SH. RAJEEV SINGAL,LUDHIANA vs. ACIT, LUDHIANA

PER BENCH:

The captioned appeals have been preferred by two different assessees against separate orders dated 20.1.2015, 11.11,2016, 20.1.2015, and 11.11.2016 of the Commissioner

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of Income Tax (Appeals)-2, Ludhiana [hereinafter referred to as CIT(A)], passed u/s 250(6) of the Income Tax

Act,1961(hereinafter referred to as “Act”) The assessment

years involved in all the appeals are A.Y 2011-12 and A.Y

2012-13. It was common ground between both the parties that the issue involved in all the appeals is identical. They were therefore heard together and are being disposed off by this consolidated common order.

For the sake of convenience we shall be dealing with the facts in the case of ITA No.262/Chd/2015 relating to assessment year 2011-12 and our decision rendered therein

will apply mutatis mutandis to other appeals also.

ITA No.262/Chd/2015(A.Y.2011-12):

“(1) That order passed u/s 250(6) of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Appeals)-II, Ludhiana is against law and facts on the file in as much he was not justified to arbitrarily uphold the disallowance of Rs. 95.73.276/- out of total disallowance of Rs. 1,49,62,428/- made by the Ld. Assessing Officer u/s 57 out of interest account.”

declaring total income of Rs. 1,55,36,200/- was filed on 30.09.2011. The assessee derives income from capital gains

and income from other sources. During the course of 3 A.Y.2011-12 A.Y.2012-13 A.Y.2011-12 A.Y.2012-13

assessment proceedings A.O. noted that the assessee had claimed interest expenses of Rs. 1,49,62,428/- against

interest income of Rs. 1,52,77,082/-. The A.O. asked the assessee to explain how each of these expenses claimed had been incurred wholly and exclusively towards earning

income. The assessee submitted that he had raised loans

from various parties/banks as overdraft facilities in the past

more than 4 to 5 years which was introduced by the assessee

with his family concerns namely M/s Janpath Estates Pvt.

Ltd. M/s Eastman Impex, M/s JVR Forgings Ltd. etc. That Over a period of time some of the loans were repaid and taken from some other parties. That after having number of entries in these 4 to 5 years, at present it was not possible

for the assessee to establish any nexus of interest paid

against earning of interest income. Keeping in view the submissions made by the assessee the A.O. asked the assessee to explain why interest expenses claimed may not be disallowed us 57 of the I.T. Act. The A.O. considered the reply of the assessee. Thereafter referring to the provisions

of Section 57, which provide that deduction would be allowed only if expenditure is laid out or expended wholly

and exclusively for the purpose of earning income, the A.O.

pointed out that there had to be a direct and complete nexus

between income and the expenditure so as to claim

deduction u/s 57. In this regard the A.O. pointed out that 4 A.Y.2011-12 A.Y.2012-13 A.Y.2011-12 A.Y.2012-13

the assessee had himself admitted in the letter dated

receipts of Rs. 1,52,77,083/-, Rs. 1,51,99,859/- had been received from M/s Janpath Estates Pvt. Ltd. The A.O. further

pointed out that the ledger of the assessee in the books of M/s Janpath Estates also showed that significant amount of payment made to M/s Janpath Estate Ltd. was during the year under consideration. The A.O. further pointed out that during the year the assessee had withdrawn Rs.

18,51,55,5307- from M/s Eastman Impex. The A.O. observed

that the payments made to M/s Janpath Estate Ltd., from whom most of the interest income had been received, was out of funds received from M/s Eastman Impex and not from borrowed funds. The A.O. therefore held that interest

bearing loans had not been used for earning of interest

income. The A.O. accordingly disallowed deduction claimed

u/s 57 amounting to Rs.1,49,62,428/-.

submissions, reproduced at para 4.3 of the order The Ld.CIT(A) analyzed the provisions of law in this regard culled

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from various judicial decisions and held that as per the provisions of section 57(iii) of the Act, any expenditure is allowable as deduction against the income from other

sources only it its is laid out or expanded wholly or exclusively for the purpose of making or earning such income. Thereafter applying this provision to the facts of the case drawn from the statement of affairs of the assessee,at para 4.7 of the order, the Ld.CIT(A) held that at best, only

funds amounting to Rs.11,55,30,660/- were deployed for earning interest and remaining amounts of funds out of the total borrowed funds of Rs.22,35,30,371/- i.e.

Rs.10,80,26,711/- were used for other activities.

Accordingly, he held that the interest on these funds be disallowed u/s 57 of the Act.

that the fact of the matter was that there were mixed funds

available with the assessee and it was difficult, therefore, to work out the direct nexus between the borrowed funds

utilized for making loans and advances. The Ld.Counsel for the assessee contended that identical issue had been dealt

with by the ITAT Chandigarh Benches in the case of ACIT,

Circle-VI, Ludhiana Vs. Pawan Kumar Goel in ITA

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No.1438/Chd/2010 dated 31.10.2011 wherein the total

amount of funds deployed for earning interest was viewed

against the borrowed funds and after considering the same

the disallowance of interest u/s 57(iii) of the Act was worked

out. Our attention was drawn to para 4.5 of the order as under:

“4. We have carefully perused the facts of the case, rival submissions and the case laws relied on by both the parties including the paper book. In this case the assessee submitted before the Id. CIT(A), as recorded at page 2 of the appellate order that own fund of the assessee exceeded borrowed funds, on which the interest was paid. It was, further, demonstrated in the form of submission field before the Id. CIT(A) that through out the year borrowed fund is on the lower side as compared to fund given on interest. As such it was contended that no disallowance on this count is called for. The relevant data in the matter is extracted from the order of Id. CIT(A) and is reproduced hereunder:-

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further submitted that as per Table 3 prepared by the AO deployed fund for interest is always higher than the borrowed fund except for the month of December, 2006. The ld. counsel in his submission has submitted that Table 4 as calculated by the AO has been taken as a basis for calculating the amount of interest not utilized wholly and exclusively for the purpose of earning of interest.

Conclusion of fund deployment as per Table 4 does not in accordance with a conclusion of fund deployed as per balance sheet. The argument put forth by the Id. counsel has strong reason to believe that the ratio taken by the Dy. Commissioner for disallowing interest expenditure is not correct. In view of the above discussion the expenditure of Rs.17,32,8117- is directed to be considered as expenditure.

This ground of appeal is therefore, allowed."

Goel Vs. ACIT in ITA No.528/Chd/2013 dated 11.7.2014. Further the Ld. counsel for assessee pointed out that following these decisions the A.O. had worked out

disallowance of interest u/s 57(3) of the Act in the case of the assessee itself in subsequent years .e. assessment year

2013-14 and assessment year 2014-15. Copies of all the above orders were placed before us. Our attention was drawn

to pages 3 to 5 of the assessment order for A.Y 2013-14,

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pointing out therefrom that following decision of the I.T.A.T.

in the case of Pawan Kumar Goel in ITA No.1438/Chd/2010

on noting that the facts were identical in the said case with that of the assessee, the A.O. had worked out disallowance

of interest by working out monthwise excess interest bearing

funds available with the assessee as compared to the interest earning advances disallowing interest relating to the same as under:

Interest Interest earning Interest bearing Interest bearing funds advances funds invested in disallowance Non-interest u/s 57(1) earning advances April- 238813515 226219957.14 12593557.86 125935.58 2012 May-2012 236404560 282969957.14 June- 238863723 290669957.14 2012 July-2012 238158189 289669957.14 August- 243135079 290819957.14 2012 Sep-2012 252273184 300169957.14 Oct-2012 268233343 303069957.14 Nov-2012 272047764 310599957.14 Dec-2012 241306970 307499957.14 Jan-2013 235013297 311999957.14 Feb-2013 242933362 315499957.14 March- 279709033 313364589.14 2013 Total 1,25,935.58 Thus, an amount of Rs.1,25,936/- is disallowed u/s 57 and added back to the income of the assessee.

page No.30 pointing therefrom that there were no surplus

interest bearing funds in that year and accordingly, no disallowance of interest was made in the assessment framed

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u/s 143(3) of the Act vide order dated 17.8.2016 which was placed at Paper Book page No.

borrowings and interest bearing advances for assessment

year 2015-16 placed at Paper Book page No.36 pointing out

therefrom that the calculation of interest disallowance u/s 57(iii) amounted to Rs.1,92,766/- which was accordingly

shown to have been disallowed by the assessee in its computation of income, placed at Paper Book page No.38 and which was accepted in assessment framed u/s 143(3) of the Act, copy of order of which was placed at Paper Book page

No.

for the impugned year were placed before us and it was pleaded that the matter be restored back to be allowed in the light of the decision of the I.T.A.T. in the case of Pawan

Kumar Goel (supra) followed by the A.O. in the case of the assessee for subsequent years as detailed above.

exercise of working out the amount of borrowed funds

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utilized for the purpose of making interest earning loans and advances and, therefore, the disallowance of interest worked

out by him, it was contended, was rightly made.

ground before us relates to disallowance of interest expenses

as per the provisions of section 57(iii) of the Act. It is an undisputed fact that the funds available with the assessee

were mixed funds and some of the interest bearing advances

had been made in the preceding years and it was difficult to work out the exact nexus between the interest bearing funds

and interest bearing advances. None of the authorities below

we find, have been able to establish directly the absence of any such nexus while working out the amount disallowable

u/s 57(iii) of the Act. The AO we find reasoned that majorly

interest was earned by the assessee from one M/s Janpath

Estates and scrutinizing the ledger account of the said

party, worked out the advances made to it during the year

on the basis of difference in the opening and closing

balance. Thereafter he derived from the bank statement of the assessee that major amount was received by the assessee

from M/s Eastman Impex which was non interest bearing. He

therefore deduced that this non interest bearing fund had been advanced for earning major portion of interest during

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the year and accordingly disallowed entire interest claimed

by the assessee. The Ld.CIT(A), we find, adopted a totally

different basis for calculating the disallowance extracting

figures from the statement of affairs filed by the assessee

and finding that total borrowings bearing interest during the year were Rs.22.35 crores while amount advanced for earning interest was only 11.55 crores, which he held could

at best be treated as made from interest bearing funds. The rest of the interest paid was accordingly disallowed by the Ld.CIT(A).Thus the disallowance of interest u/s 57(iii) of the Act, made by the Revenue authorities, we find, was not on the basis of direct nexus between non interest bearing funds

deployed for making investments earning interest.

quantum of disallowance u/s 57(iii) was worked out by calculating the monthly difference of interest bearing funds

and interest earning advances and disallowing interest

relating to the surplus of interest bearing funds raised ,on the presumption that the interest bearing funds had been deployed for making these advances and the surplus if any was therefore deployed for purposes other than earning

interest income. Moreover, we find, that in the case of the assessee in the subsequent years disallowance of interest

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u/s 57(iii) was made on this basis following the decision of the ITAT in the case of Pawan Goel(supra) . Considering the same, we hold that the disallowance u/s 57(iii) of the Act in the present case also should be worked out accordingly as prescribed by the ITAT in the case of Pawan Goel(supra) and which was followed in the case of the assessee in subsequent

years. The issue is accordingly restored back to the A.O. to work out disallowance of interest as above. This ground of appeal by the assessee is, therefore, allowed for statistical

purposes

“2. That he was not justified to arbitrarily uphold the disallowance of Rs.74,34,992/- made u/s 14A.”

u/s 14A of the Act relating to those incurred for the purpose

of earning exempt income.

had shown investment of Rs. 25,36,52,818/- and Rs.16,15,53,614/- as on 31.03.2011 and 31.03.2010

respectively in the balance sheet. The income from these

investments does not form part of the total income. The A.O.

further noted that the assessee had incurred interest

expenditure of Rs.1,49,62,428/-. The A.O. asked the 14 A.Y.2011-12 A.Y.2012-13 A.Y.2011-12 A.Y.2012-13

assessee to explain why provisions of Section 14A may not be applied in the assessee’s case. After considering the assessee’s submissions on this issue, the A.O. held that provisions of Section 14 A were attracted in the case. The A.O. computed disallowance under Rule 8D(ii) at Rs.

74,34,992/- and under Rule 8D(iii) at Rs.10,38,016/-. The total disallowance of Rs.84,37,008/- was made. However, as the whole of interest expenditure of Rs.1,49,62,428/- was disallowed by the A.O. u/s 57 of the Act, no further

disallowance on this account was made.

expenditure of Rs.1,49,62,428/- claimed by the assessee an amount of Rs.95,73,276/- had been disallowed u/s 57 of the Act and the remaining had been held as incurred directly for the purpose of earning interest income and held that no further disallowance was to be made out of the expenditure

held to have been incurred for the purpose of earning

interest income. Accordingly, he telescoped the disallowance

made by the assessee of Rs.74,34,922/- u/s 14A in the total

disallowance of interest of Rs.95,73,276/- made u/s 57 of the Act.

expenditure is bifurcated for the purpose of section 57 as 15 A.Y.2011-12 A.Y.2012-13 A.Y.2011-12 A.Y.2012-13

incurred for the purpose of earning interest income and otherwise and the later portion is disallowed, no further

disallowance u/s 14A can be made since the balance clearly

related for the purpose of earning taxable interest income.

out of the balance amount remaining after making

disallowance of interest u/s 57 of the Act. This balance

amount which is allowed u/s 57 of the Act is on the ground

that it has been incurred for earning taxable interest

income. Therefore, this interest expenses cannot now be held

to have been incurred for earning exempt income for the purpose of section 14A of the Act and hence, we agree with the Ld. counsel for assessee that after the exercise of disallowance of interest u/s 57 of the Act is completed vis-à-

vis entire interest expenditure incurred by the assessee, no further disallowance of interest is warranted u/s 14A of the Act. This ground of appeal, is, therefore, allowed.

The appeal of the assessee is allowed for statistical

purposes.

ITA No.23/Chd/2017(A.Y. 2012-13:

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“1. That order passed u/s 250(6) of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Appeals)- 2, Ludhiana is against law and facts on the file in as much as she was not justified to arbitrarily uphold disallowance of a sum of Rs. 84,28,993/- out of interest account made by the Ld. Assessing treating the same as not allowable u/s 57 of the Income Tax Act, 1961. 2. That she was further not justified to uphold disallowance of Rs. 93,88,780/- u/s 14A as worked out by the Ld. Assessing Officer.”

& 2 raised by the assessee in this appeal were similar to ground Nos.1 & 2 raised by the assessee in ITA

No.262/Chd/2015 adjudicated above .Our decision rendered

therein at paras 10 -11 and 16 respectively and will

therefore apply mutatis mutandis to these grounds also following which Ground Nos. 1 raised by the assessee is allowed for statistical purposes while ground no.2 is allowed.

“3. That she further gravely erred in upholding an addition of Rs. 23,92,500/- to the long term capital gain made by the Ld. Assessing Officer by invoking the provisions of Section 50C.”

was received from ITO, Ward 20(1)(5), Mumbai vide letter

dated 18.02.2015 that the assessee had sold a flat at Matunga, Mumbai for Rs. 85,00,000/-, the fair market value

of which was Rs.1,08,92,500/-, The valuation report attested

by the Joint Su-