DEEPAK NAGINDAS SHAH,MUMBAI vs. ACIT CIRCLE-19 (1), MUMBAI

O R D E R

PER OM PRAKASH KANT, AM

1. “On the facts and circumstances of the Appellant case and in law the Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs. 34,64,023/- on account of disallowance of interest paid.

2. On the facts and circumstances of the Appellant case and in law the Learned Commissioner of Income Tax (Appeals) failed to appreciate that business income is taxable income and not tax free income.

2 Assessment Year: 2014-15 3. On the facts and circumstances of the Appellant case and in law the Learned Commissioner of Income Tax (Appeals) failed to appreciate that it is not mandatory to have positive business income to claim expenses.

6. On the facts and circumstances of the Appellant case and in law the Learned Commissioner of Income Tax (Appeals) failed to appreciate that the appellant has earned Rs. 1,41,59,155/- as business income from M/s Ritesh Exports which is significantly higher than the interest expenses claimed.

7. On the facts and circumstances of the Appellant case and in law the Learned Commissioner of Income Tax (Appeals) failed to appreciate that entire share investment has been made out of appellant’s own capital and as such disallowance made u/s 14A r.w.r. 8D to the tune of Rs. 32,33,963/- is bad in law.

2. Briefly stated facts of the case are that the assessee is a partner in firm M/s ‘Ritesh Exports’ along with partner in other 6 (six) firms. The assessee filed return of income for the year under consideration on 08/07/2015 declaring total income of rupees nil. The return of income filed by the assessee 3 Assessment Year: 2014-15 was selected for scrutiny assessment and statutory notices were issued and complied with. In the assessment completed under section 143(3) of the Act on 06/12/2016, the Assessing Officer made disallowance of ₹ 34,64,023/- out of interest paid for money borrowed and disallowance of ₹ 7,21,341/- in terms of section 14A read with Rule 8D of Income -tax Rules,1962 ( in short the ‘Rules’). The ld. CIT(A) also upheld the disallowances. Aggrieved, the assessee is in appeal before the Income-tax Appellate Tribunal (in short ‘the Tribunal’), raising the grounds as reproduced above.

4. In ground Nos. 1(one) to 6 (six) of appeal, the assessee has challenged disallowance of Rs. 34, 64, 023/- sustained by the Ld. CIT(A). The facts in brief qua the issue in dispute are that in the return of income the assessee has shown consolidated loss of ₹ 23, 29, 925/-under the head ‘profit and gains of the business’ from seven partnership firms. While computing profit from M/s ‘Ritesh Exports’, the assessee has considered share of profit of ₹ 1,41,59,155/- as exempted u/s 10(2A) of the Act, whereas against interest income of Rs.17, 60,000/- claimed deduction of interest expenditure of ₹ 52,24,023/-. The Assessing Officer observed that assessee has borrowed funds at the interest rate of 9% per annum, whereas very nominal interest of ₹ 17,60,000/- had been earned from loan to the partnership firm on opening capital of ₹ 927.28 lakhs which was reduced to ₹ 848.68 at the year end. In view of the observations, the Assessing Officer concluded that assessee has diverted interest-bearing funds at the rate of 9% per annum for the purpose of 4 Assessment Year: 2014-15 giving loan to its related concern M/s ‘Ritesh Exports’ at very nominal rate and therefore, he disallowed the difference in interest paid ( Rs, 52,24,023/-) and interest received (Rs. 17,60,000/-) which amounted to ₹ 34,64, 023/-.

5. Before the Ld. CIT(A), the assessee claimed that borrowed money was deployed for running business income, however the Ld. CIT(A) confirmed the disallowance observing as under: “5.3 The contentions of the assessee have been duly considered. It is observed that the assessee has borrowed substantial funds @ 9% p.a. and the total interest expenditure claimed is of Rs.52,24,023/-. There is no dispute that the assessee has charged a very nominal rate of interest on the loan given to its related concern, M/s Ritesh Exports considering that the gross interest received is of only Rs.17 60,000/though the opening balance of the loan given is of Rs.927.28 lacs and the closing balance of loan is Rs.848.68 lacs. Thus, the AO has rightly held that the assessee _has diverted his interest bearing funds @ 9% for the purpose of giving loans to its related concern, M/s. Ritesh Exports at a very nominal rate. As regards t e contention of the assessee that he has also earned share of profit of Rs. 1,41,59,155/on his investment in M/s. Ritesh Exports and which should also be considered while computing the disallowance out of interest, it is held that the contention cannot be accepted since, share of profit is not taxable in the hands of the assessee. In view of such a factual position, no infirmity is found in the action of the AO of disallowing an “amount of Rs.34,64,023/being the difference between the interest paid of Rs.52,24,023/and interest received of Rs.17,60,000/-. Accordingly, Ground Nos.1 to 6 of the appeal are dismissed.”

“It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. Vs. Commissioner of Wealth-Tax (1994) 208 ITR 989 in which it was held that deduction under Section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we 6 Assessment Year: 2014-15 are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. vs. Commissioner of Wealth-Tax (1995) 215 ITR 582 also does not appear to be correct. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 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 arm-chair 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 income tax 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 view point 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.”

by the assessee are accordingly allowed.

8. In ground No. 8 of the appeal that the assessee has challenged effective disallowance of ₹ 7,21,341/- in terms of section 14A read with Rule 8D(2)(iii) of the Rules, which has been sustained by the ld. CIT(A).

9. Briefly stated facts qua the issue in dispute are that the Assessing Officer observed substantial investment of ₹ 1,66, 53,749/- by the assessee which resulted into exempted income and therefore invoking section 14A , the Assessing Officer computed disallowance under Rule 8D(2)(ii) of ₹ 25, 12, 622/-and under rule 8D(2)(iii) of ₹ 7, 21, 341/-. However, according to the Assessing Officer interest expenditure of ₹ 34,64,023/- had already been considered for disallowance out of interest expenditure, he restricted disallowance to only ₹ 7,21, 341/-. The Ld. CIT(A) upheld the disallowance observing as under: “6.3 Contentions of the assessee have been duly considered. It is observed that the AO had computed the total disallowance u/s.14A to be of Rs.34,64,023/which comprised of disallowance under Rule 8D(2)(ii) of _ Rs.25,12,622/and disallowance under Rule 8D(2)(iii) of Rs.7,21,341/-. However, since the AO had already considered an amount of Rs.34,64,023/for disallowance out of interest expenditure on account of diversion of interest bearing funds @ 9% p.a. for the purpose of giving loans to M/s. Ritesh Exports at a very nominal rate, the AO did not make any further disallowance out of interest as per Rule 8D(2)(ii) and restricted the disallowance u/s.14A to Rs.7,21,341/as per Rule 8D(2)(iii). Since the AO has not made any 8 Assessment Year: 2014-15 disallowance u/s.14A r.w.Rule 8D(2)(ii) out of the interest expenditure, the contention of the assessee that the no interest bearing funds have been used for the purpose of its exempt investments is not relevant at all. Moreover, it is observed that the assessee has earned dividend income of Rs.2 77 155/in the relevant year and therefore as per the decision of the Hon’ble ITAT Special Bench, Delhi in the case of Vireet Investments P. Ltd. (82 taxmann.com 415), disallowance is required to be made as per Rule 8D(2)(iii) in respect of the indirect expenses. Accordingly, no infirmity is found in the action of the AO of making the said disallowance u/s.14A of Rs.7,21,341/as per Rule 8D(2)(iii). Accordingly, Ground No.7 of the appeal is dismissed”.