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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI RAJESH KUMAR, AM
सुनवाई की तारीख / Date of Hearing : 3.11.2016 घोषणा की तारीख /Date of Pronouncement :18 .11.2016 आदेश / O R D E R PER RAJESH KUMAR, AM These are the two appeals filed by the revenue against the two separate orders of ld.CIT(A)-40, Mumbai dated 18.2.2014 challenging the decision of First Appellate Authority in holding that there existed a nexus between the interest expenses and interest income for the assessment years 2009-10 and 2010-11. Since the issues taken in both the appeals are identical in nature, hence the same are taken together for disposal by this common order.
Brief facts of the case are that a search and seizure action under section 132 of the Income Tax Act, 1961 was conducted by the Investigation Unit –V(2), Mumbai on 29.3.2011 at the business and residential premises of the directors of the assessee group companies. The search action was concluded on 24.5.2011. After search a notice under section 153A of the Act was issued on 4.1.2012 and in reply thereto the assessee filed return of income on 31.1.2012 declaring total income of Rs.1,54,39,003/- which was revised on 25.3.2013 declaring income of Rs.1,57,44,503/-. Thereafter, during the assessment proceedings, the AO observed that the assessee had earned interest income amounting to Rs.3,71,21,604/- and claimed interest expenses of Rs.3,57,50,206/-. The assessee has claimed deduction u/s 57(iii) of the Act thereby offering balance interest of Rs.13,71,398/- to tax. The AO not convinced with the said treatment by the assessee called for the explanation from the assessee as to why the income under the head interest amounting to Rs.3,71,21,604/- should not be added to the total income of the assessee. The assessee vide his letter dated 25.3.2013 filed detailed reply explaining the reasons for claiming interest expenditure, which was forming part of assessment order. The AO feeling dissatisfied with the reply of the assessee added the interest income of Rs.3,71,21,604/- inter alia with other additions by making assessment at Rs.5,08,44,230/- vide assessment order dated 28.3.2013 passed under section 143(3) r.w.s.153A of the Act. Aggrieved by the order of AO, the assessee preferred an appeal before the First Appellate Authority, who vide para 20 of appellate order held that the predecessor assessing officer has allowed the deduction as interest expenditure and the Hon‟ble Supreme Court in the case of Radhasoami Satsang V/s CIT (1962) 1993 ITR 321 (SC) has also held that principle of res-judicata is not applicable to the income tax proceedings, therefore, the AO could not take a different stand. Accordingly, the ld.CIT(A) allowed the claim of the assessee. Aggrieved by the order of the ld.CIT(A), the revenue is in appeal before us.
At the time of hearing, the ld.AR narrated the facts of the case and placed before us a copy of the decision of the Mumbai Bench of the Tribunal in the case of DCIT V/s Shri Himanshu B. Kanakia in & 3191/M/2014 (AY-2010-11 & 2011-12), dated 16.3.2016 to state that the issue raised in the present appeal stands covered in favour of the assessee by this decision and submitted that facts of both cases are identical and hence the issue be decided in favour of the assessee. The ld.DR fairly acceded to the contentions of the ld.AR.
After hearing both the parties and on perusal of the orders of authorities below including the order relied upon by the assessee, we find that the issue raised in the present appeal stands covered in favour of the assessee and against the revenue by the decision of Tribunal in Shri Himanshu B. Kanakia case (supra) in which author of this order is co-author in the case law relied upon by the assessee. For the sake of brevity, we reproduce the relevant finding of the Tribunal as under : “3. The Ld. CIT(A) observed that the loans upon which the assessee had paid interest were not the new loans. The issue relating to payment of interest on such loans had already been examined by the AO in the earlier assessment years and no such disallowance of interest was made by the AO in the earlier years. He, further, observed from the bank statement of the assessee that there was a direct correlation between the loan amount received and the loan amount advanced by the assessee. He observed that it was evident that the loans were raised and investments were made by the assessee with a view to earn interest income and the assessee had offered for taxation a positive interest income. Besides that the assessee at his own disallowed a sum of Rs.18,64,054/- and has offered interest income of Rs.25,01,695/- and that the suo-moto disallowance had been made by the assessee taking into consideration the overall loan taken during the year on which the interest was paid and the overall loan given during the year on which interest was received. The assessee has disallowed the proportionate interest on the amount of loan taken which was more than the amount of loan given. The Ld. CIT(A) has given a well reasoned finding, the relevant part of which, for the sake of completeness, is reproduced as under:
“18. Thus, the overwhelming view is that once the issue has been specifically examined by the AO in the earlier proceedings and has been allowed, and if there is no fresh evidence or material against the assessee, the same issue should not be raked up again in the later assessment proceedings. In my considered view, the interest expenditure on loan taken is a valid and allowable claim in the eyes of law. Evidently, loans were raised and investments were made with a view to earn interest income and interest income to the tune of Rs.88,14,417/- has actually been earned and declared. Therefore, interest expenditure cannot be disallowed. In any case, interest received at Rs.88,14,417/- is more than the interest paid at Rs.81,76,776/-, resulting into positive income under the head „interest‟. Still the assessee on his own disallowed a sum of Rs.18,64,054/- and has offered interest income of Rs.25,01,695/-. This disallowance has been made on the basis of a well thought out logic, which is 'what is the average loan taken during the year on which interest is paid and what is the average loan given during the year on which interest is received'. If the average loan taken is higher than average loan given during the year, then interest is disallowed on the difference amount of loan taken vis-à-vis loan given calculated at the effective rate of interest paid. In formula terms, it is denoted as under:- Interest disallowed= [Average amount of loan taken on which interest is paid - Average amount of loan on which interest is received] x effective rate of interest paid.
So if average of amount of loan taken is less than average amount of loan given, then no disallowance is called for. However, this calculation does not consider interest-free funds taken or given, and rightly so this methodology has been adopted by the assessee consistently over last few years and had been accepted by the then AO and Addl. CIT. Central, while completing the search assessments earlier vide order dated 31/3/2009 for A.Ys. 2007-08 and 2008-09 and appears to be reasonable. On the contrary, the logic given by the AO to disallow the entire interest paid on loan taken, though it was earlier accepted, does not appear to be sound enough. As per Balance Sheet, total amount of unsecured loan taken is Rs.15,88,47,709/- and loan given is Rs.15,13,64,527/-. However, amount on which interest is paid and received is different. In the current year, average loan taken works out to Rs.9,40,86,738/- and average loan given works out to Rs.7,33,75,025/-. Thus, there is difference of Rs.2,07,11,713/-. Effective rate of interest works out to 9%. So disallowance of interest works out to Rs.18,64,054/-, which has been done by the assessee and in my considered view appears to be fair.
The learned AO, in his order, has mentioned that there was no direct correlation between loan given and loan taken. However, it does not appear to be a correct observation. I looked into the bank statement of the assessee maintained jointly with Shri Rasesh Kanakia, his brother, and found that by an large, there is direct co- relation, even though it is not necessary to claim such an interest expenditure. This issue has been dealt with by me in the appellate orders in case of Shri Rasesh Kanakia for A.Ys. 2005-06 to 2011-12, which is being decided simultaneously. Therefore, it may be mentioned that there was strong co-relation between the loan taken and loan advanced. However, I would like to add that the interest expenditure is allowable, even if there is no direct correlation between the loan taken and the loan given, as long as the assessee is charging interest on loan given by him. In any case, the funds are flowing in and flowing out, out of the bank account, and genuineness of loan taken and loan given is not in doubt.
In view of the above discussion and respectfully following the judgements of Hon'ble Apex Court and Hon'ble High Courts as mentioned in paras 11 to 17 of this order, respectfully following the above judgements, I hold that disallowance of interest expenditure and consequently making an addition of Rs.63,12,722/- is unsustainable and unjustified. The same is, therefore, directed to be deleted and this ground of appeal is allowed.”
4. We do not find any infirmity in the above well reasoned order of the Ld.CIT(A) and the same is accordingly upheld.
5. In view of the above discussion and the precedent laid down by the co- ordinate Bench of the Tribunal, we are in agreement with the conclusion drawn by the ld.CIT(A) that the AO can not take a different view than the preceding year and accordingly allowing the claim of the assessee. Accordingly, we confirm the action of the ld.CIT (A) by dismissing the appeal of the revenue.
I.T.A. No.3198/Mum/2014