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आदेश/Order
PER N.K. SAINI, VICE PRESIDENT
This is an appeal by the Assessee against the order of the Ld. CIT(A)-5, Ludhiana dt. 19/09/2019.
Following grounds have been raised in this appeal: 1. That the orders of Ld. CIT(A) is illegal, erroneous and perverse and thus needs to be quashed. 2. That the Ld. CIT(A) is not justified in concurring with the findings of A.O., in confirming the addition of Rs. 31,28,907/- on account of interest paid/incurred on the loans taken against the income earned from interest being income from other sources amounting to Rs. 31,49,213/- being allowable under the provisions of Section 57 of the Income Tax Act, 1961. 3. That without prejudice to above, the Ld. CIT(A) is not justified in upholding the addition made by the Ld. A.O., of Rs. 31,28,907/- which finding of the CIT(A) are illegal, arbitrary and perverse and against well settled law and thus deserve to be set aside in the interest of justice.
That without prejudice to above, the appellant also disputes the quantum of addition as highly excessive. 5. That the appellant craves leave to add, amend or delete any of the grounds of appeal on or before the disposal of the present appeal.
The only grievance of the assessee in this appeal relates to the sustenance of addition of Rs. 31,28,907/- made by the A.O. on account of interest paid or incurred on the loans taken, against the income earned from interest being income from other sources under the provisions of Section 57 of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’).
Facts of the case in brief are that the assessee filed the return of income on 31/12/2016 declaring an income of Rs. 12,68,320/- which was processed under section 143(1) of the Act. Later on the case was selected for scrutiny. The A.O. asked the assessee to give documentary evidences in support of claim of deduction under section 57 of the Act amounting to Rs. 31,28,907/-. The A.O. asked the assessee to show cause as under:
"....The Case was selected for reasons-'Large deduction claimed u/s 57' From the perusal of the computation of income it is found that you have claimed a deduction u/s 57ofRs. 31,28,907/- from the income from other sources amounting to Rs. 31,49,213/-
By questionnaire u/s 142(1) dated 09.08.20]8 you are asked to submit the details of expenditure claimed u/s 57 against the head income from other sources and also provide the supporting copies of the ledger accounts of all such expenditures together with supporting documents and proof of payment made. But you did not submit any reply to these queries. Thereafter many opportunities were given to you but you did not submit any reply.
Then again by notice u/s 142(1) dated 29.10.2018, you were asked:
From the perusal of the ITR, it is found that you have earned interest income ofRs. 31,49,213/-and you have claimed deduction u/s 57 amounting to Rs. 31,28,907/-. Kindly explain the detailed nexus of the earning of the interest of Rs.
31,49,213/- and the claim of deduction u/s 57 amounting to Rs. 31,28,907/- and proof with documentary evidences that the deduction claimed amounting to Rs. 31,28,907/-was laid out or expended wholly and exclusively for the purpose of earning the income from other sources. Else kindly show cause that why deduction u/s 57 amounting to Rs. 31,28,907/- should not be disallowed and added back to your income.'
In your reply submitted on 22.11.2018 you have submitted the bifurcation of deduction claimed u/s 57 of Rs. 31,28,907/- as follows:-
Interest Paid on unsecured loans = Rs. 27,02,188/- 2. Interest paid on loan against property Rs. 4,26,719/- =
= TOTAL Rs. 31.28.907/-
You have also submitted the copy of income tax computation for 2016-17 which is showing a list of 15 persons to whom you have paid interest on unsecured loans together with copies of their ledger accounts.
Firstly, the payment for loan for house property amounting to Rs. 4,26,719/- does not constitute as an expenditure for earning the interest income shown in income from other sources.
Secondly, you have not submitted the copy of the bank statement showing the actual expenditure of giving interest on unsecured loans which the assessee has claimed as deduction u/s 57. You have not established any nexus between the borrowed money for making investment in giving unsecured loans to earn the interest income. No nexus has been established between the amounts of interest received and interest paid till today.
Thirdly, from the perusal of the interest paid accounts of 15 persons it is found that no TDS has been deducted for giving the interest payment. Thus the genuineness of the expenditure could not be established till today.
In view of the above you are asked for show cause that why deduction u/s 57 amounting to Rs. 31,28,907/- should not be disallowed and added back to his income as it is not laid out or expended wholly and exclusively for the purpose of earning the income from other sources."
In response the assessee submitted as under:
That vide our reply dated 21.11.2018, it is stated that the assessee was not maintaining regular books of accounts since the assessee is not deriving any business income. Therefore, copies of ledger accounts for claiming expenditure on account of interest etc. u/s 57 cannot be submitted. However, we have given the complete details of the interest paid along with details of transaction with the parties in excel format duly confirmed by the parties from whom loans were received vide our reply dated 21.11.2018 (uploaded on 22.11.2018).
Regarding nexus of earning of the interest and claim of deduction u/s 57. That the assessee has received as well as advance unsecured loans to various parties. The unsecured loans have been taken prior to 01.04.2015 i.e. before the beginning of the assessment year under consideration. The interest expenditure (claim u/s 57) has been made to earn the interest income shown under the head "Other Interest" in the computation of income. You will kindly observe that assessee has earned interest income of Rs. 31,46,465/-during the A.Y. 2016-17 and his paid interest aggregating to Rs. 31,28,907/- (27,02,188/- plus 4,26,719/-). It may be noted that the assessee has accumulated sufficient funds over the last more than 10 years for advancing of unsecured loans. The assessee is in regular practice of accepting and advancing of unsecured loans and this stand of the assessee has been accepted by the Department for last many years, Therefore, the nexus of the earning of the interest income and assessee's claim for deduction u/s 57 in the form of expenditure for interest stands established. In nutshell, the assessee has earned gross income of Rs. 31,49,213/- shown under the head income from other sources and claim deduction aggregating to Rs. 31,28,907/- and the net income of Rs. 20,306/- (31,49,213/- minus 31,28,907/-) was offered to tax for the A.Y. 2016-17.
That in the show cause notice, you have stated that the assessee has claimed deduction for Rs. 4,26,719/- for loan for house property. In fact, the said interest was paid for "Loan against Property" instead of loan for house property as stated by you and the interest paid on loan against property is clearly eligible for deduction u/s 57 of the Act. In funds received by the assessee out of the loan against property was also utilized for giving unsecured loans.
That in most of the'cases interest to be paid on unsecured loans has been credited to the amount of the parties. However, in few cases, interest payments have been made through banking channel and the same is duly reflected in the bank statement. We enclosed herewith the relevant extract of the bank statement of the Axis Bank saving account for F.Y. 2015-16 highlighting the interest payments as Annexure-1.
That the assessee has not made tax deduction at source (TDS) as the provisions of Section 194A ( I ) of the Act does not apply to individual. Further, the assessee
also does not fall under the first proviso to Sec. 194A ( I ) of the Act as he has not made any sale etc. during the financial year immediately preceding for the F.Y. 2015-16.
5.1 The A.O. however, did not find merit in the submission of the assessee by observing in para 4.3 of the assessment order dt. 19/12/2018 as under:
4.3. The above reply of the assessee has been perused and is not found acceptable. At Point No. 1, the assesse has submitted that no ledger accounts for claiming the deduction u/s 57 could be submitted as the assesse is not maintaining books of account. But for proving the nexus, the basic documents are the bank account statements through which the loans are given and even those have not been submitted by the assesse. Moreover when the assesse is claiming huge deduction u/s 57 year after year the there must be some record on the basis of which the deduction is claimed. But the assessee has failed to submit these details. At point no. 2, the assessee has submitted that it had accumulated sufficient funds for advancing the unsecured loans .Thus the question of the deduction u/s 57 do not arise if the funds given for advancing the interest earning unsecured loans are out of assesses own funds. Moreover the assesse has failed to prove any direct nexus between the expenditure claimed u/s 57 and the interest bearing unsecured loans. At point no. 3, the assesse has mentioned that the loan was against property but the assesse has failed to submit any utilization of the loans received against property. Thus, no nexus with the interest bearing unsecured loans has been established. It is pertinent to mention that deduction u/s 57 cannot be used for claim of any interest paid by the assesse which is not wholly or exclusively utilized for earning the income from other sources.
And at point no. 4, the argument of the assessee is not acceptable as no nexus has been proved for claiming the deduction u/s 57. 5.2 The assessee further submitted as under:
" That the practice of accepting and advancing loans is being followed consistently by the assessee for the more than ten years and the netting of interest expenditure claimed u/s 57 (iii) of the Act is being allowed. Therefore, considering the principle of consistency, the assessee contends that the interest expenditure claimed by the assessee be allowed to be adjust against interest income offered to tax as there is no change in the facts & circumstances in the year under consideration...."
The reliance was placed on the following case laws: • CIT vs. Rajendra Prasad Moody (115 ITR 519) (SC)
• JK Industries (297 ITR 176)(Karn) • Venkateshwara real estate enterprises vs. CIT (Karn) • CIT vs. Taj International Jewellers (Del) • Sh. Roshan Sethia vs. ACIT (Mumbai ‘D’ Bench ITAT)
5.3 The Assessee also submitted to the A.O. vide reply dt. 14/12/2018 as under:
" The interest expenditure (claimed u/s 57) has been made to earn the interest income shown under the head "Other Interest" in the computation of income. In this connection, we may inform that funds generated through repayment of the loans and advances made by the parties to the assessee are further regularly utilized in advancing loans to some other parties. The assessee may inform that all funds received and paid are being kept in a common bank account; it is not possible to match each and every repayment o f the loan advanced by the assessee with the loans received by the assessee. However, there is a complete nexus between the interest paid qua to the interest income and the assessee is very much eligible for deduction u/s 57 of the Act. The statement of the bank account of the assessee has already been submitted to your good self in our earlier replies in the matter. Therefore, funds from all these sources along with interest income on loans given by the assessee are although being kept in a common kitty and the out goes were also made from the same. However, only interest bearing funds were used to make loans and advances to the parties from whom the income in the form of interest was received"
5.4 However the A.O. did not find merit in the submissions of the assessee by observing as under:
In the above mentioned point, the assessee himself has agreed that it is not possible to match repayment entries advanced by the assessee with loans received by the assessee. As such deduction u/s 57 for such expenses are disallowed.
" . 4. That us all the funds received and paid are being kept in a common bank account, it is not possible to match each and every repayment of the loan advanced by the assessee with the loans received by the assessee. However, there is a complete nexus between the interest paid qua to the interest income and the assessee is very much eligible for deduction u/s 57 of the Act... "
This submission of the assessee is not acceptable as the deduction u/s 57 can only be given if a direct nexus is proved that any expenditure laid out or expended wholly or exclusively for the purpose of earning such income.However, no documentary evidences have been submitted to prove that the fact of these
loan has remained same over the years also it is evident from the referred reply that the assessee, despite being given multiple opportunities has failed to prove any direct nexus between the loan and its application. The utilization loan against property could not been linked to unsecured loan given to earn interest
4.8 In view of the above, the claim amounting to Rs. 31,28,907/- disallowed u/s 57 of the Income Tax Act, 1961 and added back to the income of the assessee.
Being aggrieved the assessee carried the matter to the Ld. CIT(A) who sustained the disallowance made by the A.O. by observing in the impugned order as under:
As already mentioned, in the present case, this nexus has not been established or proved by the appellant and the onus was on the assessee who is claiming the deduction u/s 57(iii). The AR has argued in the submission filed during the appellate proceedings that AO has not brought on record that the expenses claimed by the assessee were not incurred wholly & exclusively for the purpose of earning the income, however this argument is found erroneous and flawed. It is a settled principle of law under Income Tax Acts that for claiming any deduction, the onus of proving the same lies on the assessee. The AO is only required to examine the allow-ability of the deduction as per the law and rf not found as per law, then disallow the same.
Now the assessee is in appeal.
The Ld. Counsel for the assessee at the very outset stated that this issue is squarely covered in favour of the assessee vide order dt. 11/03/2021 in ITA No. 1354 to 1356/Chd/2019 for the A.Y. 2016-17 in cases of Shri Kamal Parkash Goyal and others, Ludhiana Vs. The ACIT,Circle-2, Ludhiana. Copy of the said order was furnished which is placed on record. It was further stated that the assessee belongs to the family of the said assessee Shri Kamal Parkash Goyal who agitated the matter before the ITAT Bench ‘A’ Chandigarh.
In her rival submissions the Ld. Sr. DR strongly supported the orders of the authorities below and reiterated the observations made in there respective orders.
We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is noticed that a similar issue having identical facts was a subject matter of the appeals by the Family members of the assessee in ITA No. 1354 to 1356/Chd/2019 for the A.Y. 2016-17 in the cases of Shri Kamal Parkash Goyal, Ludhiana and others Vs. The ACIT (supra) wherein vide order dt. 11/03/2021, the similar issue has been decided in favour of the assessee by observing in para 4 to 6 as under:
We have heard rival contentions and perused material available on record. The Ld. Counsel for the assessee has submitted that the assessee is in the activity of taking and giving loan on interest. The assessee during the year had loan from certain parties and advanced unsecured loans to other parties and yielded net positive interest income. That this activity of the assessee has been continued since many years. The lower authorities, accepting the said activity of the assessee have never made any addition on this issue in the earlier assessment years as well as in the subsequent year except the assessment year under consideration. The Ld. Counsel has further submitted that though, some part of the loans amounting to Rs. 13,40,951/- was taken from Bank against security of property given to the Bank, which was received at a lower rate of interest, whereas, the assessee had advanced loan on higher rate of interest and earned interest income. The ld. Counsel has further submitted that the lower authorities have not disputed the genuineness of the activity of advancement of loan and taking of loan by the assessee from different parties. The only issues on which the deduction has been disallowed is that the assessee has not established one to one nexus between the loan taken and loan advanced. The Ld. Counsel has further submitted that though the assessee has sufficient own funds also but that does not mean that the presumption will be that the interest yielded loans were advanced by the assessee from own funds. That there is no allegation of the Department that the interest bearing funds have been used by the assessee for some other purposes. 5. The Ld. D/R has relied upon the findings of the lower authorities. 6. We have considered the rival contents. The assessee has demonstrated from the record that the activity of the assessee of taking interest bearing loan and making advances to other parties is continued for the last so many years. The assessee in this activity has earned net positive interest income. In our view in such a case, there is no need to establish one to one nexus between each of the transaction of loan taken and loan advanced by the assessee. There transactions of taking unsecured loans otherwise has not been disputed by the Department. Even the Assessing Officer has not made any effort to verify the genuineness of the transaction by summoning the concerned parties either who have advanced loan to assessee or the parties have taken loan from the assessee. There is no allegation that the assessee has used the interest bearing funds for some other purposes. Under the circumstances, in our view, the assessee is entitled to set off the interest expenditure against the interest income earned by the assessee and the net of the same has rightly been offered by the assessee for taxation. In view
of above discussion, the addition made by the Assessing Officer is ordered to be deleted. The ld. Representative parties have submitted that the facts and issues involved in all the captioned appeals the identical. In view of our findings given above, the addition made by the lower authorities in all these three appeals is ordered to be deleted. In the result, all these three appeals are hereby allowed.
Since the facts of the present case are similar to the facts involved in the aforesaid referred to case. So respectfully following the aforesaid referred to order dt. 11/03/2021 the disallowance made by the A.O. and sustained by the Ld. CIT(A) is deleted.
In the result, appeal of the assessee is allowed.
(Order pronounced in the open Court on 14/03/2022 ) Sd/- Sd/- सुधांशु �ीवा�तव एन.के.सैनी, (SUDHANSHU SRIVASTAVA) ( N.K. SAINI) �या�यक सद�य/ JUDICIAL MEMBER उपा�य� / VICE PRESIDENT AG Date: 14/03/2022
आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :
अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File
आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar