Gujarat High Court
Harshad Bhagvandas Vaghela vs Income Tax Officer....Opponent(S) on 23 March, 2017
Bench: M.R. Shah, B.N. Karia
O/TAXAP/137/2017 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 137 of 2017
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE M.R. SHAH sd/
and
HONOURABLE MR.JUSTICE B.N. KARIA sd/
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1 Whether Reporters of Local Papers may be allowed to see NO
the judgment ?
2 To be referred to the Reporter or not ? NO
3 Whether their Lordships wish to see the fair copy of the NO
judgment ?
4 Whether this case involves a substantial question of law as NO
to the interpretation of the Constitution of India or any
order made thereunder ?
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HARSHAD BHAGVANDAS VAGHELA....Appellant(s)
Versus
INCOME TAX OFFICER....Opponent(s)
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Appearance:
MR RK PATEL, ADVOCATE for the Appellant(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE M.R. SHAH
and
HONOURABLE MR.JUSTICE B.N. KARIA
Date : 23/03/2017
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE M.R. SHAH) Draft Amendment is allowed.
1.0. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Tax Appellate Tribunal dated 21.03.2016 passed in ITA No.1871/AHD/2010 for AY 199697, by which, the learned Tribunal has dismissed the said appeal preferred by the assessee, the assessee has preferred the present appeal Page 1 of 10 HC-NIC Page 1 of 10 Created On Sun Aug 13 23:05:29 IST 2017 O/TAXAP/137/2017 JUDGMENT with the following proposed question of law.
"A. Whether on the facts and evidence on record, the Tribunal has substantially erred in law in confirming the disallowance of Rs. 30,47,240/ towards the claim of Bad Debts / Business loss ?
B.Whether on the facts and evidence on record, the Tribunal has substantially erred in law in confirming the disallowance of Rs.23,54,592/ towards the claim of interest paid for business consideration?"
2.0. The facts leading to the present appeal in nutshell are as under:
2.1. That the assessee filed return of income for AY 199697 declaring total income at Rs. 41,58,551/. The assessment for the year under consideration was completed under Section 143(3) r/w Section 144 A of the Act on 30.03.1999 determining the income at Rs.1,19,50,490/.
It appears that AO during the scrutiny assessment proceedings observed that the assessee has become proprietor viz. Lab Enterprises in which no business activities were carried out and no any income was reflected from the concern. Despite the above, the assessee claim various expenses and business expenditure including Bad Debts etc. totaling to Rs. 54,29,508/ observing that no business activities were carried out / conducted during the year under consideration the then AO disallowed the above expenses i.e. Rs. 54,29,508/. That after making the aforesaid additions, the total income of the assessee was determined by the AO at Rs. 1,19,50,490/ for the year under consideration.
2.2. Against the scrutiny assessment order, the assessee preferred appeal before the learned CIT (A). That the learned CIT(A) gives relief of Rs.7836/ . After giving effect to CIT(A)' order's, the total Page 2 of 10 HC-NIC Page 2 of 10 Created On Sun Aug 13 23:05:29 IST 2017 O/TAXAP/137/2017 JUDGMENT income for the year under consideration was at Rs.19,42,652/. That against the CIT(A) order, the assessee preferred appeal before the learned Tribunal. That the learned ITAt set aside the order of the learned CIT(A) and restored the matter to the file of the AO to decide the issue afresh after giving reasonable opportunity to the assessee.
2.3. That on remand and considering the material on record, the AO disallowed the various business expenses claimed by the assessee amounting to Rs. 54,29,508/. The AO also made disallowance of interest of Rs. 23,54,592/.
2.4. That feeling aggrieved and dissatisfied with the assessment order on remand and more particularly, making above disallowance, the assessee preferred appeal before the learned CIT(A) and learned CIT(A) partly allowed the said appeal, however upheld the disallowance of business expenses of Rs. 54,29,508/ made by the AO and also upheld the disallowance of interest at Rs. 23,54,592/.
2.5. That feeling aggrieved and dissatisfied with the order passed by the learned CIT(A), the assessee preferred appeal before the learned Tribunal and learned Tribunal by impugned judgment and order has confirmed the disallowance to the extent of Rs. 30,47,240/ towards claims of Bad Debts / business loss and also confirmed the disallowance of Rs. 23,54,592/ towards the claim of interest.
2.6. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT in confirming the disallowance of Rs. 30,47,240/ towards claim of Bad Debts / business allowance and confirming the disallowance of Rs. 23,54,592/ towards Page 3 of 10 HC-NIC Page 3 of 10 Created On Sun Aug 13 23:05:29 IST 2017 O/TAXAP/137/2017 JUDGMENT the claim of interest, the assessee has preferred present appeal with the aforesaid proposed question of law.
3.0. Shri R.K. Patel, learned advocate for the appellant has vehemently submitted that the learned Tribunal has materially erred in confirming the allowance of Rs. 30,47,240/ out of total disallowance of Rs. 54,29,508/ made by the CIT(A) on account of bad debts / business loss claimed by the assessee on the ground that assessee was not carrying business for the relevant year under consideration i.e. AY 199697.
3.1. It is further submitted by Shri Patel, learned advocate for the appellant that as such in the earlier round of litigation, the learned Tribunal specifically observed and held that the assessee was carrying on the business for the year under consideration and therefore, the matter was remanded to the AO. It is submitted that therefore, in the second round of proceeding, it was not open for the learned Tribunal to take a different view and confirming the disallowance on the ground that assessee was not carrying on business for the relevant year under consideration.
3.2. It is further submitted by Shri Patel, learned advocate for the appellant that even otherwise learned Tribunal has materially erred in disallowing the amount of Rs. 30,47,240/ claimed by the assessee on account of bad debts. It is submitted that as per the memorandum of understanding as on 31.3.1996 Labh Enterprise was to recover Rs. 62,01,858.92. Against this, stock of flat valued at Rs. 8,53,600/ was on hand with Labh Enterprise and as per the Settlement Agreement, Samrajya agreed to pay Rs. 23,01,018.59 to Labh Enterprise. It is Page 4 of 10 HC-NIC Page 4 of 10 Created On Sun Aug 13 23:05:29 IST 2017 O/TAXAP/137/2017 JUDGMENT submitted that therefore, remaining amount of Rs. 30,47,240/ was claimed as Business Loss/ Bad Debts by the assessee as the same remained unrealized. It is vehemently submitted by Shri Patel, learned advocate for the appellant assessee that the learned Tribunal has materially erred in not properly appreciating and / or considering the fact that the Tribunal has accepted continuance of business activities for AY 199798 and therefore, allowed all deductions but the same deductions were disallowed for the AY 199697 without any legal or factual justification.
3.3. It is further submitted by Shri Patel, learned advocate for the appellant that the learned Tribunal has materially erred in law and on facts in confirming the disallowance of interest of Rs.23,54,592/ as confirmed by the CIT(A) when the same has been allowed on principle by the learned Tribunal in the first round of prosecution wherein the Tribunal clearly observed that the assessee has carried on business activities and has borrowed the money which is utilized to repay the earlier unsecured loans.
3.4. It is further submitted by Shri Patel, learned advocate for the appellant that the learned Tribunal has materially erred in not considering the order of the Tribunal in first round of proceeding wherein Tribunal has clearly observed that the assessee has furnished the funds flow statement showing the source and application of funds. It is submitted that therefore, the learned Tribunal has materially erred in disallowing the interest of Rs. 23,54,592/.
4.0. Heard Shri R.K. Patel, learned advocate for the appellant assessee at length. We have reappreciated the entire material on Page 5 of 10 HC-NIC Page 5 of 10 Created On Sun Aug 13 23:05:29 IST 2017 O/TAXAP/137/2017 JUDGMENT record including earlier order of remand passed by the learned Tribunal, from the paper book produced by Shri Patel, learned advocate for the appellant. We have also perused and considered in detailed the impugned order passed by the learned Tribunal as well as order passed by the AO and the learned CIT(A) passed after first round of proceeding and after the earlier order of remand passed by the learned ITAT.
4.1. It is the case on behalf of the assessee that the impugned order passed by the learned Tribunal in confirming the disallownace of Rs. 30,47,240/ towards claim of bad debts / business loss and in confirming the disallowance of Rs. 23,54,592/ towards claim of interest paid for business consideration is absolutely contrary to the finding recorded by the learned Tribunal in the first round of proceeding. It is the case on behalf of the assessee that despite the fact that in the earlier round of proceeding, the learned Tribunal held that the assessee was carrying on the business during the year under consideration. However, considering the impugned order passed by the learned Tribunal as well as order passed by the learned CIT(A), the aforesaid has no substance. From the impugned order passed by the learned ITAT as well as learned CIT(A), it appears that the aforesaid disallowances are confirmed on their own merits and not on the ground that the assessee is not carrying on business during the year under consideration. In fact, while passing the impugned order, learned Tribunal has kept in mind the observation made by the learned Tribunal in earlier round of litigation / proceedings, more particularly, made in para 6 and 7 of the order and the Tribunal has noted that '"we find that issue relating to the fact that whether the AO was carried on business or not during the AY 199697 and 199798 has been dealt Page 6 of 10 HC-NIC Page 6 of 10 Created On Sun Aug 13 23:05:29 IST 2017 O/TAXAP/137/2017 JUDGMENT elaborately by the Coordinate Bench wherein they have given a finding that the assessee has carried out the business activity during the year under consideration". That thereafter, on merits, the learned Tribunal has allowed the expenses of Rs.23,82,268/as business expenses out of total disallowance of Rs.54,29,508/.
5.0. That thereafter, the learned Tribunal has independently taken the decision regarding disallowance of bad debts of Rs. 30,47,240/ and has deleted the addition of Rs. 23,82,268/ towards disallowance of business expenses of Rs. 54,29,508/ and has sustained remaining part at Rs. 30,47,240/ by observing in para 25 and 26 as under:
25. However, now when we look into the facts about the quantification of bad debts claimed by the assessee, we find force in the arguments made by ld.
DR wherein he has referred to various facts and figures in the paper book submitted by the assessee. We find that there is complete disparity of figure in the balance sheet as on 31.3.1995 which shows sundry debtors of Rs.14,80,458.55 in the name of Samrajya Coop. Housing Society which has increased to Rs.23,01,018.59 in the year ending on 31.3.1996. Further the MOU between the assessee and Samrajya Coop. Housing Society is also not reflecting true facts because the MOU is dated 29.2.1996 and the balance sheet as on 31.3.1996 is referred in this MOU and also the balance referred in this MOU as on 31.3.1996 at Rs.62,01,858.92 is looking far from truth and baseless because as on 31.3.1995 the amount of Samrajya Co op. Housing Society has shown Rs.14,08,458 and the same has increased by Rs.4721440.37 to ITA No. 1871 & 1872/Ahd/2010 15 Asst. Year 199697 & 199798 arrive at Rs.62,01,858.92 in a peculiar situation when there is no revenue booked in the current year. Bad debts in relation to sundry debtors can be claimed only if sales/revenue has been booked in the books of account which does not happen to be so in the case of assessee referring to the financial statement relied on by the assessee.
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26. In our view, looking to the facts and circumstances of the case, when assessee's case has travelled to the Tribunal in the second round and assessee had sufficient opportunity to prove the genuineness of the claim of bad debt of Rs.30,47,240/ and then also he has been unable to satisfy the lower authorities and even before us, during the course of hearing, we do not find any reason to accept the contentions and claim made by the assessee in this ground relating to disallowance of bad debt of Rs.30,47,240/ in the given circumstances and we dismiss the same and uphold the order of ld. CIT(A). In nut shell in the ground no.1 raised by assessee towards disallowance of business expenses at Rs.54,29,508/ we delete the addition of Rs.23,82,268/ and sustain the remaining part at Rs.30,47,240/. This ground is partly allowed.
5.1. Similarly, the learned Tribunal has independently considered the disallowance of interest of Rs. 23,54,592/ and has confirmed the disallowance of Rs. 23,54,592/ claimed by the assessee towards interest paid for business consideration on the ground that the amount of interest of Rs.23,54,592/ has been paid on loans taken has actually been diverted towards investment in shares and other non interest bearing investment. Thereafter, learned Tribunal has made disallowance of Rs.23,54,592/ towards the claim of interest paid for business consideration by observing in para 33 to 35 as under:
33.We have heard the rival contentions and perused the material on record. The issue before us is to examine the allowability of interest expenses of Rs.23,54,592/ under the provisions of section 57(iii) of the Act. Before going further let us first go through the provisions of section 57(iii) of the Act which reads as below : Sec.57(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income;
34. From the above provisions, we understand that provisions in relation to income referred to in section 56 of the Act which is income from other sources is certainly not relating to business. Assessee has shown Page 8 of 10 HC-NIC Page 8 of 10 Created On Sun Aug 13 23:05:29 IST 2017 O/TAXAP/137/2017 JUDGMENT loss of Rs.4019108/ under the head income from other sources which has been arrived after claiming the impugned interest of Rs.23,54,592/. Finding of the assessing officer which has not been controverted by the ld. AR are that the assessee had claimed interest expenses in respect of unsecured loan amounting to Rs.32123958 which were utilized for following purposes : Investment in shares Rs.2,65,60,243/ Interest bearing loans and advances Rs. 19,42,811/ Investment in Labh International Rs. 64,16,839/
35. It has been held in various judicial decisions that in order to claim expenses under the provisions of section 57(iii) of the Act nexus has to be proved that the same has been incurred for earning the income shown under the provisions of section 56 of the Act i.e. the income from other sources. Applying these provisions to the facts of the case, we find that assessee has declared interest income of only Rs.534557/ and has claimed interest expenses of Rs.4554551/ Out of total interest claimed at Rs.4554551/ Assessing Officer has already allowed the claim at Rs.2199959/ and for the balance amount of interest of Rs.2354592/ nothing was placed on record by the assessee to prove that it has been spent to earn interest income which has been declared u/s 56 of the Act and rather we find force in the observation made by ld. Assessing Officer that the amount of interest of Rs.2354592/ has been paid on loans taken has actually been diverted towards investment in shares and other noninterest bearing investment and this gets further support by the fact that assessee has earned long term capital gains of Rs.13260055/. In these circumstances, we are unable to accept the contention made by ld. AR of assessee about the allowability of interest expenses at Rs.2354592/ under the head income from other sources and we uphold the order of ld. CIT(A) and accordingly dismiss this ground of assessee.
5.2. Considering the aforesaid facts and circumstances, we are of the opinion that the learned Tribunal has not committed any error in confirming the disallowance of Rs. 30,47,240/ towards claim of Bad Debts / Business loss and in confirming the disallowance of Rs.
23,54,592/ towards claim of interest paid for business consideration.
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We are in complete agreement with view taken by the learned Tribunal. No substantial question of law arise. It cannot be said that the learned Tribunal has confirmed the aforesaid disallowance contrary to the finding recorded by the learned Tribunal in earlier / first round of proceeding, as sought to be contended on behalf of the appellant.
6.0. In view of the above and for the reasons stated above, present appeal fail and same deserve to be dismissed and is accordingly dismissed.
sd/ (M.R. SHAH, J.) sd/ (B.N. KARIA, J.) Kaushik Page 10 of 10 HC-NIC Page 10 of 10 Created On Sun Aug 13 23:05:29 IST 2017