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Income Tax Appellate Tribunal, MUMBAI BENCHES “B”, MUMBAI
Before: Shri Joginder Singh, & Shri Rajesh Kumar
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.
During hearing of this appeal, the ld. DR, Shri Samir Tekriwal, advanced arguments which are identical to the ground raised. The crux of argument is that onus was upon the assessee to show that the advances for acquiring the fixed asset was out of own funds more specifically when the funds were mixed up. On the other hand, the ld. counsel for the assessee, Shri B.V. Jhaveri, contended that it may be a good case for quantum but not of penalty and even the Assessing Officer has not recorded his satisfaction, during assessment proceedings that the assessee has either concealed the income or furnished inaccurate particulars of such income. Reliance was placed upon the decision in the case of Shri Hafeez S. Contractor vs ACIT (ITA No.6222 and 6223/Mum/2013) order dated 02/09/2015, M/s Sheetal Manufacturing Company vs JCIT (ITA NO.7107/Mum/2011) order dated 28/09/2012, Mehta Brothers Gems Pvt. Ltd. vs ACIT (ITA No.6245/Mum/2010) order dated 25/01/2012 the decision from Hon’ble Bombay High Court in CIT vs Reliance Utilities and Power Ltd. 313 ITR 340 (Bom.).
2.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee company is engaged in the business of 3 M/s M. Suresh Company Pvt. Ltd. Rs.5,12,99,150/- in it return filed on 29/09/2009. The case of the assessee was taken up for scrutiny, therefore, requisite notices u/s 143(2) and 142(1) were served upon the assessee. On verification of the balance sheet, the profit and loss account and computation of income statement, filed along with the return, it was noticed that the assessee made investment in shares of subsidiary company and mutual funds to the tune of Rs.21,81,03,600/-. The assessee earned income of Rs.3,18,500/- and claimed the same as exempt u/s 10(34) of the Act along with income from mutual funds of Rs.41,59,586/-. The assessee was asked to pin point with respect to expenses relating to various source of income, source of investment made in shares as the expenses were incurred out of common pool funds and further the assessee has maintained composite books of accounts for taxable as well as exempt income. It was also found that the assessee paid interest of Rs.27,80,056/- on overdraft account and Rs.13,89,28,290/- on working capital availed from bank. In view of these facts, the assessee was asked to provide computation of deduction u/s 14A read with Rule 8D of the rules. In reply, the assessee claimed exemption in respect of income from units of various mutual funds of Rs.41,59,586/- and dividend income of Rs.3,18,500/- u/s 10(34) of the Act. It was also noticed that the assessee paid interest of Rs.13,89,28,290/- on export/import working capital availed from the bank. The stand of the Revenue is that the assessee cannot use such working capital funds for the purposes of 4 M/s M. Suresh Company Pvt. Ltd. making investment to generate tax free income. The Assessing Officer computed the taxable income at Rs.6,00,65,950/- against the income of Rs.5,12,99,150/-. It was noticed by the Assessing Officer that the assessee advanced Rs.12.18 crores for the property in Bharat Diamonds Bourse and Rs.25 crore for the property in Oshiwara, Mumbai. The amount of Rs.25 crores was advanced from 09/07/2008 to 26/08/2008. As per the agreement with the developer, in case, if timely possession of the property is not given, the developer shall pay interest at the rate of 36% per annum on the advanced made by the assessee. The assessee did not gather possession of the property and claimed refund of the advances. As per the Revenue, the assessee was not provided the interest, so accrued from such advances and did not offer for taxation. Since, the assessee has borrowed substantial amount from banks and paid huge interest of Rs.14.17 crores to the bank, therefore, the assessee has to prove the nexus of funds advanced towards purchase of property and further to explain the position of own and borrowed funds. During assessment proceedings, the assessee was asked to prove the nexus of funds towards purchase of property, which as per the Revenue, could not be proved. Since, the funds were mixed up (own and borrowed funds) in the same basket and were diverted for non-business purposes, therefore, penalty was imposed u/s 271(1)(c) for concealing the income/furnishing inaccurate particulars of such income.
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.