JITEN SHANTILAL GOGRI,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1, KALYAN

In this appeal, assessee has raised two grievances, namely, against the disallowance of Rs.5,62,296/- u/s 14A of the Act and disallowance of interest expenditure of Rs.5,11,069/-.

At the time of hearing, the learned representative for the assessee pointed out that assessee is an individual who had filed his return of income declaring a total income of Rs.33,86,110/-, which comprised of income from salary from M/s. Jindat Silk Mills Pvt. Ltd., income from house property, income from business and income from other sources. So far as ‘Income from Business’ was concerned, it was explained that the same comprised of salary and interest received from the partnership firm, M/s. Jainam Silk Mills where assessee was a partner. Apart therefrom, assessee had received share of profits from the firm, which was exempt u/s 10(2A) of the Act. So far as the income under the head ‘Other Sources’ was concerned, the same comprised of interest income from bank, FDRs and while computing the said income, deduction of Rs.5,11,069/- was claimed on account of interest expenditure. The learned representative pointed out that with regard to the claim of interest expenditure while computing the income under the head ‘Other Sources’, assessee explained before the Assessing Officer that the same was with respect to loans utilised for purchase of property as well as for making investments in the firm and the company. However, the Assessing Officer rejected the plea and disallowed the entire interest expenditure. Secondly, it is pointed out that while noticing that assessee had earned exempt income by way of share of profit from the firm, the Assessing Officer applied Rule 8D of the Rules and computed the disallowance u/s 14A of the Act at Rs.5,62,296/- which comprised of interest disallowance as per Rule 8D(2)(ii) of the Rules of Rs.4,03,360/- and Rs.1,58,936/- on account of administrative overheads as per Rule 8D(2)(iii) of the Rules.

The learned representative submitted that before the CIT(A), assessee furnished detailed submissions with respect to the actual utilisation of loan proceeds, a copy of which is placed at page 5 of the Paper Book. In terms thereof, assessee demonstrated that out of the loan funds, a part was utilised for investment in the partnership firm and part of it was utilised for acquisition of house property. As per the said allocation, interest relatable to the investment in the partnership firm came to Rs.2,83,069/- and the amount relatable to acquisition of property came to Rs.2,28,000/-. On this basis, a fresh claim was canvassed before the CIT(A) that the interest expenditure of Rs.5,11,069/- originally claimed by the assessee under the head ‘Income from Other Sources’ partially be considered while determining the income from house property and the balance while computing the business income. The learned representative pointed out that such claim has been unjustly rejected by the CIT(A) primarily on the ground that it was a fresh claim not made through the return of income and, therefore, it could not be entertained in view of the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. vs CIT, 284 ITR 323 (SC).

Before us, the learned representative pointed out that the CIT(A) ought to have accepted the said claim inasmuch as the necessary material was already on record and that such a fresh claim was permissible to be admitted following the ratio of the judgment of the Hon'ble Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd., (2012) 349 ITR 336 (Bom).

Coming to the disallowance u/s 14A of the Act, the learned representative pointed out that a revised computation of income was filed before the CIT(A) based on the revised claim by the assessee regarding the interest expenditure which was originally claimed under the head ‘Income from Other Sources’. In this context, the learned representative pointed out that the interest expenditure of Rs.2,83,069/- was claimed under the head ‘Income from Business’. According to him, there was no justification in disallowing any interest expenditure u/s 14A of the Act because interest received by the assessee on capital contribution to the firm was to the tune of Rs.22,16,520/-, which was much in excess of the interest expenditure allocated to the business income, namely, Rs.2,83,069/-. Therefore, it was pointed out that even if one is to go by the action of the Assessing Officer in invoking Rule 8D of the Rules, the language of Rule 8D(2)(ii) of the Rules itself prescribes that only the interest not directly attributable to any particular income is liable to be considered for disallowance. In this case, the interest expenditure of Rs.2,83,069/- relates to the earning of interest income from business and, in any case, the income exceeds the expenditure and, therefore, the same could not be considered to be available for disallowance u/s 14A of the Act. It was pointed out that so far as other expenditure is concerned, the only element deducted from the business income was Professional fee of Rs.2,500/- and, therefore, there was no justification for invoking Rule 8D(2)(iii) of the Rules and disallowing the sum of Rs.1,58,936/-.

On the other hand, the ld. DR pointed out that the facts now being explained by the learned representative were not raised before the Assessing Officer, but were raised for the first time before the CIT(A) only and, therefore, the matter may be remanded back to the file of the Assessing Officer.

We have carefully considered the rival submissions. Insofar as the plea of the ld. DR for remanding the matter back to the file of the Assessing Officer is concerned, in our view, there is no justification for the same considering the facts and circumstances of the case. A perusal of the order of the CIT(A) reveals that assessee had made detailed submissions, which have indeed been reproduced in the impugned order. Moreover, it is not as if assessee has raised pleas which are not borne out of record and, therefore, considering the entirety of facts and circumstances, including the smallness of the matter, we deem it fit to adjudicate the pleas raised on their merit. The discussion in the assessment order reveals that before the Assessing Officer also, assessee had explained that the interest expenditure was relatable to house property and the business income, though such a claim was not in such details as was made before the CIT(A). Thus, it was not a claim which was an altogether new claim before the CIT(A).

Insofar as the claim of assessee of bifurcating the interest expenditure between ‘Income from House Property’ and ‘Income from Other Sources’ is concerned, the CIT(A) ought to have admitted such a claim and he fell in error by relying on the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. (supra). The decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. (supra) does not put any fetters on the powers of an appellate authority to admit fresh claims, which were hitherto not made before the lower authorities. Therefore, in our view, the learned representative has rightly canvassed that the CIT(A) ought to have admitted such a claim in view of the judgment of the Hon'ble Bombay High Court in th case of Pruthvi Brokers & Shareholders Pvt. Ltd. (supra).

Firstly, insofar as the disallowance of interest expenditure claimed by the assessee while computing the income under the head ‘Other Sources’ is concerned, the same was raised by the assessee even in the course of assessment proceedings. Of course, assessee made detailed submissions in this regard only before the CIT(A), canvassing on the basis of utilisation of loan funds, the interest expenditure relatable to acquisition of property and that relatable to the investment made in the partnership firm where assessee as a partner. In terms of said allocation, Rs.2,28,000/- is allocated to the acquisition of property as per the working made out by the assessee. No doubt, the aspect relating to the details of the property and investments thereof is factual in nature, which would require verification. Therefore, while the plea of the assessee is accepted in principle, the matter is remanded to the Assessing Officer for verifying the short point as to whether the interest expenditure is relatable to the investment in property, and if found so, he shall accept assessee’s claim for deduction of interest of Rs.2,28,000/- while computing ‘Income from House Property’.

Insofar as the disallowance u/s 14A of the Act is concerned, in our view, no interest expenditure is liable to be considered for disallowance in terms of Rule 8D(2)(ii) of the Rules inasmuch as the interest received on the capital investment in the firm exceeds the interest expenditure incurred and, therefore, there is no net interest available which can be relatable to the exempted income, being the share of profit earned from the partnership firm. Even with regard to the element of disallowance based on Rule 8D(2)(iii) of the Rules, the computation of income from business, placed at page 4 of the Paper Book, clearly shows that no expenditure has been claimed except a sum of Rs.2,500/- being Professional fee. Therefore, invoking of formula of Rule 8D(2)(iii) of the Rules and making disallowance of Rs.1,58,936/- is highly unjustified and, therefore, the same is directed to be set-aside.

In the result, we delete the disallowance made by the Assessing Officer us/ 14A of the Act and so far as the assessee’s claim for deduction of interest expenditure of Rs.2,28,000/- under the head ‘Income from House Property’ is concerned, the Assessing Officer shall carry out verification exercise as directed by us in the earlier paras and thereafter allow the same, as per law. Needless to mention, while carrying out such verification exercise, the Assessing Officer shall allow the assessee a reasonable opportunity of being heard in support of his stand.

In the result, appeal of the assessee is partly allowed.