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2016 (5) TMI 242 - ITAT AHMEDABAD

2016 (5) TMI 242 - ITAT AHMEDABAD - TMI - Disallowance of business expenses - Held that:- As objection raised by the ld. Assessing Officer in disallowing these expenses has already been struck down by the decision of co-ordinate bench in assessee's own case confirming the existence of business activity in the year under appeal, we do not find any reason for disallowance of these normal business expenses and accordingly we allow the expenses of ₹ 23,82,268/- as business expenses out of the .....

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contentions and claim made by the assessee in this ground relating to disallowance of bad debt in the given circumstances - Decided against assessee

Allowability of interest expenses under the provisions of section 57(iii)- Disallowance of interest claimed by assessee against interest income shown under the head income from other sources - Held that:- In order to claim expenses under the provisions of section 57(iii) of the Act nexus has to be proved that the same has been incurred f .....

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d by the assessee to prove that it has been spent to earn interest income which has been declared u/s 56 of the Act and rather we find force in the observation made by ld. Assessing Officer that the amount of interest of ₹ 2354592/- has been paid on loans taken has actually been diverted towards investment in shares and other non-interest bearing investment and this gets further support by the fact that assessee has earned long term capital gains of ₹ 13260055/-. In these circumstanc .....

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eld that assessee has carried out the business activities and allowed the impugned profit and loss account wherein the insurance claim and sundry balance written off were shown in the credit of profit and loss account of M/s Labh Enterprise and these credits of ₹ 30,443/- and at ₹ 14,054/- on account of insurance claim and sundry balance are arising out of business activities of M/s Labh Enterprise carried out before 1.4.1995 i.e. taking over of the business by the assessee as a sole .....

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2016 - Shri Kul Bharat, JM, & Shri Manish Borad, AM. For The Appellant : Shri J. P. Shah with Sakar Sharma, ARs For The Respondent : Shri Dinesh Singh, Sr.DR ORDER PER Manish Borad, Accountant Member. These two appeals of assessee are directed against two separate orders of ld. CIT(A)VIII, Ahmedabad of even dated 25.2.2009 for Asst. Years 1996-97 & 1997-98. Assessments were framed u/s 143(3) r.w.s 254 of the IT Act, 1961 (in short the Act) on 31.3.1998 and on 26/12/2007 for Asst. Years 1 .....

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(g) Sales Tax ₹ 393368 (h) Misc. other expenses ₹ 15323 2. The C.I.T.(Appeals) erred in upholding the disallowance of interest of ₹ 23,54,592/- as made by the Assessing Officer. 3. The C.LT.(Appeals) erred in upholding the decision of the Assessing Officer in assessing the insurance claim received of ₹ 30,443/- and sundry balance written off of ₹ 14,054/- under the head "income from other sources" instead of under the head "income from business". .....

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R has referred to the affidavit dated 31st May, 2010 submitted on 7/6/2010 with the Registry. From going through this affidavit we find that Accountant of assessee s business affairs namely Digant Upadhyay has signed this affidavit stating that he received the impugned orders passed by ld. CIT(A) dated 25.2.2009 on 21.04.2009. During this period assessee Mr. Harshad B. Vaghela was abroad and these orders were kept in the office by the accountant and pursuant to arrival of Mr. Vaghela, Accountant .....

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f assessee we find that ground no.1 is common in both the appeals and ground no.2 & 3 are raised only in appeal for Asst. Year 1996-97 and there is no other ground. Therefore, we will deal with ITA No.1971/Ahd2010 for asst. year 1996-97 and the decision for ground no.1 of this appeal will apply to ground no.1 of appeal in ITA No.1872/Ahd/2010 for Asst. Year 1997-98. 6. Briefly stated facts of the case are that the assessee is an individual running a proprietary concern namely M/s Labh Enterp .....

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2100/Ahd/2001 for Asst. Years 1996-97 and 1997-98 dated 28/09/2006 set aside the order of the CIT(A) and restored the matter to the file of Assessing Officer to decide the issue de novo. 8. Thereafter assessment was framed under section 143(3) r.w.s. 254 of the Act on 26/12/2007 determining income at ₹ 1,19,42,652/- 9. Ld. CIT(A) partly allowed the appeal of assessee. Aggrieved, assessee is now in appeal before the Tribunal. 10. We take up ground no.1 in which ld. CIT(A) has confirmed the .....

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elating to bad debts will be dealt later on. 11. The ld. AR of the assessee submitted that during the year under appeal assessee has taken over the business of M/s Labh Enterprise which was running as a partnership firm upto end of Asst. Year 1995-96 and in that partnership firm assessee was also a partner and after the retirement of second partner the business under the name and style of M/s Labh Enterprises was taken over by the assessee as a sole proprietor from 1st April, 1995 relevant to As .....

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vation no business was carried on by M/s Labh Enterprise during Asst. Year 1996-97 and therefore, no allowance of expenses would be given. Thereafter ld. CIT(A) confirmed most of the additions made by assessing authority. Thereafter the ld. AR of the assessee submitted that the co-ordinate bench in its order in ITA No.38/Ahd/2001 and 2100/Ahd/2001 for Asst. Years 1996-97 and 1997-98 dated 28/09/2006 in the case of assessee has held that assessee has carried out the business during the year under .....

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of the genuineness of the expenses being incurred for business expediency or not. 13. On the other hand, ld. DR submitted that Hon. Tribunal restored the issue back to the file of Assessing Officer to consider the allowability of expenses on merits with a decided fact basis that assessee has proved to be indulging in carrying on business activity. 14. We have heard the rival contentions and perused the material on record. The issue now before us is in the second round for adjudication that whet .....

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tten off ₹ 3047240/-. 15. We find that co-ordinate bench in ITA No.38/Ahd/2001 & 2100/Ahd/2001 has dealt with the specific issue as to whether the assessee was carrying on business activity during the Asst. Year 1996-97 and they have observed as follows :- 6. We have heard the rival submissions of both the parties. Looking to the facts and submissions of the case, we find that the Assessing Officer was of the view that the assessee s business was not continuous and activities with the .....

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book. The partnership was dissolved on 1.4.1995 and the partnership becomes proprietorship concern of the assessee, wherein entire assets and liabilities of the firm were transferred to the assessee and on 29.2.96 assessee and Samrajya Co-op. Housing Society there was dispute which was settled by the settlement thereof. In the AY 1995-96 the assessee had no income on construction but the income was from hiring the trucks. We find that from these documents it can be seen that the assessee s busi .....

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the Hon. Court to provde safety facility to the occupants in the building in question. Therefore,it cannot be said that the assessee was not carrying on business. We find that the assessee was carrying on business. We are of the considered opinion that, all the expenses has to be allowed. We find that the AO made all the additions on the ground that M/s Labh Enterprise has not carried out the business activities. As we hold that the assessee has carried out the business, the assessee is entitle .....

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the CIT(A) and restore the matter to the file of Assessing Officer for making assessment de novo in the light of our above observation in respect of all three issues. 7. We are of the considered view that assessee has carried out the business activities during the year under consideration. The assessee has carried out the business, therefore, CIT(A) is not justified in disallowing the claim of assessee amounting to ₹ 54,29,508/- and disallowance on the ground that no business activity was .....

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the same afresh as per law, after giving reasonable opportunity of hearing to the assessee. 16. From going through the decision of co-ordinate bench in assessee s own case, we find that the issue relating to the fact that whether assessing was carrying on business or not during Asst. Year 1996-97 and 1997-98, has been dealt elaborately by the co-ordinate bench, wherein they have given a finding that assessee has carried out the business activity during the year under consideration and has also .....

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submitted various details and explanation towards business expenses at ₹ 23,82,268/- relating to following expenses :- (a) Depreciation ₹ 110869 (b) Interest paid to bank ₹ 218635 (c) RTO Tax ₹ 9766 (d) Interest paid to others Rs.1534307 (f) Misc. Services ₹ 100000 (g) Sales Tax ₹ 393368 (h) Misc. other expenses ₹ 15323 Excluding (e) Bad debts written off ₹ 3047240/-. In view of above referred expenses of ₹ 23,82,268/- depreciation at ₹ .....

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arly, interest expenditure of ₹ 15,34,307/- is in relation to unsecured loan standing at the end of FY 1994-95 i.e. Asst. Year 1995-96 in the books of M/s Labh Enterprises. As all these expenses discussed here in paragraph at ₹ 23,82,268/- are related to the business activity of M/s Labh Enterprise and in view of the fact that it has been held by the co-ordinate bench that the same business activity has been carried out by the assessee during the year also and simultaneously ld. Asse .....

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ce of business activity in the year under appeal, we do not find any reason for disallowance of these normal business expenses and accordingly we allow the expenses of ₹ 23,82,268/- as business expenses out of the total disallowance of ₹ 54,29,508/- as mentioned in ground no.1 of the appeal and for the remaining amounts of bad debts of ₹ 30,47,240/- we will discuss the same in the following paragraphs. 18. Now we take up the issue regarding disallowance of bad debt of ₹ 3 .....

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amount recoverable as on 31/3/1996 was ₹ 62,01,859/-. Against this, stock of flat valued at ₹ 8,53,600/- was on hand with Labh Enterprise and therefore net recoverable amount was ₹ 53,48,259/-. Out of this, an amount of ₹ 23,Q1,019/ was consented to be paid by the society as per the settlement terms arrived and recorded in written agreement. Balance amount of Rs. 30,47,240/- being not recoverable by any means was written off and claimed as business loss / bad debts" .....

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said amount has been debited to profit and loss account. 22. On the other hand, ld. DR controverted the submissions made by ld. AR in relation to amount of bad debts claimed by the assessee at ₹ 30,47,240/- in relation to irrecoverable amount from Samrajya Co-op. Housing Society. Ld. DR submitted that in the financial statements of M/s Labh Enterprise (partnership firm in schedule-G of the balance sheet as on 31.3.1995 the outstanding amount to be received from Samrajya Co-op. Housing Soc .....

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recover ₹ 62,01,858.92 from the Society which includes project deficit of ₹ 27,21,435 calculated as per Annexure-A, routine expenses for the maintenance of the project amounting to ₹ 11,79,405.33 incurred by Labh so far and ₹ 23,01,018.59 towards certain financial transactions. ANNEXLJRE *A CALCULATION OF PROJECT OFFICIATE MEMBER RECEIPT ₹ 73,115,151.00 LESS : LAND COST 281 ,450,00 LEGAL EXP. (LAND) . 1 8,891.00 LEGAL. EXP. LAND 3,495.00 303,836.00 LESS s WORK COMP .....

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to a figure of ₹ 62,01,858.92 and there is no justification and detail for this increase irrespective of the fact that there was no revenue shown by M/s Labh Enterprise in the profits & loss a/c during FY 1995-96 except some minor insurance claim and sundry creditor written off. 23. We have heard rival contentions and perused the material on record. The issue for adjudication before us is about the genuineness of bad debt claimed by assessee at ₹ 30,47,240/- which has emanated ou .....

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985) 155 ITR 152 (SC) referred and relied on by the ld. AR wherein their Lordships have held as below :- It seems to us that even if the debt had been taken into account in computing the income of the predecessor firm only and had subsequently been written off as irrecoverable in the accounts of the assessee, the assessee would still have been entitled to a deduction of the amount written off as a bad debt. It is not imperative that the assessee referred to in sub-cl. (a) must necessarily mean t .....

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eme Court, we agree with the submissions of ld. AR that if any bad debt is booked in the profit and loss account by the assessee then subject to genuineness of the bad debt which if held to be correct then assessee would be entitled to the bad debts of irrecoverable debts held in the name of the previous owner i.e. Labh Enterprise. 25. However, now when we look into the facts about the quantification of bad debts claimed by the assessee, we find force in the arguments made by ld. DR wherein he h .....

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alance sheet as on 31.3.1996 is referred in this MOU and also the balance referred in this MOU as on 31.3.1996 at ₹ 62,01,858.92 is looking far from truth and baseless because as on 31.3.1995 the amount of Samrajya Co-op. Housing Society has shown ₹ 14,08,458 and the same has increased by ₹ 4721440.37 to arrive at ₹ 62,01,858.92 in a peculiar situation when there is no revenue booked in the current year. Bad debts in relation to sundry debtors can be claimed only if sales .....

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re us, during the course of hearing, we do not find any reason to accept the contentions and claim made by the assessee in this ground relating to disallowance of bad debt of ₹ 30,47,240/- in the given circumstances and we dismiss the same and uphold the order of ld. CIT(A). In nut shell in the ground no.1 raised by assessee towards disallowance of business expenses at ₹ 54,29,508/- we delete the addition of ₹ 23,82,268/- and sustain the remaining part at ₹ 30,47,240/-. T .....

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ich reads as under :- 12. INTEREST EXPENSES ₹ 23.54.592/- On perusal of the submitted details it is observed that the assessee has claimed total interest of Rs, 45,54,551/- as expenses and on the other hand, interest income declared of ₹ 5,34,557/-.During the originally assessment the A-O. has observed that the assessee has taken unsecured loans of ₹ 3,21,23,958/- and utilization thereof was as under: Application of unsecured loans Share investment Rs.2,65,60,243/- Interest bea .....

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from other .sources, as envisaged in section 57(iii) of the IT Act. > The application of funds for purchasing personal assets, paying insurance premium, incurring household expenditure or personal traveling expenditure was for personal purposes and interest on such borrowings was""not allowable under section 57(iii) of the Act or u/s.36(l)(iii) of the Act. > The interest on borrowings utilized in making investment in the a concern could not be allowed as deduction u/s. 36(l)(iii) .....

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expenses are as under:- " The assessee has carried out the business, therefore, CIT (A) is not justified in disallowing the claim of the assessee amounting to ₹ 54,29,508/- and disallowance on the ground that no business activity was carried out during the year of ₹ 23,54,592/ on account of expenditure on account interest payment, we are of the opinion that assessee has carried out the business activities and the assessee has borrowed the money which is utilised to repay the ear .....

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#39;ble ITAT. Since, it was established in original order that the interest expense was related to personal expenses. Further, the assessee has paid interest on the borrowings taken/accepted during the year, which was utilised for the purpose of repayment of old borrowings of the partnership firm, of which the assessee became proprietor due to dissolution, the payment of interest for such old partnership borrowings was not related to current business of the assessee, the expenditure of interest .....

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rpose of business, therefore the interest payment is purely of personal nature, for which the assessee has taken conscious decision by taking ownership of loss making firm in dissolution. In view of aforesaid facts, the expenditure on account of interest payment of ₹ 23,54.592/- was not for the purpose of business of the assessee, therefore the same is disallowed as business expenditure and added back to the total income of the assessee. 29. In appeal, the ground was rejected by ld. CIT(A) .....

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were not provided for justification of such claim, the A.O. made a disallowance of ₹ 23,54,592/- under this head. 10.2 During the appellate proceedings, the Ld.A.R. only referred to the findings of the Hon'ble I.T.A.T. and did not provide complete details to justify such claim. 10.3 I have considered the facts of the case and the submissions of the Ld.A.R. carefully. I find there is no improvement in the appellant's ci.se during the appellate proceedings. The A.O. while making the .....

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e partnership firm, of which' the 'assessee became proprietor due to dissolution, the payment of interest for such old partnership borrowings was not related to current business of the assessee, the expenditure of interest was not for the purpose of business of the assessee i.e., construction business as claimed by the assessee. The payment of interest is to pay off old liabilities, which are not pertaining to the business of the assessee as claimed, on the contrary the payment is toward .....

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enses to prove their business expediency, I do not find any reason to interfere in the findings of the A.O: at this stage. Therefore, the disallowance made by the A.O. is hereby confirmed. 30. Aggrieved, assessee is now in appeal before the Tribunal. 31. The ld. AR did not bring anything new except referring and relying on the decision of the co-ordinate bench in the case of assessee wherein it was held assessee is carrying on regular business activities. 32. On the other hand, ld. DR supported .....

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the purpose of making or earning such income; 34. From the above provisions, we understand that provisions in relation to income referred to in section 56 of the Act which is income from other sources is certainly not relating to business. Assessee has shown loss of ₹ 4019108/- under the head income from other sources which has been arrived after claiming the impugned interest of ₹ 23,54,592/-. Finding of the assessing officer which has not been controverted by the ld. AR are that t .....

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ncome shown under the provisions of section 56 of the Act i.e. the income from other sources. Applying these provisions to the facts of the case, we find that assessee has declared interest income of only ₹ 534557/- and has claimed interest expenses of ₹ 4554551/- Out of total interest claimed at ₹ 4554551/- Assessing Officer has already allowed the claim at ₹ 2199959/- and for the balance amount of interest of ₹ 2354592/- nothing was placed on record by the assesse .....

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e to accept the contention made by ld. AR of assessee about the allowability of interest expenses at ₹ 2354592/- under the head income from other sources and we uphold the order of ld. CIT(A) and accordingly dismiss this ground of assessee. 36. Ground no.3 of assessee s appeal relates to insurance claim received of ₹ 30,443/- and sundry balance written off of ₹ 14,054/- We have heard the rival contentions and perused the material on record. The only issue in this ground is that .....

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balance written off were shown in the credit of profit and loss account of M/s Labh Enterprise and these credits of ₹ 30,443/- and at ₹ 14,054/- on account of insurance claim and sundry balance are arising out of business activities of M/s Labh Enterprise carried out before 1.4.1995 i.e. taking over of the business by the assessee as a sole proprietor. We are, therefore, of the view that these credits of ₹ 30,443/- and ₹ 14,054/- on account of insurance claim received an .....

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