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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: Shri Joginder Singh & Shri G Manjunatha
Date of hearing 14-09-2017 Date of pronouncement 25-09-2017 O R D E R
Per G Manjunatha, AM :
This appeal filed by the assessee is directed against the order of the CIT(A)-38, Mumbai dated 09-01-2015 and it pertains to AY 2010-11. The assessee has raised the following grounds of appeal:-
1. “The learned CIT (Appeals)-38, Mumbai has erred in law and on facts and circumstances of the case in upholding the action of the Assessing Officer (hereinafter referred to as A.0) in rejecting the Books of Account and resorting to the provisions of Section 145 of the Income Tax Act, 1961.
2. The learned CIT (Appeals)-38, Mumbai has erred in A.O to the tune of Rs.22,71,237/- out of the total additions of Rs.27,04,348/- made by the A.O. 3. The learned CIT (Appeals)-38, Mumbai has erred in law and on facts and circumstances of the case in upholding the addition made by A.O of Rs. 16,41,096/- u/s. 69 of the Income Tax Act, 1961.
The learned CIT (Appeals)-38, Mumbai has erred in law and on facts and circumstances of the case in not accepting the 'Cash Flow Statement' as submitted by the Appellant during the course of assessment/appeal proceedings without assigning any reasons.
5. The learned CIT (Appeals)-38, Mumbai has erred in law and on facts and circumstances of the case in not appreciating that all receipts from and all payments made to MIs. Chamunda Earth Movers (R.F) (a Firm in which the Appellant is a Partner) were explained by the Appellant by producing necessary evidence like Bank Statements of the Appellant as well as of M/s. Chamunda Enterprises and also not adjudicating upon the submissions made,
6. The learned CIT(Appeals)-38, Mumbai has erred in law and on facts and circumstances of the case in upholding the additions made by the A.O of Rs.2,99,064/- on account of interest paid on borrowings and used for making advances without charging interest.
7. The learned CIT(Appeals)-38, Mumbai has erred in law and on facts and circumstances of the case in upholding the conclusion made by A.O that the Appellant has used interest bearing funds for interest free loans”.
8. The learned CIT(Appeals)-38, Mumbai has erred in law and on facts and circumstances of the case in upholding the additions made by the A.O of Rs.3,3 1,076/- u/s. 14-A of the I.T. Act, 1961 read with Rule 8D of Income Tax Rules.
9. The learned CIT(Appeals)-38, Mumbai has erred in law and on facts and circumstances of the case in coming to conclusion that the Appellant has not furnished to the CIT (Appeals) a Statement of disallowance u/s. 14-A of the I.T. Act, 1961 of Rs.14,627/- which was furnished during the course of Appeal proceedings.”
The brief facts of the case are that the assessee, an individual engaged in the business of earthwork contractor, filed his return of income for the AY 2010-11 on 09-10-2010 disclosing total income at Rs.15,75,040. The case was selected for scrutiny and statutory notices u/s 143(2) and 142(1) of the Act along with detailed questionnaire were issued. In response, the authorized representative of the assessee appeared and furnished the details as called for.
The assessment was completed u/s 143(3) on 30-04-2012 determining the total income at Rs.42,79,388 interalia making additions towards unexplained investment u/s 69C of the Act, disallowance of interest, disallowance of expenditure in relation to exempt income u/s 14A and undisclosed transaction as per ITS data.
Aggrieved by the assessment order, the assessee preferred appeal before CIT(A) and filed elaborate written submissions and argued that the AO was erred in adding a sum of Rs.16,31,563 as unexplained investment towards difference in capital account balance of partnership firm M/s Chamunda Earthmovers even though the assessee has explained each debit and credit
appeared in the ledger accounts. The assessee further submitted that additions made by the AO towards disallowance of interest against interest income, the assessee has earned interest income from M/s D Thakkar Developers Pvt Ltd and also paid interest on loans borrowed from various persons which has been claimed as deduction u/s 57 of the Act. The AO has disallowed proportionate interest paid on loans on the assumption that the assessee has diverted its interest bearing funds. Insofar as disallowance of expenditure incurred in relation to exempt income, the AO has worked out disallowance in relation to exempt income in respect of share of profit earned from the partnership firm for invoking rule 8D even though disallowance provided u/s 14A has no application towards share of profit received from the partnership firm because the said income had been taxed in the hands of the firm. As regards disallowance of difference in ITS data, the assessee submitted that two parties, viz. M/s Vasantlal & Co and M/s Rainbow Contruction Co, have filed their TDS returns by wrongly mentioning the PAN of the assessee which was reflected in form 26AS, however, the same has been rectified by the parties by filing revised TDS returns and the confirmation of the parties was submitted to the AO. The assessee also filed an application u/s 154 requesting for rectification of the above mistake which is pending for adjudication before the AO. Therefore, the additions made by the AO may be deleted.
4. The CIT(A), after considering the submissions of the assessee partly allowed the appeal filed by the assessee wherein he confirmed additions made towards difference in capital account of partnership firm u/s 69 of the Act, and addition made towards disallowance of interest and also disallowance of expenditure in relation to exempt income. However, he set aside the issue of addition towards difference in ITS database with a direction to the AO to dispose of the rectification application filed by the assessee. Aggrieved by the order of CIT(A), the assessee is in appeal before us.
The first issue that came up for our consideration is addition towards difference in capital account balance of partnership firm, M/s Chamunda Earthmovers of Rs.16,41,096. The AO made addition towards difference in capital account u/s 69 of the Act, as unexplained investments for the reason that the assessee has failed to explain difference in capital account balance of partnership firm. The AO has analysed the balance-sheet filed by the assessee along with ledger extract of partnership firm to reconcile the debits and credits appeared in the books of account of the assessee from partnership firm.
According to the AO, the assessee has failed to explain the difference appearing in the firm’s capital account. It is the contention of the assessee that it had explained each and every entry appeared in the account of the partnership firm, which has been debited / credited to his capital account. The AO of Rs.16,41,096 represents opening balance carried forward from the previous financial year which is on account of net transfer of funds between the assessee and partnership firm for which necessary reconciliation has been filed before the AO.
Having heard both the sides and considered material on record, we find that the AO has made addition on the ground that the assessee has not explained difference in capital account of partnership firms. The assessee has filed paper book containing copies of ledger extract of partnership firm. The assessee explained that additions made by the AO towards difference in capital account is opening balance brought forward from previous financial year which represents net balance of debits / credits of previous financial year which has been reconciled before the AO. The debits and credits of current financial year have been explained. The AO has not disputed the fact that all entries appearing in the account has been properly explained. We find that the AO has made addiiton towards difference in capital account on the basis of entry appearing in the ledger extract which represents opening balance brought forward from previous financial year. The facts recorded by the AO and conclusion drawn for making impugned addition are inconsistent with each other. Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of explanations of the assessee and hence, we set aside the AO and direct him to consider reconciliation filed by the assessee and decide the issue in accordance with law.
The next issue that came up for our consideration is addition towards disallowance of interest paid on borrowed capital. During the financial year relevant to AY 2010-11, the assessee has earned interest income of Rs.21,87,861 from M/s D Thakkar Developers Pvt Ltd. The assessee also paid interest of Rs.16,34,442 and claimed it as deduction against interest income u/s 57 of the Income-tax Act, 1961. The AO disallowed proportionate interest expenses of Rs.2,99,065 on the ground that the assessee has diverted its interest bearing funds for non business purpose, therefore, deduction towards total interest paid on loan borrowed cannot be allowed as deduction. The AO has worked out disallowance of Rs.2,99,065 on the basis of average rate of interest worked out by taking into account interest paid by the assessee multiplied by average amount appeared in the books of account of the assessee. The AO has worked out the average rate of interest of 13.91% and applied it to the interest free funds and determined disallowance of Rs.2,99,065.
We have heard both the parties and considered the materials available on record. The fact with regard to the earning of interest income from loans and payment of interest against loan borrowed is not disputed by the AO. The AO disallowed proportionate interest paid by the assessee for the reason that the assessee has diverted its interest bearing funds for non business purpose and also failed to explain and establish nexus of interest bearing funds and interest earning advance. Therefore, he opined that interest paid to the extent of Rs.2,99,065 cannot be allowed as deduction. We do not find any merit in the finding of the AO for the reason that the AO has disallowed proportionate interest on adhoc basis without finding any fact with regard to the diversion of interest bearing funds for non business purpose. The facts recorded by the AO and conclusion drawn in the assessment order are inconsistent with each other. Therefore, we set aside the issue to the file of the AO ad direct him to reconsider the issue afresh after affording an opportunity of hearing to the assessee.
The third issue that came up for our consideration is disallowance of expenditure incurred in relation to exempt income. The AO has disallowed expenditure in relation to exempt income in respect of share of profit received from partnership firm, M/s Chamunda Earthmovers Pvt Ltd. According to the AO, the assessee has earned dividend income of Rs.4,82,280 and share of profit from partnership firm which is exempt u/s 10(2A), whereas failed to disallow related expenditure incurred in relation to exempt income. The AO has worked out the disallowance u/r 8D(2)(ii) and 8D(2)(iii) and worked out the Rs.2,99,348 based on his own calculation of average assets and average investments, which yielded exempt income. The AO further disallowed indirect expenditure @0.5% of the average investment which worked out to Rs.31,728. Thus, he made total disallowance of Rs.3,31,076.
The assessee claims that the AO was incorrect in applying provisions of section 14A to disallow expenditure in relation to exempt income in respect of share of profit received from partnership firm. The assessee further contended that its exempt income is Rs.48,230 whereas disallowances worked out by the AO is Rs.3,31,076 which is more than the exempt income which cannot be done as pert the provisions of section 14A of the Act.
Having heard both the sides and considered material available on record, we find that the AO has worked out disallowance of expenditure incurred in relation to exempt income u/s 14A by invoking Rule 8D(2)(ii) and 8D(2)(iii). The AO has worked out proportionate interest bearing funds to partnership firms, which earned exempt income being share of profit. The AO also disallowed expenditure @0.50% of the average value of investment. We do not agree with the findings of the AO for the reason that income earned from partnership firm in the form of share of profit though exempt in the hands of the partners, is a taxable income suffered tax in the hands of the firm. We further observe that the calculations done by the AO for disallowance of interest and indirect