MUKUL GUPTA,NEW DELHI vs. ITO WARD - 61(2), NEW DELHI

The sum and substance of the grievance of the assessee is that the CIT(A) erred in upholding the addition of Rs.1429758/-by restricting the interest expense only to the extent of income earned under section 57 of the Act.

Assessee is a Chartered Accountant by profession. During the course of scrutiny assessment proceedings the AO noticed that the assessee has borrowed Rs.4,50,91,200/- from M/s. Y. K. Gupta Co. in which he is a partner and has paid interest of Rs.54,06,032/-. The AO further noticed that the assessee has extended a loan of Rs.6,37,49,869/- to M/s. Smartest Corporate Services Pvt. Ltd. from which he had received interest of Rs.3976274/- which was claimed deductions u/s.57 of the Act.

The AO was of the opinion that on borrowed funds the assessee has paid interest of Rs.54,06,032/- whereas the assessee has received interest much less from the loan given by him. The assessee was asked to explain as to why the interest of Rs.1429758/- should not be taxed under income from other sources at the same cannot be allowed as income u/s.57 (iii) of the Act. Assessee filed reply which was not accepted by the AO to concluded the assessment proceedings by making addition of Rs.1429758/-.

Assessee agitated the matter before the CIT(A) and strongly contended that the entire amount of Rs.4.50 crores borrowed from M/s. Y. K. Gupta & Company was given as loan to M/s. Smartest Corporate Services Pvt. Ltd. the entire interest paid on Rs.4.50 crores should be allowed as expenses u/s. 57 (iii) because the said expenditure was incurred wholly and exclusively for the purpose of earning interest income from M/s. Smartest Corporate Services Pvt. Ltd.

After considering the facts and the submissions the CIT(A) held as under :-

Before me the counsel reiterated what has been stated before the lower authorities and the DR strongly supported the assessment order and order of the CIT(A).

I have carefully considered the orders of the authorities below. As mentioned elsewhere the assessee is a Chartered Accountant. The assessee borrowed Rs. 4.50 crores from M/s. Y.K. Gupta & Co. a firm of Chartered Accountants wherein the assessee is a partner the assessee extended loan of Rs.6.3 crores to M/s. Smartest Corporate Services Private Limited the assessee is claiming interest paid as deduction from interest received on the ground that interest expenses were incurred wholly and exclusively for the purpose of earning interest income. I fail to understand this transaction of the assessee. The assessee is a practicing Chartered Accountant and is not engage in money laundering business. There is no dispute that the assessee has borrowed the money from his firm for the purposes of his profession. The assessee in his wisdom borrowed money at a higher rate of interest and lended the same at a lower rate of interest. In my considered opinion the AO should have disallowed the entire interest claimed by the assessee but I cannot improve the assessment order nor I can improve the order of the CIT(A). In my considered opinion borrowing money at a higher rate of interest from a related party and lending the same at lower rate of interest to an unrelated party defies all commercial prudence expected from a Chartered Accountant. Surrounding circumstances cannot be ignored.

Considering the facts of the case in totality I decline to interfere with the findings of the CIT(A). The appeal filed by the assessee is dismissed.

In the result, the appeal filed by the assessee is dismissed.