PARESH B. SHAH,MUMBAI vs. ASST CIT 4(2), MUMBAI

At the time of hearing learned AR submitted that the tax effect involved in the appeal filed by the Revenue is less than 10 lakhs. Learned Departmental Representative agreed with the same. Accordingly, in pursuance of the Circular No. 21/2015 dated 10.12.2015, the Revenue is precluded from pursuing this appeal. Accordingly, we dismiss the appeal filed by the Revenue.

In the appeal filed by the assessee, following issues are being contested:

At the time of hearing learned AR did not press grounds relating to disallowance made u/s. 14A in view of the smallness of the amount. Hence we dismiss the grounds relating to the same.

Next issue relates to disallowance made out of interest expenditure. The assessee had claimed interest expenditure of ` 23.56 lakhs under head “interest on bank overdraft”. The assessee had also claimed a sum of ` 7,04,563/- as interest paid to other parties. The Assessing Officer noticed that the assessee has withdrawn a sum of ` 1.70 crores from overdraft account towards his personal purposes. Hence the Assessing Officer disallowed the entire interest claim aggregating to ` 30,61,146/-, referred above. The learned CIT(A) deleted the interest of ` 7,04,563/- paid to other parties. With regard to interest on bank overdraft, the learned CIT(A) noticed that the bank overdraft was availed by the assessee by pledging fixed deposits made with the bank. Further withdrawals made by the assessee for personal purposes were only a fraction of the total amount withdrawn from the bank overdraft account. Accordingly, he restricted the addition to ` 99,329/- and deleted remaining amount of addition.

Learned AR submitted that the assessee is possessing sufficient amount of capital and hence the above said withdrawals of ` 1.70 crores should be considered as withdrawn from the capital account. Accordingly he submitted that there is no necessity to disallow a portion of expenditure also. In support of his contention learned AR placed reliance on the decision rendered by Hon'ble Bombay High Court in the case of Reliance Utilities & Power Pvt. Ltd. (313 ITR 340). On the contrary learned Departmental Representative supported the order passed by the learned CIT(A).

Having heard the rival contention, we are of the view that there is merit in the contentions of the assessee. A perusal of the Balance Sheet furnished by the assessee would show that the assessee is having capital balance of ` 12.46 crores. During the year under consideration the assessee has withdrawn a sum of ` 1.70 crores only from out of the bank overdraft account. In the case of Reliance Utilities & Power Pvt. Ltd (supra), the Hon'ble Bombay High Court has held that the disallowance out of 3 Paresh Bhagwandas Shah interest expenditure is not called for when the assessee has got sufficient own funds. Further it was held that where the assessee has own funds as well as borrowed funds, a presumption can be made that advances given for non business purposes have been made out of own funds. In our view, the principles laid down by Hon'ble Bombay High Court in the above said case can be conveniently applied in the instant case also. Accordingly, we hold that withdrawal of ` 1.70 crores made by the assessee should be considered as having been made out of capital only. In that view of the matter, we find merit in the contention of the assessee that there is no requirement to make any disallowance out of interest expenditure. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the addition confirmed by Ld CIT(A) out of interest paid on bank overdraft account.

Next issue relates to non-granting of deduction of interest paid on housing loan. The assessee had held three house properties namely Prithvi flat at Mumbai, Goregaon Flat and Lonavala flat. The assessee declared Goregaon flat as his self occupied property. Goregaon flat was purchased by the assessee by availing loan from State Bank of India. During the year under consideration total interest paid on housing loan was ` 21.68 lakh. However, the assessee restricted the same to ` 1.50 lakhs as per section 24(b) of the Act. The Assessing Officer, however, treated the Prithvi flat as self occupied property. Accordingly, the Assessing Officer computed the annual letting value of the Goregaon and Lonavala flats treating the same as deemed to be let out. The Assessing Officer determined the annual letting value at 7% of the investment made in purchase of flats. The assessee accepted that the self occupied property as “Prithvi flat” and did not contest the same before Ld CIT(A). However, the assessee contested the annual letting value determined by the AO in respect of other two flats.

The learned CIT(A) did not agree with the annual letting value determined by the Assessing Officer. The learned CIT(A), by following the decision rendered by the ITAT in the case of Smt. Munira Chudasama (ITA No. 3027/Mum/2011), held that the municipal rateable value should be taken as criteria for determining the annual letting value.

Before the learned CIT(A), the assessee also claimed that entire interest expenditure paid on purchase of Goregaon flat should be allowed as deduction u/s. 4 Paresh Bhagwandas Shah 24(b) of the Act since the said flat has been treated as deemed to be let out. It is pertinent to note that the assessee had treated the Goregaon flat as his self occupied property and accordingly restricted the deduction towards interest expenditure at Rs.1,50,000/- u/s 24(b) of the Act. The learned CIT(A) noticed that the assessee had submitted in its explanation that he had received Goregaon flat on bare shell basis with no tiles and interior work. Accordingly, the learned CIT(A) took the view that the said flat was not worth for giving on rent. Therefore no deemed rent u/s. 23 of the Act was required to be assessed. Accordingly, he took the view that deduction prescribed u/s. 24 of the Act cannot also be given.

Learned AR submitted that the learned CIT(A) has taken a contradict stand in as much as he has directed the Assessing Officer to determine the annual letting value by treating the same as deemed to be let out. However, while adjudicating the claim of deduction for entire interest expenditure, the learned CIT(A) has taken the view that there is no requirement to determine deemed rent u/s. 23 of the Act. Learned AR submitted that the assessee should be allowed deduction for entire interest expenditure, since the Goregaon flat has been accepted as deemed to be let out.

On the contrary, learned Departmental Representative submitted that the assessee himself has admitted that Goregaon flat was not fit for occupation, accordingly, he submitted that the learned CIT(A) was justified in rejecting the claim for deduction of interest expenditure.

Having heard the rival contention, we are of the view that this issue requires fresh examination at the end of the Assessing Officer, since the Assessing Officer himself has changed the character of the Goregaon flat, i.e. as against the claim of the assessee that the Goregaon flat is self occupied property, the Assessing Officer has treated the Prithvi flat as self occupied property. Now, the learned CIT(A), having directed the AO to treat the Goregaon flat as deemed to be let out, has given a finding that the Goregaon flat is not fit for occupation. Hence there is contradiction in the order given by the Ld CIT(A). Due to change in the character of Goregaon flat, the deduction allowable u/s 24(b) requires reconsideration, since the assessee is also putting forth claim for deduction of entire amount of interest expenditure. Under these set of facts, the determination of Annual letting value, if the Goregaon flat is 5 Paresh Bhagwandas Shah accepted as deemed to be let out, is required to be made. If it is held that the said flat is not fit for renting out, then there is no requirement to treat the same as deemed to be let out. Since there is confusion about the character of flat, we are of the view that these issues require fresh examination. Accordingly we set aside the order passed by the learned CIT(A) on these issues and restore the same to the file of the Assessing Officer with the direction to examine these issues afresh in accordance with the law after affording adequate opportunity of being heard to the assessee.

In the result, appeal filed by the Revenue is dismissed and appeal filed by the assessee is treated as allowed for statistical purposes.