHATURVEDI, A.M.)

I.T. A. No. 737 /AHD/2011 (Assessment Year: 2007-08)

M/s. Monali Developers 2nd V/S Addl. C.I.T., Circle-2, Floor, Prestige Complex, Baroda Opp. Bank of India, Race Course Circle, Baroda

(Appellant) (Respondent)

PAN: AACFM9086E

Appellant by : Smt. Urvashi Sodhan, A.R. Respondent by : Smt. Sonia Kumar, Sr. D.R.

(आदे श)/ORDER

Date of hearing : 23-04-2015 Date of Pronouncement : 07 -05-2015

PER SHRI ANIL CHATURVEDI,A.M.

1. This appeal filed by the Assessee is against the order of CIT(A)-II, Baroda dated 14.12.2010 for A.Y. 2007-08.

2. The relevant facts as culled out from the material on record are as under.

3. Assessee is a partnership firm stated to be deriving income from house property and income from other sources. Assessee filed its return of income 2 ITA No 737/AHD/2011 . A.Y. 2007-08 for A.Y. 2007-08 on 31.07.2007 declaring total income of Rs. 1,16,79,930/-. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) vide order dated 30.12.2009 and the total income was determined at Rs. 1,36,22,700/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who vide order dated 14.12.2010 granted partial relief to the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us and has raised the following ground;-

1. The ld. CIT(A) erred in confirming addition of Rs. 1,19,978/- on account of disallowance of interest on advances made to Nitaben M. Patel.

2. The ld. CIT(A) erred in disallowing a sum of Rs. 7,82,778/- u/s. 24(b) of the Act.

1st ground is with respect to addition on account of disallowance of interest.

4. During the course of assessment proceedings, A.O noticed that Assessee has advanced interest free loan aggregating to Rs. 1,70,65,846 to one of the partners, Smt. Nitaben Patel. He also noticed that during the year, Assessee had borrowed funds on which interest was paid by the Assessee and had also charged interest on the advances given to other partners. The Assessee was therefore asked to explain as to why proportionate interest on the interest free amount advanced to Nitaben Patel not be disallowed to which Assessee interalia submitted that Smt. Nitaben Patel was having credit balance of Rs. 21,84,154/- on 01.04.2006 which was repaid on 22.04.2006. It was further submitted that the amount have been advanced from ICICI bank which is a current account and on which no interest has been paid by the firm. The submission of the Assessee was not found acceptable to the A.O as he was of the view that the amount advanced to Smt. Nitaben Patel out of the 3 ITA No 737/AHD/2011 . A.Y. 2007-08 current account balances does not prove that the amount advanced was out of the surplus funds. He was further of the view that since all the funds were parked in a common bank account, onus was on the Assessee to prove that the funds which have been advanced have direct nexus with the surplus funds. He therefore concluded that the Assessee was not in a position to prove as to Assessee did not charge any interest on the amount advanced to Smt. Nitaben Patel. He thereafter, on the basis of the prevailing bank rate of 12% worked out the interest expenses on the amount advanced to Nitaben Patel and disallowed Rs. 1,19,978/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

2.3. I have considered the submissions of the Authorized Representative and the order of the Assessing Officer. There is no dispute that amount has been paid from the current account which also carries the borrowed fund. The appellant has failed to establish that interest free advance from the current account which does carry interest burden have been utilized exclusively for the purpose of business. On the facts of the appellant's case it is apparent that borrowed funds have been diverted to non-business purpose. This ground is rejected.

5. Aggrieved by the order of ld. CIT(A), Assessee is now in appeal before us.

6. Before us, ld. A.R. reiterated the submissions made before A.O and ld.

CIT(A).She further submitted that the amount has been advanced from the current account maintained with ICICI Bank and no interest is paid on such current account. She also pointed to the bank copy of account maintained with ICICI Bank bearing no. 5/3285 which was placed at page 56 to 61 of the paper book. She further submitted that Assessee has interest free funds and no borrowed funds have been used for advancing the loan and therefore 4 ITA No 737/AHD/2011 . A.Y. 2007-08 no disallowance of interest could be made. She also placed reliance on the decision of Gujarat High Court in the case of Raghuvir Synthetics reported in 354 ITR 222 (Guj). She therefore submitted that no disallowance on account of interest was called for. Ld. D.R. on the other hand submitted that the onus was on the Assessee to prove that the amount which has been advanced is out of interest free funds and not borrowed funds which the Assessee has not proved. She thus supported the order of A.O and ld. CIT(A).

7. We have heard the rival submissions and perused the material on record. Before us, one of the Assessee's submission is that Rs. 21.84 lacs paid to Nitaben Patel was the loan that was repaid to her on 22.04.2006 and that the loan is out of interest free funds and not out of borrowed funds. Before us, no copy of loan account of Nitaben Patel for the year under review has been placed on record and therefore the submission of the Assessee that the amount is interest free funds could not be verified at our end. We are therefore of the view that the submission of the Assessee needs verification at the end of A.O. We therefore remit the issue to the file of A.O to decide the issue afresh in the light of the contentions raised by the Assessee and in accordance with law. Needless to state that A.O shall grant adequate opportunity of hearing to the Assessee. Assessee is also directed to furnish all the required details called for by the A.O promptly. Thus this ground of Assessee is allowed for statistical purposes.

2nd ground is with respect to disallowance u/s. 24(b) of the Act.

5 ITA No 737/AHD/2011 . A.Y. 2007-08

8. During the course of assessment proceedings, A.O noticed that Assessee has claimed interest payment of Rs. 68,27,226/- on account of borrowed capital u/s. 24(b) of the Act. The Assessee was asked to justify its claim to which Assessee interalia submitted that Assessee has borrowed loan from UTI Bank and from others also and the amount was utilized for the purpose of acquisition of property and repayment of loan taken earlier for the acquisition of property. It was therefore submitted that the borrowed money has been utilized towards repayment of loan and therefore the interest has been rightly claimed. A.O on perusing the details furnished by the Assessee noticed that out of the amount borrowed from UTI bank, the amount used towards repayment of borrowed capital or purchase of property was only Rs. 3,56,35,053/-. The submission of the Assessee that the entire borrowed funds were utilized for acquisition of property was not found acceptable to the A.O as he was of the view Assessee could not prove and substantiate as how the borrowed capital was used for the purpose of acquisition of property. He thus considered Rs. 93,64,947/- (being the difference between the loan amount received from UTI Bank and amount used for purchase of property) as being not utilized towards the repayment of capital and hence the interest on the aforesaid amount of Rs. 7,82,778/- was disallowed. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who decided the issue by holding as under:-

3.1. The Assessing Officer has disallowed the above amount on account of proportionate interest by making the details analyses of the appellant's account. The Assessing Officer has noted that out of borrowed capital of Rs.4.50 crores from UTI Bank, the appellant had used this amount towards repayment of loan from the partners and purchase of new property. The Assessing Officer has given the complete working on page~4 of the assessment order from where it is seen that out of the total borrowing of Rs.4.50 crores only an amount of R.s.3.24 crores were used for repayment of loan or purchase of 6 ITA No 737/AHD/2011 . A.Y. 2007-08 property and the balance amount of Rs.93,64,947/- was not used for the purpose of business. The Assessing Officer after considering the appellant's objection has disallowed an amount of Rs.7,82,778/-.

3.2. Before me the appellant has objected to the same on the ground that the amount has been used for the purpose of business.

3.3. I have considered the submissions of the Authorized Representative and the order of the Assessing Officer. The appellant has not been able to point out any error in the working of the Assessing Officer regarding Rs.93,64,947/- as not being used for the purpose of business. It has been stated that the amount has been indirectly used for the purpose of business. This is a vague reply business not supported by the facts on record and therefore this ground is dismissed.

9. Aggrieved by the order of ld. CIT(A), Assessee is now in appeal before us.

10. Before us, ld. A.R. reiterated the submissions made before A.O and ld. CIT(A) and on the other hand ld. D.R. submitted that Assessee has not discharged the onus cast upon it to demonstrate that the amount was used for repayment of loan and thus supported the order of A.O and ld. CIT(A).

11. We have heard the rival submissions and perused the material on record. Before us, it is Assessee's submission that the amount borrowed from UTI Bank was utilized towards the repayment of loan and was also used for the project. On the other hand it is A.O's contention that out of the loan amount of Rs. 4.50 crore received, Rs. 93,64,947/- was not used towards the acquisition of property or for the purchase of property on which house property income was offered to tax. Before us, apart from making a statement that amount received from UTI Bank has been utilized for acquisition of property, no evidence or cash flow statement to substantiate 7 ITA No 737/AHD/2011 . A.Y. 2007-08 its stand has been placed on record. Further, even the sanction letter of UTI Bank sanctioning the loan which would contain the terms and conditions of the loan has also not been placed on record. We further find that ld. CIT(A) has also by a very cryptic order upheld the order of A.O. In view of these facts, we are of the view that the submission made by the Assessee and the factual aspect needs to be re-examined. We therefore set aside the issue to the file of A.O to decide the issue afresh after considering the submissions of the Assessee and in accordance with law. Needless to state that A.O shall grant adequate opportunity of hearing to the Assessee. Assessee is also directed to promptly furnish all the required details called for by the A.O. Thus the ground of Assessee is allowed for statistical purposes.

12. In the result, the appeal of Assessee is allowed for statistical purposes.

Order pronounced in Open Court on 07 - 05 - 2015.

Sd/- Sd/- (SHAILENDRA Kr. YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad. TRUE COPY Rajesh

Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) - 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad