PRATOSH KUMAR SHARMA,GHAZIABAD vs. DCIT, CIRCLE- 2, GHAZIABAD

Ground of appeal No.1 reads as under:- “That on the facts and in the circumstances of the petitioner’s case, the learned Commissioner of Income tax (Appeals), Ghaziabad, was wholly unjustified in law and on facts in disallowing interest paid amounting to Rs.1516666 claimed under section 57 of the Income tax Act, 1961 and also completely departing from the reasoning and view taken by the learned Assessing Officer on this issue in the impugned assessment order.”

Facts of the case, in brief, are that the assessee is an individual and derives income from salary and interest. He filed his return of income on 16th June, 2014 declaring total income of Rs.15,43,240/-. During the course of assessment proceedings, the Assessing Officer noted that the assessee has taken a loan of Rs.2.70 crores on interest @ 13.75% from M/s Cholamandalam Investment and Finance Company Ltd.. Later on out of this loan amount the assessee invested an amount of Rs.2.60 crores with M/s Subhakamna Buildwell Pvt. Ltd. on 31st May, 2012 for booking of flats in their project. On being questioned by the Assessing Officer, it was submitted that the purpose of investment was to earn profits from the increase in value of those flats by selling the bookings at a premium, thus, gaining income from other sources. It was further submitted that due to recession in real estate market the assessee could not derive any income from the investment, therefore, he withdrew the investment of Rs.1.50 crores on 13th December, 2012 and Rs.1.10 crores on 15th December, 2012. The Assessing Officer noted that the assessee did not charge any interest on the amount of Rs.2.60 crore which was invested with M/s Subhkamana Buildwell Pvt. Ltd. for the period 31st May, 2012 to 15th December, 2012. Since the assessee had borrowed an amount of Rs.2.70 crores from M/s Cholamandalam Investment and Finance Company Ltd. at an interest of 13.75% per annum and the assessee has paid interest to the tune of Rs.27,65,023/- on his borrowing, the Assessing Officer confronted the same to the assessee as to why no interest was charged from M/s Subhakamna Buildwell Pvt. Ltd. Rejecting the various explanations given by the assessee and considering that the investment was made with a builder, the Assessing Officer disallowed proportionate interest from 1st June, 2012 to 31st May, 2012 i.e., for seven months @ 10% which comes to Rs.15,16,666/-. He accordingly added the same to the total income of the assessee.

In appeal, the ld.CIT(A) upheld the action of the Assessing Officer by observing as under:-

Aggrieved with such order of the ld.CIT(A), the assessee is in appeal before the Tribunal.

The ld. counsel for the assessee referred to clause 3 of section 57 and submitted that any expenditure not being in the nature of capital expenditure laid out or expended wholly or exclusively for the purpose of making or earning of an income, is an allowable deduction u/s 57 of the IT Act. He submitted that the purpose of taking loan was for earning income and, therefore, the disallowance of interest expenditure of Rs.15,16,666/- added by the Assessing Officer and sustained by the CIT(A) is not justified. He submitted that when income is not being earned, the expenses cannot be disallowed. For the above proposition he relied on the decision in the case of CIT vs. Sanghi Finance and Investment Ltd. (2005) 272 ITR 553 (MP) and CIT vs. M. Ethurajan (2005) 273 ITR 95 (Mad). Referring to computation of total income, copy of which is filed at page 2 of the paper book, the ld. counsel submitted that the assessee has earned interest income of Rs.11,48,507/-. Referring to page 27 of the paper book, he drew the attention of the Bench to the details of the interest income from NCR Infrahomes Pvt. Ltd. and NCR Fashion Pvt. Ltd. Referring to page 4 of the paper book, he submitted that the assessee before the Assessing Officer has categorically submitted that the amount invested with Subhakamana Buildwell Pvt. Ltd. was towards transaction of booking of flats with a motive to earn income to compensate the interest expenditure which is better known as underwriting in common parlance. It was categorically stated before the Assessing Officer that the amount invested by the assessee is not for any particular flat and also not for complete value of the flats, but, was for the booking of specified area in sq. feet terms without any specific demarcation or particular allotted flats. It was submitted that it was in nature of an advance being eligible to claim interest on that booking amount. Referring to page 19 to 26 of the paper book, he drew the attention of the Bench to the bank statements and submitted that an amount of Rs.2.60 crores was given on 31st May, 2012. Therefore, the order of the CIT(A) disallowing the interest expenditure u/s 57 is uncalled for.

The ld. DR, on the other hand, heavily relied on the order of the CIT(A).

I have considered the rival arguments made by both the sides and perused the orders of the authorities below. I find the Assessing Officer in the instant case made disallowance of Rs.15,16,666/- being notional interest expenditure on account of proportionate interest on the funds invested by the assessee towards booking of flats with M/s Subhakamna Buildwell Pvt. Ltd., which was subsequently returned by them to the assessee without paying any interest. I find, the ld.CIT(A) deleted the addition made on account of notional interest, but, he disallowed the interest to the extent claimed by the assessee u/s 57 of the IT Act and the order of CIT(A) on this issue has already been reproduced in para 4 above. It is the submission of the ld. counsel for the assessee that it has received interest income from NCR Infrahomes Pvt. Ltd. amounting to Rs.10,58,712/- and from M/s NCR Fashion Pvt. Ltd. amounting to Rs.89,795/-. Further, it is also his submission that merely because income has not been earned the expenditure cannot be disallowed. I find merit in the above submission of the ld. counsel for the assessee. The Hon'ble Madras High Court in the case of CIT vs. M. Ethurajan (supra) has held that what section 57(iii) of the Act requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. This 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.

Ground of appeal No.2 raised by the assessee reads as under:-

After hearing both the sides, I find the Assessing Officer made an addition of Rs.91,666/- by estimating the notional interest on a sum of Rs.10 lakhs which was upheld by the CIT(A). It is the submission of the ld. counsel for the assessee that income which has not been earned cannot be added on notional basis. In my opinion, the facts are not coming out clearly from the order of the Assessing Officer or the CIT(A). Under these circumstances, I deem it proper to restore the issue to the file of the Assessing Officer with a direction to adjudicate the issue afresh and in accordance with law, after giving due opportunity of being heard to the assessee. I hold and direct accordingly. The ground of appeal No.2 raised by the assessee is allowed for statistical purposes.

In the result, the appeal filed by the assessee is allowed for statistical purposes. The decision was pronounced in the open court on 25.09.2019.