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Income Tax Appellate Tribunal, MUMBAI BENCHES “H”, MUMBAI
Per Amit Shukla, Judicial Member
The aforesaid appeal has been filed by the assessee against impugned order dated 15.03.2016, passed byLd. CIT(Appeals)-3, Thane,for assessment passed u/s. 144 r.w.s. 145(3) of the Income Tax Act, 1961 for A.Y. 2003-04.In the appeal memo the assessee has raised the following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law the Hon. CIT (Appeal)-3 erred in confirming the ld. AO’s action of invoking provisions of S.145(3) of the Act for rejecting appellants’ books of accounts and further in making the Aashima Chemicals and Dyechem Private Ltd. arbitrary estimate and disallowances under section 144 of the Act.
2. On the facts and in the circumstances of the case and in law the Hon. CIT (Appeal) – 3 has erred in treating the Interest Income of Rs.16,22,79,443/- as Income from Other Sources instead of Business Income as claimed by the appellants.
3. On the facts and in the circumstances of the case and in law the Hon. CIT (Appeal) – 3 has erred in confirming the disallowance of the interest expenses of Rs. 16,70,331,580/- without considering their submissions and arguments in this regard.
4. On the facts and in the circumstances of the case and in law the Hon. CIT (Appeal) – 3 has erred in not considering the facts that there was a nexus between the borrowed funds and the advances given therefrom and therefore, alternately, the Interest Expenses should have been allowed as Deduction against the Interest Income.
5. On the facts and in the circumstances of the case and in law the Hon. CIT (Appeal)-3 erred in disallowing appellant’s claim for deduction of administrative Expenses of Rs.4,29,558/- and Depreciation of Rs.1,494/- in spite of the submission of the detailed facts and legal position in that regard.
6. On the facts and in the circumstances of the case and in law the Hon. CIT (Appeal)-3 has erred confirming ld. AO’s arbitrary action of enhancing appellants’ income by Rs.5,52,969/- to Rs.17,09,303/- i.e. estimating net income @1% of the total sales of Rs.17,09,30,322/- as against the actual net profit of Rs.5,52,969/-” Besides these, the assessee has also raised following additional ground:
“1. The assessment order dated 26th March, 2014 passed on a non-existing person is invalid and bad in law.”
Before us, the learned counsel for the assessee, Shri Madhur Agarwal, first addressed on the issue of merits which has been raised vide ground nos. 2 to 4. Explaining the brief facts and the background of the case, he submitted that the assessee company has shown interest income of Rs.16,22,79,443/-, which was treated as business income by the assessee on the ground that, in view of the press release No. 1998-99/1269, dated 08.04.1999 issued by RBI,if the interest income is more than 50% of the gross receipts of the business of the company, then it need not be required to register as an NBFC with the Reserve Bank of India. As an alternative, it was contended that if the assessee’s income is treated as “income from other sources” u/s. 56, then the interest expenditure directly attributable for earning of such an income should be allowed as deduction u/s. 57(iii).
However, the ld. AO has rejected the assessee’s s first contention on the ground that the press release does not ipso facto give license to the assessee company to be deemed NBFC, rather section 4 of the “Bombay Moneylenders Act, 1946” provides that, no person can carry out the business of money lending without a license. Thus, he held that interest income should be taxed as “income from other sources”.
Regarding assessee’s claim of interest expenditure of Rs.6,70,71,580/- AO held that assessee could not prove the nexus of Aashima Chemicals and Dyechem Private Ltd. this expenditure with the interest income of Rs.16,22,76,094/-. The relevant observations of the AO in this regard read as under:
“5.3 Vide letter dated 19.03.2014, the assessee has furnished a chart of secured and unsecured loans taken by the assessee company along with the interest working and ledger accounts for A.Y. 2011-12. By the said letter, the assessee has also furnished detailed chart of loans & advances given by the assessee company along with interest working and ledger accounts for A.Y. 2011-12. From these details, it is seen that the assessee has raised interest-bearing ‘secured loans’ of Rs. 100 crores during the year form Sicom Limited and also raised interest-bearing unsecured loans of Rs.205.99 crores from 5 different companies during the year. In addition, the assessee has also raised interest-free loans totalling Rs.9,60,00,000/- from 3 different companies during the year. During the year, the assessee has paid interest of Rs.7,03,35,618/- to Sicom Limited and also paid further interest to other private parties on the loans obtained from them. However, from these ledger accounts, details of loans taken and loans advanced vis-a-vis bank statement filed by the assessee company are totally fungible in nature and that it cannot be said here that the funds so raised are diverted fully towards advancing loans to parties and, thus, the expenditure so incurred cannot be said to have been incurred wholly and exclusively in connection with the income earned on loans & advances given. For claiming deduction u/s. 57(iii) of the Act, there has to be direct nexus of expenditure so incurred with the income so earned i.e. it has to have arisen directly from the said source but here in the instant case, the assessee has not been able to substantiate the direct nexus of its interest expenditure with its interest income and, therefore, the assessee’s alternate plea of allowing the interest expenditure u/s. 57(iii) of the Act is found to be not tenable. Accordingly, the interest expenditure of Rs.16,70,31,580/- is hereby disallowed in accordance with the provision of Section 57(iii) of the Act. A copy of letter dated 19.03.2014 with Annexures
Aashima Chemicals and Dyechem Private Ltd. thereto is hereby made as a part of the present order and annexed hereto.”
Before the ld. CIT(A), it was pointed out that the assessee had enclosed the entire details of money taken from secured and unsecured loans and also the details of loans and advances given to various parties along with their names, PAN, opening balances, transaction during the year, interest paid/received and TDS deducted.
It was stated before him that the AO had also verified genuineness and credit worthiness of the parties from whom the assessee had taken loans, which is evident from details incorporated at page 18 of the appellate order. It was also pointed out that there was a direct nexus between the source of fund as shown in the balance sheet, loan taken and application of funds. Thus, there was a direct nexus of interest expenditure for the earning of interest income. However, the learned CIT(A) too confirmed the action of the AO.
Before us, Shri Madhur Agrawal, first of all drew our attention to the balance sheet of the assessee company to point out that the assessee had funds in the form of:-i) share application money of Rs. 21.77 crores;ii) secured loans of Rs. 100 crores; and iii) unsecured loans of Rs.111.80 crores. Out of these funds the assessee has given loans and advances of Rs.222.9 crores to various parties. Thus, there was a direct nexus of utilization of fund for giving advances to various
Aashima Chemicals and Dyechem Private Ltd. parties from whom the assessee had earned interest income and also paid interest on loans. Hence, u/s. 57(iii) such an interest should be allowed.
On the other hand, learned DR strongly relied upon the orders of the AO and CIT(A).
We have considered the rival submissions and perused the relevant findings given in the impugned orders as well as material referred to before us. So far as allowbility of interest expenditure of Rs.16,70,71,580/- u/s. 57(iii) is concerned, which has been raised vide ground no.3, we find from the perusal of the balance sheet that assessee had following sources of fund and corresponding application of funds, which for the sake of ready reference is reproduced here under:-
AS ON 31.03.2011 AS ON 31.03.2010 PARTICULARS (Rs. in Crores) (Rs. in Crores) SOURCE OF FUNDS Share Capital 0.01 0.01 Share Application money 21.77 21.77 Secured Loan 100.00 75.00 Unsecured Loan 111.80 37.88 Current Liabilities 0.22 0.34 Total 233.80 135.00 APPLICATION OF FUNDS Fixed Assets 0.01 - Investments 0.10 0.10 Çash& Bank Balance 2.22 0.10 Other Current Assets 0.90 0.67 Loans & Advances 222.9 126.87 Profit & Loss A/c (Dr.) 7.68 7.27 Total 233.80 135.00
Aashima Chemicals and Dyechem Private Ltd. From the perusal of the above sources and application of funds, it is quite evident that the assessee’s funds have been mostly utilized for loans and advances to various parties from where the assessee has earned interest income of Rs.16,22,79,443/-. The assessee has also paid interest on secured and unsecured loans. Once the funds have been utilised for giving loans and advances to the parties on which interest income has been earned,then ostensibly cost of funds in the form of interest payment has a direct nexus with the earning of such an income. We are unable to appreciate the blanket observation of the AO that funds lying with the assessee ware not identifiable and the assessee is unable to prove the nexus. Once, both the availability and application of funds are evident from the balance sheet, then there is apparently direct nexus between earning of income from deployment of funds and expenses incurred on cost of funds. Accordingly, the assessee is eligible for claim of interest expenditure of Rs.16,70,31,580/- u/s. 57(iii) and the same is directed to be allowed.
In view of our finding as above, we are not adjudicating ground no.2, as the ld counsel submitted that this issue will be purely an academic exercise.Accordingly, ground nos. 3 and 4 are allowed and ground no. 2 is treated as infructuous.
Regarding the second issue, which has been raised vide ground nos. 1, 5 and 6, learned counsel before us submitted that the Aashima Chemicals and Dyechem Private Ltd. assessee is engaged in the business of purchase and sale of fabrics, which is evident from the profit & loss account of the assessee which has been reproduced at page 2 of the assessment order. In the trading account, the assessee has shown sale at Rs.17.09 crores and purchase of Rs.16.98 crores and in the profit and loss account, the assessee had shown returned loss of Rs.40,26,855/-. However, the AO rejected the books of account and trading account on the ground that the summons and notices issued to various parties from whom the assessee had made purchases and sales, some of them have not responded. Based on this preliminary information the AO held that the assessee’s books of account are not reliable and he treated the entire difference between the sale and purchase for sums aggregating to Rs.11,56,334/- as income of the assessee. The learned CIT(A), too has upheld the action of the AO, however, he estimated the income of the assessee @1% of the sales. Mr.Madhur Agrawal pointed out thatsuch an action of the learned CIT(A) has led to enhancement of income by Rs.5,52,969/-, as now the income has been estimated at Rs.17,09,303/- instead of Rs.11,56,334/-. Such an enhancement has been made without confronting or any notice to the assessee and, therefore, the difference amount on account of enhancement cannot be sustained in view of provisions of section 251(2). On merits also he made his elaborate submissions. The learned DR, on the other hand, relied upon the orders of the ld. CIT(A).
Aashima Chemicals and Dyechem Private Ltd. 9. After considering the rival submissions on the limited issue of enhancement, we find that the addition of Rs.11,56,334/-, which was made by the AO on account of difference between sale and purchase, now stands enhanced to Rs. 17,09,303/- by the ld. CIT(A) by taking 1% profit on the sales figure. Such an enhancement by the ld. CIT(A) admittedly is without complying the mandatory requirement of subsection (2) of section 251 which provides that enhancement of income by first appellate authority cannot be made without giving notice to the assessee. Consequently, such an enhancement of income cannot be sustained. Accordingly, we direct the deletion of enhanced amount of Rs.5,52,969/- and thus, ground no. 6 is allowed.
Before us, the issue raised in ground no. 5 has not been pressed and hence, the same is dismissed as not pressed.
As admitted by the ld. Counsel the issue raised in ground no.1 is being kept open as no arguments have been made by both the parties. Accordingly, the same is dismissed as infructuous.
In the result, the appeal is partly allowed.
Order pronounced in the open court on this17thday of January 2017