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Income Tax Appellate Tribunal, “E”, BENCH MUMBAI
Before: SHRI PAWAN SINGH & SHRI G. MANJUNATHA
Date of Hearing 11/07/2019 Date of Pronouncement 26/07/2019 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):
These two appeals filed by the assessee are directed against separate, but identical orders of the Commissioner of Income Tax Appeals–18, Mumbai, both dated 09/01/2013 and 31/01/2014 and pertains to Assessment Years 2009-10 and 2011-12. Since, the facts are identical and the issues are common, for the sake of convenience, these appeals were heard together and are disposed-off by this consolidated order.
The assessee has raised more or less common grounds of appeal for both AY’s. For the sake of brevity, the grounds of appeal raised for AY 2009-10 are reproduced as below:-
The learned CIT (A) - 18, Mumbai erred in confirming the assessment made by the Id. Assessing Officer(A.O), The DCIT, Range 8 (3),Mumbai, erred m assessing the tote' income at Rs.95,71,826/- as against returned loss of Rs.5,20,394/-of the appellant Company.
2. The learned CIT (A) – 18, Mumbai erred in confirming the addition made by the Ld. A.O by considering a sum of Rs.20,59,535/- on account of Interest from bank as income from other source instead of income from business. The appellant Company respectfully submits that the additions made on this account may kindly be deleted. 3. The teamed CIT (A) - 18, Mumbai erred in confirming the disallowances made by the Id, A.O of Interest paid to the bank a sum of Rs.23,55,890/- u/s 36 (1) (iii) of Income tax Act, 1961,The appellant Company respectfully submits that the additions made on this account may kindly be deleted. 4. The learned CIT (A) - 18r Mumbai erred in confirming the disallowances made by the Id. A.O of a sum of Rs.51,335/- being 50% of total expenses, of Rs. 1,02,670/- out of following Expenses: - Salary – Rs. 60,000 Conveyance Rs. 42,670 Rs.1,02,670 The appellant Company respectfully submits that the additions made on this account may kindly be deleted. 5. The learned CIT (A) - 18, Mumbai erred in confirming the disallowances made by the Id. A.O of depreciation of Rs. 47,256/- The appellant Company respectfully submits that the additions made on this account may kindly be deleted. 6. The learned CIT (A)- 18, Mumbai erred in confirming .the additions made by the Id. A.O of Rs. 73.705/- u/s 14A of the Income Tax Act 1961. without considering the fact that no expenses have been incurred for earning exempt income. The appellant respectfully submits that the additions made on this account may kindly be deleted. The Id, Erred in considering the interest paid towards investment at the time of making calculation for disallowances under Rule 8D 7. The learned CIT (A)-18, Mumbai erred in confirming the addition made by the Id, A.O of Rs, 75,64,036/- u/s 41 of the income Tax Act 1961 The appellant respectfully submits that the additions made on this account may kindly be deleted. 8. Further detailed explanation will be given at the time of hearing.
9. The appellant craves leave to add to, alter or amend either of the grounds of appeal on or before the hearing of the appeal.
3. The brief facts of the case are that the assessee company is engaged in the business of investment activity filed its return of income for AY 2009-10 on 25/09/2009 declaring total income at Rs. “Nil” after claiming current year loss of Rs. 5,20,394/-. The case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act, were issued. In response to notices, the Authorized Representative for the assessee appeared from time to time and filed details, as called for. During the course of assessment proceedings, the AO noticed that the assessee has shown income earned from interest on fixed deposits and dividend income from shares as income from business in its profit and loss account. The AO, further, noted that against income from operations it has claimed various expenses including interest paid on loan from Federal Bank, depreciation on assets and administrative expenses. In order to ascertain correctness of claim of the assessee, called upon the assessee to explain as to why interest income earned from fixed deposits and dividend. Income shall not be treated as income from other sources and also interest expenditure debited into the profit and loss account shall not be disallowed in response, the assessee has submitted that it is in the activity of investment in shares and securities and also fixed deposits.
Therefore, any income earned from dividends and interest income shall be assessable under the head income from business only. The assessee has also justified, expenses claimed against business income including interest expenses and other expenses.
4. The Ld. AO, after considering the submissions of the assessee and also relied upon various judicial precedents including the decision of Hon’ble Supreme Court in the case of M/s The Totgar’s cooperatives sales Pvt.Limited vs ITO (2010 322 ITR 383) assessed interest income from fixed deposits and dividend income under the head income from other sources. Similarly, the Ld. AO has disallowed interest paid on loan from Federal Bank u/s 36(1)(iiii), on the ground that the assessee has borrowed loan from bank and diverted the same to give interest free advances to shareholders/associates and accordingly, the disallowed interest expenses u/s 36(1)(iii) of the Act. The Ld. AO has also disallowed 50% of adhoc expenses claimed under the head administrative expenses and also disallowed depreciation claimed on fixed assets including motor car. Similarly, the AO has determined disallowances of expenditure incurred in relation to exempt income u/s 14A at Rs. 1,75,213/-. Likewise, the AO has also made additions towards interest accrued and due amounting to Rs. 75,64,036/-, on the ground that although, the assessee has shown outstanding interest payable to various parties, but failed to file any evidences including confirmation to prove that liabilities shown under various names is genuine.
Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld. CIT(A), the assessee has challenged the action of the AO in assessment of interest income and dividend income under the head income from other sources, as against assessee admission under the head income from business or profession.
The assessee has also challenged additions made by the AO towards disallowance of interest expenditure u/s 36(1)(iii) of the Act. Likewise, the assesse has challenged additions made by the AO towards cessation of liability u/s 41(1) of the Act, in respect of interest accrued and due to various parties. The Ld. CIT(A) for the detailed reasons recorded in its appellate order dated 09/01/2013 partly allowed filed by the assessee, where he had affirmed the findings of the AO, in so far as, assessment of interest and dividend income under the head income from other sources and also disallowance of interest expenditure u/s 36(1)(iii) of the Act. The Ld. CIT(A) has also confirmed additions made by the AO towards 50% disallowances of administrative expenditure and depreciation on fixed assets. Similarly, the CIT(A) has confirmed additions made by the AO towards disallowance of expenditure incurred in relation to exempt income and cessation of liability u/s 41(1) of the I.T.Act, 1961. Aggrieved by the Ld. CIT(A) order, the assessee is in appeal before us.
The first issue that came up for our consideration from ground No.2 and 3 of the assessee’s appeal is assessment of interest income under the head income from other sources and disallowances of interest expenses u/s 36(1)(iii) of the I.T.Act, 1961. The facts with regard to impugned dispute are that the assessee has earned interest on fixed deposits and also dividend income from shares and the same has been treated as income from operations, under the head income from business or profession. The assessee has claimed interest paid on loan borrowed from Federal Bank as business expenditure. The AO has assessed interest income and dividend income under the head income from other sources, on the ground that interest earned on fixed deposits is not from the business activity of the assessee. Similarly, the AO has disallowed interest paid on loan borrowed from Federal Bank, on the ground that the assessee has diverted interest baring funds for non business purpose.
The Ld. AR for the assessee submitted that the Ld. CIT(A) was erred in sustaining the action of the AO in assessing interest and dividend income under the head income from other sources, without appreciating the fact that the main business activity of the assessee is investment in shares and securities and also park surplus funds in short time fixed deposits in banks therefore, consequent income should be assessable under the head income from business or profession. The Ld. AR further submitted that there is a direct nexus between loan borrowed from bank and utilization of such loans for the purpose of business, therefore any interest paid on loan borrowed from the bank is allowable as deduction u/s 36(1)(iii) of the I.T.Act, 1961 . The Ld. AR has also made an alternate argument to the effect that if at all interest income is assessed under the head income from other sources, corresponding interest paid to the bank shall be allowed as deduction u/s 57 of the I.T.Act, 1961, because there is a one to one nexus between interest earned from fixed deposits and interest paid on loans borrowed from banks.
The Ld. DR, on the other hand, strongly supported order of the Ld. CIT(A).
We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. In so far as, assessment of interest and dividend income under the head income from other source, we find that although, the main activity of the assessee is investments in shares and securities, income earned in form of interest on fixed deposits and dividend income cannot be considered as income from operations which is assessable under the head income from business or profession because, investment activity of the assessee cannot be considered as adventure in the nature of trade or commerce. Further, unless any receipts received directly from the main activity of the assessee, the same cannot be considered as forming part of income from operations. In this case, the assessee has earned interest and dividend income from shares, consequently, the nature of receipts although, it is the main activity of the assessee certainly false under the head income from other sources. Therefore, we are of the considered view that there is no error in the findings of the AO as well as the Ld. CIT(A) while assessing interest and dividend income under the head income from other sources.
In so far as, interest disallowances u/s 36(1)(iii) of the I.T.Act, 1961, we find that the AO has disallowed interest, on the ground that assesee has borrowed loan from the bank and diverted the same for non business purpose to give interest free advances to M/s Utility Premises Pvt.Ltd., M/s Lotus Investment Ltd. and M/s Deetel Securities Pvt.Ltd. It is the claim of the assessee that it has borrowed loan from the bank for the business purpose, however, on the request of the bank made short time fixed deposits in the same bank against which over draft loan has been taken therefore, any interest paid on over draft facility is having a direct nexus between interest earned on fixed deposit consequently even if the same is disallowed u/s 36(1)(iii), the same needs to be allowed u/s 57 because, the same is laid out or expended wholly and exclusively for the purpose of making or earning such income. We find that when the AO has assessed interest income under the head income from other sources, he cannot consider interest paid on loan borrowed from the bank under section 36(1)(iii) of the I.T.Act,1961,because the assessee has filed necessary details to prove that loan borrowed from the bank has been utilized for making fixed deposits in bank on which interest income has been earned consequently interest paid on overdraft loan should be treated as expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income. We further noted that an identical issue has been considered by the Co-ordinate Bench of ITAT in assessee’s group company case in the case of M./s Lotus Investments Ltd. vs DCIT in where under identical set off facts held that if at all interest disallowance is required u/s 36(1)(iii), it should be restricted to net interest expenditure ( interest earned - interest expanded). The relevant findings of the Tribunal are as under:-
The Director of the assessee company, Shri Stany Saldanah, drawing our attention to the documents placed in the paper-book submitted that the assessee earned interest income of Rs.6,83,467/- on FDRs held with State Bank of India and obtained overdraft facilities against the FDRs. The interest expended on such overdraft facility amounted to Rs.782,402/-. The credit facility so availed has been used to repay the unsecured loans standing in the books. Therefore, had the assessee not taken the overdraft facility but paid the unsecured loans directly instead of making FDRs, no interest income would have accrued to the assessee and no disallowance would have been made in the hands of the assessee. The Ld. DR relied upon the stand of lower authorities.
5. Upon careful consideration of factual matrix, we find logic in the arguments advanced by Ld. AR since the basic facts are not in dispute. The assessee obtained overdraft facility against the FDRs and paid outstanding unsecured loans standing in assessee’s books. Had the assessee not taken overdraft facility but paid the unsecured loans directly instead of parking the funds in FDRs, no interest income would accrue to the assessee and accordingly, no disallowance would be made in assessee’s hand. Finding substantial force in the same, we direct Ld. AO to restrict the disallowance u/s 36(1)(iii) to Rs.98,936/-, being the differential of interest income and interest expenditure. 11. Therefore, we are of the considered that the AO was erred in disallowance of total interest paid on loan borrowed from Federal Bank and accordingly, we direct him to restrict interest disallowance to the extent of net interest expenditure, if any (interest earned – interest paid on loans).
The next issue that came up for our consideration from ground no. 4 and 5 of assessee’s appeal is Adhoc disallowance of 50% expenses claimed under the head salary and conveyance and disallowances of depreciation claimed on fixed receipts. The Ld. AO has disallowed 50% expenses, on the ground that no satisfactory explanation has been furnished to justify payments of salary and conveyances expenses. It is the claim of the assessee that even if there is no business activity was carried out for the year under consideration, but to keep the corporate identity of the assessee, certain routine expenditure needs to be incurred.
Further, expenditure incurred under the head salary and conveyance are in the nature of day to day expenses which needs to be incurred whether or not any business activity is carried out, therefore, the same needs to be allowed as deduction. Similarly, depreciation has been claimed on fixed assets including motor car, as per the provisions of section 32 of the Act, because, such assets have been used for the purpose of the business of the assessee.
Having heard both the sides and considered materials on record, we find that the expenditure claimed under the head salary and conveyance are in the nature of day to day expenses which needs to be incurred to maintain corporate status of the assessee, whether or not any business activity is carried out during the year under consideration.
Therefore, we are of the considered view that there is no reason for the AO to disallow 50% adhoc expenses, when the assesse has explained reasons for incurring such expenses. Accordingly, we direct the AO to delete additions made towards adhoc disallowance of expenses.
Similarly, the assessee has claimed depreciation on furniture and fixtures and motor cars as per the prevailing rate of depreciation available, as per the provision of section 32 of the I.T.Act, 1961. It is not a case of the AO that the assets are not put to use in the business of the assessee. Once, the assets are put to use in the business of the assesse, depreciation allowable as per the provisions of the Act has to be allowed even though, there is no business activity for the year under consideration accordingly, we direct the AO to allow depreciation as claimed on furniture, fixtures and motor cars.
The next issue that came up for our consideration from ground No. 6 of the appeal is disallowance of expenditure incurred in relation to exempt income u/s 14A of the I.T.Act, 1961. The Ld. AR for the assessee, at the time of hearing submitted that due to smallness of the amount, he do not want to press ground No. 6, hence the same is dismissed as not pressed.
The next issue that came up for our consideration from ground No.7 is additions made towards cessation of liability u/s 41(1) of the I.T.Act, 1961 in respect of interest accrued and due. The facts with regard to impugned dispute are that the assessee shown interest accrued and due to various parties amounting to Rs. 1,43,83,953/-. The AO called upon the assesee to file necessary evidences, including confirmations from the parties to whom interest is payable. The assessee has filed details of interest payable to various parties along with confirmations in respect of all parties. The AO made additions on the ground that although the assessee has filed confirmation from the parties, but on perusal of confirmation filed by the assessee, it is noticed that there is no proper address and designation of the persons who signed confirmation letters.
Similarly, in respect of confirmation from Mrs.Jaya Bachan, the AO observed that on perusal of confirmation letter, it seems that it was not signed by Mrs.Jaya Bachan. Therefore, he opined that the liability shown under the head interest accrued and due in the name of four parties is non genuine. Accordingly, invoked provision of section 4(1) of the I.T.Act, 1961 and made additions for Rs. 75,64,036/-.
The Ld. AR for the assessee submitted that the Ld. CIT(A) was erred in not considering the issue in right perspective in light of various evidences filed by the assessee including confirmation from the parties to whom interest is payable without appreciating the fact that provision of section 41(1) cannot be invoked, when the liability is continued in the books of accounts and also relevant details including confirmation has been filed. The Ld. AR further submitted that the provision of section 41(1) could be invoked only when, the assessee has derived some benefit on account of remission/cessation of liability, in respect of any amount of deductions / allowances allowed in the earlier years. Unless, the AO has proved that the assessee has derived certain benefits out of remission/cessation of liability, the same cannot be considered within the provision of section 41(1). In this regard, he relied upon the decision of ITAT, Mumbai, ‘A’ Bench in the case of M/s Lotus Investment Pvt.Ltd. in ITA NO. 1417/um/2014.
The Ld. DR, on the other hand, strongly supported order of the CIT(A).
We have heard both the parties, perused relevant material available on record and gone through the orders of authorities below. It is undisputed fact that the assessee has filed confirmation from the parties to whom interest is shown to have payable in the financial statements. It is also an admitted fact that such interest accrued and due has been shown from past assessment years. The AO never disputed these facts, but he has made additions towards interest accrued and due u/s 41(1), on the ground that although, the assessee has filed confirmation from the parties, but such confirmation letters are not in proper format and also necessary details including address and identification of the person, who signed the confirmation letter was not ascertainable from the documents filed during the course of assessment proceedings. Except this, the AO never disputed the fact that amount shown under the head interest accrued and due was continued in the books of accounts of the assessee for the year under consideration. Once, the liability is continued in the books of accounts during the relevant period, the provision of section 41(1) of the Act, cannot be invoked unless, the AO brought on record some evidence to prove that the assessee has derived certain benefits towards remission/cessation of liability for which deductions/allowances has been allowed in earlier financial years. In this case, the AO has not brought on record any evidences to prove that the assessee has derived benefit towards cessation/remission of liability u/s 41(1) of the I.T.Act, 1961 rather, he had invoked deeming provisions without there being any specific deeming fiction provided in section 41(1) of the I.T.Act, 1961. On other hand, the assessee has filed necessary evidences to prove that the liability shown under the head interest accrued and due in the name of four creditors is a existing liability which is due for payment by filing necessary confirmation letters from the parties. Therefore, we are of the considered view that the AO was erred in making additions towards interest accrued and due u/s 41(1) of the I.T.Act, 1961, The Ld. CIT(A) without appreciating, the facts simply, confirmed additions made by the AO. Hence, we reverse the findings of the Ld. CIT(A) and direct the AO to delete additions made towards interest accrued and due u/s 41(1) of the Act.
In the result, appeal filed by the assessee for AY 2009-10 is partly allowed.
The first issue that came up for our consideration from ground No.1 to 4 of assessee appeal is assessment of interest income under the head income from other sources and consequent disallowances of interest expenses u./s 36(1) (iii) of the Act, 1961. We find that an identical issue has been considered for AY 2009-10 in ITA No. 2096/Mum/2016. The facts for the year under consideration are pari-materia with that of facts considered by us for the AY 2009-10. The reasons given by us in preceding paragraph in AY 2009-10 shall mutatis mutandis applies for this appeal also. Therefore, for detailed reasons given by us in the preceding paragraph, we affirm the findings of lower authorities in respect of assessment of interest income under the head income from other sources. Similarly, while disallowance of interest expenditure u/s 36(1)(iii), the AO shall allow deduction towards interest paid on loan borrowed from the bank, because there is one to one correlation between interest income earned and interest paid on loans.
Accordingly, we direct the AO to consider net interest expenditure for the purpose of disallowance u/s 36(1)(iii) of the I.T.Act, 1961.
The next issue that came up for our consideration from ground no.5 is disallowances of depreciation on furniture and fixtures and motor car.
We find that an identical issue has been considered in for AY 2009-10. The findings given by us for AY 2009-10 shall mutatis mutandis applies to this appeal also. Therefore, for detailed reasons given by us in preceding paragraph in , we direct the AO to allow depreciation as claimed on fixed assets.
The next issue that came up for our consideration from ground No.6 and 7 of assessee’s appeal is disallowance of expenditure incurred in relation to exempt income u/s 14A and consequent adjustment towards book profit computed u/s 115JB of the I.T.Act, 1961. The Ld. AR for the assessee, at the time of hearing, submitted that due to smallness of amount involved in dispute, he do not want to press ground No.6 and 7 and hence, the same are dismissed as not pressed.
In the result appeal filed by the assesse for AY 2011-12 is partly allowed.
As a result, both appeals filed by the assessee are partly allowed.
Order pronounced in the open court on this 26 /07/2019