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Facts
The assessee, legal heir of late Rasila S. Mehta, filed an appeal against the CIT(A)'s order for AY 2020-21. The AO had computed the assessee's total income after making additions under section 68 for capital balance and disallowing interest expenditure. The appeal challenged additions made by CIT(A) for personal withdrawals and drawings, and disallowance of interest expenditure under section 57(iii) and interest under section 234B. Ground 1 (capital balance) and Ground 5 (interest payable) were not pressed by the assessee as relief had already been granted.
Held
The Tribunal held that the CIT(A)'s addition of INR 21,60,000 for personal withdrawals was void ab initio, as it constituted an enhancement on a new source of income beyond the AO's assessment powers under Section 251(1), thus allowing grounds 2-3. However, the addition of INR 2,74,080 for drawings was upheld, dismissing ground 4. The disallowance of interest expenditure claimed under section 57 was overturned, with the AO directed to allow the deduction based on previous consistent rulings. The calculation of interest under section 234B was remanded to the AO for recomputation, directing reduction by the amount of tax deductible at source.
Key Issues
Key legal issues included the CIT(A)'s power to enhance assessment by adding income from a new source (personal withdrawals), the justification for additions related to drawings, the allowability of interest expenditure under Section 57(iii) for income from other sources, and the recomputation of interest under Section 234B considering tax deducted at source.
Sections Cited
Section 250, Section 251, Section 251(1), Section 3(2) of The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, Section 143(2), Section 142(1), Section 143(3), Section 68, Section 57, Section 57(iii), Section 234B, Section 31(3) of the Income-tax Act, 1922, Section 12(2) of the Income Tax Act, 1922, Section 4(1) of the Special Court Act, Section 11, Section 12, Section 234A, Section 234C, Section 234
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI AMARJIT SINGHSHRI SANDEEP SINGH KARHAIL
Date of Hearing – 19/09/2024 Date of Order – 13/12/2024
O R D E R PER SANDEEP SINGH KARHAIL, J.M. The present appeal has been filed by the legal heir on behalf of the assessee challenging the impugned order dated 14/12/2023, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)-52, Mumbai [“learned CIT(A)”], for the assessment year 2020-21.
In this appeal, the assessee has raised the following grounds: –
“Grounds of appeal against the order dated 14.12.2023 u/s.250 of the Act passed by the Ld. CIT(A)-52, Mumbai. Following grounds of appeal are without prejudice to each other:
1. The Ld. CIT(A) has erred in law and in fact in partly allowing the ground relating to addition of Rs. 4,50,05.53,549/- and directing the Ld. A.O. to verify and rework the capital balance. The Ld. CIT(A) ought to have deleted the addition made on account of capital balance of Rs. 4,50,05.53,549/-.
2. The Ld. CIT(A) has erred in law and in facts in making addition of Rs. 21,60,000/- on account of personal withdrawals.
3. The Ld. CIT(A) ought to have appreciated that the addition on account of personal withdrawals represents enhancement of income and that such enhancement was not permissible in view of s. 251 of the Act.
4. The Ld. CIT(A) has erred in law and in facts in making addition on account of drawings of Rs. 2,74,080/-.
5. The Ld. CIT(A) ought to have deleted the discrepancies pointed out by the Ld. A.O. instead of setting it aside to the Ld. A.O. for verification. The Ld. CIT(A) has erred in law and in facts in not granting deduction on account of interest payable by the appellant amounting to Rs. 1,25,73,937/-.
6. The Ld. CIT(A) has erred in law and in facts in not allowing set off of tax deductible at source while calculating interest u/s. 234B of the Act.”
3. Ground no. 1, raised in assessee’s appeal, was not pressed during the hearing on the basis that the addition was deleted vide order giving effect pursuant to the learned CIT(A)’s directions. Accordingly, ground no.1 raised in assessee’s appeal is dismissed.
4. The issue arising in grounds no.2-4, raised in assessee’s appeal, pertains to addition on account of personal withdrawals.
5. The brief facts of the case pertaining to this issue are that the assessee was an individual and for the year under consideration filed her return of income on 10/01/2021 declaring a total income of INR 16,74,36,420. The assessee is a notified person since 04/01/2007 under section 3(2) of The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. The return filed by the assessee was selected for scrutiny under CASS and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the year under consideration, the assessee’s income consists of dividend income and interest on deposits. In response to the statutory notices, the assessee’s legal heir submitted the details as called for on various dates. The Assessing Officer (“AO”) vide order dated 29/09/2022 passed under section 143(3) of the Act computed the total income of the assessee at INR 468,05,63,910 after making additions under section 68 of the Act on account of capital balance and disallowance of interest expenditure.
The learned CIT(A), vide impugned order, after taking into consideration the addition on account of personal household expenditure made in the assessment year 2016-17 held that it would be appropriate that a similar sum of INR 21,60,000 be excluded for the purpose of capital balance in the year under consideration. Being aggrieved, the assessee is in appeal before us.
During the hearing, the learned Authorised Representative (“learned AR”) submitted that the learned CIT(A) made the addition on altogether a new source of income which has not been processed by the AO. On the contrary, the learned Departmental Representative (“learned DR”) submitted that there is no enhancement of income by the learned CIT(A) and only the capital balance has been reduced.
We have considered the submissions of both sides and perused the material available on record. At the outset, it is discernible from the record that no addition on account of personal withdrawals was made by the AO vide assessment order and there was also no reduction of capital balance as declared by the assessee during the assessment proceedings. We find that it is for the first time while adjudicating the ground raised by the assessee challenging the addition of INR 450,05,53,549 on account of capital balance, the learned CIT(A) observed as follows: –
“9.7. At the same time, it is seen that the appellant has overstated its capital balance despite past additions / disallowances made on this account. For instance in AY 2016-17, the AO has made an addition of Rs. 21,60,000/- on account of personal household expenses. Although the assessment order was passed on 19.12.2018, the appellant had not filed any appeal against quantum proceeding till 07.11.2023 when the penalty appeal for the same year was heard. Vide para 8 of the CIT(A) order against the 271(1)(c) order for AY 2016- 17, a finding was given that the quantum issue had already become final. Hence, this amount of Rs. 21,60,000/- is not available for the appellant to be treated as-its capital. For the year under reference also the appellant was asked to explain why no drawings or expenses have been shown. In my view, it would be appropriate that a similar sum of Rs. 21,60,000/- be excluded for the purpose of capital balance. Apart from this, if any addition / disallowance has been made in the past, which impact the capital balance, the same may be verified and excluded from the capital balance. The appellant is directed to assist the AO in this regard. Besides the appellant has also shown separately a sum of Rs. 2,74,080/- as drawings, which in my view has not been appropriately reflected and hence needs to excluded. Hence, addition to this extent is also confirmed.”
As per the assessee, under section 251(1) of the Act the learned CIT(A) has been conferred the power to enhance the assessment while disposing of an appeal against the assessment order, however, such a power of enhancement does not extend to making an addition on altogether a new source of income. In this regard, reference was made to the decision of the Hon’ble Supreme Court in CIT v/s Rai Bahadur Hardutroy Motilal Chamaria, reported in [1967] 66 ITR 443 (SC). The relevant findings of the Hon’ble Supreme Court, as regards the power of enhancement of the Appellate Commissioner, are reproduced as follows: –
“The principle that emerges as a result of the authorities of this court is that the Appellate Assistant Commissioner has no jurisdiction, under section 31(3) of the Act, to assess a source of income which has not been processed by the Income-tax Officer and which is not disclosed either in the returns filed by the assessee or in the assessment order, and therefore the Appellate Assistant Commissioner cannot travel beyond the subject-matter of the assessment. In other words, the power of enhancement under section 31(3) of the Act is restricted to the subject-matter of assessment or the source of income which have been considered expressly or by clear implication by the Income-tax Officer from the point of view of the taxability of the assessee.”
Reference was also made to the similar findings rendered by the Hon’ble Supreme Court in CIT v/s Shapoorji Pallonji Mistry, reported in [1962] 44 ITR 891 (SC). From a careful perusal of the aforesaid decisions, it is evident that the power of enhancement available with the learned CIT(A) is restricted to the subject matter of the assessment or the source of income which has been considered expressly or impliedly by the AO. In the present case, as noted in the foregoing paragraphs, the AO computed the total income of the assessee at INR 468,05,63,910 after making additions under section 68 of the Act on account of capital balance and disallowance of interest expenditure. Thus, the addition on account of personal withdrawals was neither the subject matter of assessment nor the source of income which was considered expressly or impliedly by the AO. Accordingly, we are of the considered view that the learned CIT(A), in the present case, has transgressed its power of enhancement granted under section 251(1) of the Act while making the addition on account of personal withdrawals, and therefore the impugned addition is void ab initio. Accordingly, on this short point, the addition of INR 21,60,000 on account of personal withdrawals made by the learned CIT(A) is deleted. As a result, the impugned order on this issue is set aside and grounds no.2-3 raised in assessee’s appeal are allowed.
The issue arising in ground no.4, raised in assessee’s appeal, pertains to addition on account of drawings.
We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that while adjudicating the ground raised
by the assessee challenging the addition of INR 450,05,53,549 on account of capital balance, the learned CIT(A) made an addition of a sum of INR 2,74,080 on account of drawings, which as per the learned CIT(A) was not properly reflected by the assessee. As per the assessee, the drawings amounting to INR 2,74,080 were made during the financial year 2010-11 and the same was considered to be shown in the balance sheet for the year under consideration. In this regard, reference was made to the ledger account of drawings in the books of the assessee for the financial year 2010-11, forming part of the paper book on page
14. We find that the amount of INR 2,74,080 shown as drawings in the ledger account for the financial year 2010-11 appears in Schedule A of the balance sheet of the year under consideration and thereby the capital account is reduced to that extent. Since the drawings of INR 2,74,080 in the books of the assessee for the year under consideration is nothing but the drawings of the financial year 2010-11, it appears that the same was reduced erroneously by the assessee from the capital account of this year and thus the direction of the learned CIT(A) to exclude the same, which resulted in the impugned addition, on the basis that same is not appropriately reflected is correct and we upheld the same. Accordingly, the impugned order on this issue is upheld and ground no.4 raised in assessee’s appeal is dismissed.
Ground no. 5, raised in assessee’s appeal, was not pressed during the hearing on the basis that the relief has been granted to the assessee vide order giving effect pursuant to the learned CIT(A)’s directions. Accordingly, ground no.5 raised in assessee’s appeal is dismissed.
The issue arising in ground no.6, raised in assessee’ appeal, pertains to the deduction of interest expenditure.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, the assessee was asked to explain why the interest payable amounting to INR 1,43,36,252 should not be disallowed. In response, the assessee submitted that she had claimed interest expenses against income from other sources amounting to INR 1,25,72,847 and not INR 1,43,36,252. On perusal of the return filed by the assessee, it was observed that the assessee has claimed deduction/expense under section 57 of the Act of INR 1,25,73,937, which includes interest expenses of INR 1,25,72,847 and bank charges of INR 1090. The AO vide order dated 29/09/2022 passed under section 143(3) of the Act disagreed with the submissions of the assessee and held that in order to claim deduction under section 57(iii) of the Act they should be a direct nexus between the expenditure incurred with the income earned. It was held that however, the assessee in her submissions could not establish the linkage between the income earned and expenses incurred. It was further held that the assessee has not furnished any specific details providing a direct correlation of such expenses with the income from other sources earned during the year under consideration. Accordingly, the AO disallowed the deduction of interest claimed by the assessee for the following reasons: –
The interest payable is tentative and provisional. There is no basis as per which the assessee has a right to pay and the creditors has a right to receive. There is no basis of computation of interest payable which has been provided by the assessee. The provisions made on account of interest payable is a contingent liability and therefore, cannot be allowed as business expenditure. It is also seen that these broking firms have not charged any interest on the amount receivable from the companies of this group where the books of accounts have been produced before the AO.
Thus, the AO found no merits in the contention of the assessee and disallowed the sum of INR 1,25,73,937 and added the same to the total income of the assessee.
The learned CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue and upheld the disallowance made by the AO under section 57(iii) of the Act. Being aggrieved, the assessee is in appeal before us.
We have considered the submissions of both sides and perused the material available on record. In the present case, it is undisputed that the assessee has claimed interest expenditure amounting to INR 1,25,72,847 against the income under the head “income from other sources”. We find that for similar reasons as noted in the foregoing paragraph, similar disallowance was made in the case of assessee’s family member and while deleting the disallowance, the coordinate bench of the Tribunal in Pratima Hitesh Mehta v/s DCIT, in and 1180/Mum./2023, vide its order dated 26/10/2023, for the assessment year 1992-93, observed as follows: – “27. Since the issue arising in ground no.3, raised in assessee’s appeal, and grounds no.2 and 3, raised in Revenue’s appeal, pertains to the deduction of interest expenditure, therefore the aforesaid grounds are dealt with together.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, the assessee submitted that the transactions in the capital market have been made through three broking firms belonging to the family members of the assessee. As per the details submitted by the assessee, it was submitted that the amount of interest of Rs. 2,46,33,261 are shown as payable to family run broking firms such as M/s HSM, M/s ASM and M/s JHM. The AO vide order passed under section 144 read with section 254 of the Act did not agree with the submissions of the assessee and disallowed the deduction of interest claimed for the following reasons:- (i) The liabilities were not crystallise during the year. (ii) The interest payable is tentative and provisional. (iii) There is no basis as per which the assessee has a right to pay and the creditors has are right to receive. (iv) There is no basis of computation of interest payable which has been provided by the assessee. (v) The provisions made on account of interest payable is a contingent liability and therefore, cannot be allowed as a business expenditure. (vi) It is also seen that these broking firms have not charged any interest on the amount receivable from the companies of this group with the books of accounts have been produced before the Assessing Officer.
The AO following the approach adopted in earlier round of litigation rejected the assessee’s claim of deduction on account of interest and disallowed interest payment of Rs. 2,46,33,261. The learned CIT(A), vide impugned order, partly allowed the ground raised by the assessee on this issue and held that the main purpose of incurring the interest expenditure was not earning income from dividends and unless the interest expenditure was incurred solely for the purposes of making or earning dividend income, no deduction is possible under section 57 of the Act. The learned CIT(A) further held that in the acquisition of shares for capital gains, the dividend income is incidental and not a major factor, and it is thus clear that the sole purpose of borrowing by the assessee @12% per annum cannot be for the purpose of earning dividend income. Accordingly, the interest expenditure was held to be not allowable against dividend income. The learned CIT(A), however, allowed the interest expenditure only to the tune of Rs. 15,73,548 which is the share trading profit. Being aggrieved, both assessee and Revenue are in appeal before us.
We have considered the submissions of both sides and perused the material available on record. From the perusal of the computation of total income, forming part of the paper book on pages 464-466, we find that the assessee claimed interest on bank loans of Rs. 2,46,33,261 against the income under the head “income from other sources”. It is evident from the record that the learned CIT(A) placed reliance upon the decision of the Hon’ble jurisdictional High Court in CIT v/s Jagmohandas J. Kapadia, [1966] 61 ITR 663 (Bom.), in order to support the conclusion that unless the interest expenditure was incurred solely for the purposes of making or earning dividend income, no deduction as possible under section 57 of the Act. The relevant findings of the Hon’ble jurisdictional High Court in the aforesaid decision, as relied upon in the impugned order, are as under:- “It would be noticed that what is allowable as expenditure under the said sub- section is only the expenditure incurred solely for the purpose of making or earning dividend income. Emphasis thus appears to be on the object or purpose of incurring of the expenditure. The exclusive object of incurring the expenditure has to be the making or earning of the dividend income. The mere fact that income by way of dividend has accrued and that the expenditure incurred is in some manner or other related to the accrual of the dividend income is not sufficient.”
We find that the Hon’ble Supreme Court in Seth R. Dalmia v/s CIT, [1977] 110 ITR 644 (SC) agreed with the view taken by the Hon’ble jurisdictional High Court in CIT v/s H.H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom), wherein it was held that the connection between the expenditure and the earning of income need not be direct, and even an indirect connection could prove the nexus between the expenditure incurred and the income. We further find that in CIT v/s Smt. Sushila Devi Khadaria, [2009] 319 ITR 413 (Bom.), in a similar factual matrix, i.e. wherein the AO denied the deduction claimed under section 57(iii) of the Act on the basis that the expenditure was not incurred wholly for the purpose of earning income as the taxpayer was engaged in selling shares in the stock market and the dividend income had accrued as a by-product, the Hon’ble jurisdictional High Court by placing reliance upon the aforesaid decision of the Hon’ble Supreme Court in Seth R. Dalmia (supra), upheld the allowance of finance expenditure as deduction under section 57(iii) of the Act against the income by way of dividends, finance charges and interest which were shown as income from other sources by the taxpayer. Therefore, respectfully following the aforesaid decision of the Hon’ble Supreme Court in Seth R. Dalmia (supra), we are of the considered view that the assessee is entitled to claim a deduction of interest expenditure under section 57 of the Act since receipt of dividend is merely due to the shareholding of the assessee and the interest expenditure has nexus with the income under the head “income from other sources” including dividend income even though not direct. Accordingly, the AO is directed to allow the interest expenditure claimed by the assessee under section 57 of the Act. As a result, ground No. 3 raised in assessee’s appeal is allowed, while ground No. 2 and 3 raised in Revenue’s appeal is dismissed.”
During the hearing, the learned DR by vehemently relying on the impugned order submitted that the decision of the coordinate bench of the Tribunal in assessee’s family member, cited supra, has taken into consideration the decision of the Hon’ble Supreme Court in Seth R. Dalmia v/s CIT, reported in [1977] 110 ITR 644 (SC), which relates to the assessment year 1953-54 under the provisions of Income Tax Act, 1922 and not under section 57 of the Act applicable to the present case. We find that section 12(2) of the Income Tax Act, 1922, dealing with the provisions of “Other Sources”, corresponds to the provisions of section 57(iii) of the Act and the same reads as follows: -
“(2) Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains, [and further in the case of any income by way of dividend, for any reasonable sum paid by way of commission or remuneration to a banker or any other person realising such dividend on behalf of the assessee,] [provided that no allowance shall be made on account of— (a) any personal expenses of the assessee, or (b)any interest chargeable under this Act which is payable without [the taxable territories], not being interest on a loan issued for public subscription before the 1st day of April, 1938, or not being interest on which tax has been paid or from which tax has been deducted under section 18, or (c) any payment which is chargeable under the head "Salaries", if it is payable without [the taxable territories] and tax has not been paid thereon nor deducted therefrom under section 18.”
Further, the provisions of section 57(iii) of the Act, as applicable to the year under consideration, are reproduced as follows for ready reference: –
“(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income;”
Therefore, from the perusal of the plain language of the provisions of section 12(2) of the Income Tax Act, 1922, dealing with the provisions of “Other Sources” and the provisions of section 57(iii) of the Act, it is evident that under both provisions deduction of expenditure is allowable only when the same is expended/incurred solely/wholly and exclusively for the purpose of making or earning such income and such expenditure is not in the nature of capital expenditure. Thus, we find that there is no change in the language of the provisions, in respect of the issue under consideration before us, under the Income Tax Act, 1922 and the Act applicable to the present case. Therefore, we find no merits in the aforesaid submission of the learned DR.
During the hearing, the learned AR submitted that a similar issue came up for consideration before the coordinate bench of the Tribunal in assessee’s own case for the assessment years 2011-12, 2012-13 and 2013-14 in Smt. Rasila S. Mehta v/s DCIT, in ITA no. 5806/Mum./ 2015, etc. We find that in the aforesaid decision, vide order dated 27/12/2017, the coordinate bench allowed the claim of deduction in respect of interest expenditure, by observing as follows: –
“12. We heard the rival submissions and carefully considered the same along with the orders of the Tax Authorities below. We have also gone through the case law as has been cited before us the relevant provisions of the Special Court Act which has been referred to before us during the course of hearing. This is an undisputed fact which we noted that the assessee is a notified person from 08.06.1992 under Section 3(2) of the Special Court Act. As per the provisions of the Special Court Act contract entered into by a notified person prior to notification made under Section 3(2) are not affected by the notification. Section 4(1) of the Special Court Act empowers the custodian to cancel any contract or agreement entered into between 01.04.1991 to 06.06.1992 if the custodian finds that these contracts have been entered into fraudulently or to defeat the provisions of the Special Court Act. In A.Y. 1990- 91, the AO in the assessment order passed under Section 143(3) dated 26.03.1993 allowed the interest expenses to the assessee to the extent of Rs.5,86,404/-. From page 75 of the paper book which contains the computation of income for A.Y. 1990-91, we noted that the assessee has disclosed the loan taken for the purchase of investment. The assessee is consistently following mercantile system of accounting which is apparent even from the assessment order of A.Y. 1990-91 as well as from the impugned assessment year. The order for A.Y. 1990-91 in fact has been passed by the AO after the date of notification and the enactment of the Special Court Act. We have gone through the order passed by the CIT(A) in the case of Shri Ashwin S. Mehta assessment years 2010-11 and 2011-12, where we noted that this issue of taxability of interest income of the assessee and other parties has specifically been dealt with by the CIT(A) and accordingly interest income of Rs.10,68,83,732/- was brought to tax. In view of this fact it is apparent that the assessee is liable to pay interest on the amount outstanding. Therefore the liability towards interest got accrued. Under the mercantile system of accounting interest is deductible when it has accrued. This also proves that there was an agreement, may be oral, to pay the interest on the borrowed funds by the assessee to the other family members. We, therefore, reject the plea of the learned D.R. that no liability interest has accrued but it was merely a contingent liability. We noted that section 4 of the Special Court Act empowers the custodian and the court to cancel any contract or agreement in relation to the property of a person notified under that Act provided they have entered into fraudulently. In this case no cogent material or evidence has been brought to our knowledge or placed before us which may prove that the custodian under Section 4(1) of the Special Court Act has taken any action to cancel the terms relating to payment of interest. Rather we have noted from the affidavit of the custodian dated 01.03.2006 in M.P. No. 41 of 1999 that the custodian seeking to levy interest @ 15% to 18% per annum. Therefore the interest on outstanding credit balance of the brokerage firm has accrued as actual liability. The issue with regard to contract for payment of interest has been raised by the AO and the CIT(A) in the case of other notified entities duly approve the existence of liability. We noted that in the case of Growmore Leasing & Finance Ltd. for A.Y. 2007-08 by order dated 26.06.2014 the CIT(A) followed the finding in the case of other group concerns, i.e. Eminent Holding Pvt. Ltd. by observing as under: - “6.3 I have gone through the submissions of the Ld. AR. I find that though there is no express document evidencing payment of interest to the brokerage firms, the intentions of the parties were always so, this is evident from the fact that identical claim was also made during A.Y. 1990-91 and the same was allowed to the appellant and other concerns. The claim made in the affidavit of Custodian in MP No. 41 of 1999 also supports this claim. I also agree with the appellant that there need not be any written agreement and that the oral agreement coupled with the actions and intentions of the parties is sufficient to prove the existence of the liability.”
Similar issue was involved in the case of other family member, i.e. Shri Hitesh S. Mehta for A.Y. 2005-06 where also the AO has disputed the very existence of liability towards interest to creditors. The CIT(A) vide his order dated 31.08.2010 confirmed and approved the claim of the assessee that there was no need for any written agreement and that the oral agreement coupled with action and intentions of the parties is sufficient to prove the existence of liability. This order of the CIT(A) was followed by him in the case of the assessee while adjudicating the ground relating to the interest expenses for A.Y. 2006-07 vide order dated 27.09.2013 under para 6 which has been reproduced under para 18 of the order of the assessee. These finding and observation in the above orders of the CIT(A) has not been disputed by the Revenue by filing an appeal. In view of this finding becoming final, in our view, the existence of liability for payment of interest cannot be disputed.
Coming to the objection of the Revenue that interest cannot be allowed as deduction has not been shown by recipients in their income. As has been discussed by us in the preceding paragraphs the interest has been shown as income by Mr. Ashwin S. Mehta in assessment years 2010- 11 and 2011-12. We also noted that Late Shri Harshad Mehta has been offering his income on cash basis and the method of accounting has been duly upheld by the Tribunal in his case for A.Y. 1989-90. Even otherwise disallowance of interest claimed by the assessee cannot be made merely because in the opinion of the AO the corresponding interest income has not been offered by the recipients. The interest can be allowed on the basis of method of accounting followed by the assessee. We noted that similar issue when arose in the case of M/s. Growmore Leasing & Investment Ltd. vs. CIT in & 5136/Mum/2012 wherein the Coordinate Bench of this Tribunal while setting aside the issue to the file of the CIT(A) directed him to tax the income in the hands of recipient family members in accordance with the method of accounting followed by them. We find force in the submission of the learned A.R. that since the assessee as well as the recipients are notified entities under the Special Court Act unless the Court directs for distribution of the assets towards existing liabilities under Section 11(2) of the Special Court Act, the assessee cannot make the payment to these creditors. Even otherwise since the existence of liability towards interest has accrued especially when the assessee is following the mercantile system of accounting the interest is to be allowed. During the course of hearing we raised a query about the nexus of interest expenses with the interest income. The learned A.R. pointed out that the liability in the present case was accrued on account of purchases of shares securities by the assessee which were sold in terms of the directions of the Hon'ble Special Court in subsequent years and the sale proceeds so received were invested in term deposits with the banks and accordingly the assessee has claimed interest expenditure against the interest earned on term deposits. No contrary evidences or material were brought to our knowledge to contradict this fact. In view of this fact we find that there is a nexus between borrowed funds and investments in term deposits. Therefore, the interest paid on the borrowed funds has to be allowed out of the interest earned by the assessee on term deposits. We noted that identical issue was raised in the case of M/s. Growmore Leasing & Investment Ltd. in A.Y. 2007-08. The CIT(A) in his order dated 26.02.2012 considered the issue of nexus of interest expenditure with interest income, following his own finding in the case of another notified entity, i.e. Eminent Holding Pvt. Ltd. for A.Y. 2007-08 which are reproduced as under: - "As regards the nexus of the interest expenditure with the interest income, I find that the Balance Sheet of the appellant and the affidavit filed by the custodian before the Hon'ble Special Court supports the fact that the funds borrowed from Shri Harshad S. Mehta were deployed by the appellant in various assets like shares and securities, properties, etc. These funds generated income in the form of dividend and interest income. After being notified, such shares and securities got converted into Fixed Deposits with various banks. These fixed deposits generated interest income which is offered to tax. Hence, a reasonable nexus can be said to exist between the interest liability incurred by the appellant, and the interest income earned from these assets. However, this matter being sub-judice before the Hon'ble Special Court, no finding can be given on these matters."
Similar issue has arisen in the case of Shri Hitesh S. Mehta for A.Y. 2005- 06 wherein the CIT(A) vide his order dated 31.08.2010 approved the nexus between borrowed funds and the investment in term deposit which has been followed by the CIT(A) even in the case of the assessee for A.Y. 2006-07 dated 27.09.2013. We do not agree with the submission of the learned D.R. that interest expenses cannot be allowed till the Hon'ble Special Court decide the issue. The allowance or disallowance of the expenditure depends on the accrual of expenditure. Even no dispute has been raised in respect of interest on such credit balances before the Special Court. Even on this basis, following the principle of consistency, as the interest has been allowed as deduction in the A.Y. 2006-07 and there is no change in the facts, the deduction in respect of the interest expenditure has to be allowed. Our aforesaid view is supported by the following decisions: The Supreme Court in the case of Radhasoami Satsang Saomi Bagh vs. CIT 193 ITR 321 referred to the following passage from Hoystead v Commissioner of Taxation 1926 AC 155 (PC), wherein it was observed (page 328): “Parties are not permitted to begin fresh litigation because of new view they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the Plaintiff and traversable by the Defendant, has not been traversed. In that case also a Defendant is bound by the judgement, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.” At pg 329 of the judgement, Their Lordships observed as under: “We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating though the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter and if there was not change it was in support of the assesses – we do not think the question should have been reopened and contrary to what had been decided by the Commission of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under Sections 11 and 12 of the Income Tax Act of 1961.” The aforesaid dictum of law was reiterated recently by the Supreme Court in CIT vs. Excel Industries Ltd. : 358 ITR 295. “It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the Assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather spend the tax payers money in pursuing litigation for the sake of it.”
In view of our aforesaid discussion we set aside the order of the CIT(A) and direct the AO to allow deduction in respect of said interest accrued and calculated at 12% per annum amounting to Rs.2,64,72,208/- after disallowing proportionate interest in respect of the investment in shares amounting to Rs.3,51,176/- after verifying the calculation of the interest quantification. ****************** Smt. Rasila S. Mehta – & ITA 2378 & 2379/Mum/2017 27. In this case also the assessee has taken additional ground as has been taken in the case of Shri Sudhir S. Mehta in ITA No. 5799/Mum/2015. In view of the discussion in the case of Shri Sudhir S. Mehta the additional ground taken by the assessee stands admitted.
In A.Y. 2011-12 assessee has taken identical grounds as taken in the case of Shri Sudhir S. Mehta in ITA No. 5799/Mum/2015. In assessment years 2012-13 and 2013-14 the assessee has taken only ground Nos. 1 3 & 4 which were renumbered as ground Nos. 1, 2 & 3 except change in figure in ground No.
In ground No. 1 assessee has claimed deduction of interest at Rs.1,29,51,465/- after proportionate disallowance of interest at Rs.12,25,871/- for A.Y. 2012-13 and in A.Y. 2013-14 the assessee has claimed interest of Rs.1,35,62,185/- after proportionate disallowance of interest of Rs.6,15,151/- in place of Rs.1,08,72,373/- after disallowance of proportionate interest of Rs.33,04,963 in A.Y. 2011.12. Both the parties agreed that as the facts and claim of interest is similar to ground No. 1 in the case of Shri Sudhir S. Mehta in ITA No. 5799/Mum/2015, the same view may be taken in the case of the assessee. While disposing of ground No. 1 relating to claim of interest of assessee in the case of Shri Sudhir S. Mehta we have allowed the claim of interest against interest on term deposit and confirmed proportionate disallowance of interest. We, therefore, respectfully following the decision of this Tribunal in the case of Shri Sudhir S. Mehta in ITA No. 5799/Mum/2015 set aside the order of the CIT(A) and allowed deduction of interest as claimed by the assessee out of the interest on term deposit after disallowing the proportionate interest disallowed to be treated as cost of acquisition of shares and securities. Respectfully following the said decision of the Tribunal in the preceding paragraphs, we allow the deduction of interest expenditure as claimed by the assessee out of the interest on term
deposit after verification of the calculation of interest quantification. We further direct the AO to allow capitalisation of interest which has been proportionately disallowed in view of the additional ground. Thus ground No. 1 and additional ground are allowed.”
Since the issue under consideration before us has already been decided in assessee’s own case as well as in the case of assessee’s family member, respectfully following the decisions cited supra, we direct the AO to allow the interest expenditure claimed by the assessee under section 57 of the Act. As a result, ground no.6 raised in assessee’s appeal is allowed.
The issue arising in ground no.7, raised in assessee’s appeal, pertains to the calculation of interest under section 234B of the Act.
Having considered the submissions of both sides and perused the material available on record, we find that a similar issue came up for consideration before the coordinate bench of the Tribunal in assessee’s own case for the assessment years 2011-12, 2012-13 and 2013-14, cited supra. We find that in the aforesaid decision vide order dated 27/12/2017, the coordinate bench of the Tribunal observed as follows: –
“20. Ground Nos. 3 & 4 relate to levy or interest under Section 234A, 234B and 234C as well as calculation of the said interest. We find that the said issue has been decided by the Coordinate Bench in the case of Eminent Holding P. Ltd. in for A.Y. 2002-03 in which this Tribunal while dealing with the said issue held as under: -” “3. Next ground of appeal is about levy of interest u/s. 234 of the Act. Before us, AR stated that the assessee was a notified entity that the provisions of s. 234A, 234B and 234C of the Act were deemed to have complied with, that the assets were already in attachment of the Custodian appointed under the provisions of the Special Courts Act, that the Tribunal in the case of the appellant and several other entities had held the view in favour of the appellant, that the Hon'ble Bombay High Court in the case of Divine Holdings Pvt. Ltd. and Cascade Holdings Pvt. Ltd. had held that the provisions of sections 234A, 234B and 234C of the Act were mandatory and were applicable to the notified entities also, that the assessee was in the-process of filing an appeal against the said order before the Hon'ble Supreme Court, that the income earned in the year under consideration was subjected to provisions of TDS, that the changeability of the section 234A, 234B and 234C of the Act should be after considering the amount of tax deductible at source on the income assessed. The appellant relies in this regard on the following decisions. He relied upon the cases of Motorola Inc. v. DCIT [95 ITD 269 (Del.) (SB)], Sedco Fores Drilling Co. Ltd. [264 ITR 320], NGC Network Asia LLC [313 ITR 187], Summit Bhatacharya [ 300 ITR (AT) 347 (Bom)(SB)], Vijal Gopal Jindal [ITA No. 4333/Del/2009] & Emillo Ruiz Berdejo [320 ITR 190 (Bom)]. DR relied upon the cases of Devine Holdings Pvt. Ltd. 3.1. We have heard the rival submissions and perused the material before us. We find that in the case of Devine Holdings Pvt. Ltd. Hon'ble Bombay High Court has held that provisions of section 234A, 234B and 234C were applicable to the notified person also. Therefore, upholding the order of the FAA to that extent, we hold that provisions of section 234 of the Act are applicable. As far as calculation part is concerned, we find merits in the submission made by the assessee. Therefore, we are restoring back the issue to the file of the AO for fresh adjudication who would decide the issue after considering the amount taxed deductible at source on the income assessed and after affording a reasonable opportunity of hearing to the assessee. Ground no.5 is allowed in part in favour of the assessee.” Respectfully following the said order of the Tribunal in the case of Eminent Holding P. Ltd. (supra) we direct the AO to recomputed the interest liability after reducing the amount of tax deductible at source on the income earned. Thus, ground No. 3 stand dismissed while ground No. 4 stand partly allowed. ************ 30. Since ground Nos. 3 & 4 in A.Y. 2011-12 and Ground Nos. 2 & 3 in A.Y. 2012-13 and 2013-14 relating to levy and calculation of interest under Section 234A, 2343B and 234C are similar to ground Nos. 3 & 4 ground taken in the case of Shri Sudhir S. Mehta in for A.Y. 2009-10, both the parties agreed that the Tribunal may take the same view in the case of the assessee also. We, therefore, respectfully following our order in the preceding paragraph in ITA No. 5799/Mum/ 2015 dismiss ground No. 3 in A.Y. 2011-12 and ground No. 2 in A.Y. 2012-13 and 2013-14 and direct the AO to recompute the interest in accordance with our direction given in the case of Sudhir S. Mehta in ITA No. 5799/Mum/2015 while disposing off ground No.
4. Thus ground No. 4 in A.Y. 2011-12 and ground No. 3 in A.Y. 2012-13 and 2013- 14 are statistically allowed.”
26. Thus, respectfully following the aforesaid decision of the coordinate bench of the Tribunal rendered in assessee’s own case, we direct the AO to recompute the interest under section 234B of the Act in accordance with the directions as rendered by the coordinate bench in assessee’s own case cited supra. Accordingly, ground no.7 raised in assessee’s appeal is allowed for statistical purposes.
In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 13/12/2024