OM SRI MAA SHAKTI NAMAH,MUMBAI vs. ASSTT. COMMISSIONER OF INCOME TAX, CIR-32(2), MUMBAI

2. We have heard rival submission of the parties and perused the We have heard rival submission of the parties and perused the We have heard rival submission of the parties and perused the relevant material on record. levant material on record. The assessee is engaged in the he assessee is engaged in the business of building and development business of building and development. In the profit and loss . In the profit and loss account for the year under consideration, the assessee reported or the year under consideration, the assessee reported or the year under consideration, the assessee reported interest expenses amounting to Rs.43,40,876/ interest expenses amounting to Rs.43,40,876/- having details as having details as under:

“Interest Expenses nterest Expenses Particulars Amount in INR Amount in INR Om Sri Maa Shakti Naman 5 Interest paid 1,97,13,918 1,97,13,918 Less: Interest Received from others 1,45,82,918 Less: Interest Received from others 1,45,82,918 7,90,124 Less: Interest on FD Less: Interest on FD 7,90,124 43,40,876 Interest Expenses Reported in Profit & Interest Expenses Reported in Profit & 43,40,876 Loss Statement and claimed under Loss Statement and claimed under section 36(1)(iii) section 36(1)(iii) 2.1 The assessee filed return of income for the year under The assessee filed return of income for the year under The assessee filed return of income for the year under consideration consideration consideration on on on 30.11.2014 30.11.2014 30.11.2014 declaring declaring declaring total total total income income income at at at Rs.69,86,450/-. The return of income filed by the assessee was . The return of income filed by the assessee was . The return of income filed by the assessee was selected for scrutiny selected for scrutiny and statutory notices under the Income statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) were issued and complied with. During hort ‘the Act’) were issued and complied with. During hort ‘the Act’) were issued and complied with. During the assessment, the Assessing Officer was of the view that interest the assessment, the Assessing Officer was of the view that interest the assessment, the Assessing Officer was of the view that interest income earned by the assessee amounting to Rs.153,73,042/- income earned by the assessee amounting to Rs.153,73,042/ income earned by the assessee amounting to Rs.153,73,042/ should be assessed under the he should be assessed under the head ‘income from other sources’ a ad ‘income from other sources’ as same was earned from the loans advanced arned from the loans advanced by the assessee to by the assessee to various persons out of surplus available and not earned from the various persons out of surplus available and not earned from the various persons out of surplus available and not earned from the business activity. However, the Assessing Officer did not reduce the business activity. However, the Assessing Officer did not reduce the business activity. However, the Assessing Officer did not reduce the said income from the profit and gains of the business and thus said income from the profit and gains of the business and thus said income from the profit and gains of the business and thus resulting into double addition of the amount of Rs.153,73,042/ into double addition of the amount of Rs.153,73,042/ into double addition of the amount of Rs.153,73,042/-. The assessee filed further appeal before the Ld. CIT(A) however did The assessee filed further appeal before the Ld. CIT(A) however did The assessee filed further appeal before the Ld. CIT(A) however did not reply to the various notices issued by the Ld. CIT(A). not reply to the various notices issued by the Ld. CIT(A). not reply to the various notices issued by the Ld. CIT(A). Accordingly, the Ld. CIT(A) dismissed the appeal of the assessee Accordingly, the Ld. CIT(A) dismissed the appeal of the assessee Accordingly, the Ld. CIT(A) dismissed the appeal of the assessee observing as under:

“Finding and decision: “Finding and decision: All the grounds of the appeal of the appellant are related with the All the grounds of the appeal of the appellant are related with the All the grounds of the appeal of the appellant are related with the addition made under the head Income from Other Sources, hence addition made under the head Income from Other Sources, hence addition made under the head Income from Other Sources, hence the adjudication in this appeal is being made collectively. the adjudication in this appeal is being made collectively. the adjudication in this appeal is being made collectively.

Om Sri Maa Shakti Naman 6 During the course of Assessment During the course of Assessment period it was noticed that the period it was noticed that the Appellant had work in progress of the project at Rs. 8,15,00,000/ Appellant had work in progress of the project at Rs. 8,15,00,000/ Appellant had work in progress of the project at Rs. 8,15,00,000/- and had shown nil sales. The appellant in its P&L account has and had shown nil sales. The appellant in its P&L account has and had shown nil sales. The appellant in its P&L account has debited interest expenses of Rs. 43,40,876/ debited interest expenses of Rs. 43,40,876/- which included which included interest paid amounting to Rs. 1,97, interest paid amounting to Rs. 1,97,13,918/- and interest received and interest received at Rs. 1,45,82,918/ at Rs. 1,45,82,918/- and FD interest received at Rs. 7,90,124/ and FD interest received at Rs. 7,90,124/-. The AO during the course of assessment proceedings as called for The AO during the course of assessment proceedings as called for The AO during the course of assessment proceedings as called for the explanation in this regard as under: the explanation in this regard as under: "The assessee "The assessee firm is a builder and has shown WIP at firm is a builder and has shown WIP at Rs.8,15,00,000/ s.8,15,00,000/-. The assessee firm has shown interest income assessee firm has shown interest income amounting to Rs. 1,45,82,918/ amounting to Rs. 1,45,82,918/- on loan advanced and has paid on loan advanced and has paid interest amounting to Rs.1,97,13,918/ interest amounting to Rs.1,97,13,918/- on loans taken. The on loans taken. The assessee has netted the interest paid against interest income and assessee has netted the interest paid against interest income and assessee has netted the interest paid against interest income and balance amount of Rs.43,40,876/ mount of Rs.43,40,876/-claimed as interest expenses in claimed as interest expenses in the P&L account. The interest income earned is in the nature of the P&L account. The interest income earned is in the nature of the P&L account. The interest income earned is in the nature of income from other sources, hence, interest paid on loan taken for income from other sources, hence, interest paid on loan taken for income from other sources, hence, interest paid on loan taken for business purpose is not allowable to be netted against interest business purpose is not allowable to be netted against interest business purpose is not allowable to be netted against interest income. In this respect, you are requested to show cause as to In this respect, you are requested to show cause as to In this respect, you are requested to show cause as to why interest income shown at Rs. 1,45,82,918 why interest income shown at Rs. 1,45,82,918- should not be should not be treated as income from other sources and brought to tax treated as income from other sources and brought to tax treated as income from other sources and brought to tax accordingly." The appellant in its submission had submitted certain ledger The appellant in its submission had submitted certain ledger The appellant in its submission had submitted certain ledger account and certain loan confirmation in support of the claim made nd certain loan confirmation in support of the claim made nd certain loan confirmation in support of the claim made in P&L account which was not satisfactory explanation to the in P&L account which was not satisfactory explanation to the in P&L account which was not satisfactory explanation to the show cause as to why the interest income should not be charged show cause as to why the interest income should not be charged show cause as to why the interest income should not be charged under the head 'Income from Other Sources'. The AO was right in under the head 'Income from Other Sources'. The AO was right in under the head 'Income from Other Sources'. The AO was right in taking decision of disallowances of interest income from the head ision of disallowances of interest income from the head ision of disallowances of interest income from the head Income from Business to the head 'Income from Other Sources' Income from Business to the head 'Income from Other Sources' Income from Business to the head 'Income from Other Sources' The Appellant during the course of appellate proceeding in its The Appellant during the course of appellate proceeding in its The Appellant during the course of appellate proceeding in its written submission has stated that during the year relevant to the written submission has stated that during the year relevant to the written submission has stated that during the year relevant to the AY 2014-15, had borrowed unsecured loan to the tune of Rs. 5, had borrowed unsecured loan to the tune of Rs. 5, had borrowed unsecured loan to the tune of Rs. 19,32,68,911/ 19,32,68,911/- for the purpose of its business. The Appellant has for the purpose of its business. The Appellant has also stated that during the year relevant to the AY 2014 also stated that during the year relevant to the AY 2014 also stated that during the year relevant to the AY 2014-15 had given loan and advances to the tune of Rs 17,99,31,452/ given loan and advances to the tune of Rs 17,99,31,452/ given loan and advances to the tune of Rs 17,99,31,452/- out of borrowed uns borrowed unsecured loan, which beyond prospect of nature of ecured loan, which beyond prospect of nature of business of the appellant. The appellant has also stated that the business of the appellant. The appellant has also stated that the business of the appellant. The appellant has also stated that the impugned project of redevelopment was delayed due to various impugned project of redevelopment was delayed due to various impugned project of redevelopment was delayed due to various litigation and other factors and hence resulted in surplus borrowed litigation and other factors and hence resulted in surplus borrowed litigation and other factors and hence resulted in surplus borrowed fund. Requirement of borrowing fund (unsecured loan) is required when ment of borrowing fund (unsecured loan) is required when ment of borrowing fund (unsecured loan) is required when the requirements of funds actually arise for the business. Here the the requirements of funds actually arise for the business. Here the the requirements of funds actually arise for the business. Here the appellant borrowed the fund and shown as appellant borrowed the fund and shown as utilised for Loan and utilised for Loan and advances in order to earn interest income. Therefore, purpose of advances in order to earn interest income. Therefore, purpose of advances in order to earn interest income. Therefore, purpose of borrowing funds was not established properly. By doing so, the rowing funds was not established properly. By doing so, the rowing funds was not established properly. By doing so, the Om Sri Maa Shakti Naman 7 ITA No. 1989/MUM/2024 appellant has routed the unaccounted money, which needs to be appellant has routed the unaccounted money, which needs to be appellant has routed the unaccounted money, which needs to be taxed separately. As the appellant has earned interest income on taxed separately. As the appellant has earned interest income on taxed separately. As the appellant has earned interest income on routed money, such interest income to be routed money, such interest income to be taxed as per provision taxed as per provision under IT Act. The appellant in its ground of appeal has claimed that borrowed The appellant in its ground of appeal has claimed that borrowed The appellant in its ground of appeal has claimed that borrowed fund was surplus as it could not be utilised for the reason for fund was surplus as it could not be utilised for the reason for fund was surplus as it could not be utilised for the reason for delay in re-development project due various litigation and other development project due various litigation and other development project due various litigation and other factors. No any individuals/Firm/Company could have su factors. No any individuals/Firm/Company could have su factors. No any individuals/Firm/Company could have surplus borrowed fund unless it is required for the purpose of business. borrowed fund unless it is required for the purpose of business. borrowed fund unless it is required for the purpose of business. The appellant could have returned the surplus fund (unsecured The appellant could have returned the surplus fund (unsecured The appellant could have returned the surplus fund (unsecured loan) to the concerned parties, if at all there was no requirement of loan) to the concerned parties, if at all there was no requirement of loan) to the concerned parties, if at all there was no requirement of such borrowed funds for any reason for the purpose of such borrowed funds for any reason for the purpose of such borrowed funds for any reason for the purpose of business, for which it was borrowed, instead of giving the same as loan and for which it was borrowed, instead of giving the same as loan and for which it was borrowed, instead of giving the same as loan and advance in order to earn interest income. advance in order to earn interest income. The appellant being a partnership firm engaged in the business of The appellant being a partnership firm engaged in the business of The appellant being a partnership firm engaged in the business of Builders and developers and during the year under concerned, the Builders and developers and during the year under concerned, the Builders and developers and during the year under concerned, the appellant was engaged in the project of Redevelopment of Marve ant was engaged in the project of Redevelopment of Marve ant was engaged in the project of Redevelopment of Marve Apartment at Marve Rod, Malad(West), Mumbai. It is pertinent to Apartment at Marve Rod, Malad(West), Mumbai. It is pertinent to Apartment at Marve Rod, Malad(West), Mumbai. It is pertinent to mention that the project, in which the appellant was engaged mention that the project, in which the appellant was engaged mention that the project, in which the appellant was engaged during the year under during the year under concerned, was re-development of a development of a litigated project litigated project 'Marve Apartment. The appellant was well aware 'Marve Apartment. The appellant was well aware above the existence litigation of re above the existence litigation of re-development project, instead the development project, instead the appellant borrowed the money, which was not at all required for appellant borrowed the money, which was not at all required for appellant borrowed the money, which was not at all required for the purpose of the business. The intention of the appellant behind the purpose of the business. The intention of the appellant behind the purpose of the business. The intention of the appellant behind borrowing huge fund was only to netting off the interest income ng huge fund was only to netting off the interest income ng huge fund was only to netting off the interest income earned by appellant on unaccounted money towards payment of earned by appellant on unaccounted money towards payment of earned by appellant on unaccounted money towards payment of interest on borrowed funds in order to hide interest income for borrowed funds in order to hide interest income for borrowed funds in order to hide interest income for payment of due taxes. payment of due taxes. Further, the appellant did not submit the substantial Further, the appellant did not submit the substantial Further, the appellant did not submit the substantial explanation on earned interest income on loan and advances at the time of on earned interest income on loan and advances at the time of on earned interest income on loan and advances at the time of hearing during the course of assessment proceedings or in hearing during the course of assessment proceedings or in hearing during the course of assessment proceedings or in response to show cause notice, except certain ledger account and response to show cause notice, except certain ledger account and response to show cause notice, except certain ledger account and certain loan conformation, which indicates that, non certain loan conformation, which indicates that, non certain loan conformation, which indicates that, non-availability valid substantial proof with the appellant, which could be placed. valid substantial proof with the appellant, which could be placed. valid substantial proof with the appellant, which could be placed. Therefore, the undersigned sees no reason to interfere with the Therefore, the undersigned sees no reason to interfere with the Therefore, the undersigned sees no reason to interfere with the orders of the Assessing Officer. Hence the appeal of the appellant orders of the Assessing Officer. Hence the appeal of the appellant orders of the Assessing Officer. Hence the appeal of the appellant is dismissed.” ”

3. We have heard rival submission o We have heard rival submission of the parties and perused the f the parties and perused the relevant material on record. We find that the issue in dispute is that relevant material on record. We find that the issue in dispute is relevant material on record. We find that the issue in dispute is once the Assessing Officer has treated the interest income received once the Assessing Officer has treated the interest income received once the Assessing Officer has treated the interest income received by the assessee from various loans and the advances and the fixed by the assessee from various loans and the advances and the fixed by the assessee from various loans and the advances and the fixed Om Sri Maa Shakti Naman 8 deposit as under the deposit as under the head ‘income from other sources’ but head ‘income from other sources’ but simultaneously he did not reduce the same amount out of profit simultaneously he did not reduce the same amount simultaneously he did not reduce the same amount and gain business or profession. But we find that the assessee did and gain business or profession. But we find that the assessee did and gain business or profession. But we find that the assessee did not file various submissions establishing the nexus of the interest not file various submissions establishing the nexus of the interest not file various submissions establishing the nexus of the interest income earned as well income earned as well as the interest expenditure incurred and as the interest expenditure incurred and therefore in the facts and circumstances of the case, we feel it therefore in the facts and circumstances of the case, we feel it therefore in the facts and circumstances of the case, we feel it appropriate to restore this issue back to the file of the Ld. CIT(A) for appropriate to restore this issue back to the file of the Ld. CIT(A) for appropriate to restore this issue back to the file of the Ld. CIT(A) for deciding afresh after considering submissions of the assessee. The deciding afresh after considering submissions of the assessee. The deciding afresh after considering submissions of the assessee. The grounds of appeal of the assessee are accordingly allowed for f appeal of the assessee are accordingly allowed for f appeal of the assessee are accordingly allowed for statistical purposes.