SHRI KAILASH CHAND SONI C/O- S.L. PODDAR & COMPANY E-3A, KANTI CHANDRA RAOD, BANI PARK, JAIPUR,JAIPUR vs. ACIT CIRCLE-5, JAIPUR, CIRCLE-5, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCH ‘A’ JAIPUR Jh lanhi xkslkbZ] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 960/JP/2019 fu/kZkj.k o"kZ@Assessment Year :2014-15 cuke Shri Kailash Chand Soni ACIT, Vs. A-467, Ajmer Road, Vidyut Nagar, Circle-05, Jaipur Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AHNPS6421P vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Sh. S. L. Poddar (Adv.) jktLo dh vksj ls@ Revenue by : Sh. Rajendra Singh (JCIT) lquokbZ dh rkjh[k@ Date of Hearing : 03/10/2019 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 03/10/2019 vkns'k@ ORDER PER: SANDEEP GOSAIN, J.M. This is an appeal filed by the assessee against the order of ld. CIT(A)-2, Jaipur dated 28.06.2019 wherein the assessee has taken the following grounds of appeal:- “1. Under the facts and circumstances of the case the learned CIT(A) has erred in confirming the addition of Rs. 7,79,478/- on account of disallowance of interest expenses which are in accordance the provisions of section 57(iii) of the Income Tax Act, 1961.

2. The assessee craves your indulgence to add amend or alter all or any grounds of appeal before or at the time of hearing.”

2. Briefly stated, the facts of the case are that the assessee is an individual and derives income income from salary and commission from M/s Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur Finesse Jewels Pvt. Ltd. in addition to this. The assessee also earned capital gain income and interest income during the year under consideration. The assessee filed its return of income declaring total income of Rs. 17,04,990/- on 27.12.2014. Subsequently, the case was selected through cash for limited scrutiny u/s 143(3) of the Act and after serving statutory notices and seeking reply of the assessee. The additions/ disallowance u/s 57(iii) of the Act was made in respect of interest expenditure amounting to Rs. 7,79,478/-.

3. Aggrieved the order of AO, the assessee preferred an appeal before the ld. CIT(A) and ld. CIT(A) considering the case of both the parties dismissed the appeal of the assessee.

4. Aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us on the ground mentioned hereinabove.

5. Regarding Ground No. 1, this ground raised by the assessee relates to challenging the order of ld. CIT(A) in confirming the additions of Rs. 7,79,478/- on account of disallowance of interest expenses u/s 57(iii) of the Act.

“2.2 The relevant extract of the submission of the appellant is an under:- Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur "The assessee has taken unsecured loans from various parties during the year under consideration or in the earlier years for the purpose of advancing loans to other parties and making investment in finesse jewels Pvt. Ltd. where the assessee is director and shareholder. During the year under consideration the assessee has received total interest of Rs. 4,21,667/- from loan advanced to various parties and has shown total investment in finesse jewels of Rs. 52,29,785/- as on 31.03.2014. These funds have been raised through unsecured loans taken from various parties on which the assessee has to pay interest of Rs. 12,01,145/- during the year under consideration. Therefore it is clear that all the funds have been utilized for earning interest income or for business purpose and for no other use. The income tax return of the assessee along with the balance sheet and capital account is available herewith on paper book page no. 1 to 6 for your verification. The genuineness of the claim of the assessee is proved herewith in the following points as under:-

The Learned A.O. has stated in its order dated 20:12.2016 that the "the assessee's claim of interest expenditure of Rs 12,01,145/- u/s 57(iii) is not justifiable since expenditure is not related to exclusively and wholly for earning income of Rs. 4,21,667/- because logically no common prudent man intentionally incur loss by obtaining loans at higher rate of interest and advancing loan on either low or nil rate of interest." This statement shows the order issued by the Learned A.O. is in itself impugned and invalid as it is based on wrong facts. In actual the Learned A.O. has issued show cause notice upon the assessee on date 14.12.2016 requiring him to produce the complete details of interest expenses and interest income including rate of interests in both the case. In response to such notice the assessee has Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur provided complete details of interest paid and interest received which are reproduced herewith on paper book page no. 7 to 8. 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. The rate of interest on interest received varies from 14.40 % to 15% whereas the rate of interest on interest paid to parties varies from 12% to maximum of 15.60%. This means that the assessee has not advanced loan to parties at lower rate or with an intention to incur loss.However the Learned A.O. while passing the order u/s 143(3) has not considered the details of interest paid and interest received provided by the assessee and concluded that the assessee has advanced loans to various parties at low rate or nil rate of interest as the interest expenditure is higher than the interest income. Therefore the contention of the assessing officer is not maintainable as it is not based on correct facts. Therefore such an addition which is based on assumptions or surmises or erroneous findings needs to be deleted.

Further the assessing officer has stated in its order that ‘no prudent man intentionally incur a loss by obtaining loans at higher rate of interest and advancing loans on either low or nil rate of interest.”In this regard it is to be submitted that the assessee has not acted neligigently or carelessly while borrowing money from parties. It has even not advanced money to the parties at lower rate of interest except of M/s Finesse jewels Pvt. Ltd. which is a related concern of the assessee and such advances have been made out of commercial expediency by the assessee. In such a case the assessee has not utilized the loan amount for its personal use but the purpose of taking loan was to earn the income from the investment either in the form of interest or in the form of dividend or capital gain and therefore the interest expenditure is allowable deduction under section 57(iii) of the Act. 4 Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur Further the Learned assessing officer 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 reasonable expenditure is having regard to the circumstances of the case. Rather he must put himself 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 view point but that of a prudent businessman.

• In a decided case law theDelhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 337 (Del) • In another case of Commissioner of Income Tax V/s. Rockman Cycle Industries Private Limited reported in 331ITR 401 • In another case law ofCommissioner of Income Tax V/s. Special Prints Ltd. reported in 356 1TR 404

Further it is to be submitted that the assessee has shown loans and advance to M/s Finesse jewels Pvt. Ltd. of Rs. 52,29,785/- in the balance sheet as on 31.03.2014. Such a loan has been advanced to the company out of unsecured loans taken by the assessee from various parties. Further the loan has been advanced at nil rate of interest. It is to be mentioned here that M/s Finesse jewels Pvt. Ltd is a related concern of the assessee. Such an advance is made to the company for business purpose of the assessee. Any advance made to the otherparty for the purpose of business comes under the purview of commercial expediency. Here it is important to define commercial expediency. In a case ofC.R. Auluck& Sons Pvt. Ltd„ ... vs Assessee (ITA No. 915/Chd/2008)A.Y. 2005-06the supreme court has observed that "The expression 'commercial expediency' is an expression of 5 Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur 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 business expenditure if it was incurred on grounds of commercial expediency."

In the present case M/s Finesse jewels is engaged in the business of manufacturing of gems and jewellery. The assessee is a director and shareholder in such company and derives salary and commission income from such company. It has made investment in the company for the purpose of earning the income from the investment either in the form of interest or in the form of dividend or capital gain.

Therefore such an advance was clearly given by the assessee for the purpose of commercial expediency. Further it is to be noted that any advance made to the related/sister concern out of commercial expediency is allowable under the income tax return and any expenses claimed in respect of such advance given can be claimed as deduction u/s 57(iii) 137 of the income tax act, 1961. There are various case laws in support of the assessee’s contention. Some of them are as follows:- The issue as to whether an assessee, who had borrowed funds carrying interest and advanced part thereof to its sister concern on interest free basis, can claim deduction to that extent was considered by Hon'ble the Supreme Court in SA Builders Limited's case. In the aforesaid case, Hon'ble the Supreme Court opined that the tax authorities must not look at the matter from their own view point but that of a prudent businessman. In case, it is found that transfer of borrowed funds to a sister concern was on account of commercial expediency even if the same is interest free, the deduction claimed by the assessee cannot be disallowed. Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur • In another case ofDelhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 337 (Del) • In another case of Commissioner of Income Tax V/s. PankajMunjal Family Trust reported in 326 ITR 286, • The decision of the Hon'ble Apex Court rendered in the case of Vodafone International Holdings B. V. V/s. Union of India &Anr. reported in 341 ITR 1 (SC) • Hon'ble the Supreme Court in the case of Commissioner of Income Tax v. Rajendra Prasad Moody, (1978) 115 ITR 519.

In order to decide whether expenditure is a permissible deduction u/s 57(iii), following things must be considered in mind:-

(1) expenditure must not be in the nature of capital expenditure or personal expenses of the assessee; (2) The expenditure must have been laid out or expended wholly and exclusively for the purpose of making of earning "income from other sources"; (3) The distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing the mind of the assessee in incurring the expenditure; (4) If the assessee has no option except to incur the expenditure in order to make the earning of the income possible, such as when he has to incur legal expenses for preserving and maintaining the source of income, then undoubtedly, such expenditure would be an allowable deduction; however, where the assessee has an option and the option which he exercises has no 7 Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur connection with the making or earning of the income and the option depends upon personal considerations or motives of the assessee, the expenditure incurred in consequence of the exercise of such option cannot be treated as an allowable deduction; (5) It is not necessary, however, that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not of necessity and with a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the making or earning of the income; (6) If, therefore, it is found on application of the principles of ordinary commercial trading that there is some connection, direct or indirect, but not remote, between the expenditure incurred diZilieeMayne earned, the expenditure must be treated as an allowable deduction; (7) It would not, however, suffice to establish merely that the expenditure was incurred in order indirectly to facilitate the carrying on the activity which is the source of the income; and nexus must necessarily be nexus must necessarily be between the expenditure incurred and the income earned; (8) It is not necessary to show that the expenditure was a profitable one or that in fact income was earned; (9) The test is not whether the assessee benefited thereby or whether it was a prudent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bonafide for making or earning the income; (10) The question whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being on of law. Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur Further it is to be submitted that Clause (iii) to section 57 makes admissible the deduction of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income (income chargeable under the head "income from other sources'). This means section 57(iii) provides for deduction only of expenditure incurred wholly and exclusively 'for the purpose of making or earning such income". In order that expenditure may be admissible under section 57(iii), it is necessary that the primary motive of incurring it is directly to earn income falling under the head "income from other sources". The plain natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qual0, the expenditure for deduction it does not say that the expenditure shall be deductible only if any income is made or earned (CIT vs. Rajendra Prasad Moody (1978), Taxation 51 (3)-52, 115 ITR 519 (SC) : CIT vs. MurliManohar (1998) IX SITC 673 (All): CIT vs. Rampur Tirnber&Turney Co. Ltd. (1981) 129 ITR 58 (All.) : CIT vs. Administrator General of Madras (1998) 142 Taxation 85 (Mad)).

There is case law RoshanSethia, Mumbai vs Assessee on 15 May, 2015 A.Y. 2009-10in which the ITAT, Mumbai has given decision in favor of the assessee which is similar to the present case:-

Here in this case the assessee disclosed interest income of Rs.23,64,399/- under the head "Income from other sources" whereas the assessee has debited the interest paid to various parties amounting to Rs.43,88,240/- and clubbing interest income of Rs.41,23,008/-. The AO disallowed interest Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur expenditure to the extent of Rs.35,88,438/- on the ground that the assessee has used the interest bearing fund for giving interest free loan to Mrs. Tara Lodha as well as for making investment in shares. The AO also observed that the loans were utilized for acquiring controlling interest in M/s. SimDiam P. Ltd and therefore the interest is not allowable in view of the judgment of Hon'ble Jurisdictional High Court in the case of "CIT vs. Amritaben R. Shah" 238 ITR 777.

It is to be noted that the assessee has borrowed fund and invested the same by either giving loan or investment in the shares of the group concern as well as shares of the other listed companies from which it could earn interest income, dividend income and capital gain on sale of such shares. The investment in the shares of M/s. SimDiam P. Ltd which is a closed company of the assessee was in fact loan which was converted into the capital. The assessee has invested the amount by giving loan to the said company on which the assessee earned interest income in the earlier years. However, in the year under consideration the said loan was already converted into the share capital, therefore the interest which was earned in the earlier year could not be earned during the year under consideration. The Ld. A.R. has contended that earning income from the expenditure incurred is not a ShriRoshanSethia condition for allowing the deduction under section 57(iii) of the Act. It is only for the purpose of making or earning of income which is required for allowing the deduction under section 57(iii) and not the actual income earned by the assessee. He relied upon the decision of "CIT vs. Rajendra Prasad Moody".

After hearing the plea of both the parties the honorable ITAT, Mumbai has given the decision in favour of the assessee by relying on the decision of the judgment of Hon'ble Jurisdictional High Court in the case of "CIT vs. Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur Darashaw& Co. Pvt. Ltd." and judgment of Hon'ble Madras High Court in the case of "CIT vs. M Ethurayan".

A similar view is taken by the Hon'ble Madras High Court in the case of "CIT vs. M Ethurajan" (273 ITR 95 (Mad) In the present case also the assessee has provided the learned assessing officer with the bank statements in which it is clearly visible that the funds raised from the unsecured loan taken from various parties is utilized for lending money to various parties. It means that the interest paid on unsecured loans is expended wholly and exclusively for earning the interest income from loans and advances. In addition to that the assessee has advanced money to its sister concern M/s finesse jewles Pvt. Ltd. at nil rate of interest for the purpose of earning the income from the investment either in the form of interest or in the form of dividend or capital gain which will be assessed under the head "Income from other sources" in the year when it is earned. It is immaterial whether the assessee has made profit out of such expenditure or not. For claiming deduction u/s 57(iii) of the income tax act it would be sufficient to prove that there is nexus between the income earned and amount expended. Therefore here in the case of the assessee as all the requirements for claiming deduction u/s 57(iii) of the income tax act, 1961 are fulfilled, assessee can avail the full deduction u/s 57(iii). The bank statement of the assessee showing the inflow of funds from unsecured loan parties and outflow of funds to loans and advances parties is available herewith on paper book page no. 9 to 14. However the Learned A.O. has not considered section 57(iii) of the income tax act and term commercial expediency together and has contended that the expenditure is not related wholly and exclusively for earning income of Rs. 4,21,667/- only because the assessee has advanced loan to one party at nil rate of interest out of commercial expediency. In actual such loans and advances which are provided at low or nil rate of interest out of commercial 11 Shri Kailash Chand Soni, Jaipur Vs. ACIT, Jaipur expediency does not affect the nature of transaction and the interest expense would still be eligible to be claimed by the assessee u/s 57(iii) if such expenditure is wholly and exclusively laid out for earning the income under 'income from other sources". In the present case also since the advance to M/s finesse jewels Pvt. Ltd. are made at nil rate of interest out of commercial expediency, it won't affect the nature of interest expenditure to be personal and is eligible to be claimedas deduction u/s 57(iii) as it is laid out wholly and exclusively for earning interest income by the assessee."

In the result, appeal of the assessee is allowed with no order as to cost.

Order pronounced in the open Court on 03/10/2019.