DCIT 5(2), MUMBAI vs. M. SURESH COMPANY P.LTD, MUMBAI

Per Joginder Singh (Judicial Member) The Revenue is aggrieved by the impugned order dated 07/09/2013 of the ld. First Appellate Authority, Mumbai. The only ground raised in this appeal pertains to deleting the penalty of Rs.25,48,706/-, imposed u/s 271(1)(c) of the Income Tax Act, 1961 (hereinafter the Act), ignoring the fact 2 M/s M. Suresh Company Pvt. Ltd. that there was no nexus between borrowed funds and the investment made by the assessee and further huge interest expenditure was disallowed by the Assessing Officer against which no appeal was filed by the assessee, meaning thereby, the same was accepted by the assessee.

5 M/s M. Suresh Company Pvt. Ltd. On appeal, before the ld. Commissioner of Income Tax (Appeals), the penalty was deleted against which the Revenue is in appeal before this Tribunal.

2.2. If the observation made in the assessment order/penalty order, leading to addition made to the total income/imposition of penalty, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, there is no dispute to the fact that the assessee has taken huge borrowed funds on which substantial amount of interest of Rs.14.17 crores was paid to the bank. It is also noted that the assessee right from assessment stage never proved the nexus of funds advanced towards purchase of property whether the investment was made out of own funds or borrowed funds. It is also noted that the ld. Assessing Officer specifically asked the assessee to prove the nexus of funds advance towards purchase of property which was not proved. It is also undisputed fact that own funds and borrowed funds were kept in the same basket and at any stage, the assessee did not prove that the funds advanced towards purchase of property was out of own funds and not from the borrowed funds. It is noteworthy that no appeal was filed by the assessee against the quantum addition knowing fully well that the assessee has not made the investment within the parameters of the provisions of law. Even, before us, the assessee has merely relied upon the decision from the Hon’ble jurisdictional High Court in the case of CIT vs 6 M/s M. Suresh Company Pvt. Ltd. Reliance Utilities and Power Ltd. 313 ITR 340 (Bom.). However, in that case, the Assessing Officer himself recorded a finding that a sum of Rs.213 crore was invested out of own funds and Rs.147 crores was invested out of borrowed funds, whereas, in the present appeal, no separate accounts are maintained by the assessee and the same are mixed up in the same basket. The ld. Commissioner of Income Tax (Appeals) has nowhere contradicted the finding of the Assessing Officer with respect to nexus of funds and rather onus was shifted on the Assessing Officer that nothing was mentioned with respect to diversion of funds which can be directly linked with the investment of property. The facts are clearly indicate that in spite of specifically asking by the Assessing Officer, the assessee never proved the nexus, therefore, we find merit in the contention of the ld. DR. Even otherwise, as per section 36(1)(iii) of the Act, legislative amendment was made by the Finance Act, 2003 by adding a new proviso inserted w.e.f. 01/04/2004 to provide that the amount of interest, paid in respect of capital borrowed for the purposes of business or profession, it has been specifically provided that any amount of interest paid, in respect of capital borrowed for acquisition of asset for extension of existing business or profession (whether capitalized in the books of accounts or not) for any period beginning from the date on which the capital was borrowed for the acquisition of asset till the date on which such asset was first put to use, shall not be allowed as deduction. Section 36(1)(iii) has to be read on its own terms as it is a code by itself. All that section 7 M/s M. Suresh Company Pvt. Ltd. requires is that the assessee must borrow capital for business purposes, carried out by the assessee in the year of account. Unlike section 37, which expressly excludes an expense of capital nature, section 36(1)(iii) emphasizes the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. Where the money borrowed had been utilized for the business purposes as also earning income under the residuary head “income from other sources” the interest paid on the money so borrowed should be bifurcated proportionately between the “business income” and “other source of income” H.K (Investment) Company pvt. Ltd. vs CIT 211 ITR 511, 514 (Guj). The totality of facts clearly indicates that the assessee did not establish the nexus between the borrowed funds and the investment so made with a clear intention to conceal the income by furnishing inaccurate particulars of such income, therefore, in our view, penalty was rightly imposed by the Assessing Officer. The stand of the Revenue is further fortified by the fact that even the assessee did not file appeal against the disallowance of huge interest expenditure while deciding the quantum addition and accepted the same. Thus, the appeal of the Revenue is allowed. Finally, the appeal of the Revenue is allowed. This Order was pronounced in the open court on 05/11/2015.