HARSH MAHENDRA SHAH,,SURAT vs THE INCOME TAX OFFICER, WARD-1(2)(2),, SURAT

Income Tax Appellate Tribunal, SURAT BENCH, SURAT

Before: SMT. DIVA SINGH & SHRI O.P.MEENA

Hearing: 11.01.2019

Page 1 of 7 Harsh Mahendra Shah Vs. ITO, Ward-1(2)(2), Surat/ITA No.3400/Ahd/2016/A.Y.2013-14 आयकर अपीलीय अिधकरण,सुरत �यायपीठ, सुरत IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT �ीमती िदवा िसंह, �ाियक सद� तथा �ी ओ.पी.मीना, लेखा सद� के सम� BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI O.P.MEENA, ACCOUNTANT MEMBER

आ.अ.सं./I.T.A. No.3400/AHD/2016 िनधा�रण वष�/Assessment Year : 2013-14 Harsha Mahendra Shah, Vs. The Income Tax Officer, 91, Khatodara, GIDC, B/h Sub Jail, Ward-1(2)(2), Surat. Ring Road, Surat. [PAN: BMDPS 4031 H] अपीलाथ� Appellant ��यथ�/Respondent Shri Mehul Shah – CA िनधा�रती क� ओर से /Assessee by Shri P.S.Choudhary – Sr.DR राज�व क� ओर से /Revenue by 10.01.2019 सुनवाई की तारीख/ Date of hearing: 11.01.2019 उ�ोषणा क� तारीख/Pronouncement on: आदेश /O R D E R PER O.P.MEENA, AM: This appeal filed by the Assessee is directed against order of 1. learned Commissioner of Income Tax(Appeals)-2, Surat(in short “the CIT (A)”) dated 21.11.2016 pertaining to Assessment Year 2013-14 which in turn has arisen from the order passed by the ITO, Ward-1(2)(2), Surat(in short “the AO”) dated 31.12.2015 under section 143(3) of Income Tax Act,1961 (in short ‘the Act’). 2. The grounds raised by the assessee read as under : “1. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the learned assessing officer in making disallowance of Rs.20.49.011/- on account of interest expenses and addition of Rs.17,77,227/- on account of disallowance u/s.14A of the I.T.Act read with Rule 8D of IT Rules after allowing the telescoping and confirming the addition of Rs.20,49,011/-.

Page 2 of 7 Harsh Mahendra Shah Vs. ITO, Ward-1(2)(2), Surat/ITA No.3400/Ahd/2016/A.Y.2013-14

It is therefore prayed that the above addition/disallowance made by assessing Officer and confirmed by learned Commissioner of Income- tax (Appeals) may please be deleted.” 3. Briefly stated facts of the case are that the assessee has accepted loan and advances amounting to Rs.1.41 crore and has claimed interest expenses of Rs.23,26,336/-. Further, the assessee has advanced loans to several entities and had earned interest income to the tune of Rs.2,77,325/-. The AO was of the view that unsecured loans claimed to have been taken by the assessee have been utilised by the assessee to repayment of old loans and loan to certain entities and from where the assessee is not receiving any type of income including interest. The investment in private limited and public limited shares have been made to the tune to Rs.50,65,000/- and Rs.3,01,575/- respectively. The assessee has also earned interest income of Rs.2,77,325/-, therefore, the AO after allowing deduction of Rs.2,77,325/- being interest income disallowed the balance interest expenses with Rs.20,49,011/-. The AO further observed that the assessee has not made any disallowance of interest expenses u/s.14A of the Act despite having income which is not part of total income. Accordingly, the AO worked out disallowance as per rule 8D r.w.s 14A at Rs.17,77,227/-. However, since the AO has disallowed interest income of Rs.20,49,011/-, hence no

Page 3 of 7 Harsh Mahendra Shah Vs. ITO, Ward-1(2)(2), Surat/ITA No.3400/Ahd/2016/A.Y.2013-14 separate disallowance were made u/s.14A by allowing telescoping of Rs.17,77,227/-. 4. Being aggrieved, the assessee filed an appeal before the CIT(A). However, the CIT(A) observed that the appellant has not able to prove commercial expediency in advancing the loans on which interest expenses are being claimed. The appellant could only submitted that the new loans have been taken to repay the existing loans but could not submit any evidence to show that these persons to whom loans were given were having business income and transaction. In the light of these facts, the disallowance of interest expenses of Rs.20,49,011/- were confirmed. With regard to disallowance of Rs.17.77.227/- u/s.14A, the CIT(A) observed that the AO has not made any separate addition u/s.14A of the Act as he had given the benefit of telescoping to the appellant. Hence, the said ground become infructuous and required no adjudication. 5. Being aggrieved, the assessee has filed this appeal before Tribunal. The ld.Counsel drew our attention to the Annexure-A of paper book page no.1 wherein chart showing the nexus between the acceptance of loan and utilization of the loan is given according to which the assessee has received the loan of Rs.1.41 crore during the year from 8 parties out of which sum loan was

Page 4 of 7 Harsh Mahendra Shah Vs. ITO, Ward-1(2)(2), Surat/ITA No.3400/Ahd/2016/A.Y.2013-14 repaid to the old parties and some of the loan taken was given to the new parties on which the assessee has earned interest income. The ld.Counsel thus submitted that the loan taken was utilised for repayment old loan and new loans of which interest income has been earned. It was further submitted that the old loans were taken for the purpose of business, further the AO has accepted the interest income of Rs.2,77,325/- as income from business therefore the assessee is legitimately entitled the deduction against the interest income earned by the assessee. Further, the assessee has interest free funds in the form of capital of Rs.54.11 lakhs and interest bearing funds of Rs.1.41 crore out of which investment has been made towards unsecured loan for the purpose of business. The ld.Counsel further submitted relying on the decision in the case of K.Bhandari vs. ITO [2015] 63 taxmann.com 84 Kolkata Tribunal that where the assessee borrowed funds for repaying old borrowings which had been duly used for the purpose of business interest paid on subsequent borrowing was to be allowed as deduction. The ld.Counsel further submitted that the AO has worked out disallowance u/s.14A at Rs.17,77,227/- u/s.14A of the Act as against the exempt income of Rs.94,877/- (PB-26). Therefore, disallowance u/s.14A cannot be exceed the exempt income as held in the case of M.K.Overseas Pvt. ltd., vs. ACIT in

Page 5 of 7 Harsh Mahendra Shah Vs. ITO, Ward-1(2)(2), Surat/ITA No.3400/Ahd/2016/A.Y.2013-14 ITA No.1677/Del/2015 Delhi Tribunal. The ld.AR further placed reliance in the case of CIT vs Corrtch Energy Pvt. Ltd. [2014] 45 taxmann.com 116 (Guj) wherein it was held that where the assessee has not sought any income exemption there cannot be any expenses against to be disallowed. In further proposition that where the assessee declared tax exempted income and voluntary disallowed certain expenditure u/s.14A of the Act. The AO was not justified in recomputing the disallowance as held by the Hon'ble Delhi High Court in the case of Joint Investment Pvt. Ltd. vs. CIT [2018]59 taxmann.com 295 Del. The ld.Counsel further placed reliance on the decision of Co-ordinate Bench in the case of Punjab Information and Communication Technology Corporation Ltd., vs. ACIT, Circle-2(1), CHD in ITA No.49/CHD/2015 dated 06.12.2018 wherein disallowance of interest was disallowed in the case of where no exempt income was earned by the assessee. 6. We have heard the rival submissions and perused the material on record. We find that the AO has disallowed the interest of Rs.20,49,011/- as interest income on the ground that the borrowing has been used for repaying the old borrowings and failed to establish the commercial expediency. We find that the assessee has obtained loan of Rs.1.41 crores which have been used for repaying of old borrowing as well as for advancing new loans to

Page 6 of 7 Harsh Mahendra Shah Vs. ITO, Ward-1(2)(2), Surat/ITA No.3400/Ahd/2016/A.Y.2013-14 the various parties on which interest income has been earned by the assessee at Rs.2,77,325/-. Thus, there is an apparent nexus between the borrowings and interest income earned which has not been disputed by the AO as the AO has treated the interest income under the head income from business. The chart showing nexus between the acceptance of loan and utilization thereon placed Annexure-A to the paper book 1 manifest these facts. We further find that the assessee has shown income from business as mentioned in the assessment order. Therefore, the contention of the AO that original borrowings we used by the assessee for other than business purpose has not been corroborated by any evidence, therefore, interest paid by the assessee on borrowing were utilised by repaying the old business borrowings is squarely as deduction as held by the Hon'ble Co-ordinate Bench Kolkata in the case of Kamal Bhandari (supra). We further find that the AO has worked out disallowance of interest expenses of Rs.17,77,227/- u/s.14A although the same has not been added as the telescoping was allowed against the disallowance of interest of Rs.20,49,011/-. However, we find that the assessee has earned exempt income only of Rs.94,877/- which does not form part of total income. Therefore, the ld.Counsel has contended that the disallowance if any u/s.14A r.w. rule 8D of the exceed the actual amount of such exempt income received. We find some force in the above

Page 7 of 7 Harsh Mahendra Shah Vs. ITO, Ward-1(2)(2), Surat/ITA No.3400/Ahd/2016/A.Y.2013-14 argument of the ld.Counsel for the assessee. It has been held in various decisions cited by the ld.Counsel as in the case of Punjab Information and Communication Technology Corporation (supra) M.K.Overseas Pvt. Ltd. and Corrotech Energy Pvt. Ltd. and Joint Investment Pvt. Ltd. (supra). We therefore hold that disallowance u/s.14A in the instant case cannot exceed Rs.94,877/-. Since the loans were obtained by the assessee for repaying old loans as well as for advancing new loan on which interest income has been earned therefore disallowance of Rs.20,49,011/- made by the AO is accordingly deleted as against disallowance of Rs.17,77,227/- the disallowance u/s.14A the disallowance are restricted to Rs.94,877/-. 7. In view of these facts, the addition sustained by the CIT(A) are reduced to the Rs.94,877/-, accordingly the appeal of the assessee is partly allowed. 8. In the result, appeal of the assessee is partly allowed. 9. The order pronounced in the open court on 11-01-2019. Sd/- Sd/- (�ीमती िदवा िसंह /DIVA SINGH) (ओ.पी.मीना/O.P.MEENA) (�याियकसद�यतथा/JUDICIAL MEMBER) (लेखासद�यकेसम� /ACCOUNTANT MEMBER) सुरत/ Surat, �दनांक Dated: 11th January, 2019/S.Gangadhara Rao, Sr.PS Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order / / TRUE COPY / / Assistant Registrar, Surat

HARSH MAHENDRA SHAH,,SURAT vs. THE INCOME TAX OFFICER, WARD-1(2)(2),, SURAT