Case Law Details

Case Name : Anilbhai Chunilal Bhayani Vs ITO (ITAT Rajkot)
Appeal Number : ITA.No. 363/RJT/2017
Date of Judgement/Order : 10/02/2021
Related Assessment Year : 2013-14

Anilbhai Chunilal Bhayani Vs ITO (ITAT Rajkot)

ITAT finds that both AO and CIT (A) have not satisfied with the explanation given by the assessee about the usage of the properties for the business purpose, and estimation of the rental value of the properties. The ld.AO rejected the claim of the assessee on the ground that no business activities carried out by the assessee at these premises and estimated the rental value of the property on hypothetical basis. The ld.CIT(A) also confirmed the observation of the AO, but reduced the rental value of the properties by holding that value determined by the AO was on the higher side. A perusal of the assessment order would indicate that the ld.AO has rejected the contentions of the assessee regarding user of these buildings and land for the purpose of business simply for the reason that the assessee failed to submit any evidence demonstrating the fact that these premises were used for any business purpose. In the case of Anilbhai Chunilal Bhayani, the ld.AO at page no.6 of the assessment order has observed that there is no letter head provided by the assessee showing the fact that address of its shops/godowns is being displayed on the letter-head of JC & Co. In other words, the ld.AO was expecting that the assessee should produce some secondary evidence in the shape of letter head, electricity bills showing that the premises were used for the purpose of business. To our mind, these reasoning are fallacious. The assessee has been pleading that premises has been used for business purpose. The AO should have deputed someone to inspect the sites. By simply sitting in the office, he just assigned the reason that I don’t agree with your submission. This type of simple denial of the claim is not sustainable in the eyes of law. The statement of facts made by the assessee has to be rejected on the basis of some investigation. The AO has rejected the statement of facts on the ground of insufficiency of evidence produced by the assessee. To some extent for an ideal situation, the assessee could be asked to produce more evidence, but pleadings cannot be rejected simply for insufficiency without investigating or inspecting site in such circumstances. We have accepted the claim of the assessee that it has been engaged in transportation business. We have allowed transportation expenses. Considering this aspect, we are of the view that the ld.Revenue authorities are not justified in rejecting the claim of the assessee that house properties were used for the purpose of business. This claim was rejected without making any investigation. Therefore, we reverse the finding of both the authorities and direct the AO not to assess house property income.

FULL TEXT OF THE ITAT JUDGEMENT

Above two appeals by the assesseees against the orders of the ld.CIT(A), Jamnagar of even dated 24.08.2017 for the assessment year 2013­14. Since grounds in both the appeals are identical, except variation in quantum additions, therefore, for the sake of convenience, we dispose of both the appeals by this common order.

2. The grounds raised by the assessees in the appeals reads as under:

“1. Ld. AO erred in law as well as on facts in disallowing entire transportation expenses of Rs.16,76,190/- incurred against the transport income of Rs.18,12,123/- and taxing the entire income without allowing any expenditure and Ld. CIT(A) erred in confirming the same.

2. Ld. CIT(A) erred in law as well on facts in denying the fact that the property are used for business purpose and confirming addition under the head income from House Property by determining fair market rentable rent on estimation basis.

3. Id. CIT(A) erred in law and in fact in confirming disallowance of Interest Expense of Rs.1,79,154/- stating that appellant has not established that borrowed funds are utilized for purpose of business or any interest income received on funds advanced out of only borrowed funds.”

ITA No.364/RJT/2017 (Shri Ashwinbhai Chunilal Bhayani)

“1. Ld. AO erred in law as well as on facts in disallowing entire transportation expenses of Rs.16,90,417/- incurred against the transport income of Rs.18,82,619/- and taxing the entire income without allowing any expenditure and Ld. CIT(A) erred in confirming the same.

2. Ld. CIT(A) erred in law as well on facts in denying the fact that the property are used for business purpose and confirming addition under the head income from House Property by determining fair market rentable rent on estimation basis.

3. Ld. CIT(A) erred in law and in facts in confirming disallowance of Interest Expense of Rs.4,97,284/- stating that appellant has not established that borrowed funds are utilized for purpose of business or any interest income received on funds advanced out of only borrowed funds.”

3. As could seen in the grounds of appeals reproduced above, grounds raised in these appeals are identical except variation in the quantum of amounts. Therefore, we take the facts from ITA No.363/Ahd/2017 in the case of Anilbhai Chunilal Bhayani.

4. Brief facts of the cases are that assessees are having income from freight charges from transport business. In the case of Anil Chunilal Bhyani, return of income has been filed declaring total income at rs.4,64,370/-26.10.2013 and in the case of Shri Ashwin Chunilal Bhayani of Rs.3,44,750/-on 26.10.2013. Both the returns were processed under section 143(1) of the Act, and thereafter, they were selected for scrutiny assessment and notices under sections 143(2) were issued and served upon the assessee. During the assessment proceedings it was noticed by the AO that the assessee has claimed an expenses of Rs.16,76,190/- [in the case of Shri Anil Chunilal Bhayani] and Rs.16,90,458/- in the case of Shri Ashwin Chunilal Bhayani from operating of trucks having registration no.GJ-10X-8741 and GJ-10X-8748 respectively. The AO further noticed that these trucks were not shown in their respective balance sheets for the year under consideration, and therefore, he doubted the authenticity of the claim. It was explained by the assessees that the same were taken on hire basis, and therefore, they were not shown in the balance sheets. The assessees have filed bills/vouchers related to support the expenses claimed by them. However, the ld.AO did not satisfy with the explanation of the assessee for the reason that assessee has not furnished contract agreement and payment of hire charges to the owner of the truck. He further observed that on perusal of the cash and bank book, there were no entries demonstrating any payment made towards hire charges, therefore, assessee failed to prove expenses towards hire charges paid to the owners, accordingly, the ld.AO made respective additions.

5. Assessees went in appeal before the first appellate authority. Before the ld.CIT(A) it was submitted that similar income and expenditure claimed for assessment year 2012-13 and in the past years were accepted by the Department. Before the ld.CIT(A) assessee has submitted copy of the truck operating agreement with JC & Co, along with supporting bills/vouchers to prove their claim. The assessee has also given point wise detailed reply in tabular form, which the ld.CIT(A) has noticed in his impugned order from page no.12 to 15, and they read as under:

Ref. of Asstt.Order Reasons given by AO Appellant’s submission
Para no 2.0

 

During the course of scrutiny proceedings it was observed that the assesses has claimed expense of Rs.16,76,910/- in transport business from a truck having no. GJ10X8741. However, the assessee is not having this asset in his balance sheet for A.Y.2013-14 on which the said expense can be occurred. Assessee vide letter dated 16/03/2016 stated that he had taken Truck bearing no. GJ-10X-8741 on hire from   M/s. Jayantilal Chatrabhuj &  Co. so the asset was not reflected as asset in the balance sheet.
Para no.2.1

 

It is noticed that with the letter dated the assessee has neither submitted that from whom the truck was taken on hire nor he has submitted any contract/agreement or any other supporting documents which can prove the plea of the assessee that he has taken the truck on hire/rent. However, the assessee in his letter dated 21/03/2016 submitted that he has taken truck from his firm M/s. J C & Co. however, no supporting documents/papers/evidences are provided with this letter too. Assessee had in letter dated 21/03/2016 submitted before AO that he had taken Truck  on hire from M/s. JayantilalChatrabhuj& Co. and the same is also mentioned by AO in this Para no. 2.1. Further no other query or supporting was called for same during assessment proceedings in relation to same so no agreement / contract was submitted by assessee. The copy of tanker truck operating agreement entered between J C & Co and appellant is enclosed herewith wherein ownership  of the truck and all the terms  and conditions agreed  between both the  parties is  mentioned. Refer page no.  ______ of the paper book.
Para no.2.2

 

Assessee has not provided when the said truck was acquired on hire. The assessee has not provided that how much amount is paid to M/s. J C & Co. for taking truck on hire. It is further noticed from the bank statement and cash book of the assessee that there is no entry which indicate that the assessee has paid any amount to M/s. J C & Co. for taking the said truck on hire. Assessee has entered into truck operating agreement with J C & Co, which is wef 01.04.2011. The truck would be used for the purpose of transportation as per the instructions of M/s. J C & Co.

The monthly rental would be Rs. 10,000/- p.m. As per the agreement the running and maintenance expense of truck would be entirely borne by   he appellant.In return, JC  & Co. would collect monthly hire charges ofRs. 10,000/-.

M/s. J C & Co. would pay advance to driver on behalf of appellant and would incur  expenditure on behalf of  appellant.

At the end of the year, the entire income pertaining to trips carried out by appellant and expenses incurred by J C & Co. is debited/credited to the account of appellant. In return of all this, appellant would receive freight income at an agreed rate  between M/s. J C & Co. and  the appellant. Therefore^ no  entries are reflected in cash  book or bank statement of the appellant.

The copy of ledger account of M/s. J C & Co. along with ledger accounts of all expenses and income is enclosed herewith.

Para no.2.3

 

Assessee has not provided the supporting documents which indicate that the said truck belongs to the M/s. J C & Co. Neither registration certificate was provided by the assessee nor the asset details of M/s. J C & Co was provided which indicate that the said truck was of M/s. J C & Co. It is the assessee who has to prove that what he is saying is true. The onus is on the assessee to prove that he has taken the truck of M/s. J C & Co. On hire. The assessee has not successfully discharged the onus. Truck bearing no. GJ-10X8741 belongs to M/s. Jayantila lChatrabhuj& Co. Copy of registration certificate is enclosed herewith at page no. __ of the paperbook. Assessee had taken Truck bearing no. GJ-1 OX-8741 on hire from M/s. Jayantila/Chatrabhuj& Co. The copy of tanker truck operating agreement entered between J C & Co and appellant is enclosed herewith at page no. _____ of the paperbook.  
Para No.2.4

 

The bills / vouchers which were provided by the assessee were raised in the name of M/s. J C & company. Not a single bill was raised in the name of assessee. As per the truck operating agreement M/s. J C & Co. would pay advance to driver on behalf of appellant and would incur expenditure on behalf of appellant. Hence, all the bills / vouchers which were provided by the assessee were raised in the name of M/s. J C & company and not appellant.

Vouchers were obtained bythe drivers driving the  truck and business was well known in the market as “J C & Co.” and hence the vouchers were in the name of M/s. J C & Co.   Also in the R C book the  truck was registered in the name of J.C & Co. and hence all vouchers were in the name of J C & Co. J C & Co. received petrol credits^ and hence the vouchers or slips of petrol charges were taken in its name by the drivers. Even the PUC is in the name  of M/s. J C & Co. and hence all the bills and vouchers are in the name of M/s. J. C. & Co.___  

Para no.2.5

 

Perusal of cash book ( the same is annexed as Annexure Aof this order) and the bank statements submitted by the assessee for the year under consideration reflect that there are no such expenses mentioned neither in the cash  book nor in the bank statements . Not a single entry was found in the cash book or in the bank book which shows that the assessee has paid any amount  for the transport expenses as claimed by him in his Profit and loss account for the year under consideration. As per the agreement the running and maintenance expense of truck would be  entirely borne by the appellant. In return, JC & Co. would collect monthly hirecharges of Rs. 10,000/-.  M/s. J C & Co. would pay advance to driver on behalf of appellant and would incur expenditure on behalf of appellant.

At the end of the -year, the entire income pertaining to trips carried out by appellant and expenses incurred by J C & Co. is debited/credited to the account of appellant. In return of all this, appellant would receive freight income at an agreed rate between M/s. J C & Co. and the appellant. Therefore, no entries are reflected in cash book or bank statement of the- appellant._____

Para no.2.6

 

Assessee has shown Tire Puncture expense of Rs.1,18,740/- in his Profit & Loss Account for the year under consideration. As per the assessee he has hired one truck and he has incurred all the expenditure on it only. This means the truck of the assessee which has hired by the assessee has punctured near above 600 times in a year. This is an abnormal result and a layman can simply say that the same is not possible and in the situation of the assessee it is clearly not possible because assessee has shown income of Rs.18,12,123/- from the transportation business. IN THIS REGARD APPELLANT SUBMITS THAT “TYRE PUNCTURE EXPENSE” ARE OF RS. 5850/- DEBITED TO P & L A/C WHICH IS SHOWN AS TYRE EXPENDITURE BY MISTAKE. THE EXPENSE INCURRED  N TYRES OF RS. 1,18,740/- RELATES TO PURCHASE OF NEW TYRES AND OTHER EXPENSE RELATE  O IT ETC. THE COPIES OF ALL THE BILLS ARE ENCLOSED HEREWITH ‘ AT PAGE NO. OF THE PAPERBOOK. THE APPELLANT HAS BY MISTAKE CLASSIFIED ALL THE TYRE EXPENSES INCURRED DURING THE YEAR UNDER CONSIDERATION UNDER THE COMMON -HEAD “TIRE PUNCTURE EXPENSE”. IT IS  EEN FROM THE PROFIT AND LOSS ACCOUNT OF THE APPELLANT THAT THERE IS ONE MORE EXPENDITURE ‘TYRE EXPENDITURE’ OF RS.5,850/- WHICH ACTUALLY RELATES TO PUNCTURE EXPENSE. IT WAS WRONGLY NAMED AS ‘TYRE XPENDITURE’.

SUPPORTING VOUCHERS FOR THE SAME WERE ALSO PRODUCED BEFORE LD. AO. HOWEVER, AO FAILED TO APPRECIATE THE SAME. THE COPY OF LEDGER ACCOUNT OF TYRE EXPENDITURE AND TYRE PUNCTURE EXPENDITURE IS ENCLOSED HEREWITH AT PAGE NO. OF THE PAPER BOOK.

Para no.2.7

 

This can be say that the assesses no. 2.7 has not earned this income from the transportation of the truck but from any other source which is dest known to the assessee. The assesses was not able to justify the source of the income shown by the assessee. It is on the assessee to prove that what is shown by him in his return of income was true and correct. But in the present case the assessee was neither able to prove that he has taken the truck on hire nor was able to prove he has paid any amount towards expense for hiring the truck. He neither able to prove that the said income is of the transport business nor able to prove that- he has incurred any expenditure for earning such income. The source of income for appellant is transport income only. The copy of ledger account showing transport income credited monthly and rent debited as per agreement ‘of Rs.’ 10000/- monthly is enclosed herewith at page no. ____ of the paper book.

Further, appellant earns income from transportation of truck from M/s. J C & Co. which can be verified from the audit report of M/s. JC & Co in annexure “C” showing the same as transport reight expense  of Rs. 18,12,122/-. Refer page no. _____ of the paper book.

FURTHER, M/S. J C & CO. IS REGULARLY ASSESSED TO TAX U/S 143(3) AND THE FREIGHT EXPENSE INCURRED BY M/S. J C & CO. FOR AY 2013-14 IS ACCEPTED BY ASSESSING OFFICER AND NO DISALLOWANCE IS MADE FOR THIS. HENCE, THERE SHALL BE NO DOUBT ABOUT TRANSPORT INCOME EARNED. COPY OF ASSESSMENT ORDER OF M/S. J C & CO. IS ALSO ATTACHED AT PAGE NO. ___OF THE PAPER BOOK.

HE EXPENSE HAS BEEN INCURRED BY M/S. JC & CO. ON HIS BEHALF AND THUS THE SAME IS CLAIMED BY THE APPELLANT A GAINST THE TRANSPORTATION INCOME EARNED. COPY OF LEDGER ACCOUNTS OF ALL EXPENSES INCURRED IS ATTACHED AT PAGE NO. ______ OF THE PAPER BOOK.

However, the ld.CIT(A) did not accept the submissions of the assessee and confirmed the order of the AO. The assessee is now before the Tribunal.

6. Before us, the ld.counsel for the assessee reiterated the submissions made before the Revenue authorities. He further submitted that the evidences which could not be submitted during the assessment proceedings were filed before the first appellate authority. The assessee has produced original truck hire contract agreement and also prayed to allow additional evidences mentioning the reason for non-submission of the documents during the assessment proceedings. If the fact of receipt of transport income has been accepted by both the authorities, then expenditure incurred for earning such income ought to have been allowed by the Revenue authorities on the same footing. All the required details for allowance of the expenditure against the income earned by the assessee were before them, however, the same were not considered by the ld.CIT(A). Copy of log book maintained by the JC & Co. for truck trips showed that the assessee was carrying on business of transportation on regular basis, and the income thereof has been shown in the return every year, which were accepted by the Department in those years. It is further submitted that, addition if at all to be made, then the same should be on the net profit earned by the assessee from the business and not the entire gross transportation income. The assessee has given agreed hire rental charges to the said JC& Co. which was not disputed by the Revenue authorities. The Revenue authorities simply brushed aside claim of the assessee without considering the facts supported by evidences provided by the assessee. Since the claim of the assessee being genuine supported with material evidences, therefore same requires to be allowed. On the other hand, the ld.DR supported orders of the Revenue authorities.

7. We have considered rival submissions and gone through the orders of the Revenue authorities and other materials placed on record including the submissions of the assessee made before the ld.first appellate authority. We find that both the authorities have disbelieved claim of the assessee on account of transport expenses for want of evidence or details. However, we find that the assessee has submitted complete details before the ld.CIT(A) and relevant copies thereof were also placed on record before us. Further, we noted that the assessee has also made prayer to take on record those additional evidences in support of their claim before the ld.CIT(A). But the ld.CIT(A) has taken little care to consider the same and examine claim of the assessee. His finding more or less in line with the findings of the ld.AO, though substantial material in the form of evidences to establish claim of the assessee were provided during the appellate proceedings. Before us, ld.counsel for the assessee has furnished copy of truck hire agreement, ledger account of the assessee from the books of M/sJC & Co., copy of ledger account of expenses recorded by the said M/s.JC&CO in its books, and also copy of logbook mentioning details of trip carried out during the year. A reading of all these details demonstrate that the assessee has entered into hire contract agreement with the said JC&CO which inter alia provided that the said JC&CO would provide truck at a monthly rent of Rs.10,000/- and the total expenses of all the trips shall be incurred by the JC&CO by debiting the same to the account of the assessee, and that the assessee shall provide advance to the drivers of trip during the trip. The said agreement also provided that whatever rent and expenses paid by the assessee would be credited to his account, and the net amount would be paid after deducting the commission. Therefore, this agreement demonstrates that there was an understanding between two parties as to the operation, maintenance and payment of commission, therefore, the claim of the assessee cannot be doubted or disbelieved. Assessee also filed copy of ledger account of the assessee in the books of JC&CO and copy of logbook showing details of various trip undertaken by the assessee. Payments made by the assessee are identifiable with the details furnished before us and also before the ld.CIT(A). It is pertinent to observe here that similar claim of the assessee was allowed by the Revenue for the earlier year, which fact has not been denied by the Revenue authorities. No sincere efforts have been put in by the ld.CIT(A) to examine the claim of the assessee, though requisite details were placed before him. After considering the facts and circumstances of the case in totality, supported by the evidences submitted by the assessee, we find that action of Revenue authorities in disallowing the claim of the assessee for transport expenses of Rs.16,76,190/- cannot be sustained. We, therefore, reverse their orders, and allow this ground no.1 of assessee appeal.

8. As far as facts in case of Ashwin Chunilal Bhayani is concerned, they are same except quantum, therefore, identical treatment be made in this case also.

9. As regards second ground regarding income from house properties are concerned, it was observed by the AO, the assesseees have shown details of immovable properties held by them being land and buildings. The ld.AO noticed the details of these properties along with their value as per the balance sheet, in page no.5 of respective impugned orders. The assessees claimed that these land/buildings were used by them as residence and for business activities, and no income earned to them. However, the AO was of the view that since no proof of business activities being carried out at these premises were furnished by the assessees, therefore, the assessee would not have kept the properties idle, he would have earned some income in the form of rent etc., which the assessees would have received in cash or in cheque as unaccounted money. The AO accordingly estimated reasonable market rentable value of the properties and estimated income of Rs.4,62,000/- in the case of Shri Anil Chunilal Bhayani and Rs.7,62,000/- in the case of Ashwinbhai Chunilal Bhayani under the head income from the house properties.

10. Assessee carried this issue before the ld.first appellate authority. The assessee has filed detailed submissions and the same were recorded by the ld.CIT(A) in his impugned order. It was submitted that the assessee has constructed properties for residence and commercial purpose. The assessee has explained the purpose for which assets are used in a tabular form. It reads as under:

Sr.No. Assets Purpose for which utilized
Ajmera Estate (Shop 3) Used for own business and transportation and owned by assessee along with his two brothers. On the letter
head of M/s.JC&Co this premise is shown  as
branch office, which is verifiable from tanker truck operating
agreement.
Ajmera Estate, Rajkot

(Godown)

This property is owned by the assessee along with two other  co-
owners and given on rent to M/s.JC & Co
Ajanta  Co-operative, Rajkot Used for residential purpose
Navinagari, Okha Open Plot of land
Yagraj-2 Used for business purpose of  Janki Developers in         which appellant is partner

11. The submissions of the assessee did not find satisfactory on the ground that since the assessee has claimed that these properties were used for the business purpose, but there is no proof that these properties are used for assessee’s business activities. The ld. AO denied the claim of the assessee without any corroborative evidence that the assessee has used these premises for other purpose and earned some unaccounted income. However, the ld.CIT(A) restricted the addition by holding that the fair market rentable value determined by the AO is without any basis, and was on higher side. His finding in this regard reads as under:

“6. The second ground of appeal of the appellant is that the AO has erred in law and on facts in denying the fact that lands are used for business purpose and hence made an addition under the head income from house property of Rs. 4,62,000/-. With regard to this ground of appeal, I agree with the findings of the AO as given in the assessment order that no business activities have been carried on by the appellant from any of the premises. This is also in view of the facts as discussed in detail in earlier paragraphs of this appeal order. There is on record to show that any premise has been used by the appellant for his transportation business. In view of this it is held that fair market rentable value of the house properties of the appellant are required to be taken. However, in my opinion, the AO has taken the fair market rentable value without any basis and has not worked out such fair market rentable value by taking any instance of nearby area. The fair market rentable value taken by the AO for the properties appears to be on hire side. In view of this, the AO is directed to take fair market rentable value of land of Ajmera estate ( i.e. shop 3) at Rs. 12,0007- per month instead of Rs. 20,000/- per month and accordingly tax the income from house property after giving the standard deduction.

6.1 As regards land of Ajmera estate, Rajkot (i.e. godown), the AO is directed to take fair market rentable value at Rs. 12,000/- per month. Again it is submitted by the AR of the appellant vide her submission dated 09/08/2017 that this property i.e. Ajmera estate, Rajkot is co-owned by the appellant along with his two brother that is shri Ashwin Bhayani and Shri Shubhsh Bhayani. The AO is directed to tax 1/3 of the income from house property in the case of Ajmera estate Rajkot by considering the fair market rentable value at Rs. 12,000/- of the above property and after giving standard to the appellant from the gross rental income.

6.2 As regards land of Yograj-2, the AO is directed to take fair market rentable value at Rs. 9,000/- per month and accordingly tax the income from house property after giving the standard deduction to the appellant.

As regards land of Yograj-2, the AO is directed to take fair market rentable value at Rs. 9,000/- per month and accordingly tax the income from house property after giving the standard deduction to the appellant.

6.3 Thus the ground of appeal no 2 of the appellant is partly allowed.”

12. Before us, the ld.counsel for the assessee reiterated submissions as were made before the Revenue authorities. He further submitted that though the ld.CIT(A) has reduced the fair rental value of the properties, but the same was taken without taking into account various other factors which influence the rental value of the properties in question. The ld.CIT(A) has failed to take the reasonable basis or to give justification for the value so decided. On the other hand, the ld.DR supported the order of the ld.CIT(A).

13. We have considered rival submissions and gone through the record carefully. We find that both the authorities have not satisfied with the explanation given by the assessee about the usage of the properties for the business purpose, and estimation of the rental value of the properties. The ld.AO rejected the claim of the assessee on the ground that no business activities carried out by the assessee at these premises and estimated the rental value of the property on hypothetical basis. The ld.CIT(A) also confirmed the observation of the AO, but reduced the rental value of the properties by holding that value determined by the AO was on the higher side. A perusal of the assessment order would indicate that the ld.AO has rejected the contentions of the assessee regarding user of these buildings and land for the purpose of business simply for the reason that the assessee failed to submit any evidence demonstrating the fact that these premises were used for any business purpose. In the case of Anilbhai Chunilal Bhayani, the ld.AO at page no.6 of the assessment order has observed that there is no letter head provided by the assessee showing the fact that address of its shops/godowns is being displayed on the letter-head of JC & Co. In other words, the ld.AO was expecting that the assessee should produce some secondary evidence in the shape of letter head, electricity bills showing that the premises were used for the purpose of business. To our mind, these reasoning are fallacious. The assessee has been pleading that premises has been used for business purpose. The AO should have deputed someone to inspect the sites. By simply sitting in the office, he just assigned the reason that I don’t agree with your submission. This type of simple denial of the claim is not sustainable in the eyes of law. The statement of facts made by the assessee has to be rejected on the basis of some investigation. The AO has rejected the statement of facts on the ground of insufficiency of evidence produced by the assessee. To some extent for an ideal situation, the assessee could be asked to produce more evidence, but pleadings cannot be rejected simply for insufficiency without investigating or inspecting site in such circumstances. We have accepted the claim of the assessee that it has been engaged in transportation business. We have allowed transportation expenses. Considering this aspect, we are of the view that the ld.Revenue authorities are not justified in rejecting the claim of the assessee that house properties were used for the purpose of business. This claim was rejected without making any investigation. Therefore, we reverse the finding of both the authorities and direct the AO not to assess house property income.

14. As far as facts in other case is concerned, they are same, therefore, identical treatment be made in the case of Ashwin Chunilal Bhayani.

15. Ground No.3 in ITA No.363/RJT/2017:

16. In the written submissions filed before us, the assessee has explained facts and circumstances. We take note of these submissions as under:

“Ground No. 3 – Disallowance of Interest expenditure on borrowed funds claimed of Rs. 1,79,514/-

Facts:

The appellant has earned interest of Rs.2,67,939/- from partnership firm M/s. Janki Land Developers and Rs.2,44,397/- from Anand Agencies. Over and above his transport business assessee also provides his services in M/s. J C & Co. Which is also engaged in transport business for which assessee receives professional income of Rs. 3,00,0007- Appellant has claimed deduction of Interest expenditure paid on borrowed funds of Rs.6,91,490/- under Section 57 of the I T Act.

The appellant has inadvertently claimed interest income and expense of Rs.2,67,939/-and Professional Fees of Rs. 3,00,000/- under the head Income from Other Sources which actually is Profit & Gains from Business/Profession.

Contention of Appellant:

1. Interest is paid on borrowed funds and the borrowed funds are invested in the firms M/s. Advent Cinema, M/s. Janki Developers, M/s. Yesh Developers and M/s. Anand Agencies.

The details of Interest Received and paid is as under:

No. Name of the party Interest
Received
(Rs.)
Interest
paid (Rs.)
1 Interest from Anand Agencies (Interest on Loan) 2,44,397
2 Income from Janki Land Developers (interest on capital) 2,67,939
3 Interest from HarshitBhayani 17,233
4 Professional income from M/s. J C & Co. 3,00,000
5 Interest paid on unsecured loan to
–           Anil Bhayani (HUF) 2,97,966
–           ChunilalBhayani (HUF) 1,68,841
Jankibenbhayani 35,668
Vamaben Anil Bhayani 1,09,290
Others 14,039
JayantilalChatrabhuj& Co. 65,686
Total 8,29,569 6,91,490

3. The Ld. AO completely disallowed the interest expenditure of Rs.6,91,490/-however the Hon’ble CIT(A) directed the AO to find out as to whether the appellant has advanced funds to M/s. Janki Land Developers and M/s Anand Agencies only ‘out of the borrowed funds on which the interest of Rs.6,91,490/- is being claimed. If the appellant has received the interest of Rs.5,12,336/-( Rs.2,44,397/- from Anand Agencies and Rs.2,67,939/- from Janki Land Developers) on the advances made to the above two concerns which are made out of such borrowed funds, then the AO is directed to allow the interest expenses to the extent of Rs.5,12,336/-against the interest income of 5,12,336/-as there is direct nexus between interest income earned and interest expenditure incurred. As regards remaining amount of interest Rs. l,79,514/-( Rs.6,91,490 less Rs.5,12,336/-)the same cannot be allowed against any income as the appellant has not established that the borrowed funds on which the interest of Rs.1,79,514/- is paid was utilized for the purpose of business of appellant or any interest income has been received by him on the funds advanced out of only borrowed funds.

4. From the above table it is clear that the interest expense in respect of the interest received from Anand Agencies and Janki Land Developers has been allowed, however the interest expense in respect of professional income has not been given.

5. With respect to professional income earned by appellant we submit that inadvertently appellant has considered income under the head income from other sources instead of income from business or profession. If the same has been considered under business, expenses claimed should be allowed in view of commercial expediency. We request your Honour to consider the professional income under the head income from business and profession and allow the expenses claimed.

6. Hon’ble Supreme Court in the case of S. A. Builders Ltd. Vs. CIT(A), Chandigarh reported in 288 ITR 1 has used the word “commercial expediency”. In the judgment the Supreme Court has defined commercial expediency as “an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency”. What is to be seen is the purpose for which borrowed money is finally utilized. If the money is utilized in a way that makes commercial sense and helps in running the intended business of the assessee more efficiently, then it can be said that the interest paid in respect of borrowed money has been incurred for the purpose of commercial expediency.

7. There should be some basis on the part of Hon’ble CIT(A) to state that appellant has not established the fact that amount borrowed on which interest has been paid of Rs. 1,79,514/- has not been utilized for the purpose of business or any interest has been received on such borrowed funds invested because the table has already been given stating the interest paid and interest received and showing that full amount of borrowed funds on which interest of Rs. 6,91,490/- has been paid been invested at one or the other place.

8. Thus the professional income shall be allowed proportionate considering the commercial expediency. Thus, the disallowance of interest on borrowed funds of Rs.1,79,514/- should be deleted.”

17. Similarly, with regard to ground no.3 in ITA No.364/RJT/2017 is concerned, the submissions made by the assessee read as under:

“Ground No. 3: Ld. CIT(A) erred in law and in facts in confirming disallowance of Interest Expense of Rs. 4,97,284/- stating that appellant has not established that borrowed funds are utilized for purpose of business or any interest income received on funds advanced out of only borrowed funds.

1. The appellant has earned interest of Rs. 1,17,226/- from partnership firm. Appellant also receives interest income from sister concern and other entities against advances given during the year of Rs. 3,10,710/-. Over and above his transport business appellant also provides his services in M/s. J C & Co. which is also engaged in transport business for which appellant receives professional income of Rs. 3,60,000/-. Appellant has claimed deduction of Interest expenditure paid on borrowed funds of Rs. 9,13,782/- under Section 57 of the IT Act.

2. Ld AO has disallowed the amount of expenditure claimed of Rs. 9,13,782/-stating as under:

a. Assessee was not able to provide the usage or application of these loan funds for himself,

b. No nexus has been provided that the borrowed fund was utilised by the assessee for his business

c. Further, for claiming interest expenditure u/s. 57 of the IT Act, the onus to prove the j nexus between expenditure and purpose for which it is used is wholly on the assessee. d. Assessee could not furnish a single evidence that can prove that said expenditure incurred by him.

3. Hon. C1T(A) has considered the submission made by appellant and allowed expenses of Rs. 3,10,710/- to be set off against income from other sources and also allowed interest on loan for house property of Rs. 1,05,788/-. However, Hon. CIT(A) confirm the disallowance of Rs. 4,97,284/-. Hon. CIT(A) has not allowed deduction of expenses from professional fees earned and interest on capital from partnership firm.

Appellant’s contention;

4. With respect to the deduction of expenses from interest on capital we submit that that income received by appellant from partnership firm is taxable under head income from business or profession as per provisions of section 28(v).

5. When the statute has by fiction provided that the income received by the partner from the firm is to be assessed under the head ‘Profits and gains of business or profession’ under section 28, then automatically any interest paid by the partner for the purpose of earning the income must also be deducted as per section 36(l)(iii).

6. The bare reading of Section 36(l)(iii) is as follows:

“36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 –

(i)-

(ii)…

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession”

7. Thus, under this section, in computing the income referred to in section 28, the deduction is provided of the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession.

8. Further, with respect to professional income earned by appellant we submit that inadvertently appellant has considered income under the head income from other sources instead of income from ‘business or profession. If the same has been considered under business, expenses claimed should be allowed in view of commercial expediency. We request your Honour to consider the professional income under the head income from business and profession and allow the expenses claimed.

9. As laid down by Hon Supreme Court, for allowance of a claim for deduction of interest under this provision following three conditions are there:

(i) The money, that is capital, must have been borrowed by the assessee (ii) It must have been borrowed for the purpose of business.

(iii) The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure.

10. All the above conditions have not been disputed by Hon. CIT(A) and hence, deduction of expenditure from interest on capital from partnership firm should be allowed.

11. Hon’ble Supreme Court in the case of S. A. Builders Ltd. Vs. CIT(A), Chandigarh reported in 288 ITR 1 has used the word “commercial expediency”. In the judgment the Supreme Court has defined commercial expediency as “an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency”. What is to be seen is the purpose for which borrowed money is finally utilized. If the money is utilized in a way that makes commercial sense and helps in running the intended business of the assessee more efficiently, then it can be said that the interest paid in respect of borrowed money has been incurred for the purpose of commercial expediency.

Hence, in view of above submission, we request Your Honours to allow the deduction of expenses claimed from interest on capital and professional income.”

18. With the assistance of the ld.representatives, we have gone through the record carefully. The AO in both the cases was of the view that these assessees have not carried out any business activities, and therefore they are not entitled for deduction of any expenses incurred on the funds which were stated to be utilized for the purpose of business. On appeal, the ld.CIT(A) has partly accepted the claim of the assessee. The ld.CIT(A) in the case of Anilbhai Chunilal Bhayani has accepted to the extent assessee has received interest income.

19. Similarly, in the case of Ashwin Chunilal Bhayani the ld.CIT(A) has partly accepted the contentions of the assessee to the extent he has received the interest income from the partnership firm, and professional receipt from the transportation business. However, it is to be appreciated that once factum of carrying out of any business is being accepted, then all resultant expenses are to be allowed to the assessee. We have found that both the assessees were engaged in transportation business. They have earned professional receipts from transport business. Both the assessees were partners in the firms. They have earned share of profit from the partnership firms as well as interest income. The ld.CIT(A) has also accepted partly this pleading of both the appeals. Considering the above facts, once it is accepted that they were partners in the firm and they have income which is to be assessed as business income, then all consequential expenditure pertaining to this business are to be allowed. Taking this fact in mind, we are of the view that interest expenses claimed by both the assessees are relating to their professional activities or to the funds deployed with the partnership firms. Therefore, the expenses are to be allowed to both the assessees. We allow this ground of appeal and delete disallowances.

20. In the result, both appeals of the assessees are allowed.

Order pronounced in the Court on 10th February, 2021 at Ahmedabad.

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