HIGH COURT OF GUJARAT

Tax Appeal No.580 of 2013

M.R. Shah AND MS. SONIA GOKANI, JJ.

Sudhir M. Mehta for the Appellant.

Ms. Sonia Gokani, J. - The brief facts leading to this Tax Appeal are as under :

1.1 The assessee is an individual engaged in the business of construction, finance and developer. It carries on the business of finance in the name of Rajiv Enterprises and other activities are undertaken in his personal name. Two separate books of account are maintained. The return of income for the assessment year 2007-2008 was filed by the assessee on October 31, 2007, declaring his total income at Rs.10,75,140/-.

1.2 On scrutiny assessment under Section 143(3) of the Act, the Assessing Officer observed that the assessee had taken a loan from Shri Jivraj Desai, Shri Rajni Desai and Shri Ramesh Desai, on which interest to the extent of Rs.1,04,24,279/- was paid. It was also noted by him that in the trading account of Rajiv Enterprises, the assessee claimed personal loan interest of Rs.744/-, bank interest of Rs.5,36,807/-, other interest of Rs.3,37,334/- and personal interest of Rs.32,72,252/-. A show-cause notice was issued by Assessing Officer on the ground that such interest expenses were not incurred for the purpose of business and, therefore, the assessee was called upon to explain as to why the sum of Rs.41,47,137/-, which is the total of aforementioned interest amount, should not be disallowed.

1.3 The Assessing Officer on considering the balancesheet of the respondent-assessee found that the major amount reflected under the head "deposits and advances" was advances to various firms and companies and, therefore, it was in the nature of investment and deposits. He was also of the view that the loan from Sarvoday Commercial Cooperative Bank, an unsecured loan consisting of Rs.6,88,18,946/- from Rajiv Enterprises was not used for business purpose. He concluded that out of total unsecured loans of Rs.9,62,30,001/-, a sum of Rs.6,88,18,946/- was diverted to the assessee Shri Rajesh Desai and the total expenditure debited in the profit and loss account was worked out to be Rs.1,04,24,279/- and the proportionate interest was worked out to be Rs.74,54,390/-. Thus, the total claim of interest expenditure came to Rs.1,16,01,527/- (Rs.41,47,137/-+ Rs.74,54,390/-).

1.4 On bi-partite hearing, the Assessing Officer disallowed total claim of interest expenditure of Rs.1,16,01,527/-. Aggrieved by the same, the respondent-assessee approached the Commissioner of Income-tax (Appeals), which partly allowed the appeal of the assessee. It directed the Assessing Officer to disallow the deduction of interest expenditure to the tune of Rs.33,57,024/- and the balance addition of Rs.82,44,503/- was deleted. The CIT (Appeals) gave the following reasons for the same :

"5. In the light of the above, the facts in the present case are required to be examined. The appellant is doing multiple business activities of financing, land dealing and hotel business, etc. For convenience purpose, the appellant has prepared two balance-sheets. One balance-sheet is in the name of Shri Rajesh J. Desai and another proprietor of M/s. Rajiv Enterprises, which is engaged in the business of financing. In the consolidated balance-sheet as on 31-03-2007, the proprietor's capital account shows a negative balance of Rs.5,67,70,387/-. However, the appellant has got interest free deposits of Rs.6.5 crores for Okab/ Sarkhej lands. The consolidated balance-sheet shows loan from Sarvodaya Commercial Co-operative Bank at Rs.32,74,934/- and unsecured loans of Rs.18,55,92,905/-. The consolidated balance-sheet further reveals investments of Rs.1,27,87,308/- and current assets (closing stock in the form of land) of Rs .4,03,71,371/-. As per consolidated balance-sheet, the appellant has advanced loans to the extent of Rs. 13,88,28,243/-. In the assessment order, the Assessing Officer has not pinpointed a single loan transaction entered by the appellant, wherein interest has not been charged. The investments made in the land is also "for the purpose business", as the appellant is engaged in the sale/purchase of land and such transactions have been as business transaction. The appellant has got interest free funds of Rs.6.5 Crores, which is in the nature of advance receipt for land. In both the accounts i.e. of Shri Rajesh J. Desai and of M/s.Rajiv Enterprise, the appellant in majority of cases, has paid interest @12% on its borrowings. However, as regard to the interest receipt, the appellant has received interest @ 12% except in the case of M/s RJD Impex Pvt. Ltd. (Sister concern), wherein interest has been received @6%. The appellant is also paying net interest of Rs.32,72,252/- to the firms, wherein it is a partner. The details of which are as under :

Tally of Partners Interest :
Interest Payable

5.1 From the aforementioned discussion, it is apparent that the Assessing Officer has mis-directed himself, which disallowing the interest expenditure of Rs.1,16,01,527/-. The Assessing Officer has failed to take cognizance of fact that M/s.Rajiv Enterprises is also a proprietorship concern of the appellant, which is engaged in the business of financing. However, as discussed above, the appellant has charged interest @6% only on the total amount of Rs.5,59,50,402/- which it has advanced to a sister concern M/s. RJD Impex Pvt. Ltd. The appellant is borrowing in majority of cases @12%. As the interest bearing funds have been diverted to a sister concern at the lower rate of interest i.e. 6%, therefore, it is reasonable to infer that some part of interest paid is not for the purpose of the business. Accordingly, the total disallowance interest is worked out as under :

Rs.5,59,50,402/- @ 6% = Rs.33,57,024/-

5.2 In view of above discussion, the Assessing Officer is directed to disallow the deduction out of interest expenditure of Rs.33,57,024/-, although, for the altogether different reasons. The balance additions of Rs.82,44,503/- (Rs. 1,16,01,527/- -Rs.33,57,024/-) is deleted."

1.5 The assessee and the Revenue both approached the Income-tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') in cross-appeals. After extensive hearing, the Tribunal remitted the matter to the file of the Assessing Officer for clarification so far as the interest charges to M/s.RJD Impex Pvt. Ltd. was concerned. However, as far as the other amount was concerned, it relied upon the finding of the CIT (Appeals) to hold that the interest at the rate of 12% in majority of the cases was received by the assessee and it also paid interest at the rate of 12% and since such facts were not controverted by the Revenue, it did not disturb the finding of the CIT (Appeals).

1.6 Aggrieved by such decision of the Tribunal, the present appeal is preferred under Section 260A of the Income-ttax Act, 1961 (hereinafter referred to as 'the Act') by the Revenue proposing the following substantial questions of law :

2. We have heard the learned counsel Shri Sudhir Mehta for the Revenue who has fervently made submissions. He urged that the Assessing Officer has given extensive finding that the loans were not used for the purpose of business and both the CIT (Appeals) and the Tribunal committed serious error in not appreciating the cogent finding given by the Assessing Officer. He urged this Court to quash and set aside both the orders on the ground of perversity.

3. On due consideration of the orders of all the Revenue Authorities and carefully considering the submissions made by the learned counsel appearing for the Revenue, we are of the opinion that this appeal deserves no consideration in absence of any substantial question of law having been posed before this Court. We say so for the following reasons :

3.1 There is a categorical finding on the part of the CIT (Appeals) that the respondent was engaging himself in multiple activities of finance, land dealing, hotel business, etc. For his own convenience, two balancesheets have been prepared, one in his personal name "Shri Rajesh J. Desai" and another in the name of proprietary firm "Rajiv Enterprises", which is engaged in the business of financing. The consolidated balancesheet as on March 31, 2007 had shown negative balance in the capital account. However, this balancesheet had negatived the advance loan to the extent of Rs.13,88,28,243/-. The categorical finding of the CIT (Appeals) has not been controverted by the Revenue that on every transaction entered into by the respondent-Assessee, he has charged the interest. The interest-free funds to the tune of Rs.6.5 crore were in the nature of advance receipt for the land and for all the borrowings, he has paid interest at the rate of 12% It is only in the case of sister concern M/s. RJD Impex Pvt. Ltd. that the interest is received at the rate of 6%. Wherever he is partner, he is paying interest as well.

3.2 As can be noted from the discussion of the Tribunal that the rate of interest for advancing the loan to the sister concern was 6% and borrowing in the majority cases was at 12%. As the Tribunal found the possibility of factual error, it had remitted the matter to the Assessing Officer to assess as to whether the interest charged to M/s. RJD Impex Pvt. Ltd. was at 6% or 12% and if the interest is charged at 12%, in that case there would not be a case of passing of undue advantage in the case of sister concern and then, the disallowance would be required to be deleted. So after offering opportunities to both the sides, on considering the factual matrix, the aforesaid decision has been rendered. No error much less any substantial error can be said to have been committed by such directions. As far as M/s.RJD Impex Pvt. Ltd., a proprietary concern, is concerned, on having noted that it being in the business of financing, not only advances money and charges interest at the rate of 12%, but, it also passes 12% interest on the borrowings made by it. When both the CIT (Appeals) and the Tribunal appropriately dealt with the issue, we see no reason to interfere with the deletion made by the CIT (Appeals) and confirmed by the Tribunal. The Assessing Officer is required to cover the issue from the angle indicated in the order itself and after verification, the said direction is required to be flowed.

3.3 We are of the opinion that no error could be noticed in the approach of either of the authorities, much less any perversity which would warrant any interference at our end.