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2016 (2) TMI 567 - ITAT MUMBAI

2016 (2) TMI 567 - ITAT MUMBAI - [2016] 46 ITR (Trib) 756 - Assessment u/s 153A - nexus between the interest expense and interest income - disallowance u/s 14A - Held that:- As could be seen AO has duly examined the claim of the assessee with respect to the deduction of interest expenses on loan borrowed from the interest income earned from the loans advanced and has disallowed ₹ 38,19,800/- and ₹ 90,000 out of the interest expenditure claim of ₹ 96,24,943/- . Apart from the ab .....

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o new incriminating material was found or unearthed during search u/s 132(1) of the Act, having being brought on record before the Tribunal and the assessment framed vide orders dated 31.12.2009 being concluded assessment as framed prior to date of second search on 29/03/2011, we are of considered view that the concluded assessments in the instant appeal cannot be disturbed on the same set of material facts as prevailing when the assessment was framed u/s 153A read with Section 143(3) of the Act .....

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three appeals by the Revenue are directed against three separate orders of the learned Commissioner of Income Tax (Appeals)- 40 , Mumbai (Hereinafter called the CIT(A) ) all dated 18-2-2014 pertaining to the assessment years 2007-08 to 2009-10. Since similar grounds of appeal are raised in all these three appeals, we have disposed of all these three appeals by this common order for the sake of convenience and brevity. 2. The common grounds of appeal raised by the Revenue in all these appeals fi .....

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he Assessing Officer restored. 3. We shall take Revenue s appeal in ITA No. 3187/Mum/2014 for the assessment year 2007-08 as lead appeal. 4. The Brief facts of the case are that the assessee is Managing Director of Kanakia Spaces Pvt. Ltd. and in-charge of the project planning and construction activity. The Kanakia Group is primarily engaged in the real estate, hospitality, entertainment and education sectors of the economy. The assessee group has numerous commercial and residential projects in .....

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he residential premises of the assessee. However, there was no seizure of cash and jewellery from the assessee during the course of the search proceedings u/s 132(1) of the Act. However, during the course of search operations against different assessee s of the group, books of accounts, documents, valuables, diaries and other loose papers were seized. Based upon the search and post search enquiries, the assessee made disclosure of ₹ 49,750/- as sale of scrap. 6. Notice u/s 153A of the Act .....

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as earned interest income of ₹ 99,01,472/- and claimed interest expenses of ₹ 96,24.943/- against the same. The break up is as under:- Name of the party Interest (Rs) Amount(Rs.) INTEREST EARNED Kanakia Constructions Pvt. Ltd. 5805208 Kanakia Hospitality Pvt. Ltd. 1833985 Supreme Real Estate Developers P. Ltd. 2262279 99,01,472 INTEREST PAID Babubhai M. Kanakia 1395443 Evergreen Financial Services 8139500 M J Chotani 90000 (96,24,943) TOTAL: 2,76,529 The assessee offered the balance .....

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ely for the purpose of making or earning such income . The A.O. observed that the expenditure claimed by the assessee as a deduction against income from other sources has to be expended wholly and exclusively for earning such income. The assessee was show caused vide notice dated 12.03.2013 to explain the claim of deduction of interest expenses against the interest income , the assessee replied vide letter dated 25-3-2013, which is reproduced below:- This is in reference to your Show Cause Notic .....

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n Learned Additional Commissioner Income Tax, Central Range - 7, Mumbai. We draw your honour's attention to the order for AY, 2007-08 that was passed u/s. 153 A on 31/12/2009. Relevant part from the said order is reproduced as under: I have considered the submission of the assesse and the facts and circumstances of the case. The assesse has paid interest of ₹ 90,000/- to Shri M J Chotani on a loan of ₹ 5,00,000/- @ 18%. The interest paid to Shri M.J. Chotani was disallowed for th .....

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bove) on average value of loan received during the year of ₹ 11,43,43,933/- (excluding the loan of ₹ 5,00,000/- received from Shri M.J. Chotani). The assesse has paid excess interest Rs, 38,19,800/- (@ 12% on the excess average value of loans given of ₹ 3,18,31,666/-). Keeping in view of the facts of the case, the interest of ₹ 38,19,800/- is disallowed out of interest paid. Copy of the order is enclosed for reference. As it is evident from the above, the claim of interes .....

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arch. Your honour will appreciate that the special bench of Mumbai ITAT in the case of All Cargo Global Logistics Ltd. v. Deputy Commissioner of Income-tax, Central Circle-44 [2012] 23 taxmann.com 103 (Mum) (SB) held that in case of assessments which do not abate pursuant to issue of notice under section 153A, in addition to income that has already been assessed, assessment will be made on basis of incriminating material found in course of search but not produced in course of original assessment .....

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s used for giving interest bearing loans to other parties , on which interest has been earned; and the funds which have been taken on interest bearing loan from other parties. The AO held that only if the funds taken on interest bearing loan, were advanced by the assessee to other parties from whom he is charging interest; can he claim deduction of interest paid on interest earned, as per law. The AO held that the assessee's submission is completely silent on the aspect of nexus between the .....

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013 passed u/s 153A of the Act read with Section 143(3) of the Act. The A.O. also considered the alternative submission of the assessee that there is a change of opinion with respect to the claim of interest in comparison to the last assessment completed u/s 153A of the Act vide orders dated 31.12.2009. The assessee vide letter dated 25-3-2013 has submitted that similar issue was considered while passing the order dated 31.12.2009 u/s 153A of the Act which was passed with the approval of Addl. C .....

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ced in course of original assessment and undisclosed income or property discovered in course of search. Thus , the assessee contended in nutshell that once the assessment has already been finalized earlier after due deliberation on the same issue and that no incriminating material has been found during the course of search on the same issue, additions cannot be made by the A.O. The A.O. however, rejected the contentions of the assessee by holding that in case notice u/s 153A of the Act was issue .....

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see of the responsibility to furnish the correct return of income as per the provisions of law. The A.O. held that it is the mandate of the law that the A.O. shall assess or reassess the total income of the assessee in the six immediately preceding assessment years, in respect of the year of search. The A.O. shall assess or reassess the total income of six assessment years immediately preceding the search year. Thus the A.O. in the assessment proceedings u/s 153A of the Act shall examine all the .....

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search action, if any. The A.O. held that assessment includes reassessment and therefore even if the income of an earlier year may be undergoing the process of reassessment, it can still be assessed afresh on the basis of the material which was already on record at the time of completion of the original assessment. The AO held that the issue of incriminating document found during the course of search is not a binding principle on the AO. The A.O. relied upon the ratio of the decision of Hon ble .....

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-novo of the assessee based upon sound reasoning and a well reasoned order, on any issue, hence, the alternative contention of the assessee is rejected and interest income is assessed at ₹ 99,01,472/- and claim of deduction of interest of ₹ 96,24,943/- against interest income was disallowed vide assessment order dated 28-03-2013 passed u/s 143(3) of the Act read with Section 153A of the Act. 7.Aggrieved by the assessment orders dated 28-03-2013 passed by the A.O. u/s 143(3) of the Ac .....

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of ₹ 39,09,800/- which included an amount of ₹ 90,000/- paid to Sh. M.J.Chotani on loan taken from him which was treated as unexplained in earlier years and an amount of ₹ 38,19,800/- on the difference of average loan taken on which interest was paid vis-à-vis average loan given on which interest was received , at the rate of 12%. Besides, the assessee disallowed voluntarily an amount of 9,92,861/- as interest u/s 14A of the Act and this was accepted by the A.O. during .....

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itted that no incriminating material was found or unearthed during the course of second search conducted on 29-3-2011 and as entire issue had already been examined in detail during the course of the earlier search assessment proceedings pursuant to the first search carried out u/s 132(1) of the Act on 19.07.2007, disallowance made is uncalled for as it amounts to change of opinion at the end of A.O. to the same material facts and hence the addition made is unjustified. The assessee submitted bef .....

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ny new finding or material change, hence, consistency needs to be followed in the income tax proceedings. The assessee relied on the following case laws to support its contentions:- (i) Radha Swami Satsang v. ClT (1962) 193 ITR 321 (SC) (ii) ClT v. Darius Pandole (2011) 330 ITR 485 (Bom) (iii) DCIT v. Gujarat Narmada Valley Fertilizers Co. Ltd. (2013) 215 Taxman 616 (Gujarat) (iv) Consolidated Fibres & Chemicals Ltd. v. ClT - 273 ITR 353 (Cal.) (v) ClT, West Bengal-3 v. Rajan Prasad Moody - .....

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the assessee and the orders of the A.O. observed that the earlier search and seizure action u/s 132(1) of the Act was carried out in the year 2007 on 19.07.2007 and subsequently the assessment order u/s 153A read with section 143(3) of the Act was passed on 31-12-2009 for the assessment years 2005-06 to 2008-09 , wherein no disallowance of interest paid on loan taken was made under identical circumstances and the assessee s claim towards payment of interest on funds borrowed was allowed as expen .....

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offering income from interest, equity demands that any expenditure incurred in the nature of interest on loan taken should also be allowed. The facts revealed that the funds have come to the bank account of the assessee and the loans have been given from the same bank account of the assessee, therefore, the flow of funds i.e. incoming and outgoing is not in dispute. Since the issue has already been examined in the hands of the assessee at the time of earlier search assessment s u/s 153A read wit .....

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ure on loan taken is a valid and allowable claim in the eye of law and should be allowed. The CIT(A) also held that the assessee has voluntarily disallowed total interest of ₹ 49,02,661/- (Rs.90,000 + ₹ 38,19,800/- + ₹ 9,92,861/- ) in the return of income filed by the assessee appears to be fair and reasonable. The assessee has offered for taxation interest income of ₹ 51,79,190/- . The CIT(A) observed that in the current year average loan taken works out to ₹ 11,48 .....

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amounting to ₹ 5,13,43,681/- , dividend income from which has been claimed as exempted income . The total disallowance of interest of ₹ 49,02,661/- which has been voluntarily disallowed by the assessee appears to be fair and reasonable. The CIT(A) on perusal of Bank statement of the assessee gave categorical finding that there is strong direct co-relation between loan given and taken. The CIT(A) observed that the AO has not doubted the genuineness of loan taken and loan given. Thus, .....

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are two search and seizure action u/s 132(1) of the Act conducted in the case of the assessee, one in the year 2007 on 19.07.2007 and another on 29-3-2011. The ld. Counsel submitted that for the assessment year 2007-08, the return of income was filed u/s 153A of the Act in respect of first search on 11th September, 2008 and the assessment order was passed u/s 143(3) r.w.s. 153(A) of the Act on 31-12-2009. The ld. Counsel submitted that the assessments have been concluded in the case of the asse .....

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or unearthed during the course of second search conducted on 29-3-2011 with respect to the issue in dispute i.e. allowability of claim of deduction of interest paid on loans borrowed against interest income on loan advances by the assessee, hence, in view of the ratio of decision of Special Bench of ITAT in the case of All Cargo Global Logistics Ltd. v. DCIT [2012] 23 taxmann.com 103 (Mum) [SB] , this addition of ₹ 47,22,282/- being disallowance of the interest cannot be sustained. The ld .....

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ant to the first search and seizure operations u/s 132(1) of the Act conducted in the year 2007 on 19.07.2007 by the Revenue whereby the interest expenditure of ₹ 47,22,282/- incurred on loans borrowed has been accepted and allowed as deduction from the interest income of ₹ 99,01,472/- earned on the loans advanced by the assessee. We have observed that it has not been brought to our notice by both the rival parties that any incriminating material has been found or unearthed during th .....

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y Revenue on 29-03-2011 and hence in our considered view, no addition can be made with respect to the claim of deduction of interest expenditure of ₹ 47,22,282/- payable on loans borrowed by the assessee against the interest income from the loans advanced by the assessee company on the same set of material facts as existing while framing assessments u/s 153A read with Section 143(3) of the Act on 31.12.2009, in the absence of any incriminating material found during the course of second sea .....

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ch.The decision of Hon ble Bombay High Court in the case of CIT v. Continental Warehousing Corporation (Nhava Sheva) Limited (2015) 58 taxmann.com 78 (Bombay) is also squarely applicable to the instant appeal whereby Hon ble Bombay High Court has held that no addition can be made in respect of assessments which have become final if no incriminating material is found during search. The Hon ble Delhi High Court in the case of CIT v. Kabul Chawla (2015) 61 taxmann.com 412(Delhi) has taken a similar .....

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ue in SLP No. (C) No. 18506 of 2015, dated October, 12, 2015 against the Hon ble Bombay High Court ruling that no addition can be made in respect of assessment which has become final if no incriminating material is found during the course of search. Respectfully following the binding decision of the Hon ble Jurisdictional High Court i.e. Hon ble Bombay High Court in the case of Central Warehousing Corporation (Nhava Sheva) Limited(supra) as well decision of Hon ble Delhi High Court in the case o .....

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the Act only on basis of some incriminating material unearthed during the course of search which was not produced or not already disclosed or made known in course of original assessment and undisclosed income or property discovered in course of search , while in the instant appeal the AO has in the assessments framed vide orders dated 31.12.2009 u/s. 153A read with Section 143(3) of the Act in pursuance to the first search on 19.07.2007 has duly examined and allowed the claim of the assessee fo .....

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mstances of the case. The assesse has paid interest of ₹ 90,000/- to Shri M J Chotani on a loan of ₹ 5,00,000/- @ 18%. The interest paid to Shri M.J. Chotani was disallowed for the reasons discussed in earlier assessment years. There is no difference in the facts of the case. Accordingly, interest of ₹ 90,000/- paid to Shri M.J. Chotani is disallowed and added to the total income. Further, the assesse has received interest of ₹ 99,01,472/- on the average value of loans gi .....

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he facts of the case, the interest of ₹ 38,19,800/- is disallowed out of interest paid. Thus, as could be seen from the above that the AO has duly examined the claim of the assessee with respect to the deduction of interest expenses on loan borrowed from the interest income earned from the loans advanced and has disallowed ₹ 38,19,800/- and ₹ 90,000 out of the interest expenditure claim of ₹ 96,24,943/- . Apart from the above, the assessee has also voluntarily offered dis .....

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