SARVANKUMAR BHANWARLAL KOTHARI,MUMBAI vs. ASST CIT RG 4(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद"य लेखा लेखा सद"य सद"य राजे"" सद"य राजे"" राजे"" केकेकेके अनुसार राजे"" अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dated 17/10/2014 of the CIT (A)-8, Mumbai, the assessee has filed the present appeal.Assessee,an individual, filed his return of income on 26/07/2010, declaring total income at Rs. 65.02 lakhs. The AO completed the assessment, under section 143 (3),on 28/ 02/ 2013,determining his income at Rs. 70.85 lakhs. 2.First ground of appeal

is about disallowance of Rs. 2.7 lakhs under section 14. A of the Act. During the assessment proceedings the AO found that the assessee had earned tax-free dividend income of Rs.88.53 lakhs, that he had claimed the same as exempt, that he had not adopted any expenditure incurred for earning the tax-free income. In that regard the assessee explained the he had not incurred any expenditure to earn the exempt income. However, the AO held that a certain percent of the expenses claimed by the assessee would be attributable to tax-free income.Referring to the provisions of rule 8D of the Income Tax Rules, 1962 (Rules), he made a disallowance of Rs. 2, 71, 393/-(amount equal to ½% of the average value of investment + Rs. 1.52 lakhs under the head interest expenditure). 3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him it was argued that he had not incurred or claimed any expenditure against taxable income or exempt income, that no disallowance was made under section 14. A of the Act for the assessment years 2008 – 09 and 2009 – 10 wherein the assessments were passed under section 143 (3), that the AO had wrongly considered interest paid to a partnership firm for disallowance under section 14. A, that the interest was paid on account of excess withdrawal from the firm against capital balance, that the AO had wrongly calculated the average value of investment.After considering the submission of the assessee ITA/7502/M/14-Sarvan Kumar Bhanwarlal and the assessment order, the FAA held that the AO had rightfully made the disallowance. He referred to the case of Godrej and Boyce Manufacturing Company Ltd. (ITA 626 of 2010 – dated 12 eight 2010). 4.Before us the Authorised Representative (AR) argued that the assessee had not incurred any expenditure for earning the exempt income, that no disallowance could be made applying the provisions of rule 8D of the rules, that interest paid by him was not for earning exempt income.He relied upon the cases of his brothers that were decided by the tribunal and wherein the issue of 14A was adjudicated in their favour. The Departmental Representative(DR) left issue to the discretion of the bench. 5.We have heard the rival submissions and perused the material before us. We find that assessee had not claimed any expenditure against the exempt income. The AO/FAA have also not alleged that assessee had incurred any expenditure. Therefore, in our opinion there was no justification for invoking the provisions of section 14 A read with rule 8D of the Rules. Both the authorities have not considered the fact that interest was not paid by the assessee for earning tax-free income. Considering the facts of the case we are of the opinion that the FAA was not justified in confirming the order of the AO. Therefore, reversing his order we are deciding the first ground of appeal in favour of the assessee.

6.Second ground of appeal is about addition of Rs. 1.58 lakhs as Annual Letting Value (ALV) under the head income from house property. During the assessment proceedings the AO found that assessee had three properties, it had self occupied property at Pali and let out property at Bhiwandi as per the competition of the income. He referred to the provisions of section 23. (4) of the Act and held that fair return on investment had to be determined for the deemed let out property. Referring to the wealth tax return of the assessee,where value of the property at Pali was shown at Rs. 32.39 lakhs, the AO determined the gross annual letting Value of the property at Rs. 2.26 lakhs. After allowing stated a deduction at the rate of 30% for repairs and maintenance, the AO made an addition of Rs. 1, 58, 744/-to the total income of the assessee. 7.In the appellate proceedings,the FAA confirmed of order of the AO holding that as per the provisions section 23 of the Act, the AO was entitled to determine the ALV of the property. 8.During the course of hearing before us,the AR argued that assessee was not given an option as per the provisions of section 23. (4)of the Act, that the maximum addition that could be made was Rs. 8,738/-, that the calculation given by the assessee was not considered by either of the authorities. The DR supported the order of the FAA.

ITA/7502/M/14-Sarvan Kumar Bhanwarlal 9.We find that the assessee was not given option of opting the self occupied property as per the provisions of section 23 (4), that the AO/FAA had not consider the explanation filed by the assessee for considering the lower annual letting value of the property owned by the assessee. Therefore in our opinion the matter should be restored back to the file of the AO for fresh and dedication. He is directed to afford reasonable person of hearing to the assessee. Second ground of appeal is decided in favour of the assessee, in part.

10.Last ground of appeal deals with disallowance of interest of Rs. 1.52 lakhs paid to Kothari fabric.During the assessment proceedings,the AO found that the assessee had included interest paid to firm and claim the same as loss under the head share profit of the firm, that the profit from partnership firm was fully exempt under section 10. (2A) of the Act, that there could not be any loss under the head income from business and profession, that the claim made by the assessee was not allowable. 11.In the appellate proceedings, the assessee argued that he was a partner of Kothari fabrics, that the interest received from the firm on capital account was taxable, that interest paid was allowable as deduction, that the AO had not considered the true nature of the amount.The FAA upheld the order of the AO. 12.Before us, the AR argued that the share of loss from firm was different from the interest paid by the partner, that both the authorities had not considered the submissions made by it along with the ledger of the firm. He referred to the account confirmation letter signed by the assessee and the partnership firm. After hearing the rival submissions we are of the opinion that matter should be restored back to the file of the AO for fresh adjudication. He is directed to consider the explanation filed by the assessee along with the ledger account filed.Ground no.3 is decided in favour of the assessee, in part. As a result, appeal filed by the assessee stands partly allowed. फलतः िनधा"रती "ारा दािखल क" गई अपील अंशतः मंजूर क" जाती है. Order pronounced in the open court on 18th October, 2016. आदेश क" घोषणा खुले "यायालय म" दनांक 18 अ!टूबर, 2016 को क" गई । (सी. एन. "साद / C.N. Prasad ) (राजे"" / Rajendra) "याियक सद"य / JUDICIAL MEMBER लेखा लेखा लेखा सद"य लेखा सद"य सद"य / ACCOUNTANT MEMBER सद"य मुंबई Mumbai; दनांकDated : 18.10.2016. Jv.Sr.PS.