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2019 (4) TMI 742 - AT - Income TaxDisallowance of interest expenditure u/s 57(iii) - borrowed funds invested in the company for the purpose of business - commercial expediency - Assessee has claimed the interest expenditure under the head income from other sources which resulted into loss and same was claimed as set off against the income from capital gains and the business income - HELD THAT - There is no dispute that the assessee has borrowed the funds and made the investments in the business. The Assessing Officer did not make out a case that the assessee has diverted the funds for non-business purpose. Business consideration is the decision of the assessee, but not the Assessing Officer. The Hon'ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT 2006 (12) TMI 82 - SUPREME COURT held that the expression of commercial expediency is an express of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The assessee has made the investments for the purpose of business and paid the interest. The income under the head income from other sources resulted into loss which was claimed for set off under section 71 of the Act. Intra head loses are allowable to be set off against other sources of income in the same assessment year. Since the Assessing Officer did not make out a case that the assessee has diverted the funds for non-business purposes, we do not see any reason to interfere with the order of the ld. CIT(A) and the same is upheld. Appeal of the Revenue on this ground is dismissed. Disallowance u/s 14A r.w.r. 8D - interest on borrowed funds for investment in M/s. Vishnu Priya Hotels Pvt. Ltd.which yield dividend income which is exempt from the total income - diverting of funds for non-business purposes - HELD THAT - Assessing Officer has invoked section 14A r.w.r. 8D incorrectly and made the disallowance without having earned the dividend income. On an identical issue, in the case of M/s. Redington (India) Ltd. 2017 (1) TMI 318 - MADRAS HIGH COURT has taken a view that no disallowance is called for under section 14A in the absence of dividend income. Also see P. Venkateswara Rao Vs. ACIT 2018 (12) TMI 514 - ITAT VISAKHAPATNAM Addition based on Loose sheets found in search - Black money receipt - on money consideration for sale of the flat - HELD THAT - In the instant case a loose sheet was found evidencing the on money consideration for sale of the flat. The said loose sheet was not in the handwriting of the assessee or of any of the family members. No statement was recorded from the author of the loose sheet regarding the contents and enquiries were conducted with the buyer of the flat. The assessee has never agreed or accepted that he has received the sale consideration over and above the amount recorded in the registered document and no evidence was found with regard to receipt of cash. Therefore, we are unable to sustain the order of the CIT(A)) and the same is set aside and the appeal of the assessee is allowed. Cash found at the time of search - HELD THAT - Assessee filed the wealth tax returns in response to the notice issued by the Assessing Officer under section 17 of the Wealth Tax Act and the assessments were accepted by the department taking the cash balance as per wealth tax returns and no defects were found. Therefore, we are unable to discard the cash flow statement. Neither the Assessing Officer nor the ld. CIT(A) find any defect in the cash flow statement submitted by the assessee during the wealth tax proceedings also Therefore, we hold that the cash balance available as on the date of search is treated as explained and no addition is warranted. Accordingly, we set aside the order of the ld. CIT(A) and delete the addition made by the Assessing Officer. The appeal of the assessee on this issue is allowed. Addition on account of jewellery found during the course of search - AO even categorically found that the explanation of the assessee is found to be reasonable, however, the Assessing Officer made the addition in the absence of any evidence in form of wealth tax returns - HELD THAT - Once the explanation found to be reasonable, there is no case for making the addition in the hands of the assessee. Merely because of non-furnishing of wealth tax returns, the Assessing Officer cannot make the addition in the hands of the assessee when it was explained to the Assessing Officer that the jewellery belonged to his wife and mother. If at all the addition is required to be made it should be made in the right person duly initiating the proceedings. In the absence of wealth tax returns, if the gold and jewellery is to be taxed, the same is required to be brought to in the hands of the assessee s wife mother, but not in the hands of the assessee. Apart from the above, the assessee filed wealth tax returns for the Assessment Years 2009-10 2010-11, which was accepted by the department without making any addition. Therefore we hold that there is no case for making the addition on account of gold and jewellery found during the course of search in the hands of the assessee.
Issues Involved:
1. Disallowance of interest expenditure under Section 57(iii) of the Income Tax Act. 2. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962. 3. Addition of on-money received for the sale of a flat. 4. Addition of unexplained cash found during the search. 5. Addition on account of unexplained jewelry and silver articles found during the search. Detailed Analysis: 1. Disallowance of Interest Expenditure under Section 57(iii) of the Income Tax Act: The assessee claimed an interest expenditure of ?1,73,16,787 under the head ‘income from other sources,’ resulting in a loss of ?1,71,90,586, which was set off against income from capital gains and business income. The Assessing Officer (AO) disallowed the interest expenditure, arguing that the funds were diverted for non-business purposes, such as making investments in M/s. Vishnu Priya Hotels Pvt. Ltd. and giving interest-free loans. The AO held that the interest related to these investments needed to be disallowed under Section 57(iii). However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal, stating that the investments were made for business purposes and the interest expenditure was allowable. The Tribunal upheld the CIT(A)’s decision, citing that the AO did not prove the diversion of funds for non-business purposes and referenced the Supreme Court decision in S.A. Builders Ltd. vs. CIT, emphasizing ‘commercial expediency.’ 2. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962: The AO disallowed ?1,63,07,299 under Section 14A, arguing that the investments in M/s. Vishnu Priya Hotels Pvt. Ltd. yielded dividend income, which is exempt. However, the CIT(A) deleted the addition, noting that no dividend income was earned by the assessee. The Tribunal upheld the CIT(A)’s decision, referencing the Madras High Court’s ruling in M/s. Redington (India) Ltd. vs. Addl. CIT, which held that disallowance under Section 14A is not applicable in the absence of dividend income. 3. Addition of On-Money Received for Sale of Flat: During the search, a loose sheet indicated that the flat was sold for ?74.10 lakhs, with ?35.10 lakhs paid in black. The AO added ?15,13,161 as the assessee’s share of unexplained income. The CIT(A) upheld the AO’s decision, but the Tribunal overturned it, stating that the loose sheet was not reliable evidence as it was not in the assessee’s handwriting, and no further evidence supported the receipt of on-money. The Tribunal emphasized that the AO did not examine the buyer or the author of the loose sheet. 4. Addition of Unexplained Cash Found During the Search: The AO added ?5,37,775 as unexplained cash found during the search. The CIT(A) upheld this addition due to the lack of evidence supporting the cash balance. However, the Tribunal deleted the addition, accepting the cash flow statement provided by the assessee, which showed a substantial cash balance. The Tribunal noted that the wealth tax returns for the relevant years were accepted by the department, indicating no defects in the cash flow statement. 5. Addition on Account of Unexplained Jewelry and Silver Articles Found During the Search: During the search, gold jewelry, diamonds, and silver articles were found. The AO treated 50% of the jewelry as unexplained due to the lack of wealth tax returns. The CIT(A) allowed 1000 grams of gold but upheld the addition for 50% of the silver articles. The Tribunal deleted the addition, stating that the AO found the explanation reasonable, and any addition should be made in the hands of the actual owners (assessee’s wife and mother) if necessary. The Tribunal referenced the wealth tax returns, which were accepted without any additions. Conclusion: The Tribunal upheld the CIT(A)’s decisions favoring the assessee on the issues of interest expenditure and disallowance under Section 14A. It overturned the CIT(A)’s decisions on the issues of on-money received for the sale of a flat, unexplained cash, and unexplained jewelry and silver articles, ruling in favor of the assessee. The appeals filed by the assessees were allowed, and the appeal filed by the Revenue was dismissed.
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