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Income Tax Appellate Tribunal, JODHPUR BENCH,
IN THE INCOME TAX APPELLATE TRIBUNAL, JODHPUR BENCH, JODHPUR BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER AND SHRI MANOJ KUMAR AGGARWAL ACCOUNTANT MEMBER ITA No. 264/JODH/2017 (Assessment Year 2013-14) Shri Rameshwar Lal Samdani, Vs. I.T.O., D-43, Shastri Nagar, Bhilwara Ward-3, (Raj)-311001. Bhilwara. PAN No. ADQPS 6311 K Assessee by Shri Ajay Moondra Revenue by Shri K.C. Badhok, CIT-DR Date of Hearing 03.11.2020 Date of Pronouncement 29/01/2021
O R D E R PER: BENCH This is the appeal filed by the assessee against the order of the ld. CIT(A), Ajmer dated 11/04/2017 for the AY. 2013-14 in the matter of order passed U/s 143(3) of the Income Tax Act, 1961 (in short, the Act).
The hearing of the appeals was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic.
The only issued involved in the present appeal is that the assessee is basically aggrieved by the order of the ld. CIT(A) in confirming the disallowance of Rs. 8,91,535/- on account of deduction claimed u/s 57 of the Act on account of interest paid. In this regard brief fact of the case is
2 ITA 264/Jodh/2017 Sh. Rameshwar Lal Samdani Vs ITO that the assessee has claimed deduction of interest paid of Rs. 891535/- u/s 57 of the Act against the interest income received from various parties to whom advances has been given. It was contained that the funds so received as loans from various parties has been utilized for advances to other parties for earning of interest on higher rate. Being not convinced with assessee’s contention, the AO disallowed the entire interest expenditure U/s 57 of the Act, by observing as under: “Therefore in view of the facts stated above, it is clear that the asessee has failed to establish that the interest expenses claimed during the year have been out or expended wholly and exclusively for the purpose of earning interest income. No nexus has been proved by the assessee as regards the interest income and interest expenses. Thus in view of the facts discussed above the deduction claimed u/s 57 of the I.T. Act of Rs. 8,91,535/- is hereby disallowed and added back to the total income of the assessee.”
Being aggrieved by the order of the AO, the assessee carried the matter before the ld. CIT(A), who by the impugned order, has confirmed the disallowance made by the Assessing Officer after observing as under: “4.3 I have gone through the assessment order, statement of facts, grounds of appeal and written submission carefully. It is seen that either during the course of assessment proceedings or appellate proceedings, the assessee has not been able to show that the interest of Rs. 8,91,535/- was expended wholly and exclusively for earning the interest income of Rs. 11,05,286/-. The
3 ITA 264/Jodh/2017 Sh. Rameshwar Lal Samdani Vs ITO appellant has not furnished any Fund Flow Statement of Balance Sheet to show the nexus, if any, of interest bearing borrowed funds with the interest earning advances. Deduction u/s 57(iii) if admissible only in respect of expenditure expended wholly and exclusively for the purpose of earning the income referred in section 56. As the appellant has failed to show with the help of any documentary evidence that the interest of Rs. 8,91,535/- was expended by him wholly and exclusively for the purpose of earning the interest income of Rs. 11,05,286/-, therefore the disallowance of Rs. 8,91,535/- made by the AO is hereby confirmed.”
Now the assessee is in appeal before us against the impugned order of the ld. CIT(A). The ld AR for the assessee drew our attention towards the fact that during the course of assessment proceeding the AO has asked in respect of interest income received and the deduction claimed by me u/s 57 of the Act. In response to such the assessee have submitted all the documentary evidence and also explained before AO that we have engaged in the business of money lending and during the year under consideration received interest from parties amounting to Rs. 11,05,286.00 against which we had claimed interest expenses of Rs. 8,91,535.00 u/s 57 of the act and net interest income of Rs. 2,13,751.00 was duly offered for taxation in the computation of income. The expenditure claimed by us is allowable as per provisions of section 57 of the Act and used for the purpose of business only as it constitutes an admissible deduction as per the provision of law. The complete details of interest payable and interest receivable are placed on
4 ITA 264/Jodh/2017 Sh. Rameshwar Lal Samdani Vs ITO record. In such details it can be clearly seen that the rate of interest on interest received by the assessee on loans advanced is no lower than rate of interest on interest paid to unsecured loan parties. This means that the assessee has not advanced loan to parties at lower rate or with an intention to incur loss. However, the complete documentary evidence available on record proved beyond the doubt that the unsecured loan obtained by me from parties was utilized wholly and exclusively for earning the interest income from loans and advances given to parties. Further another observation made by AO that there is no nexus between loan received and loan given was established therefore deduction under sec 57 can be allowed. Regarding the same it is submitted that the interest which the assessee is liable to pay on the amount borrowed for the purpose of making investments is undoubtedly an expenditure laid out or expended wholly and exclusively for the purpose of making or earning income chargeable under the head "Income from other sources". It was urged that, applying the test of commercial expediency, the expenditure, deduction whereof is allowable under section 57(iii), may have a direct or indirect connection with the making or earned of such income. If the assessee has bona fide and voluntarily incurred expenditure out of commercial expediency, the expenditure is deductible and it is immaterial whether it is beneficial for the assessee to incur such expenditure or whether it is expedient on his part to
5 ITA 264/Jodh/2017 Sh. Rameshwar Lal Samdani Vs ITO do so. It is important to note that we have submitted the details of Interest paid and Receipt along with confirmation of all the depositors and most of them are income tax assessee, we have also filed the copy of return in which they have shown the interest income received from assesseee. The AO has not doubted on genninusses of the creditors hence the interest paid to them cannot be disallowed. The AO has not brought on record any material or evidences to substantial his allegation that the amount of borrowed fund on which interest payment has been paid were not used in the earning of interest income. It is settled law that no tax liability can be cast upon assessee on the basis of assumption & presumption. Further in support of above submission reliance is placed on the decision of Hon'ble Supreme Court in the case of S.A. Builders Limited v/s CIT reported in 288 ITR 0001, Seth R. Dalmia Vs. CIT reported in 110 ITR 644 (SC) and CIT v/s Rajendra Prasad Moody, 115 ITR 0519 (SC) and Eastern Investments Ltd. v/s CIT reported in 20 ITR 1, 4 (SC). The Hon'ble Supreme Court in the case of S.A. Builders v/s CIT reported in 288 ITR 0001. The Hon'ble High Court held as under: -
"16. We have considered the submissions of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct.” ….
6 ITA 264/Jodh/2017 Sh. Rameshwar Lal Samdani Vs ITO 31. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister-concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 6. In Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SC) 375 AIR 1979 SC 1291, this Court held that the expression "for the purpose of business" occurring under the provision is wider in scope than the expression "for the purpose of earning income, profits or gains", and this has been the consistent view of this Court.
No doubt, as held in Madhav Prasad Jatia vs. CIT (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under s. 36(1)(iii) of the Act. In Madhav Prasad’s case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee’s deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a
7 ITA 264/Jodh/2017 Sh. Rameshwar Lal Samdani Vs ITO case could not be allowed, as it could not be said that it was for commercial expediency. 7. Thus, the ratio of Madhav Prasad Jatia’s case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under s. 36(1)(iii) of the Act. It has been repeatedly held by this Court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" vide CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC), CIT vs. Birla Cotton Spinning & Weaving Mills Ltd. (1971) 82 ITR 166 (SC), etc.
The ld AR of the assessee further stated that the AO as well as the CIT (A) has without appreciating the fact and material on record as stated above has disallowed the interest expenses.
On the other hand, the Ld CIT-DR has relied upon the orders of the lower authorities.
We have considered the rival contentions and carefully gone through the orders of the authorities below and we found that the assessee has taken loan from various partner. The fact that the interest was charged with respect to the loan so taken, had not been denied by the Assessing Officer. The Assessing Officer has declined claim of asessee has failed to establish that the interest expenses claimed during the year have been out or
8 ITA 264/Jodh/2017 Sh. Rameshwar Lal Samdani Vs ITO expended wholly and exclusively for the purpose of earning interest income. No nexus has been proved by the assessee as regards the interest income and interest expenses. There is no dispute to the well settled legal proposition that the expenditure incurred for earning the interest income is to be allowed against the same. In the instant case, it is claim of assessee that the amount so borrowed from various parties was utilized in advancing the same for earning interest income. The assessee is also demonstrated that he has earned substantial interest income out of such advances. Before allowing the interest expenditure against the interest income, the burden is on the assessee to prove that the amount so borrowed has been actually and directly used for the purpose of advancing loan on which interest income has been earned. One to one link is required to be established in respect of utilization of interest bearing funds so borrowed. In the present case the assessee has discharged its burden and proved the burden by submitting the statement of nexus regarding interest received and paid placed on paper book page no 8 to 10, the same has not been contradict by the Ld AO and Ld CIT (A). Further, we find that the confirmations of all the parties from loans have been taken has also been submitted before the AO as well as the CIT (A) along with copy of return and other related documents which are placed at paper book page no 11 to 77. However,
9 ITA 264/Jodh/2017 Sh. Rameshwar Lal Samdani Vs ITO there is no finding by the lower authorities that the interest earned out of advances were not out of interest bearing funds taken from various parties.
The Hon’ble Gujarat High Court in the case of Vimati Ramakrishana V/s CIT (1981)131 ITR 659 has observed in respect of deduction of an expenditure U/S 57 cited in order to decide whether and expenditure is a permissible deduction U/S 57, the nature of the expenditure must be examined secondly the nature must not be in the nature of capital expenditure or personal expenses of the assessee and third the expenditure must have been laid out or expended wholly and exclusively for the purpose of earning “ Income from other Sources” and also decided that the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred. In fact, in the present case the nexus of transaction for earning of income against expenditure we have well proved. Further in respect of any transaction and connection between the expenditure and earning of income need not be direct and it may be indirect but in the present case the expenditure here to made and incurred for the earning of income directly so the nexus between the expenditure and earning of the income as interest well proved well decided in the case of Addl.CIT V/s Madras Fertilisers Ltd (1980) 122 ITR 139 (Mad.), Vijaya Laxmi Sugar Mills Ltd V/s CIT (1991) 191 1TR 641 (SC), CIT
10 ITA 264/Jodh/2017 Sh. Rameshwar Lal Samdani Vs ITO V/s Dwarka Chit Funds P Ltd (1996) 132 Taxation 109 (Mad.), CIT V/s K P Madan Mohan (1997) 136 taxation 506 (Mad.).
In view of the above facts and circumstances, discussion made above and the case laws relied upon, we direct AO to allow the interest paid of Rs. 8,91,535/- u/s 57 of the Act. Hence the ground of appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed. Order pronounced under Rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962 by placing the details on the notice board.
Sd/- Sd/- (MANOJ KUMAR AGGARWAL) (SANDEEP GOSAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER Jodhpur Dated 29/01/2021 *Ranjan Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT (A) 5. The DR 6. Guard File
Assistant Registrar Jodhpur Bench