USHA ASHOKKUMAR SHAH L/H ASHOKKUMAR PUKHRAJ SHAH,MUMBAI vs. DCIT 14(2), MUMBAI

O R D E R Per ASHWANI TANEJA, AM

This appeal has been filed by the assessee against the order of Commissioner of Income-tax (Appeals) [hereinafter called CIT(A)] dt 28- 03-2014 passed against the penalty order u/s 271(1)(c) of the AO dt 30- 03-2009 for A.Y. 2003-04 on the following grounds:

1) “On the facts and in the circumstances of the case and in law, the appellate authority i.e. The CIT (A) 25, Mumbai, has erred in sustaining penalty u/s 271(1)( c) without appreciating that no such penalty can be sustained in the case of the appellant. The said penalty may therefore kindly be deleted. 2) Your appellant craves leave to add to amend, delete any of the above grounds and / or to add any new grounds thereto.”

PENALTY ON ACCOUNT OF ADDITION BY ESTIMATINGH G.P.

5.1 We have considered the orders of the lower authorities as well as the order of the Tribunal and submissions made by both the sides. It is noted that this addition has been made by making estimate at all stages. The AO had estimated GP at 9% as against GP of 5.8% disclosed by the assessee; the Ld.CIT(A) adopted 8% whereas the Tribunal has reduced it to 7%. The assessee is aggrieved with the fact that the detailed working submitted by it pointing out fallacies in the estimation done at various stages has been ignored . It is further noted by us that in any case, the addition has been made on estimate basis only. Concealment of income has not been proved by the AO while levying penalty. We do not find any justification to levy penalty on the addition which has been made on estimate basis and also keeping in view the fact that there is no uniformity even on the estimation. Thus, penalty levied on this addition is directed to be deleted.

7. The next issue contested by the assessee relates to the disallowance made out of interest expenditure to the tune of Rs.2,67, 127/-. From the perusal of the Balance sheet, the AO noticed that the assessee has increased his borrowings and also increased his investments in a sister concern named M/ s Shreekar Polyester Pvt. Ltd. The assessee contended that the withdrawals made from his personal account was used to make investment in the above said concern. The AO considered the submissions of the assessee and finally came to the conclusion that the borrowings to the extent of Rs.33.52 lakhs, representing 14.8% of the borrowed funds have been used for non- business purposes. Accordingly, he disallowed proportionate amount of interest expenditure amounting to Rs.2,67,127/-. The Ld CIT(A) also confirmed the same.

8. We heard the parties on this issue. From the submissions made by the assessee before Ld CIT(A), we notice that the assessee could not establish one to one nexus between the own funds and the amount diverted to sister concern, but general submissions have been made. When the borrowed funds have not been used for business purposes, the relevant interest expenditure cannot be allowed u/s 36(1)(iii) of the Act. We notice from the assessment order, the AO

has also worked out the interest disallowance on estimated basis. Hence, the general submissions made by the assessee could not be rejected altogether. At the same time, we are of the view that it cannot be said that the assessee has not diverted borrowed funds. Further, the interest rate has ranged from 12% to 14%, Hence, on a conspectus of the matter, we are of the view that a part of interest expenditure should be disallowed. Since the interest has been disallowed by the AO on estimated basis, we are of the view the same appears to be on a higher side in view of the discussions made supra. Accordingly we direct the AO to restrict disallowance to 50%, i.e., to Rs. 1,33,500/-. The order of Ld CIT(A) on this issue stands modified accordingly.”

(a) The Tribunal has noted at paragraph 8 that the Assessing Officer had worked out the interest disallowance on estimate basis. The Tribunal also made estimate to restrict the disallowance on adhoc basis to 50% of the disallowance made by the Assessing Officer. Thus, the disallowance made is purely on estimate basis and does not amount to any type of concealment of income. (b) The assessee has earned interest income from M/s Shreekar Polyester Pvt td for Rs7.02 lakhs which has been shown as part of business income. The interest expenditure incurred on funds borrowed had been claimed as part of business expenses. Thus, assessee has claimed set off of the expenditure with interest income. Though the Assessing Officer at paragraph 11.7 of the assessment order discussed that the impugned interest income should be assessed as “Income from other sources” u/s 57 of the Act, while making final computation of income, at the conclusion of the assessment order, the aforesaid interest income has been treated as part of business income only. Once the interest income has been treated as part of business income, the interest expenses in full deserves to be allowed as per law; and (c) It is noted that in any case, even if the AOs action of treating the aforesaid interest income as “Income from other sources”, is finally upheld as it is, then that fact itself cannot prove any concealment of income or furnishing inaccurate particulars of income. The assessee made the claim with proper disclosure in its P&L account supported with other details and documents. In the opinion of the Assessing Officer, the claim on account of interest expenditure was not allowable in full. On the other hand, in the opinion of the Tribunal, the disallowance to the extent of 50% made by the Assessing Officer was not sustainable and thus, only half of the disallowance as was made by the Assessing Officer, was finally sustained by the Tribunal. None of the authortities have branded the claim as bogus. Thus, it is not a case of concealment or furnishing of inaccurate particulars of income and thus, penalty has been wrongly levied on this disallowance and, therefore, the same is directed to be deleted.