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Income Tax Appellate Tribunal, VIRTUAL COURT-I
Before: SHRI M.BALAGANESH, AM & SHRI RAM LAL NEGI, JM Shri Laxmichand Dedhia
आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-26, Mumbai in appeal No.CIT(A)-26/IT-10193/2017-18 dated 31/12/2018 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 23/03/2015 by the ld. Income Tax Officer – 27(2)(3), Mumbai (hereinafter referred to as ld. AO).
The first issue to be decided is with regard to disallowance of interest made u/s.57(iii) of the Act in the sum of Rs.2,79,594/-. The Shri Laxmichand Dedhia interconnected issue involved thereon is disallowance of brokerage of Rs.1,00,000/- on borrowed loan.
We have heard rival submissions and perused the materials available on record. We find that assessee is an individual deriving business income and income from other sources. The assessee has shown interest income of Rs.22,47,090/- against which interest and brokerage expenditure of Rs.18,55,020/- was claimed as deduction. We find that assessee had made borrowings from parties @15% per annum and had invested the same in the partnership firm where assessee is a partner, wherein he earned interest @12% per annum. This interest income @12% was offered under the head ‘income from other sources’ by the assessee in the return of income and taxed as such by the ld. AO. The interest expenditure on borrowings @15% was claimed as deduction by the assessee u/s.57(iii) of the Act. We find that the ld. AO had also granted deduction towards interest on borrowings u/s.57(iii) of the Act under the head ‘income from other sources for a reduced amount. We find that the ld. AO sought to disallow the difference in interest rates @3% (15%-12%) u/s.57(iii) under the head ‘income from other sources’ while completing the assessment. We find that there is absolutely no dispute in the facts and circumstances of the case that borrowed monies were invested by the assessee in the partnership firm. The borrowings made by the assessee were accepted as genuine by the lower authorities. We find that the ld. AR before us had pleaded that the average rate of interest paid is only 13.4% and not 15% as observed by the ld. AO. This is in view of the fact, certain borrowings were made by the assessee at reduced rate of interest. We find that once the borrowings were accepted as genuine and one to one nexus is found to have been proved that the said borrowings were indeed utilised for investment in a partnership firm wherein assessee was a partner, there cannot be any question of Shri Laxmichand Dedhia disallowance of interest on the borrowings. Reliance in this regard is placed on the decision of Hon’ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody reported in 115 ITR 519 wherein it was held as under:- “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. It is the purpose of the expenditure that, is relevant in determining the applicability of section 57(iii) and that purpose must be making or earning of income. Section 57(iii) 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. There is in fact nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure.”
3.1. Accordingly, we direct the ld. AO to delete the disallowance of interest in the sum of Rs.2,79,594/- under the head ‘income from other sources’.
3.2. We find that assessee had claimed brokerage expenses of Rs.1,79,932/- paid to three parties who had assisted the assessee in arrangement of loans. The ld. AO observed that the said expenditure is not incurred for the purpose of earning income under the head ‘income from other sources’ and accordingly sought to disallow the same in the assessment which was restricted to Rs.1,00,000/- by the ld. CIT(A) on an adhoc basis. We find that there is absolutely no dispute that assessee had paid brokerage of Rs.1,73,392/- to three parties for arranging loans for the assessee. As stated supra, there is no dispute that the borrowings made by the assessee were utilised for the purpose of investment in partnership firm from where interest has been received by the assessee and taxed under the head income from other sources. Hence, the Shri Laxmichand Dedhia brokerage paid becomes an expenditure incurred for the purpose of earning interest income in terms of Section 57(iii) of the Act and is squarely allowable as deduction. We find that the ld CIT(A) had deleted Rs 73,392/- and sustained an adhoc disallowance on account of brokerage to the tune of Rs 1,00,000/-. We direct the ld. AO to allow deduction towards brokerage for the remaining sum of Rs.1,00,000/-.
3.3. Accordingly, ground Nos. 1 & 2 raised by the assessee are partly allowed.
The last issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in upholding the addition made on account of annual value of house property in respect of property situated in a small village of Kutch district @20,000/- in the facts and circumstances of the case.
4.1. We have heard rival submissions and perused the materials available on record. We find that the assessee had inherited ancestral property more than 75 years old situated at a remote location in Sherdi Village of Mandvi Taluka, Kutch District, Gujarat where about 400 families are residing. This fact is not disputed by the revenue before us. The assessee had submitted before the lower authorities that this property would fetch only annual rental value of Rs 5,000/- as the said property is fully damaged due to earthquake. The ld. AO, however, did not agree to the submission of the assessee and estimated rental income thereon for the house to the extent of 1200 sq. ft at Rs.30,000/- and granted statutory deduction of 30% from there and brought to tax the remaining sum of Rs.21,000/- under the head ‘income from house property. We find that the ld. CIT(A) had restricted the addition towards annual value of house property @Rs.20,000/- as against Rs.30,000/- determined by the ld. AO. We find that both the AO as well as ld. CIT(A) had only estimated
Shri Laxmichand Dedhia the fair rental value of the house property without disputing the submissions made by the assessee before them. At the same time, we find that the rental income stated by the assessee @5,000/- per annum seems to be on the lower side. Hence in order to meet the ends of justice, we direct the ld. AO to determine the fair market value of property @Rs.10,000/- supra and from that statutory deduction of 30% should be given to the assessee and accordingly remaining sum of Rs.7,000/- should be taxed as ‘income from house property’. Accordingly, the ground No.3 raised by the assessee is partly allowed.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on this 13/08/2020