Income Tax Appellate Tribunal - Ahmedabad
Dhiren H.Vora,, Ahmedabad vs Department Of Income Tax on 17 September, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH - AHMEDABAD
(BEFORE S/SHRI BHAVNESH SAINI, JM AND A. N. PAHUJA, AM)
ITA No.3765/Ahd/2008
A. Y.: 2004-05
The A. C. I. T., Circle-10, Vs Shri Dhiren H. Vora,
1st floor, Narayan Chambers, 304, Anand Chambers,
Ashram Road, Nr. High Court Railway
Ahmedabad Crossing, Ahmedabad
PA No. AAWPV 2756 N
(Appellant) (Respondent)
Appellant by Shri Govind Singhal, DR
Respondent by Shri Vijay Ranjan, AR
ORDER
PER BHAVNESH SAINI: This appeal by the Revenue is directed against the order of the CIT(A)-XVI, Ahmedabad dated 17-09-2008 for assessment year 2004-05 on the following grounds:
"1. The learned CIT (A) erred allowing interest u/s. 36(1)
(iii) of the I. T. Act. The assessee has paid loan out of interest bearing loans received from Shri H. N. Vora.
Thus the assessee has paid of loan which is not being for purpose of business to be disallowed.
2. That the investment in shares of M/s. H. Nyalchand Finance Services Ltd. and Parklight Securities Ltd. are long term investment. In these out of borrowed fund which might have been purchased out of interest bearing fund of the assessee firm."
2. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the materials available on record.
3. Facts of the case are that the AO noted that during the relevant financial year the assessee has shown total receipts from trading of ITA No.3765/Ahd/2008 2 Shri Dhiren H. Vora shares to the tune of Rs.76,61,815/-. On verification of the details regarding shares sold and purchased, the AO observed that during the year, the assessee has only dealt in shares and not in mutual funds. He further noted that during the year the assessee debited an amount of Rs.21,11,803/- as interest expenditure on borrowed funds. The assessee was asked to explain as to why said interest payment should not be disallowed. The assessee explained the issue before the AO. The AO however, again requested the assessee to submit flow of chart of funds borrowed from Shri H. N. Vora, HUF to which the assessee also filed detailed account of Shri H. N. Vora, HUF and stated that funds borrowed were utilized for the purpose of business, therefore, no disallowance of interest is called for. The AO however, considering Schedule II of unsecured loans in respect of Shri Dhirubhai K. Patel, Shri R. K. Patel and Shri Sonal D. Vora noted that the assessee has made repayment of outstanding loans in respect of above persons to the tune of Rs.9,30,000/-, Rs.87,80,000/- and Rs.16,91,000/-. The AO further noted that the assessee has not earned this much amount during the year under consideration and from the details filed it appears that repayment of loans to the above persons was made out of the borrowed funds on which the assessee had paid interest during the financial year. Since the assessee has diverted its interest bearing funds for repayment of loans and no interest was earned out of it, therefore, interest attributable to the funds which were utilized for repayment of loans is to be considered as non-business purposes. The same were accordingly liable to be disallowed. The AO further noted that the assessee had made investments in shares of M/s. H. N. Financial Services Ltd. amounting to Rs.3,49,00,000/- and shares of Parklight Securities Ltd. amounting to Rs.20,00,000/-. These investments were in the nature of long term and not as stock in trade. The AO noted that in the past the assessee must have made investments in the above shares as investments out of borrowed funds. Since the funds borrowed from Shri H. N. Vora, HUF ITA No.3765/Ahd/2008 3 Shri Dhiren H. Vora has been used for repayment of loans and the assessee has not earned any income, therefore, interest is attributable to such repayment is not allowable as business expenditure under the provisions of section 36(1)
(iii) of the IT Act. The AO accordingly, disallowed interest of Rs.7,58,940/- out of total interest paid to Shri H. N. Vora, HUF in a sum of Rs.13,87,197/-. The addition was challenged before the learned CIT(A) and it was submitted that the AO has not quoted any circular etc. which states to the effect that any repayment of any loans by the assessee is permitted only if the income earned by the assessee is more than the quantum of repayment of loan. There is no such prohibition under the law. The AO has nowhere established linking even one single entry etc. with any particular amount of interest free amount available with the assessee for his business was diverted. The repayment of loan is also for the purpose of business. It was further submitted that borrowed funds were used only for the purpose of business and the AO has not established as to which interest bearing funds have been utilized for non- business purposes. Several decisions in support of the contentions were relied upon that when interest is paid for utilization of borrowed funds, the same is allowable deduction. It was submitted that there were numbers of transactions carried out with Shri H. N. Vora, HUF and whenever the assessee was to make payment funds have been borrowed. Other funds were available with the assessee on which no interest is paid. The AO has, therefore, failed to make out any case of disallowance of interest. The details submissions of the assessee have been recorded by the learned CIT(A) in the impugned order. The assessee also explained that a combined reading of the Schedule satisfies the assessee's arguments to the effect that long term investments was done from interest free loans and capital to the extent of Rs.4,24,28,000/-. Therefore, interest bearing funds were not even partially diverted and utilized for non-business purposes. The learned CIT(A) considering the ITA No.3765/Ahd/2008 4 Shri Dhiren H. Vora explanations of the assessee and details and materials on record deleted the addition. His findings are reproduced as under:
"2.6 I have carefully considered the contentions of the appellant as well as the reasoning given by the Assessing Officer.
2.6.1 The basic reason for disallowing the interest of Rs.7,58,940/- u/s. 36(1) (iii) of the I. T. Act is that interest bearing loan received from H. N. Vora, HUF have been utilized for repayment of loans by the appellant. It has been mentioned by the appellant that the loans which were repaid were taken by appellant for the purpose of business. The loans repaid were to Dhirubhai K. Patel, R. K. Patel and Sonal Vora as per the chart submitted by the appellant.
Receipt Payment
Date Name Amount Date Name Amount
16.06.2000 Dhirubhai K 3163349 16.06.2000 Vora Associate 2263349
Patel
16.06.2000 Cash book 900000
Total 3163349 6163349
24.01.2003 R.K. Patel 10000000 24.01.2003 Share Pur. 10000000
27.01.2003 R. K. Patel 20954000 27.01.2003 H. N. Vora, HUF 20954000
03.02.2003 R.K. Patel 110000 03.02.2003 H. N. Vora, HUF 110000
29.03.2003 R.K.Patel 900000 29.03.2003 H. N. Vora, HUF 540000
29.03.2003 S. D. Vora 360000
Total 31964000 31964000
18.01.2003 S. D. Vora 1911000 18.01.2003 H. N.Vora, HUF 1911000
Total 1911000 1911000
The appellant has mentioned that these loans were taken from above 3 persons for the purpose of business in the F. Y. 2000-01, 2001-02 and 2002-03 respectively as seen from the chart above and appellant has explained that these funds were utilized for the purpose of business vide his letter dated 18.8.2008. There is no finding to the effect that these funds were not utilized by the appellant for the business purpose as per the assessment order.
26.2 The A. O. has noted hat the assessee has not earned the income to the extent of repayment of loans. In this regard, it is sufficient to mention that if the loans have been utilized for the purpose of repayment of earlier loans used for business, then interest is allowable. It is not necessary that assessee can repay only out of income earned during the year.
2.6.3 As regarding the investment in shares of M/s. H. Nyalchand Financial Services Ltd. and Parklight Securities Ltd., A. O. has held ITA No.3765/Ahd/2008 5 Shri Dhiren H. Vora that they are long term investment and not stock-in-trade and appellant must have in the past made investment in these out of borrowed funds. Appellant has mentioned that these shares were acquired out of interest free funds available with appellant and nothing has been established to the contrary as per assessment order and these funds do not relate to period under dispute and even proviso to Sec. 36(1) (iii) does not apply in this case. Learned CIT(A)-XVI, Ahmedabad vide his order dated 19.5.2006 for immediately preceding year has allowed similar interest expenses. Appellant has submitted the details of source of the above shares purchased in earlier years as under:
SHARE PURCHAE ACCOUNT H. NYALCHAND FIN. SER LTD.
Receipt Payment
Date Name Amount Date Name Amount
01.04.99` Dhiren H.Vora 2582645 01.04.99 Share A/c. H. 2582645
Capital Nyalchand
Dhiren H. 469100 Share A/c. H. 469100
Vora, Capital Nyalchand
03.05.99 Vora 4346700 03.05.99 Share A/c. H. 4346700
Associates Nyalchand
05.02.00 Vora 1000000 05.02.00 Share A/c. H. 1000000
Associates Nyalchand
31.03.00 Vora 125000 31.03.00 Share A/c. H. 125000
Associates Nyalchand
31.03.00 Parklight Inv. 7520600 31.03.00 Share A/c. H. 7520600
Nyalchand
26.09.02 H. N. Vora 9900000 26.09.02 Share A/c. 9900000
HUF H.Nyalchand
Total 34944045 24944045
SHARE PURCHASE ACCOUNT- PARKLIGHT SEC. LTD.
Receipt Payment
Date Name Amount Date Name Amount
01.04.99 Cash Book 1000 01.04.99 Share A/c. 1000
Parklight Sec.
21.12.99 Vora 2000000 21.12.99 Share A/c. 2000000
Associates Parklight Sec.
Total 2001000 Total 2001000
From above chart it can be seen that these shares were purchased in earlier years starting from 1.4.99 to 26.9.2002. The appellant has make it clear that source of funds for above purchases were interest free funds from own capital account of Vora Associates, Parklight Securities and H. N. Vora, HUF. So all these securities were acquired out of own funds & non interest bearing funds.ITA No.3765/Ahd/2008 6
Shri Dhiren H. Vora 2.6.4 Appellant has further explained that interest free funds along with own capital available to appellant as on 31.3.2004 was Rs.4.24 crores against which investment in above securities was only Rs.3.69 crores and still Rs.54.83 lakhs were available with appellant. Similarly, for financial year ending March, 2003, capital and interest free funds were Rs.5.15 crores out of which RS.4.70 crores only were invested in above securities. There was no increase in investment during the year in above securities. It has been mentioned that there is no opening borrowing from H. N. Vora (HUF) and in earlier years no interest has been paid to for acquisition of above securities.
2.6.5 From above 2 paras, it is clear that interest payment to H. N.Vora (HUF) is not for acquisition of above securities and A. O. has also pointed out such correlation.
2.6.6 Appellant has point4ed out that during A. Y. 2003-04 also it has been held by Ld. CIT(A) in para 3.3. (iv) that where --- shares are held as investment portfolio, as an integral part of business, interest is allowable u/s. 36(1) (iii) of the I.T. Act relying upon various decisions of jurisdictional High Court and decision of Hon'ble Supreme Court in case of Madav Prasad (1979) 118 ITR 200 as mentioned in para 3.3(v) of above decision for A. Y. 2003-04.
2.6.7 From all the above discussion, it is clear that appellant has utilized the amount from H. N.Vora (HUF) for the purpose of business which is allowable u9/s.36(1) (iii) of I.T. Act. Accordingly, addition on account of interest of Rs.7,58,940/- is deleted."
4. The learned DR relied upon the order of the AO and submitted that since interest bearing funds were diverted for repayment of loans which were used for investments in purchase of shares and on that no income is earned, therefore, the AO was justified in disallowing interest. Learned DR submitted that even section 14A of the IT Act would apply in such a situation. On the other hand, the learned Counsel for the assessee reiterated the submissions made before the authorities below and also filed written submissions on the facts supported by material on record and submitted that neither the AO nor the learned CIT(A) has decided the issue in reference to Section 14A of the IT Act. The learned DR could ITA No.3765/Ahd/2008 7 Shri Dhiren H. Vora not contend that the provisions of Section 14A of the I.T. Act would apply to the case of the assessee.
5. We have considered the rival submissions and material on record. The AO has nowhere pointed out provisions of Section 14A of the IT Act while making the disallowance out of interest. The AO disallowed the interest u/s 36(1) (iii) of the IT Act only. The learned DR, therefore, cannot make out a case u/s 14A of the IT Act which is not made out by the AO at the assessment stage. Moreover, the learned CIT(A) has not decided this issue from that point of view and even no specific ground of appeal is taken before the Tribunal. Therefore, contention of the learned DR is rejected. The assessee explained that loans which were repaid were taken by the assessee for the purpose of business. The loans repaid were to Shri Dhirubhai K. Patel, Shri R. K. Patel and Shri Sonal Vora, details of which are noted by the learned CIT(A) in his findings. No finding has been given by the AO to the effect that these funds were not utilized by the assessee for business purposes. Once, the loans have been utilized for the purpose of repayment of earlier loans used for the purpose of business, interest would be allowed and it is not necessary that the assessee can repay only out of the income earned during the year. As regards investments made in the shares the assessee has mentioned that these shares were acquired out of interest free funds available with the assessee and the AO has failed to reconcile the same with that of interest bearing funds. The details of purchases of shares in the two companies are also incorporated in the findings given by the learned CIT(A) which would clearly suggest that these shares were purchased in earlier years from 01-04-1999 to 26-09-2002. According to the assessee, these were obtained out of interest free funds from own capital account and H. N. Vora, HUF in earlier years. There was no increase in the investments during the year in the above securities. In the earlier year i.e. 2003-04, the learned CIT(A) also deleted the addition in the case of the assessee ITA No.3765/Ahd/2008 8 Shri Dhiren H. Vora which is also confirmed by the Tribunal. The learned CIT(A) gave specific findings that loans earlier taken from three persons are used for business purposes and shares so purchased are out of own funds of the assessee and interest free funds available with assessee. The finding of fact recorded by the learned CIT(A) has not been controverted by the learned DR through any evidence or material. Considering the facts and circumstances noted above, it is clear that borrowed funds have been used for the purpose of business, therefore, interest is allowable u/s 36(1) (iii) of the IT Act. The learned CIT(A) was, therefore, justified in deleting the entire addition. As a result, we confirm the findings of the learned CIT(A) and dismiss the appeal of the Revenue.
6. As a result, appeal of the Revenue is dismissed.
Order pronounced on 12-03-2010.
Sd/- Sd/-
(A. N. PAHUJA) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date : 12-03-2010
Lakshmikant/-
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad