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Income Tax Appellate Tribunal, “SMC” BENCH,
Before: SHRI ABY T. VARKEY, JM
O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee against the order of the Ld. CIT(A)/NFAC, Delhi dated 10.11.2022 for AY. 2013-14.
The grounds of appeal
of the assessee are as under: - “1. Confirming the addition of Rs.4,71,939/- on account of interest paid on Loans borrowed for purchase of Surat Property which was given on Rent. The appellant receive Rent of same property.
2. Confirming the addition of Rs.1,68,000/- on account of deemed Rent of Rs.2,40,000/- of the Flat at Borivali, while the staff of proprietary concern M/s. Manav Jewellers were staying at the same premises.
3. Confirming addition of Rs.1,65,016/- on account of Business Exp. Treated as personal exp.
4. Confirming addition of Rs.3,82,476/- on account of disallowing of interest paid on unsecured loan, while the 2 A.Y. 2013-14 Anoopkumar Devidas Ramalani interest was claimed against Bank interest received Rs.1,10,986/- on Fixed Deposit and Rs.2,71,490/- against amenity charges received for premises given on Rent.
5. Confirming addition of Rs.3,82,476 on account of disallowing of interest paid on unsecured loan, while the borrowed fund has been advanced and interest was claimed against interest received of Rs.1,10,986/-. The appellant has also received interest of Rs.3,07,508/- on loans and advances which has been shown in Business income against which the interest paid should be allowed.”
3. Ground no. 1 is against the action of the Ld. CIT(A) confirming the addition of Rs.4,71,939/- on account of interest paid on loans borrowed for purchase of Surat Property which was given on Rent.
4. Brief facts pertaining to the aforesaid ground are that the assessee has debited Rs.4,71,939/- from the house property income “as interest paid”. The AO taking note of the claim asked the assessee to substantiate as to whether the deduction claimed u/s 24 of the Income Tax Act, 1961 (hereinafter “the Act’) is allowable as per the Act. Pursuant to which assessee replied, but the same was rejected by the AO on the ground that the assessee did not produce the interest certificate in support of his claim as per proviso to section 24(b) of the Act, and so, he disallowed the claim and added it under the head “income from the house property”. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to confirm the action of AO. Aggrieved, the assessee is before this Tribunal.
5. Assailing the action of Ld. CIT(A), the Ld. AR of the assessee submitted that the A.O. has erred in disallowing the interest claimed as expenditure under section 24(b) of the Act without considering the fact 3 A.Y. 2013-14 Anoopkumar Devidas Ramalani that the third proviso to section 24(b) of the Act is not applicable to the Appellant's case. According to Ld. AR, third proviso to section 24(b) specifically mandates for furnishing of the interest certificate from the person to whom any interest was payable on the capital borrowed for the purpose of such acquisition or construction of the property which are referred to in section 23(2) of the Act. And the property in question i.e., property in Surat, has been let out to a party on rental basis, and the said property, by no means, can be considered as property falling within the scope of section 23(2) of the Act. And since the said property is not covered by the provisions of section 23(2) of the Act, the proviso, including the third proviso, to section 24(b) of the Act are not applicable to the present case. It was further submitted that the Appellant has furnished the interest certificate at Pages 31-34 of the paper book. Thus, he pleaded that the disallowance amounting to Rs.4,71,939/- made under section 24(b) of the Act is erroneous and therefore, the same may be deleted.
6. I have heard both the parties and perused the record. The main plea of the assessee is that AO erred in disallowing the claim of deduction of interest for non-production of certificate as per 3rd proviso to section 24(b) of the Act. According to assessee, third proviso to section 24(b) of the Act is not applicable in the facts of the case because the third proviso is applicable for property refered to in sub- section (2) of section 23 of the Act and not to property given on rent. According to the Ld. AR, as per section 24 of the Act, the income chargeable under the head “income from house property” shall be computed after giving the following deduction (i) a sum equal to 30% 4 A.Y. 2013-14 Anoopkumar Devidas Ramalani of the annual value of the property and (ii) where the property has been acquired, constructed, reconstructed with borrowed capital, the amount of any interest payable on such capital. According to assessee his claim falls under section 24(b) of the Act. Thus, the assessee has to only prove that the deduction claimed (interest payable) on such capital for construction/acquiring the property has been borrowed and that the interest is payable on such capital borrowed. I find force in the submission of the assessee that he has made the claim of interest deduction of Rs.4,71,939/- u/s 24(b) of the Act and the AO erred in insisting on producing the certificate as stipulated in third proviso to section 24(b) of the Act. However, in the facts of the case, I am of the view that as per sub-clause (b) of section 24 of the Act, assessee in order to succeed on this issue has to prove by adducing evidence to show that the property in question (Surat) has been acquired with borrowed capital and the interest claimed by him was in respect of such borrowed capital. In this context, I note that the Ld. DR had drawn my attention to page no. 4 of the PB (Balance sheet) and submitted that assessee has borrowed un-secured loan from several persons and has incurred interest expenses, but failed to satisfy before AO that the interest claimed as deduction was for capital borrowed for acquiring/construction/re-construction of the shop at Surat. Be that as it may, it is admitted fact that the relevant documents were not filed before the AO/Ld. CIT(A) and for the first time some additional evidences has been filed. Therefore, this issue is restored back to the file of the AO for denovo adjudication to consider to whether, the deduction claimed u/s 24(b) of the Act is allowable or not. The AO to 5 A.Y. 2013-14 Anoopkumar Devidas Ramalani give proper opportunity to assessee to furnish relevant documents to substantiate that interest claimed by him is pertaining to the capital borrowed for construction/acquiring the property at Surat; and after considering the relevant evidences filed if any, and the submission of assessee, and the discussion (supra), the AO to decide the claim in accordance to law.
7. Ground no. 2 of assessee is against the action of the Ld. CIT(A) confirming the addition of Rs.1,68,000/- on account of deemed rent of Rs.2,40,000/- of the flat at Borivali.
8. The AO noted from perusal of the personal balance-sheet of assessee that he had more than one house property; and further noted that he was not occupying house property/ flat at Borivali (Star Apartments Flat). So he asked assessee as to why he is not offering the deemed lettable value (ALU) of this property for which assessee replied that his employees (of Manav Jewellers) are occupying the flat. Pursuant to which, AO asked the assessee to furnish evidence to prove the fact that his house/flat at star apartment was occupied by staff of Manav Jewellers. But AO noted that the assessee failed to produce any supportive evidences which proves that house was occupied by his employees and he further noted that assessee has not debited any expenses in Profit and Loss account for perquisite in the form of rent- free accommodation provided to the employees and also assessee has failed to establish employer-employee relationship about the person who was supposed to be residing in that apartment. Thus, AO proceeded to compute the annual value of the flat (Star Apartments, Borivali) on the basis of fair rental value of the flat which he computed 6 A.Y. 2013-14 Anoopkumar Devidas Ramalani at Rs.2,40,000/- and after giving deduction of Rs.72,000/- he computed the ALV of the house property at Rs.1,68,000/- which action of AO has been confirmed by Ld. CIT(A).
9. Assailing the action of AO, the Ld. AR, submitted that AO was not justified in making the notional addition in respect of the flat situated at Star Apartment, Borivili without considering the fact that the said flat was never let-out, and no rental income was derived from it to Appellant. Further, according to him, the said flat was being utilized by the employees of the proprietary concern for residential purpose and therefore, the same is directly attributable to the business of the Appellant. And according to assessee, as per the provisions of section 22 of the Act, the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax shall be chargeable to income-tax under the head "Income from house property" and so submits that the said flat constitutes as business property of the Appellant and therefore, action of AO is erroneous. And for such a preposition, he relies on the decision of the Hon'ble Madras High Court in the case of CIT v. New India Maritime Agencies (P.) Ltd. [1994] 207 ITR 392 (Madras). In view of the above, the Appellant submits that the addition under section 23 of the Act is not justified and the same be deleted. The Ld. DR relies on the decision of the Ld. CIT(A) and does not want this Tribunal to interfere with the impugned action of Ld. CIT(A).
7 A.Y. 2013-14 Anoopkumar Devidas Ramalani 10. I have heard both the parties and perused the records. It is noted that the assessee has more than one house property which fact is discernible from perusal of his personal balance-sheet. On a query from AO as to why assessee is not offering income from house property, assessee claimed that house/flat (Star Apartment) has not been given on rent rather it is occupied by his employees (of Manav Jewellers). When asked by the AO to prove his contention, the assessee failed to place any supporting evidence that star apartment flat was occupied by his employees. Moreover, AO found that assessee has not debited any expenses in P & L for perquisites provided to employee. So, AO computed the ALV of the house property. On appeal, the Ld. CIT(A) observed that only one property can be claimed by assessee as self-property under the Act and noted that assessee’s claim that flat was occupied by employees was not accepted by AO because the assessee failed to prove the fact by filing any supporting evidence. The action of AO/Ld. CIT(A) cannot be faulted because before this Tribunal also the assessee failed to produce any evidence to substantiate that Star Apartment was occupied by the employee of the assessee. And since the ALV computed by AO has not assailed, in the absence of any evidence as discussed, the impugned action of Ld. CIT(A) is confirmed and this ground of appeal of assessee is dismissed.
11. Ground no. 3 is against the action of Ld. CIT(A) confirming addition of Rs.1,65,016/- which was claimed by assessee as business expenditure but disallowed as personal expenditure.
8 A.Y. 2013-14 Anoopkumar Devidas Ramalani
Brief facts are that the assessee is an individual and proprietor of proprietary concern M/s. Manav Jewellers. And in the year under consideration, he has entered once, into a bullion transaction on 23.11.2012 wherein he purchased and sold three (3) Kg. of bullion on the same day. In this transaction, the assessee has shown profit of Rs.1,38,307/- which was shown as business income and also debited business expenditure of Rs.2,74,270/-. The AO noted that the assessee has shown to have incurred expenses for the following purposes to the tune of Rs.2,00,770/-. And, he disallowed out of it total amount of Rs.1,65,016/- as under: - Sr. No. Head of Expenses Amount Dr. in P & L) Disallowance made (Rs.) (Rs.) 1 Car Insurance Expenditure 20727 17036 2 Conveyance Expenditure 4429 3640 3 Depreciation on motor cars 116953 96126 4 Mobile phone charges 10520 8647 5 Motor car expenses 24000 19726 6 Shop Expenditure 4931 4053 7 Telephone charges 19210 15789 Total 2,00,770 1,65,016
The AO’s reason for disallowance was that in the entire year assessee has only transacted once in bullion on a single day and has claimed expenses of telephone, mobile, conveyance, car etc for entire year, which according to him was unreasonable; and that expenses are not incurred wholly and exclusively for business purpose; and that the assessee failed to justify the claim though asked to by AO vide notice dated 04.01.2016. Therefore, AO was of the opinion that personal element in such expenditure cannot be ruled out and he partly disallowed the claim.
9 A.Y. 2013-14 Anoopkumar Devidas Ramalani 14. Facts stated above are not repeated for the sake of brevity. Assessee an individual who is in the business of jewellery has transacted in gold/bullion albeit for a day in the relevant year and has shown income from it to the tune of Rs.1,38,307/-; and has claimed expenditure of Rs.2,74,270. And the AO has disallowed Rs.1,65,016/- out of such expenditure mainly on the ground that assessee has carried out business/trading in bullion only for a day and therefore assessee’s claim of expenditure is unreasonable and unjustified. Moreover, according to AO, personal expenses cannot be ruled out in the expenditure claimed viz telephone, mobile, motor car expenses etc. Therefore, he allowed only expenditure of Rs.1,09,254/- (Rs.2,74,270/- - Rs.1,65,016/-) and thus disallowed Rs.1,65,016/-. One of the reason given by AO/Ld. CIT(A) to disallow the expenditure cannot be countenanced for the simple reason that expenditure in course of the trade which is un-remunerative is a proper deduction, if wholly and exclusively made for the purpose of the business [Refer Hon’ble Supreme Court decision in CIT Vs. Rajendra Prasad Moody 115 ITR 519 (SC)]. However, assessee is a proprietor of a proprietary concern, so personnel element in expenses claimed by assessee viz telephone, mobile, conveyance etc cannot be ruled out in the absence of evidence to show that the expenditure claimed was incurred wholly and exclusively for the purpose of business. So out of expenses listed out (supra) of Rs.2,00,770/-, taking into consideration the fact that the personal expenditure may have been incurred for the aforesaid expenses, the disallowance made by the AO is restricted to 20% of 10 A.Y. 2013-14 Anoopkumar Devidas Ramalani such expenses. Balance amount is directed to be deleted and assessee’s ground is partly allowed.
Ground no. 4 & 5 is against the action of the AO confirming the addition of Rs.3,82,476/- on account of disallowing of interest paid on unsecured loan while interest was claimed against bank interest of Rs.1,10,986/- on Fixed Deposit and Rs.2,71,490/- against Amenity Charges received for premises given on rent. Or in the alternate, the assessee has also received interest of Rs.3,07,508/- on loans & Advances which has been shown as Business Income, against which the interest paid should be allowed.
Facts in respect of disallowance of interest amounting to Rs.3,82,476/- claimed under section 57(iii) of the Act, the A.O. observed that the Appellant could not establish the fact that the borrowed funds had been utilized for the purpose of repayment of loan for acquiring the income generating property under section 56 of the Act by proving the direct nexus between the interest claimed under section 57(iii) of the Act with the amenities income declared under the head 'Income from other sources' under section 56 of the Act. Thus, the A.O. disallowed the interest amounting to Rs. 3,82,476/- claimed u/s 57(iii) of the Act, which action of AO has been confirmed by Ld. CIT(A). Aggrieved, the assessee is before this Tribunal.
Assailing the action of Ld. CIT(A), the Ld. AR submits that the Appellant had availed certain loans from Kush Commodities, HDFC Bank and Manav Jewellers to acquire property at J.P. Infrastructure property, Surat which was let out on rental basis to M/s. Trent Ltd. At the time of letting out the said premises, two separate agreements were 11 A.Y. 2013-14 Anoopkumar Devidas Ramalani executed: (i) lease agreement and (ii) amenities agreement (Pages 101 107 and 108 128 of the paper book). According to Ld. AR, AO’s action of attributing Rs.8,15,628/- to the lease of property was not justified. Hence, the disallowance made by the A.O. ought to be deleted. In addition to the above, the Appellant submits that he has been consistently applying the same computation while declaring his income for A.Y. 2008-09 and 2009-10. According to him, the A.O., for A.Y. 2008-09 and 2009-10, has accepted deduction claimed by the Appellant under section 57(iii) of the Act by passing assessment orders under section 143(3) r.w.s. 147 of the Act without making any additions or disallowances for those respective years. In order to substantiate the same, the Applicant furnished the statement of income, personal capital account and Balance Sheet as well as the assessment order for the A.Y. 2008- 09 and 2009-10 (annexed at Pages 294 - 311 in the paper book II i.e., Additional evidence). Thus, according to him, in absence of any change of fact or law, principle of consistency, needs to be adhered to, and the disallowance made under section 57(iii) be deleted. Per contra, the Ld. DR supports the action of Ld. CIT(A) and pointed out that for claiming deduction under the amenity charges the assessee has not filed any evidence. Further, according to him, a perusal of the copy of amenity agreement would show that assessee is receiving amenity charges, but there is no proof to show that assessee has incurred any expenditure which was laid out or expended wholly and exclusively for the purpose of making or earning such an income u/s 57(iii) of the Act. Therefore, the AO/Ld. CIT(A) have disallowed the claim of interest. Further, according to him, a perusal of the 12 A.Y. 2013-14 Anoopkumar Devidas Ramalani assessment order passed u/s 147/143(3) of the Act would reveal that re-opening was pursuant to search in Mukesh Chokshi premises and for accommodation entry in the form of purchase of shares of M/s. Alchemist Ltd. and AO has not scrutinized the income offered by assessee on other heads. So according to Ld. DR, these orders of AO in earlier years, cannot be binding, since res-judicata is not applicable in revenue proceeding. So he does not want this Tribunal to interfere.
I have heard both the parties and perused the records. I note that assessee claimed deduction of Rs.3,82,476/- claimed u/s 57 of the Act against the interest income of Rs.3,07,508/- and the amenity charges income of Rs.7,81,932/- u/s 56 of the Act i.e. “income from other sources”. The AO asked the assessee to prove the nexus of interest expenses for the purpose of earning “income from other source” which AO notes that assessee couldn’t prove by stating that assessee had claimed to have incurred interest expenditure of Rs.3,82,476/- from three individual [(i) Ashok Raimalani (HUF) Rs.1,74,061/- and M. K. Sons Fine Jewels Pvt. Ltd Rs.1,61,667/-] and that assessee failed to show that the amount borrowed from the aforesaid persons were laid out or expended wholly and exclusively for the purpose of earning any “income from other sources”. In other words, assessee failed to prove the nexus of borrowing with earning from amenities & FD. Therefore, he disallowed the interest claim. The assessee before this Tribunal could not demonstrate by adducing any evidence to show that the borrowing from the aforesaid three (3) persons were laid out or expended wholly and exclusively for the purpose of making or earning of “income other sources” i.e. amenity charges and FD interest. Unless 13 A.Y. 2013-14 Anoopkumar Devidas Ramalani assessee shows that purpose of borrowing from three persons (supra) was for making or earning amenity income or interest from FD, the claim of interest expenses to these persons to the tune of Rs.3,82,476/- cannot be allowed and so it is confirmed.
Coming to the alternate contention assessee that since the AO in the assessments made u/s 147/143(3) of the Act for earlier years ie. AY. 2008-09 and AY. 2009-10 has accepted the interest deduction u/s 57(iii) of the Act and as per Rule of consistency the claim should be allowed, cannot be accepted for the reasons that in those orders [passed by the AO u/s 147/143(3) of the Act] which were re- assessments made after re-opening the assessment pursuant to the search happening in premises of Mukesh Chokshi, and the AO had looked into the accommodation entry in the form of purchase of shares of M/s. Alchemist Ltd. From perusal of the order, it is not discernable as to whether the AO has scrutinized the deduction claimed u/s 57(iii) of the Act and unless the AO had securitized the claim which fact assessee failed to demonstrate before this Tribunal, such a contention of the assessee cannot be accepted. Therefore, ground nos. 4 & 5 are dismissed.