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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: SHRI WASEEM AHMED
IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT [CONDUCTED THROUGH E-COURT AT AHMEDABAD] BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND MS. MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./ Assessment Year : 2015-2016 Shri Jugalkishore Natwarlal Pr. Commissioner of Dholakia, Vs Income-tax, C/o. Chokshi Vachhraj Makanji & PCIT-1, Rajkot Co., Shishumangal Road, Gandhigram, Junagadh-362001 PAN : ABQPD 2710 D आयकर अपील सं./ Assessment Year : 2015-2016 Shri Girishkumar Vachhraj Pr. Commissioner of Dholakia, Vs Income-tax, C/o. Chokshi Vachhraj Makanji & PCIT-1, Rajkot Co., Shishumangal Road, Gandhigram, Junagadh-362001 PAN : ABUPD 6245 P अपीलाथ"/ (Appellant) "" यथ"/ (Respondent) Assessee by : Shri Samir Jani, AR Revenue by : Shri Vijay Kumar Jaiswal, CIT-DR सुनवाई क" तारीख/Date of Hearing : 01/05/2023 घोषणा क" तारीख /Date of Pronouncement: 02/05/2023 आदेश/O R D E R PER MS. MADHUMITA ROY, JUDICIAL MEMBER:-
Both the appeals preferred by the different assessees are directed against the orders dated 18.02.2021 passed by the learned Pr. Commissioner of Income- tax, PCIT, Rajkot-1 (hereinafter referred to as the "PCIT"), whereby and whereunder the orders passed by the learned Assessing Officer, both dated 30.11.2017, have been quashed and set aside to the file of the learned Assessing Officer for de novo assessment in regard to the issue of disallowance and & 15/Rjt/2021 Assessee : Jugalkishore N Dholakia & Girishkumar Vachhraj Dholakia AY : 2015-16 2 applicability of Section 14A of the Income-tax Act, 1961 (hereinafter referred to as "the Act") upon declaring it erroneous and prejudicial to the interest of the Revenue under Section 263 of the Act for Assessment Year (AY) 2015-16.
Since the issue involved in these two appeals are identical in nature, these cases are heard analogously and are being disposed of by a common order for the sake of convenience.
for AY 2015-16 is taken as a lead case.
We have heard the learned Counsel appearing for the respective parties. We have also perused the relevant material available on record. The short facts leading to this case is this that the assessee is an individual who filed his return of income at Rs.2,24,83,260/- on 25.09.2015. Subsequently, the assessment was selected for limited scrutiny under CASS and a notice under Section 143(2) dated 30.08.2016 was served upon the assessee followed by a notice under Section 142(1) of the Act along with questionnaire. In compliance whereof, the representative of the assessee appeared and filed written submissions on behalf of the assessee. Upon perusal of the entire set of documents placed before the learned Assessing Officer, it was found that the assessee the assessee derives income from business profession, house property salary and other sources during the year under consideration and no adverse facts were noticed; and, therefore, the returned income was accepted by the learned Assessing Officer. Subsequently, certain fact was found to have been received from the Range Head to this effect that while finalizing the assessment, the Assessing Officer allowed interest expenses of Rs.11,40,147/- under Section 36(1)(iii) of the Act against interest income of Rs.80,29,679/- of the assessee in the status of a partner in the firm M/s. CVM & Co. It was opined by the learned PCIT that such interest expneses was allowed without examining nexus between utilization of interest bearing fund being bank overdraft the purpose of & 15/Rjt/2021 Assessee : Jugalkishore N Dholakia & Girishkumar Vachhraj Dholakia AY : 2015-16 3 business i.e. for contribution of the said fund as capital in the firm. Furthermore, the assessee earned dividend income of Rs.3,65,267/- and share of profit from firms of Rs.60,95,342/- which were claimed as exempt under Section 10 of the Act; however, the Assessing Officer failed to examine nexus between utilization of interest bearing fund for investment, income from which was claimed exempt for tax and failed to make disallowance under Section 14A of the Act out of such interest expenses. It was further found that the assessee received interest income of Rs.80,29,679/- as partner in firm of M/s. CVM & Co., against which the assessee claimed and was allowed bank overdraft interest expenses of Rs.11,40,147/-. In fact, deduction of interest expenses is allowable under Section 36(1)(iii) of the Act in respect of capital borrowed for the purpose of the business. However, the Assessing Officer failed to bring on record the documentary evidences to substantiate the claim that bank overdraft was used for business purposes. In that view of the matter, the Revenue is of the opinion that prima facie bank overdraft interest expenses of Rs.11,40,147/- was not allowable under Section 36(1)(iii) of the Act.
So far as the dividend income of Rs.3,65,267/- and share of profit from firms of Rs.60,95,342/- which has been claimed as exempt under Section 10 of the Act are concerned, the Assessing Officer further failed to bring evidences on record to prove that the interest bearing funds were not invested in the investments which generated the tax exempt income. In that view of the matter, prima facie, the provisions of Section 14A are found to be applicable and the disallowance under Rule 8D was worked out to Rs.15,97,108/-. A show- cause notice, therefore, was issued on 18.03.2020 under Section 263 of the Act by the learned PCIT which is reproduced as under:- “To, JUGALKISHOR NATWARLAL DHOLAKIA SHISHUMANGAL ROAD GANDHIGRAM JUNAGADH 362001,Gujarat & 15/Rjt/2021 Assessee : Jugalkishore N Dholakia & Girishkumar Vachhraj Dholakia AY : 2015-16 4 India PAN: Assessment Year: Dated: DIN & Letter No : ABQPD2710D 2015-16 18/03/2020 ITBA/COM/F/17/2019-20/1026752525(1) Sir/ Madam/ M/s, Subject: SHOW-CAUSE NOTICE U/S 263 OF THE INCOME TAX ACT 1961 Return of Income has been filed for A.Y. 2015-16 declaring total income of Rs. 2,24,83,260/-. The case was selected for limited scrutiny under CASS for reason “large interest exp relatable to 14A/interest expenses”. Thereafter, the assessment was completed u/s 143(3) of the Act on 30.11.2017 by accepting returned income.
2. From the records, it is seen that the assessee has claimed bank OD interest exp of Rs.11,40,147/-. However the assessee did not furnished documentary evidences to substantiate that the interest bearing fund has been fused for business purpose. Accordingly the said interest expenses is likely to be disallowed u/s 36(1)(iii) of the Act. It is further seen that, the assessee has earned dividend income of Rs.3,65,267/-, share of profit from firms of Rs. 60,95,342/- and claimed exemption u/s 10 of the Act. The assessee has also claimed interest exp of Rs.11,40,147/- on bank overdraft facility availed. However the assessee did not furnished documentary evidences showing which fund has been used for the investment from which exempt income earned Accordingly the assessee is unable to establish that the investment from which exempt dividend are earned is made from interest free capital and hence the provision of Section 14A of the Act is applicable on it. Therefore in this case it is observed that if the funds were not blocked in interest free loan/investment in firm/companies/properties they would have been available to the assessee which would have obviated his need to borrow funds carrying interest from banks. It is also considering that most of funds have been utilized to invest in companies/firms which have potential to earn exempted income, a disallowance u/s 14A r.w.s. 36(1 )(iii) of the Act was required to have been made. However no such disallowance is made while passing the assessment order. The disallowance u/s 14A rwr 8D comes at Rs. 15,97,108/- as per details given hereunder:- (i) Direct expenditure relating to exempt income = NIL (ii) A*B/C Where A = Amount of interest expenses claimed of Rs. 11,40,147/- B= Average investment, income from which is exempt B= ½ (21,12,83,594 + 13,95,37,213) = 17,54,10,404/- C= Average of total asset = ½ (25,65,75,321 + 29,89,19,392) = 27,77,47,357/- Hence A* B/C = 11,40,147 X17,54,10,404/27,77,47,357 = 7,20,056/- (iii) one half percent of B i.e. 0.5 % of 17,54,10,404/- = 8,77,052/-/- Disallowance u/s 14A r.w. rule 8D = (i)+ (ii)+ (iii) = 0+ 7,20,056 + 8,77,052 = 15,97,108/- & 15/Rjt/2021 Assessee : Jugalkishore N Dholakia & Girishkumar Vachhraj Dholakia AY : 2015-16 5 In view of the above disallowance u/s 14A read with rule 8D of Rs. 15,97,108/- should have been made in this case.
The facts mentioned above show that the assessment order passed by the Assessing Officer for the A.Y. 2015-16 is erroneous in so far as it is prejudicial to the interests of revenue as the AO has passed the assessment order without making inquiries or verification which should have been made. In view of the above, I intend to initiate revision proceedings u/s 263 of the Act and pass a suitable order.
4. Before passing such an order u/s 263 of the Act, you are hereby given an opportunity of being heard in the matter either in person or through Authorized Representative and requested to attend this office on 20/03/2020 at 3:30 PM. You may submit as to why the order passed by the AO for the AY 2015-16 on the issues discussed above should not be revised as it is erroneous and prejudicial to the interests of Revenue. In the event of non-compliance, it shall be presumed that you do not have any objection to the proposed proceedings u/s 263 of the Income Tax Act. NIRAJ KUMAR PCIT 3, RAJKOT”
The learned PCIT was of the opinion that the disallowance under Section 14A r.w. Rule 8D of Rs.15,97,108/- should have been made in the case of the assessee by the learned Assessing Officer himself. Hence, the order passed by the learned Assessing Officer was found to be erroneous and prejudicial to the interest of the Revenue; whereupon the assessee furnished details – the relevant portion whereof is as follows:-
“The appellant is one who is individually assessed to tax for income from business of trading & manufacturing of ornaments and other sources for AY 2015-16. Return of income was filed on 26.09.2015 at a total income of Rs.2,24,83,260/-. In spite of limited scrutiny, a detailed questionnaire dated 03.10.2017 requiring (ii) point compliance was issued and compliance to the entire notice was made vide submission dated 18.11.2017. Copy of notice and compliance is enclosed herewith. Thereafter, a notice dated 13.12.2017 was issued seeking further clarification and compliance. The same was complied vide submission dated 20.12.2017. The details called for were asunder:
1. 1. Explain reason for mismatch between income/receipt credited to Profit and Loss account considered under other heads of income and Income from heads of income other than business/profession.
1. Justify non applicability of Section 14A r. w. Rule 8D in your case.
ITA Nos. 14 & 15/Rjt/2021 Assessee : Jugalkishore N Dholakia & Girishkumar Vachhraj Dholakia AY : 2015-16 6 The assesses, vide reply dated 18.11.2017 complied this details to the satisfaction of Ld. Assessing Officer. The Ld. Assessing Officer has after detailed verification of the compliance completed the assessment u/s. 143(3) on 30.11.2017. Thereafter, the assesses is in receipt of show cause notice datedl8.03.2020 on 22.05.2020 under section 263 with below detailed findings: 1. From the records, it is seen that the assesses has claimed bank OD interest expense of Rs.11,40,147/-. However the assessee did not furnished documentary evidence substantiate that the interest bearing fund has been fused for business purpose. Accordingly the said interest expenses is likely to be disallowed u/s36(1)(iii) of the Act. It is further seen that, the assessee has earned dividend income of Rs.3,65,257/-, share of profit from firms of Rs.60,95,342/- and claimed exemption u/s 10 of the Act. The assessee has also claimed interest expense of Rs. 11,40,147/- on bank overdraft facility availed. However the assessee did not furnished documentary evidences showing which fund has been used for the investment from which exemption come earned. Accordingly the assessee is unable to establish that the investment from which exempt dividend are earned is made from interest free capital and hence the provision of Section 14A of the Act is applicable on it. Therefore in this case it is observed that if the funds were not blocked in interest free loan/ investment in firm/companies/properties they would have been available to the assessee which would have obviated his need to borrow funds carrying interest from banks, it is also considering that most of funds have been utilized to invest in companies/firms which have potential to earn exempted income, a disallowance u/s14Ar.w.s.36(1)(iii) of the Act was required to have been made. However no such disallowance is made while passing the assessment order. The disallowance u/s 14Arwr8D comes at Rs.15,97,108/-as per details given here under:- (i) Direct expenditure relating to exempt income = NIL (ii) A*B/C Where A = Amount of interest expenses claimed of Rs. 11,40,147/- B= Average investment, income from which is exempt (Note: Investment of capital in M/s. CVM & Co is excluded because the assessee has shown taxable interest income from the same) B= ½ (21,12,83,594 + 13,95,37,213) = 17,54,10,404/- C= Average of total asset = ½ (25,65,75,321 + 29,89,19,392) = 27,77,47,357/- Hence A* B/C = 11,40,147 X17,54,10,404/27,77,47,357 = 7,20,056/- (iii) one half percent of B i.e. 0.5 % of 17,54,10,404/- = 8,77,052/-/- Disallowance u/s 14A r.w. rule 8D = (i)+ (ii)+ (iii) = 0+ 7,20,056 + 8,77,052 = 15,97,108/- & 15/Rjt/2021 Assessee : Jugalkishore N Dholakia & Girishkumar Vachhraj Dholakia AY : 2015-16 7 In view of the above disallowance u/s 14A read with rule 8D of Rs. 15,97,108/- should have been made in this case.
3. The facts mentioned above show that the assessment order passed by the Assessing Officer for me A.Y. 2015-16 is erroneous in so far as it is prejudicial to the interests of revenue as the AO has passed the assessment order without making inquiries or verification which should have been made. n view of the above, I intend to initiate revision proceedings u/s 263 of the Act and pass a suitable order." The factual matrixes of the case is that the assessee is a partner in various firms, including M\S. Chokshi Vachhra Makanji & Company of Junagadh. The assessee owned Fix Deposits of Rs.5 Cr with HDFC Bank Ltd. in F.Y.2013-14 which was offered as security and against which a Overdraft account was opened by the bank granting an overdraft limit of Rs. 5 Cr being account number 0231000000394. Copy of overdraft account is filed herewith. The rate of interest was 1% higher than the Fix Deposits. As evident from the bank account the assessee has used these funds for crediting the same as capital account with M\S. Chokshi Vachhra Makanji & Company during F.Y.2014-15 (A.Y.2015-16) where he earns an interest @ 9% and remuneration from the firm. The taxable interest income earned for the year under consideration is of Rs.8029679/-, the taxable interest income earned on Fix Deposits is Rs. 792202/- and taxable remuneration income from the firm is Rs. 10713603/-. The investments made in the firm are strategic investments to have effective control over the firm. All the above income is shown as taxable income in the return of income for A.Y.2015-16. The assessee also obtained in F.Y.2013-14, an overdraft limit of Rs.1.80 Cr against FMP which got matured in F.Y.2016-17 and the assessee has shown taxable income under the head of LTCG. Thus, as evident from the documents filed herewith and before the Ld. Assessing Officer, it is clear that the funds obtained as overdraft limit has not been utilized for earning exempt income but for earning taxable income. Moreover, the assessee owns his own capital of Rs.280951450/- which is interest free capital. Thus, no part of borrowed fund has been utilized for earning tax free income. Copy of HDFC Bank Overdraft statement, Ledger copy of bank overdraft account, Capital account with M\S. Chokshi Vachhraj Makanji & Company alongwith contra account evidencing transfer of funds from HDFC Bank Overdraft account to Capital account with firm are enclosed herewith to support the claim as above. This factual submission of not having invested borrowed funds for earning exempt income is admitted by your kind Honour in your calculations under Rule-8D as detailed in your show cause notice under section 263 dated 18.03.2020. These facts were explained to the Ld. Assessing Officer during the course of assessment proceedings and since nexus of use of borrowed funds was convincingly proved to the Ld. AO he framed and opinion as to no disallowance u\s. 14A of the Act is warranted for. Thus, the assessment is framed after proper application of mind for which he did not feel to make detailed discussion in the assessment order.” & 15/Rjt/2021 Assessee : Jugalkishore N Dholakia & Girishkumar Vachhraj Dholakia AY : 2015-16 8
We have also gone through the records in respect of the assessment proceedings conducted by the learned Assessing Officer wherein we find that queries under Section 142(1) dated 13.11.2017 were made to the assessee by the DCIT, Junagadh Circle, wherein details in regard to working of disallowance under Section 14A as item No. (v) of sub-heading (2) “Large Interest Expenses relatable to exempt income under Section 14A” was asked for. The same is appearing at page Nos. 43 & 44 of the paper-book filed before us by the assessee. We have further found that the assessee made a statement in his reply dated 18.11.2017 that “he has not made any claim for expenditure as can be seen from Computation of Income where he has disallowed entire expenses of Rs.12,08,566/- as expenses related to Other Sources Income”. We note that no working of disallowance under Section 14A has either been filed by the assessee or narrated in such reply. Neither any documents in support of such contention made by the assessee, as narrated hereinabove, has been filed before the Assessing Officer. With utter surprise, we find that the Assessing Officer has made no whisper in regard to the applicability of the provisions of Section 14A r.w. Rule 8D in the assessment order. Mere observation that no adverse facts are noticed against the assessee by no means will justify that the Assessing Officer applied his mind on this issue, examined the same and ultimately found nothing so as to accept the returned income of the assessee. In that view of the matter, the order passed by the learned Assessing Officer is rightly found to be without making any inquiry or verification of the claim made by the assessee; the same is therefore found to be erroneous and prejudicial to the interest of the Revenue under Section 263 of the Act. Further that, on the basis of the prima facie finding on the issue of disallowance and applicability of Section 14A of the Act as worked out at Rs.15,97,108/- to be looked into by the learned Assessing Officer and considering the same to make & 15/Rjt/2021 Assessee : Jugalkishore N Dholakia & Girishkumar Vachhraj Dholakia AY : 2015-16 9 a de novo assessment upon making necessary verification and inquires and providing an opportunity of being heard to the assessee in accordance with law as observed and decided by the learned PCIT is, in our considered opinion, found to be just and proper, without any ambiguity so as to warrant interference. We, therefore, uphold the order passed by the learned PCIT. With these observations as made hereinabove, the assessee’s appeal is found to be devoid of any merit and thus dismissed.
So far as the Shri Girishkumar Vachhraj Dholakia for AY 2015-16 is concerned, the learned representatives appearing for the respective parties fairly agree that, since the facts being similar, the decision taken in the lead appeal i.e. in the case of Shri Jugalkishore Natwarlal Dholakia applies mutatis-mutandis for this appeal as well. We see no reasons to take any other view of the matter than the view so taken by us in ITA No. 14/Rjt/2021 in the case of Shri Jugalkishore Natwarlal Dholakia; therefore, respectfully following the said order, we uphold the order passed by the learned PCIT and dismiss the appeal filed by the assessee.
In the result, both the appeals filed by the assessee(s) are dismissed.