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Income Tax Appellate Tribunal, “SMC” Bench, Mumbai
This appeal by the assessee is directed against the order of learned CIT(A) dated 31.1.2019 pertains to A.Y. 2014-15.
The grounds of appeal
read as under :
1. BECAUSE; order of Id. CIT(A) is erroneous; invalid and against the basic principle of natural justice; wherein disallowance made by AO was upheld based on assumption, surmise and surmise and conjectures and are made with prejudicial state of mind which is against law and natural justice.
2. BECAUSE; CIT(A) and AO erred in law and on facts assessing income at Rs.16,88,650/- whereby unwarranted disallowance u/s. 57 of Rs.16,18,378 on account of interest paid.
3. BECAUSE; both CIT(A) and AO are erred in not considering evidences placed on record during the course of proceeding; resulting into unwarranted disallowance of interest expenses amounting to Rs.16,18,378/-.
Brief facts are that the Assessing Officer noted that during the period under consideration, the amount advanced to M/s Dhanraj Diamonds a family
2 Shri Kashish Anil Murpana controlled concern an amount of Rs. 1,48,042/- was claimed as interest received. Against that interest receipt of Rs. 1,48,042/- an amount of Rs. 16,18,378/- i.e. Rs. 3,77,872/- credited to M/s Dhanraj Bangles, and Rs. 12,40,506/- to M/s Dhanraj Jewellers were claimed as deduction on account of interest expenses u/s 57 of the IT Act, 1961. The interest credited to the two concerns was also family controlled related concerns. Order u/s 143(3) of the IT Act, 1961. Considering the above facts the Assessing Officer asked the assessee to substantiate with evidences that the interest expenses claimed were actually incurred and if incurred the same were incurred exclusively to earn the interest income.
"Mr. hashish Murpana incurred the interest expense of Rs.12,40,506/- due to loan taken from M/s Dhanraj Jewellers for the F. Y.2013-14 ( Confirmation attached) . This is already taken in M/s Dhanraj Jeweller's account as income and subsequently tax was paid on the same.
Mr Kashish Murpana is a son to Mr. Anil Murpana who is brother to Mr. Deepak Murpana and draws the salary from M/s Dhanraj Jewellery of Rs.19,50,000/- (Computation attached). During the FY under consideration ie 13-14 it is seen that M/s Dhanraj Jewellers advanced money to Mr. Kashish Murpana of Rs.67,072,37/- which Mr. Kashish Murpana gave to his father Mr. Anil Murpana for his business working capital.
From the above it is cleared that this advance given to Mr. Kashish Murpana was already taxed in M/s Dhanraj Jewellers and the same was utilized Jor business working capital for his father for which he didn't earned any interest but helped in generating profit of M/s Dhanraj Bangles thereby enhancing revenue for the department. Similar is a case of M/s Dhanraj Bangles where he paid Rs 3 77,872/- giving an extra income to M/s Dhanraj Bangles thereby paying more tax to the revenue. Overall Rs.16,18,378/- was already tweed m respective concerns ie. M/s Dhanraj Jewellers & M/s Dhanraj Bangles. Had they borrowed the funds from the external source i.e. banks or financial institution they would have incurred additional expenses in the form of bank charges, notary charges, franking charges and off course interest which would have increased the cost of borrowing thereby reducing the profit of the concerns and subsequently reduction in taxable profits. So m a way Mr Kashish Murpana has facilitated lower cost of borrowing thereby excluding all the relevant charges which usually bank lays.
In case of M/s Dhanraj Diamonds Mr. Kashish Murpana received interest of Rs. 1,48, 042/- by giving loan. M/s Dhanraj Diamonds deducted TDS @ 10% Rs. 14, 804/- which can be seen in 26AS. M/s Dhanraj Diamonds utilized the same money borrowed from Mr. Kashish Murpana for their working capital needs. The tax on the same was paid to the revenue department. From the 3 Shri Kashish Anil Murpana above explanation it is cleared that Mr. Kashish Murpana has been instrumental in enhancing the working capital need of the concerns and also generating additional revenues to the department in the form of tax.”
However the Assessing Officer was not convinced. He held that the assessee has not produced any evidence which can establish a nexus between interest earned and interest credited to family controlled related concerns. Further on the facts he held that since no direct nexus was established between interest earned and interest credited to the family controlled related concerns. He disallowed the same u/s. 57 of the Act.
Upon assessee’s appeal learned CIT(A) confirmed the Assessing Officer’s order by holding as under :-
“5.1.3 Loans taken from Dhanrai Bangles and Dhanrai Jewellers not related to Dhanrai Diamonds It is clear from above ledger account that loans received from these two concerns are not connected to loans extended to Dhanraj Diamonds. There is no nexus or co-relations. It cannot be said that interest paid to Dhanraj Jewellers and Dhanraj Bangles is on account of money received from them, which have been further lent to Dhanraj Diamonds for earning of interest of Rs. 1,48,0427-. Thus, requirement of section 57 and section 58 remain unfulfilled.
5.1.4 Benefit to other family concerns & Loans to father of assessee is irrelevant:- The argument of assessee before the AO as brought out in para 3.3. of the assessment order that assessee extended these loans from Dhanraj Jewellers & & Dhanraj Bangles to his father Mr. Anil Murpana for business working capital does not help the case of assessee as such loans can be for personal reasons and cannot be held to be in any way connected to or for purpose of earning of interest income of Rs. 1,48,042/-. Thus expenses of Rs. 16,18,378/-paid as interest to Dhanraj Jewellers & & Dhanraj Bangles cannot be claimed by assessee as expenses for earning of income of Rs,. 1,48,042/-from Dhanraj Diamonds. All the grounds of appeal singly and collectively are rejected and dismissed.”
Against the above order assessee is in appeal before the ITAT.
I have heard both the parties and perused the records.
4 Shri Kashish Anil Murpana
Upon careful consideration I note that assessee has received interest from advances made to family concern. It has also paid interest on advances received from family concern. The concerns are duly assessed. The Assessing Officer has disallowed the entre interest expenditure on the ground that nexus between interest earned and interest paid has not been established. On what basis authorities below are saying that interest received from advances to family concern and interest paid on advance from family concern are not having nexus is not spelt out. When the facts are clear that advance received and paid both are to family concern in question then what more nexus is required to be established is beyond comprehension. Learned CIT(A) is simply making a surmise that loan can be for personal reasons. This is a mere conjecture not sustainable in law. Hence, on the facts and circumstances of the case the disallowance is based on conjecture not sustainable in law. Hence, I set aside the order of authorities below and decide the issue in favour of the assessee. Since the issue has been decided in favour of the assessee the alternative claim made in submission is infructuous.
In the result, appeal is allowed.
Order pronounced in the open court on 2.5.2022.