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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI ASHWANI TANEJA, AM (A.Y:2007-08) Dy. Commissioner of Income Tax, Mahan Industries Ltd., 3rd Floor, K.K. House, Nr. Central Cir. 12, Room No. 803, Vs. 8th Floor, Old CGO building Mithakali Under Bridge, Ellis (Annex), M.K. Road, Mumbai-20 bridge Ahmedabad. Appellant .. Respondent PAN No. AABCM0370P CO No.03/Mum/2016 (ITA No.1553/Mum/2014 A.Y: 2007-08) Mahan Industries Ltd., Dy. Commissioner of Income Tax, 3rd Floor, K.K. House, Nr. Central Cir. 12, Room No. 8th Mithakali Under Bridge, Ellis Vs. 803, Floor, Old CGO bridge Ahmedabad. building (Annex), M.K. Road, Mumbai-20 Appellant .. Respondent Revenue by .. Shri Suman Kumar, DR Assessee by .. Shri Aseem L.Thakkar, AR Date of hearing .. 27-02-2017 Date of pronouncement .. 27-02-2017 O R D E R PER MAHAVIR SINGH, JM:
This appeal by Revenue and cross objection by assessee are arising out of the order of CIT(A)-VIII, Mumbai, in appeal No. CIT(A)- VIII/DCIT/Cir.4/128/12-13 dated 30-12-2013. The Assessment was framed by DCIT (OSD)-1 Circle-4, Mumbai for the A.Y. 2007-08 vide order dated 14-03- 2013 u/s 143(3) r. w. s 263 of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first common issue in this appeal of Revenue and CO of the assessee is as regards to the order of CIT(A) restricting the disallowance of notional interest expenses at Rs. 4,17,343/- as against the addition made by AO at Rs. 31,9,270/- under section 36(1)(iii) of the Act. For this Revenue has raised following ground No. 1: -
“1. Whether on the facts and in the circumstances of the case, the ld. CIT(A) was right in holding that interest Mahan Industries Ltd.; AY.07- C O No.03/Mum/2016 expenditure on margin funding, should not be proportionately disallowed without appreciating the fact that the assessee has not establish that interest free funds were available to make such interest free loans and advances.”
Assessee has raised following ground No. 2: - “The learned CIT(A) has erred in confirming the disallowance of notional interest expenses of Rs 4,17,343/- out of Rs 31,09,270/- made by AO under section 36(1)(iii) of the I.T. Act, 1961.”
Briefly stated facts are that the AO noticed during the assessment proceedings that the assessee had debited sum of Rs. 89,90,646/-as interest expenses and on the other hand has advanced loan free of interest amounting to Rs.2,59,10,583/-. According to AO the assessee company had diverted interest free funds by advancing interest free loans and thereafter on this interest free advance of Rs. 2,59,10,583/-, the AO made disallowance of proportionate amount of interest at the rate of 12% at Rs. 31,09,270/-. Aggrieved assessee preferred appeal before CIT(A), who restricted the addition at Rs. 4,17,343/- out of the total disallowance of Rs. 31,09,270/- by observing as under: - “…I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AC has disallowed the interest expenditure claimed by the appellant during the year in proportion to the interest free loans given by it during the year. it has been observed by him that the loans have been gven without any business purpose and therefore, the proportionate interest expenditure should be disallowed.
The appellant on the other hand has submitted that no interest cost has been incurred on the loans advanced on which the interest has not been charged. It has submitted that the interest expenditure that has been incurred during the year does not relate to the interest on Page 2 of 9 Mahan Industries Ltd.; AY.07- C O No.03/Mum/2016 loans taken by the appellant company. The major item of expenditure of interest was on the margin funding for share trading business of the appellant company. It has further been submitted by the appellant that the loans were advance in earlier years and have been reflected in the balance sheet from year to year. Since the loan itself had become doubtful, the appellant has submitted, it was not prudent to charge the interest.
After considering the explanation and the details given by the appellant it is noted that the advances on which the interest has been disallowed were partly new and old. Out of the advances of Rs. 2.59 crores, which have been considered by AO for disallowance, old advances were of Rs. 1.88 crores and the monies advanced during this year were 70.78 Lacs The appellant has not charge interest on any of these advances.
The claim of the appellant that it had sufficient interest free funds for making these advances is not clearly borne out. It had claimed that if had share capital of 7.15 crores and unsecured loans of 10.71 crores which were interest free during the year out of which the loans and advances have been given. However, the appellant has not been able to clearly explain the deployment of interest-free funds in earlier years so as to prove that the advances that were made in the preceding year were out of interest free funds. This plea of the appellant is therefore, not accepted.
It is further observed that the appellant has incurred the following interest cost during the year: -
I. Bank Interest 27,997/-
II. Interest on ICD 3,89,346/-
III. Interest on Margin Funding 85,73,303/- Page 3 of 9 Mahan Industries Ltd.; AY.07- C O No.03/Mum/2016 It is apparent from the above details that the interest cost has been incurred mainly on account of the margin. funding taken by the appellant for share trading and no major interest expenditure has been incurred on borrowing the funds. The interest on lCD is incurred on the money borrowed during the year whereas the amounts were advanced in the earlier years. It has been explained by the appellant that the margin funding money is never made available to the appellant and is directly paid by the bank on the half of the appellant. Therefore, the interest expenditure which is incurred on margin funding should not be apportioned for interest-free advances. The appellant has also incurred interest on lCD and rank interest. It has not been able to give any details regarding these interest expenditures. No nexus of the utilisation of fund, to prove that any of the funds on which these expenses on interest have been incurred was not advanced as interest-free loans, has been given. Since the appellant has not been able to give any explanation regarding the nexus of interest-free funds advanced with the funds available, it would be appropriate if the disallowance made by the AO is restricted to Rs. 417343 (27997+389346). The disallowance made by the AO is therefore, reduced to this extent and the ground of appeal is partly allowed.”
Aggrieved against the decision of CIT(A), both Revenue as well as assessee preferred the appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Sr. DR relied on the assessment order and stated that the AO has rightly held that the assessee company has diverted interest bearing funds by advancing interest fee loans and hence he has rightly disallowed the proportionate interest. On the other hand, the learned Counsel for the assessee argued that advances on which the interest has been Mahan Industries Ltd.; AY.07- C O No.03/Mum/2016 disallowed were partly new and old. According to him out of the advances of Rs. 2.59 crores which has been considered by the AO for disallowing old advances were to the tune of Rs.1.88 crores and money is advanced during the year were at Rs. 70.78 lakhs on which assessee has not charged any interest. The assessee before CIT(A) has claimed that it had share capital of 7.95 crores and unsecured loan to the extent of Rs.10.71 crores which were interest free during the year. It was explained by the learned Counsel for the assessee that the interest on margin funds were to the tune of Rs. 85,73,303/-, which is a normal trading of the business and not interest free advance for business. In view of this facts and circumstances, the learned Counsel for the assessee asked the Bench to delete interest in entirety. He also drew our attention to the assessment order, whereby he stated that the assessee is engaged in the business of trading of shares and regularly disclosing shares in its books of accounts as stock in trade. Since the main business of assessee is trading in shares, the AO considered the earning of income as business income. Further, the learned Counsel for the assessee stated that the assessee has charged interest to the extent of Rs. 4,02,044/- to the Profit and loss Account as income and this fact is recorded by the AO in the assessment order as under: - “…….Interest on ICD Rs.3,89,346/- is also on amounts borrowed during the year and advanced to a party during the year on which interest is charged and the same has been shown as interest income in all amounting to Rs. 4,02,044/- in profit and Loss A/c. Hence, the said interest expense has no nexus to advances which are old and on which interest is not charged for the reasons stated hereinabove.”
We have gone through the facts in entirety and notice that this advance amount of Rs.85,73,303/- is on margin fund and moreover the assessee is having its interest free funds in the shape of share capital of Rs. 7.15 crore and unsecured loan of Rs. 10.71 crore available with its interest free. In these facts and circumstances, we are of the view that no disallowance at all can be Mahan Industries Ltd.; AY.07- C O No.03/Mum/2016 attributed to the assessee on account of diversion of funds. Accordingly, this issue of Revenue’s appeal is dismissed and issue of CO is allowed.
The next issue in this Cross Objection of the assessee is as regards to confirming an addition of unexplained cash credit of Rs.56 lakhs from Tower Inn Pvt. Ltd. For this assessee has raided following ground No.1: - “The learned CIT(A) has erred in confirming the addition of Rs.56,00,000/- made by the AO for the alleged unexplained Cash Credit from Tower Inn Pvt. Ltd.”
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the CIT(A) has recorded the finding while confirming this loan as unexplained cash credit by observing as under: - “Regarding the loan taken from Tower Inn Ltd it was observed from the confirmation letters given by the appellant that does not contain the PAN of the creditor. Accordingly, with a view to ascertain whether the creditor is a regular taxpayer or not an enquiry was made from the database of the Income Tax Department. However, it was found that the name of the creditor was not reflected in the records of the Department data base. Accordingly, a letter under section 133(6) was issued by this office asking the company to conform whether it has given the loan to the appellant company. No reply to the enquiry letter was received in spite of a lapse of considerable time. It is to be noted that the letter was duly served at the given address. In view of these facts the appellant has not been able to give satisfactory evidence regarding the existence and creditworthiness of the creditor from home it has taken a loan of Rs. 56 Lacs. The addition made by the AO for this loan under section 68 is therefore, upheld.
Another loan that has been taken is from Parsoli Corporations Ltd Ahmedabad. In respect of this loan it is Mahan Industries Ltd.; AY.07- C O No.03/Mum/2016 noted that the appellant has duly given confirmation certificate which contains detailed address and the permanent account number of the creditor. The loan has been taken from banking channel. The appellant has duly discharged its anus of giving the information regarding the loan taken by mentioning the PAN and submitting the confirmation of the creditor. In view of these facts the details given by the appellant shall have to be accepted unless it is proved to be incorrect. There is no adverse fact on record which indicates that the loan taken was not genuine. The AO has made the addition mainly on the basis of general assumption without mentioning any specific finding. In view of these facts the addition is directed to be deleted. Reliance is placed on the ratio laid down in the case of DOT v. Rohini Builders (2002) 256 hR 360 (Gufl. The AO is however, directed to pass this information to the AC of the creditor so that further verification can be made by him. In view of the above discussion the addition made by the AC under section 68 of the act is upheld to the extent of Rs. 56 Lacs on account of the loans accepted from Tower inn Ltd and the balance addition is directed to be deleted.”
Now before us, the learned Counsel for the assessee could not attribute or could not argue in anything on merits hence, we have no hesitation in confirming the findings of CIT(A). Accordingly, this issue of assessee’s appeal is dismissed.
The next issue in this cross objection of assessee is as regards to disallowance of depreciation of car confirmed by the CIT(A). For this assessee has raised following ground No.3: - “The learned CIT(A) has erred in confirming the disallowance made by the AO for the depreciation on car claimed by the Respondent of Rs. 58,625/-”
Brief facts regarding disallowance of car is that the car was purchased in the name of Shri Yogendra Kumar Gupta director of the assessee company. It Page 7 of 9 Mahan Industries Ltd.; AY.07- C O No.03/Mum/2016 was claimed before AO and before CIT(A) that car was purchased out of the funds of the assessee company and also used for the business purposes of the assessee company only. To prove this point assessee produced complete audit accounts and balance sheet for the year ended 31-03-2007. The assessee has disclosed this car in the business asset and claimed depreciation. We find in the exactly similar circumstanced coordinate Bench of this Tribunal in the case of Mehta Equities Ltd. v. The ACIT in for the assessment year 2010-11 vide order dated 21-09-2016 has allowed the claim of depreciation wherein the car was purchased in the name of one of the director of the assessee company, by observing as under: - “We have gone through he orders passed by the lower authorities and copies of judgments placed before us and submissions made by both the parties before us. It is not in dispute that car has actually been purchased by the assessee company from the funds of the company and the same has been shown by the company in its balance- sheet. It was also stated that a resolution was passed by the company wherein it was clarified that though the car, for some reasons, has been purchased in the name of the director, but it belongs to the company and is owned by the company. The director has never claimed the ownership of the car. The company has undisputed ownership of the car. Both the parties involved in the transaction are clear about this factual and legal position. There is no confusion on that. Under these circumstances, it can be safely said that the company is the de-facto owner of the car. It is also not disputed that the car has been actually used by the company for its business purposes. Similar position came up before the Hon’ble Gujarat High Court in the case of Aravali Finlease Ltd (supra) wherein it was held that where vehicle though registered in the name of the director of the company, but if entire funds for purchase of vehicles had gone from the coffers of the company and the same Page 8 of 9 Mahan Industries Ltd.; AY.07- C O No.03/Mum/2016 was used for the purpose of the business of the company, under these circumstances, the company was entitled to depreciation on the said vehicle. Similarly, the Hon’ble Delhi High Court in the case of Basti Sugar Mills Co Ltd (supra) held that the company was entitled to depreciation on car which was owned by it but not registered in its name. The law in this regard was also clarified by Hon’ble Supreme Court way back in the case of Mysore Minerals Ltd vs CIT 239 ITR 775 (SC). It is further noticed by us that the co-ordinate bench of Mumbai Tribunal in its later judgment passed in the case of Edwise Consultants Pvt Ltd (supra) clarified the correct legal position in this regard and following the aforesaid judgements of high courts held that depreciation will be allowable in such a situation.
Respectfully following the same and on the same reasoning, we also direct the AO to allow the claim of depreciation to the assessee company. The appeal of Revenue is dismissed and CO of assessee is partly allowed.
In the result, the appeal of Revenue is dismissed and CO of assessee is partly allowed. Order pronounced in the open court on 27 -02-2017.