SH RAMESH KUMAR DUDANI,MOHALI vs. DCIT, CIRCLE -6(1), MOHALI

आदेश/Order

Per Sudhanshu Srivastava, Judicial Member

2 589-c-2019 (A.Y. 2015-16) – Ramesh Dudani, Mohali 2.0 The brief facts of the case are that the assessee is a proprietor of M/s Technical Products Corporation which manufactures furniture components and fasteners and building material. The return for the captioned assessment year was filed declaring taxable income of Rs.1,08,47,660/- which was initially processed under section 143(1) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) and, subsequently, the case was selected for scrutiny.

2.1 During the course of assessment proceedings, the Assessing Officer (hereinafter called ‘AO’) noted that the assessee had invested an amount of Rs. 6,99,00,000/- in securities and shares and the same had yielded exempt income and on the other hand the assessee had incurred huge interest expenses on loans borrowed from the bank and other financial institutions. The assessee was required by the AO to show cause as to why disallowance under section 14A of the Act r.w.s. rule 8D of the Income Tax Rules, 1962 (hereinafter called ‘the Rules’) may not be made as the assessee had not made any suo moto disallowance. It was the AO’s view that the investments had been made from common funds available to the assessee and there was no demarcation between borrowed funds and surplus funds and that further the assessee had not been able

3 589-c-2019 (A.Y. 2015-16) – Ramesh Dudani, Mohali to give any proof of any account which was maintained separately for keeping personal funds. Accordingly, the AO proceeded to make a disallowance of Rs.15,21,161/- towards finance expenses in terms of section 14A of the Act read with Rule 8D of the Rules.

2.2 During the course assessment proceedings, it had also been observed by the AO that the assessee had debited an amount of Rs. 3,72,000/- in the Profit and Loss account under the head administrative expenses on account of Mumbai Office. The assessee was asked to produce documentary evidence related to this expenditure and it was the submission of the assessee before the AO that since majority of the raw material used in executing export orders were imported through the Mumbai Office, maintenance of office at Mumbai was a necessity. However, the AO did not accept the assessee’s contentions as the assessee did not file any documentary evidence and proceeded to make an addition 3,72,000/- to the income of the assessee. The assessment was competed at an income of 13,0,56,034/-.

2.3 Aggrieved, the assessee approached the Ld. First Appellate Authority who confirmed both the disallowances.

4 589-c-2019 (A.Y. 2015-16) – Ramesh Dudani, Mohali 2.4 Now, the assessee has approached this Tribunal challenging the order of the Ld. CIT (A) by raising the following Grounds of appeal:

1. That on the facts and in the circumstances of the case the Learned CIT (A)-2, Chandigarh has wrongly applied the provisions of Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962 thereby upholding the addition of Rs.15,21,161/- under section 14A of the Income Tax Act,1961 made by the learned AO.

2. That on the facts and in the circumstances of the case the Learned CIT (A)-2, Chandigarh has wrongly upheld the contention of the learned AO in adding Rs.3,72,000/- for branch office expenses without appreciating the requirement of the business activity and without quoting the section of the Income Tax Act,1961 under which the disallowance of branch office expenses has been made.

3.0 The Ld. Authorized Representative (hereinafter called ‘AR’) submitted that as far as the issue of disallowance under section 14A of the Act was concerned, the AO had proceeded on an entirely

5 589-c-2019 (A.Y. 2015-16) – Ramesh Dudani, Mohali wrong appreciation of facts in as much as the assessee had not shown any investments in the books of account the business. He referred to the Balance Sheet of the proprietorship concern placed at Page 36 of the Paper-Book and demonstrated that no investment of any sort was appearing in this Balance Sheet. It was submitted that, therefore, the invocation of Rule 8D of the Rules by the AO was bad in law. He also referred to Pages 72 to 79 of the Paper- Book and submitted that in fact all the investments made by the assessee had been made from the savings bank account of the assessee with Citibank, a copy of which was enclosed in these pages. It was further submitted that the entries which have been highlighted in the said pages pertained to the investments made by the assessee during the year but the same had been made from the personal funds of the assessee and no part of borrowed funds of the proprietorship concern had been utilized for the purpose of making the investments. The Ld. AR further submitted that prior to assessment year 2011-12, the investments used to be shown in the books of account but since A.Y. 2012-13 these investments had been taken out from the books of accounts of the assessee and further drawing attention to the assessment order for assessment

6 589-c-2019 (A.Y. 2015-16) – Ramesh Dudani, Mohali year 2012-13 placed at pages 106 to 111 of the Paper-Book, it was submitted that subsequent to the investments being taken out from the books, no disallowance under section 14A of the Act had been made. He also referred to the Balance Sheet as at 31.03.2012 in respect of the proprietorship firm and submitted that no investments were with reflected in the said Balance Sheet.

3.1 The Ld. AR also referred to Page 87 of the Paper-Book which contained a certificate from the bankers of the assessee M/s Canara Bank wherein it had been certified by the Bank that the credit facilities availed by the proprietorship concern had been utilized towards 100% export of goods and that the said credit facilities had not been used for any other purpose except for the purpose of executing export orders. The Ld. AR submitted that, therefore, on facts, the disallowance under section 14A of the Act deserved to be deleted.

3.2 Coming to Ground No. 2 of the appeal, the Ld. AR submitted that identical issue had come up before the Tribunal in Assessment Year 2013-14 also and the issue had been remanded back to the AO for the purpose of fresh consideration with opportunity to be 7 589-c-2019 (A.Y. 2015-16) – Ramesh Dudani, Mohali given to the assessee to furnish the relevant details in support of the claim. It was further submitted that subsequent to the remand by the Tribunal, the AO had accepted the claim of the assessee and it was submitted that, therefore, the issue had finally been adjudicated and settled in the favour of the assessee in A.Y. 2013- 14 and, therefore, on identical facts, the assessee should be granted relief in this year also.

4.0 Per Contra, the Ld. Sr. DR, while supporting the orders of the lower authorities, submitted that as far as the issue of disallowance under section 14A of the Act was concerned, the fact remained that the bank accounts had been utilized for mixed purposes i.e. both for the purpose of running business as well for the purpose of making investments. The Ld. Sr. DR argued that the assessee had not been able to demonstrate that the borrowed funds had not been diverted for personal use and or that such borrowed funds had not been withdrawn for making investments.

4.1 On the issue of branch office expenses, it was submitted that the fact remained that the address of Mumbai office was that of a residential area and the personal use by the family members of the 8 589-c-2019 (A.Y. 2015-16) – Ramesh Dudani, Mohali assessee cannot be ruled out. It was also submitted that the assessee had not furnished any details regarding the expenses incurred towards the maintenance of office at Mumbai and, therefore, the disallowance had been rightly made.

5.0 We have heard the rival submissions and have also perused the material on record. As far as the issue of disallowance under section 14A of the Act is concerned, it is seen that the assessee has demonstrated with evidence before us that the investments were not forming part of the regular books of account of the assessee’s business i.e. proprietary concern M/s Technical Products Corporation. We have perused the Balance Sheet of the said proprietorship concern placed at page 36 of the Paper-book and a perusal of the same shows that no investments are appearing in the said Balance Sheet. This Balance sheet as on 31.03.2015 also shows three Secured Loans outstanding as on the closing date of the financial year out of which one is Automobile loan from HDFC Bank and two loans are from Canara Bank which are loans in respect of export related activity. The certificate from Canara Bank also supports the contention of the assessee that funds from these loans were utilized only for the purpose of export and that no part

9 589-c-2019 (A.Y. 2015-16) – Ramesh Dudani, Mohali of the said loan funds had been diverted towards personal use.

Apart from this, the assessee has also demonstrated with evidence before us that all the investments made by the assessee during the year were sourced from the personal Saving Bank account of the assessee which was being maintained with the Citi Bank. Further, a perusal of the Balance Sheet would also show that apart from the three secured loans, the assessee does not have any cash credit account nor any overdraft facility with the bank from which it could be inferred that the assessee had withdrawn amounts for the purposes making investments. The assessee has demonstrated that in A.Y. 2012-13, under identical circumstances, no disallowance had been under section 14A of the Act. Therefore, on an overall view of the facts of the case, we are of the concerned view that the AO could not have validly made any disallowance in terms of Rule 8D of the Rules towards financial charges when the assessee had demonstrated with ample evidence that no interest bearing funds have been utilised by the assessee for the purpose of making investments. Therefore, we are unable to concur with the action of the lower authorities in making and confirming the impugned disallowance under section 14A of the Act and, therefore, while

10 589-c-2019 (A.Y. 2015-16) – Ramesh Dudani, Mohali setting aside the order of the Ld. CIT (A) on the issue, we direct the deletion of the disallowance under section 14A of the Act.

5.2 As far as the issue of allowability of administrative expenses vis-à-vis Mumbai office is concerned, it is seen that Chandigarh Bench of the Tribunal in assessee’s own case for the assessment year 2013-14 in vide order dated 26.02.2020, had observed that there was no bar to run the business from the residential area to claim the expenditure and the only criteria was that the expenses should be incurred for the business purpose. Therefore, the first objection of the AO that the address of the Mumbai Office was that of a residential area does not hold good. However, the AO has also observed that no details had been furnished before him in respect of the expenditure incurred and the claim on this account. This issue of non submission of relevant details was before the ITAT in assessment year 2013-14 also and the Tribunal had remanded the issue back to the file of the AO for the purposes of considering the issue afresh after giving an opportunity to the assessee to furnish the relevant evidence and documents. Likewise, in this year also, since no details have been furnished by the assessee, in the interest of substantial justice, we

11 589-c-2019 (A.Y. 2015-16) – Ramesh Dudani, Mohali deem it appropriate to restore this issue to the file of AO with a direction to reconsider the issue and pass an order on the same in accordance with law after giving the assessee an opportunity to furnish details and the documents of support of his claim. Thus, Ground No 2 stands allowed for statistical purposes.

5.3 Ground No. 3 is general in nature and does not require any separate adjudication.

6.0 In the final result, the appeal of the assessee stands allowed.

Order pronounced on 22.08.2022.