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PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by assessee is directed against the order of ld. CIT(A)-17, Mumbai dated 13.08.2018. In the assessment order passed under section 143(3) for Assessment Year 2015-16. The assessee has raised the following grounds of appeal:
1. The Ld. Hon'ble Commissioner of Income Tax(A) -17, Mumbai erred in confirming the action of the AO in disallowing the interest expenses amounting to 9,50,547/ -without appreciating the fact that the appellant company had actually paid interest as per the prevailing market rates.
The Ld. Hon'ble Commissioner of Income Tax (A)-17, Mumbai further erred by enhancing such disallowance from Rs.9,50,547/- to 34,85,340/- being interest paid on non-convertible debentures without appreciating the fact that appellant company had invested in fixed deposits from the proceeds received from issuance of non-convertible debentures and that there was a direct nexus Mum 2018-Bharat S. Kanungo.
between the source and end utilization of the funds received by issuing the non- convertible debentures.
3. The learned CIT(A) further erred in confirming the action of the AO in disallowing expenses amounting to Rs.17,04,538/- claimed against Income earned from Fixed deposits on the grounds that the same were not expended wholly and exclusively for the purpose of earning such income without appreciating the fact that the appellant company had expended the said expenses for the purpose of running day-to-day business activity and the same should be allowed u/ s 37 of The Act and the business loss so created should be allowed to be set off against Income From Other Sources under inter head adjustment. 2. Brief facts of the case are that the assessee is a company engaged in the business of Providing man power recruitment services in gulf countries, filed its return of income for impugned Assessment Year (AY) on 31.03.2016 declaring total income of Rs. 6,11,310/-. The case was selected for scrutiny. During the assessment, the Assessing Officer noted that assessee has shown ‘Business Income’ of Rs. 6,34,503/- and ‘Income from Other Sources’ i.e. Interest Income of Rs. 58,38,323/-. The assessee has debited expenses of Rs. 51,90,073/- from the schedule of ‘Income from Other Sources’. The Assessing Officer further noted that assessee received Interest Income of Rs. 58,38,323/- as interest received on fixed deposits. The expenses of Rs. 51,90,073/- was claimed under section 57 of the Act. The assessee claimed interest expenditure of Rs. 34,85,340/-. The interest expenditure was incurred on issuance of Non-convertible Debenture (NCD) to different parties @ 16.5%. The interest was paid to related parties, who were Director in the assessee-company and as per the Mum 2018-Bharat S. Kanungo. view of assessing officer, was treated as hit by the provision of section 40A(2)(b). On show-cause notice, the assessee explained that a sum of Rs. 4.25 crore was received by assessee on account of sale of office premises during the Financial Year 2013-14. The assessee-company also raised fund of Rs. 4 crore by issuing 6.5% NCD during the said Financial Year.
The assessee-company was looking for some investment opportunity, however, during the mean time Rs. 7 crore was deposited with the Co- operative Bank which resulted into earning of interest income on fixed deposits. The assessee claimed that fund from debenture is utilized in fixed deposits. Therefore, resultant interest should be allowed against the interest income of fixed deposit. The explanation furnished by assessee was not accepted by the Assessing Officer. The Assessing Officer took his view that the assessee paid excess interest i.e. 4.5% and accordingly made a disallowance of Rs. 9,50,547/-. The Assessing Officer also disallowed Rs. 17,04,733/- which was claimed as expenses against the interest income by taking view that no nexus has been established of these expenses against the interest income. These expenses consist of Electricity Expenses, Bank Charges, Sundry Expenses, and Mediclaim for staff, Miscellaneous Expenses written off and Remuneration to Directors. On appeal before the ld. CIT(A), the disallowance of expenses was upheld, however, on disallowance of interest expenses of Rs. 9,50,547/-, the ld. CIT(A) issued notice of enhancement and after giving opportunity to the Mum 2018-Bharat S. Kanungo. assessee, the entire interest expenses of Rs. 34,85,340/- claimed by assessee was disallowed, thereby made further disallowance by way of enhancement of Rs. 25,34,766/-. Thus, aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before this Tribunal.
We have heard the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the revenue and perused the order of lower authorities. We have also deliberated on various case laws relied by lower authorities and the representative of the parties.
Ground No. 1 & 2 relates to disallowance of interest expenses on debenture of Rs. 34,85,340/-. The ld. AR of the assessee submits that during the earlier Assessment Year i.e. 2014-15, the assessee raised Rs. 4 crore by issuing NCD to Yograj Chauhan, Yograj Chauhan (HUF), Vijay Yograj Chauhan and Yeshi Yograj Chauhan; all persons from whom funds were raised by issuing NCD were shareholder and Director. The assessee also received Rs. 4.25 crore on sale of office premises in September & October 2013. The NCD issued to various persons @ 16.5% interest per annum (p.a.). The amount received by way of debenture and of sale consideration of office premises, the assessee deposited it in fixed deposited Rs. 7 crore @ interest rate of 8% , with Bharat Co-operative Bank of. During the year, the interest paid on debenture was Rs. 34,85,340/-. The interest earned on fixed deposits was Rs. 58,38,323/-. Mum 2018-Bharat S. Kanungo.
The interest paid on debenture was adjusted against the interest earned on fixed deposits under the head ‘Income from Other Sources’. However, during the next Financial Year 2014-15, the assessee could not find suitable property and decided to redeem it NCD and permanently closed the time deposits and return back the money to the debenture holder. The Assessing Officer made addition of different of 4.5% of interest expenditure and made addition of Rs. 9,50,547/-. However, the ld. CIT(A) enhance the disallowance by disallowing entire interest paid on debenture under section 57 of the Act.
The ld. AR of the assessee submits that it is not in dispute that there is a direct nexus between interest earned on fixed deposit and interest paid on debenture as amounts received pursuant to issue of debenture kept in fixed deposit and the assessee is entitled for interest expenses. The assessee made investment for the purpose of earning interest income. The similar interest expenditure was allowed in earlier Assessment Years in the assessment order for Assessment Year 2014-15 passed under section 143(3) dated 02.12.2016. The ld. AR of the assessee placed on record the copy of assessment order dated 02.12.2016. The ld. AR of the assessee also filed the copy of reply filed before the Assessing Officer during the assessment of Assessment Year 2014-15, wherein similar issue was examined. The ld. AR further submits that case law relied by ld. CIT(A) in Shree Maheshwar Hydel Power Corporation Ltd. [2018] 96 taxmann.com Mum 2018-Bharat S. Kanungo.
167 (Bom. HC), CIT vs. Dr. V.P. Gopinathan [2001] 248 ITR 449 (SC), Smt. Padmavati Jai Krishna v. Addl. CIT [1987] 166 ITR 176 (SC), Poona Club Ltd. [2018] 90 taxman.com 422 (Pune Trib.) are not applicable on the facts of the present case.
In support of his submission, the ld. AR of the assessee relied upon the decision of Tribunal in Triumph International Finance India Ltd. vs. ACIT [2016] 161 ITD 464 (Mum. Trib.), and CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519 (SC).
On the other hand, the ld. DR for the revenue supported the order of ld. CIT(A), the ld. DR further submits that the expenditure claimed by assessee under section 57 does not fulfil the condition of the said provision and accordingly the entire claim was liable to be disallowed, which was rightly disallowed by ld. CIT(A).
We have considered the rival submission of the parties and have gone through the order of authorities below. The Assessing Officer during the assessment disallowed the interest expenditure of Rs. 9,50,547/- by taking view that the interest paid by assessee was excessive and unreasonable.
The Assessing Officer disallowed 4.5% of the interest paid by assessee to the Director/debenture holders and worked out the disallowance of Rs. 9,50,547/-. The assessee challenged the disallowance before ld CIT(A).
The ld. CIT(A) issued the notice on enhancement. While issuing the notice of enhancement the ld CIT(A) noted that rate of interest on Fixed Mum 2018-Bharat S. Kanungo. deposits was 8% and there is no clarity on the differential rate of interest. Once an expenditure is examined on the foundation of provision of section 57(ii) and found that it does not qualify the condition stipulated in the provisions, then entire claim is to be disallowed and not the differential rate of interest. The assessee in response to the said show cause notice filed its reply dated 10th August 2018. In the reply the assessee contended that during financial year 2013-14, the assessee had received Rs. 4.25 crore on sale of office premises in the month of September and October 2013. The assessee further raised ₹ 4 crore by issuing 16.5% nonconvertible debentures in the month of July and October 2013. The assessee was looking to reinvest the said sale consideration in a new property. However, since finding a good investment was difficult and time consuming, the assessee had permanently made time deposit with Bharat co-operative bank for an amount of ₹ 7 crore in the month of October 13. However, in the next financial year 2014-15 assessee company could not find any suitable property, it decided to redeem its nonconvertible debentures. List of the assessee it’s time deposit in financial year 2014-15 and return back the money to the debenture holders. The assessee also furnished the details working of interest expenses against the income earned on such deposit. The assessee also furnished the extract of bank statement showing the corresponding debit and credit entries. The assessee explained that out of ITA No. 5368 Mum 2018-Bharat S. Kanungo.
Rs. 4 crore raised through issuing non-convertible debentures of Rs. 3.10 crore was utilised for making the fixed deposits and therefore the entire interest on such nonconvertible debentures should be allowed to be claimed as deduction against the interest from fixed deposits. The assessee further explained that remaining group in Rs. 90 lakhs was utilised by the assessee for the purpose of running its day to day activities and claim that interest on same should be allowed as interest expenditure under section 36(1)(iii). The assessee claimed that alarming interest expenditure under section 57(iii) and allowing the same under section 36(iii) would not have any impact on the tax as the same would be allowed to get set off. And the entire exercise would be a tax neutral.
The reply of assessee was not accepted by learned CIT(A). The learned CIT(A) concluded that the assessee had made attempt to show that the funds which were issuance of non-convertible debentures have been invested in fixed deposit. The assessee claimed that Rs. 90 lakhs was utilised by the assessee for the purpose of earning its day to day activities and therefore interest on the same should be allowed as interest under section 36(1)(iii) of the act. The learned CIT(A) further concluded that the scope of allowance of expenditure under section 57(iii) is much narrow.
Unlike 37(1) which talks about expenditure incurred wholly and exclusive for the purpose of business, whereas section 57(iii) ref is to those expenditure which have been incurred wholly and exclusively for the Mum 2018-Bharat S. Kanungo. purpose of earning that income. Making of fixed deposit was noted in outcome of issuance of non-convertible debentures at the rate of 16.5 percent. The nonconvertible debentures were issued for the funds for normal business activities or play and activities. Any allowance from “income from other sources” has to be examined under the parameters of section 57(iii) of the Act and accordingly enhanced the disallowance from Rs. 9,50,547/- to Rs. 34,85,340/-. The ld. CIT(A) while disallowing the entire interest expenses relied upon the decision of Shree Maheshwar Hydel Power Corporation Ltd. (supra), CIT vs. Dr. V.P. Gopinathan (supra), Smt. Padmavati Jai Krishna v. Addl. CIT (supra) & Poona Club Ltd.(supra).
During the assessment the assessing officer disallowed Rs. 9,50,547/- by taking view that the interest paid on debenture @16.5% is unreasonable.
The assessing officer disallowed 4.5% of interest and worked out the disallowance of Rs. 9,50,547/-. However, the ld. CIT(A) while considering the submission of assessee on disallowance made by Assessing Officer, issued notice of enhancement that non-convertible debenture was issued for the funds for normal business activities or planned activities has to be examined under the parameters of section 57(iii). We have noted that the assessee has filed detailed reply dated 10.08.2018, before the ld. CIT(A) in response to the show-cause notice of enhancement dated 20.07.2018. In the reply, the assessee specifically Mum 2018-Bharat S. Kanungo. stated that Rs. 4 crore received on account of non-convertible debenture was utilized for making FDs. The assessee also stated that allowance under section 57(iii) and/or under section 36(1)(iii) would not have any impact on the tax and the entire exercise would be a tax neutral. The ld. CIT(A) have not examined nor gave any finding on the aforesaid plea of the assessee. The assessee also furnished detailed working of the Fixed Deposits (FDs) and the interest paid on non-convertible debenture to various parties/directors. In our view for allowability of expenditure under section 57(iii), the expenses must have been incurred solely and exclusively for the purpose of earning income. The expenditure should not be in the nature of capital expenditure or personal expenses and should be incurred in the accounting year. There must be a clear nexus between the expenditure incurred and the income sought to be earned. The dominant purpose of expenditure incurred must be to earn income. The assessee throughout the proceeding took the stand that they have sold an office premises in the month of September, October 2013 and received Rs. 4.25 crore. The assessee also raised Rs. 5 crore by issuing non-convertible debenture. The assessee-company was looking to reinvest the sale consideration and the amount received on debenture to purchase a new property and that the funds were temporarily parked in a FDs. The assessee also stated that they could not find the suitable property and decided to redeem its non-convertible debentures and returned back the ITA No. 5368 Mum 2018-Bharat S. Kanungo. money to the debenture holders. In our view, the deposits on which interest was earned and the interest on non-convertible debenture have direct nexus.
The Hon’ble Supreme Court in CIT vs. Rajendra Prasad Mody (supra) held that expenditure under section 57(iii) must be laid out wholly and exclusively for the purpose of making or earning income. It is the purpose of expenditure that is relevant in determining the applicability of section 57(iii) ant that purpose must be of 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 expenditure shall be deductible only if an income is made or earned. The plain natural construction of language of section 57(iii) irresistibly leads to the conclusion that to bring the case within the section, it is not necessary that any income should infact have been earned as a result of expenditure.
Therefore, in view of the aforesaid discussion, we are of the considered view that the assessee is entitled for the deduction of entire amount of Rs. 34,85,340/-. 12. The case law relied by ld. DR for the revenue are based on different facts.
In Shree Maheshwar Hydel Power Corporation Ltd. (supra), the issue was whether the interest earned on the deposit can be capitalized, which is not issue in the present case. In the present case, the issue is allowability of expenses against the interest income. In CIT vs. Dr. V.P. Gopinathan Mum 2018-Bharat S. Kanungo.
(supra), the issue was whether interest paid on money borrowed by keeping FDR as security can be adjust against the income from FDR. It was held that there is no nexus between the income earned on FDS and interest paid on borrowed by keeping those FDS as security. Thus, the facts in the said case are different from the present case. In Padmavati vs. Jai Krishna (supra), the facts were completely different. In said case, assessee took loan to meet her personal liability of payment of income-tax and wealth tax, which does not qualify the conditions under section 57. In Poona Club (supra), the assessee claimed operating expenses and repair against the interest on FDR kept out of membership fees. Hence, there was no nexus between the expenses and the interest earned. In the result, the ground no.1 & 2 of the appeal are allowed.
Ground No.3 relates to disallowance of expenses of Rs. 17,04,538/-. The ld. AR of the assessee submits that the assessee-company is engaged in the business of man power recruitment services in the gulf countries for which the assessee is earning handling charges and service charges. The Assessing Officer disallowed the expenses by taking view that the same is not allowable as deduction under section 57(iii). The assessee, before the Assessing Officer requested to allow the said expenses under section 37 stating therein that the expenses were wrongly claimed under section 57.
The ld. CIT(A) held that expenses cannot be allowed under section 57. No finding was given as to why said expenses cannot be allowed under Mum 2018-Bharat S. Kanungo. section 37. The ld. AR of the assessee submits that the assessee carried its business during the relevant period and the assessee is entitled for allowance of expenses under section 37. In support of his submission, the ld. AR of the assessee relied upon the decision of Tribunal in Shri Sarang R. Wadhawan vs. ACIT in ITA No. 2990/Mum/2016 dated 18.02.2019 wherein it was held that expenses are not allowable under section 57, the allowability of the same should be alternatively considered under section
14. In alternative submission, the ld. AR of the assessee submits that expenses incurred are of normal business expenditure of the corporate entity and are allowable as business expenditure. In support of his submission, the ld. AR of the assessee relied on the decision of Hon’ble Bombay High Court in CIBA of India Ltd. vs. CIT [1993] 202 ITR 1 (Bom. HC) and Dy.CIT vs. Ozoneland Agro P. Ltd. [2018] 64 ITR (Trib.) 6 (Mum.Trib). 15. On the other hand, the ld. Departmental Representative (DR) for the revenue supported the order of lower authorities. The ld. DR further submits that in case, the Tribunal deem it appropriate to consider the allowance under section 37 in that eventuality, the issue may be restored back to the file of Assessing Officer for verification of fact and to decide it for decision afresh. 16. We have considered the submissions of both the representatives and have gone through the orders of lower authorities. The Assessing Officer Mum 2018-Bharat S. Kanungo. disallowed the expenses as the same is not admissible under section 57.
The ld. CIT(A) confirmed the action of Assessing Officer by taking view that the Assessing Officer has rightly disallowed and that the case is squarely identical to the facts of decision of Hon’ble Supreme Court in Tuticorin Alkali Chemical (227 ITR 127).
We have noted that neither the Assessing Officer nor the ld. CIT(A) considered the alternative claim for consideration of expenses under section 37. Admittedly the claim of assessee for deduction under section 57 is not admissible as it does not fulfil the condition prescribed under section 57(iii). However, considering the submission of assessee that assessee is a corporate entity and incurred certain expenses which consist of Electricity Expenses, Bank Charges, Sundry Expenses, Mediclaim for staff, Miscellaneous Expenses written off and Remuneration to Directors, which were incurred for the purpose of business. Therefore, we restored this ground to the file of Assessing Officer to verify the expenses and pass the order in accordance with law. Hence, this Ground of appeal
is allowed for statistical purpose. 18. In the result, appeal of the assessee is allowed. Order pronounced in the open court on 04/11/2019.