ACIT CIR 29(3), MUMBAI vs. RAJESH C. SAVLA, MUMBAI

This is an appeal by the Revenue against the order dated 31.03.2016 of learned Commissioner of Income Tax (Appeals)-40, Mumbai [in short ‘CIT(A)’] for the assessment year (AY) 2010-11. Ground No. 1 2. In this ground revenue has challenged deletion of addition made of ₹42 lacs under section 68 of the Income Tax Act, 1961. Briefly the facts are, the assessee is a resident individual engaged in the business of builders and Shri Rajesh G. Savla 2 developers. For the assessment year under dispute, the assessee filed his return of income on 15.10.2010 declaring total income of ₹8,09,207/-. The Assessing Officer noticed that while verifying the return of income, the Assessing Officer noticed that the assessee had claimed business loss of ₹42 lacs. After calling for necessary details and verifying them he found that the assessee, being the proprietor of M/s Jyoti Construction had entered into an agreement with M/s D.G. Construction, a proprietary concern of M/s Deepak G. Savla (HUF), for taking over Dattaguru Project for development. As per the agreement with M/s D.G. Construction, the assessee paid an amount of ₹2,08,00,000/-. Whereas, due to subsequent cancellation of agreement between M/s D.G. Construction and Dattaguru Co-op Housing Society, the assessee could receive back only an amount of ₹1,66,00,000/-. The balance amount of ₹42,00,000/-, since, could not be recovered was claimed as business loss. Being of the view that the agreement between the assessee and M/s D.G. Construction was not registered and further, M/s D.G. Construction had bidded for the TDR of Dattaguru Housing Project, wherein, the assessee is not a party, the Assessing Officer disallowed the claim of loss. The assessee contested the disallowance before the First Appellate Authority. In course of proceedings before the First Appellate Authority, the assessee made detailed submission and furnished documentary evidence to show that the loss incurred of ₹42 lacs was in course of business. The submission made by the assessee and the evidences furnished were forwarded to the Assessing Officer seeking his comment. After considering the submissions of the assessee and report of the Assessing Officer, the learned CIT(A) ultimately allowed assessee’s claim of loss of ₹42 lacs.

We have considered rival submissions and perused the material on record. As could be seen from the facts on record, M/s Dattaguru Co-op Housing Society Ltd. had floated a tender for sale of setback TDR to be received from the Municipality. M/s D.G. Construction being the successful bidder entered into an agreement with M/s Dattaguru Co-op Housing Society Ltd. for purchase of TDR. As per the terms of agreement, an amount of ₹3,51,38,260/- was to be paid towards purchases of TDR. In fact, M/s D.G. Construction paid an amount of ₹1,76,00,000/- to Dattaguru Co-op Housing Society as advance after receiving funds from the assessee as well as other lenders. However, ultimately M/s D.G. Construction could not get TDR released from the Municipality. Hence, was unable to pay the amount received from the assessee and other lenders along with interest. The assessee being a builder and developer in need of TDR stepped in to take over the TDR by entering into an agreement with M/s D.G. Construction. However, ultimately, the deal could not fructify and assessee was unable to get back either TDR or the amount of ₹2,08,00,000/- paid to M/s D.G. Construction for taking over the Dattaguru Project basis. When M/s D.G. Construction pressed upon Dattaguru Society for refund of advance given, litigation ensued with issuance of legal notices both by Dattagroup Co-op Housing Society as well as by D.G. Construction. Ultimately, Dattaguru Housing Society returned back an amount of ₹1,66,00,000/- to M/s D.G. Construction which in turn was returned back to the assessee. Thus out of ₹2,08,00,000/- paid to M/s D.G. Construction. The assessee could recover an amount of ₹1,66,00,000/- and the unrecovered amount of ₹42,00,000/- was claimed as business loss. Thus from the aforesaid facts, it is clear that the assessee had paid an amount of ₹2,08,00,000/- to M/s Shri Rajesh G. Savla 4 ITA No. 3950/M/2016 D.G. Construction and ultimately could receive back an amount of ₹1,66,00,000/-.

In the remand report, the Assessing Officer has also accepted the aforesaid factual position. Even, the Assessing Officer has also noted the fact that on the amount advanced to M/s D.G. Construction to assessee has received interest income of ₹13,38,671/-, which was offered to tax. However, it is the view of the Assessing Officer that the amount advance to M/s D.G. Construction was by way of loan. Undisputedly, the assessee is a builder and developer and was need of TDR for his own development project. Since the amount advanced to M/s D.G. Construction could not be recovered due to non- release of TDR from Municipality, the assessee entered into an agreement with M/s D.G. Construction for taking over TDR of Dattaguru and had paid an amount of ₹2,08,00,000/-. The payment made by the assessee has not been disputed or doubted by the Assessing Officer. Further, the fact that the assessee could recover only an amount of ₹1,66,00,000/- is also not in doubt. Thus, the assessee has suffered loss of ₹42,00,000/-. The question is, whether such loss is allowable as business loss. Facts on record clearly reveal that the payment made by the assessee was for the purpose of acquiring TDR, hence, in the regular course of his business as builder and developer. Therefore, whatever loss or gain the assessee could have derived by investing the amount of ₹2,08,00,000/- was certainly in course of business. As rightly, observed by learned CIT(A), by entering into the transaction the assessee not only averted the greater loss of being unable to recover the money invested but also hopeful of receiving substantial gain, in case, the deal went through.

Ground No. 2 6. In this ground Revenue has challenged deletion of addition of ₹1,28,26,748/- made under section 68 of the Act. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that the assessee had taken unsecured loan to the tune of ₹5,56,58,836/-in his proprietary concern M/s Jyoti Construction. On further verification, he observed that an amount of ₹1,28,26,748/- was availed during the year from 7 persons. Alleging that assessee could not furnish proper evidence to prove the loans, the Assessing Officer treated the amount of ₹1,28,26,748/- as unexplained cash credit under section 68 of the Act and added back to the income. Assessee contested the aforesaid addition before learned CIT(A). In course of appellate proceedings, the assessee furnished fresh evidence to prove the genuineness of the loan transaction and also made detailed submission. The evidences produced and submissions made were forwarded to the Assessing Officer for verification and comment.

After considering the report of the Assessing Officer in the context of facts and material on record, learned CIT(A), being of the view that the ingredients of section 68 of the Act are missing, deleted addition.

We have considered rival submissions and perused the material on record. It is evident, the Assessing Officer has added back ₹1,28,26,748/- representing alleged unsecured loan availed from the following parties:

Ground No. 3 10. In this ground the Revenue has challenged the deletion of addition made of ₹1,81,62,500/- (wrongly mentioned as 18,16,21,500/-) under section 68 of the Act. Briefly the facts are, in course of assessment proceedings the Assessing Officer noticed that in the books of assessee’s proprietary concern M/s Joyti Construction, the ledger account of M/s Vitrag Enterprises was reflecting journal entries of ₹96,50,000/- out of which ₹60,50,000/- has been shown as opening balance and ₹80,00,000/- was shown as other income. However, the ledger account of M/s Joyti Construction in the books of the proprietor amount of ₹16,50,000/- was shown as capital. Further, it was not reflected in the profit and loss account and balance. He further noticed that an amount of ₹20,00,000/- was availed as unsecured loan from Shri Naresh Jain, out of which the assessee has repaid ₹15,00,000/- on 26.02.2010, which is shown as capital in the capital account of M/s Joyti Construction. Further, he noticed that ₹1,50,12,500/- from the Kotak Mahindra bank account of Shri Rajesh G. Savla was transferred and shown as capital in the books of M/s Joyti Construction, which were not reflected in the profit and loss account and balance sheet.

Being of the view that the amounts are not reflected in the capital account, the Assessing Officer added back these amounts aggregating to ₹1,81,62,500/- as unexplained cash credit under section 68 of the Act. In course of proceedings before the First Appellate Authority, the assessee apart from making detailed submissions also furnished supporting evidence. The submissions made by the assessee and the evidences furnished were forwarded to the Assessing Officer for verification and comment. Ultimately, based on the remand report of the Assessing Officer and other materials on record, learned CIT(A) deleted the addition of ₹1,81,62,500/-, since, the conditions of section 68 were not fulfilled.

We have considered rival submissions and perused the material on record. As stated earlier, the disputed amount of ₹1,81,62,500/-, comprises of three figures of ₹16,50,000/-, Rs. 15,00,000/- and Rs. 1,50,12,500/-. On perusal of the remand report, the relevant extract of which have been incorporated in the impugned order of the First Appellate Authority, it is noticed that in so far as the amount of ₹1,50,12,500/-, being the amount transferred from the individual account of the proprietor maintained in Kotak Mahindra Bank to the books of M/s Jyoti Construction, the proprietary concern, the Assessing Officer has clearly stated that it is just the fund transfer from personal account to M/s Joyti Construction which is duly appearing in the balance sheet of the assessee as well as M/s Joyti Construction. He has also acknowledged the fact that copies of bank books and bank statement given by the bank showing transfer of funds from assessee’s personal account were furnished. Apparently, being satisfied with the evidences furnished, the Assessing Officer has not made any adverse comment with regard to the Shri Rajesh G. Savla 9 ITA No. 3950/M/2016 amount of ₹1,50,12,500/-. In paragraphs 7.7 of the impugned order, learned First Appellate Authority has clearly dealt with the factual aspect of the issue keeping in view the remand report of the Assessing Officer and deleted the addition. Thus when the assessee has furnished credible evidences to prove the genuineness of the transaction, no addition can be made under section 68 of the Act. In so far as the amount of ₹ 15,000/-, being loan availed from Shri Naresh Jain, a perusal of the remand report would reveal that the Assessing Officer has not found any wrong doing by the assessee. The only objection of the Assessing Officer is, since the assessee is maintaining separate books of account, the loan amount should have been paid from the account of M/s Joyti Construction. When it is factually proved that the assessee has availed loan of ₹20,00,000/- and has repaid ₹50,00,000/-, which is supported by credible evidence, no addition could have been made under section 68 of the Act. As regards the amount of ₹16,50,000/-, perusal of the remand report reveals that the amount in question was transferred from assessee’s personal account to the account of the proprietary concern M/s Joyti Construction. Nothing adverse has been reported by the Assessing Officer in this regard. Again, the only objection of the Assessing Officer is, since the assessee is maintaining separate books of account, the repayment should have been made from the account of M/s Joyti Construction. When the source of payment, creditworthiness and genuineness are established, no addition under section 68 can be made. In view of the aforesaid, we entirely agree with learned CIT(A) in deleting the addition of ₹1,81,62,500/-.

Ground No. 4 Shri Rajesh G. Savla 10 ITA No. 3950/M/2016

In this ground the Revenue has challenged deletion of addition of ₹29,32,229/- representing payment of interest. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that the assessee had debited interest expenditure of ₹30,65,288/- to the profit and loss account of the proprietary concern M/s Jyoti Construction. After verifying the details, the Assessing Officer noticed that the assessee instead of paying interest on funds borrowed, is crediting it to the loan account of lenders at the end of the financial year. Being of the view that interest was simply credited without actual payment, the Assessing Officer disallowed an amount of ₹29,32,229/-. Being convinced with the submissions of the assessee, learned CIT(A) deleted the disallowance.

We have considered rival submissions and perused the material on record. Undisputedly, the only reason for disallowance of interest expenditure is, assessee has not actually paid but has credited the interest amount to the lender’s account. As rightly observed by learned CIT(A), since the assessee is following mercantile system of accounting, interest credited to the lender’s account would also qualify for deduction. Further, as observed by learned CIT(A), the amount invested in the business activity is much more than the interest-free fund available with the assessee. Therefore, it has to be accepted that the interest expenditure was incurred for the purpose of business. In the aforesaid view of the matter, we uphold the decision of learned CIT(A). 16. Ground No. 5 17. In this ground the Revenue has challenged deletion of addition of ₹27,14,467/- made under section 68 of the Act. Briefly the facts are, in course Shri Rajesh G. Savla 11 ITA No. 3950/M/2016 of assessment proceedings, the Assessing Officer noticed that the opening capital balance shown by the assessee at ₹1,55,14,678/- was not matching with the closing capital balance of the previous year shown at ₹1,28,00,211/- in the capital account of M/s Jyoti Construction. Alleging that the assessee was unable to reconcile the difference, the Assessing Officer added back the amount ₹27,14,467/- as unexplained cash credit under section 68 of the Act. In course of proceeding before the First Appellate Authority, the assessee furnished supporting evidence to explain the alleged difference. The submissions made and evidences furnished were forwarded to the Assessing Officer for verification and comment.

Based on the report of the Assessing Officer and materials available on record, learned CIT(A) being satisfied that there is no unexplained cash credit, deleted the addition made.

We have considered rival submissions and perused the material on record. As could be seen from the observations made by the Assessing Officer in the remand report, difference between the opening and closing capital balance was due to wrong transfer of journal entry relating to the receivable from M/s Kewal Construction, proprietary concern of Rajesh G. Savla (HUF). in the remand report, the Assessing Officer After verifying the evidences furnished in remand proceeding, the Assessing Officer has observed that in the books of Mr. Rajesh G. Savla amount of ₹27,14,466/- has been shown as loan against M/s Jyoti Construction. The Assessing Officer has not offered any adverse comment with regard to the submissions made by the assessee or the evidences furnished. Learned CIT(A) having taken note of the factual position emanating from record as well as observations of the Assessing Officer in the Shri Rajesh G. Savla 12 remand report, was satisfied that the difference has been properly reconciled. The aforesaid factual position remains uncontroverted before us. Therefore, we do not find any reason to interfere with the decision of learned CIT(A).

Ground No. 6 21. In this ground the Revenue has challenged part deletion of disallowance made under section 14A r.w. Rule 8D. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticing that the assessee has claimed interest expenditure of ₹15,90,619/- in his personal profit and loss account called for the necessary details. After verifying the details furnished, the Assessing Officer noticed that an amount of ₹2,73,86,536/- was appearing as investment in partnership firm and amount of ₹1,50,000/- as investment in shares of companies. In the remand proceedings, the Assessing Officer expressed his view that since income from these investments are not taxable, interest expenditure claimed by the assessee should have been disallowed under section 14A or section 40(a)(ia) of the Act for non deduction of tax at source. 22. After considering the submissions of the assessee in the context of facts and material on record, learned CIT(A) held that no disallowance under section 40(a)(ia) could have been made as the assessee being an individual and previous year’s accounts were not required to be audited under section 14AB, the assessee was not liable to deduct tax. As regards disallowance under section 14A, learned CIT(A) noticED that on the investment made of ₹1,50,000/- in equity shares the assessee has not earned any exempt income.

Having considered rival submissions perused materials on record, we do not find any infirmity in the decision of learned CIT(A). Learned CIT(A) has given categorical factual finding that interest-free fund available with the assessee was much more than the borrowed fund. Further, he has also given factual finding that borrowed funds were utilized for the purpose of lending business from which the assessee had earned interest income. The aforesaid finding of fact remains controverted. Thus, the only disallowance which could have been made is administrative expenses under Rule 8D(2)(iii). In view of the aforesaid, we uphold the decision of learned CIT(A).

Ground no.7 being a general ground is dismissed.