SHRI JAGDISHBHAI GORDHANBHAI DOABARIYA ,RAJKOT vs. THE PR. CIT-1, RAJKOT, RAJKOT

Later on, the Learned Principal Commissioner of Income-tax (in short “Ld PCIT”), exercised his jurisdiction under section 263 of the Income-tax Act, 1961. On verification of case records, it was found by ld PCIT that the assessee has received interest from J. P. Structure Pvt Ltd, in which the assessee is one of the director and has earned interest @ 6% amounting to Rs.1,10,83,730/-. The assessee has taken unsecured loan from various persons, as per annexure -11 and the assessee has paid interest ranging from 6% to 18%. It is a settled legal proposition that when the claim of deduction is made, the onus is on the assessee to demonstrate the genuineness of such claim. As assessee has claimed excessive Shri Jagdishbhai Gordhanbhai Doabariya 3 interest expenses, therefore, the notice u/s.263 of the Act was issued by the ld.PCIT, vide letter dated 11.01.2023, which is reproduced by the ld.Pr.CIT, in his order, vide page no.2 to 4 of the Revision Order, under section 263 of the Act.

However, the ld.Pr.CIT having gone through the above submissions of the assessee observed that assessee has received interest @6% on loan given to J.P, Structures Pvt. Ltd. and paid interest @.6% to 18% to various persons as listed in notice u/s 263 of the Act. As per provisions of Section 57(iii), onus is on assessee to prove one to one nexus between borrowed funds and interest bearing advances. When assessee is paying more than 6% interest on borrowed funds, there is no reason to allow such excess interest when assessee is receiving interest @6%. Charging of interest on loan and payment of interest cannot have any nexus with director remuneration hence assessee cannot take stand that as he is receiving remuneration from J.P. Structure, interest rate @6% is reasonable. Merely because assessee and company is subject to same rate, it cannot be claimed that disallowance u/s.57(iii) cannot be made as disallowance is out of interest paid to various parties and not from interest charged from company. This aspect was not considered by AO in assessment order. From the provisions of section 57(iii) it is clear that while computing income under the head 'income from other sources', deduction can be claimed in respect of expenditure incurred solely for the purpose of earning such income. The Courts have also laid down that no expenditure under sub-clause (iii) of section 57 can be allowed as deduction unless the following conditions are satisfied: (i)Expenditure should be incurred wholly and exclusively for the purpose of making or earning income, (ii) It should not be in the nature of capital expenditure.

Therefore, learned PCIT held that it is apparent from assessment record that AO has not established one to one nexus between borrowed funds and interest bearing advances. Therefore, assessment order passed by the assessing officer is erroneous and prejudicial to the interest of the revenue.

Aggrieved by the order of the ld.Pr.CIT, the assessee is in appeal before us.

Learned Counsel for the assessee argued that during the assessment proceedings, the assessee submitted details and documents to examine the loan taken and given by the assessee. The ld.Counsel took us through page no.43 of the paper book, where the notice issued by the AO under section 142(1) of the Act, is placed, wherein the AO has raised pertinent question, which is reproduced below: “2. You have claimed a deduction u/s 57 of the IT. Act of Rs.99,81,083/- in the return of income filed against total income from other sources of Rs1,29,86,263/-. You are required to give ledger extract of interest account maintained with you. You are also required to submit the details of interest paid as under in the tabular format with the following columns:

The brief note on justification for claim of deduction u/s 57 of the IT. Act, I would like to state that deduction claimed u/s. 57 of the Income Tax Act, 1961 is in respect of the expenditure incurred by me towards Interest on Unsecured Loan and related bank charges in respect of the amount borrowed from various parties for doing investments and giving loans on which the income is earned. Further with respect to the same, I would like to clarify that the amount raised by me in the form of unsecured loans is parked in the bank account which forms a pool of resource from wherein a numerous transactions related to the income generating investments and loans are done. Further, there are various credit entries in the bank account regarding partial liquidation of income generating investments and loans. All the amount of borrowed funds are utilized for business investment purpose and providing loans and advances. Further, in respect of the utilization of the amounts raised in the form of unsecured loans by me, I would like to state that the same has been invested by me in the ordinary course of business from wherein I derives income in the form of Interest on Loans and Advances and Remuneration. Further, I would like to state that the amount so raised from the unsecured loans has been mainly invested in the form of Capital Investment in M/s. JP Structures Pvt. Ltd. From M/s J.P. Structures Pvt. Ltd., I am getting remuneration of Rs.24,00,000/- in the capacity of Director. The company is profit making and also having profit and paid higher tax and dividend is not distributed but accumulated, otherwise I will get dividend also. It means the share price of company is higher. Even the interest on monies borrowed for investment in shares is also allowable expenditure, when the shares have not yielded any return in the share of dividend during the year. Here, in my case the company is yielded return in the share of dividend, but not distributed. I have to clarify that I have not claimed any expenditure except interest. It is also submitted that no part of the borrowed funds on which interest has been paid were utilized for making investment in otherwise, hence, no expenditure has been incurred to earn exempted dividend income during the year under consideration.

The ld. Counsel for the assessee further invited our attention to the second notice issued by the AO during the assessment proceedings, which is placed in the PB page no.53 wherein the AO again conducted further inquiry and directed the assessee to submit the following details and documents, which is reproduced below: “In connection with the return of income for the AY 2018-19, further you are required to furnish the following:

In response to the notice under section 142(1) of the Act, dated 17.09.2020, the assessee submitted its reply which is placed at PB Page no.55, which is reproduced below: “In respect of above subject and reference and my earlier submissions of various dates, I would like to state that I am submitting herewith the further following details/information and explanations as required by your authority as per notice under reference: I am submitting herewith the details regarding the month-wise details of rate of interest received and total amount from J.P. Structures Pvt. Ltd. during the year under consideration as per Annexure-G10. I am submitting herewith the details regarding the month-wise chart for rate of interest paid to the lenders in tabular format as per Annexure-G11. I have submitted all the details/information and explanation as desired by you as per notice under reference. If you need any further information or clarifications, please feel free to ask us it will be pleasure for me to submit you.”

On the other hand, the ld.DR for the Revenue submitted that the assessee under consideration had given loan to J.P. Structure P.Ltd. in which the assessee himself was a director. The assessee’s case was selected for scrutiny for limited purpose of examining the interest earned by the Directors at the rate of 6%, and the assessee has taken unsecured loan from various persons as per Annexure-11 and the assessee paid interest ranging from 6% to 18%. Therefore, the genuineness of this transaction has not been examined by the AO properly.

Learned DR further stated that under the head “Income from other sources” only expenses, which are genuine, and incurred for the purpose of business are allowable. The ld.DR further stated that the case laws cited by the ld.Counsel for the assessee are pertaining to section 36(1) of the Act. The assessee has failed to prove the direct nexus between the loan given and loan taken. Therefore, the ld.DR for the Revenue submitted that the AO has not conducted sufficient inquiry during the assessment proceedings. Therefore, the order of the ld.AO is erroneous and prejudicial to the interest of the Revenue. Hence, the ld.Pr.CIT has exercised jurisdiction under section 263 of the Act, therefore, order of learned PCIT may be upheld.

We have carefully considered the facts of the case, the submission of the Learned Counsel for the assessee and ld.DR for the Revenue and evidences on record. We note that Ld. Pr. CIT has raised issue that the appellant had charged interest from M/s. JP Structure Pvt Ltd at the rate of 6% , whereas he is paying Shri Jagdishbhai Gordhanbhai Doabariya 9 interest in range of 6% to 18% PA. Accordingly, he was of opinion that interest paid at the rate exceeding 6% PA, can not be a wholly and exclusive expenses for earning interest income, and therefore excessive paid interest of Rs. 33,54,132/- is not allowable as deduction as per section 57(iii) of the Act. Working of such interest was given as under:

Similarly, the Hon’ble Punjab & Haryana High Court in case of CIT vs. Pankaj Munjal Family Trust 326 ITR 286 (P&H) has held as under: “12. After hearing the learned counsel for the parties and going through the impugned order, we do not find any force in the contention raised by the learned counsel for the Revenue; and, in our opinion, no substantial question of law is arising from the impugned order passed by the Tribunal. In the present case, undisputedly, the assessee has borrowed certain amount from the family concerns at 16 per cent. It is also not the case of the Revenue that the assessee has not paid the interest at the said rate to the lender. Merely because the assessee has invested the said borrowed amount for the purchase of 4 per cent, non-cumulative preference shares, it cannot be presumed that the said transaction was colourable because no person with ordinary prudence will borrow money at 16 per cent, and invest the same for the purpose of non- cumulative preference shares. It is the wisdom of the assessee to take a business Shri Jagdishbhai Gordhanbhai Doabariya 12 decision. If a wrong or unwise decision has been taken by the assessee, it cannot be said that the decision is dubious, or the assessee in such transaction has adopted dubious method to evade the payment of tax. In the instant case, there is no evidence of any dubious method or practice adopted by the assessee. Tax planning is a legitimate right of the assessee. In the present case, the assessee has not adopted any colourable device or dubious method while borrowing certain amount at a higher rate of interest. The Revenue has also not brought on record any evidence to show that the interest paid by the assessee on the aforesaid borrowed amount was highly exorbitant and no such rate of interest was ever prevalent in the market. Therefore, in our opinion, the Tribunal is right in law in allowing interest as claimed by the assessee.”

Further, we rely upon judgment of the Hon’ble ITAT, Bench Ahmedabad in case of Shri Girishbhai Vadilal Shah vs. DCIT in dated 15.03.2024. In this case, out of claim of Rs.1.08 crores of interest expenses, the Assessing Officer had disallowed interest expenses to the tune of Rs. 54,32,948/- , as interest was paid @12%, whereas he was charging lower rate of interest, i.e. ranging from 6% to 10%. The Hon’ble ITAT had deleted the disallowance of excessive interest holding that the disallowance made u/s 57(iii) of the Act was clearly contrary to law as interpreted by the Revenue authorities themselves. The Hon’ble ITAT has held that the Revenue authorities had misinterpreted the provision of section 57(iii) of the Act by stating that expenses under the section can be allowed only if income has been earned from incurrence of the said expense, and the term income means profit earned. We note that in the present case also, the undisputed facts are that the appellant is earning interest @ 6% on loan given, but is making interest payment in range of 6% to 18%. The Ld. Pr. CIT has, therefore, held the interest paid at more than the rate of 6% is not allowable as per section 57(iii) of the Act. Accordingly, when there is no dispute that interest expenditure was laid out for earning the interest income, then the rate of interest for payment of interest is not relevant for the purpose of allowing the deduction under section 57(iii) of the Act. The ratio as settled by the Hon’ble Supreme Court in the case of Rajendra Prasad Moody (supra) and continue followed by the Hon’ble High Courts and the Hon’ble Tribunal, fully applicable Shri Jagdishbhai Gordhanbhai Doabariya 13 to the facts of the assessee` case under consideration. Based on these facts and circumstances, we find that order passed by the assessing officer is neither erroneous nor prejudicial to the interest of the revenue and not only that order passed by the assessing officer is sustainable in the eye of law. Therefore, the impugned revision order on this count is hereby quashed, and hence, we allow the appeal of the assessee.

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