AKASH GOYAL,AGRA vs. ACIT CIRCLE 1(1)(1), AGRA

IN THE INCOME TAX APPELLATE TRIBUNAL AGRA BENCH, AGRA

BEFORE SHRI LALIET KUMAR, JUDICIAL MEMBER, AND DR. MITHA LAL MEENA, ACCOUNTANT MEMBER

I.T.A No. 234/Agra/2018 (ASSESSMENT YEAR: 2015-16)

Akash Goyal, 1/173-B, Bagh Farzana, Vs.. ACIT-Circle 1(1)(1), Civil Lines, Agra. Agra. PAN: ABVPG6220A (Appellant) (Respondent)

Appellant by Shri Navin Gargh, Adv. Respondent by Shri Waseem Arshad, Sr. DR.

Date of Hearing 10.10.2019 Date of Pronouncement 04.11.2019

ORDER Per Dr. M. L. MEENA, A. M.:

This appeal is directed by the assessee against the order dated 31.01.2018 passed by the Commissioner of Income Tax, (Appeals)-1, Agra, [herein after referred to as “the CIT(A)”], in respect of Assessment Year 2015-16, challenging the confirmation of addition of Rs.49,38,149/- in respect of disallowance of assessee’s claim of deduction u/s 57 (iii) of Income Tax Act. 2. The sole issue embedded in multiple grounds of appeal pertains to whether the deduction claimed by the assessee u/s 57 (iii) of the IT Act in respect of interest

2 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

expenses of Rs.49,38,149/- under the head income from other sources is legally allowable to the assessee ? 3. Briefly stated facts are that the assessee is an individual who has shown income from house property of Rs. Nil, interest and remuneration from partnership firm at Rs.2,03,113/- and interest income of Rs.29,45,261/- in his return of income. The AO has completed assessment at Rs.79,42,679/- as against the returned income of Rs.30,04,530/- u/s 143(3) of IT Act vide order dated 07.12.2017 wherein the only addition of Rs.49,38,149/- was made by the AO by disallowing the assessee’s claim of deduction of interest u/s 57(iii) of the Act against the interest received by him. 4. Aggrieved assessee went in appeal before the ld. CIT(A) he has confirmed the addition made by the AO by observing vide para nos. 7.5 to 7.9 as follows: “7.5 Having considered the appellant’s grounds of appeal, submissions, and facts of the case in light of the provisions of section 57(iii) and the interpretation of the same by some of the highest judicial authorities, I have reached to the conclusion that no deduction under section 57(iii) is allowable to the appellant. It is true that no question has been raised by the A.O. as regards the nexus of the interest expenses with the interest income earned by the appellant. But a mere perusal of the provisions of that section reveals that fulfilment of this

3 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

condition, in itself, is not sufficient to make an expense deductible under section 57(iii). The basic and foremost condition for allowability under section 57(iii) is that the said expense is expended or laid down for the purpose of making or earning income against which it is claimed as deduction. In the present case the interest rate at which loans were given to the sister concerns is either equal or less than the rate at which funds were borrowed by the appellant. Hence, there can be no question of earning any positive income out of the loan transactions entered into by the appellant. The second essential condition for allowability of deduction under section 57(iii) is that the said expense should be laid out or expended wholly and exclusively for the purpose of making or earning income against which it is claimed as deduction. In the present case, the borrowed funds have been given to four private limited companies, in all of which he and/or his family members are directors or major stakeholders. No purpose of giving the loans to the four companies has been specified by the appellant during the assessment proceedings or during the present proceedings But, on an appreciation of the fact that all these companies are part of his group, it can be fairly concluded that the provision of funds was made by him so as to allow them to conduct their respective business activities. This would mean that the interest expenses, in question incurred by the appellant

4 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

were not expended wholly and exclusively for the purpose of making or earning interest income. Further, as in the case of Commissioner of Income Tax vs Smt. Swapna Roy (supra), in the appellant’s case, too, the condition precedent to avail the benefit of s. 57(iii) of the Act viz. the investment must be proper and justified is not satisfied. In paragraph no. 68 of its order, after referring-to and relying upon the judgment of the apex court in the case of CIT vs Rajendra Prasad Moody (supra), Hon’ble Allahabad High Court has concluded that “proper investment means correct investment with intention to earn profit. Since the appellant has not brought out any fact to support the contention that the funds were given to the four companies with the intention to earn positive income, the above judgments of the Hon’ble jurisdictional High Court and the apex court relied upon by the former in this context, go against his claim of deduction under section 57(iii). The appellant’s argument that he has claimed deduction on a proportionate-basis and not in full, does not help his cause. This is so because such an argument does not have any bearing in the context of deductibility under the provisions of section 57(iii). If the intention to earn income is missing in any such expenditure, no deduction under section 57(iii) can be allowed even if it is not claimed in full. It will be prudent to note that the loan taken by the appellant from India Bulls Housing Finance Ltd. was for the purpose of

5 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

acquiring some immovable property. Hence, it can be easily observed that the claim of interest of Rs.14,46,688/- out of the total claim of deduction of Rs. 49,38,149/- that was in relation to the loan from India Bulls Housing Finance Ltd., cannot be allowed as deduction under section 57(iii) because its intent, purpose and use was not to earn interest-income. However, there is nothing on record that can substantiate his contention that these loans were taken by the appellant for the purpose of lending funds to his sister concerns The appellant’s reliance on the three judgments, in my 7.6 opinion, is not supported by the facts of his case. In none of the three judgments the ratio supports the argument that if the appellant has incurred any expense that has not been made for the purpose of making or earning of income, the same should be allowed as deduction under the provisions of section 57(iii). 7.7 Further, the appellant has argued that since his claim of deduction under section 57(iii) was allowed in the immediately preceding A.Y., the A.O should allow it in the impugned year. I do not find any merit in this argument because the question of allowability of an expense under section 57{iii) has to be decided on the basis of facts pertaining to the year in question, and also if any mistake has been committed in the assessment order in an earlier year, the A.O. is well within his powers to rectify it or initiate action for rectification taking resort to sections 154/148 or section 263 of the Act.

6 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

7.8 The last argument of the appellant (contained in his ground no. 1.3), is that the claim of deduction under section 57(iii) is less than the quantum of interest earned by the appellant and so no disallowance out of it can be made This argument has not been elaborated upon by the appellant. However, in the context of section 57(iii), I do not find any relevance of the fact that the claim of deduction of interest under section 57(iii) was lower than the quantum of income earned by the appellant. 7.9 Hence, in light of the above discussion and in respectful compliance of the judicial precedents, particularly those rendered by the Hon’ble jurisdictional High Court in the case of Commissioner of Income Tax vs Smt. Swapna Roy (supra), and by the Hon’ble Supreme Court in the case of CIT vs Rajendra Prasad Moody (supra), I am of the firm opinion that the appellant had incurred interest expenses not with the purpose of earning or making income and the loans given by him to his sister concerns were also not given for the purpose that can be held to be wholly and exclusively for the purpose of earning interest income. The provisions of section 57(iii), in such circumstances, would not come into play and the deduction of Rs. 49,38.149/-, claimed by the appellant under that section, is therefore not allowable. The addition of Rs. 49,38,149/- is accordingly confirmed. Grounds no. 1.1, 1.2, 1.3, 1.4, 1.5 and 1.6 are decided accordingly and are dismissed.”

7 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

He submitted that asseessee is an individual and has no business income; that he

has interest income as shown under the head income from other sources; that he

has claimed deduction on a proportionate-basis and not in full, and in the instances

of excess payments, he has himself disallowed the interest payments on

proportionate in the instances wherever payments were made to related concerns

on case to case basis. The ld. AR argued that as per provisions of section 57(iii),

the intention is apparently that such expenditure incurred by the assessee to earn

income and it is conclusively proved. Thus, deduction under section 57(iii) can be

allowed even if it is not claimed in full. In support, he relied upon the decision of

Rajendra Prasad Moody (SC) on 57(iii). The Counsel contended that the ld.

CIT(A) has misplaced reliance on the case of Smt. Swapna Roy (All HC), CLPB,

Pg 76. In that case there was no income in the past, whereas in the present case, the

assessee has income in the earlier years.

that the loans/funds have come from different pool without purpose; that the

assessee was required to explain how these were incidental to the earning of the

income from other sources.

8 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

from third parties and Financial Institutions and advanced the same to the related

parties either at equal interest rates or lower rates. The ld. CIT(A) has mentioned

that the conditions for allowability under section 57(iii) is that whether the said

expense was expended or laid down for the purpose of making or earning income

against which it was claimed as deduction, and since the loans were given to the

sister concerns either at either equal rates or less than the rate at which funds were

borrowed by the assessee and therefore, there can be no question of earning any

positive income out of the loan transactions entered into by the appellant assessee.

The Ld. CIT(A) has further observed that for allowability of deduction under

section 57(iii) it is essential that the said expense should be laid out or expended

wholly and exclusively for the purpose of making or earning income against which

it is claimed as deduction where in the present case the borrowed funds have been

given to four private limited companies, in all of which he and/or his family

members are directors or major stakeholders and that no purpose of giving the

loans to the four companies has been specified by the appellant either before the

authorities below or during the present proceedings. However, on an appreciation

of the fact, it can be fairly concluded that the funding was made to the four related

family concerns/companies on interest by the assessee so as to allow aforesaid four

companies to conduct their respective business activities. Meaning thereby that the

9 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

interest expenses, in question incurred by the appellant were expended wholly and

exclusively for the purpose of earning interest income.

interest received were reproduced before the AO and such details have

already been mentioned by the assessee in paper book. There are a few instances of

payment of comparatively higher interest than what the assessee received.

However, the assessee himself has disallowed the excess payment of such amount

of interest on those borrowed funds before debiting its legitimate claim of

expenditure u/s 57(iii) of the act which has not been not been appreciated in

positive spirit by the authorities below according to us. Thus, we conclude that the

assessee has not

advanced loan to parties at lower rate with an intention to incur losses as held by

the ld. CIT(A) to benefit the related four family companies. We further find that

the Learned A.O. while passing the order u/s 143(3) has neither

considered the details of interest paid and interest received provided by the

assessee and nor established any nexus between the amount of interest paid and the

amount of interest received on such advanced and borrowed funds to the sister

concerns particularly the funds advanced out of none of the four parties disputed

and concluded that the assessee has advanced loans to various parties at low rate or

10 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

equal rate of interest as the interest expenditure is higher than the interest income.

In view of that matter, the contention of the assessing officer is not maintainable as it is not based on correct facts and the Ld. CIT(A) was not justified in confirming the finding of the AO without ascertaining all the facts of the case.

Pvt. Ltd. which is related concern of the assessee and such advances have been made out of necessity by the assessee. It is admitted fact that nowhere, AO had pointed out that the assessee had utilized the loan amount for its personal use or claimed bogus expenditure in the garb of interest

expenses. 10. We are of the view that it is not necessary that the expenditure incurred must have been obligatory; it is enough to show that the money was

expended not necessary with a view to an immediate benefit to the assessee but voluntarily and on the ground of necessity and in order indirectly to facilitate the making or earning of the income.

(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

11 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

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), if it is proved that the primary motive of incurring such interest expenses is directly to earn income under the head "income from other sources". 11. The natural construction of the language of section 57(iii) of the Act, irresistibly leads to the conclusions that to bring a case within purview the 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 qualify, the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. Similar view is held in the cases of “CIT vs. Rajendra Prasad Moody”, (1978), Taxation 51 (3)-52, 115 ITR 519 (SC); CIT vs. Murli Manohar (1998) IX SITC 673 (All); CIT vs. Rampur Tirnber & Turney Co. Ltd. (1981) 129 ITR 58 (All.) 12. We have noted that the assessee had borrowed fund and invested the same for giving loan to the sister concerns from which it could earn interest income. The assessee had invested the amount by giving loan to the related concerns on which the assessee earned interest income in the earlier years.

12 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

However, in the earlier years on the said loan no such addition was made by the AO. The Ld. A.R. has contended that earning income from the expenditure incurred is not a condition precedent 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”, (Supra) and and “ACIT Vs. Sanjeev Agrawal” ITAT Delhi Bench, ITA No. 3418/Del/2011 (Asst Year 2006-07).

13 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

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. In view of that matter, all the requirements for claiming deduction u/s 57(iii) of the income tax act, 1961 are fulfilled and therefore assessee’s claim of interest of Rs.49,38,149/- laid out “wholly and exclusively” for the purpose of earning interest shown under the head “Income from Other Sources” can be legally allowed u/s 57(iii) of the Act.

14 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

further the department has accepted such a practice adopted by assessee in the past

assessment years. Under the circumstances, the intention to earn interest is disputed by

either of the subordinate authorities or adversely commented by the ld. CIT (A) or

controverted by the ld. DR and therefore, such interest expenditure, deductible under

section 57(iii) can be allowed even if it is not claimed in full by the assessee in the

peculiar facts of the case at hand.

precedents, we accept the grievance of the assessee justified. Accordingly, we allow

the claim of Rs. 49,38.149/- u/s 57(iii) of the Act, as legally justified. Thus, the ground

of appeal is allowed.

Order pronounced in the open court on 04/11/2019.

Sd/- Sd/- (LALIET KUMAR) (DR. MITHA LAL MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER *AKV/DOC* Copy forwarded to: 1. Assessee 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT Sr. Private Secretary

15 I.T.A No. 234/Agra/2018 ASSESSMENT YEAR: 2015-16

ITAT AGRA