Income Tax Appellate Tribunal - Mumbai
Mayur M. Kothari vs Jt. Cit on 28 April, 2006
ORDER
V.K. Gupta, A.M.
1. This appeal filed by the assessee is directed against the order of the Commissioner (Appeals) XXII dated 21-5-2001 at Mumbai and arises out of assessment completed under Section 143(3) of the Income Tax Act, 1961. The relevant assessment year is 1997-98.
2. We have heard both the sides and have also perused the materials placed on record and applicable legal provisions.
3. The assessee has raised multiple grounds in this appeal which are independent in nature, therefore, we deal with them one by one.
4. Ground Nos. 1 & 2 deal with common issue of disallowance of a sum of Rs. 53,073 out of ad hoc expenses and depreciation on motor car on account of personal use of the same.
5. Briefly stated facts in this case are that the assessee claimed vehicle expenses at Rs. 1,62,957 and depreciation at Rs. 1,55,479. The assessing officer disallowance 1/6th of the same for the reason that no log book was maintained and the personal use of the motor car could not be ruled out. On appeal, the learned Commissioner (Appeals) held that the possibility of the personal user of the motor car of the assessee could not be ruled out and provisions of Section 38(2) of the Act were clearly applicable. The learned Commissioner (Appeals) also rejected the contention for the assessee that after merger of the motor car in the block assets, no partial disallowance could be made on account of depreciation on the ground that the concept of block assets was only for the purpose of calculation of depreciation allowance on a consolidated basis and for no other purposes. The learned Commissioner (Appeals) accordingly confirmed the action of the assessing officer.
6. The learned Counsel appearing on behalf of the assessee reiterated the made before the revenue authorities.
7. The learned Departmental Representative, on the other hand, strongly supported the order of revenue authorities.
8. We have considered the submissions of both sides, material on record and orders of authorities below. Admittedly, the assessee has not maintained the log book. The possibility of personal user of the car cannot be ruled out. In the case of Gulati Saree Centre v. Assistant Commissioner (1999) 71 ITR 73 (Chd.)(SB) (ITAT Chandigarh Bench), the Tribunal held that even after the incorporation of the concept of block asset, the provisions of Section 38(2) were applicable and the assessing officer was empowered to restrict the depreciation to a fare part thereof having regard to the user of asset for the purposes of business. In this view of the matter, we hold that order of the revenue authorities is correct in law. As far as the proportion of disallowance for personal use is concerned, we find that the revenue authorities have made a reasonable proportionate disallowance at the rate of 1/6th of the total expenses including depreciation. Accordingly, we decline to interfere in the matter. Thus, both these grounds of the assessee are rejected.
9. Ground Nos. 3 & 4 are in respect of confirmation of disallowance of interest on borrowed funds of non-business purposes.
10. Briefly stated facts in this regard are that the assessing officer noted that there was a debit balance in the account of M/s. Mayur M. Kothari (HUF) amounting to Rs. 2,58,77,150 in the books of account of the assessee on account of share transactions on behalf of HUF. The opening balance in the aforesaid account was Rs. 5.59 crores approximately. The assessing officer also noted that the assessee was having borrowed loans and did not charge any interest from HUF. The assessee replied that he was having business transactions with his HUF and, therefore, the same should be treated as debtor. The assessing officer was of the opinion that it was a colourable transaction whereby the assessee was diverting his profits to HUF because with respect to other clients, the assessee got the payments received as per settlement carried out by the Stock Exchange. Accordingly, the assessing officer held that it was reasonable to disallow interest at the rate of 24 per cent which was the rate of interest being charged by the creditors of the assessee. The assessing officer further held that the transactions were also hit by the provisions of Section 40A(2) of the Act out of interest on the basis of the periods for which various amounts were due to the assessee by his HUF. Accordingly, the assessing officer disallowed a sum of Rs. 71,60,717. Aggrieved by the decision of the assessing officer, the assessee preferred an appeal before the learned Commissioner (Appeals). In the appellate proceedings, the assessee contended that the assessing officers finding regarding assessee was either transferring shares or his own profit to the HUF were not correct. It was also contended that the debit balance in the account of HUF had substantially came down and the HUF filed its return of income independently. The assessee further contended that average rate of interest on borrowed funds was 19 per cent and not 24 per cent per annum. It was also contended that the amount outstanding in HUF account was in the nature of business debt and the assessee did not charge any interest from any of sundry debtors nor paid interest to its sundry creditors. It was also contended that the provisions of Section 40A(2) of the Act were not applicable as no interest was paid to the persons as referred therein. It was also contended that if the debit balance in the account of HUF was treated as loan, no part of the interest paid on borrowed funds could be disallowed under Section 36(1)(iii) of the Act as the interest bearing funds were used for business purposes only. It was further contended that the assessee had its own capital far exceeding the loans taken, therefore, no part of interest bearing funds would be attributed towards debit balance in the HUF account. The learned Commissioner (Appeals) after considering the submissions made by the assessee, upheld the action of assessing officer in principle and directed him to verify the average rate of interest on borrowed funds and modify if necessary, the amount of disallowance.
The learned Commissioner (Appeals)s findings are reproduced below:
I have considered the submissions made. It is seen from the copies of account of M/s Mayur M. Kothari (HUF) standing in the books of the appellant since financial year 1994-95 that as on 3l-3-1995, 31-3-1996 and 31-3-1997, the HUF had debit balances in the books of the appellant of Rs. 4.78 crores, 5.59 crores and 2.59 crores respectively. Over the years the appellant was purchasing and selling shares on behalf of his HUF. The purchases made had been debited to the account of HUF and sales credited. Thus the debit balance in the account of the HUF represented unpaid purchase consideration of shares, over and above the sales made. No payment was ever received from the HUF in respect of such unpaid, dues. Further the B/S of the appellantas on 31-3-1997 discloses investment" of Rs. 21.60 crores in shares on his own account, apart from debt due from the HUF apart from investment in shares on his own account. The appellant as on 31-3-1997 had borrowed funds to the tune of Rs. 521.75 lakhs and had paid interest of Rs. 1, 11,79,680 on such borrowed funds. On scrutiny of the balance sheet of the appellant as on 31-3-1997, it has to be concluded that the appellant had utilized his borrowed funds to a substantial extent to purchase shares on behalf of his HUF It is also seen that out of the total sundry debtors of Rs. 293.66 lakhs, Rs. 258.77 lakhs was due from HUF alone. It is true that the provisions of Section 40A(2) is not strictly applicable in the present case, as the appellant had not claimed any deduction in respect of any excessive and unreasonable payment made by the appellant to any person referred to in Section 40A(2)(b), but it cannot be denied that the appellant had utilized major portion of his borrowed funds to purchase shares on behalf of the HUF. In such a situation it cannot be said that the appellant had utilized his borrowed funds for the purpose of business and as such interest paid on funds borrowed for the purpose of business, but utilized for the purpose of purchase of shares for the HUF would not be allowable as deduction under Section 36(1)(iii). One may refer in this regard to the decision of Supreme Court in the case of Madhav Prasad Jatia (118 ITR 200) and the decision of Bombay High Court in the case of Kishinchand Chellaram (114 ITR 654). However the other contention of the appellant that the average rate of interest paid by the appellant on borrowed funds during the previous year was lesser than the rate of 24 per cent adopted by the assessing officer would need consideration. On prima facie examination of the balance sheet of the appellant it is seen that the outstanding loan as on 31-3-1997 was Rs. 521.75 lakhs and total interest paid during the previous year on borrowed funds was Rs. 111.80 lakhs approximately. The above figures prima facie gives rise to an average rate of interest of 21.43 per cent per annum which however is an approximate figure. The assessing officer may give another opportunity to the appellant to prove the average rate of interest of borrowal of funds and modify if necessary, HUF amount of disallowance after reconsideration of such claim. The disallawance made by the assessing officer is in any case upheld in principle. The ground is accordingly disposed.
Still aggrieved, the assessee is in appeal before us.
11. The learned Counsel appearing on behalf of the assessee contended that there was a continuous reduction in the outstanding amount in HUF account and in the earlier years no such disallowance was ever made, therefore, there, was no reason to make such disallowance in the year under consideration. It was also strenuously argued that assessee had sufficient interest free funds, therefore, no disallowance could be made. The learned Counsel further pleaded that the provisions of Section 40A(2) were not at all applicable. The learned Counsel also referred to the relevant pages of paper book to show that Mayur M. Kothari (HUF) was independently assessed to tax, therefore, the transactions of sale and purchase of shares were real and genuine and it was only a business debtor, therefore, there was no question of any disallowance of interest on borrowed funds.
12. The learned Departmental Representative, on the other hand, contended that the HUF account was given different treatment as compared to other business customers and there was no payment received in respect of transactions executed by the assessee on behalf of HUF. The learned D.R. also contended that the learned Commissioner (Appeals) had given a categorical finding that the assessee had utilized his borrowed funds to a substantial extent to purchase shares on behalf of his HUF. It was also contended that the provisions of Section 40A(2)(b) were not directly applicable to this case. He further placed reliance on following judicial decisions to contend that interest on borrowed funds was allowable under Section 36(1)(iii) only when it was used for business purposes of the assessee and in this case funds were blocked in transactions on behalf of HUF where no interest was charged, therefore, it was a fit case for disallowance.
(i) Honble Madras High Courtin the case of Mir Mohd Ali v. CIT (1960) 38 ITR 413.
(ii) Honble Madras High Court in the case of CIT v. India Silk House .
(iii) The Honble Madras High Court in the case of CIT v. Sujanni Textiles (P) Ltd. .
(iv) The Honble Bombay High Court in the case of Phaltan Sugar Works Ltd. v CWT
(v) Honble Mysore High Court in the case of CIT v. United Breweries .
(vi) Honble Madras High Court in the case of Milapshand R. Shah v. CIT (1965) 58 ITR 525.
(vii) Honble Bombay High Court in the case of CIT v. Doctor & Co. .
(viii) Honble Allahabad High Court in the case of Saraya Sugar Mills (P) Ltd. v. CIT .
(ix) Honble Allahabad High Court in the case of Marolia & Sons v. CIT .
(x) Honble Supreme Court in the case of Madhav Prasad Jatia v. CIT .
(xi) The Honble Delhi High Court in the case of R. Dalmia v. CIT (1982) 133 ITR 169.
(xii) Honble Delhi High Court in the case of CIT v. Motor General Finance Ltd. (2002) 254 ITR 449,
(xiii) Honble Madras High Court in the case of K. Somasundaram & Bros. v. CIT .
(xiv) Honble Allahabad High Court in the case of CIT v. Saraya Sugar Mills (P) Ltd. v. CIT .
(xv) Honble Madras High Court in the case of CIT v. Indian Express (Madurai) Ltd. .
(xvi) S.A. Builders Ltd. v. CIT .
It was also contended that each year was a separate year and claim of allowability of interest under Section 36(1)(iii) was to be looked into on the basis of facts this year, therefore, it was immaterial that no such disallowance was made earlier. It was also contended that mere availability of interest free funds was not sufficient and nexus between the interest free funds and interest free advances/business debts was necessary to justify the claim of the assessee.
13. We have considered the submissions of both sides, material on record and orders of authorities below. Admittedly, the assessee is a share broker. The assessee has also undertaken multiple share transactions on behalf of his HUF. The modus operandi of the assessee in relation to this account is that the sale proceeds are credited and purchases made on behalf of the HUF are debited in this account. In the financial year 1994-95, outstanding debit balance in this account was 4.78 crores which have been reduced to 2.59 crores. From the perusal of the order of learned Commissioner (Appeals), it is observed that the Commissioner (Appeals) has considered the figures bearing in, the Balance Sheet as on 31-3-1997 to arrive at the conclusion that borrowed funds were utilized to purchase the shares on behalf of HUF whereas the figures appearing on the same date in the HUF account is lower of the outstanding balance appearing at the end of two previous financial years. The learned Commissioner (Appeals) has also observed that out of the total sundry debtors of Rs. 293.66 lakhs, Rs. 258.77 lakhs were due from the HUF alone. Whereas the assessee has contended that the amount outstanding in the HUF account is of earlier years and the same has emanated from the interest free funds owned by the assessee. However, no material has been placed on record in support of this claim. It is a settled judicial principle that any expenditure (including interest on borrowed funds) is allowable only when it is incurred for the purposes of business. It is also a settled judicial principle that res judicata is not applicable to the income-tax proceedings. The assessing authorities are empowered to look into the claim of the assessee in each year of assessment and there is no prohibition in law which debars them in doing so. Having stated so, the only aspect which the assessing authority are required to take into consideration in taking different view in respect of any claim is that such different view should be based upon the proper analysis of facts of that particular year. Therefore, the contention of the assessee that no disallowance would be made in this year because no such disallowance was made earlier is rejected. The assessee further contended that there was a substantial reduction in the outstanding amount in HUF account but that fact by itself does not lead to any conclusion unless it is shown that the amount outstanding was out of interest free funds. It is also a settled judicial proposition that the assessee has to approve the nexus between the interest free funds and deployment thereof and there is no presumption in law that availability of interest free funds would be attributable to interest free advances/business debts which yield on no interest income to assessee. The onus to prove the claim of allowability of expenditure lies on the assessee. We are also of the view that it is not necessary that for considering the disallowance under Section 36(1)(iii) there must always be a interest free loan and advance if the assessee has employed the interest bearing funds by way of giving perpetual credit facility to closely related entity without charging any interest, then such transaction can also be looked into for the purposes of allowance of interest under Section 36(1)(iii) of the Act. The assessee is admittedly not paid any interest to a relative as specified in Section 40A(2) of the Act, therefore, the provisions of that section are not applicable to the present case. It is observed that the learned Commissioner (Appeals) has confirmed the order of assessing officer based upon the figures of the financial year 1996-97 only. However, this account is a running account continuing from earlier years, therefore, the ultimate source has to be looked into. In this view of the matter, we are of the considered opinion that the matter requires re-examination of factual position with regard to utilization of interest free funds towards outstanding balances in the HUF account to arrive at a proper conclusion. Therefore, we remand back the issue to the file of learned Commissioner (Appeals) to decide the issue afresh in accordance with law and our observations given hereinabove after giving an adequate opportunity of being heard to both sides. Thus, these grounds of the assessee stand allowed for statistical purposes.
14. Ground Nos. 5 to 9 are in respect of treatment of short-term capital loss and long-term capital loss as business loss. The learned Counsel appearing on behalf of assessee pointed out that an alternative pleading was raised before the learned Commissioner (Appeals) which was mentioned in ground No. 10 of the appeal before the Tribunal wherein the assessee requested for valuation of closing stock as on 31-3-1998 at the cost of market value which was lower if the loss on shares sold was treated as business loss. The learned Counsel further contended that he was pressing only this contention and if the same was accepted, then ground Nos. 5 to 9 Could be treated as not pressed. The learned Departmental Representative could not controvert the contentions of the assessee, however, he preferred to rely on the order of revenue authorities.
15. We have considered the submissions of both sides, material on record and orders of authorities below. It is an accepted accounting principle that the stock-in-trade has to be valued at cost or market price, whichever is lower. Since the assessee treated the shares as investments, therefore, the same were valued at cost. In view of the acceptance shown by the assessee for treating the loss on share transactions as business loss as held by the revenue authorities, in our considered opinion the stock-in-trade of unsold shares should be valued at cost or market price, whichever is less. Correspondingly, the opening stock of the next year should also be modified. However, the market value of such stock-in-trade requires verification, therefore, we restore this issue to the file of assessing officer to modify the value of the closing stock in terms of the directions given as above. In the result, ground Nos. 5 to 9 stands dismissed and ground No. 10 stands allowed for statistical purposes.
16. In the result, the appeal filed by the assessee stands partly allowed.