Rashmikant Lalbhai Dalal,Huf, ... vs Assessee

Rashmikant Lalbhai Dalal HUF ACIT Sumel-II, Nr. Gurudwara Vs Circle-7, Ahmedabad Ahmedabad PAN : AADHR 6105 G

अपीलाथ)/ अपीलाथ)/ (Appellant) ू+यथ) यथ)/ थ)/ (Respondent)

Assessee(s) by : Shri Sunil H. Talati, AR Revenue by : Shri Nimesh Yadav, Sr. DR

सुनवाई क- तार.ख/ / Dateof Hearing : 16/04/2015 घोषणा क- तार.ख / Date of Pronouncement: 08/05/2015

आदे श/O R D E R

PER SHRI KUL BHARAT, JUDICIAL MEMBER:-

This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-VI, Ahmedabad ("CIT(A)" in short) dated 08.06.2011 for the Assessment Year 2007-08.

2. The assessee has raised the following grounds of appeal:-

1. The learned C.I.T. (Appeals) has erred in confirming the disallowance of interest by working out the formula, incorrectly holding that borrowed funds were used both for business and non-business purpose. The disallowance according to the said formula comes to Rs.5,60,227/-, which is totally incorrect, excessive, unreasonable and as not envisaged under the Income Tax Act It is submitted that the directions given for disallowance of interest on the basis of formula being incorrect and illegal the same be directed to be deleted.

ITA No. 2026/Ahd/2011 Rashmikant Lalbhai Dalal HUF vs. ACIT For AY 2007-08 2

2. Without prejudice to the above it is submitted that on the facts and circumstances of the case the appellant has given complete details to the Assessing Officer as well as C.I.T. (Appeals) establishing the nexus between the fund borrowed and utilization of the same for business purpose and separate utilization of interest-free funds given on interest-free advances. In view of this the entire direction and decision of learned C.I.T. (Appeals) deserves to be reversed and the addition sustained to that extent be deleted.

3. The Order passed by the learned C.I.T. (Appeals) is bad in law and contrary to the provisions of law and facts. It is submitted that the same be held so now.

4. Your appellant craves leave to add, alter and/or to amend all or any of the grounds before the final hearing.

3. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") was framed vide order dated 29.12.2009. While framing the assessment, the Assessing Officer made various additions including the addition made on account of disallowance of interest expenditure amounting to Rs.13,89,269/-. Apart from this addition, the Assessing Officer also made addition on account of capital gain amounting to Rs.3,83,664/-. Against this, the assessee filed an appeal before the ld.CIT(A) who, after considering the submissions of the assessee, partly allowed the appeal. While partly allowing the appeal, the ld. CIT(A) confirmed the disallowance of interest expending amounting to Rs.13,89,269/-.

4. The ld. Counsel for the assessee submitted that during the year under appeal, the assessee-HUF realized Rs.1,11,16,598/- by liquidating the assessee's holding in the shares of a group company namely Diamond Crucible Co. Pvt. Ltd. Similarly, other family members who hold the shares of Diamond Crucible Co. Pvt. Ltd. also sold their investment in the shares of this company. The funds so accumulated by the family members were ITA No. 2026/Ahd/2011 Rashmikant Lalbhai Dalal HUF vs. ACIT For AY 2007-08 3

advanced to the HUF for making investments and to promote group business and in turn the HUF paid token interest ranging from 2% to 7% to the family member-depositors. During the year under consideration, the assessee-HUF advanced a net sum of Rs.1,98,49,983/- to another group company - namely Diamond Digital Solutions Pvt Ltd for its business purposes. Since that funds were advanced interest-free, the Assessing Officer proportionately disallowed interest expenses of Rs.13,89,269/- out of total interest Rs.18,11,142/- holding that the assessee was not having enough own fund for advancing the same interest-free to Diamond Digital Solutions Pvt Ltd. He submitted that the details of interest paid to the relatives and family members were available as per the statement of computation of income submitted with the written submission. On the loan amount received of Rs.5,98,75,633/-, the assessee has made payment of Rs.17,28,246/- as interest to family members/relatives. He submitted that a loan of Rs.1,02,98,330/- was received by the assessee from Smt. Janki Rashmikant as interest-free and average rate of interest on other borrowings from family members was 2.84% which is significantly much less than the bank rate prevailing at the relevant time. He also submitted that out of Rs.1,98,49,983/- as advanced to the group company, the assessee has received interest free loan from Smt. Janki Rashmikant of Rs.1,02,98,330/-. He further submitted that the advances were made for the business purposes.

5. On the contrary, ld. Sr. DR. supported the orders of the lower authorities and submitted that ld. CIT(A) has considered the submissions of the assessee and gave a finding that the assessee could not establish the nexus between the fund borrowed and utilization of the same for business purposes.

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6. We have heard the rival submissions, perused the orders of the lower authorities and material available on record. We find that the ld. CIT(A) has rejected the grounds of the assessee while holding as under:-

"2.3 have considered the facts of the case, assessment order and appellant's submission. Assessing officer disallowed interest on borrowed funds on the ^ground that the part borrowed fund has been diverted to non-business use by giving interest free advances to sister concerns. Assessing officer as well as appellant submitted detailed analysis of funds borrowed and deployed. During appeal, appellant was specifically asked if there was direct nexus between borrowed fund and utilisation of the same for the purpose of business. Appellant could not establish direct nexus between funds borrowed and utilisation of the same for business purpose. It is therefore not in dispute that appellant had mixed use of funds for both business and non-business purposes and accordingly proportionate interest attributable to non-business use is disallowable under section 36 (1) (iii) of IT act. The disallowance of interest for non-business use is therefore confirmed in principle.

However assessing officer instead of disallowing proportionate interest for non-business use of funds, disallowed entire interest claimed by the appellant reduced by proportionate interest on interest free funds, This is not correct way of working proportionate disallowance of interest. Since borrowed funds were used for both business and non-business purposes, the effective rate of interest for total funds is to be multiplied by diverted funds to get disallowable interest. The formula to be used to compute interest disallowance can be as under-

Amount of interest paid * non-business diverted funds Total funds as per balance sheet

Assessing officer is directed to re-compute the interest disallowance with the aforesaid formula, Disallowance of Interest worked out as per this is confirmed."

7. Before us, the ld. Counsel for the assessee submitted that the interest free advances amounting to Rs.1,98,49,983/- was advanced by assessee- HUF to another group company namely Diamond Digital Solutions Pvt Ltd., against which the assessee had also received an interest free advance amounting to Rs.1,02,98,330/- from Smt. Janki Rashmikant. The ld. Counsel for the assessee submitted that both the authorities below failed to ITA No. 2026/Ahd/2011 Rashmikant Lalbhai Dalal HUF vs. ACIT For AY 2007-08 5

appreciate the fact that the assessee was having sufficient interest bearing funds. He submitted that under the facts of the present case, the ld. CIT(A) was not justified in confirming the disallowance by directing the Assessing Officer to re-compute the interest disallowance as per the formula laid down in his order. He also drew our attention to page No.10 of the paper- book, wherein the assessee has enclosed a list of persons to whom the assessee had paid interest at a different rate. From the list, it is evident that the assessee had paid different rate of interest to S/Shri/Smt Bhubali Shantilal Shah, Mohan M. Bhatia, Babliben L. Bhatia, Rashmikant L. Dalal, Yuthika R. Dalal, Sharadaben L. Shah, etc.. and in respect of Aadit Rajat Dalal, Chakubhai Hemchand, Ishan Shrujal Patel, Janki R. Patel & Shakuntalal L. Vaparva, these were interest free advances. The ld. Counsel also drew our attention to the interest received during the year under reference. The assessee has also received interest from Mathuresh Construction, Kushi Infotech, Troikaa Exports Pvt Ltd, Shyam Marketing, Tushal Dalal, Paresh J. Shah etc.. However, in respect of Arrow Coated products, Diamond Digital Solution Ltd and Kashyapbhai Mehta, the advances were given interest free. In respect of Center Point Maintnance Deposits, it was a security deposit. The contention of the assessee is that the interest earned exceeds to the interest paid and net interest income earned is Rs.5,66,784/-. Therefore, he submitted that the authorities below were not justified in making the additions. We find that both the authorities below have not given any reasoning for not accepting the explanation of the assessee. Therefore, we set aside the order of the CIT(A) and restore this issue to his file for deciding the issue afresh. The ld. CIT(A) would also verify the fact about the advances given to Diamond Digital Solutions Pvt Ltd out of sales proceeds of the share, fixed deposits with banks from family members on which the token interest ranging from 2% to 3% has been paid ITA No. 2026/Ahd/2011 Rashmikant Lalbhai Dalal HUF vs. ACIT For AY 2007-08 6

and other borrowed funds utilized; and thereafter, decide the issue afresh. Thus, the ground of appeal of the assessee is allowed for statistical purposes.

8. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the Court on 8th May, 2015 at Ahmedabad.

Sd/- Sd/-

( N.S. SAINI) (KUL BHARAT) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 08/05/2015 *Biju T. षत Copy आदे श क- ूितिल2प अमे2षत/ of the Order forwarded to : 1. अपीलाथ) / The Appellant 2. ू+यथ) / The Respondent. 3. संबंिधत आयकर आयु4 / Concerned CIT 4. आयकर आयु4(अपील) / The CIT(A)- II, Baroda

5. 2वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड& फाईल / Guard file.

/ BY ORDER, आदे शानु सार

TRUE COPY Dy./Asstt.Registrar) उप/सहायक पंजीकार ( उप/ अिधकरण, अहमदाबाद / आयकर अपीलीय अिधकरण, ITAT, Ahmedabad