ORDER
Sunil Kumar Yadav, Judicial Member
1. This appeal filed by the assessee is directed against the order of the CIT(A) on various grounds, which are as under:
1. The CIT(A) erred in confirming the disallowance of interest of Rs. 2,72,771/- claimed as a deduction from the remuneration of Rs. 3,48,000/- received by the assessee from a registered firm.
2.a) The CIT(A) has erred in facts and in law in confirming the addition of Rs. 8,54,758/- as unexplained investment Under Section 69 of the I.T. Act, 1961.
2.b) The CIT(A) failed to appreciate that:
i. The investment in jewellery had been disclosed under the VDIS, 1997.
ii. Certificate under Clause 68(2) of the VDIS was issued, based on the disclosure made,
iii. Part of the jewellery disclosed under VDIS was sold on 2nd January, 1997 to pay the VDIS tax and necessary entries recorded in the books of accounts.
3.a) The CIT(A) erred in disallowing Long Term Capital Loss aggregating to Rs. 4,20,750/- arising on sale of the jewellery disclosed under VDIS, 1997 on the ground that the source of acquisition of the gold ornaments was not proved.
3.b) The CIT(A) failed to appreciate that under VDIS, 1997 the source of acquisition of the gold ornaments was disclosed as per affidavits submitted with declaration to the Income-tax Commissioner.
2. We have heard the rival submissions and carefully perused the orders of authorities below and documents placed on record.
3. Apropos ground No. 1, it is noticed that the assessee has paid interest on funds raised for introduction as the assessee’s capital in his firm. The Assessing Officer noticed that since the assessee did not receive any interest from the firm as there was no specific provisions for payment of interest to partners, he disallowed the interest paid on the borrowed funds. The Assessing Officer disallowed the payment of interest for two reasons: i) The interest payment on interest free loans advanced to the firm is covered Under Section 40A(2)(b) of the Act. ii) The borrowed funds had been advanced to a distinctly different business, income from which is exempt in the hands of the assessee.
4. The assessee preferred an appeal before the CIT(A) with the submission that interest paid by the partners on the funds borrowed for investing it as capital is allowable as deduction. It was also urged that the firm had paid considerable tax and so no loss is caused to the revenue by the partners not drawing interest on capital from the firm and if such interest had actually been paid by the firm to the partners, the overall tax payable would have been reduced. The CIT(A) re-examined the issue in the light of relevant provisions of the Act and has agreed with the contention of the assessee that the invoking of Section 40A(2)(b) was not apposite. He further agreed that the stand of the Assessing Officer that the interest expense was incurred for investing in firm, profit from which was exempt from tax and that being so, the provisions of Section 14-A will apply to hit the claim of deduction of the said interest. The contention of the assessee that he had derived remuneration from the firm, which was taxable will not save the disallowance Under Section 14-A as there is no nexus between the assessee’s capital in the firm and the remuneration received by him. He accordingly confirmed the disallowance.
5. Now the assessee is in appeal before us and reiterated its contention. Having carefully examined the material available on record in the light of the provisions of Section 14A, we find that according to Section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act for the purpose of computing total income under this Chapter. Meaning thereby, if any expenditure is incurred on borrowed funds which do not earn any income, the said expenditure are not to be allowed as deduction in computing total income of the assessee. In the instant case, the assessee has borrowed funds to make an investment in the firm under its capital account. As per the partnership deed, the assessee is not entitled for any interest on its capital balance as there was no provision in the partnership deed to this effect. Whatever remuneration was earned by the assessee being a partner, it was on account of services rendered by him for the firm and not on account of investment made by him in the firm. Unless and until the nexus is established between the borrowed funds and the income of the assessee, the deduction of the interest paid on the borrowed funds would not be allowed against the income. In the instant case, since no nexus was established between the borrowed funds and remuneration earned by the assessee, the Assessing Officer was justified in disallowing the interest paid on the borrowed funds. We, therefore, find no infirmity in the order of the CIT(A).
6. Ground No. 2 relates to an addition of Rs. 8,54,758/- as unexplained investment Under Section 69 of the I.T. Act. The facts available on record in this regard are that the assessee has made a disclosure under VDIS 1997 on 05.07.1997. The Certificate Under Section 68(2) of the VDIS 1997 was issued on 30.09.1997 by the CIT. The assessee had got the valuation of the jewellery done on 1.7.97 at Rs. 22,54,390/- and it was declared in the VDIS 97. In order to raise funds for payment of VDIS tax which had been computed at Rs. 8,47,317/-, the assessee has sold 2220 gms. Of gold ornaments on 02.07.1997 for Rs. 8,54,758/- and from this sale proceeds, the VDIS tax was paid on 3.7.97. Thereafter, the VDIS declaration was filed on 5.9.97. The Assessing Officer observed from these details that ornaments valued at Rs. 22,54,390/- declared in VDIS proved that on the date of declaration i./e. 5.9.97 the jewellery was very much with the assessee and that being so, the Assessing Officer took the view that the 2220 gms. of jewellery sold 2.7.97 could not have been out of the quantity of gold ornaments declared in the VDIS. The Assessing Officer required the assessee to explain the source of acquisition of the gold ornaments sold on 2.7.97. The assessee affirmed that the ornaments sold were out of the quantity declared under the VDIS. The Assessing Officer rejected this explanation for the reason that the ornaments could not be sold, which were later on declared under the VDIS. Relying upon the clarification issued by the CBDT on 16.10.97 vide their certificate No. 3965/M/Inv.VDIS97, the Assessing Officer treated the jewellery sold as unexplained and brought the value of it being Rs. 8,4,758/- to tax Under Section 69 of the I.T. Act. As a corollary, the capital loss of Rs. 4,02,750/- on sale of the said gold ornaments were also rejected.
7. The assessee has preferred an appeal before CIT(A) and placed reliance upon the Certificate issued Under Section 68(2) of the VDIS by the CIT with the submission that it is final and cannot be questioned by the Assessing Officer. The CIT(A) reexamined the issue in the light of Board’s Clarification but was not convinced with the argument of the assessee and he confirmed the disallowance.
8. Now the assessee has preferred an appeal before the Tribunal with the submission that the amount of Voluntarily Disclosed Income cannot be excluded in the total income of the assessee Under Section 68(2). Once the Certificate is issued Under Section 68(2) by the Commissioner of Income-tax, it is conclusive and valid declaration made by the assessee and Assessing Officer has no right to question it. In support of this plea, he placed reliance upon CBDT Circular No. 754 dated 10.06.97. He further contended that various Circulars of CBDT were issued to prevent the misuse of the Scheme. Since the assessee has sold part of the jewellery to meet the expenditure required for payment of VDIS tax, it cannot be said that assessee has misused the scheme. Whenever there was a misuse of VDIS, the CBDT had made a provision for review of the Certificate issued to unscrupulous tax payers but the addition to the returned income is not possible when the certificate issued by the CIT is in force. The ld. Counsel for the assessee further contended that the Instruction No. 3965 dated 16.10.97 is an internal communication, which was never intended to and cannot override the provisions of VDIS. Such instruction cannot become the basis of addition by the Assessing Officer when the Certificate issued Under Section 68(2) is in force and has not been revoked. In support of his contention, the assessee has relied upon the judgment of Delhi High Court in the case of Nabha Investments Pvt. Ltd. v. UOI and Ors. 246 ITR 41 and Sushilarani v. CIT 253 ITR 775(SC).
9. The ld. Departmental Representative, on the other hand, has submitted that here is not a dispute with regard to validity of the certificate issued by the CIT(A) Under Section 68(2) of the VDIS. The only dispute is whether the jewellery sold on 2nd July 1997 is a part of the jewellery declared in VDIS on 5.9.1997. The ld. Departmental Representative has invited our attention to Section 66 of VDIS 1997 with the submission that as per this section, the tax payable under this scheme in respect of voluntarily disclosed income shall be paid by the declarant and the declaration shall be accompanied by the prove of payment of such tax. Meaning thereby before filing the declaration, the assessee is required to make the payment of tax payable under the Scheme and the declaration shall be accompanied by a proof of payment. The ld. Departmental Representative further invited our attention to provisions of Section 68, according to which, the amount of voluntarily disclosed income shall not be included in the total income of the declarant for any assessment year under the I.T. Act, if the following conditions are fulfilled, namely:
i) the declarant credits such amount in the books of account, if any, maintained by him for any source of income or in any other record, and intimates the credit so made to the Assessing Officer.
ii) The income-tax in respect of voluntarily disclosed income paid by the declarant within the time specified Under Section 66 or Section 67.
10. Thereafter the Commissioner shall on an application made by the declarant grant a certificate to him setting forth the particulars of the voluntarily disclosed income and the amount of income tax paid in respect of the same. Through Section 69 & 70 it was made explicitly clear that neither the declarant is entitled to reopen any assessment or reassessment made under the Income-tax Act nor is he entitled for a refund of tax. Meaning thereby that once the declaration is made along with the proof of payment of tax, certificate to this effect issued by the CIT cannot be questioned. The declarant is entitled to credit such amount in the books of account maintained by it. If these provisions are read conjointly, only one inference would be drawn that declared amount would be credited in the books of account of the assessee. Meaning thereby, whatever taxes are to be paid on the declared amount, they are from other sources not out of sale of declared items. The ld. Departmental Representative further invited our attention to the CBDT Circular No. 753 dated 10.06.1997 through which it has been clarified that the voluntarily disclosed income shall not be included in the total income of the declarant for any assessment year if the declarant credits such amount in the books of account, if any, maintained by him or in any other record and intimates the credit so made to the Assessing Officer. If no books of account are maintained, it is expected that the declarant will make the credit in some other record. The second condition for the voluntarily disclosed income not to be included in the total income for any assessment year is that tax in respect of the disclosed amount is paid within the time specified in Section 66 or Section 67 of the Finance Act, 1997. The ld. Departmental Representative further invited our attention to the format of declaration form with the submission that assessee has to declare the assets which he held on the date of declaration. Admittedly, this declaration was filed on 5th September, 1997 and on that very day the assessee itself has declared the gold ornaments worth Rs. 22,54,390/-. If the contention of the assessee is accepted that part of the gold ornaments were sold for Rs. 8,54,758/- on 2.7.97, the declared value would have been reduced by this amount but this was not done by the assessee. Meaning thereby, 2220 gms. Of gold ornaments are not part of declared gold ornaments. Since the assessee failed to explain the source of acquisition of this gold ornaments, the revenue authorities are justified in making an addition of the same Under Section 69 of the I.T. Act.
11. Having heard the rival submissions and from a careful perusal of the record, we find that the declaration under VDIS 1997 was filed with the Commissioner of Income-tax on 05.09.1997 declaring gold ornaments worth Rs. 52,54,390/- and cash of Rs. 5,70,000/-. As per provisions of Section 66 of the Finance Act, 1997 relating to Voluntary Disclosure of Income Scheme 1997, the tax payable under the scheme in respect of voluntarily disclosed income shall be paid by the declarant and the declaration shall be accompanied by the proof of payment of such tax. Meaning thereby, before filing a declaration with the Commissioner of Income-tax under VDIS, 1997, the assessee was required to pay the tax determined under VDIS on the declared amount and proof of payment is required to be annexed along with the declaration. The provisions of Section 68 of Finance Act, 1997 further clarifies that the declared amount shall not be included in the total income of the declarant for any assessment year under the Income-tax Act when the declarants credit such amount in its books of accounts or in other record maintained by him and tax determined thereon is paid during the specified time. Meaning thereby that declared amount was considered to be voluntarily disclosed income and the tax determined thereon is required to be paid from other sources not out of that voluntarily disclosed income as this voluntarily disclosed income is credited in the books of account of the assessee raising its capital.
12. We have also carefully examined the format which is required to be filled up by the assessee while filing a declaration and from its perusal, we are of the view that while filing a declaration, the assessee has to state in the specified terms how much jewellery or cash it possess on the date of declaration. The declaration is always filed after deposition of the tax determined on the declared amount. As such, the contention of the assessee cannot be accepted that tax was paid out of the sale of part of declared jewellery. If that be the case of the assessee, the declared jewellery would have been reduced by the tax paid by the assessee but it has not been done in the disclosure form. According to assessee, the gold ornaments were sold on 2nd July, 1997 and tax was deposited on 3rd July, 1997 much before the filing of the declaration i.e. on 05.09.1997. Under these circumstances, we find no force in the contention of the assessee that taxes were paid out of the sale proceeds of part of gold ornaments declared in the VDIS Scheme. We accordingly find ourselves in agreement with the observation of the lower authorities that the taxes determined on the VDIS on declared amount was paid out of undisclosed source by the assessee. We, therefore, find no infirmity in the order of the CIT(A), who has rightly adjudicated the issue in the light of the material available on record. Accordingly, the order of the CIT(A) is hereby confirmed.
13. In the result, the appeal of the assessee is dismissed.
Order pronounced in the court on this 16th day of March, 2006.