MOHIT DIAMONDS P.LTD,MUMBAI vs. DCIT 5(2), MUMBAI

The assessee being aggrieved filed an appeal with the CIT(A), who vide his order dated 05.01.2011 sustained the disallowance of Rs. 17,59,299/- (supra), and thus partly allowed the appeal of the assessee. The order of the CIT(A) upholding the disallowance of Rs. 17,59,299/- in the quantum appeal was accepted by the assessee, and the same thus attained finality.

That the A.O on the basis of penalty proceedings which were initiated u/s 271(1)(c) at the time of framing of the assessment, issued show-cause notice to the assessee, calling upon it to explain as to why penalty u/s 271(1)(c) for furnishing of inaccurate particulars of income as regards the interest on borrowed capital of Rs. 17,59,299/- (supra), which addition had been upheld by the CIT(A), may not be imposed. The assessee during the course of the penalty proceedings, vide his reply dated 15.03.2012, submitted before the AO :-

The assessee being aggrieved with the order of the A.O, carried the matter in appeal before the CIT(A). During the course of the appellate proceedings, the asssesee again relied on the judgement of the Hon’ble Jurisdictional High Court

That the assessee being aggrieved had assailed before us the order of the CIT(A) sustaining the penalty imposed u/s 271(1)(c). The Learned Authorized Representative for the asssessee (for short ‘A.R’) reiterating the submissions made before the lower authorities, therein submitted that the investment towards the purchase of the property at ‘BDB’ was made out of substantial interest free funds so available with it, as well as the surplus/profits generated during the year under consideration. The Ld. A.R in order to fortify his contention, therein drew our attention to Page 27 of the ‘Paper Book’ (for short ‘APB’), which is a ‘Cash Flow Statement’ for the year under consideration, i.e. A.Y. 2007-08. The Ld. A.R further took us to Page 10 of the ‘APB’, which is the ‘Profit and loss account’ of (A.Y. 2007-08) M/s. Mohit Diamonds Pvt. Ltd. the assessee for the year under consideration, which therein revealed that Profits/surplus after tax as had been generated by the assessee during the year amounted to Rs. 4,27,81,772/-. It was thus in the backdrop of the aforesaid facts submitted by the Ld. A.R that now when substantial interest free funds along with profits /surplus generated during the year under consideration were available with the assessee, it could therefore safely be concluded that the assessee was having substantial interest free funds and profits/surplus with it, which could justifiably be related to the investment made by the assessee towards purchase of property at ‘BDB’. It was thus submitted by the Ld. A.R that in light of the aforesaid factual background, no penalty u/s 271(1)(c) was liable to be imposed. The Ld. A.R placing reliance on the judgment of the Hon’ble Bombay High Court in the case of CIT VS Reliance Utilities and Power Limited (2009) 313 ITR 340 (Bom), therein averred that the said judgment of the Hon’ble Jurisdictional High Court, which seized the issue under consideration, was though brought to the notice of both the AO and the CIT(A), however neither of said lower authorities had taken cognizance of the same. The Ld. A.R in order to fortify his contention therein took us to the relevant pages of the ‘APB’, which clearly revealed that the assessee in support of his aforesaid claim had relied on the judgment of the Hon’ble Jurisdictional High Court in the case of Reliance Utilities and Power Limited (Supra) before the lower authorities. That on the other hand the Ld. Departmental

We have heard both the parties, perused the material on record and have given a thoughtful consideration to the issue before us. We are of the considered view that the assessee had at length submitted before both the AO as well as the CIT(A) that it was having substantial interest free funds in the form of share- holders fund, as well as substantial profits/surplus generated during the year under consideration itself, which could justifiably be related to the investment made towards purchase of property at ‘BDB’, as well as advancing of interest free advances to its subsidiaries during the year under consideration. Thus in the backdrop of the aforesaid factual position read with the settled position of law, it was submitted by the Ld. A.R that it could safely be concluded that the investment so made towards purchase of property at ‘BDB’ was funded from the said interest free funds available with the assessee. It was thus submitted by the Ld. A.R that as no nexus of any part of interest bearing funds which as a matter of fact remained injected in the business of the asssessee, was established with the making of the investment towards purchase of property at ‘BDB’, therefore the assessee could at least not be held to have furnished inaccurate particulars by claiming such interest on borrowed capital as an expenditure in the ‘Profit & loss a/c’. We find that the assessee had throughout relied on the judgment of the Hon’ble High Court of (A.Y. 2007-08) M/s. Mohit Diamonds Pvt. Ltd. Bombay in the case of CIT Vs. Reliance Utilities and Power Limited (2009) 313 ITR 340 (Bom), in support of its aforesaid contention before the lower authorities, but are surprised to find that neither of the lower authorities had taken cognizance of the said judgement, which seizes the issue under consideration. The Hon’ble High Court of Bombay in the aforesaid case had held as under: “10. If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber’s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account

We are further of the considered view that the lower authorities while justifying imposing of penalty u/s 271(1)(c) in the hands of the assessee, and sustaining of the same thereafter, had emphasized more on the fact that the assessee by not assailing the order of the CIT(A) so passed in its quantum appeal, wherein the disallowance/addition u/s 36(1)(iii) of Rs. 17,59,299/-, pertaining to interest relatable to investment made by the assessee in property at ‘BDB’ had been upheld, thus could safely be held to have accepted the said disallowance. We are of the considered view, that no doubt a finding of the A.O while making an addition in the course of the assessment proceedings does have a persuasive value

We are of the considered view that in light of the facts of the present case as they so remain, the assessee had prima facie demonstrated before us the factum of availability of substantial interest free funds, as well as the profits/surplus generated during the year, which as claimed by the Ld. A.R was lying available with the assessee, from which the investment towards the purchase of property at ‘BDB’ could be justifiably explained. It was thus averred by the Ld. A.R that in the backdrop of the aforesaid facts, as no part of the interest bearing funds available with the assessee could be related to the making of such investment, and in light of the availability of sufficient interest free funds and the profits/surplus generated during the year, which all could justifiably explain the investment made in the property at ‘BDB’, therefore no penalty u/s 271(1)(c) as regards the same was called for in the hands of the assessee. We however in all fairness and appreciation of the facts in totality, restore the matter to file of the A.O for fresh adjudication, and direct him to verify from the records of the assessee the factum of availability of sufficient interest free funds with the assessee, from where the (A.Y. 2007-08) M/s. Mohit Diamonds Pvt. Ltd. aforesaid investment made towards purchase of property at ‘BDB’ could safely be explained, as had been so claimed and projected before us by the Ld. A.R. That needless to say, the A.O during the course of the set aside proceedings shall afford reasonable opportunity to the assessee to substantiate its contention. That if the assessee on the basis of his records during the course of the set aside proceedings is able to establish before the A.O the factum of availability of such sufficient interest free funds during the year under consideration, then in light of the principle enunciated by the Hon’ble Jurisdictional High Court in the case of : Reliance Utilities and Power Limited (supra) , that if the interest free funds so available with the assessee are sufficient to meet the investments so made, the same could safely be presumed to be related to such interest free funds, then without prejudice to the fact that the assessee had allowed the quantum addition pertaining to the disallowance of interest so made in its hands u/s 36(1)(iii) to attain finality, no penalty so imposed upon it u/s 271(1)(c) of the ‘Act’ on the said count, which has been assailed before us by the assessee, shall be allowed to survive. That as a word of caution, we herein direct the A.O to dispose of the issue which is being restored to him for fresh adjudication, as per the parameters laid down by the Hon’ble Jurisdictional High Court in the case of Reliance Utilities and Power Limited (supra).