SHREYANS S SANGHAVI,DEESA vs. THE ACIT CIRCLE, PALANPUR

आदेश/O R D E R

PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax(Appeal)-4, Ahmedabad, dated 18/09/2020 arising in the matter of Assessment Order passed under s. 143(3) r.w.s. 263 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2016-2017.

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4.1 The impugned amount of loss of Rs. 29,86,332/- was set off against the salary income, business income and income from capital gain. However, the AO during the assessment proceedings was not satisfied with the claim of the assessee against the income from other sources i.e. interest claim of the assessee of Rs. 38,30,933/- against the interest income of 8,75,012/- only. According to the AO, the assessee has also advanced interest-free loans and advances and has also made investment in the personal assets. As per the AO the amount of interest-bearing loan must have also been utilized by the assessee against his personal assets and interests free loans and advances. Accordingly, the AO held that the claim of the assessee for the expenses of Rs. 38,30,933/-against the interest income of Rs. 8,75,012/- is not allowable. Thus, the AO allocated the interest cost against the

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personal asset and interest-free loans and advances amounting to Rs. 24,12,065/- which was calculated as under: 1. Interest paid of Rs.38,30,933/- less Rs.8,98,820/- (interest disallowed u/s.14A of the Act and interest earned)= Rs.29,32,113/- 2. Loans/Adavances/Personal assetRs.12,68,44,767/- Personal assets Air Condition 343900 Flats at Atlas Apartment a/c 61439222 Furniture & Fixtures 2226478 Iscon Crystal shop no.T/66 at deesa 194665 Ornaments (Gold) a/c 157135 Parth-Sarthi Flat at Ahm. a/c 778650 Rajashtripal flat at Mumbai a/c 4049394 Scoda Octavia Car 345650 Silver a/c 21960 Sumatinath Co-op. H. So. Surat Flat 501 138833 Sumatinath Flat 101 (Surat) a/c 345000 Tricon Electronic a/c 18360 70059247 Loan and advances 21375679 Investment in agriculture land 35409841 TOTAL 126844767 Interest of Rs.2,00,000/- is separately allowed to cover proportionate cost of the house on loan. 1. Total assets-Rs.15,41,92,885/- Loans & Advance/Non business assets x Interest paid Total assets 126844767 x 29,32,113 154192885 =24,12,065/-

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Considering'net interest expenditure , total assets and non business AO has made disallowance of interest expenditure u/s 57(iii) for Rs 24,12,065. 5.2.2 On perusal of written submission'and assessment order, it is observed that while computing figure of interest free advances AO has considered investment in flat at ATLAS apartment at Rs 6,14,39,222. It is found that appellant has acquired such Hat in AY 2005- 06 from Shailendra Rai for Rs 5,00,00,000 for which assessee has taken loan of Rs 2,00,00,000 from HSBC and interest paid on such loan is not forming part of interest expenditure of Rs 38,30,933. The appellant has also given advances of Rs 1 crore prior to 2001. The appellant has also taken interest free loan of Rs 1,50,00,000 from Rupaben S Sanghavi at relevant time and appellant has not paid any interest on such loan in current year as well as earlier year. The appellant has also made payment of Rs 50,00,000 from Bank of India on 05/05/2005 out of maturity of fixed deposits. Thus, aggregate amount of investment of Rs 5 crore is from interest free funds available with appellant. The appellant has also paid stamp duty and transfer fees aggregating to Rs 29,31,290 in AY 2006-07 and AO has not brought anything on record to prove that such funds 'are out of borrowed funds. Thus, aggregate value of investment in flat is Rs 5,29,31,290 as on 31st March 2006 and such value is increased to Rs 6,14,39,221 only on account of capitalisation of interest. The appellant has proved beyond doubt that such investments in flat was out of interest free funds available with her and direct nexus is proved. On this ground, such investment cannot be subject matter of disallowance u/s 57(iii) of the Act. 5.2.3 The appellant has also argued that he is having interest free funds in form of capital and unsecured' loan of Rs 11,05,81,218 which has exceeded remaining interest free advances considered by AO hence disallowance of interest expenditure cannot be made. However, this, argument of appellant cannot be accepted for the reason that had it been the case that appellant has sufficient own funds than advances made by her, there would never have any interest deficit in her case. It is also observed that while working of interest fret-advances and assets, appellant has considered such personal assets at Rs 6,54,05,545 after excluding investments in Hat at Rs 6.14 crore. It is correct that appellant has made investments in fiat at relevant time out of interest free funds and in proceeding para, it is already held that no proportionate interest expenditure can be attributable to such investments. However, as on 31st March 2016, book value of such assess are Rs 6.14 crore and housing loan is Rs 1.40 crore hence balance value of Rs 4.74 crore (6.14 crore jess Rs 1.40 crore) are used out of appellant's own funds and to that extent, availability of own funds in case of appellant is required to be reduced. In the case of appellant, closing share capital is Rs 7 00 crore, interest free unsecured loan is Rs 3.99 crore hence aggregate capita works out to Rs 11.05 crore RP.Q if from such figure, above referred investments of Rs 4.74 crore is reduced, remaining personal own funds works out toRs8.03 crore. Apart. from other, on assets side, there is investment in business of Rs 1.10 crore and land(other than land considered by AO) at Rs 0.92 crore (4.46 less 3-54) which makes aggregate investments at Rs 2.02 crore which are also considered by AC) as application of own funds. On this basis, available own funds would work out to Rs 6.01 crore against which personal assets 'would be at Rs 6.54 crore as per appellant which clearly suggest that appellant is not having sufficient own funds to cover interest free advances/personal assets. The appellant has-not established any direct nexus between own funds with interest free advances/personal assets or nor proved that borrowed funds are used for business assets and such facts clearly suggest that he was having mixed funds. Once appellant is claiming net interest expenditure in return of income and there is net loss under the head "income from other sources", onus is on appellant to prove that entire expenditure is used for earning income. The Hon'ble Supreme court in the case of Vijya Lax mi Sugar Mills Limited VS CIT 59 Taxman.com 22 has held as under: "It is true that the connection between the expenditure and the earning of income need not be direct and it may be indirect. But since the expenditure must have been incurred for the

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purpose of earning that income, there should be some nexus between the expenditure and the earning of the income. There was not even sort of an evidence to show that the .expenses incurred by the liquidator were to facilitate the earning or at least, for protecting of the income. Interest accrues suigenris. It is payable by the, bank whether it is claimed or not and whether there is any establishment or not. Normally there was no necessity for spending anything- separately for earning the interest. However, if any expenditure was incurred like commission for collection or such similar expenditure which may be considered as spent solely for the purpose of earning that income, the position may be different. But that was not so in the present case. It -could not also be said that the expenditure incurred was to preserve or acquire the asset Nor could it be said that the expenses were incurred far the purpose of maintenance of the source. The requirement under section 57{iii) that the expenditure should have been incurred' 'for the purpose of making or earning such income' shows that the object of spending or the end or aim or the intention of such spending was for earning the interest income. There could be no doubt that the expenditure incurred by the liquidator in this case could by no stretch be said to have been incurred, with the object or for the purpose of earning the interest income.- The Tribunal was, therefore, right in holding that the expanses claimed were not related to the interest income and were not a deductible expenditure under section' 57." The Hon’ble Puna ITAT in the case of Poona Club Limited Vs ACIT taxman.com 422 has held as under: "Section 57, read with section 56, of the Income-tax Act,' 1961 - Income from other sources - Deductions (Interest} - Assessment years 2008-09 and 2009-10 • Assessee, a Members Club, was established for promotion of sports and activities-connected with tne sports - During relevant years, assesses received membership fee from various members which were kept in FDRs with banks - Assessee's case was that in case interest income from- FDRs was taxed under section 56 as 'income from other services', it should have been .allowed deduction under section 57{iii/ while computing said income - Revenue authorities rejected assessee's claim - Whether eligibility for deduction under section 57(Hi) arises only if expenditure has been laid out wholly and exclusively for purpose of earning income which is chargeable under said head 'income from other sources' - Held, yes -Whether since assesses failed to establish nexus between expenditure incurred under various heads including depreciation and had also failed to justify apportionment of expenditure to earning of interest income, its claim was rightly rejected by authorities below - Held, yes [Paras 32 and 35]}In favour of revenue] Similar view is also held by Hon'ble Rajasthan High court in the case of Jaipur Spg. & Wvg. Mills Ltd. Vs DCIT 394 ITR 490. In appellant's case, there is net deficit and appellant has claimed higher interest expenditure u/s 57(iii) as against income earned as income from other sources and once appellant has not established that borrowed funds have resulted into taxable incorne(other than establishing direct nexus for investment in flat), AO'was reasonable in making proportionate interest disallowance u/s 57(iii) of the Act. 5.2.4 In view of above discussion, revised figure of advances/personal assets are considered at Rs 6,54,05,545 and disallowance u/s57(iii) is restricted to Rs 12,43,744(6,54,05,545 X 29,32,112/15,41,92.885) out of aggregate disallowance of Rs 24,12,065. This ground of appeal is partly allowed.

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10.1 On perusal of the balance sheet of the assessee, we note that the assessee has shown personal assets along with the interest-free loans and advances provided by him to the parties amounting to Rs. 12,68,44,767/- only. Out of such personal assets, there was a flat, carrying a value of Rs. 6,14,39,222/-, was taken out of borrowed fund against which the interest paid by the assessee was capitalized in the books of accounts in view of the fact that there was direct nexus between the impugned Assets i.e. Flat viz a viz the amount of loan and the interest paid thereon. Accordingly, such flat should be excluded from the alleged value of personal investment out of the borrowed fund in respect of which the interest was capitalized meaning thereby that the interest on the investment was not claimed as deduction

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against the income from other sources. Thus, to our understanding, the net amount of interest-free loans and advances given along with personal assets of the assessee stands at Rs. 6,54,05,545/- (12,68,44,767.00 minus 6,14,39,222.00) only. This amount was compared with capital balance of the assessee as well as unsecured loan borrowed by the assessee without charging any interest and it was discovered that the own fund of the assessee exceeds the amount of investment. In such a facts and circumstances, the various court have held that it shall be presumed that own fund of the assessee has been utilized against the impugned assets/ interest free loans and advances which will result not to make any disallowance of interest expenses on account of diversion of interest-bearing fund. In holding so, we draw support and guidance from the judgment of Hon’ble Apex Court in the case of South Indian Bank Ltd vs. Commissioner of Income Tax reported in 130 taxmann.com 178 where it was held as under: “Where the assessee has mixed fund made up partly of interest free funds and partly of interest-bearing funds and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the revenue to make an estimation of a proportionate figure. [Para 17] The disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under section 14A. In other words, if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax- free securities then in such cases, disallowance under section 14A cannot be made. [Para 20] The proportionate disallowance of interest is not warranted, under section 14A for investments made in tax-free bonds/securities which yield tax-free dividend and interest to assessee banks where, interest free own funds available with the assessee, exceeded their investments.[Para 27]”

10.2 At this juncture, we also note that the assessee has claimed more expenses than the income shown under the head other sources. However, the expenses claimed under section 57 of the Act cannot be disallowed merely on the reasoning that the assessee has shown less corresponding income. In holding so, we draw support and guidance from the judgment of Hon’ble Apex Court in the case of

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Commissioner of Income Tax Vs. Rajendra Prasad Moody reported in 115 ITR 519 where it was held as under: It is true that the language of section 37(1) is a little wider than that of section 57(iii), but that can make any difference in the true interpretation of section 57(iii). The language of section 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it does not mean that section 57(iii ) should be given a narrow and constricted meaning not warranted by the language of the section and, in fact, contrary to such language. Therefore, the interest on money borrowed for investment in shares, which had not yielded any dividend was admissible under section 57(iii ).

10.3 In view of the above we hold that there cannot be any disallowance of interest expenses in the given facts and circumstances. Accordingly, we hold that the loss computed by the assessee under the head income from other sources amounting to Rs. 29,86,332/- is eligible for set-off against the income of the current year as discussed in the order of the authorities below. Hence the ground of appeal of the assessee is allowed.

Order pronounced in the Court on 10/08/2022 at Ahmedabad.

Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 10/08/2022 Manish