ALICE ARUN,CHENGANNUR vs. INCOME TAX OFFICER, THIRUVALLA

As against the said order, the assessee filed an appeal before the Ld.CIT(A) and contended that the assessee is entitled for claiming deduction u/s. 36(1)(iii) of the Act since the amounts borrowed were deposited in the firm towards the capital account and thereby received the interest from the firm which is a business income u/s. 28(5) of the Act. The Ld.CIT(A) had also considered the provisions of section 36(1)(iii), 37(1) of the IT Act and also section 45S of the RBI act and dismissed the appeal filed by the assessee.

As against the said order, the assessee is in appeal before this Tribunal.

At the time of hearing, the assessee submitted that the claim made by the assessee u/s. 36(1)(iii) of the Act on the interest expenditure incurred on the loans obtained from the public are in order and therefore the said interest can be claimed as expenditure on loans. The assessee also submitted that she is not carrying on any money lending business and therefore no license had been obtained under the Kerala Money Lenders Act, 1958 and therefore section 45S of the RBI Act would not be applicable to the assessee. The Ld.AR further submitted that since the assessee is not doing any money lending business, the interest expenditure claimed would not be hit by Explanation to section 37(1) of the Act.

The Ld.DR relied on the orders of the lower authorities and prayed to dismiss the appeal filed by the assessee.

We have heard the arguments of both sides and perused the materials available on record.

In the present case, we find that the assessee is an individual and is not doing any business activities but only a partner in the firm from which she had received interest on the capital account. The case of the assessee is

Now let us consider the provision under which the exemption was claimed by the assessee i.e. 36(1)(iii) which reads as follows: “Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (i) the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession; (ia) the amount of any premium paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk raised by its members to such federal milk co-operative society; (ib) the amount of any premium paid by any mode of payment other than cash by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme framed in this behalf by— (A) the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972) and approved by the Central Government; or (B) any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999); (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; (iia) [Omitted by the Finance Act, 1999, w.e.f. 1-4-2000;] (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation.—Recurring subscriptions paid periodically by share holders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; (iiia) the pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond calculated in the manner as may be

The deduction provided in the said sub-clause is about the amount of interest paid in respect of the capital borrowed for the purpose of the business or profession. As already noted, in the present case, the assessee is not carrying on any business activities and also not borrowed any amount for the purposes of the business. If the assessee is in the business and towards the capital, if she has borrowed any amount, then naturally, she will be entitled for deduction on the interest paid by her on the capital borrowed.

The facts involved in this appeal is not supporting the argument made by the assessee. It is the case of the assessee that she is an individual and received interest income from the firm on the capital introduced by her and therefore the said interest income could be treated as business income. No doubt, the said interest income received from the firm is the business income but the interest paid by the assessee to the various members of the public is against the loans obtained in her personal capacity and not towards any business purposes.

If the arguments of the assessee is accepted that she has received business income and therefore, the interest paid by her to the public should be granted deduction while computing the income of the assessee, then naturally, the assessee will come into the lending business for which she has to necessarily obtain the license under the Kerala Money Lenders Act,

As already stated, the assessee is getting loans from deposits from the public in her personal capacity and therefore the interest expenditure incurred towards the said loans could not be adjusted as against the income earned by the assessee as business income. Considering the said facts, the Ld.CIT(A) in para no. 6.7 had observed as follows: “6.7 The appellant has also relied various decisions as referred to hereinabove. The same have been gone through. However, in view of the discussion made hereinabove, it is found that the same are not squarely applicable to the facts of the instant case. Here, the case is accepting deposits and making of capital investment in a partnership firm which is found to be of a character of an illegal finance activity without a valid money lending license and which is prohibited by the RBI Act and therefore. the expenditure incurred by such an illegal activity is not allowable as per the provisions of Sec.37(1) of the Act. The appellant has invested the borrowed funds in the partnership firm viz. M/s. Kannattu Arun Finance which was prior a proprietary concern and the AO and the Hon'ble High Court as discussed supra has classified the fund borrowed by this proprietary concern as illegal in nature and the appellant has not submitted any documentary evidences contra to this for the year under consideration and therefore, it is held that the act of the appellant is also an illegal activity prohibited by the RBI Act. Further, it is also noticed that the borrowing of money and payment of interest were made in the personal account by the appellant, therefore, the same can also not be treated as borrowed for the purpose of business without establishing the nexus. motive, fulfillment of conditions of various provisions of Kerala Money Lender's Act, RBI Act. etc. Therefore, the claim of the appellant for interest

The above said finding given by the Ld.CIT(A) is in accordance with the provisions and also the entire facts were considered by the Ld.CIT(A) and gave a finding that the interest expenditure claimed u/s. 36(1)(iii) of the Act could not be granted under the both provisions since the expenditure was incurred for the illegal activity. The assessee also relied on some judgments of the Tribunal which are not directly on the facts of the present case and therefore the said orders could not be canvassed in support of the case of the assessee. We, therefore, find that the order of the authorities below is correct and requires no interference.

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