2020 (8) TMI 175 - AT - Income Tax

Estimation of income - Bogus purchases from hawala operators - as per assessee excess gross profit element ought to have been added instead of full amount of purchase - HELD THAT - As decided in M/S MOHOMMAD HAJI ADAM CO. 2019 (2) TMI 1632 - BOMBAY HIGH COURT no ad hoc addition for bogus purchases can be made. It laid down that the addition should be made to the extent of difference between the gross profit rate on genuine purchases and gross profit rate on hawala purchases. Such case specific details were not readily available either with the ld. AR or the ld. DR for facilitating the calculation of gross profit rate of genuine and hawala purchases. Under these circumstances, we set-aside the impugned order and remit the matter to the file of the AO and recompute the amount of additions. Reopening of assessment u/s 147 - Disallowance on account of Vehicle and Telephone expenses - HELD THAT - We find that the assessee claimed Vehicle and Telephone expenses in entirety without offering any suo motu disallowance on account of personal use by the partners, more so, when the vehicles and telephone were also admittedly used for non-business purpose as the assessee had not maintained any log books etc. to show their exclusive user for business purpose. Non-offering of such disallowance on account of personal use came to the notice of the AO during the course of proceedings u/s 147 - Once the position was such, we find no hesitation in holding that the test of such escaped income coming to the notice of the AO during the course of proceedings u/s 147, got fully satisfied inasmuch as the disallowance of the instant expenses duly answered the description of any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently, in the course of proceedings in this section . Ex consequenti, the submission of the ld. AR in this regard is jettisoned. Coming to the merits of the addition, it is seen that the assessee could not adduce proper evidence in support of Vehicle and Telephone expenses having been incurred wholly and exclusively for the purpose of business inasmuch as no log books for vehicle etc., were produced despite the AO s specific requisition. We are satisfied that sustenance of disallowance at 10% of the expenses is reasonable and does not require any interference. Disallowance on account of Membership and Subscription fees - HELD THAT - Assessee is engaged in the real estate sector. In such circumstances, subscription to magicbricks.com is obviously for the advancement of the business purpose. A sum of ₹ 1,37,875/- included by the assessee in the overall expenditure of ₹ 1,97,430/- under the head Subscription fees is held as deductible. As regards the remaining amount, the assessee could not substantiate the claim of such expenditure passing the test of commercial expediency and having been incurred wholly and exclusively for the purpose of business. The finding of the ld. CIT(A) is ergo affirmed pro tanto and the disallowance is sustained at ₹ 59,555/-. Addition u/s. 36(1)(iii) - Interest paid on the capital borrowed which was used for non-business purpose - HELD THAT - There should be some interest free funds available with the assessee, whether in the shape of capital or borrowings, which can then be presumed to have been utilized firstly towards Investments. If, on the other hand, there are no interest free funds, the presumption fails. Once the assessee paid interest on capital to partners, the capital no more remained interest free fund, notwithstanding the definition of interest u/s 2(28A) read in juxtaposition to section 40(b) of the Act. It is further noted that section 36(1)(iii) talks of allowing deduction towards interest on capital borrowed. The term capital here also refers to the amount borrowed and not the capital in strict sense as contributed by partners. Capital can never be borrowed as it is always contributed in contrast to a loan which is borrowed and not contributed. It becomes explicitly clear that the assessee did not have any interest free funds available at its disposal which could have been used for making investments for non-business purpose. To that extent, the disallowance of interest pertaining to the Investments made in relation to properties meant for non-business purpose, is rightly called for.

Summary

Issues Involved:
1. Confirmation of addition towards Hawala purchases.
2. Sustenance of disallowance on account of Vehicle and Telephone expenses.
3. Sustenance of disallowance on account of Membership and Subscription fees.
4. Confirmation of addition under Section 36(1)(iii) of the Income-tax Act.
5. Initiation of re-assessment proceedings.

Detailed Analysis:

1. Confirmation of Addition Towards Hawala Purchases:
The Assessing Officer (AO) received information from the Sales Tax Department that the assessee was involved in transactions with Hawala operators, specifically purchasing ?27,16,280/- from M/s Parshwa Trading Company. The AO issued a notice under Section 148 and, after confronting the assessee, disallowed the amount due to the non-genuineness of the transactions. The CIT(A) upheld this decision. The Tribunal, referencing the Hon'ble Bombay High Court's decision in Pr.CIT Vs. Mohommad Haji Adam & Co., remitted the issue back to the AO to recompute the addition based on the difference between the gross profit rates on genuine and hawala purchases, and to provide the assessee with a reasonable opportunity for a hearing.

2. Sustenance of Disallowance on Account of Vehicle and Telephone Expenses:
The AO disallowed 20% of the claimed Vehicle and Telephone expenses (?6,44,245/-) due to personal use, which was reduced to 10% by the CIT(A), resulting in an addition of ?97,008/-. The Tribunal examined the legal provisions under Section 147 and concluded that once re-assessment proceedings are validly initiated, the AO can assess any other income that comes to his notice during the proceedings. The Tribunal upheld the 10% disallowance as reasonable, given the lack of evidence proving the expenses were wholly for business purposes.

3. Sustenance of Disallowance on Account of Membership and Subscription Fees:
The AO disallowed ?1,97,430/- claimed for Membership and Subscription fees, considering them personal expenses. The CIT(A) upheld this, except for ?1,37,875/- paid to Times Business Solutions Ltd. for magicbricks.com, which was deemed for business purposes. The Tribunal affirmed the CIT(A)'s decision, sustaining the disallowance of ?59,555/- for the remaining amount due to lack of evidence proving business purpose.

4. Confirmation of Addition Under Section 36(1)(iii) of the Income-tax Act:
The AO disallowed ?31,54,535/- of interest expenditure, linking it to investments in plots/lands, arguing that the assessee did not have sufficient own funds. The CIT(A) upheld this. The Tribunal clarified that interest on capital borrowed for business purposes, including investments in real estate, is deductible under Section 36(1)(iii). The Tribunal remitted the issue back to the AO to verify which investments were for business purposes and to disallow interest only for those meant for earning income under "Income from house property." The Tribunal rejected the assessee's argument that partners' capital contributions were interest-free funds, as interest was paid on these contributions.

5. Initiation of Re-assessment Proceedings:
The Tribunal found no merit in the assessee's challenge to the initiation of re-assessment proceedings, except for the part concerning the disallowance of certain expenses, which was already addressed and rejected. The Tribunal upheld the validity of the re-assessment proceedings.

Conclusion:
The appeal was partly allowed, with directions to the AO to recompute certain additions and verify the purpose of investments, while upholding other disallowances and the initiation of re-assessment proceedings. The judgment was pronounced in the Open Court on 07th August, 2020.