Income Tax Appellate Tribunal - Mumbai
Peejay Silk Mills, Mumbai vs Ito 20(2)(1), Mumbai on 4 August, 2017
1
ITA 1814/Mum/2016
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "J", MUMBAI
Before Shri Saktijit Dey(JUDICIAL MEMBER)
AND
Shri G Manjunatha (ACCOUNTANT MEMBER)
I.T.A No.1814/Mum/2016
(Assessment year 2010-11)
Peejay Silk Mills vs ITO, Ward 20(2)(1), Mumbai
RK Bothra, 3/37, Tardeo AC
Market, Mumbai 400 034
PAN : AAAFP6034H
APPELLANT RESPONDENT
Appellant by Shri RK Bothra
Respondent by Arju Garodia
Date of hearing 03-07-2017
Date of pronouncement 04-08-2017
ORDER
Per G Manjunatha, AM :
This appeal filed by the assessee is directed against the order of CIT(A)-36, Mumbai dated 06-01-2016 and it pertains to assessment year 2010-11. The assessee has raised following grounds of appeal:-
1. "On the facts, in law and in the circumstances of the case, whether the learned CIT (A) was justified in confirming the action of A.O. that interest paid to citi bank on housing loan account no.
2211395 to the extent of Rs. 60,000/- is not allowable as deduction.
2. On the facts, in law and in the circumstances of the case, whether the learned CIT (A) was justified in confirming the action of A.O. that interest paid to citi bank on housing loan account no. 219658 to the 2 ITA 1814/Mum/2016 extent of Rs. 7,74,887/- is not allowable as deduction.
3. On the facts, in law and in the circumstances of the case whether the learned CIT(A) was justified in confirming the action of the A.O. dis- allowing a sum of Rs. 2,75,000/- out of salary, Repairs and Maintenance and Water charges.
4. On the facts of the case, in law and in the circumstances of the case whether the learned CIT(A)was justified in confirming the action of the A.O. of levying interest amounting to Rs. 6,18,430/- on various business advances and adding to the total income of the appellant.
5. On the facts of the case, in law and in the circumstances of the case, whether the learned CIT(A) was justified in confirming the action of the A.O. in allowing depreciation on furniture and fixture on the basis of turnover of the business and income from rent and further clubbing two blocks of assets into one."
2. The brief facts of the case are that the assessee is a partnership firm carrying on business of trading in textiles, packing of textiles and computer services and also derives income from house property, has filed its return of income for assessment year 2010-11 on 14-10-2010 declaring total income of Rs.49,490. The case has been selected for scrutiny and accordingly, notices u/s 143(2) and 142(1) of the Act were issued. In response to the notices, authorized representative of the assessee attended from time to time and filed necessary details, as called for. The assessment was completed u/s 143(3) on 28th March, 2013 determining total income at Rs.21,03,140 by making following additions:-
1. Disallowance of Municipal Taxes Rs.5,24,570/-3
ITA 1814/Mum/2016
2. Disallowance of payment made to Citibank Rs.7,67,732/-
For housing loan taken in earlier years
3. Disallowance of legal expenses Rs. 29,050/-
4. Disallowance out of salary, repairs and Maintenance and water charges Rs.2,75,711/-
5. Disallowance out of interest paid by calculating Notional interest on business advances paid. Rs.8,24,227/-
6. Reduction of depreciation while working out Income from business Rs.2,74,285/-
7. Granting credit for TDS for Rs.5,50,990/- as Against credit claimed for Rs.6,42,994/- Less by 92,004/-
8. Non grant of deduction of amount paid as Society charges while determining ALV of the Flat given on rent Rs.2,11,109/-
3. Aggrieved by the assessment order, the assessee preferred appeal before CIT(A). Before CIT(A), the assessee has filed elaborate written submissions and challenged additions made by the AO towards disallowance of municipal taxes, interest on housing loan, adhoc disallowance of expenditure and disallowance of depreciation on the basis of apportionment between income declared under the heads, 'business income'and 'income from house property'. The CIT(A), after considering the submissions of the assessee partly allowed appeal filed by the assessee, wherein he has confirmed additions made by the AO towards disallowance of interest paid on housing loan, disallowance of expenditure; however, allowed partial relief in respect of notional interest worked out by the 4 ITA 1814/Mum/2016 AO on advances, re-working of depreciation on fixed assets, etc. Aggrieved by the order of CIT(A), the assessee is in appeal before us.
4. The first issue that came up for our consideration is disallowance of interest on housing loan borrowed from Citibank. The facts which lead to the impugned addition are that the assessee has borrowed two housing loans from Citibank, vide loan accounts Nos 2211395 & 219658. The AO noted that the assessee has borrowed two housing loans, i.e. one in assessee's name and another in the name of M/s Jessica Impex. The AO disallowed interest paid on housing loan borrowed in the name of M/s Jessica Impex on the ground that the loan is borrowed in different name and also the assessee failed to prove the borrowal of loan and utilization of loan proceeds for acquisition of assets. It is the claim of the assessee that both housing loans are borrowed for the purpose of acquisition of asset and repayment of loan has been made from its account. Therefore, the AO was incorrect in disallowing interest paid on loan merely for the reason that the loan is standing in different name but facts remains that the assessee has borrowed the loan in the name of M/s Jessica Impex, which is a sister concern and these facts are clearly mentioned in loan sanction letter. The assessee further contended that even while allowing interest on loan for first housing loan, the AO has adopted an incorrect figure which is different from interest paid. The certificate issued by the bank clearly 5 ITA 1814/Mum/2016 shows payment of interest of Rs.3,99,896, whereas the AO has considered interest payment of Rs.3,39,896 which resulted in difference of Rs.60,000.
5. Having heard both the sides and considered material on record, we find that the assessee has borrowed two housing loans from Citibank, i.e. one in the name of M/s Peejay Silk Mills and another in the name of M/s Jessica Impex. The AO allowed interest paid on housing loan borrowed in the name of M/s Peejay Silk Mills and disallowed interest on loan in the name of M/s Jessica Impex by holding that the assessee has failed to explain the loan borrowed in the name of M/s Jessica Impex for acquisition of asset. The assessee has filed interest certificate obtained from the bank. On perusal of the details filed by the assessee, we find that the bank has issued two separate confirmation letters for repayment of interest which shows that one loan is borrowed in the name of M/s Peejay Silk Mills and another in the name of M/s Jessica Impex. Though assessee claims to have borrowed both the loans for the purpose of acquisition of property, but failed to prove the nexus of the loan and purchase of property. Therefore, we are of the view that the AO was right in making disallowance towards interest paid on housing loan borrowed in the name M/s Jessica Impex. Insofar as housing loan borrowed in the name of M/s Peejay Silk Mills, on perusal of certificate of interest issued by the bank clearly says that the assessee has paid interest of Rs.3,99,896, but the AO has allowed interest 6 ITA 1814/Mum/2016 amount of Rs.3,39,896. Thus, there is a difference of Rs.60,000 which has been explained by the assessee that the AO has taken incorrect figure which is evident from the fact that the certificate issued by the bank clearly establishes payment of interest of Rs.3,99,896. Therefore, we direct the AO to allow interest of Rs.3,99,896 as claimed by the assessee as against Rs.3,39,896.
6. The next issue that came up for our consideration is disallowance of expenditure of Rs.2,75,711 out of staff salary, repairs and maintenance and water charges. The AO has worked out expenditure debited in the P&L Account on the basis of gross receipts and disallowed a sum of Rs.2,75,711 proportionately on the basis of gross receipts from rent and gross receipts from business. The assessee has claimed rental income under the head "Income from business" and claimed expenses against such income in the P&L Account. While completing the assessment, the AO has treated rental income under the head "Income from house property" and allowed statutory deductions allowable u/s 24. In respect of expenditure claimed in the P&L Account, the AO has bifurcated total expenditure into expenditure relatable to business activity and expenditure relatable to income from house property and accordingly worked out an amount of Rs.2,75,711 for disallowance. It is the claim of the assessee that the total expenditure debited under the head 'salary' is fully relatable to business activity and other expenses like repairs and maintenance 7 ITA 1814/Mum/2016 and water charges has already been allocated on the basis of gross receipts from rental income and business income. The AO, without any basis, simply divided the total expenditure on the basis of turnover which is not only illegal but illogical. We find force in the arguments of the assessee for the reason that unless the AO specifies himself nexus between the expenditure debited in the P&L Account to the receipts cannot disallow expenditure on the basis of receipts. The assessee has filed its financial statements for the relevant financial year. On going through the financial statement filed by the assessee, we find that the assessee has allocated expenditure relatable to rental income and business income. The AO, ignoring the workings filed by the assesse, disallowed expenditure on adhoc basis without any basis. Therefore, we are of the considered view that the issue needs to be reconsidered by the AO in the light of the explanation of the assessee. Hence, we set aside the issue to the file of the AO and direct him to consider the explanation of the assessee with regard to the allocation of expenditure towards rental income and business receipts.
7. The next issue that came up for our consideration is disallowance of notional interest on loans and advances. During the course of assessment proceedings, the AO observed that the assessee has borrowed unsecured loans on which paid interest, whereas assessee has advanced various loans but 8 ITA 1814/Mum/2016 failed to charge any interest on such loans. Therefore, the AO called upon the assessee to explain why interest on loans shall not be disallowed. In response to show cause notice, the assessee claims that the loans and advances are advanced in the normal course of business and these loans are extended out of interest free funds available. The assessee further contended that it has interest free funds of Rs.98,57,000 whereas its advances are Rs.55,28,591, therefore, the AO was incorrect in adding notional interest on business advances. The assessee further contended that many of the advances have become bad which are irrecoverable as these advances are more than 10-12 years' old paid for either purchase of raw materials or expenses. Therefore, there is no reason for computing notional interest on such advances in the absence of any nexus between diversion of interest bearing funds to non business purposes.
8. Having heard both the sides and considered material on record, we find that the AO as well as the CIT (A) has recorded a categorical finding that the assessee has paid interest on unsecured loans borrowed from other parties, whereas not charged any interest on loans and advances. We further observe that the assessee has failed to prove the nexus between advances and business connection. Though assessee claims that these advances become bad debt and not recoverable, but failed to file any evidence. This factual situation compel 9 ITA 1814/Mum/2016 us to conclude that the assessee has advanced interest free funds to the said persons without charging any interest. Therefore, we are of the view that the assessee has failed to prove the nexus between interest free funds and loans and advances given to third parties. The CIT(A), after considering relevant facts has rightly upheld additions made by the AO. We do not find any infirmity in the order of CIT(A); hence, we are inclined to uphold the order of CIT(A) and reject the ground raised by the assessee.
9. The next issue that came up for our consideration is disallowance of depreciation on furniture & fixture on the basis of turnover of the business and "Income from house property". The AO has disallowed depreciation on furniture & fixtures proportionately on the basis of turnover. The AO disallowed depreciation on furniture & fixtures which are relatable to receipts from "Income from house property". The assessee claims that the furniture & fixtures belongs to its business activity and hence, the AO was incorrect in bifurcating depreciation on furniture & fixtures based on turnover. We find force in the argument of the assessee for the reason that the assessee has filed a financial statement explaining the calculation of depreciation wherein he had bifurcated the assets used in the business activity and assets used in the buildings which is part of "Income from house property". The AO without any basis allocated depreciation on furniture and fixtures on the basis of gross 10 ITA 1814/Mum/2016 turnover and disallowed depreciation relatable to the activity of "Income from house property" on the ground that the deduction u/s 24 has been allowed. Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of submissions of the assessee that a separate working has been furnished to explain the depreciation on furniture and fixtures, which is fully relatable to business activity of the assessee. Hence, we set aside the issue to the file of the AO and direct him to consider the issue afresh in the light of the details filed by the assessee.
10. In the result, appeal filed by the assessee is partly allowed, for statistical purpose.
Order pronounced in the open court on 04th August, 2017.
Sd/- sd/-
(Saktijit Dey) (G Manjunatha)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dt : 04th August, 2017
Pk/-
Copy to :
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
/True copy/ By order
Asstt. Registrar, ITAT, Mumbai