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Income Tax Appellate Tribunal, MUMBAI BENCHES “SMC”, MUMBAI
Before: Shri Shamim Yahya
O R D E R This is an appeal by the assessee directed against order of learned CIT(A)-4, Mumbai, dated 15.02.2017 and pertains to assessment year 2014-15. 2. The assessee has following grounds of appeal:
1. The ld. CIT(A) erred in upholding the disallowance of interest of Rs 955027/- u/s 57(iii) of the Act. i. In doing so, both the ld. CIT(A) and the ITO did not appreciate the material and evidence on record. Your appellant, therefore, submits that due relief be allowed.”
At the outset it is noted that there is a delay of 79 days in filing this appeal. The reasonable cause for the delay is attributed to the illness of one of the employees. Upon careful consideration and hearing both the counsel I condone the delay in filing the appeal.
Mr Harman Harjaspal Singh Baweja
Brief facts of the case are that according to the Assessing Officer the assessee has shown interest of ` 35,56,597/- on loan taken from DHFL. Assessee was asked by letter dated 24.01.2014 to explain the claim of expenditure. In response, assessee has submitted an explanation by letter dated 31.01.2014. This explanation has not been accepted by the Assessing Officer on the ground that this loan has been utilized for giving advance to related concern on lower rate of interest. According to Assessing Officer, assessee took loan from DHFL @14.5% p.a whereas such loan has been lent to related concern on interest @6.53% hence, corresponding interest expenditure is to be allowed. In support of this contention, Assessing Officer has placed his reliance in cases of : • Seth R Dalmia vs. CIT 110 ITR 644 (SC) • CIT vs. Dr V P Gopinathan 248 ITR 449 (SC) • Omerods (India) Pvt Ltd. vs. CIT 36 ITR 329 (Bom) Thus, according to Assessing Officer, assessee has obtained loan at higher rate of interest but has diverted it to related concern at lower rate of interest which is against principle enunciated by Supreme Court for allowability of expenditure u/s. 57(iii) of Income Tax Act, 1961.
Upon assessee's appeal, learned CIT(A) confirmed the Assessing Officer's order by holding as under: “5.2 I have considered the findings of the Assessing Officer and rival submission of appellant carefully. I find that Ld. Assessing Officer has rightly disallowed the corresponding interest expenditure. It is an admitted fact that assessee has obtained loan from DHFL bearing interest rate of 14.5%, but has given the borrowed loan to related concern @6.53%. Thus, it is very evident that as compared to rate of interest on borrowed fund, assessee has charged less rate of interest to his related concern or person. Further, assessee has not demonstrated the business benefit of charging of interest @6.53%. Therefore, the finding of Ld. Assessing Officer is uncontroverted one. Assessee has not explained as to how such entire expenditure is wholly and exclusively for business purposes and how lower rate of interest is justified. Therefore, considering the facts of the case and lack of justification of charging of lower rate of interest, the disallowance of interest expenditure to the extent of Rs.9,55,027/- by the Assessing Officer is sustained.”
Against above order assessee is in appeal before the ITAT.
Mr Harman Harjaspal Singh Baweja
I have heard both the counsel and perused the records. Learned counsel for the assessee submitted that the authorities below have not appreciated the facts of the case. He submitted that assessee has borrowed funds and, thereafter, made some fixed deposit and also given loans for the purpose of business. He submitted that the interest received/interest paid both were being shown in ‘Income from other sources’. Hence, learned counsel pleaded that there is no reason to make the disallowance. He further submitted that it is settled law that if the assessee makes a loss in his transaction the same cannot be disallowed, if in view of the Assessing Officer assessee's action was not prudent.
Per Contra learned Departmental Representative relied upon the orders of the authorities below.
I have carefully considered the submissions and perused the records. I find considerable cogency in the submission of the learned counsel of the assessee that authorities below have not properly appreciated the facts. This is evident from the Assessing Officer’s enquiry and the response for the same by the assessee which is as under:
“…In the computation of income submitted by you, you have claimed deduction u/s. 57(1) of the I.T.Act of Rs. 35,56,5977- as deductions made under the head 'Income from other sources'. Kindly explain the nexus between the expenditure incurred and the interest income earned. The expenditure claimed u/s. 57(1) should be incurred wholly and exclusively for the purpose of earning or making that profit/income from other sources. In your letter dated 20/01/2014 you have stated that, you have borrowed Rs. 2.49 crs. from Dewan Housing and Finance Pvt. Ltd. @ 14.40% p.a. and you have made a fixed deposit of Rs. 1.40 crs. and the balance Rs. 1.09 % was used for generating interest income and for the purpose of your profession. Kindly show cause why you claim u/s. 57(1) should not be restricted to the amount of interest earned. Kindly explain the clear nexus between the expenditure incurred u/s. 57(1) and the income earned.
In response to the above, the assessee filed letter dated 31.01.2014 which reads as under :
Mr Harman Harjaspal Singh Baweja
".................Expenses u/s. 57(iii)
In our earlier submissions and reply to the show cause notice we have explained that the interest paid to DHFL was incurred wholly and exclusively for the purposes of earning the interest income from Fixed Deposits, Bank Interest and Interest on Loan.
There has been no other deployment of the borrowed funds by the assessee. Unfortunately since the interest rate on fixed deposits and SB account is lower than the interest on borrowed funds, the assessee has incurred a loss in the process.
Accordingly, we submit that there is no evidence of the borrowed funds not being used wholly and exclusively for the purpose of interest income. Due to the facts and circumstances of the case, the assessee has earned a negative interest from the lending of money and should not be penalized by the- tax authorities for having suffered a loss in the activity.
During the course of the assessment hearing you have asked us and also as stated in the show cause notice as to why the interest expenses should not be restricted to the interest earned. We submit as under :
Section 57(iii) lays down as under Any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income;
There is no condition in the section that the expenditure should be restricted to the amount of income or that the expenditure should not exceed the amount of income. Once on the basis of facts it is justified and explained that the expenditure is expended wholly and exclusively for earning income, the expenditure has to allowed as a deduction.
We place reliance on the decision of the Honourable Supreme Court of India in the case of Commissioner of Income vs Rajendra Prasad Moody 119 ITR 519 (SC) therein the honorable Supreme Court has held as under:
"Equally, it would make no difference whether {there is any income and if so what, since whatever it be, X or Y or NIL, would be credited. And the ultimate income or loss would be found. We fail of appreciate how expenditure which is otherwise a property expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be Mr Harman Harjaspal Singh Baweja different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income"
We also place reliance on the decision of the Honourable Punjab and Haryana High Court (Full Bench) in the case of Commissioner of Income Tax (Central) Ludhiana vs Rockman Cycles Industries Private limited 15 taxmann.com 306 which held that the even if the borrowing is done to lend to a sister concern the expenditure should be allowed.”
From the above, it is clear that the facts have not been properly appreciated. Hence, considering the present case on the anvil of aforesaid discussion I'm of the considered opinion that interest of justice will be served if the issue is remitted to the file of the Assessing Officer. Assessing officer is directed to consider the issue afresh in light of the observation and discussion here in above. Needless to add, assessee should be granted proper opportunity of being heard.
In the result, this appeal by the assessee appeal by the assessee stands allowed for statistical purposes Order pronounced in the open court on this day of 5th February, 2018.