Kuchipudi Krishna Kishore vs. The DCIT

IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD FRIDAY ,THE THIRD DAY OF MAY TWO THOUSAND AND TWENTY FOUR PRESENT THE HON'BLE SRI JUSTICE P,SAM KOSHY AND THE HON'BLE SRI JUSTICE N.TUKARAMJI |.T.T.A. NO. 291 0F 2007 |.T.T.A. NO. 291 0F 2007 lncome tax Tribunal Appeal under Section 260-A of the lncome tax Act, 1961, against the order of the lncome Tax Appellate Trrbunal, Bench "B" , Hyderabad in l.T.A. No. 8291 Hydl 2005 for (Assessment Year 2002-03) dated 22-12-2006 preferred against the order of the Commissioner of lncome Tax (Appeals), -lll Hyderabad dated 30-03-2005 in lT.A. No 213, 214 & 215 I DCfi 2 (1) Hyd/ CtT (A) llY 04-05 preferred against the order of the Deputy Commissioner of lncome tax, Circle -2 ('l), Hyderabad dated 31-12-2004 in PAN/ G.lR. No. ADOPK9347 BtK-711 Between: Kuchipudi Krishna Kishore, S/o.K.Venkateswara Rao Ryo.Flat No.101, padmaja Courts-ll, Srinagar Colony, Hyderabad ...APPELLANT' AND The DCIT, Ct-2(1), Hyderabad ...RESPONDENT Counsel for the Appellant: SRI A.V.A. SIVA KARTIKEYA on behalf of SRI. A V KRISHNA KOUNDINYA Counsel for the Respondent: SRI ARVIND rep Ms. SUNDARI R PISUPATI (Senior SC for lncome Tax Dept) t.T.T.A. NO. 292 0F 2007 AND |.T.T.A. NO. 293 0F 2007

LT.T.A. NO. 2920F 2007 lncome tax Tribunar Appear under section 260-4 of the rncome tax Act, 1g61, against the order of the rncome Tax Appe[ate Tribunar, Bench "8" , Hyderabad in lr'A No 828/ Hydr 2o0s for (Assessment year 200'r-02) dated 22-12-2006 preferred against the order of the commissioner of rncome Tax (Appears), -Ir Hyderabad dated 30-03-2005 in rr.A. No. 213, 214 & 21s / Dcrr 2(r ) Hyd/ crr (A) lly 04-05 preferred against the order of the Deputy commissioner of rncome tax, circle -2 (1), Hyderabad dated 31-12-2004 in pAN/ G.rR. No. ADopK9347 aK-r11 Between: Kuchipudi Krishna Kishore,. s/o.K.Venkateswara Rao Rr/o.Frat No.101. padmaia Courts-ll, Srinagar Cotony, Hyderabrd ----"- * -' ..lAi,piffnr.ji,' AND The DCIT, Ct-2(1), Hyderabad ...RESPONDENT Counsel for the Appeilant: SRt A.V.A. SIVA KARTIKEyA rep SRI. A V KRISHNA KOUNDINYA Counsel forthe Respondent: SRI ARVIND rep Ms. SUNDARI R plSUpATl (Senior SC for lncome Tax Dept) t.T.T.A. NO. 293 0F 2007 lncome tax Tribunar Appear under section 260-4 of the rncome tax Act, 1961, against the order of the lncome Tax Appellate Tribunal, Bench ,B,, , Hyderabad in l.T.A. No. 827/ Hydr 2005 for (Assessment year 1999-2000 ) dared 22-12-2006 preferred against the order of the commissioner of rncome Tax (Appears), - Hyderabad dated 30-03-2005 in rr.A. No. 213, 214 & 215 t Dcr 2 (1) Hyd/ crr (A)

llY 04-05 preferred against the order of the Deputy Commissioner of lncome tax, Circle-2 (1), Hyderabad dated31-12-20O4 in pAN/ G tR No. ADOPK9347 BtK-711 Between: Kuchipudi^Krishna _Kishore, S/o.K.Venkateswara Rao R/o.Flat No.101, padmaja Courts-ll, Srinagar Colony, Hyderabad ...APPELLANT' AND The DCIT, Ct-2(1), Hyderabad ...RESPONDENT Counsel for the Appellant: SRI A.V.A. SIVA KARTIKEyA rep SRI. A V KRISHNA KOUNDINYA Counsel for the Respondent: SRt ARVTND rep Ms. SUNDART R PISUPATI (Senior SC for lncome Tax Dept) The Court delivered the following COMMON JUDGMENT

HONOURABLE SRIJUSTICE P. SAM KOSHY AND HONOURABLE SRI JUSTICE N. TUKARAMJI l.T.T.A.No.293 OF 2007. COMMON JUDGMENT (per Hon'ble Sri Justice N. Tukaramji) These appeals are filed under Section 260-4 of the lncome Tax Act, 1961 (for short,'the Act') by the Assessee assailing the common order dated 22 12.2006 of lncome Tax Appellate Tribunal, Bench 'B', Hyderabad in l.T.A.Nos.g29: g28 and 827;lHyderabad/2005 for the Assessment years (Ay), 2002_03, 2001 -02, and 1 999-2000 respectively. 2. We have heard Mr. A.V.A. Siva Kartikeya, learned counsel appearing on behalf of lVlr. A.V.Krishna Koundinya, learned counsel for the appellants; and I\Ir. Arvind, learned Standing Counsel appearing on behalf of Ms. Sundari R. pisupati, learned Senior Standing Counsel for the lncome Tax Department, for the respon dents. 3 Regard being had to the similitude of the issue to be considered,in all the three appeals, the following question of law emerges for determination l.T.T.A.No.291 OF 2007, l.T.T.A.No.292 OF 2007. AND

I'\Kl&\t1il I l_l \r-l')l.lrl&l'r i_lr*)r- "Whether the tribunal is justified in holding that the assessee rs not entitled to deduction of payment of interest made on the borrowed funds, though admittedly those borrowed funds, were invested by the assessee in acquiring controlling power in the company and the assessee received all payments only because of such investment." 4(t The case of appellanVassessee (hereinafter, ,the assessee,) in brief is that, he had borrowed funds from the Oriental Bank of Commerce and invested in the shares of I\I/s. Jeevan Soft Tech Limited. Being one of the promoters and for the investment made, the assessee has been given a place in board of directors and acquired controlling authority over the company and used to receive salary income for being a director of the company. ln this backdrop the assessee paid interest to the bank against the borrowed funds at Rs.1,04,550/- for Ay-1999-2000; Rs. j 1,56,673t- for AY-2001-02 and Rs.13,22,580/- for Ay-200203 for which sought exemption from the income tax. 5. The Revenue/Assessment Officer in the assessment order dated 31 .12.2004 rejected the claim for exemption by observing that the borrowed amount was invested in the shares but not expended wholly and exclusively for the purpose of earning the 2

3 . ....t. L'l \i ' ,.,,,r . rncome. Further observed that, the deduction under Section 57(iii) of the Act under the head of income from ,other sources, does not make the capital expenditure exclusively spent for the purpose of earning income and the expenditure craimed must be of the nature relating to earning of income, with a reflection of establishing nexus between expenditure and the income. Thus herd that the interest on borrowed capital cannot be an expenditure incurred for earning of interest income and denied the request for disallowance. 6. On appeal. the Commissioner of lncome Tax (Appeals)_lll, Hyderabad vide order dated 30.03.2005 held that as per Section 10(33) of the Act the dividend income was no more taxabre and as per provrsions of Section 'r44 of the Act the investment in shares is to earn dividend income. This fact is sufficient to hold that the claimed expense of interest against the income which do not form part of taxable income. Further observed that the purchase of shares cannot be for earning salary income. Therefore the plea of the petitioner that the investment is to get salary from the company is clear improbabirity Additionary the amounts borrowed from the bank was not fully and exclusively used for earning income to be taxed under the head of other source even otherwise earning income or dividend being non taxabre, the craim for excrusion of I I

-- 4 t,:( I\\ I ii i Il l \i l,ri.trtrt',rr "rr,r- the interest paid to the banker cannot be allowed within the scope of the Section 14A of the Act. Hence sustained the order of the Assessing Officer. 8(a) Learned counsel for the appellant would submit that the ITAT failed to properly appreciate the aspect ctaimed by the assessee that interest paid to the banker has to be deducted as the payments received is only salary but not dividend. The tribunal and the authorities below faired to take note that by the investment the appellant acquired only the place in the board of directors of the Company and controlling power. Further the earned salary was returned under ,other heads, and the assessrng officer also accepted it. Therefore, the interest paid on amounts borrowed for investment should have been allowed either under Section 57(iii) 7. The Assessee carried the matter to the lncome Tax Appellate Tribunal (for short, ,lTAT,) and vide the impugned judgment, by reiterating the conclusions recorded by the forums below and also the applicability of Section 14A ofthe Act to the assessee's case, dismissed the appeals. Thus the present appeals. or 37 of the Act.

5 8(b) He also pleaded that since the investment in the shares are returned as losses for the relevant years' under Section 71 of the Act the assessee can set off the loss from one head against the income from and other head assessable in that year situation, the deduction should have been allowed' 8(c) In support, relied on the authority of Hon'ble Supreme Court in Commisslo ner of lncome Tax' West Bengat-lll v. Raghunandan Prasad Moody - fig7B) 115 ITR 51g (SC) wherein the Hon'ble Supreme Court while considering the aspect that the interest on money borrowed for investment in shares which has not yielded any dividend, held as admissible under Section 57 (iii) of the Act' by computing the income from dividend under the head 'income Even in this from other sources plea of the investment 9. Learned Senior Counsel for the Revenue would submit that' the appeal is against the consistent finding of fact and law by the Assessing Officer' the Appellate authority and the Tribunal The assessee about earning salary income from the IS incornPatible, as such the same was rightlY considered as the dividend from the investment Therefore' the tribunal was justified in affirming disallowance of the assessee claimed for deduction. Further the aspect raised by the appellant I

6 l'il.l\\IIil tIl \. :rl.:'):Ntrt ji'- was discussed and determined threadbare by the forums below Hence no tenable ground is made out for interference in appeal. 10. The submissions of the learned counsel are duly considered and the materials on record are perused. 11. The basic facts as to the assessee availing loan from the banker, investment in the shares of lvl/s. Jeevan Soft Tech Limited, his position as its director, payment of interest by him over the loan amount to the banker and earning income as salary are not in dispute. 12. The equity shares represent units of ownership of a company which can be acquired in exchange of financial asset. lndisputably the assessee borrowed finance/capital from the banker and as promoter to have control over the company purchased its shares and acquired the position of the director and for which he is earning salary. Further it has been asserted that the assessee had filed returns claiming no dividend income on one hand and showing salary as income on the other hand. These assertions remained undisputed. Thus the crystalised stance of assessee is that he borrowed amount for investment in the company for acquiring controlling interest in it and there is no

7 t,sK l&\ lli I I'l'l \- l l.l,)l&l9i :rrrl dividend income but has been earning salary. ln such situation, while denying the deduction of payment of interest on the borrowings, the authority had considered the claimed salary income as the dividend. Against specific stand of the assessee having accepted return, without any ray of material, presuming the salary as dividend, in our considered view, is unreasonable. Therefore, the scrutiny required is in the admitted set of factuar position, whether the assessee is entifled for deduction of payment of interest on the borrowings as prayed for? '1 3. Section 37 of the Act deals with a situation where any expenditure was incurred wholy and excrusivery for the purpose of business or profession is deductibre. However such expenditure shall not be in the nature of capital expenditure or personal expenses of the assessee As emphasized by the assessee the preliminary objective of his investment was to take active control in the business of the company but not to earn higher price by selling the stocks for profit at a larer date or to earn dividend. rn such position apprying the dominant purpose test and on the basis of intention of controiling the stock the expense cannot be considered as an expense on revenue account and the payment of interest on the borrowings would be for maintaining/holding of the shares of

1'jt\lN\ ltil ll"t \i lrl.lrl.\:l'.,1 l r- the company, as such the expense of investment as well d> payment of interest on it has to be capitalized. For this reason, the claim for deduction under Section 37 of the Act cannot be sustained. 14. Section 57 of the Act deals with income chargeable under the head of income from other sources which shall be computed after the enumerated deductions. Sub-section (iii) prescribes that any other expenditure not being the nature of capital expenditure expended exclusively for the purpose of making or earning on the borrowed capital by the assessee is deductible. ln the case on hand as observed in the preceding para the investment and the payment of interest are in the nature of capital expenditure the claim for deduction would also be not allowable under Section 57(iii) of the Act. This view is further strengthened by the assertion of the assessee that admittedly the business in the controlling interest has not yielded any assessable income 15. On the other hand, the appellate authority had taken a view that the assessee's plea for deduction cannot be allowed in view of Section 14-A of the Act. This provision is concerned with expenditure incurred in relation to income includable in total B tncom e As per this section the expenditure incurred in relation to

9 t,sKl&\'t Rl I l'l \s ])1.])l&])'i lorrT exempt income should not be considered for deduction. Thus to invoke this stipulation, income which do not form part of the total income out of the investment has to be determined. The assessee had claimed that, the investment has not yielded in income and the income said to have generated was the salary. Nonetheless the authority had considered the salary earning as dividend which would be exempted income under Section 8(d) or 80(m) employed Section 144 of the Act to negate the claim. As observed above, deeming the salary as dividend was without tenable basis. As such the close down that the case of the assessee would be governed by the provisions of Section 14A of the Act is not sustainable. 16. The other relevant statutory provision, in this context is Section 36 of the Act, which also deals with the aspect of deductions. Sub-section ('1 ) (iii) deals with the amount of interest paid in respect of capital borrowed for the purpose of the business or profession. The proviso explains that the amount of interest paid in respect of capital borrowed for acquisition of an asset even if it is not capitalized in the book of accounts for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date of such asset was first put to use shall not be

10 IrsKltt\ I nl i I'1.\s l') l.l{)-]&19I ]lIri allowed as deduction pertinenfly this provision is addressing the payment of interest on the capital for the purpose of business and not earning expenditure. The accepted case of the assessee that the investment was to constitute and carry out the business with the object to gain controiling interest. For that cause he had taken loan and the payment of interest, is for continuance of the business. Thus, the factual position is establishing that the interest has been paid by the assessee towards the capital borrowed investment for the prospect of business. ln addition though inconsequential for avairing benefit under this provision it has been substantiated by the return that the assessee is earning salary from the business, showing same income flow. That being the position, the undisputed facts of the assessee,s are making out an eligible case for deduction of interest expenditure under Section 36(1) (lii) of the Act. 17. Although this statutory provision has not been considered by the forums below, as the assessee,s case is squarely qualifying the parameters the interest on the capital borrowed by the assessee shall be deductible under Section 36(1)(iii) of the Act. Accordingly the appeals deserves to be allowed by setting aside the impugned orders.

11 i/TRUE COPY// t,:i\ l\\ llit i,' l, 1r,,\.;,,r r,i, '18. ln the result, the Appeat Nos.291 ,292 and 293 of 2007 stand allowed in favour of the Assessee and against the Revenue. As a sequel, pending miscellaneous petitions if any, stands closed. Sd/- B.S.CHIRANJEEVI JOINT REGISTRAR h,-- SECTIdf{ OFFICER To The lncome Tax Appellate Tribunal' Bench "B" ' Hyderabad (With Records' if any) 2. The Commissioner of lncome Tax (Appeals)' -lll Hyderabad 3.TheDeputyCommissioneroflncometax,Circle-2(.1),Hyderabad 4. One CC to SRl. A V KRISHNA KOUNDINYA Advocate IOPUCI 5.oneCCtoMs.SUNDAR|RPISUPAT|(SeniorSCforlncomeTaxDept) loPUCl 6. Two CD CoPies KuVpr 1 w

HIGH COURT OATED:2110512024 CO]\INlON JLTDGN{ENT I.T.T.A. No. 291 0F 2007 t.T.T.A. NO.2920F 2007 AND |.T.T.A. NO. 293 0F 2007 ALLOWING THE ALL APPEALS (o?. 1HE S14 fr. O B JAt.l 2[25 oo ($ [tllspa1C!rF-O :. \ I (V,, /a- _M- ,-rtv