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2015 (10) TMI 2422 - ITAT JAIPUR

2015 (10) TMI 2422 - ITAT JAIPUR - TMI - Addition on account of “Interest paid to bank” - disallowance u/s 14A - Held that:- is undisputed fact that the assessee has more interest income than interest paid on OD. Besides this he has also disclosed short term capital gain at ₹ 9,07,828/- in the income of the assessee, it is also taxable. The ld Assessing Officer had not established the nexus between the interest bearing borrowings with utilizing the fund in interest free investment. When th .....

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rading addition U/s 68 - credit appearing in the name of Shri Kanha Ram Agarwal - Held that:- It is revealed from the assessment order that Sh. Kanha Ram Agarwal, brother of the assessee has declared additional income U/s 132(4) of the Act on 27/08/2008. IN answer to question No. 22, he has disclosed ₹ 1.5 crores during the search under the various heads. It is also fact that the AR of the assessee submitted different confirmation before both the authorities. Now before us, he has filed di .....

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s pointed out by the Assessing Officer are not specific in nature. He has not brought on record any discrepancy in the books of account produced by the assessee but the compared case with M/s Supreme Carpet and Carpet palace who are in the export business. The assessee was trading goods for local market. The case is audited U/s 44AB of the Act as claimed by the assessee. The case law referred the assessee are squarely applicable. Further during the course of search, no incriminating documents we .....

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of stock found during the course of survey and stock prepared on the basis of books of account at ₹ 1,96,668/-. It is undisputed fact that the books were not complete at the time of survey. The assessee also had not prepared trading account at the time of survey to determine the exact stock as per books of account and any difference on physical verification when purchase and sale bills available with the assessee. The assessee’s argument was that the old stock was also included in the clos .....

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assessee. The assessee gets relief of ₹ 7,89,668/- Decided partly in favour of assessee. - ITA No. 969/JP/2013, ITA Nos. 971 & 972/JP/2013, ITA No. 973/JP/2013, ITA Nos. 989 & 990/JP/2013 - Dated:- 24-9-2015 - SHRI T.R.MEENA, AM & SHRI LALIET KUMAR, JM For The Assessee : Shri S.L. Poddar (Adv) For The Revenue : Shri M.S. Meena (CIT) ORDER PER BENCH These appeals are being filed by the different assessees and heard together on commons issues, therefore, these are being disposed of by a .....

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umstances of the case the Assessing Officer has erred in confirming the addition of ₹ 6,69,062/- on account of Interest paid to bank without consideration the submission of the assessee and material evidences submitted during the assessment proceedings. 3. Ground No. 1 of the appeal is not pressed, therefore, we dismiss this ground as not pressed. 4. The ground No. 2 of the appeal is against confirming the addition of ₹ 6,69,062/- on account of interest paid to bank. The assessee der .....

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and expenditure account under the head interest paid to bank. It is found by the Assessing Officer that the assessee has utilized overdraft facility from bank to invest in IPO of Indian companies and paid interest to the bank. It was submitted before the Assessing Officer vide letter dated 02/12/2010 that no borrowings were made by the assessee on which interest has been paid. The assessee is free to use his funds the way he likes. The assessee had not paid any interest to the outsider. He has .....

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sheet but they do not have relevance so far as application of fund taken on interest and claim of deduction of such interest from income generated from such assets is concerned. In case of assessee interest has been paid to the bank on withdrawals used for investment in applications of initial public offer of shares in listed companies. The income from such investments (Dividend) is exempt from tax U/s 10(38) of the Act. Thus, the expenditure on assets income from which is exempt from tax is not .....

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he FDR made from surplus funds available with him. Interest paid on the overdraft facility taken against this FDR was @ 10.75% totaling to ₹ 6,69,062/- during the year. The overdraft limit was used to invest in IPOs and shares to the extent of ₹ 91,18,262/- during this assessment year apart from the overdraft taken to advance loans to other persons outside the family from whom interest was charged. The assessee was maintaining continuous current account with the family members of the .....

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son other than family members from whom interest was charged and shown as income and also invested in shares and IPO, the income from which is dividend and was not taxable. The appellant did not have any surplus fund with him when he invested the surplus money in the FDRs. The OD taken against the FDRs amount withdrawn from the OD and invested in the IPOs cannot be claimed that the assessee was having surplus fund. The assessee is also not entitled to netting of the interest earned on FDR with i .....

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d that case law relied upon by the AR i.e. CIT Vs. Hero Cycles (2010) 233 CTR 74 (P&H) and Yatish Trading Co. P. Ltd. Vs. ACIT (2011) 50 DTR 158 (Mum) are distinguishable. Thus she confirmed the addition of ₹ 6,69,062/- U/s 14A of the Act. 6. Now the assessee is in appeal before us. The ld AR of the assessee has submitted that the assessee has earned more interest than paid. Thus the interest account of the assessee does not show any negative balance. The interest paid on OD is of S .....

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me by virtue of investment in share application on account of which interest on OD of ₹ 6,69,062/- has been disallowed. When short term capital gain is part of the total income of the assessee, the lower authorities were not right to hold that interest on OD amount was incurred for earning income which did not form part of total income. It is further submitted that even if the investment was in share application, the same do not automatically invites disallowance of interest. Investment in .....

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. Cheminvest Ltd. Vs. ITO is dated 05/08/2009 and the case law cited by him are of later date. Therefore, the decision cited by the assessee prevails over earlier decisions. It is further submitted that if there are divergent opinions on an issue the one favourable to the assessee has to be followed. If Section 14A considered by the Assessing Officer is applied, the ld Assessing Officer had to prove the nexus that interest bearing fund was utilized for the purpose of earning of tax free income. .....

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an 229 ITR 801 (Ker). Therefore, he prayed to delete the addition. At the outset, the ld DR has vehemently supported the order of the ld CIT(A). 7. We have heard the rival contentions of both the parties and perused the material available on the record. It is undisputed fact that the assessee has more interest income than interest paid on OD. Besides this he has also disclosed short term capital gain at ₹ 9,07,828/- in the income of the assessee, it is also taxable. The ld Assessing Office .....

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the assessee s appeal is allowed on this ground 8. In the result the assessee s appeal is partly allowed. 9. ITA No. 971/JP/2013: This is an appeal filed by the assessee arises against the order dated 01/11/2013 passed by the ld CIT(A), Central, Jaipur for A.Y. 2003-04. The sole ground of appeal is as under:- 1. Under the facts and circumstances of the case, the ld CIT(A) has erred in confirming the trading addition of ₹ 6,60,440/- U/s 68 of the It Act, 1961 on account of credit appearing .....

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of the Act being a search case. The ld Assessing Officer observed that the assessee filed confirmation of loan from Shyam Agarwal for ₹ 2 lacs, R.K. Agarwal (HUF) ₹ 4,40,000/- but in personal balance sheet unsecured loan are appearing amount to ₹ 18,76,370/-. The assessee filed confirmation of loan for ₹ 6,60,439.71 paisa in the name of elder brother Shri Kanha Ram Agarwal without signature but the assessee had not shown debtor Shri Kanha Ram Agarwal in his personal accou .....

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Agarwal showed the opening balance of ₹ 6,40,439/- as on 01/4/2002. To verify the observation of the Assessing Officer in the assessment order, the assessment record was called for, further verifications were made by her. She found that Sh. Kanha Ram Agarwal in the books of account had been submitted during the course of assessment proceedings, a different copy of account, which submitted before her. As per ledger account, the opening balance as on 01/4/2002 was ₹ 4,76,296/- and not .....

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that it is mistake made by the AR, the assessee should not be penalized for wrong furnishing of confirmation. He has further drawn our attention on page No. 22 of the paper book that opening balance as on 01/4/2002 was ₹ 4,76,296/- and during the year the assessee has received ₹ 1,84,143/- from Sh. Kanha Ram Agarwal, therefore, even the assessee does not submit confirmation, the maximum addition can be made U/s 68 of the Act at ₹ 1,84,143/-but Sh. Kanha Ram Agarwal is assessed .....

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has declared additional income U/s 132(4) of the Act on 27/08/2008. IN answer to question No. 22, he has disclosed ₹ 1.5 crores during the search under the various heads. It is also fact that the AR of the assessee submitted different confirmation before both the authorities. Now before us, he has filed different confirmations, therefore, the Assessing Officer is directed to verify the confirmation from the books of account of Shri Kanha Ram Agarwal. Accordingly, this issue is set aside to .....

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without having any incrimination material, hence the assessment completed in ab-initio void. 2. Under the facts and circumstances of the case the Assessing Officer has erred in confirming the addition of ₹ 1,12,021/- on account of Interest paid to bank without consideration the submission of the assessee and material evidences, submitted during the assessment proceedings. 3. Under the facts and circumstances of the case the Assessing Officer has erred in sustaining the trading addition of .....

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. The assessee derived income from capital gain on transactions in shares and other sources in the form of interest. He filed his return for A.Y. 2008-09 on 28/10/2009 declaring total income of ₹ 9,64,590/-. There was a search and seizure operation conducted in this case on 27/08/2008 in the case of Agarwal (Carpet) Group. Therefore, assessment in this case as passed U/s 153A/143(3) of the Act. The ld Assessing Officer observed that the assessee had debited a sum of ₹ 1,12,021/- in t .....

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. He has net income from other sources at ₹ 93,786/-. Further he submitted before the Assessing Officer that withdrawal of OD account were used for the share business, against this the assessee had paid interest of ₹ 1,12,021/-. The assessee had shown short term capital gain of ₹ 8,46,859/-, and FDR interest of ₹ 1,14,379/-which were taxable, therefore, it cannot be said that borrowings were used for earning of exempt income. The ld Assessing Officer observed that the ass .....

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income from which is exempt from tax is not allowable under the provisions of section 14A of the Act. Therefore, he made addition of ₹ 1,12,021/-. He relied on the decision of ITAT Delhi Bench B Special bench, New Delhi in the case of Cheminvest Ltd. Vs. ITO ITA No. 87/Del/2008 order dated 05th August, 2009. 18. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld CIT(A), who had confirmed the addition by observing that the appellant receive .....

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rrent account with the family members of the firm M/s Carpet Palace from where amounts were withdrawn from time to time to prevent the overdraft from going over the allowed limit. She further held that the overdraft facility was used to grant loans to person other than the family from whom the interest has been declared, though nexus has never been proved whether entire interest reflected in the computation of income was from loans advanced through OD account. Thus the appellant had taken OD fac .....

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netting of the interest earned on FDR with interest paid on the OD as there is no nexus between the earning of the interest and expenditure incurred on earning of this interest, therefore claim of the assessee is not allowable. She relied on the decision of Hon ble Jurisdictional High Court in the case of Hamendra Singh Vs. CIT 170 ITR 508 (Raj). She further observed that the assessee had not explained the investment in IPOs month wise and also not explained relationship between overdraft amount .....

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e balance. The interest paid on OD is of ₹ 1,12,021/- whereas interest earned by the assessee on FDR and others of ₹ 1,14,379/-. It could not be said that the assessee incurred expenditure on account of interest or investment in shares. A per provisions of Section 14A no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. The assessee has earned short term capital gains of  .....

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The assessee had shown short term capital gain, therefore, OD amount was used for taxable income. He relied on the following decisions: (i) CIT Vs. Hero Cycles 323 ITR 518. (ii) Yatish Trading Co. P. Ltd. Vs. ACIT (2011) 50 DTR 158 (Mum). (iii) Minda Investments Ltd. Vs. DCIT (2010) 52 DTR 1 (Del Trib). (iv) DCIT Vs. Maharastra Seamless Ltd. (2011) 52 DTR 5 (Del Trib). The case law referred by the Assessing Officer i.e. Cheminvest Ltd. Vs. ITO is dated 05/08/2009 and the case law cited by him ar .....

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was earned out of the funds invested in the earlier years and not from utilizing of the funds withdrawn from OD account. It is settled law that where interest is received by the assessee on his fixed deposit and is also paid on loan obtained on the security of that fixed deposit, only the net interest is chargeable to tax on the principle of mutuality. He relied on the decision in the case of CIT Vs. Dr. V.P. Gopinathan 229 ITR 801 (Ker). Therefore, he prayed to delete the addition. At the outs .....

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utilizing the fund in interest free investment. When the assessee has shown income from the short term capital gain, it is evident that he has been in the business of share trading. Further the ld Assessing Officer has not brought on record the amount deployed in shares for investment purposes. The case laws cited by the assessee are squarely applicable, therefore, the addition confirmed by the ld CIT(A) is reversed and the assessee s appeal is allowed. 21. The third ground of assessee s appeal .....

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nit manufacturing of carpet as compared to expenses shown by M/s Carpet Palace and M/s Supreme Carpet, both concerns of brothers of the assessee, engaged in similar business which had declared gross profit rate ranging from 20% to 30% during the year under consideration. The details of wastage, dead stock etc. are not properly maintained by the assessee. Valuation of closing stock has been shown at cost or market price for which no working is available. No stock register and quantitative details .....

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had confirmed the addition by observing that the ld Assessing Officer had made specific observations regarding defects of books of account of the appellant. During the course of assessment proceedings, the ld AR of the assessee had not furnished the quantitative details of stock and its valuation was not supported by the purchase bills. These bills are essential for determining the true profit of the appellant even in absence of stock register. Considering that the appellant had consistently fai .....

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ble ITAT that past history of the appellant is the best guide for determining the GP rate of the assessee, the GP rate chart was perused and it is seen that the appellant had shown a GP rate of 13.57% for A.Y. 2007-08 on total turnover of ₹ 39,89,388/- and during this A.Y. he has shown the GP of 12.57% on decreased turnover of ₹ 39,45,037/-. It is a generally accepted principle that in manufacturing industry the GP rate improves with decline in turnover. Therefore the GP is estimated .....

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M/s Supreme Carpet and Carpet Palace the business is of export. It is admitted fact that in export, the quality of carpet required much better to local market. Similarly the exporter also gets goods percentage of profit on export. The assessee has shown G.P. rate during the year @ 12.57% on total sale of ₹ 39,35,037/- compared to immediate preceding year s G.P. rate @ 13.57% on turnover of ₹ 39,89,388/-. Therefore, he prayed to accept the declared GP and relied on the decision in the .....

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no case that there were any unaccounted sales or purchases. During the course of search, no incriminating material was found suggesting unaccounted business in the hands of the assessee. The defects pointed out by the ld Assessing Officer are not sufficient to apply Section 145(3) of the Act. He further relied on the following case laws:- (i) Vishal Infrastructure Ltd. Vs. CIT (2007) 11 SOT 386 (Hyd.). (ii) Narsing Das Ram Kisan Vs. ACIT 272 ITR 467. (iii) CIT Vs. Poonam Rani (2010) 41 DTR 194 .....

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market. The case is audited U/s 44AB of the Act as claimed by the assessee. The case law referred the assessee are squarely applicable. Further during the course of search, no incriminating documents were found and seized, therefore, lump sum addition made by the Assessing Officer and partly confirmed by the ld CIT(A) is not justified. Accordingly we reverse the order of the ld CIT(A) and allow the assessee s appeal on this ground. 26. In the result, the assessee s appeal is partly allowed. 27. .....

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on of the assessee and material evidences produced during the assessment proceedings. 28. The sole ground of the appeal is against sustaining the trading addition of ₹ 9,89,419/- by applying GP rate of 35% as against 26% declared by the assessee and invoking the provisions of Section 145(3) of the Act. The assessee is having income from capital gain and other sources. A search and seizure operation was carried out on 27/08/2008, therefore, the assessee was completed U/s 153A/143(3) of the .....

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/- was found on 27/08/2008 which includes carpet stock at ₹ 21,83,418/-, unfinished carpet of ₹ 8,04,336/- and the balance stock pertained to raw material mainly consisting of woolen and cotton yarn. During the course of survey, a detailed statement of Shri Satish Agarwal husband of assessee Smt. Renu Agarwal was recorded on 27/08/2008. Sh. Satish Agarwal admitted that books of account was not complete as the accountant of the firm Shri Ramavatar Sharma had met with an accident. In v .....

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different quality. Further the opening stock includes old stock of roughly 1000 sq. ft value of which cannot be more than ₹ 100 per sq.ft. The ld Assessing Officer after considering the assessee s reply has held that the assessee was asked to prepare trading account to the date of survey and from the date of survey to the year end, but the same was not found complied with. Further the details in respect of purchase and sale have been maintained on monthly basis and proper record of purchas .....

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have undisclosed income on account of money lending, share business, gift received in the name of family members etc. excess stock found during search/survey and also surrendered ₹ 1.5 crores on this account. However, he retracted subsequently on the surrender made in the statement during search. The assessee failed to substantiate the excess stock found at his premises was genuinely recoded in the books of account during the post survey period. Since the opening stock was available with .....

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ting the books result U/s 145(3) of the Act on the ground that the assessee has not maintained stock register, cash memo, vouchers and existence of low profit by relying upon the various case laws. 29. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld CIT(A), who had allowed the appeal partly by observing that during the course of survey, excess stock could not be ascertained by the survey party. Therefore, the fundamental premise for disallowin .....

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he ld Assessing Officer take value of finished carpet @ 303 per sq.ft. and for unfinished carpet @ 273 per sq.ft. but these rates are not verifiable from the record of the assessee. The surrender made by the brother of the husband namely Sh. Kanha Ram Agarwal U/s 132(4) has no bearing on addition of 50% of stock was found. Similarly the ld Assessing Officer has not prepared the trading account on the date of survey and there is no basis of addition of 50% stock found in the income of the assesse .....

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cord, which was being made part of order of ld CIT(A) as Annexure-A. Three significant observations have been made by the ITO in the survey report, which are as under:- (a) The expenses on account of washing, commissions and salary were inflated as per the documents found during the course of survey. (b) The value of the stock of yarn was taken as per the submissions of the assessee but was not supported by purchase bills though the assessee agreed to provide the purchase bills. (c) Valuation of .....

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/- D. Value of yarn given to the wears @ ₹ 1451 4942 kg. X ₹ 145 ₹ 7,16,590/- Total value of stock as found on 27/08/2008 ₹ 43,99,054/- Thus on the basis of the observations of the auditor and the survey report made by the ITO on 28/08/2008, it is held that the books of appellant are not reliable and provisions of Sec. 145(3) are invoked in her case. She further held that the Hon ble ITAT has held that the past history of the case is the best guide in determining the GP r .....

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appellant of ₹ 29,34,491/- a trading addition of ₹ 9,89,419/- has been confirmed. 30. Now the assessee is in appeal before us. It is submitted that during the course of survey inventory of stock was made and the same was valued at ₹ 43,99,054/-. During the course of survey, books were not complete, therefore, at the time of assessment, book position of stock was submitted and valued at ₹ 42,02,386/-. However, the ld Assessing Officer without verifying the statement of th .....

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as also acted at variance to the ld Assessing Officer. The ld Assessing Officer made addition on account of non verification of stock (not on account of excess stock), the ld CIT(A) had made addition by way of applying a higher GP rate, which was found by the ld Assessing Officer in order but she has disturbed the GP rate. She further relying on the past history of the assessee s case but the same has not been applied as the assessee has shown GP rate @ 26% during the year under consideration as .....

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ovided any opportunity to the assessee as to why 50% of stock was to be treated as unexplained. Therefore, action of the Assessing Officer is against the principles of natural justice. He further argued that stock found at the time of survey at ₹ 43,99,054/- whereas as per stock computed on the basis of books of account was ₹ 42,02,386/-, the difference of ₹ 1,96,668/-was due to wrong measurement of carpet taken at the time of survey. During the course of survey, the value of p .....

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Ram Agarwal, brother of husband of the assessee for assessing the income of the assessee. He further argued that statement recorded U/s 132(4) of the Act was not recorded in presence of witnesses. There was no surrender made by the assessee during the course of search. He further relied on the decision in the case of Jain trading Co. Vs. ITO (2007) 17 SOT 574 (Mum) and CIT Vs. Shri Ram Dass Motor Transport 238 ITR 177 (A.P.), therefore, he prayed to delete the addition. 31. At the outset, the ld .....

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fference on the basis of stock found during the course of survey and stock prepared on the basis of books of account at ₹ 1,96,668/-. It is undisputed fact that the books were not complete at the time of survey. The assessee also had not prepared trading account at the time of survey to determine the exact stock as per books of account and any difference on physical verification when purchase and sale bills available with the assessee. The assessee s argument was that the old stock was als .....

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377; 2 lacs in case of assessee. The assessee gets relief of ₹ 7,89,668/-. Hence, this ground of assessee s appeal is partly allowed. 33. In the result, the assessee s appeal is partly allowed. 34. ITA No. 989/JP/2013 This is an appeal filed by the assessee against the order dated 11/11/2013 passed by the ld CIT(A), Central, Jaipur for A.Y. 2007-08. The sole effective ground of appeal is as under:- Under the facts and circumstances of the case the ld CIT(A) has erred in confirming the addi .....

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that the assessee had utilized overdraft facility from the bank to invest in IPO of Indian companies and paid interest to the bank. The assessee was given reasonable opportunity of being heard on this issue. After considering the assessee s reply by observing that the interest from the FDR is entirely different issue. The assessee owned several assets in the balance sheet but they do not have relevance so far as application of fund taken on interest and claim of deduction of such interest from i .....

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Cheminvest Ltd. Vs. ITO ITA No. 87/Del/2008 order dated 05th August, 2009. Thus, he made addition of ₹ 74,836/-. 36. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld CIT(A), who had confirmed the addition by observing that the appellant received interest @ 9.75% of ₹ 5,89,638/- on FDR made from surplus fund available with him. The interest paid on overdraft facility taken against this FDR was @ 10.75% totaling to ₹ 74,837/- d .....

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f ₹ 90 lacs. Though the nexus has never been proved whether entire interest reflected in the computation of income was from loans advanced through OD account or not. Thus the appellant had taken OD facility of ₹ 90 lacs which was used to advance loans to person other than family members from whom interest was charged and shown as income and also investment in shares and IPO, the income from which is dividend and was not taxable. The argument of the assessee was also not found convinc .....

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ssee has earned short term capital gain of ₹ 60,516/- in addition to dividend income by virtue of investment in share application on account of which interest on OD of ₹ 74,837/- had been disallowed. He further argued that short term capital gain does not come U/s 14A of the Act. The investment made in the shares/IPO out of own capital, which was at ₹ 7,69,78,116/- as on 01/4/2007 whereas the investment in share is much lower. The dividend income of ₹ 24,861 is an inciden .....

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elete the addition. 38. At the outset, the ld DR has vehemently supported the order of the ld CIT(A). 39. We have heard the rival contentions of both the parties and perused the material available on the record. The net interest income is positive. The assessee has shown short term capital gain of ₹ 60,516/- and paid tax on it. The assessee had own capital more than at ₹ 7.69 crores. The intention in applying of the IPO of the assessee may be earning of short term capital gain, long .....

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n the result, the assessee s appeal is allowed. 41. ITA No. 990/JP/2013 This is an appeal filed by the assessee against the order dated 11/11/2013 passed by the ld CIT(A), Central, Jaipur for A.Y. 2008-09. The sole effective ground of appeal is as under:- Under the facts and circumstances of the case the ld CIT(A) has erred in confirming the addition of ₹ 3,91,952/- on account of Interest paid to bank without consideration the submission of the assessee and material evidences submitted dur .....

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he assessee was given reasonable opportunity of being heard on this issue. After considering the assessee s reply by observing that the interest from the FDR is entirely different issue. The assessee own several assets in the balance sheet but they do not have relevance so far as application of fund taken on interest and claim of deduction of such interest from income generated from such assets is concerned. The interest had been paid to the bank on withdrawals used for investment in application .....

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rieved by the order of the Assessing Officer, the assessee carried the matter before the ld CIT(A), who had confirmed the addition by observing that the appellant received interest @ 9.75% of ₹ 11,75,638/- on FDR made from surplus fund available with him. The interest paid on overdraft facility taken against this FDR was @ 10.75% totaling to ₹ 3,91,952/- during the year. The assessee had invested in IPO and shares at ₹ 61,57,105/- against the OD facility of ₹ 94 lacs duri .....

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loans advanced through OD account or not. Thus the appellant had taken OD facility of ₹ 94 lacs which was used to advance loans to person other than family members from whom interest was charged and shown as income and also investment in shares and IPO, the income from which is dividend and was not taxable. The argument of the assessee was also not found convincing to her because once the appellant had invested the surplus funds in the FDR he no longer had any surplus funds. The netting of .....

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