PADAMSHI MADAN SHAH,MUMBAI vs. DCIT 8(2), MUMBAI

The captioned appeals filed by the assessees are directed against the order of the Commissioner of Income Tax (Appeals)-17, Mumbai [in short ‘CIT(A)’] and arise out of the assessment completed u/s 143(3) of the Income Tax Act 1961 (the ‘Act’). As common issues are involved, we are proceeding to dispose them off through a consolidated order for the sake of convenience. Assessment Year: 2011-12 2. The grounds of appeal

Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) following the decision of the Hon’ble Gujarat High Court in Virmati Ramkrishna v. CIT (1981) 131 ITR 659 (Guj) held that the assessee in the present case had not incurred expenses wholly and exclusively for the income that it had earned. Therefore, there is no infirmity in the order of the AO holding that the assessee had not incurred expenses of Rs.8,11,868/- for earning the income stated by him. At best, the expenditure could be equal to the income so earned and not more than that looking to the nature of income. On the basis of above reasons, the Ld. CIT(A) upheld the disallowance of Rs.8,11,868/- made by the AO.

Before us, the Ld. counsel of the assessee files a Paper Book (P/B) containing (i) written submission dated 23.11.2013 before the DCIT- 8(2), Mumbai, (ii) loans borrowed- Op. balance, new received and repayments during the year, interest for the year and cl. Balance, (iii) appellant’s fund flow analysis and (iv) advances- Op. balance, new received repayments during the year, interest for the year and Cl. Balance. The Ld. counsel files a chart indicating the following Padamshi in Vipul in Rs. Rs. Advances Given-Interest Bearing 107,54,069 162,76,296 Vipul Padamshi Shah 5 & 3999/Mum/2015 Advances Given-Free of Interest 133,54,156 161,94,298 Total 241,08,225 324,70,594 Unsecured Loans-Interest Bearing 162,43,792 211,98,661 Unsecured Loans-Free of Interest 39,31,208 137,58,168 Total 201,75,000 349,56,829 Accumulated Capital 64,74,796 33,60,953 Interest Free Advances 39,31,208 137,58,168 Total Funds – Free of Interest 104,06,004 171,19,121 Interest Income 15,59,340 23,60,063 Interest Expenditure 23,71,208 31,01,339 Thus it is stated that in Vipul, interest-free advances are more than interest-free funds. And in Padanshi, the interest-free funds are more than interest-free advances.

On the other hand, the Ld. DR relies on the decision in CIT v. V.P. Gopinathan (2001) 248 ITR 449 (SC) and CIT v. Amritaben R. Shah (1999) 238 ITR 777 (Bom) and submits that the issue in the present case be decided in favour of the revenue in view of the ratio laid down in the above cases. The Ld. DR thus supports the order passed by the Ld. CIT(A).

We have heard the rival submissions and perused the relevant materials on record. We begin with the decisions relied on by the Ld. counsel of the assessee. In Rajendra Prasad Moody (supra), it is held that (i) interest paid on money borrowed for investment in shares is deductible u/s 57(iii), though the shares did not yield any dividend and (ii) section 57 (iii) only requires that the expenditure must be laid out or expended wholly and exclusively for making or earning income and not that such income must have been earned. In Rockman Cycle Industries (P.) Ltd. (supra), the assessee borrowed money from its sister concern and paid interest therein @ 18% per annum and purchased preferential shares from sister concern which carried dividend @ 4%. The Hon’ble High Court held that (i) while deciding whether any disallowance in respect of interest is called for, the AO/appellate authorities and even the Courts can determine the true legal relation resulting from a transaction, (ii) if some device has been used by the assessee to conceal the true nature of transaction, it is the Vipul Padamshi Shah 7 ITA Nos. 3998 & 3999/Mum/2015 duty of the taxing authority to unravel the device, (iii) however, the legal effect of the transaction cannot be displaced by probing into the substance of the transaction, (iv) taxing authority must not look at the matter from their own view point but that of a prudent businessmen. 7.1 In the instant appeal, the assessee could file before the AO, only the year wise statements of unsecured loans and advances given. The same is evident from the order of the AO as well as that of the Ld. CIT(A). In view of the above facts, the case of the assessee is distinguishable from the above decisions relied on by the Ld. counsel. 7.2 We now turn to the decisions relied on by the Ld. DR. In the case of V.P. Gopinathan (supra), the assessee had put moneys into fixed deposit with a bank and had earned in the assessment year in question interest in the sum of Rs.1,17,444/- thereon. On the scrutiny of the amount so deposited, the assessee took a loan from the bank and paid in respect of the loan interest to the bank in the sum of Rs.90,410/-. The assessee claimed that he could be taxed only on the differential amount of Rs.27,034/-. His contention was rejected by the AO and in first appeal. The Tribunal took a contrary view. The High Court answered the question on the basis that the situation was one of mutuality. In appeal, the Hon’ble Supreme Court held that “It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only question then is: does it make any difference that he took the loan from the same bank in which he had placed the fixed deposit. There is no difference in the eye of the law. The interest Vipul Padamshi Shah 8 & 3999/Mum/2015 that the assessee received from the bank was income in his hands. It could stand diminished only if there was a provision in law which permits such diminution. There is none, and, therefore, the amount paid by the assessee as interest on the loan that he took from the bank did not reduce his income by way of interest on the fixed deposit placed by him in the bank.” 7.3 In the case of Amritaben R. Shah (supra), the Hon’ble Bombay High Court has held that (i) section 57 (iii) provides for deduction only of expenditure incurred wholly and exclusively “for the purpose of making or earning such income”, (ii) in order that an expenditure may be admissible u/s 57(iii) it is necessary that the primary motive of incurring it is directly to earn income falling under the head “Income from other sources” and (iii) u/s 57(iii), deduction will not be allowed if the expenditure is not incurred for the purpose of earning income falling under the head “Income from other sources”. 7.4 We are of the considered view that the ratio laid down by the Hon’ble Bombay High Court in the case of Amritaben R. Shah (supra) squarely applies to the present case. We find that neither the AO nor the Ld. CIT(A) has examined the contentious issue in the light of the above decision. Therefore, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to make a fresh assessment keeping in mind the ratio laid down in Amritaben R. Shah (supra). We direct the assessee to file the evidence before the AO. Needless to say, the AO would give reasonable opportunity of being heard to the assessee before finalizing the order.

In the result, the appeal is allowed for statistical purposes.