M/S VRUSHAL TRADING PVT LTD.,MUMBAI vs. ITO 11 (3)(3), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL "F" BENCH, MUMBAI SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER M/s Vrushal Trading Pvt. Ltd., 607, A-Wing, Atrium Chakala, Andheri Kurla Road, Andheri (E), Mumbai - 400069 [PAN: AAACV2730K] ……………… Appellant Vs ITO-11(3)(3), Room No. 429, 4th Floor, Aaykar Bhavan, M.K. Road, Mumbai - 400021 ……………. Respondent Appearances For the Appellant/Assessee : Shri Rajen Damani For the Respondent/Department : Ms. Vranda U Matkarni Date of conclusion of hearing : 20.07.2022 Date of pronouncement of order : 17.10.2022 O R D E R Per Rahul Chaudhary, Judicial Member: 1. By way of the present appeal the Appellant has challenged the order, dated 23.10.2019, passed by the Ld. Commissioner of Income Tax (Appeals)-18, Mumbai [hereinafter referred to as „the CIT(A)‟] for the Assessment Year 2012-13, whereby the Ld. CIT(A) had partly allowed the appeal filed by the Appellant against the Assessment Order, dated 16.03.2015, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟).

Assessment Year: 2012-13 2. The Appellant has raised the following grounds of appeal:

1. “The Ld. Commissioner of Income Tax (Appeals) (“the CIT”) has partly allowed the appeal but erred both on facts and in law in computing the Total Income at Rs. 69,90,838/- as against the Returned Income of Rs. 5,85,650/-. It is a case of a high-pitched assessment; 2. The Ld. CIT Appeals has recognized the fact that the Assessee has been persistently carrying on the business of trading in securities and consultancy services over the last many years as shown in the Profit & Loss Account including that in the previous year and has allowed the Appeal in favor of the Appellant as per Para 6.2.3, whereas NOT allowed corresponding business expenditure.

Assessment Year: 2012-13 7. The Appellant submits that the Assessing Officer be directed to delete the addition so made by him.“ 3. Brief facts of the case are that the Appellant, a private limited company, filed return of income for the Assessment Year 2012- 13 on 28.09.2022. The case of the Appellant was selected for scrutiny. For the relevant assessment year, the Appellant has disclosed business income of INR 9,24,204/-, and after setting off brought forward loss of INR 3,38,557/-, had offered net business income of INR 5,85,647/- to tax. The Appellant had represented that the Appellant was engaged in the business of consulting, trading in shares/securities, investment and finance activities. During the assessment proceedings, the Assessing Officer, after examining the consultancy income earned in the earlier assessment years, formed a view that the Appellant did not carry out any justifiable business activity. Ongoing through the Profit & Loss Account of the Appellant, the Assessing Officer noted that out of INR 92,78,148/- credited to the Profit & Loss Account only the consultancy fees of INR 18,000/- and the Income from Future & Options of INR 1,64,588/- were in the nature of Business Income. According to the Assessing Officer the interest income received on fixed deposit (INR 71,15,377/-) and other interest income (INR 68,446/-) were in the nature of Income from Other Sources, whereas dividend income (INR 19,11,737/-) was exempt from tax. The Assessing Officer noted that the Appellant had debited expenses aggregating to INR 84,61,374/- to the Profit & Loss Account to earn income. In view of the aforesaid, the Assessing Officer proceeded to examine the claim for deduction made by the Appellant under specific heads of expenditure offered by the Appellant. Not being satisfied with the explanations furnished by the Appellant, the Assessment Year: 2012-13 Assessing Officer proceeded to disallow expenses of INR 58,27,496/- (INR 50,29,340 + INR 7,98,156/-) debited to the Profit & Loss Account and claimed by the Appellant as expenses for earning Business Income. In addition, the Assessing Officer also made disallowance of INR 2,39,138/- in addition to the suo motu disallowance of INR.9,60,180/- made by the Appellant under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 („the Rules‟). The Assessing Officer completed assessment under Section 143(3) of the Act, vide order dated 16.03.2015 at total income of INR 69,60,838/- as against the returned income of INR 5,85,650/-.

4. Being aggrieved, the Appellant preferred the appeal before CIT(A) against the Assessment Order, dated 16.03.2015 which was disposed off vide order dated 23.10.2019. The CIT(A) overturned the findings returned by the Assessing Officer that the Appellant did not undertake any justifiable business activity observing that the Appellant had been continuously carrying on business activity and earning consultancy income from earlier years. However, the CIT(A) confirmed the disallowance of expenses of INR 58,27,496/- (INR 50,29,340 + INR 7,98,156/-) made by the Assessing Officer invoking provisions of Section 37 of the Act holding that there was no nexus between the aforesaid expenditure and Business Income consisting of consultancy fees of INR 18,000/- and the Income from Future & Options of INR 1,64,588/- offered to tax. The CIT(A) also confirmed the order of Assessing Officer to the extent of holding that interest income as income taxable under the Income from Other Sources (as opposed to Business Income as contended by the Appellant). In this regard, the CIT(A) relied upon the decision of the Tribunal in the case of the Appellant for the Assessment 4 Assessment Year: 2012-13 Year 2011-12 [ITA No. 6200/Mum/2016, pronounced on 13.03.2019]. The CIT(A) also dismissed Appellant‟s challenge to the disallowance of INR 2,39,138/- made by the Assessing Officer under Section 14A of the Act read with Rule 8D of the Rules.

5. Being aggrieved, the Appellant has preferred the present appeal challenging the order, dated 23.10.2019, passed by the CIT(A) on the grounds reproduced in paragraph 2 above.

6. The Ld. Authorised Representative for the Appellant appearing before us reiterated the submissions made before CIT(A) reproduced in paragraph 5 of the order passed by the CIT(A). Per contra, the Ld. Departmental Representative relied upon the order of the Tribunal in the case of the Appellant for the immediately preceding Assessment Year 2011-12 [ITA No. 6200/Mum/2016] as well as the order passed by the Assessing Officer and the CIT(A).

Ground No.1 7. Ground No. 1 is general in nature and therefore does not require adjudication.

Ground No. 2 to 5 8. Ground No. 2 to 5 pertain to disallowance of expenditure aggregating to INR 58,27,496/- and are, therefore, taken up together hereinafter.

8.1. We have considered the rival submissions and perused the material on record including the orders passed by the authorities below. For the relevant assessment year the Appellant had aggregated INR 92,78,148/- to the Profit & Loss Account against which the Appellant had claimed deduction for expenses 5 Assessment Year: 2012-13 aggregating to INR 84,61,374/-. The Assessing Officer after examining the details of amounts credited to the P&L Account had concluded that only consultancy fee of INR 18,000/- and Income from Future & Options of INR 1,64,588/- was in the nature of business income, whereas Interest income received on fixed deposit (INR 71,15,377/-) and other interest income (INR 68,446/-) were taxable under the head „Income from Other Sources‟. The CIT(A) had confirmed the aforesaid findings of the Assessing Officer by relying upon the decision of the Tribunal in the case of the Appellant for the Assessment Year 2011-12 [ITA No. 6200/Mum/2016, pronounced on 13.03.2019] , wherein the Tribunal had held as under: “5. We have carefully heard the rival submissions and perused relevant material on record. After thoughtful consideration, we are of the considered opinion that it is undisputed fact that investments in the shape of fixed deposits were out of excess funds held by the assessee and secondly, earning of interest on FDRs was not the prime objective of the assessee company and therefore, the same was rightly held to be taxed under the head Income from other sources. No interference is called for, in this regard.” (Emphasis Supplied) 8.2. There is no change in the facts and circumstances during the assessment year before us. Interest income has been earned on the same fixed deposits. In view of the above, respectfully following the above decision of the Tribunal, we decline to interfere with the concurrent finding returned by the Assessing Officer and the CIT(A) that interest income is taxable under the head „Income from Other Sources‟ whereas only income from consultancy fee (INR 18,000/-) and income from Future & Options (INR 1,64,588/-) was taxable as business income.

Assessment Year: 2012-13 8.3. We note that the Assessing Officer had concluded that out of the total expenses of INR 84,61,374/- debited to Profit & Loss Account only expenses incurred for earning the business income could be allowed as deduction. The Assessing Officer examined the details of consultancy income earned by the Appellant during the preceding six assessment years and the break-up of consultancy income earned during the relevant previous year, and concluded that the Appellant did not carry out any justifiable business activity. Despite holding so the Assessing Officer proceeded to examine the deductibility of various expenses debited to the Profit & Loss Account and thereafter, disallowed INR 50,29,340/- consisting of the following: Sr. No. Expenditure as per P&L A/c Amount (INR) 1 Salary and Wages 17,49,000 2. Staff Welfare Expenses 42,653 3. Depreciation/Amortization 24,01,292 4. Professional Fees 7,51,788 5. Electricity Expenses 84,607 Total 50,29,340 While disallowing the above expenses, the Assessing Officer observed that the premises used as office were also used by three sister concerned of the Appellant. Further, since the Appellant had not undertaken any justifiable business activity, the expenses are to be disallowed. 8.4. The Assessing Officer also disallowed following expense aggregating to INR 7,98,156/- holding the same to be personal in nature. Sr.No. Expenditure as per P&L A/c Amount (INR) 1. Business promotion expenses 1,97,604 2. Travelling expenses in foreign currency 1,18,100 3. Travelling Expenses 1,86,049 4. Motor Car Expenses 1,12,378 5. Miscellaneous Expenses 1,84,025 Total 7,98,156/- 7 While disallowing the above expenses of INR 7,98,156/-, the Assessing Officer specifically observed that the Appellant had failed to substantiate how the above expenses were connected to earning of Consultancy Fee and Income from Future & Options.

8.5. In appeal, the CIT(A) had concluded that the business activity was continuously carried on by the Appellant and thus, the CIT(A) reversed the finding of the Assessing Officer that no justifiable business activity was carried out by the Appellant. However, CIT(A) confirmed the disallowance of INR 58,27,496/- on the ground that the same had no nexus with the business income. We note that the Assessing Officer had disallowed expenses aggregating to INR 50,29,340/- on the ground that the Appellant had not carried out any justifiable business activity whereas the CIT(A) had disallowed the same under Section 37 of the Act on the ground that the expenses did not have any nexus with earning of business income.

8.6. In our view, once CIT(A) has over turned the finding of the Assessing Officer to conclude that the business activity was carried out by the Appellant, the CIT(A) was not justified in concluding that the aforesaid expenses of INR 50,29,340/- had no nexus with the business activity as the same was not examined by the Assessing Officer without granting opportunity to the Appellant to establish nexus by the CIT(A). We note that the Tribunal has, in the case of the Appellant for the immediately preceding year 2011-12 [ITA No. 6200/Mum/2016 pronounced on 13.03.2019], remanded the issue back to the file of Assessing Officer for verification whether the expenses incurred specified the conditions specified in Section 37(1) of the Act observing as under: 8 Assessment Year: 2012-13 “6. Proceeding further, we find that the assessee has earned meager consultancy fees of Rs.12,000/- during the impugned AY which is as per the trends in earlier years. The Ld. first appellate authority has provided relief to the assessee by observing that Ld. AO could not question the business expenditure incurred by the assessee on the basis of quantum of business receipts. However, the fact remains that the expenditure should fulfil the conditions as envisaged by Section 37(1) of the Act so as to qualify for deduction under the head business income. In our opinion, only those expenditure could be allowed to the assessee which were incurred wholly and exclusively for business purposes of the assessee. The plea, as raised by Ld. AR, that the director‟s remuneration has been offered to tax by the director could not be a conclusive or decisive factor in determining its deductibility in the hands of the assessee since the onus was on assessee to determine the deductibility of the same in terms of Section 37(1). Another plea that similar expenditure was incurred in the earlier years which was allowed by the revenue also could not help the assessee since the principle of res judicata are not applicable to income tax proceedings and each year is a separate as well as unique unit of assessment wherein the onus is on assessee to demonstrate its eligibility to claim any expenditure. So far as the claim regarding finance charges & depreciation on office premises is concerned, it is undisputed fact that other three sister concerns of the assessee were operating from the said premises. On one hand no rental income has been charged / offered by the assessee against the said business premises and on the other hand full expenditure of business premises have been claimed.

Thus, in the appeal filed by the Revenue for the Assessment Year 2011-12, the Tribunal had accepted the contention of the 9 Assessment Year: 2012-13 Revenue that the CIT(A) allowed deduction for expenses without considering whether provisions of Section 37 are complied with.

8.7. There is no change in the facts and circumstances of the case in the Assessment Year 2012-13 before us expect that the CIT(A) has this time disallowed deduction for expenses invoking provisions of Section 37 of the Act without carrying out necessary examination/inquiry and giving the Appellant an opportunity to substantiate that expenses are allowable as deduction under Section 37 of the Act. Therefore, we deem it appropriate to remand the issue back to the file of Assessing Officer for fresh adjudication in view of the finding of the CIT(A) that the Appellant was engaged in business activity during the relevant previous year with the following directions (a) The Appellant is directed to provide necessary details/documents to substantiate the claim that support the claim that expense of INR 50,29,340/- have nexus with earning Consultancy Fee and Income from Future & Option taxable as business income, (b) While determining the claim for deduction of depreciation/amortization expenses of INR 24,01,292/-, the Assessing Officer is directed to examine whether the asset/premises/expenses in respect of which depreciation/amortization has been claimed by the Appellant has been used for the purpose of business by the Appellant keeping in view of the observations by the Assessing Officer that the office premises of the Appellant were also being used by sister concerns of the Appellant.

8.8. As regards disallowance of INR 7,98,156/-, we note that the Assessing Officer had disallowed the same on the ground that the same would personal in nature and that the Appellant had failed to substantiate that the said expenditure were incurred to Assessment Year: 2012-13 promote its business. No evidence to controvert the findings of the Assessing Officer were placed before the CIT(A) in support of the averment/submission made by the Appellant that all the expenses were legitimate business promotion expenses incurred for exploring new business opportunities, entertainment and business promotion during various meetings. Even in appellate proceedings before us, the Appellant has not been able to substantiate either by producing any documents or otherwise that expenses were not personal in nature and had been incurred wholly and exclusively for the purpose of business. We are not inclined to interfere with the concurrent findings of the Assessing Officer and CIT(A) in this regard. We concur with the CIT(A) and confirm the addition of INR.7,98,156/-. 8.9. In view of the above directions/findings, Ground Nos. 2 to 5 are partly allowed.

Ground No.6 9. Ground No. 6 is directed against the disallowance of INR.2,39,138/- made by the Assessing Officer in addition to the suo motu disallowance of INR.9,60,180/- made by the Appellant under Section 14A of the Act read with Rule 8D of the Rules.

9.1. The Ld. Authorised Representative for the Appellant submitted that the Assessing Officer erred in making addition of INR 2,39,138/-under Section 14A of the Act. He contended that the investments were made out of interest-free own funds and in view of the judgment of the Hon‟ble Supreme Court in the case of South Indian Bank Limited Vs. CIT: [2021]438 ITR 1 (SC) there was presumption in favour of the Appellant. Per contra, the Ld. Departmental Representative relied upon the order passed by the authorities below. 11 9.2. We have considered the rival submission and perused the material on record. As rightly contended by the Ld. Authorised Representative for the Appellant, on perusal of the financial statements for relevant previous year (placed at Pg 120 to 142 of the paper-book), it is clear that the interest-free own funds available with the Appellant were sufficient to fund the investments and therefore, in view of the judgment of the Hon‟ble Supreme Court in the case of South Indian Bank Limited (supra) additional disallowance of INR.2,39,138/- made by the Assessing Officer under Section 14A of the Act was not warranted on the ground that separate accounts were not maintained. Further, we note that the Assessing Officer has proceeded to invoke the provision of Section 14A read with Rule 8D of the Rules without expressing dissatisfaction regarding suo motu disallowance of INR.9,60,180/- made by the Appellant. Accordingly, in view of the aforesaid, Ground No. 6 raised by the Appellant is allowed and addition of INR.2,39,138/- under Section 14A of the Act is deleted.